The Option Investor Newsletter Thursday 10-19-2000 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/101900_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 10-19-2000 High Low Volume Advance/Decline DJIA 10143.00 +168.00 10143.00 10014.60 1.30 bln 1956/917 NASDAQ 3418.60 +247.04 3423.45 3314.89 2.34 bln 2846/1158 S&P 100 733.89 + 27.12 734.47 708.35 totals 4802/2075 S&P 500 1388.76 + 46.63 1389.93 1345.64 69.8%/30.2% RUS 2000 481.30 + 15.09 481.36 466.21 DJ TRANS 2459.81 + 91.16 2468.07 2368.35 VIX 28.17 - 4.33 30.68 27.79 Put/Call Ratio 0.64 ****************************************************************** Bottom Or Not, Here Come The Buyers Despite a continuing indifference among analysts, the buyers came rushing into the market today in fear of missing the rally. This new found optimism is partly due to the Fed chief's comments this morning. At a Cato Institute conference, he said the Fed has been watching for the impact of higher oil prices on the economy and that so far it has been "modest." "Despite some slowing that likely has been related in part to the bite from the so-called 'oil tax' on household incomes, the growth of consumer spending has remained firm. But policymakers need to be on alert for oil-driven, indeed energy-driven, risks to our expansion." These comments were interpreted to further solidify the likelihood that the Fed won't raise rates at the November 15th meeting. Which is a given, but don't take that to mean they may be considering a cut in rates either. If the market continues to improve and the Middle East cools, no move seems to be the best bet at this point. Today's market action gave investors a lot to cheer about. How about a 7.79% move on the Nasdaq to calm fears. The Nasdaq gained 247.04 points to close at 3418.60. Perhaps the more exciting aspect of the 7.79% move is the strong volume. Volume was 2.15 billion and the trend of returning volume is helping provide a sigh of relief from investors who struggled through the dog days of summer. Advancers lead decliners 28-12. Everyone should be thanking Microsoft for this rally. MSFT reported strong earnings after the close on Wednesday and the stock shot up over $10 today. One interesting note, many have pointed to Microsoft's collapse on the last day of March as the beginning of the summer sell-off. The stock gapped down big that morning and has been in the dumps ever since. Perhaps today's gap higher at the open will signal the reverse in sentiment going forward. There is no doubt Microsoft surprised the Street with such a solid earnings announcement. The VIX is telling the same story in reverse. The Dow Jones Industrials also rallied today, although to a lesser extent. But we will take anything positive after the scare it gave us yesterday. The DJIA finished up 167.96 to 10142.98 on volume of 1.3 billion shares. The index was lead higher by Intel, Microsoft, Gillette, Honeywell and AT&T. And even though the market just closed a few hours ago, the Dow may have an upside bias tomorrow due to HON which continues to trade higher after-hours on merger talk. The catch 22 is United Technologies is the one supposedly looking to buy Honeywell and UTX is also in the DJIA. So what may be gained in HON, may also be lost in UTX. This index just can't win this week! Oil prices gave back a little today to close under $33 a barrel, but that move wasn't anything to write home about. The equity markets would still like to see oil sink lower. Somewhere in between the $28-30 level would be just fine with me. The bond market stayed flat-to-down as investors piled back into stocks. The 10-year Treasury note is currently yielding 5.69%. The big after-hours news revolved around eBay earnings. EBAY beat the Street with a $0.07 profit versus estimates of $0.04 per share. And this was just the beginning of the good news. Revenues also soared to $113.4 million, up 93.8% for Q3. This is leading analysts to believe the company may raise forecasts for fiscal 2001. "On the surface, it looks like it was very, very strong quarter," said Derek Brown, a financial analyst who covers eBay for WR Hambrecht. The stock is soaring after-hours. EBAY closed up $3.81 to $57.19 during regular trading before as high as $70 after the close. This could be a huge catalyst for the Nasdaq if the brutally-beaten Net stocks continued to return to favor. Nokia's stock rebounded 27% Thursday after the wireless equipment maker released its quarterly update a week ahead of schedule, revealing a 40% jump in profits, a 50% gain in sales and a bullish outlook. Apparently Nokia was tired of watching their stock get hammered due to Motorola's earnings news and forecast last week so NOK released their report a week early. Hey why not if you have the quarter in the bag and you are tired of watching your stock drop. "Nokia reaffirmed people's faith in wireless growth, so anybody in wireless is getting a boost today," Chase H&Q analyst Ed Snyder said. "This has turned the tide on the current thinking that wireless is slowing down, everything is getting worse and (the industry is) dropping off a cliff." NOK climbed $8.13 to $38.13 today. So did you heed the volume warning? I'm sure you have all heard the well known saying amongst technicians "volume proceeds price". That is what appears to be going on. Volume has been strong since last Thursday, the day analysts are now pointing to as the beginning of the end for this recent bout of weakness. It is one of those situations that will appear more and more obvious as the days go by, but investors still freeze like deer in the headlights when it happens. Of course, what I am talking about is the October lows. This could be the fourth straight year the Nasdaq has put the low in during this month. And what was the concerns? Computer and Semiconductor weakness, foreign concerns, and inflation and currency problems. Issues that are so obvious that it makes you wonder why everyone was so scared. Isn't it like watching the movie Pscyho or Halloween? Sure it is scary the first time or two, but the re-runs on cable now put me to sleep. Yet investors and traders still panic despite knowing the complete history of recent years. Now before you think the future is too bright, let me reiterate that many would debate me, saying all is not well. And it is unwise to think the market couldn't turn again on a dime and really get scary. The DJIA is not out of the woods yet. If the Nasdaq trades below yesterday's low of 3026 at this point, I would be nervous. All the signs that we have seen from previous years suggest that the bottom is in place and the next move should be consolidation or higher. If we go against this trend and sink to new lows, then we need to re-evaluate the way to trade this market. But here is why I don't see that happening. The bad news is beginning to fade fast. Microsoft, Intel and Ebay have given us something to cheer about. Again, this is in typical October fashion as the bad news rapidly fades and is quickly replaced by good news. Many investors are ready to do some buying as no one wants to get left behind. Thus you get moves like you did today where buyers flood the market. Before you know it, the prospects of getting one more chance to buy near the 3000 level on the Nasdaq grow smaller and smaller in the rear view mirror. In my mind the real dilemma is how to deal with the big moves as option traders. Chasing stocks that are up double-digit or more and have therefore spiked the implied volatility doesn't interest me. I still think there are many companies in the beginning stages of the turn. Those make for better plays. The big movers typically take a day or two off from time to time anyway and that is when to attack those plays. If history repeats itself, we are in for a favorable November run to capitalize on all kinds of different plays. Ryan Nelson Editor ***************************** OCTOBER OPTIONS WORKSHOP EXPO DENVER - Oct 27-30th ***************************** Was yesterday a bottom? Many are saying it was, but time will tell. Market bottoms or large corrections offer some great entry points and we may be in the sweet spot for future profits. Regardless of whether the market has bottomed or will continue lower is something we cannot control. What we can control is how we react to it! The most important keys to being successful in the market is knowledge and action! Successful traders are able to collect information, analyze it quickly and act on that information. Experience is often the best teacher, but it can also be the most COSTLY! True wisdom is learning from other people's experiences. We are providing a forum, at the Denver Options Expo, where you can learn from experienced traders on both strategy and technical analysis. To sign up click here: http://www.OptionInvestor.com/workshop The Denver Options Expo starts in just 8 DAYS! This is a great opportunity to learn from successful traders the do's and don'ts of option trading. You will come together with a core group of serious option traders and learn powerful and seasoned information that to learn on your own would cost many of you tens of thousands of dollars. Don't wait, sign up today! If this is a bottom, learn the information needed to profit in a flat or up trending market. If this is a head fake, then learn what you need to do to protect your portfolio. Don't leave your trading to luck or hope, become a lifetime learner and we will see you at the Denver Options Expo. 