The Option Investor Newsletter Wednesday 10-18-2000 Copyright 2000, All rights reserved. 1 of 1 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/101800_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 10-18-2000 High Low Volume Advance/Decline DJIA 9975.00 -114.70 10086.00 9654.60 1.43 bln 994/1891 NASDAQ 3171.56 - 42.40 3257.81 3026.11 2.51 bln 1451/2572 S&P 100 706.77 - 4.95 714.46 685.55 totals 2445/4463 S&P 500 1342.13 - 7.84 1356.65 1305.79 35.4%/64.6% RUS 2000 466.21 - 4.67 470.88 455.63 DJ TRANS 2368.65 - 22.57 2391.22 2348.70 VIX 32.50 - 0.21 36.74 31.42 Put/Call Ratio 1.01 ****************************************************************** Bounce Or A Bottom? Today's incredible recovery gave credence to the bulls argument. A combination of poor earnings reports and inflation-ridden economic data caused the Dow Jones Industrial Average (INDU) to fall as low at 9657 this morning - over 400 points lower than yesterday's close. The NASDAQ (COMPX) didn't look any better this morning after the tech-heavy index dipped below its near-term low. But, that was all before the bargain hunters stepped in. Major market participants stepped into the Financial and Tech sectors early this morning to scoop up bargains in old favorites such as INTC, MSFT, and JPM. The barging buying was induced by two distinct schools of bullish thought. The market technicians argued that many leading stocks are showing improving technicals - i.e. potential bottoms formed. On the other side of the analyst spectrum, many Wall Street fundamental pundits were pounding the table about the attractive valuations of leading Tech stocks. The two ideas were enough to spur a broad bargain buying bounce this morning, but weren't enough to close the major indices in positive territory. The market's inability to finish in positive territory today stems mostly from the concerns over the future of the US and world economies, and specifically the impact on corporate profits. Macro economic events, among other issues, are threatening the long-term health of the US economy. Wall Street is growing increasingly concerned about the impact of a slowing economy on corporate profits. What's more, the high price of oil, which closed at $33.48 on the NY Merc, continues to pump fear into the market. We certainly can't leave out the fact that the euro fell to an all-time low today. The ill-effects of the euro could be directly seen in Big Blue's (IBM) third-quarter earnings report after the market close yesterday. The company reported third-quarter revenues that fell short of expectations by $600 million. IBM blamed its revenue shortfall, in part, on a 3 percent drop in sales in Europe. IBM finished at $95.44, down -17.56 today, and obviously weighed very, very heavily on the INDU. IBM's woes spurred a slide in the INDU this morning that resulted in the blue chip index closing below the critical 10,000 level. Although, it could have been a lot worse! The INDU recaptured over 300 points in early trading to finish the day alive. Contributing to the INDU's slide was the earnings miss by Chase Manhattan Bank (CMB), who is acquiring JP Morgan (JPM), one of the most influential Dow components because of its high price. However, CMB, and subsequently JPM, rebounded after buyers stepped up in a big way to carry the stocks higher throughout the day. The CPI also added to the INDU's misery. Inflation news hit Wall Street this morning after the Labor Department reported consumer prices spiked 0.5 percent during the month of September. The CPI report caught many by surprise, and increased the fear level this morning. The higher-than-expected CPI report could continue to weigh on inflation-sensitive sectors of the market as concerns of higher interest rates add to fears. The INDU's close below 10,000 today really amplifies the index's current downtrend. It's painfully obvious the INDU has fallen under the control of the bears since early September. Although the INDU's massive rebound was encouraging to witness, the close below 10,000 could prove to be a significant psychological victory for the bears, and detrimental to the INDU's long-term trend. However, the INDU's dip below 10,000 could have trapped bears and ultimately lead to a big rebound should the bulls gain control. Aside from the slide at the open, the bulls held control of the INDU for the better part of trading. Although, it was somewhat disconcerting to see the INDU rollover and close below 10,000. Nonetheless, the day's trend of relatively higher lows held. The internals of both the NYSE and NASDAQ finished pretty ugly, despite the rebound in the broader markets. Decliners outpaced advancers by nearly 2-to-1 on the NYSE, while over on the NASDAQ decliners beat advances by a slightly narrower margin. Volume was very robust with 2.49 billion shares trading hands on the NASDAQ. Also worth noting was the spike in the CBOE Market Volatility Index (VIX) above 36, it's highest level since last spring. The level of fear continues to be high in the options market, which is generally conducive to a market bottom. The b-word is on the tip every traders tongue. The COMPX's bounce off its low at 3026 