Option Investor

Daily Newsletter, Monday, 08/21/2000

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The Option Investor Newsletter                   Monday 08-21-2000
Copyright 2000, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
        08-21-2000        High      Low     Volume Advance/Decline
DJIA    11079.80 + 33.30 11106.20 11027.10  732 mln   1325/1472
NASDAQ   3953.15 + 22.81  3985.62  3917.94 1.27 bln   2025/1996
S&P 100   818.44 +  4.80   820.60   812.60   totals   3350/3468
S&P 500  1499.48 +  7.76  1502.84  1491.13           49.1%/50.9%
RUS 2000  516.45 +  0.94   518.31   515.26
DJ TRANS 2818.59 - 18.55  2845.22  2815.30
VIX        19.56 +  0.14    20.15    19.41
Put/Call Ratio       .48

The Excitement Was Overwhelming Today

Nasdaq up 10, Nasdaq down 5, Nasdaq back up 10.  Not to mention,
the continuing debate over the FOMC decision tomorrow (which
is already a given) and it's no wonder I was having trouble
staying awake during today's trading.  Will Labor Day ever get
here?  That is traditionally the return of traders and the
ever important higher volume.  Today's volume of 1.24 bln on
the Nasdaq and 730 mln on the New York continued a trend of
light action.

The one point of interest that I kept checking throughout the
day was the VIX.  It broke below 20 for the first time since
last December.  That is incredible that it took over eight months
to finally pierce that level.  You know what that means too.
Use extreme caution going forward if you are long the market.
I think we are all in agreement that the VIX won't return to
its normal, active self until volume returns, but anything
under 20 always makes me nervous.  The VIX ended up closing
right near the day low at 19.56.

As far as the official numbers, the DJIA closed up 33.33 to
11,079.81.  Declines led advancers 14-13, or nearly unchanged.
The S&P 500 ended at 1499.48, up 7.76.  The Nasdaq finished
up 22.81 to 3953.15.  The Advancers/Decliners were unchanged.
There just wasn't a whole lot of action among either the
indices or individual stocks.  I have added a more long-term
chart of the Nasdaq to show how the Nasdaq range is narrowing.
I would expect an upside breakout when the volume returns to
more active levels, in the neighborhood of 2 billion shares
a day.  That won't happen until just after Labor Day at the
earliest or the end of October at the latest.  The timing
isn't precise, but the return of volume is highly likely.

In Treasury action, the 10-year Treasury note was down 2/32
bringing the yield up to 5.78%.  The 30-year bond was down
12/32 to yield 5.72%.  There was no fresh economic data for
analysts to get their hands on today.  The highlights will
come later this week with Durable Goods Orders on Thursday
and GDP and Existing Home Sales on Friday.  But we will have
something to chew on tomorrow with the Fed comments after the
rate announcement.  The Fed has been somewhat quiet lately
and those comments will shed some light on their current focus
and stance.

Big news from INTC is coming tomorrow.  It is reported that
company executives will announce new chips for wireless
technology as well as giving design details for their latest
processors.  Executives of the world's biggest chipmaker will
spell out the advances in Intel's latest processor designed
for desktop PCs and laptops at its Intel Developer Forum in
San Jose, Calif.  The Pentium 4, which will run at speeds of
1.4 gigahertz, will be available in the fourth quarter and
laptop versions sometime after that.  "It was really designed
for the visual Internet going forward," said Albert Yu, senior
vice president of Intel's Architecture Group.  The trouble is,
according to analysts, there aren't many challenges for the
microprocessor's extra horsepower yet, especially considering
the expected sticker shock.  INTC closed near a new 52-week
high at $72.06, up $1.50.  On a pre-split basis, we would be
looking at INTC up near $144.

Ford said on Monday it will idle three truck assembly plants
for two weeks beginning on Aug 28th in order to free up 70,000
tires which can be used as replacements in the Firestone recall.
In a conference call, senior vice president Martin Inglis said
25,000 trucks will be cut from Ford's Q3 production schedule.
He declined to estimate how the schedule change would affect
earnings, but it is obvious that estimates would start coming
down for the short-term.  F lost $0.50 on Monday as it ended
at $27.25.

Shares of MicroStrategy closed 40% higher on Monday, after
news of an alliance with International Business Machines caused
what traders called a short squeeze.  According to Prudential
Securities analyst Larry Wachtel, "There was a big short position
against it, and any news with the IBM name next to it could
have very well caused this short squeeze."  If anything, it
was nice to see MSTR back in the spotlight again, if only for
a day.  This stock was rapidly growing in popularity early in
the year as it traded above $300, only to get cut in half on
the open one March morning on accounting irregularity issues.
The short players are not likely to abandon this play for good
just yet.

Oil prices rose again on Monday, for the fourth straight day.
This was on concerns that a tropical storm could threaten the
U.S. Virgin Islands, which is home to large oil refineries.
Crude prices gained $0.48 to $32.47, despite surging above $33
intraday.  Hopefully, this uptrend will falter before economists
start screaming the sky is falling.  High oil costs will bring
inflation talk back as fast as anything.