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=719 ************************************************************** **************** MARKET SENTIMENT **************** Technically Speaking By Austin Passamonte Yesterday we were unsure if a bottom was in place. Today we are. At least that's what the trading desks were telling our CNBC family. Hey, remember Ralph Bloch? He's the guy every bull panned for calling the market top in August. Guy tells it like he saw it and gets hissed. Turns out he was dead-on too, unless we believe he single-wordedly moved the markets back then. If Ralph has that kind of power market bulls will be thrilled because tonight he feels all our components for a bottom are in place. Anyone care to diss him this time? We think so to. That is a firm bottom down there that can most assuredly stand repeated tests in the future. And it very well may. Market Sentiment expects a gradual rally to at least 50% from the intraday bottom to our previous highs in August. If we clear that, 68% is next. They are as follows: 50% 62% [Fibanocci from 10/18 low to 9/1 high] SPX: 1417 1444 (200 DMA) NDX: 3563 3700 OEX: 759 778 (200 DMA) Dow: 10,526 10,733 (200 DMA) For all you NASDAQ Comp addicts, just follow the NDX action. It leads the Comp anyways so if that stalls, they both do. We see considerable upside to the 62% retracement where three out of four major index 200 DMAs lie in wait. These might make very good call-play exits for those going long for the time being. Candlestick fans see major bullish-reversal patterns across the board. Dow, OEX and SPX formed great Morning Star bullish reversal patterns complete with engulfing bullish candles. The NASDAQ markets did the same using outside-day candles as well. These slight gaps between yesterday's NASDAQ highs and today's higher-lows have some technicians waiting for these to be filled. We're sure that will happen eventually but maybe not right away. A word of caution (you knew we had to): We've been spoiled by "V" bottoms in the past but let us remind you they don't have the staying power of a nice rounded bottom that's been backed & filled. Peek back at any daily chart to the Feb-April 2000 era and count how many bottoms we put in back then. some weeks had more than one. There is a lot of worry and turmoil out there to roll us over on any given day. We would caution you about loading up on bullish plays and turning your back on the action. Our expectations are for a strong rally to ensue and we will play it that way. Calls and LEAPs seem like the high-odds bet these days and that's all we can ever ask for from the markets; higher odds in one direction than another. From there, stop management will make the difference between profit and loss. Market Sentiment remains cautious as always but sees nothing to stand in the way of considerable upside from here. Remember, it's what we can't see that can kill so enter your trades, place those stops and sell too soon as our beloved mentor is apt to say! ***** VIX Thursday 10/19 close; 28.17 30-yr Bonds Thursday 10/19 close; 5.75% 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. Thursday (10/19/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 770 - 755 15,484 3,012 5.14 750 - 735 14,695 7,909 1.86 OEX close: 733.89 Support: 730 - 715 15,047 14,541 .97 710- 695 4,141 15,247 3.68 Maximum calls: 770/6,086 Maximum puts : 700/7,470 Moving Averages 10 DMA 726 20 DMA 745 50 DMA 784 200 DMA 780 NASDAQ 100 Index (NDX/QQQ) Resistance: 94 - 92 30,798 7,878 3.91 91 - 89 31,301 20,810 1.50 88 - 86 26,760 20,053 1.33 QQQ(NDX)close: 85.0625 Support: 84 - 82 29,485 21,138 .72 81 - 79 45,621 27,238 .60 78 - 76 21,921 23,251 1.06 Maximum calls: 92/19,8173 Maximum puts : 80/10,888 Moving Averages 10 DMA 80 20 DMA 85 50 DMA 91 200 DMA 94 S&P 500 (SPX) Resistance: 1450 12,736 11,585 1.10 1425 13,610 14,336 .95 1400 8,254 10,541 .78 SPX close: 1388.76 Support: 1375 10,163 10,993 1.08 1350 12,471 15,642 1.25 1325 2,064 7,883 3.82 Maximum calls: 1475/19,069 Maximum puts : 1300/20,858 Moving Averages 10 DMA 1372 20 DMA 1404 50 DMA 1455 200 DMA 1443 ***** 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? Friday's data should give a clearer picture to Commercials either covering some profitable shorts or holding fast into next Tuesday. Bullish: Fed's finished Benign government reports Disparity in overhead call/put ratios VIX above 30 Today's follow-thru rally Option expiration week Earnings season Bearish: Oil Prices (falling) COT reports Recent pre-warnings, downgrades (brutal) Broad market's break of critical M/A support ************** MARKET POSTURE ************** As of Market Close - Thursday, 10/19/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,142 9,650 10,600 ** SPX S&P 500 1,388 1,305 1,400 ** COMPX NASD Composite 3,418 3,000 3,500 ** OEX S&P 100 733 680 750 ** RUT Russell 2000 481 455 500 ** NDX NASD 100 3,402 2,950 3,500 ** ** MSH High Tech 935 825 945 ** BTK Biotech 714 630 740 XCI Hardware 1,266 1,100 1,310 ** GSO.X Software 419 355 435 SOX Semiconductor 758 600 800 ** NWX Networking 1,134 1,010 1,170 INX Internet 344 275 400 ** BIX Banking 552 505 600 ** XBD Brokerage 597 550 640 ** IUX Insurance 765 720 790 RLX Retail 769 695 810 DRG Drug 409 395 425 HCX Healthcare 849 825 875 XAL Airline 133 124 140 ** OIX Oil & Gas 309 296 328 ** The DOW, SPX, COMPX, OEX, RUT, NDX, XCI, SOX, INX, BIX, XBD, XAL, and OIX triggered support alerts in the past two sessions. The NDX and MSH triggered resistance alerts. Lowering support (DOW, SPX, COMPX, OEX, RUT, NDX, XCI, SOX, INX, BIX, XBD, XAL, OIX). Lowering resistance (INX). Raising support (DRG). Raising resistance (NDX, MSH). Note: The NDX triggered alerts at support and resistance. ************** TRADERS CORNER ************** Misery Loves Company By Molly Evans Come on in. There are a lot of riches to rags stories to share. Where there was exuberance and easy money for the taking there has now been resignation and dreams of near wealth crushed. I've seen posts on the message boards; heard it in the caller's voices on CNBC and have watched spikes being made on the charts. Those were prices paid that never came close to reaching that height again. Yes, there has been a definite concern growing out there. In times past, people waved these declines off as just being the October doldrums as everyone KNEW it'd come back. Yet, somehow it's been different this time. You know why? It's because this time, it hasn't been just the loathsome "day traders" like us that have taken hard blows. It hasn't been just those "fly by night" stocks like AMZN and YHOO that the young people want to chase. No. This time the victims have been the long term buy and holders of the big caps. You think that MSFT, INTC, ORCL, T, WCOM, CSCO, JPM and C aren't in every retirement portfolio in this nation? We've witnessed or are witnessing a historical event here. It's not that this hasn't ever occurred before. But, this bear market will be remembered for a long time to come. The wealth accumulation didn't exactly happen overnight. In the course of history, some would assert that it did but certainly, in contrast, no one can argue about the rapidity of how this bear has quickly and decisively mauled most everyone in its path. The door was marked and everyone stampeded to reach it. My how fast sentiment changes! If you've read my writings for any time, you know that I've been bearish throughout the summer, right through those rallies and frankly, I remain skeptical right up to this moment. However, the funny thing is, it has been getting awfully crowded here in my cave. What's that tell you? I know what it tells me. But, I refuse to flat out say, "that means it's a bottom." Last week I entitled my article "No, That Wasn't It" after an insistent and persistent sell off in the Nasdaq. Yet, the very next day witnessed a huge buying frenzy in the markets. I felt like a real heel though I still maintained that it would be short lived. I wrote the bulk of this article last evening not knowing that we'd have an 8% surge in the Nasdaq today. Today was good. Will it hold? This one just may. I don't know that it was necessary that we advanced so much in one day but it does help investors breathe a sigh of relief for the moment. Where I was quite leery of that rally last Friday, this one does feel better. During last Friday's buying frenzy I got long early in the morning. Great trades come from within those markets where the tapes are whirring frantically but "nimble" is the name of the game there. I really had thought we'd get a slightly up to sideways week in before the markets continued down. We got a sideways DAY only on Monday. Unfortunately, I didn't sell Monday and ended up dumping calls on Tuesday. Do you know what happens to option contracts when they're being sold on the bid? Of course you do. The owner loses his (or her!) entire gain and perhaps then some. I had a rotten day on Tuesday. Sometimes you're in sync with the market and sometimes you're not. Let me talk about that for a minute. I was pretty smug with myself on Monday. What I had