The Option Investor Newsletter Wednesday 09-20-2000 Copyright 2000, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/092000_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 09-20-2000 High Low Volume Advance/Decline DJIA 10687.90 -101.40 10824.10 10567.30 1.12 bln 1144/1651 NASDAQ 3897.44 + 31.80 3913.87 3795.08 1.80 bln 1653/2360 S&P 100 782.55 - 5.22 788.58 771.45 totals 2797/4011 S&P 500 1451.34 - 8.56 1460.49 1430.95 41.1%/58.9% RUS 2000 521.43 - 1.88 523.55 518.21 DJ TRANS 2591.45 - 14.16 2604.57 2556.21 VIX 22.77 + 0.66 24.34 21.98 Put/Call Ratio .60 ****************************************************************** A Taste of Volatility Those 100 point days are back as the markets anticipate the month of October. Can you believe it? And where did that massive bounce come from? Was there some sort of good news that I missed around 1:30pm EDT? While the bounce wasn't attributable to anything in particular, it certainly was impressive to watch. At best, today's trading session offered confusion and mixed signals for investors. An earnings warning from Sprint(FON) sparked more selling, along with macro-concerns over oil prices and the weak Euro. Yet, even with all of this looming over the market, the indices managed recoveries of heroic proportions. Well, that was one heck of a bounce on the NASDAQ. Shaking off analyst talk about a retest of the Summer lows, sellers were overcome today after what appeared to be a steady, intraday victory for the shorts. After Tuesday's 139 point gain, we were waiting to see if it was a dead-cat bounce or a reversal of fortunes. In fact, this morning Ralph Bloch called yesterday's action just that, a dead-cat. And up until about 1:30pm EDT, it looked like it. But, something happened, something that we haven't seen for a long, long time. Volatility. Remember that stuff? Right when the NASDAQ broke below 3800 and the shorts appeared to have a strangle hold on it, the index made an about- face and launched from 3795. I mean launched! Within 70 minutes, the NASDAQ was over 3900. So what happened? Obviously, a failed rally, possibly fueled by some short covering. The index found support near the 3800 level, which provided a bounce last week. You can see by the chart below that the NASDAQ is at a point of flux. As the bulls and the bears battle it out, one thing for certain is that volatility is back. Just in time for October. Could this be a reversal? Will the summer lows go untested? The answer will lie in the next two days of trading. We always talk about how we need to see follow through after a day like Tuesday to confirm the move. Today, initially didn't have that. But, the finish appears to be very bullish. Making an assumption from the close today could be deceptive. We will need to see what tomorrow brings. While the NASDAQ came back from -70 to finish up 31.80 points, the advance-decline line remains concerning. Even with today's positive finish, decliners outpaced advancers 24-17. Volume was decent, coming in at 1.76 bln. It closed just above its 10-dma of 3895, while overcoming its 100-dma at 3842 intraday. Driving the NASDAQ today was more upbeat comments surrounding INTC. After yesterday's somewhat shady upgrade from Banc of America only a week after they downgraded it, Credit Suisse First Boston analyst Charlie Galvin reiterated their Strong Buy on INTC. Intel added $2.69 on over double its ADV. EBAY was another NASDAQ 100 stock that helped drive the market higher. Investors cheered EBAY after the company set a 5 year revenue goal of $3 bln, implying a revenue growth rate of 50% annually. This projection is in part due to EBAY's effort to expand its reach in the U.S. and overseas, as well as its range of product categories. The stock soared $10.88, almost 17%, and very well may give EBAY the momentum with which it used to be so familiar. Another old Internet stock got a boost today. YHOO received a Buy reiteration from DLJ that drove the stock higher by $1.63. Although these stocks helped the NASDAQ, today's trading session has once again introduced volatility, and also caution. The VIX.X was only up fractionally to 22.70, still very low considering three straight days of triple digit ranges for the tech index. This isn't to say that we shouldn't trade, just be cautious. How can we not trade, especially when our best friend volatility is starting to come around again. There were a handful of stocks that made fantastic moves today: PDLI(+15.31), BRCD(+12.69), GSPN(+11.44), and NTAP(+11.25). Over on the NYSE, FON warned today that their 3rd quarter earnings will come in around $0.45-$0.47, below the Street estimate of $0.49. The company added that this is due to lower subscriber growth in their wireless business PCS. In an already weak telecom sector, this news absolutely crushed the two stocks, with FON falling almost 4% and PCS, the big winner on our put list, plunging $7.56 to $33.25, an 18% loss on the day! This selling spread throughout the sector: T(-3%), WCOM(-4%), SBC(-2.33%), and VZ(-3.79%). On top of earning warnings is the growing concern over oil, as the October crude futures closed above $37 a barrel for the first time in a decade. As inventories continue to shrink, the rising price has become the culprit of many earnings' squeezes in some of the old economy stocks. These concerns have create a nervousness amongst traders at the NYSE, and they have been selling the INDU stocks as a result. Not to mention, the Euro hitting another low against the dollar. Just another common culprit being heard at the earnings confessional booth. And the debate rages on about whether it's a strong dollar problem or a weak Euro. Regardless, the fact is that companies are beginning to feel the effects of the Fed's interest rate tightening policy of the past year. FON's warning today won't be the last high profile warning this quarter. The squeeze is on. As a result of all of these