The Option Investor Newsletter Wednesday 08-23-2000 Copyright 2000, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/082300_1.html Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 08-23-2000 High Low Volume Advance/Decline DJIA 11144.70 + 5.60 11172.30 11059.70 866 mln 1289/1496 NASDAQ 4011.01 + 52.80 4011.75 3902.11 1.46 bln 1946/2003 S&P 100 822.81 + 4.23 823.71 814.02 totals 3235/3499 S&P 500 1505.97 + 7.84 1507.20 1489.52 48.0%/52.0% RUS 2000 517.88 + 0.42 518.00 513.95 DJ TRANS 2735.35 - 87.73 2822.24 2730.04 VIX 19.86 + 0.24 20.58 19.63 Put/Call Ratio .50 ****************************************************************** A Classic Day in Rangebound, Technical Trading One day after the NASDAQ closed at its 200-dma at 3958, technical traders commanded the market. I think I'll just step aside while those trading desks do their stuff. Yet, what initially looked like a boring day, turned out to be rather interesting. It's beginning to feel like things are slowly starting to heat up as September quickly approaches. So what does this mean for the direction of the market? Let's look at a variety of developments that have the markets moving. First, the Fed is out of the picture at least until November with Monday's announcement being a non-event. Investors can check that worry off the list. Like Jim said last night, you knew it was coming, and many investors and traders took the opportunity to sell into the close yesterday, and somewhat this morning. Today was picture perfect, rangebound, technical trading. Traders brought the NASDAQ down to 3900 within the first hour and from there, it bounced solidly on buying interest. And they kept buying and buying until about 3980, blowing past the 200-dma at 3962. Looking at the intraday chart below, you can see that the sellers took the NASDAQ back to test the 200-dma as support twice within a half hour, just to be sure. The rest of the afternoon was a steady climb to the next opposition of 4000. Now, as it slowly approached that level, I curiously watched the chart's every tick. What were these trading desks going to do? Would they headfake on the buy side, then pull their bids to jump on the ask? After a few minutes at 3999, they continued to bid the index right on through 4000. The NASDAQ closed at the high of the day, up 52.80 at 4011, a rather significant feat considering that it hasn't closed over 4000 since July 25th. Another trading fact is that the NASDAQ traded in a 100 point range, after being down 56 points at the lows. Haven't had that since August 3rd. So we are seeing some interesting developments as Labor Day approaches. Granted, volume on the NASDAQ was a light 1.43 bln shares, it does have a solid uptrend since August 3rd. The tech stocks are strengthening and September seasonally is a good month to own them. While the NASDAQ most likely will be rangebound until after the Labor Day weekend, the upside bias is clear and investors may have begun to snatch up some of those beaten down high-fliers. Semi stocks have been on that list. Yesterday, after the close, the Book-to-Bill ratio for North American chip manufacturers was released for July and it came in at 1.23 versus June's 1.27. In layman's terms, this means that orders for chips were 23% higher than shipments for the month of July. Typically, this figure drops in July as the cycle slows, but this is a rather neutral move showing that future orders should remain strong. To add to that, Merrill Lynch analyst Brett Hodess notes that the decline from July came more from "an acceleration in shipments (rather) than from slowing orders." Further confirming the demand in the sector, the WSJ reported that a shortage of INTC's Pentium III XEON microprocessors is creating tremendous backlogs. INTC said that they have been aware of this for nine months, as well as their customers, and that they are "ramping up manufacturing across the entire product line." The Semi Index(SOX.X) was up almost 3% today, given the outlook. Individual issues had buyers flocking to them: INTC(+2.50), AMAT(+3.44), KLAC(+4.69), NVLS(+3.06), and TER(+3.69). Eat your heart out, Jonathan Joseph! Doesn't look like this cycle is slowing! Over at the NYSE, the INDU managed to squeak out a 5.50 gain today on light volume of 864 mln shares, closing at 11144. It was an up-and-down session for the INDU as well, but the trend was decidedly up after the index fell out of bed this morning. Generally mirroring the NASDAQ, the INDU hit its low of 11059 by 10:10am EDT, only to recover throughout the day. During today's climb, the index paused to drop back and establish intraday support at 11100. But, without the Financials, which have been leading the market, it was difficult to cover any new ground for the INDU. Financials came under pressure from profit takers, who decided to clip some of their proceeds. JPM was down $2.50 and C fell $1.94, coming off recent highs. Yet, it's time for the Financials to take a breather, considering the strong rally they have had over the past month. A little consolidation before September wouldn't hurt one bit. We will be watching this sector carefully to reestablish its leadership to drive the markets higher in the Fall. Technically, you can see on the chart below that August has brought an impressive rally to the INDU, and establishes it soundly above 11000. Propping up the INDU today was XOM(+1.38). The October crude oil future contract gained 80 cents to close at $32.02, after hitting an intraday high of $32.80. This comes after the American Petroleum Institute(API) released data showing a 7.8 mln barrel, larger-than-expected decline in oil inventories, bringing it to a 24 year low of 279 mln barrels. The Energy Department only reported a 4.1 mln barrel decrease and an inventory of 284 mln. This lower inventory causes short-term price inelasticity in supply, resulting in greater price volatility. Also, concerns over the hurricane season in the Gulf, a key production area, can add uncertainty to oil prices, translating into volatility. For consumers, this means that relief at the pump may be further off than expected. For oil service stocks, it means new all-time highs and continued uptrends. Some interesting developments in the world of high speed Internet access came from SBC Communications. The company announced that it would start testing its "neighborhood gateways" that will allow them to reach more businesses and consumers with DSL connections. There are ten other phone companies that will participate in the tests to be performed in California and Texas. SBC ensures that rivals will be able to take advantage of these "gateways," in order to ease FCC concerns over stifling competition. Right now, DSL can only be offered within a 3.5 mile radius from the central office, in general, so there are constraints on the reach of high speed Internet access. SBC wants to connect "neighborhood gateways," or sub-stations, to the central