The Option Investor Newsletter Tuesday 08-29-2000 Copyright 2000, All rights reserved. 1 of 2 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/082900_1.html Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 08-29-2000 High Low Volume Advance/Decline DJIA 11215.10 - 37.70 11256.20 11196.60 788 mln 1324/1468 NASDAQ 4082.17 + 11.58 4093.88 4056.26 1.49 bln 2111/1916 S&P 100 827.30 - 1.89 830.44 825.49 totals 3435/3384 S&P 500 1509.84 - 4.25 1514.89 1505.48 50.4%/49.6% RUS 2000 529.63 + 3.15 529.69 526.48 DJ TRANS 2760.44 - 26.24 2788.77 2757.62 VIX 18.92 + 0.69 19.43 18.75 Put/Call Ratio .55 ****************************************************************** New home sales soar to highest rate in seven years! - THUMP !!! Just when everybody thought the highway was clear and there were no problems ahead, an unforeseen pothole appeared directly in our path. Sure the Fed is on hold until October or November, or is it? All of a sudden economic conditions turned full circle in just one report or so it seemed. Not only was the +14.7% jump in new home sales way over estimates but the jump went against seasonal trends and rising mortgage rates. Consumer confidence remains at near historic levels. Is the Fed really dead? The Dow took today's economic news personally and traders took profits from the brief run over 11300 on Monday. The financials dropped at the open on the negative economic news but low and behold before the day was out a new picture appeared. The analyst spin doctors decided that the soaring home sales and high consumer confidence was actually evidence of a successful soft landing. Talk about selective hearing, wow! If you don't like the information then spin it to fit your investing model. We are not complaining. After the initial gap down at the open the Dow traded in a very narrow 50 point range again with a definite bottom at 11200. (A prime example of my selective chart reading. Heck, if they can spin so can I.) The Dow held its ground and after the recovery by the financials it looks pretty healthy. Part of the financial recovery was due to the DLJ rumors not market health but I will cover that later. The Nasdaq barely moved on the news and reacted more to the Rambus/Micron suit than the economic news. The Nasdaq traded in only a 37 point range and had it not been for the suit we could have seen a 25 point range. The vote is in and it appears techs are the place to put your money for the next couple weeks. (was there ever any doubt?) While the Nasdaq did finish positive by +11 points, it has stopped dead on decent volume, 1.45 bil, at just under 4100. The brief stall has some bears coming out of hibernation to claim things like triple top, failed rally, over bought and several other adjectives. Another prime example of selective vision and proves there are as many ways to look at charts as there are investors. The suit I mentioned above between Rambus and Micron is going to be a company killer for one of them. Micron (MU) is suing Rambus (RMBS) over patents RMBS is claiming on SDRAM memory. RMBS claims a significant amount of their value in royalties from memory makers for this type of memory which is the industry standard today. RMBS had fought in the past with Toshiba and Hitachi over this same issue and those firms ended up agreeing to pay these royalties. Micron claims the SDRAM interface was developed jointly by the semiconductor industry and Rambus patent claims are not enforceable. Now, I am not a patent attorney and I am just reporting the news so I can't speak to the technical facts. Micron claims the high speed interface in question was around and in use before Rambus even existed. I heard one analyst say that "Rambus claims to have invented the SDRAM interface were similar to Gore claiming to have invented the Internet." The bottom line is there are billions of dollars at stake and the very life blood of Rambus. Should Micron lose they will have to pay huge royalties on all future memory products as well as past deliveries. A major disaster. Should Rambus lose then others would not agree to pay the royalties and a multi- billion dollar income stream for Rambus would disappear. Since the possibility of this being settled anytime soon is extremely remote this could play out in the price of both stocks for years to come. Rambus has the most to lose and would be the most likely candidate to suffer. The other major market moving news today was the news that DLJ was in talks to be acquired by Credit Suisse First Boston. The news drove DLJ shares up +16.44 and powered many of the other financial and brokerage stocks to positive gains. The jump by DLJ gave them a market cap of around $11 billion. The move points out the direction many companies are moving. The need to offer customers 24 hour access to markets around the world is seen as a must have in the next 3-5 years. I can see it now. You set your price alerts on the DAX, CAC, Nikkei and put your PC speakers next to your pillow. 3:34 AM BONG! Your STOP HAS BEEN HIT, YOUR STOP HAS BEEN HIT! Thud! The thud was your wife hitting you in the head with the alarm clock for being awakened for the fifth time that night with a trading alert. So what was it? A pothole in the rally highway that knocked our front end out of alignment and will cause us to pull off for corrective measures or evidence of a soft landing? Does it matter? I don't think it matters. The vote has been cast. Huge amounts of cash have been flowing into stock funds in the last few weeks and traders are lining up for the starters pistol. The intraday bottoms we have been seeing are the under market limit orders as funds nibble at the market before Labor Day. They are not quite ready to commit 100% but they are picking up the leaders on intraday dips. Of course this can change on a moments notice and after the New Home number today we could see a little more fear and trepidation before the Employment Report on Friday. Wednesday and Thursday are neutral days on the economic report calendar but Friday is the big one. Recently we have been seeing buying going into Thursday afternoon before the report in anticipation of a rally on good news. This week could be a toss up. The main traders will not be on the floor and the second string will be at bat in most firms. There could be some excessive caution OR if they are seeing the same impending rally I am expecting there could be more aggressive buying. The spoils sometimes go to the aggressive and guessing right could move some of these second stringers up on the office totem pole. The profit taking today put the OEX right back down on support at 827 and held. The Dow held 11200 and the Nasdaq is still looking good. My suggestion would be to buy any dips aggressively. I do not expect a negative reaction to the Employment Report. Even if the number is negative, unless it is a blowout, the Fed is still on hold until November because of the election. The caution flag is out but once that pace car we have been following clears the track, the race is on! Many have asked if we are going to have a field trip to the CBOE during our Chicago seminar Sept 14-16th. We are working on it. We can't promise anything today but hopefully by this weekend we can let you know the details. We still have a few seats left but the one day Chicago seminar is this Thursday and there are no guarantees after that. Did I mention the VIX hit 18.06 on Monday? Good luck and sell too soon. Jim Brown Editor ********************* FALL SEMINAR SCHEDULE ********************* Chicago is our next stop. September 14-16th. Here is your chance to learn from the pros. The three day Technical Analysis Stock and Option Fall Seminar Series. Three days of indepth education. Don't miss it! Some comments from recent attendees: Chris & Steve, I would like to thank both of you for a great experience at the Atlanta Workshop. I learned more in the three days of the workshop about investing and trading than all of my undergraduate and graduate courses combined. It was a lot of information in a short time and I hope to put it to use very soon. Mike I attended the Atlanta seminar and wanted to forward my positive comments. The seminar "really lit my fire". I have been a trader for 20 years and often go to seminars and this was the first one that really taught me the most. Dr Lloyd Jim, I had the good fortune of attending the meeting in Orlando. Like your newsletter, it was a CLASS ACT. Chris and the others did a great job. Chris was by far the best performer but the gentlemen beside me was an option trader with several seminars under his belt and almost freaked out when Chris finished his Index Presentation. JC I am writing this note to compliment you and your staff on the great job they did in Atlanta. But more importantly I would like to single out Steve Rhoades as one of the finest speaker/teacher on technical analysis that I have ever had the pleasure of hearing. I am doing my best to persuade other members of the two investment clubs that I belong to, to attend the Detroit seminar. Sincerely, ML We guarantee you will not be disappointed. The class size is small so you will get plenty of individual attention from Chris Verhaegh, Steve Rhoads and staff. At less than the cost of a bad trade you can learn how to analyze stocks and trade options like the pros. Don't wait, do it now. Date City Sep 14-16 Chicago Sep 21-23 Austin Tx. Sep 28-30 Boston Oct 12-14 Charlotte NC Oct 19-21 San Francisco Nov 02-04 Phoenix Nov 09-11 Miami FL Dec 07-09 Philadelphia Dec 14-16 San Antonio Australia coming soon! Has the market been beating you up? Did you give back your gains from April? Would you like to understand all the technical indicators our writers use? Does the alphabet soup of technical terms like RSI, DMA, MACD, ROC, Stochastics, Bollinger bands, sound like Greek to you? You can learn from the experts how to interpret all these indicators, read charts, pick stocks and which option strategies to use on those stocks for less than the cost of one bad trade. Reserve your seat now for one of our regional seminars. Click here for more info: http://www.OptionInvestor.com/seminar/seminar.asp ************************Advertisement************************* Attention Online Traders: NobleTrading.com has become the first online trading firm to offer both Direct Access Trading, and web based trading to its customers. Trade Direct using any ECN, SOES, and SelectNet, or trade right through your browser using our web based trading application. FREE DSL service for active traders. Visit our website and sign up for a Free real-time demonstration! http://www.sungrp.com/tracking.asp?campaignid=377 ************************************************************** **************** MARKET SENTIMENT **************** Plodding Along By Austin Passamonte We realize this is normal market action; would action be the right word? The last two years have really spoiled us. If we don't see 100+ point moves two sessions out five it's pacing the floor time. After last Friday's coiling action in the major indexes we expected movement this week. Three-fourths of Monday did qualify before the late-day slide began. This stealth rally proceeds with three steps forward & two back every session. There seems to be a ceiling and floor in place each day. Rallies are sold and dips bought with equal vigor. How long can this last? Expectations are that volume will return early as next week. We sure hope so. By the same token, Trim Tabs reports record cash inflow to the market accounts this month. Where is it? If all these people are positioning cash on the sidelines, what's the ding-dang hold up? All markets are showing excellent strength in many sectors. The Fed is done. When will the traders positioning this cash decide to jump in? We wonder what the return of professional investors from vacation shall provide. Will they suit up, stroll into the office and buy everything in sight? We wonder. Countless issues are near, at or above all-time highs. Market leaders, old economy stocks and major indexes have piled on considerable gains. Will the vacationers return with panic buying? Might they be detached from