this morning could have very well been the retest that many market watchers have been calling for. The bears might argue that the COMPX traced a relatively lower low today in an attempt to refute the bulls' talk about a bottom. Nonetheless, the COMPX's rebound off its lows was encouraging. The 3240 area appears to be the next major level of resistance in the way of the COMPX's attempted rebound. If the COMPX can clear 3240, a quick retest at 3300 is not out of the question. The mixed earnings reports after the bell today will most likely make for another volatile session tomorrow, especially with October options expiration a day away. It's going to be a case of whether the bullish earnings reports outweigh the bearish reports. A report that definitely felt bullish after the close was that from Microsoft (MSFT). The software giant reported 46 cents a share in profits; the analysts were expecting a 41 cent profit. The 5 cent better report helped MSFT surge in after hours trading. At time of writing, MSFT was trading at $55.75, up $4 from its regular session close. Another bullish, but prematurely issued, profit report came in from Sun Microsystems. To make matters more interesting this afternoon, SUNW reported its third-quarter results during midday trading. The hardware giant was scheduled to report earnings after the bell today, but somehow, third-quarter profits were accidentally posted on the company's Web site early this afternoon. Word quickly spread that SUNW earned $510 million, or 30 cents per share. Analysts had forecasted a 26 cent per share profit. SUNW held its official conference call after market close, as previously scheduled before the premature earnings release. The company gave bullish guidance and told analysts to expect high 40 percent revenue growth in its next quarter. The stock added $1 in after hours. Internet heavyweight America Online (AOL) reported profits that doubled from a year prior. The company recorded earnings of 14 cents per share, beating consensus estimates by one penny. AOL added nearly $3 in the after hours session. Less than favorable earnings came from Apple Computer (AAPL), who missed already lowered estimates. The company cited slower-than-expected sales of its Mac G4 Cube and soft sales in the education market. B-2-B giant Ariba (ARBA) surprisingly posted a break-even third quarter; the company was expected to lose 5 cents. Despite the better-than-expected report, ARBA was whacked for $10 in after hours trading. Texas Instruments (TXN) posted third-quarter earnings in-line with analysts' estimates of 33 cents per share. During its conference call with analysts, TXN said it expected growth in the semiconductor business to continue into the fourth-quarter, but by a lower margin than previously expected. Among the notable earnings reports expected tomorrow are a host from the drug companies. Pharma heavyweights Bristol Myers (BMY), Eli Lilly (LLY), and American Home Products (AHP), who have been safe havens during the recent market downturn, will all report profits tomorrow. Also worth watching will be the numbers from currency-sensitive companies such as Coca Cola (KO) and McDonalds (MCD). Internet bellwether EBAY will get a chance to defend its stock and the bear attacks surrounding the Net sector resulting from the decline in online advertising spending. Third-quarter earnings reports, which were hoped to be the bullish catalyst to turn this market around, have thus far proved to be the root of more volatility and not the bulls savior. Furthermore, the weak euro, high energy costs, and threats of a slowing economy have weighed heavily on the broader markets since early September. Let's not forget, though, that we are entering into the eighth week of this shakeout - correction - bear market. There's been serious pain felt by investors and the fear levels are near historic highs, indicated by the VIX above 30. A lot of excessive valuation and exuberance has been removed from the marketplace, which makes it prime for a rebound. As Jim suggested last night, I too agree that we are in a stock picker's market, where quality stocks will make you money. Once the market turns, the companies that are still growing profits will surge higher. Trade smart, and sell too soon! I look forward to meeting many of our OI readers at the upcoming seminar in Denver and comparing recent battle wounds. Eric Utley Research Analyst ***************************** OCTOBER OPTIONS WORKSHOP DENVER - Oct 27-30th ***************************** We May Be Close To A Bottom, Learn to take advantage of it. Are you using the Power of LEAPS? Did you know you can generate Cash on a monthly basis writing calls against your LEAPS? We will be teaching powerful LEAP strategies at the Denver Options Workshop. Are you watching for the early reversal patterns with candlestick charting? You can learn how to spot these as Mr. Steve Nison presents his early signal indicators. There is a great opportunity ahead of us and it does not matter which direction the market goes! What really matters is whether you have the EDUCATION to take part in the move! We are providing a Powerful four-day Workshop that