The Option Investor Newsletter Thursday 09-28-2000 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/092800_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 09-28-2000 High Low Volume Advance/Decline DJIA 10824.10 +195.70 10856.30 10623.20 1.20 bln 1878/958 NASDAQ 3778.32 +122.02 3778.38 3626.55 1.99 bln 2598/1391 S&P 100 773.32 + 14.69 775.38 756.95 totals 4476/2349 S&P 500 1458.29 + 31.72 1461.69 1425.78 65.6%/34.4% RUS 2000 523.81 + 15.68 524.09 507.62 DJ TRANS 2572.32 + 57.79 2577.73 2513.63 VIX 21.95 - 2.41 24.87 21.55 Put/Call Ratio .48 ****************************************************************** An Absence Of Earnings Warnings Brought The Bulls From Hiding Today. But, a rotten Apple might send them back into the bear cave tomorrow. Before Apple's warning after the bell, the bulls had claimed a clean victory today. Impressive volume returned to both the NYSE and NASDAQ as buyers engaged in uninhibited bidding of stocks. Breadth on both major markets had a distinct bullish smell; advancers nearly doubled decliners on both the NYSE and NASDAQ. Moreover, nearly every sector benefited from the broad-based buying, with the exception of the major Oil Integrators, which slid lower on the dip in oil prices. But, all of that was before the Apple (AAPL) warning. Shortly after the market closed, AAPL warned it would fall well short of previous earnings estimates. AAPL told analysts it would earn between 30 and 33 cents this quarter; the consensus had been for AAPL to earn 45 cents. AAPL didn't blame its shortfall on the euro, nor the high cost of energy, which makes their warning rather unique. Instead, AAPL said sales across all market segments were weak, with especially sluggish demand in the education market, which has contributed mightily to AAPL's revenues in the past. AAPL's grim profit warning lead to bloodshed in afterhours trading. At the time of publication, AAPL had settled around the $29 level, a full 45% lower than its 4:00 EST closing price! The aftershock of AAPL's warning spread quickly to the rest of the Computer-related sectors in afterhours trading as IBM, HWP, GTW, CPQ, DELL, and even INTC traded well below their respective closing prices. Plus, the fact that AAPL accounts for a little over 1% of the NASDAQ 100 (QQQ) should lead to a lower opening tomorrow. However, the question is whether we'll see a repeat of the Intel warning or will the bears regain control? If the former plays out, recall what happened around the time of the Intel warning. The NASDAQ gapped lower by more than 200 points the morning after Intel's warning and subsequently climbed 185 points into the close of trading. If, on the other hand, the bears return to their selling ways, the NASDAQ could be headed for serious trouble. But, with so many stocks trading in oversold territory already, the prospect of a black Friday seems unlikely. The oversold condition of the broader market, especially the Tech sector, lead to the massive bounce we witnessed today. Today's advance in the NASDAQ was the fifth attempt to rally during the month of September. The preceding four rally attempts have all ended with failure, and proved to be bear traps. This time though, feels a little different, and for several reasons. For the first time this month, the NASDAQ has successfully traced a higher relative low. Over the course of the past two days, the NASDAQ was able to hold above its most recent low at 3615 (the morning after the Intel warning). Furthermore, the internals of the NASDAQ, (i.e. advance/decline line and volume) greatly improved today. And, finally, the NASDAQ shrugged off a downgrade of CSCO this morning, and carried the Networking giant up $2 on the day (more on this story below). The magnitude with which the NASDAQ rallied today was impressive. But, we've a long way to go before the index retests its double top formed between early July and September. There has been a lot of pain inflicted upon market participants during the last month, especially in the Tech and Telecom sectors. Today's rally on the NASDAQ might signal that the last of the big sellers have left the market, although the AAPL warning could change that in the near-term, only time will tell. And, it's time needed for the NASDAQ to heal from its recent wounds before the bull-market leading index resumes its record climb. Many market technicians expect the NASDAQ to trade in the lower half of its retracement until a major catalyst returns to the market and drives stocks higher. That major catalyst could very well be third-quarter earnings reports. Tomorrow marks the end of the third-quarter, which should hopefully signal an end to earnings warnings. As the market segues from earnings warning season to the actual earnings reporting season, optimism along with the bulls might return. Again, only time will tell. The NASDAQ's ability to ignore the CSCO downgrade and get on with its rally was encouraging to see this morning. Judging by the CSCO downgrade, it's clearly evident the sell-side of Wall Street cannot reach a consensus over future market direction. Sanford Bernstein downgraded CSCO and NT from respective Market Outperform ratings to Market Perform ratings. Initially, the downgrade sent CSCO and NT lower this morning, and dragged others lower such as GLW, JDSU, and CIEN. Then, with a counterpunch, Salomon Smith Barney reiterated its Buy rating on both NT and CSCO. And, Merrill Lynch did the same. The debate over telecom equipment spending appears to be far from over, which is the root of the recent demise of Lucent, Cisco, Copper Mountain, Nortel, and many, many others. However, CSCO's and NT's respective advances in light of the downgrades this morning were encouraging to see. Over on the DOW, the bulls took charge at the opening bell this morning and didn't surrender control all day long. Leading the rally in the INDU was PG +$5.25, JPM +$5.25, HWP +$3.25 (before the Apple warning), UTX +$2.88, C +$2.75, SBC +$2.31. As you can see in the aforementioned, the rally on the DOW was broad, spreading over nearly every sector. The only sector that didn't join in the rally today was the Oil group, who continued sliding lower after crude oil prices sank to a seven week low. Although the sinking oil prices are wreaking havoc in the Energy sector, the rest of the market is breathing a big sigh of relief. As long as oil prices keep heading down, the fear of inflation should ease, which is good for the DOW. While the threat of inflation through high energy prices has fallen into the background the pesky euro is looming in the shadows. Several key events will affect trading in the euro tomorrow. First, Denmark citizens voted against joining the European Union Thursday, a move that would have directly linked Denmark's economy to the beaten down euro. What's more, tomorrow marks the first day the euro will trade freely in the open marketplace, after government officials intervened. If the big speculators get a hold of the euro again and take the currency lower, the American multinationals might fall under market scrutiny once again. It's been nice not to worry about the level of the euro during the past few trading sessions, and equally enjoyable to watch the price of oil decline. If we could just get these Tech companies to stop warning of lower profits. The bigger picture has improved over the last two days, with the exception of the Apple warning this afternoon. The three worst enemies of the broader market over the past month have been: the euro, high oil prices, and profit warnings, in no particular order. With the euro stabilizing, and oil prices declining, the market is facing fewer enemies. Moreover, third-quarter earnings warning season is approaching its end. The rallies in both the DOW and NASDAQ today signaled that market participants are testing bullish waters. Tomorrow's reaction to the AAPL warning will tell us more about how ready the market is to rally. We will be watching for a follow- through to today's rally attempts in both the DOW and NASDAQ beginning tomorrow and into next week. A confirmation of today's rally might signal a near-term bottom in the market. On the other hand, failure to move substantially to the upside over the next three or four trading sessions might signal we've been trapped by the bears once again. The office here in Denver has been abuzz with excitement over the upcoming seminar. I look forward to attending the Advanced Options Workshop and meeting many of our OIN readers. Eric Utley Research Analyst ***************************** OCTOBER OPTIONS WORKSHOP EXPO DENVER - Oct 27-30th ***************************** Here is the list you have been waiting for. The guest speakers and the course outline for the October Workshop Expo. The list of guest speakers is outstanding. Here they are: Steve Nison - Steve Nison is not only the world's foremost expert on Candlestick Charting techniques, he's the author of the two top selling, definitive books on the topic: Japanese Candlestick Charting Techniques and Beyond Candlesticks. He has trained and lectured investors and investment firms around the world on how to integrate these methods into their investment strategies. Steve will be speaking on "Spotting Early Reversal Signals." ************** Gregory Spears - Author of the Spear Report. Gregory developed a unique "consensus" concept for picking stocks in the early 90's while trying to make sense of the myriad of financial newsletters in his mailbox. His unique "consensus" system has developed an average gain of 100% for his recommendations over the normal holding period which is about six months. The Spear Report is quoted or featured in dozens of financial publications and Greg's financial workshops are "standing room only." Greg will be speaking on the top market gurus, "What they are saying and why they are wrong." **************** Dick Arms - Richard Arms is the inventor of the Arms Index, otherwise known as the TRIN. He has been analyzing the market for over 35 years and is a constant visitor to CNBC as a market commentator. His work in technical analysis is older than most of the brokers now trading with his tools. His newest invention is the Equivolume charting system, the first new charting system since the 1930s. Dick will be explaining the TRIN and how we should use it to trade as well as his new Equivolume charting system. This will be an interactive session with plenty of attendee questions that Dick will answer. ***************** Stan Kim - Stan has a MBA from UCLA and worked for IBM for many years. He realized he did not want to work for anybody else and did not want anybody working for him. He has been a full time trader ever since. He is the founder of the Snail Trader system of trading and is currently working on a new book. Stan consults and mentors traders and investment firms. His topic will be, "How to Trade for a Living When You Are Not a Stock Guru." ***************** Jim Crimmins - Jim is president of TradersAccounting.com and a noted authority