The Option Investor Newsletter Tuesday 10-17-2000 Copyright 2000, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/101700_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 10-17-2000 High Low Volume Advance/Decline DJIA 10089.70 -149.10 10293.90 10026.40 1.17 bln 813/2115 NASDAQ 3213.96 - 76.32 3348.61 3173.68 1.93 bln 1231/2777 S&P 100 711.72 - 13.76 729.41 707.74 totals 2044/4892 S&P 500 1349.97 - 24.65 1380.99 1342.34 29.5%/70.5% RUS 2000 470.88 - 10.87 483.51 468.59 DJ TRANS 2391.22 - 46.92 2451.95 2384.27 VIX 32.71 + 3.21 33.51 28.53 Put/Call Ratio .89 ****************************************************************** Trying to find a bottom, again! The markets tried to rally at the open today but buyers went on strike after yesterday's wimpy performance. With no follow through from Friday's huge gains, buyers pulled in their horns and decided to wait for a few earnings results before committing further funds. After the flood of pre-earnings warnings the sentiment is negative and traders have adopted a "show me" stance for those companies announcing this week. The results have been good so far but the announcement after the close by IBM and INTC will set the tone for trading tomorrow. After struggling most of the day in advance of the IBM/INTC earnings tonight the markets managed to close off their lows but not by far. The Nasdaq dropped -117 at the low of the day but managed to suck it up to only -76. The Dow dropped to a low of 10026 around 2:PM and was only able to squeak out a 10090 close. Traders said it was not a flood of sellers just no buyers. There were no bids in quantity. Where normally there are buyers in large quantity a dollar or two under the current market bids there was no sub floor today. Fortunately the sellers did not come in force or we could have gotten a retest sooner than expected. The flood of earnings announcements have been very positive with most beating the estimates or at least meeting the numbers. If this continues then investors will start feeling more confident and start buying again. Still the earnings estimates for the fourth quarter are putting a cloud over the market. Last year earnings for the fourth quarter came in at 31%. On October 2nd the estimates for this year were +29% and had been trimmed due to the easing economy. As of today analyst consensus estimates are only +25% because of the pre-warnings and guidance from companies already announced. This bleeding of profits is slowly turning into a hemorrhage for the market. The market movers for tomorrow include Intel which beat reduced estimates of $.38 with $.41 but then warned that fourth quarter revenues would only increase +4% to +8%. Last year the number was +11% so that was effectively a lower guidance. Intel traded higher and lower after hours but stayed pretty much even with the close. Intel at $35 was called a compelling buy in an after hour interview with Ashok Kumar who was previously negative on the stock. This implied buy signal helped hold the price in after hours. IBM, which will cause the biggest impact to the Dow, announced results that only met analyst's estimates of $1.08 and lower revenue numbers than expected. They also scaled back the outlook going forward and that combination was the kiss of death. IBM dropped -$11 in after hours trading. This will equate to more than -50 Dow points at the open. Other earnings bombs today included RFMD which announced earnings in line with analyst estimates but then warned that results would slow in this quarter. RFMD dropped -$10.75 to $15.56 in after hours. CMTN announced earnings that beat estimates but then warned that the fourth quarter would only be in the range of +.04 to +.06 and that was far less than the $.28 that analysts were expecting. CMTN dropped -18.50 to $12 in after hours. That is a -60% drop! TER dropped -$10 after warning that the fourth quarter would miss by a wide margin due to a slowing semiconductor sector. That was the wrong thing to say. That rocked the semiconductor equipment manufacturers like AMAT (-4.25) and rippled through the PC sector as well. A downgrade of Micron by a major analyst at the open did not help. AMAT, MU, KLAC, NVLS all lost ground. ITWO announced after the close as well and beat estimates by doubling revenue. They also announced a 2:1 split but with the other earnings bombs coloring sentiment for tomorrow investors took profits in after hours and knocked -$10.50 off the price. Internet stocks have gone from the rock star like idols of the investing world to leper status. Telling somebody you have YHOO or AMZN in your portfolio is like admitting to owning XXX rated websites. The previous superstars are being whacked daily by investors listening to the "advertising model is dead" mantra being broadcast by the conventional media. It must be payback time. After being ignored as advertisers rushed from conventional media onto the Internet these same outlets are now welcoming advertisers back and rubbing it in big time. YHOO dropped another -6.31 today to a 52 week low of $48.88. Yep, that is a loss of -$109 billion in market cap in the last four weeks. AOL, who announces earnings tomorrow was dropped for a -$9 loss as analysts worried out loud that advertising could be a problem for them also even though the bulk of their earnings came from subscriptions. Guilty by association, a new 52 week low for AOL as well. The selling today was broad based but still orderly. The advance decline ratios indicate to me that institutions are still selling and it is not just retail investors. The decliners beat advancers on the NYSE 3:1 and 2:1 on the Nasdaq. The number of new lows on the S&P were still drastic at 211 which is over 40% of that index. This looks like to me that the funds are still selling losers in their yearly tax loss selling binge. If this is the case then we could see the Thursday lows tested again soon. Also, many funds have technical loss limits that trigger automatic sells when stocks break those limits. As each fund sells a specific stock it drives the price lower and that triggers sells from other funds and that continues to fuel the death spiral across the board. If the selling continues much longer the margin call problem will also add to this downward spiral. The margin debt as reported by TrimTabs.com is still over $250 billion, only -10% off its March high. That is actually up +37% from October of last year. Think about that for a minute. This means investors are much more leveraged and therefore more in danger than they were last year and that positive sentiment by retail investors is a very bearish contrarian indicator. There are likely many hundreds of thousands of investors having another Maalox moment tonight. If those same investors have doubled up on Internet stocks for instance since they always go back up, they may be in for an unpleasant surprise. If total bearishness is required before the market can rally then we should be really close. The pessimism is so thick you can't breathe. Now before you think I have gone off the deep end let's review historical facts. It is always darkest before the dawn and green indicators on my charts have all but disappeared. This is a good thing. Very few successful rallies evolve from a downward spike resulting in a V bottom. Most successful rallies come after a double bottom. That is where the indexes retest those original lows several days later. The Dow came very close to the 10015 from last Thursday today with 10026 but the Nasdaq has about -150 points to drop to retest the 3056 low. I would be very surprised to see Nasdaq 3000 broken and I view anything close to that as a buying opportunity but Dow 10000 is looking very fragile. With the big IBM drop at the open and six other Dow components with earnings tomorrow we could be in trouble there. MSFT, BA, IP, UTX, EK and JPM announce tomorrow. MSFT will be after the close. JPM should not be a problem and Boeing is expected to beat but IP and EK could cause a stink. Other notables for tomorrow include AKAM, AMR, BRCM, F, AAPL and AOL. What we are looking for is that retest of those Thursday lows. With the Middle East problem cooling and oil prices stabilizing the only thing left to worry about is earnings and maybe an economic report or two. The CPI is tomorrow as well as Housing Starts and the rest of the week is clear. What will make or break this week is the guidance from future earnings reports. If we can get some positive surprises WITHOUT negative guidance the market could find a bottom. It wants to find a bottom here. For every dollar the funds sell they must reinvest that money soon. What better place to reinvest than 10000/3000. Stocks are cheap, very cheap. I looked at dozens of charts tonight and there was not one real stock that looked like it was going lower than last Thursday's low. Sure there were stocks still dropping but ATML, SFE, ATHM as examples are now trading in the $10 range and are not a big factor as far as the market is concerned. I sorted my watch list by price and of the top 55 highest priced stocks 25 of them posted gains today. Of the bottom 55 only 7 posted gains. The long term losers are still losing but the higher priced quality stocks are hanging in there. I started to say small caps and large caps but I realized that most of the ones on the loser list had been large caps or at least high flyers. CMGI, ICGE, DCLK, ADAP, BMCS, NETA, INSP, HLIT, ISLD, RHAT, PRIA, KANA, ANAD, AMZN, CLRS, RNWK, LU. All relics of times past and mere skeletons of their former glory, now trading at $21 or less. The Internet bubble has burst and like everyone said, it is not pretty. Still the money that has left these stocks over the last several months is now mostly sitting on the sidelines and waiting for the smoke to clear. The power of that cash was seen last Thursday and that volume was not even especially significant at 2.07 billion on the Nasdaq. It is entirely possible that when the dam bursts and this money finally comes off the sidelines we will have a 3 billion share day. That will be confirmation. The difference between last year and this year is outlook. Analysts are dropping estimates for the fourth quarter instead of increasing them. This is a major difference but the greed factor is alive and well. A +25% quarter may not match the 31% from last year but it is way better than the +12% to +17% "normal" historical growth. Do you think that just because the estimates for 4Q are +25% that fund managers are going to buy bonds or put your cash in a money market? Not hardly. In reality it will increase the race for quality stocks. It will be a stock pickers market and those stocks will soar. The winners from 1998 were not the winners in 1999 and few of those will be winners in 2000. Those winners will emerge over the next several weeks and we will