will fill in the gaps and provide a foundation for greater achievement in the options arena. Don't Wait To Register Seats are filling up fast! To sign up click here: http://www.OptionInvestor.com/workshop There are ONLY 2 WEEKS LEFT until the Denver Options Workshop! We have over a dozen speakers that will be filling you to the brim with Knowledge on strategy, technical analysis and preparing you to act on market moves. Don't wait to enhance your education, Come to the Denver Options Workshop and associate with other traders and professionals. The event will be held on October 27-30 at the Inverness Hotel and Golf Club. We will see you there! To register click here: http://www.OptionInvestor.com/workshop Check out an outline of events here: http://www.OptionInvestor.com/workshop/outline ************************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=696 ************************************************************** ************** TRADERS CORNER ************** Near-Death Options Experience By Austin Passamonte Last week we spoke of trading current-month option contracts up until the day of expiration. Is this for riverboat gamblers only? I really don't think so. Options primarily gain or lose value in direct relation to underlying market movement. Yes I know all about the Greeks and trading strategies that take advantage of apparent premium-price disparity. This is a fine approach to take but not the one I prefer to implement. I buy calls and puts when trying to time the market. Simple as that. It is not my only strategy but certainly the main one for me. I'm guessing that's the case for a vast majority of individual traders as well. There is no additional risk to trading current options within days or hours of expiration over distant-month contracts when markets are moving sharply. Seen any conditions like that lately? The only situation extra time-premium helps with is during quiet markets or slow-developing plays. These are not what we target now. Step one is to quantify maximum loss capital we are willing to risk. At this point we are buying options so cheap it's often best to forgo stop loss orders and only buy what we are willing to watch expire worthless. If you choose to buy contracts at a cost above your maximum risk, using a 50% below purchase stop-loss order on plays than can hit 100% or higher profit returns are fine as well. Believe me, when the markets are moving this is not a problem if you pick the right target! Let's measure your trading account by increments of $10,000 units. You may choose to risk 5% of your account on high-risk, high-odds plays. That gives you $500 to work with per $10,000 that you are prepared to lose 100% of. Good - that's where we begin! You need to target underlying markets that have the chance to move far enough between now and Friday's close to inflate option value if even for a little while. Remember, even OTM option contracts will quickly inflate as the market moves in their direction. We don't care where they finish by expiration, we only want them to spike in value at some point along the way. My preference is trading the indexes and for good reason. They move exceptionally well on a frequent basis and options can be purchased for relatively lower prices than equity options in relation to strike distance from current price levels. (60-minute chart, SXY-VJ) For example, on Tuesday I traded SPX Oct 1350 put contracts that sold from a low of 3.5 to a high of 10.75 so that session. Not to say that we can buy the exact bottom but what if we entered near 5 and exited at 10? Would that be a fair return for two hour's trading effort in a single morning? I purposely left out today's market action because it was quite an anomaly from the norm. However, both the SPX 1350 Call and Put options traded above 400% returns within the session. You had to buy the puts yesterday before the close and the calls this morning prior to 10:40am EST but each swing ranged from $3.5 to $16+. Was it reasonably possible to catch both moves in their entirety? I sure didn't, but can you see how easy it is to pick off 100% returns from the middle when premiums are so cheap and "common" moves these days see 100+ to 300+% gains in one or two sessions? (60-minute chart, YQQ-VZ) Let's not rub salt into the equation talking about all the money rushing by within the indexes today. I know, I know - we should have talked about this last week to get you all prepared. Boy, you sure are an impatient one! If you aren't already a veteran of aggressive Swing Trading, today was no time to cut your teeth. I know how easy it looks from here because I'm looking at the same things you are. Real money and live fire have a way of changing perspective in a hurry and I can vouch for that in a big way! Let's use this month's action as our training wheels and prepare for the same conditions next month. Hey, 25% of the weeks we trade are expiration weeks so there's no need to force the action. The markets will wait for us until we're good 'n ready, I promise. A few key things to keep in mind: 1: Pick one or two of the best targets you can. Really whittle it down to one or two plays at the most. Trying to spread out your risk among several trades will usually just churn the account and not result in solid gains. 