The Option Investor Newsletter Sunday 10-22-2000 Copyright 2000, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/102200_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 10-20 WE 10-13 WE 10-6 WE 9-29 DOW 10226.59 + 34.41 10192.18 -404.36 10596.54 - 54.38 -196.45 Nasdaq 3483.14 +166.37 3316.77 - 44.27 3361.04 -311.78 -130.94 S&P-100 738.16 + 9.15 729.01 - 21.96 750.97 - 8.86 - 14.25 S&P-500 1396.93 + 22.76 1374.17 - 34.82 1408.99 - 27.52 - 12.21 W5000 13057.40 +253.90 12803.50 -338.60 13142.10 -471.30 - 64.80 RUT 487.45 + 7.06 480.39 - 10.63 491.02 - 30.35 - 2.55 TRAN 2469.07 + 38.89 2430.18 -113.47 2543.65 + 22.01 - 75.50 VIX 27.42 - 3.56 30.98 + 5.31 25.67 + 1.82 - .32 Put/Call .50 .76 .75 .59 ****************************************************************** Two days in a row! You can exhale now! By Jim Brown This was a week full of thrill, chills, excitement and drama. What a week to be in the stock market. Capitalism is wonderful! Of course it helps to have a +500 point gain from Wednesday's lows! The Nasdaq high on Friday was +509 points off that low and the Dow high was +573 points up from that low. There are entire months that the market does not move that much and we saw it in three days. Almost two weeks in a row! The real miracle was not the bounce from the 3026 low on Wednesday but the failure to sell off late Friday afternoon. With the Middle East flaring up again, and oil heading for $35, traders would have loved to go flat for the weekend and take some profit off the table from the big rebound. There was a little pull back but the sentiment was so strong that the normal flood of sellers did not show. October is over, almost. Only one week left and historically this is an up week. Options expiration week is over. Those weeks can be extremely volatile and this week would qualify except none of it was option related. The "teens" of October are typically the worst third of the month due to earnings warnings and just plain missed earnings reports like the Chase report on Wednesday. We got out alive with the Nasdaq only a handful of points away from 3500. 3500, seems like forever since we were here last but in reality it was only October 6th. That was a rough two weeks! If the low this week on the 18th is really the bottom then that makes the fourth year in a row for the low to occur on a day ending in 8. In 1997 it was the 8th, 1998 28th, 1999 18th, 2000 18th. Stop right here. Just knowing that the low for the fourth quarter is in October, and as you can see by those dates it is true, what are you going to do next September? Do you wonder now why Austin Passamonte kept telling you for the last eight weeks in the Market Sentiment that the institutional traders were short the S&P at 10 year highs? They have long memories and big bank accounts and they are seldom wrong. Actually since 1945 the average drop to the October lows for the Dow is -19.75%. This year from the September high to the Wednesday low the Dow only dropped -15.3%. It just happened all at once and seemed like -50%. As a point of note the average gain from those same Oct lows to the December highs is only +12%. The VIX hit a high of close to 36 and that is a range not hit but four times in the last three years and three of those were in Octobers. When the market opened Friday the tension was so thick you could feel it in the air and in every commentary by market reporters. Everyone, if given the chance would have simply opted to not open and take the day off and resume trading on Monday. It was not to be. The rally sellers showed up in force at the open and the Dow dropped -80 points almost immediately only to race back into a positive +40 and then back to negative in only minutes. Finally a floor was found at 10085 and everybody held their breath. After holding for two hours the momentum returned and both indexes headed higher. With only one week left in October it appears the bottom has been found. Money is coming back into the market even on a Friday with violence in the Middle East. Oil was not a real factor after Greenspan tried to talk it down yesterday. Traders were still watching it creep towards $35 again but if Greenspan is not worried why should traders be concerned. This attitude may come back to bite them when they are not looking but that was the sentiment today. The news reports were full of increasing violence in Israel and every time they broke for an update I kept expecting the market to crater again when the ticker returned. It never happened and that shows you just how strong the positive sentiment was. Having said that, the advance/declines were not especially positive. The NYSE advances only beat declines 15:12 and the Nasdaq 23:16. That is not very comforting but it was a Friday. There was some profit taking all day and that contributed to the weak numbers. It was all earnings and the winners were big winners as the focus turned from warnings to those winners. SDLI was the big winner with a $.45 earnings for the quarter and that was four times last year and +.07 over analyst estimates. SDLI gained +49 on the news. Merck gained +4.31 to a new 52 week high of 81.88 after beating estimates by a nickel and posting a +25% gain in revenue. Microsoft continued to add points with +3.31 to 65.19 after trading as low as $48.44 on Wednesday. That is a +$17 gain in two days from the low. EPNY gained +$25 or +39% after beating estimates by +$.15 cents. You would think being an earnings investor and holding over was a good plan but the reason for the gigantic gains was the extreme pessimism just the day before. It was not all rosy, Ericsson warned that sales were weak and took a -16% drop at the open. The global mobile phone winner is clearly Nokia by a mile! Leaps on NOK anyone? The soap opera for the week was the Honeywell, United Technology, GE saga. Evidently UTX made an offer for Honeywell of $50 in UTX stock and then UTX stock got whacked pretty badly making the deal not so appealing. The "done deal" then took a wrong turn when the bully on the block showed up and kicked UTX back into reality. GE knocked on the door on Friday and told UTX to pack up their marbles and go home. We are buying HON and you can't compete with us. UTX picked up their chips and left. End of story? After the market closed it was rumored that a third company had made an offer. I doubt they have more money than GE so that is a mute point. GE stock took a -$3 dive at the close on the prospect of a bidding war but the match of the two companies is almost perfect. It has been almost 100 years since two Dow companies merged. In 1903 U.S. Steel merged with Illinois Steel and Coal. UTX, HON and GE are all Dow stocks and should the deal go through we will be needing a new Dow component. Suggestions include the merged TWX/AOL combo. CSCO was also mentioned but the recent addition of INTC and MSFT have already added a strong tech component. Other possibilities include Lucent but after three warnings in four quarters they may not be high on the list. Also, since they were a spin off from AT&T they might not be politically correct. We are planning a "Name the Dow stock" contest if the GE offer is accepted. Put your thinking caps on and get ready to play. Next week should be very interesting. We are not out of the woods yet. The +500 point gains of the last three days still have to be digested. There WILL BE some profit taking. This means that some of the high flyers will sell off. We could see a -25% to -50% drop or more from the THR/FRI gains. The hope of course is that buyers on the sideline will see this as a buying opportunity to get stocks they missed at a discount. There are still thousands of stocks that have not seen buyers yet. The main focus of the rally was in the highly liquid big caps. The cheaper stocks have not responded as well. Some of the profit taking should be rotation out of the big caps and into the broader market. Not all big caps took part either. Buyers are being more particular in their purchases. CSCO for example lost ground on Friday. There is a lot more competition in that sector and many investors fear the CSCO growth rate may be under pressure. This same thing is happening in many places. Just throwing money at the same old faithful tech stocks is not going to reap the same rewards this time. Remember what happened to Dell last year when analysts and investors woke up to the fact that Dell could not maintain a 50% growth rate forever. It would have been heresy last year to say Dell would hit $23. Dell has not traded at that price since Oct 1998 but it did again this week. The same "it will come back, it always will" crowd bought the dip and ran it back up but it remains to be seen if it will hold. The Nasdaq support level should now be around 3350. Hopefully we will not test that but another major warning from a big tech could still cause the Nasdaq to stumble again. Fortunately most of the big techs have announced. INTC, MSFT, EBAY, JNPR, ITWO, AOL, NOK, IBM and EMLX headed the list. The rest of the crowd are less important individually but could cause trouble if several miss at one time. The next big tech problems will be DELL and CSCO who both announce in November. We are approaching the warning period for each of them and investors will be holding their breath. This should keep them from posting any big gains the next two weeks and this will slow the Nasdaq to some extent. The October tax loss selling by fund managers should be about over but those hoping for one more bounce in their loser stocks before biting the bullet and dumping them have seven trading days left. This could also keep the lid on the current rally. October is not over until it is over and until then we can continue to see more huge moves both up and DOWN. The Fed is still on hold and the economy is still headed for that soft landing. The only major economic reports next week are the Employment Cost Index on Thursday and the GDP on Friday. Once out of October mutual fund inflows Like I said last Sunday, use any dip this week as a buying opportunity. If you followed my instructions you had a wildly profitable week. Keep those stops tight and look for another entry point! The October Options Workshop in Denver is next Friday, October 27th. If you have not received your confirmation and directions please contact the seminar staff. If you have not yet registered you had better hurry. See you there! http://www.OptionInvestor.com/workshop Trade smart, sell too soon. Jim Brown Editor *********************** FREE LUNCH IN PHILADELPHIA November - 8th. *********************** OptionInvestor.com, Preferred Trade and E-Signal will hold a FREE seminar complete with handouts, freebies, door prizes and over six hours of solid information which can improve your trading results. Lightning trades, real time quotes, the best option strategies and a FREE BREAKFAST and LUNCH! How can you go wrong? It is free but you have to register so we can order food. http://www.OptionInvestor.com/seminar/free ************************* REGIONAL SEMINAR SCHEDULE ************************* The San Francisco seminar is Phoenix Nov 2/4th. Here is your chance to learn from the pros. The three day Technical Analysis Stock and Option Fall Seminar Series. Three days of in-depth education. Don't miss it! We guarantee you will not be disappointed. The class size is small so you will get plenty of individual attention from Chris Verhaegh, Steve Rhoads and staff. At less than the cost of a bad trade you can learn how to analyze stocks and trade options like the pros. Don't wait, do it now. Date City Nov 02-04 Phoenix Nov 09-11 Miami FL Dec 07-09 Philadelphia Dec 14-16 San Antonio Has the market been beating you up? Did you give back your gains from April/August? Would you like to understand all the technical indicators our writers use? Does the alphabet soup of technical terms like RSI, DMA, MACD, ROC, Stochastics, Bollinger bands, sound like Greek to you? You can learn from the experts how to interpret all these indicators, read charts, pick stocks and which option strategies to use on those stocks for less than the cost of one bad trade. Reserve your seat now for one of our regional seminars. Click here for more info: http://www.OptionInvestor.com/seminar/seminar.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=722 ************************************************************** ************** EDITOR'S PLAYS ************** It would have been tough not to have a profitable week if you bought the dip on Wednesday. With the -438 point Dow drop at the open almost every stock was instantly oversold and buyers rushed into the market. Selling puts or buying calls at that level would have been almost equally rewarding. I loaded the truck on Wednesday and did pretty well. Anticipating a sell off on Friday at the close I had set stop losses on all my open plays at 1:PM and went into meetings for the rest of the day. When I broke around 5:PM to go over the OIN plays for the weekend with the guys I was astounded to see one of my winners had not only gone negative but substantially negative. Fortunately the stop loss saved me a huge amount of money and that is the topic of this articles this week. The stock was Research in Motion (RIMM) I had sold a NOV-140 Naked put and it was looking very good as RIMM hit $126 on Friday afternoon. What a perfect chart above for a naked put seller. Near vertical performance with no weakness in sight. Had I been watching the dip I would have probably tried to rationalize the beginning of the drop and held off closing the play until it was too late and thousands of dollars had been lost. There was no news out at this time. After the close the stock continued to drop as the news became public that they were going to issue an additional six million shares of stock. The additional -$7 drop in the stock price after hours would have been a disaster and would probably have meant being put the stock over the weekend. In reality it will probably come back, (famous last words), but it would have tied up capital for several days while I weighted for it to happen. Fortunately I had set a stop loss based on the stock price at $125 before I left to go into my meetings. This kept me out of trouble and I was not even aware of it until too late. Remember the commercial that used to be on TV with the actor saying "Thank You Paine Webber?" Well, thank you Preferred Trade! I know many brokers do not even allow stop losses on options and some only allow stop losses based on an option price but Preferred Trade allows you stop losses for your options based on the stock price as well. As far as I am concerned this is worth far more than the hassle of changing accounts. You can look at a chart of your stock and plot support and resistance levels and set your stops based on those levels NOT what the option price MAY be if those levels are reached. This feature works for closing losing or winning positions at a predetermined point but ALSO works for opening positions at a support or resisatance point as well. Look at this chart on Ciena. You could have used the contingent order function to open a new position on CIEN based on the stock price several different ways last week. If you wanted to buy calls on CIEN only on a breakout over the previous top at $118 from last week then you could have placed an order to BUY NOV-120 CALL when CIEN =$120. This could have been a good till cancelled order placed days in advance. When CIEN broke out on Friday the 13th you would have been executed and very profitable. If you missed the breakout or wanted to buy more IF CIEN dropped again to $120 last week you could have placed the same order when CIEN was over $130. BUY NOV-120 CALL if CIEN hits $120. If CIEN only touches $120 at anytime before you cancel the order then you are executed. It make no difference what the price is at the time unless you want to make it a limit order as well. Something like BUY NOV-120 CALLS @ $10.00 if CIEN hits $120. If CIEN hits $120 AND the calls are less than or equal to $10.00 then you are executed. You could also sell naked puts just as easily. As a point of clarification, Preferred Trade does advertise with us and the "stop on stock price" feature was written by Preferred as a result of our input on what active option traders wanted. I don't give my personal recommendation to many products but Preferred is on the top of my list. For more info on this and other features you can go to: http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ***************** My other current plays for the week consisted of naked puts on about a dozen stocks. The only ones that survived the Friday dip are: BVSN DEC-60 PUT, BVSN DEC-20 CALL (combo play) ALTR JAN-60 PUT, ALTR JAN-30 CALL (combo play) UVN DEC-50 PUT, UVN DEC-30 CALL (combo play) QCOM JAN-125 PUT, JAN-60 CALL (combo play) CELG JAN-90 PUT EXTR NOV-130 PUT PLXS DEC-90 PUT SAPE JAN-70 PUT VRTS-NOV-200 PUT The reasoning for the combo plays is simple. The profit on a naked put is capped to the amount of premium you receive. By selling puts and buying calls on the same stock you pay for the calls with the premium from the puts and you have unlimited upside from the calls. It lets you get into the play for free and any rise over the call strike price is profit. I will be waiting patiently for a dip on TUE/WED to open some more naked puts for the next leg of the rally. This way the time and high option prices are in my favor. Good Luck ************************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=747 ************************************************************** **************** MARKET SENTIMENT **************** Christmas Rally? By Austin Passamonte Let's get through Halloween first. Don't you just hate it when retailers push the action up way ahead of time these days? What ever became of all things in due time? It is our view that a firm market bottom is in place with a strong rally likely to ensue from those levels. Straight up the charts without volatility is probably a bit much to ask. Our market future will most likely resemble that which we've come to know since March; powerful moves in each direction. That may worry stock players and call-option buyers but we are option traders and revel in such action. Can you imagine what it'd be like for the markets to move several hundred points in each direction week after week? That is option-trading Nirvana! And we just may have reached "one with ourselves." The three session rally from Wednesday morning until Friday afternoon has been one-way up the hill overall. We've covered plenty of bullish pasture and green is once again a familiar color on our chart feeds. Market Sentiment expects the indexes to stutter-step this week...a breather may be in order. Massive gains are on the table for those who bought this rally and tax-arbitrage selling from a number of funds by month's end could trigger a round of profit-taking. That's good news to all of us waiting for the next entry into the fray. We will view any pullback this week as an excellent bull-play entry. Weekly/Daily chart technical signals indicate we are setting up for a trend reversal to the upside from here. We covered these charts extensively at IndexSkybox.com tonight for those who visited our Wrap. Let's hit the high-notes here to take a glimpse of the intermediate future: When market action is uncertain and our usual time-frame charts begin to cloud up, the best approach is to step back and view longer time-frames to see the big picture. We turn to the weekly charts of major indexes to assess where highest odds of future market direction lies. S&P 500 is the pro's choice for gauging overall market health. Its weekly chart shows stochastic and MACD signals starting to turn positive from oversold extremes for the first time in months. Next overhead resistance lies near the 1460 range where the 20-week moving average meets an ascending trendline of higher-lows dating back since late February. The NDX has a strong rally underway that may bump it's head around the 3700 range, but that is 250+ index points and 6+ QQQ strikes above current levels. SOX Weekly/Daily charts indicate a big move is brewing here and little stoppage