The Option Investor Newsletter Thursday 09-21-2000 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/092100_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 09-21-2000 High Low Volume Advance/Decline DJIA 10765.50 + 77.60 10783.40 10660.50 1.09 bln 1065/1722 NASDAQ 3828.87 - 68.57 3892.40 3813.12 1.61 bln 1492/2429 S&P 100 780.39 - 2.16 782.55 772.66 totals 2557/4151 S&P 500 1449.05 - 2.29 1452.77 1436.30 38.1%/61.9% RUS 2000 514.35 - 7.08 521.43 513.86 DJ TRANS 2587.45 - 4.00 2607.64 2569.73 VIX 23.56 + 0.79 24.61 22.96 Put/Call Ratio .61 ****************************************************************** Intel warns after hours! Who is next? The Dow struggled all day and fought valiantly for every positive point trying to put as much distance as possible from the 10567 low from Wednesday hoping to make that the low for the month and position itself for October. A positive warning from MMM this morning gave the Dow a needed lift and retailers WMT and HD joined druggies MRK and JNJ to power the Dow for a +77 point gain. The Nasdaq never traded in positive territory and struggled to stay above 3800. The profit taking from the +200 point intraday gains since the 3702 Monday low weighed heavily on the tech sector. The battle between the bulls and bears for control this week took a serious turn for the worse after the market closed today. Intel warned that they would miss estimates for this quarter due to higher expenses and weaker demand. Remember the Ashok Kumar downgrade on Sept 5th? The stock and the market died for over a week and we are trading -425 points below those levels today. The warning today, based on those key words "weaker demand" may be a real party pooper for Friday. They could have said higher oil prices, lower Euro, price competition, anything but weaker demand! The qualifier on the headline news event was weaker demand in Europe but investors will disregard the Europe comment and focus entirely on the "weaker demand" words. They also said expenses were +7%-9% higher than expected due to higher raw material costs. Can you spell inflation, most likely oil induced but still a Fed magnet. Stocks from all the related sectors were trading down substantially after the announcement. DELL -5, CSCO -5, AMD -5, AMAT -12, KLAC -9, JNPR -18, NTAP -14, TXN -6, EMC -7, CPQ -3, MOT -3, IBM -3, ORCL -5, HWP -5, MSFT -4, CLRS -10, ALTR -6, MU -11, SUNW -7. When Intel was released for trading after closing at $61.50 the drop was instant and on large volume. Huge blocks were moving in the $48-50 range or -13 from the close. The impact of the warning on the markets at the open will be drastic. With Intel, Microsoft, IBM, HWP, CPQ all in the Dow the cumulative impact will be something like -150 points assuming the after hours drop of -30 points for those stocks holds. The Nasdaq will fare even worse. With every major Nasdaq stock down huge the damage could be severe. DELL, ORCL, CSCO, MSFT, INTC, SUNW, KLAC, NTAP, AMAT are down over -75 points in after hours and these are just the headliners on the Nasdaq. The "me too" stocks will all suffer the same fate. We could blow through 3700 on the open with no effort at all. No sector appears to be safe. Even the bullet proof fiber optic sector is down in after hours. CIEN -10, GLW -22. The bright side will be the buying opportunity. With significant events like this there is always the tendency to over react and we see a big sell off in after hours. The open can produce a big follow through and then the bargain hunters jump in. There is a lot of money on the sidelines and a serious downward move could produce a buying reaction. The dark side is October still ahead. Only two weeks from October we could see that same money deciding to wait to see if any other high profile warnings are in the wings. If Intel is warning then does that mean DELL, SUNW, GTW or ??? are about to warn also? Yesterday Sprint warned and today we have Intel and Goodyear Tire. Morgan Stanley missed their estimates today by -.08 cents due to lower trading volume. My headline for tonight was going to be "CURBS IN" after seeing the trading curbs forced onto the market on Wednesday after what seems like months of less volatile trading. Friday could be a lock limit type of day as well. The Nasdaq futures are down almost -100 and the S&P Futures are down -32. There is a lot of darkness before daylight and the market open in the morning and anything can change but the odds of a serious gap down are about 100%. We have had several cancellations recently because we were too bearish about our September outlook. Personally, I think a -500 point drop on the Nasdaq and a -900 point drop on the Dow would qualify as bearish. I would be the first to admit that I am never right all the time (and no one else I know either) but I have been warning you about September since two weeks before Labor Day. This is a rough month for just exactly the reasons you saw today. Summer is a tough selling season and third quarter profits are normally hit and miss. The warning season will be over in about two weeks and the markets will focus on the actual earnings which start the first week of October. It is then that the real surprises will appear. Those that miss estimates after not prewarning will be punished severely. The number one question tonight is how to play the morning drop. First we need to determine when the drop is over. Normally we will get a huge downward spike at the open followed by an upward spike as the first wave of sellers dries up and the first wave of bargain hunters rush in. This could take 10-15 min. The size of the upward spike, if any, will impact the sentiment of the remaining sellers and buyers waiting on the sidelines. A weak spike will create a second wave of selling and dumping by the bargain hunters that jumped in too early. The second dip would be the one to buy but only after the ticks turn positive and the market heads up again. The possibilities are endless for combinations and many scenarios would contain increased selling as the day wears on. Investors may not want to hold any positions over the weekend and the possibility of another warning before the Monday open. I expect Intel to try and sugar coat the news to prevent a total stock melt down. They will probably be on CNBC talking about the good growth, strong sectors and hot products. Whatever they can say to provide optimism. Investors looking for any hope whatever will cling to these comments and use them as an excuse to buy. This may take the sharp edges off the disaster but I doubt they can make it go away. Before you decide what to play on Friday you should consider the broader market direction. Yes, the Dow was up strong today but the broader market S&P-500 dropped -2.29. The S&P has been falling and is sitting exactly on its 200DMA. Same with the Wilshire-5000. Both were poised to break under these critical points and Friday could be the last straw. The S&P-100 is already under the 200DMA and only 4 points above the June/July lows. This looks like a recipe for disaster if investor sentiment turns negative tomorrow. Consider carefully the risks before you commit your funds. If you must trade you should only do it on a small scale. One way to eliminate some risk is the target shooting approach. Pick a stock you would like to own and enter a limit order for significantly less than the after hours closing price. JNPR for instance closed at $211 in regular trading and fell to $200 in after hours. First support is $192 with strong support at $183. Setting a limit order at $190 could catch a selling spike which may only last several minutes. More conservative traders could set a limit closer to the $183 number but would have a much smaller chance of being filled. This works the same way with options. The Oct $190 call closed at $30 but that was based on JNPR at $211. Take off the $11 drop and you have $19. Assume an opening spike downward and cut that $19 to $15 and put your limit order there. If you get filled you are positioned for the rebound. Pick a stock that does not relate directly to Intel. Dell for instance would not be a good target. A stock like a biotech or drug would be good. They will drop with the market but will rebound as money rotates out of PC stocks and into other sectors. The problem with this strategy is the possibility of a continued drop. If the bargain hunters elect to remain on the sidelines until warning season is over then the market could continue to sell off. If we do get a big negative number but above 3700 near the close I would take a chance on a Monday rebound. Under 3700 I would steer clear. Fasten your seatbelts. Any way you play it Friday should be really exciting. At the October Advanced Options Workshop in Denver we will be discussing strategies to take advantage of market conditions like we will see on Friday. Strategies for entering trade and also repair strategies for trades that get caught by disasters like this. Just because your options are worth half what you paid for them does not mean you cannot escape with a profit by applying the correct repair strategy. Come, have fun and learn how to be a better option trader. For more information: http://www.OptionInvestor.com/workshop Good luck and sell too soon. Jim Brown Editor ********************* FALL SEMINAR SCHEDULE ********************* The Boston seminar is September 28/30th. Options expiration is over and earnings still a week 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 Rhoads and staff. At less than the cost of a bad trade you can learn how to analyze stocks and trade options like the pros. Don't wait, do it now. Date City Sep 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 **************** Feels Like October Already By Austin Passamonte Here in western NY we have a frost warning for tonight. Cover the tender plants or watch them perish. Transition from the joys of summer to the reality of winter are never easy to accept. Have you heard about high oil prices yet? Poor earnings reports? Sector downgrades? Park your money in bonds? Yuck, perish the thought! After "bearing" with our negative posture for the past several weeks can you tolerate a bit of emerging bullishness? I thought so. We're not saying it's all uphill from here. We may not go a lot higher on a permanent basis for some time, but a near-term bottom is closer every day. We've watched the OEX test the low 770 range twice and bounce. The SPX tested 1430 area twice and bounced. The Dow and NDX have each been pressured and continue to be but refuse to break down entirely. What's behind all this? You know the fundamental reasons why