The Option Investor Newsletter Tuesday 09-19-2000 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/091900_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 09-19-2000 High Low Volume Advance/Decline DJIA 10789.30 - 19.20 10839.10 10761.90 963 mln 1380/1492 NASDAQ 3865.64 +139.12 3865.85 3740.65 1.71 bln 2246/1716 S&P 100 787.77 + 8.84 788.68 779.55 totals 3626/3208 S&P 500 1459.90 + 15.39 1461.16 1446.05 53.1%/46.9% RUS 2000 523.31 + 6.63 523.37 515.80 DJ TRANS 2605.61 - 14.55 2627.00 2574.62 VIX 22.11 - 0.90 23.47 21.89 Put/Call Ratio .58 ****************************************************************** We sure can't complain about this week! With an explosion of relief buying the Nasdaq gapped open almost +70 points in the first 15 min of trading. This put the Nasdaq dead on support at 3800 and it struggled to hold this level all morning. Once traders came back from lunch and saw 3800 holding, the race was on. The over sold rebound was fueled in part by an upgrade to Intel and AMD. The Dow however, even with strength in MSFT +2, INTC +4.56 and HWP +3.50, could not manage a positive close. After spending most of the day under 10800 the Dow managed to make a nice run into positive territory just before the close but fell back on end of day selling. The major factor for the rebound in the tech markets, other than just seriously over sold, was an upgrade by Bank of America on several stocks they downgraded just last week. Confused? Last week BOA downgraded INTC to "market perform" and set a price target of $55. INTC was trading in the $67 range at the time. After the downgrade INTC dropped over the next several days to a low of almost $55. Same with AMD which was downgraded to a "market perform" with a price target of $25. They cited slowing PC growth, weak chip sales, bad product mix, etc. But that was last week. I wonder if they were short those stocks? Today BOA upgraded both of these stocks and set a price target on INTC of $70 and $40 on AMD. Now you are really confused. How could an analyst put out a market moving research report one week and then entirely reverse it only a week later? Did he cover his shorts? AMD rose +13% or +3.50 and back to $30 and Intel +4.56 to close at 60.31. Adding to the semiconductor rally was the Bear Stearns conference call in which they stated that they are positive on current PC demand. They felt the semi cycle is not over and still has room to run. They said demand had picked up in September for Intel and Micron. DRAM prices are still strong and prices are stable to up. They set a price target on Intel of $90. These two pieces of positive news were strong motivators to the Nasdaq rally. The Dow however dropped on a profit warning from Alcoa. AA said profits would be "well below" estimates due to energy costs and slowing orders from some big industrial markets. The soft landing in the materials sector is turning in to a crash. The majority of the recent earnings warnings have been in this and related sectors. The following companies have already warned; AA, DD, ETN, DANA, FMO, IR, ROK, TRW, WHR, CR, BWA, SOI and BGG. 255 stocks have already prewarned according to First Call but only 60% of those or 153 were negative. The problem is the brand names that are warning. Names like Alcoa, Dupont and Gillette are much more widely held than JAKK. These high profile warnings in a quarter known for earnings problems just confirm the bearish sentiment. I am sure you are all excited about China getting preferred trade approval. The markets however yawned as Clinton held a news conference to trumpet the news. The real news for the day was an earnings warning from JAKK. Jakks Pacific Inc warned that there was a slowdown in sales of its main product. That product? WWF action figures. Wow! If The Rock, Kane, Hardy Boyz, The Undertaker and Stone Cold Steve Austin are not selling we must really be in for a recession. There go my role models! I wonder how Barbie and Ken are doing over at Mattel? The Euro has not hit bottom yet and posted yet another new low today. At the same time natural gas posted a new high. Let's see, energy costs more but money is worth less. Yep, sounds like a definite economic problem to me. Add in oil futures bumping up against yesterday's high of $37 and we have some real stress. The current oil problem appears to be a lack of tankers to transport it along with requirements increasing daily. A couple hundred SUVs rolled off assembly lines while I was writing this commentary. Colder weather in the north has started the run on heating oil supplies and rumors of hoarding are already appearing. Now, how would you hoard heating oil? Yes Sir, just fill up my basement please and that big hole I dug in the back yard as well. All jokes aside, some analysts are still calling for +$40 oil soon and that will continue to pressure the industrial sector. Helping the Nasdaq today Cisco CEO, John Chambers, said CSCO had no exposure to the weak Euro since all sales were made in U.S. Dollars. Actually he said there was a slight positive for them since they paid their expenses in Euros. This works for a company that sells its products to corporations but does not work for a company like Gillette which sells a much lower priced consumer product. Gillette of course warned on Monday. Microsoft got a boost today as well when Assistant Attorney General Joel Klein announced he was leaving the U.S. Government to find another job. Klein launched the landmark case against Microsoft and was a leading podium pounder against an Appeals Court hearing. With Klein out of the picture investors saw a sliver of light under the breakup door. MSFT gained +2. Dell bounced off its 52 week low set yesterday with a +1.88 gain on news that component prices were softening. This is a plus for them and will enable lower prices for consumers while maintaining profit margins for Dell. Ironically, the "lower prices for components" comment was ignored by the broader market as investors were busy in the chip feeding frenzy. Seems to me the lower prices would mean that Ashok's warning on Sept 4th regarding Intel is coming true just as others are upgrading them. Is the right hand reading the left hands reports? SunMicro actually went up after announcing a purchase of Cobalt Networks for about $2 billion. The move will position SUNW in the low end server appliance market. Investors liked the move and both stocks were up. SUNW has bounced off support at $112 for a week now and this news helped rally them off the bottom. The best scenario I mentioned on Sunday came to pass. The big sell off on Monday giving us the buying opportunity we wanted, followed by the big rally today. Unfortunately the gap open this morning made this rally hard to play. Up +30 at the open and +70 ten minutes later, those of us who like to confirm market direction after amateur hour before opening a play were left holding the bag. With a +70 point gain and a history of selling off before the close, the prudent decision would be to wait. When traders returned from lunch they wasted no time in buying more tech stocks. Must have been the three martini lunch. Either that or they were just so surprised to come back from lunch to a positive market they just lost control. Our problem now becomes how long will it hold? With the Dow still sick and sure profit taking due tomorrow on stocks like SDLI +38, PMCS +23, JNPR +18, GLW +17, AMCC +17, RBAK +16, there is a strong possibility this could be yet another bear trap rally. I hope not but we really need to put a couple positive days together before we start throwing caution to the wind and buying everything in sight. The Dow selling at the close as the Nasdaq was soaring shows us that there is still some weakness in the market. Sure, some of the Dow weakness was investor rotation back into techs but I don't think that was the whole problem. At 3865 the Nasdaq is +163 points above the double test of 3700 on Monday. That is a +29% recovery of the recent -553 point drop since Sept 1st. The Nasdaq has never been known for doing things slow yet recovering almost one third of the loss in one day is pretty strong. Lets hope all that cash on the sidelines decides the market is about to run away from them. 3900 is still the next critical level. Once over that I will feel much more comfortable. The Dow is facing a critical test of ascending support dating back to January. If it falls under 10750 we could see another round of retesting Dow lows in the 10500 range. October, although known for big drops, is also known as the bear killer month. Historically bearish Septembers are forgotten with end of the month October rallies. I can't wait! It is with great pleasure we announce the first annual Advanced Options Workshop in Denver, Colorado on October 27-30th. You have heard about our popular March Expo seminars which have sold out for the last two years. The attendees from those events have urged us to put together an advanced course in the same format. This course will be taught by over a dozen speakers including myself. This is a one time presentation with up to the minute information and as always we guarantee you will not be disappointed. The schedule is fast and furious with optional sessions lasting until 10PM each evening. This is the best option education available. The price includes your room, ALL meals, a professionally produced video of the event and one on one interaction with speakers who are experts in their field. The event kicks off with a Halloween party on Friday night. Join the fun. Be a better trader! Seating is limited. For more information: http://www.OptionInvestor.com/workshop Good luck and sell too soon. Jim Brown Editor ********************* FALL SEMINAR SCHEDULE ********************* The Austin TX seminar is September 21/23rd. Options expiration is over and earnings still several weeks away. 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 Rhoades 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 21-23 Austin TX Sep 28-30 Boston Oct 12-14 Charlotte NC Oct 19-21 San Francisco Oct 27-30 Denver, Advanced Option Workshop Nov 02-04 Phoenix Nov 09-11 Miami FL Nov 20-23 Dubai, UAE (Special 4 day seminar) Dec 07-09 Philadelphia Dec 14-16 San Antonio Australia coming soon! Has the market been beating you up? Did you give back your gains from April? Would you like to understand all the technical indicators our writers use? Does the alphabet soup of technical terms like RSI, DMA, MACD, ROC, Stochastics, Bollinger bands, sound like Greek to you? You can learn from the experts how to interpret all these indicators, read charts, pick stocks and which option strategies to use on those stocks for less than the cost of one bad trade. Reserve your seat now for one of our regional seminars. Click here for more info: http://www.OptionInvestor.com/seminar/seminar.asp ************************Advertisement************************* 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=494 ************************************************************** **************** MARKET SENTIMENT **************** There Just Might Be A Bottom By Austin Passamonte Meowww...Growl...ROAR! Which "dead cat" did we hear from today? Just when we sat teetering precariously on the edge of a great market void, back came momentum angels market bulls have come to rely on time and again. We shouldn't consider this a firm bottom beneath us quite yet but that was one impressive relief rally. Stick one or two more just like it inside this week and we may not hear "new market bottoms" for a little while again. The long-term technical picture isn't perfect for a reversal but it improved today. Flipping through daily charts of the major indexes and semi-conductor sector shows signs of life for release from oversold extreme zones soon. Let's not load the tractor-trailer with calls just yet. Short term signals indicate another round or two of tests could face us before buying conviction begins with earnest. Where? We don't pick points, we rely on technical signals to move into action. One or two retests of these most recent lows and a strong rally from there could do it. The oil/poor earnings hurdle hasn't been cleared yet either. Futures traders in the oil markets are betting that current prices are at or near their tops but Iraq is the wild-card. We'll include COT report sentiment this Friday for commercial traders in the energy sector to see how the giants are playing today's price/market action. Candle patterns show versions of bullish engulfing candles and semblances of "Morning Star" bullish reversals in the NASDAQ series markets. They are three day patterns that begin with a bearish down or red candle, a doji or stalemate of some sort the second and a clear or green bullish candle the third. This exhibits the transition of sentiment from bearish to neutral to bullish sequentially and is present in daily NASDAQ charts. Check out the put/call ratio disparity in the OEX and QQQs. Lots of puts below us and few calls above clear the runway for action if movement heads that direction. We believe the DOW will lead from here. It closed exactly on the