The Option Investor Newsletter Tuesday 09-05-2000 Copyright 2000, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/090500_1.html Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 09-05-2000 High Low Volume Advance/Decline DJIA 11260.60 + 21.80 11301.70 11184.80 843 mln 1422/1438 NASDAQ 4143.18 - 91.15 4206.51 4143.18 1.67 bln 1825/2227 S&P 100 823.49 - 6.34 827.77 820.91 totals 3247/3665 S&P 500 1507.08 - 13.69 1517.10 1503.75 47.0%/53.0% RUS 2000 539.02 - 2.89 542.79 538.41 DJ TRANS 2727.40 + 14.48 2730.69 2709.39 VIX 21.37 + 1.92 21.85 20.78 Put/Call Ratio .48 ****************************************************************** Reality check! Here they come! What precedes earnings warnings? Analyst downgrades! It does their reputation no good to downgrade a stock that has already warned so if they want to garner publicity they have to go out on a limb in advance of warning season. Ashok Kumar fired the first salvo today with a downgrade on Intel and the tech market reacted with a big drop. Great timing for the maximum press exposure. Everyone is thinking rally and you manage to take out 25% of the leaders with one announcement. The Dow managed to rally back to plus territory after Coke said they were comfortable with estimates going forward but this just proves the fallacy of looking at the Dow as a market indicator. The Dow rebound was a fluke with every other index except the transports dropping. The broader market S&P-500 lost -13.69 and the Wilshire-5000 lost -128. How to crater a rally, Step 1. Downgrade a major component of the Nasdaq. The ensuing drop of that component will take others in the index with it. Step 2. Phrase your downgrade on weakness in the sector not specific problems with the company in question. By saying that PC sales are weakening you can kill chip makers, INTC, AMD, MU, ATML, ALTR and others along with PC box makers Dell, CPQ, HWP, IBM and GTW. Guilt by association then drags in software makers MSFT, ADBE, SYMC and friends. If PC growth is weak then Internet network companies sales could slow and that hits CSCO, NT, NTAP, TERN, EXDS, FDRY, AKAM, RFMD and on and on. Every layer below the actual PC box and its impact on Internet and networking suffers. It is like that ad for weed killer Roundup. "Kill the roots, kill the weed." Kill the PC sales forecast and kill tech market. Thank you Ashok Kumar! The downgrade on Intel was from "strong buy" to "buy" but the killer language was the downgrade on growth estimates, a warning about an imminent over supply of chips and a warning that chip pricing was likely to turn into a price war. Ashok said he expected Intel growth to be only mid single digits. This was much lower than the +15%-17% prior estimates. Saying the PC rally was failing and third quarter was going to be disappointing was like saying "man to the lifeboats" on a cruise ship. Traders back from vacation and trying to decide what to buy were suddenly trying to decide what PC stocks they needed to unload instead. Add to the PC sector unrest the fear that neither presidential candidate is looking very drug friendly and suddenly another sector is looking grim. The new Bush Medicare plan was not viewed as positively as was hoped and Banc America's analyst Leonard Yaffe downgraded the entire sector to market perform. With the Gore plan seen as allowing Medicare to implement price controls on drugs and the Bush plan only slightly better, drug companies are facing possible lower profits once these plans are implemented. Lower profits mean lower stock prices and traders started moving out of the sector today. If these problems were not enough CIEN investors got an unpleasant surprise. A major customer of Ciena filed for bankruptcy and CIEN is not likely to receive payment for $28 million of optical equipment. This will result in a charge of $.06 to their fourth quarter earnings. CIEN dropped $14 even though the revenue was already accounted for in the doubtful accounts category. The charge and loss of the customer will have no impact on CIEN going forward according to CIEN. Buying opportunity? Looks good to me but wait for a new trend to appear. CIEN has a 2:1 split on Sept 18th only two weeks away! The Nasdaq posted a loss after five winning sessions in a row. Does that surprise anyone? The slightest scare of earnings or sales prompted the flight reflex as fears of lost profits overcame the greed compulsion. I want to spend a couple minutes exploring the shock loss syndrome. Remember the Emulex hoax from two weeks ago? The stock was rocketing from the mid $40s the first week of August to a high of almost $120 before the hoax on August 24th. Since the hoax the stock has fallen to only $100 even though the press release was bogus. The company is still exactly the same as it was when the stock was soaring but the stock is now falling. What changed? Profit shock. This is the term used to describe the feeling of seeing a $120 stock trading at $50 and you are still holding an open position. This is of course extreme but you get the picture. Investors who had been counting their paper profits of better than 100% were suddenly back to zero or at a loss depending on how long they had owned the stock. Once the hoax was over every investor that survived the heart attack was determined to take profits. It is called getting out alive, the second chance that many of us don't ever see. Once the opportunity presents itself to sell, traders not seeing a continuation of the rapid gains, quietly sell into rallies and count themselves very lucky. The profit shock impacts not only investors in EMLX and stocks in the same sector like QLGC, but other stocks that have run up fast as well. Watching someone else take a bath in a news disaster will make you consider windfall profits you may have in your portfolio. Lightning can and does strike twice and once hit you are forever shy. For everyone that woke up this morning expecting a continued rally and found a tech sector nightmare instead, the prospect of losing the profits from the last three weeks was suddenly crystal clear. Investor sentiment changed in the blink of a press release and +550 points of profit in the Nasdaq since August 11th were on the verge of disappearing faster than a politicians promise on November 8th. Which way from here? Like I said on Sunday, "just because everyone expects the market to do something does not mean it will," the drop today proved that millions of investors hoping for a rally cannot make it happen. The only thing that will cause a rally is buying, not hoping. Hoping is done by people with open positions and no money. Traders with money vote for rallies by buying something and their votes move the market. Volume was good today (1.6B) and that was a bad sign. Good volume on a down day causes more down days. The possibility that the PC sector analysis by Ashok Kumar may be accurate could cause more problems. Traders are beginning to be more concerned that the earnings warnings which start next week may be stronger than normal after today's tech downgrade. This COULD impact the rest of this week. There are no important economic reports this week but next week is loaded. The Nasdaq is now showing a failed rally at the 4250 resistance from Friday. The lack of a follow through today and the sector downgrade could be the one-two punch that knocks us into next weeks decline several days early. Light support is at 4100 and then 4000. With September the worst month on record in the last 49 years, even worse than October, and the four day post Labor Day rally now in doubt, I would be VERY cautious about starting new positions. There is still a ton of cash on the sidelines and this could be the buying opportunity they have been waiting for. Still, I would be careful. We blinked and sentiment changed. I hate it when that happens! 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 in-depth education. Don't miss it! Some comments from recent attendees: I want to thank Chris, Steve and Scott for the excellent workshop held in Detroit last week. Having been to the Expo in Denver in March (which was fabulous), I was ready for a smaller, hands-on approach to hone my less-than-perfect skills. I was not disappointed. One can never get too much education in options investing, and Chris and Steve offer terrific, unique approaches. Laurie 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 **************** MARKET SENTIMENT **************** Vacation's Over - Let The Buying Begin! By Austin Passamonte Here we go - Labor Day's over. As most pundits have said, time for volume and money flow to return. All these little guys squeezing in ahead of the sure-thing rally created a stealth rally of their own. Will it continue from here? Maybe. Don't you just love our commitment to prognostication? As usual, reality leaves us underwhelmed from expectations of new market highs. Hey, let's just post some matched prices of previous closing highs first! Good volume on the NASDAQ two out of the last three sessions took us 100+ points in either direction on the NASDAQ 100 index. What's that tell us? Our vaunted "buy the dip" crowd (many of us) continue to swoop in as markets sell off only to buy them back. Still, each rally mounted is cheerfully met by waves of selling and large blocks at that. The tug of war continues. Looking at candle patterns, we had some bullish white candles on Thursday last following a rally on most indexes. Friday's near holiday action left outside-day dojis in turn. Today's close created bearish "Evening Star" three-session patterns found near the top (?) range of a price move. This indicates buying strength first, indecision and then weakness over three sessions time. The Dow stands alone with what could be a "Gravestone" doji or upside-down hammer. This means the market opened, rallied up to its daily high and sold off to close near the open price. It suggests failure of the bulls to push and support prices up any further. Also, the VIX advanced from below 19 last week to close at 21.37 today. While it's still considered within bearish zone, this slight release could portend much bigger things to come. We'll see what tomorrow shall bring. On a bullish front, market pros are returning to the start of a long season at the helm. What to do with these volumes of cash lying around? Buy bonds? We think not. Fund managers need to put that money to work and will look to do so soon. That will happen when they think prices are apt to go higher. Funds are a trend-following crowd and near term buying action could trigger a wave of panic buying. Wouldn't that be nice for the bulls? Market Sentiment continues to believe we are at a key moment in the market and things are fixin' to move fast. With a triple witch expiration looming ahead there is no reason to think otherwise. It could get hot & heavy soon, stand ready to play "hot potato" with puts and calls as broad markets roil and roll. 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. Sat 9/02 close: 19.45 Tues 9/05 close: 21.37 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 (9/05) (9/07) (9/09) ************************************************************* CBOE Total P/C Ratio .48 Equity P/C Ratio .41 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 (9/05) (9/07) (9/09) ************************************************************** All index options 1.46 OEX Put/Call Ratio 1.53 OEX Maximum Open Interest Strikes/Contracts: Puts 790/6,137 Calls 800/4,361 Put/Call Ratio 1.41 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: (9/05) (9/07) (9/09) Overhead Resistance: (920-855) 87.24 (850/830) 4.02 index close: 823 Underlying Support: (825-805) 1.52 (800-780) 2.30 What the S/R measure indicates: Net open-interest ratios are firm above 830 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 continued failed tests near the 830 range an excellent put entry. 30-yr Bond: 5.67% Light, Sweet Crude, Barrel: $33.80 200 Day Moving Average (as of 9/05) The 200 DMA is widely considered the major benchmark for critical support in a market. DOW: 10,821 11,260 NASDAQ: 3,998 4,143 NDX: 3,750 3,987 SPX: 1442 1507 OEX: 780 823 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 (long) +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 5.67% 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. Friday's batch included 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. Very bullish behavior ****** BEARISH SIGNALS VIX Tuesday's close above 21 is very interesting from here. 