The Option Investor Newsletter Sunday 10-15-2000 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/101500_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 10-13 WE 10-6 WE 9-29 WE 9-22 DOW 10192.18 -404.36 10596.54 - 54.38 10650.92 -196.45 - 79.63 Nasdaq 3316.77 - 44.27 3361.04 -311.78 3672.82 -130.94 - 31.47 S&P-100 729.01 - 21.96 750.97 - 8.86 759.83 - 14.25 - 15.69 S&P-500 1374.17 - 34.82 1408.99 - 27.52 1436.51 - 12.21 - 17.09 W5000 12803.50 -338.60 13142.10 -471.30 13613.40 - 64.80 -135.50 RUT 480.39 - 10.63 491.02 - 30.35 521.37 - 2.55 - 12.06 TRAN 2430.18 -113.47 2543.65 + 22.01 2521.64 - 75.50 - 74.32 VIX 30.98 + 5.31 25.67 + 1.82 23.85 - .32 + 2.24 Put/Call .76 .75 .59 .56 ****************************************************************** Was Friday the 13th - October Fools Day or Good Friday? Are we having fun yet? It was not a day ending in 8 as the October bottom for the last three years has been but we will take Thursday's drop to 3054 on the Nasdaq and claim it as this years bottom anyway. Investors and traders alike expressed that emotion by throwing money at anything with four letters in the symbol on Friday and the Nasdaq posted a +242 point gain and the index closed at the high of the day. That in itself does not make Thursday a bottom but it does show that there is a lot of money on the sidelines ready to buy tech stocks and if 3054 is not the bottom it may be really difficult to move much below that number in the future. At prices seen Thursday investors were snapping up bargains like CSCO at $49, Dell at $23, Intel at $35, YHOO at $55 and ORCL at $31. While these prices may not be the bottom investors were betting there was little if any downside left. Volume came back into the market this week with a vengeance. The Nasdaq has been staging two billion share days one right after another and the NYSE notching one billion repeatedly as well. Thursday was a very good example of a capitulation day with decliners beating advancers 3:1 and closing at the low of the day. This came after a long stretch of seven losers out of the last nine days. Oversold, oversold, oversold. Period. Saddam Hussein could have bombed Kuwait on Friday and not driven the markets down any farther. This can be viewed by bulls as beginning of the Fall rally while the bears are looking at it as just the ninth bear trap rally since September 1st. The thing that makes this rally look so convincing is the major capitulation on Thursday on high volume but isn't that the same thing that causes relief rallies? Now before you start firing off that hate mail for casting doubt about the chances of a continued rally, please note that I believe it is the real thing but one day does not make a trend. Further confirmation would be a break and hold over 3400. Either way this was a tradable rally and it has all the earmarks of continuing for a couple days. Everybody expected it to collapse Friday afternoon and there was not even any hesitation. It was Friday the 13th after all. The relief rally sentiment was so positive after the sell off that not even a PPI at almost twice the expected amount could not hold back the buyers. The headline PPI number at +0.9%, the highest in seven months, was much higher than the +0.5% analysts had expected and the core rate at +0.3% was three times the expected +0.1%. Still the buyers did not care. Retail Sales increased 50% higher than expected at +0.9% versus the +0.6% forecast. Still the buyers did not care. The lure of cheap stocks was too much to ignore. With the Dow dropping for its fifth largest point loss ever on Thursday and the Nasdaq down -1200 points in the last six weeks the bounce was inevitable. Does this mean the Fed is really dead? Even with raging PPI and Retail Sales they will not do anything until after the election and the next move may still be a cut but it may be a long way off. Remember, a lot of the selling pressure came from global economic conditions. The price of oil moderated only slightly on Friday and further flare ups in the Middle East will only make matters worse. It was rumored today on the news that Saddam is moving troops towards Israel and analysts have not ruled out a production cutback by Iraq as a way to force the oil issues and gain concessions in negotiations. The Euro dropped to another new low of $.86 to the dollar and the falling Euro was the main reason the multinationals were losing money. The concept that the outlook is improving for the fourth quarter is being questioned and analysts are already paring down estimates for earnings. Add in the PPI and Retail Sales and things may not be as bright as the market indicated on Friday. Part of the basics behind the strong move came from strong earnings from some leading tech companies. Gateway posted earnings that only met analyst expectations but said that it's third quarter profit rose +35% and sales rose +16%. The reason for the jump in the stock price on earnings that only met estimates was really Dell. With Dell warning again that things were not going well the Gateway positive statements were a breath of fresh air. Gateway soared +9.48 to close at $53.11. PMCS reported earnings of +.31 vs estimates of .26 and the stock jumped +32 on news that they still have a significant backlog of orders and components were freeing up. Juniper Networks also beat estimates with revenue up +78% over the previous quarter. JNPR is breaking into Cisco's customer base with faster routers and newer technology. Juniper was upgraded by everybody who had a microphone and gained +29 after posting +.17 vs estimates of .09. The PE for JNPR before the earnings announcement was a record 2,310. The quickest way to reduce that is by more than doubling your earnings every quarter but 2,310, wow! The positive earnings news was instrumental to pulling the Nasdaq off the bottom near the May lows. Negative earnings are still with us with Lucent warning for the third time in three months proving that cheap stock prices on previous high flyers does not always mean value. DoubleClick and Yahoo! also announced but the tone of their announcements hammered their stock prices as well as other Internet stocks. The explosion you heard was the Internet advertising balloon bursting and the companies that depend on advertising revenues for their lifeblood will be self destructing soon. The prospect of continued good earnings are great and the announcements will start in earnest on Monday. Some of the big companies that will announce next week include INTC, MSFT, AAPL, EMLX, ITWO, PPRO, TLAB and dozens of others. Rumors that MSFT will guide analyst expectations lower with their earnings announcement was holding the stock price down when the Nasdaq was soaring on Friday. Goldman Sachs came out and said absolutely not, Microsoft is posting strong revenue increases with Windows 2000 coming on strong. We will see who is right this week. With the Nasdaq posting a +242 point gain, the 2nd largest percentage gain ever and the third largest point gain ever, you would think all fears of future selling were over. Advances on the Nasdaq beat decliners by 2:1 but the margin on the NYSE was much narrower at only 4:3. Another disturbing number repeated by network commentators all day was the new high/new low ratio on the NYSE with 161 new lows to only 19 new highs. Only one stock hit a 52 week high in the S&P-500, GD. On the Nasdaq there were 323 new lows and only 21 new highs. Come on guys, the market has been in the tank for six weeks which means that most stock prices have dropped. If it took six weeks to get here it may take more than one day for them to get back to new highs again. The new low numbers may also be related to continued tax loss selling from mutual funds. With tax season for funds already upon us they are selling the losers to offset the winners and reinvesting that money into new stocks. The new number one market prognosticator, Abbey Joseph Cohen, and head cheerleader for Goldman Sachs, came out with her carefully scripted call that the S&P was now 15% under valued. That does not take a mathematics degree to determine. The S&P was "fully valued" in her opinion at 1525 in August and at Thursday's low of 1325 it was -13.5% off her "fully valued" number. Abbey Cohen does not go out on a limb, EVER, and carefully scripts her interviews with more catch phrases than Alan Greenspan yet her words are treated as gospel in the current media environment. Go figure! How much faith does it take for a long term investor to feel comfortable buying stocks at Nasdaq 3000 or Dow 10000 with the Fed on hold? Not much. Still it makes good advertising for Goldman Sachs and that is the name of the game. More important to the market was her call that the S&P should reach 1575 by year end. That is +25 points higher than the March high of 1550 and +200 points from here. January SPX calls anyone? So was it Good Friday or October Fools Day? The VIX spiked to almost 37 on Friday, a level of volatility and fear not seen since April. Both major indexes rebounded off support levels not seen in months. The Nasdaq came within 10 points of the May low for the year of 3042 and the Dow came within 15 points of the psychological 10000 level. If this was not at least a short term bottom then I would be really surprised. The market gurus were claiming that there was really no capitulation on Thursday. Excuse me? TrimTabs.com said the first three days of the week was the largest outflow of cash from equity funds they had ever tracked. $9.7 billion was moved from stocks and into money market accounts. Tens of thousands of investors were calling their brokers and bailing out of stocks. The numbers for Thursday are not yet available but you can bet that number climbed significantly. This is real capitulation. When retail investors run for the sidelines the bottom has arrived. That was Thursday. On Friday one analyst reported on CNBC that they were receiving a record number of phone calls from institutional investors asking if they thought Thursday was the bottom. We even had brokers calling us at OIN asking if we thought Thursday was the bottom. This tells me there is a ton of cash still waiting on the sidelines for the "October bottom." Because of the nine one day bear trap rallies we have had since September 1st, everybody is very cautious about jumping back in to the market on any one day bounce. Not wanting to be October fools and buy too soon they will eventually fund the longer term rally once we have confirmation of the event. At Nasdaq 3000 everybody wants to believe it was the bottom. This is an emotional event and may not be reality. After all who wants to see Nasdaq 2500? Not me! I want to believe! I want to lead the charge out of the depths of the sell off. I also want to be the voice of reality and caution. How you react to the facts is up to you. The Nasdaq rally was great but the Dow regained less than half of the almost -400 point drop on Thursday. 10200 proved to be a top all afternoon. This could have been simply money moving out of Dow stocks and into tech stocks but it is still a concern. The Dow has strong resistance at 10300, still 110 points away. This may keep the Dow from making any serious gains in the near future. On the Nasdaq traders said there was not really a lot of buying, just no real selling. Any investor that has been in the market for any length of time knows that buying good stocks when everybody else is selling is the way to make lots of money in the market. However, these same investors don't want to lose fingers catching a falling knife. Now we are faced with the proverbial high noon standoff. Bulls against the bears, buyers vs sellers. Is it the bottom or just a blip in a longer term trend? With many good stocks down -50% from their highs investors are faced with a dilemma. Buy now and ride out any further dips or wait for confirmation of the rally and be faced with paying much more for the same stocks. I think the answer most investors and funds will decide is buy now. How much farther can CSCO, INTC and other mainline stocks fall? Not much! The me too stocks may still have more to go but with stocks like DCLK, down from it's recent high of $135 to only $12, they too cannot drop much farther. The economic conditions are ripe. The Fed is on hold and 95% of the bond dealers are forecasting the next move to be a cut to cushion the soft landing. 70% are forecasting that to be this year. Oil is still the wild card but with the announcement on Friday that many major dealers are not going to export any more heating oil to insure adequate supplies at home the price dropped over $1 at the close to only $34.10. While Saddam Hussein may eventually hold back his oil as leverage for future negotiations it is not likely. He needs the money to rebuild his war machine which the U.S and Britain are still bombing on an almost daily basis. More importantly the high oil prices have accelerated the rush to discover, develop and deliver new oil to market. Every day we get closer to those new discoveries coming to market. The OPEC nations do not want this to happen and will eventually do something to lower prices and discourage new investments into new development. The GDP is still growing at a very strong rate and the earnings this week are likely to show that things are not as gloomy as everybody has been predicting. The Middle East summit in Egypt, aimed at stopping the violence, is scheduled for Monday. Both sides will be pressured to stop fighting and save face by big political names. Bush is ahead in the polls and drug stocks as well as businesses in general are likely to benefit from his election. Consumer spending as evidenced by the Retail Sales report is still strong and even the higher oil prices have not put a serious dent in this segment of the economy. Where is the beef? Where is the gloom and doom in our future? I don't see it. Sure certain stocks will continuing falling but it is a company specific issue or in the case of the Internet an advertising revenue issue. The Internet is not going away. This is simply the process of maturity taking place on a very visible scale. If your Internet stock is dropping, pick another stock that isn't. Sound simple? It is. This same principle will continue driving the broader market into the Fall rally. Some stocks go up, others go down. October is when the losers get booted out of portfolios and winners get voted in. Now is the time to pick winners for the rally ahead. Whether it is this week or a couple weeks later the facts are simple. The economy is thriving and stocks will also. Go buy something! This is expiration week and volatility may be extreme but it is normally a bullish factor. There may be profit taking from the astronomical gains on Friday and there may be another dip or two. Consider them buying opportunities, you can bet the traders in cash on the sidelines after the big gains on Friday will be buying like there is no tomorrow. You should be too! The October Options Workshop in Denver is coming fast. October 27th is just around the corner and we have almost 20 speakers lined up to teach you everything you need to know to trade options safely and profitably in this or any market. I am especially excited about Steve Nisson and his talk on Candlestick Charting. Steve is the author of two books on candlesticks which are seen as the premier works in this field. He will be talking on "Spotting Early Reversal Signals." This is a must see presentation. Jim Crimmins, President of Traders Accounting will show you how to pay less taxes and make your tax accounting less complicated with "Trader Status." Gregory Spear, Editor of the Spear Report, will talk on the reasons behind the market gurus market moving recommendations and how we can profit from these events. Dick Arms, creator of the TRIN indicator, and author of several books on timing the market will explain next generation charting systems. These are only four of the speakers and represent the quality of the October Options Workshop. Don't wait any longer to register, time is short! 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! http://www.OptionInvestor.com/workshop Trade smart, sell too soon. Jim Brown Editor *********************** FREE LUNCH IN PHILADELPHIA November - 8th. *********************** 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 ***************************** OCTOBER OPTIONS WORKSHOP EXPO DENVER - Oct 27-30th ***************************** Here is the list you have been waiting for. The guest speakers and the course outline for the October Workshop Expo. The list of guest speakers is outstanding. Here they are: Steve Nison - Steve Nison is not only the world's foremost expert on Candlestick Charting techniques, he's the author of the two top selling, definitive books on the topic: Japanese Candlestick Charting Techniques and Beyond Candlesticks. He has trained and lectured investors and investment firms around the world on how to integrate these methods into their investment strategies. Steve will be speaking on "Spotting Early Reversal Signals." ************** Gregory Spear - Author of the Spear Report. Gregory developed a unique "consensus" concept for picking stocks in the early 90's while trying to make sense of the myriad of financial newsletters in his mailbox. His unique "consensus" system has developed an average gain of 100% for his recommendations over the normal holding period which is about six months. The Spear Report is quoted or featured in dozens of financial publications and Greg's financial workshops are "standing room only." Greg will be speaking on the top market gurus, "What they are saying and why they are wrong." **************** Dick Arms - Richard Arms is the inventor of the Arms Index, otherwise known as the TRIN. He has been analyzing the market for over 35 years and is a constant visitor to CNBC as a market commentator. His work in technical analysis is older than most of the brokers now trading with his tools. His newest invention is the Equivolume charting system, the first new charting system since the 1930s. Dick will be explaining the TRIN and how we should use it to trade as well as his new Equivolume charting system. This will be an interactive session with plenty of attendee questions that Dick will answer. ***************** Stan Kim - Stan has a MBA from UCLA and worked for IBM for many years. He realized he did not want to work for anybody else and did not want anybody working for him. He has been a full time trader ever since. He is the founder of the Snail Trader system of trading and is currently working on a new book. Stan consults and mentors traders and investment firms. His topic will be, "How to Trade for a Living When You Are Not a Stock Guru." ***************** Jim Crimmins - Jim is president of TradersAccounting.com and a noted authority on tax issues for traders. Jim is an expert on gaining Trader Status and puts on seminars on "Tax Free Trading" around the country. If you have been to a money show you have probably seen Jim with flocks of people around him. Jim IS the authority on tax accounting for traders! Jim will be speaking on Trader Status, Mark to Market and IRS do's and don'ts for traders. ***************** Add to this distinguished list above the fifteen plus speakers from OptionInvestor and you have an event you cannot afford to miss. The current roster of staff instructors includes: Ryan Nelson - Managing Editor, OptionInvestor.com Chris Verhaegh - Options 101/102 Writer and Option Strategist Steve Rhoads - Technical Analysis Instructor Molly Evans - OIN Staff writer Lee Lowell - OIN Staff writer Austin Passamonte - Editor IS, Staff Writer Buzz Lynn - Editor, Sector Trader, Staff Writer Mark Phillips - Leaps Editor, OIN Vince Dowd - Spreads Specialist Louis Horkan - Managing Editor, Premier Investor Steve Pekarek - Editor, SplitTrader.com Jeff Bailey - Editor, Premier Briefing Matt Russ - Editor, OptionInvestor.com Jim Brown - Head Option guy For a course outline click here: Http://www.OptionInvestor.com/workshop/outline The workshop is scheduled for the last weekend in October. Four days of intense, power packed option education. This is not your standard seminar. We start by putting you up in a luxury hotel and feeding you five times a day. We feed your mind from a fire hose as well with more than 15 speakers and special guests to educate you on every option strategy. There is something for everybody. Just mingling with over 15 professional option traders for four days is worth the price of admission. The entire weekend for the low price of $2995 plus your room. All meals, snacks and favors are provided and you will get a professionally produced set of videos of the entire weekend. Need we say more? If you want to learn how to be a better trader, making more and losing less then you should come to this seminar. We guarantee you will not be disappointed! For more info: http://www.OptionInvestor.com/workshop If you have not been to one of our Denver Expo seminars before here are some comments from previous attendees: The words herein are totally inadequate to express what I am feeling about you and all the OptionInvestor organization. But this medium is all I have. Thank you more than these few simple words can say. Wow, what a seminar! In my 25 years of investing I have attended many instructional conferences, but I have never, never experienced one like your Options Expo. The instructors were absolutely tops. Subjects, generally were on target. Especially for me, the Skybox, index funds/options and