current market behavior? We shall see. From a bullish standpoint, everything looks terrific. From a bearish standpoint, the same considerable fears exist. This market can still go either direction big-time, fast. Trade each leg with equal aplomb! MARKET SENTIMENT INDICATORS --------------------------- VIX The CBOE Market Volatility Index measures certain S&P 100 option pricing to determine investor sentiment. Historically, readings near 30 signal possible market bottoms while levels near 20 indicate possible market tops. Tues 8/29 close: 19.11 CBOE Equity Put/Call Ratio The CBOE equity put/call ratio is a contrarian-sentiment indicator. Numbers above .75 are considered bullish, .75 to 40 neutral and bearish below .40 ************************************************************* Tues Thurs Sat Strike/Contracts (8/29) (8/31) (9/02) ************************************************************* CBOE Total P/C Ratio .55 Equity P/C Ratio .47 Peak Volume (OEX) CBOE index put/call ratio is a contrarian-sentiment indicator. Numbers above 1.5 are considered bullish, 1.5 to .75 neutral and bearish if below .75 ************************************************************** Tues Thurs Sat Strike/Contracts (8/29) (8/31) (9/02) ************************************************************** All index options 1.88 *Bullish contrarian OEX Put/Call Ratio 2.32 *Bullish contrarian OEX Maximum Open Interest Strikes/Contracts: Puts 800/5,906 Calls 800/4,873 Put/Call Ratio 1.21 OEX S/R (Support/Resistance) Ratio Index The OEX S/R ratio is a formula to gauge possible support or resistance based on open-interest disparity. Numeral listed for resistance is the ratio of calls to puts. Support is ratio of puts to calls. Values above "10" considered firm. Divergence of numbers may indicate future market direction. OEX Tues Thurs Sat Benchmark: (8/29) (8/31) (9/02) Overhead Resistance: (920-855) 203.77 (850/830) 3.76 index close: 827 Underlying Support: (825-805) 1.66 (800-780) 2.21 What the S/R measure indicates: Net open-interest ratios are firm above 840 and impenetrable above 850 while very light all the way to 780. A large index move has downside clearance to 780 or below with relative ease. We could see 805 in a heartbeat. We still consider another failed test near the 840 range an excellent put entry. 30-yr Bond: 5.75% Light, Sweet Crude, Barrel: $32.72 200 Day Moving Average (as of 8/29) The 200 DMA is widely considered the major benchmark for critical support in a market. DOW: 10,816 11,216 NASDAQ: 3,980 4,082 NDX: 3,728 3,952 SPX: 1440 1510 OEX: 778 827 CBOT Commitment Of Traders Report: Friday 8/25 Biweekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader's direction. Small Specs Commercials DOW futures Net contracts; +7,165 (long) - 10,913 (short) Total Open Interest % 17.43% net-long 24.29% net-short NASDAQ 100 Net contracts; - 1613 (short) +38 (long) Total Open Interest % 11.85% net-long .098% net-long (flat) S&P 500 Net contracts; + 44,989 (long) -47,946 (short) Total Open Interest % 25.24% net-long 8.5% net-short What COT Data Tells Us: Commercial positions in S&P 500 and DJIA remain at or above five-year extreme short levels. Small specs continue to build net-long extremes. NDX commercials went from net-long to flat while small specs went from net-short to net-long the past two weeks. (Not Shown) Commercial positions in 10-Year Note and 30-Year Bond markets at or near five-year extreme net-short levels. Small specs build net-long. Summary: "Smart money" insiders expect stock market to decline and interest rates to rise. Small traders directly opposite, creating diverse set up favoring commercial sentiment for near-term market direction. BULLISH SIGNALS Interest rates 5.75% on the 30-year Treasury Bond make equity markets the only game in town. Fed-Fund futures are pricing slight chance of further rate hikes and dwindling. Benign Government Reports Latest statistics show the economy is cooling and no further rate hikes may be needed. Strength In Financial Sector, Many Dow Components Financial leaders approach or exceed all-time highs as plenty of old-economy stocks enjoy strong price leadership Broad Market Strength All major indexes are well above 200 DMAs and enjoying solid gains almost every day. Very bullish behavior Index and OEX Put/Call Volume Traders bought index options skewed heavily to puts instead of calls today. Contrarian bullish behavior ****** BEARISH SIGNALS VIX Tuesday's close near 19 has us in EXTREME danger zone. End Of Earnings Season Earnings season has all but ended with pre-warning cycle to begin in two weeks. It may not be pretty this time, due to.. Third-Quarter Earnings Warnings A number of companies pre-warning slowed earnings later in the year are being met with extreme selling pressure. Energy Prices Prices are still too high. Ultimately this affects profit margins and inflation. Light, Sweet Crude closed $32.72 today. All petroleum expected to be extremely high this fall. Prices in low $20s would be welcome relief but remain beyond reality. COT Report - S&P 500 & DJIA Latest updated figures show small spec traders remain heavily long S&P 500 contracts while commercial traders continue to hold ten-year extreme short position. DJX commercials added to net short while small specs added to net long holdings. Widened divergence strongly implores market turn in favor of commercials. The market's bottom may still lie ahead. COT Report - NASDAQ 100 Sentiment reversal with small speculators switching to net- long while commercials go flat may suggest near-term weakness. ************** MARKET POSTURE ************** As of Market Close - Tuesday, 08/29/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 11,215 10,950 11,400 SPX S&P 500 1,509 1,485 1,550 ** COMPX NASD Composite 4,082 3,650 4,100 OEX S&P 100 827 814 845 ** RUT Russell 2000 529 485 540 NDX NASD 100 3,951 3,500 4,050 MSH High Tech 1,102 975 1,110 BTK Biotech 735 640 770 XCI Hardware 1,617 1,500 1,680 ** GSO.X Software 463 405 470 SOX Semiconductor 1,132 1,000 1,200 NWX Networking 1,339 1,290 1,350 INX Internet 552 495 600 BIX Banking 582 550 610 XBD Brokerage 662 610 675 ** IUX Insurance 697 680 725 RLX Retail 815 805 860 DRG Drug 389 380 415 HCX Healthcare 805 795 855 XAL Airline 157 148 168 OIX Oil & Gas 310 280 320 The SPX, OEX and XCI hit our resistance levels yesterday. Today the XBD took out resistance at 635 and closed 4% above that level. The past couple of weeks we've seen multiple resistance levels taken out, indicating momentum in the market. Continue to snug up those stops and let your winners run! Raising support (SPX, XCI, XBD, DRG). Raising resistance (SPX, OEX, XCI, XBD). ************** TRADERS CORNER ************** How Much Money Does It Take To Rally The Markets? By Mary Redmond It is impressive that the markets have been able to rally this summer with a relatively light flow of cash into equity funds, and comparatively low volume on the exchanges. The Investment Company Institute reported that $22 billion went into equity funds in June. The average estimates for the months of July and August are in the range of $15 to $20 billion in cash flows to equity funds, about half the levels of last January and February. The total market capitalization of equity funds in the U.S. is approximately $4.3 trillion, and the total amount of cash in money market funds is approximately $1.75 trillion, nearly 50% of the amount in stock funds. This may be indicative that the cash on the sidelines could easily fuel even stronger rallies. Many market analysts have stated that one of the causes of the correction in the NASDAQ, S & P 500 and Dow this Spring was insufficient liquidity in the overall markets to absorb the huge number of new issues which had been brought to the marketplace. From June 1999 to June , there were approximately $285 billion in new issues and secondaries brought to the market. During this twelve month period, the Investment Company Institute reported only $196 billion net new cash went into equity mutual funds. Since the large majority of IPOs are placed with institutional buyers, this would leave a deficit in the range of $90 billion which would force fund managers to liquidate current holdings in order to buy IPOs. This may have contributed to overall market volatility and volume during the year, and a lack of liquidity this Spring, particularly when the lock-up periods for many of the 1999 IPOs began to expire. However, there is theoretically enough cash in money market funds to support a hefty IPO schedule as well as a strong rally in the markets. It is informative to examine the following statistics from the Investment Company Institute. At year end 1996, the total market capitalization in U.S. equity funds was $1.75 trillion, and money market funds had $901.85 billion, or about 25% of the total held in stock funds. By April of 1998, the equity funds had grown to $2.795 trillion, and money market fund assets had grown to $1.138 trillion, or 23%. By January of 2000, the market capitalization in stock funds had grown to $3.949 trillion, and the money market fund assets had grown to $1.659 trillion. As of last Friday, the assets of money market funds had grown to $1.747 trillion. In the last twelve months, money market funds have taken in approximately $350 billion in cash, or approximately $28 billion per month, which is higher than the level of cash which went into equity funds. This summer alone over $70 billion was deposited in to money market funds. This seems indicative that American and foreign investors have become increasingly prudent and cautious. That is, unless people are getting excited about earning about 5.5% a year in returns. If investors continue the trend of depositing a higher level of cash to money market funds than equity funds, we may need to pay close attention to the IPO schedule and the lock up schedule of previously issued IPOs, since this can drain cash from the market and stall or delay a rally. Last May, for example, insiders at 63 companies were free to sell 2.7 billion shares. This was a lot of stock for the markets to absorb, particularly after crashing in April. In June, only 1.3 billion shares were unlocked. In September, 1.8 billion shares in 45 companies will be available to be sold by insiders for the first time, according to ipolockup.com. When you add up the amount of stock which will be unlocked in September, it totals over $50 billion. However, insiders usually do not sell 100% of the amount unlocked. In October, there will only be about half as many shares unlocked by 32 companies, and by November there are only about 17 companies which will have their shares unlocked. This makes sense, as the last heavy month for IPOs was April. May's IPO schedule was very light, which means that IPO lockups will be light six months later, around November. According to Thomson Financial Securities Data, there are about 280 companies waiting in the wings to be taken public this fall. However, it is not possible to completely gauge the demand of the retail and institutional investors for these issues. It is possible that far fewer IPOs will be brought public than in 1999. In addition, it is important to track the cash flows to equity funds on a monthly and weekly basis to determine if sufficient liquidity is coming into the equity markets to absorb new issues. A high weekly moving average of cash to money market funds may be a near term (one to two week) indicator of a rally likely to stall. However, this phenomenon may be a longer term (four to six month) indicator of a possible sustained strong rally, as this excess cash seems likely to burn a hole in investors' pockets eventually. Contact Support ****** Reader Comments & Questions on My Favorite Strategies By Scott Martindale Wow, you folks can really come up with good comments, questions, and creative tweaks to my strategies. Rather than publish my planned topic today, I thought your comments and questions warranted a little more discussion for everyone to read (not just the question writer), particularly writing calls against LEAPS to create debit spreads and those intriguing ultra-deep ITM