bought on Friday morning was up nicely by then and I thought that maybe for once, the market might try to stabilize there for a few days. This is an options expiration week so I supposed it worthwhile to put on a few bull put credit spreads. If you don't recall what that is, go back to my article a few weeks ago entitled "Spreading the Risk." My thoughts were that we might enjoy an upward bias into some of these earnings days and I'd sell puts that would depreciate rapidly and perhaps even expire worthless. Some Miss Bear huh? Tuesday rolled around and the trouble began again. Those fabulous positions started to rapidly move against me so I got to the business of getting short by covering the puts I had sold. Woops. We were promptly whipsawed the other way and I chided myself for being such a nervous Nellie and got back to reselling the puts. Pretty lame isn't that? I agree! Keep in mind I had other positions working too. Well, it started getting pretty hairy yet again and quite admittedly, I began to suffer vertigo. I could no longer keep straight where I was long, where I was short, what was winning and what was losing. When the market is moving fast, well...that's a position you just don't want to find yourself in. It was dumb! Really, really dumb, not to mention expensive of me to get myself all tangled up in my own web of confusion. Not only was I finding myself in losing trades, I was making my broker very happy with all the commissions. In my mind there was only one thing to do. I liquidated. I didn't know where the market was going and I was truly fed up with the game at that point. Sometimes the best trade is exiting the very last one you have at whatever cost. I essentially sat out Wednesday. I watched as former short positions became all the better looking and lamented as my favorite stocks zoomed up and then right back down on the pages. Sure, I regret that but there's always another day and I hate it when I'm so out of sync with the moves that I can't pull off even one small winner. Hindsight is very good and of course with today's moves, I'd have been sitting pretty but who can know that at the time? Sometimes you've just go to have the presence of mind to save yourself from yourself. Today was beautiful but it's just one day at a time these days. And now, I've digressed. So why don't I want to say "bottom" here? Because the sentiment in the masses has changed. Before, I was a lone ranger out here buying puts and not understanding why XYZ would never seem to come down. I'm always early. I was gathering puts back in July and August on the brokerages but they continued their ascent. The mania continued on even if I saw the cracks in the foundation. You think it hurts to be bullish now? Let me assure you that I've paid dearly for being bearish. The masses are what move the market. Those of us who are contrarians may throw up our hands but the tank runs right over us unless our timing is precise. But as I said earlier, it had been getting awfully crowded in my cave and I don't much like to be amongst crowded habitats. The doom and gloom has been getting oppressive. Is it over? One day does not a trend make but it'll be interesting to feel the sentiment in the coming days. Maybe it's different at the bottom than at the top. Maybe being early in the bottom is different from buying puts at the top? I don't know. I do know that yesterday I saw some QQQs in the mid-seventies that were calling for a home in my IRA. I love to sell premium in the pokier accounts. I figure that if I'm thinking that, then there's little doubt that there are tens of thousands of other hungry sharks circling the reef too. Yes, the people of this country and even those from outside, love our markets and if they have any money left, they absolutely want it there. What would it take to reach that level of disdain to want nothing to do with stocks? My guess is that we don't want to know that answer. But might we? That possibility certainly exists. We're in a different market than the one in which many of us traders cut our teeth. As the sentiment changed, we saw different reactions to news. Stocks have been cut in half in a day. You've all seen it. Never before has the risk been so high. (Maybe there is something to Austin and Buzz's index trading?) Analysts are getting tougher as they've been held to the fires for putting questionable recommendations to "buy" out there. They loved 'em at $150 but hate them at $15. That ceased to sit well with those long-term investors out there who bought the $150 on that recommendation. And is there any reason to falter further? Well, there's still plenty of problems out there and you can find them if you want to look underneath the rug. The Euro hit a new low yesterday and the central bankers are very nervous about that. The Asian markets are not exactly bullish and quite frankly look to be in trouble. And how about those latest CPI and PPI reports? Hmmm. Those inflationary numbers don't exactly point to lowered interest rates anytime soon. Most market participants don't want to hear about this stuff however, and they're wishing, hoping and praying for a recovery. Mutual Fund operators are trapped too. Oh yes, this market does have many reasons for wanting to go up. The market needs a bounce to confound the masses once again. Was today it? Is it the start of an intermediate up trend? We'll know in the coming days. Don't you hate stocks? I'm getting there. We're here to trade them and shouldn't love them anyway. Remember, nimble is the name of the game. Cut your losses quickly and take the profit too soon. Historically, years ending in zeros are not good despite what the cheerleaders say about year-end numbers. What else can they say? You're not going to see Abbey, Joe or Ralph look into the camera and tell small investors that they best just get out to let the big boys take the hits here. Be very suspicious and control your greed and fear factors. I hope you're already signed up for the upcoming Denver seminar. If not, but you're still considering it, please allow me to indulge you for just a moment longer. I've been to other trading seminars and have firsthand experience that they can't hold a candle to what OIN puts on for their subscribers. It's a class act and delivers unbelievably great information. I'm just another trader out here who is quite grateful to have been in attendance for the seminar this past March. For the cost of one bad trade...or...better yet, let's say this, "You WILL pick up something that will help you pay for it in full in the succeeding trading days." I hope to meet you there. ************************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=744 ************************************************************** ************* DAILY RESULTS ************* Index Last Mon Tue Wed Thu Week Dow 10142.98 46.62 -149.09 -114.69 167.96 -49.20 Nasdaq 3418.60 -26.49 -76.32 -42.40 247.04 101.83 $OEX 733.89 -3.53 -13.76 -4.95 27.12 4.88 $SPX 1388.76 0.45 -24.65 -7.84 46.63 14.59 $RUT 481.30 1.36 -10.87 -4.67 15.09 0.91 $TRAN 2459.81 7.96 -46.92 -22.57 91.16 29.63 $VIX 28.17 -1.48 3.21 -0.21 -4.33 -2.81 Calls IDPH 188.63 5.13 14.44 5.81 0.75 26.13 New RIMM 122.44 9.75 5.75 1.94 5.50 22.94 New VRTS 160.38 9.44 -1.00 3.69 7.44 19.56 New CIEN 139.88 7.28 -5.16 -5.94 15.81 12.00 New highs??? SEBL 108.63 4.75 -0.81 -2.38 8.19 9.75 Hot Software VRTX 80.00 3.75 4.88 1.50 -0.38 9.75 Bullish BTK BRCD 244.44 8.88 -4.06 -5.94 5.94 4.81 Entry point RSAS 56.50 0.31 2.75 0.00 1.50 4.56 Charging!!! GLW 95.19 5.44 -1.31 -7.63 5.81 2.31 Dropped MRK 77.56 0.69 1.31 0.00 -0.63 1.38 Dropped NT 65.63 2.00 -3.44 -4.19 5.81 0.19 Ready to Run SCMR 78.25 -0.34 -6.13 -9.00 8.25 -7.22 Led Recovery Puts INKT 73.00 2.88 -4.31 -13.38 5.56 -9.25 13-week low CRA 64.00 -2.81 -4.56 0.19 4.88 -2.31 Dropped CPN 82.38 1.63 -1.88 -4.81 3.44 -1.63 Dropped NVDA 63.69 -1.50 -4.63 -0.94 5.63 -1.44 Entry point? CREE 86.56 -2.44 -9.19 -1.13 11.69 -1.07 Dropped 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: ***** GLW $95.19 +5.81 (+2.31) The massive rebound in the Tech sector today did wonders for our GLW play. Shares were hit especially hard yesterday after GLW confirmed that it would offer $1.2 billion in new stock and debt to help pay for its recent acquisition of Pirelli's optical business. The news has held GLW back in the last two sessions, but, upcoming earnings could carry shares higher. GLW is scheduled to report earnings before the bell Monday morning, so we're no longer initiating coverage on the stock. However, traders might watch the stock closely tomorrow and how it reacts to the SDLI report and acts ahead of earnings early next week. Be cognizant of resistance at $96 and higher around $97.50 in searching for exit points tomorrow. Both levels have given GLW trouble in the past two trading sessions. MRK $77.56 -0.63 (+1.38) We are dropping coverage on MRK tonight, and taking our modest profit off the table. It was brought to our attention that MRK will announce its earnings before the bell tomorrow instead of after the market close, therefore we are closing our play. Near-term support has moved up to the $77 level, with $76.50 area providing additional support. MRK's near-term resistance level has been established just above current