office, and then connect from there to the consumers. The end-result should be more DSL connections to the consumer quicker. SBC was up $0.56 to $40.19. Looking forward, I think it will be of the essence to watch these markets very closely the next two weeks. We are at an inflection point as the summer end draws near. Financials and Techs are what will drive this market into the Fall. I will be waiting for an entry opportunity, hopefully after a pullback and/or a consolidation. Once the volume comes back to add conviction to these recent moves, we could be off to the races. Yet, for now, as I mentioned above, we are still rangebound and the big-money trading desks are running the show. Will it be 4200 first or 3800? Volume has been light, and its return will indicate that money managers are back with their shopping carts. Another indicator that continues to be of concern is the VIX.X, closing at 19.88. It's screaming over-bought! We will have to wait and see as September draws near. I'm not bearish here, just cautious as the summer has humbled many. Until a discernable trend makes itself clear, remember, when in doubt, stay out. Matt Russ Asst. Editor ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *************** ASK THE ANALYST *************** How to spot the future winners. By Eric Utley Do your homework, and you'll make money. Last week I mentioned there were stocks emerging as new leaders, which might carry the market during the next bull run. Joan wrote in, "Will you please list these newer stocks... I'm looking for stocks that are worth monitoring and would like to know the names." While I cannot list the stocks I think will lead the market higher, I can tell you exactly what I look for when picking stocks for my investing account. In my humble opinion, the single most important factor in picking winning stocks is finding companies with growing earnings. After all, when it gets right down to it, common stock holders share in the profits of a corporation. Earnings are what matters! That's why I always try to highlight a company's earnings picture when I review stocks in this column. Along with growing profits, you have to look for company's operating within growing sectors of the economy. That's vague, I know, but it's important. There are always sectors of the economy that are emerging, slowing, or dying; make sure you're in the former. A few sectors that have recently emerged as winners, in no particular order: Generic Drugs, Asset Managers, Commercial Schools, Dental Services, Biotech Instruments and Software, and of course, Fiber Optics and the host of Chip sectors. It's important to fragment the market into specific sectors, and key in on the winners within the group. Once you find a few candidates within a given group, it pays to glance over the balance sheet and make sure the company is not mired in debt. After you have found the emerging sectors, picked the leaders, and reviewed their fundamentals, the next step is to bring in the time and price elements of technical analysis in an attempt to pick the best entry points. More on that next week. In the meantime, a good place to screen for the next market leaders is the new 52-week high list. Buy high and sell higher! I maintain OIN readers are the best of the bunch. Keep those questions and stock picks coming by sending your requests to Contact Support. Please put the symbol of the stock in the subject line of the e-mail. Thanks! ---------------------------- Cisco Systems - CSCO What's wrong with CSCO...Short and long term analyst...what do you think of the PE? - Thanks Ali CSCO, of course, is the King of the Internet, the mother of all infrastructure plays, one of the Four Horseman of the NASDAQ. The problem with CSCO right now (it's really not a problem) is that the stock is one of the Tech sector winners that has come a long, long ways over the past several years. And, it takes time to digest big runs like CSCO experienced last Fall and through the Spring. Market leading stocks, such as CSCO, need to consolidate after such runs in order for fundamentals to catch up with valuations. As for the CSCO's P/E Ali, the trailing multiple (last four quarters of earnings) is a lofty 120, and the stock's forward looking P/E (next four quarters of earnings) is a still-expensive 89. Furthermore, all the good news has already been discounted into the stock price. Which means, the bulls aren't real motivated to take CSCO higher right now. But, that can change quickly. The fact is, CSCO consistently grows earnings around 30% per year, and has one of the best management teams in the world. What's more, the company acts as an investment bank in the way of mergers and acquisitions. CEO John Chambers is renowned for purchasing competing and complimentary companies in order to beef up CSCO's product offerings and market breadth. In short, there is nothing wrong with CSCO! CSCO is the kind of stock you could probably buy at its current levels, forget about it, and sell it a lot higher five years from now. It is also a highly tradeable stock, with its massive runs that is has become notorious for. I've actually pulled up a weekly chart on CSCO below, which goes back to the Fall of 1998. Looking at the chart, I see several entry opportunities for both the short-term or swing traders and the long-term investor. First, CSCO has established solid support at the $60 level. A trader, and a long-term investor for that matter, might consider buying a dip down to that support level. The stock has had a hard time clearing resistance at $70; again, which might also provide entries for both the traders and investors upon a strong rally above that level. But, the real hurdle for CSCO will be clearing the $80 level. A burst above $80 would signal a breakout and possibly the beginning of CSCO's next major leg up. Of course, I'm following the mantra I described above of buying high and selling higher. Before CSCO breaks out, though, I'd like to see the stock consolidate for another two to three months. A six month consolidation might build the right base to launch CSCO into the heavens. In the meantime, the churning between CSCO's support and resistance levels might provide some trading profits. ---------------------------- America Online - AOL Could you please analyze AOL chart and give us your targets for the year end 2000. - Thanks Rachuru The AOL - Time Warner (TWX) merger is expected to be completed in early November. The completion of the merger will transcend AOL to a traditional media company opposed to an Internet bellwether. The upcoming transformation has hindered AOL's stock over the past several months because investors aren't quite sure how to value the combined entity. Of course, the arbitrageurs haven't helped AOL since the merger was announced. In essence, TWX is a holding company, with six areas of operations: Cable, Cable and Networks, Publishing, Music, Filmed Entertainment, and Digital