covered calls. Some of you expressed some confusion about writing short calls against your long call positions. One reader wondered why it is so critical to never be called out of a vertical or calendar spread when it's okay to be called out of a stock. First of all, check with your broker to be sure you understand how they handle a situation in which you are called out of the short leg of a spread. Make sure that they will automatically exercise your long position. But beyond that, the main reason you don't want to be called out is that you leave a lot of money on the table. The short call on expiration day has no more time premium, so its price equals the intrinsic value only (if any). However, your long position still has plenty of time value, so if you have to exercise it at the strike price to cover being called out of the short position, you forfeit all of the remaining time premium. Therefore, if the stock is going to close above the sold strike on expiration day, you must buy back to close the short call, and then decide whether to sell the long call or continue to hold it. This is called "unwinding" a spread. In fact, unless you are absolutely positive that it won't be exercised on Saturday (and remember, the price might change in after-hours trading on Friday), you should buy back any short position by expiration Friday just to be sure it's not exercised. [To be really safe, you might consider buying back on Thursday to be sure it isn't exercised early.] Many traders make a point of always buying back the short call whenever the ask gets down to some nominal amount. Be sure you understand all this before you enter into a spread or you might get an unwelcome surprise. By far, most of my mail came from readers intrigued with the ultra-deep ITM covered call play. So although I wrote about it more as an interesting curiosity, let me explore the objectives and risks a bit more. Again let's look at Juniper Networks (JNPR). Today, JNPR closed around $195. You could sell the Jan 97.5 calls for 102 3/8. If you buy 1000 shares of the stock on 50% margin, you put up $97,500, but when you sell the Jan 97.5 calls you take in $102,375, for a net CREDIT to your account of $4,875. Of course, if you use up that increased buying power, you'll pay margin interest of about $3,250 for five months. So when you're called out in January at 97.5, you'll lose $97,500 on the stock sale on top of paying the $3,250 margin interest, but you've taken in $102,375 in call premium for a small net gain of $1,625, but your rate of return is infinite and you've increased your buying power from $195,000 to $204,750. But some readers wondered about selling other calls, such as Jan 70's, or even 2003 LEAPS for bigger premiums. Regarding the 2003 LEAPS, no LEAPS are offered on JNPR. Be even if they were, I couldn't imagine tying myself to a trade like this that long. I'd be fairly comfortable betting on this company to stay above 97.5 over the next five months, but not clear til 2003 - who knows what could happen? Regarding the Jan 70's, if your intention is only to build your buying power with a margin loan at 8% interest and you don't care about making any money on this play itself, then even deeper ITM might be a good route. You could sell 10 Jan 70 calls for 127 5/8 and have an extra $30,125 in your account (extra $60,250 buying power), but end up losing $625 dollars upon expiration. With so much extra cash, you could choose to employ only part of the extra margin and leave yourself a cushion. If you sell the Jan 80's, you'll nearly breakeven upon January expiration, but you've increased your available cash by $20,625. The Jan 97.5's in the example give the most profit while still increasing buying power. Another strategy is to sell deep ITM calls on only a portion of your shares - say, enough to cancel out the margin loan - and then sell more calls at a higher strike after the stock rises. Of course, the deeper ITM's have the advantage of giving you more breathing room for a major stock correction, along with a greater increase in buying power. But remember, you will still get a margin call if you use up all your buying power, the stock drops, and your account equity is below the maintenance level! On a related subject, some of you seem to be under the mistaken impression that margin loan goes down as the purchased stock value goes up. If you spend $50 and borrow $50 (margin) to buy $100 worth of stock and the stock goes up to $200, you still have borrowed $50 that you owe margin interest on. What has changed is your account equity and available margin, each of which has gone up by $50. You may or may not choose to employ the extra margin. The only way for that margin balance (loan) to go down is to put more cash in your account either by sending in a check, writing calls against the stock, or by selling some shares. Thus, the increasing value of the shares increases the margin available to you but has no impact on your outstanding margin balance. However, in the case of naked puts, you have no outstanding loan. The margin used is really only "on hold," i.e., it's a reduction in available margin, in anticipation of your possibly being put the stock. No interest is owed, and an increase in the underlying stock value reduces the amount of margin on hold. I also want to mention that I got a special kick out of the reader who is averaging 20% per month writing covered calls based on a combination of fundamental and technical analysis, and yet he's asking me for advice on better methods for picking good covered call stocks. I told him, "I should be asking you, buddy!" Thanks for your emails - keep them coming! Contact Support ************************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 ************************************************************** ************* SECTOR TRADER ************* Put Me In, Coach! By Buzz Lynn Contact Support Just back from a summer vacation, I'm dressed and ready to play! Too bad the real game hasn't started yet, and probably won't until the rest of the players and the opposing team show up. In other words, it looks like we're going to have to wait until after Labor Day for volume and meaningful price moves. Don't get me wrong. I'm glad to see the markets advancing in my absence and there will always be a fast mover to play in the course of any given day. But for a strong marketwide advance, we need to see more volume and real investor commitment to move forward. Nonetheless, it is hard to argue with two weeks of small, albeit steady gains on the NASDAQ. Despite the poo-pooing that some are giving to the rise based on what they perceive is low volume, volume is up about 10% over this same time period last year. What this means is that buyers are alive and well while sellers are not materializing in great numbers. What we can take from that is that investors are content to hold at these levels, while dips are again gaining a reputation as a buying opportunity. The low VIX (now under 19) confirms the bullishness. The good news is that enough people are scared of the low VIX and that has created enough of a "wall of worry" for investors to scale. That is not a full blown bullish recommendation to buy everything in site. Some of us are concerned enough about the low VIX that we are sitting out even when an otherwise great entry point presents itself. As we noted last week, the VIX is low, but it can go lower, and doesn't necessarily portend a selloff if the VIX spikes. Volatility does not predict direction. Drastic moves in either direction however will spike the volatility. For those of us buying cheap options, isn't that what we want? Keep your eye on the VIX, but don't let it occupy your total thought process when evaluating a trade. The market appears stable right now (I've even seen the word "boring" pop up a few times) which means the VIX can go lower. Go with the flow until the market tells us otherwise. I can't wait to play ball again! Index Last Mon Tue Wed Thu Fri Week QQQ NASDAQ-100 99.13 0.47 0.63 0.00 0.00 0.00 1.09 HHH Internet 113.50 -4.19 -0.13 0.00 0.00 0.00 -4.31 BBH Biotech. 192.50 -2.44 -1.50 0.00 0.00 0.00 -3.94 PPH Pharm. 94.63 -0.88 -1.38 0.00 0.00 0.00 -2.25 TTH Telecom. 65.56 0.56 -0.69 0.00 0.00 0.00 -0.13 IAH I-net Arch. 104.19 2.19 0.06 0.00 0.00 0.00 2.25 IIH I-net Infr. 57.88 0.25 1.13 0.00 0.00 0.00 1.38 BHH B2B 48.13 -0.44 0.13 0.00 0.00 0.00 -0.31 BDH Broadband 94.50 0.13 -0.25 0.00 0.00 0.00 -0.13 SMH Semicon. 97.75 0.50 -0.75 0.00 0.00 0.00 -0.25 RKH Reg. Banks 103.75 0.31 -1.56 0.00 0.00 0.00 -1.25 UTH Utilities 103.00 1.56 -1.06 0.00 0.00 0.00 0.50 ************** Updates ************** QQQ - NASDAQ 100 $99.13 +0.63 (+1.09 this week) Can't you just picture a beer commercial where a few "guys" are sitting around saying, "Wow, it just doesn't get any flatter than this"? That commercial should be made for the NASDAQ! Today's trading range was just 37 points. That translates to about $1.50 range on the QQQ. It's tough to make money on moves like that unless you are selling time instead of buying it. Trouble is, time values of options are already low and the most likely outcome is for those premiums to inflate on a volatility spike. We don't want that so we are steering clear of selling options at this time. The fact is that QQQ is nearing a point of resistance at $100 to $101. It could break through with enough volume and investor commitment behind it. Without investor commitment, it could also break down for a short period to consolidate back at the $95 level before making another attempt at a breakout. In short, there isn't a directional trend for us to play right now, so we'll wait for one to materialize. Perhaps by Thursday. After two weeks of virtually uninterrupted gains (though small), it may be time for some giveback. Calendar Spread: With support at $95 and resistance at $100, this may be a good time to sell a short-term call against a long-term position. However, we encourage you to wait for a rollover first. Unlike a covered call, you don't want to get called out of the long-term position if the market continues north uninterrupted. Instead, buy back the short position when the time value approaches zero or just before expiration, whichever happens first. BUY CALL DEC- 95 QVQ-LQ OI= 85 at $11.63 SELL CALL SEP-100 QVO-IV OI=11524 at $ 2.31, ND = 9.31 or less SELL CALL SEP-102 QVO-IX OI=10820 at $ 1.63, ND =10.00 or less Average Daily Volume = 19.56 mln ----- SMH - Semiconductor $97.75 -0.75 (-0.25 this week) After a stellar move last Wednesday up to resistance at $100, SMH has been putting in a series of lower daily highs while putting in lows at current support of $97.50. While it's only been a few days, SMH has the makings of a descending wedge telling us that it may be setting up for a breakdown. Given the incredible run over the last three weeks, that wouldn't be a surprise. MACD and stochastic too are deep in the overbought zone and have flattened out. The next step could be rollover rather than a continued ascent. A bounce off $95 might be a buying opportunity, as would a move over $100 backed by volume. Otherwise a move under $95 would be our cue to drop the play and move on. Not much action here lately - not even with MU suing RMBS for patent infringement. It's not a big deal since RMBS would likely have filed against MU anyway. MU just beat RMBS to the punch. BUY CALL SEP- 95 SMH-IS OI=119 at $ 5.63 SL=3.50 BUY CALL SEP-100 SMH-IT OI=677 at $ 2.88 SL=1.50 BUY CALL OCT-100 SMH-JT OI=371 at $ 6.88 SL=4.75 Average Daily Volume = 405K K ----- BDH - Broadband $94.50 -0.25 (-0.13 this week) Hit the snooze button for another day. BDH barely budged and appears locked in a narrow trading range between $94 and $95. Resistance has proven strong at $95 while the MACD and stochastic has flattened out in the oversold territory, and show every sign of rolling over. While we'd likely drop it on any move under $92.50, it isn't weak enough yet and can easily penetrate $95. That could be considered a buying opportunity. Otherwise look for a bounce from $93 before making an entry. LU and AMCC held up well and were the only saving