2: Buy the nearest strike you can that has good open interest. You need the target to be liquid so you can easily enter & exit. 3: When in doubt, buy closer to money strike option contracts than distant OTM ones. Distant contracts won't appreciate much in value unless the market makes a large move. Better to be one or two strikes away instead. 4. Set your risk/return targets at 2/1 or better ratio. This means if you enter a high-odds trade using $500, you should have the chance to sell the position for $1,500 or better. This will allow you to win only 50% of your plays but losing 100% while gaining 200% every two trades equals 100% profit per two trades on average. 5. Utilize moving stops while watching the market like a hawk! If your $500 play goes up to $800 in value, immediately place a stop at $500 to lock-in a "free trade". Be willing to risk the entire $500 if you guess wrong and the market moves against you from the onset, but protect capital and lock in profits without fail when they move in your favor. Our actual trading approach doesn't vary this week from any other time via short-term or "Swing Trading". The only difference is our risk/return parameters. This is no time to be a hero risking massive account percentages on "high-odds" trades. They may be high odds but never a sure thing, and I can assure you from personal experience there is no way to tell the difference. This does give you an excellent chance to take the same amount of risk capital your are willing to lose 100% of on distant month option contracts and earn much greater percentage returns. Same downside risk, much greater upside potential. Sounds like a winner to me! Try that twelve times a year while managing to win more than half the time will swell your account greatly. Contact Support ************************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=703 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** VRTX - Vertex Pharmaceuticals $80.38 +1.50 (+10.13 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. Most Recent Write-Up 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. Comments True to form, VRTX tacked on a modest gain despite today's tumultuous market. Shares continue to advance as investors seek solace in the Drug sector. Aggressive traders could target shoot for entries on bounces off support levels. Look first for VRTX to bounce off support at $80, or lower near $79.50, if the stock pulls back on profit taking. Buying into strength could provide a more conservative entry. Watch for a momentum-based rally above resistance at $83. BUY CALL NOV-75 VQZ-KO OI= 30 at $11.75 SL= 9.00 BUY CALL NOV-80*VQZ-KP OI=262 at $ 8.88 SL= 6.25 BUY CALL NOV-85 VQZ-KQ OI= 56 at $ 6.63 SL= 4.50 BUY CALL JAN-80 VQZ-AP OI= 19 at $14.25 SL=10.50 BUY CALL JAN-85 VQZ-AQ OI= 26 at $12.25 SL= 9.00 Picked on Oct 17th at $78.88 P/E = N/A Change since picked +1.50 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 ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** One day doesn't make a bottom... Stocks went on a wild ride in today's session, with both major indices enduring triple digit swings. The market opened with a precipitous decline but bargain-hunting buyers stepped in to produce an incredible recovery from the morning sell-off. The euphoria didn't last long however, as institutional traders used the bounce to offload portfolio laggards under the guise of tax selling. Public investors eventually joined the trend, dumping all but the most popular issues amid fears that a slowing economy will take a bite out of corporate revenues in the coming quarters. The Dow was pummeled from the start on weakness from International Business Machines (IBM) and Chase Manhattan (CMB). IBM's third quarter sales fell short of analyst's expectations and the world's largest computer maker scaled back its outlook for future revenues. At the same time, Chase Manhattan announced disappointing earnings, sending the financial sector into a downward spiral and adding to the concerns about top-line growth in large-cap industrial issues. In the technology group, semiconductors, Internet E-commerce and computer software stocks were the best performers but there were few issues that advanced significantly during the session. The Nasdaq's midday turnaround was bolstered by a rally in shares of Sun Microsystems (SUNW) and Intel (INTC), and the latter enjoyed a substantial recovery from recent losses. In the broader market, paper, biotechnology and retail issues made the strongest moves but all was for naught as stocks eventually succumbed to widespread selling pressure. Summary of Previous Picks: Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return HAND OCT 55 53.62 91.56 $1.38 8.7% OSIP OCT 45 42.06 68.97 $2.94 5.7% ALXN OCT 85 80.25 98.00 $4.75 4.9% Positions Closed: NMSS, VECO Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return HAND OCT 45 44.31 91.56 $0.69 16.3% DCTM OCT 45 44.31 79.88 $0.69 15.5% CMRC OCT 45 44.44 59.19 $0.56 14.8% PWER OCT 55 54.44 70.00 $0.56 13.2% RIMM OCT 85 83.63 