The Option Investor Newsletter Tuesday 10-24-2000 Copyright 2000, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/102400_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 10-24-2000 High Low Volume Advance/Decline DJIA 10393.10 +121.40 10439.30 10273.60 1.16 bln 1562/1279 NASDAQ 3419.79 - 48.90 3526.71 3401.05 1.88 bln 1825/2130 S&P 100 738.42 + 4.07 747.37 731.83 totals 3387/3409 S&P 500 1398.13 + 2.35 1415.64 1388.13 49.8%/50.2% RUS 2000 487.85 - 2.11 493.84 487.71 DJ TRANS 2471.09 + 34.23 2475.03 2439.85 VIX 26.22 - 0.76 27.11 25.12 Put/Call Ratio 0.64 ****************************************************************** Nasdaq Wilts As Dow Shines Investors sold new economy stocks as the old economy continued to recover. It wasn't anything to write home about, but we saw gains in the old fashioned blue chips. International Paper deserves most of the credit as it advanced nearly ten percent. Financials like Citigroup, American Express and JP Morgan also gained ground, helping to lift the Industrials. It was the tech sector that weighed on the averages today. A profit- warning by National Semiconductor last night forced the Chip sector lower. This was a weight too heavy to allow the Nasdaq to hold onto early gains. All in all, it was nothing compared to other days already gone by in October. The Dow Industrials finished at 10,394, up 121.35 on volume of 1.16 billion shares. Advancers beat decliners 15-12. The S&P 500 also gained, although fractionally, up 2.35 points. The Nasdaq closed down 48.90 points to 3419. Volume was good, but not great at 1.83 billion shares. Today's weakness helped the VIX back up to 26.83. The bond market was equally lackluster in that trading was tepid. The 10-year slipped to yield 5.63% while the 30-year closed yielding 5.74%. After last Wednesday's panic selling which took the Dow to levels not seen since March 1999, buyers stepped in and helped the index get on track to its current uptrend. The rolling trend that has resulted from this capitulation looks strong and genuine. Today's high of 10440 will be the next overhead resistance for the Dow to roll on through. Unlike the Nasdaq, the Dow looks like it is on the road to recovery, granted it does not break down below this current trendline. In earnings news, online retail giant Amazon.com on Tuesday posted quarterly financial results that blew away estimates, surprising Wall Street with a smaller loss than it did a year ago as sales ballooned almost 80 percent. Amazon reported a third-quarter pro forma net loss of $68 million, or 25 cents per share, compared with $79 million, or 26 cents a share, during the same quarter last year. Analysts and investors were also anxious to hear what Amazon had to say about the all- important fourth quarter. The company said that sales in the fourth quarter will likely be between $950 million and $1.05 billion, with pro forma operating losses between 5% and 8% of sales. This news helped AMZN climb after-hours to $33. Nortel reported third-quarter net income of $574 million, or 18 cents a share, compared with $314 million, or 11 cents a share, during the same quarter last year. Analysts surveyed by First Call expected earnings of 17 cents a share, on average. Revenue was $7.31 billion compared with $5.15 billion during the same quarter last year, but analysts were expecting total sales of $7.63 billion in the quarter. "We are extremely pleased with the strong growth in the quarter which reflected our continued strength and leadership in the key growth areas of optical Internet, wireless Internet, local Internet and eBusiness solutions," said CEO John Roth in a prepared release. Well, John can say what he wants, but the stock is getting hammered based on the lower revenue number. The stock has already traded down near $50 during after-hours trading. The best analysis of the day goes to Robert Dickey, chief technical strategist at Dain Rauscher Wessels. "The market can move higher without the benefit of past leaders as long as some other area takes over the leadership role. The tech stars of a year ago have been replaced by the healthcare sector as the most bullish and the Biotechs leading the higher growth area of that sector. Also bullish are the energy stocks. Tech stocks are bouncing to some degree, but the sector cannot be called bullish until it has gone through a likely longer bottoming period. Put it all together and you have the makings for a market rally through year-end, although the colors on your screen will be different than the last time." The thought process here is correct. Obviously Nortel will lead the tech stocks back down tomorrow, (helping to convince investors that the bottom is in place and has been tested) but I expect it to be a short trip. It is still likely that the bias is to the upside for the rest of the year. The key which traders will be looking for tomorrow is how the markets react to Nortel and ahead of the Thursday Employment Cost Index. That report has long been a favorite of the Fed Chief's and the number will be closely watched. Expectations are for a 1.0% rise. Also, GDP is due out on Friday and will also be closely watched. The expectations there are for a 3.4% rise. Some positive economic news could put the market back on the right track. The interesting fact of late October trading is that positive news is typically followed by a decent rally. That is because the market has already been beaten to extreme levels. If Nasdaq is quick to rally, it is a good sign and one we would want to see for the end of this week. Yet, the Nasdaq finds itself in a bit of technical trouble. In the chart above, you can see that the Nasdaq experienced resistance at 3520 area, and then once again both yesterday and today. As a result of sellers stepping in at 3520, which is the low from August, the tech index has established a triple-top. This technical development will pose a strong resistance going forward. Not many were buying today, and the Nasdaq slipped away throughout the day. The minor bounce at 3400 is negligible. The real problem with the Nasdaq, other than the NT related selling in after-hours, is that it has a 159 point gap up from last Thursday. In conjunction with the trouble at 3520, the Nasdaq very well may backfill this huge gap. I know it's not what we want to hear, but it is particularly concerning with the Nasdaq futures down 82 points at 4:45pm MDT. So tomorrow is likely to end underwater for the Nasdaq, but how much of it is likely to be experienced at the open? I expect most of the losses to be incurred at the open as stocks are being sold now in after-hours. The thing to watch is if the gap down is quickly bought back up by buyers. The last gap down we saw was on the 18th and buyers quickly emerged. In fact, that was the last good buying opportunity before this recent rally. A repeat of that scenario and we could be back to rally mode as investors jump in. There is nothing better than a rally brought on by fear of missing the bottom. In all cases, let the market dictate. There is no point getting caught sideways in this fast, volatile action. Ryan Nelson Editor ***************************** OCTOBER OPTIONS WORKSHOP EXPO DENVER - Oct 27-30th ***************************** 2 Types of Traders - Which One