grace for this HOLDR today. BE careful and confirm the direction of NT, JDSU, SDLI, and GLW too before going forward. BUY CALL SEP- 90 BDH-IR OI= 22 at $6.38 SL=4.25 BUY CALL SEP- 95 BDH-IS OI=294 at $3.25 SL=1.75 BUY CALL SEP-100 BDH-JS OI= 74 at $6.38 SL=4.25 Average Daily Volume = 114 K ----- BBH - Biotech $192.50 -1.50 (-3.94 this week) Like altitude testing of jet aircraft in the 1950's when the air got so thin that engines flamed out and wings stalled from lack of lift- producing atmosphere, BBH is testing the edge of space. After testing resistance at $197, it has fallen back and can't hold altitude any more. A break under $190 would indicate that it has further to fall as that would then put it under previous resistance where it would again likely stay for a period of consolidation. MACD and fast stochastic have just rolled over indicating that further upside is unlikely. However, just in case that's a headfake, look to enter on a bounce up from $190 or a volume backed move over $197. If we can't get that, we'll toss this sector out with the Petrie dish. BUY CALL SEP-190 BBH-IR OI= 182 at $ 9.38 SL= 6.50 BUY CALL SEP-195 BBH-IS OI= 203 at $ 6.75 SL= 4.75 BUY CALL OCT-195 BBH-JS OI= 75 at $13.75 SL=10.25 Average Daily Volume = 632 K ************** No Play ************** HHH PPH BHH IIH IAH TTH RKH UTH ************* DAILY RESULTS ************* Index Last Mon Tue Week Dow 11215.10 60.21 -37.74 22.47 Nasdaq 4082.17 27.91 11.58 39.49 $OEX 827.30 5.64 -1.89 3.75 $SPX 1509.84 7.63 -4.25 3.38 $RUT 529.63 1.37 3.15 4.52 $TRAN 2760.44 -3.49 -26.24 -29.73 $VIX 18.92 -0.82 0.69 -0.13 Calls CIEN 211.94 11.50 2.50 14.00 Continuing to new highs VRSN 187.50 5.00 6.13 11.13 What a way to start the week NTAP 109.25 3.06 5.38 8.44 Has been on a tear lately IWOV 90.25 2.50 2.75 5.25 New, finally brokeout JNPR 196.13 8.13 -2.94 5.19 Reason to celebrate on Mon. PLXS 146.50 8.25 -4.25 4.00 Dropped, splits Thursday PM NEON 36.44 2.13 1.75 3.88 New, improving smoothly ORCL 87.75 2.13 1.00 3.13 New, ready for earnings run VTSS 92.13 4.81 -1.94 2.88 A little giveback after Mon. SUNW 127.13 3.06 -0.69 2.38 Leading the NASDAQ higher BEAS 61.88 0.00 2.25 2.25 Battling with $62 level VRTS 118.63 1.81 -0.13 1.69 Poised to make that next move QLGC 102.75 -3.50 2.38 -1.13 EMLX aftershocks subsiding IDTI 76.94 -1.13 -0.19 -1.31 It's been a quiet two days DIGX 84.50 0.63 -2.13 -1.50 Dropped, not enough "oomph" TIBX 94.75 2.19 -3.69 -1.50 B2B alliances over and over IMCL 98.00 -1.56 -0.31 -1.88 Managed only a weak bounce EXDS 62.75 0.44 -2.88 -2.44 Dropped, lock and load LSCC 71.38 -2.75 -0.13 -2.88 Mirroring market apathy GSPN 129.13 -0.19 -3.69 -3.88 Dropped, broke below key level INKT 119.19 -5.94 1.19 -4.75 Let's practice patience NEWP 148.00 -5.50 -0.50 -6.00 Sold off but made a recovery ITWO 157.63 -7.75 -1.13 -8.88 Rumor-based report hurt stock SDLI 387.31 -4.13 -10.69 -14.81 Dropped, violated 10-dma BRCM 251.94 -3.00 -13.19 -16.19 Is that an entry point!? Puts NTLI 39.69 -3.00 -2.38 -5.38 New, taking a beating UK 41.00 0.50 -0.56 -0.06 Turned southward today KO 56.31 1.00 -0.69 0.31 Be cautious with low volume AT 51.44 -0.44 1.06 0.63 Relief on heels of LU move QCOM 60.25 0.50 0.88 1.38 Dropped, proved persistent PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** SDLI $387.31 -10.69 (-14.81) Still behaving like its volatile self, SDLI has continued to trade in a wide range both Monday and today. Reversing last week's uptrend, the stock has lost some of its luster, but continues to give the volatility which makes it attractive to option traders. Considering the action in the NASDAQ Monday, SDLI was about as unenthusiastic as it could have been. Squeaking to a high of $406, and hitting a low of $395 on Monday, the stock logged a fairly humdrum day. Although the range was larger today, trading in a $15 range, the stock has dropped through technical support levels. Starting the day near the high of $400.25, SDLI fell off a cliff, violating both the 5- and 10-dmas of $398.79 and $386.48, hitting a low of $385.31 just before 3:00pm EDT. Trading just off the day low throughout the last hour of trading, SDLI was unable to find its feet, although it did close above the 5-dma. With the nearest support level offered near $375-380, SDLI may have further to fall before rekindling its flame. Due to the downside risk, we are dropping the play for now, in search of something with greater upside momentum. DIGX $84.50 -2.13 (-1.50) DIGX just isn't performing with enough "oomph" to keep it on the call list. The light support at $84 appears to be establishing itself with overhead resistance firming around $87. The lack of volume is also disappointing this week. There was one bright spot in Monday's session, but you had to have fast fingers to the keyboard and a high-risk nature to take a quick-shot. The stock dipped deep to $81.50 and then made a gallant charge back to the vicinity of its comfort zone before the close. This isn't the once in a while type of activity we want to play. We're moving on to catch the bigger fish. PLXS $146.50 -4.25 (+4.00) Yes indeed, the time to exit has now arrived. PLXS splits 2:1 after the market close on Thursday. PLXS provided us with a multitude of lucrative opportunities to profit. Its exciting momentum took us from the low $130s to the topside of $150 in less than two weeks. Some strategies were perhaps a bit aggressive and designed more for the high rollers, but nevertheless, there shouldn't be any complaints. Even yesterday, PLXS pumped up the volume another notch and powered to $152.88, setting its latest in a series of all-time highs. Certainly a nice touch to end our split play! Please consider closing out open positions before the stock trades ex-div on Friday. It's too risky to expose trades to the possibility of a post-split depression. GSPN $129.13 -3.69 (-3.88) On Monday morning, GSPN gapped up to open at $134. From there, the stock got as high as $138 before the amateur hour euphoria wore off. With little volume to support the up-move, GSPN headed lower, closing down 18 cents on 35% of ADV. Today, the stock continued lower right from the morning bell, after encountering resistance at $135. While GSPN did find some support at the $126 level, the stock closed below the $130 mark and in the process, closed below its 5- and 10-dma (at $133.35 and $131.20). This was despite news of Frost Securities initiating coverage of GSPN with a Strong Buy rating. With accelerating volume to the downside and a break below a key level despite good news, this does not bode well in the short term. With negative momentum now rearing its head, we are no longer recommending this play. EXDS $62.69 -2.94 (-2.50) Lock and load, it's time to take our profits and run. The news that EXDS would acquire Grenville Consulting, a privately held United Kingdom consulting firm, caused the stock to gap down by over $1.50 this morning, thus ending the run of our two-week play. EXDS clustered around its 10-dma near $62.75 after the 5-dma at $64.75 failed to fend off the sellers this morning. If the stock bounces off its 10-dma tomorrow, EXDS will most likely find resistance at $64. Although volume was less than convincing during EXDS's sell-off today, we feel it's time to sell too soon and take profits off the table. PUTS: ***** QCOM $60.25 +0.88 (+1.38) Qualcomm has been persistent. With the $60 mark being a key level for the stock, QCOM has been trying to definitively close above this level for the past 4 trading sessions. On Monday morning, the stock came storming out of the gates. It got as high as $61.06 before falling under its own weight to close below the $60 mark at $59.38 on half of ADV. In doing so, however, it managed to find support at its 5-dma and close above its 10-dma. Today, the stock dipped early on to the $58.50 level where it appears to have found some support. From there the stock moved higher, closing just above the $60 mark. Though the volume was light, at only 42% of ADV, the tenaciousness of the stock in closing above $60 has to be admired. Considering that QCOM has been drifting in the $60 area with little material news, any decent news could act as a catalyst and drive this stock higher. As a result, we are closing this play in search of better opportunities. ***********************ADVERTISEMENT************************ Save Up To 80% Off At Everything Wireless! Click On The Link Below For Store Wide Discounts. 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.sungrp.com/tracking.asp?campaignid=349 ************************************************************ 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. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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The Option Investor Newsletter Tuesday 08-29-2000 Copyright 2000, All rights reserved. 2 of 2 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/082900_2.html ************************Advertisement************************* Attention Online Traders: NobleTrading.com has become the first online trading firm to offer both Direct Access Trading, and web based trading to its customers. Trade Direct using any ECN, SOES, and SelectNet, or trade right through your browser using our web based trading application. FREE DSL service for active traders. Visit our website and sign up for a Free real-time demonstration! http://www.sungrp.com/tracking.asp?campaignid=377 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** TIBX $94.88 -3.56 (-1.50) Yesterday's action brought TIBX near the psychological resistance level of $100, but backed off before the close. Today was a test of support at the 10-dma of $93.09, from which buyers resurrected the stock several times throughout the day. The dip occurred within a ten minute period around 11:00am EDT on about 50K shares and the damage was done. From there, the selling subsided and the buyers began their repairs. With the 10-dma holding as support, we are especially encouraged as the upside volume outpaced the downside as the session wore on. The stock actually popped a dollar in the final moments on 65K shares. While the action wasn't news related today, there was some news out. IWOV and TIBX announced a strategic alliance to provide comprehensive solutions in the B2B marketplace. Not to leave anyone out, TIBX also inked a multi-year agreement with ARBA to bundle its infrastructure software with ARBA's buy-side application, Ariba Buyer 7.0. Entry into the play can be obtained on further high volume bounces from the 10-dma. Below that, a dip to $90 could provide entry if met with a bounce. Overhead, a strong move through $95 could take the stock to intraday resistance at $97. Look to the NASDAQ behavior for direction in this issue. BRCM $251.94 -13.19 (-16.19) Is that an entry point forming? After the strong run shares of BRCM had enjoyed over the prior 2 weeks, a pullback seemed likely, and it looks like a near-term bottom may have formed this afternoon near $250. Although the broad market has been in a holding pattern so far this week, shares of BRCM have given up over 8% from Friday's high. The $13+ decline today was a bit disconcerting, given that it came on volume nearly double the ADV. There was some chatter on the newswires this morning that the decline was just a technical rollover while others point to a research report out from SG Cowen. The report indicates that Microtune (TUNE) is planning to leverage its strengths in the RF market to pursue opportunities in the wireless/broadband and RF/analog markets. While this could present competition to BRCM, the company is going to be hard to unseat from its dominant position. Consider new entry points as BRCM bounces from support, either at $250, or from the $245 or $240 levels. More conservative players may want to wait for renewed buying interest to help BRCM scale resistance near $260 before playing. Wait for the selling to abate and buying volume to return in either case. LSCC $71.38 -0.13 (-2.88) Mirroring the apathy of traders in the broader markets, LSCC has had a rough go of it so far this week. The Semiconductors are having a hard time pushing higher after