be all over them. Are you ready to join the party? Get your party favors ready! There are still several seats left for the October Workshop in Denver. When it is over you will be saying I wish I had gone. Don't wait! http://www.OptionInvestor.com/workshop Good luck and sell too soon. Jim Brown Editor For those who didn't have time to watch the presidential debate Wednesday night, I've found this transcript of what was said: http://www.OptionInvestor.com/debate ***************************** 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 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 ************** 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 *********************** 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 ************************* 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************************ 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 ************************************************************ **************** MARKET SENTIMENT **************** Here Comes Chicken Little Again! By Austin Passamonte The sky is falling. By now we know the drill: nervous traders hang on every analyst word after announcement. Forget meeting or beating your numbers... tell us that you expect blow-out profits and double digit growth in the following quarters far as the eye can see. Maybe we'll let you live. Say anything even slightly naughty and we'll take you out to the woodshed where we oil up the axe & chopping block. Market bulls are wishing for a bit of political maneuvering from analysts these days; tell everyone what they want to hear now and then let the truth get discovered later. This is not much different from many other October earnings seasons in memory. Some are forgettable to the bulls but weekly charts do not lie. History is recorded for posterity. Negative sentiment isn't dripping any more; we are saturated. If capitulation is marked by irrational selling then we are close; the fires are being fanned to melt down our golden idols. Such is the stuff bull-market runs have been made of. There is plenty of reason to think this may be different. No end of fear and gloom in our industry from top to bottom, side to side. We've seen, heard and read countless valid reasons backed by fact why our financial world as we know it is about to change. The bull market is over and we're headed for long periods of vast, empty darkness. Very well might be and we won't dispute that possibility, but pardon us if we've heard it all before. Anyone just entering the grand game of Wall Street might not recall 1987 and 1988. They might not recall a few years later when war broke out in the Middle East. That's O.K., flip back on your bar charts and see what the markets did from there. Don't bother looking at many of the market's current darlings; they didn't exist back then. Nor do future stalwarts of the decade beyond. The players change but the game remains the same. Markets move up and down in cyclic rhythms regardless what anyone hopes, fears or predicts. Why don't we talk about technical indicators here right now? Which ones work? Yesterday's support & resistance are merely speed bumps today. No rational behavior is present in the short term. Therefore, we back off our view to the long term. Widen our vision. What do we see? A stable to strong economy, a Fed Chairman who's overseen an incredible bull run and a market beginning to look relatively cheap. Does danger lie ahead? Certainly! We could easily crash to new market lows beginning tomorrow. That strikes fear in the heart of stock players. Strikes fear in the heart of "call buyers". Option traders within OIN only see opportunity in each market direction. We personally watched OEX and SPX put options appreciate 300+ and 400+% today under five hours time. To option traders, that spells opportunity! Market Sentiment still believes this market will enjoy strong rallies in the near-term. Conditions are ripe for their formation. Should the rallies decide to run straight south instead, that's why we trade options; for the privilege of being able to profit wildly in both directions! Tag along in each direction with calls and puts where needed and thumb your nose at bulls & bears. It's your divine right as an option trader to do so! ***** VIX Tuesday 10/17 close; 32.71 30-yr Bonds Tuesday 10/17 close; 5.76% 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. Tuesday (10/17/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 750 - 735 13,233 10,535 1.26 730 - 715 10,586 16,527 .64 OEX close: 711.72 Support: 710 - 695 1,406 19,228 13.68 690 - 675 32 9,793 306.03*** Maximum calls: 740/5,325 Maximum puts : 700/12,365 Moving Averages 10 DMA 735 20 DMA 751 50 DMA 787 200 DMA 780 NASDAQ 100 Index (NDX/QQQ) Resistance: 87 - 85 20,933 20,747 1.0 84 - 82 36,994 20,961 1.76 81 - 79 48,448 28,040 1.73 QQQ(NDX)close: 78.25 Support: 77 - 75 11,157 24,153 2.16 74 - 72 7,837 14,238 1.82 71 - 69 1,512 7,920 5.24 Maximum calls: 78/31,568 Maximum puts : 80/14,646 Moving Averages 10 DMA 80 20 DMA 85 50 DMA 91 200 DMA 94 S&P 500 (SPX) Resistance: 1425 14,983 14,650 1.02 1400 7,271 10,890 .67 1375 6,998 12,504 .56 SPX close: 1349.97 Support: 1325 7,468 12,221 8.32 1300 3,454 25,015 7.24 1275 158 4,103 25.96*** Maximum calls: 1425/14,983 Maximum puts : 1300/25,015 Moving Averages 10 DMA 1386 20 DMA 1413 50 DMA 1459 200 DMA 1444 ***** CBOT Commitment Of Traders Report: Friday 10/13 Weekly 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 +804 -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 and Thursday? Next Fridays 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 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 - Tuesday, 10/17/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,089 10,000 10,600 SPX S&P 500 1,349 1,325 1,400 COMPX NASD Composite 3,213 3,040 3,500 OEX S&P 100 711 700 750 RUT Russell 2000 470 460 500 NDX NASD 100 3,172 3,000 3,350 MSH High Tech 868 825 935 BTK Biotech 707 630 740 XCI Hardware 1,174 1,120 1,310 GSO.X Software 388 355 435 SOX Semiconductor 648 620 800 ** NWX Networking 1,093 1,010 1,170 INX Internet 319 310 420 ** BIX Banking 539 525 600 XBD Brokerage 584 555 640 IUX Insurance 736 720 790 RLX Retail 728 695 810 DRG Drug 421 370 425 HCX Healthcare 870 825 875 XAL Airline 129 126 140 ** OIX Oil & Gas 313 308 328 ** The SOX, INX, XAL and OIX triggered support levels in the past two sessions. The XAL triggered our alert at 129, but managed to finish fractionally higher. Watch the Dow here. If the bears are able to break the 10,000 level, there could be trouble. Lowering support (SOX, INX, XAL, OIX). Lowering resistance (SOX, INX, XAL, OIX). *********** OPTIONS 101 *********** Can The Bulls Come Out And Play Yet? By Lee Lowell Last week was hard to watch. I sometimes wonder if I'm doing myself any good by sitting in front of the computer all day. While I was still a floor trader on the NYMEX, a good portion of my trades were true "day trades", where I was in and out of the positions by the end of the trading day whether they were wins or losses. As time went on and the bigger positions I held, it was not always possible to go home with a clean slate but I would try to be as delta and gamma neutral as possible. But most of the time I tried to come home with an empty portfolio. The hardest part about being an at-home trader is that you can't trade like a floor trader. You can't just get in and out with that kind of speed, and you're not privy to seeing every order that comes down the pipe from other brokerage houses. Plus, the commissions costs would eat you alive. I know most of you are thinking that you've never been a floor trader so you can't make the comparison. Just suffice it to say that being an off-floor trader really makes you become a true position trader. You need to become familiar with strategies that will work out over time. You need to know which plays to make in up, down and sideways markets. Education is the key. So if that's the case, then why do I still sit in front of the computer all day? Because I love the game, man! Once a trader, always a trader. As long as you cover yourself and don't blow it all on one play, and make rational and thought-out decisions, you can remain in the trading world for however long it takes. Anyways...back to my original statement. Last week was hard to watch, but I'm getting that feeling that we may be very close to turning the corner. Everything's just getting hammered. I'm so glad that I finally was able to control my urge to keep buying more on every dip. Now I'm waiting for the upturn to begin in earnest before I use all my available cash. Patience really helps in this case. But as long as we're still not sure which way the next move is, let's make sure we know how to handle the present environment. Have you been watching volatility? Not only has the VIX hit its highest point since March/April, but the implied volatility of many individual stocks have skyrocketed also. As noted many times in various OI articles, whenever the fear is rampant on Wall Street, volatility soars. And it usually happens when we have downmoves. This is because the downmoves are always fast and furious and the rationale of many traders gets thrown out the window. Active put buying is the catalyst that usually drives up the VIX and other stock's individual volatilities. As a sentiment indicator, the put/call ratio can also give us clues to when the market might turn around. Used in a contrarian fashion, when the put/call ratio reaches extremes and everyone is loaded up with puts, this is when we see a turnaround shortly thereafter. So let's talk about how to use this high-volatility environment. As we know, this is not the time to be buying individual options unless the volatility on that stock is at low levels. At this point, I'm beginning to look at more bullish strategies with a conservative edge. This means selling covered calls that are slightly in-the-money. Not only does selling ITM calls give me a little more downside protection, but the higher volatility allows me to get more bang for my buck. On a certain stock, I could sell a covered call for 4 points, but 3 weeks ago when volatility was much lower, that same call was only trading for about 2.5 points, even with more time left! (all else being equal). If you're feeling slightly more bullish, then you can still sell ATM or OTM calls. They won't give you as much downside protection but your upside potential is higher. On the flipside, we can sell puts or put credit spreads. Selling naked puts is a risky strategy of course, but as long as you know the consequences, then it could be a good play. Not only will the higher volatility allow you to sell further OTM puts than usual, but if you're aiming to get assigned the shares, your cost basis will be even lower. For example, 2 weeks ago