major trendline support drawn from its March intraday lows through the higher-lows from there. Technology had an excellent day but the blue chips couldn't manage to finish green. The dip-buying crowd remains alive & well. Floor traders continue to view rallies as new selling opportunities. As usual we find ourselves in a state of transition. More selling could lie ahead but it's very possible we've identified the point where tech buyers consider the usual stalwarts too cheap. Maybe it's behind us for now. We'll see. Going forward, Market Sentiment waits to see S&P 500 commercial traders move from net-short to neutral or even long. The VIX spiking towards 23.5 or higher is welcome also. Stochastic and MACD values on the daily index charts moving up above 20% extreme zone will signal the next move is underway. Index prices holding this week's higher-lows would complete bullish divergence patterns on the daily charts as well. Trade carefully until the green lights signal all's well to the upside. We'll give up the first part of any move but harvesting the biggest chunk from its middle is the safest trading of all. As always, calls or puts as your market indicators suggest is the great advantage option players have above all others! ***** VIX Wed 9/13 close: 22.11 CBOE Equity Put/Call Ratio The CBOE equity put/call ratio is a contrarian-sentiment indicator. Small traders are majority of equity-option players. Numbers above .75 are considered bullish, .75 to .40 neutral and bearish below .40 ************************************************************* Tues Wed Sat Strike/Contracts (9/19) (9/13) (9/16) ************************************************************* CBOE Total P/C Ratio .58 .66 .65 Equity P/C Ratio .52 .58 .59 Peak Volume (Index & OEX) CBOE Index & OEX put/call ratio is now a "smart money" sentiment indicator, as majority of buying done by institutional traders. Numbers above 1.5 are considered bearish, 1.5 to .75 neutral and bullish below .75 ************************************************************** Tues Wed Sat Strike/Contracts (9/19) (9/13) (9/16) ************************************************************** All index options 1.06 1.32 1.11 OEX Put/Call Ratio 1.26 .85 1.47 30-yr Bonds Friday 9/15 close; 5.92% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 830 - 815 7,868 4,115 1.91 810 - 795 9,642 5,432 1.77 OEX close: 787.77 Support: 785 - 770 974 6,558 6.73 765 - 750 68 7,294 107.26*** Maximum calls: 820/5,230 Maximum puts : 750/3,939 Moving Averages 10 DMA 801 20 DMA 813 50 DMA 806 200 DMA 783 NASDAQ 100 Index (NDX/QQQ) Resistance: 100 - 98 8,265 9,662 .86 97 - 95 12,254 23,875 .51 94 - 92 7,734 14,707 .53 QQQ(NDX)close: 93.3/16 Support: 91 - 89 4,892 19,173 3.92 88 - 86 273 9,450 34.62*** 85 - 83 178 7,268 40.83*** Maximum calls: 97/6,158 Maximum puts : 90/10,227 Moving Averages 10 DMA 93 20 DMA 96 50 DMA 94 200 DMA 94 S&P 500 (SPX) Resistance: 1525 4,060 2,031 1.99 1500 18,895 20,353 .93 1475 10,473 10,619 .99 SPX close: 1459.90 Support: 1450 3,350 12,366 3.69 1425 1,832 11,774 6.43 1400 1,069 8,625 8.07 Maximum calls: 1500/18,895 Maximum puts : 1500/20,353 Moving Averages 10 DMA 1479 20 DMA 1494 50 DMA 1482 200 DMA 1446 ***** CBOT Commitment Of Traders Report: Friday 9/08 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 DJIA futures Net contracts; +791 (long) - 2,700 (short) Total Open Interest % 11.5% net-long 12% net-short NASDAQ 100 Net contracts; -3,427 (short) -2033 (short) Total Open Interest % 21.74 net-short 4.84% net-short S&P 500 Net contracts; + 46,014 (long) -52,185 (short) Total Open Interest % 21.36% net-long 8.95% net-short What COT Data Tells Us: Commercial positions in S&P 500 and DJIA remain at or above five-year extreme short levels. NDX commercials continue to go shorter. Small specs continue to build net-long extremes in SP00S but have given ground in DJIA and switched over to heavily net- short in NDX. Weak hands are shaking out, only a matter of time in our opinion before they crumble. (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 future market direction. Bullish: Fed's finished Benign government reports Oversold market levels now Disparity in overhead call/put ratios Bearish: Oil Prices COT reports *new data Friday Recent pre-warnings, downgrades Broad market's break of critical M/A support Recent Market leaders breakdown Technical chart indicators ************** MARKET POSTURE ************** As of Market Close - Tuesday, 09/19/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,789 10,750 11,350 ** SPX S&P 500 1,459 1,440 1,495 ** COMPX NASD Composite 3,865 3,650 4,000 OEX S&P 100 787 774 810 RUT Russell 2000 523 510 550 ** NDX NASD 100 3,756 3,500 3,850 MSH High Tech 1,029 980 1,055 ** BTK Biotech 720 690 780 XCI Hardware 1,477 1,400 1,520 GSO.X Software 456 430 470 ** SOX Semiconductor 1,028 940 1,140 ** NWX Networking 1,245 1,180 1,280 INX Internet 547 530 580 BIX Banking 606 580 635 ** XBD Brokerage 660 625 710 IUX Insurance 737 705 760 RLX Retail 834 805 890 ** DRG Drug 381 365 410 HCX Healthcare 795 765 815 XAL Airline 147 144 162 OIX Oil & Gas 316 296 332 Eight alarms were triggered in the past two sessions and all were at support levels. Tomorrow looks to be a critical day for the COMPX as it has rallied back, close to its last support alert at 3,900. A move above 4,000 could send the bears running. Lowering support (DOW, SPX, RUT, MSH, GSO.X, SOX, BIX, RLX) Lowering resistance (COMPX, OEX, NDX, MSH, GSO.X, NWX, INX, BIX) Raising support (INX). *********** OPTIONS 101 *********** What's My Plan? By Lee Lowell I often hear people say, "I think stock ABC is going to go up, I'm going to buy some call options." This is the end of the thought process and the investor ends up buying any old call option on stock ABC. No consideration was given to which month to buy, which strike to buy, whether implied volatility was high or low, whether earnings are due, if a spread play might be in order, how do the support numbers look, or maybe selling an option would be the most beneficial play. Unfortunately, TV infomercials can make options trading look glamorous and easy. That's not the case. Successful options trading is hard work. You may get lucky now and again, but if you want to be a successful, long-term options trader, you must put in some effort. I'd like to go into a little more detail about some of these steps that one should take before deciding to take an options position. For me, it always comes down to whether I would want to hold the underlying stock in my portfolio for a long time. For others, it may be pure speculation and a one-day hold. The bottom line is whether the stock will actually move in the direction you anticipated, but doing a little more preparation can possibly lead to an even bigger profit or less of a loss. Once I've decided on my stock of choice, I always check its historical and implied volatility. For those of you who follow my articles, you know that I'm a volatility addict. Check the "Options 101" history section during February and March 2000 for my previous in-depth discussions of volatility. In short, implied volatility tells us whether the option premiums on any particular stock are cheap or expensive when compared to its past. Each stock and its options will go through cycles of high and low volatility. You've heard this before, but your objective is to concentrate on option-buy strategies when volatility is low and concentrate on option-sell strategies when volatility is high. This increases your chances of success. Volatility is one of the components of any option pricing model. A low volatility input will yield a lower option premium and vice versa. If the implied volatility on the stock I like is at very high levels, then I look at selling puts or put spreads. This lets me sell some very juicy premiums while having the chance to buy the stock at lower levels. This doesn't assure me of ever getting ownership of the stock, but at least I've received a credit into my account for the effort. If I truly wanted to own the stock and the volatility levels were very high, then I would just outright buy the stock at that point. I could also institute a bull call spread which would let me buy and sell the high premiums at the same time and thus not expose myself to a volatility crush. On the flipside, if the stock's implied volatility is extremely low, then I would not hesitate to buy LEAP calls or whatever month I feel the stock will move by. But since my timing has never been good, I stick with the LEAPs. LEAPs also gives you the extra padding when your timing is off. You will lose some value but not as much as if you owned the stock outright. And when the stock starts to move up and volatility starts to increase, that is when I start selling covered calls against the LEAPs. (see previous article). This ties in with which month to choose when buying options. As you know, any long option is a wasting asset. The longer it takes for the stock to hit its profit point, the faster your long call will erode. With each passing day, your option gets a little cheaper. This makes it harder for you to sell for a profit. As I said before, my timing stinks so I will always choose an option with at least 6 months before expiration if I'm not going for the LEAPs. Most people like to play close-to-expiration options because they are cheap and the payoffs can be big. But if your entry level is off and your timing is off, and/or if you bought an overvalued option...then say goodbye to that option because decay will take over. You're just not giving yourself enough time for the option to mature. Then, your emotions begin to make the trading decisions for you. But if you are a short-term speculator who has lots of faith in your timing models, then by all means, stick with what works for you. I've had no luck. Buying the extra time gives you that margin for error if you happen to get in at a bad entry point or if some rumors may be floating about. Now what about which strike to buy? Again, most people like to buy out-of-the-money options because they are cheap and the returns can be astronomical. But the success rate is very low. The stock has to move a great deal in a short amount of time in order to make a profit. (See my articles on probability of profit). To get the real bang for your buck, stick with at-the- money or in-the-money options. They may cost more but you'll get more movement out of them and they won't be comprised of just all time value (extrinsic value). Another idea is to employ a spread trade. You can buy a call spread which will not only lower your break-even point but it will also lower your initial capital outlay. This is a great strategy to use that can deal with high volatility issues, and you can tailor the strikes to the level you think the stock might reach by expiration. Say for instance you like Copper Mountain Networks (CMTN) for a long-term play. The stock's been beaten down recently and looks very oversold. At the moment, the implied volatility on CMTN is on the high side, so buying outright calls can be a little risky if volatility starts to drop. You could purchase the longest dated ATM call which happens to be the March 2001 $40 call for 13 points. This makes your break- even point $53/share. If CMTN continues to go lower and volatility starts to fall, you will lose quickly. Instead, you can buy the longest-term ATM call and sell an OTM call against it as a spread. You could purchase the March 2001 $40 call and sell the March 2001 $70 call for about 8 points. If volatility starts to drop, then both options will lose value. The $40 call's loss will be somewhat protected by the $70 call's gain. The spread will cost $500 cheaper and the break-even point has been lowered to $48/sh. It's true that your profits are capped at 22 points, but you won't be kicking yourself until CMTN moves past $70/share. That's a healthy move from its current price and plus, who wouldn't be happy with a 22 point profit? The last items are fundamental and technical in nature. Being able to spot good support and resistance levels, having good timing and momentum indicators will certainly help you in picking a decent entry and exit point. Plus, with the free information overload that exists on the web today, you should always know when the stock has analyst meetings, earnings announcements, stock splits, etc. These actions are notorious for inducing big volatility moves. Use it to your advantage. So the next time you want to buy a call option, take a little extra time to check the details and remember your Options 101! ************** TRADERS CORNER ************** Volatility Revisited By Mary Redmond It can be informative to look at the historical and implied volatility numbers for several stocks which have recently made moves, as well as some which have been flat for a period of time. Four weeks ago, I wrote about the historical and implied volatilities of QCOM and CMGI. At the time, options of both stocks had implied volatilities which were lower than the six month average of the historical volatilities of the stocks. QCOM had an historical