on tax issues for traders. Jim is an expert on gaining Trader Status and puts on seminars on "Tax Free Trading" around the country. If you have been to a money show you have probably seen Jim with flocks of people around him. Jim IS the authority on tax accounting for traders! Jim will be speaking on Trader Status, Mark to Market and IRS do's and don'ts for traders. ***************** Add to this distinguished list above the fifteen plus speakers from OptionInvestor and you have an event you cannot afford to miss. The current roster of staff instructors includes: Ryan Nelson - Managing Editor, OptionInvestor.com Chris Verhaegh - Options 101/102 Writer and Option Strategist Steve Rhoads - Technical Analysis Instructor Molly Evans - OIN Staff writer Lee Lowell - OIN Staff writer Austin Passamonte - Editor IS, Staff Writer Buzz Lynn - Editor, Sector Trader, Staff Writer Mark Phillips - Leaps Editor, OIN Vince Dowd - Spreads Specialist Louis Horkan - Managing Editor, Premier Investor Steve Pekarek - Editor, SplitTrader.com Jeff Bailey - Editor, Premier Briefing Matt Russ - Editor, OptionInvestor.com Jim Brown - Head Option guy For a course outline click here: Http://www.OptionInvestor.com/workshop/outline The workshop is scheduled for the last weekend in October. Four days of intense, power packed option education. This is not your standard seminar. We start by putting you up in a luxury hotel and feeding you five times a day. We feed your mind from a fire hose as well with more than 15 speakers and special guests to educate you on every option strategy. There is something for everybody. Just mingling with over 15 professional option traders for four days is worth the price of admission. The entire weekend for the low price of $2995 plus your room. All meals, snacks and favors are provided and you will get a professionally produced set of videos of the entire weekend. Need we say more? If you want to learn how to be a better trader, making more and losing less then you should come to this seminar. We guarantee you will not be disappointed! For more info: http://www.OptionInvestor.com/workshop ************************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=533 ************************************************************** **************** MARKET SENTIMENT **************** Blue Skies and North-Bound Markets By Austin Passamonte It was a glorious day across much of the world, including downstate New York. For Wall Street analysts trying to guess where the near-term market bottom is we'd suggest it might be way back at the end of today's vapor trail left by the Dow and joined with most techs as the day progressed. The markets couldn't sell forever and we knew today would arrive soon. We just didn't know which one today would be, but here it is! Just like that, one fell swoop and the technical picture is looking much brighter. Chart are improving as well outline below; The Dow has closed above its 10 and 200 DMAs with the 20 and 50 DMAs well over 100+ points above us. Clearly more room to run. The SPX is also above its 10 and 200 DMAs with the 20 and 50s lying in wait near the 1475 mark. The NDX has a little more congestion with the 20, 50 and 200 DMAs not far overhead from the close. A serious test of this resistance can be expected soon. The OEX still trades below all four major moving averages and has some work to do. However, the four key indexes formed textbook bullish "Morning Star" candle formations over these three trading sessions. First we had a bearish, long red candle to show negative sentiment. Next we had yesterday's clear doji or stalemate showing neutral or changing sentiment. Today we finished the pattern with a long clear or green bullish candle longer than the bearish red, an engulfing candle. This suggests all that bearish sentiment has now converted to the bullish side in an even bigger way. How's that sound to you? With all that massive buying today the VIX managed to behave itself, trading in absolute perfect range between its 50 and 200 DMA as well. We currently consider it in benign territory although it bears watching from here. Daily chart stochastic values on all major indexes are still near or within the 20% oversold range and have forever to move up from here. That doesn't mean we will, it simply means we could before becoming overbought on a long-term basis once again. Should we go out and load the trader's truck with LEAPs? We hope you did that last night. Seriously, there is a lot of upside possible here but don't expect it all at once. Call buyers spoiled from the previous couple of years where fall rallies went straight up and never looked back will most likely be very disappointed going forward. The speculative bubble that just popped cannot reasonably be expected to form once again any time soon. Option traders on the other hand will revel in this environment. Call buyers will slowly fall by the wayside but option trades can enjoy 100+ and 200+ daily swings in each direction on a frequent basis. Puts will be as profitable or much more so and those who master both sides of the market can and will get very rich indeed. We never said it'd be easy but we promise it will be worth it. Market Sentiment honestly doesn't care which direction those 200+ range days move just so long as they keep up the good work! ***** VIX Thur 9/28 close; 21.95 CBOE Equity Put/Call Ratio The CBOE equity put/call ratio is a contrarian-sentiment indicator. Small traders are majority of equity-option players. Numbers above .75 are considered bullish, .75 to .40 neutral and bearish below .40 ************************************************************* Thurs Sat Strike/Contracts (9/28) (9/30) ************************************************************* CBOE Total P/C Ratio .48 Equity P/C Ratio .44 Peak Volume (Index & OEX) CBOE Index & OEX put/call ratio is now a "smart money" sentiment indicator, as majority of buying done by institutional traders. Numbers above 1.5 are considered bearish, 1.5 to .75 neutral and bullish below .75 ************************************************************** Thurs Sat Strike/Contracts (9/28) (9/30) ************************************************************** All index options .85 OEX Put/Call Ratio .86 30-yr Bonds Thursday 9/28 close; 5.88% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 810 - 795 16,770 3,773 4.44 790 - 775 10,102 10,475 .96 OEX close: 773.32 Support: 770 - 755 15,410 11,876 .76*** 750 - 730 134 15,735 117.42*** Maximum calls: 800/7,501 Maximum puts : 750/8,484 Moving Averages 10 DMA 774 20 DMA 794 50 DMA 801 200 DMA 783 NASDAQ 100 Index (NDX/QQQ) Resistance: 101 - 99 14,304 3,415 4.19 98 - 96 15,020 16,545 .91 95 - 93 24,184 24,975 .97*** QQQ(NDX)close: 92.23/32 Support: 92 - 90 26,911 27,476 1.02 89 - 87 6,057 39,315 6.49 86 - 84 1,153 18,258 15.84*** Maximum calls: 95/11,766 Maximum puts : 88/16,901 Moving Averages 10 DMA 91 20 DMA 91 50 DMA 93 200 DMA 94 S&P 500 (SPX) Resistance: 1500 18,357 17,965 1.02 1475 18,409 13,590 1.35 1460 2,120 1,326 1.60 SPX close: 1458.29 Support: 1450 81,244 12,553 1.52 1425 7,724 18,168 2.35 1400 1,271 11,432 8.99 Maximum calls: 1475/18,409 Maximum puts : 1425/18,168 Moving Averages 10 DMA 1447 20 DMA 1472 50 DMA 1475 200 DMA 1447 ***** CBOT Commitment Of Traders Report: Friday 9/22 Biweekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader's direction. Small Specs Commercials DJIA futures Total Open Interest % 13.37% net-long 11.78% net-short NASDAQ 100 Total Open Interest % .04% net-long 8.9% net-short S&P 500 Total Open Interest % 29.07% net-long 10.57% net-short What COT Data Tells Us: Commercial positions in S&P 500 and DJIA remain at or above five-year extreme short levels. NDX commercials continue to go shorter. Small specs continue to build net-long extremes in SP00S but have given ground in DJIA and switched over to heavily net- short in NDX. Weak hands are shaking out, only a matter of time in our opinion before they crumble. (Not Shown) Commercial positions in 10-Year Note and 30-Year Bond markets at or near five-year extreme net-short levels. Small specs build net-long. Summary: "Smart money" insiders expect stock market to decline and interest rates to rise. Small traders directly opposite, creating diverse set up favoring commercial sentiment for future market direction. *Data compiled on 9/26 by COT Bullish: Fed's finished Benign government reports Broad rally today Disparity in overhead call/put ratios Bearish: Oil Prices (falling) COT reports (changing?) Recent pre-warnings, downgrades Broad market's break of critical M/A support Market leaders breakdown ************** MARKET POSTURE ************** As of Market Close - Thursday, 09/28/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,824 10,550 10,850 ** SPX S&P 500 1,458 1,415 1,465 ** COMPX NASD Composite 3,778 3,600 3,950 OEX S&P 100 773 754 780 RUT Russell 2000 523 500 525 NDX NASD 100 3,725 3,500 3,800 MSH High Tech 990 945 1,020 ** BTK Biotech 800 740 820 XCI Hardware 1,369 1,320 1,430 GSO.X Software 463 440 470 SOX Semiconductor 901 850 1,000 NWX Networking 1,207 1,140 1,250 ** INX Internet 506 475 545 ** BIX Banking 625 585 635 XBD Brokerage 648 620 685 IUX Insurance 774 720 780 ** RLX Retail 821 800 875 DRG Drug 409 365 415 HCX Healthcare 855 805 855 XAL Airline 145 140 152 OIX Oil & Gas 307 296 332 Six alarms were hit in the past two sessions, with IUX triggering the sole resistance alert. The remaining five alerts were at support levels. Today's rally gives traders an excellent opportunity to assess risk/reward profiles for the sectors you're interested in. Lowering support (DOW, SPX, MSH, NWX, INX) Lowering resistance (COMPX, OEX, RUT, NDX, XCI, INX, XBD) Raising support (OEX, BTK, HCI, GSO.X, SOX, BIX, XBD, HCX) Raising resistance (IUX) ************** TRADERS CORNER ************** Spreading The Risk By Molly Evans When most people think of the stock market, they envision that when it goes up, that's very good. When it goes down, obviously, that's bad. As option traders, that's not necessarily the case for ourselves unless we're positioned adversely to the opposite side of the pendulum market swings. Now clearly, on any given day, not everything is going up or down. If you are holding positions diversified over various sectors, something is pulling back while another is pedaling ahead. You fret over whether it's time to cut what's losing or to take profits on what's winning. These are the mental gymnastics of traders everywhere. The market has been a killer to anyone who dared go long the wrong stock as of late. The shorts have become accustomed to getting the wind knocked out of their plays for so long that they don't know what to do with success so they probably cover too soon or too late (like today) and in the end no one is happy as the market slowly bleeds and then whipsaws to the other extreme. During my training in anesthesia, we were constantly told that if something isn't working, we have to do something different and do it fast. If the securing