Are You? There are really only two types of traders. We call them Winners and Losers. Now don't get us wrong, no trader wins 100% of the time, however, consistent winners learn to cut their losses while allowing their profits to run. The key to consistently winning is applied knowledge. The place to obtain this knowledge is at the October Options Expo. This event will take place in Denver, Colorado, from October 27 through the 30th. Seating is limited. To sign up click here: http://www.OptionInvestor.com/workshop A Taste of What You Will Learn: Looking for ways to spot early reversal patterns? Candlestick charting may be the answer for you. Here you will learn the most important candlestick formations, how to use them, and why. Learn how to use candlesticks with western technicals from the foremost expert on Japanese Candlesticks, author Mr. Steve Nison. Learn to use the Arms Index (TRIN) effectively for short-term trading from the Index's inventor, Mr. Dick Arms. Mr. Arms is the author of several books on trading, including the renowned "Trading Without Fear." Mr. Arms will be sharing his newest charting system called "EQUIVOLUME". This is the first new charting system since the 1930's! You won't want to miss being one of the first to learn about this new technique. Mr. Jim Crimmons will be helping you learn how to manage your taxes as a trader and how to get Trader's Status when filing. If you face nightmares with your current tax situation, and want an easier and more effective system for tracking your trades, you don't want to miss this class. Mr. Jim Brown, President and founder of OptionInvestor.com will be teaching "How to Prepare to Trade the Market", along with other useful trading strategies. This will include information on how best to prepare and find your new plays. Then you will go to battle the next morning, as we make LIVE trades using the very candidates you helped us find. There is no better way to learn how to trade than to TRADE WITH THE PROS! This is just a taste of the event. You will spend four days with over a dozen professional traders. This is not just a 9 to 5 seminar. We are going from early morning to late night. This is serious training for serious traders. You won't need to go anywhere else, as you will be staying in one of the nicest hotels in Denver, The Inverness Hotel and Golf Club. Not only will we be feeding your mind for almost 15 hours a day; we will also feed your body, with delicious meals and breaks five times a day. What an opportunity to spend four days in luxury, learning from the pros, while being fed in so many ways. You may be asking, "How much will this Power-Packed Options Expo Cost Me?" This is a great question, however, the question you should really ask is, how much will it cost you if you don't attend? Have little mistakes or a lack of specialized education in the options arena cost you any money lately? Or could you have reaped greater profit if you only had the right tools? How much would successful trading techniques have saved you last Spring during the NASDAQ sell-off? Learn to protect yourself and profit in volatile markets. The only difference between the pros and amateurs is EDUCATION, ACTION and EXPERIENCE. We are providing the EDUCATION and EXPERIENCE, so that when you take the ACTION, you will have a winning combination. To register click here: http://www.OptionInvestor.com/workshop Check out an outline of events here: http://www.OptionInvestor.com/workshop/outline ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=776 ************************************************************** **************** MARKET SENTIMENT **************** Dear Markets: Where Are You Going? By Austin Passamonte Are we the only ones searching for a little market conviction here? It seemed like we were actually on the path in one firm direction heading into the weekend, but something happened between happy hour and the start of a new work week. Investor sentiment sure did change. No amount of bad news after last Wednesday noon could keep prices down very long. Now they are just down, period. A few keynote companies report tonight after the bell and it's red ink all over the screens. Let's see; last Wednesday we... oh never mind. How about the Wednesday before instead? Looking over that chart we see... uh, better not focus on the Wednesday theme here if you have any bullish blood flowing at all. Market noise, market chop, market indecision. Where will we go next? Market Sentiment still sees good things on the horizon for equity indexes heading into the future. That doesn't mean it begins tomorrow. Weekly charts help long-term traders and that won't make it for open calls on tech leaders at tomorrow's open. We cannot stress enough the importance of trading within very conservative limits of your account until clear market trends do evolve. Candlestick patterns on the NASDAQ indexes are all Evening Star bearish formations, with a grain of salt. This bearish reversal holds more merit towards the top of recent market highs and we wouldn't exactly call current levels that. This doesn't negate the fact that it shows three days of sentiment change from bullish to undecided to bearish in succession. The Dow has enjoyed four consecutive higher closes and a decent run from 9600 Wednesday, er uh one certain morning last week. The OEX and SPX have logged three consecutive stalemate "dojis" which warn of a significant move soon. What's our guess? Let's reason this out; we are up big overall from the lows last week and are hitting overhead resistance, earnings are mixed to poor, selling pressure still persists, the equity futures commercials haven't switched to neutral or net-long yet, the euro and Middle East soap operas rage on... do you see where this is headed? Likely the same direction our markets are - down. Down to the next great entry point for bullish plays. Market Sentiment will still trust our weekly charts and long-term signals to lay odds that the next sustained move is up. There remains heavy put-to-call ratios below current levels with comparatively light resistance above. In our estimation it would take shocking news to keep us at or below last week's intraday lows any time soon. We currently view all pullbacks from here to be worthy test entries to probe with bullish plays ONCE THE MARKET TURNS from support! These are markets where we need to buy strength and short weakness as it occurs. Tight stops trailed up and small amounts of risk capital will keep us in good stead until the next sustained trend is safely underway. Trade lightly and carry a big reserve of cash until then! ***** VIX Tuesday 10/24 close; 26.22 30-yr Bonds Tuesday 10/24 close; 5.71% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Tuesday (10/24/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 775 - 760 4,461 2,708 1.65 755 - 740 8,527 5,033 1.69 OEX close: 738.42 Support: 735 - 720 5,366 8,369 1.56 715 - 700 1,273 7,471 5.87 Maximum calls: 740/5,155 Maximum puts : 730/4,132 Moving Averages 10 DMA 724 20 DMA 740 50 DMA 780 200 DMA 779 NASDAQ 100 Index (NDX/QQQ) Resistance: 91 - 89 12,880 9,572 2.26 88 - 86 16,339 16,528 .99 85 - 83 19,744 36,868 .54 QQQ(NDX)close: 82.50 Support: 81 - 79 14,968 21,604 1.44 78 - 76 7,046 29,318 4.16 75 - 73 