volatility of 97 in June and the QCOM October at-the-money call options had an implied volatility of 66. CMGI had an historical volatility of 94 in June and the call options had an implied volatility of 85.7. QCOM has moved up from $60 to $70 in the last few days and another 7 points today. The November 70 call options have an implied volatility of 72.4, and the January 2002 70 LEAPs have an implied volatility of 73.8. The stock moved up approximately 16% and the implied volatility of the near-term options moved up slightly under 10%. This may indicate that the market thinks the options will not necessarily move up as dramatically as the stock has in the past. QCOM had an almost unbelievable rise last Fall and Winter, during which the historical volatility of the stock rose dramatically. Last December, the historical volatility of QCOM was 115. This means that based on the past performance of the stock, QCOM had a probability of over 95% of moving within two standard deviations of 115% above or below its price at the time. However, like many high flyers QCOM fell dramatically during April of this year, and has been almost flat this summer. In April, the historical volatility of the stock was 103, although the stock had fallen substantially from its high of the year. The volatility stayed high through May and June, and dropped substantially in July and August. In July, QCOM had a historical volatility of 49.5, and in August the historical volatility was 49. It took several months before the stock had stayed flat enough for the historical volatility to drop significantly. At the end of August, the historical volatility of the stock was 49, and the implied volatility of the call options was 66. Usually, it is best to buy an option when the implied volatility of the option is lower than the historical volatility of the stock. However, the six month average of the stock's historical volatility was 78.8. Ideally, it could be best to buy an option when the implied volatility is lower than the stock's historical volatility, and the stock's historical volatility is lower than in previous months. If the stock makes a move higher, the options can be highly profitable. Volatility is a little like velocity. It measures how much the stock has moved on a historical basis. Volatility used in a combination with other fundamental and technical indicators can be a useful tool. One important point to remember is that a large move to the downside can increase the implied volatility of the options and thus their price. This means even if the stock is low, the options may be expensive. For example, Lucent is near a 52-week low of $36. The historical volatility of Lucent in August was 40.36. The November at-the- money LU calls have an implied volatility of 51. The six month average historical volatility is 49. You might think that the options would be undervalued by a large percentage, but Lucent made several large daily moves this year, which can add to the implied volatility of the options. It is interesting to look at the historical and implied volatility numbers for several other stocks, as it can give us an indication as to how these numbers change. For example, Sycamore Networks has only been a publicly traded stock for less than a year. The historic volatility numbers on this stock have a tendency to be on the high range. For example, in April the historic volatility was 210. In May, the historic volatility was 137. This is partly because the volatility numbers reflect the past trading range of the stock. This stock has not really had a flat period since it has been publicly traded. If you buy LEAPs, it is generally best to try to find stocks which make steady, gradual one or two point gains rather than stocks which have wild trading patterns of moving up and down 20 points in a day. The more volatile the stock the more expensive the option premiums. It seems ironic that we have just finished a year of worrying about the Fed’s cycle of interest rate hikes and now people are starting to worry about the Euro and oil prices. There have been so many different theories on the Fed’s next move that we have heard everything from another 50 basis point hike (highly unlikely) to a rate cut by next year. Some analysts claim that we could be heading for a recession. However, a recession generally means a period of negative growth in the GDP. The last recession we had was 1991. It seems extreme that the GDP could go from a rate of over 5% annually to a negative rate in a very short period of time. ****** Analysis of My Recent Plays By Scott Martindale Wow, we sure went through some ups and downs between August expiration and September expiration. Traders went from bullish to bearish, and now many are saying we’ve bottomed, while others say watch out for more downside. Monday resembled the kind of "final capitulation" I’ve been expecting in that even the "generals" (i.e., CSCO, INTC, ORCL) were selling off steeply. The technical picture was looking gloomy with lots of bearish talk, but it was also a bit oversold with lots of cash on the sidelines. Today was certainly encouraging. For me, it sounds like another good time for naked puts. I thought it would be instructive for today’s article to review some of my September options plays (mainly naked puts) to explore how I closed them out, other ways I could have closed them, and other plays on them. First of all, I really shied away from buying calls this past month. In fact, I had all of one call play: JNPR Sept 170’s, which I bought on August 16 when JNPR was at 166 for a lovely entry point. In retrospect, I could have won big on this, but I followed OIN’s advice to sell too soon, which I did at the first sign of weakness for a small profit. [This is one of the disadvantages of the high premium momentum stocks - the stock has to do more than go up; it has to go up faster than the rapid premium erosion.] Of course, JNPR soon launched to over $220, which could have given me a very nice profit, but I never got back in because I never saw a sufficient pullback and bounce. Instead, I concentrated on naked puts. As I’ve mentioned in this column before, my favorite plays are naked puts and put credit spreads. I also like buying stocks or LEAPS on pullbacks within an uptrend and writing covered calls or spreads against them on strength. Keep in mind that when you sell an OTM option (call or put) you make money if it goes in your direction, stays at the same level, or even goes slightly against you. So my focus is on selling puts, particularly during this just-completed highly uncertain September option period. The main point I’m making in going over these plays is that there are many ways to play naked puts other than simply selling them and waiting for them to expire. For September, I sold puts (some ATM and some slightly OTM) on nine different stocks: USIX, SCON, CNXT, MSTR, ICIX, DCLK, GSTRF, VIGN, and ORCT. I chose them from a watchlist made up of stocks that I like for their important technology, favorable technical picture, and high options premiums. I got ICIX directly from the OIN pick list, and DCLK and GSTRF were OIN picks as well. As it turned out, I got good pops on various "surprise" news events for ICIX, CNXT, MSTR, and VIGN so I could close them out early for $0.25 or better. This is the absolute best possible outcome for a naked put - you close out early on a good news run. Sometimes the run is short-lived, so it’s always best to close it out when you can. As for the other plays, GSTRF maintained good technical strength throughout, and SCON briefly violated the $20 support but quickly recovered, so I let both expire worthless. DCLK maintained good strength but couldn’t close above the $40 strike I had sold, so I bought it back for a small profit. ORCT closed below the $10 strike I had sold, but I chose to buy back only half the position and take some shares for selling covered calls (mainly because I think it is at a low-risk price right now). As for USIX, let me tell you about this one. I had been successfully writing puts against it for several months even though the technicals have not been good. I just didn’t believe that this important ASP company would go below $10, so I wrote the September 10’s on August 11th for $1.25 when the stock was bouncing off $11. Come September, it slid down to about $7, but I still couldn’t bring myself to close it out because I believed the stock was way oversold, which is something I always tell myself not to get caught up with. [Use a strict loss-cut strategy, I tell myself. It doesn’t matter what the stock SHOULD be doing - it only matters what it’s actually doing.] This time, however, I got lucky. USIX got an upgrade on expiration Friday, which gave it a last minute $2 boost back into the 9’s, and I actually closed out the position at 1/2 - the best price of the day. [Never depend on this sort of serendipity.] This week USIX is back down. This experience reminds me to never ignore technicals, no matter how oversold it is or how I feel about the company. I’m sure you’ve noticed that all of the plays were at $40 or less. Although I do write puts on higher priced stocks up to $200, I generally prefer to sell a greater number of contracts on a variety of stocks, and lower priced issues allow me to do that. If I was very focused on capital preservation and risk minimization, and I didn’t have a lot of time to watch my positions, there are ways to protect my downside. First, I could turn all naked puts into credit spreads, either by entering both legs simultaneously, or by "legging in" as the stock rises to increase the credit. [I could have done this on a few of my plays, but I chose not to do so this month. I’m more likely to play spreads on higher priced stocks.] Then, if the stock is closing on expiration below the sold strike (inside or outside the spread), I can choose either to close out the spread or take all or some of the stock for writing covered calls. If I choose to take the stock for covered call writing, I can reduce risk by buying a put to cover the downside of the covered call play, i.e., the stock losing value. Here’s an example using DCLK. DCLK closed on Friday at $38. If I had sold a Sept 40 put and chose to take possession, I would have control of the stock on Monday. Today, DCLK closed at $40.44. If I wanted to sell a call at the close on today’s strength, I could have sold the Oct 40 for $4.25 and simultaneously protected the downside by buying an Oct 35 put for $1.75. That’s a net credit of $2.50 with a $5 stock price depreciation risk. Alternatively, I could try to play the momentum a bit better. The high of the day was $41.94 about 30 minutes prior to the close. I might have been able to sell the Oct 40 call for $5 and buy the Oct 35 put for $1.50 for a net credit of $3.50. I could also hold out for more price appreciation on continued market strength. If the stock price carries up to near $45 before finding resistance, I might then choose to sell an Oct 45 call (for about $4) and buy an Oct 40 put (for about $1.50) to eliminate the downside risk altogether. Or I could sell an ITM Oct 40 call (for about $7.13) and buy either an Oct 40 put (for about $1.50) that eliminates the downside or a cheap Oct 35 put (for about $0.50) with a net credit (of about $6.63) that more than offsets the $5 stock price risk. ************************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=502 ************************************************************** ************* SECTOR TRADER ************* How Many Lives Does a Dead Cat Have? By Buzz Lynn sectortrader@OptionInvestor.com Only time will tell if today was a major turning point or a giant headfake. Following yesterday's selloff to 3700, today's rally brought us back above the 3800 level on the NASDAQ. In the meantime, it's given us one heck of a tradable rally. Those wondering if it can last are asking the right question. Yes, 1.7 bln shares looks good. So does a close above 3850 on the NASDAQ, which carries it nicely above support levels of 3700, 3800 and 3850. All these figures coincide with a bottom at the major trend line and the 252 day moving average (252? the rough number of trading days in a year - sometimes helpful, sometimes not). Most tech stocks, many sporting double-digit gains, were up on decent volume and signaled a nice change from the previous few days. OEX was also up nearly 9 points to close at 787.77. All this looks technically positive for the future. On the theory that nothing goes down (or up) in a straight line, you'll know from last night's Wrap that a rally wasn't unexpected and sure enough we got it. That's just natural, even when the bigger trend is pointed down. Forgive us for introducing the rain cloud to the freshly lit campfire. However, we have reason to remain cautious. First, the Dow did not participate, which weakens the case for a sustainable market wide reversal to the upside. Second, earnings warnings are still coming out as a result of weak foreign currencies and higher natural resource and production costs (a.k.a. high oil costs). Crude oil costs and anticipated tight supply are still on an upward trajectory. Dana (DCN) and Federal Mogul (FMO), both major suppliers to the auto industry, have warned over the last two days. One analyst yesterday downgraded Daimler Chrysler (DCX) and outright said they would not hit revenue projections. How long until Ford (F) and GM enter their confession? That would not be good for other suppliers including electronic (a.k.a. technology) manufacturers that supply the industry. For reference, DCX, GM and F have total sales of $492 bln. That’s more than three times the sales of CSCO, INTC, MSFT, DELL, ORCL, and WCOM combined. A smokestack manufacturing slowdown matters. Third, the VIX hasn't yet shown signs that investors are sufficiently worried. Fourth, the OEX and NASDAQ both have yet to break through their resistance points (the values from which they rolled over) from yesterday. They are still trading essentially even for the week. Growl! Bear noises from the Denver Bunch? Not really. While there are opportunities to put on profitable trades, currency and crude are a stronger influence than lines on a daily technical chart, which by the way have not yet given us the buy signal. Until the chart show us a clear bottom and upturn, we remain cautious on betting the farm on today's rally. That said, you might be wondering why we don't list any put plays for the downside. The simple answer is that NASDAQ and OEX are already oversold and waiting for the big trend buy opportunity to show itself. It doesn't mean you can't make day or even swing trades to the downside. It means that technically the markets are due to go up. Be patient. The entries will come once we see capitulation and/or 2 bln shares traded on a market-positive day. This is not the time to place a long-term bet. Consider sticking with hit and run plays until a larger trend emerges. ***Note we have the MACD set at 8,18,6 and the stochastic set at 10(3),5 for all our technical references in this section.