of a breathing tube into the windpipe isn't going well, the practitioner has to change the blade they're using or realign the patient's head for a better axis. If the patient is not breathing, that tube HAS to get in there. Anesthesia runs pretty automated once the bus is on the road but human intervention is what gets it there. In comparing this to our world of trading, it would follow that if a portfolio is gasping, one simply MUST do something to stop it. We've got to give the portfolio a breathing tube, so to speak, and that is by cutting losses and good money management. You know the deal. No more than 2% of portfolio at risk in any one position, wait for the entry off your favorite technical indicator and get out when it violates your preset limits or achieves the goal. Easy. Not really. We're all human and have preconceived notions about how the play is going to go. When it doesn't, we tend to think that we just misjudged a little bit, are willing to forgive the stock's transgression and wait for it to do what we knew it was supposed to do. Afterall, we wouldn't have entered the trade if we didn't think it was going to go our way. And that my fellow traders, is how you, me and most everyone else ends up in trouble at least one time or another. Once we figure out how to stop losing money and come to the realization that taking winnings out of the market isn't so easy afterall, how do we still manage to bring home returns superior to what a mutual fund could do? How can we get off the emotional roller coaster of cheering a stock on or cussing when it goes against our bias? What would it be like to put that bus on the road and sit back and wait to just tweak the play a little now and then? Positioning your portfolio into spreads can do it. We've talked about this numerous times on the site and have ongoing columns dedicated to picks suitable for spreads. However, I had the opportunity to talk with one of our readers in-depth about how he likes to maneuver himself around in the market and wanted to tell you about it. He's a big spread fan and as such, is quite happy to keep taking base hits and doubles, forgoing homeruns. Who's had a homerun lately anyway? Some, I would suppose, but not many. G, as I will call him, has been trading options for ten years but has gradually converted himself into a more conservative trading style. He is no longer subject to the incredible swings in portfolio value inherent with a strictly directional investing style. In fact, G really doesn't mind which way the market moves, just so it does. His favorite play is the calendar bull spread, buying LEAPs and then selling OTM calls against them. You might also hear these referred to as Bull Debit Spreads because they will always require a debit of cash to implement. The lower strike costs more than the higher strike you're selling. The beauty in this trade is in capturing the time premium month after month and marching the strikes upwards as the stock advances. He does these with stable stocks as it just isn't feasible to try and capture the tops and volatility of the wild ones. I asked what he does if the stock moves up to the strike he sold as it's nearing expiration day and he is at risk for being assigned. No problem, he rolls it up by buying back the call and selling the higher strike. He doesn't want to be assigned and the underlying LEAP is gaining in value along with that move anyway. It's not that big of a deal to have to buy back the call to close the position, and then turn right back around and sell a higher out-of-the-money strike. Another trick, and more power to you if your broker will allow you to do it, is to rewrite the next month's calls on expiration Friday without buying back to close the expiring previously written calls. He is in effect writing naked calls for the weekend to capture the volatility and little bit of time on that Friday rather than the following Monday. An equivalent position can be established with puts. This would be called a Bull Put or Bull Credit Spread. Here you work opposite the calls by buying the less expensive, lower strike or more out-of-the-money put, and then sell the closer to the underlying, more expensive put. There is a net credit into your account which you can collect interest upon provided you have the margin collateral the broker requires until the spread is closed. Of course, you implement this put spread if you have a bullish outlook on the stock because as the stock moves up, the put you sold loses its value as does the one you own. But you've already collected your premium and are just waiting for them both to expire worthless. You could, though, buy back the put to close if you think the stock is topping, keep the profits you've already bagged thus far, and let your out-of-the-money put appreciate as the stock drops. G likes to implement a variety of spreads like this. He's not a one trick pony. He's not afraid to play the dark side either. Instead of simply buying puts when he thinks the stock is going to come down, naturally he'll implement a bear spread. For instance, this is G's thought on a day like today: a one-day wonder. It's still Fall, we've been spanked hard and the market wanted a rally. Will it hold? That's a million dollar question, isn't it? G doesn't think so, so what he did was pull the option chain for one of those high flying babies today. He wants to implement either a Bear Call Credit Spread or a Bear Put Debit Spread. When a bear spread is implemented with calls, you're taking in a credit by buying the call with the higher strike and selling the call with the lower strike. The usual credit into the account caveats apply and the play runs exactly opposite of what we discussed in the Bull Put Spread. You want the underlying to drop so that your lower strike call will fall in its value and thus you conceivably pocket the entire net amount should they both expire worthless or you sell to close the lower strike once the stock shows signs that it wants to rebound. You can also construct the bear spread with puts by buying the higher strike put and selling the lower strike put against it. This offsets the cost of your more valuable short position. You are thus hedged and have limited your risk but also your profit potential. Think back one week ago. This was the day Intel warned. On Friday morning, panic was in the air and what happened? It was all over very quickly as the sharks came to feed. The market was already in an oversold state and that was the point of maximum irrationality to where smart money wants in, even if only temporarily. It was amazing to watch, much like today's frenzy in fact. Short covering is like that and traders who've been beaten up, don't want to miss their chance on the long side if the market is finally going to let them in on an upswing. For G, last Friday was one of those great days that truly smart traders wait and pray for. I'll let him tell you about it in his own words, "Friday was a special day. A very good, very special day. Intel's announcement bombed the market. Most of the tech stocks dropped. I entered orders to cover the short side of my call spreads prior to the open. And, I entered orders to write puts against long put positions. Bingo. Tremendous fills within the first 15 minutes of the day. Then, the market gradually crept back to about where it was the day before, (except Intel of course). On Monday, I'll rewrite the short side of several bull call spreads and I'll cover the puts written at Friday's open. My portfolio is generally bullish, suggesting that I think that the market will rise. When it went south on Friday morning, I was still able to turn a profit as I'm constantly selling premium" and thus able to leg out of a profitable play at points of extreme as witnessed last Friday. Spreads aren't for everyone, but everyone should give pause to consider allocating some of their portfolios to doing it. If for nothing else, it will force you to become a more rounded trader and to better understand the myriad of possibilities to profit with options other than by simply buying calls and/or puts. ************************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=547 ************************************************************** ************* SECTOR TRADER ************* Will A Rotten Apple Spoil the Bunch? By Buzz Lynn Contact Support What looked a broad-based rally today could easily retrace following AAPL's earnings warning tonight. Let's quickly summarize today's business headlines: PG and BMY announced that they would meet or beat estimates this quarter - good. Dole Foods warns citing (what else?) Euro and oil - bad. A federal judge dismissed part of the Department of Justices' lawsuit against tobacco companies that sought recovery of billions of dollars to treat sick smokers - good (for business. . .no hate mail from tobacco litigants please). The government revised reported economic growth figures upward to correct an error while initial job claims fell, indicating a tight labor market - potentially bad with an FOMC meeting next Tuesday. EXDS will buy GBLX's Global Center hosting unit for $6.5 bln in EXDS stock giving GBLX approximately 20% ownership of EXDS - good for GBLX and the telecom industry; bad for EXDS; good for all in the long run. Denmark rejected the Euro in a vote today, but Central Bank buying may keep the Euro from plunging - mixed opinions. Lehman Bros. Reiterates Buy rating on WMT - good. CSCO and NT receive downgrades from Sanford Bernstein, but Merrill and others rush to sector's defense - mixed opinions. So what is the meaning of all this? In the absence of any really bad news, investors took today's snippets of good news as a reason to rally, especially since the markets (NASDAQ in particular) have been down for the last four days. All that may come to an abrupt end tomorrow following AAPL's warning tonight. It wasn't just slower U.S. sales. It was slower sales "in all geographic regions". After closing at $53.50 today, AAPL traded down to $29 after hours. We noted Tuesday, "according to First Call, 64% of the companies providing estimates this quarter will miss earnings, vs. 55% for the previous quarter, as reported by briefing.com. That's a big reason to stay concerned." INTC, AAPL, EK, AA, DOL, CUM, FMO, G, ROK, and GT have all warned and been severely punished - generally 30% or more. Despite that earnings warnings effectively wind down after tomorrow's close. That still leaves one more day and nothing says it can't happen again over the weekend for those companies that report later in October. Unfortunately, there is still time to disappoint. The fact is that this market still has highly valued companies lined up like ducks in a carnival gallery. The only reward for meeting or exceeding earnings is in living to make the cycle again. The punishment is getting shot without hope of recovery anytime soon. That said, it's a bit early to get bullish despite the technical test and bounce from support levels on