on a random stock, you could've sold a put that was 20 points OTM for $5, but now with the increased volatility, that same put is worth $8 (all else being equal). To see the effects of increased volatility of your options, plug the numbers into your options calculator. Just bump up the volatility estimate and leave all the other inputs the same. You'll see how the premiums will increase. If you're not willing to take the unlimited risk that naked puts offer, then go with selling put spreads. Your risk is limited so you know what the potential loss could be. Once again, the higher volatility allows you to sell further OTM put spreads which increases the chance of them expiring worthless. High volatility doesn't necessarily mean that buying options are off limits. Just don't buy individual options unless you're extremely psychic and you know for sure which way the stock is going to move. Buy call spreads or put spreads. The high volatility of one strike will be offset by the high volatility of the other strike. Check the skew too. You may be able to get the short side of the spread off at a more favorable volatility level. This is why I suggest getting a data feed vendor that can give you the option's "bid implied volatility" and its "ask implied volatility." This way you are sure to know exactly what volatility level you are buying and what level of volatility you are selling. It's not enough to just look at the "implied volatility" column within the option chain because that IV column is based on the last trade of the option. Well, that option could've traded days ago, so you're not getting up- to-date information. Just like when you want to buy the stock outright, it never makes sense to look at the last trade because it's already old hat. You need to see the stock's actual bid/ask to know what level you really can do the trade for. Don't forget to look into you bag of other strategies to use in these situations. Backspreads are a great strategy to use when bullish and there is a reverse skew - meaning the lower strikes have higher implied volatilities than the higher strikes. Also, calendar spreads are a great way to take advantage of skewing between different expiration months. When volatility explodes, it's usually the front-month options that see the majority of it, leaving the further-out expiration months with less of a rise in volatility. This lets you sell front month options that will decay quickly while being long slower-decaying further-out options. It just takes a little education and trial and error to see how all these strategies play out. Give 'em a try. Good luck. ************** TRADERS CORNER ************** Exit Strategies By Scott Martindale This uncertain market climate makes it very important to protect profits and minimize losses. So, I'm writing this article for two reasons. First, I'd like to give you readers some ideas to consider for protecting your portfolios. And second, I'm not doing a great job of it myself, so I need to reinforce in my own mind these strategies. If you're like me, you've held some stock positions too long - to the point that there's no use in selling now if you still like the company long-term. And you've surely held options positions too long. Exit strategies do not apply only to long/short stock positions. They apply to every kind of play, including LEAPs, naked puts & calls, long puts & calls, spreads, straddles, etc. Even if the market bottoms nicely and we start a new 6-month bull run, not everything will go up - and certainly nothing will go straight up. You must use a strategy for protecting your gains and minimizing losses. An effective exit strategy addresses a number of issues: 1. Eliminates the need for subjective decisions under duress 2. Prevents you from selling so soon (within a "normal" range of volatility) that you deprive yourself of the opportunity to let your profits run 3. Keeps you from giving back your profit or letting it run into a loss To make the really big gains, either short or long term, you usually have to ride out some corrections, and that's never pleasant. Emotions can get the best of you. A mechanical exit strategy is your best bet. But what works? An envelope channel can be useful. You might have a rule that a stock should be sold or shorted, a put bought, or a call sold, on the first down day after closing above the envelope. However, even volatile stocks generally don't rise above their uptrending envelopes very often. But when a stock has raced up so quickly that the pace is unsustainable, there is no point in letting your profit run any further. Technical cross-overs, support or resistance penetrations, fixed percentage pullbacks, or percentage pullbacks versus a benchmark are examples of general exit strategies. Simple fixed percentage rules are the easiest to adhere to. For example, you might set a profit target (like 50 or 100%) and sell when you hit it. Don't even worry about what you missed out on. However, if you're down by a fixed percentage, such as 25% or 50% on an option or 15% on a stock, close the position. Once you are up by 10% on a stock or 25% on an option play, try very hard not to let it turn into a loss. Stocks that outperform the market in multiple time periods and have nice, smooth, uptrending chart patterns tend to keep moving up. Shallow corrections are important because it tells you that there are people who want to buy the stock on any pullback. An effective strategy is a simple trendline or moving average. For example, if you put a 40-day moving average under a strong stock, you should see that it tends to bounce off that line. An easy system is to sell a long stock or call position (or buy back a naked put) when the stock closes below its simple 40-day moving average. Last week I talked about various technical indicators, such as Volume, Accumulation, Money Flow, Stochastics, MACD, RSMA, Bollinger Bands, and RSI. Some of these can indicate in advance that an exit signal might be imminent, while others can provide the actual exit signal. For example, when the Stochastics crosses up through the 80% line or when RSI crosses through the 70% line, price is generally in an overbought position. For both Stochastics and RSI, the shorter the time frame the more short-term signals you get, which is generally desirable for front-month call plays. Exit signals for long stock or call positions are produced when: 1. An overbought stochastic moves down through its MA 2. The MACD falls below its signal line 3. A divergence of RSMA below the moving average occurs 4. The price drops back down inside the upper Bollinger Band after previously moving outside of it. It's useful to choose one or more of these as objective signals, and choose the time frame that best fits your trading style. Short-term plays require shorter time frames, whether you prefer 6-month or 10-minute plays. But keep in mind that sensitivity gets you out sooner, perhaps sooner than you really want. It may give you too many signals. One of the objectives of RSMA is to give you a better chance of letting your profits run. If a stock is dropping mainly because the market itself is dropping, there is less chance of an exit signal than if it were dropping while the market was rising. This is fine for a long-term stock play, but for a call play, your premium is still eroding. Also, here are a few price-volume trading guidelines that you might consider: 1. Increasing volume on increasing price means buying pressure is accelerating and price should continue up. 2. Increasing volume on decreasing price means selling pressure is accelerating and price should fall. 3. Decreasing volume on increasing price means price is leveling off and probably will reverse. This is the most reliable of all the relationships, constituting a "failed rally." - Exit signal 4. Decreasing volume on decreasing price means the pullback is leveling off. In the midst of a general uptrend, pullbacks are expected and desirable. Expect a price reversal to the upside. 5. Higher than normal volume at price highs means that traders are selling into strength, creating a short-term price ceiling. When stocks increase their volume on short-term rallies, they tend to exhaust themselves and pull back on lightening volume before they can proceed up again. This is a short-term or intra- day exit signal, but may not be an exit for a medium or longer- term trend. 6. Higher than normal volume at price lows means that traders are buying on weakness, possibly creating price support for a short- term or intra-day bounce. But longer-term, unless some external event dictates high demand, the final bottom will more likely be a low volume test. The short-term investor, including most of us option traders, is actually trying to take advantage of price discrepancies in a longer-term trend. Therefore, we must watch for areas of "congestion" serving as support or resistance, which can delay or even stop breakout moves (up or down). Compare open interest in calls vs. puts at a given strike to find imbalances. For example, if there is quite a bit more OI of calls at a strike price that the stock is approaching, it might serve as resistance and provide a possible exit signal. I have covered a lot of different approaches to exit strategies. Experiment with them. But be sure to settle on something, because the standard amateur practice of going with your gut is not an effective long-term trading strategy in these uncertain markets. ****** Watching The P/E Ratios By Mary Redmond It is important to note that the price/earnings ratio of the S&P 500 index has decreased from 26 in March to its current level of 23. This one of the reasons why many market strategists are stating that the market is undervalued. We can look at the price/earnings ratio of the S&P 500 over a longer period of time to get an understanding of how stocks have been valued in different periods. For example, in 1990 the P/E of the S&P 500 ranged from 12.7 to 15.9, with an average of 14.3. In 1998, the P/E ranged from 21.3 to 26.3, averaging about 23. It is not unrealistic to value most companies at a higher multiple now than a decade ago. This is because many structural and fundamental changes in the U.S. economy and businesses have occurred in recent years. In addition, the productivity of American workers has increased dramatically over the last several years. Also, over the last several years the S&P 500 has added many more companies with a higher growth rate than they used to include. The average return on equity of the S&P 500 companies was 10% in 1990. Today's return on equity is approximately 20%. Some analysts feel that a company should trade at a P/E ratio equal to its earnings growth rate. For example, if a company's earnings are growing at 25% annually then the P/E should be 25. If it is over 25, the