2,994 17,258 5.76 Maximum calls: 90/12,953 Maximum puts : 78/19,689 Moving Averages 10 DMA 81 20 DMA 83 50 DMA 90 200 DMA 94 S&P 500 (SPX) Resistance: 1475 16,924 4,783 3.54 1450 9,443 8,503 1.11 1425 7,667 10,722 .72 SPX close: 1398.13 Support: 1375 11,730 16,048 1.42 1350 7,650 20,613 2.69 1325 1,816 9,844 5.42 Maximum calls: 1475/16,924 Maximum puts : 1350/20,613 Moving Averages 10 DMA 1370 20 DMA 1399 50 DMA 1452 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) (0.21% 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 but the overall net-short percentage declined slightly. Small specs decreased their net-long positions as compiled Tuesday 10/17 by the CFTC. Friday's data should give a clearer picture to Commercials either covering some profitable shorts or holding fast into this week. Bullish: Fed's finished Benign government reports Disparity in overhead call/put ratios Earnings season Some positive earnings Bearish: Oil Prices (falling) COT reports Recent pre-warnings, downgrades Earning shortfalls Lack of market follow-thru Broad market's break of critical M/A support Market leaders breakdown ************** MARKET POSTURE ************** As of Market Close - Tuesday, 10/24/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,393 9,650 10,600 SPX S&P 500 1,398 1,305 1,420 COMPX NASD Composite 3,419 3,000 3,650 OEX S&P 100 738 680 750 RUT Russell 2000 487 455 500 NDX NASD 100 3,353 2,950 3,700 MSH High Tech 931 825 990 BTK Biotech 746 630 800 ** XCI Hardware 1,241 1,100 1,310 GSO.X Software 420 355 455 SOX Semiconductor 716 600 805 ** NWX Networking 1,106 1,010 1,200 ** INX Internet 344 275 400 BIX Banking 559 505 565 XBD Brokerage 613 555 630 IUX Insurance 786 720 790 RLX Retail 771 695 785 DRG Drug 420 395 430 ** HCX Healthcare 868 825 900 ** XAL Airline 133 124 140 OIX Oil & Gas 306 304 328 Five alerts were triggered in the past two sessions, all at resistance. The SOX triggered an alert right at resistance, then got hammered. Lowering resistance (BIX, XBD, RLX). Raising resistance (BTK, SOX, NWX, DRG, HCX). *********** OPTIONS 101 *********** The School of Hard Knocks Part 2 By David Popper Many years ago, a young trial lawyer found himself in a case in which he was severely overmatched. On the night before his final argument, he was working feverishly. The harder he worked, the more confused he became, until the whole argument was one disjointed mess. He just knew that he would make a fool of himself. He just knew that word would get back to his boss and that he would be fired. Sure he was tired. Twenty hour days for two weeks straight is tiring. It also caused him to lose sight of the big picture. He could not see the forest from the trees. He was intimidated. After years of dreaming for the opportunity of being lead counsel in a huge trial, he was not relishing the challenge, instead, he was shrinking from it. Somewhere around 10:00 that evening, his boss came by to pick up a file. He observed the young attorney's demeanor and asked a few general questions about the case. At 9:00 AM the next day, it was time to proceed. The young trial lawyer looked over his shoulder to see the size of the crowd. To his surprise, his boss was in the courtroom. Now his heart really raced. Then the older attorney stood, approached the table and asked, "May I argue this one?" Twenty minutes later the older attorney gave a stirring and passionate argument. After the case was over, the younger attorney was dumbfounded. "How in the world could you argue so well and so passionately on such little preparation," asked the young lawyer. "Little preparation, are you kidding," exclaimed the older gentleman. "Son, I have had thirty years of preparation and have suffered greatly. Thirty years of legal practice teaches you about yourself and others that you cannot learn out of a book. Son, you cannot argue passionately until you have suffered deeply. I have had thirty years generally and twenty minutes in direct reparation for this argument." Last week, I discussed the impact of my first real initiation into a market correction. The dates were August 31st and September 1st, 1998. Before that time, I had read the books, read the newsletters, read IBD and followed the rules, but it was all mechanical. I had no sense of history and I had no feel. Money was easy before that date, so I figured that I knew all that I had to know. After feeling the panic of a drop, the relief of selling, and the disillusionment of witnessing stocks rebounding after I sold, I was mentally and emotionally drained. Like the young lawyer above, my strategies and account were one disjointed mess. I realized that I really didn't know much about the market, maybe I was ready to learn. Last week, I began to discuss some of the lessons that I learned in the carnage of those two days. Please refer to the October 10th, 2000 Options 101 article. Those lessons dealt with stock selection. Below are additional lessons that I learned. Some of these lessons are personal in as much as they fit within my personal time constraints and may not be applicable to the full time trader. 5. DO NOT USE MARGIN. Simply put, margin makes you a victim. When the market moves against you and you are margined, fear and panic grip you. You can lose your objectivity, because your lifestyle is affected. You begin to hope, then panic. Worse yet, you may get a maintenance call from your broker. This requires you to pony up money immediately or suffer a forced sale which usually happens at the market bottom and just before a reversal. Instead of using margin on the front end, save some cash to use to buy the severe dips. Someone else's margin call can be your buy of the year. Use the dips to make great buys, do not allow the dips to wreck your account. 6. DO NOT BUY FRONT MONTH CALLS UNLESS YOU CAN MONITER THE ACTION ON AN HOURLY BASIS. In case you haven't noticed, this market turns on a dime. Who knows what will happen next hour much less the next day. Front end options can depreciate instantly. At least with stocks, you have the luxury of selling for a loss or waiting for a rebound. With front end options, you can lose it all quickly. This obviously affects your psyche and objectivity. When objectivity is lost, anyone can and will make silly and desperate decisions. 7. SAVE SOME CASH FOR RAINY DAYS. This rule is consistent the above rules. When you have some cash set aside, downturns can turn into buying opportunities instead of margin calls. When you have some cash set aside, you can take positive action to enhance your account, rather than sit by helplessly watching your account shrink. 