The Option Investor Newsletter Sunday 10-08-2000 Copyright 2000, All rights reserved. 1 of 5 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/100800_1.asp ****************************************************************** Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** WE 10-06 WE 9-29 WE 9-22 WE 9-15 DOW 10596.54 - 54.38 10650.92 -196.45 10847.37 - 79.63 -293.65 NASDAQ 3361.04 -311.78 3672.82 -130.94 3803.76 - 31.47 -143.18 S&P-100 750.97 - 8.86 759.83 - 14.25 774.08 - 15.69 - 23.13 S&P-500 1408.99 - 27.52 1436.51 - 12.21 1448.72 - 17.09 - 28.69 W5000 13142.10 -471.30 13613.40 - 64.80 13678.20 -135.50 -236.50 RUT 491.02 - 30.35 521.37 + 2.55 518.82 - 12.06 - 4.82 TRAN 2543.65 + 22.01 2521.64 - 75.50 2597.14 - 74.32 + 19.86 VIX 25.67 + 1.82 23.85 - .32 24.17 + 2.24 + 1.24 Put/Call .75 .59 .56 .65 ****************************************************************** It's Always Darkest Before The Dawn The air is getting colder, the leaves are changing colors, and technology stocks are getting hit...it must be October. Not only are we seeing the same signals and warnings that are common for this time of year, but the feeling of despair is the same too. Why is it that investors always feel the economic world is about to end this time of year? Who knows why traders do what they do sometimes, but if history repeats itself, the market could be setting up for a bottom in both the short and long-term. That is what has always struck me as bizarre in trading during this time of year. How one week the trading world is coming to an end and the next week the future could not look brighter. Nevertheless, let's dissect the carnage and separate fact from fiction. Like always, the Nasdaq will get the first look. Obviously, it has been stuck in a downward range for five weeks. Here is the chart of the Composite that I posted in last Sunday's Wrap. Now compare it to this week's chart. Yep, the same trend is in tact. In trading the recent market, this indicator has been my first stop. It is the ever-exciting, range-bound action, culminating in a 300-point loss for the Nasdaq this week. The news has been bad and the volume has been big. Still, we have held true to this range for weeks and it is telling us that we are currently at the bottom of the range. That should give an upside bias for the coming week, but remember this is still a downtrend. A successful week in a down-trending range just means you will be lucky to end the week flat on that index. This is a very tough market for traders to make money on. The more likely scenario is that you will get swung in and out of trades constantly for little profits. But it is an exciting time as well, considering that big moves may be waiting in the wings. So now let's move on to the longer-term view, which seems to be coming to a head here against the short-term pattern. This next chart shows just what I have been waiting weeks for. We are headed into the second week of October and fear is rising. The VIX is back above 25 and the Nasdaq has traded down over 20% since September 1st. We have been stuck in the pattern mentioned above, but will face strong long-term support shortly. Some analysts have been talking about retesting the May lows down around 3150. It looks like they may get their wish. With the Nasdaq at 3361 and maintaining the current trend, we should be there late this week or early the following week. Does that mean we will have a major event? Not necessarily, but the odds are definitely increasing as the two forces collide. Either the support has to hold and shoot the Nasdaq up and out of the current range or the support will fail and the losses will accelerate. Which will happen? I will make my prediction below, but it is important to recognize the factors at work. Here's the chart... The strong Jobs report was the kicker on Friday. Analysts had expected a gain of 235K new jobs and unemployment at 4.1%. Instead it got 252K and a shocking 3.9% number on unemployment. Traders didn't really know how to react to this and it produced some choppy action. Fortunately, there was an absence of wage pressure or trading may have been real dicey. "Job gains were very strong in the services industry, but the overall employment change was tempered by widespread job losses in manufacturing," the government agency said. This report can't make the Fed happy, but there are factors to keep the Fed sidelined, like a sinking stock market. While this report wasn't good, it didn't strike me with a sense of fear like it did for some. The market has likely already factored these numbers in. The DJIA had a rough day on Friday too, dropping 130 points. This is unfortunate due to the fact that it had been trying to move up and out of a consolidation period from the past two weeks. Volume was steady at 1.15 million shares. The omission of major analysis on this index is not an oversight. Let's face it, it's October and traders are talking tech. I have seen too many traders burned when buying the supposedly "defensive" plays in this month. While a break of support at 10,500 would be discouraging and require a deeper look into the crystal ball, until it happens we will keep focused on techs. Besides, the DJIA will again run into a lot of technical congestion soon after such a breakdown. Now we are about to kick-off the earnings season in earnest next week. We will see International Paper, General Motors and General Electric from the Dow Industrials. Plus many big names in the Nasdaq like Yahoo, Juniper, DoubleClick, Veritas, PMC Sierra and KLA-Tencor. Not to mention some tech stocks sitting on the big board like Gateway, Motorola and Seagate. The hope here is that some solid earnings numbers will help to curb the tide of negativity that is sweeping across Wall Street right now. First Call noted that even though negative pre-announcements have been heavy, the impact on aggregate estimate revisions has been relatively light. And expectations for earnings growth were trimmed no more than the normal amount. The number of negative pre-announcements currently stands at 351, up 25% from the same time last year. Expectations for 3Q growth in S&P 500 companies are now at 15.9% versus the 18.8% growth rate expected on July 1st. As mentioned in previous articles, you never know when the October fear will subside, but it will come eventually. The first indication will be the Nasdaq breaking out of the above range. I breakout to the upside should mean the emergence of a new trend and the end of the selling pressure. Markets cycle and the current range (lasting nearly six weeks) is getting old in a hurry. That should encourage buyers. On a similar but different note, a breakdown out of the range may also have positive implications. If we were to see a real capitulation where the Nasdaq gets slammed and trades 3000 (or less!), then you have got a situation that many will point to as being way oversold and a buying opportunity. Is my bias showing? Either way, I want to see a move out of the this down-trending channel. The more bleak analysts paint the picture, the more I want to do some buying. Some are feeling the pain as the Nasdaq nears 35% off the year high, but some of my favorite companies are trading at prices I wouldn't have been able to imagine a couple months ago. The last time I felt this fear/opportunity feeling in my gut was last October. And that was the entrance to the biggest bull run on record. Will it happen again? No one knows for sure, but I have just one remaining thought..."Those forget the past are condemned to repeat it." Therefore, I am looking for that gut feeling where the sentiment switches back to bullish. Some of you may know what I am talking about. It is like a switch was flipped and the mood and markets reverse on a dime. It may take days or weeks for confirmation and knowing when the timing is right is half the battle, but you always remember the instant it turned. Until then, don't buy too soon. Also, Jim sent in two articles from the John Dessauer Seminar in Switzerland today, be sure to look for them. One is listed below and the other is in Editor's Plays. Ryan Nelson Editor ****** Tales From the Far Side By Jim Brown I just completed a week in Grindelwald Switzerland where I spoke at a John Dessauer Dream Swiss Seminar. It was quite different from the seminars we produce. John Dessauer has a very loyal following for his stock newsletter (www.dessauerinvestorsworld.com) and this month he is celebrating his twentieth anniversary issue. Twenty years is a long time to be a newsletter writer. The Dow was under 1000 in Oct, 1980. There has been a lot of water and money under the bridge since then. If you could go back in time to 1980 with knowledge of the performance history of five stocks to provide you with a trading income, which ones would you take back? It would be a hard choice. IBM maybe? Microsoft, Intel and certainly Cisco and Dell. All of these were trading at mere fractions of their current prices or in the case of Dell, not at all. Talk about a ground floor opportunity! Many of the people here have been taking John's newsletter for many years. Newsletter readers are very loyal. When you find something that works you want to stick with it. Many of our subscribers have been with OIN since our first year. In the newsletter business you suffer with the peaks and valleys in the markets as though you had caused them. Readers accustomed to making money in bullish markets lose money in bearish markets, like we have seen in September. The market shifts for traders not in the market every day are subtle and devious. Multiple down days with triple digit relief rallies often convince traders the worst is over, come on back, when the market has cleverly set a bear trap to steal your meager funds. Warnings from editors to stay on the sidelines are ignored as too bearish and traders charge back into battle. After getting mauled by the bears traders must find someone to blame and the newsletters are the easy target. It must have been the picks, the picks were bad. Just not the quality they used to have. Many run to other newsletters in hopes of finding fortune from a different Pied Piper. Little do those traders realize that readers from that newsletter are looking for another source as well while licking their wounds from different plays. The market treats us all the same. The best of plays today are tomorrow's earnings warnings. The dogs today are tomorrow's value plays. Investing is a game of common sense where only the investors who have survived multiple market downturns and garnered wisdom from painful losses survive. I have been warning of the September drop since July and forecasting a bottom between October 10th-28th for over a month. Do you think that prevented anyone from buying calls with abandon? No! Traders with short memories have been jumping in on every rally day with the hope that this was the real thing only to see their positions dwindle with the next wave of selling. If you think the last six weeks have been rough think about the readers to John Dessauer's 20 year old newsletter. While we have only seen moves of a few hundred points recently, John's readers have seen the Dow move from 800 points to the recent stratospheric heights of 11800. The Nasdaq has soared to over 5000 and seems determined to retest 20 year lows this week. Since John is steadfastly bullish you would think all his readers were multimillionaires from following his advice to stay fully invested over the long term. Many are but because the market does not always do in the short term what we long term thinkers expect there are always those readers leaving to find a better mousetrap. I spoke to many who had left only to return years later to find the same stocks they had dumped when leaving to be up +200% or +300% on their return. While buy and hold stock investors are not guaranteed returns over the short term it is almost impossible to not prosper eventually. John Dessauer is not a short term stock picker based on somebody else's recommendations. John does his own leg work traveling around the globe and investigating companies individually. He talks to the people who know and then he even researches the economies of the countries involved by talking to the public at large. This Columbo like dogged determination has produced many winners over the years but John's research like any stock picker is at times trashed by the market. Nobody is perfect, nobody has an unblemished record. Whether is be Michael Murphy, Louis Navalier, John Dessauer or myself we are all at the mercy of the market. We do our best spending thousands of hours and hundreds of thousands of dollars in research so you don't have to. Still the readers listen with selective hearing and flee at the slightest mention of bearishness. After being involved with over 100 of John's longtime readers for the last week I am impressed with their dedication. They all laugh in pain at stocks like RiteAid and Cendant which should have gone up but didn't. It is a common bond, a kinship of sorts. They talk about their basis on John's stocks they have held for years. How would you like to have a basis of $.18 cents in Proctor & Gamble? Some here brag of that. Do the winners outweigh the losers? You bet! With the market down huge from the beginning of this year John's portfolio of stocks is still positive. Sure there have been losers but the winners outweigh them. Nobody is perfect, we only need to look at the holes in our own portfolios to prove that, but I think John has the right idea for the buy and hold investor. Buy good stocks with a bright outlook on market dips and hold on. Sounds simple but many other stock pickers fail at this every year. John has weathered 20 years and still going strong. My hats off to him and in the cut throat world of competing stock pickers and back stabbers I feel fortunate to have him as a friend. For those who take John's newsletter I have taken his top picks for October and created a special editors plays section this weekend. Since this is an option newsletter I have charted each one and listed the options I would play in lieu of owning stock. The plays listed are more long term than I would personally normally recommend but with the market in the tank this is an ideal time for some long term thinking. Good Luck from Grindelwald Switzerland! Jim Brown ***************************** OCTOBER OPTIONS WORKSHOP EXPO DENVER - Oct 27-30th ***************************** Just a few spaces left. Don't miss this spectacular event. Sign up today! http://www.OptionInvestor.com/workshop Have you taken the time to see what you will be missing? This is a power packed event from morning till night. Check out the outline: http://www.OptionInvestor.com/workshop/outline Here is the quest speaker list: Steve Nison - Steve Nison is not only the world's foremost expert on Candlestick Charting techniques, he's the author of the two top selling, definitive books on the topic: Japanese Candlestick Charting Techniques and Beyond Candlesticks. He has trained and lectured investors and investment firms around the world on how to integrate these methods into their investment strategies. Steve will be speaking on "Spotting Early Reversal Signals." ************** Gregory Spears - Author of the Spear Report. Gregory developed a unique "consensus" concept for picking stocks in the early 90's while trying to make sense of the myriad of financial newsletters in his mailbox. His unique "consensus" system has developed an average gain of 100% for his recommendations over the normal holding period which is about six months. The Spear Report is quoted or featured in dozens of financial publications and Greg's financial workshops are "standing room only." Greg will be speaking on the top market gurus, "What they are saying and why they are wrong." **************** Dick Arms - Richard Arms is the inventor of the Arms Index, otherwise known as the TRIN. He has been analyzing the market for over 35 years and is a constant visitor to CNBC as a market commentator. His work in technical analysis is older than most of the brokers now trading with his tools. His newest invention is the Equivolume charting system, the first new charting system since the 1930s. Dick will be explaining the TRIN and how we should use it to trade as well as his new Equivolume charting system. This will be an interactive session with plenty of attendee questions that Dick will answer. ***************** Stan Kim - Stan has a MBA from UCLA and worked for IBM for many years. He realized he did not want to work for anybody else and did not want anybody working for him. He has been a full time trader ever since. He is the founder of the Snail Trader system of trading and is currently working on a new book. Stan consults and mentors traders and investment firms. His topic will be, "How to Trade for a Living When You Are Not a Stock Guru." ***************** Jim Crimmins - Jim is president of TradersAccounting.com and a noted authority on tax issues for traders. Jim is an expert on gaining Trader Status and puts on seminars on "Tax Free Trading" around the country. If you have been to a money show you have probably seen Jim with flocks of people around him. Jim IS the authority on tax accounting for traders! Jim will be speaking on Trader Status, Mark to Market and IRS do's and don'ts for traders. ***************** Add to this distinguished list above the fifteen plus speakers from OptionInvestor and you have an event you cannot afford to miss. The current roster of staff instructors includes: Ryan Nelson - Managing Editor, OptionInvestor.com Chris Verhaegh - Options 101/102 Writer and Option Strategist Steve Rhoads - Technical Analysis Instructor Molly Evans - OIN Staff writer Lee Lowell - OIN Staff writer Austin Passamonte - Editor IS, Staff Writer Buzz Lynn - Editor, Sector Trader, Staff Writer Mark Phillips - Leaps Editor, OIN Vince Dowd - Spreads Specialist Louis Horkan - Managing Editor, Premier Investor Steve Pekarek - Editor, SplitTrader.com Jeff Bailey - Editor, Premier Briefing Matt Russ - Editor, OptionInvestor.com Jim Brown - Head Option Guy For a course outline click here: http://www.OptionInvestor.com/workshop/outline The workshop is scheduled for the last weekend in October. Four days of intense, power packed option education. This is not your standard seminar. We start by putting you up in a luxury hotel and feeding you five times a day. We feed your mind from a fire hose as well with more than 15 speakers and special guests to educate you on every option strategy. There is something for everybody. Just mingling with over 15 professional option traders for four days is worth the price of admission. The entire weekend for the low price of $3795. All meals, snacks and favors are provided and you will get a professionally produced set of videos of the entire weekend. Need we say more? If you want to learn how to be a better trader, making more and losing less then you should come to this seminar. We guarantee you will not be disappointed! For more info and to sign up: http://www.OptionInvestor.com/workshop ********************************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 ***************************************************************** ************** EDITOR'S PLAYS ************** Looking At John Dessauer's Picks Watching the market from Switzerland this week was a exercise in frustration. The U.S. markets open at 3:30PM and close at 10:PM Swiss time. While that has some advantages for traders who like to sleep late the disadvantage for U.S. traders is watching CNN in Swiss/German and not understanding a word. October is playing out just like I expected and the earnings warnings continue to hammer tech stocks and non-tech stocks alike. Once earnings start and numbers are reported that are not as bleak as thought the bottom will form and we will be off to the races again. The fourth quarter is expected to be a good quarter and those expectations will start the ball rolling. The last three years the low for the quarter has been either October 8th, 18th and 28th. While I do not think the lucky "8" series will continue I do expect a bottom in the next week or two. This makes long term plays entered over the next two weeks pretty safe if I am right. The plays below range from simple LEAPs to combination plays to take advantage of the dips and reduce the cost of each play. Consider your own risk factor and account parameters before writing puts on these stocks. Conservative investors can simply buy the calls/LEAPS and aggressive investors can utilize the combinations. These are John Dessauer's top picks for October. These picks are for long term stock investors and I am putting the option spin on them for OIN readers. Now you have the best of both worlds. Leverage is the name of the option game! Read and believe. ******* Nokia - $37.69 Jan-2003 $45 LEAP Nokia is the largest cell phone company in the world and has been beat up by the perception that