The Option Investor Newsletter Tuesday 10-03-2000 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/100300_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 10-03-2000 High Low Volume Advance/Decline DJIA 10719.70 + 19.60 10857.70 10709.80 1.10 bln 1360/1524 NASDAQ 3455.83 -113.07 3639.29 3454.65 1.96 bln 1527/2543 S&P 100 758.03 - 5.23 774.09 757.15 totals 2887/4067 S&P 500 1426.46 - 9.77 1454.82 1425.28 41.5%/58.5% RUS 2000 504.67 - 7.00 515.22 504.36 DJ TRANS 2498.18 + 33.76 2526.27 2465.02 VIX 24.39 + 0.96 24.39 22.35 Put/Call Ratio .76 ****************************************************************** Don't Fight the Fed Score one for Greenspan and company today. And to think, we all figured that this meeting would be a non-event. In fact, I had to remind myself that there WAS an upcoming FOMC meeting. Well, it seems the FOMC intends to keep the lid on the market for now. It was no surprise that interest rates were left unchanged, but most traders were caught a little flat-footed when it was announced that they were remaining in a defensive mode against the inflation threat. With recent economic data indicating that a slow down is occurring, it was reasonable to expect that the FOMC would at least adopt a neutral stance in regard to inflationary pressure. The primary reason they gave for continuing their hawkish tone - high energy prices - may be the very reason they should consider lowering interest rates. Yes, high energy prices do lead to inflation, but they can lead to recession in the long term as well, since consumers have less discretionary spending. Warning signs of possible trouble were reported just this morning, with the 5th consecutive decline in the Index of Leading (sometimes misleading) Economic Indicators. A set of 3 has historically been a precursor to a recession, but the previous string of 5, which occurred in 1995, was of the soft landing variety, so we can't make a solid conclusion yet. So, we ended with a big minus 114-point day on the Nasdaq Composite and the Dow lost most of a 138-point gain to finish up only 20 points. For the Nasdaq, it's the third straight day of big "gap up" mornings, followed be a close near the bottom of the day. Is it time for an up day? Maybe, but we may be due for some pain first thing in the morning. With today's slip below the 3521 level and 3500 for that matter, we now have an official confirmation of the double top formation on the chart. We were hoping for a double bottom at 3521 to build a base. Unfortunately, that support was broken. I guess we shouldn't be too surprised though. I just never felt fear gripping this market. Sure, the "generals" were beginning to fall, but the Volatility Index was not moving toward 30 and these "gap up" mornings were just too optimistic. When the climatic selling starts (as if today's volume of 1.9 bln shares weren't enough), I look for a pivotal turnaround in this downtrend - that day could be Wednesday, but it may take longer than that to truly put in a bottom. Late today, we saw sell stops and margin calls dragging this market lower as it passed under 3500. If we get a gap down in the morning, we could see the same type of capitulation selling that would be a buyable event, at least for a one-day play. But the outlook isn't so bad for the longer term. Our old friend Abby Joseph Cohen of Goldman Sachs kicked off today's early morning bullishness. Remember her? She set the bearish wheels in motion last March, when she said she was un-weighting techs and moving heavily into financials. The market did likewise. She's the E.F. Hutton of the millennium - when she talks, people listen. The good news is that she likes technology again. Couple that with the historically strong season of November through March and we are likely to see the bull market return soon. It appears she particularly likes the storage, network equipment, and Internet infrastructure software companies - no surprise there. They've been the strongest stocks all summer. Names mentioned were EMC Corp. (EMC), Network Appliance (NTAP), Juniper Networks (JNPR), Cisco (CSCO), Oracle, (ORCL) and BEA Systems (BEAS). Despite Abby's friendly words, the tech sectors suffered, some more than others. B2B stocks took it on the chin in a major way today. Ariba (ARBA -14.59) and i2 Technologies (ITWO-17.88) continued yesterday's sell off on the news that their "alliance" had lost a major customer - the Global Healthcare Exchange. Joining those two unfortunate stocks today was IBM - the third member of the alliance. IBM had some trouble of its own as rumors circulated the trading floor that the company could pre-announce an earningswarning, but no confirmation as of yet. Add to that a downgrade of Commerce One (CMRC -13.62) and the B2B sector was down for the count. Also hurting was the Software group - particularly stocks engaged in B2B software. Leading that group was Oracle (ORCL), which tanked a full 9.50 points. Many related stocks followed suit and the Goldman Sachs Software Index took a massive 7.5% blow to the downside. Of course, the standout in the software industry was tiny Corel (CORL +2.09), maker of WordPerfect and Linux operating system compatible software, which just signed a $135 mln deal with rival Microsoft (MSFT +2.54). Thank Xerox, the world's top photocopier maker, for at least part of today's selling. The company warned AGAIN, that it would not make earnings forecasts for the upcoming quarter. Bad news from XRX has come to be expected with their current mismanagement, but the company's comments placed blame on a slowing U.S. and European economy. Those words made the entire tech sector uneasy, since there are already plenty of worries about revenue growth rates. A yellow flag should be thrown at Wit Soundview for a late hit on the chip equipment stocks. We can trust analysts to help us run up stocks, but not to get us out in a timely fashion. The brokerage firm today downgraded the industry, citing slowing growth prospects. Falling into disfavor with Wit was Applied Materials (AMAT), Brooks Automation (BRKS), Semitool (SMTL) and Nanometrics (NANO). In the chip sector, the equipment stocks are generally the last to be upgraded and the first to be run back down. If that is the case, the worst might not be over for the semiconductors. But the carnage of the tech sector didn't carry over to the old economy. Banks finished well for a second day in a row, with stocks like Citibank (C) looking pretty healthy. Also looking good is General Electric (GE), which finished up 0.54 points, accompanied by some of the cyclical stocks, which buoyed the Dow Industrials. Institutional equity traders looking for a flight to safety had limited opportunities today, since bonds were also trading lower after the Fed announced a hawkish stance toward inflation. With the FOMC finger on the interest rate trigger, bond traders looked for the exit doors as well. The ten-year note lost 10/32 to $99.09 and now yields 5.94%. Looking again at the charts, the Nasdaq Composite could be targeting a follow through of the double top formation, which is twice the distance from the tops to the trough. That would put us at the May low near 3050, which would be tidy enough. I'm not sure it will get that bad though. If the market gaps down huge Wednesday morning, day traders are likely to step in and buy it up. Of course, further weakness could set the margin calls and sell stops in motion and we could get to the bottom rather quickly. The INDU is still forming a base in the 10,600 region. Today's early strength was encouraging though, so if the tech components of the index can just get their act together, the index is looking relatively strong. Looking at tomorrow's action, the most likely event would be sell at the open orders which take the market down while stopping out many traders. After the first thirty minutes, that trend could reverse, especially if the value guys step in with the intention to buy at sale prices. Of course, the other scenario is that the value players could begin talking before the market, causing a gap up at the open, which would likely be faded out further in the day. Either way, it's going to be fun from a trading perspective. As for the longer term, the move below support is discouraging. The May low is a possibility, but not a certainty. We all know that October is a time for disastrous sell offs, but it's also a bear killer. I'm betting that in just a few weeks the bears will be hard to find again. Also - keep in mind that there are two jokers with a lot of influence debating on television tonight. Oil, drugs, healthcare and the economy are going to be hot topics - I would expect a reaction of some sort in the markets tomorrow. Good Luck! Steve Pekarek Contributing Editor ***************************** OCTOBER OPTIONS WORKSHOP EXPO DENVER - Oct 27-30th ***************************** 2 Types of Traders - Which One Are You? There are really only two types of traders. We call them Winners and Losers. Now don't get us wrong, no trader wins 100% of the time, however, consistent winners learn to cut their losses while allowing their profits to run. The key to consistently winning is applied knowledge. The place to obtain this knowledge is at the October Options Expo. This event will take place in Denver, Colorado, from October 27 through the 30th. Seating is limited. To sign up click here: http://www.OptionInvestor.com/workshop A Taste of What You Will Learn: Looking for ways to spot early reversal patterns? Candlestick charting may be the answer for you. Here you will learn the most important candlestick formations, how to use them, and why. Learn how to use candlesticks with western technicals from the foremost expert on Japanese Candlesticks, author Mr. Steve Nison. Learn to use the Arms Index (TRIN) effectively for short-term trading from the Index's inventor, Mr. Dick Arms. Mr. Arms is the author of several books on trading, including the renowned "Trading Without Fear." Mr. Arms will be sharing his newest charting system called "EQUIVOLUME." This is the first new charting system since the 1930's! You won't want to miss being one of the first to learn about this new technique. Mr. Jim Crimmons will be helping you learn how to manage your taxes as a trader and how to get Trader's Status when filing. If you face nightmares with your current tax situation, and want an easier and more effective system for tracking your trades, you don't want to miss this class. Mr. Jim Brown, President and founder of OptionInvestor.com will be teaching "How to Prepare to Trade the Market," along with other useful trading strategies. This will include information on how best to prepare and find your new plays. Then you will go to battle the next morning, as we make LIVE trades using the very candidates you helped us find. There is no better way to learn how to trade than to TRADE WITH THE PROS! This is just a taste of the event. You will spend four days with over a dozen professional traders. This is not just a 9 to 5 seminar. We are going from early morning to late night. This is serious training for serious traders. You won't need to go anywhere else, as you will be staying in one of the nicest hotels in Denver, The Inverness Hotel and Golf Club. Not only will we be feeding your mind for almost 15 hours a day; we will also feed your body, with delicious meals and breaks five times a