*** ************** QQQ ************** QQQ - NASDAQ 100 $93.31 +3.44 (+3.00 this week) Yesterday didn't look so hot as the NASDAQ slid to critical support of 3700, which corresponded to a low of $88 for QQQ. If you bought in at that level yesterday at the close, congratulations. There's a medal of bravery waiting for you on Wall Street. Today's recovery was equally fantastic showing us that 3700 is a strong support level and that 3800 would provide little resistance. The Q's remained equally strong clawing back over the $90-$91 level to $93.31 at today's close. Can it last? Wish we had the answer. 1.7 bln shares looks good, but we've seen no capitulation yet nor heavy buying. Today looks like a technical bounce and the daily chart has yet to confirm any upside trend. Fact is smokestack company warnings may eventually trickle down to the tech sector. Today's pop may not last. On the other hand, NASDAQ and QQQ can't stay oversold forever. Resistance is at $94.50-$95.50, then $97.50 and $99-$100. Calendar Spread: Much as we want to get caught up in today's enthusiasm, we still encourage caution going forward. Technicals MACD and stochastic on a daily chart have yet to give us the buy signal. That said, we might yet get another opportunity. For those that entered a long leg yesterday as QQQ touched $88, tomorrow may be the day to sell a short leg if today's finishing action carries through the morning and rolls over. Selling the rollover may prove smart if the rest of the market shows weakness too. This could be especially fun for those using stochastic and MACD to trade in and out of the short leg on a 30 or 60-min chart. Support is at $90- $91, then $88. That might be a good time to enter the long leg. Resistance is at $94.50-$95.50, then $97.50 and $99-$100, which may make a good time to sell the short leg. Just make sure you sell the rollover first. BUY CALL JAN- 90 QVQ-AL OI= 6907 at $12.38 SELL CALL OCT- 95 QVQ-JQ OI= 5735 at $ 4.13, ND = 8.25 or less SELL CALL OCT- 97 QVQ-JS OI= 6710 at $ 3.25, ND = 9.13 or less SELL CALL OCT-100 QVO-JV OI= 6302 at $ 2.13, ND =10.25 or less Long Call: Sometimes we don't emphasize it enough in this section but bounces off support, not just a stochastic/MACD move, make excellent entries. We have yet to see a confirmation on a daily technical chart that signal us to enter. However, $88 support mid-day yesterday might have made a nice target at which to shoot. If you didn't get in there, no sweat. You may again have an opportunity. Today' may have been only a technical bounce wherein QQQ resumes the downward trajectory tomorrow. While you can still target shoot at support of $90-$91, then $88, we still favor a short stochastic cross over of the long stochastic and 20% level, followed by a MACD crossover for confirmation to make an entry. We've resisted offering puts as long as the technicals indicate oversold, but you are still welcome to play them for quick hit and runs. We just favor sticking to the bigger trend patterns for a good call entry. Resistance is at $94.50-$95.50, then $97.50 and $99-$100 BUY CALL OCT- 90 QVQ-JL OI= 4510 at $7.25 SL=5.00 BUY CALL OCT- 95 QVQ-JQ OI= 5735 at $4.38 SL=2.50 BUY CALL OCT-100 QVO-JV OI= 6302 at $2.19 SL=1.00 Bullish Put Credit Spread: Still waiting for the eventual turnaround from the oversold position on the daily chart. Gunslingers could have entered the badlands yesterday as the QQQ touched $88, but it would have taken nerves of steal and a gamblers outlook at that moment to pull the trigger. We favor waiting for a stochastic reversal over the 20% mark and a MACD crossover to the positive side of zero. Remember, this is supposed to be a safer way to play an upward trending market without the risk of a naked put. Wait for the signals. Be sure to cover before the maximum threshold of pain if the trade goes against you SELL PUT OCT-90 QVQ-VL OI=10840 at $3.00 BUY PUT OCT-85 YQQ-VG OI= 7496 at $7.75 Net Credit = $1.25 or better Average Daily Volume = 18.8 mln ************** OEX ************** OEX - S&P 100 $787.77 +8.84 (-2.00 this week) A tough day for the OEX yesterday took it down hard to 778.93 right at previous support set in June, July and August. You could guess that it might have bounced today and you'd be right. Despite a 60-min technical chart showing a nice entry for the longs today, the daily chart has yet to tell the same story. We are still not convinced that that a long entry is available based on the daily chart, but it is likely near given the deeply oversold position of the MACD and stochastic. That said, negative fundamentals in the form or expensive oil and currency risk remain at the forefront of investors' minds and can easily overpower a chart that looks like it should move up. Keep in mind too that the OEX has a few more smokestack businesses in its composition than the NASDAQ and is thus more susceptible to earnings warnings, especially if the car companies warn. Then it's look out below! Our inkling is to remain cautious until the short stochastic crosses above 20% and the long stochastic line. We'd like to see a MACD confirmation. Support is strong at 783, then 775-780, while resistance is at 791, 798, and 800. Long Call: Wish we had a different story to tell, but we think given the earnings warnings based on currency exchange rates and oil prices may keep the index pinned for the moment even if it is in technically oversold territory on the MACD and stochastic indicators of a daily chart. While today presented a juicy recovery that could have made us money had we been brave enough to buy on Friday's close, it moves a bit closer to gambling if we don't see technicals to confirm it. Fact is there hasn't been blood in the streets followed by a 2 bln share upward moving day, nor has the VIX popped to 24 yet, which indicates still some investor complacency at current levels. In short, we don't know yet if today was a headfake or a real recovery. That's why we'll wait for a technical signal from MACD and stochastic first before entering. BUY CALL OCT-780 OEZ-JP OI= 266 at $25.00 SL=17.50 BUY CALL OCT-790 OEZ-JR OI=1864 at $17.88 SL=12.50 BUY CALL OCT-800 OEX-JT OI=2661 at $13.25 SL=10.00 Bullish Calendar Spread: Tap tap tap. That's the sound of our fingers drumming the desk waiting for a technical bullish turnaround. Actually, if you were brave enough to take it, a target shot entry at 780 support would have been terrific. However, it was looking pretty scary for a long entry yesterday as OEX hit that level. For those already in a long leg of he spread, tomorrow if we see an OEX rollover in the morning following today's euphoria, that might make an excellent time to sell the short leg. That of course assumes that earnings warnings are going to keep pressure on the indices. To heck with stochastic and MACD. Fundamentals can overpower them. That's why we'll wait for a clear reversal from oversold on the daily stochastic and MACD chart. Remember our job as spread traders is to buy cheap and sell dear while letting time value decay to our benefit. Support is at 783, then 775-780 - a possibly good time to buy long. Resistance is at 791, 798, and 800 - possibly a good time to sell short. BUY CALL MAR-800 OEX-CT OI= 10 at $49.25 SELL CALL OCT-800 OEX-JT OI=2661 at $13.25, ND=36.00 SELL CALL OCT-820 OEX-JD OI=5230 at $ 5.50, ND=43.75 Bullish Put Credit Spread: Tap tap tap. Same sound - still drumming. Somebody out there must have taken advantage of this trade yesterday when the OEX looked pretty dark and gloomy at 777. Unfortunately it wasn't me. While it may look like support is firm at 775-780, the MACD and stochastic haven't yet given us the reversal buy sign form their currently oversold position. Keep in mind this is still a risky trade if you don't understand it. It hinges on a level of comfort that the OEX will not fall below 775 and that we get to keep the entire credit at the end of the month. It's a bit like a naked put only with some, rather than unlimited, protection. Unfortunately, the credit has narrowed to under $0.50 and this play is no longer worth the effort. Average Daily Volume = 1266 ************* DAILY RESULTS ************* Index Last Mon Tue Week Dow 10789.29 -118.48 -19.23 -137.71 Nasdaq 3865.64 -108.71 139.12 30.41 $OEX 787.77 -10.84 8.84 -2.00 $SPX 1459.90 -21.30 15.39 -5.91 $RUT 523.31 -14.20 6.63 -7.57 $TRAN 2605.61 -51.30 -14.55 -65.85 $VIX 22.11 1.08 -0.90 0.18 Calls IDTI 103.31 5.25 7.06 12.31 Another all-time high QCOM 77.50 3.56 7.69 11.25 Welcome back CDMA ITWO 182.25 -2.75 12.81 10.06 Breakout above $180 CFLO 127.88 -2.13 7.63 5.50 Looking strong CHKP 156.25 -1.00 6.00 5.00 Close to breaking out CAH 92.31 1.34 2.97 4.31 New, steadily climbing AGIL 79.00 2.00 1.75 3.75 Higher lows and highs YHOO 108.06 -0.81 3.00 2.19 Closed over 10-dma SEBL 100.88 1.75 0.13 1.88 Consolidate today, entry? PALM 50.81 1.00 -0.31 0.69 Resting, watch for a run PEB 106.75 -3.28 3.53 0.25 Profit taking gives entry CORR 60.19 -2.06 1.81 -0.25 Watch for profit taking ABGX 79.13 -2.56 2.06 -0.50 Holding up, entry point AFL 60.31 -0.69 0.13 -0.56 Stable at the $60 level CMRC 69.00 -5.00 3.81 -1.19 Dropped, lost momentum NT 71.00 -4.19 3.00 -1.19 Retesting support at $68 CDWC 79.25 -4.69 0.44 -4.25 Profit taking blues Puts PCS 40.81 -2.06 -2.56 -4.63 Approaching 52-week low DIGL 70.81 -4.53 2.47 -2.06 Lower highs and lows EPNY 82.25 2.00 -3.75 -1.75 New, close to breakdown MMM 83.88 -1.94 0.69 -1.25 No reversal yet! UK 36.00 -0.03 -0.56 -0.59 The falling euro hurts LVLT 74.00 -4.69 4.13 -0.56 Telecoms still trending SCMR 106.56 -4.88 5.94 1.06 Concerns are rampant CMTN 44.69 -2.13 3.81 1.69 Short covering rally? PWAV 42.06 2.63 2.38 5.00 Rebound, possible entry CREE 124.69 -3.44 12.19 8.75 Dropped, upgrade too much 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: ***** CMRC $69.00 +3.81 (-1.19) CMRC and ARBA battled for the spotlight at their respective conferences today. The press releases flowed in an unending stream as the duel raged on. Some of the highlights included a two-year marketing and sales agreement with Compaq Computer (CPQ), which makes CPQ the preferred hardware provider and increases CMRC's product exposure. There was also a deal with Computer Sciences (CSC) in which CSC will use CMRC's software to create a private exchange of its own. Commerce One announced too that a pilot program with Boeing (BA) to connect supplier to "Exostar", an Internet exchange for the aerospace industry, was successfully completed. Amidst the round of declarations, USB Piper Jaffrey restated a Strong Buy and raised annual estimates for the company. DLJ also reiterated a Buy recommendation. The exposition coupled with the Internet revival bumped CMRC off its recent bottom support of $65. The bounce returned CMRC to a respectable position at the converged 5 and 10 DMAs. Nonetheless, it's time to exit CMRC. The conference is history and CMRC just isn't demonstrating its earlier spunk. Perhaps, the share price will perk up next month. The company confirmed it's reporting earnings on October 19th, after the market close. PUTS: ***** CREE $124.25 +11.75 (+8.75) Yesterday was business as usual for CREE as