concerns, the INDU has broken down dramatically. I have included below a 60-minute chart of the INDU with the same exact extended lines that I drew on last Wednesday's chart. The 11100 support line that the INDU was holding broke the very next day. Since then, it has been down day after down day. Nine of last ten INDU sessions have been negative. You can see that the drop in the INDU has been dramatic as it accelerated away from the downtrend line that I drew last week. Most technically concerning is today's break of the 100-dma that was the index's last technical support. From here, the Summer lows of 10500 might be next as the global concern over oil and currencies grows. Volatility has also crept back in the INDU, with today's range spanning over 250 points! I caught me off guard to see on CNBC that the curbs were in. We joked at the office that we haven't seen those pop up in ages! Yet, like the NASDAQ, the INDU managed quite a midday recovery to pair its losses, recouping 120 points from the low. Once again, the next two days will be very telling for the INDU. Investors are not finding a lot of reasons to buy given the looming fears in the market. Today we did see some bargain hunting, but as Art Kashin, Director of NYSE Floor Operations for Prudential, said on CNBC, the accelerating volume wasn't there on the bounce so it will take a couple of days before a diagnosis can be made. Leading the index lower was: HWP(-4.13), AA(-2.81), KO(-2.63), and MMM(-2.13), another highlight on the put list. Looking forward, I repeat, the next two days will be essential for determining where we go next, and how much merit we can put into today's broad market bounce. We need to see confirmation in the NASDAQ in order to call it a reversal. The increase in price volatility for both indices is just a precursor of what's to come for October, historically one of the most volatile months. Yet, where there is volatility, there is opportunity for option traders. Exercise caution and stick with stocks that provide relative stability. Many have been bucking the trend, like QCOM, SEBL, PALM, and EMC to name a few. Initial Jobless Claims will be released tomorrow morning and traders may use the data to move the markets one way or another. Given the state of flux right now, we will be watching the market closely for directional clues. With markets changing direction on a dime and wild intraday swings, trading requires a little extra attention...and some antacid, just in time for October. Matt Russ Editor ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=496 ************************************************************** *************** ASK THE ANALYST *************** Go On And Take The Money And Run. By Eric Utley Judging by the flood of e-mail I received last week, it's obvious OI readers like to take profits. And, rightfully so! As the faithful Ask the Analyst readers know, I presented a quiz last week in an attempt to challenge OI traders. For those of you who didn't read Ask the Analyst last week - shame on you. In case you did accidentally miss my column last week, here's a repeat of the question. You've been watching the Telecom Equipment sector with bearish eyes. Ursa Modem Company (UMC) has been acting weak and you're ready to claw into a put play. You discover an analyst over at Contradictory Brokers issued a big downgrade on UMC's main competitor earlier in the day, which brought out the sector sellers. The bears teamed together to take UMC below its two-week support level at $80. The stock's losses are mounting and you decide to buy 10 at-the-money puts near market close after UMC falls below $79. The next morning you discover the NASDAQ futures down -50 points on a profit warning from a big Telecom carrier. The news causes UMC to gap down by -$4, it then falls another -$2 after amateur hour expires, and then stabilizes during mid-day trading. Since you bought front-month puts with little time value left, and the contracts were at-the-money with a delta near 50, the options move with lightning speed and show you a one-day paper gain of 200%. What next? Do you: A) Laugh all the way to the bank after selling your entire line B) Take half off the table and let the rest ride C) Hold tight D) Add to your position Before we delve into discussion, let me make it perfectly clear that there are no "right" nor "wrong" answers, only four possibilities in our hypothetical trade. And now, let's talk. The majority of you that responded said you would choose answer (A), to take the money and run. Now, there's nothing wrong with taking all your profits. Or, is there? One of our readers strayed from the crowd and provided a different solution to our 200% gain problem. Robert wrote, "I believe the best answer lies somewhere between B) 'Take half off the table...' and C) 'Hold tight'." Let's examine the dynamics of what Robert suggested. In the hypothetical trade, you'd been watching the Telecom Equipment sector with a bearish bias. So, you acted on your speculation with an almost immediate confirmation in the form of a 200% gain on your short play on UMC. The 200% gain screams, "You were right". Who's to say your put play on Ursa Modem Company (UMC) won't show an even greater profit if you hold longer? Well, the market is the ONLY one that will tell when you are right or wrong. And, until the market shows you UMC has stabilized or is ready to rebound, what is the harm in holding onto your winning position? By doing what Robert suggested, and taking a little off the table (your initial investment) and holding tight (let your paper profits run), you position the put play for even greater profits. By getting back your initial risk capital through the sale of a few contracts, you in effect remove a great deal of emotion from your position. Robert said with perfection, "By taking your initial investment back, one reduces the leverage of fear that otherwise