the early morning strategies and trading were particularly great. The attention to the many details and nuances were especially evident, and I guess most of the credit in that area goes to your great support team. Now, the real challenge is to apply and implement the powerful knowledge I was exposed to. Sincerely and warmly, Kevin Hughes, Denver ********* Jim & Staff, I am sitting in the hotel room after a great 3 days in your seminar. I can't tell you how pleased I am and want to thank each of you for a job well done. Having been responsible for events like this, albeit on a much smaller scale, I can recognize all the hard work that went into the seminar. Each member of the staff is to be congratulated!! The seminar confirmed my belief that the OIN staff really cares about the success of their subscribers. Jim, you all should be proud of the work you do to enrich the lives of so many people. It is one thing to amass a personal wealth. It is a much higher calling to help others meet their goals in life. I was very impressed that you were emotional in your closing remarks. You have so much to be proud of -- helping people fish all over the world! Thanks again and I look forward to attending another seminar in the future. My best reagrds, Jim Boettcher Austin, Texas ************ Please pass on my thanks to the entire OIN group for a fabulous EXPO. The seminar far surpassed any expectation that I would have fathomed, had I attempted to! OIN has the right attitude and the obvious ability to be a leader and I look forward to many years of positive experiences with you folks. Kind regards, Gwen Richardson ************* GREAT JOB TO EVERYONE! I described this event to my friends as a life changing event! (options aside) ,the quality of people, dedication, sacrifice of their time (the second 40+ hours a week they don't have to work but do) they do this because they care, wanting to help others change their life dramatically (My wife thinks I was oxygen deprived up there !) I came back a different person for those who know me that says a lot. Now for the options side: I have to admit there was so much info to absorb, most of it came to me on the 2000+- mile ride home it all started to fall into place I feel Very confident (yes Jim this can be bad but I know this now!) Notice the patience here guys! that's one change I have a plan to stick to ! THANK YOU !!! Allan O'Neill ************** Need we say more? If you want to learn how to be a better trader, making more and losing less then you should come to this seminar. We guarantee you will not be disappointed! For more info: http://www.OptionInvestor.com/workshop ************************* REGIONAL SEMINAR SCHEDULE ************************* The San Francisco seminar is October 19/21st. Here is your chance to learn from the pros. The three day Technical Analysis Stock and Option Fall Seminar Series. Three days of in-depth education. Don't miss it! Some comments from recent attendees: I want to thank Chris, Steve and Scott for the excellent workshop held in Detroit last week. Having been to the Expo in Denver in March (which was fabulous), I was ready for a smaller, hands-on approach to hone my less-than-perfect skills. I was not disappointed. One can never get too much education in options investing, and Chris and Steve offer terrific, unique approaches. Laurie Chris & Steve, I would like to thank both of you for a great experience at the Atlanta Workshop. I learned more in the three days of the workshop about investing and trading than all of my undergraduate and graduate courses combined. It was a lot of information in a short time and I hope to put it to use very soon. Mike I attended the Atlanta seminar and wanted to forward my positive comments. The seminar "really lit my fire". I have been a trader for 20 years and often go to seminars and this was the first one that really taught me the most. Dr Lloyd Jim, I had the good fortune of attending the meeting in Orlando. Like your newsletter, it was a CLASS ACT. Chris and the others did a great job. Chris was by far the best performer but the gentlemen beside me was an option trader with several seminars under his belt and almost freaked out when Chris finished his Index Presentation. JC I am writing this note to compliment you and your staff on the great job they did in Atlanta. But more importantly I would like to single out Steve Rhoades as one of the finest speaker/teacher on technical analysis that I have ever had the pleasure of hearing. I am doing my best to persuade other members of the two investment clubs that I belong to, to attend the Detroit seminar. Sincerely, ML We guarantee you will not be disappointed. The class size is small so you will get plenty of individual attention from Chris Verhaegh, Steve Rhoads and staff. At less than the cost of a bad trade you can learn how to analyze stocks and trade options like the pros. Don't wait, do it now. Date City Oct 19-21 San Francisco Nov 02-04 Phoenix Nov 09-11 Miami FL Dec 07-09 Philadelphia Dec 14-16 San Antonio Has the market been beating you up? Did you give back your gains from April/August? Would you like to understand all the technical indicators our writers use? Does the alphabet soup of technical terms like RSI, DMA, MACD, ROC, Stochastics, Bollinger bands, sound like Greek to you? You can learn from the experts how to interpret all these indicators, read charts, pick stocks and which option strategies to use on those stocks for less than the cost of one bad trade. Reserve your seat now for one of our regional seminars. Click here for more info: http://www.OptionInvestor.com/seminar/seminar.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=643 ************************************************************** ************** EDITOR'S PLAYS ************** What is the eternal question of life? Not, what is love? Or how high is the sky? Or even where did we come from? Inquiring minds want to know after a big day like Friday....what do I do now? How do I trade this event? The market tanked hundreds of points. Stocks and options were cheap if only I had the guts to buy on Thursday afternoon. Now call premiums are up huge. Stocks like JNPR +28, PMCS +32, GTW +9, SUNW +13, RBAK +19, SDLI +27, MUSE +22, ITWO +21 have gone completely stratospheric again and options cost more than just buying the stocks on margin. What should I do? Is that the question you find yourself asking today? Probably so! The meaning of life and love pale in significance to the quandry faced by traders on Monday morning. Let's try to solve this puzzle. First, let's focus on the value of stocks. Is CSCO so overvalued at $56 that we should not buy it? Yes, you could have gotten it at $50 on Thursday but in any sustained rally CSCO should hit or exceed $70 by year end. The March high was $81. Even with the inflated options from the Friday rally CSCO is still a decent play. Capturing a $14 move with a $7 option is still a good deal in my book. Second, should you go bottom fishing for stocks that are really beaten up like Lucent, Dell or DoubleClick. Absolutely not. Just because these stocks are cheap does not make them good plays. You get what you pay for. Lucent has warned three times in three quarters and from the sound of their last warning it will not get any better soon. Dell is finding out that bigger is not always better and sequential growth is harder and harder the bigger you get. DoubleClick may be the biggest force in the Internet advertising market but that market is crashing. What does a helium balloon do in a down elevator? It may hug the ceiling but it still goes down. If a sector is crashing then even good stocks in that sector will go down. Third, nobody, and that includes me, can accurately predict market direction for any period, a day, a week or a month. We can only tell you what the market should do based on the factors we have at the time we make the prediction. Those factors are changing every minute, 24 hours a day. What is logical at 10:PM on Friday may not be logical at 9:30AM on Monday. The solution for all these problems is time. Wait long enough and you will know all the answers. Those options you should have bought have now tripled but you did not lose any money since you took no risk. Since waiting is not the answer we want, the only answer we can use is to buy this time in advance. Instead of buying Oct/Nov options lets buy Jan/Feb or even later options. Actually this is an ideal time to buy leaps. A $6 move in CSCO is immaterial to 2003 leaps. The 2003-$75 leap went from $11.75 to $14.25 on Friday, a gain of 2.50. Add another $14 move to CSCO back to the $70 range and that same leap will be over $20 and you will have almost a 50% gain. That could happen before October is over and you would still have two years to go on the leap. Your risk that CSCO will not go back to $70 in the next two years is so slim that Vegas would not take odds against it even if they could. For those that have the capability of writing naked puts the options are much more variable. You can buy calls much closer to the money and also closer time wise and decrease the cost of those calls by selling puts at the same time. In the CSCO example you could sell the Jan-2001 $60 put for $9.00 and buy the same 2003 $75 leap for $14.25 for a net cost of $4.25 for the transaction. If CSCO is over $60 in January, a very sure bet, then you keep the $9.00 and your leap cost you $4.25. If CSCO is under $60 in January you will be put the stock at $60 for a net cost of $51 ($60-9=$51) and you still have the leap with two years to go. Is CSCO a buy at $50? 74 million shares were traded on Friday and there was no shortage of buyers over $50. Using the same strategy with an April $60 call at $8.75 gives you a free trade if CSCO is over $60 by January. Any amount CSCO is over $60 is pure profit through April. Another tactic is to pick a stock that has a large upside potential but is not a rocket ship like JNPR. The non-volatile stocks can make you just as much money because the options do not cost as much. Take GE, only up +2.50 on Friday but it is only $3 away from its 52 week high. GE did not sell off like the tech stocks and when it comes to earnings power it cannot be matched. If security is your thing then stocks like GE are the way to go. A November $60 call is only $1.75. If the market rallies on good oil and Mideast news this could be a real winner. December is only $.75 more. A Jan-2003 $70 leap is only $9.00 with plenty of upside available. The easiest tactic in this type of market is still selling naked puts. It is also dangerous until a new trend is established. You must be willing to set stop losses and stick to them as well as possibly ending up owning the stock for at least a day. The market is likely to be very volatile next week and that means it can go in either direction very fast. Good candidates would be stocks like HGSI which have not shown any real indications of dropping yet have good premium values. GE would not be a good candidate since there is no premium associated with GE puts. You need a volatile stock to collect good premiums. HGSI has hovered above $75 for the last three weeks when the market was crashing. Selling the October, yes, October $90 put would be high risk but if the market goes in our favor the stock could be over $90 in one day. The premium is $9 and makes your total risk owning HGSI for $81. If you are a naked put seller then you already know how to use this strategy and there is an excellent list of candidates in tonights newsletter under "Big Cap Naked Puts" if you are a risk taker or under the regular "Naked Put Section" for very limited risk plays. To recap, I would not buy calls on the high flyers on Monday simply because of the high call premiums left over from Friday. I would buy longer term calls/leaps on less volatile stocks that have a big upside potential. I would sell puts against any stock I bought calls on to defray some of my cost. As a speculative naked put seller this week you could either make a lot of money if the market runs in our favor or get a serious case of heartburn if the Nasdaq rolls over again. Be careful and keep those stops in place. ************ Try to maintain a market neutral outlook and react to what the market gives us instead of trying to force plays to fit your market view. The market does not HAVE to go up from here. Jim Brown ************************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=651 ************************************************************** **************** MARKET SENTIMENT **************** Ten Months Pregnant By Austin Passamonte Like an expectant mother long past her due date, market bulls were getting pretty grumpy waiting for relief. Heck, we've all been waiting for a relief rally, dead-cat bounce, short- squeeze...anything at all describing green on our charts. It arrived on Friday just as predicted. Then again, we've been predicting such a rally every night for about two weeks now so eventually we had to be right. Now that it's here, what next? Good question. All market bulls (90+ percent of small spec traders) hope & pray this will be a V-bottom straight up from here to New Year's. We've seen such action before and it isn't out of the question this time but I wouldn't trade it that way yet. One day does not erase all market fears, real & imagined. Yes it was one heckuva session and bullish candle patterns can be seen across numerous charts but let's not get carried away. We need to see a few more things take place within the next two weeks first. Market Sentiment will take the unusual step of inserting two charts that help us quantify where we are in relation to a firm market bottom. We will examine the S&P 500 and the NASDAQ 100, the two biggest index bell weathers. All others follow their lead. The NDX has recently broken below it's long-term trendline support dating back to October 1999 turn in the market. Its weekly MACD and stochastic values are very close to a reversal area but haven't turned yet. When in doubt about long-term market action, consult long term charts. I fully realize these words are not welcome to raging market bulls straining at the gate to snatch up every call in sight. A good bet would say many readers are narrowing their eyes and tuning out the hearing already. For that I am sorry but we cannot manufacture our own reality in the markets. We can hope, pray & pretend all we want but rest assured our trading accounts will impress upon us the truth every time. Painfully or otherwise. Here's the story; these are still sick markets that enjoyed an afternoon in the fresh air, sun shining and birds singing. Summer may have arrived but let's wait a bit before sticking our tender new plants in the garden. Frost warnings could be ahead. Most every good rally I can recall emerged from conditions just like these or worse. This time won't be any different, whenever that will be. The VIX has soared to scary heights and put/call ratios hit some highs I haven't seen in a long, long time. Fear was certainly upon us enough to create a short-squeeze tinderbox waiting for a careless match to be struck. Terrible news Thursday caused irrational selling pressure. When this overdone hangover cleared after the close, plenty of traders had to rethink what they'd done. "My gosh, did I really sell everything I owned, shorted the world and actually bought all those puts? What if news improves over the weekend and a rally on Monday wipes me out? I already got killed buying INTC above $70 as it broke to new highs. That's the best time to buy a stock, right?" Do you think any traders went soundly to sleep Thursday night waiting for Friday's open? My money says yes. No one wanted to hold over this weekend any open positions. That means long or short. If the overwhelming majority of open interest was to the short side, where would pressure push the markets as they cover to go flat? That's all well & good... what about Monday? Expect the buying to continue. Too much negative mantra and oversold conditions are one reason why. Buyers buy; that's what they do. Pent-up and anxious to get going, any reason to justify getting started will do. Incredible numbers of put-option contracts lie open beneath us with very little call option open-interest overhead. These puts need to lose value or expire worthless in order for the market to function and we can certainly expect them to do so. Expiration week is typically a bullish time. Something like eleven out of the last thirteen times we've ended the week higher than open. I like our chances to the upside once again. The heart of earnings season will begin and no big surprises from bell weathers too shy for confession will add fuel to the rockets. Don't be surprised to see broad markets tack on a lot more growth between now and our visit next Saturday. No wayward ambush from forces unseen to us with continued good news will be the action bulls have been longing for. Then comes post-expiration Monday. This is a whole other ballgame and we face historical downside market tendencies then and beyond. But let's not dwell on that now. Prepare yourself for a wild week probably to the upside. Surprise events could take us right back to the depths we just left or below. Both could easily happen during the next five sessions as well. One thing is for sure; volatility is here to stay. Expecting these markets to go straight in any direction for long is not realistic. This is a trader's fantasy; big swings in both directions on a regular basis. Call-buyers may suffer greatly this year but option traders will enjoy one of the most action- packed seasons in history. Count on it! ***** VIX Saturday 10/14 close: 30.98 30-yr Bonds Saturday 10/14 close: 5.80% 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 (10/14/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 765 - 750 14,339 12,471 1.15 745 - 730 11,215 10,608 1.06 OEX close: 729.01 Support: 725 - 710 6,285 15,768 2.51 705- 690 783 12,696 16.21*** Maximum calls: 700/5,062 Maximum puts : 700/8,420 Moving Averages 10 DMA 743 20 DMA 757 50 DMA 791 200 DMA 781 NASDAQ 100 Index (NDX/QQQ) Resistance: 90 - 88 42,027 39,567 1.06 87 - 85 20,616 23,411 .88 84 - 82 15,841 22,420 .71 QQQ(NDX)close: 81.25 Support: 80 - 78 46,768 25,089 .54 77 - 75 19,071 16,739 .88 74 - 72 8,230 13,011 1.58 Maximum calls: 78/25,314 Maximum puts : 90/13,984 Moving Averages 10 DMA 81 20 DMA 86 50 DMA 91 200 DMA 94 S&P 500 (SPX) Resistance: 1450 12,642 11,053 1.14 1425 13,823 14,938 .93 1400 6,452 10,994 .59 SPX close: 1374.17 Support: 1350 2,488 17,111 6.88 1325 721 8,133 11.28 1300 1,387 26,965 19.44*** Maximum calls: 1475/22,103 Maximum puts : 1300/26,965 Moving Averages 10 DMA 1399 20 DMA 1421 50 DMA 1463 200 DMA 1445 ***** CBOT Commitment Of Traders Report: Friday 10/13 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 +14 +306 Total Open Interest % (.19% net-long) (1.75% net-long) NASDAQ 100 Open Interest Net Value +840 -1268 Total Open Interest % (4.9% net-long) (3.41% net-short) S&P 500 Open Interest Net Value +53,546 -59,293 Total Open Interest % (30.45% net-long) (9.85% net-short) What COT Data Tells Us: Commercial positions in S&P 500 added to five-year extreme short levels while small specs added to net- longs as compiled Tuesday 10/10 by the CFTC. Guess who got creamed and who skimmed the profits Wednesday & Thursday? Next Friday's data should give a clearer picture to Commercials either covering some profitable shorts or holding fast into next Tuesday. Bullish: Fed's finished Benign government reports Disparity in overhead call/put ratios VIX above 30 Friday's rally Option expiration week Earnings season Bearish: Oil Prices (falling) COT reports Recent pre-warnings, downgrades (brutal) Broad market's break of critical M/A support Market leaders breakdown ************** MARKET POSTURE ************** As of Market Close - Sunday, 10/15/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,192 10,000 10,600 SPX S&P 500 1,374 1,325 1,400 COMPX NASD Composite 3,316 3,040 3,500 OEX S&P 100 729 700 750 RUT Russell 2000 480 460 500 NDX NASD 100 3,277 3,000 3,350 MSH High Tech 905 825 935 BTK Biotech 675 630 740 XCI Hardware 1,227 1,120 1,310 GSO.X Software 394 355 435 SOX Semiconductor 758 660 870 NWX Networking 1,132 1,010 1,170 ** INX Internet 356 320 465 ** BIX Banking 556 525 600 XBD Brokerage 593 555 640 IUX Insurance 746 720 790 RLX Retail 728 695 810 DRG Drug 411 370 425 HCX Healthcare 846 825 875 XAL Airline 131 129 148 OIX Oil & Gas 315 310 332 Two alerts were triggered in the last session, with the NWX triggering an alert at resistance. Lowering support (INX) Lowering resistance (GSO.X). Raising support (DOW, OEX, RUT, NDX, MSH, BTK, XCI, SOX, NWX, BIX, IUX). Raising resistance (NWX). Who said Friday 13th is always bad? ***********************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.nextcard.com/index6.html?ref=aff0049911 ************************************************************ *************** ASK THE ANALYST *************** Divine Inefficiencies By Eric Utley Market uncertainty yields boundless trading profits. In light of recent world events and financial market instability, I thought it would be relevant to examine the current uncertain state of US capital markets, particularly the NASDAQ. As many of you have read here at OIN, the CBOE Market Volatility Index (VIX) traded above 30 last week. In an efficient market, the VIX generally trades at 25, because the expected rate of return on US stocks is + or - 12% annually. When the VIX spikes above 30, it