levels at $78, with major resistance located near the stock's 52-week high at $81. Possible exit points might be found if MRK rolls over near either major resistance level. PUTS: ***** CPN $82.38 +3.44 (+1.63) Banc of America Securities reiterated its coverage on CPN yesterday, which included its Buy rating and $120 price target. The analyst talk helped CPN to rebound off $77.50 and bounce into today's trading. The Electric-Power sector received an additional boost today from two bullish earnings reports from FPL Group (FPL) and Dominion (D). CPN gapped higher this morning, which might signal a near-term bottom, thus an end to our put play. For traders with existing positions, watch how CPN acts around resistance at $83.50; a break down below the $82 level could send CPN to retest its gap at $81 and provide a good exit point. CRA $64.00 +4.88 (-2.31) Throughout CRA's decline in October, the 5-dma has served as formidable resistance, providing traders with entry points on a regular basis. Today, CRA settled above its 5-dma. The selling pressure we witnessed on Tuesday and Wednesday has proved to be climatic as CRA found support at the $55 level. Today, CRA managed to close above the 5-dma, now at $62.38, suggesting that the downtrend may be over. While CRA did find resistance at the 10-dma (now at $65.57), it appears that worst may be over. With the Amex Biotech Index ($BTK) back above its major moving averages, we know sector sentiment is also improving. As a result of aforementioned events, we are taking out profits and closing our put play. CREE $86.56 +11.69 (-1.06) CREE has moved in step with the Semiconductor sector for the past couple of days. Negative sentiment in the NASDAQ yesterday morning resulted in a gap down at the open below $70 support. The gap brought in bargain hunters, who quickly bid the stock. From there, CREE drifted lower to close slightly lower on over 150% of ADV. Today, with sentiment improving in the broader Tech market and the oversold Semiconductors, CREE gapped up at the open and rallied to close up over 15%. While volume was average, the close put CREE firmly above resistance at the 5-dma (near $82). While there is still resistance at the 10-dma (at $92.50), improving sector sentiment leads us to believe that today's bounce could signal more upside to come and with that, we are dropping coverage on the play. ***********************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 ************************************************************ 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. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Thursday 10-19-2000 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/101900_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=720 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** SEBL $108.63 +8.19 (+9.75) The blowout numbers from Microsoft helped shares of SEBL to finally eclipse the $105 level. SEBL's strong rally on equally strong volume could portend higher prices in the coming sessions as we approach earnings, which have been confirmed to be released on October 24th (next Tuesday). We'll want to watch early tomorrow for the bulls to continue buying SEBL. Look for SEBL to break out above the $110 level on strong volume. Should SEBL break $110, the stock could very well go on to retest its 52-week high at $118.44, which was traced less than one month ago. If the NASDAQ pulls back tomorrow to consolidate today's gains, aggressive traders might target shoot bounces off support levels. Watch for SEBL to bounce off the pivotal $105 level, and make sure to wait for the buyers to step in and bounce the stock higher. Commerce One (CMRC), a SEBL competitor, reported bullish earnings after the bell today, which might help our play rally above the key $110 level tomorrow. CIEN $139.88 +15.81 (+12.00) The return of the Tech bulls today boosted CIEN up to the $140 level, but just shy of its recently minted 52-week high at $141. CIEN is on the brink of breaking out once again. With continued strength in the NASDAQ, shares could break out in the coming days. The blowout numbers from SDL Incorporated (SDLI) after the bell today could help CIEN to rally above its high tomorrow, and provide a solid entry into new positions. If CIEN can't eclipse the $140 level tomorrow, traders might look to enter new positions on a pullback to support near the $137 level, lower around the $135 area, or down around $131 on an extended round of profit taking. The bullish earnings report from Nokia (NOK), among others, could get our CIEN play rolling in the coming weeks. We'll want to pay close attention to earnings reports from the likes of GLW, JDSU, and NT in the coming week and their effects on our CIEN play. BRCD $244.44 +5.94 (+4.81) Gapping down at the open, yesterday morning offered aggressive traders an entry with a bounce near the 10-dma. From there, the stock found buyers but resistance at $250 brought in the sellers. BRCD closed modestly lower on 120% of ADV, despite a stellar earnings report from storage giant EMC. Interestingly enough, growth in EMC's Storage Area Network (SAN) division was over 400%. Numbers like this only emphasize the potential of the SAN space, which Brocade is the clear leader in, with over 80% market share. Today, on the heels of a strong NASDAQ, BRCD gapped up at the open. Getting as high as $247, the stock sold off until an end of day push lifted shares higher to close up 2.49%. A bounce off support at $240, or the 10-dma at $233.75, could provide traders with an aggressive entry while conservative traders could look for a break above $247 resistance. In either case, make sure buying volume supports any advance before entering new positions. VRTX $80.00 -0.38 (+1.13) Strong moving average support and improving sentiment in the Biotech sector has been the key to this play. With Merrill Lynch's Biotech HOLDR (BBH) back above the 200-dma, the Biotechs are bouncing back. Yesterday, in the face of a volatile NASDAQ, VRTX gapped down at the open. Touching its 10-dma (now at $73.65), the buyers came in mass to drive the stock back up, but shares hit resistance at $85, and eased back to close up 1.9% on over 155% of ADV. After such a display of strength, VRTX took a breather today, closing down fractionally on low volume. With strong support at $76.80, thanks to the convergence of the 5 and 50-dmas, a bounce off that level could provide for an aggressive entry. There is also additional support in the $75-76 area. Investors may also consider entering at current levels but make sure the buyers are out in force before initiating a play. NT $65.63 +5.81 (+0.19) Yesterday's carnage provided a great entry into our earnings run play on NT - for those with iron-cast stomachs. While it was encouraging to see buyers step up every time the stock dropped to $60, the buying was pretty anemic. Today was a different story altogether as buyers showed up en masse, right from the open. Gapping up at the open, NT spent the first hour deciding whether the opening gains were for real, and then headed off on a steady rise, right into the closing bell. Volume was solidly above the ADV, and it really picked up after lunch time, adding proof that this move was for real. With earnings just around the corner, next Tuesday to be exact, this looks like the beginning of the move we have been waiting for. While double-digit gains were found in abundance in the technology sector today, we are more than happy with the 10% move we got from NT. Our play has been flirting with the 200-dma (now at $63.63) for the past month, and today's strong move puts it back above this important level. NT found resistance today at $66 and the next level of resistance is sitting at $68. Profit taking from today's strong move could provide an attractive entry point on a bounce from the $63-64 support level, but more cautious traders will want to buy a breakout above resistance. Keep in mind that there are only three trading days left until NT's earnings announcement; we want to have all open positions closed by that time. RSAS $56.50 +1.50 (+4.56) Barely taking notice of the rampant selling in the broader markets yesterday morning, RSAS responded by charging up to test the $60 level. Unfortunately, the afternoon weakness took its toll and our play fell right back to the $55 level (now acting as support) at the close. Today's gains were more controlled as buyers only pushed the stock up to the $58 level, but it was nice to see the afternoon selloff halt at $56. This pattern of surging higher at the open and then selling off near the close is a familiar one for RSAS investors, as it has been doing it fairly regularly for the past two weeks. Find a pattern and exploit it as long as it continues. Along those lines, the late afternoon declines can be used as entry points for the next day's surge. This approach is only for aggressive traders, and you must make sure the afternoon selloff doesn't violate the series of higher lows the stock has built up over the last two weeks. Helping to fuel the move higher in recent days is a long list of positive press items. Among them, RSAS has teamed with CSCO on e-business security, and Global Network Privacy has selected RSAS for its digital certificate and authentication