Tomorrow should be interesting.  How will traders react to an
announcement that is 99% in the bag?  Typically you could at
least expect huge volatility in the hour or so following a
rate announcement, but tomorrow may not even provide that.  My
guess is that the markets will weather the announcement without
a major move in either direction.  Leaving me basically in the
same frame of mind I've had all summer long, in that it's still
a stock-pickers market.

The one kicker that still lingers in my mind is the VIX, which
I mentioned above.  I never want to be long bullish positions
when it is under 20.  There is just too much risk.  Sure, it
seems as if it has become a lesser indicator this summer, but
that is what everyone always says when the VIX is under 20.  It
is the classic sign of complacency.  Therefore, if anything, you
may want to err on the side of caution.  There is no point in
being in anything too heavy during the third week of August.
I would rather be in cash and re-evaluate new positions later
in the month.  In all cases, be smart until volume returns.

Ryan Nelson

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Rolling Stocks; Part Deus
By Austin Passamonte

Fitting that I visit a conservative, buy & wait strategy
after a furious session of option roulette last week. My
mailbox is flooded with buy/sell confirmation sheets from
the brokerage after trading everything in sight.

We made, missed & lost some money during expiration week that
ended with less flurry and more thud. When the dust finally
settled I had lots of fun but profits weren't really worth
all that effort.

If one trades options for the sport that's fine but for those
who consider maximum profit the ultimate reward, one might
ought to trade less and keep more.

Reminds me of days spent long ago fishing a major river near
my home town. Plenty of folks gathered by the banks and sat
there withering in the hot sun for hours catching panfish
and the occasional juvenile bass, channel catfish or walleye.

Hour after hour watching the water flow by, re-baiting those
hooks stripped by tiny fish only to toss the rig out once
again hoping for a lunker.

Every once in awhile someone would hook a decent fish and the
gang would hoop, holler and freshen up their offerings. Oh
boy, the bite is on!

Not really. Soon boredom would settle in again as endless,
timeless river currents rolled past.

Certain events set up much different circumstances, however.
Let it rain overnight or have the dam release some water and
poof - every fish in the river came alive with renewed vigor.
We might have to wait days or even weeks for favorable conditions
to prevail but once they did the action was incredible!

Increased water volume had fish on the move, becoming easy
targets for us. Present the offering, set the hook and carefully
reel the trophies in.

Funny thing was, all those people who spent sultry summer days
baking in the sun were nowhere to be found. They had burned
themselves out (no pun intended) trying to fill buckets with
panfish, demanding a Herculean effort. Failure to do so for
most left them with a negative mindset that fishing was sub-par
in this river. Far from the truth, all they needed to do was be
patient and let water VOLUME return.


For non-fisher-people still awake at this point, hopefully
you've realized over-fishing and over-trading can be fun but
seldom incredibly fruitful.

I realize it doesn't seem that way: the markets flow every day
just like that river does. The market is full of active stocks
just like that river is. Each day presents opportunity to
land both and it seems quite an easy venture but for those who've
tried both I think you've discovered the truth by now yourself.

This from a guy with live trades four days out of five, but I'm
a slow learner. Got to get up pretty early in the afternoon to
fool me but I'm catchin' on quick. I can easily afford to churn
small accounts as most traders can but what's the point? Isn't
it more fun racking up winning trades instead?

Those unable to make their brokers filthy rich like us day
traders do may appreciate plays like examples which follow
below. Such stodgy symbols may not pump the adrenaline but
sure can pump up conservative accounts. Which do you prefer?

(Daily Chart, UTX)

United Technologies rolled several times between $60 and $66 for
roughly 10% gains both directions. It offered a couple of round
trips before breaking down to a lower range.

After spending a few weeks down there it may be attempting to
return once again within old familiar support/resistance. This
is the type of setup we look for in habitual rolling stocks.

I've never been one to believe traders should buy or sell anything
just because prices hit resistance or support. I need to see some
kind of technical confirmation in addition to that. If I must pick
just one tool most useful to me it would have to be stochastics.

Can you see in the example above where the clearest, up or down
10% runs were signaled or confirmed by the daily stochastic fast-
bar? If we did nothing more than trade bounces off 20% oversold
or 80% overbought fast bar when prices reached the recent support/
resistance zones, what would be our result?

(Daily Chart, MO)

Again, who in the world wants to trade options on Phillip Morris?
Please! It's a good day when this one can post a half-point move
up or down the chart. Plod along it does with stealth rallies and
selloffs as we fixate ourselves on the sexy NASDAQ roller coasters.

Time has a way of piling up and so do profits if we buy distant-
month contracts as mighty MO rolls on. This is one stock I have
bought options on numerous times in sympathy from my blue-collar
days at Kraft foods. Truth in disclosure, I was looking the other
way on its last several moves including the 50% price-gain
recently logged.

If a gargantuan-float stock like MO rises 50%, what do back-
month options appreciate in return? Please don't write to tell
me; I really don't want to know!

(Daily Chart, GM)

If any of us are adverse to buying puts I hope this chart of
GM serves a stark lesson. Again, to be honest I would have
passed on several of those trades but the crystal-clear "head
and shoulders" pattern where the right shoulder stalled exactly
at resistance would have been a four-alarm blaze to buy puts on
that baby for sure!

