The Option Investor Newsletter Wednesday 09-13-2000 Copyright 2000, All rights reserved. 1 of 1 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/091300_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 09-13-2000 High Low Volume Advance/Decline DJIA 11182.20 - 51.00 11231.00 11140.70 1.07 bln 1376/1453 NASDAQ 3893.89 + 44.38 3895.81 3794.29 1.66 bln 1998/1978 S&P 100 803.02 + 0.45 804.49 795.79 totals 3374/3431 S&P 500 1484.91 + 2.92 1487.45 1473.61 49.6%/50.4% RUS 2000 534.00 + 1.57 534.36 529.79 DJ TRANS 2723.46 + 38.06 2727.73 2671.28 VIX 21.48 + 0.30 22.25 21.27 Put/Call Ratio .66 ****************************************************************** Up One Day, Down The Next Or maybe it is down one day, up the next. At any rate, the two major indices just can't seem to get this dance step down as the rotation continues. Today, the rotation favored the beleaguered NASDAQ after Tuesday's sell-off, with two tech stocks, ironically, dragging the INDU lower. But considering the news related to the two indices, one would have thought the opposite to have happened. The Chase-JP Morgan merger announced this morning confirmed rumors of the deal, but the Financials sold off, as well as JPM. Then, one of the NASDAQ generals, INTC, received a downgrade that gapped the stock down, yet the NASDAQ rebounded after three days of heavy selling. With triple-witching this Friday, PPI tomorrow, and earnings warnings abound, the markets sure do some wacky things. The big news at the NYSE was the announcement that Chase Manhattan Bank (CMB) would buy JP Morgan (JPM) in a stock deal valued at $35 bln. It was only a matter of time before JPM was swallowed up amid constant speculation and rumors, and the suitor is now known. Specifics of the deal will give JPM shareholders 3.7 shares of CMB, valuing the takeout price of JPM at $207. JPM closed down $4.25 to $181.25. So naturally, on news of the merger, Financials rallied, right? Wrong. Actually, other potential takeover targets lost on the day. I'm beginning to believe that whatever you would expect to happen in this market won't and the exact opposite will. A la the post-Labor Day rally. I think this trend is a product of the speed/span of information dissemination, but that's a whole 'nother story. LEH, which is considered a takeover target, got hammered today, off $9.13, almost 6%. Others include: BSC(-2.56) and MER(-2.69). Getting a boost on the news, however, were online brokers. Ameritrade(AMTD) and E-Trade(EGRP) soared, up 7% and 4.4% respectively. But the big winner was Knight Trading(NITE). NITE is thought to be the most attractive target, being the leading NASDAQ market-maker. The top two candidates that might be looking at NITE: Citigroup and Morgan Stanley. NITE was up a whopping 22%, or $6.56, to $36. Bottomline, there isn't a lot of big fish left in the industry with the ability to buy some of these targets, nor find them as a strategic fit. There may be some nibbling from across the pond, as foreign companies attempt to get into the U.S. markets. But, we may see a slowdown in consolidation for the Financial sector. Helping JPM drag down the INDU was tech components HWP and INTC. Just a week after the Ashok Kumar downgrade of INTC to a Buy, Semi analyst Rich Whittington of Banc of America slashed his rating on INTC and AMD. The downgrade from a Strong Buy to a Market Perform weighed heavily on the stocks, taking INTC down another $3.69 on almost triple the ADV. To put that in perspective, since the Friday before Labor Day, just eight trading sessions ago, INTC has sunk 17%! $60 appears to be a good support level, and institutions were actively battling to distribute and accumulate the stock today based on block trades. Its 200-dma lies at $59.08, which hasn't been tested since October 1999. Traders will be carefully watching this NASDAQ general as a barometer of broader tech health. AMD fell $2, about 6.5%. The HWP decline was fairly hefty. Continuing its perilous fall, HWP dropped $5.88 to close right on its 200-dma of $105.13. You would think we could blame it on an earnings warnings, right? Well, kind of, but not HWP's. The culprit actually was SCI Systems(SCI), which warned it would miss Q1 earnings estimates of $0.38 by 4 cents. Investors punished the stock by hacking its share price by 18%. The warning was attributed to weak September sales and seasonal weakness in consumer electronics and PCs. So what about HWP? HWP is one of SCI's biggest customers. This may be an indication of what's to come for some of the hardware companies. As a result, the INDU slid lower as it consolidates in the 11100 - 11200 area. On Tuesday, the INDU tested support near the 11100 area, and buyers stepped in to move the index higher. Yet, the new trend that has been developing since running into resistance at 11400 last Wednesday has become concerning. With earnings warnings, and the quickness in which investors abandon stocks at any sign of weakness, i.e. HWP, fear may be mounting. The INDU lost 51 points today while the VIX.X gained a quarter of a point to 21.43, still extremely low. We will be watching support at 11100. A break will certainly bring the INDU to 11000. Otherwise, the index will need to break above this short-term trend to settle investor fears. The former looks like the most probable move considering the increasing earnings warnings, and the fact that September historically is a down month. Sherwin- Williams(SHW) warned today, citing higher raw material costs, while McDonald's stated in after-hours that its 2000 EPS would be 2 cents lower-than-expected due to the weak Euro. Shaking off the second INTC downgrade in the last two weeks, the NASDAQ rebounded after four days of selling. Many stocks that had been hit hard during the recent selling, got a bit of relief. CSCO, which dropped through the key support level of $60 Tuesday and its 200-dma on Monday, found buyers waiting at $58 and it climbed higher throughout today's session. This action buoyed the NASDAQ, yet CSCO is still under its 200-dma at $62.34. Right on the open, the NASDAQ gapped down and traded below the 3800 level. The low of the day was 3794, just 5 points below the 252-dma, noted in the chart below. This is a technical that many traders use because it is roughly based on the number of trading days in a year. The bounce was steady throughout the day and slightly off its highs. Adding 44 points today, the NASDAQ did not quite make it to test 3900. The overall sentiment in the tech sector has grown more cautious. Yet, today, investors bought many of the high-fliers with reckless abandon. CIEN(+14.75), ITWO(+10.88), NEWP(+14.81), MUSE(+12.31), and