cell phones are slowing. John feels that cell phones are going to be just like any other disposable electronic gadget. With new features coming out daily the phone you have today is probably not the phone you will have next year. This will promote upside surprises for cell phone makers. John's recommendation is to buy NOK under $42 and Fridays sell off gives us a great entrypoint for this play. ERICY - 2003 $15 Call LEAP Ericsson is the other half of the cell phone duo. John is recommending buying equal amounts of NOK and ERICY to cover all the bases. His buy is for ERICY under $15. By selling the put you can decrease the cost of your investment to only $1.00. Worst case you will be put the stock at $20 but after deducting the $5 premium received you will have a $15 basis and still have the $6 leap as well. GBLX - 2003 $30 Call LEAP @ $7.50 Global Crossing is the fiber leader for worldwide connections. Much more reliable than satellites GBLX is positioning to be the carrier of choice in this decade. GBLX may retest $25. Try to limit buy the 2003-$30 call leap at $7.50. Aggressive players can sell the Nov-$25 put for $30 on the same dip to redce your cost in the leap to $4.50. Worst case you own GBLX stock at $22 if you are put. AT&T (T) $30 2003 Call Leap Sorry John, I don't think AT&T has found a bottom yet. With another downgrade on Friday we still have a good chance of seeing $25. I think institutions will see the value there and hold the line. Wait for $25 and buy the $30 2003-LEAP for $5.00 and aggressive players can sell the $30 2001 put for $5.00. This gives you a free play if T can get back to $30 before January expirations. Lucent - 2003 $30 Call LEAP Lucent appears to have found a bottom and now might be a good time to open a long term leap position. The 2003 leaps are expensive given the possibilities of Lucent going back to $60-$80. Aggressive traders could sell the 2001 $40 put for $7.63 to reduce the call expense. LSI - 2003 $30 call leap LSI Logic is still declining and real support should be in the $22-$23 area. Wait for that price and place a limit order of $9.00 for the 2003 $30 call leap. You should also be able to sell the Jan-2001 $25 put for about $5 and decrease the cost of the play to $4.00. Worst case you own the stock for $20 and still have the leap. WAIT FOR THE BOTTOM! PHG - April $40 call @ $4.00 Phillips is rapidly approaching support at $37. Wait for that support to hold before starting this play. Buy the $40 April calls @ $4.00 (cheaper then) since PHG has no leaps. Aggressive players can sell the April $40 puts for about $6.00 and have an immediate profit on the play of $2.00. If you are put you will own the stock at $34. WAIT FOR SUPPORT TO HOLD NOVL - Jan-2002 $10 Call LEAP @ $3.63 Novell is dead on strong support at $8 and should only go up from here when the market recovers. NOVL is rapidly building out new products to steal business from the current networking leaders. Once the story is known the stock could retrn to recent highs. Buy the 2002 $10 leap for $3.63 and sell the 2001 $10 put for $1.63 to reduce your cost to $2.00. PPE - April $12.50 Call Park Place Entertainment has been beaten up by the market drop and profit taking from the recent run. Appoaching support at $12 and lack of expectation on this stock also provides us a cheap option. Today's price is only $1.81 and should go to $1.25 or less once $12 is tested. WAIT FOR THE BOUNCE OFF SUPPORT! RAD - 2003 Call leap @ $2.12 Dead on suport at $4.00 and no where to go but up. Great same store numbers last week and new things happening at the company. You can get into this play for free and anything over $5.00 two years from now is profit. This is a real company with real potential. CD - May 2001 $10 Calls Cendant is another Dessauer turnaround hopeful. At $2 for a May call it is a cheap bet. Sell the put as well and have a free play. This is for aggressive players only since CD is unloved at this time. Cash value of the company is a majority of the stock price so there is limited risk but still risk. SFA - March $55 call SFA has been on a roller coaster but found support at $53. A high risk play would be the March $55 call at $10.00. Lots of premium but not as much time as a leap. (no leaps on SFA) Sell the Mar $55 put for $10 as well and have a free play but the risk is owning SFA at $55 if it trades under $55 in March. AHO - March $30 call Royal Ahold does not have leaps but the March $30 call is very cheap at $1.88. Sell the March $25 put for $1.00 and your cost is only $.88 to play this stock for five months. FTU - 2003 $35 call leap First Union looks like it is trying to mount a recovery after a two year decline. The 2003 leaps could be a big winner if it comes true. No put play here. Just buy the leaps for $6.75 and sell them if FTU drops under $30 again. BGP - May $15 call @ $1.50 Any time you can get a $1.50 call for seven months of time you have minimum risk. Borders Group has held support with the Nasdaq crashing daily. Sell the May $15 put for $2.50 and have a $1.00 profit on the trade and seven months to watch. AXA - April $55 call Axa Financial is maintaining a positive trend in a terrible market. The April $55 call at $2.75 is a value buy I would BUY a January $50 put as insurance that the stock does not crater on profit taking soon. If it does sell the put for $5.00 or more and keep the call for a free play. AVE - April $70 Call Aventis is also maintaining a positive trend in a down market. Buy the April $70 call for $13.38. You will have $5 of intrinsic value already. Aggressive players sell the put for $11.88 and decrease your cost to $1.50 for the play. **************************** The following table shows the cost of each play using the agressive option and selling puts to reduce your cost. As you can see you can control 17,000 shares of stock worth over $500,000 for just slightly over $32,000 in capital. There is some margin requirement for holding the positions but most brokers only require 25% or $125,000. There is risk associated with options and especially with selling naked puts but as stock traders who would buy this stock anyway at these numbers using ohn Dessauer's recomendtions you have no down side risk. Today's prices are the price you would own the stock is the put is exercised. Assume 25% go down and 75% go up (we are near a market bottom) then you would capture the upside on 12,000 shares and only suffer from the 5,000 that went down. Assuming John is right about these stocks over the next two years there could be significant upside potential for minimum expense. As always consider the risk before entering any trade and consult your broker about the suitability of options in your account. (assumes 10 contracts of each) Stock Option Stock 1000 Cost(10) Price Shares AHO 880 28.12 28120 AVE 1500 76.75 76750 AXA 4880 51.75 51750 ERICY 1000 15.38 15380 BGP -1000 13.25 13250 CD 0 9.88 9880 NOVL 2000 9.50 9500 LSI 4000 28.25 28250 FTU 6750 32.44 32440 NOK 2120 37.69 37690 GBLX 4500 27.00 27000 T 0 27.25 27250 LU 7000 33.25 33250 PHG -2000 38.50 38500 PPE 1250 13.13 13130 RAD -250 3.94 3940 SFA 0 53.94 53940 TOTAL $ 32,630 $500,020 Good Luck Jim Brown Editor ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=594 ************************************************************** **************** MARKET SENTIMENT **************** A Giant's World By Austin Passamonte Do you want us to make our market bulls feel good or just tell the truth? Considering we report without bias here, we'll do our best to accomplish both. Individual traders are predominantly bullish by nature and are hoping & praying for the sell off to stop. It will do so when good and ready, which could be any day or some distance into the future. Technical signals are dismal. All moving averages lie overhead and now offer resistance instead of support. Flat and inclined trend line measures of support are falling left and right. Bullish and/or neutral wedge formations have been violated to the downside. Not pretty. The VIX has not spiked out of it's daily Bollinger Band over the past several sessions even as we expect it to soar. Fear hasn't reached the panic stage just yet. Commercial traders within the equity and interest-rate markets continue to hold record net-short positions and in some case built upon them as of Tuesday, 10/03 data compilation. Some of these shorts may have been covered for massive gain since then but not nearly all. It takes time to scale in and out of these huge holdings, and that's what we now await. The very moment S&P 500 institutional traders go from extreme net short to flat or long we can be sure our next firm bottom is in place. Not a moment before. Will the markets completely crash from here? It's possible but we expect a relief rally to ensue first. One like May or August would be nice for the bulls but might be asking for much. The media are doing an admirable job of trying to stem the slide but to no avail. Friday saw most of CNBC's anchors working hard to steer bullish words out of analysts' mouths. Even Ralph Bloch got led pretty hard, but didn't bite. Non-biased reporting? Might they depend on momentum traders and unabashed call buyers to thrive? A bit of reality news; Friday just past 11:00am EST a major player bought 3,000+ OEX Oct 750 puts for 10 points each. He or she didn't try to wish the market, they just plunked down over $3 million in the direction it wanted to go. Well before the close these contracts traded at 13 for a cool $900,000+ increase to the trade. To our knowledge it remains open. That's what we must do. Trade puts when the market insists on going down and prosper. There was a time in the distant past when only calls would work but those days may be gone for quite awhile. The next rally will emerge exactly from market conditions like these and could happen this week. Favorable earnings and fourth- quarter projections would be just the ticket. Anything less might not be. This is and will continue to be a volatile trader's market. We are traders and should revel in that fact. Follow the day's action without bias and generous profits are right there for the taking in front of us! ***** VIX Friday 10/06 close; 25.67 30-yr Bonds Friday 10/06 close; 5.85% 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. Saturday (10/07/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 790 - 775 13,120 6,245 2.10 770 - 755 8,880 14,253 .62 OEX close: 750.97 Support: 745 - 730 89 1,523 118.24*** 725 - 710 10 13,502 1350.20*** Maximum calls: 800/8,331 Maximum puts : 720/5,574 Moving Averages 10 DMA 761 20 DMA 775 50 DMA 796 200 DMA 783 NASDAQ 100 Index (NDX/QQQ) Resistance: 92 - 90 40,364 27,610 1.46 89 - 87 16,194 35,995 .45 86 - 84 7,195 27,032 .27*** QQQ(NDX)close: 83.00 Support: 82 - 80 1,442 17,116 11.87 79 - 77 128 8,329 65.07*** 76 - 74 295 11,017 37.35 Maximum calls: 90/15,459 Maximum puts : 90/16,408 Moving Averages 10 DMA 87 20 DMA 89 50 DMA 92 200 DMA 94 S&P 500 (SPX) Resistance: 1475 22,346 17,246 1.30 1450 13,274 11,422 1.16 1425 8,793 15,322 .57 SPX close: 1408.99 Support: 1400 1,689 12,444 7.37 1375 993 8,916 8.98 1350 522 22,374 42.86*** Maximum calls: 1475/22,346 Maximum puts : 1350/22,374 Moving Averages 10 DMA 1432 20 DMA 1449 50 DMA 1470 200 DMA 1447 ***** CBOT Commitment Of Traders Report: Friday 10/06 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 Open Interest Net Value 848 -753 Total Open Interest % (12.82% net-long) (5.15% net-short) NASDAQ 100 Open Interest Net Value -204 -708 Total Open Interest % (1.22% net-short) (2.10% net-short) S&P 500 Open Interest Net Value 50277 -57890 Total Open Interest % (29.17% net-long) (9.76% net-short) What COT Data Tells Us: Commercial positions in S&P 500 and DJIA remain at or above five-year extreme short levels. Small specs continue to build net-long extremes in SP00S but have given ground in DJIA and switched over to net-short in NDX. (Not Shown) Commercial positions in 10-Year Note and 30-Year Bond markets at or near five-year extreme net-short levels. Small specs are building 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 10/03 by COT (Canadian Dollar commercial traders entering five-year extreme net-long positions. Expect this currency to rally, possibly mild affect on U.S./Canadian based-companies in trade exchange) Bullish: Fed's finished Benign government reports Large disparity in overhead call/put ratios Bearish: Oil Prices (falling) COT reports Recent pre-warnings, downgrades (brutal) Broad market's break of critical M/A support Market leaders major breakdowns ************** MARKET POSTURE ************** As of Market Close - Sunday, 10/08/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,596 10,500 10,900 ** SPX S&P 500 1,408 1,390 1,445 ** COMPX NASD Composite 3,361 3,250 3,750 OEX S&P 100 750 735 770 ** RUT Russell 2000 491 485 525 NDX NASD 100 3,311 3,250 3,700 MSH High Tech 902 890 975 BTK Biotech 669 650 790 XCI Hardware 1,222 1,200 1,350 ** GSO.X Software 398 385 445 SOX Semiconductor 799 775 960 ** NWX Networking 1,131 1,105 1,210 ** INX Internet 419 385 510 ** BIX Banking 601 585 635 ** XBD Brokerage 615 595 655 ** IUX Insurance 762 735 790 RLX Retail 784 765 835 ** DRG Drug 409 370 425 HCX Healthcare 842 825 860 XAL Airline 145 138 152 OIX Oil & Gas 305 296 332 Ten alerts were triggered at support on Friday, but risk/reward characteristics are starting to favor the bulls and at some point, the bears will be locking in their gains. Since September 01, 88 support alerts were triggered compared to just 28 alerts at resistance. Lowering support (DOW, SPX, OEX, XCI, SOX, NWX, INX, BIX, XBD, RLX) Lowering resistance (SPX, OEX, MSH, XBD). There were no upward adjustments made to support or resistance. ************************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=607 ************************************************************** *************** ASK THE ANALYST *************** In The Coming Season Of Ghosts and Ghouls, Remember... By Eric Utley Trading losses are evil and must be exorcised. The majority of responses I received to last week's trading problem involved cutting the hypothetical loss right away. For those who missed the problem last week, here it is. We'll discuss the situation below. You've been watching your favorite fiber optic stock, Bull Fiber Optic Company (BFOC), climb for the past two months to one record high after another. Amazingly, BFOC has not fallen below its 10- dma during the last two months. You decide that it's finally time to reap the sweet rewards of the fiber optic sector and purchase calls on BFOC. In your search for the ideal entry point, you decide to buy BFOC the next time the stock bounces off its 10- dma...After a weak opening on the NASDAQ, due to a profit warning from some fruit-related computer company, BFOC gaps down, and like clockwork finds support at its 10-dma. You notice the buyers are stepping in near the 10-dma with good volume, and BFOC begins to drift higher. And like that, you're in for 10 front-month, at-the-money calls... After returning from your usual hour-long lunch break, you flip on your computer screen to discover that after bouncing off its 10-dma, BFOC ran into resistance and headed southward in a big way, following a major sell-off in the NASDAQ. Upon closer inspection, you discover BFOC has fallen nearly two points below its 10-dma for the first time in two months. As a result of the market dip and BFOC's trip, your calls are now worth 30% less than you paid for them earlier in the day. Do you: A) Cut your losses and get out of town B) Double up your position in hopes of a quick rebound C) Hold tight and see what happens I'm sure you have read about the importance of cutting losses many times here at OIN. As such, the problem with BFOC might seem somewhat simple or even rudimentary. However, the ability to cut losses quickly and decisively is often what separates successful traders from other market participants. The reason losses are so difficult to take is that hope too often clouds objective judgment and decision making. Hope and fear are the two most driving emotions in financial markets, and the biggest threats to traders. Hope is so dangerous because it is generally relied upon at the wrong time in trading decisions. If traders are looking at a loss in a position, the only emotion to rely upon is fear - that is the fear of losing more money. The fact that BFOC fell right after we bought calls, and subsequently fell through its 10-dma, should've revealed a serious warning and change in the market. When the market tells us we made a wrong trading decision in the form of a loss, we must heed its warning and cut losses for fear of greater declines in our trading capital. In our BFOC problem, as in all trading decisions, a multitude of factors will influence the direction of the trade. When faced with a loss, traders need to step back in an objective manner and take the best course of action through either cutting their loss or holding onto a losing position if conditions warrant. The old adage, 'profits take care of themselves, but losses never do' is one of the most important cliches to remember. Losses are much more difficult to attend, but are necessary to contain for the vitality of your trading account. For what it's worth, my answer to the BFOC problem is the same as the majority of the responses I received from OI readers, which was A - cut losses and get out of town. Most of the charts you're about to read below are pretty ugly as a result of the current market environment. I'd like to see a few "good looking" stocks sent in for review next week to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- Emulex - EMLX This stock looks good now - what do you think? - Ed EMLX, of course, was the victim of the notorious hoax back in late August. Unfortunately for EMLX shareholders, the stock suffered bearish ramifications from the false news release for nearly two weeks after the actual event. However, EMLX appears to have shaken off the ill-effects of the hoax, and has held up very well over the past month in spite of the weakness in the broader tech sector. EMLX manufactures a broad line of products used in data storage applications. The data storage area, as highlighted in my review of EMC last week, continues to be a good place to put money to work in this current market. What's more, EMLX announced a 2-for-1 stock split after the close last Friday, which sent the stock over $5 higher in after hours trading. I have wrote in the past that I'm a big fan of stock splits when announced at the right time relative to the market environment and recent stock performance. I like the fact that EMLX declared a split after the stock had rallied from its August lows by over 100%. However, the current market is fickle, which presents risks in several forms. Though, EMLX's split announcement could help the stock to outperform early next week. Furthermore, the company announces earnings on October 18th, which could also be a near-term catalyst. The EMLX chart below was created using a weekly timeframe, which goes all the way back to 1997. The majority of the charts I will use today are weekly charts. I thought it would be pertinent to step back and take a look at the bigger picture in light of the recent market conditions through using longer time frames on our chart observations. EMLX has traced a very interesting chart pattern over the course of this year's trading. The stock suffered huge losses during last spring's bear market, but has since rebounded to recover almost 50% of its lost ground. Let me repeat that. EMLX has retraced nearly 50% of its losses from last spring. EMLX's big drop last spring and subsequent retracement is the only thing that gives me reason to pause. The company has great fundamentals and is in a great sector of technology, but it's weekly chart is somewhat concerning. EMLX wll definitely be an interesting stock to watch into the end of the year. If EMLX gets above the $130 level, it could be in the clear for takeoff. Otherwise, if the stock begins to rollover at $130, it might be wise to get out of the way. ---------------------------- Genentech - DNA Any thoughts on DNA (Genentech)? I have been following this one lately, and am wondering when a good time to position might be? Once again, thanks for your help. - Larry Genentech is one of the leading biotech stocks with earnings, a deep product line, and strong research and development efforts. The company gathers human genetic data and transforms that information into medicines to treat various diseases and ailments. Genentech has a total of nine pharmaceuticals, which include the likes of Rituxan for the treatment of non-Hodgkins lymphoma and Herceptin, which is used to help treat breast cancer. Genentech's deep product pipeline and already existing blockbuster drugs will help the company increase earnings by about 25% over the next several years. The company trades at a fairly high valuation relative to its earnings growth. But, the