8. DO NOT PLACE TOO MUCH MONEY INTO ANY ONE STOCK. Although It is tempting, try to avoid placing too much money into any one stock. Just one week ago the market rallied 250 points, but EXTR fell 12 points despite blowout earnings. EXTR is a great stock, but it did not act great that day. PMCS and CHKP offset the EXTR loss. Needless to say, it is better to divide your risk. 9. HAVE AN OVERALL PLAN. I wrote this article last week, so I do not have the benefit of knowing what happened on Monday or today. If the market is doing well, no doubt you feel euphoric. If the market is down, fear is in the air. If you have a plan, you feel neither euphoric or fearful because you realize that over the long haul there will be great times and bad times in the market. You simply have to learn to execute in all environments. Personally, in my IRA account I am more patient with each stock when they fall because I am convinced of their overall quality. In my cash account, I try to generate a monthly income, so I typically write covered calls most of the time. I do not represent myself as any expert. In fact my conservative money management is employed because I recognize my inadequacies. I am in this game over the long haul, so I can not let the August 31st's of the market break me. Like any other storm of life, they must be confidently and adequately managed. ************** TRADERS CORNER ************** Ouch! Review of My October Plays By Scott Martindale Okay, picture this scenario. I have just arrived home in the early morning hours of Wednesday Oct 18th after a week in sunny Mexico. After catching a few hours sleep, I'm at the computer with CNBC on the TV, looking at email and trying to get my bearings as the markets plummet - the Nasdaq is down 188 points. I had closed a few naked put positions before leaving the country, but still held several. The QQQ puts that I bought for insurance had executed at my limit order (near the market low!) for a nice gain, but my naked puts were in bad shape. I really wanted to sell some more, both under support and deep ITM. But my conservative (or is it wimpy?) side overrode, so I sat and watched the market climb 400 points from that hole into the next day while I added only one new naked put position (ATM Oct 10 puts on ICGE). The late market advance was not enough to make me whole on most of my remaining October naked puts, but it was better than a kick in the head. I was able to buy some of them back at reasonable prices. Let's look at some of my plays, shall we? Like last month, I shied away from buying calls. In fact, I bought no calls at all. Now, you must realize that I played tons of calls during 1999, but as I've discussed in previous articles, it got to the point that I seemed to be merely churning the account, so I now focus primarily on selling naked puts, with some covered calls as well. However, I made a couple of short-term put purchases on CPTH (OIN recommendation) and QQQ, both of which proved quite profitable. But I'm a bull at heart. This month I sold covered calls on BBH and PEB during the strong biotech surge, but there was not enough of a broad advance leading to overbought conditions to entice me to sell much more. As usual, I concentrated on naked puts. All told, I sold puts (mostly ATM, some slightly OTM, and a couple well-ITM) on ten different stocks: VITR, RHAT, SCON, MSTR, GSTRF, PRSF, SCMR, WGR, ORCL, and ICGE. I chose them from a watchlist made up of stocks that I like for their important technology or products, favorable technical picture, and high options premiums. I first sold puts on VITR based on the OIN naked put list. The stock had been strong technically, so I sold Oct 40 puts on the first pullback on Sept 6th. It then held up nicely in spite of Nasdaq weakness, going back over $50. Nonetheless, the option premiums never really came down much, which is one of the problems you run into when you sell OTM puts. So, I thought I'd give it more time to erode, and I really didn't worry about it given its huge gap above the $40 strike. However, after hitting $54.75 on Sept 27th, it began a rapid decent in which it actually touched $20 two days prior to expiration on Oct 20th (a mere three weeks)! Fortunately, I closed the position for a small profit when it started showing severe weakness on Oct 3rd - only four trading days after the $54.75 peak. This is why stocks like VITR command such high premiums. I started selling puts in greater earnest on the first signs of Nasdaq support around 3800 in mid-September, and then sweated it out as the market continued its slide. I sold puts on RHAT, SCON, and MSTR on weakness. I bought back RHAT two weeks later at a small loss, bought back MSTR the day before expiration for a small gain, and took assignment of SCON, since it's on my list of high- potential stocks to accumulate. I sold SCMR puts on weakness as the stock was dropping. I was listening to a favorite guru who called SCMR a "table-pounding buy" under $110. I sold ITM puts, and then more ITM puts as it dropped further, looking for a rebound that didn't occur until it had dropped even further. I bought some puts back, but I also took some shares at $100 since it's on my list of stocks to accumulate. The play that worked out the best was on WGR, a natural gas company. I sold the Oct 25 put on Sept 28th when the stock was at $24.50, and bought it back on expiration day when the stock was about the same price, but all the time premium had eroded. This is the way you're supposed to make money in a sideways market. ORCL was my one successful short-term ITM play. I sold Oct 65 puts for $6.38 on Oct 4th when the stock was knocked down to $61 due to a misinterpretation of the CFO's body language at a presentation. That paid off when I bought them back two days later for $2.50. I was tempted to hold them longer to burn up more time value, but I held myself to the exit strategy I planned going in, which was to do a short-term play on an oversold bounce. In retrospect, a more profitable play would have been to sell the Oct 70's, which would have provided more premium erosion as the stock rose back above $70. There were some instructive things that took place during the month. I sold most of the naked puts while the VIX was low, so it was hard to buy them back much cheaper as the VIX rose and brought up the options premiums along with it. For example, I sold the Oct 40's on VITR for $4.13 on Sept 6th when the stock was at $45, but the premium never went much below 3 even as the stock rose to almost $55. Unlike last month, I wasn't able to close out any positions for cheap long before expiration, which is the primary goal of all my naked put plays. But expiration week gave us a nice bottom and bounce. As it turned out, I got good pops on the last few days to close out positions for much better prices than it appeared would be possible, thanks to some great earnings reports. But because I sold puts a little too early and then failed to buy back while I was ahead, I came up with more losers than winners for the month. However, my plan to exit early if things went against me didn't play out very well because they gapped down too fast. It's hard to bring myself to close out for a big loss after such huge negative moves on good stocks. I decided to wait for some inevitable recovery and time value erosion before closing them. This strategy worked for some but not all of the positions. Keep in mind that it doesn't matter what the stock SHOULD be doing - it only matters what it's actually doing. In the end, the only thing that matters is price. It looks like we have an after-market sell-off tonight on a lot of big names like NT, SCMR, GLW, SDLI, JDSU, etc. Perhaps we'll test the bottom again, or perhaps this is an entry point. Me? I think I'll wait for some confirmation, but I'm starting to nibble for November expirations. ************************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=808 ************************************************************** ************* DAILY RESULTS ************* Index Last Mon Tue Week Dow 10393.07 45.13 121.35 166.48 Nasdaq 3419.79 -14.45 -48.90 -63.35 $OEX 738.42 -3.81 4.07 0.26 $SPX 1398.13 -1.15 2.35 1.20 $RUT 487.85 2.51 -2.11 0.40 $TRAN 2471.09 -32.21 34.23 2.02 $VIX 26.22 -0.44 -0.76 -1.20 Calls IDPH 200.75 6.63 3.88 10.50 Biotech leading the way BRCD 260.00 14.19 -6.63 7.56 Another all-time high AGIL 77.63 2.19 2.88 5.06 New, dodged weak Tech sector RIMM 118.75 5.84 -4.47 1.38 Succumbed to NASDAQ's weight HAND 88.13 -3.56 2.38 -1.19 New, hand-held is hot SCMR 82.28 4.13 -6.78 -2.66 Dropped, un-nerved optical BRCM 239.00 9.56 -12.75 -3.19 Profit taking pullback RSAS 54.38 -1.81 -1.56 -3.38 Low-volume profit taking EMC 95.69 -0.06 -4.25 -4.31 Trouble with $100 level JNPR 218.13 -7.13 -6.75 -13.88 Weak optical sector CIEN 135.38 -7.38 -6.75 -14.13 Earnings jitters in tech NTAP 133.69 -8.25 -6.69 -14.94 Valuation downgrade VRTS 144.56 -9.44 -12.81 -22.25 Dropped, lost its backbone Puts VTSS 67.50 -2.63 -6.75 -9.38 New, fell below 200-dma PVN 98.25 -2.31 -2.50 -4.81 Selling volume waning FCEL 71.50 -2.09 -1.78 -3.88 Failed rally attempt PHCC 51.94 6.94 -3.38 3.56 Analyst disagreement ANEN 104.31 6.38 7.44 13.81 Dropped, strong rebound PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** VRTS $144.56 -12.81 (-22.25) National Semiconductor's (NSM) warning today hit the NASDAQ, and it was not a good time for a slide. It quickly took the backbone out of the buyers, and as a result, VRTS sold off all the way back to the 20-dma at $143. The stock actually dipped below this support mark to a low of $141. Since today's action broke below our 10-dma support stop line, it requires that we drop the play Today, Solomon Smith Barney reiterated VRTS with a Buy rating as a result of the company's meeting with analysts. Many analysts have been concerned with a possible deterioration in VRTS' relationship with SUNW. Also, news came out in the meeting that Legato is beginning to take significant market share from the company. With this news and turn of events, we dropping coverage on VRTS tonight. SCMR $82.28 -6.78 (-2.66) Clearly un-nerved by weakness in the Optical sector, SCMR investors have been systematically shedding shares of the company since yesterday morning. After failing to hold above the $92 resistance level, our play has given up over $10, and it is likely to get worse tomorrow morning. The sector sentiment got decidedly worse this afternoon after the close with NT's disappointing earnings report, and it seems a forgone conclusion that SCMR will gap down at the open tomorrow morning. Use any bounce tomorrow as an opportunity to obtain a better exit point. With the Optical elevator headed down the past 2 days, investors are selling first and asking questions later. It would be foolish to try and fight the crowd, so we are cutting SCMR loose tonight. PUTS: ***** ANEN $104.31 +7.44 (+13.81) We never got an opportunity to play ANEN. The stock immediately gapped at Monday's open and before long, exhibited strength near the $95 mark. Today, ANEN broke to the upside in a big way. It stopped just shy of $110 and then gradually receded to find intraday support around $106 and $107. The volume levels weren't out of the ordinary nor was there any pertinent news to predispose ANEN to such a sharp recovery. With all hopes dashed for a further breakdown of the share price, we're taking ANEN off our put list this evening. ********************************Advertisement******************** American Express® Cardmembers are buying online Find out more! http://www.sungrp.com/tracking.asp?campaignid=823 ***************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Tuesday 10-24-2000 Copyright 2000, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/102400_2.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=777 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** CIEN $135.38 -6.75 (-14.13) The underlying jitters about future earnings augmented the profit taking in the tech sector this week. CIEN fared well though and offered a nice intraday spread to target shoot. In both sessions, CIEN challenged the upper resistance and flirted with Friday's all-time high of $151. Initially, $138 and $140 supported CIEN on intraday swings; however, today's late day sell-off brought CIEN down to its previous resistance level. With concerns about market direction making traders nervous, it'd be wise to consider waiting for the buyers to return to the NASDAQ. What's more, the revenue short-fall from Nortel after the bell today may cause problems for CIEN tomorrow. The more enterprising might enter positions on a rally above $140 backed by respectable volume. As it turns out, there is about six more weeks before Ciena reports earnings. NTAP $133.69 -6.69 (-14.94) Robertson Stephens clearly noted that NTAP's downgrade to a Buy from Strong Buy on Monday wasn't due to any weakness in the current quarter or future growth. Analyst Dane Lewis cited rising competition in the NAS market and the stock's rich valuation as limiting upside potential. The rate cut, nevertheless, put a negative bias on NTAP's trading. And yes, there was the typical profit taking to ice the cake. Remember that on Friday NTAP just hit a new 52-week high following a couple days of strong action. Taking an entry into this momentum play at the current level might be too risky for some traders. So if you'd rather take a more modest approach, buy into strength as NTAP moves back through $140 on good volume. There may be some opposition around $145, but then it's on to challenge 152.75 for another new record. The company is confirmed to report earnings in just a couple weeks on November 14th, after the market. BRCM $239.00 -12.75 (-3.19) BRCM has been a stellar performer up until today's warning from National Semiconductor (NSM) sent the tech sector lower. BRCM gave us a $15 range yesterday, as it continued its bullish momentum to its upper resistance level at $260. Early morning trading took shares right to the resistance mark, where it served as the roll-over point for today's sell- off. As the NASDAQ deteriorated, BRCM remained in its downward trend as well. It did manage to bounce off the low of $234.50 to close near support at the 50-dma at $238, where it might rebound. Rebounds off the 10 and 50-dmas are playable on market strength. If momentum and strength can take us back through the $260 area, we should see BRCM retest near $275. Big news that might help BRCM higher is the stock's addition to the NASDAQ 100 index on Monday. This could add IDPH $200.75 +3.86 (+10.50) Momentum is clearly in IDPH's favor as the stock continues to move up on accelerating volume. On Monday, helped by an across-the-board rally for the Biotech sector, IDPH gained $6.64 on over 180% of ADV. While many Biotechs gave back their gains today, IDPH continued higher, adding another 2% to its price and in doing so, closed above the $200 resistance level. The close resulted in IDPH making yet another new all-time high, on twice the ADV. With blue-sky territory up ahead, resistance can be found in increments of $5 at $205, $210 and $215. If the buyers continue to bid up