the past 2 weeks of solid gains, and volume on the major indices has been positively anemic. This is the kind of behavior we expected to see this week. If the post-Labor Day rally comes to fruition, the remainder of this week will best be used by looking for attractive entry points. Accordingly, LSCC fell to the $71.50 support level by yesterday afternoon, and spent the bulk of today's session in a very tight trading range. It was looking like today would end on a quiet note, until the final half-hour. A surge of selling volume (nearly a million shares) drove the price of LSCC down by $1.50, fractionally penetrating the $71.50 support level. The next level of support sits at $68, with overhead resistance close by at $76. Consider new entries if LSCC can move back above the $71.50 level or drops and bounces near $68. Volume is still the key, and could be hard to come by as the week winds down in advance of the holiday weekend. At any rate, don't force the play - wait for buying activity to give you an early indication that the Semiconductors and our play are ready to run higher before jumping on board. IMCL $98.00 -0.31 (-1.88) Lacking the conviction of strong volume. IMCL, nonetheless, put in a weak bounce this afternoon, right at the $97 support level. Unless you really like to live dangerously though, you have yet to enter the play. After rolling over near $101.50 in the middle of yesterday's session, IMCL continued to drop this morning until it came to rest on support 90 minutes into the trading session. Although it was encouraging to see the stock hold its own for the remainder of the day, the late-day bounce was weak and came with little in the way of confirming volume. Indicative of the indecision in the broad market and the Biotech sector ahead of the long weekend, investors seem unwilling to place any strong bets until they see what the rest of the week has to offer. If volume returns later this week, aggressive traders can consider entries on a bounce from current levels, but waiting for a breakout above yesterday's high may be the more prudent move. Additional selling pressure could drop IMCL to the next support level near $92, and a bounce near this level could provide a nice entry for the much anticipated post-Labor Day rally. QLGC $102.75 +2.38 (-1.13) The aftershocks from last week's EMLX hoax seem to be subsiding and it looks like QLGC is ready to trade on its own merits again. After the huge intraday move on Friday, it has actually been nice to see both the price range and trading volume drop back into a more normal range. That's the good news, though. It appears that many investors may still be a bit shell-shocked from last week's excitement, as there has been very little strength to moves in either direction this week. Rallies are being sold and declines are being bought, keeping QLGC in a fairly narrow range between support at $97 and resistance at $106. While money can normally be made in a $9 range, it is tough to do when volume is anemic. Below current levels, support sits at $92, and although a bounce from support is still buyable, taking a more conservative approach may be the best course of action this week. If that sounds like it fits your risk profile, wait for a resurgence of buying volume to push QLGC through resistance near $1067 before playing. BEAS $61.88 +2.25 (+2.25) Yesterday, BEAS made a strong effort to close above the elusive $60 mark. Early morning buying on strong volume broke through $60, but the rest of the day the stock drifted down to close unchanged despite volume clocking in at 115% of ADV. Today, BEAS gapped up to open above the $60 level. Sellers came in attempting to bring BEAS below $60 and were successful for a short period of time. Finding support at its 5-dma ($59.50), BEAS came back at the end of the day, thanks to some end of day buying to close above the $60 mark. At this point, those looking to enter aggressively could look for a bounce off the $60 level as well as the 5-dma but confirm with volume. The next levels of resistance can be found at $62.50 and then $65. There has been much news for BEAS as yesterday the company unveiled a new web site for the e-generation, as well as a new partner in dynamic commerce solutions provider Moai Technologies Inc. Today's move up was most likely helped by British Telecommunications selecting BEAS as its Global E-Commerce Platform. NTAP $109.25 +5.38 (+7.56) Astute traders who watched NTAP closely on Monday were rewarded with an excellent entry point as the stock dipped near its psychological level of $100. From there, the stock rebounded strongly before encountering resistance at $105 to close up $3.06 on about 65% of ADV. Today, the stock easily cleared the $105 hurdle as it gapped to open at $105.56, thanks to news of an alliance with Zack Network. Moving up on strong volume, NTAP encountered resistance at $110 and headed lower. Finding some support at the $107.50 area, the stock rallied to close up 5.17% on an impressive 120% of ADV. Traders looking to buy a bounce off of a support level will look for support at $107.50, $105, the 5-dma at $103, and the psychological $100. A more conservative entry would be to buy a break above the $110 on strong volume. Today's alliance with Zack Networks involves the two companies co-developing an Internet content delivery product by combining information applications from Zack with caching hardware from NTAP. VRSN $187.50 +6.13 (+9.06) What a way to start the week. A bounce off the 5-dma in early Monday morning trading provided an aggressive entry as the stock moved higher by $5, or 2.83%. In doing so, VRSN managed to close above resistance at $180, though volume was light at 65% of ADV. Today, VRSN successfully tested its newfound support level early in the day and from there, the stock moved steadily up to close up another 3.88%. Volume for the day came in stronger, this time at about 80% of ADV. The strengthening volume on the up moves so far this week bodes well for our play. Those looking for an aggressive entry point may want to buy a bounce off VRSN's 5-dma, now at $179.68. There also is support at $180 and $185. Conservative traders will want to wait until VRSN clears $190 with conviction before entering. In the news today, the theme is partnerships. The company announced two partnerships, first with B2B portal eConstructors, and then with online reverse auction service NetgenShopper. VTSS $92.13 -1.94 (+2.88) The week started with a bang for VTSS and the semiconductors as VTSS moved higher, up $4.81 on almost 130% of ADV. In doing so, VTSS cleared the $90 resistance level with authority. Today saw VTSS succumb to a bit of profit taking, as it encountered resistance at the $95 level. Despite closing down 2.06%, volume came in light at 80% of ADV. Considering the strong advance on Monday, we'll take a little giveback on low volume. Those that want to target-shoot for a lower entry may want to look for a successful test of the $90 support level where the 5-dma also resides. Below that, there is additional support at $88.30 and $87. Overhead the next level of resistance at $95 and then the psychological $100. A break through $95 on strong volume would serve as a conservative entry point. Monday saw news in the announcement of a laser diode driver for optical telecom and datacom equipment manufacturers. CIEN $211.94 +2.50 (+14.00) The profit takers we had cautioned of never showed up Monday. CIEN burst to a new 52-week high yesterday on the news the company would add an Ethernet Technology to its suite of optical services. The company announced the new product addition at the much heralded National Fiber Optic Engineers Conference, which commenced Monday morning. As the conference rolls on throughout the week, additional news might find its way into the markets, which could carry our CIEN to higher highs if the broader Tech sector cooperates. CIEN's momentum carried over into today's trading, which carried the stock above the $210 level to yet another all-time high. If CIEN's momentum spills over into Wednesday's trading, aggressive traders might look for a quick entry on a bounce off support at $212, while a more conservative trader might wait for a strong move to new highs above $214. Aggressive traders might also look to enter the play on profit taking to support at $210, lower at $205, or near the 5-dma at $203. Watch for the selling to subside and wait for a bounce before entering on a pullback. IDTI $76.94 -0.19 (-1.31) It's been a quiet two days for the Chip sector so far this week. The Philly Semi Index ($SOX) pulled back for the third consecutive session today as profit taking settled into the sector. IDTI edged into negative territory today on bleak volume, at best. Less than a third of IDTI's ADV changed hands Tuesday. In spite of the light selling today, IDTI traced a higher low than was witnessed during Monday's session of profit taking. Our play's relative strength might be the key to higher prices once the Semi sector starts rolling again. The fact that the Chip sector, including IDTI, is in consolidation mode requires patience on our part. Aggressive traders might consider entering the play on a pullback to support at $76 in IDTI's new found trading range. Below $76, IDTI has major support again at its 10-dma at $74. A more conservative entry might be found once the Semi sector resumes its rally and IDTI clears resistance at $78 or higher at $79. Make sure to confirm any rally with the return of volume, and watch the direction in the overall Semi sector, before entering the play. ITWO $158.00 -0.75 (-8.50) A Josephthal analyst issued a rumor- based report Monday morning that said Manugistics (MANU) had won a $40 mln contract over ITWO to supply CSCO with software. The news was enough to bring out the profit takers, who've called the tune in ITWO over the past two days. However, Wall Street came to the defense of our play today with fervor. Gruntal & Co. reiterated its Buy rating and short-term price target of $170, Robertson Stephens reiterated its Buy rating based on ITWO's solid third quarter outlook, and finally, USB Piper Jaffray initiated coverage with a Buy rating after setting a $192 target price. The support from Wall Street helped to tame the ITWO profit takers today. If ITWO's bounce off support today at $155 extends into Wednesday's trading, look for an entry if the stock moves back above its breakout point at $160. A more conservative trader might wait for a momentum-based rally above resistance at $162. If ITWO slips lower tomorrow, the stock has support just below at $155 and again at its 10-dma near $153.75. NEWP $148.00 -0.50 (-6.00) What was a simple case of profit taking Monday turned into a full-fledged sell-off Tuesday after NEWP said it would terminate its stock repurchase program. Although the company hasn't repurchased a single share of stock since last August, traders initially viewed the news with bearish colored glasses. NEWP's losses accumulated quickly after the announcement, which ultimately presented a favorable entry into the play. If your stops weren't triggered, our play quickly rebounded on a surge in volume during the latter half of trading to finish the day only slightly lower. If today's late-day buying is a sign of things to come, NEWP might be headed for a quick rebound Wednesday. Aggressive traders might look for a quick entry tomorrow morning if NEWP rallies off the $148 level, while conservative traders might wait for momentum to gather and consider entry on a strong rally above resistance at $150. Support is now located at $145 and again at the 10-dma at $143.38. SUNW $ 127.13 -0.69 (+2.38) The Computer Hardware sector got a lift yesterday with the favorable report issued on IBM. The broad sector rally lifted SUNW, which set the stock to test its 52-week high. Although SUNW fell just short of its all-time high Monday, and slipped lower on profit taking today, the stock's ascending channel continues to carry our play further into profit territory. SUNW traced a higher low and bounced off support at $126 today to close the session on a burst of buying. If the Tech sector shows