stock is considered to be overvalued and vice versa. However, the price/earnings ratio alone is often insufficient information to consider when valuing a company. One of the most important fundamental factors to consider is the rate of return on shareholder's equity, and the growth level of the shareholders equity in relation to the market capitalization. For example, why would anyone buy Juniper with a P/E ratio of over 954? Because Juniper's shareholders' equity grew from approximately $44 mln in 1997 to over $457 mln in 1999. In addition, many analysts talk about Juniper in comparison to Cisco, which is a company worth $383 bln in market value. Investors are willing to pay a premium for a $76 bln company which they think will be a $383 bln company someday. We also need to consider another factor. Equity mutual funds now take in approximately as much money on a weekly basis as they did on a yearly basis in 1980. There are approximately 100 times more investors in the stock market now than there were a decade ago. Money flows are more powerful and more significant now. Years ago, companies were primarily valued on a cash flow basis. Nowadays, fundamentals can be ignored if market participants dislike a company. In this investing period, volatility is more severe and pronounced due to the power of money flows into and out of securities based on the emotions of market participants. As earnings season progresses, many traders may buy calls in anticipation of earnings runs. Most of the time, companies will sell off after their earnings are reported unless they report numbers which are widely disparate from the analysts' expectations. It is important to recognize that the analysts' predictions of earnings are usually more precise with larger, well established companies which have been public for many years. For example, the estimates of Cisco's earnings have usually been accurate to within one cent for the last several quarters. When a company has been public for a long time, the analysts often become as almost as familiar with the management team as they are with their family members. Analysts may be more conservative with companies which were brought public very recently and are growing their earnings at a very fast rate. Often, these stocks are the ones which can report earnings widely disparate from the analysts' predictions, and rally after earnings are reported. The analysts may be more conservative when they are not as comfortable with the company's history of execution. Other factors are important when looking at a company's history in terms of deciding when to trade. For example, it is usually a sign of technical weakness when a company falls below the 200-DMA. However, we may take exception to this rule in certain cases. For example, Sycamore has only been public for about a year. If SCMR dropped below the 200-DMA, it might not be as indicative of weakness as it would with a stock like Lucent. We want to try to identify as many trend lines as possible when trading. The current market environment is worrisome because it looks like the two year trend line of the S&P 500 has been violated. It looks like the train went off the tracks and has to get back on. We may need to wait until this primary trend line is re-established before investors feel completely comfortable investing at previous levels. We want to consider the last time the S&P 500 broke down from its primary trend line in the last several years. This was in the summer of 1998. There were many crises occurring which scared investors out of the market and threatened our economic stability, including the Asian currency devaluation, the Russian default, and the collapse of Long Term Capital. In retrospect, these issues seem worse than our present situation except in one way. The Nasdaq had not increased to the lofty levels we saw earlier in 2000. The severe correction which occurred in technology and internet stocks this spring has impacted our economy in ways many investors may not realize. The failure of many developmental stage internet companies may be one of the reasons high yield debt rates are so high, and the IPO market is so tight. These issues are making it very difficult for small company stocks to rally. You could make a case for the fact that the Nasdaq has yet to find a real long term trend line. The Nasdaq always seems to get ahead of itself, make steep moves up, and run out of breath. We have to consider that 10 years ago the Nasdaq was considered by many to be an irrelevant index consisting largely of risky start-up companies. Ciena is an example of a company which has a strong upward trending trading pattern. It has shown amazing resilience even in the market correction over the last month. You can often benefit from drawing key support lines on a chart. They identify levels the stock at which a break to the downside would be in violation of the primary trend line. Often, these points correlate to high levels of outstanding interest in puts below the stock price or calls above the stock price. Sunday's article had an error. The fund flows for 1994 were $75.4 billion. In 1995, they were $116.5 billion, and in 1997 they were $189.6 billion. ************************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=640 ************************************************************** ************* DAILY RESULTS ************* Index Last Mon Tue Week Dow 10089.71 46.62 -149.09 -102.47 Nasdaq 3213.96 -26.49 -76.32 -102.81 $OEX 711.72 -3.53 -13.76 -17.29 $SPX 1349.97 0.45 -24.65 -24.20 $RUT 470.88 1.36 -10.87 -9.51 $TRAN 2391.22 7.96 -46.92 -38.96 $VIX 32.71 -1.48 3.21 1.73 Calls VRTX 78.88 3.75 4.88 8.63 New, aggressive drug play EMLX 134.56 -0.31 5.19 4.88 Dropped, earnings Thur BRCD 244.44 8.88 -4.06 4.81 Strong sector and stock GLW 97.00 5.44 -1.31 4.13 Restricted by the NASDAQ SEBL 102.81 4.75 -0.81 3.94 Holding strong above $100 RSAS 55.00 0.31 2.75 3.06 New, investors love EPS CIEN 130.00 7.28 -5.16 2.13 Trading near all-time high LLY 89.13 2.81 -0.69 2.13 Droppped, earnings Thur MRK 78.19 0.69 1.31 2.00 Close to new 52-week high SUNW 111.38 3.56 -3.19 0.38 Dropped, earnings tomorrow AKAM 49.13 3.88 -3.75 0.13 Dropped, earnings tomorrow NT 64.00 2.00 -3.44 -1.44 Pressured by NASDAQ bears SCMR 79.00 -0.34 -6.13 -6.47 Nervousness in Tech stocks Puts CREE 76.00 -2.44 -9.19 -11.63 New, market is confused CRA 58.94 -2.81 -4.56 -7.38 CRA still sliding NVDA 59.00 -1.50 -4.63 -6.13 New, sales slowing JPM 137.63 -0.13 -5.38 -5.50 Dropped, earnings tomorrow CPTH 47.38 -0.94 -3.69 -4.63 Dropped, earnings Thur INKT 80.81 2.88 -4.31 -1.44 Thankful for resistance CPN 83.75 1.63 -1.88 -0.25 On the brink of breakdown DNA 149.38 12.13 2.63 14.75 Dropped, biotech rebound PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** SUNW $111.38 -3.19 (+0.38) One thing about the sun, it doesn't shine every day. Neither does SUNW. Not that it was any fault of the stock, just an overall pending earnings gloom in the markets. A ray of hope was offered today on our play however, as the 20-dma ended up supporting SUNW, and we got a bullish tail on the candlestick indicating an underlying optimism. Of course, most of SUNW's resilience to the current market can be attributed to tomorrow's earnings announcement, confirmed after the market close. Watch for a run into the announcement, however, consider exiting existing positions before tomorrow afternoon in order to avoid a post announcement dip. Current call holders could look to sell into any strength offered into the earnings announcement tomorrow. AKAM $49.13 -3.75 (+0.13) Did you catch the bounce? We hope so, as AKAM proved to be a profitable play for OI Investors, reaching a high of $58.50 on Monday. A majority of the momentum from Friday into this week occurred in anticipation of the earnings announcement tomorrow. Today, AKAM started higher out of the gate, but quickly sold off on continued market weakness. Intraday, AKAM found support at the 20-dma near $49, but due to our cardinal rule to never hold over earnings, we will exit this play with the profits offered. Traders still in the play could any strength offered to exit positions. LLY $89.13 -0.69 (+2.13) While LLY has been a slow mover compared to the more volatile high-tech stocks we usually like to play, it has also been a steady winner. With many of our favorite Tech stocks taking it on the chin lately, LLY has provided us with a safe place to make some money. LLY continued to head higher on Monday gaining $2.81 or 3.23%, though it did encounter resistance at $90. Today, that resistance level held up, as LLY gave back some of yesterday's gains. It is interesting to note that trading volume in Merrill Lynch's Pharmaceutical HOLDR (PPH) has increased over 5 fold recently and is about to challenge its all-time highs. While we would love to continue the play, LLY reports earnings on Thursday so instead, we will take our profits and keep an eye on it for future opportunities. EMLX $134.56 +5.19 (+4.88) As stocks in the Technology sector continue to suffer on earnings concerns and analyst downgrades, EMLX is a rare bright spot. Yesterday saw our play give back a tiny portion of Friday's stellar gains, and today buyers pushed the stock to its highest close since late March. Lest you get the idea that it was just a lack of selling, volume confirmed the positive move with 50% more shares than the daily average changing hands today. That is a powerful argument for the strength of EMLX as earnings approach. The company is set to report its numbers on Thursday after the close, so now you know why our play moves to the drop list tonight. We never recommend holding plays over an earnings announcement, and that rule is even more important in this volatile market. We don't recommend initiating new positions at this point. Tighten up your stops to protect your profits and then use any further gains as an opportunity to capture a little more profit before Thursday's announcement. PUTS: ***** CPTH $47.38 -3.69 (-4.63) Negative sentiment in the Internet sector continues to drag CPTH lower, with leaders AOL, AMZN, YHOO and parent company CMGI making 52-week lows. Investors who once ignored losses in the EPS column in favor of revenue growth are now taking a closer look and not liking what they see. Growth prospects are being seriously questioned and business models are being challenged. These factors have all contributed to CPTH being a highly successful put play. Alas, all good things must come to an end and as CPTH is set to report earnings on Thursday, we are sadly ending the play. A weak attempt to rally on Monday morning was harshly denied, giving us an entry for the one last play we were looking for. Thank you CPTH! JPM $137.63 -5.38 (-5.50) The weekend did little to change the fundamental picture as fears of a hard landing in the economy, deteriorating credit quality in the corporate bond market and a slumping stock market continue to weigh on financial stocks. On Monday, JPM had a day of indecision as it closed slightly down on average volume, after encountering resistance at $145-146. Today, that level provided resistance yet again as the stock broke below $140 support to close down 3.76% on low volume. While we would love to keep the play, letting our already substantial profits run, JPM reports earnings tomorrow after the bell so with that, we are taking our gains off the table. DNA $149.38 +2.63 (+14.75) As though waiting for us to recommend puts before moving, DNA responded by gapping up at the open yesterday and continuing to rise all the way into today's close. Strength in both the Biotech and Drug sectors has allowed our play to continue to shake off weakness in the broader markets, as it appears to have put in a solid bottom near $130. The buying volume continues to be strong, and towards the end of the day, DNA managed to poke through the $148 resistance level. Stochastics gave a solid buy signal on the daily chart today, and given that we have yet to get an entry signal for buying puts, this looks like a good time to remove it from the 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=648 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Tuesday 10-17-2000 Copyright 2000, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/101700_2.