Media. AOL is having a hard time integrating TWX's fragmented businesses smoothly. Furthermore, the Federal Communications Commission is reviewing the merger with a microscope, which might lead to certain stipulations and restraints as requested by rival Disney. And, consumer advocate groups are screaming the horrid 'monopoly' word. Isn't it ironic that AOL CEO Steve Case, who testified against Microsoft, is now being accused as a monopolist. The aim of AOL and TWX is to merge television and the Internet into one. And, if they succeed, the combined entity will be a media powerhouse. AOL's 23 mln subscribers combined with TWX's breadth of media offerings will create a force to be reckoned with, which is why Disney so vehemently opposes the merger. And, if the consumer advocate groups are right and the combination of AOL and TWX becomes a monopoly, that could mean big profits for investors in the coming years. But, the possibility of a monopoly being formed represents risks in and of itself. The hurdles challenging AOL, namely government scrutiny and valuation concerns, have the stock trading at a discounted level relative to the broader market. If all goes well with the merger, AOL might be a bargain at its current levels. Further, the closing of the merger in early November will alleviate the selling pressure from the arbitrageurs. But, I don't expect AOL to greatly outperform the market by year's end, as it has done in the past. AOL is no longer the highflying Internet stock that made the Janus and Legg Mason funds a ton of money over the last five years. Before loading up on the stock, I think it might be prudent to wait and see how the market views the completion of the merger. If AOL starts climbing out of its six month slump it might be time to jump on board. Rachuru, let the market set AOL's price target, not the analysts. Let the market tell you when it's time to buy, sell, or hold. ---------------------------- Vodafone Airtouch - VOD Please comment on VOD. What is it's problem? Recovery? - Thank you Wanda Wanda, the European Telecom operators are a bad, bad place to be right now. A few casualties of war over in Europe are Telefonica (TEF), Deutsche Telecom (DT), France Telecom (FTE), and your VOD. Don't bother looking at the charts of the aforementioned stocks, they are too much to bear, no pun intended. The most recent bout of selling in VOD was spurred by the recent auction of third-generation mobile phone licenses in Germany. The German regulators charged an exorbitant $46 bln for six licenses. For better or worse, VOD won a license to operate. Now, there are two problems with VOD paying such a high duty to operate in Germany. First, profit margins shrink to razor thin levels, and the company needs to raise cash to pay for the licenses. The European Telcom companies, including VOD, are issuing huge amounts of stock and debt in order to raise funds for the purchase of the licenses. A huge supply of stock is expected to come to market over the next year. There simply not enough demand to meet the new supply of stock. And, VOD's debt is mounting. Credit analysts, Standard & Poor's and Moody's, recently downgraded their respective ratings on VOD's debt. The two aforementioned credit rating services are much more telling than your run of the mill equity analyst. You want to pay special attention when bonds are downgraded. The aim of VOD in buying the wireless licenses in Germany is to tap into the country's rich consumer base, and sell them Internet services and cell phone services. VOD knows that it needs a presence in all of the major European markets (Britain, France, Germany, and Italy) in order to make money. But, some analysts question whether or not the traditional Telecom Service Providers such as VOD will ever profit from wireless Internet services in the European markets. What's more, VOD will have to continue to pay up huge amounts of cash as more and more licenses are freed up by European regulators. Wanda, I hate to say this, but I can't argue a bullish case for VOD from any angle. The stock is now almost 50% off its yearly high, and I don't see the selling subsiding. In fact, the technicals suggest more downside to come. ---------------------------- Calpine - CPN Could you recommend some good call plays on Calpine (CPN) and Dynergy (DYN). These utility stocks have been on a steady rise of late. - Jim In retrospect, I should have included the Utilities sector in my list of leading sectors above. CPN is an independent power producer that sells electricity across the country. Now, CPN is not your father's utility stock. CPN is a 'New Economy' utility company with a 40% earnings growth rate. The company has a history of increasing earnings, and has thrown in several upside surprises. In its last quarter, CPN surprised Wall Street with a profit report 58% above estimates. The company is benefiting from the deregulation of the power industry and the need to rebuild the country's energy infrastructure. Also, electricity is in high demand. All of those little gadgets we've come to love (like the computer I'm using now) need a lot of power to turn the wheels. CPN has a stronghold on two of the largest and fastest growing markets, California and Texas. Deregulation has allowed CPN to build more power plants in those key markets in an attempt to fulfill the current surge in demand for electricity. Merrill Lynch recently called CPN the single best way to play the deregulation and build-out of the power industry. I tend to agree with Merrill's views, especially with the kind of fundamentals CPN has. The company has been on an acquisition binge lately to help spread its reach in the power industry. In less than a month, CPN has acquired Quintana Minerals, a Canadian natural gas company, a power plant in San Jose, California along with 205 bln cubic feet of natural gas reserves, and two natural gas-fired power plants in the Northeastern United States. CPN's fundamentals are in place, and despite the stock's recent run, it still sells at a relatively cheap price. And, the chart is just beautiful. To me, it looks like CPN has caught the attention of the momentum investors. As always Jim, I cannot give specific call recommendations, but I can tell you where you might look for entry points. After breaking from its most recent consolidation in late July, it looks like a good strategy has been to buy the dips. The stock is using its 5-dma for support, which might provide an entry into the stock upon a dip down to that level. Since CPN is at a new 52-week high, there's no resistance above, just clear blue sky. The stock generally advances in a stable fashion during intra-day climbs, making entry into CPN in the morning possibly profitable if the Utility sector continues its climb into record territory. One last thing, CPN is a candidate to be added to the S&P 500! ---------------------------- SDL Incorporated - SDLI Can you review