you should sell all your stocks and finally buy that emu farm you've longed for. We won't bore you with all that. Market Sentiment is controlled by technicians and we will bore you with that. The major index charts aren't beautiful but they ain't that bad. Let's run through them; The SPX has twice tested and held an ascending trendline dating back from late-February lows through mid-April and late-May lows as well. The absolute bottom support has held yesterday and today so far. Overhead resistance begins just above 1460 as it now rests just above the 200 DMA. The Dow is currently trying to penetrate a similar ascending trendline just overhead around the 820 area. A close over this would be welcome news for our bulls. The NDX has twice tested its own ascending trendline drawn from late-May intraday lows across the early August intraday low as well. It has been tested and held the last five sessions out of six. Same goes for the SMH semi-conductor HOLDRs. Oscillator signals are all buried in oversold on every major index and the hourly & 30 minute charts are now lining up the same. Good news again. We could be just part of or one session away from the next rally. Open interest disparity is huge on underlying puts and light on overhead calls. This means everyone is loading up for the big drop and eschewing calls, knowing that we are sure to test new lows. Overhead resistance is scant with underlying support just about impenetrable in some cases. The VIX extreme high near 24+ has been penetrated twice in its daily Bollinger Band, each time when the OEX tested the 770 low range. Both times the VIX backed off and the OEX sprang back. Need we go on? Why pile on when you get the point. Surface fear in the market is palpable but underlying technical studies are all pulling together in silent but convincing fashion. We've tested the "bottom" several times so far and felt some sand in between our toes. Oh, and one other thing; INTC stepped up to the confessional after the close. Something or other about missed earnings this time around. Did I fail to mention that? Pre-market prices are down 12+ points taking all indexes and most everything with a symbol along for the ride. Not good. We can expect a smash-down capitulation day tomorrow that will likely spill over into next week. Fine. Why wait in agony for October to get here and languish in a sideways market. Sell it off and let's find our bottom from there. The commercial futures traders who are heavily net-short will happily cover from happless victims selling the farm from here. Their next move will be to start accumulating long positions at the levels we're about to hit. Will Intel drop to $30 a share? Count us in if it does! The next few quarters aren't that far away for us to load up on 2001 LEAPs. Will it tank everything in it's wake tomorrow? Most likely. Time to sell our blood and wire the proceeds to the brokerage for LEAPs coming soon. All things in perspective here; stand aside and wait for the bounce. It won't be long now. We'll repeat ourselves here until the end of time; calls and puts as circumstances dictate is our great advantage over all other equity traders. ***(Market Data Unavailable)*** (On a personal note for all who inquired about last night's "Trader Corner" reported put play, it was the mother of all typos. We bought QQQ 96 calls @ 3.25 Wednesday that stopped out on a trail @ 3 this morning. Wonder what they'd be worth tomorrow? Sorry for the massive confusion!) ************** MARKET POSTURE ************** As of Market Close - Thursday, 09/21/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,765 10,450 11,150 ** SPX S&P 500 1,449 1,425 1,495 ** COMPX NASD Composite 3,828 3,650 4,000 OEX S&P 100 780 770 810 ** RUT Russell 2000 514 510 550 NDX NASD 100 3,718 3,500 3,850 MSH High Tech 1,015 980 1,055 BTK Biotech 732 690 780 XCI Hardware 1,464 1,400 1,520 GSO.X Software 454 430 470 SOX Semiconductor 984 940 1,060 NWX Networking 1,202 1,180 1,280 INX Internet 540 530 580 BIX Banking 592 580 635 XBD Brokerage 633 625 685 IUX Insurance 728 705 760 RLX Retail 855 805 890 DRG Drug 396 365 410 HCX Healthcare 824 775 830 ** XAL Airline 143 144 152 ** OIX Oil & Gas 308 296 332 Five alarms were triggered in the previous two sessions with the HCX triggering a resistance alert. Intel’s earnings warning after the bell could spell trouble for the COMPX and most likely the SOX. Watch the DRG, if the HCX continues its advance. Don’t over-leverage on margin! Lowering support (DOW, SPX, OEX, XAL) Lowering resistance (DOW, SOX, XBD, XAL) Raising support (HCX) Raising resistance (HCX). ************** TRADERS CORNER ************** Tracking Option Volumes: Part II By Molly Evans A couple of weeks ago, you read it here first, that there was a high volume of call options being bought on QCOM. The rewards came almost immediately. I like this indicator! Tracking option volume requires a little bit of investigative work. When you see the volume in particular options, you have to determine if it's being equally bought and sold on the opposite side of the play too. Someone might be hedging through spreads or they might be selling covered calls to offset risk of holding the underlying. Yesterday, I tracked the top option volume throughout the day. The usual suspects showed up, CSCO, MSFT, INTC but what was interesting was that as Sprint PCS stock sold off, so did the whole telecom sector but the option buyers were catching all the ground balls. T and NOK options were well taken up over average daily volumes even though their charts look pretty unimpressive. In fact, AT&T (T) is at lows that it hasn't seen since October of 1997. Is this where you want to call a bottom, throw your hat in the ring and bet that it'll turn on a dime to be profitable by October's expiration? Why are they buying October at-the-money calls? A good part of the answer probably lies over in the put section. While the October ATM call volume was three times over the average daily volume, so too was the ATM put volume. I'd assume the buyer is initiating some sort of spread or other hedge play. Then again, lots and lots of people like to buy low and sell high. If they're picking T to do that, they've had lots and lots of chances to do so. The January 30 call options were on a fire sale and options buyers scooped up around 7,000 contracts of TAF. Traders wanted a piece of NOK too. The October 43.75 contracts traded more contracts in that one issue than all the other puts combined. That speaks to people just wanting the NOK contracts while it was on a dip with the big sell off that was occurring. The underlying itself was rather boring as it has been for nearly a month. It traded in a 2.25 point range on less than 65 day average volume. What's more is that NOK has been trading in this tight point and a half to two point range for most of the past month's trading. What does this do? You all know the answer. Mary and Lee discussed it just earlier this week. It shrinks the implied volatility and the options become "cheap" in terms of historical range. But let's back up and revisit the AT&T option volume. Where might a savvy option player place their bet for a profitable play? Here's something to consider. All things being equal, the market not crashing or breaking out to runaway highs, the most logical place for AT&T to close in price at October Expiration is just above $30 but certainly below $35. "Bravo and brilliant!" you say (as you throw dirty socks at me)? Ok, ok, so it's not the greatest example as AT&T hasn't seen $35 since June 22. However, let's look at how this determination has been concluded. As of half an hour before the close today, there were 56,950 call contracts in-the-money versus 137,288 contracts that were out-of-the-money. On the other side, there were 59,449 put contracts in-the-money versus 64,139 puts out-of-the-money. It's the theory of Maximum Pain. What will cause the most maximum of pain to the holders of T options at expiration? Clearly, if T closes above $30, then 137,288 call contracts will have burned off all value and 64,139 put contracts with strikes of $30 and below will fall on their swords as well. Only 56,950 calls and 59,449 puts would have any value. I used this "indicator" to save me from myself just the other day. Recall that I was at the OIN seminar in Chicago late last week. On Thursday afternoon, Chris pulled up Q charts to have a look at the market just before close. Imagine this! The day before triple witching, the Nasdaq is screaming. You know me, Miss Bear, sniffed around that screen to see what I "know" is a "can't miss" play. I quickly spotted my prey and slipped quietly up to my room to place a nice big bet (and that's exactly what it is these days) on some INKT puts. INKT was up $15 on no news and I felt pretty smug about buying the September 120 puts. It was only after that purchase that I thought to look at the maximum pain values for INKT for September Expiration. Sure enough, INKT would be scheduled to mysteriously close above $120 by the time the bell rang to end the next day's trading. So, the morning came and can you believe it? The market is lower! INKT was actually pretty strong considering how weak the market was the next day so I took my near 50% gain as quickly as it presented itself and got back to my meeting. Sometimes better to be lucky, eh? Guess where INKT closed at on Friday? $120.50. Amazing how that works, isn't it? So what else was on the call volume list? Would you believe a gold mining stock hit the big numbers yesterday? Newmont Mining (NEM) Oct 17.5 call traded one huge block that made the ratio of that trade 17:1 vs. average daily volume. That's one thing but then 1280 contracts of the Jan 30 calls traded. The 65-day average volume for that issue is 31. I don't have any answers, I'm just snooping around. Louis Rukeyser loves to kick the "Goldbugs" in the teeth every week on his show. Yet, every dog has his day. Who thinks gold is going to rise from its long dreary descent? NEM saw its all-time highs back in the Spring of 1996. Now, just yesterday it hit another 52 week low. Someone bottom fishing again? A gold fund selling covered calls? Why would they sell the 30s? Is Japan going to hold good on Prime Minister Hashimoto's threat several years ago to go to gold if it had to in regards to settlement trades? The international scene is always something to keep an eye on. As the strong dollar and rising oil costs undermine world economies, those on the other side of the ocean could throw a couple unexpected punches at any time. Would you have ever considered buying oil index contracts a year and a