IDPH tomorrow, an entry can be made on a break above today's high ($202.19) on volume. Aggressive traders might look for a pullback to support at $200 or the 5-dma, currently at $192.93 before initiating a play. While IDPH was able to buck the Biotech trend today, sector sympathy is still an important consideration, especially with the recent news from the company. RIMM $118.75 -4.48 (+1.38) Last Friday, after the closing bell, RIMM announced that it had filed to sell 6 million shares of its stock. Without providing a reason for the sale, traders sold the stock down after-hours but on Monday, the market had a chance to factor in the news. Gapping down at the open near the 10-dma (currently at $110.78), buyers came in mass to bid the stock up. Not only did RIMM get back to even, but it moved higher, until it hit resistance at $125. Despite this, RIMM closed up $5.86 or almost 5% on over 150% of ADV. Today, the stock attempted to move higher. Breaking through resistance at $125, the stock got as high as $132.69 before it succumbed to the weight of the NASDAQ, allowing the sellers to take back some of Monday's gains. On further pullbacks, aggressive traders will be watching for a bounce off the 10-dma near $110 for a possible entry while conservative traders will want to see RIMM break above $120 with conviction before making a play. BRCD $260.00 -6.63 (+7.56) What better way to start the week than by making a new all-time high? That's exactly what BRCD did yesterday. A morning dip to $250 led to a bounce above the 5-dma and a push above resistance at $260. From there, the buyers came in on accelerating volume and in doing so, BRCD closed near it's highs for the day, up $14.19 or 5.62% on healthy volume. This move was in spite of a flat to weak session for the NASDAQ. Today, traders decided to take some of their profits. With the NASDAQ moving lower, BRCD gave back some of yesterday's gains, shedding 2.48%. Considering the low volume of the move and the close right on support at $260, an entry at current levels if the buyers return could be a good way to initiate a play. A pullback to the 5-dma (now at $252.32) could provide aggressive traders with a higher risk, but potentially more profitable entry. EMC $95.69 -4.25 (-4.31) The psychological $100 mark is proving to be formidable resistance for EMC. While the stock was able to get as high as $100.88, three attempts to get above that level were turned back as EMC spent Monday in a narrow range to close slightly down on average volume. Today, in the face of a weak NASDAQ, traders took some profits in the Storage sector. With MCDT (which EMC owns a stake of over 80%) dropping almost 14% today, this provided a further drag. But there's good news. EMC managed to successfully test its 10-dma near $94 as well as its 100-dma at $95, closing above both levels. As well, volume was average suggesting that today's drop can be attributed to profit taking. For aggressive traders, a bounce off moving average support could be a possible entry point. Conservative traders will most likely sit back and wait for EMC to break through $100 with conviction before making a play. JNPR $218.13 -6.75 (-13.88) This week has not been kind to our JNPR play as it was turned back yesterday at the $237 resistance level. Then weakness in the Optical sector made things even more difficult today, as we saw our play unable to scale even the $230 level. Particularly frustrating was the fact that JNPR fell through the $220 support level in the afternoon, and was never really able to recover. Adding to the stock's woes tomorrow will be the effect of NT's earnings, which came out after the close. Even though the company beat estimates by a penny, and had revenue growth of 42%, it was less than the street was expecting. NT sold off sharply in the after hours session, and the negative sentiment bled into other Optical stocks like JNPR as well. Since adding the play on Sunday, we have fortunately not had an opportunity to enter the play, and we need to exercise extreme caution when considering new entries. The $220 support level has been violated which leaves support at roughly $10 increments below, starting at $210. Before opening any new positions, we need to see strong buying volume that propels the stock back over $220. While aggressive traders may want to buy a bounce from support, they need to be very careful not to catch a falling knife. At a minimum, we need to see positive sentiment return to both the technology market in general and the Optical sector specifically. RSAS $54.38 -1.56 (-3.38) The bulls held their breath today as profit taking dropped RSAS below $55 today for a bounce right on the 10-dma ($53.81). The key to determining that it was normal profit taking was the weak volume seen over the past 2 days. While our play is looking vulnerable, with daily Stochastics and MACD beginning to roll over, the $52 support level is still intact and unchallenged. Volume has been a reliable indicator of RSAS' direction lately with negative days accompanied by weak volume, indicating normal profit taking. With no negative news, today's weakness seems largely motivated by weakness in the broader technology market, so we need to confirm positive market direction before initiating any new positions. Aggressive traders can consider opening new positions on a volume-backed bounce from support, but a more cautious approach will be to wait for buyers to push our play solidly above the $55 level first. Above there, RSAS has resistance at $58, and then $60 (also the site of the 200-dma), so the bulls will have their work cut out for them if they are going to push our play significantly higher. A violation of the $52 support level (just below the 50-dma) will cast a negative light on our play and raise a big red caution flag. ******************* PLAY UPDATES - PUTS ******************* PHCC $51.94 -3.38 (+3.56) The specialty drug distributor rose a substantial 14%, or $6.94 in Monday's session on an upgrade from Lehman Brothers. Analyst Lawrence Marsh raised PHCC to an Outperform from Neutral and commented that he expects the share price to reach $75 within a year. Goldman Sachs, on the other hand, took PHCC off their Recommended List and downgraded it to a Trading Buy the same day. Volume was heavy at 4.7 times the ADV on the upswing. PHCC topped out at $56.50 before getting shot back down in today's marketplace. The share price quickly broke $50 during amateur hour, but unfortunately failed to rollover at the $52 and $53 level. While PHCC remains beneath the 200-dma line, it's imperative the share price makes a high-volume move to the underside of $50 soon. FCEL $71.50 -1.80 (-3.88) With Middle East tensions back in the forefront of traders' minds and oil prices edging higher this week, has helped FCEL to hold above support at $70. An early morning rally attempt on Monday was quickly denied as traders sold into the strength to drive the stock below the $70 mark. But a late day bounce allowed FCEL to close above $70, down $2.08 or 2.76% on over twice the ADV. Today the bulls came out again with an early morning rally attempt but somewhere along the way, buying interest dropped off and with that, the stock headed lower to close below its 50-dma, down 2.45% on