CHKP(+11.13) all surged. Caution should be taken though since the downtrend is still intact. Jim said today that this is a trading market, given that September is historically a down month. We will be watching to see if the NASDAQ continues to break down and violate 3800, or if higher volume drives the index higher, breaking this short-term downtrend. Looking forward, tomorrow morning will have the PPI announcement. Expectations call for an increase of +0.1 and +0.2 for the core rate. A benign or positive number will only reassure what most people on the Street already believe, that the Fed is out of the picture until next year. A negative number would give investors another reason to unload some of their holdings. Key earnings tomorrow will come from ORCL and ADBE, which are expected to be strong. As we progress through the dreary month of September, keep up your radar for more earnings warnings. This not only hurts the individual stock but also related sectors, as in the SCI-HWP case. Bargain hunters showed up today, and with valuations coming down on favorites like INTC and CSCO, they may continue to nibble. Exercise caution as it appears investors are quicker to sell than buy. It is expiration week and Friday is triple witching, so look for some good action in those September lottery options. Good luck. Matt Russ Editor ***New Research Position Available*** Research Analyst We are looking for a research analyst that specializes in Delta Neutral trading, Combos, and other types of advanced options strategies. This is a Denver position, yet if all qualifications are met, this may be negotiable. A strong candidate would have a proven track record of successful trading, especially with the above strategies. If you have the ability to screen stocks and then employ those strategies successfully, then we want you. This position would require a good grasp of option "Greeks," how to trade them, and strong writing skills. Compensation is based on many factors. If you want to be a part of our winning research team, then please send us your qualifications. You will undergo an audition in which we will ask you to recommend real-time plays employing Delta Neutral trading strategies. The results will speak for themselves. Serious applicants only! Please send cover letter and resume to ************************Advertisement************************* Attention Online Traders: NobleTrading.com has become the first online trading firm to offer both Direct Access Trading, and web based trading to its customers. Trade Direct using any ECN, SOES, and SelectNet, or trade right through your browser using our web based trading application. FREE DSL service for active traders. Visit our website and sign up for a Free real-time demonstration! http://www.sungrp.com/tracking.asp?campaignid=485 ************************************************************** *************** ASK THE ANALYST *************** Are You A Good Trader? By Eric Utley Take my quiz and find out. I decided to drift away from my usual trading rhetoric - political rant - poor attempt at humor and challenge the faithful Ask the Analyst readers. Over the next several weeks, I will present a series of cases, which will represent some of the most important dynamics of trading. I hope that you read through the problems as if you were in a similar trading situation and think carefully about what you would do next. Make note of what drives your decision making and analyze your psychological motives. We'll begin delving into and analyzing the answers next week. Before you tackle the conundrum below, know this, there's no "right" answer. You've been watching the Telecom Equipment sector with bearish eyes. Ursa Modem Company (UMC) has been acting weak and you're ready to claw into a put play. You discover an analyst over at Contradictory Brokers issued a big downgrade on UMC's main competitor earlier in the day, which brought out the sector sellers. The bears teamed together to take UMC below its two-week support level at $80. The stock's losses are mounting and you decide to buy 10 at-the-money puts near market close after UMC falls below $79. The next morning you discover the NASDAQ futures down -50 points on a profit warning from a big Telecom carrier. The news causes UMC to gap down by -$4, it then falls another -$2 after amateur hour expires, and then stabilizes during mid-day trading. Since you bought front-month puts with little time value left, and the contracts were at-the-money with a delta near 50, the options move with lightning speed and show you a one-day paper gain of 200%. What next? Do you: A) Laugh all the way to the bank after selling your entire line B) Take half off the table and let the rest ride C) Hold tight D) Add to your position Think carefully about what you would do if faced with the preceding "problem" and feel free to chime in with your mock decision. One more thing before we jump into this week's requests. I've been in the process of moving over the past week and a half. As such, I've neglected many of you by not responding to the host of e-mails that I have received. So, please flood my e-mail inbox with question, comments, and don't forget to send your stock requests to Contact Support. I'll make an effort to respond to every e-mail. Don't forget to put the symbol of your stock request in the subject line of the e-mail. ---------------------------- Nortel Networks - NT An excellent equity but heading down all the time. Can you please advise your comments where one can expect a solid support or is there some news causing this fall? - Regards, Sunil You are correct Sunil, NT is an excellent equity. We actually kicked around the idea of adding the stock to our put list, but decided not to because it's such a strong equity. NT has been punished over the last two weeks on the news of a slowdown in capital spending by the major Telecom carriers. Simply put, the likes of T, WCOM, and FON will buy less equipment from the likes of NT, LU, and CSCO. So, the market thinks sales will slow or even level off for the Tech beauties like NT. The question is whether or not the market has completely discounted that fact into the stock prices or if the market is even correct in doing so. Here is where the story gets interesting. NT's CEO said yesterday that the company has sold out of fiber optic equipment and that sales of $12 bln were attainable this year. Furthermore, several analysts came to the defense of the entire Telecom Equipment sector today, calling the recent correction in the group overdone. The fact is the Internet is still growing at mach speed. I've complained in the