day. What an opportunity to spend four days in luxury, learning from the pros, while being fed in so many ways. You may be asking, "How much will this Power-Packed Options Expo Cost Me?" This is a great question, however, the question you should really ask is, how much will it cost you if you don't attend? Have little mistakes or a lack of specialized education in the options arena cost you any money lately? Or could you have reaped greater profit if you only had the right tools? How much would successful trading techniques have saved you last Spring during the NASDAQ sell-off? Learn to protect yourself and profit in volatile markets. The only difference between the pros and amateurs is EDUCATION, ACTION and EXPERIENCE. We are providing the EDUCATION and EXPERIENCE, so that when you take the ACTION, you will have a winning combination. To register click here: http://www.OptionInvestor.com/workshop Check out an outline of events here: http://www.OptionInvestor.com/workshop/outline ********************************Advertisement******************** Option trades starting at only $15.50, stock trades as low as $9.95! Mr. Stock provides key advantages to the serious option investor. Along with complex option trading online, fast executions, advanced charting capabilities and the ability to trade from any screen, we now offer some of the best commissions on the Internet. Our staff understands the sense of urgency required in today's market and will respond quickly to your most important trading needs. http://mojofarm.mediaplex.com/adserver/click_thru_request/565-58-1875-3 ***************************************************************** **************** MARKET SENTIMENT **************** Getting Ugly Early By Austin Passamonte We've been bullish for a couple of weeks now and what has it got us? Signs of a bottom are fading in the foreground as we speak. Is all hope lost? Never! Just set aside for now. The failed rally we saw today is likely a sign of what's to come. Market Sentiment feels these major indexes will not sprout strong legs and scamper straight up their charts without some major flushing out. After all, it is October. We've been here/did this too many times from the call buyers side of view. Put buyers on the other hand are throwing parties multiple times weekly. It is a proven fact that more money can be made trading puts an equal amount of entries than calls on average. Most equity-option traders scoff at the notion, harboring sweet memories of 2 calls sold for 20 numerous times over the prior two years. Who said that behavior was average? Spoiled call buyers have either turned into option traders or turned their accounts to ash by now, one of the two. There are numerous examples of each all around us. Considering we are option traders, the put side of things is looking favorable this week. Major traders are all too willing to sell every rally that dares rear its horns. The afternoon plummet today may pick up where it left off soon. Real soon. Should bullish option traders crawl under a rock and sleep this action off? Nope. It takes a firm market bottom to launch the next incredible bull-market rally from and we are fixin' to do that. If we wanna buy calls at 2 and sell them for 20 ever again, they must reach the price of 2 first. Talking about finding support is not easy. Moving averages are all resistance now instead. Trendlines are resistance as well. Speaking of trendlines, the next major long-term support on the OEX lies near the 730 mark. The SPX will find a bottom near 1400 as well. Long ways off from new market highs of 850 and 1525, respectively. Just as those levels are now but a faded memory, so too will these soon be. Market Sentiment is hanging its hat on our one-last market reversal signal remaining; the COT commercials position. They went 10-year net short and many people scoffed at the notion. They've proven once again how seldom the market giants actually lose. By the same token, they won't stay short forever. We have to believe some of those shorts are coming off even as we speak and more to follow. The very moment these giants switch to net-neutral or slightly long we can be sure a firm bottom is in place. This Friday's report and each Friday thereafter now will give us plenty of warning when this happens. Just don't bet the farm this week. It could get ugly early and stay that way for awhile. Be prepared to buy options that appreciate in the direction your market is headed. You know what we mean; we've preached calls & puts as conditions dictate forever now and will do so the rest of our time together here! ***** VIX Tuesday 10/03 close; 24.39 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 ************************************************************* Monday Tues Strike/Contracts (10/02) (10/03) ************************************************************* CBOE Total P/C Ratio .72 .76 Equity P/C Ratio .68 .70 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 ************************************************************** Monday Tues Strike/Contracts (10/02) (10/03) ************************************************************** All index options 1.23 1.56 OEX Put/Call Ratio 1.24 .96 30-yr Bonds Tuesday 10/03 close; 5.95% 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: 795 - 780 11,492 6,230 1.84 775 - 760 7,576 12,246 .62 *** OEX close: 757.74 Support: 755 - 740 1,555 16,829 10.82 735 - 720 47 13,634 290.09 *** Maximum calls: 800/7,607 Maximum puts : 750/7,802 Moving Averages 10 DMA 767 20 DMA 784 50 DMA 798 200 DMA 783 NASDAQ 100 Index (NDX/QQQ) Resistance: 92 - 90 28,059 26,326 1.07 89 - 87 7,659 35,233 .22 86 - 84 2,114 23,853 .09 *** QQQ(NDX)close: 83.375 Support: 82 - 80 669 15,388 23.00 79 - 77 36 7,427 206.31 *** 76 - 74 115 8,242 71.67 Maximum calls: 90/13,077 Maximum puts : 90/16,235 Moving Averages 10 DMA 89 20 DMA 91 50 DMA 93 200 DMA 95 S&P 500 (SPX) Resistance: 1475 20,411 15,223 1.34 1450 10,475 12,423 .84 1435 246 646 .38 SPX close: 1426.26 Support: 1425 7,770 16,345 2.10 1400 947 11,038 11.66 1375 1,043 8,687 8.33 Maximum calls: 1475/20,411 Maximum puts : 1350/21,322 Moving Averages 10 DMA 1439 20 DMA 1459 50 DMA 1472 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 10/3 by COT next Bullish: Fed's finished Benign government reports Monumental disparity in overhead call/put ratios Bearish: Oil Prices COT reports (changing?) Recent pre-warnings, downgrades (brutal) Broad market's break of critical M/A support Market leaders breakdown Major failed rally today ************** MARKET POSTURE ************** As of Market Close - Tuesday, 10/03/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,719 10,550 10,900 ** SPX S&P 500 1,426 1,415 1,465 COMPX NASD Composite 3,455 3,250 3,750 ** OEX S&P 100 758 754 776 RUT Russell 2000 504 500 525 NDX NASD 100 3,353 3,300 3,700 ** MSH High Tech 910 890 1,000 ** BTK Biotech 698 690 790 ** XCI Hardware 1,243 1,240 1,350 GSO.X Software 401 390 445 ** SOX Semiconductor 812 800 960 ** NWX Networking 1,159 1,140 1,210 INX Internet 440 430 510 ** BIX Banking 629 600 635 XBD Brokerage 670 620 670 ** IUX Insurance 778 720 790 RLX Retail 797 780 850 DRG Drug 407 370 425 ** HCX Healthcare 841 805 860 XAL Airline 141 136 152 OIX Oil & Gas 332 296 332 Ten alarms were triggered in the past two sessions. Believe it or not, two were at resistance levels (DOW, XBD). Lowering support on (COMPX, NDX, MSH, BTK, GSO.X, SOX, INX, RLX). Lowering resistance on (COMPX, OEX, NDX, MSH, BTK, XCI, GSO, SOX, NWX, INX, RLX). Raising support (BIX) Raising resistance (DOW, XBD). Tomorrow's open will be interesting! *********** OPITONS 101 *********** Another Downside Strategy? By Lee Lowell This seems to be all we can talk about these days. I'm tired of all my holdings going down in price. There's only so much downside protection covered calls can give you, and I don't like buying puts all that much because I'm more of a premium-seller kind of trader. So what else can we do in this bearish environment while keeping our long-term bullish opinion? We can actually combine these two trades to form a strategy called the "collar." A collar is a strategy that is just like a covered call trade but with a twist. The collar is a combination of long stock, long an at-the-money put and short an out-of-the-money call. It is ideal to use this strategy on a stock that is somewhat volatile so the discrepancy between the put and call premiums is more pronounced. You want to use LEAP options so you have enough time for your bullish bias to work out and because the pricing of the options are more favorable the more time you have. So you buy the ATM put to give you the downside protection and sell the OTM call to pay for that protection. The call premium should be more than the put premium so that you can establish the spread for a credit. This strategy gives you complete downside protection for zero debit or a credit into your account, along with the chance for good upside potential. With a regular covered call approach, your downside is protected only to the extent that the short-call premium gives you. Plus, your upside is capped at the short-call strike. With the collar, your upside profits are also capped, but you are protected all the way down to zero. Plus, you've received a credit for your effort. Sounds like a no brainer to me. What's the catch? There really isn't one except that your profits may be capped and you may have to wait awhile to see the rewards. But we are here for the long-term, so that doesn't bother me. Let's take a look at an example with real prices. You want to get in on the hot fiber optic sector and decided to take your chances on Corning, Inc. (GLW). This is a volatile stock, to say the least--just what we want. As of this writing, GLW is trading for about $297/share. You want to hop on board but you've seen the destruction that some of these high fliers have done in the recent past. To insulate yourself for one of those nasty downdrafts, let's put on a collar. We'll buy 100 shares of GLW at $297, we'll buy 1 Jan 2003 $300 put for $83, and we'll sell 1 Jan 2003 $400 call for $85. This gives us an initial option credit of $2, theoretically bringing our 100 share purchase price of GLW down to $295. So where do we stand? We've got 100 shares of GLW with a cost basis of $295, we're long a Jan 2003 $300 put, and short a Jan 2003 $400 call. What does the risk/reward look like? In a worst case scenario, if GLW goes belly up and falls to zero, we'll walk away with $500 in our pocket. This is because we get to exercise the $300 put which means we get to sell GLW for $300/per share. Since we bought GLW for $297, plus our initial 2 point credit, that's 5 points ($500) profit no matter what (excluding commissions). What about the upside? That's even better. We have a 100 point leeway. We won't start giving up profits until we hit $400 per share. So come expiration day in Jan 2003, if GLW ends up at $400, we'll make 105 points x 100 shares = +$10,500. Not too bad. And that's only working with the minimum amount of contracts. Do that with 1000 shares and 10 option contracts and see what you get. So at the extremes, we'll either end up with $500 if GLW goes broke, or we'll make 10K if GLW goes up to $400/sh. Looks pretty good. I think anyone who gets to sell a covered call 100 points OTM, buy an ATM put for total downside protection, and gets to take in a credit