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 $33.80 today. All petroleum expected to be extremely high this fall. Prices in low $20s would be welcome relief but remain beyond reality. Seasonal patterns are rising prices soon as well. 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, 09/05/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 11,260 11,000 11,400 SPX S&P 500 1,507 1,485 1,550 COMPX NASD Composite 4,143 4,000 4,300 OEX S&P 100 823 814 845 RUT Russell 2000 539 520 575 NDX NASD 100 3,987 3,900 4,300 MSH High Tech 1,095 1,080 1,170 BTK Biotech 741 690 800 XCI Hardware 1,596 1,500 1,680 GSO.X Software 485 450 500 SOX Semiconductor 1,121 1,000 1,200 NWX Networking 1,357 1,325 1,400 INX Internet 594 550 625 ** BIX Banking 606 550 610 XBD Brokerage 687 660 700 IUX Insurance 718 680 725 RLX Retail 816 780 840 ** DRG Drug 380 365 410 ** HCX Healthcare 791 770 830 ** XAL Airline 158 148 168 OIX Oil & Gas 312 280 320 It was a rather negative day as traders got back to work and found some nice profits had piled up over the past week. Volume picked up, but it was to the downside for many sectors and indices. Both the INX and RLX hit our resistance points, while the DRG and HCX broke support levels. Raising support (INX, RLX). Raising resistance (INX, RLX). Lowering support (DRG, HCX). Lowering resistance (DRG, HCX). *********** OPTIONS 101 *********** Covered Calls and Calendar Spreads By Lee Lowell These are topics that seem to get lots of press on many financial websites, including OIN. I'd also like to write about these strategies not only because they are very popular to many investors, but because I too am starting to increase my use of these tactics. Covered calls are considered to be one of the most conservative and safest of all option strategies. This is why brokerages will allow almost anyone who fills out an option agreement to employ this strategy. There really is no extra risk in selling a covered call that a brokerage needs to worry about. The investor already has the shares in the account, so he/she is covered against the short call. And since the investor already faces the risk of their stock going to zero, the covered call will actually offset that catastrophe by a few points. The only downside to this strategy is that the investor may have their profits capped if the stock starts to blast off. If you read my article from 08/07, you'd see that I expanded on the use of covered calls to give yourself some downside protection and a possible monthly inflow. Everyone should employ these tactics. You need to get the most out of your portfolio by utilizing option strategies that work with what you already have. Don't just "wait and hope" for your languishing stock to go back up. Sell a call against it. This at least keeps you involved and may help to increase your returns. For years, I sat with my portfolio of stocks knowing that eventually over time they would all go up. But for those periods of meandering and downticks, I would just chalk it up to "that's the market." I now know that a majority of stock and indices, in general, trade within certain ranges and patterns, which makes me more comfortable selling covered calls. I can lower my cost basis by a few points during those down periods and by using the tools of the trade, I can pick the most effective calls to sell. If my stock moves up, then hopefully from my analysis the call that I sold will still expire worthless. I think the reason that most people are hesitant to sell covered calls is due to the possibility of losing their stock, and missing out on a big upside move. But, how many of you were wishing back in March and April that you had some covered calls that could've saved you lots of money during the correction? You can never time the market, so you can never know when a good time might be to sell a call. That's why you should always look to sell calls against your longs every month. Now you may have a good feeling about the stock or it might be in a good uptrend right now. That's fine. If you feel really good about the near-term, then hold off from selling the call. If you are worried about being called out and possibly missing out on the "big move", then you can always buy the call back for a small loss. Or you can buy the call back and roll it out to the next month's option. Just remember, if you are losing money on the short call, you are guaranteed to be making MORE MONEY on your long stock. That's how covered calls work. I can hear it now, "why take the chance of losing any money by buying back the short call for a loss if I know my stock will eventually go back up?" The key word is "eventually." Like I said, what about those in between times when there's no movement and those times of slow downward drifts? Do you want to bring in a few extra dollars each month or do nothing? This doesn't have to be a long-term commitment. You can sell front month options each month that decay very rapidly. It's up to you. I know what I'm going to do. I want to talk about a variation of the covered call. It's a cross between a covered call and a calendar spread. The strategy involves buying an in-the-money LEAP call option and selling a closer-to-expiration call option with different strike prices. In a traditional calendar spread, a longer-term option is purchased and a near-term option is sold, with both options having the same strike price and both being calls or puts. Additionally, if the near-term option has higher implied volatility than the longer- term option, than you will have an even better edge in the trade. With the new strategy, you will purchase an in-the-money LEAP call and sell a closer-to expiration call whose strike price is dependent on the premium of the LEAP. In a covered call strategy, you either already own the stock and then sell a call against it, or you can be the speculator and simultaneously buy the stock and sell the call at the same time. Buying an in-the-money LEAP call will not only closely mimic the movement of the long stock (delta effect), but it will cost less to do so. This will also lower your total loss should a potential downside disaster occur. Buying the LEAP also gives you plenty of time for the strategy to work and keeps the decay to a minimum (theta effect). You should buy at least the 2002 or 2003 LEAPs. So in effect, you really are implementing a covered call strategy except that the LEAP is a surrogate for the stock. And since we are dealing with options in different months, we are also in theory conducting a calendar spread. The LEAP call should be about 20 points in-the-money which will probably have at least an .90 delta. The short call against the LEAP has to be at a strike price that comprises the strike of the LEAP plus its premium. Here's an example. I've been considering buying LEAP calls on Nokia which is trading around $46. I've decided that I want to purchase the Jan '02 $25 calls for a premium of $24 or lower. If I get filled, I want to start selling calls with a strike price of $49 or higher ($25 call + $24 premium = $49). In this case, I would look to sell a Nokia $50 or higher call in a month that has a few points of premium. This could either be the Oct 2000 or the Jan 2001 calls. The reason why you want to sell a call with that specific strike formula is because it eliminates the negative effect of being called out of a LEAP call prematurely. The one problem of a regular calendar spread in which both options are of the same strike price is that if the stock sky rockets and you are called out of the near-term call, you may be forced to exercise the long-term call. This basically makes you forfeit all the time premium you just paid for. With the in-the-money LEAP call, this is not a factor because of the little time value it has to begin with. Once the stock starts to sky rocket and you are called out of the short call, your LEAP will practically consist of all intrinsic value, so early exercise is not an issue. It's the same as if you had to give up your shares of stock. Remember, an ITM call with a delta of .90 is comprised almost entirely of intrinsic value so you don't have to worry much about time decay or exercising prematurely. I can either buy 100 shares of NOK for $4600 or spend $2400 for the Jan '2002 $25 call and get almost the same results. I have 1.5 years for the trades to work for me. Right now, the Jan '02 $25 call is trading for $24 with NOK trading at $46. That means it has $21 worth of intrinsic and $3 worth of time premium (very small). Let's say I sell the Jan '01 $50 calls against it for $4.50 and NOK finishes at $55 on expiration day in Jan '01. I will be called out of my Jan '01 $50 calls for a 1/2 point loss ($5 point intrinsic - $4.50 initial premium intake) and I will have to exercise my Jan '02 $25 calls to cover it. The $25 calls at Jan '01 expiration are worth $30 intrinsically, but they are trading for roughly $30.75 in the marketplace (using an options calculator). This means that I will only be giving up 3/4 point in lost time premium due to the early exercise. I can live with that. Also, my overall gain from the LEAP/short call is +5 1/2 points. If I had instead purchased 100 shares of NOK with the short call, my gain at Jan '01 expiration would be +8 1/2 points. I'd make an extra $350 if I owned the stock but it would've cost me an extra $2200 to make the trade initially. I think I'll stick with the LEAPs. The strategy is worth a look if you have some LEAP calls that interest you. I welcome all questions. Good luck. Contact Support ************** TRADERS CORNER ************** Using Volatility and Delta in Spreads By Mary Redmond Spreads don't necessarily have to be boring options strategies. Sometimes you can make a higher percentage profit on a spread with lower risk than in other options strategies. Spread traders generally keep track of the volatility of the options they are buying and selling, as well as the probability of the options moving in a particular direction, and many other factors which can influence the stock's price. Generally speaking, with spreads you should use the same rules as when buying and selling call and put options. You should usually try to buy an option when the implied volatility is lower than the historic volatility. With a spread, the best strategy is generally to buy an option with comparatively low implied volatility and sell an option with higher volatility as a simultaneous transaction. This will not guarantee a success, but it will increase the odds of success. You also should become familiar with a stock's trading pattern before buying options. Typically, a stock which has been public for several years will usually have established a more predictable trading pattern. It is much easier to become familiar with the pattern of a stock like GE than a stock which went public 6 months ago. Younger companies tend to have more erratic trading patterns and may respond with more severe price swings to news and changes in trading volume. For example, if you take a stock which has been relatively flat for a period of time the LEAP call options will probably be priced with little difference in price between each option. In this case, the volatility chart will be tend to be relatively flat. This is the implied volatility chart of CMGI Jan '02 LEAPs. It is important to note that the implied volatility graphs will often be flatter when there is more time until expiration. For example, the implied volatility of the Sept 50 CMGI calls is 77.5. The implied volatility of the Sept 75 calls is 125. The implied volatility of the Sept 100 calls is 182.7. When the implied volatility is significantly higher than the historical volatility, the probability of the call options becoming profitable is very low. Below is the implied volatility chart of the September CMGI calls. You can use this factor to your advantage in many different spread strategies, including calendar spreads. If you buy LEAPs