reveals the market is uncertain about the future rate of return on stocks. Uncertainty leads to volatility, which leads to inefficiencies in the marketplace. While I hesitantly agree with the Efficient Market Theory and its application to the long-term ownership of stocks, I know for a fact market inefficiencies exist in short time frames. How else can we rationalize Cisco Systems (CSCO) losing 14% early last week, then rebounding 12% during Friday's rally? As a trader, I hope, live, and dream for market inefficiency because it produces wide price swings in stocks. Those wide price swings can - and should - be readily acted upon to produce trading profits. Historically, when the VIX traded above 30, declining markets have generally found bottoms and subsequently rallied. While I tend to believe the NASDAQ is near a bottom, I can only say for certain the market is currently inefficient and very tradable. The magnitude of market volatility we are currently witnessing doesn't come around but once or twice per year. As such, if you've been waiting out the waning summer months for action in the stock market, now is the time trade. However, don't confuse my enthusiasm with that of calling a market bottom. It's absolutely critical to remain objective and be willing to trade both declines and advances in such volatile times. I've provided an example of CSCO's volatile trading on a chart below, along with strategies on how to make money from the stock's wide price swings. With the recent market volatility we've experienced, I'd expect OIN readers to have a lot stocks to review in the coming weeks. If you have a quality rebound candidate or a stock likely to lead the markets higher, share your insight by sending any stock ideas to Contact Support. As always, please put the symbol of your requests in the subject line of the e-mail. ---------------------------- Cisco Systems - CSCO CSCO is a widely held stock that has been reviewed several times in this very column. I thought CSCO would represent a good example of how to take advantage of the high levels of volatility in the marketplace. I must also confess the CSCO kid has been a friend of mine recently in the form of trading profits. Keep in mind, our CSCO strategy discussion can be applied to virtually any stock traded on the NASDAQ. For about four months, the market valued CSCO between $60 and $70. CSCO traded very efficiently from May until September, which made it difficult to earn short-term profits from the stock. However, the market's valuation of CSCO changed about three weeks ago, signaled by the stock trading below its long-time support level at $60. Market participants didn't know how to react to CSCO's fall below $60. As a result, a great deal of uncertainty, in the form of volatility, entered CSCO's space. Since falling below $60, CSCO traded as low as $48. In that time, CSCO has offered several trading opportunities to both bulls (call buyers) and bears (put buyers). The first bear opportunity was presented when CSCO broke $60. A good strategy would have been to buy puts right when the stock fell below $60 and set a tight stop to limit the damage of a potential bear trap. After the initial break below $60, the market adjusted its value of CSCO between roughly $55 and $59. The battle between bulls and bears intensified, indicated by CSCO's tightening price range for about eight days of trading. The second bear opportunity was provided when the stock broke below its string of relatively higher lows. The bulls got their chance after CSCO flirted with its spring low around $50, subsequently traced a double bottom, and broke its string of lower highs. ---------------------------- Vitesse Semiconductor - VTSS Your past comments have always proved to be a good guideline for trading. Please advise the future prospects for VTSS. - Regards, Sunil Today's column is filled with several semiconductor-related stocks which have managed to hold up quite well in the recent market environment. Each of the company's I reviewed today operated in a specialized segment of the Chip sector, which has allowed them to beat the Tech bears which have infested the NASDAQ. VTSS is a specialty manufacturer of Chips used in communications types of applications. Several chip stocks that supply communications related semiconductors have done very well in the market recently. Take a look at IDTI and ELNT. VTSS has been somewhat insulated from the volatility seen in other chip makers such as INTC and MU. Maybe it's because VTSS is expected to grow its earnings by 40% over the next five years. Like many market leading stocks, VTSS has not been adversely affected by the recently turmoil in the Tech sector. The stock's three year up-trend is well intact and looks strong as ever. Until VTSS breaks decidedly from its upward trend, the stock should continue to climb. A good way to trade VTSS is to use bounces off its trend-line of moving averages. It's harder to gain entry into a stock with such a defined trend, sometimes you just have to buy. ---------------------------- Silicon Storage Technology - SSTI Could you please comment on SSTI? This stock seems to be a powerhouse in regards to its earnings growth and potential of the next few quarters. - Shane SSTI is one of the leading manufacturers of flash memory chips. Flash memory devices are used in cell phones, digital cameras, MP3 players, and a host of other electronic gadgets. Up until last spring, many industry analysts expected flash memory manufacturers to ride a wave of prosperity and boom in the semiconductor business. However, the slowdown in the cell phone sales, and the other consumer electronics caused a big dip in major flash makers. The stocks have since rebounded as fears of a major market meltdown have left the sector. The fact is, SSTI is expected to grow its earning by more than 35% over the next several years. The stock is currently selling at a discounted price relative to its earnings growth. Despite the huge losses on the NASDAQ these past six weeks, SSTI's chart actually looks pretty good. The stock is up about 100% so far in 2000, and has been consolidating its huge gains from the last two years. Shares have been trading between $20 and $35 for essentially seven months now. I think the stock is due for a breakout if the NASDAQ can regain its footing. If, however, SSTI falls below its long-time support at $20 it might be prudent to step aside and not catch a falling knife. But, with the earnings growth you referred to, Shane, SSTI should be a good stock to hold for several years. ---------------------------- Applied Micro Circuits - AMCC Can you please review AMCC. In the recent downtrend in the NASDAQ, this stock actually held and just won't go down. My question is: When the market starts to rally, will this stock have more room to go up? - Thanks, MARJ AMCC is one of the high-flying optical component makers that has taken the NASDAQ by storm this year. The company makes chips that go into use in high-speed optical networks - still a red-hot area of technology despite the recent market downturn. AMCC reported third-quarter earnings last week that surpassed consensus estimates by 13%. The company also declared a 2-for-1 stock split. While AMCC relayed a generally bullish message to investors during its conference call, management made a few cautionary statements. AMCC said it was likely to face supply constraints in the coming quarter, which will dampen revenue growth to an estimated 20% increase over this quarter's 31% increase. Despite the cautionary remarks last week, AMCC should continue to outperform the broader Tech sector because the company's fundamentals are superior. The fiber-optic business is still growing at an almost exponential rate. AMCC doesn't have to deal with the macro issues that have been afflicting other areas of Tech such as Software companies, Handset makers, and certain Chip stocks. Because AMCC's business is somewhat isolated from other areas of Tech, the stock should continue to do well, especially when the market turns around. AMCC's chart looks very good right now in spite of the NASDAQ's recent performance. The stock retested its pivotal breakout point at $160 last Friday and subsequently bolted off that level. A little more time in consolidation and AMCC will be ready to take off with the rest of the Tech sector. ---------------------------- 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 16, 2000 Monday ====== Business Inventories Aug Forecast: 0.30% Previous: 0.20% Tuesday ======= Industrial Production Sep Forecast: 0.20% Previous: 0.30% Capacity Utilization Sep Forecast: 82.20% Previous: 82.3% Wednesday ========= CPI Sep Forecast: 0.40% Previous: -0.10% Core CPI Sep Forecast: 0.20% Previous: 0.20% Housing Starts Sep Forecast: 1.545M Previous: 1.531M Building Permits Sep Forecast: NA Previous: 1.486M Thursday ======== Trade Balance Aug Forecast:-$31.8B Previous:-$31.9B Initial Claims 14-Oct Forecast: NA Previous: 306K Philadelphia Fed Oct Forecast: 6.70% Previous: 8.20% Friday ====== None Scheduled Week of October 23rd ==================== 23-Oct Treasury Budget 25-Oct Existing Home Sales 26-Oct Employment Cost Index 26-Oct Initial Claims 26-Oct Help-Wanted Index 27-Oct GDP 27-Oct GDP Chain Deflator 27-Oct Durable Orders 27-Oct Michigan Sentiment FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. 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The Option Investor Newsletter Sunday 10-15-2000 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/101500_2.asp ************** TRADERS CORNER ************** Watching Cash Flows and Interest Rates By Mary Redmond Investors in the 1990s have had several key factors in our favor. The free cash flow and profit margins of US corporations have increased substantially since 1980. The returns on equity of US corporations are higher than they ever have been. We have been flooded with liquidity from American and foreign stock market investors. We have been fortunate enough to have oil prices low enough to not impact our GDP significantly. Interest rates have also been low by historical standards. As long as these factors stay favorable, a rally seems highly probable. We need to monitor the interest rate environment, which is constantly changing and has a big impact on the market. Treasuries made considerable gains this week, as money flowed into the perceived safety of the 30 year bonds. Many analysts are expecting yields to decrease in the next six to twelve months. This can depend on many factors and economic reports, which are due to be released. It is also important to monitor the actions of the Treasury Dept, to determine if the program of buying back government bonds will continue in the future to the same degree that it has this year. We have heard many unconfirmed rumors about brokerage losses in the junk bond sector. However, it is clear that creditors are becoming increasingly tight with their lending practices, after being burned from extending loose credit. Moody’s has down graded a higher number of borrowers than at any time since 1989. Only the highest quality borrowers and premier IPOs have access to their corporate financing needs. This makes it difficult for smaller, highly leveraged stocks to rally. Some analysts think that this factor alone may indicate that a rate cut in 2001 is highly probable. We can use the VIX.X in many different time periods. It is often useful as a daily trading tool. When used over a monthly or quarterly time frame it has shown to be an accurate sell signal when under 20. It is more difficult to use the VIX.X as a buy signal. For instance, in mid April the VIX.X spiked to over 37. This would have been an excellent daily trading buy level. However, the markets proceeded to fall significantly lower for several weeks after the initial drop. No technical indicator is ever completely accurate used alone. A better buying opportunity developed in late May, after the selling volume had declined, and the VIX was in the high 20s. However, this correction is different for a number of reasons. The Nasdaq had only risen to 4250 in August, versus 5000 in March. Also, the levels of margin debt were lower in August. The VIX.X generally spikes higher during severe market drops because the crashes are almost always sharper and more intense than market rallies. A number of factors influence the implied volatility of put options. One is the demand for puts, which rises during crashes. Another is the speed with which market crashes occur. Once the VIX.X spikes to this high level, it means that put options are expensive. It is generally a poor time to buy puts. However, individual call options may still have low volatility. Also, selling put options in put credit spreads can often be profitable when the VIX.X is high. One factor which may indicate that the market might be poised to recuperate faster than it did after the spring crash is the lower levels of margin debt. Last March, margin debt was at a record high. Money market funds experienced a net outflow of over $50 bln in April, most of which was attributed to margin selling. It was about a month later, at the end of May, when selling volume abated and the markets started to rally. Margin selling often causes wide spikes in daily volume with intense downside pressure as forced liquidation occurs. Often, this selling intensified during the middle of the day to ease toward the end of the day. Statistics on margin debt are often delayed. However, margin debt was down in August from the high levels of April, which is not surprising. Statistics on money market funds flows can give an indication of market mentality and margin debt. The Investment Company Institute reported that money market funds took in a record amount of cash last week. Retail money market funds took in $8.1 bln in cash, to total $1 trln. Institutional money market funds took in a whopping $16.54 bln, to reach a record $778 bln. There may have been margin selling, but probably not at the same levels seen in April, and the margin selling has not made a significant dent in the cash stash. The estimates for cash flows to equity funds this week vary from outflows of $9 bln to inflows of $1 bln. The four week moving average of cash to equity funds is in the range of $2 bln. There were over 13 companies which were scheduled to debut in IPOs this week. However, it is not surprising that only 6 companies made it. The light IPO market frees up cash to be invested in other stocks in the indexes. It is informative to examine the cash flows to the markets following the last series of Federal Reserve rate hikes in 1994. During 1994, the S&P 500 stayed flat, and the total cash deposited into equity funds was approximately $75.4 trln. The following year, the flows increased to $116.5 trln. By 1997, equity funds took in $189 trln in cash. 1996 and 1997 were two of the best years on record for the S&P 500. In 1999, equity funds took in $170.7 trln in cash. However, this was the first year in the 1990s when the level of cash raised in IPOs was higher than the level of cash which was deposited to equity funds. We want to see a higher level of cash coming into the market than exiting through new issues. In addition, in 1997 the S & P 500 was approximately 600. It has since doubled in market capitalization. If the same level of cash went into the S & P 500 next year as the amount which was deposited in 1997, it might not be sufficient to increase the market to the same percentage. Fortunately, investors have demonstrated over the last twelve months that they have on average a minimum of approximately $50 to $70 bln per month available to invest in the market. If the IPO schedule continues to moderate and the flows start rising consistently, then the market should have no problem rallying. As earnings are released, it is important to monitor the actions of individual stocks and their sectors. For example, the chip stocks tend to move very closely in tandem. However, within the chip sector there are many specialized areas. Some may be in the middle of slowdowns, while others may find their growth accelerating. In the last two weeks, PMC Sierra sold off over 62 points, due to concerns about slowing semiconductor growth. However, the company had not warned that their earnings would be lower than expected, and they blew away earnings by a wide margin. When the Nasdaq rebounded, PMCS was in a perfect position for a strong rebound. And rebound it did! ***** "En Garde" By Lynda Schuepp In fencing the term "En garde" means on guard. It is a stance that fencers assume before preparing to fence. After the gains we saw on Friday, I think we should all be on guard. I'm not saying we couldn't go to the sky from here, but one must use caution. Trade what the market gives you, not what you would like it to give you. I am very encouraged by the spikes in VIX this week, the oversold readings in the market, and the bounce off the April lows on Thursday and the close above on Friday. However, I remain cautious. I tried to leg out of my OEX put spread from last week, but the market makers were not cooperative. They widened the spread to 3 points! Usually the spread is about 1/2 point. No way could I exit without the potential of taking a real beating on one leg or the other. Wednesday I liked the action at the open and had been watching the QQQ's. I was eager to get in on the action. The QQQ's had been showing signs of being oversold for quite some time that I decided to buy a lottery ticket. The bid ask spread was reasonable and the calls were actually priced pretty fairly. I looked at the October calls but decided that for an extra buck I could buy a month more of time to be right. I noticed that the volume spikes on the 15 minute chart was accompanied with up candles, indicating to me that the QQQ's were being accumulated in size so I bought the November 80 calls for $4.63 when the QQQ's were trading at about $78. By 2:00pm EDT, the QQQ's were bumping their heads at a strong psychological resistance level of $80. They ran down to $77.25 by the end of the day. My calls were under water by a point. The next day, things were looking good at the open and then the news about the bombing of our ship. I was reminded of the movie "Wag the Dog" and couldn't help but wonder about the timing of this suicide raft. Needless to say, the QQQ's and everything else sunk. I had to leave to catch a plane to North Carolina for a fencing event for my daughter so I missed seeing a lot of the bloodshed. The QQQ's closed at $75.13. The next day I spent in the Greensboro convention center trying to stay focused in two different worlds, the world of fencing and the stock market. Needless to say I was not "en garde." I couldn't get cell phone service because of the Bell Atlantic/Verizon merge. The left hand didn't know what the right hand was doing. They couldn't find my number in their data base! The Telecom industry definitely has some room to improve. I felt helpless without my computer or cell phone. Now, Friday the 13th has always been my lucky day, and this Friday proved to be the same. The QQQ's ran all the way up over the previous resistance of 80! I am very hopeful of at least a bounce. The market will give us signs, but meanwhile I am holding my November calls. They closed at $6 for a gain of 30%. If the options keeps their high volatility, I will be tempted to sell a higher October strike call against them and then ride the long call up for the November run. A close below $80 might send me running for shelter. On Monday, I will be back in position and "En garde." My hope is that I can just sit back and watch the profits grow. I am armed and ready for battle. ************************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=644 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* EMLX - Emulex Corporation $129.69 (+21.69 last week) See details in sector list Put Play of the Day: ******************** INKT - Inktomi Corporation $82.25 (-8.75 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=652 ************************************************************** ************* DAILY RESULTS ************* Index Last Week Dow 10192.18 -561.96 Nasdaq 3316.77 -44.24 $OEX 729.01 -21.96 $SPX 1374.17 -34.82 $RUT 480.39 -10.63 $TRAN 2430.18 -164.49 $VIX 30.98 5.31 Calls BRCD 239.63 25.94 New, it pays to be in the right sector EMLX 129.69 21.69 Leading the charge on the NASDAQ CIEN 127.88 17.31 Strong rebound launched CIEN to upside AKAM 49.00 12.81 New, long time comingrebound is here SCMR 85.47 7.22 New, young optical with rebound potential SEBL 98.88 6.44 Relative strength to extend rebound LLY 87.00 4.06 Tech wreak bringing money into the Drugs SUNW 111.00 3.50 Tech leader running into earnings NT 65.44 3.13 Leading optical player set to rally GLW 92.88 2.44 New, big money in bid bandwidth MRK 76.19 0.13 Leading drug maker - leading the market Puts DNA 134.63 -27.88 New, investors buy drugs, not biotech CRA 66.31 -13.06 High-risk biotechs are hurting JPM 143.13 -9.88 Finance sector facing several problems INKT 82.25 -8.75 The bigger trend is still negative CPN 84.00 -8.25 New, breakdown below key support JBL 49.38 -1.88 Dropped, strong rebound in Semis CPTH 52.00 1.25 Bad Net sector thanks to YHOO and DCLK AETH 87.00 4.75 Dropped, events combined to boost AETH QLGC 85.00 10.75 Dropped, running for high country ************************** 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 today PUTS JBL $49.38 (-1.88) A strong bounce in the Semiconductor sector, a stellar earnings report and