half ago when it was 48% less than what it is now? I'll bet you've considered it within the last six weeks though. Now please don't think we're advocating you go and buy options on the gold industry. That is one nasty downtrend and it's not like gold has a growth rate or a PE ratio. I was waving the flag on QCOM but gold? No. However, if you hear something that grabs your attention, it never hurts to remember our little trick of following the volume trail. Stranger things have happened. So how about this market? Isn't it interesting that this time, the generals have been shot before the soaring eagles? ORCL, INTC, NT, JDSU, MU and SUNW, some of the biggest and brightest of stars have been struggling. Yet, as I watched the trades go through on JNPR the other day, I watched the PE rise just as fast as the green candles. Pretty amazing to watch. Did I hear someone say "soft landing"? The news has just now been released on INTC warning. I think we can pretty much put that idea to rest. I know a lot of people are out there getting creamed. Please know you're not alone, professional traders are getting whipsawed each way too. We're taught to water the flowers and pull the weeds. Well, the flowers are quite deceptive and the weeds are plentiful. This is something I constantly struggle with too. Take my QCOM example. I sold all contracts into strength last Friday thinking that Monday the market would be down. It was down alright but QCOM was up 4 or something. The next day it was up 7 or 8. That made it a three-bagger. Who gets three-baggers on the long side in this market? I would have but I took the profits and ran. There are so many rules to trading. QCOM was a flower and I cut it before its prime. Aren't there just as many who advocate to take any profit and run? No regrets here (well...maybe a little). I made three trips to the bank with QCOM. That's terrific but it just goes to show us that emotions are very difficult to overcome when trading. It was fear of watching dissolving profits on the day I sold and unabashed greed and loathing on Tuesday as I watched it go higher and higher without me. "I will not chase. I will not chase. I will not chase." It looks like it's going to be ugly here for a bit. Remember your discipline. All these stocks are going to be on sale tomorrow. Be sure you're picking up a real bargain though. Volatility will be high and opportunities will be all around; good luck to you and be careful out there. ************************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 ************* Don't Know Which Direction to Trade? By Buzz Lynn sectortrader@OptionInvestor.com It's hard to keep your horns sharp with bears gnawing - no, crunching - off your points. Well, as we begin to write this, INTC has just warned that business has slowed overall and the shares have halted trading. Can you guess? Yep - earnings warning. Gross margins will fall from 63/64% to 62% while interest and other expenses will increase to $900 mln from earlier estimates of $800 mln. That's $100 mln in additional interest expense. Weak sales in Europe are also shouldering much of the blame. So, another Wall Street axiom was just shattered. Interest rates DO matter and can affect even the mightiest of tech stocks. Get use to it. So how bad is it going to be tomorrow? DELL is trading at $34, MSFT at $60.50, AMD at $24.50, ORCL at $75, SUNW at $112, CSCO at $58.13, HWP at $97, and IBM at $120. Tomorrow is going to be painful for the NASDAQ, and the worst part is that a gap down at the open is going to prevent us from escaping with a protective stop order. Since INTC and MSFT are a part of the Dow, it too will take a beating. The QQQ is already trading down at $88.50 from its $92 close today. Roughly translated, that's about 3600- 3700 on the NASDAQ. INTC reopened after hours at $50. We're going to have to take our lumps. All right, let's assume that INTC didn't warn. We'd be talking about indecision on part of investors as to which direction the market will go. Despite slight follow through on Tuesday's rally, the technical indicators, though inching up, have yet to give us a stochastic and MACD buy signal on a daily chart on the broader market OEX. So close yet so far. Our stochastic only managed to get to 19.59%. We need to see it clear 20% for a good entry. As tempting as it would have been to jump the gun anticipating an upturn, we'd be burned big-time tomorrow. Just like a pilot in instrument conditions, we've got to trust our gauges, not the seat of our pants. Fundamentally too, advances are rarely made without the participation of financials and tech stocks, neither or which did well today. Unfortunately, we must admit defeat in taking a QQQ trade yesterday. In fact, we did get our stochastic signal entry on a daily chart and an apparent crossover of the MACD yesterday. There's also a saying on Wall Street that "the second mouse gets the cheese". While today's pullback to support of 3800 (actually 3813), might have given us second mice a better entry, INTC just threw the match in favor of the unforeseen third mouse. Now, time to look to the clouds for a silver lining. Tomorrow morning may give us our capitulation we've been looking for where investors throw in the towel on everything technology related. Ideally, the selloff would be sharp, with marketwide capitulation setting us up for a way oversold rebound late in the day or next week. We can dream can't we? However, earnings warning season, high oil prices and currency risk will keep the bias to the downside. Also, an increasing VIX (as high as 24.58 today) is showing that the market is gaining more fear. It may not be over tomorrow. Unless you see a substantial rebound over tomorrow's gap down opening price, or a V-bottom rebound off the morning low, we suggest sitting on your hands waiting until the dust settles. Good market timers and day trader types, however, may want to take advantage of the volatility for some quick trades. If we see some support, that may actually be an opportunity for a straight buy, or long leg of a spread. Use good judgement on your entries and if you are wrong, cease to be wrong by getting out. With so much pessimism, tomorrow may be a great day to take advantage of some blood in the streets. ***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 $88.31 -6.31 (-2.94 this week) Actually, prior to INTC's warning, the market finished regular trading at $92.56. Well, INTC warned, techs and QQQ will suffer tomorrow. Goodnight, Irene. End of story (unless the story line changes again by tomorrow morning). The only positive we can see is if the selloff is met with a sharp V-bottom rebound. That may not make a great long-term trend, but it should be tradable. Some of you may be wondering why we don't pick up puts at this point. Good question. The answer is that we won't see much if any profit thanks to an anticipated gap down. More importantly, the market is oversold technically. It would be poor trading practice to expect a technically bottomed chart to continue further down. That said, the charts may not get much lower, but the market sure can, which would give us a few individual short-term put trading opportunities on a fundamental basis, which we encourage you to take advantage of if that suites your trading profile. However, we are mostly about technicals here and are thus staying clear of puts until we see "oversold" on the charts again. Support is at $88, 85, and $83 thanks to INTC. The NASDAQ is likely to trade in the 3600-3700 range tomorrow, maybe lower. You may want to use any V-bottom as a trading opportunity, especially if 3700 holds by the close tomorrow. Resistance now moves to $90-$91, $93, then $94.50-$95.50 Calendar Spread: This one is simple. This is likely not the time to be selling the short leg. Now is the time to be looking for an entry on a long leg or buy back a short you've already sold. A V-bottom on the chart might make a nice buying opportunity, but wait for the bottom, or better yet wait for the dust to settle. That may mean sitting on your hands tomorrow and waiting for a technical reversal. Of course, those accustomed to target shooting can shoot at support of $88, 85, and $83 (your risk profile, you decide) if you want to risk jumping the gun. Better confirm blood in the streets though first. Remember, our job is to buy the long leg cheap (cover the short leg too) and sell the short leg for as much as possible letting time decay eventually pay for the long position. BUY CALL JAN- 85 YQQ-AG OI= 654 at $14.88 SELL CALL OCT- 90 QVQ-JL OI= 7648 at $ 6.13, ND = 8.75 or less SELL CALL OCT- 95 QVQ-JQ OI= 7170 at $ 3.38, ND =11.50 or less Long Call: Same principle here. Wait for a bottom. It may come at $88, $85, or $83. Otherwise, those of us trying to play the technical moves will have to wait until the short stochastic crossover of the long stochastic and the 20% line. MACD should confirm it (and would have saved us from taking the trade yesterday if we'd been a bit more patient). Let the dust settle. Don't try to catch the falling knife. You may be able to daytrade a V-bottom, but don't walk away from your screen if you do. BUY CALL OCT- 85 YQQ-JG OI= 232 at $9.75 SL=6.75 BUY CALL OCT- 90 QVQ-JL OI= 7648 at $6.38 SL=4.25 BUY CALL NOV- 90 QVQ-KL OI= 69 at $8.38 SL=5.75 Bullish Put Credit Spread: Don't even think about it until this market finds a bottom. Gunslingers are still welcome to partake, but be sure you can get out if the entry you've chosen fails to give you the desired outcome. We list no strikes tonight until we see evidence of a clear bottom. Average Daily Volume = 18.8 mln ************** OEX ************** OEX - S&P 100 $780.81 -2.16 (-8.96 this week) While it may have been possible to day trade off $18 swings in the OEX 30 and 60-min charts the last two days, the best part about this index is that we just missed an stochastic entry signal by .44%! Thankfully, that will keep us out of tomorrow's gap down selloff expected as a result of INTC's warning. Much like we outlined above in the QQQ, we would expect the same behavior from the OEX. That said, with enough blood in the streets tomorrow (capitulation on hopefully huge volume), a V-bottom might actually give us a good daytrading opportunity. But with high oil prices, earnings warnings and currency risk presenting fundamental market detractors, the condition may be only temporary, though the technicals look ready to bounce. As we've noted before, a fundamental market change will overpower a line on a chart any day. In the end, the financials and tech stocks must participate in any rally. INTC's warning and the high