SDLI and the potential of this as an option play as the stock is trading significantly below the projected rate of exchange if JDSU completes the merger? - Thanks Rick JDSU agreed to pay 3.8 shares of its stock for each share of SDLI. Based on Wednesday's closing prices, SDLI is worth around $465, about a 17% premium above the actual closing price. The 17% premium might not seem like a lot because of SDLI's high price, but, options players can use leverage to exploit that spread, which is why SDLI was recently added to the OIN call list. In order for that spread to continue to narrow, the market needs to be convinced that the deal will go through as planned. JDSU has fallen under Justice Department scrutiny in the past for its history of buying its largest competitors, such as ETEK. But, JDSU also has a history of appeasing government regulators through stipulations and spin-offs, which might have otherwise given the company a monopoly over certain segments of the Fiber Optic market. The proposed merger hasn't faced very much scrutiny from the DOJ yet. So, for the time being, it looks like the deal will go through, which makes the current spread an attractive proposition. JDSU recently said the merger is on track to close in the December quarter. Of course, JDSU needs to remain at its current levels or even trade higher for an arbitrage trade to be profitable. If you're looking to SDLI for more than a trade, I think the stock represents a good long-term investment. Given the current spread in the deal, it's a cheap way to buy JDSU. Essentially, by buying SDLI, you're buying JDSU at a nice discount relative to its actual price. Furthermore, the combined JDSU-SDLI entity will be the 600 lb gorilla of the Fiber Optic Components market. And that market is showing no signs of slowing. Both companies are having a hard time keeping up with demand from network builders. By joining forces, JDSU and SDLI will benefit from synergies, which will combine to ramp production and development efforts to better meet the demand of the glowing Fiber Optic market. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. *********** OPTIONS 101 *********** A Plug By David Popper Last week, I had the opportunity to go to the option seminar in Orlando. Chris, Steve and Scott ran the show. This seminar had a little bit for everyone, from the experienced investor to the novice. Steve and Scott spoke about stock trading, while Chris dealt with options. Specifically, Steve calls himself a Gamma Trader. As far as the stock trading portion of the seminar is concerned, Steve concentrated on a number of strategies, some of which are proprietary. These strategies center around recognizing and trading divergences between the price action on the one hand, and indicators such as RSI, MACD, ROC, etc. on the other. Steve’s premise is that when there are divergences, such as the price moving up while the indicators are down or vice versa, an extreme condition exists, which makes the stock ripe for reversal 70% of the time. Steve began by describing and giving examples of extreme conditions generally. He then spent the bulk of two days migrating from simple strategies to strategies that became more and more refined. The simple strategies could be used by almost anyone immediately. The more refined strategies were more profitable, but take time to master. In short, the simpler strategies require less monitoring, but are less profitable. The more refined strategies are more profitable but require much more maintenance. As Chris stated, "you can make a living on the simple strategies, but you can make a fortune on the refined strategies." In my opinion, the simplest divergence system provides easy to understand entry and exit points that should substantially enhance any strategy that is currently being used. For example, I may use a simple divergence strategy to enhance covered call or naked put writing. I believe that even a basic understanding of Steve’s strategies would have saved me more money in March than the cost of the seminar. Thrown into the mix was a proprietary strategy, which is easy to use, and when is used properly makes it difficult to lose money. I wish that I could talk about it, but as an attorney, especially one that lives in Orlando, I am acutely aware of the dangers of revealing proprietary information. Incidentally, I think Disney recently learned a similar lesson. Chris spent the last day talking about options. Chris discussed the option basics, such as fundamentals about puts and calls, pricing, etc. Particularly interesting was the discussion about how market makers go about their business. Understanding options from the market maker’s perspective, and believe it or not, understanding the role that a dividend plays in an option price is helpful. Further understanding "the Greeks" should enhance everyone’s option performance. Finally, Chris introduced a LEAP option play, where the upside potential is enormous, but the downside risk is minimal. Again, it is good enough to be proprietary. Before I attended the seminar, my preconceived notion was that I would receive a lot of high risk strategies that could kill me if incorrectly executed. I felt that if I learn a trick or two it may be worth it. I was surprised when the speakers emphasized safety above all else. In their minds, safety does not mean to refrain from trading, it means trading with understanding. So the seminar was helpful, now how will I use it? Will I throw out every other strategy that I use? No. I have strategies that I have used for a long time and I am comfortable. Will I use the information to enhance the strategies that I already use? Absolutely! Should I be more profitable? Yes. Will I go again? Yes. Should you go? If at all possible. We trade for our families. If trading can be more than a hit or miss adventure, our financial futures are more secure. Learning systems for profitable trading was what this weekend was all about. Contact Support ************** TRADERS CORNER ************** Education In Options Trading By Austin Passamonte "Can you believe the price of coffee?" That statement jolted me from a meandering daydream recently as I sat slumped and bored at a family gathering. Did I miss something? Were coffee futures about to make a run on a freeze-scare short covering? Nope. Just one family member relating to another how their morning dose of caffeine recently jumped from 80 cents all the way to 96 cents at a small-town breakfast stop they frequent. Land sakes, a 16 cent price increase? Heaven help us! I was annoyed at being distracted from my thoughts. I was mentally replaying the last losing trade stopped out not long ago at $250 per option and I held ten of them. These guys are worried about 96 cent cups of coffee while one wrong guess cost me $2500 in the blink of an eye - are we still on the same planet here together? I'd happily pay $96.50 for a stinkin' java cup just to