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=641 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** SEBL $102.81 -0.81 (+3.94) SEBL started the week off with a bang despite the toil and trouble in the broader Tech sector. The stock shot above $100 early yesterday morning, and hasn't fallen back below that level since. In fact, SEBL bounced off exactly $100 today during the NASDAQ meltdown. Going forward, use a bounce off the $100 level as entry into new positions as the risk to reward remains favorable. However, consider setting a stop to limit losses in case the $100 support level does fail. More conservative traders could enter new SEBL positions if the shares rally above the $104 level on increased volume. SEBL had a hard time clearing $104 today, which could be a pivotal level going forward. Make sure to confirm direction in the NASDAQ before buying into strength. The confusion around earnings has been settled. SEBL will report its third-quarter results on October 24th. MRK $78.19 +1.31 (+2.00) MRK has benefited from two distinct events early this week. There's no denying the fact the Pharmaceutical sector would rally with a Republican government. As such, MRK has been steadily climbing as the Republican presidential candidate continues to climb in the polls. Although it's hard to game, we need to be cognizant of the political impact on our play. Along with politics, MRK continues to advance as investors seek solace in the Drug stocks while Tech tumbles. A continued sell-off in the NASDAQ could continue to carry MRK higher with flight-to-quality buying. The two aforementioned events have positioned MRK on the brink of breaking out above $80 and past its 52-week high at $81.13. The more conservative traders might consider entering new positions if MRK rallies on strong volume above $80. The aggressive traders could enter new positions at current levels if MRK advances early tomorrow; confirm sector direction by monitoring MRK's competitors LLY, SGP, and PFE. If, however, the Drug sector pulls back tomorrow, aggressive traders might consider entering new positions if MRK bounces off support at $77.50 or lower near $77. CIEN $130.00 -5.13 (+2.13) CIEN traced its second consecutive new 52-week high today despite the continued weakness in the broader Tech sector. Shares gapped higher this morning after Warburg Dillon Read reiterated its Buy rating on CIEN and raised its price target from $108 to $175. Warburg commented that CIEN remains the leader in next generation optical systems. In spite of the bullish comments, the Tech bears got to CIEN today and closed the morning gap to erase the stock's gains. CIEN is acting like it wants to go higher, plus, continues to trace higher lows. CIEN's strength bodes well, if we could just get the NASDAQ to cooperate! If CIEN's pattern of relatively higher lows holds, aggressive traders might find entry near current levels, or lower near the $120 level. A more conservative approach might be to wait for CIEN to build momentum and target shoot for entries if the stock rallies above $135 on strong volume. Positive direction in the NASDAQ will certainly be conducive to our play and might be worth waiting for. GLW $97.00 -1.31 (+4.13) Turmoil in the Tech sector continues to prevent our GLW play from reaching its potential. The outlook and prospects for the high-speed network business remain bullish as confirmed by recent upward revisions by none other than GLW and positive profit reports by the likes of JNPR. Many on Wall Street feel that GLW remains in a market leading position, at the same time, though, analysts feel GLW will remain under pressure as long as the NASDAQ continues to slide. With that said, it's crucial to monitor the direction in the broader Tech sector (the NASDAQ) before entering new positions in GLW. Aggressive traders might consider taking on new positions at current levels if the NASDAQ turns positive early tomorrow, or on a bounce off GLW's near-term low around the $95.50 level if the bargain hunters step in. On the other hand, more conservative traders might wait for GLW to gain momentum and look to enter new positions if the stock rallies above the ever-important $100 level. Make sure to confirm strength in the NASDAQ and watch for heavy volume to give credence to any breakout attempt. BRCD $244.44 -4.06 (+4.81) The Storage sector continues to hold up in a market lukewarm on Tech stocks. Monday was just another opportunity for BRCD to assert itself in spite of a soft NASDAQ. Starting the week on a positive note, the stock spent the remainder of the day headed higher to close up $8.88 on 120% of ADV. Today, aggressive traders were treated to an entry point as BRCD spent the first half of the day heading lower on decreasing volume, to touch its 5-dma, now at $238. From there, the stock found buyers and bounced, narrowing today's small loss. Volume was light, less than 80% of ADV, suggesting today's action is likely profit taking after a strong move up. Resistance has been encountered at the $253-254 area in the past couple of days. A break above that level would be a conservative entry while aggressive traders may want to target shoot a bounce off the 5-dma. In the news today, BRCD announced that it expanded its alliance with storage software giant Veritas, further solidifying its commanding leadership position in the Storage Area Network space. NT $64.00 -3.44 (-1.44) While holding up alright during yesterday's directionless trading, Networking stocks fell victim to broad-based technology selling today. Bucking the market trend yesterday, NT managed to tag $68 before falling back a bit at the close. The fledgling weakness grew into a serious pullback this morning as our play dropped to bounce at the $63-64 support level. This support level also happens to be sitting right on top of the converged 200-dma ($63.50), 10-dma ($63.38), and 5-dma ($63.50) and it was encouraging to see this level hold as the major indices dropped throughout the day. Our play is predicated on anticipation of a run into earnings, and we are rapidly approaching the company's release date. Scheduled for October 24th after the close, we now only have 5 days of trading for NT to make its move. Below current support, our play should find help at $60, but a major selloff that violates the level would be a strong sign to stand aside. Aggressive traders can buy a bounce from the vicinity of today's lows, but need to watch for volume to confirm the bounce before playing. Traders with a more cautious approach will want to wait for buying volume to push NT through the $66 resistance level before opening new positions. SCMR $79.00 -6.13 (-6.47) Following the lead of the NASDAQ yesterday, SCMR couldn't make up its mind, and as a result, ended the day virtually unchanged after moving in a nearly $10 range. Today was a different story, but not necessarily better. Falling to the $79-80 support level early in the day, it was clear that there was not enough conviction in the bulls camp to push prices back up and as a result SCMR ended the session very near its low of the day. This came on volume significantly above the ADV and is a good reflection of the nervousness that is surrounding technology stocks. Below current levels, support should materialize at $75, and then $72 (the lows from last week). Intraday resistance is forming near $84 (also the site of the 10-dma), with a more significant obstacle found at the $90-92 resistance level. Consider new entries on a strong (volume-backed) bounce from support or if you prefer the more cautious approach, wait for buying interest to push through the $84 resistance level. ******************* PLAY UPDATES - PUTS ******************* INKT $80.81 -4.31 (-1.44) INKT once again cycled a profit for short-term investors, but you had to be nimble and very resilient in order to benefit from the play. All we can say is thank goodness for resistance. The stock continued its rally on Monday, rising pretty much to our touted resistance line at $90, the 10-dma. Since the buzz-word on the street has been to sell into strength, that's exactly what investors did to INKT as it bounced nicely off the resistance late in the day. This morning, another rally attempt occurred in the first ten minutes of trading. However, the doom and gloom of the markets sent INKT lower, ending with a close near the bottom of its $12 range today. Since the markets have shown the inability to maintain the rally attempt offered on Friday, things are looking up for short players and INKT should continue to profit us on the downside. Monday, Lehman Brothers reiterated its Buy rating on shares, but it only benefited the stock for one day. Investors can once again look to play a resistance bounce off the now $89 mark, or look for INKT to trade below $77 on continued market weakness to ride the current negative momentum on the play. CPN $83.75 -1.88 (-0.25) ABN AMRO issued a research report this morning in which it reiterated its Outperform rating on CPN. The brokerage house also raised earnings estimates by quite a substantial margin. The news caused CPN to gap modestly higher this morning, which proved to be the site of the stock's intraday high. CPN rolled over at the $87.50 level and never looked back. In fact, CPN slipped towards its day low near the close of trading after the buyers stepped aside and let the sellers