the stock continued to encounter resistance at the 5- and 10-dma. After some early morning stability, the stock headed lower and spent the rest of the day in that direction. As could be expected, it managed to find support above the $110 level we mentioned on Sunday. That level was further reinforced by CREE's lower Bollinger band. Today, with a strong day for Tech stocks and coverage initiated by First Union Securities for CREE at a Buy, the stock took off on high volume, closing up $11.75 or 10.44%. In doing so, the stock closed above its 5- and 10-dma for the first time this month, which might suggest CREE's downtrend may be over. While confirmation is still required and volume was about average today, the oversold condition of the Semis and the possibility of a recovery caused us to move on. ***********************ADVERTISEMENT************************ Up To 60% Off At EverythingWireless.com The online super-store for your active lifestyle. Select from the largest range of accessories and products you use every day including Cellular and PCS phones, batteries, chargers, hands-free kits, wireless data products and more. http://www.everythingwireless.com/wireless/homepage?id=1601002 ************************************************************ FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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The Option Investor Newsletter Tuesday 09-19-2000 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/091900_2.asp ************************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=495 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** IDTI $103.31 +7.06 (12.31) The bulls are stampeding with IDTI leading the herd. IDTI announced a product improvement yesterday, along with the extension of an existing strategic alliance with Arrow Electronics (ARW). The two separate announcements helped IDTI to buck the overwhelmingly negative trend in the Chip sector yesterday, which positioned the stock for a breakout today. And, breakout might be an understatement. IDTI charged to a new 52- week high today on volume that confirmed the move. In fact, over 1.5 times the ADV changed hands during IDTI's rally today. If we get any extension of today's rally in the Tech sector tomorrow, adventurous traders might consider entering IDTI at its current levels early Wednesday morning. If, however, the NASDAQ heads southward again, watch for IDTI to stabilize before jumping in. Aggressive traders might look near the $100 support level for entry points if IDTI pulls back tomorrow. The stock has held up relatively well in spite of the NASDAQ's weakness; remember we have the possibility for a split announcement this Friday. ITWO $182.25 +12.81 (+10.06) DB Alex Brown reiterated their Buy rating on ITWO Monday morning, citing the B-2-B giant's prospects for a blowout third quarter and its building business momentum. But, despite the analyst praise, ITWO continued to slip lower along with the NASDAQ. However, after ITWO bounced off its support level at $172 for the third time this afternoon, the stock was launched into orbit. In the final hour of trading, ITWO actually eclipsed the $180 level on a surge of buying volume. If today's rally in the Tech sector proves to be more than a dead-cat-bounce, aggressive traders might look to enter new positions in ITWO early tomorrow morning as the stock broke above resistance at $180. Watch the direction in the NASDAQ carefully before playing ITWO. If the Tech sector pulls back, consider playing a bounce off ITWO's newly established support at $180; make sure to wait for the Tech bulls to return before buying any bounce. If the Tech sector gathers momentum early tomorrow, conservative traders might look to enter ITWO on a rally above $185, after confirming strong volume. AGIL $79.00 +1.75 (+3.75) Despite a down day for the market yesterday, AGIL managed to buck the trend, gaining $2 on almost 4 times the ADV. After a brief visit near the 5-dma to start the week, the stock quickly bounced as it was bid up during amateur hour. While it spent the rest of the day digesting its morning gains, volume increased right up into the close. Today was a continuation of AGIL's up-trend as an early morning visit near the 5-dma led to sideways trading for most of the day until the close as it was lifted higher by a rallying NASDAQ on twice the ADV. AGIL's up-trend has been strong ever since the bounce last Wednesday. A continuation of that up-trend will see bounces off the 5-dma (now at $75.85) as aggressive entry points. AGIL also has strong support near former resistance at $75 and also the 10-dma at $73.56. The stock's next hurdle is the $80 level. A breakthrough $80 on strong volume would confirm upward momentum allowing for a conservative entry. CFLO $127.88 +7.63 (+5.50) CFLO managed to hold up well in yesterday's Tech downdraft as it gave up only $2.13 on average volume. Today saw the stock erase yesterday's loss and then some as it gained $7.63 or 6.34% on over 160% of ADV. Today's trading provided entry points for aggressive and conservative traders alike. A morning dip near the 10-dma at $115.81 led to a strong bounce as buyers came in aggressively and bid the stock up the rest of the day on increasing volume. In doing so, resistance at $125 was taken out, allowing conservative traders to participate in the rally. CFLO encountered resistance at the $130 level, which will be the next hurdle to overcome. As long as the up- trend holds, look for aggressive entries on bounces off the 5-dma now at $121 and near 10-dma, which has moved up to $116. Those who want to wait for confirmation before entering will watch for CFLO to break through $130 with conviction. Entries can also be found on bounces off support at $125 and $120. NT $71.00 +3.00 (-1.19) Like Friday, NT encountered resistance at its 10-dma yesterday. Opening at that level, the stock spent the rest of the day selling off to close down $4.25 on almost twice the ADV. Despite this, NT found support at $67 and closed near its 100-dma at $68.83. Today saw the $67-68 area continue to provide support as NT took back some of its gains to close up 3.86%. Volume today came in lighter than yesterday, at 120% of ADV and it appears that the 10-dma, now at $71.21, continues to act as resistance. Conservative traders will want to see NT break through this moving average before entering the play while aggressive traders may want to target-shoot bounces off the $67-68 area but confirm direction on a bounce with volume. On Monday, the company announced new DSL solutions to make DSL Service more readily available. A possible reason for Monday's down day aside from a weak Tech market is a lawsuit against ATON by Resonate, who claim that ATON has infringed on one of their patents. ATON is currently being acquired by NT. CHKP $156.25 +6.00 (+5.00) On Monday, CHKP unveiled VPN-1/ FireWall-1(R) SmallOffice, a software solution that extends the company's SVN architecture, to bring comprehensive Internet security to small businesses. They're integrating the new product with high-performance, low cost security appliances, the first of which are also being announced today by CHKP's partners Intrusion.com and Ramp Networks. The news was barely enough to keep CHKP afloat for the day, as it fought the weak NASDAQ. The NASDAQ closed down 108 points, but, CHKP showed its strength closing down only $1 for the day at $150.25 on average volume. Tuesday morning, we quickly sold-off to a low of $147.69, piercing below the 5-dma and the 10-dma (currently $149.60 and $148.60, respectively), before smartly bouncing back to a mid-morning high of $152. As we approached the half-way point of trading, CHKP was trading just below the flat line on quiet volume. But, as the Nasdaq goes so goes CHKP, as was evident by its continued ascent all afternoon and into the closing bell. For the record, CHKP finished the day at $156.25, up $6.00 for the day on average volume, not too far from its old high at $159. Watch for a continued move to the upside through the old high on stronger volume as an aggressive way to gain entry to the play. If the market rests, look for CHKP to pullback to its 5-dma and 10-dma, currently $149.60 and $148.60, respectively. Use a pullback to the above mentioned levels combined with a volume supported move back up as a potential entry point. AFL $60.31 +0.13 (-0.56) Stable Mabel! AFL got off to a rocky start on Monday, getting caught up in all the selling that took place. In early morning trading, AFL pierced below its 5-dma at $60.60 to an intraday low my mid-morning of $58.81, just below the 10-dma at $59.10. Investors used the piercing of the 10-dma to begin buying AFL once again and push the stock up to $60.19 by days end, down only -$0.69 for the day. Volume was above normal, logging in at 1.38 mln shares on the day (3.1 times ADV), increasing as we headed towards the closing bell. Tuesday morning, AFL announced they filed a shelf registration statement with Japanese regulatory authorities for the issuance of up to Y100 billion (approximately $930 million at the current exchange rate) of yen-denominated (Samurai) bonds. AFL anticipates it will use the proceeds of any issuance of the yen-denominated bonds to repurchase its stock, or for general corporate purposes. Did duck season open Tuesday? AFL opened in negative territory, but investors decided that it might be time to take a little more duck. They ran AFL to a new high of $62.25 early Tuesday morning, before settling it back to a mid-morning level $61.63, comfortably above its 5-dma currently at $60.60. Buyers stayed quiet in AFL as the day moved on, focusing more attention on the busy Tech sector. AFL closed just above the flat line at $60.31, up $0.13 for the day, just below its current 5-dma at $60.60. Overhead resistance is now at today’s intraday high of $62.25. Traders should look for a pullback to the 10-dma at $59.10, coupled with a volume backed bounce, as an ideal spot for entry to AFL. Another alternative may be to watch for AFL to push above $62.25 on strong volume, thereby creating a breakout scenario, to enter a trade. ABGX $79.13 +2.06 (-0.50) On Monday, they rested! ABGX and the rest of the Biotechs took a big breather, in sympathy with the Nasdaq on Monday. ABGX slipped into negative territory immediately, as the market opened cautiously. As we approached mid-day, ABGX had logged in an intraday low of $77, down over $2 for the day. Later in the day, ABGX retested the earlier low and pierced through dropping to a low on Monday of $76.69, just above its current 5-dma at $76.20 and by the close we had settled down $2.56 at $77.06 on slightly heavier volume. The Nasdaq and the Biotechs in general got off to a solid start on Tuesday. ABGX saw some good buying in early trading reaching as high as $80.50. However, as the morning pressed on, the buyers weren't quite as visible and supportive and ABGX slipped to $77.50, just below its 5-dma currently at $77.80. ABGX closed in positive territory by the end of the day, up $2.06 to finish at $79.13 for the day on lighter volume. Overhead resistance still resides at last Thursday's high of $84.50, and again between $90 and $92. A conservative approach would be to watch for a pullback to the current 5-dma or 10-dma (currently $77.80 and $74.60, respectively) with a nice bounce on volume as ideal entry. Pay close attention to market sentiment and direction at this time as you consider opening new trades. SEBL $100.88 +0.13 (+1.88) Monday morning, SEBL announced Great Plains (GPSI), a leading provider of e-business solutions, intends to expand its partnership with SEBL. The news coupled with Mr. Siebel's appearance on CNBC later in the day and Mr. Siebel's keynote address at Bank of America's investment conference helped fuel the buyer's fire in SEBL for the majority of the day. It left the gates running Monday morning touching a high of $103, breaking through old resistance of $101.25, before getting caught up in the negative sentiment in the NADSDAQ. We saw SEBL pullback to a low of $97.50, before investors boosted the stock back above the flat line by the closing bell. When all was said and done Monday, SEBL finished up $1.75 at $100.75 supported by volume of 10.97 mln shares (1.33 times ADV). Today, SEBL announced Fujifilm is standardizing its customer-facing activities in France on SEBL's e-Business Applications. Trading was somewhat volatile Tuesday morning, as SEBL traded in a $3.50 range touching a high of $103.31 and a low of $99.75. By mid-day, trading was calm and SEBL was down $0.63 at $100.13 on light volume. Even though the Nasdaq kicked it into gear today SEBL needed a day of rest and it finished the day quietly, up $0.12 at $100.88 on lighter volume. Overhead resistance now sits around $103. You may want to wait for a break through that level with strong volume before jumping in to this trade. Alternatively, look for a light volume pullback to the 5-dma or 10-dma (currently $95.50 and $94.60) coupled with a strong volume bounce and good market sentiment as a conservative way to enter this trade. CORR $60.19 +1.81 (-0.25) Going along for the ride with the broader markets this week, CORR dropped yesterday to close near its low of the day before rebounding nicely today. The strong move this morning came right at the open and wasn't tradable, but when the price retested yesterday's lows this afternoon, it provided an acceptable entry for the target shooters. This afternoon's bounce came just above $58, and the recovery into the close kept CORR above its 5-dma (currently $59.19). Volume has been dropping this week, and today saw slightly less than the daily average number of shares trading hands. This made for the lowest volume in the stock since August 24th. That is not a good sign, so watch out for profit taking in the days ahead. Momentum runs are fueled by buying volume and when it disappears, it doesn't take long for the rocket to come crashing back to earth. Rather than buying dips at support, the most prudent entry strategy for now looks like buying strength. Wait for CORR to blast through the $62 resistance level with strong volume before initiating new positions. That way you won't get stuck trying to catch a falling knife. PALM $50.81 -0.31 (+0.69) As we mentioned last weekend, PALM was due for a little consolidation and that is exactly what we have seen this week as the stock has remained between $49-51 while the broader markets sold off yesterday and recovered today. Product related news today didn't have much of an effect either, with licensee HandSpring announcing they would be producing two new PDAs, one color, and one with a cellular phone module. Production for these little gadgets is barely keeping up with the strong demand, as more and more consumers find they can't live without them. Price action in the PALM's stock is another matter altogether, though. After running from $40 to $50 in a little more than a week, consolidation was needed and it looks like PALM could be getting ready for another run, market permitting. Dips to the $49-50 level still look buyable, but preferably with stronger volume on the bounce than we have seen so far this week. The 5-dma (now at $50.38) is reinforcing the chart support, so this may be a good level to target shoot. Although the gains in the broader market were solid today, we need more than one day to justify a rally. Conservative traders will want to wait for a break through the $53 resistance level on solid volume before jumping into the play. PEB $106.75 +3.53 (+0.25) Profit taking yesterday served up an attractive entry point, for those with cast iron stomachs. After selling off sharply towards the close, buyers stepped up to support the price at the $102 level, right at the 5-dma. The buying continued this morning, as amateur hour enthusiasm drove PEB up to almost $106 before traders stopped to catch their breath. After trading flat for much of today's session, our play caught another wave of enthusiasm as it surged through intraday resistance in the final hour, pushing the stock over $107 just before the close. The volume this afternoon was beautiful as it ramped up throughout the afternoon, giving nice confirmation to the price rise. The problem is, that even with the attractive volume trend, today's volume came in at only half the ADV, making us suspicious that there may not be a lot of enthusiasm to drive our play higher. The 5-dma (now at $104.31) should provide mild support with the 10-dma (just above the $100 support level) providing a stronger place to target shoot new entries on pullbacks. If you would rather buy strength, look for a breakout over resistance at $110 as your trigger point. Keep an eye on the volume, as it needs to be stronger to move us significantly higher. QCOM $77.50 +7.69 (+11.25) Our timing was on the money! QCOM's depressed share price enticed the bargain hunters! Shares of QCOM soared as investors took another chance on Qualcomm's CDMA technology. Friday's gains extended into Monday after Mark Roberts at First Union Securities gave QCOM a boost. He upped his recommendation on the stock to a Strong Buy from Buy and commented on upcoming news events. Recall QCOM broke free from the mighty shackles at $65 after money manager, Graham Tanaka, predicted a strong comeback for QCOM last week. The powerful momentum easily cracked the first line of opposition at the 100- dma ($71.08). The volume blazed on again today as QCOM propelled upward towards the $80 objective. If the trading activity continues to reach two or three times the ADV on the uptake, then this resistance level shouldn't be too difficult to overcome. Still be aware that QCOM hasn't seen the upside of $80 since early June. Support is solid at the 10-dma ($64.73), but pullbacks to the 5-dma ($68.03) are more likely if QCOM retraces. Also consider entries on high-volume moves off $75 and the current level. CDWC $79.25 +0.44 (-4.25) The profit taking mongers took some off the top of CDWC this week. But you can't really blame them. CDWC hit four consecutive highs last week and stretched even higher to $86.13 on Monday. Plus, stocks move in cycles, which provide buying opportunities. So, now we have the opportunity to take an entry into this recovery play. CDWC is currently situated between the 10-dma ($78.98) and the 5-dma ($80.60). The above-mentioned technical lines have proven to be supportive indicators on the stock's recent climb. Take a look at a daily chart for visual confirmation. Therefore, a definitive bounce off this level backed by respectable volume is considered reasonable confirmation that the momentum is intact. In the news this week, the company announced the launch of CDW Solutions, a 'magalog'. The magazine-style editorial is an industry first and perhaps best explained by CEO, Michael Krasny, who said, " As a multi-brand technology source, we have a unique place in the industry -- we've got our finger on the pulse of both the manufacturers and small to medium-sized business customers. We're translating all that knowledge into a brand new magalog that provides timely technology information and details on new products in the market." YHOO $108.00 +2.94 (+2.13) After an entry opportunity yesterday afternoon, YHOO got a boost from the press today. YHOO announced Tuesday morning that Barnes&Noble.com(BNBN) would replace AMZN as the featured merchant on the portal's site. But, AMZN won't go away feeling bad, as an official called it "mutual." The press injected some buying momentum in YHOO, as investors see this new alliance as offering YHOO a valuable partner in the offline world, being Barnes & Noble(BKS). Trading action today gave YHOO an almost 3% boost, closing over the 10-dma of $106.88 for the first time since August 25th. Volume, however, was light at 4.8 mln shares. We would watch for YHOO to hold its 10-dma and also to make a move higher through $110. Entries may be attained on pullbacks to the 10-dma, or $106, accompanied by a bounce. More conservative traders may want to wait for a break above $110. Once again, this is a stock for quick intraday trades based on the recent rolling pattern. ******************* PLAY UPDATES - PUTS ******************* CMTN $44.69 +3.81 (+1.69) The Amex Networking Index ($NWX) rose a solid 3.3% today, on the back of the broader Tech sector. For its part, CMTN benefited from the bounce in the Network Equipment sector and rose along with the NASDAQ. However, it's been a bearish month for CMTN thus far in September, and today's bounce might have provided a solid entry into our short play. If the Tech bears return tomorrow to wreak havoc in the Telecom Equipment sector, aggressive traders might look to enter new put positions in CMTN near its current levels. The stock faces major resistance just above at the $45 level, which might provide a solid entry into the play should CMTN rollover. However, wait for the sellers to refute any CMTN attempt to break above $45. The more conservative traders might wait for weakness to return to the NASDAQ before entering new plays. Consider entering the play if CMTN slips back below support near the $44 level, or wait for the stock to break down below support at $43 for a more conservative entry. UK $36.00 -0.56 (-0.59) The bears have taken complete control of the Chemicals sector. Despite the bloodletting in the Tech sector yesterday, the Chemicals sector, which is generally a place of solace for scared investors, slipped further into the sludge. The main culprit in the Chemicals continued slide, and UK for that matter, is the slumping euro. As we saw today, the euro fell to yet another new low, which in turn sent UK to another new low. Because of its vast multinational operations, UK is sensitive to the movement in the euro, which will be the telling indicator for our put play going forward. If the euro continues to slide lower tomorrow, traders might consider initiating new positions in UK early in the day. Otherwise, wait for UK to fall below its intraday low of $35.81 before entering the play. Volume continues to turn up during UK's down days; make sure to confirm any fall lower with above average volume. PWAV $42.06 +2.38 (+5.00) Monday saw PWAV find support at $36.75. From there the stock moved higher, bucking the trend of a down market to close up $2.63, this kept PWAV's price below the 50-dma and resistance at $40. Today the stock was helped by a rallying NASDAQ. Gapping up on the open, PWAV spent most of the day trading in a narrow range before some end of buying in the last hour of trading closed the stock up 5.94%. Despite this, volume came in at roughly half the ADV, suggesting a lack of conviction on the part of the buyers. At least for today, there were more buyers than sellers. Up ahead is strong resistance in the form of the 200-dma at $42.65. A failure to break through this level could be a great entry point but make sure volume confirms a rollover before jumping in. Above that the next level of resistance is at $45. PCS $40.81 -2.56 (-4.63) We love it when a plan comes together! PCS is moving according to script. Following the big volume move down on Friday, the sellers continued their assault on Monday. The negative sentiment in the Tech sector definitely worked in our favor. Although volume was not as robust as it was on Friday, PCS did slip to $43.38, down $2.06 for the day. We had been looking to cross below the intraday low of $44.06 set back in April; it happened Monday! It felt like the shorts were covering a bit of their positions early Tuesday morning as the Tech sector bounced off of the lows of Monday. PCS hit a high of $44, looking like the beginning of a solid day, before stalling and dropping all the way to $41.50 on increasing volume as we approached mid-morning. The selling continued and PCS got hit to the downside by $2.56 on 7.28 mln shares (2 times ADV) to finish the day at $40.81, a new low for the year. The selling could become more aggressive from here as there is no near term support on the charts, so traders may want to enter the play just off an intraday bounce back to the $41.75 to $42.00 area. Watch for a short-covering rally or potential dead-cat bounce rally from here as a more conservative way to enter the trade. LVLT $74.00 +4.13 (-0.56) Don't let today's strong gains fool you. LVLT is still in a downtrend and today's action looks like little more than an oversold bounce. You know what those are good for don't you? That's right, entry points on put plays! While we didn't get an entry today (LVLT closed right at its high of the day), market weakness in the morning could provide just such an entry. Sentiment in the Telecom sector hasn't improved, and until it does, stocks like LVLT will likely continue to languish. Volume has been increasing for the past 3 days, with today's action more than 50% above the ADV. The 50-dma ($74) and the 30-dma ($72.38) look to be converging near $73, and this level will likely be pivotal going forward. If LVLT can recover, look for that level to act as support, but further weakness will likely turn it into resistance. Yesterday's drop punctured the 50-dma and even with today's big gain, LVLT still ended the day below this level. Look for a rollover from the vicinity of the 50-dma to provide a good entry point going forward. It won't help the bulls case that this level is backed up by more resistance at the 5-dma ($74.88), the 10-dma ($76.44), and the 100-dma ($78.50). Unless there is a strong rally in the broader markets, LVLT will have a hard time pushing higher. MMM $83.88 +0.69 (-1.25) The list of companies that are warning about their upcoming 3rd quarter results continues to grow, and we are just waiting for MMM to show up at the confessional. Since attempting to break above the $97 level two weeks ago, the stock has been caught in a pretty strong downtrend. Finding temporary solace at the $84 support level near the end of last week, it looked like our play might actually be trying to put in a bottom. Well that all changed at the open yesterday as MMM cratered down to solid historical support at $82, before beginning a very gradual recovery. While the price has been gradually moving higher since yesterday's open, we are