have that trade back again. Fact is we traders do exist in a different world than most. Think about it; how many of your non-trading friends have the privilege to make or lose a weekly, monthly or yearly median U.S. income on a single trade? My own inner circle counts exactly zero such people beyond the trading world. Do you sometimes find yourself as I do with one foot still in each world? Hopefully, this outlook doesn't include the investment cost of your trading education. I'm not talking about money...the price we must pay to succeed is time, our most precious commodity of all. There's a literal sea of money out there that you & I watch flow past us every day. Learning to safely & effectively capture our share & then some is the tricky part. In my time, I've searched out endless financial & trading websites. This activity has actually intensified over the last few weeks via a personal project. One thing has become increasingly clear: to my discovery yet there doesn't exist a trading site filled with more pure education than right here in OIN. This isn't some promotional article for OIN lest it seem that way. OIN has done just fine before me and will continue to long beyond. I'm merely a paid subscriber who contributes material on a free-lance basis. With that in mind, let me share some personal experience with you. I had traded options successfully for some time prior to discovering OIN by chance. My educational library compiles more than 100 books and videos on trading subjects across the spectrum. Over a decade of trading & following stocks and commodities lies under my young belt, besides. There was little doubt option trading would be yet another level to learn and probably the most complex study of all. Even so, I was a bit on the cocky side about the whole thing. Can you sense what's coming next? Well, getting started trading equity options in a bull market will hide plenty of mistakes. Missed the best entry point on those calls? No problem, if we bought enough time the markets will come back before long. Remember those days? After getting burned a few times, I realized there was more to this than most how-to books divulge. Right about then was my discovery of OIN. I took advantage of the trial period and signed up well before it expired. This was truly the source of "in the trenches" info I'd been searching for. Over a few weeks (and I do mean weeks, I spent every night with few exceptions squirreled away in my home office going back through OIN archives reading every single article, news release and chat-room string available. Without question I learned more from that study than my entire trading library combined ever taught me. You don't have time for such massive study? Forgive me but that would not be stating a fact. It's stating a preference. Free time is a myth; we each use our allotted 24 hours daily already. How we choose to carve it up and invest or squander such is strictly up to us. Do you think any option traders out there who feel they have too little time for study might tune into "Survivor" three- hour episode & follow up tonight? I'd bet all my trading accounts a bunch of them are glued to the screen even as these words sit idle waiting to be read. I'm sure it's a wonderful show and everything but I've yet to watch a single minute of it and probably never will. Personally, I don't have time NOT to study options trading. Using three hours of my life tonight to learn who of the four wins one million dollars does not move me one inch closer to my first million, now does it? Spotting the next incredible trade on my charts just might. I receive a fair stream of email from readers on a daily basis and enjoy them all. Every question where money's concerned is a good one and we field plenty. It is clear to me many readers never take time to sift back through OIN archives and glean the wealth of information in there. Colossal waste of incredible learning resources! New readers should immediately begin with the "Education," heading in the front page and click on every link below, methodically reading & taking notes from all articles contained within. Those who do so with dedication will soon be within the top 10% of all equity traders in education by study's end. How do I know? That's easy; 90% of all traders just plunk their money down on "hot" calls they hope will appreciate. Again, I'm sure a number of traders still feel there's no time for that. Hey, isn't the purpose of OIN to click in, skim for plays and enter such with the broker for tomorrow's execution? Not hardly. No question in my mind that's exactly what a majority of men do. Notice I said men. Women are much better at study & research as a general rule. We prefer to cut corners, especially when it comes to "investing". No time to learn - the markets are flying by. Just take a hot tip from chat room strangers and throw money at the market, it's sure to throw even more back! Those of you still left reading at this point are among the potential elite. Others sifted themselves out many words ago to find the next hot trade in five minutes or less. After all, we can get rich trading options by studying the markets during Monday Night Football commercials. That's what one prominent options "course" touts. Five minutes a day to wealth...oh really? I must be stone stupid then because it took endless hours to claw my way to this point. I know, I know - your good friend's rich buddy made a fortune in the markets over the past two years and he doesn't know squat about trading. Just took some tips on CSCO, JDSU and a bunch of others from his broker or golfing buddies. Worked for him! Marvelous. By the way, how's he doing so far this year? We always have lottery winners in every aspect of life but is that how you intend to bet your financial future? The markets will dish out easy money just enough times to suck it all back and plenty more besides soon as the neophyte thinks he's an expert. Margin calls, anyone? If I had to choose between OIN archives and every trading book in my library for a sole source of education, there'd be a massive pile of books burning in the backyard post-haste. Are you tapping into this resource? Can you afford to invest your time dedicated to earning incredible wealth from this complex pursuit? Can you afford NOT to? Invest the time necessary to research this site and the reward could be more time freedom than you ever imagined as a result. Incidentally, we're pulling for Rudy to win it all tonight. The crusty ex-SEAL is a Rochester, NY native who promises to donate most of the jackpot to young family and charity. Who said I'm lifeless and out of touch? austinp@OptionInvestor.com ***********************ADVERTISEMENT************************ Up To 60% Off At EverythingWireless.com The online super-store for your active lifestyle. Select from the largest range of accessories and products you use every day including Cellular and PCS