light volume. At this point, the bulls and bears alike are watching the news and oil prices. Confirming with news, watch for a break below $70 on heavy volume for a conservative entry while high-risk traders may target-shoot a failed rally above the 5- and 50-dma, at $77.98 and $73.62, respectively. PVN $98.25 -2.50 (-4.81) Even with the DJIA recovering nicely over the past two days, PVN can't make any headway. Today the Financial stocks had a nicely positive day, and our play continued to deteriorate. The 5-dma (currently $104.69) continues to cap each attempted recovery, as selling pressure pushes PVN closer to major support at the 200-dma (currently $92.63). This is just above solid historical support at $90-92. A penetration of this level will open the door for a test of support at the spring and summer lows in the range of $80-82. While the technicals like MACD and Stochastics are still pointed south, we are seeing the selling volume fall off. This could just be a symptom of declining volume in the broader markets, but it is a warning sign that selling pressure may be diminishing. The rollover this morning at $105 provided an ideal entry point for new plays, and prudent players will make sure they have their stops in place. As PVN approaches the 200-dma, it is reasonable to assume that the bulls will attempt to rally the stock. There is no reason to give back your profits in that event. Use any recovery as an opportunity to open new positions as the bears reassert control, and the selling pressure intensifies. ************************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=809 ************************************************************** ************** NEW CALL PLAYS ************** HAND - Handspring Inc $88.13 +2.38 (-1.19 this week) Handspring manufactures the Visor handheld computer. The Visor is a personal organizer that is enhanced by an expansion slot for extra memory. This unique design accommodates such add-ons like wireless modems, books, games and digital cameras. The co- founders of Palm Computers created Handspring in 1998. Currently, Hawkins and Dubinsky retain a 51% stake in the company. A bright future and a strong demand for the company's handheld computers recently launched HAND to new heights. Last Tuesday, Handspring posted a lower-than-expected loss and easily beat consensus estimates as a result of surging sales. According to Chief Executive Donna Dubinsky, "While other product sectors seem to be experiencing stagnating or slowing growth, we continue to see a robust market for handheld computers." COO Bernard Whitney also told analysts that predicted sales in the current quarter will also top earlier estimates. For the October-December period, Handspring expects sales to reach into the $95 to $105 mln range. Besides the obvious demand for its product, the continued expansion in the US retail market and new distribution channels in Canada, Europe, and Asia should also help augment future revenues. The analysts and investors obviously liked what they heard. CIBC World Markets and USB Piper Jaffray reiterated Strong Buy recommendations and the latter also raised the price target to $110 from $90. Investors demonstrated their enthusiasm on Wednesday by taking HAND quickly through the resistance at $80 and $85. By the finish, the share price advanced $13.69, or 17.6% at the finish and cracked the $95 level. Trading activity was paramount at 5.5 times the normal volume levels. In the aftermath, HAND continues to trade at these higher levels. The volume remains robust and the share price is finding intraday support first at $90, then lower at $85. We're anticipating that this stock will break out again when the profit taking on the NASDAQ subsides and buyers move back into the techs. Consider target shooting for an entry on pullbacks to $85 if your portfolio tolerates a bit more risk. Otherwise, consider taking an entry on strong bounces from the $90 level. The $95 mark poses the first obstacle, but the real resistance is just shy of the century mark at $99.31, last Thursday's all-time high. In a move to keep up with the times, Handspring products now come with color screens. Its color Visor Prism was designed to rival the new 256 color Palm III. Now if you're not into colors, but want to know where you're going, there's CitySync. The CitySync module comes preloaded with guides to New York City, Chicago, San Francisco and Los Angeles. BUY CALL NOV-85 HQA-KQ OI= 92 at $15.00 SL=11.00 BUY CALL NOV-90*HQA-KR OI=263 at $12.63 SL= 9.50 BUY CALL NOV-95 HQA-KS OI= 68 at $10.75 SL= 8.00 BUY CALL DEC-90 HQA-LR OI= 0 at $16.50 SL=12.00 BUY CALL DEC-95 HQA-LS OI= 0 at $14.50 SL=10.75 Picked on Oct 24th at $88.13 P/E = N/A Change since picked +0.00 52-week high=$99.31 Analysts Ratings 9-6-0-0-0 52-week low =$22.38 Last earnings 09/00 est= -0.13 actual= -0.08 Next earnings 01-01 est= -0.17 versus= N/A Average Daily Volume = 1.05 mln AGIL - Agile Software $77.63 +2.88 (+5.06 this week) Agile Software develops and markets collaborative manufacturing commerce solutions that speed the build and buy process across the virtual manufacturing network. Agile Anywhere (formerly Agile Workplace) is a Web-based, collaborative software suite that helps global companies and their partners add, update, and manage product content throughout the manufacturing supply chain. The company's offerings are well suited for participants connected in outsourced supply chains, as well as those managing multi-site engineering, manufacturing, sales and distribution via the Internet. AGIL primarily targets computer, electronics, and medical equipment markets. AGIL has managed to dodge weakness in the technology sector this week. The stock has extended last week's recovery from the $60 support level. One possible catalyst for the strong and sustained move is news that SLR is expanding its use of AGIL's products (see news below). The selloff on the NASDAQ last Wednesday pushed AGIL below its 200-dma, but the buyers stepped up to the plate first thing Thursday morning, and since then our new play has tacked on an impressive 19%. Even weakness on the NASDAQ has been unable to damp investors' enthusiasm for the stock. The company is scheduled to announce earnings on November 16th, so it is still a bit too early for a run into that event, but a pullback to support could provide a very attractive entry. The first level to consider is $72, which happens to correspond to the 50-dma ($72.50). Below that, AGIL has support between $64-65, with the 200-dma just below at $63.75. With Stochastics and MACD pointing solidly upwards, our play could be in the beginning stages of a strong rally. We need to exercise caution, though. Resistance is looming directly overhead at $81, so conservative players will wait for a strong move above that level before opening new positions. Strong volume accompanied the initial bounce last week, but was much weaker today, falling short of the ADV by 15%. This could be a sign that buying interest is beginning to dry up, so make sure strong buying volume is present before opening new positions. AGIL continues to form strategic alliances, and this seems to have encouraged investors over the course of the past week. Today's alliance with Alventive, a leading