for the trade, is doing very well. If it's still confusing, let's break it down using total dollars to help clarify. If GLW goes bankrupt, we'll lose $29,700 on the long stock. We'll make $21,700 on the put ($300 strike - $83 premium = $217 x 100 = $21,700), and we'll make $8500 on the short call expiring worthless. $21,700 + $8500 = $30,200 - $29,700 = $500 total profit. Or put another way, just take the $300 put and subtract the cost basis of $295 for GLW and you get $5 points x 100 = $500. If GLW goes up to $400/sh. by expiration, we'll make 103 points on our 100 shares for +$10,300 ($400 - $297), plus the $200 initial credit from the options to give us a total of +$10,500. The collar is a great way to protect yourself on the downside and to give you some room for profit on the upside. The GLW trade is really great because you have over 100 points of upside potential before having to give up profits and you're protected all the way down. This type of strategy can work for almost any stock. But you must look at long-term options and stocks that are a little more volatile. Of course, you can always adjust the collar in terms of strikes, expiration dates, etc. If you are really bullish you can actually reduce the amount of calls you use (if you are doing multiple contracts). Let's say you buy 1000 shares of stock and 10 put contracts. You can adjust the call strike and sell only 8 calls against the puts. As long as you use a low enough call strike whose premium will still outweigh the put price, you can still do the collar for a credit. So if your stock starts to rise, you will make more money sooner than later because you only have 8 short calls instead of 10 short calls. Theoretically, this gives you unlimited upside potential now instead of being capped. Give it a try. Good luck. ************** TRADERS CORNER ************** Call Options On Fallen Stars May Be Dangerous By Mary Redmond With earnings season arriving, many traders will start deciding which stocks are the best candidates for earnings runs. Many traders plan to buy call options as the earnings dates approach on certain stocks. It may also be profitable to buy put options on companies which you think will release lower-than-expected earnings. There are some solid companies in the S&P 500 which have consistently beaten expectations and rallied into earnings, and a few which have continued to rally the following day. Sometimes it may be even more profitable to find the ones which are likely to miss expectations, buy puts before the earnings are released. This is because the stocks which disappoint tend to move down more rapidly than the ones which meet or even beat expectations move up. Many companies have a history of reporting disappointing earnings. Many give excuses - last year it was Y2K, this year it is the Euro, next year it will be something else. If you research a company's history of beating or missing expectations, you can estimate the likelihood of the same scenario repeating. For example, in a slowing economy certain sectors are more vulnerable to slowing earnings, including capital intensive, transportation and durable goods. In addition, if a company is a repeat offender, they probably will continue to disappoint unless something changes, like new management. In certain cases, earnings slowdowns may already be priced in. We need to find certain cases in which the earnings may be much lower or higher than the market already expects. The better you know the company, the management, the accuracy of the analysts, and the developments in the industry, the better equipped you are to judge if a company will disappoint. A real killing can be made in options if you think a company will perform far better or far worse than expectations, and you are accurate. There are so many stocks which have lost 20% to 50% of their market value lately that some investors may wonder if they could be good long term investments at bargain prices. However, it is worth noting that companies can go far lower after the first drastic drop. For example, did anyone really think Lucent would go to $28 from a high of $80? Many people probably thought it was a bargain at $40. How about Intel, Procter & Gamble, or Apple? Intel lost 20 points and then lost another 7 this week. The fact that Apple lost 50% of its value in one day does not necessarily make it a bargain. It could easily lose more. There is no shortage of great companies trading on the exchanges. The investment banking and technology boom of the 1990s has given rise to hundreds of dynamic, rapidly growing companies competing for investors' dollars. The market shows absolutely no tolerance for mediocrity. If a company disappoints the market analysts and shareholders, it can lose a big chunk of its value in one day, and then experience slower, more prolonged selling later. Most investors feel they do not want to bother wasting time with a company which warns of weak earnings when there are hundreds of companies which state that their earnings should beat estimates. It is difficult to judge what the bottom will be on any stock since fundamentals can be ignored if market participants are selling heavily. A better strategy is to wait until a base is formed, and the stock changes course, starts to show technical strength and turn around. In fact, buying call LEAPs on stocks which have just made dramatic drops can be a poor strategy. The reason for this is primarily the fact that such rapid drops often increase the implied volatility of the options. For example, the historic volatility of Apple as of August was 47.92. The implied volatility of the Jan ATM options yesterday was 82.8. This means that using volatility alone, the options are overpriced. The historic volatility of Intel in August was 45.8. The implied volatility of the options is over 72. Since volatility tends to revert to its historic level, this means that the options on Intel may be overvalued despite its drop. Currently, many investors are worried that a decrease in the earnings growth of the S&P 500 companies will lead to lower stock prices in the fourth quarter and in 2001. However, there is not always a direct correlation between earnings and profit growth and market performance. If history is a guide, it seems that the markets perform the best in an environment of stabilizing interest rates, even if earnings growth is slowing. For example, in 1994 the Fed raised rates 7 times. The following three years were some of the best in market history. And yet, the rate of earnings growth of the S&P 500 companies slowed. Consider what happened last Spring. The majority of companies in the S&P 500 blew away earnings estimates by a wide margin, and yet we had one of the worst market crashes in decades. Now that the cycle of rate hikes is over, it may take market participants some time to adjust to a new environment of stable or decreasing interest rates. There is wide divergence among market analysts regarding the next move which will be taken by the Federal Reserve on rates. A significant number of market analysts are expecting a rate cut early in 2001 since virtually all of the most recently released economic indicators point to demand side inflation being under control, and some think the economy may be slowing too much. However, this view does not seem to be priced into the stock market. Perhaps some in the market are still expecting further rate increases, and this is putting a damper on the market enthusiasm. If the perception changes to an expectation of a rate cut, the market could react favorably. When you realize how much money American and foreign investors have at their disposal, it is easy to forecast a market rally. For example, the Investment Company Institute reported that investors deposited $23.4 bln to equity funds during August, and $22 bln to money market funds. During the last year, investors deposited an average of $60 bln monthly either to equity funds or money market funds. This is about $700 bln annually that investors have at their disposal. If they put half this amount in the market, we could have a strong rally. Even last January, when investors put $41.7 bln into equity funds, they still deposited $41 bln to money market funds. In addition, the IPO market has been averaging in the range of $3 bln weekly, or $12 bln monthly. This amount could easily be absorbed. If the IPO market starts dumping $30 or $40 bln worth of stock on the market we might need to start worrying. We had an optimistic turnaround in the Dow and Nasdaq mid day today, and it is worth noting that Cisco came very close to crossing the 200-dma of $59.57. Cisco has lost a considerable amount of its market capitalization in the last few weeks, and is considered a bellwether for Nasdaq strength. Many of the technology stocks had superb entry points around 11:15am EDT today for daily trades just when the VIX spiked out if its trading range. However, it the trades weren't exited early, all of the gains could have been lost. ****** My Favorite Technical Indicators By Scott Martindale Wow. Ugly, unless you play puts. It's the put players who continue to perform the best in this market. Have you been playing the OIN put recommendations? I bought CPTH Oct 60 puts on Friday and promptly sold today for an 80% gain before the mid-day rally. Perhaps I should have held longer. Certainly I should have played more puts. Have you seen the poll posted on the OIN website? It gives four choices as to where you think the NASDAQ will bottom, but the lowest choice is the May low of 3042. What about last year's mid- year top of around 2900? It could go that low. Despite this observation, this week's OIN call list happens to be a virtual who's who of my personal watchlist of stocks to buy for my long-term account. Stocks like VRSN, SEBL, CHKP, QCOM, JNPR, VRTS, PEB, and BRCM - the most desirable new technology companies. Even in the face of a down market, they are looking poised to move up soon, whether due to fundamentals, technicals, earnings anticipation, splits, or whatever. Some of them have held up so well that they still haven't (and may never) fall below my trigger price. I always feel more comfortable playing my favorite companies, even for short-term plays, even though it is no guarantee of a short-term gain. This brings up a good question: How do you know when to enter a trade (long-term or short-term) on your favorite stocks? Let's say one has fallen close to your target buy price - what do you do? First, confirm market direction. As we see these days, even stocks that desperately want to rally can get caught in the market downdraft. This happened to each of the stocks listed above from the Sunday call list. Second, are there any recent or planned news events that could provide a catalyst? Third, look at the technical picture. Of course, this is more art than science, and there are no hard-and-fast rules that guarantee success. I'll talk more about my favorite indicators in a moment. Fourth, decide what is your strategy. My guidelines are: 1. Short-term trade, with target gain and sell stop: Enter when you see a firm bounce off support, or after a brief pullback during a momentum run, or after a high-volume breakout above a previous high. 2. Long-term position to hold or write covered calls: Buy 1/2 of your target position, then the other 1/2 after it moves 10% up or down. 3. Intermediate-term