stock is cheap relative to competitors IMNX and MEDI. As I have stated in the past, I'm bullish on the long-term outlook for the biotech sector. And, when I say long-term, I'm talking about five, maybe ten years down the road. As such, I think DNA is an excellent way to reap long-term rewards from the biotech sector. But, in the near-term, DNA might experience some problems. The biotech sector has held up relatively well during the past month while the broader market fell under control of the bears. However, it would appear that the bears are beginning to claw their way into the biotech sector based upon the trading of the BTK.X (Amex Biotech Index) and DNA last week. DNA has been on a course of relatively higher lows and highs since late May. However, that course might be in danger given DNA's big drop last Friday. However, DNA's upcoming 2-for-1 stock split might save the stock from a sell-off. The distribution date for the split is October 24th. ---------------------------- Cisco Systems - CSCO, Oracle - ORCL, Intel - INTC I picked CSCO, ORCL, and INTC. The reason I picked these three because I evaluate them based on their past earnings and their market cap. I know that these three are very volatile, yet I am confident that I will make money from them soon. The past weeks, these three stocks that I picked are not doing so well. In other words, I'm losing money on all of them. Do you think I will have a chance to gain my principle next year? Can you please give me more insights on these three tech stocks? Thank you so much for your time. - Cristina I normally don't fulfill multiple requests due to a lack of space and time. However, Cristina, the three stocks you requested are widely held and watched, and have been the center of recent debate. The leadership ability of CSCO, ORCL, and INTC has come into question lately and has caused problems for the broader indices, especially the COMPX. Both CSCO's and ORCL's fundamentals and respective business lines appear to bullish as ever, aside from the attack on the latter last week. INTC on the other hand, has suffered a serious setback because of its earnings warning. Albeit small, it was a warning nonetheless. Let's take a close look at the three charts of CSCO, ORCL, and INTC and see what the market is trying to tell us. It's hard to say when you'll earn your money back, Christina. However, by looking over the charts, we can see what risk might be left in owning the stocks. As long as CSCO trades above the $50 level I think the stock will be fine. If $50 breaks, look out below! CSCO has had an incredible run during the great bull market, and it appears the stock has fallen into an extended consolidation. That tells us the stock simply needed to take a break, which is perfectly normal. Sometimes the break (consolidation) can last for several years. The important thing is for CSCO to remain within its trading range, and not fall below key support levels; $50 is THE key support level. Furthermore, the long-term trendline which CSCO has used to roll higher for the past three years is very well intact. Despite the recent turmoil in the Tech sector, I think CSCO looks pretty good here. This might be a good place to look for a long-term entry point. But, again, if CSCO falls below $50, look out! ORCL is another stock that has held up relatively well despite the bear attacks and rumor mongers last week. ORCL has spent the last six months trading between a low of $60 and a high of $80. With that said, the $60 level is the key support area for ORCL. If ORCL falls below $60, the stock could easily fall to $40. Aside from the possibility of the $60 level failing, ORCL doesn't look too bad right here. Akin to CSCO, ORCL is simply digesting extraordinary gains that were earned over the past two years. The fact that the stock is not giving back the majority of its gains bodes very well for its long-term outlook. Profits might be taken from ORCL using its trading range between $60 and $80. As for the long-term outlook, as long as the stock trades above $60, all is well, you'll just have to wait for the bull market to return. INTC's situation is somewhat different from both ORCL's and CSCO's, and we can conclude so just by looking at the chart. INTC, the greatest manufacturing company in the history of the world, warned of lower earnings about two weeks ago. INTC's warning cause serious, serious damage to the stock. Since INTC has been a publicly traded company, its stock has never fallen with the magnitude as it has during the last four weeks. I think INTC's recent miss has changed the stock for quite some time to come. I could be very wrong, though. However, the market is telling us that something has changed with INTC. And, it may be for the worse. ---------------------------- Yahoo! - YHOO I have liked following Yahoo in the past. It's been in a down trend lately. Could you give your comments? - Thanks, Cheryl You are absolutely correct, Cheryl, YHOO is in a definite downtrend. Will earnings break the bears' hold on YHOO? Maybe. I have heard the polar extremes of bullish and bearish cases argued for YHOO ahead of the company's earnings report. The bulls say the concerns over a slowdown in online advertising spending has been blown out of proportion, and YHOO is due for a quick rebound back above $100. The bulls argue that Wall Street will receive confirmation of YHOO's solid business and growth prospects when the company YHOO reports its third-quarter results next Tuesday. The bears, who by the way refer to the stock as BOO HOO, are calling for YHOO to fall as low as $20. I'm not making that up! I've read reports that suggest YHOO could fall as low as $20. Of course, the market will be the final judge, but it's scary to think of the ramifications of YHOO at $20. Until recently, YHOO was one of the last standing Internet generals. But, over the past two weeks the stock has traced one new 52-week low after another. For nearly five months, YHOO spent most of its time between the $120 and $130 levels. That means a great deal of investors put on positions around those levels, which made it a place of value and efficiency. However, the fact that YHOO's value area failed in early September, and the stock subsequently slide below $100 tells me something has seriously changed with the stock. The market is definitely testing the pain tolerance of YHOO bulls. If the bulls prevail, YHOO could move back above $100, where I'd like to see it trade for several weeks and form a new value area. However, if the bears win, YHOO could be headed for serious trouble. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* For the week of October 9, 2000 Monday ====== None Scheduled Tuesday ======= None Scheduled Wednesday ========= Wholesale Inventories Aug Forecast: 0.60% Previous: 0.30% Thursday ======== Initial Claims 7-Oct Forecast: NA Previous: NA Export Prices ex-ag. Sep Forecast: NA Previous: -0.20% 2Import Prices ex-oil Sep Forecast: NA Previous: 0.10% Friday ====== Retail Sales Sep Forecast: 0.40% Previous: 0.20% Retail Sales ex-auto Sep Forecast: 0.40% Previous: 0.30% PPI Sep Forecast: 0.40% Previous: -0.20% Core PPI Sep Forecast: 0.10% Previous: 0.10% Michigan Sentiment Oct Forecast: NA Previous: 106.8 Week of October 16th 16-Oct Business Inventories 17-Oct Industrial Production 17-Oct Capacity Utilization 18-Oct CPI 18-Oct Core CPI 18-Oct Housing Starts 18-Oct Building Permits 19-Oct Trade Balance 19-Oct Initial Claims 19-Oct Philadelphia Fed ************************Advertisement************************* PRIVATEBUY.COM(tm). SHOP ONLINE. ANONYMOUSLY. ANYWHERE. You no longer need to submit your real name, credit card number, or sensitive personal information when you shop online! PrivateBuy.com is the first private debit account that allows you to make purchases safely and anonymously at ANY merchant online. 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The Option Investor Newsletter Sunday 10-08-2000 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/100800_2.asp ******************************************* FREE ONE DAY TRADING SEMINAR Miami - Tuesday - October-10th. Phoenix/Scottsdale - Tuesday - October 17th ******************************************* OptionInvestor.com, Preferred Trade and E-Signal will hold a FREE seminar complete with handouts, freebies, door prizes and over six hours of solid information which can improve your trading results. Lightning trades, real time quotes, the best option strategies and a FREE BREAKFAST and LUNCH! How can you go wrong? It is free but you have to register so we can order food. http://www.OptionInvestor.com/seminar/free/ ************** TRADERS CORNER ************** Watch The Bond And Stock Offerings By Mary Redmond After suffering through September, the markets seem to be at a critical turning point. One way or the other, the indices will probably make a big move in the fourth quarter. In order to gain some insight into market money flows and internals, it can be instructive to watch the stock and bond market new offerings along with other money flow indicators. We are starting to see indications that it is becoming increasingly difficult for corporations to finance their expansion needs through stock and bond offerings. This week may have been a litmus test for near term IPO issuance. According to Edgar online, approximately $1.8 bln was raised in IPOs, which is significantly less than the amount scheduled to debut. Eight new companies were brought public, including three large high-profile IPOs, which had successful debuts with strong after market performances. However, several IPOs were withdrawn. Investment bankers can't force IPOs out the door if the institutional demand isn't there. This can free up cash to be invested in other stocks in the indices. The moderation of IPO demand may benefit the market in the coming months. It is an optimistic sign that AGCX started trading Friday afternoon amidst the sell off. If institutions were bearish, there would be far less stock successfully brought public. Equity mutual funds took in approximately $2 bln last week, with the majority of the money going to growth funds. The four week moving average of cash to equity funds is $2 bln, steady and consistent, but far lower than previous levels. The Investment Company Institute reported that retail money market funds took in $3.06 bln, and institutional money market funds took in $8.35 bln. The cash deposits to money market funds continue to be significantly larger than deposits to equity funds. There is a lot of interesting information on the Treasury's web site. Of particular interest to traders and investors is the U.S. savings rate and capital flow. The current savings rate is around 6%. In addition, we have experienced a strong flow of capital into U.S. securities from foreigners, which seems unlikely to abate in the near future. Last year, foreign investors purchased approximately $107 bln worth of U.S. securities. This year the net purchases have already totaled over $90 bln in the first two quarters. In contrast, U.S. investors have been net sellers of foreign securities with the exception of corporate takeovers and stock swaps. Money is flowing into the U.S. market in huge quantities. Although the Treasury Dept. has stabilized the Euro, it seems unlikely to rally anytime soon. Historically, the U.S. stock market has performed best during periods when the dollar was strong against other currencies. The flows to the U.S. markets from foreign investors are likely to increase if our markets rally further. The market seemed to overreact to the Fed's hawkish statements about inflation this week. The statements seemed surprising, considering that the recent economic indicators have been benign. Perhaps more important than economic indicators is the spread between Treasuries and high yield corporate bonds. Last month, high yield corporate debt rates were averaging around 13.6%. The current high yield corporate debt rate is averaging 12.5%. Medium risk corporate debt is averaging 9.4% and low risk (BBB or better) is averaging 9.12%. High yield bond issuance has fallen by approximately 50% this year. High yield corporate debt rates are holding down some sectors like CLECs and some internet stocks which otherwise might be rallying. This can hinder corporate expansion in some areas, and ultimately decrease the rate of economic growth. The credit situation is also hurt by the net outflow from bond funds we have seen this year. Bond funds have experienced a net outflow of over $40 bln in the last 12 months. This limits available capital for corporate financing needs. Junk bond funds have had serious redemption problems for months. Some people seem to be concerned about the Fed's bias toward tightening (although it isn't really called a bias anymore.) However, considering the potential credit crunch developing, more interest rate hikes in the near term future seem unlikely. A credit crunch could ultimately decrease our GDP, and there is a real possibility of a rate cut in 2001. We may need to consider another factor. The Treasury has been buying back government bonds aggressively since January of 2000. This has helped to keep long term rates low. With the election approaching, and both parties discussing the taxation and spending programs they think are most likely to get them elected, there may be a perception of uncertainty regarding the continuance of this program. The public's perceptions of future budget surplus projections can vary depending on the mood of the moment, and future projections can never be completely accurate or precise. There are options on the Treasury yield, which are generally not as liquid as the futures. However, if someone anticipated higher or lower interest rates then purchasing a yield option could be a strategy. For example, the March TYX 60 puts made a slight move up this week. If rates went to 5.5% this could be profitable. However, it is generally not wise to buy Treasury yield options without any experience in the bond markets. It is interesting to look at the implied volatility of Greenpoint Financial(GPT) since it can reveal some surprising facts about options pricing and volatility. GPT got clobbered earlier this year during the severe rotation from "old economy" to "new economy" stocks. In April, the implied volatility of the options increased to 60, partly due to the steep drop it experienced. The steeper the rise or fall, the bigger the change in the implied volatility numbers. The stock has moved up over 10 points to over $29 in the last few months, and the implied volatility of the options has actually dropped from 60 to 28.5. This is partly because the move up was slow, steady and gradual. Anyone who kept an eye on the VIX would have noticed that it moved up out of the daily trading range it had been in for the last few weeks of 23.5 to 24.5. Some traders can use the VIX as a daily trading tool, as high and low spikes are often accurate buy and sell signals. However, a high VIX toward the end of the day in a down trending market could be a dangerous buy signal, unless it is used in combination with other technical indicators. Last year, the Nasdaq entered October just under 3000 and ended the year at 4000 by rallying over 1000 points from late October to the end of December. Many people were concerned about Y2K computer problems. In fact, some market analysts actually predicted a world wide recession in 2000 because of this problem. The year before the Nasdaq rallied nearly 80% from November to the Spring. So there is still hope, despite the chronic grumbling of the bears. ****** OEX Spread Trading in a Volatile Market By Lynda Schuepp You can make money even when you're wrong if you trade spreads. I was dead wrong about market direction, but by legging out of the spread I made about a 40% return in a week. My favorite trading vehicle is the OEX because of its liquidity and manageable volatility (most of the time). Because it is made up of the S&P 100 stocks, you inherently have diversification. I put on a bullish put spread on the OEX a week ago Thursday and took half of my position off on Friday and actually made money, even though I was wrong about market direction. At the time, the OEX had just come off a double bottom and broke up through the 200 period moving average. I said to myself, "At last, the bottom has come." You have to understand I am a hopeless optimist who has a hard time being bearish. If I didn't do spreads, I'd be dead because of my strong bullishness. In fact, I lost a lot of money simply trading directionally (naked puts). Trading spreads allows you to make a bet on market direction, but because you have a long and a short leg, you have a built in insurance policy. If you're wrong, the other leg will make up most of your loss. My plan was to sell an October At-The-Money(ATM) put, expecting the market to rise before the October sell off, and at the same time buy an In-The-Money(ITM) November put that could be sold after the October bloodshed. It looked to me that the market was poised for a run-up. The OEX was trading at about 770, so I bought 10 contracts of the November 760 put, 10 points in-the-money for $15.75. I like to buy as much time as I can afford. This allows me time to be wrong OR right(hopefully). Next, I sold 10 contracts of the October 770 put for $12.88. The net debit was $2.88. The reason I chose the October 770 strike was because first, it was ATM which gives you the highest time value premium, and secondly I thought that this would be a significant support level on the way back down. After I initiated the trade, the OEX climbed to 775 and then turned over and broke down through the 200 period moving average. The OEX continued down, with the 200 MA now acting as resistance. The pattern continued until Tuesday's gap up open. During that time, the value of my spread remained relatively unchanged. What I lost on the short leg, I gained on the long leg. When Tuesday morning came, I began to feel confident again. The OEX climbed back up to 774 but then did a nose-dive. The OEX fell 17 points to 757. I froze. I questioned my judgment, but when I checked my position, it was actually up, because of the increase in volatility. However, the market makers had widened the bid-ask spread so much that it was questionable whether I'd get a good fill, so I sat on my position. Thursday morning, the OEX made it's first tweezer bottom at 752. This is a bullish signal. The OEX rose back above the 200 MA to a high of 768 which was above the 200 MA. This was more like it. In my past life, I would have sold my long puts here and rode the short put (now naked) up for the ride. Actually, this could have been successful IF AND ONLY IF I could have foreseen the top on Friday morning before the meteoric plunge. Having been burnt badly on this strategy in the past, I now leg out short leg first. The unemployment figures came out at 8:30 AM EDT. The futures whipsawed up and down in the pre-market, indicating great uncertainty. This market is very fragile right now. Any piece of bad news causes further declines while the good news doesn't seem to buoy up the market. I expected the market to drop once they were done "spinning" the numbers, so I bought back 5 contracts of my short leg near the open for $12.38. After commissions, this was about a break even. I watched the OEX tank to 752. Next came a second tweezer bottom at the same level as the one on Wednesday, a really bullish sign. Also 750 is a very significant level for the OEX. I thought the fact that it bounced indicated very strong support so I sold five contracts of my long puts for $17, for a profit of 1.25 points. That's a 43% profit in a little over a week. If I wasn't so blindly bullish, I could have ridden my long put all the way to $28.50 for an 80% profit! But I really can't complain. I now have 5 contracts of the 760/770 spread left and my adjusted cost is almost nothing ($0.63), so I can afford to play this one out. I'm still bullish and think that we will see a run up. If so, I can buy back my 770's for a profit and then let the October mayhem kick in and then I can sell my 760 puts. Hopefully, we aren't seeing the October bloodbath a little early this year, because I'm really tempted to sell my long puts at this level but I keep telling myself, "don't do it, you've been burned before." ************************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=595 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* NT - Nortel Networks $62.31 -4.44 (+2.81 last week) See details in sector list Put Play of the Day: ******************** CRA - Celera Genomics $79.38 (-20.25 last week) See details in sector list ************************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=608 ************************************************************** ************* DAILY RESULTS ************* Index Last Week Dow 10596.54 74.00 Nasdaq 3361.01 -311.81 $OEX 750.97 -8.86 $SPX 1408.99 -27.52 $RUT 491.02 -30.35 $TRAN 2543.65 46.66 $VIX 25.67 1.82 Calls QCOM 77.81 6.56 Breakout from ascending wedge last week! NT 62.31 2.81 $61 level could launch NT into earnings LLY 82.94 1.81 Benefiting from rotation out of Tech CHKP 157.81 0.31 Minor victory last week bodes well ADBE 147.63 -7.63 Split in 12 days, and lookin' for a run CIEN 110.56 -12.25 Coiled spring ready to burst MERQ 143.00 -13.75 Leading Tech stock with rebound potential SEBL 92.44 -18.88 Capable of quick rebound to recent high Puts AETH 82.25 -23.25 Couldn't hold the century mark!!! INKT 91.00 -23.00 New, high Tech equates to high risk CRA 79.38 -20.25 New, breakdown below trendline looks bad AKAM 36.19 -16.32 Pain in AKAM last week, loss accelerating QLGC 74.25 -13.75 Deteriorating in a weak Tech sector CPTH 50.75 -10.00 Path of least resistance is down DIGX 36.94 -9.94 Consolidation not helping DIGX much CMOS 24.19 -5.81 Dropped, stabilized last Friday JBL 51.25 -5.50 Guilty with weak box makers and chips ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS No dropped calls PUTS CMOS $24.19 (-5.81) Despite the bloodshed in the broader tech sector last Friday, CMOS finished modestly higher. The bounce in CMOS can be attributed to the firming up of the Chip Equipment sector, which was induced by favorable analyst remarks. Both Bank of America and Robertson Stephens commented on the Chip Equipment sector Friday, which buoyed CMOS and its closest competitors TER and AMAT. Despite Friday's advance, CMOS' current slide could continue and take the stock to the $20 level. However, in light of the CMOS' impressive showing last Friday, we're playing it safe and taking our well-earned profits off the table. A near-term bottom might be signaled should CMOS advance back above the $25 level, while a failure at $22.50 could carry the stock lower. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** No new calls today ***********************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=613 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 10-08-2000 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/100800_3.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=596 ************************************************************** ****************** CURRENT CALL PLAYS ****************** CHKP - Check Point Software $157.81 (+0.31 last week) Check Point Software is in the Internet security business. The company develops, markets and supports Internet security solutions for enterprise networks and service providers. CHKP's three main product lines include security products, traffic control for bandwidth management, and finally management products. CHKP delivers solutions that enable secure, reliable and manageable communications over any Internet Protocol network including the Internet, intranets and extranets. In light of the NASDAQ's 8.5% slide last week, CHKP's minor gains could be viewed as a major victory. Although, CHKP's small triumph didn't come easy. The bulls and bears fought a fierce battle last week, which lead to volatile trading in CHKP. The stock traded as high as $171 (its 52-week high) and as low as $143.81 over the course of last week's trading. CHKP's increase in volatility created plenty of profit opportunities and generated several solid entry points. And, until the NASDAQ finds bottom, we'll continue to look to CHKP's wide swings for profit opportunities. However, as proved last week, we must exercise prudent judgment going forward and take full advantage of stops to minimize risk. The rebound from day lows in the NASDAQ late last Friday boosted CHKP $4 higher and back above its 10-dma at $156. CHKP's ascending 10-dma could be a good area to trade around as the stock continues to churn higher along that line. Given CHKP's close above its 10-dma, and the NASDAQ's late-day rebound last Friday, aggressive traders might consider entering new positions at current levels, or wait for a pop back above the $160 level. A more conservative approach might be to wait for CHKP to gain momentum and look to enter new positions if the stock trades above $162.50, after confirming strength in the NASDAQ. If however, the NASDAQ continues to fall earlier next week, watch for CHKP to find support at its 10-dma ($156) or a little lower at the $155 level. If the $155 support level fails, traders might consider waiting for CHKP to stabilize around lower support levels at $150 or $145. No matter the entry strategy, consider using stops to protect profits and/or limit losses. Bullish comments from analysts at Robinson Humphrey last Friday could portend a rally ahead of CHKP's third-quarter earnings report. The analysts said CHKP will likely exceed revenue estimates, which should lead to an upside surprise in EPS. CHKP has surpassed estimates by a substantial margin in its last four quarters and, anticipation for upside earnings could be the catalyst we need to take our play higher. CHKP will report its third-quarter results on October 18th, before the market opens. ***October contracts expire in 2 weeks*** BUY CALL OCT-150 KGE-JJ OI=1721 at $14.38 SL=10.75 BUY CALL OCT-155*KGE-JK OI= 273 at $11.13 SL= 8.25 BUY CALL OCT-160 KGE-JL OI= 759 at $ 8.50 SL= 6.00 BUY CALL NOV-155 KGE-KK OI= 10 at $18.25 SL=13.25 BUY CALL NOV-160 KGE-KL OI= 168 at $15.88 SL=11.50 Picked on Sep 3rd at $149.44 P/E = 205 Change since picked +8.38 52-week high=$171.00 Analysts Ratings 13-5-0-0-0 52-week low =$ 20.25 Last earnings 06/00 est= 0.21 actual= 0.25 Next earnings 10-20 est= 0.26 versus= 0.15 Average Daily Volume = 2.17 mln SEBL - Siebel Systems $92.44 (-18.88 last week) Siebel Systems is a provider of eBusiness applications. Their products are used by organizations that wish to enhance their ability to sell to, market to and service their customers across multiple channels such as the Web, call centers, resellers, retail and dealer networks. SEBL's products and services are available in industry-specific versions. The founder and CEO, Mr. Siebel got his start as a salesman for the Oracle Corporation. There's no denying the fact that SEBL suffered the brunt of the bears' attacks on the NASDAQ last week. What's more, the earnings warnings from competitors Computer Associates (CA) and BMC Software (BMCS), plus the rumors surrounding ORCL, compounded to wreak utter havoc on our play. The +19 points we had worked so hard for two weeks ago were just as swiftly taken away last week by the bears. However, SEBL is very capable of rebounding, which is the reason the stock remains on the call list. If the NASDAQ bounces back from last week's bruising, SEBL could very well lead the bulls' charge higher. Furthermore, SEBL has a five-month trendline that began at its May lows during the last bear raid. SEBL has tested its trendline several times over the last five months, with Friday's decline marking the fifth such retest. The supportive trendline now sits near the $90 level, which was the site of SEBL's intraday low last Friday. After SEBL traded down to its trendline last Friday, the stock quickly rebounded $2 higher into the close. SEBL's rebound was encouraging to witness and it might project higher prices ahead. Given SEBL's bounce off the $90 level, aggressive traders could consider entry at current levels or on a rally above resistance at $95. The more conservative traders might wait for SEBL to regain lost ground and look to enter new positions if the stock trades above $100. But, be cognizant of SEBL's descending 10-dma at $101, which might present problems. Additionally, if the NASDAQ's slide continues next week and SEBL falls below its trendline at the $90 level, it might be wise to step aside from the play. Dain Rauscher Wessels issued positive comments on SEBL late last Friday, which might help the stock to rebound early next week. Analysts at the brokerage reported they were bullish on SEBL's prospects in the near-term. ***October contracts expire in 2 weeks*** BUY CALL OCT- 90*EZG-JR OI= 543 at $ 8.25 SL=6.00 BUY CALL OCT- 95 EZG-JS OI=2211 at $ 5.75 SL=3.75 BUY CALL OCT-100 EZG-JT OI=2103 at $ 3.88 SL=2.50 BUY CALL NOV- 95 EZG-KS OI= 700 at $10.38 SL=7.50 BUY CALL NOV-100 EZG-KT OI=2326 at $ 8.25 SL=6.00 Picked on Sep 17th at $99.00 P/E = 429 Change since picked +6.56 52-week high=$118.44 Analysts Ratings 17-5-0-0-0 52-week low =$ 16.88 Last earnings 06/00 est= 0.09 actual= 0.11 Next earnings 10-17 est= 0.11 versus= 0.07 Average Daily Volume = 5.38 mln MERQ - Mercury Interactive $143.00 (-13.75 last week) As a provider of integrated performance management solutions that enable businesses to test and monitor their Internet applications, MERQ is looking for growing e-commerce demand to continue to fuel its business. The company's products perform such tasks as analyzing and eliminating Web site performance bottlenecks and automating quality assurance testing. MERQ's client base spans a wide range of industries including Internet companies such as Amazon.com and America Online, infrastructure companies Ariba and Oracle, as well as Apple Computer, Cisco Systems and Ford Motor Company. Let it be said that we are not afraid of volatile stocks. In fact, as option traders, we thrive on volatility. Which is why despite the 30+ point range from top to bottom in MERQ's trading last week, we are holding the play. With many Tech stocks declining since early September, MERQ for the most part has bucked the trend, moving ever higher until last week. MERQ's recent rally was backed by a string of positive news. With a complete lack of announcements last week, MERQ's fate was left in the hands of the NASDAQ, with its earnings warnings and general weakness. Despite last week, there is much to be positive about in looking at MERQ's chart. The $130 level was a strong resistance level for MERQ, which recently became support. The support held up when MERQ hit that level on Wednesday morning, leading to a strong bounce. Friday's close above $140 on 130% of ADV, suggests that buyers are willing to step back into MERQ, even in current market conditions. But make no mistake, this is a volatile high-risk stock so make sure stop losses are set after entering positions. Friday's close put MERQ back above it's 5-dma at $142.64. Conservative traders will be watch for MERQ to rally above its 10-dma, near strong resistance at $148 before entering, but make sure the buyers are back in force. Aggressive traders and bargain hunters could set their sights on a bounce off support at $130 and $135, with the more risk tolerant considering a bounce off $140. MERQ's earnings date is confirmed for October 17th, less than 10 days away. If market sentiment turns positive, an earnings run is not out of the question. As well, any positive news from the company could see the stock return to its upward trending ways. ***October contracts expire in 2 weeks*** BUY CALL OCT-140 RBF-JH OI=271 at $12.75 SL= 9.75 BUY CALL OCT-145*RBF-JI OI=331 at $10.38 SL= 7.50 BUY CALL OCT-150 RBF-JJ OI=632 at $ 8.00 SL= 5.75 BUY CALL NOV-145 RBF-KI OI= 23 at $17.75 SL=13.00 BUY CALL NOV-150 RBF-KJ OI=399 at $15.63 SL=11.25 SELL PUT OCT-135 RBF-VG OI= 71 at $ 7.38 SL=10.50 (See risks of selling puts in play legend) Picked on Sep 24th at $148.94 P/E = 285 Change since picked -5.94 52-week high=$162.50 Analysts Ratings 9-3-1-0-0 52-week low =$ 28.38 Last earnings 07/00 est= 0.12 actual= 0.14 Next earnings 10-17 est= 0.16 versus= 0.11 Average Daily Volume = 1.57 mln LLY - Eli Lilly & Co. $82.94 (+1.81 last week) Lilly is a leading innovation-driven pharmaceutical corporation. They are developing best-in-class pharmaceutical products by applying the latest research from their own worldwide laboratories and from collaborations with well-known scientific organizations. As their products save and improve lives, they also save overall health care costs: they are often less expensive than other forms of health care, such as surgery and hospitalization. Lilly employs more than 31,000 people worldwide and markets their medicines in 179 countries. Lilly has major research and development facilities in 9 countries and conducts clinical trials in more than 30 countries. While Tech stocks have been in decline since the beginning of September, LLY has been quietly putting together impressive gains. In recovering from a 29% one-day plunge in early August when the Federal Appeals court ruled in favor of Barr Laboratories, allowing them to sell a generic version of Prozac, LLY had much overhead resistance to overcome. Finding support above the $65 level in early September, LLY did just that, trading in an upward sloping regression channel as investors ran to leading drug stocks for shelter. Even in a slowing economy, the demand for medicine is perceived as inelastic. As a result, peers such as MRK, PFE and SGP have also traded higher in recent weeks. Now, near the bottom of the trading channel, with Tech fears becoming more feverish, the possibility for LLY extending its rally is likely. When we started this play on Thursday, one of the entry points we mentioned was a bounce off strong support at the 50-dma, now at $81.30. We got just that on Friday as some early morning jitters, due to the jobless rate hitting a 30-year low, brought on the sellers. Looking at the 30-minute chart, we can see the turnaround as selling during amateur hour led to a recovery, confirmed with volume. Friday's close did however, put LLY back below its 100-dma, at $84.50. A break above that level would provide conservative traders with an entry while aggressive traders will be watching for a bounce off the 100-dma. A bounce off the 5-and 10-dma, converged near $82.50, is another target to shoot for but confirm the bounce with volume. With earnings scheduled for October 19th, positive sector sentiment, and strong moving average support, a break above the 100-dma could see LLY rally to the top of its trading channel, currently at $90. ***October contracts expire in 2 weeks*** BUY CALL OCT-75 LLY-JO OI=2559 at $8.50 SL=6.00 BUY CALL OCT-80*LLY-JP OI=4780 at $4.38 SL=2.75 BUY CALL OCT-85 LLY-JQ OI=4385 at $1.69 SL=0.75 BUY CALL NOV-85 LLY-KQ OI= 620 at $3.50 SL=1.75 BUY CALL NOV-90 LLY-KR OI=1136 at $1.81 SL=1.00 Picked on Oct 5th at $84.56 P/E = 31 Change since picked -1.63 52-week high=$109.00 Analysts Ratings 6-11-13-0-0 52-week low =$ 54.00 Last earnings 06/00 est= 0.60 actual= 0.61 Next earnings 10-19 est= 0.71 versus= 0.62 Average Daily Volume = 3.81 mln ADBE - Adobe Systems $147.63 -0.88 (-7.63 last 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. An inauspicious beginning to our split run, ADBE finally fell victim to profit taking. Just to recap, ADBE announced a 2-for-1 stock split with their earnings report three weeks ago, and the good news was followed by a buying frenzy that propelled shares to a new all-time high of $170.19 last Tuesday. As the stock ran out of willing buyers, profit taking came into play, and coupled with weakness on the NASDAQ, our play was down more than 17% at its low Friday. After plunging through support at $145, ADBE successfully tested the $140 support level Friday morning, and fortunately it held. Following such a swift decline, only aggressive traders with nerves of steel would have bought that bounce, as the requisite volume confirmation was nowhere in sight. But, by the end of the day, the stock had stumbled its way to a recovery over the $145-146 support level, and on volume nearly double the ADV. While not exactly a strong recovery, it was enough to keep our play alive to fight another day. So where do we go from here? The NASDAQ is still looking weak, and ADBE has seen both its Stochastics and MACD move sharply into negative territory, so we need to exercise extreme caution in initiating new plays. Rather than buying dips near the $140 level, should they materialize next week, a more prudent strategy would seem to be waiting for buying volume to push our play up from current levels first. In the absence of a supportive market, our play will have a hard time clearing the congestion that exists between $147-152. Cautious traders will want to wait for ADBE to clear this zone before initiating new positions. Once our play gets its head back above water, we expect it to have a nice run into its split which is now only 12 trading days away. Showing up a little late to the party, Tucker Anthony initiated coverage on ADBE with a Buy rating on Wednesday. That was the day after the stock reached a near-term peak near $170, and finally succumbed to the law of gravity and profit taking. Nevertheless, ADBE has widespread support from the analyst community, with 11 of the 13 who follow the stock rating it either a Buy or Strong Buy. ***October contracts expire in 2 weeks*** BUY CALL OCT-145 AXX-JI OI=910 at $10.25 SL= 7.25 BUY CALL OCT-150*AXX-JJ OI=695 at $ 7.75 SL= 5.50 BUY CALL NOV-150 AXX-KJ OI=252 at $13.88 SL=10.50 BUY CALL NOV-155 AXX-KK OI= 93 at $11.63 SL= 8.75 BUY CALL JAN-150 AXX-AJ OI=525 at $22.13 SL=16.50 SELL PUT OCT-135 AXX-VG OI=692 at $ 3.25 SL= 5.25 (See risks of selling puts in play legend) Picked on Oct 3rd at $163.44 P/E = 62 Change since picked -15.81 52-week high=$170.19 Analysts Ratings 5-6-2-0-0 52-week low =$ 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 = 1.74 mln NT - Nortel Networks $62.31 -4.44 (+2.81 last week) Nortel Networks is a leading global supplier of data and telephony network solutions and services. Covering all the bases, its business consists of the design, development, manufacture, marketing, sale, financing, installation, servicing and support of networks for both carrier and enterprise customers. With a presence in over 150 countries, NT serves local, long-distance, personal communications services and cellular mobile communications companies as well as cable television companies, Internet service providers and utilities. No longer just a little Canadian upstart, NT has managed to carve itself a nice leadership position in the Optical Networking space. Through both strong internal growth and an acquisition strategy that is second only to that of rival CSCO, NT has built a business that leads its industry in terms of technology, while still growing revenue and earnings at a blistering pace. While our play is having a hard time advancing, its impressive strength relative to the broader technology market is attributable to the strength of the Optical Networking sector and NT's impressive track record of increasing revenue growth. Revenue growth is now running just below 50% year-over-year, and the company has met or exceeded earnings estimates every quarter since the 4th quarter of 1996. This is the kind of consistency that investors are looking for in this unsettled market. In an environment where stocks are being downgraded left and right, NT continues to enjoy almost universal support from the analyst community (see news below). Considering that the continued bearish market sentiment handed the NASDAQ an 8.5% loss, NT actually had a pretty decent week. The low from September 28th ($57.94) wasn't challenged all week, and we are seeing support materialize near $61. Though well below its July high of $89, our play looks like it is building a base for a run into its next earnings report, scheduled for October 24th. The bulls and the bears are battling for control, resulting in volume 25% above the ADV all last week. This tug- of-war will likely be resolved in favor of the bulls, but the big question is when. Aggressive traders can take advantage of dips to support, opening new positions as the buyers regain control and propel the price higher on strong volume. A more cautious approach may be the most prudent however. If that sounds like it is more your style, wait for the buyers to wrest control and push through resistance near $67. No matter which way you play it, keep a tight reign on your position with stop losses. As we have seen recently, this market can turn on a dime, and even leading stocks suffer casualties. NT announced Thursday that it has completed its acquisition of Alteon WebSystems, adding yet another notch to the leading optical networking company's belt. If you think that analyst upgrades are the fuel of stock appreciation, then NT should be just about topped off by now. On Tuesday, CSFB reiterated their Strong Buy rating, followed by ING Barings initiating coverage with a Strong Buy and Sands Brothers starting coverage with a Buy rating yesterday. NT now has a total of 35 analysts following the stock of which 31 of them rate the stock either a Buy or Strong Buy. ***October contracts expire in 2 weeks*** BUY CALL OCT-60*NTV-JL OI=21334 at $5.88 SL=3.75 BUY CALL OCT-65 NTV-JM OI=58750 at $3.00 SL=1.50 BUY CALL NOV-60 NTV-KL OI= 3018 at $8.63 SL=6.00 BUY CALL NOV-65 NTV-KM OI= 1995 at $6.00 SL=4.00 BUY CALL NOV-70 NTV-KN OI= 5502 at $4.00 SL=2.50 SELL PUT OCT-60 NTV-VL OI=21092 at $3.13 SL=5.00 (See risks of selling puts in play legend) Picked on Oct 5th at $66.75 P/E = N/A Change since picked -4.44 52-week high=$89.00 Analysts Ratings 21-11-2-1-1 52-week low =$24.78 Last earnings 07/00 