116.94 $1.38 11.5% ALXN OCT 80 76.75 98.00 $3.25 11.4% ITWO OCT 135 133.88 179.00 $1.13 10.5% OSIP OCT 40 38.56 68.97 $1.44 10.0% VRTS OCT 105 104.19 152.94 $0.81 9.6% EXTR OCT 83 81.38 107.13 $1.13 9.5% PPRO OCT 30 29.60 32.56 $0.41 8.8% Adj 2-1 Split ELNT OCT 80 78.62 87.06 $1.38 8.5% CTIC OCT 45 44.19 68.38 $0.81 8.4% AGIL OCT 60 58.56 61.63 $1.44 8.3% VRTS OCT 110 108.31 152.94 $1.69 7.5% VRTS OCT 110 107.94 152.94 $2.06 7.0% EXTR OCT 85 83.75 107.13 $1.25 7.0% NTAP OCT 115 112.81 133.50 $2.19 6.8% MEDX OCT 95 93.62 110.31 $1.38 6.8% 2-1 Split 10/19 PDLI OCT 73 70.87 115.81 $1.63 6.6% RIMM OCT 60 58.37 116.94 $1.63 6.4% EXTR OCT 83 81.06 107.13 $1.44 6.2% BLDP OCT 90 88.50 91.75 $1.50 6.2% PALM OCT 40 39.12 57.44 $0.88 6.1% JNPR OCT 145 143.69 213.88 $1.31 5.8% RMBS OCT 60 58.50 58.75 $0.25 1.1% Positions Closed: NMSS, AVNX, METHA, RBAK, VECO Sell Straddles: PMCS OCT 165 163.31 172.50 $1.69 7.4% PMCS OCT 260 261.38 172.50 $1.38 6.0% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return GMST OCT 90 90.50 64.25 $0.50 13.0% TUTS OCT 120 122.31 37.44 $2.31 9.8% MRVC OCT 85 86.00 38.25 $1.00 8.2% AETH OCT 145 146.31 77.94 $1.31 7.8% RBAK OCT 180 181.00 120.56 $1.00 6.6% New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Naked Puts Today's activity might be classified as "Extreme Volatility" and you just have to love it - or at least enjoy the over-priced option premiums it creates. If you bought calls or puts and didn't sell quickly, you may even hate it. Only when the market corrects sharply can one appreciate the value of a conservative positions. The current high-volatility conditions do offer the potential for tremendous profit, but at great risk and with the deflated premiums for call options, we prefer to focus on a high probability of profit through the sale of deep-out-of-the-money Naked Puts. *************** APWR - AstroPower $60.38 *** Short Squeeze? *** AstroPower develops, manufactures, markets and sells a range of solar electric power products for the global marketplace. The company currently sells five classes of products: solar cells, modules, panels, systems and solar electricity. The company's products are used to generate electricity for users not connected to the utility grid. These applications include electrification of rural homes and villages, and power supply for equipment in the communications and transportation industries. AstroPower's products are also used by customers already connected to the utility grid as a clean, renewable source of alternative or supplemental electricity. Additionally, the company recently expanded a joint venture agreement with GPU International to generate wholesale solar electric power. AstroPower is the first of the New Energy Technology companies to offer the residential market a relatively low cost premium power system with multi-mode control electronics. Electricity prices are also stimulating demand, and with over 400 roof-top systems sold to date, the company has decided to initiate an increase in marketing and hire additional management. The new demand for multi mode (grid connected, standalone, or backup) premium power systems is being driven by deregulation, reduced power quality and reliability, and environmental issues, and Astropower is poised to benefit from these factors. It's hard to determine the reason this stock keeps going up but somebody is buying the issue and the technicals are clearly bullish. Our conservative positions simply offer a choice of favorable entries into this increasingly popular stock. APWR - AstroPower $60.38 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put NOV 40 PUW WH 38 1.44 38.56 10.8% *** Sell Put NOV 45 PUW WI 42 2.25 42.75 15.9% ****** DCTM - Documentum $79.88 *** Earnings Rally Underway! *** Documentum develops, markets and supports an open, scalable, standards-based content management platform and application suite for managing the content organizations rely on for global operations and to bring their businesses online. Documentum's Internet-scale content management solutions facilitate e-business connections with customers, business partners and employees. These solutions enable customers to create, deliver, manage and personalize all content from contributors within and outside the enterprise, for key business process, in a targeted manner. Documentum is another E-business leader that appears to be well positioned to profit from the current Internet-based demand for software. Analysts say the company is transforming from a document management vendor to a leading provider of Web content management products. Their rapidly maturing 4i product-line is scalable, technically solid and fully Web-based and as the Web content management market expands to include B2E and B2B, the company will leverage its enterprise document management skills and customer base to emerge as one of the top vendors. Earnings are due on or about October 19 and third quarter results are expected to meet or exceed consensus. Technically, the issue appears to be successfully completing a consolidation phase but we will approach the position from a conservative viewpoint with a deep-in-the-money cost basis. DCTM - Documentum $79.