until the 1,000 area or so. Dow's weekly chart shows it's upside move has yet to begin but is flashing emergence. We expect rather clear sailing up to the 10,700 to 10,800 range - a long ways from where it rests tonight. Does all this mean we can buy calls, LEAPs and blindly walk away? Don't you dare! Those days are gone for now and maybe quite some time in the future. Any & all markets can easily retest & retrace from here, especially with global uncertainty in several key areas. We would like to see plenty of backing & filling of this price action as markets move forward. V-bottoms are great to trade but have little staying power. Several clear examples of this since February point that out for themselves. Don't be surprised if the markets move big in each direction between now and next spring. Do not count on one major sustained rally, although it can easily happen. Do count on plenty of volatile swings as Market Sentiment and others here at OIN will try our very best possible to help forecast the action! ***** VIX Friday 10/20 close: 27.42 30-yr Bonds Friday 10/209 close: 5.73% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Saturday (10/21/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 775 - 760 3,600 2,810 1.28 755 - 740 5,592 3,827 1.46 OEX close: 738.16 Support: 735 - 720 3,013 4,469 1.48 715- 700 1,226 6,859 5.59 Maximum calls: 740/2,411 Maximum puts : 700/3,402 Moving Averages 10 DMA 726 20 DMA 745 50 DMA 784 200 DMA 780 NASDAQ 100 Index (NDX/QQQ) Resistance: 95 - 93 11,086 2,102 5.27 92 - 90 15,735 8,295 1.90 89 - 87 11,753 11,627 1.01 QQQ(NDX)close: 86.312 Support: 85 - 83 19,698 23,214 1.18 82 - 80 30,285 18,806 .62 79 - 77 3,137 27,461 8.75 Maximum calls: 81/15,125 Maximum puts : 78/18,590 Moving Averages 10 DMA 80 20 DMA 83 50 DMA 90 200 DMA 94 S&P 500 (SPX) Resistance: 1475 17,116 4,747 3.61 1450 9,393 8,158 1.15 1425 5,355 10,678 0.50 SPX close: 1396.93 Support: 1375 11,542 15,344 1.33 1350 8,247 20,002 2.43 1325 1,581 8,067 5.13 Maximum calls: 1475/17,116 Maximum puts : 1350/20,002 Moving Averages 10 DMA 1370 20 DMA 1401 50 DMA 1453 200 DMA 1443 ***** CBOT Commitment Of Traders Report: Friday 10/20 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 -91 -5 Total Open Interest % (7.19% net-short) (2.86% net-short) NASDAQ 100 Open Interest Net Value +300 -85 Total Open Interest % (1.73 net-long) (.21% net-short) S&P 500 Open Interest Net Value +55,273 -66,352 Total Open Interest % (17.89% net-long) (10.75% 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 10/17 by the CFTC. Next Fridays data should give a clearer picture to Commercials either covering some profitable shorts or holding fast into next Tuesday. We keep saying that as every Wednesday adds another big sell-off to the previous! Bullish: Fed's finished Thursday/Friday rally Earnings season Positive earnings begin Bearish: Oil Prices (falling) COT reports Recent pre-warnings, downgrades Broad market's break of critical M/A support Market leaders breakdown ************** MARKET POSTURE ************** As of Market Close - Sunday, 10/22/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,226 9,650 10,600 SPX S&P 500 1,396 1,305 1,420 ** COMPX NASD Composite 3,483 3,000 3,650 ** OEX S&P 100 738 680 750 RUT Russell 2000 487 455 500 NDX NASD 100 3,456 2,950 3,700 ** MSH High Tech 954 825 990 ** BTK Biotech 727 630 740 XCI Hardware 1,282 1,100 1,310 GSO.X Software 431 355 455 ** SOX Semiconductor 752 600 800 NWX Networking 1,152 1,010 1,170 INX Internet 355 275 400 BIX Banking 546 505 600 XBD Brokerage 621 555 640 IUX Insurance 768 720 790 RLX Retail 752 695 830 DRG Drug 411 395 425 HCX Healthcare 855 825 875 XAL Airline 131 124 140 OIX Oil & Gas 314 304 328 Five alerts were triggered at resistance in the past session (SPX. COMPX, NDX, MSH, AND GSO.X). Raising support (OIX). Raising resistance (SPX, COMPX, NDX, MSH, and GSO.X). Many of the indexes are considerably higher than support levels, so snug those stops! ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ *************** ASK THE ANALYST *************** Fear And Loathing On Wall Street By Eric Utley Is the bad trip over? The NASDAQ's initial rally attempt two Friday's ago (Friday the 13th) off its low of 3054 signaled a change in sentiment. Last Thursday (four days after the initial rally attempt) the NASDAQ followed through by gaining well over 200 points, on heavy volume to boot. According to several technical theories, including that from the infamous William O'Neil, the recent action in the major market averages is indicative of a market bottom. That's not to say the NASDAQ won't pull back to digest its two-day gains of more than 300 points. A natural reaction to such big rallies is, well... natural! The NASDAQ's action last week could very well signal a bottom. It's clearly obvious the market WANTS to move higher. But, a few major macro events could impede the rehabilitation of the NASDAQ. The unrest in Jerusalem has the potential to wreak havoc on the price of oil. The potential for crude oil futures to trade above $30 for an extended period of time is somewhat disconcerting. Here's why. Crude oil has traded above $30, for an extended period, only three times in the last twenty years. Interestingly, the US economy has fallen into a recession after each of the three times oil traded above $30 (1980, 1982, and 1990). Now, according to many economists, including Doc Greenspan, the high-price of oil is not expected to have such an adverse impact on the "New Economy" as was the case in 1980, 1982, and 1990. However, I know an executive in the oil industry who happens to think otherwise. While the action in the markets last week may portend a rally into the end of the year, the rising cost of energy could imply less-than-favorable trading. However, the uncertainty surrounding the Middle East is sure to create volatility, which is not necessarily a bad thing, as I explained last week. As trading commences next week, ask yourself two questions: Which way is the market trying to go? and How easily is it moving in that direction? The answers to the two preceding questions will reveal a lot about the market's tendencies, and should dictate trading strategies. Send in your stock requests, market opinions, questions, comments, disagreements, and/or money-making tips to Contact Support. As always, please put the symbol of your stock requests in the subject line of the e-mail. ---------------------------- Check Point Software - CHKP Please evaluate CHKP. I look forward to articles in OIN. Keep up the good work. - Thanks, Ben Check Point Software is, by far, the leader in Internet security solutions. The company makes and markets software that secures corporate intranets, Virtual Private Networks (VPNs), and extranets. Check Point faces competition from Tech-heavyweights including Cisco Systems, Nortel, and 3Com. However, judging by Check Point's stock performance in the last year (+550%), it's safe to say they're the leader in the Internet security space. Check Point has a near pristine balance sheet with over $400 million in cash and no debt. Plus, the company enjoys nearly 50% profit margins. Those fat margins will help Check Point grow earnings by more than 70% this year and at least 40% over the next several years. The stock is expensive, with a forward-looking PE north of 100. However, you pay for what you get. And with CHKP, you get quality in the form of high earnings growth. The stock could very well grow into one of the BIG Tech leaders in the coming years. Check Point reaffirmed its bullish prospects last week when the company beat third-quarter earnings estimates by 8 cents. What's more, Check Point reported a 100% increase in sales over the same time last year! The strong earnings report from Check Point had the bulls cheering last week, but there has been some recent fears reflected in shares due to the conflict in the Middle East. Check Point is actually an Israeli-based company, but has operations in Redmond, California and here in Denver, Colorado. Check Point along with other Israeli companies (Teva Pharmaceuticals (TEVA) and Nice Systems (NICE), among others) dropped sharply two weeks ago as tensions increased in Jerusalem. I don't know how big of an impact the fighting will have on Check Point's operations. The stock smartly rebounded last week after dropping as low as $120 the week prior. The stock's ability to rebound so quickly amid increased fighting last week tells me the company's operations might not be troubled at all. Any further dip due to hostilities in the Middle East might prove to be an excellent entry into shares of Check Point. After all, the stock doesn't fall very often as seen on its weekly chart below. ---------------------------- Exodus - EXDS EXDS is a stock I've successfully traded for about two years now. However, since its recent acquisition, it seems to have lost momentum. Please tell me this isn't another AOL!? - Thank you, Tonay Tonay, I hope you've been trading shares of Exodus from the short-side recently. The stock has taken a beating recently as investors have lost patience with money-losing concerns, such as Exodus. The company reported a loss of 14 cents per share for its third-quarter of operations late last Thursday. Despite reporting a 238% increase in revenues over the same period last year, the stock sank on the news. The biggest weight on Exodus' stock is the company's massive expansion efforts, which have resulted in exorbitant spending. The company recently agreed to acquire the Web hosting business of Global Crossing (GBLX) known as Global Center. The combination of Exodus' operations with Global Center will create, by leaps and bounds, the largest Web hosting outfit in the world. Exodus' aim is to attract international business through offering end-to-end services for corporate Web sites. It's a strategic move that could potentially produce huge profits for Exodus, and investors as well. However, in order to pay for its many acquisitions, Exodus has taken on an enormous amount of debt. Exodus' highly leveraged balance sheet makes the stock a very aggressive equity to own, thus risky and volatile. The stock's volatility can create trading profits, though, as you well know, Tonay. For the long-term investors, though, Exodus may prove to be an attractive investment over the next couple of years. Although the company is walking a fine line with such a large debt burden, revenues are growing at an unbelievable rate. Once Exodus stops spending money and turns revenues into profits, the stock should react very well. When that will happen, I don't know. The company is expected to lose money for several years to come. But, if Exodus continues to execute wisely, and doesn't weigh its stock down too much, it should be a solid long-term performer. If an investor is looking for exposure to a company that will benefit from the continued expansion of the Internet, Exodus is worth considering. Exodus is better positioned to reap rewards from the Internet than the likes of CMGI, Double Click, or even Yahoo! ---------------------------- Research In Motion - RIMM I am amazed at the gains in RIMM recently. Is the revenue there? I mean gee it is only a PDA. Is the market cap a fantasy? Maybe it will continue to buzz for the winter? The fantasy looks too good. I believe a cell phone is a better device but that is me. I'm a technophobe so maybe that explains my inherent caution in affirming the present market cap of RIMM. Your thoughts? - Thank you, Debra Debra, I'll let the market answer whether or not Rim's $8.4 billion market cap is for real. To be perfectly honest, I don't know if Rim's market cap is justified. But, judging by the stock's recent performance, Rim's market cap could be headed a lot higher. The company reported revenues of $42.5 million in late September. Sales were 57% greater than its prior quarter and a full 100% greater than the year-ago period. Those numbers were well received by the market. To delve a little more into Rim's valuation, let's compare the stock to another wireless-related company in Palm. It may not be the very best comparison, but it should serve our purposes. Palm trades at 25 times last year's revenues, with an expected earnings growth rate of 38%. Rim, on the other hand, trades at 69 times revenues with estimated earnings growth at 54%. So, Rim's stock is more expensive, but the company's earnings growth is expected to outperform. As usual, you have to pay extra for superior earnings growth. The question, and risk, with Rim is how much of the company's superior earnings growth has already been factored into its stock price? Judging by Rim's chart, the stock has been in favorite with momentum investors since late May. That momentum can quickly disappear if the valuation concerns you wrote of, Debra, come to light. But, until they do, Rim might have more upside in the near-term, especially with improving conditions in the Tech sector. Furthermore, long-term investors might look closely into Rim's stock. It's hard to ignore 50% earnings growth. Finally, take a look at other hand-held companies, and note the recent strong performance of their stock prices. Have you seen Palm or Handspring lately? Even Microsoft said it made a lot of money in the hand-held area last quarter, which may or may not have helped Mr. Softee's rebound. ---------------------------- Cree Research - CREE I'm wondering about CREE Research as a rebound candidate. The stock traded as high as 202 back in March. It's a company that continues to beat the street and has strong fundamentals. Now selling for less than 90. - Thanks, Gregg Cree is a very interesting and unique Chip company. Cree makes semiconductors using its proprietary silicon carbide (SiC) technology, which are used in light emitting diodes (LEDs). LEDs are the little gadgets that light up the dashboards in automobiles, the screens on cell phones, and the displays on radios, among a host of other electronic gadgets. The company also manufactures crystals, which are used in the production of wafers used in research directed towards high-tech applications. Cree's uniqueness somewhat shelters the company from the typical cyclicality associated with the Semiconductor sector. Although, the stock did get whacked with the bearish sentiment in the Chip sector over the last two months. Cree was also adversely affected by a "false" press release published by BridgeNews about a week ago. BridgeNews reported that Cree had "warned" analysts to not expect "such high margins" going forward. To confound matters, CNBC reported the so-called warning from Cree as it crossed the wires. Cree immediately responded to the press release by stating such speculation was false. However, as I've mentioned in the past, rumors can be detrimental to stock prices for an extended period of time. Even if they are just rumors. To expand on your point, Gregg, Cree has superior fundamentals than many Chip company's envy. The company is expected to grow earnings by 32% over the next several years. Plus, Cree has no debt and, as reaffirmed by the company's CFO in light of the rumors two weeks ago, enjoys 50% profit margins. If the market shrugs off the rumors in the coming weeks, Cree's stock will be a solid rebound candidate and could provide traders with good profits. But, be cautious of the big downtrend! ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* For the week of October 23, 2000 Monday ====== None Scheduled Tuesday ======= None Scheduled Wednesday ========= Existing Home Sales Sep Forecast: 5.13M Previous: 5.27M Thursday ======== Employment Cost Index Q3 Forecast: 1.00% Previous: 1.00% Initial Claims 21-Oct Forecast: NA Previous: NA Help-Wanted Index Sep Forecast: NA Previous: 78 Friday ====== GDP Q3 Forecast: 3.40% Previous: 5.60% GDP Chain Deflator Q3 Forecast: 2.40% Previous: 2.40% Durable Orders Sep Forecast: 0.60% Previous: 2.90% Michigan Sentiment Oct Forecast: NA Previous: 106.4 Week of October 30th ==================== 30-Oct Personal Income 30-Oct PCE 31-Oct New Home Sales 31-Oct Chicago PMI 31-Oct Consumer Confidence 1-Nov Auto Sales 1-Nov Truck Sales 1-Nov NAPM Index 1-Nov Construction Spending 1-Nov Fed Beige Book 2-Nov Productivity 2-Nov Initial Claims 2-Nov Leading Indicators 3-Nov Nonfarm Payrolls 3-Nov Unemployment Rate 3-Nov Hourly Earnings 3-Nov Average Workweek 3-Nov Factory Orders 3-Nov NAPM Services ************************Advertisement************************* Tired of waiting on trades to execute? 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The Option Investor Newsletter Sunday 10-22-2000 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/102200_2.asp ************** TRADERS CORNER ************** If Your Spread Is Red, You Could Be Dead By Lynda Schuepp You've heard me preach about how safe spreads are. Warning, warning, don't hold an "out-of-the-money" spread on the OEX just before expiration. Let me tell you the scare I had this week. On September 28th, I put on an "at-the-money" bull put spread on the OEX, anticipating that we were bottoming out. I bought the November 760 put and sold the October 770 put for a cost of $2.88. According to my charts, I thought the OEX would continue up and then do a reversal (the October syndrome). My intent was to ride the OEX up and buy back my October short put for a profit, and then ride the OEX down for the October correction and profit from my long November put. If the market did not cooperate, then I could simply buy back the October 770 put (at a loss) and then sell the November 770 put for more money than I had to buy back the October put for, but my plans backfired. VIX climbed from 24 to over 34 during the period of September 28th to the beginning of this past week. The OEX went from 770 on September 28th to 703 by October 12th. Normally, I would roll the short option out with such a drop. With the severe drop in the OEX, and the large increase in volatility, the market makers made it impossible to buy back the put without taking a major hit. The bid ask spread went from 50 cents to $3.50! I had no way of knowing how far in the spread they would be willing to negotiate, since they were so far out of the money, hence no volume. I played the wait and see game, taking my chances that the bid/ask spread would close up and I could roll my option out. Now many of you probably don't know that OEX options are cash settled options. What that means is this: the settlement is in cash. Unlike a stock, when if you are put the stock, you merely turn it around the morning you are notified and sell the stock. Usually, there isn't a major difference between the close and the open and you have all day to hold the stock and day trade it to your advantage, most of the time without any serious cash consequences. The OEX works differently. I was put my short October 770 leg on October 16th. The OEX closed at 725.48. What that means is that cash was taken out of my account. The amount was the difference between the strike of 770 and the closing price of 725. Luckily I only had 5 contracts left, as I had rolled out of 15 contracts earlier for a small profit. If you are assigned, you are supposed to be notified before the opening the following day. At that point, I would have had the option to roll out and sell the November 770 puts or exercise my long November 760 put. The real risk in this case would have been if the OEX gapped up at the open and your long put was losing money with each point increase on the OEX. Your spread is no longer in tact. I must have a guardian angel looking out for me, because I was assigned on the 16th but my sheets from broker didn't get faxed to me until the morning of the 18th. I couldn't understand my sheets, because the numbers didn't make any sense. I was trying to calculate from the closing of the 17th, which was 707 but the calculation was based on a closing of 725. I figured it must be a mistake. My broker couldn't explain the discrepancy, so he called the head of the trading department. I was panicking, because I had received my sheet on the 18th so my assigned price would have been the close on the 17th of 707 or 63 points per contract for a total debit of $31,500. I didn't want to wait to