capabilities. While bounces from the $55 support level look attractive for new entries, more conservative traders will want to wait for a volume-backed move through the $58 resistance level before initiating new positions. SCMR $78.25 +8.25 (-7.22) Although beaten up with the rest of the technology sector yesterday, Optical Networking stocks led the NASDAQ recovery today, and SCMR wasn't about to be left behind. Buyers showed up early and often, pushing our play nearly 12% higher on volume 25% above the ADV. While still underwater from where it was at the beginning of the week, today's strong move is encouraging. Things were nip and tuck near the close yesterday as SCMR flirted once again with major support at $70, but we are willing to overlook this poor behavior in light of the solid performance seen today. Prior support at $79-80 will now act as resistance and conservative traders will want to wait for strong volume to push our play through this level before initiating new positions. Intraday support sits near $75, and more aggressive traders can consider new positions on an intraday bounce from this level. Earnings are still set for November 14th, so that event is unlikely to have an effect, at least not until the end of October. In the meantime, market health and sentiment is likely to be the dominant factor in our play, and today's action is encouraging. Pay careful attention to the action in the broader markets, and the Networking sector. As long as today's improving sentiment continues, SCMR looks poised to perform nicely over the days and weeks ahead. ******************* PLAY UPDATES - PUTS ******************* NVDA $63.69 +5.63 (-1.44) Recent selling pressure in the PC sector came to an abrupt halt yesterday as the major indices bounced from their lows. Improving sentiment continued into today's session, and NVDA was just one of many beneficiaries. With the exception of IBM (due to disappointing earnings), virtually everything PC-related had a nice recovery today, due in no small part to MSFT's solid earnings. After gapping down to $55 at the open yesterday, NVDA has enjoyed a rather impressive recovery, ending today's session just below $64, for a gain of nearly 16%. So why is it still on the Put list? The $64 level looks like it is creating some formidable resistance and the $66 level will be even tougher to crack. While yesterday's recovery came on nearly 30% more volume than the ADV, today saw a sharp decline in volume, failing even to reach the ADV. Today's afternoon rollover came right at the 10-dma ($64), and this could be an attractive entry point for aggressive players. A more conservative strategy would be to wait for selling volume to pick up, pressuring NVDA below $61, near the opening price this morning. Earnings are scheduled for November 9th, so that event is unlikely to impact our play, at least for the next week. Keep an eye on sentiment in the PC sector. If it begins to deteriorate, it will be a good sign that NVDA is likely to face more hard times ahead. INKT $73.00 +5.56 (-9.25) Despite the optimistic rebound in the markets today, our stellar put play with INKT continued to profit investors. INKT hit a new 13-week low on the sell-off which occurred during the morning trading session. Once the stock hit the low of $62, it bounced rather strongly on the broad rally and powered back to near the day's open. The entries once again are offered off of resistance, now at $80 near the 10-dma, and momentum trades below the previous day's low. INKT has confirmed their earnings release for Oct. 26th, so ne cautious of the event, now five trading days away. It appears that Freeserve's (FREE) search engine will not be served by INKT anymore. Rather they will use the GOTO engine which is also powered by INKT. Thus a net zero change in scope, but the market thinks it's negative. Investors can once again look for INKT to rollover at the $80 resistance area, which is the most favorable entry at current levels. The momentum break through below $62, which is a lot of profit to forgo to be safe, however it is playable with negative market 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=745 ************************************************************** ************** NEW CALL PLAYS ************** VRTS - Veritas Software Corp $160.38 +7.44 (+19.56 this week) Truthfully, as its name applies, Veritas is the world's best when it comes to data storage. They lead the market in this ever critical component of data storage, and management to help their customers avoid errors and crashes with network systems. If a crash does occurs, VRTS' management software allows for very quick recoveries. So effective is VRTS at what they do, that Microsoft and Hewlett-Packard are principle clients and reasons for the company's success. What market uncertainty? As if there were no market direction uncertainty, VRTS rallied off the convergence of the 50 and 200-dma's to establish a new 13-week high today at $160.38. This is truly a technical momentum play, with several bullish formations backing the play. Also, VRTS broke above resistance at the established $150 mark. Furthermore, the positive breakout today did so forming a very positive hammer bar with a significant downside tail. This is an indication of the true positive nature of the play showing buyers dominating the boards with VRTS. A good late afternoon rally raised the stock $4, indicating professional players are also interested in the issue. VRTS is rallying in a post earnings way, as they reported profits two cents better than expected. No depression here, rather a pick-up in momentum due to the news. Four analysts confirmed Buy or Strong Buy opinions on the stock, reaffirming optimism in the play. The good news and performance on the play has analysts expecting continued good numbers next quarter. Two possible entries are offered on this play depending on market conditions. First, look for a momentum run to continue, and let VRTS trade above $160.50 on positive market support. Second, continued jitters in the market could take VRTS back near support at the 10-dma near $140. A rebound off this support would be very playable. VRTS just introduced their File Sharing Option, to dramatically speed up transaction speeds. Dot Hill Systems Corp today announced they have signed an agreement to be a reseller for VRTS. Because of Dot Hill's presence in the industry, the combination should help VRTS increase market penetration. A great marketing campaign was also introduced by VRTS today, that allows purchasers to receive cash equivalent to the stock value of VRTS software at the close of the program. BUY CALL NOV-155 VUQ-KK OI=281 at $17.63 SL=13.00 BUY CALL NOV-160 VUQ-KL OI=609 at $15.13 SL=11.00 BUY CALL NOV-165*VUQ-KM OI=584 at $12.88 SL= 9.75 BUY CALL NOV-170 VUQ-KN OI=698 at $10.88 SL= 8.25 BUY CALL FEB-170 VUQ-BN OI=224 at $24.50 SL=18.50 SELL PUT NOV-140 VUQ-WH OI=350 at $ 6.00 SL= 8.50 (See risks of selling puts in play legend) Picked on Oct 19th at $160.38 P/E = n/a Change since picked +0.00 52-week high=$174.00 Analysts Ratings 11-10-1-0-0 52-week low =$ 35.31 Last earnings 10/00 est= 0.14 actual= 0.16 Next earnings 01-11 est= 0.16 versus= 0.12 Average Daily Volume = 6.01 mln RIMM - Research In Motion Ltd $122.44 +5.50 (+22.94 this week) Based in Waterloo, Ontario, Canada, Research In Motion Limited is a leading designer, manufacturer and marketer of innovative wireless solutions for the mobile communications market. Through development and integration of hardware, software and services, RIMM provides solutions for seamless access to time-sensitive information including email, messaging, Internet and intranet-based applications. RIMM technology also enables a broad array of third party developers and manufacturers in North America and around the world to enhance their products and services with wireless connectivity. It appears that a major shift is taking place in the computer industry. With traditional boxmakers such as Apple and Dell recently putting out earnings warnings, stocks in PC makers have tumbled. But it has been in this climate that shares of portable computing device companies such as Handspring, Palm and RIMM have bloomed, marking a unique divergence in the hardware sector. No longer content with large clunky desktop machines or even laptops for computing and Internet needs, consumers have gravitated strongly towards mobile Internet-ready devices. Even in last night's conference call with Apple Computer, analysts repeatedly asked Steve Jobs what he thought about the handheld computing market, suggesting the change in trend toward portable hand-held devices capable of wireless access to the Internet. According to Banc of America Securities analyst Rob Sanderson, "Handheld computing wireless Internet stuff have done really well in this recent market downturn, because they don't have the exposure to some of things that are really scary going on in Tech." Bill Crawford of Merrill Lynch added, "Right now we are seeing a shift from the old computing paradigm that stopped at the personal computer toward handheld devices. That's the new growth area and clearly Handspring, RIMM, and Palm are sitting in the sweat spot of that." Like its geographic location in the Great White