might spook you out of the trade on minor reversals, letting you objectively watch the indicators to exit, maybe at a much better point than you'd dare with the full trade." I couldn't have said it better, that's why I quoted Robert. The immediate 200% gain in the short play gives immediate confirmation that your speculation of weakness in the Telecom sector was correct. Remember, no major moves in the financial markets take place in one day. The extraordinary traders that earn extraordinary gains always let their profits run, and often add to their winning positions as choice (D) suggested. Is there a right answer to our 200% problem? No. Of course, we haven't taken into account a myriad variables that would affect trading decisions. However, letting profits run is a fundamental rule that the best traders follow. I have a feeling that Robert falls into that camp. Thank you, Robert, for the input. And now, let's move onto the best part of this column, your requests. But, before we do, one more piece of business. We are moving the Ask the Analyst column back to the Sunday newsletter. So, I'll see you again in about a week-and-a-half with a new trading problem and a fresh batch of stock reviews. In the meantime, I'd be happy to answer any questions or entertain ideas about our trading problem. Make sure to send a few new stock requests to Contact Support over the next week. Don't forget to put the symbol of your stock request in the subject line of the e-mail. ---------------------------- Waters Corp - WAT Please comment on FBCE (Fibercore), and WAT (Waters Corp). - Thanks, Vishal I knew I could rely on Vishal for another great stock request. I believe I reviewed WAT some time ago, but thought it relevant, pertinent, and potentially profitable to take a look at the stock again. Behind Agilent, WAT is one of the largest makers of Scientific Instruments. The instruments that WAT's makes are used mainly by Pharmaceutical and Biotech companies for research and development. With the ushering in of the Human Genome project and, DNA research in general, WAT's profits have grown faster than bacteria on a petri dish. I think the potential of the Biotech is just awesome. The Biotech companies are attempting to improve our quality of life and increase our life-spans. I don't know about you, but if 'it' improves and lengthens my life, I'm buying. How does that all relate to WAT? Well, WAT will supply all the gadgets and instruments to the Biotech companies building the drugs of the 21st Century. WAT also provides software and a host of services to the Biotech sector. So, obviously, WAT is dependent on the growth of the Biotech sector. WAT has the benefit of operating in a blossoming sector of the economy, but, the company also has exceptional fundamentals. Though, the stock is a bit pricey relative to its past and future earnings because of its big run this year, I think there is plenty of upside left in WAT. As long as WAT continues to execute its business strategy as it has done in the past, the stock should be a long-term winner. In fact, I don't think it unreasonable that WAT will greatly outperform the broader markets over the next decade. Spending in the Biotech sector should only accelerate in the coming years as geneticists decode the Human Genome with WAT's tools. And because WAT has been such a great performing stock this year, we're faced with the recurring problem of finding a solid entry into the stock. The stock has been consolidating for over two months now, and might be ready to run to new highs in the near future. All in all, WAT is a great stock to hold for the next several years. ---------------------------- MRV Communications - MRVC Please comment on MRVC. MRVC is one of those banged-up Telecom Equipment makers that has been punished by the bears recently. The company is an interesting firm, with operations in making both optical components and Internet infrastructure equipment. The company competes with the likes of SDLI, BRCM, and VTSS. All of which have been great performing stocks this year. About two years ago, MRVC adopted a business model very similar to what CMGI does. In essence, MRVC creates and manages a diverse group of businesses within the Communications sector. And like CMGI, MRVC sometimes spins-off its business units with an IPO. One of MRVC's upcoming IPOs has already attracted a lot of attention. MRVC will spin off its Luminent unit, which makes fiber optic components. The IPO price for Luminent has been estimated to be roughly $15 a share. What's interesting is that in the recent and very similar IPOs of Corvis (CORV) and Avici Systems (AVCI) both stocks enjoyed incredible first-day pops. Now, the landscape in the Telecom sector has changed since CORV and AVCI went public. Nonetheless, MRVC's IPO of Luminent might give the former a nice pop; MRVC will retain 92% ownership in Luminent after the IPO. While the IPO of Luminent might give MRVC a boost in the near-term, the bigger issue remains the overall health and direction of the broader Telecom sector. The snowball began rolling several weeks ago when a couple of big Telecom carriers told analysts spending on equipment would slow. Since that time, the snowball has been building and gaining downhill momentum. However, the fact remains that North America's communication systems are archaic, and in desperate need of upgrades and repairs in order for the Internet to flourish. Companies such as MRVC are the ones who are trying to build a better communications system, which in the long run makes the stock a big winner. However, you will have to stomach the periods of capital spending volatility, like we are currently experiencing, if you're going to hold stocks like MRVC for the long-term. I like MRVC's business model, I like the fact that the company operates in a dynamic and growing sector of the economy. With that said, I think MRVC is a great stock