probability of other financial institutions failing to please the Street may keep any rally from getting too serious. We suggest sitting out until a clear bottom forms, though as traders at heart, that may test our will power. When you don't how deep the water is, it's best not to dive. Long Call: Morgan Stanley (MWD) failed to please analysts and INTC warned big-time. Tomorrow promises to deliver a sizeable selloff. Time to buy calls? Maybe if the market can give us a deep V-bottom, we could see a daytrading or short-term opportunity on the 30 or 60- min charts. For our longer term purposes, a daily chart of the stochastic and MACD says we should stand aside until the short stochastic clears the 20% mark and crosses the long stochastic in the process. MACD should confirm it, but gunslingers may be tempted to jump the gun on that indicator. That may be warranted if the selloff happens on huge volume (say, 2.0 bln plus shares - we may see more than that on INTC's woes). Personally, I might be willing to overlook a MACD confirmation if there is otherwise clear evidence of a market bottom. How low can it go? It flirted today with 772 (below the 775-780 support level) and should open below that figure tomorrow. The next levels of support are at 760 and 752. . .740 if that doesn't hold. Resistance? You probably won't need to refer to that tomorrow. Prices listed tonight will be meaningless tomorrow, so be sure to check them before trading. BUY CALL OCT-760 OEZ-JL OI= 49 at $34.00 SL=24.00 BUY CALL OCT-770 OEZ-JN OI= 73 at $27.00 SL=19.00 BUY CALL OCT-780 OEZ-JP OI= 997 at $20.25 SL=14.50 BUY CALL NOV-780 OEZ-KP OI= 35 at $29.00 SL=20.00 Bullish Calendar Spread: This isn't looking like much fun, but what an opportunity we may get tomorrow to buy a cheap long leg of the spread. That said, most of us might be better off sitting out unless we see a deep V- bottom formation after tomorrow's anticipated opening selloff. Target shooters may want to forget technical indicators if it fits the risk profile. Our suggestion is not to do that, but rather wait for the technicals on a daily chart to give us the MACD and Stochastic entry we desire. Sell the short leg? Forgeddahboudit. Tomorrow will give us a grand opportunity to cover a short we might have already sold though. Remember to buy cheap (cover your shorts cheap too) and sell dear. Chances may be better for an entry next week. But for those comfortable with risk, tomorrow might give you your opportunity too. Support is at 760, 752 and 740. We'd rather play it safe. Again confirm new prices tomorrow after the open. BUY CALL MAR-780 OEZ-JL OI= 1 at $56.50 SELL CALL OCT-780 OEZ-JP OI= 997 at $19.50, ND = 37.00 SELL CALL OCT-800 OEX-JT OI=3523 at $ 9.50, ND = 47.00 Bullish Put Credit Spread: Average Daily Volume = 1266 ************* DAILY RESULTS ************* Index Last Mon Tue Wed Thu Week Dow 10765.52 -118.48 -19.23 -101.37 77.60 -161.48 Nasdaq 3828.87 -108.71 139.12 31.80 -68.57 -6.36 $OEX 780.39 -10.84 8.84 -5.22 -2.16 -9.38 $SPX 1449.05 -21.30 15.39 -8.56 -2.29 -16.76 $RUT 514.35 -14.20 6.63 -1.88 -7.08 -16.53 $TRAN 2587.45 -51.30 -14.55 -14.16 -4.00 -84.01 $VIX 23.56 1.08 -0.90 0.66 0.79 1.63 Calls CFLO 135.00 -2.13 7.63 4.13 3.00 12.63 Upside IDTI 98.56 5.25 7.06 -0.06 -4.69 7.56 Split??? PEB 113.56 -3.28 3.53 1.88 4.94 7.06 Bio Bull ITWO 178.50 -2.75 12.81 3.63 -7.38 6.31 Trending up QCOM 71.94 3.56 7.69 -2.47 -3.09 5.69 Entry point AGIL 79.50 2.00 1.75 2.06 -1.56 4.25 Holding up SEBL 102.75 1.75 0.13 -0.88 2.75 3.75 Volatile CAH 91.56 1.34 2.97 0.19 -0.94 3.56 52-wk high PALM 53.19 1.00 -0.31 3.69 -1.31 3.06 EPS on 9/25 YHOO 108.13 -0.81 3.00 1.63 -1.56 2.25 Bounce? AFL 61.25 -0.69 0.13 0.88 0.06 0.38 Steady CHKP 151.06 -1.00 6.00 4.00 -9.19 -0.19 Ascending CORR 59.94 -2.06 1.81 0.50 -0.75 -0.50 Biding time ABGX 78.25 -2.56 2.06 3.81 -4.69 -1.38 Dropped CDWC 79.00 -4.69 0.44 0.13 -0.38 -4.50 Pullback NT 61.00 -4.19 3.25 -2.50 -7.00 -10.44 Dropped Puts PCS 29.13 -2.06 -2.56 -7.56 -4.13 -16.31 WHOA!!! AFCI 38.69 -1.06 2.34 -1.16 -6.50 -6.38 New DITC 41.25 -1.88 1.81 -1.06 -3.38 -4.50 New DIGL 69.00 -4.53 2.47 0.25 -2.06 -3.88 Range bound EPNY 81.19 2.00 -3.75 -2.88 1.81 -2.81 Independent LVLT 71.75 -4.69 4.13 -2.38 0.13 -2.81 Sick UK 36.38 -0.03 -0.56 0.06 0.31 -0.22 Stable PWAV 37.38 2.63 2.38 -2.44 -2.25 0.31 Rollover MMM 86.44 -1.94 0.69 -2.13 4.69 1.31 Dropped CMTN 46.75 -2.13 3.81 1.44 0.63 3.75 Bounced SCMR 113.38 -4.88 5.94 -1.06 7.88 7.88 Rebound? 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: ***** NT $61.13 -7.00 (-10.44) It appears that resistance at the 5- and 10-dma (now converged near $68.50) was too much for Nortel to handle. Yesterday, upon touching the 10-dma in the early morning, the stock sold off to close down $3 or 4.23% on 124% of ADV. This put NT below its 100-dma (now just below $69). Today NT gapped lower at the open and spent most of the day drifting down until the end of day brought in the sellers on high volume. Closing down 10.77% on 174% of ADV, this put the stock below its 200-dma at $62.05. With volume to the downside still strong and violations of major support levels suggesting more downside ahead, we are closing this play. ABGX $78.25 -4.69 (-1.38) The Biotech index pulled back Wednesday morning, as the Nasdaq slipped, so of course ABGX had to follow. It touched down to a low of $74.63 bouncing around in negative territory for the majority of the morning, however, when the big bad Nasdaq reversed course mid-morning, ABGX did not disappoint us. It popped into positive territory and stayed there into the close, finishing at $83 up $3.88 for the day on lighter than average volume. This close left us comfortably up the 5-dma and 10-dma ($80.70 and $76.60). Mild profit-taking dropped ABGX to a morning low Thursday, of $79.94 below its 5-dma of $80.70. As we neared the end of trading Thursday a few sellers popped up and pushed ABGX down to a closing price of $78.25, the lows for the day. Volume was average at 609K. ABGX can't seem to muster any traction and the Biotech sector continues to show weakness, therefore, it feels like it is time to move on to greener pastures. PUTS: ***** MMM $86.44 +4.69 (+1.31) Well now, there's a surprise. MMM came out this morning announcing that they are on track to meet growth estimates for the remainder of the year. Not only that, but the company's CEO says that strong growth in Asia is expected to overcome the effects of the weak euro. After giving us a very nice ride from the mid-90s, MMM seemed to find a solid bottom near $81 over the past couple days providing a nice profit for those that have been playing. With the positive news today, the sentiment seems to have shifted, and it looks like MMM is unlikely to test its recent lows again in the near future. Any open positions should have been stopped out on this morning's sharp rise, and rather than wait for another entry, we'll happily take our profits and move on to the next opportunity. ***********************ADVERTISEMENT************************ Up To 60% Off At EverythingWireless.com The online super-store for your active lifestyle. 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The Option Investor Newsletter Thursday 09-21-2000 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/092100_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 $98.56 -4.69 (+7.56) IDTI has spent the last two days consolidating its recent gains, which has provide profitable entry and exit points. IDTI retested its breakout point at the $95 level yesterday, which could remain a possible entry level. However, the Intel warning is sure to shake things up in the Semi sector, so we'll want to proceed with caution tomorrow. Aggressive traders might look to enter new positions if IDTI pops back above $100. Additionally, an extended pullback to IDTI's 10-dma now at the $95 level might also provide a profitable new entry into the play. A conservative entry might be found if the $SOX strengthens and IDTI rallies back above the $102 level. And finally, the risk averse traders might consider buying into strength and look for entry if IDTI moves past its 52-week high at $104. IDTI's shareholder meeting will begin tomorrow at 9:00 a.m. PDT; we'll be listening for a split announcement. ITWO $178.50 -7.38 (+6.31) Yesterday, ITWO announced it had acquired an equity interest in the privately held Primavera Systems, a provider of project management software. The news gave ITWO a nice pop yesterday morning, which also generated a quite of bit of volatility. ITWO bolted above $185 early in the day, retested support at $175, then finished back above the $185 level. ITWO again retested support at the $175 level during today's trading as the NASDAQ wavered. The Intel profit warning is sure to sway our ITWO play tomorrow morning, so we'll want to use caution in initiating new positions. If the NASDAQ gaps down tomorrow morning, watch for ITWO to stabilize near its support at $170. If the buyers jump in early tomorrow, look for an entry if ITWO bounds from support near $170 or higher around the $175 level. The more conservative traders might wait for ITWO to form a solid up-trend, supported by healthy buying volume, before entering the play. Near-term resistance levels are located near $178 and $180. Conservative traders might consider target shooting for entry points if ITWO climbs past either of the aforementioned levels. QCOM $71.94 -3.09 (+5.69) Entry point, entry point! Recall this stock recently broke from a three-month long base near the $60 level early last week. By Tuesday, QCOM challenged $80! At the moment however, QCOM is lingering at a newfound support level while the techs take a breather amid earnings worries. Certainly this re-emerging Tech favorite has "profit potential" written all over it, but be careful of taking entries below the 100-dma line ($70.36). The more conservative might even want to hang back until QCOM resurfaces above the $77 mark and rallies through its near-term high at $78.75. If you're portfolio can handle the risk, you might buy into strength as QCOM rebounds off the current level. Earnings for Qualcomm aren't expected until late next month. This is strictly a recovery play. CAH $91.56 -0.94 (+3.56) Seven must be this one's lucky number! For the last seven consecutive sessions, CAH has stepped into new territory. The latest 52-week record is at today's peak of $93! The dynamism driving the share price originally stemmed from a succession of bullish comments and upgrades last week. Now, it appears that pure momentum is carrying CAH to new heights. Volume levels reaching 1.5 times the ADV have ushered in the