Did I catch the $25 plunge in GM over six weeks? Heck no, who
in the world charts GM? What self-respecting day-trader getting
carved to pieces in choppy, no-volume markets would ever do such
a thing? I can name one for you off the top of my head starting

When I first began trading options my account wasn't big enough
to trade any of the high-flying options. $2,000 per contract?
I only had $5,000 to work with. that approach wouldn't do. So I
began buying back-month options on names I knew that sported good-
looking charts.

At the time I knew just enough about trading options to be
dangerous. Enough to get myself killed in a hurry if I tried to
run with the big dogs. Life expectancy on that last bottle of
Lowenbrau at our clambake Saturday was much greater than my tiny
account trading PDLI, SDLI or any other four-figure option play.

Funny thing happened though. My $500 WMT calls became $850
calls in a week or two. $900 LEAPs on GBLX became $1,350 contracts
by and by. Same for MO, GE, HWP, ERICY, DIS, HON, BCT, WCOM and a
slew of others. That tiny account swelled several times before
more was added to it. Was it straight-up multiplication? No, but
it was steady growth just the same.

Am I cured from short-term, intra-day trading? Get real. It's
too much fun. And I do reside in the plus column for my efforts
besides. Not to mention the fact that a return to real market
action like we expect the next six months ahead can make astute
short-term traders rich.

That's the good news. The best news is trading such high-odds
stealth plays depicted above works equally well in fast times
and lean. The very same approach trading index options or sector
HOLDRs available these days offers even more promise of solid,
steady returns to patient, deliberate traders.

In lieu of get-rich-quick would you settle for build-wealth soon?
You can surely bet my "safe money" will be played this way.

Swing traders can and do make oodles of money when favorable
conditions exist. I for one wish that with everything in me for
you. However, those with limited time to trade on their hands can
do just as well or better than those of us currently wearing our
keyboards smooth, I'm 98% convinced.

The other 2% is denial that justifies my diving in and out of
the melee again tomorrow!

See you Wednesday & Best Trading Wishes

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SDLI - SDL, Inc. $408.50 +13.25 (+13.25 this week)

SDL's products power the transmission of data, voice, video and
Internet information over fiber optic networks to meet the needs
of telecommunications, cable television and satellite
communications applications.  They enable customers to meet the
bandwidth needs of increasing Internet, data, video and voice
traffic by expanding their fiber optic communications networks
much more quickly and efficiently than would be possible using
conventional electronic and optical technologies.  SDL's optical
products also serve a variety of non-communications applications,
including materials processing and printing.

Most Recent Write-Up

Hold onto your hat, the boosters are being ignited!  Closing
$17.37 above 5-dma, SDLI remains on the fastrack. On July 10th,
JDS Uniphase proclaimed its intent to acquire SDLI in a
stock-for-stock transaction worth $41 bln.  Ever since then,
the stock has been on rocket propulsion, climbing to a 52-week
high of $460.50 on July 24th.  Clearly, the profit takers took
their cue at that point, sending the stock as low as $315 a week
later.  Since bottoming on July 31st, a day after losing over $50
in a single session, SDLI has been on a roll, regaining some $80
points.  That about sums up this play: volatile and risky, but it
can be very rewarding. The nearest support for the stock lies
at the 5-dma of $377.89.  Hitting a low of $386.19 today, the
stock has managed to outpace all technicals, trading as high
as $397.  Closing $1.75 below the day high, SDLI seems
determined to revisit July's glory days.  Granted, the fiber
optic sector is hot right now, but the stock still seems
well-positioned to shoot higher before calling it quits.  Look
for entry points to the play on dips below $390, but remain
aware that the day lows are higher every day.  Likewise, if the
stock drives through today's high of $397, this could be a good
indication that the buyers are on the prowl, hoping to take SDLI
back to higher ground.


JDSU is once again moving to the upside, breaking out of its
current range, and thus pulling SDLI along for the ride.  SDLI
is making big moves and carrying a lot of momentum as traders
are trying to figure what SDLI's end price will be once the
merger is complete.  In any case, selling puts may be the
better option since the calls are just outrageous.  Support
at $380 looks solid.

BUY CALL SEP-390 OSL-IR OI=3421 at $40.00 SL=30.00
BUY CALL SEP-400 OSL-IT OI=1064 at $33.63 SL=25.25
BUY CALL SEP-410 OSL-IB OI= 500 at $30.38 SL=22.75
BUY CALL DEC-430 OSL-LF OI= 170 at $58.50 SL=44.00

SELL PUT SEP-380*OSL-UP OI= 378 at $14.75 SL=19.50
(See risks of selling puts in play legend)

Picked on August 17th at $383.00    P/E = 511
Change since picked       +25.50    52-week high=$460.50
Analysts Ratings      12-8-0-0-0    52-week low =$ 30.83
Last earnings 07/20    est= 0.30    actual= 0.33
Next earnings 10-26    est= 0.37    versus= 0.10
Average Daily Volume  =  5.7 mln

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