signs of rallying early Wednesday, an aggressive trader might consider entering the play on a bounce off current levels at $127. A more conservative entry into the play might be found if SUNW climbs back above resistance at the $128 level. If any light selling continues over the coming days, aggressive traders might consider buying a pullback to support at $126, near $125, or lower near $124 on any extended profit taking. Consider setting stops to protect the profits in SUNW we've worked hard for. JNPR $196.25 -2.94 (+5.20) Get the party decorations back out! JNPR broke free from its consolidation on Monday and shattered the $200 level by mid-session. Despite some pullbacks in the market today, JNPR's price level held its ground. Continual bounces off $195 set the stage for this mark to develop as a launching pad in the short-term. Again, volume levels were the master key. On both days, strong volume at 2+ mln shares intraday forecasted the advances. An entry for this aggressive Internet play can still be attained on another high volume breakout over $195 as it surges towards $200. Otherwise, look for those attractive dips to $190 as more enterprising entry. VRTS $118.63 -0.13 (+1.69) VRTS has yet to have an earth- shattering breakout since we added it a few days ago, but it's not standing still either. Each day it's adding to its share price and importantly, the volume is healthy. From a technical viewpoint too, the stock is maintaining a posture above its staunch adversary, the 50-dma ($113.60), which is very bullish. Pullbacks to light support at $115 offer an entry point into this momentum play, however, it may be wise to wait for a definitive move through $120 to confirm a stronger trend before entering. After the momentum becomes clear, then we would expect VRTS to make a strong challenge at $120. In recent news, Mark Leslie, Chairman and CEO of VERITAS, was recognized as Entrepreneur of the Year in the technology category by local Silicon Valley business professionals. INKT $119.19 +1.19 (-4.75) Last week, INKT was propelled through upper resistance on news of a powerful alliance with AOL, ISLD, and EXDS. However, this week news hit the press that Cisco (CSCO) may be entering its market, which put a damper on INKT's trading momentum. The recent highs also drew out some profit takers and this too brought INKT down a notch. From a conservative viewpoint though, the pullback confirms that old resistance at $118 and $120 is now a solid landing platform to take entries. However, let's practice patience. Look for moves, backed by respectable volume, to first take INKT through the 100-dma ($122.50). And better confirmation should come over the short-term - we're anticipating a break to the upside of $125 to really get the momentum into full-throttle. ******************* PLAY UPDATES - PUTS ******************* KO $56.31 -0.69 (+0.31) After the downgrade-related pummeling that KO shares took last Friday, a bounce from its lows seemed inevitable. The price jumped up at the open yesterday, but the inability of the bulls to push back above the 5-dma (then at $57.56) gave a strong indication that it wouldn't last. Entering new positions as KO rolled over provided a nice start to the play as KO deteriorated for the remainder of the day and continued to be weak this morning. Support appears to be forming near $56, the bottom of yesterday's gap up, and there is more support at $55, which is the low from Friday. The 200-dma (currently $55.56) may provide significant support going forward. Although volume on yesterday's decline was 50% above the ADV, today's fractional decline came on less than two-thirds of the ADV, indicating that the selling volume may be drying up. Although new entries can still be considered on a rollover from the 5-dma (currently $57.19), a more prudent strategy would be to wait for selling volume to increase, penetrating support. Conservative entries can be considered as selling picks up again, pushing shares of KO below $55. UK $41.00 -0.56 (-0.06) After enjoying a two-day reprieve of light buying, UK turned southward today. In an informal report Monday morning, PaineWebber said the merger with DOW will most likely be completed in October. And, although the deal has not yet received regulatory approval, PaineWebber went on to say that UK is "sorely" undervalued at its current levels and is a Buy. Traders rallied UK on extremely light volume on the heels of the comments. But, sure enough, the stock ran into resistance at its 10-dma at $42, and slid lower as Monday's trading wore on. Volume picked up today as the Chemicals sector resumed its slide into the sludge. The greater volume on down days versus days when UK rallies has convinced us to hang onto the play. The stock finished Tuesday's trading near its lows of the day, which might prompt an aggressive trader to enter the play early Wednesday if the heavy selling returns. More conservative traders might wait for UK's losses to accelerate and look to enter the play if the stock falls to a new 52-week low at $40.50. AT $51.44 +1.06 (+0.63) The negative earnings pressure kept a tight lid on AT's trading. AT saw the fractional underside of $50 in Monday's session and without an army of buyers backing up their trucks. Today AT rose slightly, however, it was likely the solid 4% gain by heavyweight, Lucent Technologies (LU), that prompted the minute gains. Overhead resistance remains firm at $52, which is in-line with the 5-dma ($51.95). Use this mark as a potential entry point after confirming a negative sentiment within the sector and downward bounces. Currently, AT is firming at a $50 bottom, so the more cautious will wait for a high- volume move to the underside to better substantiate a continued breakdown. ************************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 ************************************************************** ************** NEW CALL PLAYS ************** NEON - New Era Networks, Inc. $36.44 +1.75 ($3.88 this week) NEON, otherwise known as New Era of Networks Inc., supplies over 2500 customers worldwide with Internet infrastructure software and services. Their products and services enable the integration of Internet-facing appliances and core operational systems for goods and services providers. Through the use of these products, businesses can automate their end-to-end processes such as fulfilling an order at the speed and volume their respective e-business environment requires. Established reseller and joint marketing relationships with complementary e-business entities such as a BEA, BroadVision, Commerce One, IBM, Microsoft and Sun Microsystems, further strengthen and fuel NEON's business. Technically, NEON is beginning to show improvement. Since hitting an intraday high of $95.25 on March 14th, NEON plummeted straight down to an intraday low of $17.88 on April 17th. As the stock struggled from those lowly levels, trading has remained choppy and rangebound between $20 and $45. Most encouraging of late has been NEON's ability to crossover and close above its 50-dma, currently at $32.37, for the last four days on good volume. Provided that the NASDAQ environment remains healthy, NEON should be able continue its ascent. The move in the stock may meet some minor resistance at the $40 level. However, if NEON surpasses that level with strong volume, it should be clear sailing to $45, the site of the most recent top, and the 200-dma at $44.75. The stock price has been up for the last 3 days, so a pullback could be in order. Ideally, a low volume pullback to intraday support at $34 or the 50-dma, along with a bounce, would offer a nice entry point. As always, watch the NASDAQ direction and sentiment for confirmation of NEON's bias. Fundamentally, NEON's business appears to be robust. Their customer list is impressive with the likes of IBM, Citibank, GTE, JP Morgan and Monsanto Company. On August 14th, IBM and NEON further strengthened their alliance with major customer wins. Analysts expect that the continued public proclamations of this alliance confirm the health of their relationship. Today, Webvertising selected NEON as their strategic partner for their XML and Internet-Based Solutions. BUY CALL SEP-30*QNO-IF OI=763 at $7.00 SL=5.25 BUY CALL SEP-35 QNO-IG OI=872 at $3.38 SL=2.50 BUY CALL SEP-40 QNO-IH OI=242 at $1.13 SL=0.00 BUY CALL OCT-35 QNO-JG OI=941 at $5.63 SL=4.25 BUY CALL JAN-40 QNO-AH OI=363 at $7.88 SL=6.00 Picked on August 29th at $36.44 P/E = N/A Change since picked +0.00 52-week high=$96.25 Analysts Ratings 3-6-0-0-0 52-week low =$12.13 Last earnings 06/00 est=0.04 actual= 0.06 Next earnings 10-18 est=0.07 versus=-0.17 Average Daily Volume = 867 K IWOV - Interwoven, Inc. $90.25 +2.75 (+5.25 this week) Interwoven is a leading provider of software products and services that help businesses and other organizations manage the information that makes up the content of their Web sites. In the Internet industry, this is often referred to as "Web content management." Interwoven designs software products to help companies rapidly and efficiently develop, maintain and extend large Web sites that are essential to their businesses. Interwoven's principal product, TeamSite, incorporates widely accepted Internet industry standards and is designed with an open architecture that allows it to support a wide variety of Internet software products, including Web authoring tools and Web application servers. It's been a crazy and volatile year for shareholders of IWOV. Hitting an all-time high of $100 in early March, the stock proceeded to dramatically sell off to a low of $21 by mid-April. To say that stock has made a miracle recovery since then would be an understatement. Looking back at that dark period, it appears that the stock sold off in sympathy with the downdraft in the tech sector, with little company-specific news to explain the loss in investor confidence. That confidence came back as a recovery began in June with a gap up above the 50-dma and resistance at $35. Encountering resistance at $80, the stock sold off after its run into earnings and 2-1 split. Despite the sell-off, earnings for the second quarter were nothing short of spectacular. The company posted revenues of $24.3 mln, an increase of 738% over last year's revenues of $2.9 mln. Quarter-over-quarter, this was an increase of 75% over revenues of $13.9 mln. IWOV has been challenging formidable resistance at $80, which was finally overcome last week. The past couple of weeks has seen the 5- and 10-dma (at $85.67 and $81) serve as support during IWOV's recent run. The former resistance level of $80 should also provide support, and a pullback to that level would be ideal for aggressive traders looking to get in on a bounce. But, intraday support can be found at $85. Up ahead, resistance may be encountered at $95. From there, the stock would be poised to challenge its all-time high at the psychological $100. News this week for IWOV has been good and plentiful. Monday was a busy the company announced that Taiwan Semiconductor selected IWOV's products to manage its web content. This came on the heels of news that ChipCenter had successfully integrated IWOV's TeamSite solution. Along with this came an announcement of a partnership with leading broadband media company Chuckwalla. Today, IWOV announced a strategic alliance with TIBCO software to supply products and services to the B2B market. BUY CALL SEP- 85*IQG-IQ OI=254 at $8.13 SL=5.75 BUY CALL SEP- 90 IQG-IR OI= 77 at $5.13 SL=3.00 BUY CALL SEP- 95 IQG-IS OI= 70 at $3.13 SL=1.50 BUY CALL OCT- 95 IQG-JS OI= 0 at $9.88 SL=7.00 BUY CALL OCT-100 IQG-JT OI= 40 at $8.00 SL=5.75 Picked on August 29th at $90.25 P/E = N/A Change since picked +0.00 52-week high=$100.00 Analysts Ratings 4-2-0-0-0 52-week low =$ 18.38 Last earnings 07/18 est=-0.09 actual=-0.02 Next earnings 10-17 est=-0.02 versus= N/A Average Daily Volume = 743 K ORCL - Oracle Corporation $87.75 +1.00 (+3.13 this week) According to the company's ads, "Software powers the Internet". ORCL is a supplier of software for information management, servicing two broad product categories - systems software and business