positive outlook going forward from PC maker Gateway along with a deeply oversold chart helped JBL gain $5.38 or 12% on Friday in a NASDAQ-wide relief rally. Or was it more than relief? Ever since hitting a bottom at $39 on Wednesday, the stock has been making a comeback. While resistance at the 5-dma near $45 held strong on Thursday, Friday's rally was enough to put JBL back above both the 5- and 10-dma, now at $48.65. While the stock is still having trouble with resistance at $50, a friendlier atmosphere in Tech stocks could be enough reason for JBL to continue its recovery. With profits already realized on this play, we are moving on to new and better prospects. AETH $87.00 (+4.75) Did you have your paddles handy? AETH never gave us a clean break of $75 on Friday. Instead, the culmination of the recent five mln-share insider offering, new Buy coverage at CE Unterberg Towbin, and rallying market conditions sent AETH through the roof by late afternoon. The share price climbed $11.44, or 15% on almost twice the ADV. The upswing took AETH through the 10-dma at $85.07, which marked the upper resistance. This violation clearly signals the play is over. Earnings are also just around the corner. The company is expected to report around October 23rd. QLGC $85.00 (+10.75) Well, QLGC took its beating, there's no doubt about that! But on Friday, the stock made a no-holds-bar run for the high country amid the rallying marketplace. Once QLGC made a definitive move through near-term resistance of $77.50 and the 100-dma line, the share price bolted upwards. The strong break through $80 and the bullish close at its former support of $85 leaves no room for argument. We're cutting QLGC from our put list this weekend. Plus, OIN never recommends holding over an earnings report and Qlogic is scheduled to report next week. They're scheduled for Wednesday, October 18th, after the market close. *********** 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 ************** AKAM - Akamai Technologies Inc. $49.00 (+5.06 last week) Straight line broadband content delivery, best describes this companies approach to the market. AKAM is the leader when it comes to delivering ads and streaming video online. This company commands a 70% market share according to Briefing.com, having captured the majority through its customer Yahoo. AKAM has good team support as well, with Apple and Cisco helping in the technology development. AKAM's main product called FreeFlow, allows end users to experience the fastest streaming delivery by optimizing content distribution to over 4000 servers in 45- countries. The software looks for the server closet to the request, and efficiently routes the data, optimizing user experience. With its recent purchase of InterVu, AKAM is poised to protect and maintain its market dominance in this area. It's been a long time coming, but AKAM has turned the corner and is offering investors a good level of entry from the long side. Since July, AKAM has experienced a negative trend along with the rest of the Tech sector. That negative trend came to a halt last week after AKAM established a solid bottom and began to climb higher. Last Friday, the stock hit a low of $35, and has since commenced an upward trend. Normally not so intriguing, however, the MACD is indicating this as the start of serious and very positive momentum in the play. Thursday's target cross on the MACD is showing an ascending slope that promises break through capability that should allow AKAM to trade above the current $50 resistance mark. Once this occurs, an explosive run should commence to the target area of $60. Of course, we need the NASDAQ to cooperate if AKAM is going to accomplish our goal. AKAM is confirmed to release its earnings on Oct. 18th. The company is still in the red, with an estimated loss of 67 cents. The key here is the street. AKAM is whispered to beat estimates by 6-cents, so this could help rally the stock to its target. Keep in mind however, we won't hold over earnings. In preparation for this earnings run, Piper Jaffray initiated coverage on the AKAM Friday with a Buy rating. AKAM has developed a 2-day support level at $41. A rebound off this mark could be playable for traders, although the more prudent entry will be to follow momentum. Allow AKAM to trade above $50 with continued positive market support. Trail stops closely to prevent a turnaround due to tough market conditions. News Friday revealed that AKAM is integrating storage capability with its content delivery to allow the company to tap into a growing $8-billion industry by 2003. This expansion will take place in its EdgeAdvantage product to allow managed data storage of audio, video, photographs, games, etc. BUY CALL NOV-45 RUG-KI OI=840 at $10.00 SL=7.00 BUY CALL NOV-50*RUG-KJ OI=374 at $ 7.88 SL=5.75 BUY CALL NOV-55 RUG-KK OI=285 at $ 6.13 SL=4.00 BUY CALL FEB-50 RUG-BJ OI=111 at $13.25 SL=9.75 BUY CALL FEB-55 RUG-BK OI=177 at $11.38 SL=8.50 SELL PUT NOV-40 RUG-WH OI=826 at $ 3.63 SL=2.38 (See risks of selling puts in play legend) Picked on Oct 15th at $49.00 P/E = N/A Change since picked +0.00 52-week high=$345.50 Analysts Ratings 5-5-0-0-0 52-week low =$ 45.50 Last earnings 07/00 est= -0.59 actual= -0.50 Next earnings 10-18 est= -0.67 versus= N/A Average Daily Volume = 2.16 mln BRCD - Brocade Communications $239.63 (+25.94 last week) Brocade is leading the way in a new category of networking: providing a scalable, reliable foundation for storage environments. They are the market leader in Fibre Channel Fabric switches-the essential framework for networking servers and storage systems. Brocade switches deliver the flexible and secure "Fabric" that supports the tremendous information and storage demands of today's leading companies. Brocade Fibre Channel fabric switches and software provide a networking foundation for storage area networks (SANs). It pays to be in the right sector. In the midst of the recent weakness in the NASDAQ, storage stocks such as EMC, NTAP and VRTS have all held their ground far better than stocks in sectors such as the Semiconductors, Internets, B2Bs - and for good reason. Even in a slowing economy, there are industries which display such phenomenal growth rates that more than compensate for any macro-based concerns. If VRTS' earnings report on Thursday is any indication, boasting year-over-year revenue growth of over 100%, the storage business is alive and booming with BRCM a direct beneficiary. With eight consecutive periods of quarter-over- quarter revenue and earnings growth under its belt, BRCD appears to be headed for number nine. Bouncing off strong support at $206 last Monday, the stock put together a 5-day winning streak this past week, even in the face of a down market. Using the 50-dma (now near $220) for support, BRCD put itself back on the right side of the 5- and 10-dma on Tuesday. From there it's been all up, trading in a wide intra-day channel spanning over 20 points. This is a volatile stock and the premiums reflect it. But as the saying goes, you get what you pay for and in this case, it’s exponential growth. The 10-dma, now at $224.33, provided a launching point for BRCD's blast-off on Friday when friendly market conditions helped it rally to close up $10.64 on 115% of ADV. In doing so BRCD closed above resistance, now support at $230, which is reinforced by the 5-dma. At this point, a pullback to the 5- or 10-dma would be an aggressive target to shoot for while a strong market on Monday could easily lift BRCD past resistance at $240 for a conservative entry point, but confirm the breakout with volume and sentiment in the NASDAQ before entering. With many Tech stocks down so far in October, BRCD has the rare distinction of being up for the month. If BRCD can perform this well in such adverse conditions, an auspicious market could see the stock challenging its all-time highs. News such as Wednesday's announcement of a new high-profile customer in Fujitsu will certainly help the cause. BUY CALL NOV-230 GUF-KF OI= 560 at $28.25 SL=20.50 BUY CALL NOV-240*GUF-KH OI= 180 at $21.38 SL=15.50 BUY CALL NOV-250 GUF-KJ OI= 185 at $18.00 SL=13.00 BUY CALL JAN-240 GUF-AH OI= 491 at $35.00 SL=25.50 BUY CALL JAN-250 GUF-AJ OI=6374 at $31.00 SL=22.50 SELL PUT NOV-230 GUF-WF OI= 68 at $14.50 SL=20.00 (See risks of selling puts in play legend) Picked on Oct 15th at $239.53 P/E = 619 Change since picked +0.00 52-week high=$259.81 Analysts Ratings 9-6-2-0-0 52-week low =$ 52.81 Last earnings 08/16 est= 0.13 actual= 0.16 Next earnings 11-15 est= 0.20 versus= 0.03 Average Daily Volume = 2.79 mln SCMR - Sycamore Networks $85.47 (+7.22 last week) Sycamore Networks develops and markets intelligent optical networking products that transport voice and data traffic. The company combines its significant experience in data networking with expertise in optics to develop intelligent optical networking solutions for network service providers. Based on a common software foundation, SCMR's products enable the company to concentrate on the delivery of services and end-to-end optical networking. Among the company's offerings are optical transport, access and switching systems and end-to-end optical network management solutions. A relative newcomer to the Optical Networking space (at least compared to players like NT), SCMR wants its share of this latest gold rush. The company scored a major victory with its deal with BellSouth last week (see news below), and it appears this may be the catalyst to pull the stock out of its recent nosedive. Recall that we have been playing SCMR to the downside since it violated support in the vicinity of $120 last month. Since then it has been a painful slide, as investors have seemingly jettisoned any high PE stock. The heavy volume that occurred near the $70 level may be indicative of a solid bottom formation, and Friday's strong gains were enough to tip the scales in favor of the bulls. Accordingly, SCMR finds its way back onto the call list this weekend. While the recovery is still tenuous, volume came in at nearly double the ADV on Friday, as our new play tacked on a gain of 11%. While all of the moving averages (except the 5-dma at $80.13) are arrayed overhead, the technicals are starting to turn positive. Support appears to be rock-solid at the $70 level, with milder support in the $78-80 range. Intraday dips to the higher support level should provide attractive entry points in the week ahead, but make sure you are catching a bounce, not a falling knife. Friday's recovery brought SCMR right up to the $86-87 resistance level, and the next obstacle above that is found at $91-92. More cautious investors will take a wait-and-see attitude, requiring SCMR to scale these levels on solid volume before jumping into the fray. Earnings are still a month away for our play, so if that is the game you want to play, you still have plenty of time to get into position. SCMR announced on Thursday that its earnings will be released on November 14th after the closing bell, followed by the conference call. Given the announced multi-million deal with BellSouth for new-generation optical switches, the current quarter's earnings may be less significant than the company's forward looking statements. Terms of the deal with BellSouth have not been disclosed, but the symbolic value may far outweigh the dollar value, as this marks the first sale of SCMR's advanced fiber-optic switching equipment to a regional Bell. BUY CALL NOV- 85*QSM-KQ OI= 160 at $14.38 SL=10.75 BUY CALL NOV- 90 QSM-KR OI= 221 at $12.00 SL= 9.00 BUY CALL NOV- 95 QSM-KS OI= 249 at $10.00 SL= 7.00 BUY CALL DEC- 95 QSM-LS OI= 105 at $14.75 SL=11.00 BUY CALL DEC-100 QSM-LT OI=2769 at $13.38 SL=10.00 SELL PUT NOV-70 SMZ-WN OI=159 at $5.38 SL=7.75 (See risks of selling puts in play legend) Picked on Oct 15th at $85.47 P/E = 1185 Change since picked +0.00 52-week high=$199.50 Analysts Ratings 9-4-2-0-0 52-week low =$ 47.25 Last earnings 08/00 est= 0.06 actual= 0.08 Next earnings 11-14 est= 0.02 versus= -0.19 Average Daily Volume = 6.16 mln GLW - Corning Inc $92.88 (+2.44 last week) Corning is a global communications technology company that operates in three primary business segments: Telecommunications, Advanced Materials, and Information Display. They are the world's top producer and pioneer of fiber-optic cable, which it invented over 20 years ago. Corning also owns the well known crystal maker, Steuben Glass. The company operates 40 manufacturing plants in 10 countries. In a marketplace that's tormented with thoughts of a tech slowdown, there's GLW shining brightly above the rest. It’s a simple fact. You can't have a network without network fiber and parts! People and businesses want more bandwidth and this "networking hunger" keeps the Cornings of the world in the big money. On Thursday, the company announced that it expects to hit between $0.34 and $0.35 when it reports on October 24th, after the market. If the company's expectations are "on the money", so to speak, the numbers will crush Wall Street's estimates of $0.30 cents for its 3Q! According to James Flaws, Corning's CFO, "the key driver has been optical fiber" and "the earnings are largely due to better-than-expected fiber pricing". The welcomed announcement follows a year of rapid growth for Corning. The company successfully emerged from a glassware maker to a leader in the fiber-optic industry. To meet the ever-growing demand, Corning announced in late September that it will pay $3.6 bln in cash to buy Pirelli, an Italy-based optical components business. Recently too, GLW traded as high as $334 prior to its 3:1 stock split on October 4th. After suffering a mild bout of post-split depression, the above-earnings surprise lifted GLW to its current level above the 10-dma ($91.88). We're anticipating the momentum to build and generate more upside action prior to the earnings release later this month. However before jumping into the impending momentum, it may be more prudent to wait for GLW to demonstrate strength above $90. GLW was a recipient of a slew of upgrades this week. Sands Brothers and William Blair & Co both offered Buy ratings on GLW, while Thomas Weisel Partners upgraded the stock to a Strong Buy. BUY CALL NOV- 90 GWD-KR OI=5568 at $11.25 SL= 8.25 BUY CALL NOV- 95*GWD-KZ OI= 121 at $ 8.75 SL= 6.25 BUY CALL NOV-100 GWD-KT OI=5989 at $ 6.75 SL= 4.75 BUY CALL JAN- 95 GWD-AZ OI= 178 at $13.75 SL=10.25 BUY CALL JAN-100 GWD-AT OI=4472 at $11.75 SL= 8.75 Picked on Oct 15th at $92.88 P/E = 149 Change since picked +0.00 52-week high=$113.33 Analysts Ratings 6-5-0-0-0 52-week low =$ 21.36 Last earnings 06/00 est= 0.79 actual= 0.94 Next earnings 10-24 est= 0.30 versus= 0.18 Average Daily Volume = 3.92 mln ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 10-15-2000 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/101500_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=645 ************************************************************** ****************** CURRENT CALL PLAYS ****************** SEBL - Siebel Systems $98.88 (+6.44 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. Despite last Friday's massive rally, the NASDAQ lost another 1% in the past week of trading. On the other hand, SEBL tacked on a relatively impressive 7%. Needless to say, we're pleased with SEBL's performance! We're looking for SEBL to extend its recent rebound in the coming week as third-quarter earnings enter the forefront. However, there has been some confusion as to when SEBL will actually report its third-quarter results. According to SEBL's Web site, the company is slated to report in over a week on October 24th. There have been several conflicting reports issued, which suggested SEBL is set to announce earnings this coming week. We will contact SEBL's Investor Relations department early next week and relay the correct earnings date. Whether earnings are announced this coming week or next, SEBL's profit report is sure to cause a stir within the Software sector. The company's commanding position in the CRM Software market has propelled SEBL past earnings estimates by an average of 22% in its last two quarters. Investor expectations will be high going into SEBL's earnings report and could transcend into bullish anticipation. If that anticipation morphs into aggressive buying early next week, aggressive traders could enter new positions if SEBL breaks through the $100 level. A more conservative approach might be to wait for SEBL to gain momentum and look to enter new positions if the stock plows above resistance at $103. If, however, SEBL pulls back early next week, traders could use a bounce off support at $95, or even lower near the $90 level to enter new positions. Make sure to wait for SEBL to rebound off support before entering on a dip. Rick Sherlund, the infamous Goldman Sachs Software analyst, recently shifted his bullish support from long-time favorite MSFT. Sherlund subsequently bestowed software makers ORCL, ITWO, and our SEBL with bullish blessings. Sherlund's bulling of SEBL confirms the company's high-growth status, which could result in a blowout third-quarter earnings report. BUY CALL NOV- 95 EZG-KS OI= 809 at $13.50 SL=10.00 BUY CALL NOV-100*EZG-KT OI=2359 at $11.13 SL= 8.25 BUY CALL NOV-105 EZG-JA OI=1498 at $ 8.63 SL= 6.25 BUY CALL JAN-100 EZG-AT OI=6793 at $17.00 SL=12.25 BUY CALL JAN-105 EZG-AA OI= 999 at $14.75 SL=10.75 Picked on Sep 17th at $99.00 P/E = 400 Change since picked -0.13 52-week high=$118.44 Analysts Ratings 17-5-0-0-0 52-week low =$ 19.88 Last earnings 06/00 est= 0.09 actual= 0.11 Next earnings 10-24 est= 0.11 versus= 0.07 Average Daily Volume = 5.89 mln SUNW - Sun Microsystems Inc. $111.00 (+3.50 last week) Sun Microsystems is a self contained giant. They not only provide the world with UNIX based servers and work stations, but they also provide their own peripherals. Among these are (Solaris) operating systems, (SPARC) chip components, and the now famous Java technology that much of today's software incorporates. This allows for any system to have uniform and compatible running capability. SUNW is poised to continue its aggressive growth as it focuses on the telecommunications industry now. This is an industry which many think will overwhelm what we have seen with growth in the computer industry. Are you superstitious? Many thought Friday the 13th would continue to scare investors into selling. As the day started, and the PPI and retail sales numbers came in higher than expected, it appeared that a scare was truly in the cards. Not so however, as Friday the 13th proved to be a day for the contrarians, and buying ensued. SUNW participated in this rebound nicely, as chip and technology issues served as the main fuel energizing the NASDAQ's rebound. Much like the NASDAQ, SUNW closed strong near its high at $111.13, bouncing nicely off the 200-dma support line at $96 as we anticipated. The reason for this robust bounce is due to the oversold condition on the play, and the fact that investors used the support as an opportunity to enter the play to take advantage of the earnings run. Numbers for SUNW are confirmed to be released next Wednesday the 18th. With good numbers being released Friday from Gateway and Juniper Networks, investors regained some confidence in SUNW's earnings run potential. The buying interest Friday catapulted SUNW above the 10 and 100-dma's, and the stock should now look to use $105 as its new support, where these two dma's converge. Investors should now play SUNW with the view of taking advantage of current positive momentum. As such, look for continued strength above the 20-dma at $113 as possible entry points, or a rebound rally off the $105-support area once it is confirmed. SUNW once again is making history as they offer open source coding to the public on their StarOffice 6 product. The nine million lines of code are available for download and review, as SUNW mimics what AOL did with their Netscape division. Bill Roth of SUNW development said they are analyzing the open source strategy and how it will "affect the development process. BUY CALL NOV-105 SUX-KA OI=3753 at $14.00 SL=10.50 BUY CALL NOV-110 SUX-KB OI=1460 at $11.25 SL= 8.25 BUY CALL NOV-115*SUX-KC OI=4248 at $ 8.75 SL= 5.75 BUY CALL JAN-110 SUX-AB OI=6663 at $17.38 SL=12.50 BUY CALL JAN-115 SUX-AC OI=3697 at $15.13 SL=11.00 SELL PUT NOV-105 SUX-WA OI= 1157 at $ 7.25 SL= 5.00 (See risks of selling puts in play legend) Picked on Oct 10th at $103.19 P/E = 89 Change since picked +7.81 52-week high=$129.31 Analysts Ratings 11-11-1-0-0 52-week low =$ 43.78 Last earnings 07/00 est= 0.33 actual= 0.39 Next earnings 10-19 est= 0.25 versus= 0.17 Average Daily Volume = 14.9 mln LLY - Eli Lilly & Co. $87.00 (+4.06 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. With the DOW down over 400 points last week and the NASDAQ losing 44 points, LLY has indeed, to quote Chase H&Q analyst Alex Zisson, "been a safe place to be." The drug stocks for the most part have continued their steady ascent, as if immune to the recent market fears. While posting modest gains for the week, low options premiums relative to those of volatile Tech stocks make the profits realized on this play well worth the effort. Despite recently encountering resistance at its 100-dma at $85, the stock broke out of that level on Wednesday as investors, scared lily-white by a falling market ran to LLY for cover, helping it to close up almost $3 on strong volume. On Thursday, in the face of tensions in the Middle East and a 379 point down day for the DOW, LLY continued to be a bastion of strength, ending