to hold onto for several years. But, in the meantime, bullish traders might want to stay out of the dicey Telecom sector. ---------------------------- Extreme Networks - EXTR Your astute opinion about EXTR. Have made a few nice plays within the last month or so and am currently playing OCT call options. Your opinion is greatly appreciated. - Thanks, Trader J Please advise what are the reasons behind EXTR strength and the steady rise. - Regards, Sunil Despite the poor performance of the NASDAQ, EXTR is trading at an all-time high. How do we explain that? Well, let's take a look at a few recent EXTR developments that have taken place over the past month. In the beginning of August, EXTR said it would add a Layer 7 application to its broadband network solutions. What's a Layer 7 switch? I don't know. But, I do know it is a new product added to EXTR's deep pipeline of network offerings. New products can be big drivers of stock prices. Then, about three weeks ago, Chase H&Q reiterated its Buy rating on EXTR, citing the company's expansion of its sales force and its winning of key contracts. A few days thereafter, CIBC World Markets initiated coverage on EXTR with a Buy rating. And today, Salomon Smith Barney raised its price target to $155. As a result, EXTR to a new 52-week high. So, I think it's safe to say that the company is going to have a blowout quarter when it reports profits a month from now. Because of its new Layer 7 product, because of its already superior product line, because of its successful sales force, and because of what the market has been telling us over the past three weeks, EXTR will blow away estimates later in October. The question is whether or not the market is done taking EXTR higher. Now, I find it extremely bullish that EXTR is trading at its 52-week high given the NASDAQ has shed 8% in September. That tells us traders are willing to pay up for EXTR no matter the direction in the broader Tech sector. We know something is going on with EXTR, and the stock is acting as if it wants to go higher. But, we again face the dilemma of finding a prudent pivot point with which to gain entry into the stock. The breakout above $100 yesterday would have provided a solid entry into EXTR especially with its market bucking rally. But, after today's sprint, entry points look hard to come by. I think EXTR goes higher, especially once the NASDAQ decidedly turns around. But, you're going to have to work hard for a good entry point. I'll review a few possibilities on the chart below. ---------------------------- Sycamore Networks - SCMR SCMR has been down for over three weeks from a high of over 170 to now about 110. I felt that the stock is way oversold and if I buy front month calls now it will have a decent chance to double in the next two to three weeks. Your advice? - Michael Could you give me your thought on SCMR for short-term (3 months). It has been falling like a rock after their earnings which beat the estimates. Do you see a recovery to 140's, given their sector has been a bit sluggish in the last week or two. - Thank you, Sinan It sounds like both of you, Michael and Sinan, are looking to buy SCMR in hopes of a rebound. I don't know if that's the best bet right now given the weakness in the Telecom sector. Besides, you both probably know how I feel about buying stocks on the way down. If you don't know, I don't like buying low. But, I'll put aside my biases and try to give you an objective SCMR review. First off, know that SCMR is still on the OI put list. The staff here at OI are still bearish on SCMR, and I think its for good reason. While SCMR did beat EPS estimates, like you mentioned Sinan, the company fell well short on its deferred revenue projections. Deferred revenues can be a telling measure of a company's growth. Since SCMR missed the target, they got hammered by sellers. On top of their company specific problems, SCMR fell under additional pressure in the form of sector weakness, which resulted from the news of a slowdown in capital spending by the Telecom Carriers. Because of SCMR's high valuation and the problems within its sector, traders have been more than willing to sell the stock lower. Because of its plummeting action, I don't know if buying front month calls is the most prudent strategy, Michael. However, I don't think it's unreasonable to believe that SCMR will be back to $140 by year's end, but it might take the full three-months remaining to do so. Before jumping in for a trade to the upside, I think it would be wise to wait for SCMR to find bottom, which I don't think it has done just yet. There are still a lot of shorts in the stock, who are willing to defend their positions and take SCMR lower. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************** TRADERS CORNER ************** Idiot's Guide To Technical Chart Study By Austin Passamonte Is that title already taken? It's about the only one I'd feel comfortable writing. Believe you me, this is a subject that can soar right over my head real easy. For over ten years I've been an avid reader of "Technical Analysis of Stocks & Commodities" magazine. This is a real gem for traders (available on big newsstands) but certainly a lesson in humility each and every time I open the pages. There are contributing writers in there who concoct formulas to tweak up super-indicators that were never taught in any schools I happened past. I'm not so sure a few of them don't solve pi on their way to market forecasting. If that's your bag, I might suggest you consider hitting the "back" button right now for fear of my insulting you. On the other hand, if you like to use a basic approach to trading the markets, maybe we can help shed some insight. Speaking of MENSA-mathematics types, long ago I attended a trading seminar hosted by the legendary stock and commodity trader Larry Williams. By his own admission, he's simplistic a trader as they