past that I haven't been able to get high- speed Internet access even though I lived in a highly populated area. Well, I just moved to an even more densely populated area, and wouldn't you know it, high-speed Internet access isn't available. The market, in which NT dominates, is growing, plain and simple. NT is the premiere provider of optical equipment in its respective space. I think the recent correction in NT, and the rest of the Telecom Equipment sector, has presented a very favorable entry for the long-term investors. Looking over NT's chart, I don't see much downside risk below its current levels. And, for the long-term investor, limited downside risk and a lot of upside potential should sound pretty good. ---------------------------- DST Systems - DST What are your long-term views of DST (a sleeper of a stock that keeps running up, and is highly profitable). Great job, I really enjoy reading all the requests, thanks! - Bruce. DST is a leading provider of computer software solutions and services to the financial services industry. The dawn of decimalization is a huge windfall for companies such as DST. By switching to a decimal-based trading system, opposed to fractions, spreads in the market should narrow, which should induce more trading and liquidity. More trading translates into bigger profits for DST. An increase in trading activity means mutual funds, brokers, and institutions need to keep track of increasingly larger amounts of transactions. And, DST is there to provide the software to keep track of all those trades. DST also provides services to the telecom carriers, insurance providers, and cable TV operators. But, the heart of the company's business is financial software. I think the stocks such as DST are going to be big winners in the next year. It will definitely be a sector to watch in the coming months. Simply said Bruce, I'm bullish on DST and its industry group for the short and long-term. DST's chart reflects the market's optimism about the company's future. I don't think all the good news is factored into the stock price just yet. Analysts have been moving up their EPS estimates for DST on a fairly regular basis over the past three months. That's always a bullish sign when Wall Street raises its expectations for a company. DST has some fantastic fundamentals to support the stock's price. However, the stock has run quite a ways recently without much hesitation. Since the stock has not consolidated its gains, it makes it a bit more difficult to gain entry into the play. You can see below on the chart that DST has the tendency to pullback to its 50-dma. With the lack of a solid base to search for entry points, I would suggest looking to buy DST on a pullback to a major support level, which looks to be the 50-dma. ---------------------------- Micron Technology - MU How dangerous is MU now? - May That is a good question May. MU is a barometer for the Semi sector and if MU is hurting the rest of the chips are probably feeling the pain. And the pain has been rampant recently. MU has shed 30% since its August high. The stock has sold off on the threats of slowing growth and the anticipation of profit warnings in the Tech sector. Are the market's concerns valid? To be quite honest, I don't know. There is a lot of concerns over valuations in the Chip sector, which has added to the bears' fury. Let's keep in mind that the $SOX is still up around 50% on the year. Those are some pretty healthy gains that some investors are sitting on, and combine the threats of a slowdown in the Chip cycle, you've got yourself a few good reasons to sell stocks. For those reasons, I think the $SOX, specifically MU, will retest key support levels very soon. September is historically a bad, bad month for stocks. With the concerns floating around the Chip sector and given the time of year, I think it would be wise to stand on the sidelines and wait for MU to settle down. The stock did get a nice pop today, but it doesn't tell us too much about the market's perception of MU. If the industry analysts are right, and the current Chip cycle has another 12 to 18 months before ending, there will be plenty of time to gain a favorable entry into MU. As it stands now, MU is a bit dicey. One possible play on the stock might be to look for an entry on a retest of support near $60. ---------------------------- 1-800 Contacts - CTAC CTAC has had an incredible run-up. Will it continue up? - Rod CTAC is a direct marketer of, well, contact lenses. The company boasts of servicing 1.2 mln customers since its founding in 1995. Since CTAC is a specialty retailer, the company is less afflicted by rising interest rates. When the money supply is tight, consumers are more likely to opt for a new pair of contact lenses over a new pair of jeans. Since CTAC is interest rate immune, the stock has done quite well this year despite Doc Greenspan's antics. The company is growing its business at an incredible rate and has fundamentals that any retailer would love. Earnings should grow over 30% in the next several years, and despite its recent run, CTAC sells at a relatively cheap valuation. But, because of its recent run, we're faced with the same problem we have DST - finding a good entry point. CTAC is consolidating around the $40 level, with its 10-dma providing a little back-up. Aggressive traders might look to buy the stock on a bounce off its support level. But, the more conservative approach would be to wait for the stock to consolidate for at least seven weeks and watch for the inevitable break out. CTAC has had an incredible run, but I think it can go higher given a little time to consolidate its gains. I actually know one of CTAC's employees; he loves the company and they treat him well. That's bullish to me! ---------------------------- Cell Genesys - CEGE This stock has over 200 patents granted, hundreds pending in the biotech field. It has several hundred mln in cash. With about 30 mln shares outstanding and selling around $30 a share it is undervalued. Do you agree? - James Cell Genesys is a leading gene therapy company, who is focused on the development of cancer vaccines - a noble cause to say the least. The company has a prostate cancer drug in the latter stages of phase II trials, and pancreatic and lung cancer vaccines that are in early phase II clinical trials. Like you alluded to James, CEGE has the largest patent portfolio in the gene therapy field. The company licenses its gene activation technology to the likes of Pfizer, Amgen, Human Genome, and others. Those licensing agreements are the primary source of CEGE's revenues, right now. Obviously, that would change