the day fractionally higher. On Friday it was time for the rest of the market to catch up while LLY had a day of rest, bouncing off support at the 5-dma near the $86 level and encountering resistance just above $88.50 to close down 50 cents. Trading volume in the stock as well as in the options has accelerated as LLY approaches its earnings date. At this point, a bounce off strong support at $85 or the 5-dma near $86 could be an aggressive target to shoot for but make sure the bounce is confirmed with volume. Conservative traders will want to see LLY break through $88.50 on strong buying volume before making a play, keeping in mind the next level of overhead resistance at $90. LLY is set to report earnings after the close on October 19th so there is little time left for the play. In keeping with our policy of taking money off the table before such announcements, we will be closing this play before that time comes. Last Thursday, investors looking for protection bought heavily into October 80 and 85 puts, on almost twice the average trading volume. While this increased implied volatility, the change was minute and contrarian thinking would view this as a positive development. BUY CALL NOV-80 LLY-KP OI= 887 at $9.13 SL=6.25 BUY CALL NOV-85*LLY-KQ OI= 740 at $5.88 SL=3.75 BUY CALL NOV-90 LLY-KR OI=1821 at $3.25 SL=1.75 BUY CALL JAN-85 LLY-AQ OI=7144 at $8.88 SL=6.25 BUY CALL JAN-90 LLY-AR OI=4349 at $6.50 SL=4.50 Picked on Oct 5th at $84.56 P/E = 32 Change since picked +2.44 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= 0.70 versus= 0.62 Average Daily Volume = 3.74 mln MRK - Merck & Co $76.19 (+0.13 last week) Merck is a global pharmaceutical company, which specializes in the development of human and animal health products. They are the #1 industry leader in the US and #2 worldwide. Some of its more prominent drugs include Zocor and Meycaor (cholesterol drugs), Pepcid (an anti-ulcerant), top-selling hypertension drugs, Vasotec and Prinivil, and more recently the AIDS medication, Crixivan. The drug maker also provides pharmaceutical benefit services through Merck-Medco Managed Care which it sells to corporations, labor unions, and insurance companies. When it comes to e-commerce Merck won't be left behind either. The company has formed an alliance with CVS to market drugs online. As a leading drug manufacturer with a solid business model and a strong sales record, Merck is considered a top dog in one of the best performing sectors this millennium. Its bottom line is estimated to grow by 15% in 2001 as a result of a strong trend in prescription drug sales, despite loosing patent protection on some drugs. As profit warnings and disappointing quarterly earnings afflict the tech sector, MRK has attracted plenty of buying. The investors are simply seeking shelter from the carnage and the drug stocks are great defensive plays during volatile market conditions. The robust volume sent the stock through tough resistance at $75 and positioned it for a strong run into earnings. Shares continued to edge higher this week, forming a tight consolidation around $76 and $77. Upper resistance still remains firm at $80 and $81.13, the 52-week high. If you were looking to set up for a run into next week, the multiple bounces off $75 during Friday's session provided reasonable entry opportunities. Plan your strategy accordingly. There are only four sessions left to trade MRK. The company is confirmed to report on October 20th, BEFORE the market opens. Merck recently announced that its drug, Fosamax, was approved by the FDA for treatment to increase bone mass in men with osteoporosis. This medicine is the first of its kind. It's projected that the number of men with osteoporosis will increase approximately 20% by the year 2015. BUY CALL NOV-70 MRK-KN OI= 3406 at $7.75 SL=5.50 BUY CALL NOV-75*MRK-KO OI= 5206 at $4.13 SL=2.50 BUY CALL NOV-80 MRK-KP OI= 4521 at $1.88 SL=1.00 BUY CALL JAN-75 MRK-AO OI= 9864 at $6.38 SL=4.50 BUY CALL JAN-80 MRK-AP OI=12946 at $4.00 SL=2.50 Picked on Oct 10th at $76.88 P/E = 29 Change since picked -0.69 52-week high=$81.13 Analysts Ratings 8-11-10-0-0 52-week low =$52.00 Last earnings 06/00 est= 0.69 actual= 0.73 Next earnings 10-20 est= 0.73 versus= 0.64 Average Daily Volume = 4.69 mln CIEN - Ciena Corp $127.88 (+17.31 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. Strong action on Friday launched CIEN to the upside of its tight trading channel of $110 and $120, with style! The share price tacked on an impressive 12.7%, or $14.44 on 1.5 times the ADV. The rallying market conditions were, of course, catalysts; however, there were other bullish factors to influence CIEN's breakout. Despite a collapse of the major indices mid-week, we saw CIEN finish strong on the back of positive analyst comments. SG Cowen started CIEN with a Strong Buy and a $150 price target. They cited accelerating sales growth and its evolvement from a point-product company to a diversified optical systems vendor as primary reasons for its "remarkable recovery". Then there was the upbeat analyst meeting on Thursday. CIEN is on track for Q4 earnings (ends 10-31) and gave positive updates on all core product lines. The company is expected to report earnings around November 16th. As for the play, CIEN has formed a solid base using $110 as support; yet shares seem to have solid support as far down as $106 on a pullback. For our purposes, a pullback of this magnitude isn't expected over the near-term. Consider looking for intraday dips at the intersecting 5 and 10 DMAs at $115.66 and $115.21, respectively, as a guideline for entries. If you'd rather enter on the climb, confirm strength above $120 before taking this aggressive approach. We're looking for a test of $136.13, the 52-week high set on September 25th. Keep stops tight in this volatile marketplace. On Thursday, the company announced plans for its latest leading- edge development. Ciena will introduce "channel spacing", an industry first that will enable new levels of channel density in its optical transport systems. BUY CALL NOV-120 UEZ-KD OI=2825 at $18.00 SL=13.00 BUY CALL NOV-125 UEZ-KE OI=1799 at $15.63 SL=11.25 BUY CALL NOV-130*UEZ-KF OI= 896 at $13.38 SL=10.00 BUY CALL JAN-125 UEZ-AE OI=9503 at $23.88 SL=18.75 BUY CALL JAN-130 UEZ-AF OI=2731 at $21.50 SL=16.75 Picked on Sep 24th at $120.75 P/E = 630 Change since picked +7.13 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 11-16 est= 0.24 versus= 0.03 Average Daily Volume = 8.03 mln EMLX - Emulex Corporation $129.69 (+21.69 last week) A leading networking company, EMLX designs, builds and distributes three types of connectivity products: network access servers, printer servers, and high-speed fibre channel products. It's fibre channel products, which are based on internally developed ASIC technology, are deployable across a variety of network configurations and operating systems to support increasing volumes of stored data. EMLX sells its products directly throughout the world to OEMs and end users, as well as through system integrators and industrial distributors. As though shot from a cannon, EMLX led the charge as the NASDAQ recovered mightily on Friday. The gap down at the open was to be expected after Thursday's carnage, but the buyers appeared immediately and their enthusiasm carried our play higher all day. Volume was a healthy 25% over the ADV, and it grew stronger throughout the day, adding conviction to the nearly 13% rise. The market was due for a positive bounce, given the damage from earlier in the week, but EMLX had telegraphed its willingness to move higher by refusing to break down through the $105 support level. Posting higher lows since early October, EMLX was poised to rally and did not disappoint. Comments made at the Fibre Channel Technology Conference may have helped EMLX to hold its ground, but it seems the more plausible explanation is that investors began focusing on the company's rapidly approaching earnings announcement. Scheduled for October 19th, after the close, the company's 1st quarter results are expected to double the year-ago number, and expectations are high. The early bounce provided target-shooters with a bargain of an entry point, but even more risk-averse players had a solid entry once our play cleared the $121 resistance level. This level should now act as support going forward, backed up by historical support at $110-112. Use pullbacks as an opportunity to add new positions. Friday's close has brought EMLX right back up to the $130 resistance level, and pushing through this level will provide another conservative entry point. As always, we need to see strong volume to propel our play to new heights, but if Friday's action is any indication, EMLX looks ready to run. If the enthusiasm continues through the next few days, follow the cardinal rules and get out ahead of the announcement. High expectations frequently lead to post announcement selloffs, regardless of how strong the numbers are. Whatever he had to say at the Fibre Channel Technology Conference last week, EMLX's Director of Product Marketing, Mike Kane, sure didn't scare investors. Focusing on the growing demand for 2Gb/sec solutions and future needs for 10Gb/sec solutions, he painted a rosy picture for the future of Fibre Channel technology and EMLX's place in it. In addition, the company demonstrated its LightPulse Sbus host adapter and its PCI-based 2Gb/sec LP9002 host adapter, highlighting the company's auto speed negotiation capability. BUY CALL NOV-125 UMQ-KE OI= 87 at $22.13 SL=16.50 BUY CALL NOV-130*UMQ-KF OI=133 at $19.75 SL=14.25 BUY CALL NOV-135 UMQ-KG OI=188 at $17.25 SL=12.50 BUY CALL JAN-130 UMQ-AF OI=326 at $30.63 SL=23.00 SELL PUT NOV-110 UMQ-WB OI= 80 at $ 8.50 SL=11.25 (See risks of selling puts in play legend) Picked on Oct 12th at $115.00 P/E = 134 Change since picked +14.69 52-week high=$225.50 Analysts Ratings 3-7-0-0-0 52-week low =$ 35.50 Last earnings 08/00 est= 0.21 actual= 0.25 Next earnings 10-19 est= 0.26 versus= 0.13 Average Daily Volume = 2.04 mln NT - Nortel Networks $65.44 (+3.13 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. Friday's trading finally provided some action for the bulls, as NT followed the technology sector higher all day, tacking on a respectable 9% gain. The volume picture tilted in favor of the stampeding bulls as well, with the day's tally coming in at 50% above the ADV. After building a solid base near $58, NT was ready to bounce higher, and all it needed was a little encouragement from the broader market. On top of that, the company made some aggressive comments about its wireless Internet strategy (see below), and earnings are rapidly approaching. Set to be released on October 24th after the close, this gives us just 7 trading days to capitalize on the rest of the earnings run. Even if you didn't have the gumption to pull the trigger on the bounce from the $60 level, confirmation of the bullish move came with the stock's clean move through resistance at $63. While the verdict for the day was unclear as late as 2pm EDT, the increasing volume into the close made a strong case for NT heading higher into its earnings announcement. Optical Networking is one sector that is still growing by leaps and bounds, and investors can't seem to get enough of the stocks in this arena. As long as the bulls can parlay this one-day advance into a meaningful rally, this sector should lead the charge into the much-anticipated fall rally. Support is rock solid at the $58-60 level, with milder support now seen near $63. Use any pullback to these levels as a buying opportunity, as long as the bounce is confirmed by increasing volume. The rise on Friday has NT approaching resistance in the $66-67 area. Conservative players will wait for strong buying volume to push through this level before opening new positions. Grabbing investor attention Friday at a Telecom conference in Barcelona, NT's mobile Internet chief, Peter MacKinnon said that his company is aiming for a 25 percent share in the global third-generation (3G) mobile Internet market. Consistently showing up on Telecom providers' short list, NT looks to be well on its way with a $780 million 3G contract with British Telecom's Cellnet and a $100 million 3G contract with Spanish operator Airtel. And according to MacKinnon, more deals will be announced before the end of the year. BUY CALL NOV-65 NTV-KM OI=5980 at $7.50 SL=5.25 BUY CALL NOV-70*NTV-KN OI=8294 at $5.38 SL=3.25 BUY CALL NOV-75 NTV-KO OI=3697 at $3.38 SL=1.75 BUY CALL DEC-70 NTV-LN OI=6256 at $6.75 SL=4.75 BUY CALL DEC-75 NTV-LO OI=4843 at $4.75 SL=2.75 SELL PUT NOV-60 NTV-WL OI= 6159 at $4.63 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 -1.31 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 = 13.80 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=653 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 10-15-2000 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/101500_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=646 ************************************************************** ************* NEW PUT PLAYS ************* CPN - Calpine Corp $84.00 (-8.25 last week) Calpine is the world's top geothermal producer. Calpine owns the largest producing geothermal resource, The Geysers, in northern California as well as varying interests in power plants in 11 US states. They principally engage in the operation of power generation facilities and the sale of electricity and its by-product, thermal energy (steam). Through subsidiaries Calpine Gas and Calpine Natural Gas, the company has 430 bln cu/ft equivalent of proved reserves. Despite being a top utility in the midst of an energy crisis, CPN is tumbling fast. Granted CPN isn't in the oil business, but it does generate power in a country, whose demands far exceed its supplies, so you'd think it'd be pillar of strength. Shares of this company have, in fact, more than doubled this year. It wasn't until the turbulence on the DOW began rumbling earlier this month that CPN had its share price cut by an astonishing 19.5%! Two brokerage firms even came to CPN's defense with Buy recommendations. Gerard Klauer Mattison also issued a strong $118 price target, but to no avail. Last week, shares slipped under the 10-dma ($93.16) and violated the 5-dma ($89.60) on more than twice the normal volume. Friday's move through the $85 historical support signals there may be more weakness over the short-term, although it'll be important to keep an eye on the DOW. Remember CPN is highly influenced by its sentiment. Assuming CPN dives further into the abyss, the next level of support is found at $75 and $77, bolstered by the 100-dma line ($77.55). Downward bounces off $87, or even higher on an intraday spike to $90, offer entries into this put play. A break of $84 and $83.50 (Friday's low) would however offer better corroboration that CPN can slither lower. BUY PUT NOV-90 CPN-WR OI=4000 at $11.13 SL=8.25 BUY PUT NOV-85*CPN-WQ OI= 21 at $ 8.13 SL=5.75 BUY PUT NOV-80 CPN-WP OI= 0 at $ 5.63 SL=3.50 Wait for OI!! Average Daily Volume = 1.80 mln DNA - Genentech $134.63 (-27.88 last week) Using human genetic information to discover, develop, manufacture and market human pharmaceuticals for significant unmet medical needs is DNA's quest. Thirteen of the currently approved Biotechnology products came as a direct result of the company's science. DNA markets and manufactures 7 of these with the eighth just getting ready to go into production. The products include Rituxan, Activase, Nutropin, NutropinAQ, Nutropin Depot, Protropin, Pulmozyme, and Actimmune. The firm is developing other cancer drugs with ImmunoGen and earns royalties for hepatitis B vaccines, bovine growth hormones, and Humulin (human insulin). As the broader markets have disintegrated during the month of October, the Biotech sector has been one of investors' favorite whipping boys. In just over 2 weeks, the Biotechnology Index (BTK.X) has given up over 20%, and DNA has mirrored this action. Falling from north of $185 at the beginning of the month, Friday's low of $128.25 represents a loss of more than 30%. The stock failed to have even a hint of a rally into their earnings announcement on Wednesday, and after just meeting estimates, the sellers came back with a vengeance. Even though there was a bit of a bounce from the lows on Friday, the fact that the stock couldn't get above Thursday's close, paints a decidedly negative picture. As put players, that is precisely what we are looking for -- poor relative strength. Sure all our technical indicators are deep in oversold territory, with all of the moving averages arrayed over head, but the intense selling pressure seen earlier last week looks like it is likely to continue. Support in the $128-130 range is the first obstacle to overcome, with further support at $123, then $120 and $115. Overhead resistance will be a tough nut to crack, with Friday's rollover occurring near the $137 historical support level. Further obstacles exist at the historical level of $148 which is being backed up by the 5-dma ($147.13). Above there, we have the $155 resistance level, confirmed by the 10-dma ($159.69). Barring an unforeseen event, DNA is likely to have a tough time for the remainder of the month. Use failed rallies to resistance levels as an opportunity to enter new positions, or if you prefer a more cautious approach, let selling pressure provide your entry point as DNA falls through support near $128. As always, volume will be the key. Weakening volume on a decline will indicate diminishing selling pressure, while anemic volume on an attempted recovery will be your indication that buying pressure lacks conviction. BUY PUT NOV-140 DNA-WH OI= 88 at $13.63 SL=10.25 BUY PUT NOV-135*DNA-WG OI= 0 at $11.50 SL= 8.75 BUY PUT DEC-135 DNA-XG OI=160 at $14.88 SL=11.00 Average Daily Volume = 835 K ***************** CURRENT PUT PLAYS ***************** INKT - Inktomi Corporation $82.25 (-8.75 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 very 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. By using a Content Delivery Suite, INKT is able to delegate data to many servers, and then combine them from these multiple locations for the rapid and efficient deployment their ISP customers have come to expect. The company also offers sophisticated search engines used by AOL and Lycos which offer more detailed search criteria than the competition. With high speed data delivery now becoming wireless, INKT is currently positioning itself with Hewlett Packard and Sun Microsystems to take advantage of this new market as well. Friday the 13th confused everybody, as it instead put the scare into short players as the markets rallied from an oversold position. INKT faired well by simply bouncing off its short-term support now at $74. The overall trend and momentum on this play remains negative, and this slight rebound only offers more entry opportunity to investors on the short side. With tensions increasing in the Middle East, and the renewed concerns of inflation due to higher than expected numbers in retail sales and the PPI, the Tech sector is not out of the woods yet. INKT investors also remain on the alert as its recent acquisition of FastForward will continue to dilute earnings. INKT is attempting to steal business from Akamai in the content distribution arena. They are having a tough time of it however, as AKAM commands a 70% market share, and INKT has to battle with giants such as AOL and Cisco in contention for this market pie. Since AKAM has a strong hold with Yahoo, this is proving to be a much more formidable task than INKT had anticipated, and investors can feel the battle scars of late. Since INKT was also unable to trade higher than last Thursday's high of $84.75, we'll look to this area for another possible rollover on the play. It is apparent on INKT's intraday chart, that it is stalling on the upside. Several bounces occurred near the $83-area, as INKT was unable to effectively break the mark. Investors will want to watch this area, as it may prove too much, and send INKT lower on renewed market weakness. Once investors confirm negative sentiment in the markets again, look for entry opportunities off either the $83 or $93 resistance areas, depending upon Monday's setup. Should INKT continue to slide from here, wait for a break below the $74-support before entering. BUY PUT NOV-90 KYQ-WR OI=952 at $16.63 SL=12.00 BUY PUT NOV-85*KYQ-WQ OI=294 at $13.50 SL=10.00 BUY PUT NOV-80 KYQ-WP OI=163 at $10.50 SL= 7.25 Average Daily Volume = 2.30 mln CPTH - Critical Path, Inc. $52.00 (-1.25 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 downtrend is still intact, as market forces, sector sympathy and political concerns all conspired to take CPTH down the rocky path. Parent company CMGI continues to be a burden on its subsidiaries, making new 52-week lows on a daily basis. A one-two punch of earnings reports from YHOO and DCLK left starry-eyed investors with lofty expectations disappointed, adding a further drag to the Internet sector. Despite the stock having a strong Friday, closing up $6.13 or 13%, there are a number of reasons why we are keeping this put play. First, volume was average, suggesting that it was more of a short covering and bouncing off oversold conditions rather than buying conviction. Second, the stock was unable to close above its 10-dma, now at $52.27. Third, there is strong overhead resistance at $53. Add to that the bounce off the upper part of its downward trending regression channel on Friday, all we need is a little profit taking or