applications software. Systems software is a complete Internet platform to develop and deploy applications for computing on the Internet and corporate Intranets. Business applications software automates the performance of specific business data processing functions for customer relationship management (CRM), supply chain management, financial management, procurement, project management, and human resources management. Ready for an earnings run? That's right, ORCL is out of sync with the rest of the market, and is tentatively scheduled to release its latest batch of numbers on September 12th. The stock has been rangebound since hitting a high of $90 in late March and is once again approaching that level. Given the rate at which the company continues to innovate (see news below) and its consistent financial performance, it looks like the approach of earnings in two weeks could be just the catalyst to propel the stock to new highs. Would you like another bullish factor to whet your appetite? ORCL typically becomes a split candidate above $80, and the company currently has 11 bln shares authorized with only 2.8 bln outstanding. Late last week, buyers propelled shares through the $84 level, which has been acting as solid resistance since early August. The next level of resistance sits at $88, and buying volume hasn't yet been strong enough to push through to new highs yet. Given the directionless nature of the broad market so far this week though, ORCL's gains definitely look promising. Since beginning its latest up move a little over a week ago, the 5-dma (currently at $85.31) has been providing support, and today saw volume back up near the ADV, confirming that the bulls are alive and well. Look to initiate new positions on a volume-backed bounce from the 5-dma or the $84 support level. More conservative players will want to wait for continued strong buying interest to propel shares through $88 on the way to new highs above the $90 level. Continuing to innovate, ORCL turned the Sales Automation market upside down yesterday by offering free online sales software. The new product, OracleSalesOnline.com, delivers the core sales application of the Oracle E-Business Suite as a free, online service. This radically changes the sales force automation (SFA) market by offering basic SFA services free to medium and large-size enterprises. BUY CALL SEP-85 ORY-IQ OI=23288 at $5.75 SL=3.75 BUY CALL SEP-90*ORY-IR OI=26453 at $2.81 SL=1.50 BUY CALL SEP-95 ORY-IS OI=15217 at $1.13 SL=0.00 BUY CALL OCT-90 ORY-JR OI= 2999 at $5.75 SL=3.75 BUY CALL OCT-95 ORY-JS OI= 1498 at $3.50 SL=1.75 BUY CALL DEC-90 ORY-LR OI= 7320 at $9.38 SL=6.50 SELL PUT SEP-85 ORY-UQ OI= 5004 at $2.44 SL=4.00 (See risks of selling puts in play legend) Picked on August 29th at $87.75 P/E = 41 Change since picked +0.00 52-week high=$90.00 Analysts Ratings 12-15-4-0-0 52-week low =$17.72 Last earnings 06/00 est= 0.26 actual= 0.31 Next earnings 09-12 est= 0.13 versus= 0.04 Average Daily Volume = 18.70 mln ************* NEW PUT PLAYS ************* NTLI - NTL Incorporated $39.69 -2.38 (-4.56 this week) NTL is the UK's biggest cable TV operator. They provide extensive communication networks to homes, businesses, and wholesalers. Television, radio, Internet, wireless, and a variety of telecommunications services are provided to more than two million subscribers. NTL is presently extending its reach in Europe through the purchase of Cablecom, the #1 Swiss cable operator, and France Telcom has agreed to take a 25% stake in the company in a deal worth approximately $5.5 bln. Cable operators in the UK have aggressively been acquiring rivals in their quest to build scale. Recently, NTL bought the UK cable assets of Cable & Wireless Communications and a major competitor, Telewest, merged with content provider, Flextech. There's another contender in the ring too. It's the European giant, UPC. And so the saga of who's going to be the reigning champion rages on in the UK cable world. The companies are tight-lipped, but it appears Telewest, whose share price has lost two-thirds of its value in the past six months, is now an attractive take-over target. As a result of the resurfaced scuttlebutt this week, NTLI was effectively knocked against the ropes. The one-two punches cut the share price down 10.3% in just two rounds. Bottom support at $44 was tested throughout August, but now there is no safety net to catch the falling share price! Volume is robust too and topped the ADV in today's session. Enter on downward moves off intraday resistance at $41 and $40. Otherwise, err on the side of caution and wait for a break to the underside of $38 for better confirmation that NTLI is truly out for the count. BUY PUT SEP-45 IQS-UI OI=125 at $4.50 SL=2.75 BUY PUT SEP-40*IQS-UH OI=300 at $2.81 SL=1.50 Average Daily Volume = 2.07 mln ********************** PLAY OF THE DAY - CALL ********************** VRTS - VERITAS Software $118.63 -0.13 (+1.69 this week) VERITAS Software is the industry's leading enterprise-class application storage management software provider. They furnish storage management software for protection against data loss and file corruption, efficient file processing and networks back-up. VERITAS (Latin for "truth") has made its name by partnering with such technological heavyweights as Hewlett-Packard, Microsoft, and Sun Microsystems, all of which have licensed and embedded VERITAS products in their operating systems. Its purchase of the network and storage management software group of disk drive maker, Seagate Technology, doubled VERITAS's size and gave Seagate an approximate 33% stake in the company. Most Recent Write-Up VRTS has yet to have an earth-shattering breakout since we added it a few days ago, but it's not standing still either. Each day it is adding to its share price and importantly, the volume is healthy. From a technical viewpoint too, the stock is maintaining a posture above its staunch adversary, the 50-dma ($113.60), which is very bullish. Pullbacks to light support at $115 offer an entry point into this momentum play, however, it may be wise to wait for a definitive move through $120 to confirm a stronger trend before entering. After the momentum makes itself clear, we would expect VRTS to make a challenge at $120. In recent news, Mark Leslie, Chairman and CEO of VERITAS, was recognized as Entrepreneur of the Year in the technology category by local Silicon Valley business professionals. Comments VRTS is right there. It is getting ready to take on the $120 level of resistance. Trading in a $4 range today, VRTS flirted with $120 again for the second day but couldn't maintain that level. Volume on the upside was heavier than the downside action and this could indicate that VRTS is readying itself to conquer $120. A quick dip to $118 with a bounce would provide an entry point. If profit takers bring the stock lower, look for bounces from $117, $116, and $115. A break of $115 would be concerning. Ideally, buyers would drive the stock through $120 on strong volume and give a nice confirming entry to the play. BUY CALL SEP-115 VUQ-IC OI=12563 at $ 9.00 SL= 6.75 BUY CALL SEP-120*VUQ-ID OI= 1357 at $ 6.38 SL= 4.50 BUY CALL SEP-125 VUQ-IE OI= 3103 at $ 4.25 SL= 2.50 BUY CALL OCT-115 VUQ-JC OI= 926 at $16.38 SL=12.75 BUY CALL OCT-120 VUQ-JD OI= 237 at $13.25 SL=10.50 Picked on August 24th at $115.69 P/E = N/A Change since picked +2.94 52-week high=$174.00 Analysts Ratings 10-12-1-0-0 52-week low =$ 24.92 Last earnings 06/00 est= 0.12 actual= 0.13 Next earnings 10-12 est= 0.14 versus= 0.09 Average Daily Volume = 5.52 mln ***********************ADVERTISEMENT************************ Save Up To 80% Off At Everything Wireless! Click On The Link Below For Store Wide Discounts. 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.sungrp.com/tracking.asp?campaignid=350 ************************************************************ ************************ COMBOS/SPREADS/STRADDLES ************************ New concerns over third-quarter earnings emerge... Industrial stocks slumped today as selling pressure abruptly ended the recent rally. Monday, August 28 The most popular industrial average ended at a recent high today as traders shopped for financial and blue-chip technology issues. The Dow was up 60 points to 11,252 while the Nasdaq closed up 27 points at 4,070. The S&P 500 index finished up 7 points 1,514. Trading volume on the NYSE was a light 726 million shares, with declines beating advances 1,434 to 1,377. Activity on the Nasdaq was thin at 1.3 billion shares with technology advances outpacing declines 2,130 to 1,895. The 30-year bond was down 26/32, bid at 107 14/32, yielding 5.72%. Sunday's New Plays (positions/opening prices/strategy): Loral Space LOR JAN10C/JAN7P $0.12 credit synthetic Phone.com PHCM SEP70P/SEP75P $0.68 credit bull-put Polycom PLCM OCT115C/120C $2.75 debit bull-call Polycom PLCM OCT-80P $1.50 credit naked-put Mead MEA JAN30C/SEP30C $1.75 debit calendar Loral Space corrected today, providing a great entry opportunity near the target credit. Phone.com also slumped early in the day and the suggested credit was available. Polycom opened higher and never retreated, preventing any favorable entry in the debit spread combination. Mead traded in a relatively small range but the premium in the September options drifted lower and the spread disparity was less than expected. The lowest debit offered (on a simultaneous order basis) was slightly above our target but we will track the position based on the higher entry price. Portfolio Plays: The broad market rallied today amid investor confidence in the economy and a favorable interest rate outlook. The past month has seen one of the most well balanced market rallies in recent history, much better than the bullish activity last fall, which was led by such a narrow group of stocks. Traders say the trend is likely to continue going into the Labor Day weekend but they also caution that late Summer is one of the worst periods for negative earnings warnings and stocks will likely consolidate from current levels before moving higher. On the Dow, American Express (AXP), General Motors (GM), and Hewlett-Packard (HWP) led the gainers. International Business Machines (IBM) also rallied after CS First Boston said the firm is on track to meet or beat its third-quarter earnings estimates. The research firm raised its price target on the issue to $150. On the Nasdaq, Internet stocks were affected by the slump in Yahoo! (YHOO), which fell to $122 after Lehman Brothers said the outlook remains worrisome for the company. Shares of Emulex (EMLX) continued to slide, ending below $100 in the wake of last week's bogus press release that claimed the company would restate earnings and that its chief executive was resigning. In the broader market, energy shares also contributed to the rally early in the day amid rising crude and oil products prices. One other item of interest: The New York Stock Exchange started its decimal pricing program with seven stocks today. The move was greeted with little enthusiasm but there were no major problems reported with trading in the trial issues. Ameritrade (AMTD) rose with the financial group, climbing to a mid-day high near $19 as investors continued to speculate on the potential buyout candidate. Our new synthetic position offered a $0.50 profit at one point during the day. Countrywide Credit (CCR) also rebounded from previous losses. The bullish diagonal spread provided a $1 return on $6.25 invested and it may be wise to use the current strength to achieve a favorable early exit in the position. Some of our big-cap technology issues moved higher during the session. Virata (VRTA) rallied $5 after new coverage was initiated on the chip-equipment maker by Frost Securities with a "buy" rating. Our long-term position is relatively safe at a cost basis near $40. International Rectifier (IRF) and Network Appliances (NTAP) also participated in the bullish activity and our adjusted positions in those issues should expire at maximum profit. One issue that moved lower (in our favor) was Xilinx (XLNX) and it appears that the technical resistance near $95 may