come. Successful too. For those not familiar with Larry, he entered the Robbins Cup trading contest using real money taking actual trades on S&P 500 and bonds futures contracts. Beginning with $10,000 in the year-long contest, he handily won the public event with an ending balance just a bit over $1.1 million. You did read that correct. Not a bad run, would you agree? So here we are in a seminar with Larry and he's telling us about looking for divergence in the daily and weekly charts. I'm trying to scribble notes furiously and this guy behind me with a very annoying voice keeps interrupting him. "What do you consider that pattern to be, type one or type two" our questioner asked. "What formulas or statistical guidelines do you use to analyze such price action?; Would you say those signals are concave, convex, converse, etc?" Larry is without ego and possesses the patience of job, personal traits most welcome in a public speaker (or anyone, for that matter). He calmly ended the irksome interruption by stating that market divergence is easy to quantify: whenever price action does something unexpected or opposite chart signals it is signaling a pending reversal. Plain & simple as that. This sound advice has served me well here ever aft. When markets do something opposite what's expected, change is upon us. Last Thursday's PPI reaction was a prime example. Benign values are announced and the markets fail to rally. Sell-off time! Soon as I saw that it was time to load up on puts and wait for the roll. We weren't kept waiting very long. Technical divergence is an even better study in my opinion. It just might be the very best leading indicator for any symbol or market we can use. Certainly offers that service to me. We'll look at some customary charts in a minute to shed insight on what to look for but first let me invite you into the OIN "Traders Corner" archives under the Education header in the front page of this site. Open up our August 30th article on "Stochastics," and roll down to the daily chart of SMH semi- conductor HOLDRs and the NDX below it. We outlined bearish price action/stochastic action in the SMH chart and warned of pending market failure. The same thing was pointed out a week prior in some "Sector Trader" stand ins we tried to fill Buzz Lynn's shoes with. At the time this index was soaring near the 100 range as INTC was posting all-time highs and pulling the sector with it. However, chart signals told a different story. Had we simply bought the SMH October 95 put when prices were testing the 100 range we could have picked off a chunk of the 5 - 12.5 price range from high to low it traded through. The best part is we could have leisurely entered a long-put play, put-debit spread or call credit-spread over the course of several sessions with powerful market forecasting well in front of this inevitable slide. Now looking into the future, do we see any other examples on the horizon that may be of interest to us? Why, I'm so glad you asked! We personally rode QQQ puts to glory during expiration week as the media people stood in shock over the recent sell off. See the daily stochastic lines plunge from overbought to oversold? Simply playing their direction between extreme values several times a year is enough to make any of us very happy traders. However, note the lower stochastic lows while correlating price action held considerably higher-lows than the end of July's spike. This tells us that NDX is oversold to a greater relative degree right now based on stochastic value than it was back in July. And it sits much higher today than then. Where might prices go when stochastic lines turn up out of extreme oversold and make the round trip again? Don't look now but I think the slow stochastic bar is peeking its head above the 20% extreme line. Could it be planning the next trip up this chart? The SEC forbids me to tell you I'm loaded with QQQ puts but I can tell you I maxed out my account this afternoon about 2:30pm with a position well in the black I feel real good about from here! Same story - different symbol. May's surprise rally should have surprised no one adept at spotting divergence. The market makes lower-lows, stochastics make higher-lows. What kind of divergence is this called? Beats me but I bought OEX calls regardless! Oil, oil, oil. That's quickly replaced the Fed - fear wall of worry. Oil stocks have soared to new recent highs even as they tanked our post-Labor day rally. Are they overdone? Not according to the media who were calling for oil well above $40 per barrel just a few days ago. Here's what the AMEX XOI oil index had to say; Higher-high price action but lower-high stochastic value. Had we seen this in the same chart before? What happened then? The XOI November 520 put was trading @ 5.88 "ask" with the index peaking out around the 550 area. I haven't priced it today but expect it might be somewhat more valuable now. Even in this illiquid market (no pun, I'm serious) we can buy at ask, sell at bid and profit from such large moves over time. Look at daily stochastics... think this index has reached a near-term bottom yet? For those who've asked I know of no books that cover this topic in detail, although I'm sure some exist. Rest assured we will cover these topics and much, much more in the very near future. See you soon & best trading wishes, austinp@OptionInvestor.com ************************Advertisement************************* Attention Online Traders: NobleTrading.com has become the first online trading firm to offer both Direct Access Trading, and web based trading to its customers. Trade Direct using any ECN, SOES, and SelectNet, or trade right through your browser using our web based trading application. FREE DSL service for active traders. Visit our website and sign up for a Free real-time demonstration! http://www.sungrp.com/tracking.asp?campaignid=504 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** QCOM - Qualcomm $75.03 -2.47 (+8.78 this week) Qualcomm develops and manufactures communications technologies and products. It's best known for its CDMA (code division multiple access) technology which is the industry standard for mobile communications. This technology is used in cellular phones, wireless telephone system equipment, and satellite ground stations. In addition, Qualcomm provides the trucking industry with a monitoring system call OnmiTRACS and is currently in a joint venture to develop a low-earth-orbit satellite communication system called Globalstar. They are also the #2 supplier of digital cell phones following Nokia. Most Recent Write-Up 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. Comments QCOM has re-emerged as a Tech favorite among market participants. The stock broke from a three-month long base near the $60 level early last week, and has since hurdled several key resistance areas. Today, QCOM took a break from its recent run and pulled back on typical profit taking volume, which might present favorable entry into the play. Aggressive traders might look for entry points around QCOM's pattern of higher relative lows, including the current $75 level and just below near $73. The more conservative traders might look to buy into strength as QCOM climbs past the $77 level or rallies through its near-term high at $78.75. BUY CALL OCT-70 AAO-JN OI=27033 at $ 8.88 SL=6.25 BUY CALL OCT-75*AAF-JO OI=13161 at $ 6.13 SL=4.00 BUY CALL OCT-80 AAF-JP OI=12382 at $ 4.00 SL=2.50 BUY CALL JAN-75 AAF-AO OI= 3281 at $13.00 SL=9.75 BUY CALL JAN-80 AAF-AP OI= 6763 at $10.88 SL=8.25 Picked on Sep 17th at $66.25 P/E = 89 Change since picked +8.78 52-week high=$200.00 Analysts Ratings 8-10-4-0-0 52-week low =$ 45.13 Last earnings 06/00 est= 0.27 actual= 0.27 Next earnings 11-02 est= 0.24 versus= 0.23 Average Daily Volume = 15.0 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Anybody seasick yet? Oil up, Euro down, and waves all around! Industrial stocks slid lower today amid increasing oil prices, a faltering European currency and continued profit warnings. The session started poorly for old economy issues as crude futures returned to the $37 range after the American Petroleum Institute reported that oil inventories fell lower than expected last month. Higher energy costs are one of the primary reasons for declining profits in industrial companies and concerns of further increases in oil prices are weighing heavily on the market. In addition, the weakening euro has reduced revenues for many of the companies that participate in overseas markets and the unwelcome trend is expected to continue. The heaviest losses on the Dow were seen in shares of American Express (AXP), AT&T (T), Coca-Cola (KO), Honeywell (HON), and United Technologies (UTX). The finance group was one of the few bright spots with Lehman Brothers (LEH) and Goldman Sachs (GS) both enjoying early rallies after announcing favorable quarterly results. On the Nasdaq, technology shares recovered from morning losses amid strength in Internet issues and biotech stocks. At the same time, semiconductor companies consolidated from recent gains and the telecom sector sagged on news of falling revenues at Sprint (FON). Sprint said its third quarter profits will come in below expectations and that growth is slowing in its PCS subscriber base. In the broader market, oil service issues moved higher after the news of declining reserves but utility shares continued to slump. With little impetus for a near-term rally, we will continue to focus on companies with favorable valuations and superior technical indications. Summary of Previous Picks: NOTE: September prices as of Friday's Expiration Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return METHA SEP 45 41.50 52.63 $3.50 8.6% PHCM SEP 85 78.25 88.56 $6.75 7.1% ADBE SEP 115 109.68 132.63 $5.32 6.4% SMTC SEP 80 75.43 100.63 $4.57 6.1% 2-1 Split 9/26 MANU SEP 70 67.81 90.13 $2.19 6.1% BLDP SEP 105 103.18 111.00 $1.82 6.0% MIPSB SEP 45 43.25 47.75 $1.75 5.4% MIPS SEP 45 42.88 53.44 $2.12 5.0% ARTG SEP 90 87.63 89.81 $2.18 4.7% NAVI SEP 45 42.87 42.50 -$0.37 0.0% ORCL SEP 85 82.75 78.31 -$4.44 0.0% NMSS OCT 65 59.75 73.00 $5.25 6.1% OSIP OCT 45 42.06 65.44 $2.94 5.7% ALXN OCT 85 80.25 109.00 $4.75 4.9% Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return ITWO SEP 160 159.06 172.19 $0.94 24.8% JNPR SEP 175 174.19 201.69 $0.81 21.8% MANU SEP 65 63.56 90.13 $1.44 14.7% MANU SEP 70 69.19 90.13 $0.81 14.5% MIPSB SEP 45 43.37 47.75 $1.63 14.2% METHA SEP 40 38.37 52.63 $1.63 14.0% INFA SEP 85 83.50 99.94 $1.50 10.8% ARTG SEP 85 83.63 89.81 $1.38 10.4% TUTS SEP 85 83.19 87.50 $1.81 10.0% MIPS SEP 40 38.87 53.44 $1.13 9.9% BOBJ SEP 95 93.31 104.88 $1.69 9.9% ADBE SEP 105 102.75 132.63 $2.25 9.4% INFA SEP 90 89.19 99.94 $0.81 9.1% VRTX SEP 58 56.44 80.38 $1.06 9.0% Adj 2-1 split NAVI SEP 40 39.00 42.50 $1.00 8.9% QLGC SEP 85 83.50 93.38 $1.50 8.7% EMLX SEP 55 53.75 99.00 $1.25 7.9% SMTC SEP 70 68.62 100.63 $1.38 6.9% 2-1 Split 9/26 MMCN SEP 55 53.94 106.06 $1.06 6.7% MXIM SEP 65 63.75 76.31 $1.25 6.6% INKT SEP 100 98.62 120.50 $1.38 6.3% PHCM SEP 65 63.50 88.56 $1.50 6.2% MERQ SEP 100 99.00 124.50 $1.00 6.2% BLDP SEP 100 99.44 111.00 $0.56 5.5% ORCL SEP 80 79.06 78.31 -$0.75 0.0% ALXN OCT 80 76.75 109.00 $3.25 11.4% OSIP OCT 40 38.56 65.44 $1.44 10.0% METHA OCT 45 43.06 53.00 $1.94 9.7% NMSS OCT 55 53.00 73.00 $2.00 8.4% AVNX OCT 115 111.50 130.25 $3.50 7.2% RMBS OCT 60 58.50 82.50 $1.50 6.7% RIMM OCT 60 58.37 78.69 $1.63 6.4% PALM OCT 40 39.12 54.50 $0.88 6.1% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return SNWL SEP 100 101.31 60.00 $1.31 10.8% 2-1 Split 9/18 LSCC SEP 80 81.00 61.31 $1.00 8.7% TUTS OCT 120 122.31 74.38 $2.31 9.8% New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Naked Put Extravaganza! *************** AGIL - Agile Software $81.06 *** Hot Sector! *** 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" Tuesday, thanks to the rally in technology issues, an Oracle (ORCL) upgrade and new industry optimism ahead of a host of company conferences. The bullish activity continued in today's session as investors searched the Internet E-commerce sector for additional bargains. 