with a low implied volatility, you can often sell near term calls with higher implied volatility which may expire worthless. If a stock has been flat for a period of time and the volatility graph is flat, the options' prices tend to be closer together at different strike prices. For example, a few weeks ago the CMGI Jan 50 calls were $12.50 and the Jan 100 calls were $6. You could have bought the 50 and sold the 100 for a cost of $6.50. Today, the Jan 50 calls are $19.38 and the 100 calls are $10.13 to $10.50. The spread could have been closed at $8.88, a profit of $2.38. If one option is at-the-money and the other is deep out-of-the- money and the stock rises, the ATM call should rise by a greater amount than the deep OTM. If the 50 call became in-the-money this could be more pronounced. The delta of the ATM call is approximately 65. The delta of a deep OTM call option is about 35. If CMGI were to rise 10 points the 50 call could rise approximately $6.50 and the 100 call might rise only $3.50 to $4. If the stock were to tank, the out-of-the-money call would decrease more slowly, which could be a disadvantage. Other factors can affect the delta, including the demand for the options and the liquidity. If both options have high outstanding open interest and trade daily, then the movement of the option according to its delta should be more precise. If you are doing options or spread trading, you also want to consider how the implied volatility can change as a stock moves. This can depend on the public's perception of what the option will do over it's lifespan, as well as the demand for the option. For example, if the demand for an option rises because many people are bidding for it, the implied volatility will usually rise. If many people are selling call options, for example in covered call writing, the implied volatility may decrease. You need to use your judgement to determine if people will start to buy a particular option or write the option if the price changes. A difficulty with LEAPs is that the spread between bid and ask can be as much as two points and you often have to buy a LEAP at the ask and sell at the bid unless the market changes. If a LEAP is quoted at $16 to $17.50, you may not get it at anything under $17.50. If you have a broker who can call to the market-makers and put a spread order in at a particular price, this could help. However, if the market is illiquid, the market-makers may not give you a spread at the ratio you want. You could request an 2002 spread with 4 points and you might not get it. If you are trading spreads, you have to consider the possibility of being assigned. Normally, assignment will occur on or after the expiration date. However, a person who owns an American style option has the right to exercise the option at any time before that. If you sell an option, there is always a risk that you could be assigned. If every option you sold is covered by one you bought, your risk is limited. In today's highly volatile markets, it can be very dangerous to sell naked calls, since stocks can gap up or down as much as 50 points in a day, and naked option writing can result in severe losses. Contact Support ****** Oil Sector Trading By Scott Martindale Say, what? Oil sector? But we are high-flying options traders on technology companies, aren't we? Our lifeblood is the volatility, the energy, the excitement, the morning gap ups, the big killings. Right? Well, I'd guess that many of the OIN subscribers do feel that way. In fact, many probably won't even read this (or perhaps any other Traders Corner article, for that matter), but just go straight to the play recommendations. And that's fine. But perhaps at least a handful of you folks get a little unnerved by the volatility and would prefer longer term plays with lower premiums and less stress, relatively speaking of course. For you, the oil sector might be good. I worked in the oil industry for many years, and for the last few in particular, I watched with envy as the stock of tech companies shot through the roof while my stock just kept plugging along with slow, steady growth, or get mired in a long-term trading range. For example, look at this uninspiring (for me) table of 5-year total growth: Growth % Texaco 59 % Chevron 74 Exxon/Mobil 131 (not bad) Nabors Drilling 396 (pretty good!) Microsoft 488 (wow) Cisco 1,655 (feeling envious) JDS Uniphase 13,622 (don't depress me) Well, you can see why I'm schlepping articles for OIN rather than lying on a sandy beach in the South Pacific sipping a Mai-Tai. It certainly could have been a lot worse - I could have worked in the steel industry. Of course, many tech employees, especially those in the internet sector, had to put their early retirement plans on indefinite hold when the bottom dropped out this Spring and, for many, never recovered. My friends who work for small money-losing start-ups with promising technology say that the employees become almost paralyzed with distraction during the periods when their stocks and stock options run up in value; the frantic momentum runs and then quickly turn south before they exercise the options. Everyone stays glued to the stock screen. However, despite the modest gains for the oil stock buy-and-hold strategy, a closer look at the charts for the major international companies shows that there is consistent money to be made by playing options at the cyclical support & resistance points. Their oil drilling and services brethren such as NBR, DO, SLB, HAL, BJS, BHI, and GLM all tend to move in lock step with one another, but they are much more vulnerable to the downside and have more potential on the upside. So they are not as low-stress as the majors. Let's look at the charts of TX and CHV, as well as a top service company like SLB. They move in predictable patterns, selling off on MACD cross-overs - indicating that their medium-term trends are not particularly news-sensitive. When they begin to come off a trough, they tend to stay on track. This makes for less stressful trading. Looking at Texaco's 5-year chart, after a persistent uptrend in the early 1990's, TX has been trading between $50 and $60 for almost 3 years, with a couple of narrower intermediate trading ranges during 1998 and 1999. Chevron could have been played between $75 and $85 for almost 2 years between mid-1997 and 1999, buying or selling every 3 months. During 1999, the trading range moved up to between $85 and $95, with a couple of retests of the $75 resistance level this year. As for the oil services companies, if you look at charts for the late-1997 through early-1999 period, the majors tended to stay within a trading range while the oil service companies cratered. Schlumberger lost over 55% of its market value during this period. However, during the same period, the majors lost at worst about 20%, with some like Exxon-Mobil actually increasing about 15%. This is because the majors are "vertically integrated," meaning that they can make money in any of the stages from production of crude oil & natural gas through retail marketing of refined products & petrochemicals. But the services companies are dependent solely upon the exploration & production stages, requiring strong worldwide demand and high petroleum prices to meet financial targets. However, if you had followed the news on oil industry spending and zealously enforced your stops, you could have avoided the big downturns in the oil services sector while enjoying the greater returns offered during the up periods. The prognosis for the health of both the oil and oil services sectors continues to be quite good. Many are currently valued based on $20-25/barrel oil, even though the benchmarks sit well above $30. With current inventories tight, global economic recovery underway, and no economical oil substitute anywhere in sight, there's a good chance we'll see strength for some time to come. Nonetheless, we will see the inevitable periods of short- term weakness as prognosticators speculate about things like OPEC agreements breaking down or weakening worldwide demand, which may provide good entry points. My view as to the best way to play the major oils is with "rolling LEAPS." Austin touched on this concept recently. It simply means to buy LEAPS at the cyclical troughs and then sell them, or sell front-month calls against them, at the technical peaks. With the oil service companies, many of which do not offer LEAPS, play the longest-term options available. You'll find that these LEAPS and long-term options are much cheaper and less volatile than the exciting but stressful tech plays. smartindale@OptionInvestor.com ************************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.nobletrading.com/newaccount/optioninvest.html ************************************************************** ************* SECTOR TRADER ************* New - OEX Trades By Buzz Lynn sectortrader@OptionInvestor.com As of today, say goodbye to the HOLDRS and hello to the OEX. Of course the QQQ remains in integral part of this section too and we will be adding a third index soon based on your "votes" and the indexes tradability. Thanks to all those who wrote in with their suggestions so far. Keep those e-mail suggestions coming! Now on to today's trading with an eye on tomorrow's profits! While many of us expected traders and fund managers to return to their terminals and PCs from vacation with fat wallets to buy everything in site, it didn't happen that way today. Remember the NASDAQ had been up 14 of the last 15 days or so and was due for a breather. As an experienced trader or manager, you won't open up that wallet the first day back with that kind of a positive trend in place and no pullback. You'll likely wait for a re-tracement to get a better entry especially after the last three weeks of gains. NASDAQ gave us that pullback today on Ashok Kamur's downgrade of Intel from Strong Buy to Buy. He cited slowing sales of INTC's most powerful new chips. Of course that means slowing PC sales, and that perhaps fewer people than anticipated are buying the latest memory-hogging software. Add to that WCOM's cratering on its announced purchase of Intermedia (ICIX) which owns a controlling interest in DIGX, plus CIEN's announced $28 mln charge-off for a bad account in Europe, and you get a good idea about how the day will end. Can you guess what happened to technology issues, and thus, the NASDAQ today? Right! Booted into the basement on respectable volume. We wouldn't be concerned about it if it happened on lighter volume. But that coupled with the VIX back over 20 at 21.37 creates a catch 22. Are we going to see the VIX get higher? Or did that little spike register enough fear in the market to convince us there is again a "wall of worry" for the bulls to scale? We don't have the answer, but on the VIX we can see resistance around 24. Thus at this point, that looks like the upper limit should the markets need more time off. The good news is that the slow stochastic is again reaching resistance at 67 while the MACD isn't far from bumping its head on the neutral 0.0 line on the daily charts. Both levels were points of resistance in late June, July, and August. Let's hope they hold. Of course, the VIX is directly linked to the OEX and we'll cover that index more in the write-up below. Just note that the tech stocks like IBM, HWP, NOK and MOT were down in sympathy with INTC. There may be sympathetic earnings warnings to boot from other sectors dependent on robust technology. While it's probably just an overdue profit taking day in the big picture, keep your eye on the VIX. ************** QQQ ************** QQQ - NASDAQ 100 $99.59 -2.75 (-2.75 this week) So much for the trend's continuation intact. The Qs gapped down and continued down from there. Even the bounce off $100, which we thought would lend support, was penetrated. Fortunately volume on the QQQ was slightly below the ADV indicating lack of desire to panic toward the exit door, but still an increase over last Thursday and Friday's volume. However, $99.50 is the real test. Otherwise look for $97.50 to provide the next level of support. Technically on daily chart the MACD and stochastic have showed a flattening out if not a rollover in