advances. Therefore, pay heed to high-volume moves over the immediate resistance at $92 to signal another breakout. Keep stops tight for protection; especially if you're taking positions on the climb. At these price levels, and considering the unprecedented advances, expect some profit taking. On a pullback, look for $90 at the 5-dma line to hold as near-term support. Be wary of a slide back to the 10-dma line however, which is now higher at $87.55 and just above the former resistance at $84-85. CAH may not be able to recover quickly enough from this deep of a cut. CDWC $79.00 -0.38 (-4.50) The consolidation following the powerful run-up continues this week, but not without a spike to $82.94 during amateur hour this morning! Currently, the $77 level firmed as a strong bottom. This pullback effectively offers more aggressive traders entries into this momentum play. Above, shorter-term support is developing at $79 and $80, which is in the vicinity of the 5 & 10 DMAs, respectively. Taking positions off this level on a strong bounce coupled with intraday volume at 50 K, or better, is less risky. But as everyone knows, there are never any guarantees! Expect some resistance at $83 and $84 before CDWC challenges $86.13, the latest 52-week record. Look for CDWC's momentum to recapture its intensity accompanying a NASDAQ rally. AGIL $79.50 -1.56 (+4.25) Wednesday was another good day for AGIL in a string of many over the past week. The stock started the day up and continued higher until encountering resistance at the $83-84 area. From there, AGIL eased back to close up $2.06 or 2.61% on almost 3 time the ADV. Today, AGIL attempted to head higher but resistance at $83 held strong. Along with a weak NASDAQ, AGIL closed down 1.93% with volume coming in slightly higher than yesterday. The stock has maintained a steep up-trend which started last Wednesday when it bounced strongly above its 200-dma (now at $66.13). A continuation of the current up-trend would see any bounces off the 5-dma (now at $78.46) as an aggressive entry point. Support is strong at $75, which is also its 10-dma. Breaking above $83 would be the target for conservative traders. It should be noted that while volume has been strong lately, it has been tapering off. Make sure a move up is backed by strong volume when entering. CFLO $135.00 +3.00 (+12.63) On Sunday, we mentioned that CFLO's trading channel allowed the possibility for great upside potential if the market cooperated. For now, it appears that the stock is fulfilling that potential, with or without help from the rest of the market. Yesterday, CFLO gained $4.13 or 3.23% on 140% of ADV. Today, on a weak day for most Tech stocks, CFLO added nicely to its gains. Encountering resistance at $145, profit takers stepped in but the stock still managed to close up $3, with volume clocking in at twice the ADV. Volume to the upside has been accelerating all week long, which is a good sign. Bounces off the 5- and 10-dma (at $127.83 and $120.70) continue to offer aggressive entry points but confirm with volume before entering. Resistance overhead can be found at $140 and $145. In the news, the company announced today that HydraWEB Technologies has joined CFLO's Adaptive Content Exchange initiative. PEB $113.56 +4.94 (+7.06) Select Biotechs have continued to surge higher this week, and PEB is one of the chosen few. While the broader tech sector has struggled to decide which way it wants to move, Biotechs like PEB, which are involved in the hot new Proteomics research, have continued to move up. Perhaps helping the move in PEB over the past 2 days was Tuesday's announcement that Oxford Glycosciences will become an early access customer for PEB's next generation MALDI TOF/TOF mass spectrometer. This system is intended to enable higher throughput with enhanced informational content for researchers pursuing a better understanding of proteins and their role in the onset and treatment of disease After Monday's weakness, where PEB dropped back to confirm support at $103, the chart has shown nothing but green. Today's nearly $5 gain propelled the stock through the $111 resistance level, and overhead resistance is thinning out now, with the next obstacles located at $117 and then $120. The only concern we have right now is the volume picture. Even though the price is moving sharply higher, volume today still was only two-thirds of the ADV, and if PEB is going to continue its run, it will need the support of stronger volume. The 5-dma (currently $107.75) is continuing to support the price rise, with further support coming from the 10-dma (currently $103.63), just above the $103 historical support level. Consider a pullback to support to be an attractive entry point, as long as it doesn't come on strong volume. As long as support holds on the pullback, look to initiate new positions on a volume-backed bounce from support. PALM $53.19 -1.31 (+3.06) Enthusiasm for the new Handspring products gave PALM a shot in the arm yesterday, and even in a weak Tech sector today, PALM managed to hang onto much of its gains. From Tuesday's writeup, "HandSpring announced 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." Mild profit taking today dropped the price down to confirm the $52 support level before the stock recovered into the close. With earnings rapidly approaching (scheduled for September 25th, after the close), we are running out of time on our play. In order to provide time to exit the play ahead of the quarterly results, we will be dropping PALM this weekend, but that doesn't mean that you gunslingers can't trade it just a little longer. Consider a renewed bounce from the $52 level as an attractive entry point, but only if it is accompanied by strong buying volume. A better approach might be to wait for the bulls to push the price through $55 resistance before initiating new positions. CORR $59.94 -0.75 (-0.50) While it has been nice to see CORR holding its recent gains, we need to see the price go up for our calls to appreciate. Select Biotechs have performed nicely in the face of the NASDAQ weakness, and CORR may just be gathering its strength for the next leg up the chart. Yesterday's volume was downright anemic at only 370K shares, but today saw well over double the average number of shares trading hands. The daily Stochastics and MACD are still showing CORR in ascent mode, but that doesn't mean we won't see any near-term weakness. Support has been building near $58, just above the rising 10-dma ($58.19), followed by stronger support near $55. While these support levels could provide a good point to enter new positions before the next run, we don't want to jump the gun and get caught in a selloff. If you want to buy the dip, make sure you wait for strong buying volume to confirm the bounce first. A more conservative approach will be to wait for CORR to jump through the $62 resistance level before putting your money at risk. CHKP $151.00 -9.25 (-0.19) The ascent continued Wednesday morning. Out of the chute, CHKP shot to a new high of $163.38 within the first 45 minutes of trading, however, the Nasdaq slipped into negative territory later in the morning and CHKP followed, hitting an intraday low of $152.25. All's well that ends well, and the market did end well. The Nasdaq reversed course, ending up for the day and Check Point stabilized into the close to finish up $4 on the day at $160.25, a new closing high. Volume was a very robust 2.58 mln shares (1.63 times ADV). Of note Wednesday, Activis, a global provider of managed security services agreed to integrate Check Point's Provider-1(TM) into its extensive managed Internet security offering. Thursday, Enstar announced that they would be integrating CHKP's FireWall-1 software into their new eSM service. Mild profit taking was the theme in early trading for CHKP, pulling back to just above its 5-dma at $154.40. The 5-dma could not hold CHKP so it went down to test the 10-dma (at $150.20) late in the afternoon. It did not get much of a bounce from that support level, as it closed at $151 down $9.25 for the day on volume of 2.25 mln shares (1.4 times ADV) Traders could enter a trade on a strong volume supported move up, from here, off the 10-dma. Watch for further profit-taking and pay attention to market sentiment before jumping into any new trades. AFL $61.38 +0.19 (+0.38) Aye! Aye! Captain. Steady as she goes! This stock was rock solid Wednesday even as the indexes were getting pummeled around it. The pullback it did have today was to a low of $59.75, just below its 5-dma and 10-dma. But, AFL headed higher into the closing bell settling at $61.19 the high for the day. Volume was average and the closing price was above the converged 5-dma and 10-dma (currently $60.50). Anemic is the first word that comes to mind for the volume and price action for AFL Thursday morning. Banc of America Securities analysts stated today that stocks of insurance companies have turned around. The steadiness continued, as Aflac finished the day at $61.38 up $0.19 on volume of 517K. The converged 5-dma and 10-dma at $60.50 acted as support for the issue today. Watch for a move up from this level coupled with strong volume as a nice way to gain entry to this trade. YHOO $108.13 -1.56 (+2.25) Given the shocking warning from INTC that hit after the bell, NASDAQ stocks are going to gap down at the open tomorrow. It will take some time for the stocks to settle down. Today, YHOO traded up into overhead resistance at $112 and then declined with the NASDAQ, finding support at $108. But, with this news coming to light about INTC, YHOO will open lower tomorrow, and at some point will offer an entry. It is going to be extremely important to watch for sentiment on the Street tomorrow. YHOO traded down to $103.50 in after-hours so we will be looking for buyers to step in. Look to $102.50 and $100 for support. A high volume bounce could offer entry along with a broad market recovery. Tomorrow will certainly be a test on the NASDAQ as to whether investors go bargain hunting. If buying interest doesn't materialize, or YHOO breaks $100, stay out until the dust clears and the markets can be discerned. There is still limited risk if $100 holds, and good upside for an earnings run, due to report on October 10th, confirmed. SEBL $102.75 +2.75 (+3.75) If you didn't see the price action on Wednesday you might think, all right...pretty calm day, however, SEBL traded as low as $95.75 and as high as $102.75 showing us its ability to be just as volatile as the general market. As we finished up the day, Siebel ended down $0.88 for the day at $100, just above its 5-dma and 10-dma ($99.10 and $95.10). Wednesday, it was announced that Berkeley Enterprise would join the Siebel Alliance Program as a Premier Partner and Interactive Intelligence will be joining Siebel Alliance Program as a Siebel Software Partner. Joint research was just completed by Int'l Data Corp. and the Cap Gemini consulting group in reference to the enterprise relationship management business. They stated that Siebel Systems is the market leader in this area with an 18% market share in 1999 (three times the share of its closest rival). We pierced through the 5-dma of $99.10 during early trading Thursday, but as we approached mid-day buyers had regained their interest in SEBL, pushing it into positive territory at $101. The buyers decided from here it was time to buck the negative market trend. They pushed SEBL higher all day, albeit on light volume of 4.9 mln shares (60% of ADV), to close up $2.75 at $102.75, near the yearly high of $103. Traders could use a strong push through $103, the last bit of overhead resistance, as a good entry spot. It is possible we could see a pullback to the 5-dma or 10-dma (currently $99.10 and $95.10), from which you could enter a new trade as long as volume is there to support the move. ******************* PLAY UPDATES - PUTS ******************* CMTN $46.75 +0.63 (+3.75) Near the close of trading today, it appeared that the downward slide of the Telecom Equipment sector had come to an end. At least that's what Wall Street thought. Salomon Smith Barney issued a research report, highlighting several network equipment suppliers. While SSB didn't specifically mention CMTN in its report, the analyst comments were enough to lift the entire sector. The buyers stepped up in a big way today as nearly 2.5 times the ADV traded. While it appeared the bulls had regained control of CMTN today, the Intel warning after the bell could change everything tomorrow. If the bears do come back into the Telecom Equipment sector early tomorrow, aggressive traders might look to enter new CMTN short positions if the stock falls just below current levels past the $46.50 support level. If the stock gaps down, aggressive traders might look to enter the play if CMTN falls past $45. The more conservative might wait for the selling to pick up and considering entering the play if CMTN falls below $42 on heavy volume. UK $36.38 +0.31 (-0.22) After slipping down to a new yearly low earlier this week, UK bounced of its low at $36 and has stabilized near the $36.50 level. The stabilizing price action in the euro, and the re-encouraging words from MMM this morning helped to boost UK. What's more, the retreat in oil prices also alleviated selling pressure from UK. Going forward, the direction of both the euro and oil prices might continue to provide profits in our UK put play. Aggressive traders might look to enter new positions if UK rallies up to resistance near the $37 level, then turns lower. But, before entering on a rally, confirm higher oil prices with possibly a lower euro. The more conservative traders might wait for the big institutional sellers to return to UK and look to enter the play if the stock falls below the $36 level. DIGL $69.00 -2.06 (-3.88) Trading behavior in the last two sessions demonstrated that DIGL may be range bound. The upper resistance at the 10-dma ($72.44) is no doubt keeping a tight lid on the share price. This aspect was clearly evident at yesterday's close and during amateur hour this morning. DIGL just couldn't get over the top. Furthermore, the 5-dma line ($70.42) started to put the pressure on DIGL as today's session progressed. So, while the ceiling is being lowered, there's the hazard of a narrowing trading channel because DIGL hasn't tested the waters below Monday's intraday low of $66.50. Today's bearish close on the underside of $70 is promising. But let's err on the side of caution and keep this one a tight leash until we see more conclusive evidence. SCMR $113.38 +7.88 (+7.88) Today's huge spike was the direct result of Salomon Smith Barney's bullish comments. The firm tagged SCMR a Buy and issued a $165 price target. B. Alex Henderson cited the recent decline as "unjustified" and believes the company is a strong player among the optical networks. To say the least, these words wrecked havoc on our play. The share price rocketed through the converged 10 and 200 DMAs right from the opening bell - a "Thank Goodness" for stop losses moment! Today's 11.6% peak advance is certainly not bearish behavior, however we're keeping SCMR on our put list tonight. Intel's (INTC) warning could have quite the negative impact on the Networking sector tomorrow. So let's not shut the door on this put play just yet. We're looking for another dramatic decline to the underside of the century mark. EPNY $81.19 +1.81 (-2.81) The past couple of days have seen EPNY buck market trend and move in a direction of its own. Yesterday, on an up day for the NASDAQ, the stock headed lower until the mid day. Finding support above $75, EPNY bounced but closed down $2.88 or 3.50% on 134% of ADV. Today on a down day for the NASDAQ, EPNY made an attempt to rally above its 5-dma (now at $82.61). Unable to do so, the stock still managed to gain 2.28% on 159% of ADV. The 5-dma continues to act as formidable resistance, making for an aggressive entry point. There is also strong resistance at $85. Having breached the $80 support level already, another below above that level could signal further downside ahead. Yesterday, the company announced an alliance with marketing company Martiz Inc. in which Martiz will integrate EPNY's E.5 system into their VAULT system. Today, EPNY gained a new customer in Daimler Chrysler, who will use their software for data gathering, analysis and management. PWAV $37.38 -2.25 (+0.31) Unable to rally above its 200-dma (currently at $42.77), PWAV spent Wednesday selling off to close down $2.44 or 5.79%. While volume came in at only half of ADV, the close below support at $40 proved to be a sign of things to come. Today saw PWAV sell down right at the open. Stabilizing by mid-day, the stock traded sideways until the end of the day when the sellers came in to close PWAV down 5.68%. Once again, volume was light, coming in a less than half of ADV. Despite the lack of conviction in selling, PWAV continues to break through support levels. Light support at $38 was broken today and a break below $36.75 could signal more downside ahead. Failures to rally above the 5- and 10-dma (at $39.14 and $42.18 continue to be great entry points but confirm the rollover before making a play. LVLT $71.75 +0.13 (-2.81) The sickness that has infected the Telecom sector took a turn for the worse yesterday, with Sprint (FON) confessing that they would fail to meet their earnings estimates for the current quarter. This news hit many Telecom equipment suppliers with big names like NT and CSCO heading further south. The selling continued today, but LVLT is refusing to head lower, holding above the $68 support level. This could be indicating that the downside pressure is diminishing. On the other side of the coin, we have a powerful convergence of the 5-dma, 10-dma, 30-dma and 50-dma, all clustered between $72.31 and $74.88. This will be a tough obstacle to climb through, especially when you consider the chart resistance that has built up near $74. The INTC earnings confession this afternoon is likely to add downside pressure to anything technology related, so an entry point could show up as early as tomorrow morning. Conservative players will want to wait for selling pressure to violate the $68 level before opening new positions, while more aggressive traders can grab the better entry points as LVLT fails to penetrate the $72-74 resistance zone. PCS $29.88 -4.13 (-16.31) Who pulled the fire alarm?! Remember in grade school, you were sitting in class just after recess and the fire alarm would go off and the race was on between you and your buddies to get back to the playground first, so you could squeeze in another game of tag. Well, today it felt like that fire alarm was pulled and the kids were sprinting for the playground. We were down over $3 in the first 45 minutes of trading, but it seemed calm. Then the bombshell hit! Sprint pre-announced a bad upcoming quarter, coupled with the fact that PCS would not meet its targets for expanding its customer base. In fact, PCS is now slated to add a net of 800,000 new subscribers in the quarter, below earlier expectations of 900,000 net new subscribers. The sellers began hammering PCS to an intraday low of $32.44 and it managed to close the day just barely above that level at $33.50, down $7.31. Here's the biggy though, volume was an astounding 33.6 mln shares on Wednesday (9.2 times ADV) Ouch! The sellers continued to slaughter PCS from the get-go Thursday, dropping it to $30.38 by mid-morning on volume of over 12 mln shares. Not much new as we closed out Thursdays trading except we fell further off the cliff. PCS closed at $29.88 down $3.13 on huge volume of 26.7 mln shares (7.3 times ADV). Again, this could continue to slide from here, but, it may be prudent to use a short covering rally as a way to gain entry into this play. ************************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 ************** No new calls today ************* NEW PUT PLAYS ************* AFCI - Advanced Fibre Comm. Inc. $38.69 -6.50 (-6.38 this week) Advanced Fibre takes care of what’s known as the "local loop." That means they design and manufacture end-to-end distributed multi-service access solutions for the portion of the telecomm network between the carrier's central office and you at home. They also design and manufacture environmentally hardened outside plant cabinets and technology and indoor cabinets. They compete with the likes of ADC Telecom, Cisco, Lucent and Northern Telecom. Recent developments for AFCI this summer include a new 3 year $105 mln contract with ALLTEL and an agreement with Tellabs to continue supplying components. Furthermore, Frost Securities reiterated coverage on AFCI with a Strong Buy and a target of $103 in August. None of this has had much of a positive effect on their stock price. The continuing concern in the marketplace that capital expenditures in the Telecomm sector are slowing, is weighing heavily on AFCI and other stocks in the sector. The overall chart for Advanced Fibre does not look healthy, as a series of lower highs have formed beginning with the high set back in the March-April timeframe. Of late, AFCI pierced its 200-dma (currently $49.10) on September 13th and from there, it has been downhill. This week has been kind