heavy volume. Window dressing will be on the menu and S&P additions get announced tomorrow, which could keep the markets choppy too. Technical indicators have yet to turn positive and give us the bullish reversal signal. While the FOMC convenes Tuesday next week and shouldn't produce any surprises, we would be wary of jumping in with both feet until we see some technical oscillator buy signals first. We recall being pretty excited about last Friday's recovery too. Maybe today's rally is the start of something good, but in this market, we'll wait another day or so to make sure it's the real thing. Fool me once, shame on you. Fool me twice, shame on me. ***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 $91.56 +2.83 (-1.38 this week) Today provided a nice daily recovery to an otherwise down week proving that an oversold market can be become more oversold, and that a one-day bounce doesn't make a trend. Any gains today in INTC, MSFT, CSCO, and DELL were just making up losses from earlier in the week. WCOM was the only clear winner today. Otherwise, technical indicators MACD and stochastic have yet to give us the buy sign. Don't misunderstand, the strong bounces off 3650 on the NASDAQ yesterday and today, which equate to about $88 on the QQQ, make for great daytrading possibilities, but have yet to get our MACD into positive territory on a daily chart. While the stochastic is now above 20%, MACD has yet to confirm the move. Selling time looks good to us. Resistance is good at $93.50 and $95. With APPL's warning tonight, you may want to stand aside until next week. Calendar Spread: While the upturn may be near, we still are not bullishly confirmed on the chart to go long. That said, let's sell some time value just before a weekend, shall we? That way, premium evaporates on the buyer into our account. Remember, we want to buy the long leg cheap at support, and sell the short leg dear at resistance. Now may be the time to do the latter if AAPL's warning puts pressure on the technology horizon. Watch for a rollover at $93.50 or $95. BUY CALL JAN- 95 QVQ-AQ OI= 3609 at $ 8.75 SELL CALL OCT- 95 QVQ-JQ OI=11766 at $ 2.69, ND = 6.06 or less SELL CALL OCT-100 QVO-JV OI=10362 at $ 1.06, ND = 7.81 or less Long Call: Today actually looked great for daytrading on a 30 or 60-min chart. However, since we are most interested in capturing a directional move, we still need to wait for the no longer oversold stochastic (over the 20% line) to be confirmed with a positive MACD. Despite today's rally, we aren't there yet. Support is at $90 and $88 with resistance at $93.50 and $95. Target shoot where you like or wait for the technicals. BUY CALL OCT- 90 QVQ-JL OI=11429 at $5.63 SL=3.75 BUY CALL OCT- 95 QVQ-JQ OI=11766 at $2.88 SL=1.25 BUY CALL NOV- 95 QVQ-KQ OI= 500 at $5.25 SL=3.25 Bullish Put Credit Spread: Four down days deserved to be greeted with an up day. but that doesn't mean the trend has reversed. Until we see a MACD confirmation of the no longer oversold stochastic, we should not be eager to jump into this play. Remember, this is for experienced traders only. The intent is to sell a put and buy a lower strike price put for protection, meanwhile taking a credit into our account. It's like a naked put with a safety net, but it still requires margin usage. Ideally, we enter at the bottom of a trend and use a rising market to have both positions expire worthless. We then keep the whole credit. Follow the math below! This one looks juicy just before a weekend - value decays while we mow the lawn and sleep this weekend. SELL PUT OCT-90 QVQ-VL OI=16765 at $2.50 BUY PUT OCT-85 YQQ-VG OI=10832 at $1.38 Net Credit = $1.13 or more Average Daily Volume = 19.5 mln ************** OEX ************** OEX - S&P 100 $773.32 +14.69 (-0.76 this week) The overall market cooperated today sending the OEX bouncing off Tuesday's and yesterday's lows around 752-755. It also bounced off the low Bollinger band giving us the signal that the reversal may finally be near. Now we need to see OEX turn stochastically positive by moving over the oversold 20% level, followed by a positive MACD confirmation. When that happens we will likely be at the beginning of a sustainable uptrend. Unfortunately, one bad apple (AAPL) can spoil the bunch and the oversold can become more oversold. We'd opt to wait until next week to enter any trades here. That way, the effects of the S&P reshuffling and window dressing changes will have run their course, or at least be manageable risks. Support is at 770, 750, 740, and rock solid at 730. Resistance is at 775, 780, mildly at 790, then again at 800. Long Call: Today's rally did not give us a stochastic or MACD buy signal on the daily chart. The stochastic, despite last Friday's brief poke above 20%, remains in oversold territory. MACD has not been positive for all of September. If today's rally has any legs, that may about to change. Don't jump the gun but wait for the confirmation on the daily chart before getting in. For those with a bit more time to watch, you can use the same signals on a 30 or 60-min chart to position trade or daytrade. As noted above, support is at 770, 750, 740, and rock solid at 730. Resistance is at 775, 780, mildly at 790, then again at 800. BUY CALL OCT-750 OEZ-JJ OI= 52 at $23.63 SL=16.50 BUY CALL OCT-760 OEZ-JL OI= 475 at $17.00 SL=12.25 BUY CALL OCT-770 OEZ-JN OI=1071 at $12.13 SL= 9.25 BUY CALL NOV-770 OEZ-KN OI= 99 at $19.88 SL=14.50 Bullish Calendar Spread: Now might be a good time to sell some time if we AAPL puts a drag on the markets tomorrow. Like the QQQ above, our job will be to sell the short leg dear at resistance while buying the long leg cheap at support. If the market rolls over, feel free to grab some of that time value decay for the weekend, especially if today's rally turns out to be a one-day wonder. Resistance is at 775, 780, 790, and 800. BUY CALL MAR-800 OEX-CT OI= 22 at $40.63 SELL CALL OCT-800 OEX-JT OI=7501 at $ 4.00, ND = 36.63 SELL CALL OCT-820 OEX-JT OI=6466 at $ 1.00, ND = 39.63 Bullish Put Credit Spread: In this kind of play, we must be comfortable that we have found a bottom. We have our bounce off the lower Bollinger band, but still need to break the 20% oversold line with the fast stochastic and confirm it with a positive MACD. That's when we'll know we've hit bottom. At that point, our job it instigate a "safe" naked put by buying a lower strike put for protection and let the trend make our position expire worthless. Meanwhile we keep the credit we got when we entered the trade. The risk is that OEX drops through the floor and we are liable for the difference between strike prices minus the credit. This play is better suited for advanced traders, but know the strategy and your threshold of pain before entering. SELL PUT OCT-765 OEZ-VM OI=2514 at $10.00 BUY PUT OCT-760 OEZ-VL OI=2608 at $ 8.88 Net Credit = $1.13 or more Average Daily Volume = 1266 ************* DAILY RESULTS ************* Index Last Mon Tue Wed Thu Week Dow 10824.06 -39.22 -176.83 -2.96 195.70 -23.31 Nasdaq 3778.32 -62.54 -52.12 -32.80 122.02 -25.44 $OEX 773.32 -8.07 -9.14 1.76 14.69 -0.76 $SPX 1458.29 -9.69 -11.82 -0.64 31.72 9.57 $RUT 523.81 -3.44 -5.49 -1.76 15.68 4.99 $TRAN 2572.32 -41.51 -37.56 -3.54 57.79 -24.82 $VIX 21.95 0.23 0.68 -0.72 -2.41 -2.22 Calls CFLO 145.50 13.84 5.97 -1.50 -10.00 18.31 Profit taking SEBL 116.47 2.75 -2.50 3.31 7.91 3.56 All-time high AFL 64.56 0.94 2.25 -0.56 -0.88 2.63 Fractional CIEN 130.00 6.81 -0.44 -4.00 6.88 2.38 Setting records AGIL 92.00 3.69 -0.69 -1.19 10.19 1.81 Broke out CAH 90.94 0.31 2.38 -2.00 -2.06 0.69 Dropped QCOM 74.81 -3.00 3.38 -0.50 1.94 -0.13 Still holding ENZN 71.00 -1.94 -1.38 3.06 0.19 -0.25 Bargain hunt VRSN 208.38 -2.69 -5.63 7.88 13.94 -0.44 New JNPR 228.00 2.25 2.63 -5.50 3.00 -0.63 Still strong BRCM 256.19 3.50 4.75 -9.25 8.44 -1.00 Support held MERQ 156.31 4.56 1.75 -9.25 10.31 -2.94 Rebounding FRX 118.91 -2.94 -1.88 -0.19 4.47 -5.00 Recovered ITWO 192.50 -3.56 1.50 -3.38 11.75 -5.44 On fire today PEB 119.44 0.75 -10.81 3.81 6.69 -6.25 Rejoice IDTI 96.53 -0.19 1.19 -7.75 7.34 -6.75 Heckava bounce CHKP 153.25 0.13 -3.31 -5.44 9.44 -8.63 Came back Puts CPTH 58.88 1.94 -4.25 -5.69 -2.94 -8.00 New OMC 74.19 -1.06 -3.00 -2.75 4.19 -6.81 Doctor's order CMOS 31.00 -2.88 -1.13 -1.06 0.19 -5.06 Lower highs EPNY 82.50 -2.13 -1.56 0.00 4.00 -3.69 Dropped DITC 42.00 -5.56 3.31 -0.38 5.13 -2.63 Dropped AFCI 37.94 0.50 -1.44 -1.63 2.88 -2.56 Not dead yet MU 49.50 -6.00 3.19 2.00 -2.13 -0.81 Not convinced PCS 34.50 3.56 -0.06 0.56 2.44 4.06 Dropped 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: ***** CAH $90.94 -2.06 (-1.44) Temperate volume escorted CAH lower as profit taking took a foothold in the past two sessions. Stop losses would have easily protected against the recent downdraft. The overall lack of gains amid the broad rallies plainly indicates CAH has peaked. Today's weak close below the intersecting 5-dma ($92.81) and 10-dma ($91.79) is definitely a bearish sign too. So while the bullish series of all-time highs off the low $80's was exciting and lucrative, it's time to exit this momentum play. CAH is expected to report earnings around October 24th. PUTS: ***** EPNY $82.50 +4.00 (+0.31) It appears that EPNY has settled into a trading range, spanning 10 points, between $75 support and $85 resistance. Volume has been tapering off dramatically this past week. Support at $75 has been tested numerous times successfully and the recent selling pressure on accelerating volume has abated. Yesterday in a down market, EPNY was able to finish unchanged on less than average volume. Today the stock closed up 5.10% on about half of its ADV. In doing so, EPNY managed to close above both its 5- and 10-dma (now at $80.31 and $81.46) for the first time in almost three weeks. Though volume on today's move was low, it appears the downtrend may be over and with that, we are closing this put play. PCS $34.38 +2.31 (+6.38) The shorts continued to cover their positions on Wednesday. Even as the Techs took a rest, PCS found itself in positive territory for the majority of the day. By days end Wednesday, PCS had settled at $32.06, up $0.56 on the day accompanied by lighter than normal volume. In early morning trading Thursday, PCS continued its ascent, climbing by over $1 to $33.06. As the Tech sector picked up steam, PCS buyers continued to appear, pushing it up to $34.25 by mid-day. Control remained in the buyer's hands all day as PCS finished up to finish the day at $34.38, comfortably above its 5-dma of $30.40. It feels as if all the bad news may be priced in to PCS now, as the buyers seem to be supporting PCS and other telecom related issues. As a result, we are going to take our huge profits and run. Thanks PCS! DITC $42.00 +5.13 (+2.50) As suspected, the low from Tuesday marked the bottom for DITC. The jury was still out yesterday, but today's strong recovery definitely boots DITC off the put list. Opening at the low and finishing very near the high for more than a $5 gain has the definite earmarks of a recovery. Throw in bullish reversals on the MACD and Stochastics, and a close over the 10-dma for the first time in 3 weeks, and the outlook is anything but bearish. Hopefully you followed our advice and kept those stops tight, as they should have taken you out of the play during today's steady upside move. ************************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=559 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. 