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. AGIL - Agile Software $81.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put OCT 60 AUG VL 31 1.44 58.56 8.3% *** Sell Put OCT 62.5 AUG VZ 10 1.81 60.69 10.2% Sell Put OCT 65 AUG VM 30 2.38 62.62 12.9% ****** BLDP - Ballard Power Systems $111.44 *** Hot Sector! *** Ballard Power Systems is developing proton exchange membrane (PEM) fuel cells and fuel cell systems. A fuel cell is an environmentally clean power generator that combines hydrogen fuel with oxygen, without combustion, to produce electricity, with pure water and heat as the only by-products. It produces power efficiently and continuously, as long as fuel is supplied. Ballard is developing their PEM fuel cells for use in transportation, stationary power generation and portable applications. The fuel-cell sector is rallying again as investors realize that with crude oil prices on the rise, the futuristic technology is becoming much more attractive. Fuel cells are a low polluting, energy generating technology that can be used in a wide range of industries with various practical applications such as powering automobiles or replacing cell phone batteries. Their potential is enormous with supplies of oil falling and the cost of finding new energy sources rising. Since they use a chemical process to generate power without burning, and contain no moving parts, the unique products are efficient and reliable while emitting few impurities. In addition, fuel-cell technology offers potential in third-world countries as it can be utilized in constructing power grids with low installation costs in remote areas. Investor interest in fuel-cell developers is growing and Ballard Power is a leader in all of the primary technologies. Ballard's strong points include sound management and a solid customer base along with established relationships with many of the potential end-users in the industry. The recent rally above technical resistance was further supported last week after the issue was upgraded by CS First Boston to a "strong buy" and the long-term up-trend appears to be firmly established. After a brief bout with profit-taking, the issue is "on the move" again! The stock has excellent buying support near our cost basis and the favorable option premiums will allow us to speculate, in a conservative manner, on the future movement of the issue. BLDP - Ballard Power Systems $111.44 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put OCT 90 DFQ VR 72 1.50 88.50 6.2% *** Sell Put OCT 95 DFQ VS 123 2.44 92.56 8.1% ****** EXTR - Extreme Networks $110.25 *** Post-Split Rally? *** Extreme Networks is engaged in the design, manufacture and sale of high performance networking products based on Gigabit Ethernet technology. They provide end-to-end switching solutions that meet the requirements of enterprise LANs, ISPs and content providers. Their Summit and BlackDiamond switches share a common ASIC, software and management architecture that facilitates a relatively short product design and development cycle, thereby reducing the time-to-market for new products and features. Extreme reached a new, all-time high today and was very active during the session after Salomon Smith Barney raised its rating on the telecommunications equipment maker. Analyst B. Alexander Henderson upped his 12-month price expectation for Extreme to $155, a 50% rise from current levels, based on a number of key factors. In a research note, Henderson said he expects the company to deliver another exceptional quarter with financial results well ahead of forecasts. In addition, he also expects margins to improve as revenues grow faster than expenses. New product launches for October are on schedule and additional hires in the current quarter will provide potential for future growth. EXTR has received a number of other bullish ratings from several analysts, including Morgan Stanley Dean Witter and Lehman Bros. With this proliferation of positive analyst's opinions, the stock has climbed impressively above a recent trading range, ending at a new, all-time high near $110. The current technical outlook is favorable and our conservative position offers a great way to participate in the volatile issue with relatively low risk. EXTR - Extreme Networks $110.25 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put OCT 82.5 EXR VX 8 1.44 81.06 6.2% *** Sell Put OCT 85 EXR VQ 167 1.94 83.06 8.2% Sell Put OCT 87.5 EXR VY 68 2.31 85.19 9.6% ****** NTAP - Network Appliance $141.13 ** On The Move! *** Network Appliance designs, manufactures, and markets high performance network attached data storage and access devices which provide fast, reliable and cost-effective file service and content delivery solutions for data-intensive networks. They pioneered the concept of the network appliance, an extension of the industry trend toward specialized devices that perform a specific function in the network, similar to the development of the router for network communications. Their Internet caching solutions (NetCache appliances) and file servers deliver fast, cost-effective access to network-stored data and allow shared file services for UNIX, Windows NT, and the Internet. Network Appliance rallied this week in the wake of bullish comments by tech stock guru George Gilder. At the Gilder/Forbes Telecosm Conference on Friday, Gilder made some extremely positive remarks concerning the company, and NTAP's share value has moved substantially higher in subsequent sessions. NTAP is undoubtedly a leader in its industry but Gilder's selection of a particular issue often translates