est= 0.14 actual= 0.18 Next earnings 10-24 est= 0.16 versus= 0.14 Average Daily Volume = 13.10 mln CIEN - Ciena Corp $110.56 (-12.25 last week) CIENA Corporation's market-leading optical networking systems form the core for the new era of networks and services worldwide. CIENA's LightWork architecture enables next- generation optical services to transmit signals simultaneously over the same circuit. This multiplexing system changes the fundamental economics of service-provider networks by simplifying the network and reducing the cost to operate it. About 45% of sales come from outside the US markets. Is CIEN's "sexy" optical status losing out to the "safer" economy stocks? Traders recently rode CIEN up to another all- time high ($136.25) on September 25th, but unfortunately profit taking and a wobbly market took CIEN down a few notches. Robust volume ushered in both the stock's ascent and descent, which indicates the battle of the bulls and bears is going strong. The volatile share price is currently channeling primarily between $110 and $120. The coiling spring will eventually let go and send CIEN on a fervent run. The question of which direction is obviously a concern. On one hand, there's the stock's strong moves amid rallying conditions, but on the other is the peculiar coverage CIEN received this week. First there was Centennial Capital Management who started new coverage on CIEN with a Sell and a one-to-three-month price target of $88. Then came a ST Underperform and $103 price target from Bluestone Capital Partners. As weird as it sounds, we need to be cautious; especially taking into account the market conditions. Play it safe. Consider waiting for CIEN to resume a definitive uptrend and move through $120 before jumping into new plays. If you're strategizing a risky entry off the 30-dma ($110.69) or 5- dma ($114.76), keep stops particularly tight. This week, Cienna announced it will open a new office in Hong Kong in an effort to increase its global presence and to keep pace with the demand for its intelligent optical networking systems. ***October contracts expire in 2 weeks*** BUY CALL OCT-105 UEE-JA OI= 2734 at $11.38 SL=8.50 BUY CALL OCT-110*UEE-JB OI= 2597 at $ 8.50 SL=6.00 BUY CALL OCT-115 UEE-JC OI= 3893 at $ 6.38 SL=4.50 BUY CALL NOV-115 UEZ-KC OI= 346 at $11.38 SL=8.50 BUY CALL NOV-120 UEZ-KD OI= 2607 at $ 9.25 SL=6.75 Picked on Sep 24th at $120.75 P/E = 546 Change since picked -10.19 52-week high=$136.25 Analysts Ratings 9-9-0-0-1 52-week low =$ 14.69 Last earnings 06/00 est= 0.17 actual= 0.19 Next earnings 12-07 est= 0.24 versus= 0.03 Average Daily Volume = 7.29 mln QCOM - Qualcomm Inc $77.81 (+6.56 last 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. QCOM's ascending wedge in the $71 to $75 range indicated a potential strong volume break to the upside. QCOM just needed a burst of energy to make it over the $80 hill. As the NASDAQ violated key support and closed to the underside of 3400 this week, QCOM held tight. Given the recent selling, this was no easy feat for a tech stock . But she's the little engine that could! The NASDAQ's relief rally on Wednesday provided optimum conditions for QCOM's coiling spring to burst. The upward propulsion sent QCOM soaring towards $80! The fractional miss was a letdown to the day's bullish performance. However, QCOM saw the topside of $80 on 2.3 times the average volume the next day! Despite the profit taking on Friday, QCOM closed strong above previous resistance at $75 and the 5-dma ($76.59). This is certainly a bullish indication that QCOM can withstand the gyrations of the broader markets. Any relief in the NASDAQ next week would certainly give QCOM a welcomed boost. Another strong break over $80 would warrant an entry, but given the recent profit taking, utilize stop losses More on the Asian front last week. On 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. In other words, Qualcomm will benefit no matter which standard is used because of CDMA royalties. 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. ***October contracts expire in 2 weeks*** BUY CALL OCT-70 AAO-JN OI=21021 at $9.50 SL=6.50 BUY CALL OCT-75*AAF-JO OI=19296 at $6.00 SL=4.00 BUY CALL OCT-80 AAF-JP OI=16478 at $3.50 SL=1.75 BUY CALL NOV-75 AAF-KO OI= 4187 at $9.50 SL=6.50 BUY CALL NOV-80 AAF-KP OI= 4661 at $7.25 SL=5.00 Picked on Sep 17th at $66.25 P/E = 92 Change since picked +11.56 52-week high=$200.00 Analysts Ratings 8-9-3-0-0 52-week low =$ 47.25 Last earnings 06/00 est= 0.27 actual= 0.27 Next earnings 11-02 est= 0.24 versus= 0.23 Average Daily Volume = 14.5 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=609 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 10-08-2000 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/100800_4.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=597 ************************************************************** ************* NEW PUT PLAYS ************* INKT - Inktomi Corporation $91.00 (-23.00 last week) If you have a need for speed on the Internet, INKT is a highly recognized company to consider. They specialize in delivering high content data through their caching application network at high and reliable rates. Reputable companies such as AOL and Excite@Home have come to rely on INKT's technology to help them meet their high speed customer demands online. The company also offers sophisticated search engines used by AOL and Lycos which offer more detailed search criteria than the competition. High risk, high-tech companies that have not been able to create some stable fundamentals for investors have been especially hit hard in our recent market environment. INKT meets this criteria and has paid the price as investors feel it's risky with numbers of a slowing economy, weakening euro, and election uncertainty at hand in the markets. Volume that came in Friday well above its average of 2.5 million shares caught our eye on the play. Further analysis shows why investors are leaving, as the stock has seen a continued technical breakdown since September 25th. At that time, INKT was unable to break above the critical 200-dma resistance and since has seen technical momentum building on the downside. Last Friday's decline broke below a key support level at $95, which many investors had hoped would form a double bottom on the play from August 3rd's rebound at that level. Instead, a very bearish candle bar formation occurred on 4-million shares, breaking support and confidence in the stock. INKT closed near its low of the day at $90.18, a new 26-week low on the play. Intraday charts show mild support at $90, so investors will want to look for INKT to break below this support before committing. Overhead resistance is now becoming formidable for INKT, as the 10, 50, and 100-dma's all converge near the $115-mark. This also offers opportunity to play a resistance bounce off the top trend channel near $109, as INKT did last Wednesday and Thursday. Investors aren't expecting much regarding earnings on Oct. 26th, as the company's recent $1.3 billion acquisition of FastForward Networks will be dilutive to the bottom line for at least two quarters. In summary, wait for INKT to trade below $90 with continued negative momentum, or look for the resistance bounce off $109. Both should be accompanied by negative market sentiment before entering new put positions. ***October contracts expire in 2 weeks*** BUY PUT OCT-100*KYQVT OI=3170 at $13.75 SL=10.50 BUY PUT OCT- 95 KYQVS OI= 722 at $10.38 SL= 7.00 BUY PUT OCT- 90 KYQVR OI= 698 at $ 7.63 SL= 5.25 Average Daily Volume = 2.30 mln CRA - Celera Genomics $79.38 (-20.25 last week) Celera was formed to usher in the digital age of medical science through the development, analysis, and interpretation of genomic, proteomic, and related biological and medical information. By combining its definitive information with proprietary technologies in computer science, software, mathematical algorithms, and molecular biology, Celera will help to accelerate the drug discovery process, elucidate pathways of disease, and transform molecular diagnostics and therapeutics into practices that have a more personal and direct impact on our lives. So far, October has not been kind to CRA. Only five trading days have passed, yet all of them have been to the downside. We are left to wonder what the rest of this much-dreaded month has in store. CRA is not alone, however. With peers such as DNA, HGSI and MLNM all finishing much lower last week, it appears that sector sympathy is the name of the game. The NASDAQ usually rallies on the backs of the Semiconductors and Biotechs. Recent weakness in the Chip sector has now spread to the Biotechs, with the Genomic issues taking the brunt of the damage. CRA, as a leading Genomic stock, is leading the way down. A late September attempt to recover back above the 200-dma was unsuccessful, leading to a steady decline into October. While the volume during that time was low, the selling action picked up last week. Unable to make it back above the psychological $100 level on Monday, CRA fell below its 50- and 100-dma on Tuesday, closing just above support at the $88. On Wednesday, the stock opened below that level, leading to a tug-of-war between the bulls and bears, ending the day in a stalemate. An early morning attempt to rally was quickly and easily rejected on Thursday, leading to more selling, which continued into Friday. With the close below $80 support last week, CRA broke to the downside and it appears there may be more selling to come. An entry at current levels could be considered, but make sure that resistance at $80 holds CRA down before entering. The next level of support for CRA is at $75. With the Merrill Lynch Biotech HOLDR (BBH) sitting just above its 200-dma, a break below that level could be the confirmation conservative traders need to enter this play. ***October contracts expire in 2 weeks*** BUY PUT OCT-85 CZA-VQ OI=149 at $9.88 SL=7.00 BUY PUT OCT-80*CZA-VP OI=204 at $6.88 SL=5.00 BUY PUT OCT-75 CZA-VO OI=162 at $4.13 SL=2.50 Average Daily Volume = 1.19 mln ***************** CURRENT PUT PLAYS ***************** JBL - Jabil Circuit, Inc. $51.25 (-5.50 last week) Founded in suburban Detroit in 1966, Jabil Circuit, Inc. provides electronic manufacturing services for companies in the communications, personal computer, computer peripheral, automotive and consumer industries. Jabil offers its customers the total manufacturing solution including circuit design, board design from schematic, mechanical and product design, sourcing and procurement, prototype and volume board assembly, system assembly, design and implementation of product testing, direct fulfillment, warranty and repair services from 20 facilities in North America, Latin America, Europe and Asia. Jabil is one of the world´s largest electronic manufacturing services providers. Guilt by association is the theme for our play. As a leading supplier of components that go into PCs, earnings warnings from Intel and Apple have helped in keeping JBL from breaking above its 50-dma, currently sitting at $57.51. Fears of a slowdown for PCs have translated to the possibility of slowdown in demand for JBL's components. This possibility was all but confirmed this past Wednesday when Dell, a major customer of JBL, announced after the closing bell that sales would grow at a slower than expected rate this year. Prior to Dell's bombshell, JBL had been in a tight trading range, between $54 and $60. On Tuesday, JBL broke below that range, with resistance at the 10-dma, now at $54.67. Since then, the downtrend has accelerated, with the 5-dma, now at $52.22 providing further resistance. Dell's news was not well received on Thursday as the stock broke below support at the 100-dma, now at $51.93. A Friday bounce off deeply oversold conditions found resistance right at $51.93. On Friday, Deutsche Banc Alex Brown analyst Chris Whitmore initiated coverage on JBL with a Buy rating. While this helped the stock buck the market trend for the day, resistance at the 100-dma held strong. A failed rally above the 100-dma as well as the 5- and 10-dma could provide opportunities for entry but confirm a rollover before entering. The next level of support for JBL is at the $45 level, just above its 200-dma. Confirm downward direction in the $SOX before entering new plays. ***October contracts expire in 2 weeks*** BUY PUT OCT-55*JBL-VK OI=1327 at $5.38 SL=3.50 BUY PUT OCT-50 JBL-VJ OI= 860 at $2.81 SL=1.50 Average Daily Volume = 1.38 mln CPTH - Critical Path, Inc. $50.75 (-10.00 last week) Critical Path, Inc. is the dominant global provider of business-to-business Internet messaging and collaboration solutions for the wireless, Internet-centric, telecommunication and corporate markets. Critical Path, founded in 1997, helps businesses maximize the communication and revenue potentials of messaging while minimizing costs. Critical Path has built an industry-leading global infrastructure with mail centers connected to key Internet exchange points around the world. Critical Path's technology currently reaches more than 125 million end-users through its customer relationships and more than 25 million wireless devices. The path of least resistance was clearly down last week for CPTH. Coverage on the company was initiated by Adams Harkness on Monday and then on Tuesday, by CIBC World Markets, both with Strong Buy ratings. The news was largely ignored as a Monday open near resistance at the 5- and 10-dma led to a steady decline. By the end of the day, CPTH was below its last line of moving average support, the 100-dma. Tuesday was more of the same, with intra-day attempts to recover met with resistance at $58.50 and $56.50. On Wednesday, CPTH bounced strongly off support at the $49-50 level, ending the day up $6, putting the stock back above its 5- and 100-dma. This turned out to be a one-day wonder, a devious trap set by the bears, and an excellent entry into the play. Wednesday's close was just below resistance at $58.50. By Thursday morning, when it failed to break above that level, CPTH fell back below its 5- and 100-dma. A last ditch effort by the bulls to recover was denied at the $56.50 line. This set the stage for Friday's big decline. Dragged down by a weak NASDAQ, CPTH lost nearly 8% on 140% of ADV, closing just above the $50 mark. While volume in CPTH's decline has been light this past week, Friday's action bodes well for our put play. That being said, CPTH spent the week in a highly tradable range with lows at the $49-50 level and the highs at $58.50. If this range holds next week, aggressive traders will be watching for bounces off resistance at $58.50 and $56.50 for an entry. The 5-dma ($54.45) continues to weigh heavily on CPTH, as does the 100-dma ($56.78). A bounce off these levels could also provide entry points. Conservative traders will be watching for CPTH to break below $49-50 on strong volume before jumping in. With negative sentiment in the Internet sector, the bias is currently to the downside but make sure to confirm sector sympathy before initiating a play. ***October contracts expire in 2 weeks*** BUY PUT OCT-55 UPA-VK OI=109 at $7.50 SL=5.25 BUY PUT OCT-50*UPA-VJ OI= 75 at $4.38 SL=2.75 Average Daily Volume = 1.05 mln AKAM - Akamai Technologies $36.19 -3.50 (-16.31 last 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. With the accelerated selling on the NASDAQ on Friday, the pain being felt by Internet investors intensified. Once high-flying stocks like AKAM continued their descent into the basement, as buyers were nowhere to be found. It doesn't matter whether it is technical weakness in the stock, jitters over the Internet sector, economic problems, or October. Whatever the reason(s), we have been handed the makings of a nice put play. Since we added it on Tuesday, selling volume has been on the rise, clocking in at 65% above the ADV on Friday. This is a nice confirmation of the price action, which has seen our play hitting new all-time lows for the past 3 days. Stochastics is drilling deeper into oversold territory, and the nearest moving average, the 5-dma ($42.44), is more than $6 above Friday's close. Intraday resistance sits at $39, followed by $44. The 10-dma shouldn't even be a factor, as it sits clear up at $47.75. Just as nothing goes up forever, neither does it go down forever without a pause. With AKAM so deep into oversold territory, and the price action flattening out at the end of the day on Friday, an oversold bounce could be close at hand. Friday's low of $35 represents the only support level available, and it is a weak one at that. If the Internet-related selling continues next week, which seems likely at this point, look for AKAM to continue posting new lows. Selling volume that penetrates Friday's low, will provide a decent entry into the play, but an oversold bounce could yield an even better entry point as the upward momentum peters out near resistance. ***October contracts expire in 2 weeks*** BUY PUT OCT-45 RUG-VI OI=435 at $10.75 SL=8.00 BUY PUT OCT-40*RUG-VH OI=647 at $ 7.00 SL=5.00 BUY PUT NOV-40 RUG-WH OI=479 at $ 8.63 SL=6.00 BUY PUT NOV-35 RUG-WG OI= 28 at $ 5.38 SL=3.25 Average Daily Volume = 2.13 mln DIGX - Digex Inc $36.94 (-9.94 last week) DIGX is a leading provider of hosting services to businesses and organizations operating mission critical, multi-functional Web sites and Web-based applications. Their hosting services are used by some of the leading Internet companies. The company also offers value-added enterprise and professional services, including performance and security testing, monitoring, reporting and networking services. They operate two data centers in the US and one in the UK that house more than 2,300 company-owned and managed servers. Digex clients include Forbes, J. Crew, and Nissan. Typically a takeover can drive up a company's share price, but in the case with DIGX, shareholders have vehemently sold off the issue on strong volume. The September 5th announcement of Worldcom's (WCOM) successful $6 bln dollar bid for DIGX and its parent, Intermedia Communications, sent investors into a frenzy. On the news, DIGX was cut down a whopping 19.7%, or $16.63 on volume levels at ten times the ADV. The competitive move by Exodus to acquire Global Crossing's (GBLX) GlobeCenter for $6.53 mln dollars the previous week also added fuel to DIGX's downward momentum. By the end of September, DIGX fell through the last technical net at the 5-dma line and also, slid under the staunch support level at $50. Overall the share price has lost over 56% of its value in its descent, so watch for a bottom. There is currently some light support around $35; although the bearish sentiment that typically plagues the markets in October may help drive DIGX down further in the short-term. The ultimate challenge is DIGX's 52-week record of $24.50. Above, the 5-dma ($39.66) marks upper resistance and provides a reasonable measurement for entry points. But keep the stops tight if you plan on buying into further weakness. The recent lows and upcoming earnings may bring in the bargain buyers. The company is scheduled to report third-quarter earnings on October 26th. ***October contracts expire in 2 weeks*** BUY PUT OCT-45 UOM-VI OI= 34 at $9.75 SL=6.75 BUY PUT OCT-40*UOM-VH OI= 22 at $5.50 SL=3.50 BUY PUT OCT-35 UOM-VG OI=110 at $2.69 SL=1.25 Average Daily Volume = 1.24 mln AETH - Aether Systems Inc $82.25 (-23.25 last 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 stock that not long ago once commanded a lofty price of $345! Now AETH cannot even hold a price above the century mark. A prime example of the merciless marketplace. Recently too, the company staged a release of 24 mln shares into the market following the lock-up period for March's secondary offering. This event is likely a contributing factor to the downward momentum. The bearish market is, of course, the perfect environment for AETH to continue moving towards its IPO prices found below the $80 mark. The drama began on September 26th when the NASDAQ stumbled. AETH came off higher support above $120 and made a dramatic close at $106.69, down nearly 15% on the day. The sharp drop sent more investors running for cover. A distinct pattern of lower-highs and lower-lows evolved. There was some concern this week about short-term support developing at $90, but the bounces toward $100 on Wednesday provided a prime entry. The more adventurous saw their reward during Friday's session. AETH plummeted $7.75, or 8.6%. Even the more prudent traders saw the "jump on board" sign. The next objective is to move through the $80 level and in the most perfect world, dive deep. Conservative players should wait for AETH to demonstrate further weakness before jumping back into the momentum. Otherwise, use the trailing 5- dma ($89.89) for more aggressive entries. ***October contracts expire in 2 weeks*** BUY PUT OCT-90 HIZ-VR OI=38 at $13.75 SL=10.25 BUY PUT OCT-85*HIZ-VQ OI=52 at $10.50 SL= 7.50 BUY PUT OCT-80 HIZ-VP OI= 0 at $ 7.75 SL= 5.50 Wait