North, RIMM's stock price has headed in that direction since finding a bottom in late May. During that time, the stock has appreciated over 400%, most recently finding support on a bounce off the $85 level. At this point, an aggressive entry could be found on bounces off the 5 and 10-dmas, at $112.70 and $107.67. There is also strong support at the recent resistance level of $115. A break through $125 resistance on volume would provide risk adverse traders with a more conservative entry point. Continued interest from analysts in the handheld computing sector will be a key driver to RIMM's stock price. When making a play, look for price moves in HAND and PALM to confirm the direction. In the news today, RIMM introduced a new handheld wireless device for use with Bell Mobility's Wireless Data Network, which serves over 2.7 million Canadian customers. BUY CALL NOV-115 RUL-KC OI=235 at $17.38 SL=12.50 BUY CALL NOV-120 RUP-KD OI= 32 at $13.38 SL=10.00 BUY CALL NOV-125*RUP-KE OI= 35 at $11.13 SL= 8.25 BUY CALL DEC-125 RUP-LE OI=134 at $16.38 SL=11.25 BUY CALL DEC-130 RUP-LF OI= 21 at $14.50 SL=10.75 SELL PUT NOV-110 RUL-WB OI=188 at $ 6.75 SL= 9.50 (See risks of selling puts in play legend) Picked on Oct 19th at $122.44 P/E = 1949 Change since picked +0.00 52-week high=$175.75 Analysts Ratings 6-7-1-0-0 52-week low =$ 23.25 Last earnings 09/28 est= -0.03 actual= -0.02 Next earnings N/A est= -0.02 versus= 0.05 Average Daily Volume = 1.46 mln IDPH - IDEC Pharmaceuticals $188.63 +0.75 (+26.13 this week) Based in San Diego, IDEC Pharmaceuticals Corporation is a biopharmaceutical company engaged primarily in the research, development and commercialization of targeted therapies for the treatment of cancer and autoimmune and inflammatory diseases. The Company's first commercial product, Rituxan, and its most advanced product candidate, Zevalin (ibritumomab tiuxetan, formerly IDEC-Y2B8), are for use in the treatment of certain B-cell non-Hodgkin's lymphomas (NHL). While it's been a rough October so far for many stocks, investors in IDPH have had much to cheer about. With high oil prices, Middle East tensions, concerns about credit quality in corporate bonds, and a host of other fears, traders have been running to the drugs stocks for cover, as could be seen in the strong appreciation of stocks such as LLY, MRK and ABT. With many pharmaceuticals near their all-time highs, traders then turned to the battered Biotech stocks, driving up many of those issues, as well as Merrill Lynch's Biotech HOLDR (BBH) back above its 200-dma. With the Amex Biotech Index (BTK) also back above its major moving averages, it appears that the Biotech bounce is for real, which is good news for IDPH. Since mid-September, IDPH has been trading in a range of 30 points from top to bottom, with support at $150 and resistance at $180. This all changed on Tuesday when the stock broke above $180, thanks to a stellar earnings report. Beating the Street consensus by three cents and the dreaded whisper number by two cents, the stock rallied on Tuesday as investors piled in to take IDPH above the key resistance level. Since then, IDPH has continued higher, using its 5-dma for support. Based on the current trend, a bounce off the 5-dma, currently at $177.73, would provide aggressive traders with a target to shoot for, with further support from the 10-dma near $170. A bounce off support at $180 is another possible entry point, but confirm the bounce with volume. Overhead, resistance can be found in increments of $5 at $190, $195 and the bicentennial mark at $200. Tuesday's rally was also helped by positive comments from Bank of America Securities, which rated IDPH a Strong Buy, US Bancorp Piper Jaffray, which gave the stock a Buy rating, and Prudential Securities, raising their price target to $200. Along with today's upgrade of IDPH from Adams Harkness, buying interest in the stock has risen dramatically. Confirm that sector sympathy is on your side when initiating a play, using the BTK and the BBH. BUY CALL NOV-185 IHD-KQ OI= 84 at $19.00 SL=13.75 BUY CALL NOV-190*IHD-KR OI= 84 at $16.63 SL=12.00 BUY CALL NOV-195 IHD-KS OI=111 at $14.25 SL=10.50 BUY CALL JAN-190 IHD-AR OI=521 at $30.13 SL=21.75 BUY CALL JAN-195 IHD-AS OI= 0 at $27.88 SL=20.25 Wait for OI!! SELL PUT NOV-180 IHD-WP OI= 10 at $10.50 SL=14.00 (See risks of selling puts in play legend) Picked on Oct 19th at $188.63 P/E = 241 Change since picked +0.00 52-week high=$196.13 Analysts Ratings 5-6-0-0-0 52-week low =$ 42.75 Last earnings 10/16 est= 0.28 actual= 0.30 Next earnings N/A est= 0.36 versus= 0.15 Average Daily Volume = 897 K ************* NEW PUT PLAYS ************* No new puts today ********************** PLAY OF THE DAY - CALL ********************** BRCD - Brocade Communications $244.44 +5.94 (+4.81 this week) Brocade is leading the way in a new category of networking: providing a scalable, reliable foundation for storage environments. They are the market leader in Fibre Channel Fabric switches-the essential framework for networking servers and storage systems. Brocade switches deliver the flexible and secure "Fabric" that supports the tremendous information and storage demands of today's leading companies. Brocade Fibre Channel fabric switches and software provide a networking foundation for storage area networks (SANs). Most Recent Write-Up Gapping down at the open, yesterday morning offered aggressive traders an entry with a bounce near the 10-dma. From there, the stock found buyers but resistance at $250 brought in the sellers. BRCD closed modestly lower on 120% of ADV, despite a stellar earnings report from storage giant EMC. Interestingly enough, growth in EMC's Storage Area Network (SAN) division was over 400%. Numbers like this only emphasize the potential of the SAN space, which Brocade is the clear leader in, with over 80% market share. Today, on the heels of a strong NASDAQ, BRCD gapped up at the open. Getting as high as $247, the stock sold off until an end of day push lifted shares higher to close up 2.49%. A bounce off support at $240, or the 10-dma at $233.75, could provide traders with an aggressive entry while conservative traders could look for a break above $247 resistance. In either case, make sure buying volume supports any advance before entering new positions. Comments BRCD held solidly throughout the day at the $240 area. That's the support we are watching for a bounce and an entry tomorrow. We would like to see BRCD make a successful challenge of overhead resistance at $250. A break through of $250 with strong volume momentum would warrant a conservative entry. If BRCD falls to the profit takers tomorrow, look for buyers to show up at $240 or the 10-dma at $233.98. BUY CALL NOV-230 GUF-KF OI= 567 at $28.50 SL=20.50 BUY CALL NOV-240*GUF-KH OI= 210 at $22.75 SL=17.50 BUY CALL NOV-250 GUF-KJ OI= 356 at $17.63 SL=13.75 BUY CALL JAN-240 GUF-AH OI= 493 at $37.75 SL=29.50 BUY CALL JAN-250 GUF-AJ OI=6380 at $33.00 SL=25.75 SELL PUT NOV-230 GUF-WF OI= 68 at $10.88 SL= 8.50 (See risks of selling puts in play legend) Picked on Oct 15th at $239.53 P/E = 619 Change since picked +4.81 52-week high=$259.81 Analysts Ratings 9-6-2-0-0 52-week low =$ 52.81 Last earnings 08/16 est= 0.13 actual= 0.16 Next earnings 11-15 est= 0.20 versus= 0.03 Average Daily Volume = 2.79 mln ***********************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 ************************ What a difference a day makes! Stocks rallied across the board today in a classic technical rebound. Wednesday, October 18 Stocks closed lower today after a volatile session as investors continued to worry over the outlook for corporate earnings. The Dow Jones industrial average dropped 114 points to 9,975 and the Nasdaq composite index slipped 42 points to 3,171. The S&P 500 index fell 7 points to 1,342. Trading volume on the Big Board was heavy at 1.43 billion shares with declines topping advances 1,891 to 1,000. The Nasdaq was extremely active at 2.5 billion shares traded, the third heaviest day in history. In the bond market, the bellwether 30-year bond edged lower to 106 22/32, pushing the yield up to 5.77% as stocks trimmed earlier losses. Tuesday's new plays (positions/opening prices/strategy): Chase Bank CMB DEC35C/DEC40P $0.00 debit straddle Bear Stearns BSC JAN50C/OCT60C $8.50 debit diagonal Juniper JNPR NOV170P/N175P $0.88 credit bull-put Intel INTC JAN30C/JAN35C $2.50 debit bull-call Chase started the day off with a bang, announcing lower than expected earnings before the open. The issue quickly dropped $6 on the news, and we had no opportunity to initiate the straddle position. The move affected other stocks in the financial group and Bear Stearns opened $4 lower in sympathy with the bearish announcement. Traders who participated in the bullish diagonal spread were offered an excellent entry price. Juniper dropped $15 in early trading and there was also a favorable opportunity in that position. Surprisingly, Intel rallied in opposition of the downward trend and the bullish spread offered a number of entry points in the morning session. For those of you unfamiliar with the Bull-Call (or call-debit) spread, the explanation is quite simple. The bull-call spread involves the purchase of one call and the sale of a higher priced call. The