figure out what was wrong with my sheets and have the OEX start running upward, leaving me and my long puts in the dust. All I knew was, that I had to do something. Trying to sell the November 770 puts was disaster. The market makers wouldn't give me a break. I couldn't get a fill between the spread, so I exercised my 760 long put, even though it still had time value. This is where I got lucky. The OEX was falling, so my long put was going up in value. I finally got my act together and decided to watch the OEX until the close and exercise. The OEX closed at 706, so I received 54 points, the difference from the strike and the close. This is where I really got lucky. I actually made 9 points, but it really could have been disaster. This is what they don't teach at the seminars about risk in spreads. The OEX could just as easily run up 20 points and I would have to either hold and sweat it out, hoping a praying for a crash, or sold my put for a 20 point loss. This was an invaluable lesson to me, which I felt I must share. I really never stopped to think through what could happen in a situation like this. In hind sight, the safe thing to have done would have to close out all my contracts and not to have let that last 5 run or alternatively, roll out the short leg to November, even though the bid/ask spread was really wide. Better to take a small loss than a big one. I was very lucky to not only come out alive but profitable. The lesson is don't hold an OEX spread that is deeply "out-of-the-money" unless you like playing with fire. ****** Volatility Changes After Earnings By Mary Redmond This week, several companies rallied after reporting earnings, including Microsoft. Usually a stock will rally going into its earnings report and sell off somewhat afterwards, depending on the earnings. However, we have to consider that the market has been very oversold for the last month. This may impact investors' expectations of earnings. This earnings season should be more volatile and unpredictable than most, due to the fact that the Federal Reserve's cycle of rate hikes caused many analysts to revise their earnings estimates downward. It is generally a risky decision to hold call options over a company's earnings report. If the company's earnings were to come in even one or two cents below the estimates, then the loss of option premium could be huge. In some cases, you can estimate what the market's expectations may be by looking at the implied volatility numbers for the options. Microsoft's implied volatility was 58.2 on Wednesday before the earnings were reported. This could have been impacted by many factors, including the extreme volatility in the major market indexes this week. Microsoft reported earnings which were much higher-than-expected, and the stock rallied 10 points. The MSFT Nov 50 calls were $5 on Wednesday, and moved up to $12.3 on Thursday. However, once the earnings were released, the implied volatility dropped to 48.2 on Thursday. This can indicate that if the stock had stayed flat after the earnings were released, the call option could have lost value due to loss of implied volatility. The additional profit which could be gained from holding over earnings reports in most cases is not worth the risk, due to the fact that the implied volatility of most options will increase as earnings approach, and decrease after the earnings are released. The Sun Microsystems November 115 calls had an implied volatility of 71.7 on Wednesday, and the calls were $7.25. The day after the earnings were released, the implied volatility fell to 62.9. The Nov 115 calls went up only 2 points on Thursday, although the stock increased over 7 points. On Friday, the Nov 115 calls actually lost 0.125 points although the stock increased one point. In this case, the company blew away the earnings expectations, and yet the calls increased very slightly afterwards. The difference between the action of the Microsoft options and the Sun Microsystems options after the earnings were released can be attributed to many factors. One factor is that MSFT was on a downward trend for months, and was below the 50 and 200-DMA. Sun Microsystems probably had higher expectations priced in to the option, as it had been on a strong up trend and was strongly above the 200 and 50-DMA. The delta of an option generally estimates how much the option will move for a one point move in the stock price. Generally, an at-the-money option will move approximately one half point for every one point move in the stock. This means the ATM option has a delta of .50. A deep in-the-money option will generally move one point for every point move in the stock. This means it has a delta of 1. A deep out-of-the-money option can have a delta of anything from .5 to almost zero depending on how deep out-of-the-money it is. However, the delta is only an estimate. The actual movement of an option can depend on many factors, including the change in implied volatility, the demand for the option, the liquidity, and the market's perception of whether the stock will continue to move in the same direction at the same pace. If you buy an at-the-money call option and the stock were to drop precipitously, the option can lose more than one half point for every point drop in the stock. Most of us have had the unfortunate experience of watching call options drop much faster than they rise. If you think a company will report earnings higher than the predictions and rally afterward, you can sell the options and buy the stock. For example, I bought NT Dec 65 calls this week at $5, and sold them Friday at $10. NT reports earnings Tuesday, and has beaten the expectations solidly for the last several quarters. Suppose you put $5000 into calls and sold them for $10,000. You could then buy $5000 worth of NT. The risk would be more limited than holding the calls over earnings. Many analysts are stating that the earnings growth rate of the S&P 500 companies will be about 17% higher than last year. This is lower than the earnings projections and results for the first quarter of this year. However, this does not necessarily mean that the performance of the index will be lower than it was in the first quarter. For example, in 1995, the earnings year over year growth rate was 17%. This was lower than the earnings growth rate in 1993. Yet, the S&P 500 rallied over 34% in 1995. There is not always a direct correlation between earnings growth rates and stock market performance. It is interesting to note that the 30 year Treasury yield is on an unmistakable downtrend. This should benefit the market. However, this may be a bad time to speculate on the direction of interest rates. We don't know if the Treasury will continue to buy back government bonds next year. In addition, it may be too early to predict an interest rate cut in 2001, although there is indication that it is likely. We had seven new IPOs this week raising over $3 bln. However, there are still many more IPOs being cancelled than brought public. In addition, the issuance of high yield debt continues to be tight. Many small, unprofitable companies are not participating in the rally due to the difficulties in obtaining financing. For example, Chase Manhattan reported that their earnings were lower partly due to unforeseen losses on stock investments in the internet and technology sectors. This is significant because it indicates part of the reason why creditors, venture capitalists, banks, and investment banks are becoming wary about lending money to developmental stage internet companies. Ultimately, if small company stocks cannot get financing, our rate of economic growth could slow considerably. AMG Data reported a light inflow of $378 mln to equity funds last week. The flows have been light for several weeks. However, there is so much cash stored on the sidelines in money market funds that it seems like the dam is about to burst. It is not surprising that we saw a net outflow from money market funds this week for the first time in weeks. The Investment Company Institute reported that retail money market funds increased by $392 mln, and institutional money market funds decreased by over $400 mln. For the last several weeks, investors have been depositing about $12 bln weekly to money market funds and about $2 bln weekly to equity funds. If investors were started to deposit a few billion to the market consistently, we could easily fuel a rally and still have money left over for money market funds. ************************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=723 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* VRTS - Veritas Software $166.81 (+26.00 last week) See details in sector list Put Play of the Day: ******************** FCEL - FuelCell Energy $75.38 (-8.56 last week) See details in sector list ************************Advertisement************************* Attention Online Traders: NobleTrading.com has become the first online trading firm to offer both Direct Access Trading, and web based trading to its customers. Trade Direct using any ECN, SOES, and SelectNet, or trade right through your browser using our web based trading application. FREE DSL service for active traders. Visit our website and sign up for a Free real-time demonstration! http://www.sungrp.com/tracking.asp?campaignid=748 ************************************************************** ************* DAILY RESULTS ************* Index Last Week Dow 10226.59 -49.20 Nasdaq 3483.14 166.37 $OEX 738.16 9.15 $SPX 1396.93 22.76 $RUT 487.45 7.06 $TRAN 2469.07 29.63 $VIX 27.42 -3.56 Calls IDPH 190.25 27.75 The Biotech bulls are back in a big way NTAP 148.63 27.19 New, booming data storage market BRCM 242.19 26.88 New, beginning another upside run VRTS 166.81 26.00 Bullish technical and momentum factors CIEN 149.50 21.63 Bulls return, and another new 52-wk high RIMM 117.38 17.88 Blossoming in the hand-held market SEBL 113.00 14.13 Dropped, earnings on Tuesday BRCD 252.44 12.81 Storage is hot, but SAN area is on fire VRTX 79.75 9.50 Dropped, earnings on Tuesday RSAS 57.75 5.81 Can't overlook cheap earnings growth EMC 100.00 5.06 New, stealth Tech sector leader JNPR 232.00 3.50 New, blowout earnings... ready to soar! NT 68.31 2.88 Dropped, earnings on Tuesday SCMR 84.94 -0.53 Change in sentiment with new contract Puts ANEN 90.50 -29.69 New, shaken from its pristine pedestal PHCC 48.38 -19.25 New, profit taking gone mad FCEL 75.38 -8.56 New, quickly losing power PVN 103.06 -8.38 New, financial stocks taking a beating INKT 80.00 -2.25 Dropped, upside break above 10-dma NVDA 69.63 4.50 Dropped, can't fight new trend ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS VRTX $79.75 (+9.50) In another time and place, we would not be dropping the play. In fact, if conditions last week were similar to those of the last few, we would be holding on to this one. But as the markets change, new opportunities present themselves and that's the reason we are exiting the play. By most measures, there is little wrong with the play. While the close below $80 could be a cause of concern, and the stock has been making lower lows, volume has been light. As well, VRTX's up-trend is still intact. But with improving sentiment in the NASDAQ, there are quite frankly, better plays out there. What's more, the company announces earnings next Tuesday. All the more reason to drop VRTX. NT $68.31 (+2.88) Just when the markets are finally getting healthy and NT is starting to really move, we've run out of time on our play. Remember that earnings are coming up on Tuesday after the close and as always, we need to be out of any open positions before that. As it turned out, the final bounce at $60 late Wednesday was the bears last desperate attempt to break the back of NT's rock-solid support. Gapping up at the open on Thursday, NT has steadily marched higher, briefly flirting with the $70 resistance level on Friday before profit taking took hold. Those looking for a quick play can consider new positions on a solid bounce from the $68 support level, or a solid move through the $70 resistance level, but don't get too comfortable. This play turns into a pumpkin after the close on Tuesday. SEBL $112.88 (+14.13) The SEBL rebound we had been gaming finally materialized last week. A bullish earnings report from software giant Microsoft boosted SEBL above several key resistance levels, after the bulls came charging back into the Software sector. The positive report from Microsoft might portend an earnings surprise from SEBL when the company reports after the bell this Tuesday. Look to exit existing positions before the close of Trading Tuesday. In search for profitable exit points, watch for SEBL to break above resistance at $115 early next week and retest its 52-week high at $118.44. Major support levels can now be found just below at the $110 level and lower near $105. PUTS INKT $80.00 (-2.25) INKT offered several great opportunities for us to profit due to its volatile bouncing between resistance and support based on market conditions. Now with general conditions shaping up, and a temporary upside break above our 10-dma resistance at $81, it indicates that upside risk is growing on the play. Earnings are also confirmed for release next Thursday, October 26th, which is increasing positive sentiment on the play. With good expectations on numbers, and rumors that INKT would be a good takeover candidate, we ready to exit. Traders should look to sell into any weakness offered, keeping in mind that any breaks above the $81-resistance is our sell line in the sand. NVDA $69.63 (+4.50) As we were expecting, NVDA dropped to test the 200-dma (then at $52.81), but unfortunately it did so on Wednesday's huge gap-down open on the NASDAQ. The solid bounce prevented us from getting an entry into the play and improving sentiment in the PC sector, due in large part to MSFT's blowout earnings report, has propelled the stock sharply higher ever since. While mild signs of weakness began to appear at the end of the day on Friday, the technical picture is now looking decidedly bullish. Rather than fight the emerging trend, we'll cut NVDA loose and go in search of easier prey. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** BRCM - Broadcom $242.19 (+26.88 last week) Broad essentially means wide, and that's exactly what BRCM is involved in. A wide array of products that help customers stream vast amounts of data online at high speeds. BRCM is the company that provides the integrated circuitry that allows cable, DSL, and satellite broadband communication to occur. Now with a fast growing broadband wireless market, things continue to look promising for BRCM and their position. Customers include Motorola, 3Com, Cisco, and SFA just to name a few. Since BRCM is in the business of broadband, they are very familiar with wave lengths. The companies stock is looking like a familiar wavelength as well; it's beginning the upside run of its third cycle since July. A long term support has been seen in the area of $204, and Oct. 13th basically tested the area for the third time. The test has commenced BRCM on its current rebound rally. It appears to have considerable potential due to the bounce off the underlying 200-dma support at $196, then on Oct. 13th. Since that time, it has performed very well in its rebound despite the recent market weakness. BRCM's strength has taken it above all the major dma's which could have served as resistance, but didn't. Most recently, Friday's strength took the play above the critical 50-dma which should now serve as support as BRCM aims for a $270-target. BRCM blew away estimates last Wednesday by 6 cents, which is helping to fuel the current momentum and outlook on the play. On the heels of the earnings news, nine analysts issued very bullish Buy and Strong Buy opinions on the stock. There is currently a very high positive sentiment in the IC communications sector that is attracting new found interest. Investors once having determined market direction can enter plays from two points. The most prudent is to ride the momentum, letting BRCM trade above $245 on volume. The second is to look for a pull-back to the 20-dma at $231 and watch for a rebound bounce. In both instances look for positive market support to avoid a head fake in this rally. News that BRCM is poised to become the dominant end-to-end silicon technology solution provider is allowing analysts to raise their estimates and outlooks dramatically on the stock. Revenues have been revised to expect $1.82 billion in 2001. This move from a broadband provider to a silicon solutions provider opens the LAN, WAN, & SAN markets to them. BUY CALL NOV-240 RDU-KH OI=2453 at $23.13 SL=16.50 BUY CALL NOV-250*RDU-KJ OI= 924 at $18.25 SL=13.00 BUY CALL NOV-260 YRL-KL OI=1323 at $14.50 SL=10.50 BUY CALL NOV-270 YRL-KN OI= 583 at $11.25 SL= 8.50 BUY CALL JAN-260 YRL-AL OI= 384 at $31.25 SL=23.50 SELL PUT NOV-220 RDU-WD OI= 717 at $10.38 SL=14.00 (See risks of selling puts in play legend) Picked on Oct 22nd at $242.19 P/E = 340 Change since picked +0.00 52-week high=$297.94 Analysts Ratings 7-11-0-0-0 52-week low =$ 54.28 Last earnings 10/00 est= 0.24 actual= 0.30 Next earnings 01-17 est= 0.27 versus= 0.16 Average Daily Volume = 4.77 mln NTAP - Network Appliance $148.63 (+27.19 last week) The idea was inspired. Yet simple. Separate storage from an application server and put all that data on a special "appliance" tasked with serving data at high speeds. In 1992, NETP originated this high-performance network appliance concept. Today they're a recognized leader in data storage and access. Corporations and ISPs, including 3Com, Adobe Systems, Tripod, John Deere, NationsBanc, and GTE use NTAP's solutions to reduce the cost and complexity of managing their mission-critical data. With a network-centric economy pushing along expanding volumes of information, an easily scaleable appliance solution couldn't have come at a better time. A booming storage market, positive momentum on the NASDAQ, and a solid earnings report from industry rival, EMC, all played a role in NTAP's run up this week. It's a debate whether or not the market's reached a bottom, but one thing's for sure, investors have started nibbling on NTAP. Once EMC reported a respectable 55% increase in 3Q profits on Wednesday evening and the Tech bulls incited a broad rally, NTAP really took off. Investors quickly bid the share price through $140 and upwards to the vicinity $146.19, challenging the $150 level. The bullish gains extended into Friday's session and NTAP tagged $152.75 for a new 52-week record. Continued strength and positive direction in the NASDAQ could send NTAP to new heights next week. If the market maintains its current upward momentum and NTAP breaks above $150, traders might look to target shoot an entry near shorter-term support at $148, or lower at $144. While support is much firmer at $130-$135 and would be a premium entry, a return to this level is dangerous. A more moderate approach, and yet aggressive, may be to enter new positions on a pullback to previous resistance at the $140 level. In just a few weeks on November 14th, NTAP is scheduled to report its own earnings numbers after the market close. Another booster, which may or may not affect trading, is the fact that NTAP is currently trading at a historical split-level of $150. It's also interesting to note that the triggers for NTAP's previous split announcements were earnings releases. This week, Network Appliance, together with Sybase Incorporated (SYBS), a leading supplier of e-Business solutions, unveiled a powerful integrated application that delivers a higher capacity of storage scalability and simplifies manageability. BUY CALL NOV-145 ULM-KI OI= 345 at $16.50 SL=12.00 BUY CALL NOV-150*ULM-KJ OI= 648 at $14.63 SL=10.75 BUY CALL NOV-155 ULM-KK OI= 654 at $12.25 SL= 9.25 BUY CALL DEC-150 ULM-LJ OI= 243 at $20.88 SL=14.50 BUY CALL DEC-155 ULM-LK OI= 143 at $18.75 SL=13.75 Picked on Oct 22nd at $148.63 P/E = 795 Change since picked +0.00 52-week high=$152.75 Analysts Ratings 16-3-0-0-0 52-week low =$ 15.64 Last earnings 06/00 est= 0.07 actual= 0.09 Next earnings 11-14 est= 0.09 versus= 0.05 Average Daily Volume = 6.66 mln EMC - EMC