phones, batteries, chargers, hands-free kits, wireless data products and more. http://www.everythingwireless.com/wireless/homepage?id=1601002 ************************************************************ ********************** PLAY OF THE DAY - CALL ********************** DIGX - Digex Inc $85.00 +4.56 (+4.44 this week) DIGX is a leading provider of hosting services to businesses and organizations operating mission critical, multi-functional Web sites and Web-based applications. Their hosting services are used by some of the leading Internet companies. The company also offers value-added enterprise and professional services, including performance and security testing, monitoring, reporting and networking services. They operate two data centers in the US and one in the UK that house more than 2,300 company-owned and managed servers. Digex clients include Forbes, J. Crew, and Nissan. Most Recent Write-Up Let the games begin! We're in the midst of a battle as DIGX consolidates at its new price level. Average volume is typically around 816K shares, but this week they reached 2.05 and 1.07 mln shares, respectively. After DIGX spiked through the overhead resistance ($81.81) during amateur hour on Monday, traders were effectively offered an optimum entry. DIGX came off a low of $75.88 and made immediate headway to the $80 support level, just above the former opposition at the 200-dma. Then again today, DIGX dipped under the $80 mark to tag $77.63 offering another opportunity. On this rebound, however, the stock tested the ceiling three times before settling at the close. This is a bullish sign. Although, if you're considering entering on upside action, it would be wise to wait for the upper resistance (now $82.88) to be shattered before opening new momentum plays on DIGX. Comments Well, the battle today was won by the bulls as they used the $80 support level as a launch pad. Once the NASDAQ made its own test of the 3900 level, it was clear sailing for DIGX. Volume remained steady throughout the day. Intraday support was established at $84, so any pullbacks and bounces from there, along with a strong NASDAQ, would be a good entry. If that doesn't hold, look to $82.50 and then $80 for bounces. More conservatively, a trader may want to wait for DIGX to barrel through the $85 level with convincing volume before entering. Watch the NASDAQ for an idea of direction. BUY CALL SEP-80 UOM-IP OI= 615 at $10.63 SL= 8.25 BUY CALL SEP-85*UOM-IQ OI= 429 at $ 8.00 SL= 6.25 BUY CALL SEP-90 UDX-IR OI= 141 at $ 5.75 SL= 4.00 BUY CALL OCT-85 UOM-JQ OI= 180 at $12.75 SL=10.25 BUY CALL OCT-90 UOM-JP OI= 156 at $10.25 SL= 7.75 Picked on August 20th at $80.56 P/E = N/A Change since picked +4.44 52-week high=$184.00 Analysts Ratings 9-6-0-0-0 52-week low =$ 21.19 Last earnings 06/00 est=-0.56 actual=-0.54 Next earnings 11-01 est=-0.62 versus=-0.36 Average Daily Volume = 816 K ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** The "Chips" try to lead the Market out of the dip... The market edged higher today amid anemic activity as confidence in a late Summer rally waned. Analysts remain optimistic that the Fed will provide a soft landing for the economy but most investors are not inclined to overweight their portfolios with stocks at this time of the year. Even though the FOMC suggested that the likelihood of an interest rate hike is slim in the near future, it appears that the trading public is willing to wait for the next round of earnings before committing any substantial funds to the equity market. Some speculation surfaced in semiconductor and Internet shares and those groups continued to sustain the recent Nasdaq rally. A number of well-known analysts commented on the July semiconductor capital equipment book-to-bill ratio, which declined slightly from last month's numbers. CS First Boston said the report supports the view that industry fundamentals are healthy and that the longevity of the cycle continues unabated. Donaldson Lufkin & Jenrette commented that they still expect the leading chip-makers to meet or exceed earnings expectations over the next few quarters. Biotechnology stocks also enjoyed small gains after the U.S. National Institutes of Health approved new, controversial guidelines for human embryo stem cell research funding. Human embryos contain stem cells, which promise medical advances in drug development and the decision is expected to end the uncertain future for many biotech companies. Solid advances were seen in oil industry stocks. Shares were boosted by a jump in crude oil prices in the wake of another plunge in inventories. Merrill Lynch said it remains bullish on the energy group and reported that although the sector is not as favorable as it was earlier in the year, the larger stocks in the industry are seen as inexpensive. On the downside, finance and brokerage shares consolidated while paper, retail and airline shares slumped. Based on the lack of conviction among major indicators, we will continue to focus on conservative entry points into technically bullish charts, with reasonable monthly returns. Summary of Previous Picks: Covered Calls: (Margin would double the listed Monthly Return) *** NOTE: August prices as of Friday's Expiration Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return PROX AUG 75 73.43 92.34 $1.57 7.2% GMST AUG 60 56.06 74.13 $3.94 7.1% EXTR AUG 140 137.31 178.13 $2.69 6.6% CALP AUG 50 47.84 53.06 $2.16 6.0% CALP AUG 50 48.50 53.06 $1.50 5.9% TUTS AUG 90 88.50 98.44 $1.50 5.7% ITWO AUG 115 109.00 150.00 $6.00 5.6% ENE AUG 75 72.88 86.94 $2.12 5.5% NTAP AUG 90 85.44 93.94 $4.56 5.4% IDPH AUG 120 116.94 131.94 $3.06 5.0% VRTA AUG 55 52.18 60.69 $2.82 4.4% VSTR AUG 135 127.25 123.38 -$3.87 0.0% Ouch! ARTG Closed AWRE Closed AETH Closed METHA SEP 45 41.50 52.69 $3.50 8.6% PHCM SEP 85 78.25 85.50 $6.75 7.1% SMTC SEP 80 75.43 103.38 $4.57 6.1% MIPS SEP 45 42.88 57.63 $2.12 5.0% NAVI SEP 45 42.87 43.25 $0.38 0.9% At support Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return PROX AUG 75 73.75 92.34 $1.25 17.1% SAPE AUG 95 93.12 124.56 $1.88 13.7% TUTS AUG 85 84.12 98.44 $0.88 11.8% ENE AUG 75 73.12 86.94 $1.88 11.8% TUTS AUG 70 68.81 98.44 $1.19 11.8% CALP AUG 45 43.88 53.06 $1.13 10.9% CALP AUG 45 44.31 53.06 $0.69 10.4% VRTA AUG 55 53.81 60.69 $1.19 9.6% IDPH AUG 110 108.50 131.94 $1.50 9.2% NTAP AUG 80 78.12 93.94 $1.88 8.7% VRTA AUG 50 48.38 60.69 $1.62 8.4% EXTR AUG 130 129.12 178.13 $0.88 8.1% GMST AUG 50 48.87 74.13 $1.13 7.7% AMCC AUG 120 118.31 174.13 $1.69 6.5% SEBL AUG 115 113.94 172.31 $1.06 6.5% MACR AUG 75 73.32 76.25 $1.68 6.2% ITWO AUG 95 93.31 150.00 $1.69 6.1% MERQ AUG 85 83.32 101.44 $1.68 5.8% SAPE AUG 85 83.56 124.56 $1.44 5.7% VSTR AUG 110 108.31 123.38 $1.69 5.6% MERQ AUG 80 78.87 101.44 $1.13 5.2% TIBX AUG 90 87.63 88.94 $1.31 4.2% ARTG Closed (Ended up profitable - Murphy's Law) AWRE Closed (Ditto - hindsight!) CLRN Closed (Ditto - sigh) AETH Closed METHA SEP 40 38.37 52.69 $1.63 14.0% MIPS