if CEGE is granted approval for just one of its cancer vaccines currently in clinical trials. CEGE's story is similar to that of many Biotechs. The company has a string of drugs on which it's hanging its future on, and if the company receives approval it could reap huge rewards for obvious reasons. Anything that could combat cancer would surely be a blockbuster drug. But, there's always the risk that CEGE won't receive approval for any of its drugs or that you might have to wait several years before the company recognizes profits from its clinical developments. To combat those risks, though, CEGE has accumulated about $240 mln in cash on its balance sheet to make its financial sailing as smooth as possible. In addition, CEGE owns roughly 12% of Abgenix (ABGX). So, your best bet in trading CEGE is to watch the action in ABGX and listen for more announcements about CEGE's clinical developments. CEGE is a riskier bet for the long-term investor because the company does not yet have a profitable product pipeline. However, because of its strong fundamentals, CEGE is a good stock to trade the movements in the broader Biotech sector. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************** TRADERS CORNER ************** Chunks From The Middle By Austin Passamonte Aw shucks...not a single person took the bait I dangled in Monday's visit. I made a statement saying it was my belief that disciplined traders using a multi time-frame chart system could achieve a 3/1 win-loss ratio of trades. Not a single person disagreed! Either I'm the only one here (it's possible) or you guys are making that happen already. If so would you please let me in on your secret? I only said it was possible, not that I was doing so. Reality is I'm human and prone to seeing trade signals just a wee bit before they actually complete. You know, one of those "close enough for me" setups? A weakness to succumb for those keeps me from the elusive 3/1, but I'm working on it. Actually, massive wealth can be achieved with a mere 2/1 win- loss ratio coupled with a good money-management system. That's subject matter for another day, so we'll stay on track here. Our objective should be to win two trades for every loss and obviously have bigger profits than losses. The big picture there is that smaller profit trades are much easier to win than the big hits. I know, I know, we all wanted to buy OTM JP Morgan calls on Monday but not all of us did. My congrats if you were one who had such foresight. Still, a long-term living is tough to eke out that way. A few people questioned the put-play returns I noted in last Saturday's Market Sentiment piece. These were meant to be examples of entire trades that were possible. 100+% and 200% percentages were there, but I'm never able to buy lowest and sell highest. I've done the reverse plenty of times but never seem to pick off an entire move. Nope, I can't make a fortune doing that but can see my way to such doubling my money risked on every three trades averaged. How's that? Well, my primary goal is to risk one dollar to make one dollar and win two for every loss. Chunks of profit from the middle will settle for me and me for them. For example, trading the OEX or QQQs is a whole different dollar game between the two but our concept is exactly the same. If I see a developing trade that seems high odds to me, I will enter at the best point possible and set a stop-protect order 2 points below. All I expect on that trade is a mere 2 point gain in return. Now the bid/ask spread eats into our two-point protect right from entry so we better be accurate about this. Diligently following the 60/30 minute chart setup handles most of that. Once the option's trade price reaches halfway to our target we immediately move our protective stop up from two points below entry to entry level. Once the live play reaches a trade range of two points over entry, we place a sell-limit order to harvest our profit immediately or at least place a stop order just below if there's strong reason to believe it's continuing straight up. Here's a live scenario; on Monday afternoon just past 2:00 EST I watched the QQQs start rolling over from the 94 level. My 30 minute chart had stochastics crossing in the overbought range on that short-term chart. Its hourly chart showed the same in progress. I instantly entered a limit-buy order for the Sep 91 puts @ 1/2 and was filled. No stop was placed in this case because I only spent what I was otherwise willing to risk on an October contract's stop loss. A free trade, if you will. By 3:00pm the position was trading at 7/8 and I placed my first stop at 1/2 with the bid/ask spread 3/4 - 15/16. Before too much longer the spread was at 1 - 1 1/16. I moved my stop to a sell-limit at 1 and closed out for 100% return on purchase in less than 90 minutes total time. If the market had rallied into the close, my stop would have been hit near entry and I'm only out commissions. I'll take a par trade over a loss any day! You'd be surprised how many swing trades in a market only move the exact same amount a safe stop order is before reversal. On the OEX, two or three-point swings are most common. SPX, 5-point daily swings are the norm. That happens to be what I feel are the best stop-loss orders below entry on each respective market. Risk one, make one, two out of three times. Bear the occasional gap-loss against and also the big pop in your favor to balance things out. Pick any figures you want and win two out of three balanced trades over time on a spread sheet. Let me know what that might do for your early retirement plans! On another note, I don't want to open Pandora's box here so please internalize what I'm about to say. This does not negate all you've been told about trading options. Personally, the concept of "amateur hour" does not influence my trade-entry at all. This time frame affects equity options much more than indexes. Individual stocks are notorious for a gap-move open in one direction only to gradually fade to the opposite. This action is due to the pre-market pressure of parked orders to buy or sell at the open. News and events are usually what draw us to that play along with everyone else. I seldom buy a market that has just gapped in any direction due to the strong tendency for it to refill the gap quickly, often within the same session. Indexes are a blended average of many stocks and seldom pop big at the open. When they do, I simply stand aside and watch how the first thirty minutes or so will unfold. A great many times during large range days the perfect entry lasts the first five to ten minutes after the open before it shoots