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The Option Investor Newsletter Thursday 09-28-2000 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/092800_2.asp ***********************ADVERTISEMENT************************ DirectAccessTrader, an international firm and division of InvestIN Securities Corp. (Member: NASD, SIPC), announces the EXP Trader. The EXP Trader is an advanced, next generation trading platform featuring: unparalleled speed via a direct connection to the Exchanges, SMART ORDER routing, stop orders, and direct access to the Island ECN book. Trade Faster. Trade Smarter. The EXP Trader. Call 1-800-327-1883. Speak directly with our trader support team. Open an account today and trade as low as $9.95. http://www.sungrp.com/tracking.asp?campaignid=572 ************************************************************ ******************** PLAY UPDATES - CALLS ******************** ITWO $192.44 +11.69 (+6.25) ITWO was on fire today with a little help from the broader NASDAQ market. After five sessions of selling, the NASDAQ was due for an oversold bounce and traders piled into their favorite momentum plays. Also helping out our play was yesterday's announcement that Robert W. Baird initiated coverage of ITWO with a Market Outperform. And the stock did just that today, tacking on a 6.5% gain. The trend remains steady and ITWO traded right down to its 10-dma at $181.44, just after the open, only to explode throughout the day. Volume was stronger by one mln shares over the ADV. Depending on how the AAPL warning affects the market tomorrow, this momentum may be too strong to get in front of. In that case, $200 will be the next price objective overhead. Today's high of $195.75 will also be resistance. Even if the market slips in the morning, look for buyers to step into ITWO. Any bounces from $190, $185, or even $180, if it goes that far, will provide entries into this high flier. IDTI $96.56 +7.38 (+0.44) That was one heck of a bounce and entry point. Boy, I hope somebody jumped on that one! Ticking in with a low of $86.13 near the open, volume stepped up and quickly drove the stock to $92 where it based during midmorning. It was a very nice day trade, yet we want to convey a sense of caution. There has been a few development with this play that concern us. Wednesday's selloff brought IDTI below its 10-dma, which is now at $96.67 and acted as resistance today. In regards to this, IDTI could not get back to yesterday's opening price near $99. This may be a preemptive signal that profit taking could continue. Also, today's volume was not as strong as the volume to the downside on Wednesday. We have been riding this play for quite a while, up nearly $30. We would not initiate new plays unless IDTI moves convincingly through the $99 range and onto $100. Tighten up stops and watch carefully as the sellers have been rearing their ugly heads. AGIL $92.00 +10.19 (+12.00) Struggling with strong resistance at $85, AGIL finally broke out today, and it did so in style. Yesterday was a relatively quiet day for AGIL, as the stock found support above its 10-dma (now at $81.23) and closed on its 5-dma (at $84.07), providing aggressive traders with a point of entry. Those who didn't take advantage of the opportunity yesterday got another chance today as another bounce above its 10-dma in the early morning lead to a break though its 5-dma. AGIL spent the rest of the day moving higher, breaking through resistance at $85, to close up 12.45% on 230% of ADV. There was no news to accompany the move up but we'll take the gain nonetheless. With resistance at $85 and $90 cleared, look for those two points to be levels of support as AGIL attempts to challenge $95 and then the psychological $100. Look for a bounce off support, especially off $90 where the 5-dma also currently resides as a possible entry point for the aggressive and a break above $95 with conviction for the more conservative. CFLO $145.50 -10.00 (+8.31) After such a great start to the week, a little profit-taking is not surprising, perhaps even healthy. Encountering resistance at the $160 level on Tuesday, the stock continued to do so on Wednesday. Hitting a high of $160 early in the day brought in the sellers, closing the stock down $1.50, with volume coming in at 252% of ADV. Today, CFLO gapped down at the open and spent the early part of the day selling off. Finding support near its 10-dma and $140, the stock quickly bounced, providing aggressive traders with an ideal point of entry. CFLO closed he day down 6.43% on 240% of ADV. While selling volume these past couple of days appears to be high, it should be noted that it is about average when compared to the large volume to the upside this past week. Conservative traders, however, will want to see CFLO break through $150 (just above its 5-dma) before making an entry. Conservative traders may be target shooting for another bounce off strong support at $140. MERQ $156.31 +10.31 (+7.38) Yesterday gave investors in MERQ a little scare as the stock was dragged lower by the weight of a falling NASDAQ. The stock spent the day moving lower in stair-step fashion to close down $9.25, about 6%. On the bright side, volume was low, at only 90% of the ADV. Today saw MERQ gap down at the open. Getting near strong support at $140, the stock quickly bounced as buyers stepped in eagerly to buy the dip. This turned out to be an excellent entry point as MERQ also found support from its 10-dma at $142.20. From there the stock spend the rest of the day moving ever higher. MERQ closed up 7% on higher than average volume. In doing so, it more than erased yesterday's drop and finds itself once again challenging its all-time highs. A break above $160 on volume would be a conservative entry point. Aggressive traders may want to look for a bounce off the 5-dma (at $151.85) or support at $150. CHKP $153.25 +9.44 (+0.81) We got the pullback, mentioned in the update Tuesday night, early Wednesday morning as the Techs struggled. CHKP saw an early morning low of $145.75 and by mid day was still at those levels on average volume. However, as Wednesdays trading wore on, the selling pressure in the Nasdaq intensified and CHKP felt the pressure, closing below the support levels at $145-$146, finishing down $5.44 at $143.81. Thursday, the selling pressure continued as CHKP slipped to an early morning low of $141 before rebounding smartly to $146, all within the first hour of trading. By mid-day, the Nasdaq heated up and CHKP followed, moving into positive territory by more than $6 at $150.50. As we headed toward the end of trading, the Tech sector remained strong. CHKP followed suit closing up $9.44 on volume of 2.69 mln shares, to finish at $153.25 just above its 10-dma (currently $152.10). It is possible we may see a continued upward move from here, so aggressive traders may need to use intraday pullbacks as a way to enter this trade. A pullback to the 5-dma at $149.10 would offer a more conservative entry point. AFL $65.00 -0.44 (+2.19) You can't knock a good stock down. This AFL has been a star, making its own way in this difficult market environment. Wednesday was no different, as AFL pulled back only fractionally in early trading, only to push back up to the flat line my mid-day. As we finished up on Wednesday, AFL found itself down $0.50 at $65.50 on robust volume once again. Of note Wednesday was Aflac's recognition by InformationWeek magazine as being named to the InformationWeek 500 Listing of Information Technology Innovators. Thursday morning felt like business as usual for AFL, giving us the usual light volume pullback, moving down by only $0.38 to $65.06. Half way through the trading day, Aflac was still fractionally below the flat line, as the focus moved to the Tech sector. The rally in the Techs continued for the remainder of the day and subsequently, AFL rested for the balance of the day. Volume was a light 673K shares today. Traders could look for a continued light volume pullback to the 5-dma or 10-dma at $63.80 and $62.20, respectively, along with a volume supported bounce as an ideal entry point. SEBL $116.63 +8.06 (+11.63) As the Nasdaq showed weakness, SEBL bucked the trend Wednesday finishing at a new closing high. By mid-day, SEBL had been as high as $111.38, but, some selling pressure late in the day caused SEBL to close at $108.56, up $3.31 for the day. Strength was the theme for Thursday morning as SEBL moved up by $4 to touch $112.25. As the day finished up, the strong got stronger as SEBL pushed to a new intraday high of $117.31. In concert with the strengthening Nasdaq, SEBL posted an all-time closing high of $116.63 on decent volume. This horse could keep galloping from here as momentum players pile in, so traders may have to use intraday pullbacks to gain entry here. Pullbacks to the $114 level or the $111 level could be bought provided the bounces from those levels are accompanied by strong volume. The 5-dma is down at $105.90. It is important here to watch for profit taking. QCOM $74.81 +1.94 (+1.81) Patience is running thin, but QCOM is still a contender. The object of this play is for a strong momentum move to the upside of $80 followed by a run leading into earnings. The company is confirmed to report on November 2nd, after the market. Granted that's five weeks into the future. But if the momentum takes hold and the market is conducive to a rally, then the sky's the limit for this old-time favorite. While we didn't see any sharp moves or spikes in volume in recent sessions, QCOM has established a higher level of near-term support at $73 and $74. The recurring tests at the $75 mark is encouraging, but a breakout above the near-term high of $78.13 would provide better confirmation. Aggressive traders may consider entries at the trailing 5 and 10 DMAs at $72.81 and $72.46, respectively. However, a return to the 100-dma ($68.56) vicinity should send you running for cover. In the news, Qualcomm and Agilent Technologies (A), a test and measurement equipment maker, announced they entered into a multi-million dollar deal. Under the terms of the agreement, it will allow Agilent to use patents, software and chipsets to expand its line of Code Division Multiple Access (CDMA) test equipment. CIEN $130.00 +6.88 (+9.25) Bucking the trend of many techs in recent sessions, CIEN continues to reach new heights. Yesterday Ryan, Beck & Co restated a Strong Buy recommendation and issued a $165 price target. Sentiment remains strong amongst the analysts that the fiber-optic companies will beat earnings