SEP 40 38.87 57.63 $1.13 9.9% NAVI SEP 40 39.00 43.25 $1.00 8.9% At support EMLX SEP 55 53.75 98.25 $1.25 7.9% SMTC SEP 70 68.62 103.38 $1.38 6.9% MMCN SEP 55 53.94 80.94 $1.06 6.7% MXIM SEP 65 63.75 84.06 $1.25 6.6% PHCM SEP 65 63.50 85.50 $1.50 6.2% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return MRVC AUG 100 102.44 70.19 $2.44 19.4% IMCL AUG 90 90.69 88.50 $0.69 15.8% VRSN AUG 175 176.00 159.75 $1.00 11.2% RBAK AUG 155 156.13 147.50 $1.13 8.7% ADBE AUG 135 135.69 122.56 $0.69 8.2% MUSE AUG 195 196.31 129.88 $1.31 5.9% HWP AUG 150 151.00 112.00 $1.00 5.7% New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** ADBE - Adobe $126.06 *** Bracing For A Rally? *** Adobe Systems is a provider of graphic design, publishing, and imaging software for Web and print production. They offer a line of application software products for creating, distributing, and managing information of all types. Adobe licenses its industry-standard technologies to major hardware manufacturers, software developers, and service providers, and offer integrated software solutions to businesses of all sizes. Not much news on well-known this issue but last week the company announced the release of a significantly enhanced version of its award-winning professional Web authoring software, Go Live 5.0, as well as its sponsorship of the 2000 ESPN Summer X Games. The company also recently filed a lawsuit against Macromedia (MACR), a leading maker of Internet software, for allegedly violating a patent on how information is displayed on a computer screen. The case is complex and will undoubtedly take a significant amount of time to resolve, and as is the case with most patent trials, will most likely end up with a settlement rather than a judgement. From a trend and momentum viewpoint, today's move suggests there may be additional upside potential in the future of this issue and a cost basis near technical support will suit us just fine. ADBE - Adobe $126.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call SEP 115 AXX IC 1271 16.38 109.68 6.4% *** Sell Put SEP 105 AXX UA 844 2.25 102.75 9.4% *** Sell Put SEP 110 AXX UB 905 3.50 106.50 12.2% Sell Put SEP 115 AXX UC 1474 4.88 110.12 14.6% Chart = ****** INKT - Inktomi $120.75 *** On The Rebound! *** Inktomi provides scalable software applications designed to significantly enhance the performance and intelligence of large scale networks, particularly the Internet. Inktomi provides applications in the areas network products and portal services. Their network products consist of the Traffic Server network cache platform, Content Delivery Suite and associated Traffic Server extensions, which are intended to provide a complete infrastructure solution for the distribution, delivery and management of content and applications. Inktomi responded positively to the announcement of a new deal today, rallying almost $10 to close near $120 on heavy volume. The alliance is called "Content Bridge," and is with America Online Digital Island, and Exodus Communications. The pact was formed to help ensure Internet users receive the most up-to-date information available on the Web. Under the new, multilateral agreement, Inktomi will deliver network infrastructure technology for the system. Technically, the issue is showing increasingly bullish indications and today's move above the August high suggests the stock is moving back into the previous trading range. We also favor the support provided by the recent consolidation near $105 and the favorable sector outlook. INKT - Inktomi $120.75 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put SEP 100 KYQ UT 978 1.38 98.62 6.3% *** Sell Put SEP 105 KYQ UA 191 2.25 102.75 8.6% Sell Put SEP 110 KYQ UB 180 3.38 106.62 10.9% Chart = ****** MIPSB - Mips Technologies (B) $52.38 *** On The Move! *** MIPS Technologies is one of the leading designers of high performance processors, cores and related intellectual property for use in a wide variety of increasingly sophisticated consumer devices and business equipment. Its designs are based on its reduced instruction set computing (RISC) architectures. Its 64-bit RISC architecture is the volume leading architecture for 64-bit processors. MIPS licenses its designs and related intellectual property to semiconductor companies and system original equipment manufacturers. Its licensees currently offer over 60 standard processors based on its RISC architecture, which have a cumulative installed base of over 120 million units. Earnings are one of the primary movers of stock prices and last month, MIPS reported stellar results for the quarter. Revenue for fiscal year 2000 grew 25% to a record $89 million and when the royalties from Nintendo were excluded, revenues increased over 100% compared to fiscal 1999. Contract revenue jumped 176% and accounted for 38% of the total revenue. Quite simply, MIPS Technologies completed its strongest quarter and fiscal year since their IPO and future growth in the fundamental business is forecast to be excellent. If you favor the bullish outlook for the issue, this conservative position in the company's [B] issue offers an excellent entry point, considering the current market volatility. MIPSB - Mips Technologies (B) $52.38 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call SEP 45 QOS II 41 9.13 43.25 5.4% *** Sell Put SEP 45 QOS UI 5 1.63 43.37 14.2% *** Sell Put SEP 50 QOS UJ 0 3.50 46.50 21.0% Chart = ****** QLGC - Qlogic $106.38 *** Breakout! *** QLogic is a designer and supplier of semiconductor and board level input/output(I/O) and management controller products. Their I/O products provide an interface for the direct attachment or networking of computer systems and their data storage environments. Additionally they design and market baseboard and enclosure management products that monitor and communicate management information related to components that are critical to computer system and storage subsystem reliability. With the recent acquisition of Ancor, Qlogic will complement its existing Storage Area Network (SAN) product lineup with a number of new Fibre Channel switch systems. QLogic already offers the broadest line of SAN components in the industry with a range of products including PCI host bus adapters, controller chips and software solutions. Being a one-stop shopping source for host bus adapters and switches positions the company uniquely among SAN component suppliers. The potential is high for the sum to be more than the parts. Their unique status in the industry allows them to deliver and service complete, open-standard, end-to-end infrastructure solutions that can be tailored to complement the diverse requirements of OEMs, system integrators and resellers. That says a lot about the fundamental outlook for the company but we simply favor the bullish chart pattern and the increased volume on today's technical "breakout." QLGC - Qlogic $106.38 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put