a continuation in negative sentiment for Internet stocks and we've got an ideal entry point. A failure to rally above resistance at $53 or its 10-dma with sellers coming in on high volume would serve as an aggressive entry point while a break below $50 near the 5-dma could give conservative traders a chance to enter this play. Earnings are confirmed for this coming Thursday, on October 18th after the closing bell. As always, we stand by our rule of never holding a position over an earnings report and will close out this play before that time. Until then, there appears to be enough time for at least one more play. BUY PUT NOV-55*UPA-WK OI= 53 at $10.50 SL=7.50 BUY PUT NOV-50 UPA-WJ OI=119 at $ 7.63 SL=5.25 BUY PUT NOV-45 UPA-WI OI= 70 at $ 5.25 SL=3.25 Average Daily Volume = 988 K CRA - Celera Genomics $66.31 (-13.06 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. It's been a highly profitable week for our put play. Investors have been eschewing the higher risk Biotech stocks for safe haven Pharmaceutical issues, trading in blockbuster potential for a slow and steady proven track record. As the fate of the NASDAQ depends largely on the direction of the Semiconductors and Biotechs, it's no wonder the Tech index continued lower for most of the week. While earnings reports from old school Biotechs DNA and BGEN last week were able to meet or barely beat Street estimates, analysts have been sending mixed signals, with high expectations for the sector, yet expressing disappointment in revenue growth from the reports. The reason for buying at the moment, according to analysts, appears to be based on valuation. But just because a stock or sector has fallen sharply does not mean it will not fall even more. Merrill Lynch's Biotech HOLDR (BBH), a basket of leading Biotech stocks, fell below its 200-dma last week, reflecting the negative sentiment in the sector. CRA has been well below that point for quite some time now and while Friday's gain of $3.06 or 4.84% was a step in the right direction (at least as far as shareholders are concerned), the lower than average volume on the move lacked conviction. As well, CRA has been unable to close above its 5-dma, now at $66.50, since September. With strong resistance at $70 and intra-day resistance just above $67, a failure to rally above these levels could be a signal for aggressive traders to take a position. Conservative traders who want to make sure the technicals are weak will be watching for a break below $62 backed by strong selling volume before entering. BUY PUT NOV-70 CRA-WN OI=54 at $11.25 SL=8.25 BUY PUT NOV-65*CRA-WM OI=91 at $ 8.38 SL=6.00 BUY PUT NOV-60 CRA-WL OI= 0 at $ 5.88 SL=4.00 Average Daily Volume = 1.17 mln JPM - J.P. Morgan & Co. Inc. $143.13 (-9.88 last week) J.P. Morgan is a leading global firm that meets critical financial needs for business enterprises, governments, and individuals around the world. They advise on corporate strategy and structure, raise capital, make markets in financial instruments, and manage investment assets. Their expertise is based on an in-depth knowledge of their clients' needs and the industries and environments in which they operate. They also commit their own capital to promising enterprises and invest and trade to capture market opportunities. Fundamentals continue to be the key driver for JPM's decline this past week, as fears of credit quality, a slumping NASDAQ, and political turmoil conspired to lead the stock lower. While the rumors last week of Morgan Stanley Dean Witter losing money in the junk bond market were greatly exaggerated, with estimated losses of over $1 billion, they were nonetheless true. According to MWD, the losses were no more than $90 million since the beginning of June. This does confirm suspicions however, that the under-performing junk bond business, an important source of revenue for investment banks, will have a negative material impact on earnings going forward. Credit quality is another concern casting a pall over the financial sector. According to Moody's, the 12-month default rate is expected to rise 8.4% by next September, up from its current 5.13% levels, and the highest since the 1991 recession. A higher default rate means money lost for lenders leading to further decreased earnings going forward. Concerns about the Euro this week were muted by larger macroeconomic influences, with tensions in the Middle East but that does not mean the problem has gone away. Put all these factors together and the fundamental picture doesn't good. In fact, it got worse on Friday as a stronger than expected PPI number. While JPM rallied $7.13 or 5.24% in spite of the news, volume was average and the close below 5-dma resistance at $145 leads us to believe that JPM may not be out of the woods yet. With additional overhead resistance at $150, a failure to rally above these levels could be a signal for aggressive traders to enter this play. A break below $140 on volume would serve as an entry point for conservative traders. Earnings are scheduled for October 18th. As usual, we advise traders making a play to close out their positions before Wednesday's close. BUY PUT NOV-145 JPM-WI OI= 22 at $8.75 SL=6.25 BUY PUT NOV-140*JPM-WH OI=148 at $6.38 SL=4.50 BUY PUT NOV-135 JPM-WG OI= 43 at $4.50 SL=2.75 Average Daily Volume = 1.98 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=654 ************************************************************** ***** LEAPS ***** Once Again, The VIX Lights Our Path By Mark Phillips Contact Support The first week of the October earnings cycle got off to a rocky start, as leaders like YHOO failed to impress investors and the Internet sector took a turn for the worse. This added to the pressure on the NASDAQ, and the INDU turned sharply negative as well. The silver lining around these clouds was our good friend the VIX. By the end of Thursday's session, it had gotten itself solidly into oversold territory at 34.36, and Friday's recovery should be no surprise. Friday's opening gap in the broader markets drove the VIX above 35, before the rally began in earnest. By the time the dust had settled, all the major indices had posted strong gains with healthy market internals, and the VIX had settled down to end the week at 30.82. While the VIX can certainly go higher (it hit 41.53 during the April selloff), the sharp rise in our volatility index should have had you dusting off your entry plans for your favorite LEAPS plays. This is the time of year that gives us our optimum entries, when fear finally reaches a crescendo, and everyone around us is sure the sky is falling. History has a funny way of repeating itself, and patience through the wild gyrations of the past several months left us ready to take advantage of the excellent entry points as they presented themselves, right on schedule. While there is certainly the possibility of more downside in the days and weeks ahead, the heavy selling followed by a strong recovery across all the major indices has given us many of the ingredients to a high probability entry point in many of our current plays. Provided the lows from this past week are not violated, now is the time to take that cash you've been hoarding and start putting it to work. We've been waiting all year for this entry point, and it is unlikely to get much better until we repeat this cycle next fall. Before I leave you, let me inject a few words of caution into my decidedly bullish commentary. While current market conditions have me thinking this is just about the bottom for the market, that does not mean we can go out and buy everything on the LEAPS playlist. We still have to observe proper entry technique on each and every play. As long as the market can continue Friday's recovery, that is just our license to look for entry points on specific plays. Look for confirmation that the stock is holding critical support levels, and then use your favorite technical indicators (I prefer daily MACD and Stochastics) to give you that entry signal. We are continuing to clean house in the LEAPS playlist, and are weeding out the non-performing or losing plays. Getting the axe this weekend are BRCM, PHCM, and GM. Of course, we are adding new plays as the opportunities present themselves and this week a fallen star makes it onto the playlist. See below for the details of each. Keep your wits about you, and happy hunting! Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2002 $ 45 WUE-AI $ 9.50 $55.63 485.53% 09/17/00 JAN-2003 $100 VUE-AT $32.75 $32.25 - 1.53% CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $21.50 95.45% NT 11/28/99 JAN-2002 $37.5 WNT-AU $15.13 $36.13 138.76% 09/10/00 JAN-2003 $ 75 ODT-AO $27.50 $24.13 -12.27% SUNW 12/19/99 JAN-2002 $ 90 WJX-AR $22.00 $41.88 90.34% ERICY 01/30/00 JAN-2002 $16.3 WRY-AO $ 6.75 $ 3.75 -44.44% 07/23/00 JAN-2003 $ 25 VYD-AE $ 6.88 $ 3.13 -54.58% NSM 02/27/00 JAN-2002 $ 70 WUN-AN $24.25 $ 6.25 -74.23% AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $ 8.40 -54.91% 08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $17.00 2.86% AXP 03/12/00 JAN-2002 $46.6 WXP-AQ $ 9.33 $15.38 64.79% WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $13.13 143.96% JDSU 04/16/00 JAN-2002 $ 80 YJU-AP $39.63 $37.63 - 5.06% 08/27/00 JAN-2003 $130 VEQ-AF $55.25 $31.25 -43.44% MOT 05/14/00 JAN-2002 $36.6 WMA-AZ $ 9.54 $ 2.31 -75.76% NOK 05/21/00 JAN-2002 $ 50 IWX-AJ $17.25 $ 4.50 -73.91% 07/30/00 JAN-2003 $ 50 VOK-AJ $17.75 $ 7.50 -57.75% C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $11.13 7.90% 10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $ 9.88 -19.39% AMGN 07/02/00 JAN-2002 $ 75 WQY-AO $20.75 $14.13 -31.93% JAN-2003 $ 70 VAM-AN $28.75 $23.25 -19.13% VRSN 07/02/00 JAN-2002 $190 YVS-AR $66.25 $50.13 -24.34% 09/03/00 JAN-2003 $190 OVS-AR $86.63 $67.38 -22.22% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $19.38 13.11% JAN-2003 $ 70 OZG-AN $23.13 $25.50 10.25% HWP 07/30/00 JAN-2002 $110 WPW-AB $28.25 $17.38 -38.50% JAN-2003 $120 VHP-AD $32.63 $21.75 -33.34% EXDS 08/06/00 JAN-2002 $ 55 WZZ-AK $20.75 $11.13 -46.39% JAN-2003 $ 60 VTQ-AL $25.38 $14.75 -41.88% MFNX 08/06/00 JAN-2002 $ 40 WOF-AH $13.75 $ 4.38 -68.18% JAN-2003 $ 45 VKW-AI $15.63 $ 5.88 -62.41% GM 08/06/00 JAN-2002 $ 65 WGM-AM $ 9.88 $ 7.88 -20.29% JAN-2003 $ 65 VGN-AM $13.25 $11.38 -14.15% FRX 08/13/00 JAN-2002 $ 95 WRT-AS $31.38 $35.63 13.53% JAN-2003 $100 VFB-AT $37.38 $41.38 10.69% BRCD 08/27/00 JAN-2002 $220 YNU-AD $65.38 $80.63 23.32% JAN-2003 $220 OMW-AD $86.50 $103.88 20.09% CMRC 09/10/00 JAN-2002 $ 80 YCU-AP $30.13 $22.75 -24.49% JAN-2003 $ 80 OCU-AP $38.75 $31.00 -20.00% PHCM 09/10/00 JAN-2002 $ 90 YPH-AR $45.75 $34.63 -24.32% JAN-2003 $ 90 OFO-AR $52.50 $40.75 -22.38% QCOM 09/17/00 JAN-2002 $ 70 WBI-AN $22.50 $25.00 11.11% JAN-2003 $ 70 VLM-AN $29.63 $32.63 10.11% BRCM 09/24/00 JAN-2002 $250 YRR-AJ $77.13 $55.88 -27.56% JAN-2003 $260 OYG-AL $95.63 $74.75 -21.83% COMS 10/01/00 JAN-2002 $ 20 WTH-AD $ 6.38 $ 6.50 1.96% JAN-2003 $ 25 VTH-AE $ 7.13 $ 7.38 3.51% WCOM 10/01/00 JAN-2002 $ 35 WQM-AG $ 6.75 $ 3.88 -42.59% JAN-2003 $ 35 VQM-AG $ 9.88 $ 6.25 -36.71% Spotlight Play HWP - Hewlett-Packard $90.63 Holding true to historical patterns, the broader market (particularly technology) experienced significant weakness through September and the first half of October. Our HWP play felt the pain along with other computer-related stocks and plunged right through the $100 support level. As the selling intensified over the past 2 weeks, HWP fell to $82.50, a level not seen since January. It remains to be seen whether the recovery on Friday is the beginning of the fall rally or just another head-fake, but the market internals looked encouraging. With a gain of almost $7 on heavy volume, it looks like it may be time to consider new positions in HWP. The 2-for-1 split announced with earnings in August is set to take place on October 27th, and if the market heads higher from here, now would be a good time to take a position. A pullback to support at $85-86 would make for an attractive entry point, provided it is followed by strong buying volume. More conservative players may want to wait for our play to clear the $93 resistance level before jumping aboard. In either case, a positive market will be a necessary condition for a successful play. BUY LEAP JAN-2002 $ 95.00 WPW-AS at $21.13 BUY LEAP JAN-2003 $100.00 VHP-AT at $25.75 New Plays INTC - Intel Corporation $40.38 It looks like it is time to dip our feet back into the Semiconductor pool, and what better place to start than INTC, the mother of all Semiconductor stocks. After warning of an earnings shortfall for the current quarter, shares of the chip-maker have been cut in half, but it looks like the carnage has just about run its course. The company is set to report its earnings on Tuesday, and once that is out of the way, investors are likely to begin looking forward again. While a slowdown in the PC sector is having its effect on INTC (hence the earnings warning), it is unlikely that there is much more downside in the stock. Support looks very strong near $35, with milder support at $38. The recovery on Friday morning lifted the share price to the $40 resistance level, where it flatlined for much of the day. Any weakness in the technology sector next week could provide an attractive entry point. Consider new positions on a bounce from support, so long as it is confirmed by strong buying volume. A more conservative approach is to wait until after the company releases its earnings for the current quarter and for buyers to push the price through the $43 resistance level before initiating new positions. BUY LEAP JAN-2002 $45.00 WNL-AI at $ 9.50 BUY LEAP JAN-2003 $45.00 VNL-AI at $13.38 Drops BRCM $215.31 Unable to get out of its own way, BRCM continues to drift lower. With the exception of a half-hearted attempt to break through the $260 resistance level at the end of September, our play hasn't been able to catch a break since we added it. The decline last week penetrated the long-term support between $215-220, and even Friday's rally couldn't put our play back into the black. While it was encouraging to see the stock bounce at its 200-dma, the weak technical picture combined with litigation concerns with INTC, does not make for a good long-term play. After 3 weeks of waiting in vain for a decent entry point, it is time to throw in the towel on BRCM and go in search of healthier plays. PHCM $84.13 While managing to put together a nice run in the latter part of September, selling pressure in the Wireless and Internet sectors created too much weight for PHCM to lift. After breaking out above the $100 resistance level, our play was looking healthy until it found new resistance near $120. When the stock rolled over and headed south with the broader technology market, open plays should have been stopped out for a small profit. The selling intensified last week and then things really got ugly as the stock broke both the $85 support level and its string of higher lows. This technical failure, combined with expectations for the company to post widening losses when it reports earnings on Wednesday, makes it difficult to continue to recommend new positions. Even the recovery on Friday looked anemic, as our play ran out of gas as it approached resistance (old support) at $85. Use any rally in the stock as a more attractive exit point for any open positions, rather than an opportunity to initiate new plays. GM $57.69 While our GM play provided us with a nice triple-digit profit during the month of August, the weight of the $75 resistance level (also the site of the 200-dma) was too much to bear. As the broader markets languished last month, GM slid back through $70, and the problems mounted as Carl Icahn, angered by the company's disclosure of his plans to purchase up to $15 million in GM stock, sold his stake in the automaker. Then the situation went from bad to worse, with GM reporting disappointing sales for the month of September, a weak earnings report last Thursday, and a host of analyst downgrades from the likes of Lehman Brothers and Dain Rauscher Wessels. In addition, several other brokerage firms (Goldman Sachs, UBS Warburg and PaineWebber) trimmed their estimates for GM going forward. With weakness in Europe likely to have a pronounced effect on the company's revenues, and the professionals lining up on the bearish side, it is time to drop GM to make room for more attractive plays. ************************Advertisement************************* Live Stock Picks --- Two Week Free Trial Real-Time AOL Instant Messenger alerts on every Buy/Sell opportunity from our Top Trader. Over 834% return since Feb 1997 (Day Trading) Over 172% return since April 2000 (Swing Trading) Click the link below for a FREE TRIAL.1-800-776-7966 http://www.sungrp.com/tracking.asp?campaignid=632 Full risk disclosure on website. ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 10-22-2000 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/102200_5.asp ************* COVERED CALLS ************* The Bargain Hunting Begins... By Mark Wnetrzak With the recent uncertainty in the market, we have received an increasing number of requests for information on covered-calls with LEAPS. Here is an explanation of the basic concepts and common trading techniques that will help you profit from this conservative, long-term strategy. LEAPS can be an ideal investment tool for the option trader who expects future growth in an underlying stock but does not want to make the substantial capital outlay required for entering an outright position in the issue. With expiration dates months or even years in the future, time decay occurs very slowly for LEAPS and these unique instruments offer an effective way to benefit from a stock's appreciation without incurring the risk associated with the actual purchase of shares. Buying LEAPS is an excellent strategy that finds the happy medium between aggressive, short- term option trading and the outright purchase of the underlying issue. Covered call writing is a stock options trading strategy that some investors use when they are looking for a conservative risk/return profile, while maintaining a meaningful profit potential in either bullish or bearish market environments. An investor will usually write a covered call to generate income, collecting a premium for the sale of an option against a stock in his or her portfolio. This strategy can also be used with LEAPS options, but it differs because it does not involve the direct ownership of shares of the underlying stock; LEAPS are substituted for the long position. There is the added benefit that comes from writing calls against the long position on a regular basis, lowering the overall cost of the LEAPS as each short-term option expires. One of the best and most popular strategies associated with LEAPS is writing a covered call on the long-term option. The technique is similar to a calendar spread (or time spread). The strategy generally consists of the sale of one call and the simultaneous purchase of another call, both on the identical underlying stock, with the same strike price but one option near-term and the other option further out. The theory behind calendar spread profits is based on a neutral philosophy in which time erodes the value of the near-term option at a faster rate than the far-term option. The most common type of time spread is bullish, where the price of the underlying issue is some distance below the strike price of the options. This position is speculative with low initial cost and large potential profits, and two favorable outcomes can occur: The stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long option's strike price. Covered-calls with LEAPS positions can be constructed for any market outlook or bias on both volatile and stagnant positions. The strategy is best initiated when the front-month options are trading at a premium with respect to longer-term volatility. Most investors prefer to establish these positions at least 8-12 months before the LEAPS expire, capitalizing on the ability to sell a number of short-term options. The basic concept in this type of spread is selling time value in the options when they are overpriced (high implied volatility) and buying it back, if necessary, when the options return to intrinsic value. Ideally, the trader would like to have the stock finish just below the sold strike when the near-term option expires. However, when the short-term position is in-the-money on the last day of the strike period, you must buy it back so that you don't have to exercise the LEAPS to cover your obligation; that would defeat the purpose of the strategy. At the beginning of each strike period, you simply sell the next month's call to further reduce the cost basis of the LEAPS. Larry McMillan's book, "Options as a Strategic Investment" has some excellent information on calendar spreads and other time selling strategies. It is available in the OIN bookstore. 