today's trading, suggesting there may be further downside in the next few days. With the Fed mostly out of the picture until next year, we don't expect that to last long unless we get some nasty earnings warnings in the next few days. The shorter-term (30 and 60-min) charts show that we may be nearing a bottom suitable for a bullish swing trade entry. If we are wrong we can always exit with a stop and enter at a lower price. That said, we urge you not to pull the trigger until you see a clear direction form. Support is at $97.50, 99.50; resistance is still at $101, then $103. Again, watch the tech stocks, INTC, MSFT, CSCO, WCOM, DELL, ORCL and SUNW for direction. Calendar Spread: Still attempting to "leg in" to a spread? It would have been tough today to sell the short position suggested over the weekend for a substantial profit. What we want to do is sell short term calls against longer-term calls to keep taking in credits to reduce the cost of our long position to zero, letting time decay work in our favor. This strategy works just like a covered call except that at the end of the month, we don't want to get called out of our long-term position. Thus it becomes necessary to cover the short when its time value approaches zero, or a day or so before expiration, whichever occurs first. Don't worry that it costs more to repurchase than what you paid for it. Remember, your long position is rising in value by an equal or greater amount. You simply need to keep some cash on hand to make the repurchase. Then you can sell the next month out for another time value credit. However, if the price of the QQQ breaks below support, you can exit the trade for a small loss and re-enter the whole trade when the price stabilizes and bounces again. Keep in mind that intent is buy long position cheap and sell the short as expensive as possible (like when it hits resistance) to minimize the net debit. Support is at $97.50 and $99.50; resistance is at $101 and $103. ***September options expire in 2 weeks*** BUY CALL DEC-100 QVO-LV OI= 8982 at $ 9.13 SELL CALL SEP-100 QVO-IV OI=12696 at $ 2.44, ND = 6.69 or less SELL CALL SEP-102 QVO-IX OI=12870 at $ 1.63, ND = 7.50 or less SELL CALL OCT-100 QVO-JV OI= 2528 at $ 5.88, ND = 3.25 or less SELL CALL OCT-105 QVO-JA OI= 1372 at $ 3.63, ND = 5.50 or less Long Call: We noted Sunday to exhibit caution this week since nothing goes up or down in a straight line. After nearly three weeks of solid gains, there shouldn't be any surprise that we saw profits swept form the table today. INTC's downgrade by Ashok Kumar today may have been just an excuse. In any case, the decline came on increased volume, which should cause us to keep our guard up for more declines in the coming days. Earnings warnings would keep the QQQ moving down, while liquidity still needs to be put to work in the markets. We favor the latter, but need to see a bounce first in the next few days before entering a bullish trade. The fact is the daily MACD and stochastic are flattening or possibly rolling over indicating more declines to come. However on the 30 and 60-min charts, a near-term bottom and possible positive reversal may be forming. Wait for the bounce and let increasing volume be your clue. Also watch the lead companies noted in the intro above. Support is at $97.50 and $99.50. Resistance is at $101 and $103. ***September options expire in 2 weeks*** BUY CALL SEP- 95 QVQ-IQ OI=12039 at $5.88 SL=3.75 BUY CALL SEP-100 QVO-IV OI=11696 at $2.50 SL=1.25 BUY CALL OCT-100 QVO-JV OI= 2528 at $5.88 SL=3.75 BUY CALL OCT-105 QVO-JA OI= 1372 at $3.63 SL=2.00 Average Daily Volume = 18.9 mln ************** OEX ************** OEX - S&P 100 824.06 -5.77 (-5.77 this week) While mentioning the OEX, we cannot escape that other symbol, VIX, that goes with it. VIX is an indication of volatility. Volatility determines option prices on the OEX. The higher the volatility, the higher the time premium of OEX options. While the VIX is a reflection of the OEX, it also has an approximate, but not perfect correlation with other indices. You've hear the old saying, VIX is low, time to go; VIX is high, time to buy. Historically, the VIX has predicted tops (low VIX) and bottoms (high VIX) with good though not perfect accuracy. A VIX spike back over 20 indicates more volatility and perhaps a move back down for the OEX if the VIX continues to rise. The good news is that the VIX has resistance at 24, and the slow stochastic is again reaching resistance at 67 while the MACD isn't far from bumping its head on the neutral 0.0 line on the daily charts. Both levels were points of resistance in late June, July, and August, and may be so again. Time will tell. In the meantime, the OEX has flattened out and clearly found resistance at 835 while support appears pretty good at 815-820. Nonetheless, the daily chart shows MACD and stochastic rolling over (possibility that OEX will go lower), while the shorter term charts show that OEX could be setting up for a nice bullish long entry. Wait for the bounce in the 815-820 area if you go long. Long Call: You know the story. Chips, PCs, telecom, biotechs, drug stocks - all took it in the shorts today, while the smokestacks like steel, autos, paper, and oil puffed their way to the gainers column. If the techs start playing seesaw with the smokestacks, OEX could be rangebound, but that's no reason not to play a short-term swing trade based on your 30 and 60-min charts. As noted above, MACD and stochastic are indicating they may be ready to take OEX back up, especially with support at 820. Wait for the dip and bounce to be sure and watch the VIX, QQQ, and Dow for an indication of overall market direction. If these are positive, OEX should be there too. BUY CALL OEX-JB OCT-810 OI=3192 at 34.75 SL=24.50 BUY CALL OEX-JD OCT-820 OI=1483 at 28.00 SL=20.00 BUY CALL OEX-JF OCT-830 OI= 310 at 22.25 SL=15.50 Bullish Calendar Spread: Just like the QQQ above, our objective here is get monthly credits to reduce the cost of a long-term position to zero, and allow time decay to work in our favor. You can leg in to the position by testing your timing skills based on support and resistance, which generally means you'll need to remain an active trader to make this one work. The idea is buy the long position cheap and sell the short position as the price rolls over at resistance. In this case, that means buying at support at 820 and perhaps selling the call when the OEX reaches 835 or rolls over from a lesser value along the way, say 830. ***September options expire in 2 weeks*** BUY CALL DEC-840 OEX-LH OI=584 at $32.25 SELL CALL SEP-840 OEX-IH OI=3054 at $ 4.75, ND=27.50 SELL CALL OCT-840 OEX-JH OI= 719 at $16.25, ND=16.00 SELL CALL OCT-850 OEX-JJ OI= 824 at $11.88, ND=20.38 Average Daily Volume = 1269 ************* DAILY RESULTS ************* Index Last Mon Tue Week Dow 11260.61 0.00 21.83 21.83 Nasdaq 4143.18 0.00 -91.15 -91.15 $OEX 823.49 0.00 -6.34 -6.34 $SPX 1507.08 0.00 -13.69 -13.69 $RUT 539.02 0.00 -2.89 -2.89 $TRAN 2727.40 0.00 14.48 14.48 $VIX 21.37 0.00 1.92 1.92 Calls CHKP 154.50 0.00 5.06 5.06 Run, CHKP, Run!!! MERQ 129.06 0.00 2.56 2.56 New, the love is back! VERT 57.19 0.00 2.44 2.44 New, VERT on the rise! TIBX 110.13 0.00 2.06 2.06 Blessed with new deal SNDK 90.06 0.00 1.56 1.56 Unusual strength today INKT 131.13 0.00 0.38 0.38 Bucked the weak NASDAQ VRTS 121.88 0.00 0.13 0.13 Higher prices are holding ISSX 84.06 0.00 -0.06 -0.06 Higher-highs on track NEON 37.25 0.00 -0.50 -0.50 Need NASDAQ rally AGIL 74.06 0.00 -0.69 -0.69 New, another B2B beauty AAPL 62.44 0.00 -1.00 -1.00 Flat day of trading DISH 51.88 0.00 -1.19 -1.19 Mild round of profit taking JNPR 220.13 0.00 -1.50 -1.50 Hurt by the CIEN debacle ORCL 91.06 0.00 -1.56 -1.56 Pullback on profit taking IWOV 96.00 0.00 -2.00 -2.00 Dropped, $100 formidable BEAS 68.50 0.00 -2.25 -2.25 Volatile day, bears move in LSCC 75.28 0.00 -2.41 -2.41 Getting close to 5-dma NTAP 112.94 0.00 -2.56 -2.56 Dropped, profit taking ahead IDTI 89.19 0.00 -3.38 -3.38 Anticipated pullback today ITWO 175.19 0.00 -4.06 -4.06 Post-holiday pop from SSB VRSN 181.31 0.00 -4.63 -4.63 Dropped, up-trend over??? MRVC 75.50 0.00 -4.88 -4.88 Sector sympathy-soft NASDAQ QLGC 108.13 0.00 -7.88 -7.88 Dropped, tired momentum NEWP 156.88 0.00 -12.06 -12.06 Dropped, valuation downgrade CIEN 216.31 0.00 -13.81 -13.81 EPS charge, entry point??? Puts CREE 124.44 0.00 -6.56 -6.56 New, Chip dip AT 48.94 0.00 -0.88 -0.88 Late-day selling MMM 92.25 0.00 -0.25 -0.25 Meandering lower UK 40.88 0.00 1.31 1.31 Flight to value, entry??? KO 56.31 0.00 2.06 2.06 Dropped, EPS sigh of relief 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: ***** VRSN $181.31 -4.63 (-4.63) It appears that VRSN's current up-trend may be over. While Friday's high volume selling could be attributed to profit taking after a strong run, and today's 2.49% loss on 136% of ADV could be blamed on a weak market, there's always an excuse that can be found if one looks hard enough. Friday's move resulted in VRSN closing below its 5-dma (now at $189.33). For most of VRSN's rally in August, the 5-dma served as the anchor and now it appears that support is gone. The 10-dma also provided support early on in the recovery. Today's close put VRSN below that mark, currently at $182.32. In addition to this, the key support level of $185 was violated today. With the next moving average support from the 50-dma at $170, there could be further downside ahead. As a result, we are no longer recommending this play. NTAP $112.94 -2.56 (-2.56) As mentioned on Sunday, where the NASDAQ leads, NTAP follows. With the tech index heading lower today, NTAP tagged along for the ride down. After encountering strong resistance on Friday at the $120 level, it appears that NTAP could now continue to move even lower. Strong selling volume in the early morning brought the stock down to the $112 area. From there the stock spend the rest of the day attempting to gather strength and rally. This was not to be as the stock closed down 2.22% on 67% of ADV. While volume today was light, the resistance at $120 is formidable. Nothing goes straight up and after a month of strong rallying in August, it appears that further profit taking may be ahead. As a result, we are closing this play. Today's down day was in spite of news of an alliance with FDRY and NOK to deliver seminars on e-commerce network infrastructure in an effort to help companies realize the value of e-commerce and promote their products. IWOV $96.00 -2.00 (-2.00) The psychological resistance level of $100 is proving to be a formidable challenge for IWOV. While the stock started weak in the early morning, buyers came in to support IWOV at the $95 level. From there IWOV spent the rest of the day attempting to pierce the century mark. By the end of the day, when it seemed apparent that the $100 resistance would hold, the sellers came in to take advantage of shifting sentiment and weak NASDAQ to close the stock down 67% of ADV. Despite the low volume of the down move and support holding at $95, the end of day selling action on high volume does raise a red flag on this play. It could take some consolidation for IWOV to gather enough strength to break through $100. Sideways movement means decaying premiums for options, which results in decreases in value for call options. As a result, we are closing this play and moving our money elsewhere. NEWP $156.88 -12.06 (-12.06) One day Wall Street can be your favorite friend and the next your worst enemy. In a contradictory research report this morning, ABN AMRO lowered its rating to an Outperform from a Buy rating on NEWP based solely on valuation concerns. At the same time, ABN raised its EPS estimates for this year and the next, and lifted its price target. Despite the latter half of the report, which rang of bullish tones, the damage had been done by the downgrade. NEWP might bounce back quickly tomorrow if bargain hunters step in to give support to the stock. Major resistance is now at $160, near the 10-dma, and support is located just below current levels near $155. QLGC $108.13 -7.88 (-7.88) Thanks to the EMLX hoax, our play on QLGC saw quite a bit more excitement than we originally bargained for. After investors recovered their senses, they proceeded to bid shares of the company higher late last week. Helping in the move higher was Salomon Smith Barney initiating coverage of the stock with a Buy rating late last week. That news managed to propel the stock above $119 the next day, but it has been a downhill slide since then, as profit taking has shaved nearly 10% from the share price. It was looking like the $110 support was going to provide another entry point until a surge of selling volume dropped QLGC down to $108.13, for a close at the low of the day. The momentum that attracted us to the play is looking pretty tired, and rather than wait for it to come back, we'll take our profits and move on to healthier plays. PUTS: ***** KO $56.31 +2.06 (+2.06) Recharging investor enthusiasm for shares of KO, the company announced this morning that they are comfortable with analyst expectations for its third quarter earnings. The sigh of relief from investors was almost audible, as they cast off the concerns voiced last week by Salomon Smith Barney. After falling sharply last week, today's infusion of good news lifted shares of KO above the 200-dma ($55.50) and the 10-dma ($56.13). Both fundamentally and technically, KO is no longer looking like a healthy put play. After moving strongly higher this morning, KO gradually drifted lower throughout the afternoon, and we could see more weakness tomorrow. We aren't recommending any new plays at this time. Instead, use any pullback as an opportunity to exit the play at a better price. ************************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 ************************************************************** 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. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Tuesday 09-05-2000 Copyright 2000, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/090500_2.html ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ ******************** PLAY UPDATES - CALLS ******************** NEON $37.25 -0.50 (-0.50) This morning NEON provided the investor with a light volume pullback to $36.63, just above its 5-dma (currently at $36.20), within the first half hour of trading. From there, price action was relatively quiet as NEON hovered below the flat line, until mid-day. Volume continued to be light for the remainder of the day, as NEON settled down $0.50 for the day, to close at $37.25. NASDAQ market sentiment and direction need to be monitored closely before entering new trades. If you did not gain entry this morning during the small pullback, look for NEON to pullback on light volume to its 5-dma at $36.20 or to its 50-dma at $32.30, along with a bounce, for an entry. DISH $51.88 -1.19 (-1.19) As the NASDAQ went, so went DISH. Hit with a mild round of profit taking, in sympathy with the general market sentiment, we saw it hit an early morning low of $50.75. This is still well above its 50-dma (currently at $40.40) and its 200-dma (currently at $47). Volume was strong in early morning trading but lightened up as we approached the midway point for the day. Volume was heavier than normal for the day as 3.1 mln shares traded hands and DISH closed just above its low for the day at $51.88. DISH seems to want to trade in the direction of the NASDAQ so be alert when opening new trades. Continue to look for a small pullback to the 200-dma at $47, along with a bounce, for an ideal spot to enter a new trade. TIBX $110.13 +2.06 (+2.06) Blessed with a new software deal this morning, TIBX managed to jump back into positive territory, after an early morning pullback to $105.63, just above the 50-dma (currently at $104.50). This morning it was announced that Italy's premier telecommunications company, Wind Telecomm. SpA, selected Tibco to provide real time e-business infrastructure software. Investors accepted the news positively as they moved TIBX's stock price up over $1.50 by mid-day. Trading was calm for the balance of the day, however, TIBX finished the day in positive territory, closing up $2.06 at $110. on volume of 1.84 mln shares. TIBX moved counter to the NASDAQ today, so, a pullback of size may not be in the cards. This mornings move down at the open to $105.63 may have been your only chance for a pullback. However, continue to watch for some profit taking and keep and eye on the NASDAQ. Watch overhead resistance at $114 and $122. CHKP $154.50 +5.06 (+5.06) Run Forest Run!! After a quiet open for CHKP, the buyers remembered that this baby just broke to an all-time high on Friday. With no overhead resistance, the buyers took CHKP to an early morning high of $158.50 before settling back to $154.50, by mid-day. Even as the NASDAQ struggled, the buyers continued to take more CHKP today as it closed up $5.06, at $154.50. Volume came in at 2.01 mln shares today (1.2 times ADV). Look for a pullback to yesterday's close, and the sight of the current 5-dma, at $149.44, as a possible entry point. Today, intraday support was found at $153.50, which may provide bounces going forward if CHKP continues to hold buying interest. This internet play is quite volatile; traders should be alert and understand that this is an aggressive play. BEAS $68.50 -2.25 (-2.25) Fresh from a long weekend, bulls and bears alike were ready to make some moves. As a result, BEAS had a volatile day. Early morning selling in the stock led to a visit to support at the 5-dma (currently at $66.50). This brought in the buyers who bid BEAS up until mid-day. Encountering resistance at the $71, the bears came back to close the stock down 3.18% with volume clocking in at 85% of ADV. Despite this minor pullback, BEAS' up-trend is still firmly intact. As long as the trend holds, aggressive investors will find bounces off the 5-dma to be an ideal entry point. There is also support at $68. Those waiting for confirmation will want to see BEAS clear the $71 area with conviction before entering. In the news Today, BEAS announce an alliance with KPMG Consulting to develop enterprise products based on BEAS' software. As well, vice president of marketing for BEAS will speak at GartnerGroup's conference on September 6. MRVC $75.50 -4.88 (-4.88) What better way to start the week than with an entry point? Throughout most of MRVC's rally last month, the 5-dma (now at $76.91) has provided the bulk of the support with the occasional visit to the 10-dma. Today's action in MRVC was due in part to sector sympathy and a generally soft market for Tech stocks. Peers such as GLW and JDSU traded lower today on the announcement that CIEN would take a one-time $28 million charge in the fourth quarter due to the inability of a customer (Iaxis Limited) to pay. For the most part, MRVC spent the day drifting lower. Finding a bottom above its 10-dma (currently at $74.37), MRVC bounced at $73.13 to close down 6.07% on 65% on ADV. A strong bounce off $75 support or the 10-dma could serve as an aggressive entry while conservative traders will look for MRVC to move strongly above its 5-dma before entering. As mentioned on Sunday, confirm sector sympathy for direction before making a play. SNDK $90.06 +1.56 (+1.56) Bucking the trend of a weak NASDAQ, SNDK showed unusual strength today as it closed up 1.77% on 127% of ADV. After a day of rest, traders were eager to jump on the SNDK bandwagon as the stock came storming out of the games. Getting as high as $94.50 on strong volume during amateur, the stock settled down for the rest of the day before some late day selling came in to end the day. Despite this, the small move up today in the face of a soft market for tech stocks and a move above resistance at $90 is a good sign. There was no news to explain the move today, just good old-fashioned investor interest. At this point where SNDK will go will depend on the market, with volume accelerating to the upside these past few days. Support for the stock can be found at $90 and $88.50. Also providing support is the 5-dma at $85.56 and the 10-dma at $82.95. Conservative traders will look for a definitive break above $95 to enter. CIEN $216.31 -13.81 (-13.81) CIEN took a hit early this morning after the company announced it would take a 6 cent charge against EPS in its fiscal fourth quarter due to the bankruptcy of one of the company's European customers. After the news was fully disseminated and the trading halt was lifted, CIEN fell to the critical $200 level then quickly bounced back to churn around $215. Despite the big dip today, CIEN managed to climb its way back and trace a higher low in its month-long ascending channel. Aggressive traders might watch for bargain buying early Wednesday morning and look for an entry point on a bounce off current levels near $215. A more conservative trader might wait for CIEN to regain its footing and watch for momentum to carry the stock back above the $220 level. After this morning's big sell-off there's not much resistance preventing CIEN from moving higher. Watch for the stock to fill its gap on a rally above its day high at $222. ITWO $175.19 -4.00 (-4.00) ITWO began the week with a post holiday pop after Salomon Smith Barney initiated coverage on the stock with an Outperform rating and set a $179 price target. In fact, Solly issued favorable reports on the broader B-2-B sector, which fueled the group's recent momentum. However, not even sector momentum could fend off the profit takers late this afternoon. ITWO slid in the final half-hour of trading today as traders scrambled to lock in profits. ITWO did stop at support right at $175, which might provide the aggressive traders with a solid entry into the play if the stock quickly rebounds early Wednesday morning. If the sellers return tomorrow to wreak havoc on our play, look for ITWO to next find support at its 5-dma near the $170 level. More conservative traders might wait for ITWO to resume its recent climb and consider entering the play on a rally above $180, with a move above $185 marking a full recovery from today's sell-off. Wait for the broader B-2-B sector to turn positive before entering the play, use CMRC and ARBA as reference. IDTI $89.19 -3.38 (-3.38) IDTI's pullback today was inevitable. After all, the stock ran 20% over the previous two sessions. Add the Intel downgrade to the mix and we had the perfect recipe for profit taking in IDTI today. The bearish comments on Intel sent a cold chill through the broader Semi sector, which added undue pressure on our play. We are now faced with the usual consolidation conundrum. IDTI's big gains late last week might lead to further sideways action this week. Going forward, listen for positive analyst comments on IDTI or watch for the Semi sector to rally. IDTI's impressive relative strength will carry the stock higher if the broader Chip group resumes its rally. And, we saw what happened when IDTI received favorable analyst comments last week; listen for bullish words from Wall Street. Aggressive traders might consider buying IDTI's dip today if support at $88 holds. IDTI appears to have settled into a range between support at $88 and resistance at $92. With that said, trading the range is possible, with more conservative traders looking for a breakout above $92 for new entry into the play. If the Chip bears continue to rampage the sector, look for IDTI to next find support near its 5-dma, which has moved up around $85. INKT $131.13 +0.38 (+0.38) The momentum that followed last week's upgrades stayed intact following the long holiday weekend. In fact, INKT bucked the NASDAQ sentiment and stretched higher on moderate volume before taking a hit in the last hour of trading. The share price gained 2.8%, or $3.63 at its peak, but couldn't quite penetrate the next level of resistance at $135. Future bullish sessions are likely to incite INKT to rise above this opposition and move towards the split-level of $150. Take entries into this momentum play off near-term support at $128 and $130, assuming INKT stays on its upward course. If INKT abruptly pullbacks to the 10-dma ($123.36), the more aggressive traders may choose to take entries on convincing rebounds. AAPL $62.44 -1.00 (-1.00) Robust volume and a positive economic outlook continued to stimulate AAPL's momentum today. Initially the share price flirted with the immediate