have their way. CPN finished near the $83.50 level today, which is a pivotal area for our play. CPN has bounced from $83.50 in the past, and could find support at that level again. However, if support at $83.50 fails, CPN could fall to $80. With that said, watch for CPN to fall below its support level at $83.50, and confirm any break down with heavy volume. Aggressive traders might target shoot for entry if CPN rolls over near resistance at $84 or higher near $85. CRA $58.94 -4.56 (-7.38) Sentiment in the Biotech sector has been improving lately, with both the Merrill Lynch Biotech HOLDR (BBH) and the Amex Biotech Index (BTK) bouncing late last week and moving higher this week despite trouble in the rest of the NASDAQ. Peers such as DNA, IDPH, and HGSI have been strong so far this week but negative momentum might prove stronger for CRA as it continues to head deeper into the red on the back of the 5-dma. Encountering formidable resistance at $70 on Monday morning, the stock sold off to close near its low of the day on over 130% of ADV. Today, CRA picked up where it left off, heading ever lower, once again with resistance from the 5-dma, now at $63.50. Breaking below $60 support, CRA closed down 7.19% on over 115% of ADV. Aggressive traders may target shoot the 5-dma or a bounce off $60 resistance for an entry point while a more conservative entry can be had if CRA breaks below $55 on volume. ************************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=649 ************************************************************** ************** NEW CALL PLAYS ************** VRTX - Vertex Pharmaceuticals $78.88 +4.88 (+8.63 this week) Vertex Pharmaceuticals Incorporated discovers, develops and markets small molecule drugs that address major unmet medical needs. The Company has eight product candidates in clinical development to treat viral diseases, inflammation, cancer, autoimmune diseases and neurological disorders. Vertex has created its pipeline using a proprietary approach, information-driven drug design, that integrates multiple technologies in biology, chemistry, and biophysics to increase the speed and success rate of drug discovery. Vertex's first approved product is Agenerase, an HIV protease inhibitor that Vertex co-promotes with Glaxo Wellcome. Market fears are mounting. Consider the concerns of a slowing economy, the weak Euro, Internet business models questioned, semiconductor slowdown, deteriorating credit quality and a host of other worries. As a result of the increasing worries on Wall Street, many investors have fallen back on the good old reliable drug stocks as a safe haven. After all, those with illness care little that oil is over $30 a barrel or that credit quality in high-yield corporate bonds are trending toward recession-level default rates. They just want their medicine, at almost any cost, as long as they get better. It is with this inelastic demand in mind that analysts such as Chase B&Q's Alex Zisson have described the drug sector as "a safe place to be". With Merrill Lynch's Pharmaceutical HOLDR (PPH) poised to challenge new highs, the positive sentiment in drug stocks appears to be spreading to the battered Biotech issues, which have bounced strongly since their lows of last week. Finding support at the 100-dma (now at $63.53), VRTX has rallied back above it's 50-dma (at $75.93), a level that served as formidable resistance last week. As well, it put itself back on the right side of the 5 and 10-dma, now converged in the $72.75 area. With a down NASDAQ today, VRTX was able to buck the trend, thanks to a strong day for the Biotech sector. The stock did however, encounter resistance at $80. A break through this level on volume would be the signal for conservative traders to take a position while aggressive traders may watch for a pullback to the 50-dma or the 5 and 10-dma for an entry. As there has been a dearth of news for VRTX lately, sector sympathy will play a key role in the future direction of the stock. Confirm technicals with the BBH or the Amex Biotech Index (BTK) before initiating a play. BUY CALL NOV-75 VQZ-KO OI= 43 at $10.25 SL= 7.00 BUY CALL NOV-80*VQZ-KP OI=562 at $ 8.25 SL= 5.75 BUY CALL NOV-85 VQZ-KQ OI= 59 at $ 5.88 SL= 4.00 BUY CALL JAN-80 VQZ-AP OI= 17 at $13.75 SL=10.00 BUY CALL JAN-85 VQZ-AQ OI= 26 at $12.00 SL= 9.00 SELL PUT NOV-70 VQZ-WN OI= 0 at $ 4.00 SL= 6.00 Wait for OI!! (See risks of selling puts in play legend) Picked on Oct 17th at $78.88 P/E = N/A Change since picked +0.00 52-week high=$96.00 Analysts Ratings 2-7-0-0-0 52-week low =$11.69 Last earnings 06/00 est= 0.20 actual= 0.22 Next earnings 10-24 est= -0.33 versus= -0.28 Average Daily Volume = 916 K RSAS - RSA Security $55.00 +2.75 (+3.06 this week) RSA Security Inc. is a trusted name in e-security, helping organizations build secure, trusted foundations for e-business through its two-factor authentication, encryption and public key management systems. As the global integration of Security Dynamics and RSA Data Security, RSA Security has the market reach, proven leadership and unrivaled technical and systems experience to address the changing security needs of e-business and bring trust to the new, online economy. A global company with more than 5,000 customers, RSA Security is renowned for providing technologies that help organizations conduct e-business with confidence. Things were looking pretty grim for RSAS investors less than two weeks ago. Their stock reached a two-year intraday low on October 4th. The company threw investors a lifeline the same day, announcing that revenues for the third quarter rose 29% and announcing that it would report better than expected results on October 12th. Icing on the cake was the company's statement that it would buyback up to four million shares of its stock - always a sign of confidence for the future. The announcement helped RSAS recover from its lows and the next day's $5 gap up was just the start of what has been a consistent recovery ever since. True to its word, RSAS reported solid earnings less than a week ago and investors have shown their approval by continuing to drive the price higher. Volume has been coming in solidly above the ADV for the past 2 weeks, and the stock has now traversed the entire distance between the lower and upper Bollinger bands. In the process, RSAS has also scaled every one of its moving averages except for the 200-dma (now at $60.31). Today's solid 5% move in a negative technology market was very encouraging and it was even better that we saw the stock scale the last of its shorter moving averages, the 50-dma ($53.31). The $50-51 level represents decent historical support, and seems like a good level to target shoot new entries on an intraday pullback. While there may be some mild resistance to overcome near current levels, the next serious level of contention will be at the $60 level. With the strong move over the past two weeks, RSAS is due for a little bit of profit taking, especially with today's move above the upper Bollinger band. Waiting for a pullback before initiating new positions may be the most prudent strategy, but if RSAS defies the odds and heads higher from current levels, feel free to open new plays as buying volume pushes our play above today's high. Music to investors ears was the company's announcement less than two weeks ago that they would impress the street with their third quarter results and buy back up to four million shares of their own stock. Even better was the fact that RSAS managed to deliver on their promise, and post solid earnings in an environment where it seems that past heroes are falling left and right. On October 5th, First Analysis Securities upgraded the stock from Accumulate to Strong Buy and FAC/Eqts First Albany jumped in with their own upgrade from Accumulate to Buy last Friday. BUY CALL NOV-50 QSD-KJ OI=1124 at $7.75 SL=5.50 BUY CALL NOV-55*QSD-KK OI= 84 at $4.88 SL=3.00 BUY CALL JAN-55 QSD-AK OI= 46 at $8.75 SL=6.00 BUY CALL JAN-60 QSD-AL OI= 74 at $6.63 SL=4.50 BUY CALL JAN-65 QSD-AM OI= 49 at $5.25 SL=3.25 SELL PUT NOV-50 QSD-WJ OI= 81 at $2.31 SL=3.75 (See risks of selling puts in play legend) Picked on Oct 17th at $55.00 P/E = 16 Change since picked +0.00 52-week high=$93.06 Analysts Ratings 6-5-1-0-0 52-week low =$28.88 Last earnings 10/00 est= 0.24 actual= 0.24 Next earnings 01-11 est= 0.26 versus= 0.23 Average Daily Volume = 462 K ************* NEW PUT PLAYS ************* CREE - Cree, Inc. $76.00 -9.19 (-11.63 this week) Cree, Inc. is the world leader in the development, manufacturing, and marketing of electronic devices made from silicon carbide (SiC). The Company incorporates its proprietary technology to produce compound semiconductors for use in automotive and liquid crystal display (LCD) backlighting; indicator lamps; full color light emitting diode (LED) displays and other lighting applications. The Company also manufacturers SiC crystals used in the production of moissanite gemstones and SiC wafers for research directed toward optoelectronic, microwave and power applications. The market does not like confusion, as investors in CREE have recently learned. Reporting earnings last Thursday evening, CREE managed to double Street expectations, posting revenue growth of 80%. After the conference call, BridgeNews released a report with the headline "CREE warns not to keep expecting such high margins". Joe Kernan reported this as news on CNBC the next day, which caused CREE to close down almost 8% on ten times the ADV. CREE's CFO Cynthia Merrell responded by saying, "We have not changed our range of low- to mid-50 percent for gross margins going forward. This is the same range as before." Despite this, BridgeNews stands by its report, stating that "BridgeNews did not state that CREE had issued a formal warning on its margins, but did indicate that CREE was cautioning analysts not to assume future margins would be consistently quite as high as the record latest quarter levels." Amidst all this confusion, at least we can turn to the charts for solace. After encountering formidable resistance from the 50-dma ($115.75), CREE has sold off on the backs of the 5 and 10-dma ($87.47 and $99.30, respectively). At the height of the selling panic last Friday, CREE bounced at $77. Gapping up at the open on Monday, CREE was unable to break through resistance at $93, which brought in the sellers, who tool the stock below the $77 mark today. Volume to the downside has been accelerating since the beginning of October. Add to that negative sentiment in the Chip and Wireless stocks, the confusion last week only served to accelerate the negative momentum already present in CREE. At this point, there are a number of ways to enter the play. A bounce off $77 or the 5-dma are aggressive targets to shoot for while a break below $75 on strong volume would be