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 PRGN 20.94 20.75 OCT 17.50 4.00 *$ 0.56 14.4% FFD 10.56 12.00 OCT 10.00 1.06 *$ 0.50 11.4% GALT 29.13 31.50 OCT 25.00 4.75 *$ 0.62 11.1% TKTX 45.38 39.94 OCT 35.00 12.00 *$ 1.62 10.5% CCUR 19.00 19.31 OCT 17.50 2.38 *$ 0.88 7.7% IMGN 26.19 38.19 OCT 22.50 5.50 *$ 1.81 7.6% ENMD 26.38 24.13 OCT 22.50 4.63 *$ 0.75 7.5% CTIC 50.13 73.50 OCT 40.00 12.50 *$ 2.37 6.8% MCKC 23.69 21.19 OCT 20.00 4.00 *$ 0.31 6.8% PSFT 33.88 40.63 OCT 30.00 4.75 *$ 0.87 6.5% GLGC 24.75 21.94 OCT 20.00 6.38 *$ 1.63 6.4% WDC 5.75 5.25 OCT 5.00 1.19 *$ 0.44 6.2% BCGI 20.00 23.94 OCT 17.50 3.38 *$ 0.88 5.8% LBRT 30.00 23.56 OCT 22.50 9.13 *$ 1.63 5.7% ASPX 12.38 11.81 OCT 10.00 2.75 *$ 0.37 5.6% IMGN 21.81 38.19 OCT 17.50 5.50 *$ 1.19 5.3% WGAT 22.88 19.00 OCT 17.50 6.63 *$ 1.25 5.0% AAS 42.28 44.69 OCT 40.00 4.00 *$ 1.72 4.9% KOSP 19.75 19.56 OCT 17.50 2.81 *$ 0.56 4.8% ISIP 11.50 10.19 OCT 10.00 1.81 *$ 0.31 4.6% SYNM 20.75 17.06 OCT 17.50 4.38 $ 0.69 3.7% MSTR 31.38 24.19 OCT 25.00 8.25 $ 1.06 3.0% GNSS 19.31 16.75 OCT 17.50 2.63 $ 0.07 0.5% RCOT 15.81 14.31 OCT 15.00 1.44 $ -0.06 0.0% TRIH 32.38 28.75 OCT 30.00 3.50 $ -0.13 0.0% EFCX 11.88 8.88 OCT 10.00 2.63 $ -0.37 0.0% PRST 20.13 16.13 OCT 17.50 3.63 $ -0.37 0.0% QHGI 15.00 13.38 OCT 15.00 0.88 $ -0.74 0.0% OSUR 14.00 10.50 OCT 12.50 2.50 $ -1.00 0.0% (EPTO) CYBS 12.69 6.38 OCT 10.00 3.13 $ -3.18 0.0% AVID 14.75 15.38 NOV 12.50 3.63 *$ 1.38 10.8% RDRT 7.94 8.31 NOV 5.00 3.25 *$ 0.31 5.7% BPUR 17.38 19.50 NOV 15.00 3.25 *$ 0.87 5.4% WDC 6.13 5.25 NOV 5.00 1.44 *$ 0.31 4.8% *$ = Stock price is above the sold striking price. Comments: Purchasepro.Com (PPRO) was unplayable this week as the gap-up open on Monday deflated the over-priced call option we were targeting. It is again that time to re-evaluate your outlook on those stocks that were not called away and act accordingly. Positions Closed Early: Red Hat (RHAT), Ventro (VNTR), Wave Systems (WAVX), Tivo (TIVO), Worldpages.Com (WPZ), Neoforma.Com (NEOF), Globalstar (GSTRF), Niku (NIKU), and Youthstream Media (NETS). NEW PICKS - Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ANSR 18.31 NOV 12.50 QRA KV 6.63 330 11.68 28 7.6% CTXS 21.44 NOV 17.50 XSQ KW 4.88 206 16.56 28 6.2% ECLP 21.38 NOV 17.50 IQV KW 4.63 90 16.75 28 4.9% FFD 12.00 NOV 10.00 FFD KB 2.75 1460 9.25 28 8.8% FIBR 32.50 NOV 20.00 QFW KD 13.50 18 19.00 28 5.7% MTSI 9.38 NOV 7.50 TQM KU 2.81 20 6.57 28 15.4% UAXS 15.31 NOV 12.50 QXX KV 3.38 10 11.93 28 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. ***** ANSR - answerthink $18.31 *** Second Chance Entry! *** answerthink provides comprehensive eBusiness strategy, marketing and technology-enabled solutions focused on the emerging digital marketplace. As an eBusiness leader, the company offers a range of integrated solutions, including best practices benchmarking, eBusiness strategy and architecture, interactive marketing and design, business applications and technology integration. On Tuesday, answerthink reported net revenues for the third quarter increased 22% to $84.1 million from $69.0 million last year. Net income increased to $6 million, or $0.15 per diluted share, from $4 million, or $0.10 per diluted share, in the third quarter of 1999. The company was recently upgraded and downgraded and the current weakness may offer a second chance to own this issue at a reasonable cost basis. The solid earnings demonstrate that the company continues to strengthen and their recent alliances should enhance their ability to deliver strategic technology-enabled solutions to their clients. NOV 12.50 QRA KV LB=6.63 OI=330 CB=11.68 DE=28 MR=7.6% ***** CTXS - Citrix Systems $21.44 *** Stage I Base *** Citrix Systems is a global leader in application server software and services that offer "Digital Independence(TM)" - the ability to run any application on any device over any connection, wireless to Web. Its products, including MetaFrame(TM) application server software, NFuse(TM) application portal software and Independent Computing Architecture (ICA), a core application-server technology, have been widely adopted by the corporate mainstream to achieve key business goals. Citrix was one of the first stocks to receive a "haircut" back in the Spring after the company issued a warning and lost its CEO. Analysts appear to favor Citrix's technology and market niche, but are waiting to see if the company can deliver solid results. On Wednesday, Citrix reported net revenues for the third quarter of $113.5 million, up 7% from $105.8 million and net income of $27.5 million or $0.14 per share beating estimates by $0.02. The results seem to have pleased investors as the stock rallied on strong volume and closed above its 50 dma. We simply favor the improving technically pattern and bullish outlook. NOV 17.50 XSQ KW LB=4.88 OI=206 CB=16.56 DE=28 MR=6.2% ***** ECLP - Eclipsys Corporation $21.38 *** Earnings Rally! *** Eclipsys is a leading healthcare information technology provider. The company provides, on an integrated basis, enterprise-wide, clinical management, access management, patient financial management, health information management, strategic decision support, resource planning management and enterprise application integration solutions to healthcare organizations. Additionally, the company provides other information solutions including remote hosting, outsourcing, networking technologies and other related services. This month, Eclipsys shares have been in rally mode after receiving favorable ratings from Jefferies & Co. and Raymond James. Eclipsys recently released a Linux version of its eWebIT, a Web-based enterprise application integration (EAI) product. On Wednesday, HEALTHvision (created through a merger of Eclipsys and VHA Inc.), announced an agreement with Cox Health Systems to deploy a comprehensive e-health strategy. This is a first step in providing a service that addresses the varied needs of key constituents with a single Web-based platform. We favor the Stage II breakout on heavy volume as investors speculate on next Tuesday's earnings report. NOV 17.50 IQV KW LB=4.63 OI=90 CB=16.75 DE=28 MR=4.9% ***** FFD - Fairfield Communities $12.00 *** Buyout-Merger? *** Fairfield Communities sells vacation ownership interests (VOIs), commonly known as timeshares, through its points-based vacation system, Fairshare Plus. The company also offers financing for VOI purchasers and other related services. Fairfield recently announced that it is engaged in preliminary discussions concerning a possible merger or other transaction between Fairfield and an undisclosed company. They emphasized that there can be no assurance that these discussions will lead to a definitive agreement and the company is not expected to issue any further public statements regarding the discussions until an agreement is signed or the discussions are terminated. We simply favor the bullish breakout on high volume and the ability to speculate conservatively on the outcome of the rumors. NOV 10.00 FFD KB LB=2.75 OI=1460 CB=9.25 DE=28 MR=8.8% ***** FIBR - Osicom Technologies $32.50 *** New Deal! *** Osicom Tech is a developer and marketer of metropolitan optical networking systems, through its optical networking subsidiary Sorrento Networks. Sorrento Networks has been a provider of all optical networking solutions that are used in both interoffice and access networks since 1997. Last week, Sorrento announced a sweeping agreement with Atlanta-based Cox Communications to provide optical transport solutions nationwide, with immediate installations in Virginia, California, Arizona and Louisiana. They will build a next-generation network with scaleable band- width capabilities allowing Cox to deliver these broadband capabilities in these locations more efficiently. After posting rather dismal earnings in September, this 4-year deal worth up to $40 million could be just what the doctor ordered. Osicom appears to be undergoing a change of character and Friday's move on heavy volume offers a chance to enter this issue at a reasonable cost basis. NOV 20.00 QFW KD LB=13.50 OI=18 CB=19.00 DE=28 MR=5.7% ***** MTSI - MicroTouch Systems $9.38 *** What's Up? *** MicroTouch Systems is a leader in the manufacture of computer touchscreen display products incorporating the two most popular touch technologies; analog capacitive and resistive membrane. The company applies these technologies in a variety of products, and markets them under the ClearTek and TouchTek brand names. No news to explain MicroTouch's recent spike in price though Bloomberg.com states that Texas investor Edward W. Rose III and his affiliates acquired a 7.1 percent stake in Microtouch, spending $6.2 million to buy 460,300 Microtouch shares from Sept. 27 to Oct. 11. That still doesn't account for the recent three day surge. Is someone else interested in this stock? Why? Maybe it's an earnings run? (Earnings are due next Thursday). Remember, the "Tape" tells all and this play offers cheap speculation at a reasonable cost basis. NOV 7.50 TQM KU LB=2.81 OI=20 CB=6.57 DE=28 MR=15.4% ***** UAXS - Universal Access $15.31 *** Internet Speculation *** Universal Access is an Internet network infrastructure services provider that provisions, interconnects and manages high-capacity multiple-carrier networks in the most efficient, timely and cost- effective manner. By combining information and facilities management, it provides the only solution in the marketplace today that delivers end-to-end network connections to ISPs, application service providers, and telecommunications service providers with the speed to market required to accelerate revenue growth and meet the Internet-driven demand for bandwidth. Universal Access has been named to the Deloitte & Touche's prestigious "Fast 50" program for Greater Chicagoland, a ranking of the 50 fastest growing tech- nology companies in the area. The company was recognized as number 1 in the "Rising Star" category of the awards. This week Universal Access was raised to a "strong buy" by analyst Jonathan Atkin at Dain Rauscher Wessels with a 12-month target of $55.00 per share. The technical picture also continues to improve as Universal Access forges a stage I base. This position offers a favorable cost basis for investors who have a bullish outlook on the company. NOV 12.50 QXX KV LB=3.38 OI=10 CB=11.93 DE=28 MR=5.2% ************************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=726 ************************************************************** ************************* 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 ADBE 140.06 130 AXX-WF 7.63 3502 22% 130 AETH 106.88 90 HIZ-WR 6.88 2672 26% 90 ARBA 129.81 120 RBU-WD 9.75 3245 30% 120 ARTG 88.50 80 AYQ-WP 5.13 2213 23% 80 AVNX 118.75 100 UYN-WT 5.63 2969 19% 100 BEAS 85.56 75 BUC-WO 4.00 2139 19% 75 BRCD 252.44 230 GUF-WF 8.88 6311 14% 235 BRCM 242.19 220 RDU-WD 10.38 6055 17% 220 CHKP 170.00 150 KGE-WJ 6.75 4250 16% 160 CRA 68.75 60 CRA-WL 4.13 1719 24% 60 CREE 90.50 80 CQR-WP 5.00 2263 22% 80 ELNT 104.63 95 UET-WS 5.75 2616 22% 95 EMLX 160.25 140 UEL-WH 8.50 4006 21% 135 EXTR 99.44 90 EXR-WR 6.88 2486 28% 90 GSPN 82.63 65 GHY-WM 5.25 2066 25% 65 IDPH 190.25 175 IHD-WO 8.13 4756 17% 175 INKT 80.00 70 KYQ-WN 5.50 2000 28% 70 ITWO 186.88 175 QYI-WO 10.25 4672 22% 175 IWOV 119.81 105 IQG-WA 5.25 2995 18% 105 JNPR 232.00 220 JUD-WD 14.38 5800 25% 220 MUSE 195.25 180 UZQ-WP 15.63 4881 32% 180 NEWP 162.00 140 NOQ-WH 8.63 4050 21% 140 NTAP 148.63 130 ULM-WF 6.00 3716 16% 130 PDLI 121.31 110 RPV-WB 5.38 3033 18% 110 QLGC 95.38 85 QLC-WQ 4.50 2385 19% 85 SCMR 84.94 75 SMZ-WM 6.50 2124 31% 75 SDLI 339.00 300 QJV-WT 14.75 8475 17% 300 VRSN 177.31 160 XVR-WL 10.13 4433 23% 160 VRTS 166.81 145 VUQ-WI 5.25 4170 13% 145 *********************** CONSERVATIVE NAKED PUTS *********************** October is almost over, so lets get ready for the next rally! By Ray Cummins Today we begin a series of regular reviews of the most common questions asked by new traders. Our subject for this session is "Option Pricing Concepts." Question: Why is it so important to understand option pricing and fair value? Why can't I just buy an option and wait for the market to move in the right direction? Answer: The most important factors in option trading are market movement, option volatility (with regard to pricing and probability), and time decay. The knowledge of these concepts is paramount to profitable trading and without a suitable basis, you will likely enter the market at a theoretical disadvantage. The primary requirement is familiarity with option pricing. In volatile issues, the emotional optimism of traders can cause prices to vary widely from their true worth. Without a realistic estimate of the value of an option, you will often pay an excessive amount for the rights inherent in the contract and that usually results in a much lower return (if any) when the issue finally makes the expected move. As intelligent traders, we have the ability to measure the value of an option through mathematical evaluation, but if you aren't partial to formulas, pricing models will help you determine the fair market value of an option. Many of the established tools for pricing options are free and they should be used before opening any new position. Remember, in the majority of trading techniques, the end result is almost always a product of what you know, and how well you act upon it. There are option pricing and volatility calculators at various sites on the Internet. One of the most popular (free) tools is available at the CBOE's web-site (www.cboe.com). In addition, there is a great freeware program that downloads data from the CBOE web-site and displays a quote montage along with the Greek values available from Rocky Point Software (www.rpsw.com). Question: What are the "Greeks" and why is "Delta" (or the hedge ratio) so important when buying and selling options? Answer: An option's price is determined by mathematical equations that use variables from all of the factors affecting its value. Each aspect of option pricing is a separate component of the formula and they have Greek titles; Delta, Gamma, Theta, Vega, and Rho. The primary influence on an option's price is the movement of the underlying security. This concept relates directly to the first and most important of the Greeks; Delta. Delta measures the rate of change in an option's price compared to a one point movement in the underlying security. It can be thought of as a percentage of the movement of the stock price. If the stock price moves up $2 while the option on that stock gains $1, it has a delta of 50 (or 50%). An at-the-money (ATM) call option will typically have a delta of 50. In-the-money (ITM) calls will have higher deltas; a greater percentage move, based on the change in the underlying issue. The opposite is true for out-of-the-money (OTM) call options; their deltas are lower. A deeply out-of-the-money call option will have a delta very close to zero. Call deltas are positive; put deltas are negative, reflecting the fact that the put option price and the underlying stock price are inversely related. The delta of an option is also occasionally called the "hedge ratio" and it can be used to determine the number of calls one would need to be short to create a risk-less hedge; a position which would be worth the same whether the stock price rose by a very small amount or fell by a very small amount. In such a "delta neutral" portfolio, any gain in the value of the shares held due to a rise in the share price would be exactly offset by a loss on the value of the calls written. Of course, as the delta changes with the stock price and time to expiration, the number of shares would need to be adjusted to maintain the hedge. How quickly the delta changes with regard to the stock price is given by gamma, one of the lesser known "Greeks." Gamma is sometimes considered the "delta" of the delta. Market makers use this component almost exclusively in the management of large option accounts. Specialists who hedge portfolios using the delta technique try to keep gamma as small as possible to help limit the adjustments necessary to maintain a risk-free position. If the position gamma is too large, a small change in stock price can devastate the hedge. Adjusting gamma can be difficult, thus computers are used to monitor portfolio positions and alert the specialists when corrections are needed to maintain the complex ratios. Vega is the change in option price given a one-percentage point change in volatility. Similar to delta and gamma, Vega is also used for hedging. Theta is the change in option price given a one-day decrease in time to expiration. This component is basically a measure of time decay. Time value and time decay are actually two of the easiest aspects of option pricing to understand. The time value of any option can be simply viewed as everything but the intrinsic value. Time costs money and more time equals more money. The amount of time value in an option's price decays each day it is in existence. The closer the option gets to expiration, the faster it decays. In a strictly mathematical sense, time value decays at its square root and this rate of decay is known as Theta. Rho, while not commonly used by retail traders, is the change in option price given a one percentage point change in the risk-free interest rate. Next week, we review another complex subject in the realm of option pricing; "Historical Volatility." Good Luck! SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return PSFT 34.44 40.63 OCT 27.50 0.44 *$ 0.44 26.1% CRUS 39.19 45.00 OCT 30.00 0.50 *$ 0.50 26.1% MDRX 17.56 15.88 OCT 15.00 0.50 *$ 0.50 21.9% ASPX 12.25 11.81 OCT 10.00 0.50 *$ 0.50 17.2% ECLP 16.00 21.38 OCT 12.50 0.38 *$ 0.38 15.4% PROX 48.63 58.00 OCT 40.00 0.38 *$ 0.38 14.7% PSFT 33.88 40.63 OCT 27.50 0.44 *$ 0.44 12.6% PALM 53.19 59.38 OCT 45.00 0.38 *$ 0.38 12.3% WGAT 23.31 19.00 OCT 17.50 0.56 *$ 0.56 11.7% CLTR 36.75 35.31 OCT 30.00 1.13 *$ 1.13 10.8% PLNR 19.75 17.75 OCT 15.00 0.69 *$ 0.69 10.8% LBRT 32.44 23.56 OCT 22.50 0.63 *$ 0.63 9.6% GLGC 23.00 21.94 OCT 17.50 0.31 *$ 0.31 9.1% ALLP 16.50 13.88 OCT 12.50 0.50 *$ 0.50 8.5% UNM 25.00 27.00 OCT 22.50 0.63 *$ 0.63 8.4% CERN 46.69 53.06 OCT 40.00 0.44 *$ 0.44 7.7% CMNT 21.00 30.56 OCT 17.50 0.56 *$ 0.56 7.4% HCR 16.00 14.81 OCT 15.00 0.38 $ 0.19 7.1% PRBZ 29.44 31.81 OCT 25.00 0.50 *$ 0.50 6.9% WGR 26.25 25.13 OCT 22.50 0.56 *$ 0.56 6.7% DRXR 19.06 17.63 OCT 15.00 0.38 *$ 0.38 6.6% STAT 20.00 22.72 OCT 15.00 0.44 *$ 0.44 6.4% SCUR 26.25 24.50 OCT 17.50 0.50 *$ 0.50 6.3% VITR 48.94 37.25 OCT 30.00 1.00 *$ 1.00 6.0% CTIC 50.13 73.50 OCT 35.00 0.56 *$ 0.56 5.7% CERN 46.44 53.06 OCT 40.00 0.50 *$ 0.50 5.7% NERX 23.00 17.38 OCT 17.50 0.38 $ 0.26 5.7% FNSR 48.38 37.00 OCT 40.00 0.69 $ -2.31 0.0% OCR 16.88 15.81 NOV 15.00 0.63 *$ 0.63 8.3% CHTR 19.38 18.63 NOV 17.50 0.63 *$ 0.63 7.0% VICR 49.38 50.50 NOV 40.00 0.88 *$ 0.88 6.8% VPI 25.50 23.75 NOV 22.50 0.50 *$ 0.50 5.6% HSIC 22.56 20.69 NOV 20.00 0.50 *$ 0.50 5.2% *$ = Stock price is above the sold striking price. Comments: Noven Pharma (NOVN) gapped-up on Monday's open and moved higher all week, thus no entry was available. Many of the issues closed early (listed below), rebounded strongly on Friday and actually would have provided a positive return - Murphy's Law in action! Positions Closed Early: Goto.Com (GOTO), Wave Systems (WAVX), Xerox (XRX), Knight Trading (NITE), Coinstar (CSTR), Cadence Design (CDN), Andrea Electronics (AND), Niku Corp. (NIKU) NEW PICKS - Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return BCGI 23.94 NOV 17.50 QGB WW 0.56 0 16.94 28 11.4% CYTC 50.25 NOV 40.00 YQK WH 1.13 214 38.87 28 11.0% STAT 22.72 NOV 20.00 TAQ WD 0.69 0 19.31 28 10.6% RNBO 47.00 NOV 35.00 BQO WG 0.88 40 34.12 28 9.3% ENTU 29.00 NOV 20.00 EXH WD 0.50 61 19.50 28 8.6% PATH 17.63 NOV 15.00 AQE WC 0.38 70 14.62 28 8.6% ICN 40.19 NOV 35.00 ICN WG 0.56 313 34.44 28 5.3% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** BCGI - Boston Communications $23.94 *** Solid Earnings! *** Boston Communications Group operates in the following segments: Prepaid Wireless Services, Teleservices, Roaming Services, and Systems Divisions. The Prepaid Wireless Services Division offers prepaid wireless service that allows carriers to access BCGI's prepaid C2C platform. The Teleservices segment provides customer support teleservices to wireless carrier's customers. Their Roaming Services Division provides services that give carriers the ability to generate revenues from subscribers who are not covered under traditional roaming agreements by arranging payment for roaming calls. The Systems Division manufactures and markets voice processing platforms to wireless and wire-line carriers; sells prepaid systems to international carriers; and manufactures the voice nodes used to support BCGI's C2C network. Quarterly earnings were reported last week and the numbers were favorable. In addition, the technical breakout above $21 suggests the issue has additional upside potential. NOV 17.50 QGB WW LB=0.56 OI=0 CB=16.94 DE=28 MR=11.4% ***** CYTC - CYTYC Corporation $50.25 *** Earnings Rally? *** CYTYC Corporation designs, develops, manufactures and markets a sample preparation system for medical diagnostic applications. Their ThinPrep System allows for the automated preparation of cervical cell specimens on microscope slides for use in cervical cancer screening, as well as for the automated preparation of cell specimens on slides for use in non-gynecological testing applications. The ThinPrep System is designed to reduce the incidence of false negative diagnoses, improve slide quality and enable a single sample to be used for additional testing. The company also sells ThinPrep Microscope Slides which improve cell adhesion to the slide. Earnings are due next week and based on the recent bullish activity, investors believe the results will be favorable. We will speculate on the outcome of the report with this deep OTM position. NOV 40.00 YQK WH LB=1.13 OI=214 CB=38.87 DE=28 MR=11.0% ***** ENTU - Entrust Technologies $29.00 *** On The Rebound! *** Entrust is a global provider of public-key infrastructure (PKI) products and services