conservative trader will initiate the spread with the long call option in-the-money and the short call option at- or slightly out-of-the money, where the greatest amount of (sold) time premium exists. An investor can use this strategy when the outlook for the underlying issue is bullish, but a reasonable amount of downside protection is required. In the newsletter, we generally prefer deep-in-the-money plays for maximum downside protection while still retaining a favorable profit potential. In the case of the INTC play, the long option is in-the-money and the short option is slightly out-of-the-money. The goal is for INTC to be above $40 by expiration week in January. If that occurs, the value of the spread will be $5, since both options are in-the-money, and the return on investment will be 100%. However, if Intel's woes continue, the risk is limited to the initial outlay of $2.50. A closing price in the middle of the spread returns a portion of the initial investment. There is no suggested stop-loss on this position but you should use a mental exit point; maybe half of the value of the spread debit. If the market rallies and Intel continues to recover, the spread might be closed early for a slightly smaller profit, as both options move deep-in-the-money. Portfolio Plays: After a precipitous 435 point decline early in the session, the Dow managed to crawl to a respectable finish at the close, down only a fraction of the original deficit. The Nasdaq moved in a similar manner, rebounding from an initial 187-point loss to a positive interval at midday, before succumbing to additional selling pressure at the close. Analysts said concerns over the high price of energy and weakness in the Euro contributed to the broad market decline. International Business Machines (IBM) was the big loser among Dow components, tumbling $17 to $95 after several analysts downgraded the stock and lowered their future revenue estimates in response to the computer giant's flagging quarterly earnings. IBM's loss represented over 100 Dow points and the issue single-handedly brought the industrial average to its lowest level since March. Not to be outdone, Chase Manhattan (CMB) reported quarterly earnings that missed consensus estimates by 20% and since Chase is acquiring J.P. Morgan (JPM), investors also punished that Dow component. Intel (INTC) was the surprise of the day, rallying to $38 after the chip company's quarterly numbers topped First Call's revised earnings estimates. In a conference call with analysts, company officials offered cautious optimism about Intel's prospects going forward. On the Nasdaq, technology stocks got a boost when Sun Microsystems (SUNW), a leading maker of Internet servers, inadvertently posted strong quarterly results on its Web site ahead of its scheduled report after the close of regular trading. That was a big surprise! A relatively low key issue, PeopleSoft (PSFT) was the top Nasdaq performer with a 25% spike after the e-business applications provider's results beat the consensus expectations. The bullish news prompted upgrades from ING Barings, Goldman Sachs, and the Lehman Brothers. In the broader market, paper, biotechnology and retail companies were the best performers. Our portfolio resembled an ancient battlefield with rubble and debris scattered amongst the ruins and streaks of bright crimson covering the entire section. The scene could have been worse however, without the recovery at midday. Only a few technology issues managed to advance during the session and those gains were relatively small. The leaders included Research in Motion (RIMM), Manugistics (MANU), Sepracor (SEPR), and of course, Intel (INTC). In the industrial group, Allstate (ALL) was a minor surprise, up $1.25 as investors speculated on the outcome of the company's quarterly earnings. Carter Wallace (CAR) also continued higher, adding another positive day to its recent climb on momentum from buyout rumors. Worldcom (WCOM) and BellSouth (BLS) were standout issues in the telecom sector and it appears that industry may be headed for a recovery sooner than expected. One bright spot in the small-cap issues was Ligand (LGND) as the stock moved to the top of a recent trading range, and the issue is now poised for a breakout. Our new straddle candidate, Globix (GBIX) fell over $2 during the session, providing a great early-exit opportunity in the play. The straddle traded as high as $6.50 overall, a $0.50 profit on $6.00 invested for just one week in the play. On the downside, a number of stocks endured substantial losses and our bearish positions are performing quite well. American Home Products (AHP) finally succumbed to selling pressure and just one day after we closed the play for a small loss, it now appears that our bear-call credit spread will finish at maximum profit. Positions that have benefited from the downward movement include International Business Machines (IBM), Halliburton (HAL), Smith International (SII), Covad Communications (COVD), Symantec (SYMN), and Microchip Technology (MCHP). At the same time, we need to make adjustments in a few positions to preserve current gains, and our primary candidates today are Tolgrade (TLGD) and I-stat (STAT). Tolgrade dropped $17 and is now below a recent support area. We plan to use any technical rebound to exit the position or roll to a (short) November Put in the $80-$85 range. I-stat is consolidating after a recent rally and to maintain a profitable position, we are going to roll to the November $20 Put for a small ($0.12) credit. Of course, a major rally would make these transitions much easier. Thursday, October 19 Stocks rallied across the board today in a classic technical rebound. The Nasdaq recorded its third biggest gain ever as investors cheered strong earnings from technology bellwethers. The broad market also recovered from recent selling pressure amid bargain-hunting and short-covering. The Dow ended 167 points higher at 10,142 and the Nasdaq finished up 247 points at 3,418. The S&P 500 was up 46 points to 1,388. Activity on the Nasdaq was moderate at 1.95 billion shares exchanged, with advances beating declines 2,851 to 1,156. Volume on the NYSE reached 1.31 billion shares, with advances beating declines by 1,963 to 920. In the bond market, the 30-year Treasury rose 7/32, pushing its yield down to 5.752%. Portfolio Plays: Today's broad-based rally came as a welcome surprise to almost every investor and our portfolio reveled in the bullish activity. The move propelled all of our big-cap technology positions to recent highs and the monthly results improved significantly with the outstanding performance of both major indices. The best performer in today's session was Applied Micro Circuits (AMCC), up $26 to $194, and our new credit-spread strangle is expected to finish at maximum profit. A number of popular issues also closed with spectacular numbers including Qlogic (QLGC), up $19; Juniper Networks (JNPR), up $18; and Manugistics (MANU) up $14. Honorable mention should be made for Adobe (ADBE), Ariba (ARBA), Agile Software (AGIL), Brocade (BRCD), Intel (INTC), Nice Systems (NICE), Polycom (PLCM), Research in Motion (RIMM), Tolgrade (TLGD) and Verisign (VRSN). The rally in Nice Systems was particularly important as it pushed the value of our short-term straddle to $6.50, a $2.75 profit on $3.75 invested in just one week. The Nasdaq-100 (QQQ) straddle also benefited from the upside activity and in addition to being profitable, the neutral play has reached the break-even points on both sides of the straddle. Lower-priced issues joined in the bullish movement with Allstate (ALL), Bear Stearns (BSC), Carter Wallace (CAR), Delta Airlines (DAL), Delphi Financial (DFG), Federal Express (FDX), Knight Trading (NITE), Read-rite (RDRT), and Worldcom (WCOM) closing higher. The only issue that endured a major fallout was drug maker Sepracor (SEPR). Sepracor lost more than a third of its market value today after it and partner Eli Lilly (LLY) decided not to develop the new version of Lilly's blockbuster antidepressant Prozac. The two abandoned further development of the compound following studies in which a heart irregularity was detected using high doses of the drug. The drop in share value was unavoidable as the news came out prior to the open, but the issue traded in a $22 range during the day, providing plenty of opportunity to profit from the announcement. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** EMC - EMC Corporation $97.00 *** EMC keeps going and going! *** EMC Corporation and its subsidiaries design, manufacture, market and support a wide range of hardware and software products and provide services for the storage, management, protection and sharing of electronic information. These integrated solutions enable organizations to create an electronic information infrastructure, or what EMC calls an E-Infostructure. EMC is the supplier of these solutions, which are comprised of enterprise storage systems, networks, software and services. Its products are sold to customers utilizing a variety of the world's most popular computing platforms for key applications, including electronic commerce, data warehousing and transaction processing. EMC believes these and other information-intensive applications provide it with significant growth opportunities. EMC has been one of the steady gainers in the market for many years. Its split-adjusted cost five years ago stands at about one dollar. Fundamentally, it is a very strong company with earnings that have exceeded forecasts four quarters in a row, and most recently this week, with another great report. EMC's long-term growth rate is estimated at over 31%, giving its share value ample room to move higher. On the cautious side, be aware that EMC's P/E is relatively high at around 166 and its market capitalization is also lofty at over $200 billion. Neither factor in itself is a major cause for concern but if business slows down for any reason, the company's P/E and market cap will quickly garner attention. Technically, the chart looks great, although the stock did break down below the 50-day EMA (Exponential Moving Average) on bearish earnings expectations and general market jitters. However, the move was short-lived and the stock price rebounded nicely in today's session. From a business point of view, EMC dominates the HOT storage sector. I have been following their technology for many years and have heard nothing but praise from EMC's many clients. In addition to their hardware and associated software, EMC is leveraging their expertise by providing consulting services to current clientele, thus adding to the already lucrative revenue streams. A great way to participate in the share value growth of this company is to buy (call) LEAPS. Buying a LEAP affords you leverage on stock price appreciation at a fraction of the cost of stock ownership. To sweeten the deal, we can also sell covered-calls against our LEAPS to reduce our cost basis. The stock has only to move up to $109 in 26 months for the LEAP to be profitable on its own. That is only $12 from the closing price today. Selling the covered call immediately lowers our cost basis. The goal is for the stock to rally to the strike price of the sold option by January 2001. At that time (if the call expires), we can simply sell another call. If the stock price is substantially above $110, we can close the play for a favorable profit. In that case, the value of the LEAPS will have increased in price more than the (short) call because it is deeper in-the-money and has a slower rate of time decay. PLAY (conservative - bullish/LEAPS/CC's): BUY CALL JAN03-50 VUE-AJ OI=1222 A=$59.00 SELL CALL JAN01-110 EMC-AB OI=5316 B=$6.50 INITIAL NET DEBIT TARGET=$52.00 TARGET ROI=100% (26 months) ****************************************************************** HGSI - Human Genome Sciences $91.44 *** Roller Coaster! *** 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. HGSI was one of the high fliers of last year and also the first quarter of this year. Then the Nasdaq crashed and with it came HGSI, all the way down to the mid $20 range. After several months of consolidation and forming a stage I base, it resumed its upward trend. Though its decline today was discouraging considering the upward momentum in the overall market, this can be attributed to the Biotech's simply taking a breather after a run to the current levels. Keep in mind that during this week's down days, HGSI was still up and on Wednesday it was again one of the leaders in the group. The most recent bullish move came 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 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 news and recent price movement, HGSI was selected in the "Big-Cap Naked Puts" section on Wednesday, October 18. http://members.OptionInvestor.com/nakedputs/101800_1.asp Since Naked Puts may not be your cup of tea, we will discuss another strategy that lets you speculate on the movement of HGSI. As a spreader, the first thing that comes to mind is to cover the (naked) put with a lower strike, thus creating a credit spread. That will be one part of our strategy. In addition, if you are really bullish on this issue, you can utilize the discrepancies in option pricing and buy a bullish call spread. If the equity moves in the correct direction, our put spread will expire worthless (we keep the premium) and our debit spread will inflate in price, allowing us to close it for a profit. By combining these two positions, we can achieve a very good return while limiting the risk using spreads. In the first part of the combination, our risk is limited to the collateral for the position; approximately $3.38. In the second spread, our risk is limited to the initial debit; approximately $2.25. The reason we play different months is to hedge against the position going sour in November. If all goes as planned and HGSI rallies, our put-credit spread will expire worthless and our call-debit spread will be in-the-money and profitable. If the issue falters, we will have some time premium left in the call spread and can attempt to recoup a portion of the initial cost. HGSI can take its time moving up as long as it does not break below $80 before the November options expiration and it finishes above $105 in late January. PLAY (speculative - bullish/credit spread): BUY PUT NOV-75 HHA-WO OI=264 A=$3.12 SELL PUT NOV-80 HBW-WP OI=571 B=$4.50 INITIAL NET CREDIT TARGET=$1.50-$1.62 ROI(max)=42% - AND - PLAY (speculative - bullish/debit spread): BUY CALL JAN-100 HBW-AT OI=621 A=14.12 SELL CALL JAN-105 HBW-AA OI=392 B=11.75 INITIAL NET DEBIT TARGET=$2.12-$2.25 ROI(max)=120% ****************************************************************** FFD - Fairfield Communities $12.00 *** Reader's Request! *** Fairfield Communities sells vacation ownership interests (VOIs), commonly known as timeshares, through its points-based vacation system, Fairshare Plus. The company also offers financing for VOI purchasers and other related services. Fairfield recently announced that it is engaged in preliminary discussions concerning a possible merger or other transaction between Fairfield and an undisclosed company. They emphasized that there can be no assurance that these discussions will lead to a definitive agreement and the company is not expected to issue any further public statements regarding the discussions until an agreement is signed or the discussions are terminated. One of our subscribers noticed the increased buying activity in both the stock and options on Fairfield. She also requested that we identify some favorable combination positions in the issue. Based on the favorable technical outlook and increased option interest, the easiest way to profit from future upside activity may involve one of the most common forms of bullish option plays. PLAY (speculative - bullish/synthetic position): BUY CALL JAN-12.50 FFD-CV OI=103 A=$1.81 SELL PUT JAN-10.00 FFD-OB OI=1095 B=$1.00 INITIAL NET DEBIT TARGET=$0.50-$0.62 ROI TARGET=50% Note: Using options, the position is equivalent to being long on the stock. The collateral requirement for the naked put is approximately $380 per contract. ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** ADVS - Advent Software $55.88 *** Probability Play! *** Advent Software is a provider of stand-alone and client/server software products, data interfaces, and other related services that automate and integrate certain mission-critical functions of investment management organizations. Advent shares fell $18 on Wednesday after the company reported quarterly earnings of $7.1 million, or $0.21 a share, up from last year's profit of $5 million, and a penny ahead of consensus analyst estimates. The company's revenue rose to $34 million in the latest three months from $27 million in the same period a year earlier. So why the big drop? Who knows, but the move has produced some excellent premiums in OTM options, and we will use those inflated prices to speculate on the future movement of the issue. With the recent volatility in stocks, we have received a number of requests for new candidates in the neutral, premium-selling category of options trading. Based on analysis of the historical option pricing and technical background, this position meets our fundamental criteria for a potential credit-strangle. The issue has overpriced options, a relatively well-defined trading range, and with the recent precipitous decline after quarterly earnings, there should be little news to produce additional volatility in the underlying stock. The probability of profit from this play is higher (80%-90%) than other plays in the same strategy based on historical option pricing. As with any recommendation, the position should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. Many of you may favor an aggressive position, selling options that are closer to the current price of the issue, to produce a higher return initially. While that technique may appear more profitable, it also increases the theoretical risk of loss. Only you can know what positions are suitable for your risk-reward tolerance and portfolio outlook. PLAY (conservative - neutral/credit strangle): SELL CALL NOV-80 UIV-KP OI=131 B=$0.62 SELL PUT NOV-40 UIV-WJ OI=10 B=$0.50 INITIAL NET CREDIT TARGET=$1.25-$1.38 ROI(max)=10% UPSIDE B/E=$81.25 DOWNSIDE B/E=$38.75 ************************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=734 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "firstname.lastname@example.org"
Option Investor Inc