again prove too much to overcome. We will monitor the issue for signs of a bearish reversal to confirm the short-term movement. Our new position in Maytag (MYG) suffered today in sympathy with a drop in Whirlpool (WHR) shares. Prudential Securities came out with a notably bearish stance on the appliance firm, cutting its rating on the stock to "sell" due to concerns about market share loss and pricing pressures. Whirlpool dropped $5 after analysts said there is significant downside risk in the company due to a series of massive changes rapidly altering the historic ways the appliance business is conducted in North America. One of their concerns is that Whirlpool is being squeezed out of value-added alliances in the industry. According to Prudential, Maytag and Electrolux (MYG's potential buyout suitor) will begin outsourcing their fulfillment services to GE but Whirlpool isn't likely to be offered this option. Hopefully investors will realize that MYG will not suffer in the long-term from Whirlpool's bearish outlook. Just when it appeared we were out of the woods on VoiceStream Wireless (VSTR), the stock slumped again today after the company said it would buy Powertel (PTEL), a wireless service provider that fills a gap in their plan for a US cellular system based on global system for mobile communications (GSM) technology. Now the question is whether analysts will focus on VoiceStream's growth in the industry or the outcome of its potential merger with Deutsche Telekom. The key technical level for the stock appears to be near $115 and that's the area we will focus on when making any future adjustments in our current position in the unpredictable issue. Tuesday, August 29 Industrial stocks slumped today as selling pressure abruptly ended the recent rally. The Dow closed down 37 points at 11,215 but the Nasdaq Composite inched 11 points higher, in a session of listless trading and light volume. The S&P 500 index was down 4 points to 1,509. Trading volume on the NYSE reached 787 million shares, with declines beating advances 1,472 to 1,330. On the Nasdaq, activity was average at 1.48 billion shares traded, with advances beating declines 2,115 to 1,920. The 30-year Treasury fell 12/32, pushing its yield up to 5.74%. Portfolio Plays: The market ended mixed today as weakness in the finance and oil sectors weighed on the broader market while traders gambled on select technology shares. Merger speculation in the brokerage group couldn't prevent profit-taking in major bank shares and airline, paper and utility stocks also consolidated. Issues in the technology group witnessed buying interest in the computer hardware and networking sectors, which helped the Nasdaq remain in positive territory but overall, it was a listless session. Many analysts believe the market still has upside potential but worries over earnings "pre-announcements" combined with a weak follow-through after the previous positive quarters have raised concerns over upcoming reports. Volume is expected to remain light throughout the month with little in the way of significant news to spur participation. The Fed is expected to remain on the sidelines in the coming weeks and the only economic data of importance is the employment report for August. Many analysts have commented that trading activity will increase after Labor Day but most don't expect the market rally to broaden. Instead they suggest that the recent sector rotation will continue, and that most investors will favor big-cap technology stocks in the near future. A small group of technology issues dominated the Spreads/Combos portfolio in today's session. Network Appliances (NTAP) led the way, up over $5 to $109 on strength in the networking sector and Advanced Fibre (AFCI) was also on the move, closing almost $5 higher as investors speculated on a near-term rally in the group. Leap Wireless (LWIN) and Qlogic (QLGC) were the top performers in the telecom and semiconductor sectors, respectively and both of the bullish positions on those issues are expected to finish at maximum profit. In the brokerage group, Knight Trading (NITE) rallied $2 to close at a recent technical resistance level near $30 and it appears the merger activity in the sector may provide enough optimism to boost the issue to a new trading range. Our new position in Ameritrade (AMTD) also continued higher as the online broker's share value edged to a 4-month closing peak near $19. In the broader market positions, Anheuser Busch (BUD) and Wellpoint Health (WLP) have experienced technical recoveries from recent slumps and there is a fair probability that these slumping issues will consolidate near the current prices. The new debit spread combination in Polycom (PLCM) may yet become available as the issue dropped $4 today in anticipation of the upcoming stock split. The new shares will be distributed on August 31 and it is our intention to enter the play during the anticipated sell-off. We will not however, initiate the position at a debit as it has a speculative outlook and is favorable only because the cost of the "bull-call" spread is borne by portfolio collateral. Questions & comments on spreads/combos to Contact Support ****************************************************************** - READER'S REQUEST - ****************************************************************** LU - Lucent Technologies $44.56 *** Bottom Fishing! *** Lucent designs, develops and manufactures communications systems, software and products. Lucent is engaged in the sale of public and private communications systems, supplying telecom systems and software to most of the world's largest network operators and service providers. Lucent is also engaged in the sale of business communications systems and the sale of microelectronic components for communications applications to manufacturers of communications systems and computers. Lucent Technologies was formed from the systems and technology units that were formerly a part of AT&T (T), including the research and development capabilities of Bell Laboratories. Currently, Lucent's research and development activities are conducted through Bell Labs, an industrial research and development organization. One of our subscribers commented on the current bullish activity in the Networking Group and in some of the networking equipment issues that have benefited from the recent sector optimism. He also requested that we identify some favorable spread positions in the issue. Based on the technical outlook and extreme open interest, the easiest way to profit from future upside movement may involve one of the most common forms of bullish option plays; the synthetic position. For investors that anticipate upside activity in the underlying stock, this is a relatively safe method in which to speculate on the future movement of the share value, as long as you wouldn't mind adding it to your portfolio. Traders who support a positive near-term outlook for Lucent can use this synthetic position to profit from bullish activity, at the risk of owning the issue at a favorable cost basis. PLAY (conservative - bullish/synthetic position): BUY CALL OCT-50 LU-JJ OI=17559 A=$1.31 SELL PUT OCT-40 LU-VH OI=12831 B=$1.19 INITIAL NET CREDIT TARGET=$0.00-$0.25 ROI TARGET=25% Note: Using options, the position is equivalent to being long on the stock. The collateral requirement for the naked put is approximately $1450 per contract. ****************************************************************** - TECHNICALS ONLY - ****************************************************************** VITR - Vitria Technology $47.00 *** On The Rebound? *** Vitria is a leading provider of eBusiness infrastructure software. The company's flagship product, BusinessWare, provides the means to enable incompatible information technology systems to exchange information over corporate networks and the web. BusinessWare enables this exchange to take place automatically, without human intervention. This eliminates manual entry of information into multiple IT systems, and eliminates the need to manually exchange information with customers and business partners using telephone, facsimile or mail. BusinessWare is designed to provide business managers with a software infrastructure that gives them complete control and visibility of their business operations, enabling them to reduce time to market, rapidly respond to change, and manage the growing complexity of business interactions with partners and customers. After two months of declines, Vitria is finally rebounding from its recent post earnings sell-off. While second-quarter revenues increased 400% from the year-earlier period, investors did not favor the rise in the company's "days-sales outstanding," a basic measure of how long it takes to get paid by customers. However, that's not the only reason for the slumping share price. Vitria's value soared earlier in the year when it was grouped with primary business-to-business stocks but analysts soon began to downgrade the company, based on different business models within the B2B sector. Now the same analysts have recently been commenting on how important it is for the internal systems at businesses to coordinate with one another, as well as with the systems of the online marketplaces where they conduct their daily business. In short, Vitria's technology is now seen as a necessary component for the B2B industry and investors have followed suit, showing new interest in the discounted issue. With a small disparity in the (OTM) Put option premiums, this position offers a favorable speculation play for traders who are bullish on the issue. PLAY (conservative - bullish/credit spread): BUY PUT SEP-35 TKU-UG OI=191 A=$0.88 SELL PUT SEP-40 TKU-UH OI=26 B=$1.62 INITIAL NET CREDIT TARGET=$0.88 ROI(max)=17% ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** TD - Toronto Dominion $27.88 *** Probability Play! *** The Toronto-Dominion Bank, with its many offices around the world, offers a broad array of services. TD provides a full range of financial products and serves millions of customers worldwide, through a number of key businesses: Canada Trust (retail banking), TD Waterhouse (discount brokerage), TD Securities (corporate and investment banking), TD Asset Management (investment management) and TD Commercial Banking. TD has more than $260 (cdn$) billion in assets and is also the largest shareholder in TD Waterhouse Group, one of the largest discount brokerage firms in the world. TD Waterhouse serves more than 3 million customers worldwide, including those in Canada, the United Kingdom, Hong Kong, India and Australia, as well as the United States. One comment heard almost daily in the pits is how cheap option premiums have become. More than a few experts now expect the market to make a significant move, considering how low Implied Volatility, the mathematical measure of an issue's potential movement and a key ingredient of an option's price, has fallen. One way investors can attempt to profit from periods of low Implied Volatility in the market is to buy option "premium" on the expectation that the underlying stock might move up or down substantially in the near future. In a debit-strangle, a trader buys an "out-of-the-money" call and an "out-of-the-money" put with the same expiration date. The strangle is initiated with the hopes of a significant move in the underlying issue, where either position, the put or call, rises in value enough to offset the premium originally paid for both options. This position meets our criteria for favorable debit-strangles; cheap option premiums, a history of adequate price movement and future events or activities that may generate volatility in the issue or its industry. This selection process provides the best combination of low risk and potentially high reward. As with any position, it should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (aggressive - neutral/debit strangle): BUY CALL JAN-30 TD-AF OI=92 A=$1.06 BUY PUT JAN-25 TD-ME OI=45 A=$0.62 MAXIMUM INITIAL NET DEBIT=$1.50 TARGET ROI=25% ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. 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