off and never looks back. This is tricky to play, as reversals are common. However, such market reversals happen anytime during open hours these days and I trust chart signals to keep me out of great harm the majority of times. I DO NOT recommend entering stock-option plays at the open if it makes a gap-move right off the bat. For every one that goes on to profit, several others hit the daily high right from the opening pop. Let non-OIN readers fall prey to such "buy-the-tip-top" follies with their market orders to buy parked with brokers. ***** I had hoped to cover Bollinger Bands technical study tonight but I'm experiencing tremendous equipment challenges this week. Plainly, I've bought new computers, switched to Adobe Photo Shop and have yet to tame the beast. I am a minimalist trader for a reason; technically-challenged is being kind. We promise to be on track for our visit next week and will surely cover this important subject then. Enjoy the heck out of expiration week... buy cheap and sell very dear! Best Trading Wishes, Contact Support ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=471 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** PALM - PALM, Inc. $48.50 +1.38 (+3.50 this week) Known for its ubiquitous Palm-branded handheld devices, PALM brought handheld computing to the masses. Although Apple pioneered the concept of the Personal Digital Assistant (PDA) with its ill-fated Newton series, PALM, which was spun off from 3Com (COMS) in March, has managed to convince consumers they can't live without these little electronic gadgets. The company's product offerings have grown and now include the Palm III, Palm V, and the Internet-enabled Palm VII product families. These pocket-sized PDAs allow users to use pen-based input and to copy and synchronize information between the device and a personal computer. Most Recent Write-Up The IPO of PALM in early March was one of many new offerings last spring, and it received an amazing amount of interest on its first day. Opening the day at more than double its offering price, the stock quickly shot as high as $165 before more rational thinking prevailed, bringing the price back to earth. In the midst of the spring NASDAQ correction, PALM shares languished for months, finally bottoming near $20. Finally, in late June, volume began to increase, and the stock has seen significant accumulation ever since. The most recent bout of profit taking ended in mid-August, and the subsequent rally has brought the price up through resistance near $45. Today's strong gains pushed PALM through this level to close at its highest point since late March. The technicals, such as MACD and Stochastics, are still looking strong, and the 10-dma (currently $43.44) has provided support on each pullback over the past 3 weeks. The bulls ran into resistance today at $48, and above that looms the $53 level. Below the $45 support level is solid support around $40. Use pullbacks to support as buying opportunities, but make sure volume confirms the bounce before playing. The pullbacks recently have been brief and shallow, so the $45 level looks like the best point to target shoot. Continuing strength that pushes PALM above $48 on strong volume will provide a more conservative entry. Comments PALM moved above the aforementioned $48 level today on volume that revealed the bulls were large and in charge. PALM has fallen under heavy institutional accumulation, which has carried the stock steadily higher for over a month. Ahead of the PPI report tomorrow, we thought PALM would be a conservative bullish play. Watch for the steady professional buying to lift PALM above resistance at $49 tomorrow morning and confirm a rally with a continuation of heavy volume. Also, buying PALM's pullbacks has been a profitable trade recently. A bounce off support at $48, or lower near $47, might provide the aggressive traders with a favorable entry. BUY CALL OCT-45 UPY-JI OI= 3444 at $6.00 SL=4.00 BUY CALL OCT-50*UPY-JJ OI= 2715 at $3.50 SL=1.75 BUY CALL OCT-55 UPY-JK OI= 203 at $1.94 SL=1.00 BUY CALL NOV-50 UPY-KJ OI=15283 at $4.75 SL=2.75 BUY CALL NOV-55 UPY-KK OI= 2966 at $3.00 SL=1.50 Picked on Sep 12th at $47.13 P/E = 529 Change since picked +1.38 52-week high=$165.00 Analysts Ratings 6-2-1-0-0 52-week low =$ 19.88 Last earnings 07/00 est= 0.00 actual= 0.03 Next earnings 10-19 est= 0.02 versus= N/A Average Daily Volume = 8.29 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Volatility increases as the major groups vie for control of the market... Technology stocks recovered today while industrial issues slumped amid concerns over upcoming earnings. The Nasdaq Composite edged higher during the session but the blue-chip Dow average remained firmly negative as computer hardware components Hewlett-Packard (HWP) and Intel (INTC) suffered major losses. Selling in shares of Citigroup (C), Philip Morris (MO), McDonald's (MCD), and Home Depot (HD) also pressured the industrial group. At the same time, financial issues slumped after weeks of bullish activity on news that Chase Manhattan (CMB) will purchase J.P. Morgan (JPM). The transaction values JPM shares at over $205 and the merged entity, to be named J.P. Morgan, Chase, & Co., will have assets near $660 billion. One issue that continued to benefit from speculation in the sector was Knight Trading Group (NITE). The largest Nasdaq market-maker saw its shares soar 30% on rumors the company is the next takeover target. In the technology group, a Banc of America Securities downgrade of Advanced Micro Devices (AMD) weighed on sentiment in the semiconductor sector and fears of a slowdown in the Personal Computer industry were boosted early in the session by component-maker SCI Systems' (SCI) warning that its quarterly results would come in well below estimates. The company blamed seasonal weakness in consumer electronics and finished personal computer demand for the shortfall. In addition, analysts said the PC slowdown is centered on low-end box makers and shares of sector competitors fell in tandem with the news. In the broader market, utility, airline and biotech stocks moved higher but oil and oil service shares slumped as crude prices dipped following the rally earlier in the week. The recent jump in crude futures is becoming a major problem for the market and from a seasonal viewpoint, this month is rarely a bullish period for stocks. In addition, the earnings-warning period is in full swing and most investors are too concerned with avoiding the companies that may miss estimates to focus on long-term portfolio additions. With that fact in mind, we will continue to focus on positions that offer