position for conservative gains on LEAPS: Buy deep ITM after a sustained bounce off firm support, confirmed by market and sector strength. Now, let's talk about technical indicators. I watch several. They rarely line up at the same time to give screaming buy signals, so you must use "feel" to decide what the true story is. My favorites are Volume, Accumulation, Money Flow, Stochastics, MACD, RSMA, Bollinger Bands, and RSI. I also use a couple of proprietary indicators developed by my charting service to look for systematic buying (accumulation). On Balance Volume (OBV) is a momentum indicator that relates volume to price change. It is a running total of volume that shows if volume is flowing into or out of a security. In general, you look for divergences. For example, a divergence is detected when the price makes a new high and the OBV fails to confirm. Volume Accumulation is a modification of OBV. Instead of assigning all the period's volume to either buyers or sellers, the Volume Accumulator uses a proportional amount of volume based on the relationship between the closing price and its intra-period mean price. Strong accumulation is bullish. Money Flow attempts to measure the amount of money buying a stock vs. the amount of money selling a stock to indicate the general buying and selling pressure on a stock. I look for money flowing strongly into a stock. Stochastics is an indicator that measures the price velocity. It shows us where price is trading within a given range. The boundaries of the range would be the high and the low for a specific time period determined by the user. A stochastic of 100% would mean price is currently trading at the extreme high of the range and a stochastic of 0 would mean price is trading at the extreme low. This helps to indicate whether price is overbought or oversold. When the Stochastics crosses up through the 80% line, it is considered overbought. Below 20% is considered oversold. When an oversold stochastic moves up through its MA, a buy signal is produced. I watch both 40-day and 7-day, but I prefer the shorter period to get more signals. MACD (Moving Average Convergence/Divergence) shows the relationship between two moving averages of prices. MACD is derived by dividing one moving average by another. It is based on the point spread difference between two exponential moving averages (EMA) of the closing price. The basic MACD trading rule is to sell when the MACD falls below its signal line and to buy when the MACD rises above its signal line. I use the 12/24/11 parameters. The relative strength graph is generated by comparing the relative price performance of any two items (such as two stocks or a stock and a market index). If the first item in your comparison is out- performing the second item, the relative strength line will be rising. For tech stocks, I compare against the NASDAQ Index. I also compare the relative strength graph against its 10 and 40-day moving averages (RSMA). Divergences above the moving averages are bullish. Bollinger Bands are a type of envelope (or trading band) plotted at standard deviation levels above and below a moving average. Because standard deviation measures volatility, the bands widen during volatile markets and contract during calmer periods. The Bollinger rules are: (1) sharp moves in price tend to occur after the Bands tighten (reduced volatility), and the closer to the average the better, (2) moving outside the Bands signals a continuation of the move until the prices drop below or inside of the Bands, (3) moves starting at one Band tend to go to the opposite Band. I use a 20-day moving average. Relative Strength Index (RSI) is a price momentum indicator that measures a security's price relative to itself and its past performance, thereby indicating its internal strength. It depends solely on the changes in closing prices. When RSI registers a reading of 70% or higher, price is generally in an overbought position. When RSI reaches the 30% level, price can be considered oversold. I prefer a 14-bar period. Keep in mind, these technical indicators do not purport to forecast or predict future price movement. They merely quantify the recent behavior of market players so as to give an indication of the likely direction of future price movements. Beware of external forces like major news events, announcements, or analyst upgrades/downgrades that can throw recent technical trends out the window. This is why we still use stop losses. Despite your rigorous analysis, preparation and execution, external forces can and do create surprises that will ruin it all. ************************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=591 ************************************************************** ************* DAILY RESULTS ************* Index Last Mon Tue Week Dow 10719.74 49.21 19.61 68.82 Nasdaq 3455.83 -103.92 -113.07 -216.99 $OEX 758.03 3.43 -5.23 -1.80 $SPX 1426.46 -0.28 -9.77 -10.05 $RUT 504.67 -9.70 -7.00 -16.70 $TRAN 2498.18 -57.22 33.76 -23.46 $VIX 24.39 -0.42 0.96 0.54 Calls ADBE 163.44 7.75 0.44 8.19 New, upcoming split!!! QCOM 72.50 0.06 1.19 1.25 Back on track today! CHKP 155.88 11.00 -12.63 -1.63 Partnership with BRCM PEB 112.69 -3.69 -0.13 -3.81 Healthy biotech CFLO 135.13 -0.63 -7.25 -7.88 Extended profit taking VRTS 130.44 -2.13 -9.44 -11.56 Dropped, no entry pts CIEN 110.13 -1.44 -11.25 -12.69 Major support at $110 AGIL 75.69 -2.63 -11.63 -14.25 Bounced off 50-dma SEBL 97.03 -8.81 -5.47 -14.28 B-2-B weakness gets SEBL MERQ 140.50 -5.31 -10.94 -16.25 Entry channel bottom? MUSE 183.50 -8.56 -8.88 -17.44 Down, but not out JNPR 201.44 -12.81 -4.69 -17.50 Close above critical $200 RATL 50.00 -1.63 -17.75 -19.38 Dropped, disconcerting BRCM 224.25 -10.06 -9.44 -19.50 Dropped, hard time chip VRSN 180.00 -10.69 -11.88 -22.56 Dropped, support failed ITWO 152.00 -17.19 -17.88 -35.06 Dropped, bad B-2-B bears Puts AETH 93.63 -11.94 0.06 -11.88 New, supply vs demand CPTH 52.00 -4.56 -4.19 -8.75 Parent Co. sympathy AKAM 44.00 -5.63 -2.88 -8.51 New, sellers took over DIGX 39.13 -3.63 -4.13 -7.75 Consolidation concern CMOS 25.25 -1.63 -3.13 -4.75 Broke below key $30 mark MU 43.06 -3.63 0.69 -2.94 Dropped, earnings 10/04 OMC 75.44 0.69 1.81 2.50 Dropped, beat the bears 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: ***** ITWO $152.00 -17.78 (-35.06) ITWO, along with its partner ARBA, took it on the chin early Monday after investors learned of another setback for the B-2-B alliance. The Global Health Care Exchange said it would go with an alternate technology in developing its online health care meeting place. On top of the lost contract, ITWO investors learned early this week that a key ITWO executive had left the company. The two bearish news items in conjunction with a weak Tech sector were enough to take ITWO down by nearly 20%. High trading volume has confirmed ITWO's fall from grace over the past two days, which makes the sell-off all the more disconcerting. In light of the recent debacle, we are no longer initiating new positions in ITWO. However, ITWO is extremely oversold and may be due for a bounce tomorrow. But, given the current weakness in the B-2-B space, a relief bounce might provide a good exit point. VRSN $180.00 -11.88 (-22.56) A strong selling sentiment amongst the techs took VRSN down to the mat this week. By late afternoon today, VRSN's firmer support at $188 and $190 couldn't hold up to the mutiny of the NASDAQ. The stock went down hard and fast. Stop losses may have gotten some of you out before the massacre hit full-force. If not, try to repair losses. Because VRSN is a fast-rising network security leader it's subject to volatility. Therefore, if you have open positions try to exit on an oversold rally. The only consolation for today's decline was that it occurred on below average volume, which indicates that traders aren't dumping stock in a panic. Verisign is expected to report solid earnings around October 23rd. RATL $50.00 -17.75 (-19.38) While the stock appeared to hold up well yesterday, closing down only $1.63 on a weak NASDAQ day, today was another story. Like many Tech stocks, RATL started the day down and headed lower. What is surprising is RATL's drop, down 26.20%, with no apparent news to explain the move. The end of day sell-off on high volume is disconcerting, with final volume for the day clocking in at 477% of ADV, putting RATL well below it's 50-dma at $56. With earnings confirmed for October 11th, a sell-off this steep, even on a weak market day, is not a good sign. RATL may find support at it's 100-dma, near $49 but we will be looking to exit this play on any strength. BRCM $224.25 -9.44 (-19.50) That loud sucking sound you heard this afternoon was the sound of just about every technology stock flushing recent gains down the drain. BRCM was having a hard enough time in yesterday's session, giving up the $242 support level to close in critical condition, below even the $235 level. The recovery this morning looked a little on the weak side, and once the stock clawed its way back to the $242 support (now resistance) level, the bears came out in force. As the NASDAQ tanked this afternoon, we watched BRCM sell off with a vengeance, losing nearly $18 in the final 2 hours on very strong volume. All the technicals on the daily chart have turned strongly negative, so it is time to walk away and let the stock regain its dignity. Solid support sits between $215-220, but given today's action, we wouldn't be surprised to see this level fall to the bears this week. Use any relief rally in the morning as a chance to get out of the play with at a better level. VRTS $130.44 -9.44 (-11.56) First the bad news... Our new call play got slaughtered this week. It seemed as though nothing could buck the downward NASDAQ trend as one support level after another got broken. The good news is that, aside from a mild bounce early yesterday morning, there hasn't been anything approaching a decent entry point. If you dove into the play at that point, you should have been stopped out in the decline yesterday afternoon. This is an example of a play that was broken from the beginning, as VRTS has given up nearly $20 since hitting $149.75 yesterday. If you did get in and are still holding onto a losing position, use any oversold bounce tomorrow as an opportunity to get out, not as a chance to enter the play. Needless to say, VRTS is a drop tonight. PUTS: ***** OMC $75.44 +1.81 (+2.50) The bargain-basement prices and the upcoming ad presentations enticed buyers to snatch up some shares of OMC and its rival, True North this week. Recall these two advertising firms are involved in a winner-take-all shootout for over $1 bln in DaimlerChrsyler business. Presentations are set for this Friday. There's also been widespread scuttlebutt that TNO is a potential takeover target by OMC, but analyst sentiment is mixed on that issue. While last week's strong losses dominated the scene, OMC is currently advancing amid the controversy and excitement. The steady moves through the 5-dma ($73.24) and 10-dma ($74.73) clearly warrants an xit tonight. MU $43.06 +0.69 (-2.94) We would love to keep this put play on the list, considering the stock dropped 17% in seven sessions, but MU reports earnings after the bell tomorrow. As a general rule, we do not recommend holding over an earnings announcement due to the possibility of unexpected price swings. This would mean exiting positions by tomorrow's close. MU performed well for us in the wake of INTC's warning, giving us plenty of entry opportunities, and a continued downtrend. This morning, Bear Stearns analyst Charles Boucher defended the stock, stating that it was "oversold" and reiterated his Buy rating on the stock. As a result, MU traded higher until the afternoon when stock followed the NASDAQ's lead and sold off into the close. There may be one day left for this put, but we are closing it tonight. Just remember to be out by the close tomorrow. ************************Advertisement************************* PRIVATEBUY.COM(tm). SHOP ONLINE. ANONYMOUSLY. ANYWHERE. Protect your identity with PrivateBuy.com – the first way to pay for goods & services on anywhere on the Web in pure, unadulterated anonymity. Your identity will be cloaked no matter where you buy! Sign up for your free privatebuy account today @ http://www.privatebuy.com/signupdisplay.asp?srcid=4E2W ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. 