for OI!! Average Daily Volume = 1.15 mln QLGC - Qlogic Corp $74.25 (-13.75 last week) QLogic Corporation is the leading manufacturer of fibre channel bus adapters. The company is also a designer and supplier of semiconductor and board level input/output (I/O) components They've been designing and marketing SCSI-based (small computer system interface) products for over 12 years and sells its products to server, workstation, and date peripheral makers. Blue-chip clients include Compaq, Dell, Hitachi, IBM, and Quantum Corporation. QLGC's share price rapidly deteriorated in this week's marketplace. Before Tuesday's tech sell-off, QLGC was holding its own above the $85 mark. But the downward pressure amid the market was too much for this hardware-related stock. The subsequent momentum resulted in a pattern of lower-highs and lows. By Thursday, not only had QLGC shattered any hopes of finding support at the 100-dma ($78.54), but the technical line is now serving as the upper trading band. A move through Friday's intraday bottom of $73 coupled with a slide under $70 would open the door for more QLGC losses and profits for our put play. The next line of support is found near the $60 mark. More cautious traders will wait for definitive moves through the above- mentioned levels before taking additional positions. Look too for moderate to strong volume to back any further decline. In an industry besieged with earnings warnings and serious downgrades, QLGC is poised for deeper cuts going into next week. But, as always, play it safe and set stops to protect against sharp rallies. The company is expected to report earnings around October 23rd. ***October contracts expire in 2 weeks*** BUY PUT OCT-80 QLC-VP OI=625 at $10.13 SL=7.00 BUY PUT OCT-75*QLC-VO OI=630 at $ 6.88 SL=5.00 BUY PUT OCT-70 QLC-VN OI=431 at $ 4.25 SL=2.50 Average Daily Volume = 2.69 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=610 ************************************************************** ***** LEAPS ***** October Lives Up To Its Reputation By Mark Phillips Contact Support The bears have been vindicated so far this month, as the selling in the equity markets has intensified, dragging the INDU below the 10600 level and bringing the NASDAQ within spitting distance of its May lows. While the selling on many issues seems to have been overdone, it has served to weed out the strong players from those that once had undeservedly high valuations. For those that watch for historical patterns, this should come as no great surprise - this is the pattern that we witness every year at this time. It should now be painfully clear why we recommended exiting 2001 positions several months ago. While there was still lots of time value in these options in May or June, we are now in October, and time decay has taken a big fat bite out of those premiums. This wouldn't be a problem in an up market, but historically the markets do not move in that direction during the summer and fall. October has a high likelihood of setting a bottom in place for the usual fall rally, and those of you that have been patiently waiting, are likely to see some attractive entry points materialize in the next few weeks. Next week kicks off the October earnings cycle, with heavyweights like YHOO, MOT, AMD, AMCC, and GE posting their results. The early earnings reports are likely to set the tone for the remainder of the month - disappointments will likely be met with renewed selling across the broader markets. On the other hand, a strong set of numbers from the industry leaders could go a long ways towards setting a positive tone for the market as we head toward the holidays. The one bright point in the markets is our old buddy the VIX, which finally found some life towards the end of the week. While it hit a high of 26.67 and closed out Friday's session at 25.67, it has yet to reflect the capitulation we need to see in the market. Recall that last year, the October lows were accompanied by a VIX reading above 33, so there is definitely not enough fear in this market yet. It seems entirely possible that we could see more selling before the necessary capitulation event occurs. Keep your eyes peeled and your cash safe as we roll through the stormy October seas. I have had a lot of email in recent weeks pertaining to when we drop plays and what we advise in terms of stop losses on LEAPS. While these issues have been addressed in prior articles, this seems a good time to revisit them. First, let's talk about the LEAPS playlist. It should be treated in the same way as the regular Call and Put playlist - a list of possible plays to be considered, IF an entry point presents itself. If you read the LEAPS section each weekend and then buy the new plays on the following Monday, you are missing the point and are well on your way to running your account down to zero. It is not an actual portfolio, although I frequently take positions that are listed in the playlist. There are far too many plays to manage responsibly in a single portfolio. The intent of the playlist is to provide a short list of possible plays, with a description of a prudent entry strategy. When we drop a play, that is not the signal to close out a losing position, as we are probably was past it by that point. When we drop a play, it indicates that we no longer advocate keeping the play on your radar screen awaiting a new entry point. It means the play is broken or has run its course and it is time to move on to more fertile ground. What would have happened if you had bought LEAPS on LU or YHOO the day after we added them as new plays? Hopefully you would have been stopped out for a loss, but judging from some of the email I have received, you might still be holding onto losing positions. I highlight these two plays because they promptly dropped through our critical support levels without providing an entry point. Nobody should have entered these positions, but I know that some did. Now I know that we all get caught by a fickle market from time to time, and that is why we have to use stop losses. It doesn't matter whether you are trading front-month options, LEAPS, or actually buying and selling stocks. Stop losses are the last line of defense between you and a position going to zero. Not every position goes up immediately after purchase, so while we need to take steps to protect our capital, we also need to provide some room for it to move. I think any number between 20-30% provides a good level at which to place a stop loss, although I stick to 25% for my own trading. Another approach would be to place a stop based on the movement of the stock. For instance, our YHOO play was predicated on the stock holding support at $100. Let's assume you bought the 2002 $110 LEAP the day after it was listed as a new play when the stock was trading around $107. If you had placed your stop loss just below support, say $98, then you would have been taken out of the play with a smaller loss than just using a 25% stop loss placed on the option. In either case, the decline that ensued, would have triggered your stop and you would be free to take your cash and employ it in other plays. Given the turmoil in the markets this week, we have refrained from adding any new plays, but we will be on the lookout for new opportunities as the current earnings cycle gets underway. Have a great week! Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2002 $ 45 WUE-AI $ 9.50 $50.75 434.21% 09/17/00 JAN-2003 $100 VUE-AT $32.75 $28.88 -11.83% CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $21.63 96.59% NT 11/28/99 JAN-2002 $37.5 WNT-AU $15.13 $33.38 120.59% 09/10/00 JAN-2003 $ 75 ODT-AO $27.50 $22.13 -19.55% SUNW 12/19/99 JAN-2002 $ 90 WJX-AR $22.00 $39.25 78.41% ERICY 01/30/00 JAN-2002 $16.3 WRY-AO $ 6.75 $ 4.13 -38.89% 07/23/00 JAN-2003 $ 25 VYD-AE $ 6.88 $ 3.38 -50.94% NSM 02/27/00 JAN-2002 $ 70 WUN-AN $24.25 $ 5.63 -76.80% AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $11.60 -37.73% 08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $21.30 21.71% AXP 03/12/00 JAN-2002 $46.6 WXP-AQ $ 9.33 $18.75 100.96% WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $14.13 225.55% JDSU 04/16/00 JAN-2002 $ 80 YJU-AP $39.63 $35.88 - 9.48% 08/27/00 JAN-2003 $130 VEQ-AF $55.25 $29.88 -45.93% MOT 05/14/00 JAN-2002 $36.6 WMA-AZ $ 9.54 $ 4.25 -55.45% NOK 05/21/00 JAN-2002 $ 50 IWX-AJ $17.25 $ 6.50 -62.32% 07/30/00 JAN-2003 $ 50 VOK-AJ $17.75 $ 9.88 -44.37% C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $13.13 27.30% 10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $11.88 - 3.06% AMGN 07/02/00 JAN-2002 $ 75 WQY-AO $20.75 $13.13 -36.75% JAN-2003 $ 70 VAM-AN $28.75 $22.00 -23.48% VRSN 07/02/00 JAN-2002 $190 YVS-AR $66.25 $67.88 2.45% 09/03/00 JAN-2003 $190 OVS-AR $86.63 $86.38 - 0.29% DELL 07/09/00 JAN-2002 $ 55 WDQ-AK $12.63 $ 1.25 -90.10% JAN-2003 $ 60 VDL-AL $15.38 $ 2.63 -82.93% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $16.75 - 2.22% JAN-2003 $ 70 OZG-AN $23.13 $22.50 - 2.72% HWP 07/30/00 JAN-2002 $110 WPW-AB $28.25 $15.63 -44.69% JAN-2003 $120 VHP-AD $32.63 $19.75 -39.47% EXDS 08/06/00 JAN-2002 $ 55 WZZ-AK $20.75 $13.63 -34.34% JAN-2003 $ 60 VTQ-AL $25.38 $17.75 -30.06% MFNX 08/06/00 JAN-2002 $ 40 WOF-AH $13.75 $ 5.13 -62.73% JAN-2003 $ 45 VKW-AI $15.63 $ 6.75 -56.81% GM 08/06/00 JAN-2002 $ 65 WGM-AM $ 9.88 $10.63 7.54% JAN-2003 $ 65 VGN-AM $13.25 $14.38 8.49% FRX 08/13/00 JAN-2002 $ 95 WRT-AS $31.38 $36.50 16.32% JAN-2003 $100 VFB-AT $37.38 $41.63 11.36% BRCD 08/27/00 JAN-2002 $220 YNU-AD $65.38 $64.38 - 1.54% JAN-2003 $220 OMW-AD $86.50 $85.25 - 1.45% INKT 08/27/00 JAN-2002 $130 XOR-AF $50.13 $25.63 -48.88% JAN-2003 $140 VFR-AH $60.88 $35.38 -41.89% VERT 09/03/00 JAN-2002 $ 60 YER-AL $22.13 $ 5.88 -73.45% JAN-2003 $ 60 OER-AL $28.88 $ 8.50 -70.56% CMRC 09/10/00 JAN-2002 $ 80 YCU-AP $30.13 $21.38 -29.06% JAN-2003 $ 80 OCU-AP $38.75 $29.38 -24.19% PHCM 09/10/00 JAN-2002 $ 90 YPH-AR $45.75 $45.25 - 1.09% JAN-2003 $ 90 OFO-AR $52.50 $51.25 - 2.38% QCOM 09/17/00 JAN-2002 $ 70 WBI-AN $22.50 $30.25 34.44% JAN-2003 $ 70 VLM-AN $29.63 $38.38 29.51% BRCM 09/24/00 JAN-2002 $250 YRR-AJ $77.13 $62.75 -18.64% JAN-2003 $260 OYG-AL $95.63 $81.25 -15.04% COMS 10/01/00 JAN-2002 $ 20 WTH-AD $ 6.38 $ 7.00 9.80% JAN-2003 $ 25 VTH-AE $ 7.13 $ 7.50 5.26% WCOM 10/01/00 JAN-2002 $ 35 WQM-AG $ 6.75 $ 4.25 -37.04% JAN-2003 $ 35 VQM-AG $ 9.88 $ 6.88 -30.38% Spotlight Play EXDS - Exodus Communications $45.31 Declining from its late August highs, EXDS was right back to its ascending trendline a week and a half ago, looking like an entry point could be close at hand. Then the company announced that it would be buying GBLX's Global Center web hosting operations, and the stock promptly fell another 20%. While this acquisition will likely strengthen the company's market position in the web hosting market, the current negative bias in the Internet sector has served up what is looking like a tasty entry point into our play. Support is looking solid near $40, and once the market is finished shaking out the weak hands, EXDS could have a very nice run this fall. Earnings are scheduled for October 19th after the close, and cautious investors may want to wait for any post-earnings weakness to play out before initiating new positions. After all, the market isn't showing any signs of running away to the upside in the near future, so we are unlikely to miss out on much of the stock's appreciation by waiting. Make sure the $40 level holds and then consider initiating new positions as technical indicators like Stochastics and MACD to head back into positive territory. BUY LEAP JAN-2002 $50.00 WZZ-AJ at $15.00 BUY LEAP JAN-2003 $50.00 VTQ-AJ at $20.25 New Plays None Drops DELL $25.31 The long slow decline in DELL's share price has been both painful and amazing to witness. AAPL's earnings warning heaped more pressure on the stock's narrow shoulders, along with other PC-related stocks. We decided last weekend to give our play one more chance, setting the $30 level as our maximum pain threshold. It was as though the bears were reading our column, selling the stock right through that level on Monday morning. Continued weakness on the NASDAQ pressured our play throughout the week, and then the other shoe dropped as DELL warned of their own earnings and revenue shortfall. Pointing to weak server sales and a soft European market, the #2 PC maker promptly fell to the $25 level where it appears to be finding some support. While it is hard to imagine much more downside, the company's once stellar reputation has been tarnished and until conditions improve, we cannot recommend initiating new positions. VERT $21.75 Originally added based on its ascending wedge pattern, and on optimism for a revival in the B2B Internet space, VERT turned negative in early September, when it once again failed to penetrate the $60 resistance level. As it declined near its ascending trendline (near $39), it looked like we might get a decent entry point on our play. Alas, it wasn't to be, as continued selling pressure pushed VERT below this support and in two shakes it was testing the spring lows near $30. As we held our breath wondering if we would have to drop the play, the market made up our mind for us, pushing the stock further into the basement. Friday's sharp decline was the final straw, as it came on the heels of analyst downgrades, prompted by reports indicating that some of VERT's largest customers are dissatisfied. This is not the type of report that sits well with investors in a down market, especially when the company has yet to show a profit. Until the company can present evidence that analyst fears are unfounded, VERT has no place on our play list. INKT $91.00 The Internet stocks are having a rough time lately, with even leading stocks like YHOO trading at new 52-week lows. Like VERT, INKT had formed an ascending wedge pattern over the past 6 months, and looked like it would find support near $95. Unfortunately, the bears had other ideas on Friday, as they pushed shares of the Internet software company as low as $90.13 on nearly double the ADV. Sentiment on the NASDAQ and in the Internet sector has deteriorated significantly in recent weeks, and unless earnings are surprisingly strong, it looks like these stocks will continue to languish. Given the technical violation on Friday, and the negative market sentiment, INKT no longer looks like a viable play. *********** SPLIT PLAYS *********** Time To Catch Up On Other Things By Ryan Nelson Without upside momentum, all we can do wait for the market to find its footing. If you have any hobbies, unfinished reading, or travel plans, you may want to take care of those items now while we patiently for some buyers. Split runs are the furthest thing from trader's minds right now as most would settle for a some bids. But, like always, the momentum will turn and we need to be ready so stay tuned. Once a bottom is in sight, we will be ready to add some of the split runs. Current Split Run Plays ADBE - 10/25 ex-date Current Split Candidate Plays CHKP SEBL MERQ Candidates That Are Not Current Plays BRCD NEWP ARBA EXTR RIMM CFLO BRCM MUSE JNPR VRTS VRSN AMCC RBAK SONS PMCS 10 Most Recent Announcements We Predicted DNA - 10/05 (most recent announcement) LEH - 09/20 ORCL - 09/14 SUNW - 08/17 GLW - 08/16 HWP - 08/16 CIEN - 08/15 SEBL - 08/08 SAPE - 08/01 AMD - 07/19 Major Announcements So Far This Month = 3 DNA BEC EMLX For our complete stock split calendar, click here... http://members.OptionInvestor.com/splits/index.asp Symbol Company Name Splits Payable Executable MDZ - MDS Inc. 2:1 10/10/2000 10/11/2000 LSCC - Lattice Semiconductor 2:1 10/11/2000 10/12/2000 ORCL - Oracle Corporation 2:1 10/12/2000 10/13/2000 PPRO - PurchasePro.com, Inc. 2:1 10/12/2000 10/13/2000 IMCL - Imclone Systems, Inc. 2:1 10/13/2000 10/16/2000 FLEX - Flextronics International Ltd. 2:1 10/16/2000 10/17/2000 ASF Administaff, Inc. 2:1 10/16/2000 10/17/2000 BVF - Biovail Corporation 2:1 10/16/2000 10/17/2000 MEDX - Medarex, Inc. 2:1 10/18/2000 10/19/2000 GBBK - Greater Bay Bancorp, Inc. 2:1 10/18/2000 10/19/2000 ADX - Adams Express Company 3:2 10/19/2000 10/20/2000 EXAR - Exar Corporation 2:1 10/19/2000 10/20/2000 PEO - Petroleum & Resource Fund 3:2 10/19/2000 10/20/2000 DST - DST Systems, Inc. 2:1 10/19/2000 10/20/2000 MSS - Measurement Specialties, Inc. 2:1 10/20/2000 10/23/2000 LEH - Lehman Brothers Holdings, Inc. 2:1 10/20/2000 10/23/2000 BSYS - Bisys Group, Inc. 2:1 10/20/2000 10/23/2000 NUHC - Nu Horizons Electronics 3:2 10/23/2000 10/24/2000 RNBO - Rainbow Technologies, Inc. 2:1 10/23/2000 10/24/2000 ADBE - Adobe Systems, Inc 2:1 10/24/2000 10/25/2000 DNA Genentech, Inc. 2:1 10/24/2000 10/25/2000 CMRO - Comarco, Inc. 3:2 10/27/2000 10/30/2000 HWP - Hewlett-Packard Company 2:1 10/27/2000 10/30/2000 PNS Pinnacle Data Systems 2:1 10/31/2000 11/01/2000 TEK - Tektronix, Inc. 2:1 10/31/2000 11/01/2000 AZA - ALZA Corporation 2:1 11/15/2000 11/16/2000 PSC - Philadelphia Suburban 5:4 12/01/2000 12/04/2000 SUNW - Sun Microsystems 2:1 12/05/2000 12/06/2000 BEC Beckman Coulter, Inc. 2:1 12/07/2000 12/08/2000 ***********************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=614 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 10-08-2000 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/100800_5.asp ************* COVERED CALLS ************* Position Management... By Mark Wnetrzak One of our readers requested a review of the proper management of "in-the-money" covered-call positions. In a covered-write, if the share value rises substantially after the initial position has been established, you have a number of choices. You can do nothing, get "called-out" and accept the original return that was established when the play was opened. If the option is priced near parity, you can close the position early; or, you may also choose to adjust the position to match the new outlook for the underlying issue by "rolling" the call up (or up and forward) to a higher strike price. In closing the position early, an experienced trader evaluates the cost of commissions versus the increased annualized return. A "net" order (net credit) can be used in closing a covered write to ensure a proper exit. Similar to a "Buy-Write", you would place an order to sell the stock and "buy-to-close" the sold call for a specific net credit at a price relatively close to parity. When you roll up (buy-back the current sold call and sell a higher strike call), you increase the profit potential of the position. The catch is, you surrender downside protection. The new downside break-even point will be increased by the amount of debit required to complete the transaction; the cost of the closed position minus the premium received for the new position. Thus when one rolls up, a debit is incurred and this is usually considered a negative move (placing more money at risk) by many traders. Usually, it is more beneficial to roll to a future expiration date as it reduces the debit required for the new position. It is normally not advisable to adjust to a higher strike if a 10% correction in the underlying stock price cannot be withstood (though this percentage may not be applicable to volatile stocks). As expiration nears and the time value premium disappears from the written option, you could also consider rolling forward to reduce the likelihood of early assignment and increase the overall profit potential of the position. You can buy-back the short option and sell a new, longer-term call at the same strike price or move to a different series, consistent with your outlook for the underlying issue. With deep in-the-money calls, the time value premium often vanishes long before expiration. However, as long as there is time premium left in the call, there is little risk of early assignment. In addition, you are earning time premium by remaining with the original position. As the option price (bid) falls to parity or a discount, there is a considerable probability of early exercise by arbitrageurs; floor traders who do not pay commissions for trading. When this situation occurs, you should endeavor to roll-forward or adjust the position in some manner that prevents a monetary loss through early assignment. When the share price falls below the sold strike, an investor also has several choices. Since the covered-write strategy provides a limited profit potential, it is imperative that action is taken to limit losses. Otherwise, one losing position could negate several winning positions. The simplest form of follow-up action to a decline in the value of the underlying issue is to close out the position. This exit strategy can be triggered by a percentage decline in the share value of the underlying issue or a move below a pre-determined technical support level. Rolling down is a technique often used to avoid potential loss and reduce one's cost basis in the underlying issue. Generally, an investor buys back the original call (presumably at a profit as the underlying stock has declined), and then sells a new call with a lower striking price. The idea is to provide more downside protection against a further drop in the stock price and yet offer the potential for additional income if the share value stabilizes. Though rolling down generally reduces the maximum profit potential of the covered write, obtaining additional downside protection is often the more pressing concern. The use of a more distant expiration month should also be considered when rolling down and aggressive investors may want to adjust only part of the covered call position to allow for increased profit potential. In all of these situations, one generally has a bearish outlook for the underlying issue and doesn't believe current prices will hold. The problem is that by using a longer-term call, one is reducing his profit potential for a longer period of time. Again, that could be of secondary concern. A combination of the two; rolling down half the current position near term and the other half to a longer-term call allows an investor to obtain maximum protection on at least part of his investment and still retain reasonable upside potential. In extreme cases, rolling down can only provide a locked-in loss. Although it is not a pleasant experience, it may be beneficial to make the adjustment to protect as much of the stock price decline as possible. Using near-term calls allows an investor to attempt to recover the available premium in the sold call, in the least amount of time. This bearish strategy is difficult to implement successfully, but as the overall cost basis in the position is reduced each month, an astute investor may eventually achieve a profitable outcome. The key is to evaluate the risk-reward outlook of all the possible scenarios and construct a position that fits your trading plan and your future outlook for the underlying issue. Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return CCUR 19.00 18.19 OCT 17.50 2.38 *$ 0.88 7.7% IMGN 26.19 28.88 OCT 22.50 5.50 *$ 1.81 7.6% CTIC 50.13 60.63 OCT 40.00 12.50 *$ 2.37 6.8% GLGC 24.75 22.63 OCT 20.00 6.38 *$ 1.63 6.4% RCOT 15.81 15.63 OCT 15.00 1.44 *$ 0.63 6.4% EPTO 14.00 13.19 OCT 12.50 2.50 *$ 1.00 6.3% WDC 5.75 6.13 OCT 5.00 1.19 *$ 0.44 6.2% BCGI 20.00 18.75 OCT 17.50 3.38 *$ 0.88 5.8% LBRT 30.00 22.81 OCT 22.50 9.13 *$ 1.63 5.7% ASPX 12.38 12.25 OCT 10.00 2.75 *$ 0.37 5.6% GNSS 19.31 18.13 OCT 17.50 2.63 *$ 0.82 5.3% NIKU 24.38 17.75 OCT 17.50 7.50 *$ 0.62 5.3% IMGN 21.81 28.88 OCT 17.50 5.50 *$ 1.19 5.3% MSTR 31.38 25.44 OCT 25.00 8.25 *$ 1.87 5.2% WGAT 22.88 19.56 OCT 17.50 6.63 *$ 1.25 5.0% AAS 42.28 47.75 OCT 40.00 4.00 *$ 1.72 4.9% ISIP 11.50 10.78 OCT 10.00 1.81 *$ 0.31 4.6% TRIH 32.38 33.44 OCT 30.00 3.50 *$ 1.12 4.2% EFCX 11.88 9.63 OCT 10.00 2.63 $ 0.38 3.6% SYNM 20.75 16.75 OCT 17.50 4.38 $ 0.38 2.0% KOSP 19.75 16.94 OCT 17.50 2.81 $ 0.00 0.0% CYBS 12.69 8.94 OCT 10.00 3.13 $ -0.62 0.0% WPZ 5.19 3.63 OCT 5.00 0.94 $ -0.62 0.0% NEOF 5.81 2.88 OCT 5.00 1.94 $ -0.99 0.0% PRST 20.13 15.50 OCT 17.50 3.63 $ -1.00 0.0% NETS 6.25 3.25 OCT 5.00 1.75 $ -1.25 0.0% NIKU 23.69 17.75 OCT 20.00 4.63 $ -1.31 0.0% GSTRF 11.50 7.19 OCT 10.00 2.25 $ -2.06 0.0% TIVO 26.88 16.50 OCT 22.50 6.13 $ -4.25 0.0% *$ = Stock price is above the sold striking price. Comments: In this sea of red we call the "Market" there is no luck. Silicon Valley's (SVGI) buyout by ASM Lithography was announced Monday before the open, thus we were unable to enter the play. Again, the current bearish conditions may exaggerate normal corrections, but money management (and capital preservation) dictates exiting issues that have broken down technically. Long-term investors may consider rolling down on the following issues: EFCX, SYNM, KOSP, CYBS, and PRST depending on their outlook for each issue. Tivo (TIVO) broke down on Friday and has been closed. Globalstar (GSTRF) continues to move lower and exiting should be considered. NIKU, NETS, NEOF, and WPZ should be watched closely and possibly closed on any rally. Positions Closed: Red Hat (RHAT), Ventro (VNTR), Wave Systems (WAVX) NEW PICKS ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ENMD 26.38 OCT 22.50 QMA JX 4.63 10 21.75 14 7.5% FFD 10.56 OCT 10.00 FFD JB 1.06 2098 9.50 14 11.4% INCY 38.38 OCT 35.00 IPQ JG 4.50 1106 33.88 14 7.2% PSFT 33.88 OCT 30.00 PQO JF 4.75 12069 29.13 14 6.5% QHGI 15.00 OCT 15.00 HQG JC 0.88 475 14.12 14 13.5% TKTX 45.38 OCT 35.00 UFT JG 12.00 225 33.38 14 10.5% WDC 6.13 NOV 5.00 WDC KA 1.44 483 4.69 42 4.7% Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return QHGI 15.00 OCT 15.00 HQG JC 0.88 475 14.12 14 13.5% FFD 10.56 OCT 10.00 FFD JB 1.06 2098 9.50 14 11.4% TKTX 45.38 OCT 35.00 UFT JG 12.00 225 33.38 14 10.5% ENMD 26.38 OCT 22.50 QMA JX 4.63 10 21.75 14 7.5% INCY 38.38 OCT 35.00 IPQ JG 4.50 1106 33.88 14 7.2% PSFT 33.88 OCT 30.00 PQO JF 4.75 12069 29.13 14 6.5% WDC 6.13 NOV 5.00 WDC KA 1.44 483 4.69 42 4.7% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ENMD - EntreMed $26.38 *** Making the Silver Bullet! *** EntreMed is a clinical-stage biopharmaceutical company emphasizing antiangiogenesis therapeutics that inhibit abnormal blood vessel growth associated with a broad range of diseases such as cancer, blindness and arteriosclerosis. EntreMed's strategy is to quicken development of its core technologies through collaborations and sponsored research programs with university medical departments, research companies and government laboratories. EntreMed gained the spotlight when a preliminary research report showed that the growth of the small blood vessel network feeding coronary artery plaques in mice could be reduced by giving them an angiogenesis inhibitor (Endostatin). EntreMed plans to present the first public presentation of the data from the on-going Phase I clinical trials of Endostatin in the U.S at a symposium in Amsterdam that is scheduled the week of November 7th. This was announced at the same time the company started its fourth Phase I clinical trial to explore the continuous infusion and subcutaneous administration of Endostatin. We simply favor the stage I base with a cost basis below long-term technical support. OCT 22.50 QMA JX LB=4.63 OI=10 CB=21.75 DE=14 MR=7.5% ***** FFD - Fairfield Communities $10.56 *** Stealth Breakout! *** Fairfield Communities is one of the largest vacation ownership companies in North America. The Company markets vacation products and manages resort properties that provide quality recreational experiences at 33 locations in twelve states and the Bahamas, to more than 303,000 vacation owning households. No news to explain the recent breakout that started with heavy call buying back in September, though Fairfield was once a take-over target of cruise line company Carnival. We favor the bullish breakout supported with heavy volume. As I have said before, the tape tells all! (Actually, Stan Weinstein should be credited with that quote.) OCT 10.00 FFD JB LB=1.06 OI=2098 CB=9.50 DE=14 MR=11.4% ***** INCY - Incyte Genomics $38.38 *** Stage I Biotech *** Incyte Genomics is the leading provider of an integrated platform of genomic technologies designed to aid in the understanding of the molecular basis of disease. INCY develops and markets genomic databases and partnership programs, genomic management software, micro array-based gene expression services, related reagents and services. These products, programs and services assist pharma- ceutical and biotechnology researchers with all phases of drug discovery and development including gene discovery, understanding disease pathways, identifying disease targets and the discovery and correlation of gene sequence variation to disease. Salomon Smith Barney analyst Meirav Chovav recently started coverage on Incyte with a "buy" rating and a price target of $54. In August, Motorola joined forces with Incyte to develop DNA chips. Incyte, which has recently split, has been in a stage I base for over 6 months. The stock has recently been trading in a tight range from $35 to $45 and the technicals suggest the current trend will continue. OCT 35.00 IPQ JG LB=4.50 OI=1106 CB=33.88 DE=14 MR=7.2% ***** PSFT - PeopleSoft $33.88 *** Nice Rebound! *** PeopleSoft designs, develops, markets, and supports a family of enterprise application software products for use throughout large and medium sized organizations. These organizations include corporations, higher education institutions, and federal, state, provincial and local government agencies worldwide. The company provides enterprise application software for customer management, human resource management, financial accounting, distribution, and supply chain management, along with a wide range of industry solutions. Its applications offer a high degree of flexibility, rapid implementation, scalability across multiple databases and operating systems, and low cost of ownership. PeopleSoft has also introduced several additions to its existing product lines, plus industry specific software solutions including new products for both manufacturing and public sector financial management. The company's earnings are due on or about October 17 and investors are expecting positive results. The stock has excellent technical support near our cost basis and the favorable option premiums will allow us to speculate, in a conservative manner, on the outcome of the quarterly report. OCT 30.00 PQO JF LB=4.75 OI=12069 CB=29.13 DE=14 MR=6.5% ***** QHGI - Quorum Health Group $15.00 *** Rally Mode! *** Quorum Health owns and operates acute care hospitals nationwide through its affiliates. Quorum Health Resources, a subsidiary, is the nation's largest manager of not-for-profit hospitals and also provides consulting services to hospitals. The recent rally in Quorum Health appears to be the result of the company announcing this week that it has reached understandings with the U.S. Dept. of Justice to recommend agreements to settle two qui tam lawsuits. The Hospital sector has been improving as investors have been searching for safe havens during the recent Market maelstrom. Hospital patient flows are increasing and managed-care company pricing as well as Medicare reimbursements are also rising. With the legal problems apparently behind it, Quorum Health has broken out to a new 21-month high on heavy volume. OCT 15.00 HQG JC LB=0.88 OI=475 CB=14.12 DE=14 MR=13.5% ***** TKTX - Transkaryotic $45.38 *** Waiting on the Judge! *** Transkaryotic Therapies is a biopharmaceutical company that is developing a broad and renewable product pipeline based on several proprietary platforms. Transkaryotic currently has four products in clinical development, for conditions such as anemia and hemophilia. It has been over a month since Transkaryotic's patent trial against rival Amgen was summed up in court. U.S. District Judge William Young still has not issued his ruling - so much for being expeditious. Will the decision be made before the October expiration (two weeks away) and who will it favor? To add to the mix, Transkaryotic and Genzyme reported this week that their rival experimental treatments for a rare inherited disorder known as Fabry disease both proved successful in late-stage clinical trials. Transkaryotic filed a retaliatory complaint against Genzyme in September regarding their Fabry treatment, Replagal, stating that it does not infringe U.S. Patent No. 5,356,804 and that the patent is invalid. Replagal could be the first and only treatment available for patients who suffer from Fabry disease. This play requires a high-risk tolerance and extensive due diligence. OCT 35.00 UFT JG LB=12.00 OI=225 CB=33.38 DE=14 MR=10.5% ***** November Positions ***** WDC - Western Digital $6.13 *** Cheap Speculation! *** Western Digital is a manufacturer of hard drives used for information storage in desktop computers and home entertainment electronic products. Their hard drives are designed for the desktop PC market and the high-end hard drive market. Recently they have developed hard drives specially designed for audio- visual applications, such as new video recording devices. Disk Drive manufacturers have rallied strongly buoyed by optimism that companies in this sector may return to profitability in the second half of the year. Recent agreements between Western Digital's subsidiary, Connex and SYNNEX should help Connex penetrate into the Storage Area Network and Network Attached Storage marketplace. In late September, Western Digital completed an agreement for a $125 million secured revolving credit and this week Prudential upgraded its rating. Maxtor's acquisition of Quantum HDD should spark speculation on the next company to be bought out. We favor the recent bullish move and the low risk entry point as WDC forges a stage I base. NOV 5.00 WDC KA LB=1.44 OI=483 CB=4.69 DE=42 MR=4.7% ************************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=598 ************************************************************** ************************* NAKED PUT PERCENTAGE LIST ************************* Naked Put Percentage List By Matt Russ Stock Stock Strike Option Option Margin Percent Support Symbol Price Price Symbol Price At 25% Return Level ABGX 72.13 65 AXY-VM 2.00 1803 11% 65 AGIL 73.88 65 AUG-VM 2.56 1847 14% 60 AMCC 184.00 170 AZV-VN 7.13 4600 16% 170 ANEN 119.00 110 EUA-VB 3.75 2975 13% 110 ARBA 113.75 105 IUR-VA 7.25 2844 25% 105 ARTG 69.00 70 AYQ-VN 5.00 1725 29% 60 BRCD 213.56 200 GUF-VT 5.50 5339 10% 200 BRCM 227.31 220 RDU-VD 9.38 5683 17% 215 CHKP 157.81 150 KGE-VJ 5.38 3945 14% 145 CIEN 110.75 100 UEE-VT 3.13 2769 11% 100 EXTR 99.81 90 EXR-VR 4.13 2495 17% 90 IDPH 161.13 150 IDK-VJ 4.38 4028 11% 150 MEDX 100.88 100 MZU-VT 5.50 2522 22% 100 MERQ 143.00 130 RBF-VF 4.50 3575 13% 130 MUSE 168.81 160 UZQ-VL 6.63 4220 16% 160 NEWP 160.06 150 NOQ-VJ 8.63 4002 22% 150 PDLI 98.13 90 RPV-VR 3.75 2453 15% 90 QCOM 77.81 75 AAF-VO 2.63 1945 14% 75 SEBL 92.44 90 EZG-VR 5.13 2311 22% 90 SUNW 107.50 100 SUX-VJ 3.63 2688 14% 100 VRSN 188.03 175 QVZ-VO 7.50 4701 16% 175 VRTS 130.94 120 VUQ-VD 4.38 3274 13% 120 XLNX 81.94 75 XLQ-VO 2.06 2049 10% 75 *********************** CONSERVATIVE NAKED PUTS *********************** Stick to the basics in volatile markets... By Ray Cummins Investing can be lots of fun and playing the market is the best game there is, providing you study diligently, learn the rules and acquire the necessary trading and analysis tools. In this unique competition, the education never ends, and since stocks are dynamic, ever-changing entities, investors must continuously improve their skills to be successful. When the market becomes unruly or difficult to forecast, it's important to focus on historically proven methods that provide the most accurate means of identifying primary directional trends and the character of individual issues. In most cases, the preferred technique for experienced traders is charting or technical analysis. The recent slump in technology and industrial issues highlights the broad weakness now prevalent in the stock market. It also accounts for the widespread pessimism among investors, and the rise of the doom-and-gloom analysts. However, technical traders should not be persuaded by the onslaught of profit warnings and economic factors, such as the flagging Euro, that are fashioning much of the current market sentiment. Historical charts should continue to guide your decisions and during periods of excessive pessimism, the most important patterns to study are long-term. Traders generally use daily charts for entry and exit signals but the best way to determine major support and resistance levels is through the analysis of weekly or monthly time frames. Primary support and resistance levels are especially significant during periods when the market appears to be overextended or near a potential climax and by carefully reviewing long-term cycles and trends, a trader can identify areas where significant supply or demand will likely be encountered. In addition, major reversal and continuation patterns found in daily charts also occur within both weekly and monthly periods and the significance of these formations is strikingly similar. In the Covered-Call and Naked-Put sections, our methodology of selecting stocks with chart analysis and option pricing models has been very successful regardless of the market's condition. In most cases, we take a purely technical view with regard to each individual issue and our decision-making process is based on the stock's past trading history along with its current share value and primary directional trend. We carefully analyze the price action of each candidate using a wide range of technical indicators to determine if the issue meets our minimum criteria for a favorable position. The secret is to identify relatively strong issues early in a bullish cycle where there is far less downside risk and longer time frames often provide more accurate indications in that respect. After we have compiled a list of potential stocks, a thorough review of the option premiums is conducted to determine if the overall position offers sufficient downside protection, relative to the issue's technical history and price support. Once the minimum acceptable cost basis has been established, it is relatively easy to select positions in which the return on investment warrants our participation in a play. Most traders agree that technical analysis is an art and this concept is even more apparent when we are in the throes of a bearish market environment. The best indicators can be highly unreliable when extreme emotion dictates the daily movements in stocks and it is far more difficult to earn consistent returns under these conditions. The best we can do is focus on methods that have worked well in the past and simply let the technical condition of each individual issue be our guide. In short, we use the more recent price action of the stock to alert us to favorable opportunities while at the same time relying on the longer-term patterns to determine if the movement is likely to continue. After the position is initiated, the performance of the issue will determine our future actions. If we are wrong about the character of the underlying stock, we simply exit the position and look for another potential play. The worst outcome that can occur with this approach is a modest loss in capital and usually, that limited shortfall is more than offset by other gains in the portfolio. In fact, the primary reason that novice investors achieve poor results with low risk, low return trading strategies is not due to a deficiency in play selection, but rather their inability to effectively manage failing positions for minimum loss. Of course, that's another subject entirely! Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return ASPX 12.25 12.25 OCT 10.00 0.50 *$ 0.50 17.2% ECLP 16.00 16.88 OCT 12.50 0.38 *$ 0.38 15.4% WGAT 23.31 19.56 OCT 17.50 0.56 *$ 0.56 11.7% CLTR 36.75 30.25 OCT 30.00 1.13 *$ 1.13 10.8% PLNR 19.75 16.06 OCT 15.00 0.69 *$ 0.69 10.8% NIKU 24.38 17.75 OCT 15.00 0.38 *$ 0.38 10.5% LBRT 32.44 22.81 OCT 22.50 0.63 *$ 0.63 9.6% GLGC 23.00 22.63 OCT 17.50 0.31 *$ 0.31 9.1% FNSR 48.38 42.31 OCT 40.00 0.69 *$ 0.69 8.6% ALLP 16.50 15.00 OCT 12.50 0.50 *$ 0.50 8.5% UNM 25.00 28.31 OCT 22.50 0.63 *$ 0.63 8.4% NERX 23.00 18.69 OCT 17.50 0.38 *$ 0.38 8.3% CMNT 21.00 27.25 OCT 17.50 0.56 *$ 0.56 7.4% PRBZ 29.44 28.38 OCT 25.00 0.50 *$ 0.50 6.9% WGR 26.25 24.56 OCT 22.50 0.56 *$ 0.56 6.7% DRXR 19.06 17.75 OCT 15.00 0.38 *$ 0.38 6.6% STAT 20.00 22.75 OCT 15.00 0.44 *$ 0.44 6.4% SCUR 26.25 23.13 OCT 17.50 0.50 *$ 0.50 6.3% NIKU 24.88 17.75 OCT 17.50 0.38 *$ 0.38 6.2% VITR 48.94 38.00 OCT 30.00 1.00 *$ 1.00 6.0% CTIC 50.13 60.63 OCT 35.00 0.56 *$ 0.56 5.7% CERN 46.44 46.69 OCT 40.00 0.50 *$ 0.50 5.7% CDN 27.13 24.63 OCT 25.00 0.81 $ 0.44 4.0% AND 8.88 6.88 OCT 7.50 0.31 $ -0.31 0.0% CSTR 13.56 11.13 OCT 12.50 0.56 $ -0.81 0.0% NITE 37.00 26.50 OCT 30.00 0.88 $ -2.62 0.0% NITE 36.00 26.50 OCT 30.00 0.63 $ -2.87 0.0% *$ = Stock price is above the sold striking price. Comments: Knight Trading (NITE) joined the crowd at the confessional this week and suffered accordingly. Both positions have been closed. Coinstar's (CSTR) horrid move this week has broken through near term support and it is another potential exit candidate. Andrea (AND) is testing support and is now at a "key" moment. Cadence Design (CDN) continues to act worrisome and a loss-cutting exit should be considered on further downside movement. Positions Closed: Goto.Com (GOTO), Wave Systems (WAVX), Xerox (XRX) NEW PICKS ********* Sequenced by Company ***** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return CERN 46.69 OCT 40.00 CQN VH 0.44 302 39.56 14 7.7% HCR 16.00 OCT 15.00 HCR VC 0.38 73 14.62 14 14.3% MDRX 17.56 OCT 15.00 HIQ VC 0.50 10 14.50 14 21.9% PSFT 33.88 OCT 27.50 PQO VY 0.44 722 27.06 14 12.5% CHTR 19.38 NOV 17.50 CUJ WW 0.63 34 16.88 42 7.0% HSIC 22.56 NOV 20.00 HQE WD 0.50 0 19.50 42 5.2% OCR 16.88 NOV 15.00 OCR WC 0.63 92 14.38 42 8.2% Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return MDRX 17.56 OCT 15.00 HIQ VC 0.50 10 14.50 14 21.9% HCR 16.00 OCT 15.00 HCR VC 0.38 73 14.62 14 14.3% PSFT 33.88 OCT 27.50 PQO VY 0.44 722 27.06 14 12.5% CERN 46.69 OCT 40.00 CQN VH 0.44 302 39.56 14 7.7% OCR 16.88 NOV 15.00 OCR WC 0.63 92 14.38 42 8.2% CHTR 19.38 NOV 17.50 CUJ WW 0.63 34 16.88 42 7.0% HSIC 22.56 NOV 20.00 HQE WD 0.50 0 19.50 42 5.