conservative entry points into technically favorable charts, with reasonable monthly returns. Summary of Previous Picks: Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return METHA SEP 45 41.50 51.06 $3.50 8.6% PHCM SEP 85 78.25 88.13 $6.75 7.1% ADBE SEP 115 109.68 125.94 $5.32 6.4% SMTC SEP 80 75.43 106.19 $4.57 6.1% 2-1 Split 9/26 MANU SEP 70 67.81 86.88 $2.19 6.1% BLDP SEP 105 103.18 109.88 $1.82 6.0% MIPSB SEP 45 43.25 48.69 $1.75 5.4% ARTG SEP 90 87.63 90.31 $2.37 5.1% MIPS SEP 45 42.88 54.75 $2.12 5.0% ORCL SEP 85 82.75 81.81 -$0.94 0.0% Earnings 9/14! NAVI SEP 45 42.87 41.69 -$1.18 0.0% At support NMSS OCT 65 59.75 71.06 $5.25 6.1% Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return MANU SEP 65 63.56 86.88 $1.44 14.7% MANU SEP 70 69.19 86.88 $0.81 14.5% MIPSB SEP 45 43.37 48.69 $1.63 14.2% METHA SEP 40 38.37 51.06 $1.63 14.0% INFA SEP 85 83.50 102.31 $1.50 10.8% ARTG SEP 85 83.63 90.31 $1.38 10.4% TUTS SEP 85 83.19 85.00 $1.81 10.0% MIPS SEP 40 38.87 54.75 $1.13 9.9% BOBJ SEP 95 93.31 103.13 $1.69 9.9% ADBE SEP 105 102.75 125.94 $2.25 9.4% INFA SEP 90 89.19 102.31 $0.81 9.1% VRTX SEP 57.5 56.44 75.75 $1.06 9.0% Adj 2-1 split NAVI SEP 40 39.00 41.69 $1.00 8.9% QLGC SEP 85 83.50 98.06 $1.50 8.7% EMLX SEP 55 53.75 96.06 $1.25 7.9% SMTC SEP 70 68.62 106.19 $1.38 6.9% 2-1 Split 9/26 MMCN SEP 55 53.94 108.38 $1.06 6.7% MXIM SEP 65 63.75 81.00 $1.25 6.6% ORCL SEP 80 79.06 81.81 $0.94 6.4% Earnings 9/14! INKT SEP 100 98.62 108.75 $1.38 6.3% PHCM SEP 65 63.50 88.13 $1.50 6.2% MERQ SEP 100 99.00 119.94 $1.00 6.2% BLDP SEP 100 99.44 109.88 $0.56 5.5% METHA OCT 45 43.06 51.06 $1.94 9.7% NMSS OCT 55 53.00 71.06 $2.00 8.4% AVNX OCT 115 111.50 148.06 $3.50 7.2% RIMM OCT 60 58.37 78.19 $1.63 6.4% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return SNWL SEP 100 101.31 54.50 $1.31 10.8% 2-1 Split 9/18 LSCC SEP 80 81.00 65.25 $1.00 8.7% New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** September Expiration Speculation! ITWO - i2 Technologies $172.00 *** Short-term Speculation! *** i2 Technologies is a provider of intelligent eBusiness solutions that help enterprises optimize business processes both internally and among trading partners. Its solutions enable enterprises to operate more efficiently, more effectively collaborate with suppliers and customers, and conduct business transactions over the Internet. They recently launched TradeMatrix, a robust platform of business-to-business solutions, services and marketplaces, which will allow customers, partners, suppliers and service providers to do business together in real time. Its services include procurement, commerce, customer care, strategic sourcing, product development, and more. i2 Technologies is one of the leaders in the Internet B2B sector and investors, as well as industry experts, are bullish on the company's outlook. A recent survey of analysts produced these results: 9/12/00 I2 Technologies was rated a "strong buy" in new coverage by analyst Richard Davis at Needham & Co. The target price is $222 per share. 9/11/00 I2 Technologies was rated a "buy" in new coverage by analyst David Garrity at Dresdner Kleinwort Benson Securities. 9/6/00 I2 Technologies was maintained "accumulate" by analyst Douglas Crook at Prudential Securities. The 12-month target was raised to $200 from $150 per share. 9/5/00 I2 Technologies was rated "outperform" in new coverage by analyst Gretchen Teagarden at Salomon Smith Barney. The 2001 price target is $179. Obviously, the analysts' consensus opinion is very optimistic but this play is simply based on the current price or trading range of the underlying issue and its recent technical history. We will use the current market volatility and the overpriced option premiums to help initiate these relatively conservative, bullish positions. The probability of the share value falling to our target strike price appears rather low but there is always the possibility of a major correction so monitor the issue daily for changes in technical character. ITWO - i2 Technologies $172.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put SEP 160 QYI UL 469 0.94 159.06 24.8% *** Sell Put SEP 165 QYI UM 129 2.00 163.00 47.7% ****** JNPR - Juniper Networks $198.63 *** A Big Recovery! *** Juniper Networks is a provider of unique Internet infrastructure solutions that enable Internet service providers and other telecommunications service companies, to meet the critical demands resulting from the rapid growth of the Internet. The company delivers next generation Internet backbone routers that are specifically designed, or purpose-built, for service provider networks. The company's flagship product is the M40 Internet backbone router, and it recently introduced the M20, an Internet backbone router purpose-built for emerging service providers. The company's Internet backbone routers combine the features of the JUNOS Internet Software, a new high performance ASIC-based packet forwarding technology and Internet-optimized architecture into a purpose-built solution for service providers. Technology stocks recovered today from some of their September blues, thanks to strength in top Internet equipment shares. The tech-heavy Nasdaq, which closed higher for the first time since late last week, was boosted by the surging prices in industry leaders like Juniper Networks. Obviously, investors are still treading lightly ahead of key data expected later this week; the Producer Price Index (PPI), due out on Thursday and the CPI or Consumer Price Index, which will be announced Friday. The data from these reports is an important measure of inflation at the wholesale and retail levels and the market can react abruptly to unfavorable numbers in either of these indices. Fortunately, the recent trend for technology issues has been a flight to the more expensive stocks and we think Juniper is one of the issues that will remain bullish, even in the event of a negative announcement. With favorable disparities in the front-month option premiums, this position offers an excellent speculation play for those who agree with our outlook for the issue. JNPR - Juniper Networks $198.63 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put SEP 175 JUD UO 1073 0.81 174.19 21.8% *** Sell Put SEP 180 JUD UP 883 1.19 178.81 29.2% October Expiration ALXN - Alexion Pharma $100.88 *** Bracing For A Rally? *** Alexion Pharmaceuticals develops products for the treatment of cardiovascular, autoimmune, and neurologic diseases caused by improper functioning of the human immune system. They have two lead product candidates in Phase II trials, one for the treatment of acute inflammation caused by