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The Option Investor Newsletter Tuesday 10-03-2000 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/100300_2.asp ************************Advertisement************************* Live Stock Picks --- Two Week Free Trial Real-Time AOL Instant Messenger alerts on every Buy/Sell opportunity from our Top Trader. Over 834% return since Feb 1997 (Day Trading) Over 172% return since April 2000 (Swing Trading) Click the link below for a FREE TRIAL.1-800-776-7966 http://www.sungrp.com/tracking.asp?campaignid=583 Full risk disclosure on website. ************************************************************** ******************** PLAY UPDATES - CALLS ******************** QCOM $72.50 +1.19 (+1.25) While the NASDAQ radically veered from its course, QCOM went back on track today! A bullish ascent off the supportive 5 & 10 DMAs coupled with an unwavering push through the resistance at $75 restored our confidence that QCOM is destined to run up. Last Monday Wu Jichuan, head of China's Ministry of Information Industry, announced that China is allowing its telecom companies to choose which CDMA standard they want to use. So one thing stands clear, Qualcomm will get a piece of the Chinese market no matter which standard is used because of CDMA royalties. This good news may be just the catalyst to drive up QCOM's share price over the near-term, especially with earnings approaching on November 2nd. After today's bloodbath, it's clear that near-term support at $72 and $73 is established. However, in this fearful market and it being October and all, err on the side of caution. A conservative entry into this call could be taken on a break above $75 with strong volume. More aggressive entries can be attained on bounces from the $71 - $71.50 area. But keep stops in place no matter what. Traders are selling into strength and QCOM could easily turn on a dime. In other news, the new Japanese telecom giant KDDI announced it plans to launch the world's fastest mobile phone-based data service. They will use Qualcomm's high data rate technology, which is 75 times faster than regular phone lines. CHKP $155.88 -12.63 (-1.63) CHKP and Broadcom (BRCM) announced a strategic partnership this morning to develop and deliver next generation Internet security products. However, despite the significant announcement with BRCM, CHKP fell victim to the bears in the software sector. The earnings warning from Computer Associates (CA) after the bell today might continue to pressure the software sector tomorrow, especially if the Tech bears return. With that said, traders might wait for CHKP to stabilize tomorrow morning before entering the play. The stock has major support just below at $155 and lower near $150. A bounce off either level might provide a solid entry into the play if the broader Tech sector rebound tomorrow. the more conservative traders might wait for CHKP to rally back above its breakout point near the $160 level. Make sure to confirm the return of heavy volume with any rally attempt in CHKP before entering new long positions. SEBL $97.03 -5.47 (-14.28) The controversies swirling around in the B-2-B sector over the past two days have weighed heavily on our SEBL play. The B-2-B exchange-related news concerning ITWO and ARBA yesterday began the bear ball rolling, which only gained momentum today. Several analysts and even company executives tried to defend stocks in the B-2-B sector, but had little persuasion over the bears' relentless selling. Because of the uninhibited selling in the B-2-B sector, SEBL fell below its 10-dma yesterday and the ever-critical $100 support level today. What's more, volume has picked up over the last two days, which makes SEBL's slide a bit concerning. As such, we'll want to use caution in the coming trading sessions when considering entering new SEBL positions. If the bears continue to claw the B-2-B sector, aggressive traders might look for SEBL to find support at its 50-dma currently at $93.50. SEBL's 50-dma has provided solid support for the past two months and might provide a solid entry into the play. However, if the 50-dma fails, SEBL might be in serious trouble. On the other hand, if SEBL rebounds tomorrow, traders might look for a quick pop back above the $100 level. Conservative traders might wait for SEBL to move back above its 10-dma near $104 before entering the play. CIEN $110.13 -11.25 (-12.69) Shares of CIEN faded into negative territory amid a mixed market on Monday despite a positive show by some of the large telecommunications equipment stocks. NT rose on a $1.4 bln, 10-year deal with Cable & Wireless to transform their international network to Internet-based technology. The news, however, couldn't bring CIEN above $128 and it closed at a critical level. While most stocks advanced earlier in the day ahead of the Fed's meeting, CIEN succumbed to another session of heavy selling today with volume levels topping 1.5 times the ADV right from the get-go. When the market literally fell apart, CIEN was already off-kilter. It quickly slipped through the safety net at the intersecting 5 & 10 DMAs ($121-$122). It didn't help matters that analyst Rick Berry at Centennial Capital Management started new coverage on CIEN with a Sell and a one-to-three-month price target of $88! Huh? Who's that... and who issues a lower price target? As weird as it sounds, we need to be cautious. The stock's current position at the proximity of the 30-dma ($109.05) line isn't an opportune place to take an entry. Wait for the market and stock to resume a clear-cut, bullish direction before jumping back into this sexy optical. AGIL $75.69 -11.63 (-14.25) Monday morning started off on the right track as AGIL rallied strongly in the first half hour of trading. Getting past $95, the stock looked poised to challenge the century mark when the rally suddenly fizzled, replaced by small but consistent waves of selling. By the end of the day, those small moves down added up, as AGIL closed down $2.63 on 152% of ADV. Today, the stock continued to head lower. It appeared to find bottom early in the day at $75, when end of day selling pushed AGIL lower to test successfully test $70 support. Another test of $70 could provide for an aggressive entry point as well as $75, but make sure there are buyers to back the move. Overhead, resistance can be found a $80 as well as the 5- and 10-dma at $85.15 and $83.34. One news item of special interest came from Chase H&Q, who maintained their Buy rating, commenting that "Agile is cementing its position as an established industry leader in the area of supply chain collaboration, a major new area of strategic corporate investment." CFLO $135.13 -7.14 (-7.88) CFLO has been able to flourish despite weakness in the NASDAQ over the past month. The relative strength of this stock has been simply amazing. So much so that the stock was in 4th place for the best performing stocks of the third quarter, posting a 132% gain during that period. So far this week, CFLO has had a more challenging time bucking the market trend. On Monday, CFLO held up strongly, closing down just fractionally on average volume, right on its 10-dma. Today, the stock finally succumbed to the downward pressure of the NASDAQ. A failed attempt to rally in the morning brought in the profit takers, who took away 5.09% on twice the ADV. Aggressive traders looking to enter this play may want to target shoot support at $135 and $130 but confirm a bounce with volume before entering. Conservative traders will want to wait for momentum to carry CFLO above resistance at $140 before entering, while keeping an eye on resistance from the converged 5- and 10-dma at $143.75. MUSE $183.50 -8.88 (-17.44) Down but not out yet. Unable to hold the $200 level, MUSE sold off on Monday along with the NASDAQ, shedding $8.56 on 77% of ADV. Attempting to make it back above $200 this morning, the sellers stepped in once again. Finding support at the $185 level, the stock attempted a comeback but market forces prevailed, with MUSE closing down another 4.61% on 90% of ADV. While it's been a rough week so far for MUSE, investors can take solace that volume to the downside has been light. As well, MUSE's upward sloping regression channel since early August remains intact, with a strong bounce off the lower part of the channel today, near $175. For those who have a high risk tolerance, a bounce off support a $175 or $180 could be an excellent entry point but make sure that volume supports the bounce. Conservative traders may want to hold back until MUSE clears $190, where its 10-dma currently resides, before considering an entry. JNPR $201.44 -4.69 (-17.50) JNPR had a rough day yesterday, falling as low as $201.50 before a mild recovery at the close. After gapping up this morning, the NASDAQ deteriorated throughout the day, dragging just about anything technology related down with it. JNPR wasn't immune to this effect, falling early in the morning to retest the lows from yesterday, where we saw anemic buying action support a recovery back up to where the day began, near the $214-215 level. That was as good as things got, as the selling intensified again, pushing our play down to close out the session just above the $200 support level. The MACD and Stochastics have turned sharply negative on the daily chart, giving the impression that more downside is possible. The 30-dma ($206.63) didn't even halt the stock's decline and the next moving average that might provide support is the 50-dma, currently at $186.25. This corresponds to major chart support, currently positioned at $181-184. Be very careful in initiating any new positions at this point. While there may be bullish swing trades available on any oversold bounce, it looks like the near-term trend may still be down. Rather than buying bounces from support, we would look for JNPR to rally back above $215 on strong volume before initiating any new positions. PEB $112.69 -0.13 (-3.81) While it isn't exactly the picture of health, at least the Biotechs seems to have dodged the rampant selling that has afflicted the broader technology sector. PEB looks even better than the Biotech Index (BTK.X), managing to keep from violating any significant support levels this week. This isn't to say that the bulls have had a free reign, but at least they have managed to keep the bears