estimates; and thus, we're anticipating more upside action over the short-term. CIEN is expected to report on November 16th. The current momentum recently drove CIEN to a new 52-week record at $136.25 on Monday. The ensuing action following the sharp upswing established a higher support level at $124 and $128, which has held throughout the week. The first marks to conquer are $130 and $131. Expect a bit more resistance as CIEN attempts to stretch into new territory. Dips to the rising 5-dma line, now at $125.70, still offer the enterprising trader solid entries. While, in hindsight, today's downdraft to the 10-dma ($118.09) offered a lucrative entry, be wary taking positions on such deep cuts. ENZN $71.00 +0.19 (-0.06) The strong gyrations amid active trading provided opportunities for lucrative entries and exits in the past two sessions. If you had quick fingers on the keyboard, ENZN demonstrated strength above $70 after amateur hour on Wednesday and offered the opportunity to jump into the building momentum. The share price catapulted to $74.13, a new 52-week record, before it settled back into the vicinity of $71 for the remainder of the day. The profit takers returned in today's sessions and initially brought ENZN down a few notches. But once again, the $66 level proved to be a solid launching pad. ENZN bullishly finished the day at a respectable price level. The bargain hunters are obviously out in force! BRCM $256.19 +8.44 (+7.44) Things were looking pretty grim for BRCM yesterday as selling pressures pushed the stock down through support between $248-250. Then, the bears pushed our play down for a retest of support at $242, which fortunately held up. The recovery continued this morning, getting back over $250 before the noon hour. Steely-nerved target shooters could have jumped in to buy the bounce as it occurred right in the middle of the convergence of the 10-dma ($243.38), 30-dma ($244.69) and 50-dma ($239.19). As the afternoon wore on, the bears forced one more test of the $250 level before letting the bears push the price up to close just below the high of the day, putting our play back in the black. It was nice to see the recovery today, and while dips to support at $250 and then $242 look buyable, the markets are not looking like they have picked a direction yet. Discretion may dictate waiting for a solid (read that as strong volume) move through the $260 resistance level before playing. FRX $118.91 +4.47 (-0.53) Recovering its composure in the middle of the noon hour yesterday, FRX pulled itself up by its bootstraps and recovered right into the close. It was a relief to see buyers step up to the plate at the $110-112 support level, which is reinforced by the 10-dma (then at $112.56). This support level is now stronger, given another successful test under its belt and another intraday dip to this area is definitely buyable. While volume was nothing to write home about over the past 2 days, it is holding above the average seen since the LLY-induced selloff last month. While it didn't manage a new high today, FRX's recovery was respectable, tacking on over $4, to close just over $2 from a new all-time high. The real fly in the ointment continues to be the broader markets, and specifically earnings warnings. The markets seem ready to rally, but are having a hard time doing so in the face of the daily earnings confessions. October is just around the corner, and for now, the best course of action may be to wait for a convincing breakout to new highs before opening new positions. JNPR $228.00 +3.00 (+2.38) Falling right at the open yesterday, the only positive thing that could be said about JNPR was that the price bounced just above the 10-dma (then at $214.25). While today did see the price continue a modest recovery, the jumpy nature of the price action today made it very hard to get a good entry. With the daily procession of companies coming to the earnings confessional, the markets remain jittery, selling off at the slightest provocation. Recovering out of their oversold condition this morning, it was clear that they really wanted to rally and that is what they did, taking our play along for the ride. But the enthusiasm may be short-lived with AAPL pressuring the tech sector in the after-hours session today, warning that their earnings will not be up to snuff. The $230 level is still looking like solid resistance, and waiting for a volume-backed breakout seems the most prudent entry strategy. Intraday dips to the $224 support level, followed by $215-217, are still buyable. Just make sure that buyers are stepping forward before you jump in - there's no sense trying to catch a falling knife. PEB $119.44 +6.69 (+0.44) Biotech buyers rejoice. Despite wild fluctuations in the broader markets, PEB is holding up nicely and continuing to probe the $121 resistance level. PEB, which has recently changed its name to Applied Biosystems had the good fortune to have UBS Warburg initiate coverage yesterday with a Buy rating, and that could have been partially responsible for the strength today. Even with the large decline on Tuesday, PEB managed to maintain support at the 10-dma (now at $111.83), and further dips to the $110-112 level look attractive for new entries. One item of concern is the fact that the volume has been declining all week. This may portend some near-term weakness, or it could just be consolidation ahead of a renewed assault on resistance. Rather than trying to guess as to what our play will do next, a more cautious approach is to wait for strong volume to propel the shares through the $121 resistance level before initiating new positions. With the unsettled market conditions, make sure to keep your stops in place to protect against the unexpected. ******************* PLAY UPDATES - PUTS ******************* MU $50.75 -0.88 (-1.25) The past three days have been low volume relief for MU, after Monday's drubbing, which was a picture perfect put entry by the way. MU got its head above $50 on Wednesday, and managed to close above that level today. Yet, there are two things that are worth noting: if you look at the intraday chart, resistance at $54.50 offered an entry before rolling over midday on Wednesday; then today, MU rolled at $53, on a day that the NASDAQ was up over 120 points. This lower intraday high tells us that buyers just aren't willing to push the stock higher. In simple terms, a lack of conviction. Another factor is the lower volume during the last two days. Given the AAPL warning after the bell, MU will likely be hit by sellers tomorrow. A break through $50 will give even conservative traders an entry. Any intraday spikes up to $51, $53, or $54 along with a rollover would provide entries as well. On the downside, look for the stock to move toward support at $47, and then possibly challenge Monday's low of $46. CMOS $31.00 +0.19 (-4.88) Although finding some relief today on the heels of the NASDAQ's 122 point gain, CMOS continue to sink lower on the chart. Lower high after lower high, traders look for any pop in the stock to sell. Wednesday's high was $34 with resistance at $33 establishing itself as CMOS plunged in the final two hours of trading, even as the NASDAQ came off its lows. Today's high was $32.75, and after that was set, sellers took down CMOS into the close, just off the lows of the day. Bottomline: CMOS ain't going up right now. Selling volume increased into the close and with the AAPL warning after the bell, we can expect there to be a downward bias on hardware and computer-related sectors tomorrow, including Semi stocks. If CMOS spikes up during the day, consider entries on rollovers from resistance at $32, $33, and $34. If the CMOS heads lower, jump on in. A break of $30 would attract momentum shorts and even conservative traders might want to grab an entry. Support below $30 is wherever you want it to be, meaning slim to none. AFCI $37.94 +2.88 (+0.31) Wednesday morning provided you with another good entry into AFCI, as it moved strongly to the plus side in the first hour of trading. After hitting an early morning high of $38.88, it did pullback and slip into negative territory by mid-day. As you know, the selling pressure heightened in the Nasdaq late Wednesday and AFCI felt the pressure too, finishing the day down $1.63 at $35.06. As we got started Thursday, volume was light and price action was fairly quiet as AFCI was down by $0.56 to $35.63 in the first hour of trading. AFCI picked up the pace in sympathy with the Nasdaq as we approached the mid way point for the day and this momentum continued into the closing bell. Volume was a light 1.57 mln shares, which indicates that today's gains might not have the conviction to continue higher. Look for a failed rally attempt from here to the $40-$41 level, the site of the 10-dma (currently $41.30) or watch for a move back down through the above-mentioned 5-dma on strong volume as ways to enter this trade. OMC $74.19 +4.19 (-2.81) Yesterday's high-volume downtrend was just what the doctor ordered. OMC quickly fell victim to selling pressure. It shattered the potential support at $70 and slithered helplessly to $68.13, a new 52-week low, before buyers stepped in to snatch a bargain. Although, even in today's broad market rally, OMC couldn't regain a position above the first level of resistance near $75. The stock is currently sandwiched between the 5-dma ($73.98) and the 10-dma ($75.64). Consider taking entries on downward moves from the current level or buy into the downtrend as OMC moves through $72. The impending acquisition with True North (TNO) and the possibility of losing its major ad account with DaimlerChrysler should continue to put negative pressure on the share price in the near-term. ************************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=548 ************************************************************** ************** NEW CALL PLAYS ************** VRSN - VeriSign Inc $208.38 +13.94 (+13.50 this week) VeriSign provides Internet-based trust services that authenticate and protect data so secure transactions and communications can be conducted over the Internet, intranet, and extranets. Websites, enterprises, government agencies, and even individuals use VeriSign's digital ID's (digital certificates) with the encrypted information as cybersafeguards for such activities as e-mail, home banking, and credit card transactions. Visa represents 14% of total sales. If you want security on the web, then look no further than Verisign. The company's custom-made e-commerce network provides authentication and secure transactions. With a strong business model and an anticipated revenue growth of 55% over the next 3 years, VRSN is considered a favorite among market participants. A glance at VRSN's long-term chart visually confirms investors' bullish sentiment on the company. The steady buying has kept the share price in a very consistent trading channel of $150 to $200. It's also a relevant issue that VRSN is a split-candidate at this price