a more conservative entry. BUY PUT NOV-80 CQR-WP OI=41 at $13.38 SL=10.00 BUY PUT NOV-75*CQR-WO OI= 5 at $10.13 SL= 7.00 BUY PUT NOV-70 CQR-WN OI= 0 at $ 7.88 SL= 5.75 Wait for OI!! Average Daily Volume = 1.51 mln NVDA - NVIDIA Corporation $59.00 -4.63 (-6.13 this week) NVIDIA Corporation designs, develops and markets 3D graphics processors, graphics processing units and related software that set the standard for performance, quality and features for every type of desktop personal computer user. Used in a wide variety of application including games, the Internet and industrial design, the company's products were the first to incorporate a 128-bit multi-texturing graphics architecture. This design approach delivers to users a highly immersive, interactive 3D experience with compelling visual quality and stunning effects at real-time frame rates. NVDA sells its products to major PC manufacturers such as Compaq, Dell, Gateway, Hewlett-Packard and IBM. Building a better mousetrap is only profitable if people are willing to spend money to get rid of mice. Likewise, making the best graphics processing card is only going to keep the profits flowing in if people continue to buy PCs, and lots of them. Well, the verdict seems to be that PC sales are slowing and that means PC component sales will slow too. Investors seem to have figured out the math and have spent the first half of October shaving nearly 30% off NVDA's share price. Volume has been heavy, with today's tally coming in at 50% above the ADV. Closing out the session below the critical $60 support level for the first time in over 2 months is not a good sign, and our play has now violated every one of its moving averages, save one. The last holdout is the 200-dma ($52.63), and it is nestled right at the next critical support level, $52-53. Although the daily Stochastics are now in the oversold zone, recent events in the technology sector have demonstrated that an oversold stock can almost always become more oversold. A violation of today's intraday low of $58.31 looks like a good point at which to enter new positions, so long as volume remains heavy. Using the rule that old support becomes resistance, NVDA should find its first challenge at the $62-63 level in the event of a short-term recovery. This happens to correspond to the 5-dma ($63.13), so look to initiate new plays as our play fails to penetrate resistance and rolls over. BUY PUT NOV-60*RVU-WL OI=91 at $6.38 SL=4.25 BUY PUT NOV-55 UVA-WK OI=37 at $3.88 SL=2.25 Average Daily Volume = 1.32 mln ********************** PLAY OF THE DAY - PUT ********************** INKT - Inktomi Corporation $80.81 -4.31 (-1.44 this 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. Most Recent Write-Up INKT once again cycled a profit for short-term investors, but you had to be nimble and very resilient in order to benefit from the play. All we can say is thank goodness for resistance. The stock continued its rally on Monday, rising pretty much to our touted resistance line at $90, near the 10-dma at $89.06. Since the buzz-phrase on the Street has been to "sell into strength," that's exactly what investors did to INKT as it rolled over nicely at the open. This morning, INKT only managed a high of $88.88 in the first ten minutes of trading. The doom and gloom of the markets sent INKT lower, however, the stock closed about $3 over its low of the day as the NASDAQ bounced. Since the markets have shown the inability to maintain the rally attempt offered on Friday, things are looking up for short players and INKT should continue to profit us on the downside. Monday, Lehman Brothers reiterated its Buy rating on shares, but the benefits were brief. Investors can once again look to play a rollover at overhead resistance of $83 and $89. A break of $77 on continued market weakness would provide an entry to ride the current negative momentum on the play. Comments We are looking for the negative momentum to continue tomorrow for the NASDAQ. Any morning relief will likely be met with selling into strength. Look to enter on any rollovers from overhead resistance, or a break below Tuesday's low of $77.13. BUY PUT NOV-85 KYQ-WQ OI=312 at $13.00 SL=10.50 BUY PUT NOV-80*KYQ-WP OI=174 at $10.00 SL= 7.50 BUY PUT NOV-75 KYQ-WO OI= 6 at $ 7.50 SL= 5.75 Average Daily Volume = 2.30 mln ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ ************************ COMBOS/SPREADS/STRADDLES ************************ Revenue Worries Plague the Market... Stocks closed sharply lower today amid concerns over a potential earnings slowdown in the coming quarters. Monday, October 16 The stock market ended mixed Monday as profit-taking subdued the the Nasdaq while the Dow rallied on strength in retail issues. The composite technology index retreated 26 points to 3,290 but the Dow Jones industrial average rose 46 points to 10,238. The S&P 500 ended relatively unchanged at 1,374. Trading volume was average on the Big Board at 1 billion shares exchanged. Broad market declines outpaced advances 1,490 to 1,377. Activity on the Nasdaq was moderate with 1.78 billion shares changing hands. Technology declines edged advances 2,067 to 1,939. In the bond market, the bellwether 30-year bond fell 2/32 to 106 3/32, with its yield edging up to 5.81%, as traders awaited news from the Middle East summit. Sunday's new plays (positions/opening prices/strategy): Answerthink ANSR OCT22C/OCT20C $0.50 credit bear-call Shire Pharma SHPGY OCT50P/OCT55P $0.75 credit bull-put Read-Rite RDRT APR12C/NOV12C $1.06 debit calendar Carter Wallace CAR JAN25C/NOV30V $2.94 debit diagonal Nasdaq-100 QQQ OCT81C/OCT81P $4.12 debit straddle Applied Micro AMCC OCT155P/O165P $1.38 credit bull-put Applied Micro AMCC OCT210C/O200C $1.00 credit bear-call Today's market volatility provided some excellent opportunities to participate in our new combination positions. The AMCC play worked perfectly. After opening to the upside and then trading within a $13 range, it settled near $180 for the close and then gave back an additional $2 in after-hours trading. The issue is perfectly in the middle of the target area ($170-$190) and there is a high probability the position will expire at maximum profit. Portfolio Plays: Technology investors braced for impact in today's session as the glut of earnings reports began to pour in. Over 1,500 companies are set to announce quarterly results this week and institutional traders are expecting a major sell-off in less favorable issues. Mutual funds must record their losses between now and the end of the month and that activity will weigh heavily on the supply side of share values. In addition, economic concerns overseas such as currency conversion, energy costs, and slowing sales will affect the outlook for almost every industry. This week's reports will be paced by Intel (INTC), International Business Machines (IBM), Honeywell (HON), Citigroup (C) and Philip Morris (MO). Investors are skeptical about the outlook for blue-chip technology stocks and their concerns pushed Dow bellwethers Intel and Microsoft to the top of the loser's column during the session. Intel warned of lower revenues earlier in the month and today, Microsoft hit a 52-week low in anticipation of the company's quarterly results. In contrast, the Dow's rally was led by its retail components. Wal-Mart Stores (WMT) and Home Depot (HD) both recovered from recent losses as traders looked for bargains in blue-chip stocks. Also helping the industrial average were gains in Coca-Cola (KO), American Express (AXP), Johnson & Johnson (JNJ), and Minnesota Mining & Manufacturing (MMM). On the Nasdaq, Amazon.com (AMZN) paced the losers, tumbling to $24 after an article in investment magazine Barron's said the Internet retailer might be seeking to raise cash through a secondary stock offering. Semiconductors were also lower and in the broader market, bank and financial issues slumped after major companies reported mediocre earnings. Oil and oil service shares consolidated as crude futures slipped on news that Saudi Arabia will raise output unilaterally if OPEC fails to take action after the recent talks. Our portfolio enjoyed a few favorable moves during the volatile session. Qualcomm (QCOM) climbed $7 to a recent high near $77 amid reports the company would provide China Unicom with its CDMA technology to build a mobile phone network. Our bullish position at $55 is expected to finish at maximum profit. Ariba (ARBA) was a big mover in today's trading, closing almost $10 higher at $132. Brocade (BRCD) was also active, up $9 to $246 on a solid technical rebound. The credit strangles on these issues have provided excellent returns. Agile Software (AGIL) and Commerce One (CMRC) finished strong, both up over $5 as investors searched for new leadership in the technology group. Positions in these issues have also provided excellent returns. Nice Systems (NICE) made a big move in early trading, rising to $55.88 during the morning session. The rally provided a great opportunity to close our recent debit straddle and the neutral play yielded $5.50 credit, a profit of $1.75 on $3.75 invested in less than one week. In addition, there were numerous early exit and adjustment opportunities. Our primary concerns were Enzo Biochem (ENZ) and American Home Products (AHP), and both positions were closed to limit further losses. Knight Trading Group (NITE) has also been a particularly troubled issue in the past few weeks and with our (sold) Put position in jeopardy, we decided to roll forward and down to the November options for a small debit. Tuesday, October 17 Stocks closed sharply lower today amid concerns over a potential earnings slowdown in the coming quarters. The Dow Jones average retreated 149 points to 10,089 and the Nasdaq composite slid 76 points to 3,213. The S&P 500 index dropped 24 points to 1,349. Trading volume on the Big Board totaled 1.16 billion shares as declines outpaced advances 2,116 to 818. Activity on the Nasdaq was heavy with 1.9 billion shares exchanged. Declines trounced advances 2779 to 1234. In the bond market, the 30-year treasury rose 20/32 to 106 23/32, pushing its yield down to 5.765% as the stock sell-off prompted safe-haven buying. Portfolio Plays: Concerns over corporate earnings continued today as traders sold for profits in all but the most favorable issues. Semiconductor and Internet stocks led the Nasdaq's decline while weakness in financial and retail issues caused the Dow's demise. The market has been plagued by profit warnings over the past few weeks, with many high-profile companies announcing they won't meet consensus estimates. At the same time, uncertainty over oil prices and the failing Euro has driven investors away from equities into more conservative ventures. On the Dow, a handful of companies posted their quarterly results this morning and the