in check. Yesterday's trading pushed our play down below the $112 support level before an end of day mini-rally provided a bit of relief. This positive action continued into trading this morning, but the early bullishness soon evaporated, and PEB sold off at the close. Ending once again, at the $112 support level, our play is at a critical juncture, now below the 10-dma ($114.38) for the first time in nearly a month. Although there is solid support near $108, the rate at which support levels were violated in the technology sector during today's session, paints a bleak picture for the bulls. For those of you with open positions, keep those stops in place. While the more adventurous may want to buy the next bounce off of support, we would feel much more comfortable waiting for PEB to rally back above $116 before opening any new plays. MERQ $140.50 -10.94 (-16.25) Making a new intra-day high of $162.50 on Monday morning, MERQ promptly sold off by mid-day, as sellers rushed to take their profits off the table. As a result, the stock closed down $5.31 or 3.39% on 126% of ADV. In doing so MERQ closed below its 5-dma, but managed to find support at the 10-dma. Today, that support was broken in the first hour of trading. Bouncing at $135 level, MERQ attempted to rally back but with resistance at $145, headed lower to close the day down 7.22% on 180% of ADV. This is a dangerous time to be a bull but with that danger comes opportunity. Connecting the highs and lows since September, we can see that at today's low MERQ touched the bottom of its upward sloping channel, just above $132, before bouncing convincingly. With strong support at $130 as well as support at $135, an aggressive trader could see bounces off these levels as buying opportunities. But make sure market direction supports the move up when considering a play. Conservative traders will want to see MERQ back above $150 before initiating a play. ******************* PLAY UPDATES - PUTS ******************* CMOS $25.25 -3.13 (-4.75) The pivotal $30 level we had been closely monitoring gave way yesterday morning, and the bears haven't stopped selling CMOS since. The discounting in the Chip sector seems to be far from over as the likes of AMAT, NVLS, KLAC, and even INTC continue lower. Since CMOS fell below its key support level at $30 early this week, our next objective will become the $20 level, which was the stock's breakout point from over 18 months ago. CMOS has fallen a long way in the last month, and a relief rally or oversold bounce is long over due. If CMOS does bounce higher in the coming days, aggressive traders might wait for the stock run into resistance in the form of heavy selling, and look to enter new put positions on a rollover. Resistance levels to watch for a rollover are currently located at the $26 level and again at $27. If, however, the Chip bears continue their assault on CMOS, consider entering new positions if the stock falls below $24.75, or beneath its intraday low at $24.38. Make sure to monitor the direction in CMOS' sector by watching KLAC, AMAT, and TER. DIGX $39.13 -4.13 (-7.75) Black October arrived in style and DIGX played out like a charm. Does "what a deal" sum it up for you? After just adding DIGX to our put list this weekend, DIGX opened at $47.13 Monday morning and methodically slid lower. News of its own takeover by WCOM and EXDS's recent announcement of its acquisition of Global Crossing's (GBLX) GlobeCenter is fueling DIGX's obliteration. This week, the downward momentum first extended the losses below the $45 mark and successfully met the challenge at $42.50, the site of Thursday's intraday low. The declining intensity continued to apply the pressure and DIGX slid under $40 in today's session. There is some historical support at this price level and more at $35, so be prepared for some resistance. Keep stops tight to protect against "oversold rallies". CPTH $52.00 -4.19 (-8.75) As parent company CMGI continues to make new 52-week lows, it appears that CPTH is tagging along for the ride. On Monday, coverage was initiated on CPTH by Adams Harkness with a Strong Buy. This did little to generate buying interest in the stock as it opened lower and spent the rest of the day continuing in that direction. CPTH closed down $4.56 or 7.51% and in doing so, fell below its 100-dma, now at $56.32. Today, we saw resistance at the 5-dma (now at $58) continue to act as a ceiling for CPTH, as two attempts to rally above that level were met with selling pressure. Volume for the past couple of days has been about 800 K, with average volume at the one million mark. While volume may be low, the bias in direction is clearly down. Look for a failure to break above the 5- or 100-dma to provide for an entry point but confirm an entry with market sentiment. Conservative traders will want to see CPTH break below support at $50 before jumping in. ************************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=592 ************************************************************** ************** NEW CALL PLAYS ************** ADBE - Adobe Systems $163.44 +0.44 (+8.19 this week) A long-time leader in desktop publishing software, ADBE provides graphic design, publishing, and imaging software for Web and print production. Offering a line of application software products for creating, distributing, and managing information of all types, the company generates nearly 75% of sales through publishing software products such as Photoshop, Illustrator, and PageMaker. Its Acrobat Reader, which uses portable document format (PDF) is popping up all over the Internet, as businesses shift from print to digital communications. In addition, ADBE licenses its industry standard technologies to major hardware manufacturers, software developers, and service providers, as well as offering integrated software solutions to businesses of all sizes. Showing their approval for ADBE's strong earnings report 3 weeks ago, investors continued to bid the price higher, while the broader technology sector continued to weaken. So, what prompted this bullish activity? It's funny how a 2-for-1 split can bring out the bull in even the most cautious investor. Set for October 24th, the announcement of the split conveys the company's positive business outlook, and analysts are seeing the same thing (see news below). Between continued strong revenue growth and successful new product launches, ADBE is strengthening its dominant position in the desktop and Web publishing space. Although some profit taking did take place in late September, solid support formed at the $145-146 level, and it launched higher again in the middle of last week. Well above the 10-dma (currently at $155.38), ADBE tagged a new all-time high today, but is running into the upper Bollinger band, and showed some technical weakness this afternoon. This is likely a side-effect of the broad market weakness, but if it intensifies, we wouldn't be surprised to see some profit taking before our play is ready to run higher. Historical support is seen at $157, followed by $152, and then $145-146. Aggressive traders can consider buying bounces at support, but use caution in such a weak technology market. Even the strongest stock can't buck the broader market trend forever. A more conservative approach will be to wait for the NASDAQ to show better health and enter new positions as ADBE continues its run to new highs. ADBE has experienced broad-based support for its new InDesign software, as additional leading service providers are integrating the software product into their product and service offerings. This will help ensure that the advantages of InDesign will be leveraged from the original stages of design through the final printing of materials. Jumping in the day after the AAPL earnings warning, Prudential Securities defended ADBE, stating that APPL's problems should have no effect on ADBE. They recommended buying ADBE on any knee-jerk weakness, and reiterated their Strong Buy rating on the stock. BUY CALL OCT-160 AXX-JL OI=1005 at $11.25 SL= 8.50 BUY CALL OCT-165*AXX-JM OI= 724 at $ 8.75 SL= 6.25 BUY CALL OCT-170 AXX-JN OI=1099 at $ 6.63 SL= 4.50 BUY CALL NOV-165 AXX-KM OI= 206 at $14.75 SL=11.00 BUY CALL NOV-170 AXX-KN OI=5537 at $12.25 SL= 9.25 SELL PUT OCT-155 AXX-VK OI= 308 at $ 4.88 SL= 6.75 (See risks of selling puts in play legend) Picked on Oct 3rd at $163.44 P/E = 68 Change since picked +0.00 52-week high=$170.19 Analysts Ratings 5-5-2-0-0 52-week low =$ 53.44 Last earnings 09/00 est= 0.52 actual= 0.57 Next earnings 12-14 est= 0.58 versus= 0.46 Average Daily Volume = 1.61 mln ************* NEW PUT PLAYS ************* AETH - Aether Systems Inc $93.63 +0.06 (-11.88 this week) Aether Systems is the company that offers information in the palm of your hand. They provide wireless data services and systems enabling people to use wireless handheld devices for real-time data communications and transactions. The company also designs and develops wireless data systems and software engineered exclusively for healthcare, education and government. AETH is based in Owings Mills, MD and has branch offices in New York and Florida. Here's a company that puts wireless Internet in the palm of your Hand, yet it's losing its connection with shareholders. If you take a 52-week journey back in time, there's no doubt AETH's taken its investors on a wild and wholly ride. The stock's price rallied as high as $345 and has sunk as low as $41.13. Since September 1999, it's acquired seven companies and raised $1.1 bln via a secondary offering last March. Our play on AETH is that the stock may come under more short-term pressure as a result of the staged release of 24 million shares (about 63% of total shares) into the market at the end of the lock-up period. Couple this event with the nasty market environment and there's a recipe for a lucrative put play. Last Tuesday, AETH came off higher support above $120 and for a dramatic close at $106.69, down nearly 15% on the day. This week proved fatalistic too. AETH slithered below the century mark and set an intraday bottom at $88.06 in today's session. The downtrend line is intact and the clear pattern of lower-highs and lower-lows indicates further weakness in the share price. Consider target shooting the intraday spikes for entries. The 5-dma, currently at $100.90, is offering upper resistance amid the descent. Use this technical line as an entry/exit gauge. It's imperative that you be aware of the positive sentiment regarding AETH over the long-term. Robinson Humphrey, Wedbush Morgan, and JP Morgan have all recently gone to the podium for this stock. Remember, our play is short-term: get in, take your profit, and get out while the negative conditions govern. BUY PUT OCT-100*HEX-VZ OI=213 at $14.13 SL=11.25 BUY PUT OCT- 95 HIZ-VS OI= 0 at $11.13 SL= 8.75 Wait for OI! BUY PUT OCT- 90 HIZ-VR OI= 0 at $ 8.25 SL= 6.25 Wait for OI! Average Daily Volume = 1.10 mln AKAM - Akamai Technologies $44.00 -2.88 (-8.51 this week) Using software based on the company's proprietary mathematical algorithms, AKAM provides a global delivery service for Internet content, streaming media and applications that improves Website speed, quality, reliability, and scalability. It even helps to protect against Website crashes due to demand overloads. Superior delivery of customer Web content and applications through a worldwide network