to e-businesses and other organizations. Their solution is a comprehensive, end-to-end PKI framework designed to assure the security of electronic transactions and communications over advanced networks, including the Internet. Its open, scalable software solution operates across multiple platforms, network devices and applications. The products that constitute the core of the company's PKI solution are unique alternatives to current industry offerings. Last week, Entrust reported that its third-quarter results beat analyst estimates by two cents a share while showing a turnaround from a loss the previous period. Analysts agree with the company's new outlook and the cost basis for this position is a favorable price at which to own this issue. NOV 20.00 EXH WD LB=0.50 OI=61 CB=19.50 DE=28 MR=8.6% ***** ICN - ICN Pharmaceuticals $40.19 *** For Sale! *** ICN Pharmaceuticals is a global, research-based pharmaceutical company that develops, manufactures, distributes and sells pharmaceutical, research and diagnostic products. The products treat viral and bacterial infections, diseases of the skin, neuromuscular disorders, cancer, cardiovascular disease, diabetes and psychiatric disorders. On Friday, ICN said it would consider strategic transactions including a sale of the company prior to undertaking its restructuring. Under the restructuring, ICN will spin off two of its divisions into separate publicly traded units to its current shareholders: Ribapharm, which encompasses ICN's research and development activities and ICN International, which comprises the company's operations in Western Europe and Asia. It will also create a third publicly traded entity made up of its existing operations in North and South America. The bullish chart suggests that investors favor the company's strategy. NOV 35.00 ICN WG LB=0.56 OI=313 CB=34.44 DE=28 MR=5.3% ***** PATH - AmeriPath $17.63 *** Earnings Rally! *** AmeriPath is an integrated physician group practice and laboratory management company that is focused on providing anatomic pathology diagnostic services in the United States. Since inception, the company has acquired or affiliated with a large number of physician practices across America. The hundreds of pathologists employed by the company provide medical diagnostic services in laboratories owned and operated by AmeriPath, in addition to hospitals, and outpatient ambulatory surgery centers. Earnings are due next week and investors are confident about the outcome of the report. The issue has rallied above a recent trading range to a 52-week high and based on the current technical strength, there is additional upside potential if the earnings report is favorable. NOV 15.00 AQE WC LB=0.38 OI=70 CB=14.62 DE=28 MR=8.6% ***** RNBO - Rainbow Technologies $47.00 *** Earnings/Stock Split! *** Rainbow Technologies is a developer and supplier of computer network security products that secure the rights to software and other digital content, and that provide privacy and security for computer network and Internet communications and commerce. The company's products include software protection products against piracy, license management and tracking, and software distribution over the Internet; information security products for network and satellite communications; and Internet security products for Internet transaction capabilities in a secure environment, access controls for computer networks including Virtual Private Networks. A bullish chart, a stock split and upcoming earnings...what more could you want in a speculation play? Plan to "target shoot" a higher premium initially, as the issue consolidates from recent gains. NOV 35.00 BQO WG LB=0.88 OI=40 CB=34.12 DE=28 MR=9.3% ***** STAT - I-Stat $22.72 *** On The Move Again! *** I-STAT develops, manufactures and markets medical diagnostic products for blood analysis that provide health professionals with immediate and accurate critical diagnostic information at the point of patient care. The company's current products, known as the I-STAT System, consist of portable, hand-held analyzers and single-use, disposable cartridges, each of which simultaneously performs different combinations of commonly ordered blood tests. The I-STAT System uses a simple, one-step procedure, and the results can be easily linked by infrared transmission to a health care provider's information system. The Medical Instruments and Appliances group has performed very well over the past few months and STAT is poised to become one of the premier companies in the industry. While there are a number of positive fundamental aspects in this company, the technical strength of the recent rally suggests there may be additional upside potential in the future of the stock and a cost basis near historical support will suit us just fine. NOV 20.00 TAQ WD LB=0.69 OI=0 CB=19.31 DE=28 MR=10.6% ************************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=751 ************************************************************** ************************ SPREADS/STRADDLES/COMBOS ************************ The Market Recovery Continues... ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, October 20 Stocks moved higher today as bargain hunters emerged after a new batch of positive earnings reports. The Nasdaq ended 64 points higher at 3,483 and the Dow was up 83 points at 10,226. The S&P 500 index finished up 8 points at 1,396. Trading volume on the NYSE reached 1.19 billion shares, with advances beating declines 1,595 to 1,230. Activity on the Nasdaq was heavy at 2.12 billion shares exchanged, with advances beating declines 2,357 to 1,594. In the bond market, the 30-year Treasury rose 12/32, pushing its yield down to 5.73%. Thursday's new plays (positions/opening prices/strategy): Human Genome HGSI NOV75P/NOV80P $1.50 credit bull-put Human Genome HGSI JAN100C/J105C $2.38 debit bull-call EMC Inc. EMC LJAN50C/J110C $52.00 debit LEAPS/CCs Advent ADVS NOV80C/NOV40P $1.12 credit strangle Fairfield FFD JAN12C/JAN10P $0.62 debit synthetic Today's market volatility provided some excellent opportunities to participate in our new combination positions. Portfolio Plays: The market rally continued Friday as investors gained confidence in the recent recovery amid strong earnings reports. Trading was volatile due to the "double witching" expiration of options on stocks and stock indexes and both major averages experienced triple-digit swings. Honeywell (HON) led the Dow higher, surging $10 to $46 after United Technologies (UTX) said it has terminated merger discussions with the company and that Honeywell received an alternative merger proposal, possibly from General Electric (GE). Hewlett-Packard (HWP), Merck (MRK), Microsoft (MSFT) and AT&T (T) were among the leading blue-chip issues. Semiconductor giant SDL Inc. (SDLI) led the Nasdaq, rising $50 to $339 after reporting third-quarter profits that beat consensus estimates by $0.07. SDLI's merger partner JDS Uniphase (JDSU) also rallied, finishing up $12 at $102. Customer analysis software maker E.Piphany (EPNY) rose $25 to $90 after beating third-quarter earnings estimates and announcing a bullish outlook for the future. In addition, several analysts raised their price targets on the company. Vitria (VITR) was another big winner, up $10 to $37 after posting third quarter profits that beat First Call's estimates. The Spreads/Combos portfolio enjoyed a number of favorable moves during the session and this week's broad market rally boosted the majority of our October positions to a profitable finish. The top performers in the technology group were Commerce One (CMRC), Ballard Power (BLDP), Manugistics (MANU), Qlogic (QLGC), Verisign (VRSN), and Virata (VRTA). Market bellwethers have dominated the recovery and our new bottom-fishing position in Intel (INTC) has exceeded all expectations. The downtrodden issue has rallied 20% since the bull-call debit spread was initiated and the long call option is over $10 in-the-money. Applied Micro Circuits (AMCC) was also one of the leaders this week, but today the issue went too far after analysts at J.P. Morgan started coverage on the company with a "buy" rating and a 12-month target price of $265. The bearish portion of our credit-spread strangle was short at $200 and those of you that didn't close the position Friday morning (at a favorable profit) were left with a small loss at the close of trading. The unpredictable market activity has produced a number of great volatility opportunities and our new positions in Globix (GBIX), Nice Systems (NICE), and SCM Micro (SCMM) all returned favorable short-term profits. The recent Nasdaq-100 (QQQ) straddle also provided excellent profits for those that traded the position during expiration week. In the financial sector, shares of Bear Stearns (BSC) soared to $61.50 amid new strength in brokerage issues and continued speculation of a potential takeover. Buyout rumors have boosted activity in the stock and its options over the past few weeks and Friday was another big day as traders surmised that a deal would finally be consummated over the weekend and announced before the market opens on Monday. Our one-week bullish diagonal spread yielded a 17% return and there is additional potential for those of you that rolled to November options in the short position. Knight Trading Group (NITE) was also a popular issue, up almost $3 to $29.38 and our recent downward adjustment to the NOV-$25 Put may yet produce a profitable outcome. Overall, it was a good month for the Spreads/Combos section, and considering the recent slump in the market, we were happy to end the expiration period "in the black." Looking forward, we have a number of improvements planned for the section and with the new addition to our staff, we expect to provide a wider variety of strategies to the OIN's many dedicated readers. Those of you with suggestions on how the section can be improved should send your comments to: Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** EYE - VISX Incorporated $23.00 *** Speculation Play! *** VISX develops products and procedures to improve people's eyesight with lasers. The company's principal product, the VISX STAR S2 Laser System (VISX System), is designed to correct the shape of a person's eyes to reduce or eliminate their need for eyeglasses or contact lenses. The VISX System ablates, or removes, submicron layers of tissue from the surface of the cornea to reshape the eye, thereby improving vision. The Food and Drug Administration has approved the VISX System for use in the treatment of most types of vision problems including nearsightedness, farsightedness, and astigmatism. The company sells VisionKey cards to control the use of the VISX System and to collect license fees for the use of its patents. VISX has its eye on the top spot in the field of laser-corrected vision. They earn profits primarily through the collection of a license fee for every completed Lasik procedure. Several months ago they reduced their $500 per-eye fee to help increase demand for the procedure. The immediate impact hurt the stock, which was once a Wall Street darling. However, the demand for the procedure is now growing at an incredible pace, and it seems everybody that has undergone the procedure, including myself, loves the outcome. In addition, the company reported outstanding earnings last week, beating the Street estimates by a penny. Of course, fundamentals can make a great company but they won't guarantee a great stock. (Review a one year chart of the issue for a great example of that fact.) There is a twist in this play. The legendary corporate raider Carl Icahn had accumulated approximately 10% of the outstanding VISX shares. The FTC granted him antitrust approval to buy up to 15% of the float back in August, however VISX shareholders adopted a "poison pill" to stop him. The company's poison pill prevents Icahn (or others) from holding more than 10% of the outstanding shares. Icahn is currently in close talks with VISX President and COO concerning strategic options for the company. History tells us that Icahn will not rest till he shores up the value of the company's sagging shares, thus a short-term bullish position is definitely in order! PLAY (speculative - bullish/diagonal spread): BUY CALL DEC-20 EYE-LD OI=434 A=$4.62 SELL CALL NOV-25 EYE-KE OI=131 B=$1.25 INITIAL NET DEBIT TARGET=$3.25 INITIAL TARGET ROI=53% B/E=$23.25 There are several possible outcomes for this play. One scenario would be for the stock to close just under $25 at expiration in November. In that case, we would sell the DEC-$22.50 or DEC-$25 call, reducing our cost basis in the long position and creating a bullish debit spread. Of course, the issue could simply finish above our sold strike in November and the play would return a 53% profit for one month. There are other, more complex alternatives and those will be discussed as the play progresses. ****************************************************************** HON - Honeywell International $46.00 *** Takeover Target! *** Honeywell is a diversified technology and manufacturing company serving customers worldwide with aerospace products and services, control technologies for buildings, homes and industry, automotive products, power generation systems, specialty chemicals, fibers, plastics and electronic and advanced materials. Operations are conducted by strategic business units that have been aggregated under four reportable segments: Aerospace Solutions, Automation and Asset Management, Performance Materials and Transportation and Power Products. Late last year, AlliedSignal and Honeywell completed a merger and as a result, the former Honeywell became a subsidiary of AlliedSignal. In short, AlliedSignal was renamed Honeywell International. Honeywell was in the news late last week as United Technologies (UTX) made a bid for the company. The share value soared $10 on Friday, closing near $46 on heavy volume. In almost any other circumstance, this would be a classic "short" opportunity as the chart pattern is not very strong and the short-term Stochastic is approaching overbought territory. However, when significant news produces the rally, all bets on technical analysis are off. The spike in share value increased Honeywell's market cap to almost $28 billion and considering that United Technologies' offer was rumored to be somewhere around $40 Billion (and General Electric upping the ante), the stock could be in for a nice upward ride. Technically, the issue held up reasonably well (in the mid-30's) before the merger news became public and it should have little difficulty remaining in the $40 range. If it falls below the sold strike, the position risk is limited to less than $2. At the same time, you could simply take assignment of this popular Dow component (at a discount) and sell covered calls to recover any losses. PLAY (speculative - bullish/credit spread): BUY PUT NOV-37.50 HON-WU OI=250 A=$1.00 SELL PUT NOV-40.00 HON-WH OI=79 B=$1.63 INITIAL NET CREDIT TARGET=$0.75-$0.88 ROI(max)=42% ****************************************************************** BCHE - Biochem Pharma $24.50 *** Increased Options Activity! *** BioChem Pharma is an international biopharmaceutical company dedicated to the research, development and commercialization of innovative products for the prevention, detection and treatment of human diseases, with a focus on the anticancer and other nti-infective areas. Its products include 3TC, a nucleoside analog with a novel heterocyclic surrogate sugar ring, various lines of vaccines, and diagnostic systems and products. BCHE has been very active in recent sessions and traders say the upcoming earnings report is the likely culprit. Whatever the reason, the new option interest has created a number of favorable premium disparities and based on your outlook for the issue, the opportunities to construct profitable positions are excellent. Note: This play is based on increased activity in the stock and underlying options. Although the position offers a favorable risk/reward potential, it must also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - bullish/calendar spread): BUY CALL APR-30 BQX-DF OI=40 A=$1.88 SELL CALL NOV-30 BQX-KF OI=207 B=$0.38 INITIAL NET DEBIT TARGET=$1.31-$1.38 TARGET ROI(max)=50% The strategy is best initiated when the front-month options are trading at a premium with respect to longer-term volatility. Most investors prefer to establish these positions at least 3-5 months before the long options expire, to allow the sale of a number of short-term options. The basic concept in this type of spread is selling time value in the call options when they are overpriced (high implied volatility) and buying it back, if necessary, when the options return to intrinsic value. Ideally, the trader would like to have the stock finish just below the sold strike when the near-term option expires. However, when the short-term position is in-the-money on the last day of the strike period, you must buy it back so that you don't have to exercise the long-term options to cover your obligation; that would defeat the purpose of the strategy. At the beginning of each expiration period, you simply sell the next month's call to further reduce the cost basis of the long position. ****************************************************************** HAND - Handspring $89.31 *** A Big Mover! *** Handspring is a provider of handheld computers. The company's first product, the Visor handheld computer, is a personal organizer that is enhanced by its Springboard platform, an open expansion slot. Since the Visor's introduction, more than 2,500 developers have registered with Handspring's developer program to receive support in developing modules. Examples of modules commercially available or in development include a digital camera, an MP3 player, a two-way pager, a global positioning system and content such as books and games. Handspring is set to capitalize on the emerging wireless market, producing a unique, hand-held wireless device. The company has moved to the forefront of the PDA industry this quarter and the introduction of its GSM module in mid-September, which enables voice telephony on the Visor, has made the convergence of data and wireless voice a reality. The company has also aggressively expanded its international exposure in recent months, introducing the Visor in Europe, Hong Kong, Taiwan and Singapore. As the company continues to increase production, the Visor is expected to be launched in other foreign markets later in the year. Handspring announced record earnings last week and just like all the other companies in the small group, their numbers exceeded analysts' consensus estimates. However, the stock is now slightly overbought and a post-announcement consolidation is expected. Our conservative position offers a great method to participate in the future movement of the issue with relatively low risk. Target a higher spread credit initially, to allow for a brief pullback in the issue. PLAY (conservative - bullish/credit spread): BUY PUT NOV-50 HQA-WJ OI=66 A=$1.43 SELL PUT NOV-55 HQA-WK OI=43 B=$2.00 INITIAL NET CREDIT TARGET=$0.68-$0.75 ROI(max)=16% ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** BRCM - Broadcom Corporation $242.19 *** Probability Play! *** Broadcom Corporation is a provider of highly integrated silicon solutions that enable broadband digital transmission of voice, video and data to and throughout the home and within the business enterprise. These integrated circuits permit the cost-effective delivery of high-speed, high-bandwidth networking using existing communications infrastructures that were not originally designed for the transmission of broadband digital content. Using unique proprietary technologies and advanced design methodologies, the company designs, develops and supplies integrated circuits for a number of the most significant broadband communications markets, including the markets for digital cable set-top boxes, cable modems, high-speed office networks, home networking, direct broadcast satellite and terrestrial digital broadcast, and digital subscriber lines. BRCM is an excellent candidate in the neutral, premium-selling category of options trading. Based on analysis of the historical option pricing and technical background, this position meets our fundamental criteria for a potential credit-strangle. The issue has good option premiums, a relatively well-defined trading range, and with the company's quarterly earnings announced last week, there should be little news to produce additional volatility in the underlying stock. The probability of profit from this play is higher (80%-90%) than other plays in the same strategy based on historical option pricing. As with any recommendation, the position should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. Many of you may favor an aggressive position, selling options that are closer to the current price of the issue, to produce a higher initial return. While that technique may appear more profitable, it also increases the theoretical risk of loss. Only you can know what positions are suitable for your risk-reward tolerance and portfolio outlook. PLAY (conservative - neutral/credit strangle): SELL CALL NOV-320 YRL-KD OI=438 B=$2.50 SELL PUT NOV-185 RDU-WQ OI=296 B=$2.88 INITIAL NET CREDIT TARGET=$5.50-$5.75 ROI(max)=10% UPSIDE B/E=$325.50 DOWNSIDE B/E=$179.50 ****************************************************************** ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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