nowhere near seeing a reversal, with the 5-dma (now at $84.75) continuing to exert downward pressure. The $84 support level is now acting like resistance, and continued market weakness could be just the catalyst needed to push MMM down towards its 52-week low, which sits at $78.19. If MMM comes to the party and admits to problems with their earnings estimates, then look out below. With the amount the stock has fallen in the past 2 weeks, relief buying could appear at any time, especially if the DJIA can mount any kind of recovery. Use any such event as an entry point, buying puts when the stock runs out of steam and begins to roll over at resistance, first at $85, and then the declining 10-dma ($87.63). As always, keep one eye glued to the volume chart; it provides a wealth of information as to the strength of any move, whether up or down. SCMR $106.56 +5.94 (+1.06) The market jitters over lowered sales demand from the major telecoms continued to rattle the network equipment stocks on Monday. The downturn extended to the fiber- optic companies like CIEN and of course, SCMR. As we mentioned in earlier write-ups, some concern is also related to vendor financing risks. SCMR subsequently lost 4.6%, or $4.88 on strong volume. Today however, SCMR reversed. The share price rose above $106 on bullish comments from Max Schuetz, an analyst at Thomas Weisel Partners. It's also likely that SCMR got a shot of adrenaline from today's technical rally in the NASDAQ. Despite it all, SCMR remains bound by overhead resistance at the 5-dma ($107.11) and $108. High-volume moves off the current level offers reasonable entries into this momentum play. If you're more adventurous, look for intraday peaks to take a position. Expect some resistance near the century mark. Keep stops tight. DIGL $70.81 +2.47 (-2.06) The grave concerns about a spending slowdown among the phone companies dragged the Networking stocks down further on Monday. DIGL was a big recipient with a $4.53, or 6.2% loss! More importantly, the grim sentiment jump-started the downward momentum. DIGL slid below $70 by mid-afternoon and then dived to $66.50 on strong volume. The weak close at $68.34 was a nice touch, too. The last minute bounce off $68 today can't be ignored, but don't throw the baby out with the bath water just yet. For one, upper resistance is firmly established at the 10-dma ($74.86) and is currently developing near the 5- dma ($72.09). The ceiling is getting lowered. This effectively may push DIGL lower or it could narrow the trading range. Therefore, wait for definitive confirmation before taking additional positions. Only time will tell if the bearish move through last Wednesday's low of $68 will ultimately set DIGL up for more losses. ************************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=503 ************************************************************** ************** NEW CALL PLAYS ************** CAH - Cardinal Health Inc 92.31 +2.97 (+4.31 this week) Cardinal Health is the nation's leading provider of products and services that support the health-care industry. They operate under four distinct business segments: Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and Services, Pharmaceutical Technologies and Services, and Automation and Information Services. Clients include independent and chain drugstores, hospitals, alternate care centers, and the pharmacy departments of supermarkets and mass merchandisers. A series of analyst upgrades catapulted CAH to new heights in recent sessions. The dynamic momentum first drove CAH through the formidable resistance at $85, then cast it higher still. Following a Buy recommendation and upped price target to $98 from $85 by Lawrence March at Lehman Brothers, CAH responded with convincing gains on September 12th. A pattern developed. First Union Securities issued a Strong Buy recommendation and raised its price target to $97 from $86. CAH advanced further. On September 14th, MSDW restated an Outperform rating and also upped its price target to $100 from $74. Again, CAH tacked on more points. From there on in, it's been pure momentum driving the share price to new 52-week highs. Today, CAH closed smack on the newest record of $92.31! You can't beat that bullish sentiment. Short-term support is at $89 and $90, which is just above the 5-dma line. This level offers solid entries during consolidation or on intraday dips. A pullback to the 10-dma around $84 and $85 should however raise your radar. Look for the high-volume to precipitate another breakout. In recent news, Cardinal Health said it's expanding its financial-reporting segments, from three to four, to fine tune the way it manages its businesses. The company is expected to report earnings around October 26th. BUY CALL OCT-85 CAH-JQ OI=726 at $9.13 SL=6.25 BUY CALL OCT-90*CAH-JR OI=161 at $5.63 SL=3.50 BUY CALL OCT-95 CAH-JS OI= 94 at $2.88 SL=1.50 BUY CALL NOV-90 CAH-KR OI= 0 at $5.75 SL=3.75 Wait for OI! BUY CALL NOV-95 CAH-KS OI= 0 at $4.75 SL=2.75 Wait for OI! Picked on Sep 19th at $92.31 P/E = 39 Change since picked +0.00 52-week high=$92.31 Analysts Ratings 12-7-1-0-0 52-week low =$37.00 Last earnings 06/00 est= 0.71 actual= 0.72 Next earnings 10-26 est= 0.65 versus= 0.53 Average Daily Volume = 970 K ************* NEW PUT PLAYS ************* EPNY - E.piphany, Inc. $82.25 -3.75 (-1.75 this week) E.piphany is a leading provider of intelligent customer interaction software for the customer economy. The company serves more than 250 industry-leading enterprises in ecommerce, financial services, communications, consumer-packaged goods, and technology. Delivering an integrated solution combining insight and action software products, EPNY's web-based analytic and operational CRM portfolio provides global business with a single, enterprise-wide view of each customer, to better understand and proactively respond in real-time to customer and market opportunities. Actions speak louder than words. Despite all the great words coming from analysts and from the company itself lately, EPNY continues to head ever lower, with volume to the downside accelerating. First the words, as last week there were two pieces of good news for EPNY. ING Barings initiated coverage on the stock with a Buy rating last Thursday. As well, the company announced an alliance with ZAMBA Solutions, in which the two firms will integrate and support systems running EPNY's software. On Monday, EPNY announced an upgrade to its B2B software, which would extend the capabilities of its system to better serve its customers. Also, EPNY announced partnerships with Emptoris and iMediation. Today, Robinson-Humphrey issued positive comments on EPNY, rating the company a Buy. Despite all the good news and a strong market for Tech stocks today, EPNY lost 4.36% on 155% of its ADV. Where words fail to explain, perhaps EPNY's chart could shed some light on the situation. Ever since encountering resistance at $110 to start the month, it's been all downhill for EPNY. Already far below its 200-dma (now at $131.78), the stock broke below its 50-dma first, now just above the psychological $100. From there, it's been a slide down the back of the 5-dma ($88.42) below the 100-dma at $94.36. This level is also reinforced by the 10-dma. With EPNY unable to overcome resistance at the 5-dma, a failure to rally above this moving average could be a great entry point. As well, former support at $85 may also offer formidable resistance. Support for the stock can be found in increments of $5, starting at $80 and $75. A failure at $75, and we could see the stock quickly drop to $63. Weak support levels, strong overhead resistance, and negative momentum despite positive news all adds up to a promising put play. Just make sure volume to the downside confirms a rollover when making an entry. BUY PUT OCT-85 PEY-VQ OI=237 at $11.00 SL=8.25 BUY PUT OCT-80*PEY-VP OI= 97 at $ 8.63 SL=6.00 BUY PUT OCT-75 PEY-VO OI= 25 at $ 6.63 SL=4.50 Average Daily Volume = 652 K ********************** PLAY OF THE DAY - PUT ********************** CMTN - Copper Mountain Networks $44.69 +3.81 (+1.69 this week) CMTN helps its clients climb to the peak of connectivity. The company is a leader in digital subscriber line (DSL) communications products for telecom and Internet service providers, which enable high-speed broadband connectivity over existing copper phone lines. The company has partnerships with 3Com and Lucent. NorthPoint Communications accounts for about 40% of CMTN's sales. Most Recent Write-Up The Amex Networking Index ($NWX) rose a solid 3.3% today, on the back of the broader Tech sector. For its part, CMTN benefited from the bounce in the Network Equipment sector and rose along with the NASDAQ. However, it's been a bearish month for CMTN thus far in September, and today's bounce might have provided a solid entry into our short play. If the Tech bears return tomorrow to wreak havoc in the Telecom Equipment sector, aggressive traders might look to enter new put positions in CMTN near its current levels. The stock faces major resistance just above at the $45 level, which might provide a solid entry into the play should CMTN rollover. However, wait for the sellers to refute any CMTN attempt to break above $45. The more conservative traders might wait for weakness to return to the NASDAQ before entering new plays. Consider entering the play if CMTN slips back below support near the $44 level, or wait for the stock to break down below support at $43 for a more conservative entry. Comments A bounce wasn't out of the question today on the NASDAQ. CMTN felt some relief, gaining over 9%. The true test tomorrow will be whether the NASDAQ can follow through, or render today just another dead-cat bounce. If the NASDAQ rolls over, our put play will be ready. With the 10-dma at $47.59, a rollover at that technical resistance would offer a great entry. A break of this level would be an indication to stay out. If the broader tech market falters, look to CMTN to follow as sellers return. BUY PUT OCT-50 KUA-VJ OI=1110 at $ 8.75 SL=6.75 BUY PUT OCT-45*KUA-VI OI= 334 at $ 5.63 SL=4.00 BUY PUT OCT-40 KUA-VH OI= 728 at $ 3.25 SL=1.75 Average Daily Volume = 2.73 mln ***********************ADVERTISEMENT************************ Up To 60% Off At EverythingWireless.com The online super-store for your active lifestyle. Select from the largest range of accessories and products you use every day including Cellular and PCS phones, batteries, chargers, hands-free kits, wireless data products and more. http://www.everythingwireless.com/wireless/homepage?id=1601002 ************************************************************ ************************ COMBOS/SPREADS/STRADDLES ************************ Technology stocks recover amid strength in semiconductor issues... The Nasdaq enjoyed a triple-digit rebound as investors shopped for bargains after the recent slump. Monday, September 18 Rising energy prices and a weak euro created cause for concern in today’s session. The Dow closed down 118 points at 10,808 while the Nasdaq fell 108 points to 3,726. The S&P 500 Index was down 21 points at 1,444. Trading volume on the NYSE hit 956 million shares, with declines beating advances 2,212 to 690. Activity on the Nasdaq was moderate at 1.61 billion shares exchanged, with declines beating advances 2,981 to 1,103. In the bond market, the 30-year Treasury slumped 25/32, pushing its yield up to 5.95%. Sunday’s new plays (positions/opening prices/strategy): Abbott Labs ABT OCT40P/OCT42P $0.50 credit bull-put St Jude STJ JAN50C/OCT50C $1.93 debit calendar Franklin BEN JAN45C/JAN40P $4.75 debit strangle Cell Path CLPA OCT60C/OCT17P $2.06 credit strangle Gemstar GMST OCT95C/OCT55P $3.75 credit strangle All of our new positions were affected by the market’s volatile movement today. Abbott Labs slumped at the open but the premiums were also lower than expected. The credit for the position was well below our target and we will wait for a better opportunity in the coming sessions. St. Jude rallied near the open and there was little chance to enter the position near the target price. A slump near 10:00 A.M. provided the best entry, but the debit was still well above our suggested range. Franklin was also uncooperative with higher than expected prices in the neutral, debit strangle. Limit orders held the book prices at a premium. Cell Pathways and Gemstar offered favorable entries and both positions were active. A 10-contract trade in GMST was observed near 9:45 AM and there was also participation in the CLPA play, during the first few minutes of the session. Portfolio Plays: A combination of higher oil prices, slowing earnings growth and the weak bond market conspired to drive the stock market lower today. Crude prices topped $37 per barrel as tensions in the Middle East grew after reports of a missile attack on Baghdad and continued claims by Iraq that Kuwait was stealing oil. In addition, the flood of revenue warnings continued, with several companies citing the recent decline in the euro as the cause of falling earnings. The European currency is near all-time lows and is expected to reduce