level. The company has more than enough stock to announce a stock dividend with 1 bln share authorized and 194 mln outstanding. The big break came in today's incredible rally. The momentum pushed the shares through the upper resistance to an intraday peak of $209.56! With the company's earnings report due next month around October 23rd coupled with the bullish moves today, we're anticipating strong upside action. Look for good volume at 4+ mln shares or better to move the stock higher. Due to today's incredible $13.94 advance, watch for profit taking. For price pullbacks, $188 and $190 mark support, bolstered by the 10-dma ($190.92). More conservatively, consider taking entries on bounces off former resistance at $200 and buying into strength as VRSN moves through the $210 level. In the news today, Verisign announced that over 10,000 companies have adopted its Payment Services. This comprehensive e-commerce solution enables businesses to create a secure online storefront in a matter of minutes. BUY CALL OCT-200 QVZ-JT OI=3736 at $20.50 SL=14.75 BUY CALL OCT-210*QVZ-JB OI=1099 at $15.50 SL=11.25 BUY CALL OCT-220 QVZ-JD OI= 954 at $11.50 SL= 8.75 BUY CALL NOV-210 QVZ-KB OI= 329 at $24.50 SL=19.00 BUY CALL NOV-220 QVZ-KD OI= 41 at $20.13 SL=14.50 Picked on Sep 28th at $208.38 P/E = N/A Change since picked +0.00 52-week high=$258.50 Analysts Ratings 13-11-1-0-0 52-week low =$ 48.81 Last earnings 06/00 est=-0.01 actual= 0.07 Next earnings 10-23 est= 0.06 versus= 0.02 Average Daily Volume = 3.85 mln ************* NEW PUT PLAYS ************* CPTH - Critical Path, Inc. $58.88 -2.94 (-10.94 this week) Critical Path, Inc. is the dominant global provider of business-to-business Internet messaging and collaboration solutions for the wireless, Internet-centric, telecommunication and corporate markets. Critical Path, founded in 1997, helps businesses maximize the communication and revenue potentials of messaging while minimizing costs. Critical Path has built an industry-leading global infrastructure with mail centers connected to key Internet exchange points around the world. Critical Path's technology currently reaches more than 125 million end-users through its customer relationships and more than 25 million wireless devices. September has not been kind to CPTH. With its parent company CMGI trading near its 52-week low, CPTH has been dragged along for the ride, after encountering resistance at the $80 level at the end of August. Most recently, CPTH has bounced off support at $63 only to find strong resistance at a lower high of $75. This week started out promising for the company as the stock managed to close above its 5- and 10-dma. Connecting the highs and lows since the middle of August reveals that CPTH has been forming a symmetrical triangle pattern. While Monday's action was within the range of that pattern, Tuesday saw CPTH break to the downside, putting it once again below the 5- and 10-dma. While volume to the downside was low, confirmation came yesterday in the form of a break below its 50- and 200-dma (at $63.33 and $65.51) on 150% of its ADV. Along with that, previous support at $63 was violated as well. Today saw CPTH continuing lower on accelerating volume, despite news of an alliance with Elron Software. Unable to break through overhead resistance at $63 in the early going led to the stock selling off to close down 4.75% on over twice the ADV, even as most Tech stocks soared. The 5- and 10-dma, at $66 and $69, provide additional overhead resistance. Look for a failure to rally above $60 or $63 as a possible aggressive entry point. A break below $56 on volume would be the target for the more conservative. With many Internet stocks going through tumultuous times, second-tier issues with weak technicals such as CPTH are affected even more so. Make sure sector sympathy is on your side before making an entry. BUY PUT OCT-60 UPA-VL OI=280 at $6.75 SL=4.75 BUY PUT OCT-55*UPA-VK OI= 58 at $4.63 SL=2.75 BUY PUT OCT-50 UPA-VJ OI= 22 at $2.88 SL=1.50 Average Daily Volume = 988 K ********************** PLAY OF THE DAY - PUT ********************** MU - Micron Technology $50.75 -0.88 (-1.25 this week) Micron is one of the world's leading makers of semiconductor memory components. Two-thirds of the companies revenues come from dynamic random-access memory (DRAM), flash memory, and other chips. MU has added the newer Rambus DRAM and Synchronous DRAM products to its line, and it is developing embedded memory for the digital video and other markets. The other third of the company's sales come from Micron Electronics (61% owned by MU), which makes PCs and laptop computers and offers Internet related business services. Most Recent Write-Up The past three days have been low volume relief for MU, after Monday's drubbing, which was a picture perfect put entry by the way. MU got its head above $50 on Wednesday, and managed to close above that level today. Yet, there are two things that are worth noting: if you look at the intraday chart, resistance at $54.50 offered an entry before rolling over midday on Wednesday; then today, MU rolled at $53, on a day that the NASDAQ was up over 120 points. This lower intraday high tells us that buyers just aren't willing to push the stock higher. In simple terms, a lack of conviction. Another factor is the lower volume during the last two days. Given the AAPL warning after the bell, MU will likely be hit by sellers tomorrow. A break through $50 will give even conservative traders an entry. Any intraday spikes up to $51, $53, or $54 along with a rollover would provide entries as well. On the downside, look for the stock to move toward support at $47, and then possibly challenge Monday's low of $46. Comments With an AAPL earnings warning after the bell today, hardware and computer-related stocks, i.e. Semis, will likely experience some selling pressure. MU has had two days of low volume gains. On both of the last two trading sessions, sellers have taken advantage of early morning strength and sold in the afternoon. We don't believe the selling is over. Look for entry on a break of $50 as this newest earnings warning sinks in. BUY PUT OCT-55 MU-VK OI=3593 at $7.38 SL=5.50 BUY PUT OCT-50*MU-VJ OI=4729 at $4.50 SL=2.75 Average Daily Volume = 7.30 mln ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.sungrp.com/tracking.asp?campaignid=555 ************************************************************ ************************ COMBOS/SPREADS/STRADDLES ************************ Stocks Recover Amid Optimistic Outlook... The market staged a broad-based rally today as investors cheered some positive earnings forecasts. Wednesday, September 27, 2000 Technology stocks ended lower today as concerns over corporate earnings sent Internet stocks into a downward spiral. The Nasdaq ended down 32 points at 3,656. At the same time, the Dow average finished almost unchanged at 10,628 in a volatile yet range-bound session. The S&P 500 index was also unchanged at 1,426. Trading volume on the NYSE reached 1.16 billion shares, with advances beating declines 1,528 to 1,318. Activity on the Nasdaq Exchange was heavy at 1.94 billion shares traded, with declines outpacing advances 2,454 to 1,550. In the bond market, the U.S. Treasury announced it will stage a buyback, repurchasing up to $1 billion of callable long-term bonds. The 30-year Treasury fell 23/32 on the news, pushing its yield up to 5.89%. Tuesday's new plays (positions/opening prices/strategy): American Home AHP OCT65C/OCT60C $0.62 credit bear-call Veeco Inst. VECO OCT85P/OCT90P $0.75 credit bull-put Federal Express FDX JAN40C/OCT45C $4.50 debit diagonal All of our new positions offered favorable entry opportunities during Tuesday's volatile trading. Federal Express and Veeco both dipped briefly while American Home Products rallied for a short period in the active session. Of course, each of these entries may be improved if the market continues to move in an extreme daily range. Portfolio Plays: Stocks finished lower today after an early rally faded amid news of additional earnings warnings. In recent weeks, the market has been fixated on the upcoming quarterly reports and indications that the economy is slowing, combined with record oil prices and Europe's weak currency, has investors pessimistic about revenues for many companies. This time, the Internet sector was the main culprit and the Nasdaq endured additional selling pressure when Priceline.com (PCLN) warned that quarterly earnings will be below consensus estimates due to a shortfall in airline ticket sales. PCLN shares quickly tumbled and Yahoo! (YHOO), Amazon.com (AMZN), eBay (EBAY), and America Online (AOL) all fell in sympathy. In other technology groups, computer hardware and software stocks retreated, and semiconductor issues also slumped after an early morning rally. On the Dow, classic industrial issues slid lower with Eastman Kodak (EK), Caterpillar (CAT), and Microsoft (MSFT) leading the way. In the broader market, energy stocks finished higher on concerns about rising fuel costs as winter approaches. Financial and retail stocks also had a tough time as investors moved money out of blue-chip issues and in many cases, companies were penalized or rewarded based on their future earnings outlook. The Spreads/Combos portfolio experienced little notable activity during the volatile session. HNC Software (HNCS) was the leader in the technology group, up over $3 to $72. Our bullish credit spread at $45 is expected to expire at maximum profit. Global Crossing (GBLX) continued its recent active movement, up $2 to $30 on speculation that Exodus Communications (EXDS) is close to a deal to buy the company's GlobalCenter Web hosting unit, which manages companies' Web sites, for about $6.5 billion in stock. The purchase of GlobalCenter would make Exodus the largest firm in the fast-growing Web hosting market, allowing it to compete against other leading companies in the group. Global Crossing will own a 20% stake in Exodus, becoming its largest shareholder. Under a joint marketing agreement, Global Crossing would be able to market the Web hosting services of Exodus to its own customers. The marketing pact would give GBLX the benefit of offering those services to its customers without the cost of maintaining and building the Web hosting unit. The pact will help reduce Global's expenses and allow it to focus its funds and time on building other aspects of its business. That's certainly going to affect the company's flagging share value and it should bring our long term position back to profitability. Read Rite (RDRT) also edged higher and it appears to be comfortable in the $11 range. Most of the activity surrounding the company in recent weeks has been tied to the launch of a new subsidiary called Scion Photonics, which is developing optical wafers for use in the fiber-optic networks. Scion is currently valued at approximately $100 million and if their optical wafer prototype functions as touted, Read Rite's share value will increase substantially. On