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** CERN - Cerner Corporation $46.69 *** New Trading Range? *** Cerner designs, develops, markets, and supports information technology, and content solutions for healthcare organizations and consumers. These solutions are implemented on individual, combined or enterprise-wide systems and are accessible on the Internet by consumers, physicians and healthcare providers. The company's integrated suite of solutions enable providers to improve operating effectiveness, reduce costs, and improve the quality of care as measured by clinical outcomes. Cerner's solutions are designed to provide the appropriate information and knowledge to care givers, clinicians, and consumers the correct management information to healthcare administration on a real-time basis, allowing secure access to data by clinical and administrative users in organized settings of care and by consumers from their home. Some bullish forecasts have boosted this issue to a new trading range and we favor the opportunity to own the stock at a lower cost basis. OCT 40.00 CQN VH LB=0.44 OI=302 CB=39.56 DE=14 MR=7.7% ***** HCR - Manor Care $16.00 *** Portfolio Position *** Manor Care is a provider of a range of health care services, including skilled nursing care, assisted living, sub acute medical care, rehabilitation therapy, home health care and management services for sub-acute care, rehabilitation therapy, vision care and eye surgery. Manor Care operates hundreds of skilled nursing facilities and assisted living facilities across the nation. A positive earnings forecast by hospital operator Tenet Healthcare gave a boost to industry stocks in early September and the trend is expected to continue for the next two quarters. Earnings are predicted to be favorable based on growing (hospital) admissions and continuing upward trends in pricing. In addition, nursing homes are expected to get $3 billion to $5 billion in Medicaid reimbursements over the next five years and that bodes well for Manor Care in the long-term. OCT 15.00 HCR VC LB=0.38 OI=73 CB=14.62 DE=14 MR=14.3% ***** MDRX - Allscripts $17.56 *** Bottom Fishing! *** Allscripts provides physicians with Internet and client/server medication management solutions designed to improve the quality and cost effectiveness of pharmaceutical healthcare. Allscripts currently offers products in four main categories: point-of-care medication management, Internet services, information products and prepackaged medications. The company's TouchScript software enables electronic prescribing and provides prescription data at the point of care. The company's other e-commerce products and services offer physicians and their patients medication-related education and information and Allscripts also sells prepackaged medications to physicians for onsite distribution. An upgrade from Banc of America Securities sparked the recent recovery and positive comments from a Bears Stearns analyst brought subsequent attention to the issue. We simply favor the bullish technical reversal. OCT 15.00 HIQ VC LB=0.50 OI=10 CB=14.50 DE=14 MR=21.9% ***** PSFT - Peoplesoft $33.88 *** On The Move! *** PeopleSoft designs, develops, markets, and supports a family of enterprise application software products for use throughout large and medium sized organizations. These organizations include corporations, higher education institutions, and federal, state, provincial and local government agencies worldwide. The company provides enterprise application software for customer management, human resource management, financial accounting, distribution, and supply chain management, along with a wide range of industry solutions. Its applications offer a high degree of flexibility, rapid implementation, scalability across multiple databases and operating systems, and low cost of ownership. PeopleSoft has also introduced several additions to its existing product lines, plus industry specific software solutions including new products for both manufacturing and public sector financial management. The company's earnings are due on or about October 17 and investors are expecting positive results. The stock has excellent technical support near our cost basis and the favorable option premiums will allow us to speculate, in a conservative manner, on the outcome of the quarterly report. OCT 27.50 PQO VY LB=0.44 OI=722 CB=27.06 DE=14 MR=12.5% ***** November Positions ***** CHTR - Charter Communications $19.38 *** Entry Point! *** Charter Communications is the fourth largest operator of cable systems in the United States, serving approximately 6.2 million customers. The company offers its customers a full array of traditional cable television services and programming and has begun to offer new and advanced high bandwidth services such as high-speed Internet access. The company plans to continually enhance and upgrade these services, including new programming and other telecommunications offerings. With products such as high-speed Internet access, video-on-demand, and cable telephony complementing their basic and digital offerings, cable companies are expected to achieve excellent revenues in next few quarters. Charter is one of the leading companies in the group and the issue rallied this week after a Merrill Lynch analyst upped the short-term rating on the stock with new target price of $27. The analyst said Charter's share value will be helped by cash flow growth; the upcoming launch of video-on-demand service on its Los Angeles systems; and the rollout of a Web portal next month. The company's fortunes should also improve on the launch of a TV set-top box-based platform next year that will allow e-mail, chat, instant messaging, streaming video and other features. NOV 17.50 CUJ WW LB=0.63 OI=34 CB=16.88 DE=42 MR=7.0% ***** HSIC - Henry Schien $22.56 *** New Patent! *** Henry Schein is a distributor of healthcare products and services to office-based healthcare practitioners in the combined North American and European markets. The company markets products and services to over 400,000 customers, primarily dental practices and dental laboratories, physician practices, veterinary clinics and institutions. Through its comprehensive catalogs and direct marketing programs, the company offers a broad product selection of unique medical items. Last week, Henry Schein announced that it has been awarded a U.S. Patent its new digital motion video technology. The patent effectively makes Henry Schein the only source for this digital motion video technology used in intra-oral photography and furthers the company's lead in the development of the clinical workstation of the future. Henry Schein plans to advance the technology, and as next generation PC capabilities expand to real time recordable MPEG II and DVD formats, the patent will enhance intra-oral photography, the quality of treatment, and dental archiving. NOV 20.00 HQE WD LB=0.50 OI=0 CB=19.50 DE=42 MR=5.2% ***** OCR - Omnicare $16.88 *** Bracing for a rally? *** Omnicare is a provider of pharmacy services to long-term care institutions such as skilled nursing facilities, assisted living communities and other institutional health care facilities. The company's Pharmacy Services segment provides distribution of pharmaceuticals, related pharmacy consulting, data management services and medical supplies to long-term care facilities. OCR's CRO Services segment provides comprehensive product development services globally to client companies in the pharmaceutical, biotechnology, medical devices and diagnostics industries. The healthcare sector continue to be one of the few bullish areas in the market and Omnicare is a leader in their niche industry. The fundamental outlook for the company is excellent and based on the recent technical indications, the issue is poised for a test of the 52-week high. NOV 15.00 OCR WC LB=0.63 OI=92 CB=14.38 DE=42 MR=8.2% ************************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=611 ************************************************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Halloween was never this scary! Friday, October 6 The market was pummeled today as profit warnings and new interest rate fears weighed heavily on investors. The Dow closed down 128 points at 10,596 and the Nasdaq ended 111 points lower at 3,361. The S&P 500 index was down 27 points to 1,408. Trading volume on the NYSE reached 1 billion shares, with declines beating advances 1,982 to 852. Activity on the Nasdaq was moderate at 1.8 billion shares exchanged, with declines beating advances 2,899 to 1,088. In the bond market, the 30-year Treasury rose 22/32, pushing its yield down to 5.84% in a classic flight-to-quality. Thursday's new plays (positions/opening prices/strategy): Hershey HSY FEB55C/FEB50P $5.12 debit straddle Ligand LGND NOV17C/NOV12P $0.12 debit synthetic Kellogg K MAR30C/NOV30C $0.68 debit calendar Today's market activity provided little opportunity to enter our new positions at favorable prices. The only play that might have been initiated at our target was the Kellogg calendar spread but the best observed debit (on a simultaneous order basis) was $0.68. We will monitor LGND and HSY for potential entry points in the coming sessions. Haunted by a seemingly endless stream of profit-warnings, the market fell precipitously today as investors worried that most companies won't be able to deliver the remarkable revenues they have become accustomed to in recent quarters. The widespread perception is the inflation-fighting Fed and the increasing cost of energy are finally taking their toll on corporate America's bottom line. In addition, the employment report released this morning ended the prospect of the FOMC adopting a neutral bias in the near future, adding to the negative bias. Analysts say the belief that technology companies won't be able to deliver the kind of growth that justifies their current valuations is starting to have a pronounced negative affect on the market, a condition that may be difficult to reverse in the near term. On the Dow, J.P. Morgan (JPM) and American Express (AXP) led the losers in the finance group while Home Depot (HD) was toppled in the retail sector. HD slumped after Lowe's (LOW) reported that same-store sales for the fiscal third quarter would come in well below the previous estimates. Meanwhile, AT&T (T) trampled the telecoms, falling to $27 after Salomon Smith Barney slashed its rating on the issue due to weakness in the long distance market. On the Nasdaq, Internet stocks retreated with Amazon.com (AMZN) leading the way while biotechnology, semiconductor and networking stocks also slumped. In the broader market, oil and oil service shares rebounded slightly along with utilities while retail issues retreated and brokerage stocks fell steeply amid rumors that Morgan Stanley Dean Witter had suffered huge losses from its junk bond operations. Portfolio Plays: There was little positive movement in today's session and the performance of our portfolio mirrored the overall activity of the stock market; bullish plays suffered while bearish plays profited. Regardless of the optimism one might feel, it would be almost impossible to put a positive spin on the grim summary of the day's trading, so I won't bother trying. In short, the market is at a key moment and with many analysts now calling for total capitulation before a recovery can begin, it appears there is further downside potential in the near term. With that in mind, it's important that we manage every position for minimum loss, to reduce the potential for a catastrophic depletion of trading capital (something that can occur very quickly when the market suffers a serious correction). Traders should consider taking profits in any bullish plays that have positive returns and at the same time, any positions that have substantial risk should be closed to limit possible losses. In addition, every portfolio play should be reevaluated to determine if it meets the original criteria for a favorable position. It's obvious that each person has a different risk-reward tolerance (and portfolio outlook) and every position adjustment should be based on one's individual perspective. Amazingly, there was some favorable activity in the technology portion of the Spreads/Combos section. Agile Software (AGIL) bounced back from recent losses, closing up almost $7 at $74. The move bodes well for our put-credit spread at $60. BellSouth (BLS) performed well this week but today's downgrade of AT&T (T) had a bearish affect on the sector. Our new position in BLS is offering a $1.00 profit with less than one week in the play and that's a favorable, early exit profit. Our credit strangles in Gemstar (GMST) and Brocade (BRCD) are now profitable and Ariba (ARBA) held up well considering the precipitous decline in the Nasdaq. Positions in American Home Products (AHP), Covad (COVD), International Business Machines (IBM), Halliburton (HAL), Smith International (SII) and Microchip (MCHP) are expected to finish at maximum profit and Caremark (CMX) continued to edge higher on momentum from a recent technical break-out. Another calendar spread issue, St. Jude Medical (STJ) has fallen back to the $50 area (our sold strike), providing a great week of premium erosion for those of you remaining in the long-term position. Veeco Instruments (VECO) was the big loser today, falling $35 to $67 after warning third-quarter profits would be well below the First Call estimate of $0.40 per share. At the same time, the firm's president and chief operating officer, Christine Whitman, resigned. The stock dropped to $59 at the open and then traded as high as $76 in the morning session before slumping to $68 at the close. Obviously, there was a great opportunity to trade the initial bounce but there is no way to speculate on when (and at what price) our spread might have been closed. The maximum loss in the play was near $4 and the position traded at a $4.75 debit (on a simultaneous order basis) for much of the session. There was a $10 swing in the option prices during the period that we monitored the spread for closing prices. For the record, our portfolio exit was a respectable $3.25 loss, based on a $4.00 debit minus the initial credit in the position. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** DAL - Delta Airlines $47.69 *** Potential Buyout? *** Delta's goal is to become the #1 airline in the eyes of all its customers, flying passengers and cargo from anywhere to everywhere. Passengers already choose to fly Delta more often than any other airline in the world on 5,244 flights each day to 339 cities in 48 countries on Delta, Delta Express, Delta Shuttle, the Delta Connection carriers, and Delta's Worldwide Partners. Delta is a founding member of SkyTeam, a global airline alliance which provides customers with extensive worldwide destinations, flights and services. Delta Air Lines' shares have rallied over the last few days on news of a possible buyout offer. Business Week magazine cited unnamed industry insiders as saying two former airline executives and a major buyout group were looking for bank financing for a $7.5 billion bid, which would amount to $61 per Delta share. The potential suitors were not named but the rumors propelled Delta's to the top of its recent price channel on heavy volume. Though the technical picture is improving with this quick-term reversal, Delta may still need to do some work as it approaches near-term resistance near $50. This conservative position offers a great way to speculate on the outcome of the rumors with relatively low risk. PLAY (conservative - bullish/diagonal spread): BUY CALL NOV-45 DAL-KI OI= A=$6.50 SELL CALL OCT-50 DAL-JJ OI= B=$1.56 INITIAL NET DEBIT TARGET=$3.81-$3.88 INITIAL TARGET ROI(max)=28% ****************************************************************** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is also higher than other plays in the same strategy based on disparities in option pricing. Current news and market sentiment will have an effect on these issues. Review each play individually and make your own decision about the future outcome of the position. ****************************************************************** SYMC - Symantec $44.44 *** Going Down! *** Symantec, a world leader in Internet security technology, offers a broad range of content and network security solutions to both individuals and enterprises. Symantec is a leading provider of virus protection, risk management, Internet content and e-mail filtering, as well as remote management and mobile code detection technologies. Symantec's Norton AntiVirus software is the best- selling virus protection software for personal computers. Symantec is in a stage IV downtrend and has broken the neckline of a long-term head-n-shoulders top (look at a 1 year chart). The current oversold movement has shown very little strength and the head-n-shoulders neckline near $50 should be difficult to overcome. The stock has rallied several times over the last couple months only to fail at its 50 dma, which is currently at $47.50. In addition, earnings are expected near the 18th of October. PLAY (aggressive - bearish/debit spread): BUY PUT OCT-55 SYQ-VK OI=168 A=$11.38 SELL PUT OCT-50 SYQ-VJ OI=5363 B=$8.00 INITIAL NET DEBIT TARGET=$3.12-$3.25 ROI(max)=60% ****************************************************************** FILE - FileNET $16.75 *** Trading Range! *** FileNET develops, markets, and services Web-based management and eBusiness applications that help corporations and government organizations build Intranets, business-to-business and other business-to-consumer portals to manage their ongoing business information and work processes more productively. The company's Panagon software products allow users to create, access, edit, process, organize, secure, store and archive digital content of all types for Web-based applications, as well as client/server environments. The company also offers professional services relative to the implementation of these software products and 24x7 customer support. Additionally, the company manufactures and sells a line of 12-inch optical storage and retrieval libraries (OSARs). Filenet made an excellent rally attempt back in late August but profit-taking and the bearish market environment presented too much downward pressure to overcome. The issue has performed well in the past and it will likely recover in the future however, the current indications are slightly negative and with this quarter's earnings approaching, the bearish activity is likely to continue. We will utilize the current downward trend and the small premium disparity to profit from this relatively conservative position. PLAY (conservative - bearish/credit spread): BUY CALL OCT-22.50 ILQ-JX OI=345 A=$0.31 SELL CALL OCT-20.00 ILQ-JD OI=597 B=$0.62 INITIAL NET CREDIT TARGET=$0.43-$0.50 ROI(max)=20% ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** VRSN - Verisign $188.06 *** Probability Play! *** Verisign is a provider of Internet-based trust services, including authentication, validation and payment, needed by websites, enterprises, electronic commerce service providers and individuals to conduct trusted and secure electronic commerce and communications over wired and wireless Internet protocol (IP) networks. The company has established strategic relationships with industry leaders, including BT, Cisco, Microsoft, Netscape, and RSA Security to enable widespread utilization of its digital certificate services and to assure their interoperability with a wide variety of applications and network equipment. The company has used its secure online infrastructure to issue over 215,000 of its website digital certificates and over 3.9 million of its digital certificates for individuals. Here is another candidate in the neutral, premium-selling category of options trading. Based on analysis of historical option pricing and technical background, this position meets our fundamental criteria for a potential credit-strangle. The issue has overpriced options and a relatively well-defined trading range. The probability of profit from this position is higher (80%-85%) than other plays in the same strategy based on historical option pricing. As with any recommendation, the play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - neutral/credit strangle): SELL CALL OCT-240 QVZ-JH OI=351 B=$1.38 SELL PUT OCT-140 XVR-VH OI=672 B=$1.38 INITIAL NET CREDIT TARGET=$3.00 MONTHLY ROI=15% UPSIDE B/E=$243.00 DOWNSIDE B/E=$137.00 ***********************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=615 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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