revenues in American corporations in the coming months. On the Dow, J.P. Morgan (JPM) continued to slump while Johnson & Johnson (JNJ) and Eastman Kodak (EK) also moved lower. In the technology group, bellwether issues dropped with JDS Uniphase (JDSU), Cisco Systems (CSCO), Dell Computer (DELL), Intel (INTC), Oracle (ORCL) and Microsoft (MSFT) among the losers. Biotechnology stocks added to the Nasdaq's woes and in the broader market, financial, retail and computer hardware issues all moved lower. There were few favorable moves in the Spreads/Combos portfolio. Qualcom (QCOM) was one of the few surprises, up almost $4 to $69 after First union upgraded the stock to a "strong buy." Our new "bull-put" position achieves maximum return with the issue above $55. Virata (VRTA) was another unexpected gainer, up almost $2 at mid-day after Robertson Stephens upgraded their outlook for the company. In a research note, analysts said that Virata's DSL business remains strong, with sales of its Helium communications processor leading the charge. Reportedly, semiconductor sales at Virata drove almost all of the upside in the quarter and margins are expected to improve in the coming months. Small-cap issues fared little better than the broader market but Maxtor (MXTR) and Caremark RX (CMX) were among the few upside movers. Regrettably, the rest of the section experienced downward pressure and there were a number of precipitous declines. With today’s breach of key technical levels, it appears the recent bearish trend will continue for a few sessions before a rebound occurs. That means that decisions will have to be made regarding a number of failing issues. Most of these come from the Reader’s Request category but other OIN subscribers may have participated in the positions as well. Bullish, long-term plays in Loral Communications (LOR), Lucent (LU), and Netspeak (NSPK), along with calendar spreads on Global Crossing (GBLX), Mead Corporation (MEA), and Steven Madden (SHOO), and the debit spread in Covad (COVD), should be reviewed, and possibly closed or adjusted based on your outlook for each issue and your personal risk/reward attitude. Speculative plays in Crossroads Systems (CRDS), Engage (ENGA), and Ventro (VNTR) also deserve attention and with the unfavorable condition of the market, you must decide if these past selections continue to meet your criteria for potential portfolio holdings. Tuesday, September 19 The Nasdaq enjoyed a triple-digit rebound as investors shopped for bargains after the recent slump. The composite technology index rose 139 points to 3,865. The Dow industrials retreated however, as earnings worries continued to plague the group. The blue-chip average closed down 19 points at 10,789. The S&P 500 Index was up 15 points to 1,459. Activity on the Nasdaq reached moderate levels with 1.69 billion shares traded. Declines beat advances 2,253 to 1,597 in technology issues. Trading volume on the NYSE reached 1 billion shares, with declines beating advances 1,494 to 1,383. In the bond market, the 30-year Treasury moved 18/32 higher, pushing its yield to 5.91%, as market participants looked ahead to the Treasury buyback coming on Thursday. Portfolio Plays: Technology stocks rallied today as bargain-hunting buyers feasted on slumping semiconductor shares. Intel (INTC) and Advanced Micro Devices (AMD) led the recovery after Banc of America Securities upped its ratings on both stocks and other issues in the group followed suit. The chip sector, which often defines the outlook for technology stocks, has under-performed the market in recent weeks. Internet shares managed decent gains with CMGI (CMGI) and Exodus Communications (EXDS) pacing the advance. Meanwhile, the Dow edged lower amid profit concerns, with one of its old-economy components warning that it will fall short of quarterly earnings expectations after the close Monday. Alcoa (AA) announced that revenues will be much lower than expected, based on sharp declines in the transportation, building, construction and distribution markets as well as higher energy costs. Other Dow shares moving lower included Wal-Mart (WMT), Home Depot (HD), Honeywell (HON), and International Paper (IP). The broader market saw gains in the financial arena, led by bank stocks. Goldman Sachs (GS) and A.G. Edwards (AGE) both posted earnings ahead of consensus estimates, boosting share values of similar companies. Biotechnology and major drug issues also advanced while paper, retail, and utility shares consolidated. Oil and oil service stocks retreated amid a weakening in crude prices. Our portfolio experienced a number of favorable moves during the session and technology issues were the leaders in every category. Qlogic (QLGC) outpaced all other stocks in the section, up $10 to $93 after the company was touted in three major brokerage reports during the session. Qualcomm (QCOM) was another top performer, up almost $8 to $77 as the recent rally continued amid optimism over an upgrade from First Union Securities. The issue traded higher on volume well above its norm, making the stock a standout among other bullish issues. Commerce One (CMRC) made solid gains and HNC Software (HNCS), Polycom (PLCM), and Virata (VRTA) also rallied during the upbeat session. Global Crossing (GBLX) edged higher in sporadic trading and Crossroads (CRDS), Netspeak (NSPK) and Ventro (VNTR) provided indications that they aren’t ready to "give up the ghost" quite yet. In the financial sector, Allstate (ALL) and Toronto Dominion (TD) both performed well and our new positions in these issues are profitable, with over three months remaining until expiration. Another new position, Abbott Labs (ABT) slumped during the session, providing an improved entry in the bullish, "put-credit" spread. On a sour note, Covad Communications (COVD) dropped over $2 to close in the $15 range after a day of rampant selling. There was no public news to explain the move but traders speculated that an upcoming $500 million dollar debt offering, which was rated very poor by Moody's, may be part of the explanation. Regardless of the reason, the issue was unloaded by institutional traders and the volume in today’s session was well above average. Based on the new technical indications, we may consider selling the long position in the debit spread, while it has favorable premium and leaving the sold position (at $17.50) uncovered in the short-term. Obviously, it’s an aggressive move but something has changed the outlook for this issue and the bearish character suggests a new downtrend is in place. An early exit of the long position will provide a small profit in the play and the stock can always be purchased at a later date - to create a covered-call - if and when the issue recovers. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** FNV - Finova Group $7.25 *** Cheap Speculation! *** The Finova Group is a financial services holding company. Through its principal subsidiary, Finova Capital, the company provides a broad range of financing and capital market products. Finova extends revolving credit facilities, term loans and equipment and real estate financing primarily to middle-market businesses with financing needs falling generally between $100,000 and $35 million. Finova operates in twenty specific industry or market niches under three market groups. The principal lines of business are Capital Markets; Commercial Finance; and Specialty Finance. Finova shares have fallen to new lows in recent months but this week, the issue showed signs of life as takeover rumors surfaced in the pits. When asked about the activity, company officials reiterated their statements from earlier in the year regarding the hiring of Credit Suisse First Boston to help determine a strategy for the future. The plan includes a review of alternatives that would possibly include the sale of the company or a potential equity infusion by a major funding group or entity. The process is ongoing and publicly, there have been no major announcements. Implied volatility and volume in FNV’s options jumped today on active call buying and we are going to pursue a speculative play in the issue, based on the new interest from investors. PLAY (conservative - bullish/calendar spread): BUY CALL JAN-10 FNV-AB OI=1330 A=$1.00 SELL CALL OCT-10 FNV-JB OI=1364 B=$0.38 INITIAL NET DEBIT TARGET=$0.50-$0.56 TARGET ROI=50% This position is based on recent increased activity in the stock and underlying options. Although the play offers a favorable risk/reward potential, it must also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** AGIL - Agile Software $79.00 *** B2B: Not a bad place to be! *** Agile Software develops and markets collaborative manufacturing commerce solutions that speed the build and buy process across the virtual manufacturing network. Agile’s solutions manage product content and critical communication, collaboration and commerce transactions among original equipment manufacturers, electronic manufacturing services providers, customers and other suppliers in real-time. The company's offerings are well suited for participants connected in outsourced supply chains, as well as those managing multi-site engineering, manufacturing, sales and distribution via the Internet. Business-to-business stocks were "on the move" today, thanks to the recovery in technology issues, an Oracle (ORCL) upgrade and new industry optimism ahead of a host of company conferences. Agilent is one of the top companies in the group and the issue’s most recent rally began in late August when U.S. Bancorp Piper Jaffray Senior Business-to-Business e-Commerce Analyst Timothy M. Klein initiated new coverage on the company with a "buy" rating. Agile Software provides Web-based collaboration applications that help OEMs communicate manufacturing change orders with contract manufactures, suppliers and internal engineers and Klein believes that Agile is one of the top companies addressing opportunities within the collaborative-enterprise-solutions market. Expansion in that niche sector is fueling growth in business-to-business eCommerce and strong industry fundamentals along with the trend toward increased outsourced manufacturing and shorter product lifecycles will directly benefit Agile's future prospects. In addition, the company has industry-leading technology, solid fundamentals and promising revenue potential. We simply favor the recent bullish technicals and the opportunity to speculate on the future movement of the issue in a conservative manner. PLAY (conservative - bullish/credit spread): BUY PUT OCT-55 AUG-VK OI=16 A=$1.31 SELL PUT OCT-60 AUG-VL OI=31 B=$1.69 INITIAL NET CREDIT TARGET=$0.56-$0.62 ROI(max)=12% ****************************************************************** HAL - Halliburton Company $50.56 *** Oil Industry Slump? *** Halliburton Company provides a variety of services, equipment, maintenance and engineering and construction to energy, industrial and governmental customers. The company offers its products and services through three business segments: Energy Services, which provides discrete services and products and integrated solutions to customers in the exploration, development and production of oil and gas; Engineering and Construction, which provides services to energy and industrial customers and government entities worldwide; and Dresser Equipment, which designs, manufactures and markets highly engineered products and systems, primarily for the energy industry. This month has seen record levels in the oil industry as crude oil prices closed above $35 a barrel for the first time in ten years. Concerns over shrinking winter heating oil supplies outweighed a bigger-than-expected rise in current crude stocks and the recent OPEC output hike to produce extreme demand for the commodity. On Monday, crude futures rallied even higher as tensions increased between two oil-producing nations in the Middle East and after the close today, prices climbed higher when a key inventory report showed a new, unexpected drop in supplies. The American Petroleum Institute posted its weekly petroleum supply data and one of the biggest surprises came from crude-oil inventories, which fell 2.03 million barrels to 286,580 million barrels during the week ended September 15. That was almost 3 million barrels shy of analysts' average estimate; they'd predicted a rise between 800,000 and 1.2 million barrels. With the bullish, after-hours news, this stock is likely to move higher in tomorrow’s trading however, we believe the current technical indications favor a bearish play on any strength in the issue. In this case, the premiums for the (OTM) call options are slightly inflated and the potential for a successful rally to new highs is significantly affected by the resistance at the sold strike price; a great situation for a "call-credit" credit spread. PLAY (aggressive - bearish/credit spread): BUY CALL OCT-60 HAL-JL OI=3576 A=$0.43 SELL CALL OCT-65 HAL-JK OI=5127 B=$1.12 INITIAL NET CREDIT TARGET=$0.81-$0.93 ROI(max)=22% ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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