cardiopulmonary bypass surgery, and the other for the chronic treatment of rheumatoid arthritis and membranous nephritis. Alexion is developing its Apogen and UniGraft technologies in preclinical studies. They are targeting their first Apogen product candidate, known as MP4, for the treatment of patients with multiple sclerosis. Alexion has been focusing on an important aspect of the natural healing process known as the complement cascade. Complement is made in the body in a series of complex steps in reaction to foreign pathogens. In most cases, the complement cascade is triggered after the white blood cells begin to protect the body. Once activated, its job is to help kill the cells harboring the invasive pathogen. However, the human healing system can become too protective, leading to other problems such as autoimmune and inflammatory diseases. For now, there no products available that block any part of the complement cascade but analysts have been paying close attention to one of Alexion's new drugs, an antibody complement cascade inhibitor for lupus and rheumatoid arthritis. In addition, Alexion announced last week that it received "fast track" status for the approval process for its treatment for patients undergoing bypass surgery, which it is developing in partnership with Procter & Gamble (PG). The fast track approval could substantially reduce the amount of time the U.S. FDA takes to grant approval for Alexion's new treatment, designed to block inflammation that could cause heart or brain damage. The company also said that it has completed the enrollment of 1,000 patients for the Phase II trials to test the efficacy of the drug. Based on the technical indicators, investors like the fundamental outlook for the company and we favor the opportunity to own the issue at a reduced cost basis. ALXN - Alexion Pharma $100.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call OCT 85 XQN JQ 20 20.63 80.25 4.9% *** Sell Call OCT 90 XQN JR 100 17.50 83.38 6.5% Sell Put OCT 80 XQN VP 5 3.25 76.75 11.4% *** Sell Put OCT 85 XQN VQ 0 4.88 80.12 13.7% Sell Put OCT 90 XQN VR 0 6.50 83.50 14.9% ****** OSIP - OSI Pharmaceuticals $51.69 *** Drug Development! *** OSI Pharmaceuticals is a research and development company that utilizes a comprehensive drug discovery and development capability to rapidly and cost effectively discover and develop novel, small-molecule drug candidates for commercialization by major pharmaceutical companies. OSI conducts its drug discovery and product development programs independently as well as in conjunction with major pharmaceutical companies. Their efforts are primarily focused in the areas of cancer, diabetes, cosmeceuticals and G-protein coupled receptor, or GPCR, directed drug discovery. OSI Pharmaceuticals rallied today after the company announced a summary of early data emerging from a Phase II study of OSI-774 in non-small cell lung cancer patients. OSI-774 is a potent, selective and orally active inhibitor of the Epidermal Growth Factor Receptor (EFGR), an oncogene that is associated with the aberrant growth that is characteristic of cancer cells. Philip Bonomi, a lead investigator, and Director of Medical Oncology at the Rush Cancer Institute in Chicago says that OSI-774 is a well tolerated, oral medication which is active in non-small cell lung cancer. He was particularly impressed by partial responses with OSI-774 in two patients who had been treated previously with two and three different chemotherapy regimens. OSI commented that they are confident the study confirms OSI-774 to be an active and well tolerated anti-cancer agent and an important competitor in the new class of EGFR inhibitors. In addition, OSI Pharmaceuticals recently announced an acquisition from Pfizer of a small molecule EFG receptor inhibitor, a cancer drug candidate. The acquisition came as a result of a decision between Pfizer and the Federal Trade Commission as a requirement of Pfizer's merger with Warner-Lambert. Company officials believe this is a transforming event and a fundamental positive for OSIP, as growth factor inhibitors are the next major wave of cancer therapeutics. Numerous biotechnology and pharmaceutical companies are working on such agents, demonstrating the market opportunity in this therapeutic category. That's certainly good news for the company and we favor the bullish chart indications and today's new, all-time high. OSIP - OSI Pharmaceuticals $51.69 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call OCT 45 GHU JI 90 9.63 42.06 5.7% *** Sell Put OCT 40 GHU VH 48 1.44 38.56 10.1% *** Sell Put OCT 45 GHU VI 103 2.94 42.06 14.3% ****** PALM - Palm Incorporated $48.50 *** Earnings Rally? *** PALM is a global provider of handheld computing devices, and has brought about the widespread acceptance and use of these gadgets. Although Apple pioneered the concept of the Personal Digital Assistant (PDA) with its ill-fated Newton series, PALM, which was spun off from 3Com (COMS) in March, has managed to convince consumers of the utility of their products. Their product offerings have grown and now include the Palm III, Palm V, and the Internet-enabled Palm VII product families. These pocket sized PDAs allow users to use pen-based input and to copy and synchronize information between the device and a personal computer. Palm has been a favorite of the OIN in recent sessions and we noticed there are some excellent premiums available for traders who wish to initiate a new portfolio position through the sale of Naked Puts. Of course, the company's earnings are due on Monday, September 25, and that could be the primary cause of the recent rally. We favor these positions based on the bullish technical outlook for the issue but you can learn more about the company at: http://members.OptionInvestor.com/calls/091200_3.asp PALM - Palm Incorporated $48.50 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put OCT 40 UPY VH 778 0.88 39.12 6.1% *** Sell Put OCT 45 UPY VI 621 2.38 42.62 10.7% ****** RMBS - Rambus $84.47 *** A New Deal! *** Rambus designs, develops, licenses and markets high-speed chip- to-chip interface technology to enhance the performance and cost- effectiveness of computers, consumer electronics and other electronic systems. They license semiconductor companies to manufacture and sell memory and logic ICs incorporating Rambus interface technology, and market their products to systems companies to encourage them to design Rambus interface technology into their products. They have been aggressive in this respect, licensing more than 100 patents to around 30 semiconductor companies. Their technology cost-effectively increases