opposition at $64. However the market conditions ultimately produced a rather flat day of trading for AAPL. But not without merit! It's evident that AAPL nonetheless established a higher level of intraday support around $62 and 63, which is very bullish. And importantly, it didn't succumb to much selling pressure. This is very good news for a stock that just shattered its historical opposition ($60) on Thursday. We're expecting AAPL to revisit its old highs in the short-term and perhaps extend to new heights. More enterprising traders may take entries off the current price level on strong bounces. Otherwise use the 5-dma daily line as an entry gauge to enter on dips. Currently this technical indicator is just above the old resistance. Pay heed to slides under $60 and moves back toward the 10-dma ($58.26), which could be a red flag for reversal. JNPR $220.13 -1.50 (-1.50) In keeping with the explosive behavior of late, JNPR set another all-time high at $128 before some news and overall market conditions mildly effected trading. Another major networking firm, Ciena (CIEN), warned that Iaxis, a closely held European telecommunications company, may not be able to pay its $28 mln bill. This bankruptcy culprit is also one of Juniper's clients, but who fortunately doesn't have an outstanding balance. It's the bigger picture however that influenced the sector trading today. The news accentuates the huge risk networking companies take on the in dealing with start-ups and this gave investors a scare. Honestly though, JNPR held up very well throughout the whole session. It was off a bit, but easily managed the higher support level at $217 and $220. The early breakout also denotes that JNPR's momentum is still calibrated to run. Take note of the rising 5-dma line, which represented the lower end of today's trading spectrum. This technical can be used as a device measurement when planning more aggressive entries. The more conservative may want to sit on the side-lines or wait for additional advances off the current level before entering. VRTS $121.88 +0.13 (+0.13) While there weren't any dynamic moves today, VRTS did demonstrate it could hold the higher share price at $121 and $122 support today. However the upper resistance at $125 is posing a challenge. VRTS needs to overcome this obstacle soon or the play could easily fizzle. Recall this play is based purely on its recovering momentum; therefore it's essential that VRTS not stay in one place for too long. Although other heavyweights in the computer storage industry like BRCD, EMC, and NTAP all took a breather today too. So let's use discretion and play cautiously. Entries on bounces off old resistance at $120 or light support at $121 are reasonable in a good environment. But err on the side of caution if VRTS slides back to the 10-dma ($117.30). A deep retracement could prove lucrative, but may not be worth the ISSX $84.06 -0.06 (-0.06) Today ISSX nudged its way through Friday's intraday high. The fractional progress is nonetheless keeping the pattern of higher-highs on track as ISSX rides the wave of recovery. Now that the share price is above a respectable support level ($80) and considered a split- candidate, the momentum should perk up even more. Technically too, ISSX remains above the 50 & 100 DMA lines. On the analyst front, Kama Krishna at Ryan, Beck, and Co started ISSX with new Buy coverage. Take entries into this recovery play off the current prices on a breakout or look for pullbacks to light support near $80 and $81. If you want better confirmation, then you'll have to wait for ISSX to make a conclusive run for $90. LSCC $75.28 -2.41 (-2.41) Entry point alert. Continuing it's month long stair-step pattern, LSCC has pulled back over the past 2 sessions on declining volume and today the selling halted right on the $75 support level. It was encouraging to see that LSCC did not sell off in the wake of the bearish news about INTC, leading us to believe our play still has room to run. On each pullback, the stock has been finding support between the 5-dma (currently $74.81) and the 10-dma (currently $72.94). Don't look now, but we are very close to this level now. Add in the fact that LSCC has historical support at $75, and the weak volume over the past 2 sessions makes it look like the stock is getting ready for its next surge higher. Recall that investors got an infusion of excitement last Thursday when the company announced a 2-for-1 stock split, payable on October 11th. After pulling back for the past 2 days, the upper Bollinger band is now north of $80, making room for the stock's next surge higher. Any move up from the $74-75 level looks attractive for a new entry point, as long as it is confirmed by strengthening volume. Conservative investors may want to wait for LSCC to rise through the $78 resistance level before playing. ORCL $91.06 -1.56 (-1.56) Falling back with the rest of the NASDAQ, ORCL is cooperating with us, serving up another entry point for those that missed the first one. Thursday's breakout over $90 is still alive and well, as today's pullback only dropped the price to $90.56. We need to be vigilant though, as ORCL closed very near the low of the day. One other encouraging factor is that volume came in at only two-thirds of the ADV, giving the appearance of simple profit taking. Use the current weakness as an opportunity to jump aboard this freight train as it pulls out of the station heading for its earnings announcement on September 14th. Salomon Smith Barney jumped aboard this morning, initiating coverage on the software company with an Outperform rating. Look for the $90 support level to hold, and consider initiating new positions as the buying volume returns. Alternatively, a more cautious approach would be to wait for buying volume to push ORCL above resistance at $93 before playing. ******************* PLAY UPDATES - PUTS ******************* UK $40.88 +1.31 (+1.31) The dichotomy between the Technology sector and the old-line groups such as the Chemicals was clearly evident in today's trading. It was a case of selling the highly valued Tech stocks and buying the undervalued names such as UK. Along with the ebb and flow of capital into the Chemicals sector, UK received a boost early this morning after DOW officials said the proposed merger will be completed in the near future. The comments fueled UK's rally as the spread between the deal narrowed as the likelihood of the merger being completed was factored into the stock price. However, UK's rally today might be short-lived if the Technology sector reasserts its leadership role and draws money away from the Chemicals sector. Aggressive traders might look to enter the play on a bump against resistance at UK's descending 10-dma near the $41 level. A more conservative trader might wait for UK's losses to mount before initiating new positions and look to enter the play on a slip below support at $40.50, or lower near the $40 level. Make sure to confirm the return of big sellers with heavy volume before entering the play. AT $48.94 -0.88 (-0.88) Two analysts offered positive reiterations on AT today. Legg Mason's Wood Walker maintained a Strong Buy for the stock, but cut the price target to $90 from $100. Charles Pluckhahn at Stephens also restated a Buy rating and issued an $88 12-month price target. These comments may have played a role in AT's inability to crack the $49 bottom earlier in the session. However the late day pressure finally knocked AT back towards Friday's all-time low ($48.75). What's more is that AT's negative disposition at the end of the session caused it to close smack on the daily low, which is always a nice bearish touch. Above there remains a strong ceiling at $49 and the 5-dma ($50.31), which is keeping a tight lid on the share price. However let's not ignore the narrow channel and the above-mentioned analysts' recommendations. They give us special notice to keep the stops in place. So while volume remains healthy, wait for a definitive downtrend line to resume before opening new positions. MMM $92.25 -0.25 (-0.25) Quiet trading was the rule of the day on MMM, as the stock spent the session meandering between $91.50 and $92.75. Traders didn't come back this morning in a strong buying mood, but they weren't in a rush to sell either. Friday's session had pushed the stock under its 30-dma (currently $92.88) and the buyers today were unable to push the price back above that level. The 5-dma (currently $93.13) has been pressuring shares of MMM over the past week, and this effect could be intensified as the 5-dma crosses below the 30-dma. The first serious level of support sits at $90, which is also the site of the 200-dma. While investors are now back from their summer vacations, and the Fed appears to be out of the way for now, signs are clearly pointing to an economic slowdown. With little on the calendar to move shares upwards in the near term, MMM could continue to drift lower as investors await the beginning of earnings warning season. In the meantime, consider new entries as MMM rolls over from the vicinity of the 5-dma and heads lower on increasing volume. ************************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.nobletrading.com/newaccount/optioninvest.html ************************************************************** ************** NEW CALL PLAYS ************** AGIL - Agile Software Corp. $74.06 -0.69 (-0.69 this week) Agile Software is the leading provider of Collaborative Manufacturing Commerce solutions that speed the "build" and "buy" process across a virtual manufacturing network, thereby improving time to volume, customer responsiveness and cost of goods sold. Agile's solutions manage product content, and the critical communication, collaboration and commerce transactions among Original Equipment Manufacturers (OEMs), Electronic Manufacturing Service (EMS) providers, suppliers and customers in Internet time. Like many Tech stocks, July was a rough month for AGIL. After failing to break through formidable resistance at $75, the stock spent the rest of the month selling off sharply. Finding bottom at just above the $45 level in the beginning of August, the stock has since moved higher. In doing so, it had to break above the 100-dma and 50-dma (now at $53.96 and $64). Most recently, AGIL cleared the 200-dma at $65.67, a support that has since been successfully tested. AGIL's recovery was also helped by a stellar earnings report on August 17th, the company posted a narrower than expected loss of 3 cents versus a loss of 9 cents from the previous year. Beating Street expectations by a penny, AGIL moved strongly higher post-earnings. The stock was likely helped by positive comments from Chase H&Q and more recently, U.S. Bancorp Piper Jaffray's Senior B2B analyst Timothy Klein, who initiated coverage on AGIL with a buy rating. According to Klein, "We believe that strong industry fundamentals and the trend toward increased-outsourced manufacturing and shorter product lifecycles will directly benefit Agile's growth prospects. In addition, we believe the company has strong technology, solid fundamentals and very promising growth potential." At this point AGIL finds itself where it was in early July, attempting to overcome strong resistance at $75. Aggressive traders looking for an entry will look for a confirmed bounce off the 5-dma at $71.57 or the 10-dma at $69.10. There is also support at $71. A break through $75 on strong volume to confirm upward momentum will be the signal for conservative traders to enter this play. Since last week's coverage by U.S. Bancorp Piper Jaffray, there has been little news for AGIL. Look for AGIL to move in sympathy with the NASDAQ and its peers in the B2B space. Confirm bounces and upward moves with sector sentiment when considering entry points. *** September contracts expire in two weeks *** BUY CALL SEP-65 AUG-IM OI= 65 at $10.38 SL=7.00 BUY CALL SEP-70*AUG-IN OI=401 at $ 7.13 SL=5.00 BUY CALL SEP-75 AUG-IO OI= 86 at $ 4.13 SL=2.50 BUY CALL OCT-75 AUG-JO OI= 47 at $ 9.00 SL=6.25 BUY CALL OCT-80 AUG-JP OI=186 at $ 7.00 SL=5.00 Picked on September 5th at $74.06 P/E = N/A Change since picked +0.00 52-week high=$112.50 Analysts Ratings 2-7-0-0-0 