Corporation $100.00 (+5.06 last week) EMC is the leading builder of the world's most robust, secure and trusted information storage infrastructures. Their storage systems, software, networks and services ensure fast, round-the-clock access to all of the information businesses and individuals must have to prosper in the Information Economy. EMC's wide range of hardware and software products Enable organizations to create an electronic information Infrastructure which EMC calls an E-Infostructure. When people think of the Four Horsemen of the NASDAQ, Cisco, Intel, Dell, and Microsoft come to mind. Recently, the shake-up in Tech stocks has been a point of contention, with companies such as Dell, Oracle and Worldcom all laying claim to the coveted position. Yet all this time, EMC has been lurking in the background, playing the role of the strong, silent type. Sporting a market cap of $218 billion, the market has deemed the company more valuable than DELL, ORCL, and WCOM. Its recent strength during the malaise that plagued the NASDAQ has proven the company to be a stabilizing force in investors' portfolios. While shares of DELL, ORCL and WCOM are attempting to recover from steep declines, EMC looks poised to challenge its all-time highs. It's no secret that Storage is clearly a high-growth sector, or is it? While Fiber Optic, Broadband and Networking stocks have taken the spotlight, the bulls have been less vocal about extolling the virtues of the Storage sector. Networkers may enable information to travel vast distances at great speeds but at some point, that information needs to be stored. That's where EMC comes in. The stock having just successfully tested its 100-dma (now at $86), broke back above its 50-dma at $95 and closing on Friday right on the psychological $100 level, appears headed towards its all-time highs at $104.94. If the market moves higher on Monday, an entry at current levels would not be a bad idea, but make sure the buyers are in control before entering. A pullback to the 5-dma at $95.75 or the 50-dma are also possible targets to shoot for while conservative traders looking to enter into strength will be watching for EMC to break above $105 with conviction. Reporting earnings last Wednesday, EMC said net income grew by 55%, with earnings of 20 cents per share, beating Street estimates by a penny. While the company missed the whisper number of 21 cents, investors appear to be more interested in the revenue figures and projected future growth in the storage space, which can only bode well for EMC. BUY CALL NOV- 95 EMC-KS OI=2648 at $ 9.13 SL=6.25 BUY CALL NOV-100*EMC-KT OI=8297 at $ 6.25 SL=4.25 BUY CALL NOV-105 EMC-KA OI=2583 at $ 4.13 SL=2.50 BUY CALL JAN-100 EMC-AT OI=8940 at $11.50 SL=8.50 BUY CALL JAN-105 EMC-AA OI=1918 at $ 9.50 SL=6.50 SELL PUT NOV- 90 EMC-WR OI= 751 at $ 2.38 SL= 4.00 (See risks of selling puts in play legend) Picked on Oct 22nd at $100.00 P/E = 216 Change since picked +0.00 52-week high=$104.94 Analysts Ratings 17-10-1-0-0 52-week low =$ 30.00 Last earnings 10/18 est= 0.19 actual= 0.20 Next earnings N/A est= 0.23 versus= 0.17 Average Daily Volume = 8.51 mln JNPR - Juniper Networks $232.00 (+3.50 last week) As a provider of Internet infrastructure solutions, JNPR serves Internet service providers and other telecommunications service providers, helping them to meet the demands resulting from the rapid growth of the Internet. The company delivers next generation Internet backbone routers that are specifically designed for service provider networks. JNPR's flagship product is the M40 Internet backbone router, which complements the recently-introduced M20, which is a router built specifically for emerging service providers. The routers provided by the company combine the features of the JUNOS Internet Software, high performance ASIC-based packet forwarding technology and Internet-optimized architecture into a purpose-built solution for service providers. Seasonal weakness derailed our JNPR play less than a month ago. But, after its blowout earnings, the stock looks ready to soar to new heights. Investors willingly pushed the price up above $230 in anticipation of an impressive earnings report, but our play ended up being the proverbial helium-filled balloon in an elevator headed for the basement. As the NASDAQ headed down to retest 3000, JNPR was dragged down for a retest of solid support at $180, also the site of the 50-dma at the time. Fortunately, it held and, although volatile, the stock is back near its all-time high of $244.50. If investors liked JNPR before their most recent earnings announcement with a PE north of 2600, then they've got to absolutely love it now that the PE has dropped below 1000. The quickest way to make your PE ratio drop is to double your earnings every quarter, and JNPR has done a nice job, improving their results from a loss of 9 cents in the year ago period to a profit of 17 cents in the most recent quarter. Exponential growth is what momentum investors like to see, and with revenue growth running in excess of 500% year-over-year, this rocket ship looks to have plenty of fuel left. The weakness last week as the NASDAQ tested the 3000 level again could only push JNPR down to about $213, just above the 10-dma (then at $211.31), and the recovery was quick and decisive as buyers emerged to push the stock back above the $230 resistance level. Friday saw our play move as high as $239.50, before fear of darkness took over and the stock fell back to close at $232. The next level of support below $230 is $220, but it appears unlikely that level will be tested unless profit taking appears on the NASDAQ early next week. Aggressive traders can use a bounce from support as their entry trigger while a more cautious approach will be to buy a breakout over $244. Let volume be your guide in either case. This is a volatile momentum play, and volume will likely lead the price action. Analysts, as well as individual investors, are drawn to companies with strong earnings and revenue growth, as seen by the ratings of the 19 who follow JNPR. All except for 3 rate the stock a Strong Buy, with the remainder giving it a thumbs up Buy rating. The most recent convert was Morgan Stanley Dean Witter, initiating coverage with a Strong Buy on October 13th, the day after the company's stellar earnings report. BUY CALL NOV-230 JUD-KF OI=1674 at $22.88 SL=17.25 BUY CALL NOV-240*JUD-KH OI=1719 at $18.00 SL=13.00 BUY CALL NOV-250 JUD-KJ OI=1724 at $13.88 SL=10.50 BUY CALL JAN-250 JUD-AJ OI=2585 at $31.38 SL=23.50 BUY CALL JAN-260 JUD-AL OI= 342 at $28.38 SL=21.25 SELL PUT NOV-210 JUD-WB OI= 495 at $10.75 SL=14.50 (See risks of selling puts in play legend) Picked on Oct 22nd at $232.00 P/E = 905 Change since picked +0.00 52-week high=$244.50 Analysts Ratings 16-3-0-0-0 52-week low =$ 39.50 Last earnings 10/00 est= 0.09 actual= 0.17 Next earnings 01-11 est= 0.13 versus= 0.01 Average Daily Volume = 9.20 mln ***********************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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The Option Investor Newsletter Sunday 10-22-2000 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/102200_3.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=724 ************************************************************** ****************** CURRENT CALL PLAYS ****************** VRTS - Veritas Software $166.81 (+26.00 last week) Truthfully, as its name applies, Veritas is the worlds best when it comes to data storage and backup systems. They lead the market in this ever critical component of data storage, and management to help their customers avoid errors and crashes with their network systems. If a crash does occurs, VRTS' management software allows for very quick and efficient recoveries, minimizing down time. So effective is VRTS at what they do, that Microsoft and Hewlett-Packard are principle clients and reasons for this companies success. The technical and momentum factors that have presented themselves as our reasons for playing VRTS have come through with shining colors. Riding on the back of renewed optimism in the general market, and a possible short-term turnaround, VRTS profited investors nicely. Once again, the stock powered ahead to hit a new 13-week high of $166.88. Not only that, but it basically closed at that high providing VRTS with a very bullish bar on the chart for the day. This is definitely the type of formation and momentum we like to see in plays, as it was also done on above ADV close to 10 million shares. VRTS started as a resistance breakout play above the $150-mark. Now this same level will be looked to as resistance. Currently it stands on its own, based on the extended resistance line from Sept. 28th, but the 10-dma is quickly approaching, and should add support to our rise very soon. With a current bullish divergence taking place in the MACD, and the new trend for VRTS steepening in its slope, the play should continue to profit investors as it now sets its target on taking out the 52-week high at $174 set back in March. Investors should continue to take advantage of the upside momentum, waiting for VRTS to trade above $167 with positive market support and good upside volume. It appears VRTS is having to go in a round about way to acquire some of the assets of Seagate Tech. The sale of Seagate's operating assets are being sold to a group of private equity firms, among which is Silver Lake Partners. Then the sale between Seagate and a subsidiary of VRTS can take place. This procedure was officially approved on Friday by the SEC as they stated the S-4 registration is effective. BUY CALL NOV-160 VUQ-KL OI= 661 at $17.88 SL=13.00 BUY CALL NOV-165 VUQ-KM OI= 621 at $15.25 SL=11.00 BUY CALL NOV-170*VUQ-KN OI= 831 at $12.88 SL= 9.75 BUY CALL NOV-175 VUQ-K0 OI=2287 at $10.63 SL= 8.25 BUY CALL FEB-175 VUQ-B0 OI=1285 at $25.88 SL=19.50 SELL PUT NOV-150 VUQ-WJ OI=864 at $ 6.88 SL=10.00 (See risks of selling puts in play legend) Picked on Oct 19th at $160.38 P/E = n/a Change since picked +6.43 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 CIEN - Ciena Corp $149.50 (+21.63 last week) CIENA Corporation's market-leading optical networking systems form the core for the new era of networks and services worldwide. CIENA's LightWork architecture enables next- generation optical services to transmit signals simultaneously over the same circuit. This multiplexing system changes the fundamental economics of service-provider networks by simplifying the network and reducing the cost to operate it. About 45% of sales come from outside the US markets. Three times must be a charm! The return of the Tech bulls lifted CIEN up to the $151 level on Friday as it traced its third new 52-week high last week. CIEN's building momentum is also demonstrated by its strong pattern of higher lows. Earlier in the week the share price got a boost after Warburg Dillon Read reiterated its Buy rating on CIEN and raised its price target to $175 from $108. Warburg commented that CIENA is the only company that is either number one or two in all three key next-generation optical systems products. Other key events that directly impacted Friday's stellar performance included the blowout numbers from SDL Incorporated (SDLI) and better-than- expected results for the 3Q from Nokia (NOK). We'll want to pay close attention to this week's earnings reports from the likes of GLW, JDSU, and NT and their effects on our CIEN play. CIENA itself is expected to announce its numbers around November 16th. A confirmed date is not yet available. Aggressive traders might consider an entry into the momentum on a deep pullback back to support near the $137 level or the 5-dma line ($139.39). A more conservative approach would be to consider target shooting if CIEN rallies above $150 on strong volume. A favorable buying climate and continued strength in the NASDAQ will certainly be conducive to additional gains in the coming weeks. CIENA's CEO Patrick H. Nettles was recently named as the Chairman of the BoD. The company also announced that COO Gary B. Smith will assume an additional role as President as well as take a seat on the BoD. BUY CALL NOV-145 UEZ-KI OI=1733 at $16.50 SL=11.75 BUY CALL NOV-150 UEZ-KJ OI=1576 at $14.13 SL=10.50 BUY CALL NOV-155*UEZ-KK OI= 398 at $11.38 SL= 8.50 BUY CALL NOV-160 UEZ-KL OI= 916 at $ 9.50 SL= 6.50 BUY CALL JAN-160 UEZ-AL OI= 793 at $19.88 SL=14.50 Picked on Sep 24th at $120.75 P/E = 736 Change since picked +28.75 52-week high=$151.00 Analysts Ratings 9-9-0-0-1 52-week low =$ 15.13 Last earnings 06/00 est= 0.17 actual= 0.19 Next earnings 11-16 est= 0.24 versus= 0.03 Average Daily Volume = 8.57 mln IDPH - IDEC Pharmaceuticals Corp $190.25 (+27.75 last 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. The Biotechs are back! After a steep decline in the early part of the month, it appears the Biotechs have not only bounced, but are poised to head toward higher ground. With the NASDAQ largely driven by movements in the Biotechs and the Semiconductors, the recent declines of both leading sectors have put much fear into the heart of Tech bulls. Last week, the NASDAQ came through with an amazing turnaround and while the Semis played a role moving the index higher, the Biotechs did a larger part of the heavy lifting. With the Merrill Lynch Biotech HOLDR (BBH) now back above its 200-dma and the Amex Biotech Index (BTK) firmly above its major moving averages, Biotechs led the NASDAQ turnaround as early as the previous week, with the Semis arriving later, lending support at the end of this past week. The earlier turnaround was likely helped by the Pharmaceutical sector. With investors running to the sector for cover, drug stocks quickly approached their all-time highs. This led to a spillover effect to the battered Biotechs as bargain hunters bought the beaten-down shares, leading to the bounce. Throughout the month of October, IDPH had been in a trading range, spanning 30 points from top to bottom, with support at $150 and resistance at $180. With resistance broken, thanks to a stellar earnings report, the stock has been moving higher on the back of the 5-dma, now at $183.75. With support also in increments of $5 at $190, $185 and $180, a bounce off support, backed by buying volume, would provide for an aggressive entry point. Conservative traders may wait to make sure that IDPH can break past $195 with conviction before taking a position. Tuesday's rally was helped by a triple dose of positive comments from Bank of America Securities, US Bancorp Piper Jaffray and Prudential Securities, showering IDPH with upward price target revisions and upgrades. This was followed by an upgrade on Wednesday by Adam Harkness. Sector sympathy and analyst bullishness will be the key to success with this play. Confirm direction with the BBH and BTK when considering an entry. BUY CALL NOV-185 IHD-KQ OI=990 at $19.75 SL=14.25 BUY CALL NOV-190*IHD-KR OI=336 at $17.13 SL=12.25 BUY CALL NOV-195 IHD-KS OI= 71 at $14.75 SL=11.00 BUY CALL JAN-190 IHD-AR OI=523 at $30.88 SL=22.25 BUY CALL JAN-195 IHD-AS OI= 1 at $28.50 SL=20.25 SELL PUT NOV-180 IHD-WP OI= 10 at $10.25 SL=14.00 (See risks of selling puts in play legend) Picked on Oct 19th at $188.63 P/E = 241 Change since picked +1.63 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 = 917 K RIMM - Research In Motion $117.38 (+17.88 last 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. While fears of a slowdown in PC sales have caused shares of companies such as Apple and Dell to wilt, shares of mobile computing net-ready device makers such as Handspring, Palm and RIMM have been blossoming. While on the surface, both types of companies are very similar, closer inspection reveals some fundamentally important differences. The most important difference of all is growth rate, as investors are willing to pay a premium for high growth. While the 30% year-over-year revenue growth rates in Apple and Dell are good, it pales in comparison to the 90 to over 100% growth rates offered by the likes of Palm and RIMM. As well, in a trend-driven economy, the trend towards sexy, portable, wireless, handheld devices is a key driver for strong future demand. With high profile clients such as Bill Gates and Michael Dell sporting RIMM pagers, the company is difficult to ignore. While RIMM's products are still in the early-adoption stage, with high prices to cover research and development costs, the good news is, people are buying. The need for portable computing and Internet appliances has, so far, been unquenchable and appears to be just beginning. It's been a great week for RIMM as the stock moved ever-higher, with bounces off the 5-dma (now at $116.42) providing aggressive entries into this play and as long as the current up-trend holds, will continue to do so. There is further support at previous resistance at $115, $110 and the 10-dma at $108.47. The past few days, RIMM has encountered resistance in the $126-127 area. If RIMM can close above $125, this would set the stock up for a break above that level, confirming continued upward momentum and providing conservative traders with a safer entry. On Friday, RIMM announced it had filed to sell six million shares of its stock. The company did not state how the proceeds would be used, and this uncertainty likely led to Friday's decline. As details become clearer, look for the news to drive RIMM's price. Considering the large number of high profile investment banks involved in the offering, including Goldman Sachs, Merrill Lynch ,and US Bancorp Piper Jaffray, as well as an option for an additional 900,000 more shares available for over-allotments, there should be great demand for this offering. BUY CALL NOV-110 RUL-KB OI=146 at $16.63 SL=12.00 BUY CALL NOV-115 RUP-KC OI=240 at $14.00 SL=10.50 BUY CALL NOV-120*RUP-KD OI= 48 at $10.88 SL= 8.25 BUY CALL DEC-120 RUP-LD OI=133 at $15.88 SL=11.50 BUY CALL DEC-125 RUP-LE OI=135 at $13.75 SL=10.50 SELL PUT NOV-110 RUL-WB OI=246 at $ 7.75 SL=10.50 (See risks of selling puts in play legend) Picked on Oct 19th at $122.44 P/E = 2041 Change since picked -5.07 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 = 1.51 mln BRCD - Brocade Communications $252.44 (+12.81 last week) Brocade is leading the way in a new category of networking: providing a scalable, reliable foundation for storage environments. They are the market leader in Fibre Channel Fabric switches-the essential framework for networking servers and storage systems. Brocade switches deliver the flexible and secure "Fabric" that supports the tremendous information and storage demands of today's leading companies. Brocade Fibre Channel fabric switches and software provide a networking foundation for storage area networks (SANs). Storage is hot. Stellar earnings reports this past week from companies such as EMC and McData (MCDT) confirm bullish sentiment. While EMC posted a year-over-year revenue growth rate of 47%, its Storage Area Network (SAN) division posted revenues over 5 times that of last year's. EMC's SAN spin-off MCDT also posted strong results, with revenue growth of over 215%. This can only be good news for BRCD, as it currently dominates the SAN space, commanding over 80% market share. So while storage is hot, the SAN space is even hotter, with BRCD clearly sitting in the sweet spot, ready to capture a large portion of the rewards. While this has helped BRCD hold up recently in a weak market for Tech stocks, a bouncing market has given fresh legs to BRCD's run. As we mentioned last week, if BRCD could hold up well in adverse conditions, then a strong market would likely lead to the stock challenging its all-time highs. This is exactly what happened last week, but not without a number of buying opportunities. While aggressive traders have had much success buying bounces off the 5-dma (now at $246.17), Wednesday provided an even better deal as the stock bounced above its 10-dma, currently sitting at $238.37. From there, the stock has moved higher, breaking strong resistance at $250. With that hurdle now passed, BRCD appears poised to challenge its all-time high at $256.50. At this point, there are a number of support levels for BRCD, most notably at $250, the 5-dma, $245, $240. A