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put NOV 50 QDC WJ 20 1.56 48.44 9.0% *** Sell Put NOV 55 QDC WK 10 2.19 52.81 12.2% Sell Put NOV 60 QDC WL 50 3.38 56.62 17.7% ****** HAND - Handspring $91.56 *** Up, Up and Away! *** Handspring is a provider of handheld computers. The company's first product, the Visor handheld computer, is a personal organizer that is enhanced by its Springboard platform, an open expansion slot. Since the Visor's introduction, more than 2,500 developers have registered with Handspring's developer program to receive support in developing modules. Examples of modules commercially available or in development include a digital camera, an MP3 player, a two-way pager, a global positioning system and content such as books and games. Handspring is set to capitalize on the emerging wireless market, producing a unique, hand-held wireless device. The company has moved to the forefront of the PDA industry this quarter and the introduction of its GSM module in mid-September, which enables voice telephony on the Visor, has made the convergence of data and wireless voice a reality. The company has also aggressively expanded its international exposure in recent months, introducing the Visor in Europe, Hong Kong, Taiwan and Singapore. As the company continues to increase production, the Visor is expected to be launched in other foreign markets later in the year. Earnings are due on or about October 21 and most of the other companies in the small group have exceeded analysts' consensus estimates. However, the issue is now slightly over-extended and a post-announcement consolidation is expected. Our conservative position offers a method to participate in the outcome of the report with relatively low risk. HAND - Handspring $91.56 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put NOV 50 HQA WJ 51 1.25 48.75 6.5% *** Sell Put NOV 55 HQA WK 38 2.06 52.94 10.3% Sell Put NOV 60 HQA WL 111 2.69 57.31 13.0% ****** HGSI - Human Genome Sciences $100.94 *** On The Move! *** Human Genome Sciences researches and develops novel compounds for treating and diagnosing human diseases based on the discovery and understanding of the medical usefulness of genes. The unique company has used automated, high speed technology to discover the sequences of chemicals in genes and generate a large collection of partial human gene sequences. The company believes that its collection includes most of the genes responsible for producing proteins in the human body. Human Genome possesses one of the largest databases of the genes of humans and microbes, which the company refers to as its genomic database. It has created a base of product opportunities based on its genomic technology. The company is now focused primarily on the research and development of proteins for the treatment of human disease. Biotech stocks recovered from today's early morning sell-off to post reasonable gains, even as the broad market faltered. Human Genome Sciences was again one of the leaders in the group, adding to recent advances on momentum from Monday's announcement that pharmaceutical giant SmithKline Beecham exercised an option to jointly develop and commercialize repifermin, a wound-healing agent. Repifermin is currently the subject of three phase II clinical trials and it has the potential to treat a number of afflictions, including diabetic ulcers and inflammatory bowel diseases. The two companies have agreed to share the costs of phase III as well as development costs beyond those studies and US Bancorp Piper Jaffray analyst Thomas Hancock estimated that potential revenues for repifermin could reach $1 billion. Based on the favorable reaction to the announcement and the positive technical outlook for the issue, this play provides an excellent opportunity to speculate on the success of the venture. HGSI - Human Genome Sciences $100.94 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put NOV 70 HHA WN 412 1.06 68.94 5.1% *** Sell Put NOV 72.5 HHA WV 6 1.19 71.31 5.6% Sell Put NOV 75 HHA WO 264 1.56 73.44 7.3% ****** SEPR - Sepracor $120.81 *** Bracing For A Rally? *** Sepracor is a specialty pharmaceutical company focused on the cost-effective development of safer, purer and more effective drugs that are improved versions of widely-used pharmaceutical compounds. The company develops and markets these drugs by leveraging its expertise in chiral chemistry and pharmacology, and experience in conducting new clinical trials and seeking regulatory approvals for new drugs. SEPR's Improved Chemical Entities pharmaceutical development program has yielded an extensive portfolio of drug candidates intended to treat a broad range of indications in respiratory care, urology, gastroenterology, psychiatry and neurology. The company is also broadening its development focus to include discovery and development of new chemical entities. Most recently, Sepracor introduced Xopenex, a single-isomer form of the bronchodilator, albuterol. Xopenex is the first pharmaceutical product to be developed and commercialized by Sepracor. Earnings are driving the market and companies in the major drug industry have enjoyed