bearish effects were far-reaching. Shares of American Express (AXP), AT&T (T), Home Depot (HD), Hewlett-Packard (HWP) and Walt Disney (DIS) drifted lower after the announcements. Blue-chip technology bellwethers Intel (INTC) and International Business Machines (IBM) will be reporting after the market close and their revenue outlooks are expected to have a profound affect on upcoming sessions. Earnings news also failed to inspire financial stocks, with brokerage issues pacing the slump amid worries over declines in trading volume. On the Nasdaq, chip companies were pummeled after analysts at Chase H&Q lowered their ratings on the semiconductor capital equipment sector to "market perform," indicating that capital expenditures will likely come in at or below 10% in 2001, versus widespread expectations of 20%-25% growth levels. In the broader market, oil, oil service, drug, utility and biotech shares fared well but most other sectors moved lower on increasingly negative sentiment. Our portfolio was a "sea of red" and there was little positive activity worth noting in the technology group. Manugistics (MANU) and Research in Motion (RIMM) were the only major issues that advanced and many of the losses in that category were substantial. As expected, the market experienced a large movement overall, with the Nasdaq falling over 100 points during the past two sessions. On the bright side, our Nasdaq-100 (QQQ) straddle is performing quite well and the position has already yielded a small profit for aggressive traders, with additional potential over the next three days. The neutral position in Applied Micro Circuits (AMCC) also achieved favorable results, losing significant time value as the issue traded in a $10 range. In addition, a number of plays on drug stocks benefited from the upside activity in the group and the majority of bearish positions are at maximum profit. Most analysts are anticipating additional volatility ahead of the "double-witching" expiration of stock and index options Friday, and it will be interesting to see whether the market can rebound from the current setback and continue with last week's recovery. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** BSC - Bear Stearns $57.00 *** Takeover Play! *** The Bear Stearns Companies, through its subsidiaries, primarily Bear, Stearns Securities and Bear, Stearns International Limited, is an investment banking, securities trading and brokerage firm serving corporations, governments, institutional and individual investors worldwide. The company operates in three segments: Capital Markets, Execution Services and Wealth Management. Bear Stearns has been a popular take-over candidate in the past and recently, the implied volatility and volume in BSC's options has increased to unusual levels. Traders are speculating that a "buy-out" is in the works and based on the bullish activity in the underlying issue, that appears to be a reasonable assumption. PLAY (speculative - bullish/diagonal spread): BUY CALL JAN-50 BSC-AJ OI=1846 A=$11.88 (wide B/A spread) SELL CALL OCT-60 BSC-JL OI=3368 B=$1.56 INITIAL NET DEBIT TARGET=$9.75-$9.88 TARGET ROI(max)=25% This position is based on recent increased activity in the stock and underlying options. Although the play offers favorable risk versus reward potential, it must also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** JNPR - Juniper Networks $228.00 *** High Flier! *** Juniper Networks is a provider of unique Internet infrastructure solutions that enable Internet service providers and other telecommunications service providers, to meet the demands resulting from the rapid growth of the Internet. The company delivers next generation Internet backbone routers that are specifically designed, or purpose-built, for service provider networks. The company's flagship product is the M40 Internet backbone router, and it recently introduced the M20, an Internet backbone router purpose-built for emerging service providers. The company's Internet backbone routers combine the features of the JUNOS Internet Software, high performance ASIC-based packet forwarding technology and Internet-optimized architecture into a purpose-built solution for service providers. Unlike conventional routers, which were developed for enterprise applications and are mostly inadequate for service provider use in public networks, the company's Internet backbone routers are specifically designed to accommodate the size and scope of the Internet. Juniper is breaking into Cisco's (CSCO) market segment with faster and better equipment and their fundamental performance reflects that fact. The company recently reported earnings of $0.17 per share, versus estimates of $0.09, and the issue has rallied from under $200 to over $240 in just three trading sessions. The big move on the Nasdaq last week contributed to the issue's gains and after reaching the upper "Bollinger" band, the price retreated to $229 at the close of trading today. So where does JNPR go from here? The issue will probably trade in a wide range over the next few weeks as the chart shows strong support at $180 and the 50-DMA is near $200. The company has a very high P/E ratio, but with earnings doubling every quarter, that P/E ratio will continue to move lower. Going into November, we can likely expect more upside than downside on the Nasdaq and all the indications suggest we can successfully initiate a bullish, put-credit spread on JNPR, that will expire worthless in November. PLAY (conservative - bullish credit put spread): BUY CALL NOV-170 JUD-WN OI=655 A=$4.88 SELL CALL NOV-175 JUD-WO OI=405 B=$5.38 INITIAL NET CREDIT TARGET=$0.62-$0.75 ROI(max)=14% Note: Playing a $5 spread allows you to "leg out" of the spread if things turn sour and still have a high probability of making money. This position is $50 below the current price of the issue and if JNPR were to go down that low, it will be with large moves. If you put a "buy-to-close" order on the short option, based on the stock price of $180, and JNPR crashes down through it, then most probably you will be able to exit the long option with a profit. Though the objective here is for the spread to expire worthless, keep in mind that going for the smaller spread (5 instead of 10 or 20) and putting smart stop orders in place usually results in better profits. If your broker does not allow you to place stop orders based on stock price, then keep a mental stop near $180 and be faithful to it. ****************************************************************** INTC - Intel $36.25 *** Bottom-Fishing! *** Intel Corporation, a semiconductor chip maker, supplies the computing and communications industries with chips, boards, systems and software that are integral in computers, servers and networking and communications products. Intel's major products include microprocessors, chipsets, flash memory products, networking and communications products, embedded processors and microcontrollers, and digital imaging and other PC-peripheral products. Their component-level products consist of integrated circuits used to process information. Intel sells its products to original equipment manufacturers, PC and computing appliance users, industrial and communications equipment manufacturers, and businesses, schools and state and local governments. Intel also provides data center services to businesses needing e-Commerce services. Intel is organized into five operating segments according to various product lines: the Intel Architecture Business Group, the Wireless Communications and Computing Group (formed out of the Computing Enhancement Group), the Network Communications Group, the Communications Products Group, and the New Business Group. Intel needs no introduction! After jockeying with Microsoft (MSFT) and General Electric (GE) for the title of the largest capitalized company in the world earlier in the year, Intel fell from grace. Now its technical history looks like that of a "has been" dot-com company. However, contrary to what seems to be a common belief these days, our economy will not collapse overnight and we are not going back to using the Abacus. We will all be using computers next year. Intel stock is a steal at this level and any significant rally in the Nasdaq rally should boost the issue significantly. Intel also issued its earnings report today after the close. Their sales rose 19% in the third quarter and earnings came at $0.36, compared with $0.21 for the same period last year. Judging by the after-hours activity, traders are happy with the results. PLAY (conservative - bullish debit spread): BUY CALL JAN-35 INQ-AG OI=29098 A=$6.00 SELL CALL JAN-40 INQ-AH OI=34269 B=$3.62 INITIAL NET DEBIT TARGET=$2.25-$2.38 TARGET ROI(max)=110% ****************************************************************** - STRADDLES - One of our readers requested some Straddle positions on Financial issues, to take advantage of the earnings-related volatility in the sector. This position meets our criteria for a favorable straddle; relatively cheap option premiums, a history of adequate price movement and future events or activities that may generate volatility in the issue or its industry. This selection process provides the foremost combination of low risk and (potentially) high reward. As with any recommendation, it should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** CMB - Chase Manhattan $37.94 *** Earnings Play! *** Chase Manhattan Corporation is a bank holding company that is organized into three major businesses: Global Bank, National Consumer Services and Global Services. The company conducts domestic and international financial services businesses through various bank and non-bank subsidiaries. The principal bank subsidiaries are The Chase Manhattan Bank, Chase Manhattan Bank USA, and Chase Bank of Texas. The company's principal non-bank subsidiary is Chase Securities, which is engaged in securities underwriting and dealing activities. The company's bank and non-bank subsidiaries operate nationally as well as through overseas branches, representative offices, and affiliated banks. Earnings are driving the market and companies in the Bank and Finance industry have been significantly affected by the recent troubling reports. Chase Manhattan announces quarterly earnings on Wednesday afternoon and the outcome is sure to produce future volatility in the issue. PLAY (conservative - neutral/debit straddle): BUY CALL DEC-35 CMB-LG OI=6200 A=$5.00 BUY PUT DEC-40 CMB-XH OI=3005 A=$4.00 INITIAL NET DEBIT TARGET=$8.75 TARGET ROI=25% Note: We are using ITM options in this position to reduce the cost of time-value premium. With this conservative approach, the upside break-even is $44.00, and the downside break-even is $31.00. ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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