bounce off support could be a buy signal for aggressive traders while conservative traders may want to wait until BRCD clears its previous all-time high and enter on strength. In both cases, make sure there are buyers supporting the move up in the form of heavy volume. Alliances were the theme last week for BRCD. On Tuesday, the company expanded its partnership with software storage giant Veritas. That was followed by an OEM partnership on Wednesday with MTI Technology Corp (MTIC), in order to produce next generation SAN products. The alliances only serve to strengthen BRCD's leading position on the Storage Area Networking space. BUY CALL NOV-240 GUF-KH OI= 227 at $27.63 SL=20.00 BUY CALL NOV-250*GUF-KJ OI= 373 at $21.75 SL=16.50 BUY CALL NOV-260 ULF-KL OI= 439 at $16.50 SL=12.00 BUY CALL JAN-250 GUF-AJ OI=6380 at $36.75 SL=26.75 BUY CALL JAN-260 ULF-AL OI=4813 at $32.75 SL=23.75 SELL PUT NOV-240 GUF-WH OI= 104 at $12.38 SL=17.00 (See risks of selling puts in play legend) Picked on Oct 15th at $239.53 P/E = 661 Change since picked +12.81 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 = 2.87 mln RSAS - RSA Security $57.75 (+5.81 last week) RSA Security Inc. is a trusted name in e-security, helping organizations build secure, trusted foundations for e-business through its two-factor authentication, encryption and public key management systems. As the global integration of Security Dynamics and RSA Data Security, RSA Security has the market reach, proven leadership and unrivaled technical and systems experience to address the changing security needs of e-business and bring trust to the new, online economy. A global company with more than 5,000 customers, RSA Security is renowned for providing technologies that help organizations conduct e-business with confidence. Investors looking for a lower risk play in the Internet security space have a hard time overlooking RSAS. With a PE ratio of only 17, and solid year-over-year earnings growth of almost 30%. This is in contrast to stocks like Verisign (VRSN) and Entrust (ENTU) which are growing revenues at a faster rate, but have yet to receive a PE ratio, due to their continuing habit of losing money on a quarterly basis. Things were looking pretty grim for RSAS investors just over 2 weeks ago, as their stock reached a nearly 2-year intraday low on October 4th. The company threw investors a lifeline the same day, announcing that revenues for the third-quarter rose 29% and announcing that it would report better-than-expected results on October 12th. Icing on the cake was the company's statement that it would buy back up to 4 million shares of its stock - always a sign of confidence for the future. The announcement helped the stock recover from its lows and the next day's $5 gap up was just the start of what has been a consistent recovery ever since. True to its word, RSAS reported solid earnings less than a week ago and investors have shown their approval by continuing to drive the price higher. Support has been solidifying at the $55 level, and target shooters got another shot at an entry at this level when RSAS dropped at the open on Friday. Bucking the trend of taking profits at the end of the day, investors continued to buy right into the close, propelling the stock up to close near its high of the day. While support is solidifying, so is resistance, first at $58, and then $60, also the site of the 200-dma. The action over the past two weeks has kept our play in a narrow channel between the 5-dma (currently $55.31) and the upper Bollinger band (now at $59). If the bulls can take over next week, our play looks ready to charge through the $60 level, and such an event would be the trigger for conservative players to open new positions. The next level of resistance sits between $64-66, and a move through the level will clearly require a positive mood in the broader technology markets. Helping to fuel the move higher in the past week 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. And then on Thursday, RSAS announced that Rainfinity, the maker of Internet Reliability Software, has licensed RSA BSAFE SSL-C software to encrypt and authenticate the communication between its browser-based management console and other products. BUY CALL NOV-55 QSD-KK OI= 95 at $6.50 SL=4.50 BUY CALL NOV-60*QSD-KL OI= 24 at $4.13 SL=2.50 BUY CALL JAN-60 QSD-AL OI= 79 at $7.88 SL=5.50 BUY CALL JAN-65 QSD-AM OI= 47 at $6.13 SL=4.00 BUY CALL JAN-70 QSD-AN OI=168 at $4.63 SL=2.75 Picked on Oct 17th at $55.00 P/E = 17 Change since picked +2.75 52-week high=$93.06 Analysts Ratings 6-5-1-0-0 52-week low =$29.88 Last earnings 10/00 est= 0.24 actual= 0.24 Next earnings 01-11 est= 0.26 versus= 0.23 Average Daily Volume = 465 K SCMR - Sycamore Networks $84.94 (-0.53 last week) Sycamore Networks develops and markets intelligent optical networking products that transport voice and data traffic. The company combines its significant experience in data networking with expertise in optics to develop intelligent optical networking solutions for network service providers. Based on a common software foundation, SCMR's products enable the company to concentrate on the delivery of services and end-to-end optical networking. Among the company's offerings are optical transport, access and switching systems and end-to-end optical network management solutions. Suffering the indignity of having its share price cut by nearly 60% in the past two months, SCMR looks like it is on the road to recovery. The change in sentiment is due in no small part to its deal to provide optical switches and equipment to BellSouth for its planned Internet gateway service center in Florida. Announced a little over a week ago, the positive development helped SCMR to halt its slide and it began probing tentatively to the upside. Resistance is in place at the $87-88 level, followed by $93 and then $98, but with earnings just around the corner on November 14th, it looks like the recovery may be just about to get under way. Stochastics and MACD have turned positive, with volume clocking in at nearly 50% above the ADV, as SCMR has now climbed back above the $80 level. Then after the close on Friday, the company announced it is requesting approval from shareholders to increase the number of authorized shares from 1.5 billion to 2.5 billion. Do you think management might be contemplating another split? Recall that the last one was a 3-for-1, announced in late January when the stock was trading near $200. The vote will take place at the annual shareholder meeting, scheduled for December 14th. Splits tend to be announced when management has a positive outlook, so even though there is nothing definite, this looks like a good sign going forward. Consider new positions on a renewed bounce from support between $80-82, but make sure that buying volume confirms the bounce. Although an intraday dip to the $77 level would provide a better entry point, the risk associated with such an entry strategy is higher, as it would indicate potential weakness in the stock. While support at $70 is rock solid, having been tested several times recently, only high-risk players should consider entries at this level, should the opportunity arise. More conservative players may want to wait for bullish enthusiasm to drive SCMR through resistance at $88 before playing. Grabbing investors attention on Thursday, SCMR announced it had expanded its portfolio of intelligent optical switches to extend the flexibility and value of switching from the core to the edge of the optical network. With the introduction of the SN 3000 Optical Access Switch and the SN 4000 Optical Edge Switch, SCMR becomes on of the first vendors to provide service providers the ability to re-architect their networks to take advantage of the bandwidth-on-demand, end-to-end restoration, and scaling capabilities of optical switching. BUY CALL NOV- 85 QSM-KQ OI= 345 at $12.50 SL= 9.50 BUY CALL NOV- 90*QSM-KR OI= 443 at $ 9.75 SL= 6.75 BUY CALL NOV- 95 QSM-KS OI= 614 at $ 8.00 SL= 5.75 BUY CALL DEC- 95 QSM-LS OI= 152 at $13.88 SL=10.50 BUY CALL DEC-100 QSM-LT OI=2764 at $12.38 SL= 9.25 SELL PUT NOV- 70 SMZ-WN OI= 291 at $ 4.63 SL= 6.50 (See risks of selling puts in play legend) Picked on Oct 15th at $85.47 P/E = 1204 Change since picked -0.53 52-week high=$199.50 Analysts Ratings 9-3-2-0-0 52-week low =$ 47.25 Last earnings 08/00 est= 0.06 actual= 0.08 Next earnings 11-14 est= 0.02 versus= -0.19 Average Daily Volume = 6.56 mln ************************Advertisement************************* Attention Online Traders: NobleTrading.com has become the first online trading firm to offer both Direct Access Trading, and web based trading to its customers. Trade Direct using any ECN, SOES, and SelectNet, or trade right through your browser using our web based trading application. FREE DSL service for active traders. Visit our website and sign up for a Free real-time demonstration! http://www.sungrp.com/tracking.asp?campaignid=749 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 10-22-2000 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/102200_4.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=725 ************************************************************** ************* NEW PUT PLAYS ************* PVN - Providian Financial $103.06 (-8.38 last week) As one of the top ten US credit card companies, PVN issues mainly secured credit cards to more than 12 million customers, many of whom have spotty credit histories. The company also offers standard and premium crecit cards to those with better credit. In addition to credit card products, the company also offers a suite of loan products and membership services. Soliciting new customers via direct mail, phone calls, and online advertising, PVN has more than $27 billion in assets under management and over 14 million customers. Financial stocks have been taking it on the chin lately, and PVN is no exception. After failing to penetrate the $135 resistance level earlier this month, the stock has given up over $30 and is sitting just above major support between $100-103. The interest rate environment has turned more friendly lately, with no hikes expected for the remainder of the year and talk of interest rates dropping next year. The company reported its most recent quarterly results last Thursday, and although it came in a penny ahead of estimates, the stock continued to come under selling pressure. In the past two days, PVN has given up over 8% on volume approaching triple the ADV, and the picture continues to look negative. Adding to the downward pressure in the past two days were a couple of influential analysts downgrading the stock. On Thursday, First Union Securities cut the stock from Strong Buy to Buy, and on Friday, AG Edwards dropped the stock from Accumulate to Maintain. That last one sounds suspiciously like a veiled Sell rating. The stock is now below all of its shorter term moving averages and the 5-dma ($110.75) and 10-dma ($111.44) will likely conspire to create some formidable resistance in the days ahead. The only moving average that PVN hasn't violated yet is the 200-dma, which is sitting at $93.31, right at a major support level. While it would be nice to get a more attractive entry as our play fails to penetrate resistance near $110, we may have to settle for entering new positions on continuing weakness. If $100 fails to support PVN, and the selling volume is strong, that looks like a good time for conservative traders to enter the play. BUY PUT NOV-105*PVN-WA OI=189 at $8.13 SL=5.75 BUY PUT NOV-100 PVN-WT OI=101 at $5.75 SL=3.75 Average Daily Volume = 1.01 mln FCEL - FuelCell Energy $75.38 (-8.56 last week) FuelCell Energy, Inc. is headquartered in Danbury, Connecticut. The Company employs more than 150 people with scientific, engineering and manufacturing backgrounds. FuelCell is a developer and manufacturer of fuel cells. A fuel cell is a device that electrochemically converts the chemical energy of a fossil fuel into electricity without the combustion of fuel. FuelCell's fuel cells are clean, efficient electric power generators that operate on a variety of fuels including natural gas, coal-gas, ethanol and landfill gas. Traditionally, Energy stocks have always done well during the slow summer trading season. This year, with oil prices rising to over $30 a barrel and more recently, tensions in the Middle East, stocks in the Energy sector have rocketed upwards, with shares of FCEL more than tripling since the beginning of June. But now with the Autumn season rapidly approaching, it appears the money is rotating out of Energy stocks and into the battered, yet more exciting Tech stocks. This can clearly be seen as trading volume in FCEL has been steadily declining. It appears the momentum in the stock is quickly losing power. Technically, the chart does not look too healthy either, as FCEL appears to have formed a head and shoulders formation over the past couple of months. Such a pattern usually foretells a definitive end to an intermediate-term up-trend and a strong move in the opposite direction. Drawing a line across the $94 level on a 2-month daily chart, the shoulder tops can clearly be seen, with the first in mid-September and the most recent this past week. The head can be seen in late September/early October when the stock topped out at the $108-109 area. Drawing a line across the $70 mark reveals the neckline. If FCEL breaks below this support level, it could be a quick trip to the 100-dma at $52.62. Conservative traders will be watching for a break below $70 on volume for an entry point, while traders who are willing to take on more risk may want to get in early and buy failed rallies above the 5 and 10-dmas, currently at $85.13 and $83.46, respectively. Another aggressive entry could be found on a break below the 50-dma, currently at $72.07. BUY PUT NOV-80 FQG-WP OI= 67 at $13.50 SL=10.00 BUY PUT NOV-75*FQG-WO OI=312 at $10.88 SL= 8.25 BUY PUT NOV-70 FQG-WN OI= 99 at $ 8.25 SL= 6.00 Average Daily Volume = 732 K PHCC - Priority Healthcare Corp $48.38 (-19.25 last week) Priority Healthcare distributes specialty pharmaceuticals and other medical supplies to healthcare industry. They also offer disease treatment programs and self-injectable pharmaceuticals to the individual. The company's Priority Distribution process serves over 2,000 customers across the US and Puerto Rico. Here's another case of profit taking getting out of hand in dangerous market conditions. And, magnified by further selling on earnings news. On October 12th, PHCC experienced an incredible collapse in its share price. While it's true that CSFB's new Hold recommendation wasn't a ringing endorsement, a 4.8% drop in price the following day is a bit extreme. PHCC did find support at the 50 & 100 DMAs at $63.08 and $62.28, respectively. Then the axe fell last Thursday. PHCC announced solid earnings and a 2:1 stock dividend (payable on November 22nd) before the opening bell. Traders sold off the issue on more than six times the ADV! The rush resulted in a $5.69, or 8.8% cut by the close. The critical downslide was a clear divergence from the rest of the sector, which was basking in the glow of great earnings from industry leader, Merck (MRK). To boot, the market was in rally mode and PHCC received a Buy reiteration from Southwest Securities! This is a prime example of "selling the news". The losses snowballed in Friday's session with volume again at incredible levels. A downgrade by First Union Securities to a Buy from Strong Buy effectively pressured the share price lower and under the 200-DMA ($53.38). Next week, confirm the weakness before taking new positions. Look for high-volume moves through the recent intraday low of $47.50 and a challenge of the light support at $46 and $43. If you're more adventurous, consider taking entries on roll-overs at the $53 and $54 level. Look for new at and out-of-money November contracts to be issued next week, and wait for open interest to build. BUY PUT NOV-65 UHP-WM OI=75 at $17.13 SL=12.25 BUY PUT NOV-60*UHP-WL OI= 0 at $12.75 SL= 9.50 Wait for OI!! BUY PUT NOV-55 UHP-WK OI= 0 at $ 8.75 SL= 6.25 Wait for OI!! Average Daily Volume = 234 K ANEN - Anaren Microwave $90.50 (-29.69 last week) Anaren manufactures and supplies microwave components and subassemblies for the satellite communications, defense electronics, and wireless industries. Anaren's breakthrough in lightweight multi-layer packaging technology has allowed for innovative compact, lightweight designs at affordable costs. U.S. customers account for nearly 80% of total sales. Yet another tech player shaken from its pristine pedestal. ANEN reached a pinnacle of success at $144.06 on October 2nd, only to get kicked to the curb during the NASDAQ correction. The share price steadily lost value until it found recent support just above the $109 level at the 100-dma line. However, ANEN's new bottom was essentially well, virtual. Last Tuesday evening, the company reported 1Q earnings numbers that were riddled with record results. Net sales increased a whopping 78% and there was also a 70% increase in EPS of $0.34 versus $0.20. Even considering the adjustments for acquisitions, the "real growth" was a positive 34% for the same quarter last year. Pretty solid numbers. Still the old clichi of "take your money and run" came into play on Wednesday. ANEN sold off at an incredible rate. Volume levels were at 21 times the ADV and reached 1.58 mln shares exchanging. ANEN lost $18.94, or in percentage terms, a devastating 17.1% in just one session. You'd have expected buyers to return after that backslide and honestly, some did. The Tech Bulls charged back into the arena on Thursday and there was an attempted recovery, but it was to no avail. An overhead barrier around the $97 level stopped the progress in its tracks. The sharp sell-off near Friday's close also indicated that ANEN was on shaky ground. A confirming move to the underside of $90 would warrant entry into the put play. Look for robust volume to back the decline and expect some resistance at $87.13, Wednesday's intraday low. BUY PUT NOV-95*EUA-WS OI=3 at $14.25 SL=10.50 BUY PUT NOV-90 EUA-WR OI=0 at $11.13 SL= 8.25 Wait for OI!! BUY PUT NOV-85 EUA-WQ OI=0 at $ 8.75 SL= 6.00 Wait for OI!! Average Daily Volume = 334 K ***************** CURRENT PUT PLAYS ***************** No put updates today ************************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=750 ************************************************************** ***** LEAPS ***** If That Isn't Capitulation, I Don't Know What Is By Mark Phillips Contact Support Proving that V-bottoms are unconvincing patterns from which to launch a recovery, the markets got another jolt this week as IBM and CMB disappointed investors. The result was a retest of the 3000 level on the NASDAQ and a violation of 10000 on the DJIA. This decline had all the earmarks of the capitulation selling we have been waiting for with heavy volume, a spike in the Put/Call ratio and the VIX shooting deep into oversold territory. For those that doubt the utility of the VIX, look at a daily chart of this indicator and you can see a beautiful double-top at 36.74. Doesn't this pattern look an awful lot like the pattern seen in October of the past 3 years? Sure, the numbers are different, but every year we see the VIX drift into the lower end of its range during September and early October, only to reverse sharply and hit extreme readings on the opposite end of the scale in short order. Even Ralph Bloch showed up on CNBC this past week calling this the market bottom due to the capitulation selling indicated by heavy volume, a spike in the Put/Call ratio and the VIX moving deep into overbought territory. While the VIX can spend extended periods of time below 20 before reversing towards the other extreme, it rarely spends much time north of 30. The fear indicated by such a high VIX reading quickly shakes out the weak hands and allows us to get on with the business of buying LEAPS for the next leg up in our long-term bull market. For the final stats, the VIX finished forming its double-top at 36.74 on Wednesday, and as the markets recovered throughout the rest of the week, it declined sharply to close out the week at 26.85. This is what we have been waiting for throughout the summer and early fall, and it looks like it is time to put those dusty acquisition plans into action. Although there is likely to still be some more collateral damage to individual issues as we move through the rest of the October earnings cycle, it looks unlikely that the NASDAQ will retest the 3000 level. Even the DJIA managed to claw its way back over the 10200 level, indicating that the worst may be over for this index as well. The VIX has come off of its extreme readings and has settled nicely into the mid-20's so premiums should not be exorbitantly expensive. The recent volatility has shaken out many of the weaker stocks in the market, leaving the winners sitting in an even stronger leadership position as we head into the end of the year. These leaders will outperform those stocks that have been disappointing over the past year, as investors have learned the painful lesson that cheap stocks are not always a bargain. A perfect example is the wireless handset trio, NOK, ERICY, and MOT. The dust has settled and it looks like there is one clear winner (see the details below). So fire up your action plan and start putting your money to work - just don't spend it all at once. If the past is any indication of what to expect in the future, we are likely to have a series of attractive entry points in the weeks ahead. The upcoming seminar in Denver is less than a week away. I look forward to meeting many of you there and comparing stories from the front lines. As always, choose your plays carefully and follow your plan. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2002 $ 45 WUE-AI $ 9.50 $60.75 539.47% 09/17/00 JAN-2003 $100 VUE-AT $32.75 $35.63 8.78% CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $22.13 101.14% NT 11/28/99 JAN-2002 $37.5 WNT-AU $15.13 $38.63 155.29% 09/10/00 JAN-2003 $ 75 ODT-AO $27.50 $26.25 - 4.55% SUNW 12/19/99 JAN-2002 $ 90 WJX-AR $22.00 $47.25 114.77% ERICY 01/30/00 JAN-2002 $16.3 WRY-AO $ 6.75 $ 2.25 -66.67% 07/23/00 JAN-2003 $ 25 VYD-AE $ 6.88 $ 1.88 -72.75% NSM 02/27/00 JAN-2002 $ 70 WUN-AN $24.25 $ 5.88 -75.77% AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $ 5.50 -70.48% 08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $12.80 -26.86% AXP 03/12/00 JAN-2002 $46.6 WXP-AQ $ 9.33 $17.13 83.55% WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $12.63 134.67% 10/22/00 JAN-2003 $ 45 VWI-AI $ 7.88 $ 7.88 0.00% JDSU 04/16/00 JAN-2002 $ 80 YJU-AP $39.63 $44.50 12.29% 08/27/00 JAN-2003 $130 VEQ-AF $55.25 $37.00 -33.03% MOT 05/14/00 JAN-2002 $36.6 WMA-AZ $ 9.54 $ 2.81 -70.52% NOK 05/21/00 JAN-2002 $ 50 IWX-AJ $17.25 $ 7.00 -59.42% 07/30/00 JAN-2003 $ 50 VOK-AJ $17.75 $10.88 -38.73% C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $11.88 15.18% 10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $10.38 -15.31% AMGN 07/02/00 JAN-2002 $ 75 WQY-AO $20.75 $16.25 -21.69% JAN-2003 $ 70 VAM-AN $28.75 $25.88 -10.00% VRSN 07/02/00 JAN-2002 $190 YVS-AR $66.25 $59.75 - 9.81% 09/03/00 JAN-2003 $190 OVS-AR $86.63 $78.50 - 9.38% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $21.88 27.70% JAN-2003 $ 70 OZG-AN $23.13 $28.13 21.60% HWP 07/30/00 JAN-2002 $110 WPW-AB $28.25 $19.88 -29.65% JAN-2003 $120 VHP-AD $32.63 $24.63 -24.53% EXDS 08/06/00 JAN-2002 $ 55 WZZ-AK $20.75 $ 7.50 -63.86% JAN-2003 $ 60 VTQ-AL $25.38 $10.75 -57.64% MFNX 08/06/00 JAN-2002 $ 40 WOF-AH $13.75 $ 3.63 -73.64% JAN-2003 $ 45 VKW-AI $15.63 $ 5.13 -67.21% FRX 08/13/00 JAN-2002 $ 95 WRT-AS $31.38 $51.25 63.32% JAN-2003 $100 VFB-AT $37.38 $56.38 50.82% BRCD 08/27/00 JAN-2002 $220 YNU-AD $65.38 $90.50 38.42% JAN-2003 $220 OMW-AD $86.50 $114.00 31.79% CMRC 09/10/00 JAN-2002 $ 80 YCU-AP $30.13 $27.25 - 9.56% JAN-2003 $ 80 OCU-AP $38.75 $37.00 - 4.52% QCOM 09/17/00 JAN-2002 $ 70 WBI-AN $22.50 $28.13 25.00% JAN-2003 $ 70 VLM-AN $29.63 $36.38 22.76% COMS 10/01/00 JAN-2002 $ 20 WTH-AD $ 6.38 $ 6.63 3.92% JAN-2003 $ 25 VTH-AE $ 7.13 $ 7.38 3.51% WCOM 10/01/00 JAN-2002 $ 35 WQM-AG $ 6.75 $ 4.63 -31.48% JAN-2003 $ 35 VQM-AG $ 9.88 $ 7.50 -24.05% INTC 10/15/00 JAN-2002 $ 45 WNL-AI $ 9.50 $11.00 15.79% JAN-2003 $ 45 VNL-AI $13.38 $15.00 12.15% Spotlight Play WM - Washington Mutual $39.69 For those of you just tuning in, WM has been a great sleeper play since we added it at $25. Recovering from its lows over the past 7 months, our play has significantly outperformed the Financial sector. Tracing a nice series of higher highs and higher lows, our play has cleared one level of resistance after another, and is now within striking distance of its all-time high of $45.75. The company's most recent earnings report added to the bullish picture, beating estimates by a penny. Technically it is hard to find fault with the stock as it continues to find support between the 30-dma (currently $38.56) and the 50-dma (currently $36.75). Volume has been a solid indicator of near-term direction, increasing during the upward moves and falling off during periods of profit taking. Even the recent volatility in the broader markets has been unable to shake WM out of its consistent upward stair step pattern. With solid support at $37-38, nestled right between the two moving averages mentioned above, our play looks like it could be setting up to provide one more attractive entry point before taking another run at the $42 resistance level. Daily MACD and Stochastics have turned south in recent days and volume has been declining, indicating normal consolidation is taking place. Wait for the technicals to turn positive, and then take your position as WM confirms support and heads back up. BUY LEAP JAN-2002 $40.00 WWI-AH at $6.88 BUY LEAP JAN-2003 $45.00 VWI-AI at $7.88 New Plays TXN - Texas Instruments $47.50 Back from its travels in bear country, TXN is showing promise for a nice recovery as the Semiconductor industry recovers. Thoroughly abused with the rest of the stocks in its sector, the DSP (Digital Signal Processing) chip leader finally found a bottom on Wednesday's decline and appears to have put in a solid bottom at $35. TXN is a major supplier of chips to the handset makers, and perceptions of a slowdown in the industry had added to the downside pressure. With NOK's impressive results and forward-looking statements, it became clear that there was not an industry-wide slowdown in handset sales, although it sure seems that way to MOT and ERICY as they lose market share to the Finnish handset maker. While there are still concerns about a slowdown in the PC-related Semiconductor industry, TXN's exposure to this market segment is limited. In its most recent quarter, TXN managed to meet estimates and post solid revenue growth of 25%, keeping alive the notion that specialized Semiconductors are still a hot commodity. Although the worst appears to be over for our play, a retest of the $40 support level is not out of the question, especially if the bears manage to pressure the technology sector one more time before the fall rally begins in earnest. A milder retracement to the $45 level looks like a good level for initiating new positions as long as the buyers step up to the plate. Stochastics and MACD have turned decidedly positive, adding credence to the theory that TXN has turned the corner, but that doesn't rule out a bit more weakness as we slog our way through the remainder of the spooky month of October. Conservative investors will want to wait for the bulls to scale the $52 resistance level before jumping into the play. BUY LEAP JAN-2002 $50.00 WTN-AJ at $13.75 BUY LEAP JAN-2003 $50.00 VXT-AJ at $18.38 Drops ERICY $11.69 Given the concerns about the Wireless sector and the stock's weak performance, we put ERICY on probation a few weeks ago, listing $14 as the critical support level it needed to hold. It looks like the company definitely doesn't have its house in order as demonstrated by its disappointing earnings results posted on Friday. Their guidance for the future didn't inspire confidence, and it is clear from NOK's positive earnings announcement and bullish comments that ERICY is losing market share to their Nordic rival. Apparently First Union Securities saw this coming, as they downgraded the stock on October 11th from Buy to Market Perform. After the lackluster earnings report, Lehman Brothers cut their rating from Buy to Outperform and Josephthal & Co dropped their view of the stock from Buy to Hold. While the drop on Friday may represent a near-term bottom, it is entirely possible that the stock will retest major support in the $8-9 range before recovering its footing. There are too many quality plays out there to waste any more time with ERICY. MOT $23.38 The results of the wireless handset companies are now out in the open and it is clear that the problems seen by MOT are the same problems seen by ERICY. A slowdown in demand for handsets is NOT the problem, as NOK once again posted impressive results and had glowing comments about the immediate future. The problem for MOT and ERICY is that NOK is eating their lunch, taking over more market share, while continuing to maintain a nice fat profit margin. MOT's disappointing results from earlier in the month dropped the stock to the $20 level before buyers were willing to step in. Just for historical reference, the stock hasn't seen that level since December of 1998. We've seen a minor recovery in the past several days, but since plunging below the $28 support level, MOT will encounter major resistance at that level. This just isn't the type of play that belongs on the LEAPS playlist, so we are giving it the boot this weekend. *********** SPLIT PLAYS *********** When Have I Seen This Before? By Ryan Nelson A mid-October turn for the tech stocks came in right on schedule. It almost makes you wonder what the markets were fearing last week. It's not like we haven't seen this before, as in the past three years. Nevertheless, the momentum seems to be on the way back. That will give us opportunity was we play the split runs for the coming weeks. Adobe appears to be turning higher and could be considered for an entry. Other split runs may be materializing in stocks like AMCC and HWP. Current Split Run Plays None Current Split Candidate Plays VRTS BRCD IDPH JNPR BRCM NTAP Candidates That Are Not Current Plays ARBA RIMM CFLO MUSE VRTS VRSN PMCS NUAN SEBL VRTX PWER 10 Most Recent Announcements We Predicted AMCC - 10/11 (most recent announcement) DNA - 10/05 LEH - 09/20 ORCL - 09/14 SUNW - 08/17 GLW - 08/16 HWP - 08/16 CIEN - 08/15 SEBL - 08/08 SAPE - 08/01 Major Announcements So Far This Month = 13 DNA BEC EMLX AMCC IWOV TLB ITWO CDIS ABK PHCC PVN DCTM EPNY For our complete stock split calendar, click here... http://members.OptionInvestor.com/splits/index.asp Symbol Company Name Splits Payable Executable MSS - Measurement Specialties, Inc. 2:1 10/20/2000 10/23/2000 LEH - Lehman Brothers Holdings, Inc. 2:1 10/20/2000 10/23/2000 BSYS - Bisys Group, Inc. 2:1 10/20/2000 10/23/2000 NUHC - Nu Horizons Electronics 3:2 10/23/2000 10/24/2000 RNBO - Rainbow Technologies, Inc. 2:1 10/23/2000 10/24/2000 ADBE - Adobe Systems, Inc 2:1 10/24/2000 10/25/2000 DNA - Genentech, Inc. 2:1 10/24/2000 10/25/2000 CMRO - Comarco, Inc. 3:2 10/27/2000 10/30/2000 HWP - Hewlett-Packard Company 2:1 10/27/2000 10/30/2000 AMCC - Applied Micro Circuits 2:1 10/30/2000 10/31/2000 PNS - Pinnacle Data Systems 2:1 10/31/2000 11/01/2000 TEK - Tektronix, Inc. 2:1 10/31/2000 11/01/2000 TLB - Talbots, Inc. 2:1 11/07/2000 11/08/2000 PKE - Park Electrochemical Corp. 3:2 11/08/2000 11/09/2000 CDIS - Cal Dive Intl Inc 2:1 11/13/2000 11/14/2000 EPNY - E.piphany, Inc. 3:2 11/13/2000 10/31/2000 DCTM - DOCUMENTUM 2:1 11/13/2000 11/14/2000 EV - Eaton Vance Corp 2:1 11/13/2000 11/14/2000 AZA - ALZA Corporation 2:1 11/15/2000 11/16/2000 BEIQ - BEI Technologies, Inc. 2:1 11/21/2000 11/22/2000 PHCC - Priority Healthcare Corp. 2:1 11/22/2000 11/24/2000 PVN - Providian Financial Corp 2:1 11/30/2000 12/01/2000 PSC - Philadelphia Suburban 5:4 12/01/2000 12/04/2000 ITWO - i2 Tech 2:1 12/04/2000 12/05/2000 SUNW - Sun Microsystems 2:1 12/05/2000 12/06/2000 BEC - Beckman Coulter, Inc. 2:1 12/07/2000 12/08/2000 ABK - Ambac Financial 3:2 12/12/2000 12/13/2000 IWOV - Interwoven 2:1 12/29/2000 01/02/2000 ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 10-22-2000 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/102200_5.asp ************* COVERED CALLS ************* The Bargain Hunting Begins... By Mark Wnetrzak With the recent uncertainty in the market, we have received an increasing number of requests for information on covered-calls with LEAPS. Here is an explanation of the basic concepts and common trading techniques that will help you profit from this conservative, long-term strategy. LEAPS can be an ideal investment tool for the option trader who expects future growth in an underlying stock but does not want to make the substantial capital outlay required for entering an outright position in the issue. With expiration dates months or even years in the future, time decay occurs very slowly for LEAPS and these unique instruments offer an effective way to benefit from a stock's appreciation without incurring the risk associated with the actual purchase of shares. Buying LEAPS is an excellent strategy that finds the happy medium between aggressive, short- term option trading and the outright purchase of the underlying issue. Covered call writing is a stock options trading strategy that some investors use when they are looking for a conservative risk/return profile, while maintaining a meaningful profit potential in either bullish or bearish market environments. An investor will usually write a covered call to generate income, collecting a premium for the sale of an option against a stock in his or her portfolio. This strategy can also be used with LEAPS options, but it differs because it does not involve the direct ownership of shares of the underlying stock; LEAPS are substituted for the long position. There is the added benefit that comes from writing calls against the long position on a regular basis, lowering the overall cost of the LEAPS as each short-term option expires. One of the best and most popular strategies associated with LEAPS is writing a covered call on the long-term option. The technique is similar to a calendar spread (or time spread). The strategy generally consists of the sale of one call and the simultaneous purchase of another call, both on the identical underlying stock, with the same strike price but one option near-term and the other option further out. The theory behind calendar spread profits is based on a neutral philosophy in which time erodes the value of the near-term option at a faster rate than the far-term option. The most common type of time spread is bullish, where the price of the underlying issue is some distance below the strike price of the options. This position is speculative with low initial cost and large potential profits, and two favorable outcomes can occur: The stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long option's strike price. Covered-calls with LEAPS positions can be constructed for any market outlook or bias on both volatile and stagnant positions. The strategy is best initiated when the front-month options are trading at a premium with respect to longer-term volatility. Most investors prefer to establish these positions at least 8-12 months before the LEAPS expire, capitalizing on the ability to sell a number of short-term options. The basic concept in this type of spread is selling time value in the options when they are overpriced (high implied volatility) and buying it back, if necessary, when the options return to intrinsic value. Ideally, the trader would like to have the stock finish just below the sold strike when the near-term option expires. However, when the short-term position is in-the-money on the last day of the strike period, you must buy it back so that you don't have to exercise the LEAPS to cover your obligation; that would defeat the purpose of the strategy. At the beginning of each strike period, you simply sell the next month's call to further reduce the cost basis of the LEAPS. Larry McMillan's book, "Options as a Strategic Investment" has some excellent information on calendar spreads and other time selling strategies. It is available in the OIN bookstore. Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return PRGN 20.94 20.75 OCT 17.50 4.00 *$ 0.56 14.4% FFD 10.56 12.00 OCT 10.00 1.06 *$ 0.50 11.4% GALT 29.13 31.50 OCT 25.00 4.75 *$ 0.62 11.1% TKTX 45.38 39.94 OCT 35.00 12.00 *$ 1.62 10.5% CCUR 19.00 19.31 OCT 17.50 2.38 *$ 0.88 7.7% IMGN 26.19 38.19 OCT 22.50 5.50 *$ 1.81 7.6% ENMD 26.38 24.13 OCT 22.50 4.63 *$ 0.75 7.5% CTIC 50.13 73.50 OCT 40.00 12.50 *$ 2.37 6.8% MCKC 23.69 21.19 OCT 20.00 4.00 *$ 0.31 6.8% PSFT 33.88 40.63 OCT 30.00 4.75 *$ 0.87 6.5% GLGC 24.75 21.94 OCT 20.00 6.38 *$ 1.63 6.4% WDC 5.75 5.25 OCT 5.00 1.19 *$ 0.44 6.2% BCGI 20.00 23.94 OCT 17.50 3.38 *$ 0.88 5.8% LBRT 30.00 23.56 OCT 22.50 9.13 *$ 1.63 5.7% ASPX 12.38 11.81 OCT 10.00 2.75 *$ 0.37 5.6% IMGN 21.81 38.19 OCT 17.50 5.50 *$ 1.19 5.3% WGAT 22.88 19.00 OCT 17.50 6.63 *$ 1.25 5.0% AAS 42.28 44.69 OCT 40.00 4.00 *$ 1.72 4.9% KOSP 19.75 19.56 OCT 17.50 2.81 *$ 0.56 4.8% ISIP 11.50 10.19 OCT 10.00 1.81 *$ 0.31 4.6% SYNM 20.75 17.06 OCT 17.50 4.38 $ 0.69 3.7% MSTR 31.38 24.19 OCT 25.00 8.25 $ 1.06 3.0% GNSS 19.31 16.75 OCT 17.50 2.63 $ 0.07 0.5% RCOT 15.81 14.31 OCT 15.00 1.44 $ -0.06 0.0% TRIH 32.38 28.75 OCT 30.00 3.50 $ -0.13 0.0% EFCX 11.88 8.88 OCT 10.00 2.63 $ -0.37 0.0% PRST 20.13 16.13 OCT 17.50 3.63 $ -0.37 0.0% QHGI 15.00 13.38 OCT 15.00 0.88 $ -0.74 0.0% OSUR 14.00 10.50 OCT 12.50 2.50 $ -1.00 0.0% (EPTO) CYBS 12.69 6.38 OCT 10.00 3.13 $ -3.18 0.0% AVID 14.75 15.38 NOV 12.50 3.63 *$ 1.38 10.8% RDRT 7.94 8.31 NOV 5.00 3.25 *$ 0.31 5.7% BPUR 17.38 19.50 NOV 15.00 3.25 *$ 0.87 5.4% WDC 6.13 5.25 NOV 5.00 1.44 *$ 0.31 4.8% *$ = Stock price is above the sold striking price. Comments: Purchasepro.Com (PPRO) was unplayable this week as the gap-up open on Monday deflated the over-priced call option we were targeting. It is again that time to re-evaluate your outlook on those stocks that were not called away and act accordingly. Positions Closed Early: Red Hat (RHAT), Ventro (VNTR), Wave Systems (WAVX), Tivo (TIVO), Worldpages.Com (WPZ), Neoforma.Com (NEOF), Globalstar (GSTRF), Niku (NIKU), and Youthstream Media (NETS). NEW PICKS - Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ANSR 18.31 NOV 12.50 QRA KV 6.63 330 11.68 28 7.6% CTXS 21.44 NOV 17.50 XSQ KW 4.88 206 16.56 28 6.2% ECLP 21.38 NOV 17.50 IQV KW 4.63 90 16.75 28 4.9% FFD 12.00 NOV 10.00 FFD KB 2.75 1460 9.25 28 8.8% FIBR 32.50 NOV 20.00 QFW KD 13.50 18 19.00 28 5.7% MTSI 9.38 NOV 7.50 TQM KU 2.81 20 6.57 28 15.4% UAXS 15.31 NOV 12.50 QXX KV 3.38 10 11.93 28 5.