52-week low =$ 18.31 Last earnings 08/17 est= -0.04 actual= -0.03 Next earnings 11-16 est= -0.02 versus= -0.05 Average Daily Volume = 558 K MERQ - Mercury Interactive $129.06 +2.56 (+2.56 this week) As a provider of integrated performance management solutions that enable businesses to test and monitor their Internet applications, MERQ is looking for growing e-commerce demand to continue to fuel its business. The company's products perform such tasks as analyzing and eliminating Web site performance bottlenecks and automating quality assurance testing. MERQ's client base spans a wide range of industries including Internet companies such as Amazon.com and America Online, infrastructure companies Ariba and Oracle, as well as Apple Computer, Cisco Systems and Ford Motor Company. Investors' on again, off again love affair with MERQ is definitely back on. Prompted by the positive press from International Data Corporation (IDC) on August 28th (see news below), buying volume really picked up. Blasting through resistance at $110 last Monday, investors only paused for a day before continuing to push MERQ higher, closing out the week above the $120 resistance level. Then, despite weakness on the NASDAQ today, buying volume remained strong, pushing the stock higher by another $2.56. Adding fuel to the stock's climb is the possibility of a stock split. With more than enough shares authorized for a 2-for-1, MERQ became a split candidate again when it moved above $90, and the strong rise since then is making it more likely that an announcement could be on the horizon. Technically the stock looks strong too, as it is well above all of its moving averages, with the 5-dma ($121.35), acting as support over the past 2 weeks. Buying volume is keeping MERQ at its upper Bollinger band and after the last four days strong gains, profit taking in the near future would not be out of the question. Look for a pullback to support near $120 to trigger new entries, but make sure volume confirms the bounce before playing. Continuing to innovate at a breakneck pace, MERQ is showcasing its abilities at the Silicon Valley Marathon by providing cutting edge technology to track the performance of runners. Ranging from finish-line chips to streaming video and real time online maps of the runners' progress on the marathon web site, MERQ will load test the site prior to the event to ensure optimum performance, as well as monitor the site during the event. The real driver for recent price action though was IDC's report on August 25th that MERQ was the 1999 worldwide leader for automated software quality tools, with a 41% market share and 55% revenue growth from 1998 to 1999. *** September contracts expire in two weeks *** BUY CALL SEP-125 RBF-IE OI=293 at $ 8.75 SL= 6.25 BUY CALL SEP-130*RBF-IF OI=131 at $ 6.00 SL= 4.00 BUY CALL OCT-130 RBF-JF OI=365 at $14.38 SL=10.75 BUY CALL OCT-135 RBF-JG OI= 56 at $12.25 SL= 9.00 BUY CALL OCT-140 RBF-JH OI= 47 at $10.25 SL= 7.25 SELL PUT SEP-120 RBF-UD OI=124 at $ 2.13 SL= 3.75 (See risks of selling puts in play legend) Picked on Sep 5th at $129.06 P/E = 43 Change since picked +0.00 52-week high=$134.50 Analysts Ratings 9-3-1-0-0 52-week low =$ 26.25 Last earnings 07/00 est= 0.12 actual= 0.14 Next earnings 10-12 est= 0.16 versus= 0.11 Average Daily Volume = 1.81 mln VERT - VerticalNet $57.19 +2.44 (+2.44 this week) VerticalNet owns and operates 55 industry-specific Web sites designed as on-line B2B communities, known as vertical trade communities. Each of these communities is individually branded, focuses on one business sector, and caters to professionals responsible for selecting and purchasing highly specialized, industry-related products and services. These communities allow users around the world to contact each other online, allowing buyers to research, source, contact and purchase from suppliers through new business models such as electronic marketplaces, exchanges and auctions. With volume on the rise, VERT may be getting ready to live up to its name again. Ever since the spring decline, the B2B sector has been trading more horizontal than vertical, but it looks like that is about to change. Positive analyst comments and improving investor sentiment are helping to lift these stocks out of their recent trading ranges. VERT has been stuck between $20-60 for the past 5 months, well off its highs near $150. Now that the summer doldrums are behind us, we are seeing a resurgence in B2B stocks and it looks like VERT is ready to take another run at resistance. The level to clear is the 200-dma (currently $65.56) as this is where the stock has been turned back on its last two rally attempts. Since beginning to move higher 3 weeks ago, VERT is finding support at the 5-dma (currently $55.06) and a pullback to this level looks like a good point to open new positions, as it coincides with mild historical support from last week. Below there, VERT should find stronger support at $53, and then $51. The first level of resistance that needs to be cleared is $58, followed by $62, and then the 200-dma. Conservative traders may want to wait for continued strong volume to push through this first level of resistance before playing. Tighten up your stops as VERT approaches the 200-dma - you don't want to give back your profits if the third time fails to be the charm and the bears take charge again. Increasing confidence in B2B vertical marketplaces and easing concerns about the speed of e-marketplace adoption is leading to a nice rally in B2B stocks. Positive analyst comments from CS First Boston today only served to fuel stocks in this sector, and as one of the featured stocks, VERT was one of those moving strongly higher. *** September contracts expire in two weeks *** BUY CALL SEP-55 UER-IK OI=1495 at $ 4.50 SL=2.75 BUY CALL SEP-60*UER-IL OI=1059 at $ 2.13 SL=1.00 BUY CALL SEP-65 ERW-IM OI= 447 at $ 0.88 SL=0.00 BUY CALL OCT-60 UER-JL OI= 894 at $ 6.13 SL=4.00 BUY CALL OCT-65 ERW-JM OI= 730 at $ 4.38 SL=2.75 BUY CALL JAN-60 UER-AL OI= 571 at $12.38 SL=9.25 Picked on Sep 5th at $57.19 P/E = N/A Change since picked +0.00 52-week high=$148.38 Analysts Ratings 12-15-1-0-0 52-week low =$ 16.00 Last earnings 07/00 est=-0.30 actual=-0.23 Next earnings 10-25 est=-0.28 versus=-0.14 Average Daily Volume = 2.70 mln ************* NEW PUT PLAYS ************* CREE - Cree, Inc. $124.44 -6.56 (-6.56 this week) Cree is the world leader in the development and manufacture of silicon carbide (SiC), which is a base material used in the fabrication of the Company's blue light emitting diodes (LEDs), wafers and gemstone materials. The company was formed in 1987 by a group of researchers from North Carolina State University, who were pioneers in the development of single crystal silicon carbide. Cree's vertical integration throughout the manufacturing process from crystal growth to device package and test, allows total control over all aspects of the production process. Since a failed attempt to make a recovery in June, CREE has been making lower highs and lower lows. Encountering resistance at $175, the stock then sold off only to bounce off $120 in July. From there, CREE attempted to rally but failed to get above $160, which resulted in a sell-off to the $100-105 range, in spite of a strong earnings report on July 27. For its fourth quarter, CREE posted an 82% increase in revenues over last year's and an increase of 13% from the previous quarter. Net income increased 183%, product revenues grew 90%, but this did not stop the selling. In August, CREE moved higher with the rest of the NASDAQ. Hitting a low of $84.75, the stock managed to break through several overhead resistance levels. By the end of the month however, the stock stalled, encountering resistance near $148. So far, September has not been good to CREE. On Friday, the stock closed below both its 5- and 10-dma, which are currently converging near the $135 area. Today the stock gapped down at the open and spent the rest of the day moving sideways to lower, closing down 5.01% on about average volume. In doing so, CREE closed below support at $127. As well, strong moving average support was violated in the $130 area, with the 50- and 100-dma both near that point. The only moving average support left to breach is the 200-dma at $123.70. At this point there are a number of possible entry points. A failure to rally above its 5- and 10-dma near $135 with volume to confirm could provide an aggressive entry point. An even more aggressive entry point would be to look for a failed rally above resistance at $127 or moving average support at $130. Those looking for confirmation of weakness in CREE could wait until the stock moves below its 200-dma at $123 with conviction before entering, with the next levels of support at $120 and then $112. *** September contracts expire in two weeks *** BUY PUT SEP-130 RNC-UF OI=509 at $9.50 SL=6.50 BUY PUT SEP-125*RNC-UE OI=464 at $7.63 SL=5.25 BUY PUT SEP-120 CQR-UD OI=514 at $4.63 SL=2.75 Average Daily Volume = 1.1 mln ********************** PLAY OF THE DAY - CALL ********************** CHKP - Check Point Software $154.50 +5.06 (+5.06 this week) Check Point Software Technologies, Ltd is in the Internet security business. They develop, market and support Internet security solutions for enterprise networks and service providers, which also include Virtual Private Networks and Managed Service Providers. There are three main product lines for CHKP and they are security products, traffic control for bandwidth management, and finally management products. In a nutshell, Check Point delivers solutions that enable secure, reliable and manageable business-to-business communications over any Internet Protocol network including the Internet, intranets and extranets. Most Recent Write-Up Run Forest Run!! After a quiet open for CHKP, the buyers remembered that this baby just broke to an all-time high on Friday. With no overhead resistance, the buyers took CHKP to an early morning high of $158.50 before settling back to $154.50, by mid-day. Even as the NASDAQ struggled, the buyers continued to take more CHKP today as it closed up $5.06, at $154.50. Volume came in at 2.01 mln shares today (1.2 times ADV). Look for a pullback to yesterday's close, and the sight of the current 5-dma, at $149.44, as a possible entry point. Today, intraday support was found at $153.50, which may provide bounces going forward if CHKP continues to hold buying interest. This internet play is quite volatile; traders should be alert and understand that this is an aggressive play. Comments CHKP made its own bright spot today by bucking the NASDAQ trend, and posting an impressive gain. This just might be a sign of things to come, as the Internet security company set another new high today. We would watch $150 as a key level for CHKP to hold tomorrow to make another run for a new high. With the 10-dma clear down at $140.19, technical support doesn't enter the picture. If the NASDAQ bounces back from today's profit-taking, look for CHKP to roll onward. If the selling continues, use caution with the play to see if it can buck again. ***September contracts expire in two weeks*** BUY CALL SEP-145 KGE-II OI=404 at $13.38 SL=10.75 BUY CALL SEP-150*KGE-IJ OI=432 at $ 9.75 SL= 7.25 BUY CALL SEP-155 KGE-IK OI=142 at $ 7.00 SL= 5.25 BUY CALL OCT-155 KGE-JK OI= 83 at $16.75 SL=13.00 BUY CALL JAN-160 KGE-AL OI= 11 at $24.13 SL=18.50 SELL PUT SEP-145 KGE-UI OI=163 at $ 2.38 SL= 3.75 (see risks of selling puts in play legend) Picked on Sep 3rd at $149.44 P/E = 194 Change since picked +5.06 52-week high=$158.50 Analysts Ratings 13-4-0-0-0 52-week low =$ 14.40 Last earnings 06/00 est=0.21 actual=0.25 Next earnings 10-20 est=0.25 versus=0.15 Average Daily Volume = 1.58 mln ************************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 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ Nasdaq slumps on profit-taking... The technology index retreated today as biotech and semiconductor stocks consolidated. Tuesday, September 5 The technology index retreated today as biotech and semiconductor stocks consolidated. The Nasdaq finished down 91 points at 4,143 while the Dow Jones industrial average managed slim gains, ending at 11,260. The S&P 