of tough for AFCI, possibly in sympathy with Sprint's recent pre-announcement of a bad quarter and general Nasdaq deterioration. AFCI has been trying to hold onto support at the 5-dma (currently $45.40) for the last few days, but, today the sellers came out in force and drove it down by $6.50 to finish the day at $38.69. There was strong support at the $43 level which was also pierced today as volume picked up to 5.79 mln shares (2.48 times ADV). There is some support down at the $35-$37 level, but, the tech sector should be rough tomorrow as Intel' pre-announcement rocked Wall Street after the bell. That being said, aggressive traders may have to catch this one as it continues to fall. The more conservative approach would be to watch for a failed rally up to the intraday support levels at $40 or to the stronger support level at $43 as a way to gain entry. Continue to monitor the sentiment in this sector, as it has been very negative of late. We don't think profit taking will be a factor in this trade, but, watch for short covering as this play develops. BUY PUT OCT-40*AQF-VH OI= 175 at $4.88 SL=3.00 BUY PUT OCT-35 AQF-VG OI= 63 at $2.69 SL=1.25 Average Daily Volume = 2.33 mln DITC - Ditech Communications $41.25 -3.38 (-4.50 this week) Making it easier to be heard, DITC's echo-cancellation products eliminate the problem of echo in emerging and existing voice networks. With six standalone products in this arena, the company provides solutions ranging from the third generation 18T1 and 18E1, all the way up to the system level Broadband Echo Cancellation System, which employs the company's fourth generation Quad T1 echo cancellation product. The company's optical communications networking products enable telephone companies to expand network capacity quickly, and in a cost-effective manner. Included in the company's optical offerings are optical amplifiers, wavelength division multiplexers and demultiplexers, and a dense wavelength division multiplexing monitor. In the currently unsettled markets, good news seems to be ignored, as evidenced by investors' response to DITC's latest product release. Yesterday, the company announced a new 10 gigabit per second (OC-192) optical amplifier. This product will enable service providers to significantly increase the distance between optical-to-electrical signal regeneration points (up to 300 miles). In addition, these new amplifiers allow service providers to replace intermediate electrical regenerators that are priced in excess of $200,000 with DITC amplifiers at one-tenth the price. The Optical sector seems to still be an analyst favorite, underscored by Salomon Smith Barney's upgrade to a handful of Optical stocks this morning. Even while the sector has been moving strongly of late, DITC hasn't been able to break out of the consistent downtrend, which has been in place since the highs posted in early March. After rolling over at the $60 level in early September, the stock has continued to head south, pressured by the 10-dma (currently $46.38). Support had been holding near $45, but the consistent selling pressure this week has now dragged DITC down near $41. Showing weakness in a strong sector is not a good sign, and it is likely that the fallout from INTC's earnings warning tonight will create even more downside pressure tomorrow. Use any failed rally as an opportunity to enter the play at a better price, but wait for the failure before playing. Conservative players will want to wait for selling to penetrate the $41 level on strong volume before jumping into the play. BUY PUT OCT-45*DUI-VI OI=120 at $7.50 SL=5.25 BUY PUT OCT-40 DUI-VH OI= 73 at $4.50 SL=2.75 Average Daily Volume = 832 K ********************** PLAY OF THE DAY - CALL ********************** CFLO - CacheFlow Inc. $135.00 +3.00 (+12.63 this week) CacheFlow Inc. designs, manufactures, and markets Internet caching appliances. These easy-to-use appliances speed Web page response times, while saving network bandwidth. Because of these key benefits, caching appliances are becoming an integral component of the network infrastructure - much like routers and switches. Explosive growth is forecasted for the caching appliance market, with revenues projected to exceed $3 billion by 2003. Company partners include Akamai, Alcatel, CSC, EDS, Hewlett-Packard, Lucent, Real Networks, Secure Computing Websense and Westcon. CacheFlow is a global organization with offices throughout Asia, Europe, and North America. Most Recent Write-Up On Sunday, we mentioned that CFLO's trading channel allowed the possibility for great upside potential if the market cooperated. For now, it appears that the stock is fulfilling that potential, with or without help from the rest of the market. Yesterday, CFLO gained $4.13 or 3.23% on 140% of ADV. Today, on a weak day for most Tech stocks, CFLO added nicely to its gains. Encountering resistance at $145, profit takers stepped in but the stock still managed to close up $3, with volume clocking in at twice the ADV. Volume to the upside has been accelerating all week long, which is a good sign. Bounces off the 5- and 10-dma (at $127.83 and $120.70) continue to offer aggressive entry points but confirm with volume before entering. Resistance overhead can be found at $140 and $145. In the news, the company announced today that HydraWEB Technologies has joined CFLO's Adaptive Content Exchange initiative. Comments In the wake of INTC's warning, NASDAQ stocks are going to gap down tomorrow. The last trade in after hours was at $134, only a dollar off of its NY close. CFLO has remained incredibly resilient in the face of NASDAQ weakness. Look for CFLO to find a bounce at $130 or $127 for an entry. Watch the NASDAQ to see if buyers step in to bargain hunt. A recovering NASDAQ will only help CFLO continue its trend. BUY CALL OCT-125 FUJ-JE OI= 12 at $16.38 SL=12.75 BUY CALL OCT-130*FUJ-JF OI=313 at $13.75 SL=11.00 BUY CALL OCT-135 FUJ-JD OI= 20 at $11.00 SL= 8.75 BUY CALL JAN-140 FUJ-AV OI= 2 at $22.25 SL=17.25 SELL PUT OCT-115 FUJ-VC OI= 61 at $ 3.25 SL= 4.50 (See risks of selling puts in play legend) Picked on Sep 7th at $113.00 P/E = N/A Change since picked +22.00 52-week high=$182.19 Analysts Ratings 4-3-0-0-0 52-week low =$ 27.00 Last earnings 08/16 est= -0.17 actual= -0.14 Next earnings 11-15 est= -0.11 versus= -0.22 Average Daily Volume = 617 K ***********************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 ************************ Market ends mixed as industrial stocks recover... The Dow ended a major losing streak today as bargain hunters flocked to drug and retail issues. Wednesday, September 20, 2000 Technology issues recovered from early selling pressure to finish positive amid strength in biotechnology and Internet stocks. The the Nasdaq rose 31 points to close at 3,897. Industrial issues were unable to overcome negative sentiment from rising oil prices and earnings warnings. The Dow closed down 101 points at 10,687. The S&P 500 index ended down 8 points at 1,451. Trading volume on the NYSE reached 1.1 billion shares, with declines outpacing advances 1,658 to 1,147. Activity on the Nasdaq was moderate at 1.79 billion shares traded, with declines beating advances 2,362 to 1,663. In the bond market, the 30-year Treasury fell 21/32, pushing its yield up to 5.95%. Tuesday’s new plays (positions/opening prices/strategy): Finova Group FNV JAN10C/OCT10C $0.62 debit calendar Agile Software AGIL OCT55P/OCT60P $0.56 credit bull-put Halliburton HAL OCT60C/OCT55C $0.88 credit bear-call All of our new positions offered favorable entry points during the session. Finova traded sideways for a few minutes near the open, allowing a brief period to enter the calendar spread. The Halliburton position offered a great entry opportunity as the stock price spiked in early trading. A 50-contract transaction was observed in the Agile spread near 9:50 A.M. Portfolio Plays: Industrial stocks slumped again today as worries over the price of oil and the weakening Euro weighed heavily on investors. Concerns over negative pre-announcements also plagued the market and the Street's mood was soured by a report that the U.S. trade deficit widened to a record $31 billion in July. Old economy stocks took the news hard and on the blue-chip average, Hewlett Packard (HWP), Coca-Cola (KO), and 3M (MMM) were the biggest losers. Only five Dow components ended in positive territory. At the same time, technology stocks rose for a second day in a row as investors scooped up some of the group’s choice issues. The Nasdaq trimmed an earlier 70-point loss on strength in chip and Internet Issues. The biotech sector was also a net gainer, and shares of bellwether computer companies contributed to the positive finish. In the broader market, oil service issues moved higher after the news of declining reserves, but utility shares continued to slump. Our portfolio enjoyed a few positive moves and some of the new positions have reached profitability. On the Nasdaq, fuel cell stocks were strong with Ballard Power (BLDP) up $5 to $111 and Plug Power (PLUG) closing $2 higher at $47. Internet stocks were also strong and Commerce One (CMRC) led that group, breaking the $70 mark as investors flocked to the sector. In the small-cap group, Steven Madden (SHOO) continued to rebound from a recent slump, ending $0.75 higher at $12. Netspeak (NSPK) also edged up to the $12 range and the issue may yet surprise us with a future rally. One of our new positions, St. Jude (STJ) rose for a 10th consecutive day and our recent calendar spread position offered a favorable, early-exit profit. The issue closed at $49 and the credit for the (JAN50C/OCT50C) position ended at $2.69. That’s a $0.75 profit on $1.93 invested for just three days. Traders should consider the early exit because the overall spread credit will shrink initially, as the implied volatility between the near term and long term options equalizes. Toronto Dominion (TD), a recent debit strangle, also made the exit list, closing at $2.43 credit overall for the JAN30C/JAN25P position. The cost basis for the play was near $1.69, thus offering a 25% return for less than a month in the position. We will take the easy money and continue to monitor the position for the benefit of the readers. Covad Communications (COVD) has endured heavy selling pressure over the past few sessions and the decision to close the long position in our bullish debit spread may yet pay dividends. The issue fell another $0.50 to $14.31 in today’s session and there was little news to explain the drop. Some traders suggested the sale of $500 million of five-year convertible senior notes was the