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ANSR - answerthink $18.31 *** Second Chance Entry! *** answerthink provides comprehensive eBusiness strategy, marketing and technology-enabled solutions focused on the emerging digital marketplace. As an eBusiness leader, the company offers a range of integrated solutions, including best practices benchmarking, eBusiness strategy and architecture, interactive marketing and design, business applications and technology integration. On Tuesday, answerthink reported net revenues for the third quarter increased 22% to $84.1 million from $69.0 million last year. Net income increased to $6 million, or $0.15 per diluted share, from $4 million, or $0.10 per diluted share, in the third quarter of 1999. The company was recently upgraded and downgraded and the current weakness may offer a second chance to own this issue at a reasonable cost basis. The solid earnings demonstrate that the company continues to strengthen and their recent alliances should enhance their ability to deliver strategic technology-enabled solutions to their clients. NOV 12.50 QRA KV LB=6.63 OI=330 CB=11.68 DE=28 MR=7.6% ***** CTXS - Citrix Systems $21.44 *** Stage I Base *** Citrix Systems is a global leader in application server software and services that offer "Digital Independence(TM)" - the ability to run any application on any device over any connection, wireless to Web. Its products, including MetaFrame(TM) application server software, NFuse(TM) application portal software and Independent Computing Architecture (ICA), a core application-server technology, have been widely adopted by the corporate mainstream to achieve key business goals. Citrix was one of the first stocks to receive a "haircut" back in the Spring after the company issued a warning and lost its CEO. Analysts appear to favor Citrix's technology and market niche, but are waiting to see if the company can deliver solid results. On Wednesday, Citrix reported net revenues for the third quarter of $113.5 million, up 7% from $105.8 million and net income of $27.5 million or $0.14 per share beating estimates by $0.02. The results seem to have pleased investors as the stock rallied on strong volume and closed above its 50 dma. We simply favor the improving technically pattern and bullish outlook. NOV 17.50 XSQ KW LB=4.88 OI=206 CB=16.56 DE=28 MR=6.2% ***** ECLP - Eclipsys Corporation $21.38 *** Earnings Rally! *** Eclipsys is a leading healthcare information technology provider. The company provides, on an integrated basis, enterprise-wide, clinical management, access management, patient financial management, health information management, strategic decision support, resource planning management and enterprise application integration solutions to healthcare organizations. Additionally, the company provides other information solutions including remote hosting, outsourcing, networking technologies and other related services. This month, Eclipsys shares have been in rally mode after receiving favorable ratings from Jefferies & Co. and Raymond James. Eclipsys recently released a Linux version of its eWebIT, a Web-based enterprise application integration (EAI) product. On Wednesday, HEALTHvision (created through a merger of Eclipsys and VHA Inc.), announced an agreement with Cox Health Systems to deploy a comprehensive e-health strategy. This is a first step in providing a service that addresses the varied needs of key constituents with a single Web-based platform. We favor the Stage II breakout on heavy volume as investors speculate on next Tuesday's earnings report. NOV 17.50 IQV KW LB=4.63 OI=90 CB=16.75 DE=28 MR=4.9% ***** FFD - Fairfield Communities $12.00 *** Buyout-Merger? *** Fairfield Communities sells vacation ownership interests (VOIs), commonly known as timeshares, through its points-based vacation system, Fairshare Plus. The company also offers financing for VOI purchasers and other related services. Fairfield recently announced that it is engaged in preliminary discussions concerning a possible merger or other transaction between Fairfield and an undisclosed company. They emphasized that there can be no assurance that these discussions will lead to a definitive agreement and the company is not expected to issue any further public statements regarding the discussions until an agreement is signed or the discussions are terminated. We simply favor the bullish breakout on high volume and the ability to speculate conservatively on the outcome of the rumors. NOV 10.00 FFD KB LB=2.75 OI=1460 CB=9.25 DE=28 MR=8.8% ***** FIBR - Osicom Technologies $32.50 *** New Deal! *** Osicom Tech is a developer and marketer of metropolitan optical networking systems, through its optical networking subsidiary Sorrento Networks. Sorrento Networks has been a provider of all optical networking solutions that are used in both interoffice and access networks since 1997. Last week, Sorrento announced a sweeping agreement with Atlanta-based Cox Communications to provide optical transport solutions nationwide, with immediate installations in Virginia, California, Arizona and Louisiana. They will build a next-generation network with scaleable band- width capabilities allowing Cox to deliver these broadband capabilities in these locations more efficiently. After posting rather dismal earnings in September, this 4-year deal worth up to $40 million could be just what the doctor ordered. Osicom appears to be undergoing a change of character and Friday's move on heavy volume offers a chance to enter this issue at a reasonable cost basis. NOV 20.00 QFW KD LB=13.50 OI=18 CB=19.00 DE=28 MR=5.7% ***** MTSI - MicroTouch Systems $9.38 *** What's Up? *** MicroTouch Systems is a leader in the manufacture of computer touchscreen display products incorporating the two most popular touch technologies; analog capacitive and resistive membrane. The company applies these technologies in a variety of products, and markets them under the ClearTek and TouchTek brand names. No news to explain MicroTouch's recent spike in price though Bloomberg.com states that Texas investor Edward W. Rose III and his affiliates acquired a 7.1 percent stake in Microtouch, spending $6.2 million to buy 460,300 Microtouch shares from Sept. 27 to Oct. 11. That still doesn't account for the recent three day surge. Is someone else interested in this stock? Why? Maybe it's an earnings run? (Earnings are due next Thursday). Remember, the "Tape" tells all and this play offers cheap speculation at a reasonable cost basis. NOV 7.50 TQM KU LB=2.81 OI=20 CB=6.57 DE=28 MR=15.4% ***** UAXS - Universal Access $15.31 *** Internet Speculation *** Universal Access is an Internet network infrastructure services provider that provisions, interconnects and manages high-capacity multiple-carrier networks in the most efficient, timely and cost- effective manner. By combining information and facilities management, it provides the only solution in the marketplace today that delivers end-to-end network connections to ISPs, application service providers, and telecommunications service providers with the speed to market required to accelerate revenue growth and meet the Internet-driven demand for bandwidth. Universal Access has been named to the Deloitte & Touche's prestigious "Fast 50" program for Greater Chicagoland, a ranking of the 50 fastest growing tech- nology companies in the area. The company was recognized as number 1 in the "Rising Star" category of the awards. This week Universal Access was raised to a "strong buy" by analyst Jonathan Atkin at Dain Rauscher Wessels with a 12-month target of $55.00 per share. The technical picture also continues to improve as Universal Access forges a stage I base. This position offers a favorable cost basis for investors who have a bullish outlook on the company. NOV 12.50 QXX KV LB=3.38 OI=10 CB=11.93 DE=28 MR=5.2% ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=726 ************************************************************** ************************* NAKED PUT PERCENTAGE LIST ************************* Naked Put Percentage List By Matt Russ Stock Stock Strike Option Option Margin Percent Support Symbol Price Price Symbol Price At 25% Return Level ADBE 140.06 130 AXX-WF 7.63 3502 22% 130 AETH 106.88 90 HIZ-WR 6.88 2672 26% 90 ARBA 129.81 120 RBU-WD 9.75 3245 30% 120 ARTG 88.50 80 AYQ-WP 5.13 2213 23% 80 AVNX 118.75 100 UYN-WT 5.63 2969 19% 100 BEAS 85.56 75 BUC-WO 4.00 2139 19% 75 BRCD 252.44 230 GUF-WF 8.88 6311 14% 235 BRCM 242.19 220 RDU-WD 10.38 6055 17% 220 CHKP 170.00 150 KGE-WJ 6.75 4250 16% 160 CRA 68.75 60 CRA-WL 4.13 1719 24% 60 CREE 90.50 80 CQR-WP 5.00 2263 22% 80 ELNT 104.63 95 UET-WS 5.75 2616 22% 95 EMLX 160.25 140 UEL-WH 8.50 4006 21% 135 EXTR 99.44 90 EXR-WR 6.88 2486 28% 90 GSPN 82.63 65 GHY-WM 5.25 2066 25% 65 IDPH 190.25 175 IHD-WO 8.13 4756 17% 175 INKT 80.00 70 KYQ-WN 5.50 2000 28% 70 ITWO 186.88 175 QYI-WO 10.25 4672 22% 175 IWOV 119.81 105 IQG-WA 5.25 2995 18% 105 JNPR 232.00 220 JUD-WD 14.38 5800 25% 220 MUSE 195.25 180 UZQ-WP 15.63 4881 32% 180 NEWP 162.00 140 NOQ-WH 8.63 4050 21% 140 NTAP 148.63 130 ULM-WF 6.00 3716 16% 130 PDLI 121.31 110 RPV-WB 5.38 3033 18% 110 QLGC 95.38 85 QLC-WQ 4.50 2385 19% 85 SCMR 84.94 75 SMZ-WM 6.50 2124 31% 75 SDLI 339.00 300 QJV-WT 14.75 8475 17% 300 VRSN 177.31 160 XVR-WL 10.13 4433 23% 160 VRTS 166.81 145 VUQ-WI 5.25 4170 13% 145 *********************** CONSERVATIVE NAKED PUTS *********************** October is almost over, so lets get ready for the next rally! By Ray Cummins Today we begin a series of regular reviews of the most common questions asked by new traders. Our subject for this session is "Option Pricing Concepts." Question: Why is it so important to understand option pricing and fair value? Why can't I just buy an option and wait for the market to move in the right direction? Answer: The most important factors in option trading are market movement, option volatility (with regard to pricing and probability), and time decay. The knowledge of these concepts is paramount to profitable trading and without a suitable basis, you will likely enter the market at a theoretical disadvantage. The primary requirement is familiarity with option pricing. In volatile issues, the emotional optimism of traders can cause prices to vary widely from their true worth. Without a realistic estimate of the value of an option, you will often pay an excessive amount for the rights inherent in the contract and that usually results in a much lower return (if any) when the issue finally makes the expected move. As intelligent traders, we have the ability to measure the value of an option through mathematical evaluation, but if you aren't partial to formulas, pricing models will help you determine the fair market value of an option. Many of the established tools for pricing options are free and they should be used before opening any new position. Remember, in the majority of trading techniques, the end result is almost always a product of what you know, and how well you act upon it. There are option pricing and volatility calculators at various sites on the Internet. One of the most popular (free) tools is available at the CBOE's web-site (www.cboe.com). In addition, there is a great freeware program that downloads data from the CBOE web-site and displays a quote montage along with the Greek values available from Rocky Point Software (www.rpsw.com). Question: What are the "Greeks" and why is "Delta" (or the hedge ratio) so important when buying and selling options? Answer: An option's price is determined by mathematical equations that use variables from all of the factors affecting its value. Each aspect of option pricing is a separate component of the formula and they have Greek titles; Delta, Gamma, Theta, Vega, and Rho. The primary influence on an option's price is the movement of the underlying security. This concept relates directly to the first and most important of the Greeks; Delta. Delta measures the rate of change in an option's price compared to a one point movement in the underlying security. It can be thought of as a percentage of the movement of the stock price. If the stock price moves up $2 while the option on that stock gains $1, it has a delta of 50 (or 50%). An at-the-money (ATM) call option will typically have a delta of 50. In-the-money (ITM) calls will have higher deltas; a greater percentage move, based on the change in the underlying issue. The opposite is true for out-of-the-money (OTM) call options; their deltas are lower. A deeply out-of-the-money call option will have a delta very close to zero. Call deltas are positive; put deltas are negative, reflecting the fact that the put option price and the underlying stock price are inversely related. The delta of an option is also occasionally called the "hedge ratio" and it can be used to determine the number of calls one would need to be short to create a risk-less hedge; a position which would be worth the same whether the stock price rose by a very small amount or fell by a very small amount. In such a "delta neutral" portfolio, any gain in the value of the shares held due to a rise in the share price would be exactly offset by a loss on the value of the calls written. Of course, as the delta changes with the stock price and time to expiration, the number of shares would need to be adjusted to maintain the hedge. How quickly the delta changes with regard to the stock price is given by gamma, one of the lesser known "Greeks." Gamma is sometimes considered the "delta" of the delta. Market makers use this component almost exclusively in the management of large option accounts. Specialists who hedge portfolios using the delta technique try to keep gamma as small as possible to help limit the adjustments necessary to maintain a risk-free position. If the position gamma is too large, a small change in stock price can devastate the hedge. Adjusting gamma can be difficult, thus computers are used to monitor portfolio positions and alert the specialists when corrections are needed to maintain the complex ratios. Vega is the change in option price given a one-percentage point change in volatility. Similar to delta and gamma, Vega is also used for hedging. Theta is the change in option price given a one-day decrease in time to expiration. This component is basically a measure of time decay. Time value and time decay are actually two of the easiest aspects of option pricing to understand. The time value of any option can be simply viewed as everything but the intrinsic value. Time costs money and more time equals more money. The amount of time value in an option's price decays each day it is in existence. The closer the option gets to expiration, the faster it decays. In a strictly mathematical sense, time value decays at its square root and this rate of decay is known as Theta. Rho, while not commonly used by retail traders, is the change in option price given a one percentage point change in the risk-free interest rate. Next week, we review another complex subject in the realm of option pricing; "Historical Volatility." Good Luck! SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return PSFT 34.44 40.63 OCT 27.50 0.44 *$ 0.44 26.1% CRUS 39.19 45.00 OCT 30.00 0.50 *$ 0.50 26.1% MDRX 17.56 15.88 OCT 15.00 0.50 *$ 0.50 21.9% ASPX 12.25 11.81 OCT 10.00 0.50 *$ 0.50 17.2% ECLP 16.00 21.38 OCT 12.50 0.38 *$ 0.38 15.4% PROX 48.63 58.00 OCT 40.00 0.38 *$ 0.38 14.7% PSFT 33.88 40.63 OCT 27.50 0.44 *$ 0.44 12.6% PALM 53.19 59.38 OCT 45.00 0.38 *$ 0.38 12.3% WGAT 23.31 19.00 OCT 17.50 0.56 *$ 0.56 11.7% CLTR 36.75 35.31 OCT 30.00 1.13 *$ 1.13 10.8% PLNR 19.75 17.75 OCT 15.00 0.69 *$ 0.69 10.8% LBRT 32.44 23.56 OCT 22.50 0.63 *$ 0.63 9.6% GLGC 23.00 21.94 OCT 17.50 0.31 *$ 0.31 9.1% ALLP 16.50 13.88 OCT 12.50 0.50 *$ 0.50 8.5% UNM 25.00 27.00 OCT 22.50 0.63 *$ 0.63 8.4% CERN 46.69 53.06 OCT 40.00 0.44 *$ 0.44 7.7% CMNT 21.00 30.56 OCT 17.50 0.56 *$ 0.56 7.4% HCR 16.00 14.81 OCT 15.00 0.38 $ 0.19 7.1% PRBZ 29.44 31.81 OCT 25.00 0.50 *$ 0.50 6.9% WGR 26.25 25.13 OCT 22.50 0.56 *$ 0.56 6.7% DRXR 19.06 17.63 OCT 15.00 0.38 *$ 0.38 6.6% STAT 20.00 22.72 OCT 15.00 0.44 *$ 0.44 6.4% SCUR 26.25 24.50 OCT 17.50 0.50 *$ 0.50 6.3% VITR 48.94 37.25 OCT 30.00 1.00 *$ 1.00 6.0% CTIC 50.13 73.50 OCT 35.00 0.56 *$ 0.56 5.7% CERN 46.44 53.06 OCT 40.00 0.50 *$ 0.50 5.7% NERX 23.00 17.38 OCT 17.50 0.38 $ 0.26 5.7% FNSR 48.38 37.00 OCT 40.00 0.69 $ -2.31 0.0% OCR 16.88 15.81 NOV 15.00 0.63 *$ 0.63 8.3% CHTR 19.38 18.63 NOV 17.50 0.63 *$ 0.63 7.0% VICR 49.38 50.50 NOV 40.00 0.88 *$ 0.88 6.8% VPI 25.50 23.75 NOV 22.50 0.50 *$ 0.50 5.6% HSIC 22.56 20.69 NOV 20.00 0.50 *$ 0.50 5.2% *$ = Stock price is above the sold striking price. Comments: Noven Pharma (NOVN) gapped-up on Monday's open and moved higher all week, thus no entry was available. Many of the issues closed early (listed below), rebounded strongly on Friday and actually would have provided a positive return - Murphy's Law in action! Positions Closed Early: Goto.Com (GOTO), Wave Systems (WAVX), Xerox (XRX), Knight Trading (NITE), Coinstar (CSTR), Cadence Design (CDN), Andrea Electronics (AND), Niku Corp. (NIKU) NEW PICKS - Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return BCGI 23.94 NOV 17.50 QGB WW 0.56 0 16.94 28 11.4% CYTC 50.25 NOV 40.00 YQK WH 1.13 214 38.87 28 11.0% STAT 22.72 NOV 20.00 TAQ WD 0.69 0 19.31 28 10.6% RNBO 47.00 NOV 35.00 BQO WG 0.88 40 34.12 28 9.3% ENTU 29.00 NOV 20.00 EXH WD 0.50 61 19.50 28 8.6% PATH 17.63 NOV 15.00 AQE WC 0.38 70 14.62 28 8.6% ICN 40.19 NOV 35.00 ICN WG 0.56 313 34.44 28 5.3% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** BCGI - Boston Communications $23.94 *** Solid Earnings! *** Boston Communications Group operates in the following segments: Prepaid Wireless Services, Teleservices, Roaming Services, and Systems Divisions. The Prepaid Wireless Services Division offers prepaid wireless service that allows carriers to access BCGI's prepaid C2C platform. The Teleservices segment provides customer support teleservices to wireless carrier's customers. Their Roaming Services Division provides services that give carriers the ability to generate revenues from subscribers who are not covered under traditional roaming agreements by arranging payment for roaming calls. The Systems Division manufactures and markets voice processing platforms to wireless and wire-line carriers; sells prepaid systems to international carriers; and manufactures the voice nodes used to support BCGI's C2C network. Quarterly earnings were reported last week and the numbers were favorable. In addition, the technical breakout above $21 suggests the issue has additional upside potential. NOV 17.50 QGB WW LB=0.56 OI=0 CB=16.94 DE=28 MR=11.4% ***** CYTC - CYTYC Corporation $50.25 *** Earnings Rally? *** CYTYC Corporation designs, develops, manufactures and markets a sample preparation system for medical diagnostic applications. Their ThinPrep System allows for the automated preparation of cervical cell specimens on microscope slides for use in cervical cancer screening, as well as for the automated preparation of cell specimens on slides for use in non-gynecological testing applications. The ThinPrep System is designed to reduce the incidence of false negative diagnoses, improve slide quality and enable a single sample to be used for additional testing. The company also sells ThinPrep Microscope Slides which improve cell adhesion to the slide. Earnings are due next week and based on the recent bullish activity, investors believe the results will be favorable. We will speculate on the outcome of the report with this deep OTM position. NOV 40.00 YQK WH LB=1.13 OI=214 CB=38.87 DE=28 MR=11.0% ***** ENTU - Entrust Technologies $29.00 *** On The Rebound! *** Entrust is a global provider of public-key infrastructure (PKI) products and services to e-businesses and other organizations. Their solution is a comprehensive, end-to-end PKI framework designed to assure the security of electronic transactions and communications over advanced networks, including the Internet. Its open, scalable software solution operates across multiple platforms, network devices and applications. The products that constitute the core of the company's PKI solution are unique alternatives to current industry offerings. Last week, Entrust reported that its third-quarter results beat analyst estimates by two cents a share while showing a turnaround from a loss the previous period. Analysts agree with the company's new outlook and the cost basis for this position is a favorable price at which to own this issue. NOV 20.00 EXH WD LB=0.50 OI=61 CB=19.50 DE=28 MR=8.6% ***** ICN - ICN Pharmaceuticals $40.19 *** For Sale! *** ICN Pharmaceuticals is a global, research-based pharmaceutical company that develops, manufactures, distributes and sells pharmaceutical, research and diagnostic products. The products treat viral and bacterial infections, diseases of the skin, neuromuscular disorders, cancer, cardiovascular disease, diabetes and psychiatric disorders. On Friday, ICN said it would consider strategic transactions including a sale of the company prior to undertaking its restructuring. Under the restructuring, ICN will spin off two of its divisions into separate publicly traded units to its current shareholders: Ribapharm, which encompasses ICN's research and development activities and ICN International, which comprises the company's operations in Western Europe and Asia. It will also create a third publicly traded entity made up of its existing operations in North and South America. The bullish chart suggests that investors