500 index finished down 13 points at 1,507. Trading volume on the Nasdaq was a heavy 1.66 billion shares as investors returned to the market after the holiday. Declines led advances 2,238 to 1,828. Volume on the NYSE reached 840 million shares, with declines beating advances 1,441 to 1,425. The U.S. 30-year Treasury fell 4/32, pushing its yield up to 5.67%. Sunday's new plays (positions/opening prices/strategy): Southdown SDW SEP65C/SEP60P $2.50 credit strangle Netspeak NSPK NOV20C/NOV7P $0.00 debit synthetic Sirius Sat. SIRI SEP35P/SEP40P $0.00 credit bull-put Transkaryotic TKTX SEP-25P $0.00 credit naked-put Transkaryotic TKTX OCT22P/OCT20P $0.00 debit bear-put There was very little opportunity to participate in our new plays today. The difference in option premiums from Friday's close and Tuesday's open was substantial. Sirius and Transkaryotic did not offer favorable premiums during the session (although the issues moved higher, as expected). The drop in Implied Volatility in options for SIRI came after the successful launch of its second satellite, Sirius-2, from a Russian launch pad in Kazakhstan on Tuesday morning. Netspeak offered a reasonable entry but it was just below our target in the synthetic position. The premium for the Southdown strangle was also much lower than expected. Portfolio Plays: Profit-taking in technology issues plagued the Nasdaq today but interest in retail and financial stocks helped the Dow rally. Leading the blue-chip barometer on the upside were shares of Coca-Cola (KO), Home Depot (HD), Wal-Mart (WMT), Alcoa (AA), Philip Morris (MO), and International Paper (IP). The biggest losers in the industrial group were Intel (INTC) and Merck (MRK), with both stocks moving lower after downgrades. On the Nasdaq, semiconductor, computer hardware and networking issues paced the decline in technology shares but Internet stocks rallied, led by the business-to-business sector. In the broad market, drug and biotech issues retreated, increasing the overall session losses. Increased uncertainty over the third-quarter earnings weighed heavily on investors as comments concerning the potential for early warnings were made by a number of analysts. First Call noted that third-quarter earnings estimates are being lowered in the consumer cyclical group, with retailers experiencing the brunt of the reductions. At the same time, analysts said that momentum remains on the upside and there is a lot of money on the sidelines. Trim Tabs said liquidity surged in the latest survey and they expect heavy inflows this week as fund managers return from their vacations. In addition, the research group reported that foreign investors and the recent takeovers of U.S. companies have been an important factor behind the bullish move in the major averages between May and August. On the downside, Trim Tabs expects an increase in public offerings over the next few weeks and the rise in the number of new issues is likely to limit the market's potential going forward. Our portfolio experienced little activity of significance in today's session. Phone.com (PHCM) and Polycom (PLCM) were the leaders in the technology group and it appears that Polycom is going to survive the post-split selling pressure. Our bullish combination position is at maximum profit with the issue above $60 at expiration. Knight Trading Group (NITE) rallied to a mid-day high near $33.50, bring our remaining position in the October debit straddle to a break-even exit. Now we will look for a favorable "early-exit" opportunity in the coming sessions. In the small-cap category, Mead (MEA) climbed back above $27 on strength in the Paper group. The long-term calendar spread will achieve maximum returns with the stock near $30. Loral Space (LOR) rebounded to $8.12 amid renewed optimism in the Satellite Communications group. Our target in the synthetic position is a return of 50%. Ryder (R) was one of the few other surprises of the day. The issue continued to recover from last week's slump, reaching a session high just below $20 and our long-term diagonal spread is offering a small positive return. We expect the long-term position to achieve a credit (no potential loss) as we move to October options. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - One of our readers requested a new candidate for the debit-spread combination (short put/bull-call spread). Fortunately, we have a number of great candidates for the strategy and here is my top pick, based on the current price and trading range of the stock and its recent technical history. News and market sentiment will have an effect on the so review the play thoroughly and make your own decision about the future outcome of the position. ****************************************************************** VNTR - Ventro $17.88 *** Low Risk Entry! *** Ventro Corporation engages in the business-to-business e-commerce economy by building and operating companies that transform the supply chain in businesses around the world. Ventro operating companies allow suppliers, buyers and enterprises to streamline business processes, enhance productivity and reduce costs. Their companies offer complete E-2-E commerce solutions consisting of extensive online marketplaces, electronic procurement, systems integration to interface with third-party/back-office systems, and comprehensive services and support. The recovery in Ventro began in early August when the company agreed with American Express (AXP) to form a join venture to be called MarketMile, which will build and operate Internet-based marketplaces offering business products and services. The new online marketplace will allow companies to transact business products such as office and industrial supplies and corporate services including temporary labor. It will initially target mid-sized companies, with plans to expand into the markets for large and small firms. American Express will have a 65% stake initially, while Ventro will own 35% of MarketMile. That's great news however, the majority of these new exchanges won't last long unless they are very successful. One analyst believes the average number of electronic marketplaces in each vertical industry sector will peak at more than 10 by year-end 2000, but will drop to three dominant viable marketplaces per sector by year-end 2001. Independent sites that have the advantage of substantial capital reserves and are generating actual revenues are the only ones that will survive. Ventro falls comfortably into that group and that's why we believe the issue will soon return to its past stature as a leader in the industry. PLAY (very conservative - bullish/debit spread combination): BUY CALL DEC-15.00 UWV-LC OI=433 A=$6.38 SELL CALL DEC-17.50 UWV-LW OI=442 B=$5.00 SELL PUT DEC-10.00 UWV-XB OI=372 B=$1.00 DEBIT SPREAD TARGET=$1.25 NAKED PUT TARGET=$1.25 OVERALL NET DEBIT TARGET=$0.00 TARGET ROI=75% This debit spread combination strategy is nothing more than a sold (short) PUT and a "bull-call" debit spread. The position is actually somewhat aggressive, based on the bullish outlook for both components, but we use "out-of-the-money" options on the sold PUT to lower the potential risk. The premium from the sold PUT is used to finance the purchase of the debit spread. In this play, the collateral requirement for the PUT is approximately $455 per contract. ****************************************************************** GBLX - Global Crossing $35.13 *** New Trading Range! *** Global Crossing is an independent global provider of Internet and long distance telecommunications facilities and related services utilizing a network of undersea and terrestrial digital fiber optic cable systems. The Global Crossing Network contains almost 100,000 announced route miles, serving 24 countries and over 200 major cities around the world. The network is being engineered and constructed using the latest in fiber optic technology, including self-healing ring structures, erbium-doped fiber amplifier repeaters, wavelength division multiplexing, and the use of redundant capacity to ensure instantaneous restoration. Through the network, their telecommunications and Internet product offerings will soon be available to most of the communications traffic on the planet. The sub-sea optical fiber network will eventually span 27 countries linking Asia, the Americas and Europe. Shares in Global Crossing rallied last week after the company raised its financial expectations for the current business year. GBLX officials reported that they expect cash revenues from continuing operations, which consist of telecom services and installation and maintenance services, to rise to $5 billion, up 7% from the previous projections and almost 40% higher than their 1999 results. In addition, Chase H&Q, CIBC World Markets and four other firms have been added to the list of underwriters for the upcoming initial public offering by Asia Global Crossing. Asia Global Crossing is offering 53 million common shares in a range of $14-$16 a share. Global Crossing has a 57.5% stake while Microsoft and Softbank each has a 15.8% position. The international company, with offices on multiple continents, intends to be a pan-Asian telecommunications carrier providing Internet, data, voice and Web-hosting services to wholesale and business customers. Based on the recent bullish activity in the stock, investors are confident about the future of the company. We also have a positive outlook for the stock but there will likely be a period of consolidation as the issue transitions to a new trading range. We offer this play for experienced traders only, who are aware of the potential adjustments necessary in a calendar spread on a relatively volatile issue. PLAY (aggressive - bullish/calendar spread): BUY CALL JAN-40 QGV-AH OI=9797 A=$4.62 SELL CALL OCT-40 QGV-JH OI=8370 B=$1.75 INITIAL NET DEBIT TARGET=$2.62-$2.75 TARGET ROI=50% ****************************************************************** CMRC - Commerce One $69.25 *** Can't Catch This One! *** Commerce One is a provider of global e-commerce solutions for business. Its solutions are designed to create a network of interoperable marketplaces, trading communities and commerce portals called the Global Trading Web. They have developed the Commerce One Solution to automate the procurement cycle between multiple buyers and suppliers. The Commerce One Solution is comprised of enterprise e-procurement applications consisting of BuySite Enterprise Edition and BuySite Portal Edition, and the MarketSite Portal Solution. Within the MarketSite Portal Solution, business services such as auction services and other enhanced content services are offered, with some to be added in the future. Earlier this year, Commerce One Ventures was formed to accelerate global participation in e-business through strategic investments. The move brought renewed investor interest to the company and now analysts are beginning to focus on the outcome of its partnership with Germany's SAP (SAP). In addition, an exchange that Commerce One is helping build for the major auto-makers is coming on line and perhaps more importantly, some observers are beginning to see the value in the company's focus on "direct" B2B, which involves buying and selling major supplies like steel for cars instead of office supplies. Then there's the coming completion of Commerce One's acquisition of consulting firm AppNet (APNT), a deal which provides the company with one of the leading consultants in the B2B marketplace. Commerce One has been positioning itself expertly for the long haul, especially with its focus on the direct B2B business. This position offers an excellent way for conservative investors to participate in the potential movement of the issue. Plan to use any near-term consolidation in the issue to increase the credit in the position. PLAY (conservative - bullish/credit spread): BUY PUT OCT-45 RJC-VI OI=587 A=$1.12 SELL PUT OCT-50 RJC-VJ OI=1294 B=$1.81 INITIAL NET CREDIT TARGET=$0.88-$1.00 ROI(max)=25% ***********************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=423 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html www.OptionInvestor.com/disclaimer.html
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