is achieved by locating the content and applications geographically closer to users. Exploiting the fact that even on the Internet, the shortest distance between two points is the fastest, AKAM monitors Internet traffic patterns and delivers its customers' content and applications by the most efficient route available. Bargain hunters that tried to pick the bottom on AKAM yesterday were in for a rude awakening today. After gapping slightly higher, the sellers took over, pushing the stock down below $44 before the stock saw any relief. Broad-based weakness in the technology sector was the culprit, and the attempted mid-day rally came to an abrupt end as the selling intensified again in the final two hours of today's session. The Internet sector as a whole saw heavy selling, especially as the day moved on, and with AKAM's recent weakness, it was like yelling "Fire!" in a crowded theatre. This was just the latest installment in a downtrend that has been uninterrupted for the past month. AKAM is now sitting almost 40% below where it sat just before the Labor Day weekend, and today's bearish action traced yet another all-time low of $43.88. Throughout the past month, the stock has channeled between the 10-dma (now at $53.19) and the lower Bollinger band (now at $44.25). The daily Stochastics are solidly in oversold territory, but showing no sign of reversing direction and the MACD looks like it is headed further into negative territory. Keep your eye out for an oversold bounce, and use it as an opportunity to buy puts as the price rolls over again. The 10-dma looks like a great level for initiating new positions, but given the NASDAQ weakness, we may not get that lucky. More realistic entries can likely be had with a rollover from either the $47 or $49 levels which should now act as resistance. Of course, if the selling intensifies from current levels, feel free to jump into the play as AKAM breaks to new lows. AKAM will report earnings on October 18th after the close, but its pattern of increasing losses since the company went public a year ago is not likely to inspire any investor confidence in the near term. BUY PUT OCT-45*RUG-VI OI=377 at $5.50 SL=3.50 BUY PUT OCT-40 RUG-VH OI=225 at $3.13 SL=1.50 Average Daily Volume = 2.06 mln ********************** PLAY OF THE DAY - CALL ********************** QCOM - Qualcomm Inc $72.50 +1.19 (+1.25 this week) Qualcomm develops and manufactures communications technologies and products. It's best known for its CDMA (code division multiple access) technology which is the industry standard for mobile communications. This technology is used in cellular phones, wireless telephone system equipment, and satellite ground stations. In addition, Qualcomm provides the trucking industry with a monitoring system called OnmiTRACS and is currently in a joint venture to develop a low-earth-orbit satellite communication system called Globalstar. They are also the #2 supplier of digital cell phones following Nokia. Most Recent Write-Up While the NASDAQ radically veered from its course, QCOM went back on track today! A bullish ascent off the supportive 5 & 10 DMAs coupled with an unwavering push through the resistance at $75 restored our confidence that QCOM is destined to run up. Last Monday Wu Jichuan, head of China's Ministry of Information Industry, announced that China is allowing its telecom companies to choose which CDMA standard they want to use. So one thing stands clear, Qualcomm will get a piece of the Chinese market no matter which standard is used because of CDMA royalties. This good news may be just the catalyst to drive up QCOM's share price over the near-term, especially with earnings approaching on November 2nd. After today's bloodbath, it's clear that near-term support at $72 and $73 is established. However, in this fearful market and it being October and all, err on the side of caution. A conservative entry into this call could be taken on a break above $75 with strong volume. More aggressive entries can be attained on bounces from the $71 - $71.50 area. But keep stops in place no matter what. Traders are selling into strength and QCOM could easily turn on a dime. In other news, the new Japanese telecom giant KDDI announced it plans to launch the world's fastest mobile phone-based data service. They will use Qualcomm's high data rate technology, which is 75 times faster than regular phone lines. Comments QCOM held tight as the NASDAQ violated key support and finished on the low of the day. Trading in QCOM over the past two weeks has built an ascending wedge in the $71 to $75 range. It continues to higher lows and is coiling like a spring. Any relief in the NASDAQ would certainly give QCOM a welcomed boost. We're looking for this coiling spring to burst and any strong volume break over $75.56 would warrant entry. Given the recent selling, utilize stop losses. BUY CALL OCT-65 AAO-JM OI=14836 at $9.25 SL=6.75 BUY CALL OCT-70*AAO-JN OI=22577 at $5.75 SL=4.00 BUY CALL OCT-75 AAF-JO OI=16122 at $3.25 SL=1.50 BUY CALL NOV-75 AAF-KO OI= 3875 at $6.38 SL=4.25 BUY CALL NOV-80 AAF-KP OI= 3481 at $4.75 SL=2.75 Picked on Sep 17th at $66.25 P/E = 84 Change since picked +6.25 52-week high=$200.00 Analysts Ratings 10-9-4-0-0 52-week low =$ 45.33 Last earnings 06/00 est= 0.27 actual= 0.27 Next earnings 11-02 est= 0.24 versus= 0.23 Average Daily Volume = 14.4 mln ************************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=606 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ Nasdaq slides to recent lows.. Technology stocks fell precipitously as investors continued to fret over future earnings growth. Monday, October 2 The Nasdaq foundered again today, suffering triple-digit losses as concerns over corporate earnings plagued technology stocks. The index finished down 103 points at 3,568. The Dow industrials edged higher after last week's slump, rising 49 points to 10,700. The S&P 500 ended relatively unchanged at 1,436. Trading volume on the Nasdaq reached 1.76 billion shares, with declines beating advances 2,735 to 1,427. Activity on the NYSE was average with 1.02 billion shares traded. Broad market declines beat advances 1,648 to 1,274. In the bond market, the 30-year Treasury fell 20/32, pushing its yield up to 5.92%. Sunday's new plays (positions/opening prices/strategy): Maxtor MXTR NOV7C/OCT10C $1.88 debit diagonal Advance Para. ADVP OCT30P/OCT35P $0.62 credit bull-put Intl. Bus. Mach. IBM OCT130C/125C $0.75 credit bear-call Worldcom WCOM OCT32C/OCT27P $0.19 debit synthetic Bergen Brunswig BBC DEC12C/OCT12C $0.43 debit calendar Our new group of spread candidates experienced mixed activity. Maxtor started strong but finished lower as technology stocks slumped and there may be a better opportunity to enter the position later this week. Advance Paradigm also failed to offer the target credit and we will monitor the spread for additional premium in the coming sessions. IBM was the big winner on the Dow, up over $5 after falling precipitously last week. A move through resistance near $122 will be the first indication of a sustainable rally but we believe it will be difficult for the issue to remain above the sold strike ($125) after the company's upcoming earnings report. IBM is vulnerable to missing estimates due to the flagging Euro and a decline in sales growth resulting from the general slowdown in computer sales. Worldcom pulled back at the open and the synthetic position was available at a better-than-expected price. Unfortunately, it went even lower during the session. The target debit in the Bergen Brunswig calendar spread appeared difficult to achieve but there were a number of (apparently) simultaneous positions opened at $0.43 during the day. Portfolio Plays: Technology stocks tumbled today as additional reports of profit shortfalls troubled investors in the wake of Apple Computer's earnings warning last week. Analysts said the recently lowered expectations for the U.S. economy has affected the outlook for revenue growth in emerging companies. Monday's trading activity was dominated by a flight to safety and blue chip shares rallied amid strength in the financial group. J.P. Morgan (JPM) led the way, up over $5 as traders speculated on further consolidation in the industry. Rumors that HSBC (HBC) would acquire Merrill Lynch (MER) helped boost gains in the sector. Caterpillar (CAT) shares also moved higher despite warnings that third-quarter net income would be 10%-15% below consensus estimates. Analysts said that the stock is already cheap and currently reflects lower earnings going forward. In the tech sector, hardware stocks rallied early and then retreated with Apple Computer (APPL) again leading the decline. Internet issues slumped and biotechnology stocks also moved lower after MedImmune (MEDI) was hit with downgrades. The issue fell $20 after analysts cut their ratings on the company. Among broad market stocks, oil shares edged higher as crude oil futures rose on concern that a hurricane heading toward the Gulf of Mexico may reduce production in the next few weeks. On the downside, retail and transportation stocks slipped lower while aerospace/defense issues consolidated from recent gains. Portfolio Plays: Our portfolio endured losses in all but a few of the technology positions. Adobe Systems (ADBE) was one of the bright spots, up almost $8 to $163 after some positive comments were reported in the Wall Street Transcripts. One analyst noted the graphic arts sector has seen very positive growth with the sector as a whole up 43% year to date. The sector's expansion has been boosted by Adobe, which has experienced a huge turnaround and tremendous growth. The company has become a major player in the evolution of digital imaging and the demand for rich visual media over the Web. Our conservative position near $125 is expected to return maximum profit. Research in Motion (RIMM) continued its winning ways, up another $4 to $103 on momentum from the recent blow-out earnings. Investors applauded the company's quarterly results last week, pushing RIMM's stock up $15 on Friday to an all-time high and on the Nasdaq, the issue led the "net gainers" category. One of the recently slumping issues, Enzo Biochem (ENZ) jumped almost $5 after the company reported that new data on the first individual treated in the Phase 1 clinical trial of HGTV-43, the company's HIV-1 gene medicine product, show that Enzo engineered cells have successfully engrafted in the patient's bone marrow and were spawning new differentiated cells designed to fight the virus. It is apparently a scientific milestone as no current technology has been successful in engrafting cells expressing a cloned gene in the bone marrow of adult subjects without first ablating the patient, a process in which existing blood cells are destroyed. With renewed interest in the company, its share value should resume an upward trend for the next few sessions, allowing our bullish credit spread to expire profitably. Only one other positive move was worth reporting. Allstate (ALL) rallied with the financial group, climbing to $36 near mid-day and the credit for our bullish synthetic position reached $1.00. That's a favorable early-exit profit, based on the entry debit $0.06. On the downside, Ariba (ARBA) was hammered today after losing a key online marketplace customer. Ariba fell $16 to $127 after reports that the trading-exchange