into tradable rallies as investors follow what's commonly known as "The Gilder Affect." Gilder publishes a monthly newsletter that focuses on companies whose technologies could transform the information economy. Strangely enough, the shares of companies featured in the newsletter are often observed to rally significantly the day the report is released. In this case, his outlook certainly had some effect but we also believe in the company's fundamental future. Our target position is a conservatively optimistic entry point with little downside potential and a favorable risk/reward ratio. NTAP - Network Appliance $141.13 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put OCT 110 ULM VB 446 1.56 108.44 5.3% Sell Put OCT 115 ULM VC 364 2.19 112.81 6.8% *** Sell Put OCT 120 ULM VD 343 3.38 116.63 8.8% Sell Put OCT 125 ULM VE 179 4.50 120.50 10.2% ****** PDLI - Protein Design Labs $117.06 *** Sector Leader! *** Protein Design Labs, a member of the S&P 600 Small Cap Index, is a leader in the development of humanized monoclonal antibodies for the prevention and treatment of disease. They have licensed rights to their first humanized antibody product, Zenapax (daclizumab) to Hoffmann-La Roche Inc. and its affiliates, which markets it in the U.S., Europe and other countries for the prevention of kidney transplant rejection. They have seven other humanized antibodies in clinical development for autoimmune and inflammatory conditions, transplantation and cancer. Protein Design has been "on the move" after announcing earlier this month it will adapt a murine antibody for human use under an agreement with pharmaceutical giant Eli Lilly (LLY). Lilly will develop it as a pharmaceutical product. Protein Design will be compensated by Lilly with a non-refundable upfront fee of $1.7 million, milestone payments upon completion of specified objectives, annual maintenance fees and royalties on sales of the humanised antibody. On Monday, the announcement was followed by a second agreement with Lilly for another humanized antibody, with terms similar to the first, except the upfront signing fee for this agreement was $1.36 million. Even as biotech stocks slumped earlier in the week, PDLI managed to lead the group and today the issue closed up $15 at $117, on almost twice its normal volume. We think that's a fairly good indication of its strength, relative to other companies in the sector. PDLI - Protein Design Labs $117.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put OCT 72.5 RPV VV 0 1.63 70.87 6.6% *** Sell Put OCT 75 RPV VO 61 2.19 72.81 8.7% Sell Put OCT 77.5 RPV VW 0 2.38 75.12 9.4% ****** VRTS - Veritas $136.94 *** An OIN Favorite! *** Veritas is an independent supplier of storage management software. Their products help to improve the levels of control, automation and manageability in computing environments. Their products provide protection against data loss and corruption, allow rapid recovery after disk or computer system failure, enable IT managers to work efficiently with large numbers of files, and make it possible to manage data distributed on large networks without harming productivity or interrupting users. Veritas develops and sells products for most popular operating systems, including UNIX and Windows NT. This company is simply one of our favorites for long-term stock portfolios and the new demand for Application Software Providers has boosted the bullish issue out of a previous trading range. The fundamental outlook is very positive; revenues are expected to grow substantially in the coming year and the company should see higher share values in the future. The current technical trend is favorable and we offer this position as an entry point, based on the chart indications. Obviously, the issue is slightly over-extended but a reasonable cost basis exists near the previous resistance area at $110. VRTS - Veritas $136.94 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put OCT 105 VUQ VA 254 1.38 103.63 4.8% Sell Put OCT 110 VUQ VB 921 2.06 107.94 7.0% *** Sell Put OCT 115 VUQ VC 806 2.88 112.12 8.2% Sell Put OCT 120 VUQ VD 495 4.25 115.75 10.2% *************** BEARISH PLAYS - A Naked Call *************** MRVC - MRV Communications $56.50 *** Trading Range? *** MRV Communications has created several start-up companies and formed independent business units in the optical technology and nternet infrastructure area. Their core operations include optical networking and internet infrastructure products, primarily subscribers' management, and physical layer, switching and routing management systems in fiber optic metropolitan networks; and fiber optic components for the transmission of voice, video and data across enterprise, telecommunications and cable TV networks. A recent Barron's article, based primarily on the views of Mark Roberts of Off Wall Street Consulting Group, did nothing to help MRVC’s current bearish trend. The company's share value has fallen precipitously since reaching a new high in early September and now it appears the issue is struggling in the wake of a major downtrend. Obviously, the company is fundamentally sound but the technical picture is less than outstanding. We will utilize the current consolidation period and the overpriced option premiums to profit from these relatively conservative, bearish positions. The probability of the share value reaching our target strike appears rather low but there is always the possibility of a recovery rally so monitor the issue daily for changes in technical character. MRVC - MRV Communications $56.50 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call OCT 77.5 RVY JW 87 1.75 79.25 13.6% Sell Call OCT 80 RVY JP 1330 1.50 81.50 11.9% Sell Call OCT 82.5 RVY JX 253 1.25 83.75 10.1% Sell Call OCT 85 RVY JQ 467 1.00 86.00 8.2% *** ***********************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. 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