SEP 85 QLC UQ 164 1.50 83.50 8.7% *** Sell Put SEP 90 QLC UR 209 2.56 87.44 11.8% Sell Put SEP 95 QLC US 120 4.00 91.00 15.0% Chart = ****** TUTS - Tut Systems $110.94 *** Up, Up and Away! *** Tut Systems develops and markets advanced communications products that enable high-speed data access over the copper infrastructure of telephone companies, as well as the copper telephone wires in homes and businesses. Their products incorporate high-bandwidth access multiplexers, associated modems and routers, Ethernet extension products and integrated network management software. Expansion is the key to success in telecom networking and Tuts recently announced it will use its swelling Nasdaq market cap to buy privately-held ActiveTelco, a maker of unique telephony and messaging products. The move is expected to enhance Tut's next generation multi-service platform by allowing service providers to offer additional voice and telephony services to their major customers. With the acquisition, the company is poised to offer an entire portfolio of products which can deploy integrated communications services to virtually every type of building or facility. These solutions provide cost-effective, high-quality alternatives for service providers in the fast growing market of telecommunications networking. This company is one of our favorites for long-term portfolios and the recent demand for Communications Equipment Providers has boosted the bullish issue out of a previous trading range. The fundamental outlook is very positive - revenues are expected to grow 100% year over year - and the stock should see higher prices in the future. The current technical trend is favorable and we offer this position as a "second chance" entry, based on the chart indications. The stock is slightly over-extended but a reasonable, short-term cost basis exists near the previous resistance area at $85. TUTS - Tut Systems $110.94 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put SEP 80 QSS UP 176 1.06 78.94 6.0% Sell Put SEP 85 QSS UQ 57 1.81 83.19 10.0% *** Sell Put SEP 90 QSS UR 42 2.63 87.38 13.3% Sell Put SEP 95 QSS US 76 4.13 90.88 16.8% Chart = ****** VRTX - Vertex $145.06 *** Drug Sector Hedge *** Vertex Pharmaceuticals designs, develops and commercializes novel small molecule drugs that address significant markets with major medical needs, including the treatment of viral diseases, cancer, autoimmune and inflammatory diseases and neurological disorders. Vertex has discovered and advanced nine drugs into clinical development, including one product, the HIV protease inhibitor Agenerase (amprenavir), which has reached the market. It has 7 drugs in Phase II clinical development. Vertex has significant collaborations with Glaxo Wellcome, Aventis, Schering AG (Germany), Eli Lilly, and Taisho that provide it with financial support and other valuable resources for its research programs and the marketing and sale of its drugs. Vertex develops small molecule therapeutics. Its current product is an anti-HIV protease inhibitor, Agenerase, which was approved by the FDA in 1999. In the coming months, Agenerase is expected to get European approval, and a second-generation formulation is scheduled to enter Phase III testing before the end of the year. In addition to Agenerase, Vertex has built a broad pipeline of drug candidates for treatment of cancer, inflammation, autoimmune diseases, hepatitis C and neurological diseases. The company anticipates that a number of new drug candidates could enter clinical testing before the end of 2001. Vertex also intends to position itself in the post-genomics era, using new, structural information for a particular protein to discover information about other proteins in similar families. The benefit of such an approach is that it reduces the time required to devise the precise three-dimensional structure of all proteins of interest for possible therapeutic development. Vertex Pharmaceuticals also recently announced that its board has authorized a two-for-one stock split. The CEO says the split was initiated to increase the liquidity of Vertex common stock and to broaden their shareholder base. This move is intended to reflect the enthusiasm for Vertex's opportunities for continued growth as well as a long-term commitment to building shareholder value. The split will be in the form of a stock dividend and new shares will be distributed on August 23, to shareholders of record on August 9, 2000. VRTX - Vertex $145.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put SEP 110 VQR UB 15 1.31 108.69 5.7% Sell Put SEP 115 VQR UC 23 2.13 112.87 9.0% *** Sell Put SEP 120 VQR UD 24 2.88 117.12 10.6% Sell Put SEP 125 VQZ UE 15 3.88 121.13 12.2% Chart = *************** BEARISH PLAYS - Naked Calls *************** SNWL - SonicWall $74.00 *** Technicals Only! *** SonicWall designs, develops, manufactures and sells Internet security infrastructure products designed to provide secure Internet access. Their SonicWall solution is a high performance, solid state appliance that provides robust, reliable, easy-to-use and affordable Internet security. SonicWall sells its products to customers in the small to medium enterprise, branch office, telecommuter and education markets. There's not much news in the recent history of SNWL to explain the precipitous sell-off. The sector is performing well and in late July, the company posted record quarterly revenues and profits for its second quarter. In addition, the company said its board had declared a two-for-one stock split, to be paid on September 15 to shareholders of record as of August 25, 2000. Even as the market was moving higher, SonicWall experienced another major sell-off in today's session, on higher-than-average volume. With the issue now trading below an intermediate-term moving average, it appears the trend has further downside potential. The volatile activity in the stock has produced some excellent premiums in the OTM call options and we will use the current speculative interest to open a conservative, short-term position with a bearish outlook. SNWL - SonicWall $74.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call SEP 90 UWL IR 394 2.94 92.94 21.9% Sell Call SEP 95 UWL IS 53 2.00 97.00 15.7% Sell Call SEP 100 UWL IT 273 1.31 101.31 10.8% *** Chart = **********************ADVERTISEMENT************************* Free voicemail, email, fax, and paging - all in one place! Accessible over the phone & Internet. Free Local & 800 Phone Number for Life! Send & receive faxes & email via the web or phone. ThinkLink charges no monthly fees. Plus, for a limited time, sign up now and receive an airline voucher worth up to $100 dollars off any major airline. FREE NOW! FREE FOREVER! http://www.sungrp.com/tracking.asp?campaignid=323 ************************************************************ ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. 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