substantial rallies prior to announcing the actual results. Sepracor is next on the list to issue its quarterly numbers and the results are expected to beat consensus estimates. In addition, Sepracor is expected to announce several positive achievements in the coming months including developments in its product pipeline. The company's major pharmaceuticals in late stage development include Fluoxetine, Norastemizole and Zopliclone, and Fluoxetine, the company's improved formulation of Prozac (now in Phase III trials) has shown a significant advantage over the currently marketed version. Norastemizole and Zopliclone are also exhibiting beneficial traits and along with their other formulations, Sepracor has one of the most compelling pipelines in the specialty pharmaceutical industry. With favorable premiums in the November options, this position offers an excellent speculation play for traders who are bullish on the issue. SEPR - Sepracor $120.81 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put NOV 90 ERU WR 34 1.13 88.87 4.5% Sell Put NOV 95 ERU WS 4 1.88 93.12 7.3% *** Sell Put NOV 100 ERU WT 523 2.94 97.06 9.8% ****** VRTS - Veritas $152.94 *** An OIN Favorite! *** Veritas is an independent supplier of storage management software. Their products help to improve the levels of control, automation and manageability in computing environments. Their products provide protection against data loss and corruption, allow rapid recovery after disk or computer system failure, enable IT managers to work efficiently with large numbers of files, and make it possible to manage data distributed on large networks without harming productivity or interrupting users. Veritas develops and sells products for most popular operating systems, including UNIX and Windows NT. This company is simply one of our favorites for long-term stock portfolios and the demand for Application Software Providers has helped the issue remain relatively bullish in the midst of catastrophic failures of a number of industry-leading stocks. The fundamental outlook is very positive; revenues are expected to grow substantially in the coming year and the company should see higher share values in the future. In the evolving Storage Area Network (SAN) industry, Veritas is well positioned because of its relationships with core equipment manufactures and its unique products, which help control the entire architecture. The current technical trend is favorable and we offer these positions as potential entry points, based on the bullish chart indications. Obviously, the issue is prone to volatile activity with the technology group but a reasonable cost basis exists at the previous support area near $120-$125. VRTS - Veritas $152.94 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put NOV 110 VUQ WB 876 1.69 108.31 5.3% *** Sell Put NOV 115 VUQ WC 367 2.38 112.62 7.3% Sell Put NOV 120 VUQ WD 1124 3.13 116.87 9.4% *************** NEUTRAL PLAYS - SELL STRANGLES *************** EXAR - Exar Corporation $104.44 *** Premium Play! *** Exar Corporation designs, develops and markets high-performance, high-bandwidth mixed-signal (analog and digital) silicon solutions for the worldwide communications infrastructure. The company uses its high-speed, analog and mixed-signal design expertise, system level knowledge and standard CMOS process technologies to offer integrated circuits, or ICs, for the communications markets that address asynchronous transmission standards, such as T/E carrier and ATM. The company is leveraging this expertise to develop products based on current optical transmission standards, such as SONET/SDH. Additionally, Exar provides solutions for the serial communications market as well as the video and imaging markets. EXAR is certainly a volatile issue, having moved through a $30 range almost three times in October. The slump in technology stocks was the reason for the decline earlier in the month but earnings speculation reversed the downtrend and quickly produced a major rally. Then the company's quarterly report became public and the issue was downgraded by Prudential Securities. Now the question is how much activity can we expect in the near-term with little or news anticipated, regarding the company. EXAR - Exar Corporation $104.44 NEUTRAL CREDIT-STRANGLE (sell naked call & sell naked put) This play is simply based on the current price or trading range of the underlying stock and its recent technical history. The probability of profit from these positions is also higher than other plays in the same strategy based on disparities in option pricing. We will use the recent volatility and the overpriced options to initiate a neutral position with a favorable premium. The probability of the share value reaching our sold strikes is rather low, but there is always the possibility of a break-out from the recent trading range, so monitor the position daily for changes in technical character. Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call NOV 125 EQC KE 16 5.38 130.38 20.5% *** Sell Put NOV 85 EQC WQ 2 4.00 81.00 15.4% *** ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. 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