the data transfer rate, allowing semiconductor memory devices to keep pace with faster generations of processors and controllers. Deal of the century? No, but Rambus' licensing agreement with NEC of Japan is certainly a bright spot amidst the lawsuits the chip designer is embroiled in over licensing royalties. NEC is the world's second-largest chipmaker, and is the largest chipmaker to sign a licensing agreement with Rambus. The agreement involves working on developing technology to speed the performance of memory chips. The financial details of the agreement were not revealed but investors reacted positively to the agreement, moving the share price up almost ten percent at the close, on higher than average volume. Rambus has had more than its share recently of legal entanglements, settling one lawsuit over patents favorably with Hitachi, and launching a similar suit against Infineon Technologies. Rambus is not only the "hunter" in the realm of patent lawsuits, but the "hunted" as well. Micron Technology and Hyundai Electronics Industries of South Korea filed suits against Rambus, rejecting the Rambus claims to patent royalties and instead accusing the company of violating industry antitrust laws. With the philosophy of a good offense being the best defense, Rambus filed a counter-lawsuit against those two companies in Europe on Tuesday. We simply favor the new outlook for the company and the inflated option premiums will allow us to speculate on the future movement of the issue with a reasonable cost basis. RMBS - Rambus $84.47 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put OCT 60 BYQ VL 443 1.50 58.50 6.7% *** Sell Put OCT 65 BYQ VM 336 2.00 63.00 8.7% Sell Put OCT 70 BYQ VN 773 3.25 66.75 11.8% *************** BEARISH PLAYS - Naked Calls *************** TUTS - Tut Systems $85.00 *** Taking Profits! *** Tut Systems develops and markets advanced communications products that enable high-speed data access over the copper infrastructure of telephone companies, as well as the copper telephone wires in homes and businesses. Their products incorporate high-bandwidth access multiplexers, associated modems and routers, Ethernet extension products and integrated network management software. Despite the recent sell-off, this company remains one of our favorites for long-term portfolios. The fundamental outlook is very positive; revenues are expected to grow 100% year over year, and the stock should see higher prices in the future. However, the current technical trend is very unfavorable and the volatile activity in the stock has produced some excellent premiums in the (OTM) call options. We will use the current speculative interest to open a conservative position with a bearish outlook. If the price of the issue moves through the current resistance area near $115, we will buy the stock to cover our sold options. TUTS - Tut Systems $85.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call OCT 120 QSS JD 8 2.31 122.31 9.8% *** Sell Call OCT 125 QSS JE 51 1.75 126.75 7.7% ************** BROKERS CORNER ************** Leveraging Covered Calls Leverage is one of the reasons to buy options over the underlying security. Some investors prefer to trade covered calls to trading calls and/or puts. One alternative to covered call writing is to buy a longer-term (long option) option and sell (short option/ naked) a nearer term option at the same or higher strike price. This is referred as a calendar or debit spread. The longer-term option is generally more expensive than the nearer-term option due to time value. The long-term is also more expensive due to buying the strike closest to the stock price and selling the near-term out of the money. Therefore, a net debit is achieved. For instance, buying one JAN 50 2002 call option for 15 and selling one OCT 60 2000 call option at 2 results in a net debit of 13 (15-2=13) and an initial return of 13.3% (2/15= 0.133). One benefit of the Calendar spread is the leverage. Leverage is one of the attractive qualities associated with option trading. For instance, buying 1000 shares of a 100 stock on margin usually requires a minimum requirement of 50%. Therefore, the minimum cash required to facilitate the trade would be $50,000. For the sake of the example, let's assume the JAN 2002 100-call option is trading at 28 with a delta of 72. I determine whether to buy the option or the stock by calculating the hedge by multiplying the stock price by the initial margin by the delta (divided by 100) of the call option in question (100X50%X0.72=36). In my opinion, if the calculation yields a higher number than the option price, it is better leverage to buy the option. The strategy is simple. The most difficult aspect, as with any investment, is determining which stock to buy. Some investors look for up-trending stocks, while others look for the highest premium. The best entry strategy is the one that, among other things, best suits the individual's risk tolerance, investment objectives, and desired return. I have heard investors comment that "you can't lose with covered calls." This is false if the stock goes down below the cost basis. The risks of buying the long-term option (LEAP) are depreciation of time value, price deflation due to decline in stock price, slippage, etc. It is necessary to have an exit strategy if the trade goes against you. Options expire and cause an investor to lose up to their initial investment. In addition, it is also necessary to have a strategy if the stock price advances to or above the sold option's (short) strike price. In this case, one must either close out the short option if in the money by buying the call to close or be prepared to sell stock that you may not own. If the short call needs to be closed out, it may by beneficial to close out the long-term option as well. Robert John Ogilvie If you have any additional questions regarding this article, please feel free to contact me at 877-925-0880 or e-mail firstname.lastname@example.org. Neither Cutter & Company, Inc. nor Robert J. Ogilvie makes any representation as to the accuracy, reliability or completeness of any charts, formulas, and/or research opinions presented herein. This article is intended solely for educational purposes. Nothing herein should be construed as an offer or solicitation to buy or sell any securities. Option trading is speculative and entails risk with the potential to lose principal. Option trading is not suitable for all investors. Cutter and Company is a Member of the NASD, MSRB, SIPC. ************************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. 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