favor the company's strategy. NOV 35.00 ICN WG LB=0.56 OI=313 CB=34.44 DE=28 MR=5.3% ***** PATH - AmeriPath $17.63 *** Earnings Rally! *** AmeriPath is an integrated physician group practice and laboratory management company that is focused on providing anatomic pathology diagnostic services in the United States. Since inception, the company has acquired or affiliated with a large number of physician practices across America. The hundreds of pathologists employed by the company provide medical diagnostic services in laboratories owned and operated by AmeriPath, in addition to hospitals, and outpatient ambulatory surgery centers. Earnings are due next week and investors are confident about the outcome of the report. The issue has rallied above a recent trading range to a 52-week high and based on the current technical strength, there is additional upside potential if the earnings report is favorable. NOV 15.00 AQE WC LB=0.38 OI=70 CB=14.62 DE=28 MR=8.6% ***** RNBO - Rainbow Technologies $47.00 *** Earnings/Stock Split! *** Rainbow Technologies is a developer and supplier of computer network security products that secure the rights to software and other digital content, and that provide privacy and security for computer network and Internet communications and commerce. The company's products include software protection products against piracy, license management and tracking, and software distribution over the Internet; information security products for network and satellite communications; and Internet security products for Internet transaction capabilities in a secure environment, access controls for computer networks including Virtual Private Networks. A bullish chart, a stock split and upcoming earnings...what more could you want in a speculation play? Plan to "target shoot" a higher premium initially, as the issue consolidates from recent gains. NOV 35.00 BQO WG LB=0.88 OI=40 CB=34.12 DE=28 MR=9.3% ***** STAT - I-Stat $22.72 *** On The Move Again! *** I-STAT develops, manufactures and markets medical diagnostic products for blood analysis that provide health professionals with immediate and accurate critical diagnostic information at the point of patient care. The company's current products, known as the I-STAT System, consist of portable, hand-held analyzers and single-use, disposable cartridges, each of which simultaneously performs different combinations of commonly ordered blood tests. The I-STAT System uses a simple, one-step procedure, and the results can be easily linked by infrared transmission to a health care provider's information system. The Medical Instruments and Appliances group has performed very well over the past few months and STAT is poised to become one of the premier companies in the industry. While there are a number of positive fundamental aspects in this company, the technical strength of the recent rally suggests there may be additional upside potential in the future of the stock and a cost basis near historical support will suit us just fine. NOV 20.00 TAQ WD LB=0.69 OI=0 CB=19.31 DE=28 MR=10.6% ************************Advertisement************************* Attention Online Traders: NobleTrading.com has become the first online trading firm to offer both Direct Access Trading, and web based trading to its customers. Trade Direct using any ECN, SOES, and SelectNet, or trade right through your browser using our web based trading application. FREE DSL service for active traders. Visit our website and sign up for a Free real-time demonstration! http://www.sungrp.com/tracking.asp?campaignid=751 ************************************************************** ************************ SPREADS/STRADDLES/COMBOS ************************ The Market Recovery Continues... ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, October 20 Stocks moved higher today as bargain hunters emerged after a new batch of positive earnings reports. The Nasdaq ended 64 points higher at 3,483 and the Dow was up 83 points at 10,226. The S&P 500 index finished up 8 points at 1,396. Trading volume on the NYSE reached 1.19 billion shares, with advances beating declines 1,595 to 1,230. Activity on the Nasdaq was heavy at 2.12 billion shares exchanged, with advances beating declines 2,357 to 1,594. In the bond market, the 30-year Treasury rose 12/32, pushing its yield down to 5.73%. Thursday's new plays (positions/opening prices/strategy): Human Genome HGSI NOV75P/NOV80P $1.50 credit bull-put Human Genome HGSI JAN100C/J105C $2.38 debit bull-call EMC Inc. EMC LJAN50C/J110C $52.00 debit LEAPS/CCs Advent ADVS NOV80C/NOV40P $1.12 credit strangle Fairfield FFD JAN12C/JAN10P $0.62 debit synthetic Today's market volatility provided some excellent opportunities to participate in our new combination positions. Portfolio Plays: The market rally continued Friday as investors gained confidence in the recent recovery amid strong earnings reports. Trading was volatile due to the "double witching" expiration of options on stocks and stock indexes and both major averages experienced triple-digit swings. Honeywell (HON) led the Dow higher, surging $10 to $46 after United Technologies (UTX) said it has terminated merger discussions with the company and that Honeywell received an alternative merger proposal, possibly from General Electric (GE). Hewlett-Packard (HWP), Merck (MRK), Microsoft (MSFT) and AT&T (T) were among the leading blue-chip issues. Semiconductor giant SDL Inc. (SDLI) led the Nasdaq, rising $50 to $339 after reporting third-quarter profits that beat consensus estimates by $0.07. SDLI's merger partner JDS Uniphase (JDSU) also rallied, finishing up $12 at $102. Customer analysis software maker E.Piphany (EPNY) rose $25 to $90 after beating third-quarter earnings estimates and announcing a bullish outlook for the future. In addition, several analysts raised their price targets on the company. Vitria (VITR) was another big winner, up $10 to $37 after posting third quarter profits that beat First Call's estimates. The Spreads/Combos portfolio enjoyed a number of favorable moves during the session and this week's broad market rally boosted the majority of our October positions to a profitable finish. The top performers in the technology group were Commerce One (CMRC), Ballard Power (BLDP), Manugistics (MANU), Qlogic (QLGC), Verisign (VRSN), and Virata (VRTA). Market bellwethers have dominated the recovery and our new bottom-fishing position in Intel (INTC) has exceeded all expectations. The downtrodden issue has rallied 20% since the bull-call debit spread was initiated and the long call option is over $10 in-the-money. Applied Micro Circuits (AMCC) was also one of the leaders this week, but today the issue went too far after analysts at J.P. Morgan started coverage on the company with a "buy" rating and a 12-month target price of $265. The bearish portion of our credit-spread strangle was short at $200 and those of you that didn't close the position Friday morning (at a favorable profit) were left with a small loss at the close of trading. The unpredictable market activity has produced a number of great volatility opportunities and our new positions in Globix (GBIX), Nice Systems (NICE), and SCM Micro (SCMM) all returned favorable short-term profits. The recent Nasdaq-100 (QQQ) straddle also provided excellent profits for those that traded the position during expiration week. In the financial sector, shares of Bear Stearns (BSC) soared to $61.50 amid new strength in brokerage issues and continued speculation of a potential takeover. Buyout rumors have boosted activity in the stock and its options over the past few weeks and Friday was another big day as traders surmised that a deal would finally be consummated over the weekend and announced before the market opens on Monday. Our one-week bullish diagonal spread yielded a 17% return and there is additional potential for those of you that rolled to November options in the short position. Knight Trading Group (NITE) was also a popular issue, up almost $3 to $29.38 and our recent downward adjustment to the NOV-$25 Put may yet produce a profitable outcome. Overall, it was a good month for the Spreads/Combos section, and considering the recent slump in the market, we were happy to end the expiration period "in the black." Looking forward, we have a number of improvements planned for the section and with the new addition to our staff, we expect to provide a wider variety of strategies to the OIN's many dedicated readers. Those of you with suggestions on how the section can be improved should send your comments to: Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** EYE - VISX Incorporated $23.00 *** Speculation Play! *** VISX develops products and procedures to improve people's eyesight with lasers. The company's principal product, the VISX STAR S2 Laser System (VISX System), is designed to correct the shape of a person's eyes to reduce or eliminate their need for eyeglasses or contact lenses. The VISX System ablates, or removes, submicron layers of tissue from the surface of the cornea to reshape the eye, thereby improving vision. The Food and Drug Administration has approved the VISX System for use in the treatment of most types of vision problems including nearsightedness, farsightedness, and astigmatism. The company sells VisionKey cards to control the use of the VISX System and to collect license fees for the use of its patents. VISX has its eye on the top spot in the field of laser-corrected vision. They earn profits primarily through the collection of a license fee for every completed Lasik procedure. Several months ago they reduced their $500 per-eye fee to help increase demand for the procedure. The immediate impact hurt the stock, which was once a Wall Street darling. However, the demand for the procedure is now growing at an incredible pace, and it seems everybody that has undergone the procedure, including myself, loves the outcome. In addition, the company reported outstanding earnings last week, beating the Street estimates by a penny. Of course, fundamentals can make a great company but they won't guarantee a great stock. (Review a one year chart of the issue for a great example of that fact.) There is a twist in this play. The legendary corporate raider Carl Icahn had accumulated approximately 10% of the outstanding VISX shares. The FTC granted him antitrust approval to buy up to 15% of the float back in August, however VISX shareholders adopted a "poison pill" to stop him. The company's poison pill prevents Icahn (or others) from holding more than 10% of the outstanding shares. Icahn is currently in close talks with VISX President and COO concerning strategic options for the company. History tells us that Icahn will not rest till he shores up the value of the company's sagging shares, thus a short-term bullish position is definitely in order! PLAY (speculative - bullish/diagonal spread): BUY CALL DEC-20 EYE-LD OI=434 A=$4.62 SELL CALL NOV-25 EYE-KE OI=131 B=$1.25 INITIAL NET DEBIT TARGET=$3.25 INITIAL TARGET ROI=53% B/E=$23.25 There are several possible outcomes for this play. One scenario would be for the stock to close just under $25 at expiration in November. In that case, we would sell the DEC-$22.50 or DEC-$25 call, reducing our cost basis in the long position and creating a bullish debit spread. Of course, the issue could simply finish above our sold strike in November and the play would return a 53% profit for one month. There are other, more complex alternatives and those will be discussed as the play progresses. ****************************************************************** HON - Honeywell International $46.00 *** Takeover Target! *** Honeywell is a diversified technology and manufacturing company serving customers worldwide with aerospace products and services, control technologies for buildings, homes and industry, automotive products, power generation systems, specialty chemicals, fibers, plastics and electronic and advanced materials. Operations are conducted by strategic business units that have been aggregated under four reportable segments: Aerospace Solutions, Automation and Asset Management, Performance Materials and Transportation and Power Products. Late last year, AlliedSignal and Honeywell completed a merger and as a result, the former Honeywell became a subsidiary of AlliedSignal. In short, AlliedSignal was renamed Honeywell International. Honeywell was in the news late last week as United Technologies (UTX) made a bid for the company. The share value soared $10 on Friday, closing near $46 on heavy volume. In almost any other circumstance, this would be a classic "short" opportunity as the chart pattern is not very strong and the short-term Stochastic is approaching overbought territory. However, when significant news produces the rally, all bets on technical analysis are off. The spike in share value increased Honeywell's market cap to almost $28 billion and considering that United Technologies' offer was rumored to be somewhere around $40 Billion (and General Electric upping the ante), the stock could be in for a nice upward ride. Technically, the issue held up reasonably well (in the mid-30's) before the merger news became public and it should have little difficulty remaining in the $40 range. If it falls below the sold strike, the position risk is limited to less than $2. At the same time, you could simply take assignment of this popular Dow component (at a discount) and sell covered calls to recover any losses. PLAY (speculative - bullish/credit spread): BUY PUT NOV-37.50 HON-WU OI=250 A=$1.00 SELL PUT NOV-40.00 HON-WH OI=79 B=$1.63 INITIAL NET CREDIT TARGET=$0.75-$0.88 ROI(max)=42% ****************************************************************** BCHE - Biochem Pharma $24.50 *** Increased Options Activity! *** BioChem Pharma is an international biopharmaceutical company dedicated to the research, development and commercialization of innovative products for the prevention, detection and treatment of human diseases, with a focus on the anticancer and other nti-infective areas. Its products include 3TC, a nucleoside analog with a novel heterocyclic surrogate sugar ring, various lines of vaccines, and diagnostic systems and products. BCHE has been very active in recent sessions and traders say the upcoming earnings report is the likely culprit. Whatever the reason, the new option interest has created a number of favorable premium disparities and based on your outlook for the issue, the opportunities to construct profitable positions are excellent. Note: This play is based on increased activity in the stock and underlying options. Although the position offers a favorable risk/reward potential, it must also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - bullish/calendar spread): BUY CALL APR-30 BQX-DF OI=40 A=$1.88 SELL CALL NOV-30 BQX-KF OI=207 B=$0.38 INITIAL NET DEBIT TARGET=$1.31-$1.38 TARGET ROI(max)=50% The strategy is best initiated when the front-month options are trading at a premium with respect to longer-term volatility. Most investors prefer to establish these positions at least 3-5 months before the long options expire, to allow the sale of a number of short-term options. The basic concept in this type of spread is selling time value in the call options when they are overpriced (high implied volatility) and buying it back, if necessary, when the options return to intrinsic value. Ideally, the trader would like to have the stock finish just below the sold strike when the near-term option expires. However, when the short-term position is in-the-money on the last day of the strike period, you must buy it back so that you don't have to exercise the long-term options to cover your obligation; that would defeat the purpose of the strategy. At the beginning of each expiration period, you simply sell the next month's call to further reduce the cost basis of the long position. ****************************************************************** HAND - Handspring $89.31 *** A Big Mover! *** Handspring is a provider of handheld computers. The company's first product, the Visor handheld computer, is a personal organizer that is enhanced by its Springboard platform, an open expansion slot. Since the Visor's introduction, more than 2,500 developers have registered with Handspring's developer program to receive support in developing modules. Examples of modules commercially available or in development include a digital camera, an MP3 player, a two-way pager, a global positioning system and content such as books and games. Handspring is set to capitalize on the emerging wireless market, producing a unique, hand-held wireless device. The company has moved to the forefront of the PDA industry this quarter and the introduction of its GSM module in mid-September, which enables voice telephony on the Visor, has made the convergence of data and wireless voice a reality. The company has also aggressively expanded its international exposure in recent months, introducing the Visor in Europe, Hong Kong, Taiwan and Singapore. As the company continues to increase production, the Visor is expected to be launched in other foreign markets later in the year. Handspring announced record earnings last week and just like all the other companies in the small group, their numbers exceeded analysts' consensus estimates. However, the stock is now slightly overbought and a post-announcement consolidation is expected. Our conservative position offers a great method to participate in the future movement of the issue with relatively low risk. Target a higher spread credit initially, to allow for a brief pullback in the issue. PLAY (conservative - bullish/credit spread): BUY PUT NOV-50 HQA-WJ OI=66 A=$1.43 SELL PUT NOV-55 HQA-WK OI=43 B=$2.00 INITIAL NET CREDIT TARGET=$0.68-$0.75 ROI(max)=16% ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** BRCM - Broadcom Corporation $242.19 *** Probability Play! *** Broadcom Corporation is a provider of highly integrated silicon solutions that enable broadband digital transmission of voice, video and data to and throughout the home and within the business enterprise. These integrated circuits permit the cost-effective delivery of high-speed, high-bandwidth networking using existing communications infrastructures that were not originally designed for the transmission of broadband digital content. Using unique proprietary technologies and advanced design methodologies, the company designs, develops and supplies integrated circuits for a number of the most significant broadband communications markets, including the markets for digital cable set-top boxes, cable modems, high-speed office networks, home networking, direct broadcast satellite and terrestrial digital broadcast, and digital subscriber lines. BRCM is an excellent candidate in the neutral, premium-selling category of options trading. Based on analysis of the historical option pricing and technical background, this position meets our fundamental criteria for a potential credit-strangle. The issue has good option premiums, a relatively well-defined trading range, and with the company's quarterly earnings announced last week, there should be little news to produce additional volatility in the underlying stock. The probability of profit from this play is higher (80%-90%) than other plays in the same strategy based on historical option pricing. As with any recommendation, the position should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. Many of you may favor an aggressive position, selling options that are closer to the current price of the issue, to produce a higher initial return. While that technique may appear more profitable, it also increases the theoretical risk of loss. Only you can know what positions are suitable for your risk-reward tolerance and portfolio outlook. PLAY (conservative - neutral/credit strangle): SELL CALL NOV-320 YRL-KD OI=438 B=$2.50 SELL PUT NOV-185 RDU-WQ OI=296 B=$2.88 INITIAL NET CREDIT TARGET=$5.50-$5.75 ROI(max)=10% UPSIDE B/E=$325.50 DOWNSIDE B/E=$179.50 ****************************************************************** ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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