culprit. The notes, which were priced at 100 and include a $75 million over-allotment option, carry a coupon of 6%, above the 5% to 5.5% range expected. They are convertible into Covad common stock at $17.77 a share, a 20% premium over the stock's current price. Regardless of the reason, it’s doubtful the issue will return to the $17 range (and our sold strike) anytime soon. However, monitor the technical character of the stock for future reversals and be prepared to cover the short option if the issue crosses $17.50 in the next month. Loral Space (LOR) and Lucent (LU) have also performed poorly in the past few weeks and both issues confirmed their respective downtrends, closing at recent lows in today’s session. Traders with bullish spreads in these issues should be closing, adjusting or offsetting the positions to limit further losses. The Maytag (MYG) play offered a good example of what can be done with a synthetic position in a stock that moves out of an established trading range. In that case, a combination of offsetting spread positions (sell OTM call - buy ITM put) was suggested to reduce the potential losses until the stock recovers. Thursday, September 21 The Dow ended a major losing streak today as bargain hunters flocked to drug and retail issues. The blue-chip average ended 77 points higher at 10,765. Meanwhile, the Nasdaq declined 77 point to close at 3,828, amid weakness in semiconductor shares. The S&P 500 index ended relatively unchanged at 1,449. Trading volume on the NYSE reached 1.08 billion shares, with declines beating advances 1,724 to 1,072. Activity on the Nasdaq was average at 1.59 billion shares exchanged, with declines beating advances 2,430 to 1,493. In the bond market, the U.S. 30-year Treasury rose 15/32, pushing its yield down to 5.92%. Portfolio Plays: Industrial stocks rebounded today amid strength in retail issues while technology shares slumped on weakness in the chip sector. A rally in Minnesota Mining and Manufacturing (MMM) led the Dow higher but continued profit warnings and the recent rise in oil prices capped the upside activity. MMM said it expects annual sales growth of about 11% and per-share earnings growth of 13% over the next three years, and that boosted the outlook for old economy issues. The other blue-chip frontrunners included Home Depot (HD), Wal-Mart (WMT), Merck (MRK), and Johnson & Johnson (JNJ). On the Nasdaq, Internet shares led the group lower in the wake of EBay's (EBAY) sell-off. The issue retreated $5 to $71 following Wednesday’s big jump after the announcement of bullish revenue goals. In the broader market, oil and oil service shares slumped after November crude prices dropped below $35. President Clinton has been under pressure to release U.S. petroleum reserves in order to avert a winter fuel-oil crisis and the future cost of crude may be softening amid the affects of those political demands. Financial issues slumped after a disappointing earnings report from Morgan Stanley Dean Witter (MWD) and biotech stocks were also weak but small gains were seen in the retail and drug sectors. Most of the positive activity in our portfolio came in mid-cap issues. HNC Software (HNCS) was the leader in that category, up $3 to $68 on continued momentum from the upcoming distribution of Retek (RETK). The distribution ratio will be 1.24 shares of Retek common stock to be paid as a dividend on each share of HNCS common stock that was outstanding on the September 15, 2000 record date. Our bullish, put-credit spread at $45 appears to be safe for now. Abbott Labs (ABT) moved up over $2 on strength in the major drug group and St. Jude Medical (STJ) continued higher, closing at a new, all-time high near $50. Our recent calendar spread offered a $2.62 closing credit for much of the session and that is a very favorable, early-exit profit of $0.68 on $1.93 invested, in less than one week. Allstate (ALL) rallied $1.38 to close at a recent high near $33 and our synthetic position is profitable by $0.38. The one technology standout was Research in Motion (RIMM), which finished $4 higher at $83 amid renewed momentum in the wireless personal communication group. In the credit strangles category, implied volatility in Cell Pathways’ (CLPA) options has fallen substantially and the closing debit for our new position is near $1.06; a $1 profit after just one week in the play. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** NITE - Knight Trading Group $38.75 *** Cheap Speculation! *** Knight Trading Group is one of the leading market maker in Nasdaq securities and in the Third Market, which is the over-the-counter market in exchange-listed equity securities, primarily those on the New York Stock Exchange and the American Stock Exchange. The company has attained its leadership position as a market maker by providing best execution services to brokers and institutional customers through its proprietary trading methodology and systems. The company makes markets in thousands of equity securities on the Nasdaq and through Trimark, it makes markets in all NYSE and AMEX securities in the Third Market. Knight has received expressions of interest from several potential buyers, including the Salomon Smith Barney unit of Citigroup (C) and Morgan Stanley Dean Witter (MWD), but a formal offer isn't on the table yet. Speculators say the top suitors are willing to pay $45 to $55 per share for the company, or about $5.7 billion to $7 billion. Today Morgan Stanley Dean Witter's CFO Robert Scott told analysts in a conference call that the firm plans to build up its market-making capacity on its own, not with the addition of a new firm such as Knight. Surprisingly, NITE continued to move higher in the wake of that announcement, closing up $2.12 at the end of the day. Now the issue is down again in after-hours trading and there is no way to determine where it will open tomorrow. Those who support a bullish outlook for the stock can use this synthetic position to speculate conservatively on the outcome of the merger rumors, at the risk of owning the issue at a favorable cost basis. Initially, we will target a $0.25-$0.38 credit in the position. Plan to make adjustments based on the stock’s movement during the morning session. PLAY (speculative - bullish/synthetic position): BUY CALL OCT-50 QTN-JJ OI=2321 A=$0.62 SELL PUT OCT-30 QTN-VF OI=9063 B=$0.43 INITIAL NET CREDIT TARGET=$0.25-$0.38 ROI TARGET=20% Note: Using options, the position is equivalent to being long on the stock. The collateral requirement for the naked put is approximately $835 per contract. ****************************************************************** TLGD - Tollgrade Comm. $131.12 *** New Trading Range? *** Tollgrade is a provider of unique service assurance solutions to the telecommunications industry. Tollgrade's focus is helping local exchange carriers deliver the high quality of service through enhanced testability. The company develops, manufactures and markets Test System and Test Access technology that enables local carriers to achieve maximum Digital Loop Carrier (DLC) testability, along with the effective provisioning and deployment of next generation services that include Digital Subscriber Line (DSL) service. Tollgrade's next generation DigiTest centralized network test platform serves as the company's system solution. DigiTest includes its Digital Wideband Unit for loop qualification and in-service DSL testing; the Digital Measurement Unit, which contains the test head for load coil detection and the complete range of Plain Old Telephone Service (POTS) measurements, and Digital Measurement Node, which serves as the mounting shelf for the system. There’s not much news to report on this issue and with the recent slump in telecom equipment stocks, it is strange to see such a strong performance from an issue in that group. It may be that investors are expecting another outstanding earnings report in October from a company that has a history of beating expectations. Last quarter, Tollgrade rallied after the company posted earnings that nearly doubled what analysts were expecting in the second quarter. The unique issue is held in high regard at a number of specialty research firms and based on the recent movement of the share value, investors also believe in the company’s outlook. We simply favor the recent bullish technicals and the opportunity to speculate on the future movement of the issue in a conservative manner. The stock is slightly over-extended but a reasonable cost basis exists below the recent trading range near $110. Target a slightly higher (than quoted) premium to open the position. PLAY (conservative - bullish/credit spread): BUY PUT OCT-100 TQK-VT OI=40 A=$1.43 SELL PUT OCT-105 TQK-VA OI=16 B=$1.88 INITIAL NET CREDIT TARGET=$0.62-0.75 ROI(max)=17% ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** BRCD - Brocade Communications $233.00 *** Technicals Only! *** Brocade Communications Systems is a provider of Fibre Channel switching solutions for Storage Area Networks (SANs), which apply the benefits of a networked approach to the connection of computer storage systems and servers. The company's family of SilkWorm switches enables companies to cost-effectively manage growth in their storage capacity requirements, improve the performance between their servers and storage systems and increase the size and scope of their SAN, while allowing them to operate intensive applications, such as data backup and restore, and disaster recovery, on the SAN. The company sells its SAN switching solutions through leading storage systems and server original equipment manufacturers (OEMs) and through system integrators. These OEMs and system integrators combine their solutions with other system elements and services for data processing centers. This play is based solely on the current price or trading range of the underlying stock and its recent technical history. We favor this well-known issue for a bullish position and have decided to sell premium for credit and use the earned income to offset any losses on the downside, in the event we are required to accept assignment of the stock. If the price of the issue approaches the (short) call option at $170, we will buy the underlying stock to cover our obligation. As with any position, it should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - neutral/credit strangle): SELL CALL OCT-270 ULF-JN OI=567 B=$3.00 SELL PUT OCT-190 GUF-VR OI=1502 B=$1.75 INITIAL NET CREDIT TARGET=$4.75-$5.00 ROI=10% UPSIDE B/E=$275.00 DOWNSIDE B/E=$185.00 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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