joint venture of Ariba, i2, and IBM, was dismissed by the Global Health Care Exchange. The sell-off was exacerbated by the slump in the Nasdaq and the news fueled speculation that the Alliance was not the happy marriage portrayed by the three partners. Ariba has been riding a wave of optimism in recent months, after reporting favorable results in the most recent quarter, but today the bullish momentum ended abruptly. Our neutral credit strangle is short at $110 and when the issue approaches that price, we will evaluate the technical outlook and make the appropriate position adjustments. Tuesday, October 3 Technology stocks fell precipitously as investors continued to fret over future earnings growth. The Nasdaq slid 114 points to a recent low near 3,454 and the momentum dragged the blue-chip stocks. The Dow industrials ended off their earlier highs, up 19 points to close at 10,719. The S&P 500 index was down another 10 points to 1,426. Activity on the technology exchange was heavy at 1.94 billion shares traded, with declines outpacing advances 2,550 to 1,528. Trading volume on the NYSE reached 1.09 billion shares, with advances beating declines 1,527 to 1,367. In the bond market, the 30-year Treasury fell 4/32, pushing its yield up to 5.93%. Portfolio Plays: Bargain-hunting buyers in the cyclical industry helped the Dow finish positive but there was no salvation for the Nasdaq. The technology index plummeted amid continued profit worries and the downward momentum has significantly eroded investors confidence in the group. There was little help from the Fed's decision to leave short-term rates unchanged and the outlook was less than outstanding. In its statement, the Fed said risks to the U.S. economy remain tilted toward inflation although recent economic data suggests demand has moderated to a pace more in line with the economy's potential productivity. Analysts had unanimously predicted no change in interest rates, thus the effects of the announcement were almost unnoticed. Inside the technology group, networking and semiconductor stocks performed better than most while Internet issues slumped as the business-to-business sector was plagued by selling pressure. On the Dow, industrial issues Alcoa (AA), DuPont (DD), Caterpillar (CAT), International Paper (IP) and United Technologies (UTX) were the best performers. In the broad market, banking, transportation and biotech companies were popular and aluminum, chemicals and defense stocks rallied. In contrast, photo imaging and office equipment shares retreated and online brokerage and utility issues topped the sellers list. Strangely enough, Abby Joseph Cohen of Goldman Sachs says she is bullish on technology stocks, and that concerns over the earnings environment may be overdone. Abby commented that slowing growth will prolong the "profit expansion" and that stock markets enjoy the best results when investors are confident that growth can be sustained. I don't know about you, but my confidence is quickly fading. Our portfolio was a "sea of red" today as investors began to capitulate in earnest, selling their holdings at recent lows in a classic, broad-market exodus. Technology companies were hit hard and the only issues in the big-cap category that finished positive were Adobe (ADBE) and Qualcomm (QCOM). That's scary! In fact, there was little positive activity in any group and only a few stocks achieved closing gains. Federal Express (FDX) edged higher amid strength in the transport sector and St. Jude Medical (STJ) rallied to the top of a recent trading range as investors searched for growth issues unaffected by the downdraft in technology issues. Our bullish position in St. Jude is now offering a $1 profit and that's a favorable early-exit return. Abott Labs (ABT) appears to be bracing for a new rally and Enzo Biochem (ENZ) managed to retain most of Monday's gains. Based on its bullish performance amidst the negative background, we have new confidence in the technical outlook for the issue. Of course, the downward trend has also helped a number of bearish positions. International Business Machines (IBM), Halliburton (HAL), Microchip (MCHP), Smith International (SII), and Covad Communications (COVD) all fell victim to the selling pressure, bolstering the outlook for our current plays in those issues. A number of positions are at risk now that the underlying issues have transitioned to bearish trends and there will certainly be some adjustments in the coming sessions. The obvious candidates include Ariba (ARBA) and Ballard Power (BLDP) and the positions in these issues will likely be rolled forward and down to lower the cost basis in each issue. The big loser today was Plug Power (PLUG) and as we commented last week in our discussion on spread adjustments, the issue was a prime candidate for further downside movement, after it broke through technical support. The stock began moving lower near 10 A.M and the short option traded below $5 early in the day. By the end of the session, the long option was worth over $7, a great opportunity for those who participated in the movement. While it's difficult to determine what results could have been achieved without actually trading the position, a break-even exit, considering the original $0.75 credit, was not an overwhelmingly difficult feat. There were other strategies that could have been implemented to limit any additional losses, including shorting the issue or initiating an offsetting spread. As the market slump continues (along with new technical failures) we will review some of the common techniques for exiting popular spread positions. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** BLS - BellSouth $41.00 *** On The Rebound! *** BellSouth is a communications giant serving millions of customers in countries around the globe. BellSouth offers, on its wireline network, local, long distance and network access services for voice communications, digital and data services, cable/digital TV and advertising services. The company also markets e-commerce services, Web design and hosting and online access to residential, business and institutional customers of all sizes. BellSouth is one of the world's largest wireless communications providers with local and long distance, voice and data communications services in major markets throughout the United States and in key growth areas around the world. Telecom issues are expected to recover in the upcoming weeks and BellSouth has rebounded in recent sessions on optimism over its new wireless communication network. On Friday, the FCC approved SBC Communications' (SBC) and BellSouth's proposal to create the second largest wireless carrier in the U.S. The venture, which was announced in April, will have about 18 million subscribers, second to only to Verizon Wireless. The new company, which will be 60% owned by SBC and 40% by BellSouth, pushes AT&T's wireless business down to the #3 spot and is expected to become a leader in a number of major markets across the country. Based on the bullish activity in the issue, investors favor the new agreement and this position provides an excellent opportunity to speculate on the success of the venture. PLAY (speculative - bullish/synthetic position): BUY CALL JAN-45.00 BLS-AI OI=1756 A=$1.88 SELL PUT OCT-37.50 BLS-MU OI=1913 B=$1.68 INITIAL NET CREDIT TARGET=$0.25-$0.38 ROI TARGET=50% Note: Using options, the position is equivalent to being long on the stock. The collateral requirement for the naked put is approximately $1450 per contract. ****************************************************************** STAT - I-Stat $24.19 *** On The Move! *** i-STAT develops, manufactures and markets medical diagnostic products for blood analysis that provide health professionals with immediate and accurate critical diagnostic information at the point of patient care. The company's current products, known as the i-STAT System, consist of portable, hand-held analyzers and single-use, disposable cartridges, each of which simultaneously performs different combinations of commonly ordered blood tests in approximately two minutes. The i-STAT System uses a simple, one-step procedure, the results of which can be easily linked by infrared transmission to a health care provider's information system. The Medical Instruments and Appliances group has performed very well over the past few months and STAT is poised to become one of the premier companies in the industry. While there are a number of positive fundamental aspects in the company's future, this position is based solely on the technical outlook for the underlying issue. From a trend and momentum viewpoint, the strength of the recent rally suggests there may be additional upside potential in the future of this stock and a cost basis near technical support will suit us just fine. As always, news and market sentiment will have an effect on the issue so review the play thoroughly and make your own decision about the future outcome of the position. PLAY (aggressive - bullish/credit spread): BUY PUT OCT-20.00 TAQ-VD OI=10 A=$0.31 SELL PUT OCT-22.50 TAQ-VX OI=0 B=$0.75 INITIAL NET CREDIT TARGET=$0.50-$0.62 ROI(max)=25% ****************************************************************** - STRADDLES - ****************************************************************** SCMM - SCM Microsystems $36.22 *** Probability Play! *** SCM Microsystems designs, develops and sells hardware, software and silicon that enables secure access of digital content and services. The company sells its products primarily into four markets: Digital Television, where its products are used to control access to digital television broadcasts; Broadband Access, where its products are used to provide secure connections between a limited number of users or to control access to subscribed content from a satellite, terrestrial or cable operator; Network Security, where its products are used to control access to PCs, computer networks and the World Wide Web to facilitate enterprise security and online transactions, and Digital Media Transfer, where its products expedite the transfer of information between PCs and digital appliances such as digital cameras and digital music players. SCM's customers are manufacturers in the consumer electronics, computer, digital appliance, digital media and conditional access system industries. This position meets our criteria for a favorable straddle; cheap option premiums, a history of adequate price movement and future events or activities that may generate volatility in the issue or its industry. This selection process provides the foremost combination of low risk and potentially high reward. We would like to use shorter-term options to achieve profits based on the neutral outlook but the Open Interest in the November and December options is almost nil. The March series offers some liquidity and it will increase as time passes. The options in that month also provide an acceptable risk/reward ratio however, as with any play, the position should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - neutral/debit straddle): BUY CALL MAR-35 SIU-CG OI=10 A=$7.12 BUY PUT MAR-35 SIU-OG OI=18 A=$6.25 INITIAL NET DEBIT TARGET=$13.00 TARGET ROI=50% ***********************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=612 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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