the downside, Ventro (VNTR) fell $2 to $9 and it now appears there is no hope of finding a buyer for the company in the near future. However, the company's falling market cap will certainly make it easier to negotiate a favorable price, should a potential suitor emerge. Steven Madden (SHOO) has also retreated below a short-term (30-day) moving average and it may be time to salvage the remaining premium in the position. Knight Trading (NITE) has slumped in recent sessions but there appears to be a relatively solid support range near our cost basis at $30. We will monitor the issue for a move below that price. A bullish stock that is consolidating in our favor is St. Jude (STJ). The new calendar spread is offering a $2.75 credit for early exit; an $0.81 profit in just over one week. One of our recent credit strangles has seen the implied volatility in its options decline favorably. The neutral position in Gemstar (GMST) offered a $1.25 profit to exit the play early during the session. Today's slump in shares of Delphi Financial (DFG) offered a second-chance entry for those of you interested in the recent put-credit spread, and the spike in oil prices has boosted Smith International (SII) to near-term highs, providing a new entry opportunity for traders who believe the issue will be unable to sustain any future rally attempts. Thursday, September 28 The market staged a broad-based rally today as investors cheered some positive earnings forecasts. The Dow closed up 195 points at 10,824 and the Nasdaq ended 121 points higher at 3,778. The S&P 500 index was up 31 points at 1,458. Trading volume on the NYSE reached 1.2 billion shares with 1,878 advancers and 958 decliners. On the Nasdaq market, 2,598 advancers led 1,391 decliners as 1.95 billion shares traded hands. The U.S. 30-year treasury closed at 5.88%. Portfolio Plays: The market staged an unexpected rally today as investors went bargain hunting for discounted shares. Financials, biotech, utility, drug and retail stocks all advanced, with only the oil service group retreating amid slumping crude oil prices. On the Dow, Procter & Gamble (PG), Citigroup (CI), American Express (AXP), and Walt Disney (DIS) enjoyed bullish activity. Proctor & Gamble led the way, up over $5 after reporting a favorable profit outlook. The company said it can achieve double-digit earnings growth in the coming year and the announcement boosted the share values of many old-economy companies, which have been hammered in recent weeks on concerns over the impact of the falling Euro and higher energy costs. In the technology group, networking shares managed positive results and Internet stocks also made an impressive move, rebounding to a positive finish after yesterday's brisk sell-off. Semiconductors continue their short-term rally, pacing the advance for a second consecutive session. Analysts say that third quarter earnings will be the market's upside catalyst as we muddle through the seasonally soft period of the year and when the top companies begin to report favorable numbers, stocks will rally to new highs. Our portfolio greeted today's activity with great relief as many of the bullish positions were approaching key technical areas. A number of technology issues rallied during the session and there were also some excellent gains in the industrial issues. Adobe Systems (ADBE), Agile Software (AGIL), Manugistics (MANU), and Qlogic (QLGC) led the big-cap category and Global Crossing (GBLX) continued to recover, up almost $2 after Exodus (EXDS) officially announced it would buy Global Crossing's GlobalCenter Web hosting unit for $6.525 billion in stock, making it the biggest company in the Web hosting market. Federal Express (FDX) was a big mover, up over $2 as investors speculated in the transport sector. Our new diagonal position returned an $0.80 profit in one day! Those of you with a long term bullish outlook for the issue can remain in the play until the technical indications change. In the bank and financial sectors, Knight Trading (NITE), Franklin Resources (BEN) and Delphi Financial (DFG) participated in the upside move but Allstate (ALL) led the way with a $2 rally to $35, a new high for the year. Our recent synthetic position can be closed for an $0.88 profit. With the broad market recovery, the down and out issues came to life. Sizable gains were seen in Engage (ENGA), Loral Space (LOR), Lucent (LU), and Novell (NOVL). The leaders in the small-cap group were Maxtor (MXTR) and Caremark (RX), and both issues are profitable in the calendar spread category. One last note, Gemstar (GMST) jumped $11 after News Corp. (NWS) said it has agreed to buy Liberty Media's 21% stake in the company. The deal is seen as positive for Gemstar and our short position at $95 may be in jeopardy if the rally is sustained. Monitor the issue for further upside movement in the coming sessions. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** MAT - Mattel $11.63 *** New Option Interest? *** Mattel designs, manufactures and markets a wide variety of family products on a worldwide basis through both sales to retailers and direct to consumers. Mattel's reportable segments are separately managed units and include Toy Marketing, Consumer Software and Operations. The Toy Marketing segment is divided on a geographic basis between domestic and international. Domestic Toy Marketing segment is divided into USA Toys, US Fisher-Price/Tyco Preschool and other activities. The Consumer Software segment consists of educational, productivity and entertainment software products developed and sold by the Learning Company division on a worldwide basis. The Operations segment manufactures toy products, which are sold to the Toy Marketing segments. Some increased trading activity has occurred recently in Mattel options and there is little reason to explain the new interest. Some traders suggested the speculation might be based on Mattel's plans to sell its interactive toy unit, a division that has been the subject of negative reviews in the past few months. Other traders offered comments on a new licensing agreement with a unit of Walt Disney (DIS). Last week, Mattel agreed to produce toys based on Disney characters, including Mickey Mouse and Winnie the Pooh, in all global territories except Japan. In the new pact, the Fisher-Price subsidiary of Mattel will produce preschool and plush toys, dolls, and games based on classic Disney characters. While it is unlikely that either of these issues is the culprit, something favorable may be occurring in the company and we are going to speculate on the future movement of Mattel's share value with this conservative, long term position. PLAY (conservative - bullish/calendar spread): BUY CALL APR-12.50 MAT-DV OI=2476 A=$1.62 SELL CALL OCT-12.50 MAT-JV OI=5192 B=$0.38 INITIAL NET DEBIT TARGET=$1.00-$1.12 TARGET ROI=50% It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, the spreader would like to have the stock finish just below the sold strike when the near-term option expires. If the short options are in-the-money at expiration, he will have to buy them back to preserve the long-term position. ****************************************************************** SEPR - Sepracor $122.00 *** On The Move! *** Sepracor is a specialty pharmaceutical company focused on the cost-effective development of safer, purer and more effective drugs that are improved versions of widely-used pharmaceutical compounds. The company develops and markets these drugs by leveraging its expertise in chiral chemistry and pharmacology, and experience in conducting clinical trials and seeking new regulatory approvals for drugs. Sepracor's Improved Chemical Entities pharmaceutical development program has yielded an extensive portfolio of drug candidates intended to treat a wide range of indications in respiratory care, gastroenterology, urology, psychiatry and neurology. Sepracor is also broadening its development focus to include discovery and development of new chemical entities. Recently, they introduced Xopenex, a single-isomer form of the leading bronchodilator, albuterol. Xopenex is the first pharmaceutical product developed and commercialized by Sepracor. Biotechnology and major drug issues have become favorable in recent sessions and the renewed bullish activity in these groups suggests that investors are using the sectors as safe havens for growth speculation during sluggish periods in the semiconductor and networking industries. Sepracor is one of the leading companies in this area and based on the positive technical outlook for the issue, we have decided to initiate a short-term spread position with a conservative outlook. We will target a higher premium in the position initially, to allow for a reasonable pullback in the stock from its current levels. PLAY (conservative - bullish/credit spread): BUY PUT OCT-95 ERU-VS OI=1516 A=$1.00 SELL PUT OCT-100 ERU-VT OI=299 B=$1.43 INITIAL NET CREDIT TARGET=$0.62-$0.68 ROI(max)=14% ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** ARBA - Ariba $149.19 *** Reader's Request! *** Ariba is the leading business-to-business e-commerce platform and network services provider. Through the Ariba B2B Commerce platform; an open, end-to-end infrastructure of interoperable software solutions and hosted Web-based commerce services, the company enables efficient on-line trade, unique integration and collaboration between B2B marketplaces, buyers, suppliers and commerce service providers. The functionality of the Ariba B2B Commerce platform creates Internet-driven economies of scale and process efficiencies for leading corporations around the world. Their products include the B2B Commerce Platform, Marketplace, Ariba Buyer, and Dynamic Trade. One of our readers asked for another candidate in the neutral, premium-selling category of options trading (that Jim favors). Based on analysis of the historical option pricing and technical background, this position meets our fundamental criteria for a potential credit-strangle. The issue has overpriced options, a relatively well-defined trading range, and with today's rally and the upcoming quarterly earnings (10/18), speculators are sure to keep the premiums high in the OTM options. The probability of profit from this position is higher (80%-85%) than other plays in the same strategy based on historical option pricing. As with any recommendation, the play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. Many of you may favor an aggressive position, selling options closer to the current price of the issue but, in any case, due diligence is mandatory in this play! PLAY (aggressive - neutral/credit strangle): SELL CALL OCT-195 IMU-JS OI=305 B=$1.43 SELL PUT OCT-110 IUR-VB OI=301 B=$1.62 INITIAL NET CREDIT TARGET=$3.19-$3.25 ROI=10% UPSIDE B/E=$198.25 DOWNSIDE B/E=$106.75 ************************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=560 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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