provider of collaborative commerce Design-to-Order solutions, comes on the heels of last Thursday's announcement by Solectron (SLR). SLR will implement AGIL's Agile Anywhere suite at all its manufacturing sites worldwide. BUY CALL NOV-75 AUG-KO OI= 47 at $ 9.50 SL= 6.75 BUY CALL NOV-80*AUG-KP OI= 55 at $ 7.00 SL= 5.00 BUY CALL NOV-85 AUG-KQ OI= 124 at $ 5.00 SL= 3.00 BUY CALL JAN-85 AUG-AQ OI=1611 at $12.50 SL= 9.50 BUY CALL JAN-90 AUG-AR OI= 18 at $10.50 SL= 7.50 Picked on Oct 24th at $77.63 P/E = N/A Change since picked +0.00 52-week high=$112.50 Analysts Ratings 2-7-0-0-0 52-week low =$ 18.31 Last earnings 08/00 est= -0.04 actual= -0.03 Next earnings 11-16 est= -0.02 versus= -0.05 Average Daily Volume = 743 K ************* NEW PUT PLAYS ************* VTSS - Vitesse Semiconductor $67.50 -6.75 (-9.38 this week) Vitesse Semiconductor is a supplier of high-performance integrated circuits targeted at systems manufacturers in the communication and automatic test equipment (ATE) markets. A leading manufacturer of gallium arsenide (GaAs) integrated circuits, a type of IC that performs at higher speeds than silicon chips. The company offers several products that address the needs of high-performance communications systems at data rates from 622 Mb/sec up to 10Gb/sec for the SONET, ATM, IP, Fibre Channel and Gigabit Ethernet markets. VTSS also provides gate arrays and custom products that offer a combination of high complexity, low power dissipation and high speed for the ATE market. Over 80% of sales are to makers of high-speed communication and networking equipment such as Lucent, Alcatel, Cisco, Ericsson, and IBM. Despite a strong earnings report last Wednesday, VTSS has fallen victim to continued bearish sentiment in the Semiconductor sector. Even as the NASDAQ and SOX.X recovered sharply late last week, the stock was unable to break through the $80 resistance level. The selling has picked up steam this week, falling through the 200-dma ($72.13) and support at $69. Even a new Buy rating from JP Morgan on Friday seemed to have no impact as the bears showed up right after amateur hour on Monday. The picture was looking mildly negative right up to the final 90 minutes of today's session, as volume picked up sharply and our play gave up an additional $3.75. The poor earnings report from NSM after the close yesterday likely played a pivotal role in this unfolding saga, as skittish investors need very little incentive to bail out of a stock or sector with the slightest hint of weakness. There is likely to be more weakness on the NASDAQ tomorrow morning, as the entire Optical sector saw significant selling in the wake of Nortel's earnings report after the close today. This weakness, which bled into the broader Networking sector, will have a negative effect on VTSS due to the high percentage of its sales which go to leading Networkers like LU and CSCO. The NT news will also create weakness in the technology sector at the open tomorrow and this effect will likely be felt by VTSS as well. While that is bad for investors, more weakness is likely to give us some attractive trading opportunities to the downside. After violating support at $69-70, look for VTSS to encounter overhead resistance at this level. If buyers step in to support the price, this looks like a logical level to initiate new positions as the stock rolls over. Further pressure will come in the form of the 10-dma ($73.25), which has continued to pressure the stock for the past 2 weeks. A more conservative play will be to enter on continuing weakness, and falling through $66 on continued strong volume will be the trigger. BUY PUT NOV-70 VQT-WN OI=179 at $7.50 SL=5.25 BUY PUT NOV-65*VQT-WM OI=282 at $4.88 SL=3.00 Average Daily Volume = 4.65 mln ********************** PLAY OF THE DAY - CALL ********************** IDPH - IDEC Pharmaceuticals Corp $200.75 (+10.50 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. Most Recent Write-Up Momentum is clearly in IDPH's favor as the stock continues to move up on accelerating volume. On Monday, helped by an across-the-board rally for the Biotech sector, IDPH gained $6.64 on over 180% of ADV. While many Biotechs gave back their gains today, IDPH continued higher, adding another 2% to its price and in doing so, closed above the $200 resistance level. The close resulted in IDPH making yet another new all-time high, on twice the ADV. With blue-sky territory up ahead, resistance can be found in increments of $5 at $205, $210 and $215. If the buyers continue to bid up IDPH tomorrow, an entry can be made on a break above today's high ($202.19) on volume. Aggressive traders might look for a pullback to support at $200 or the 5-dma, currently at $192.93 before initiating a play. While IDPH was able to buck the Biotech trend today, sector sympathy is still an important consideration, especially with the recent news from the company. Comments The Biotech sector continues to provide investors with profits. Despite the volatile trading in the broader markets, IDPH has steadily charged higher over the past week, which culminated with a break above the significant $200 level today. Traders could look to enter new positions at current levels early tomorrow, after confirming strength in the Biotech sector. A pullback to support at $195, or lower near $190, might present favorable entry points should the profit takers show up tomorrow. BUY CALL NOV-195 IHD-KS OI= 291 at $19.63 SL=14.25 BUY CALL NOV-200 IHD-KT OI=1922 at $16.00 SL=11.50 BUY CALL NOV-210 IHD-KB OI= 126 at $12.50 SL= 9.25 BUY CALL JAN-200 IHD-AT OI= 144 at $31.88 SL=23.00 BUY CALL JAN-210 IHD-AB OI= 0 at $27.25 SL=20.50 Picked on Oct 19th at $188.63 P/E = 241 Change since picked +12.13 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 ********************************Advertisement******************** American Express® Cardmembers are buying online Find out more! http://www.sungrp.com/tracking.asp?campaignid=824 ***************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ Another Great Day! Industrial stocks rallied Monday amid strong earnings from several blue-chip firms. October 23, 2000 Industrial stocks rallied today amid strong earnings from several blue-chip firms. Technology issues retreated however, as traders took profits after recent gains. The Dow closed up 45 points at 10,271 while the Nasdaq finished down 14 points at 3,468. The S&P 500 index ended down 1,395. Trading volume on the NYSE hit 1.02 billion shares, with declines outpacing advances 1,580 to 1,282. Activity on the Nasdaq was average at 1.69 billion shares, with advances edging declines 2,087 to 1,874. In the bond market, the 30-year Treasury rose 22/32, pushing its yield down to 5.68%. Sunday's new plays (positions/opening prices/strategy): Honeywell HON NOV37P/NOV40P $0.00 credit bull-put Visx EYE DEC20C/NOV25C $3.06 debit diagonal Biochem BCHE APR30C/NOV30C $1.43 debit calendar Broadcom BRCM NOV320C/N185P $5.00 credit strangle Handspring HAND NOV50P/NOV55P $0.62 credit bull-put Honeywell was a heartbreaker, announcing on Sunday that General Electric (GE) agreed to buy the company for $45 billion in stock in a deal that will bolster GE's aerospace, power, industrial controls, and materials businesses. Officials said GE will exchange 1.055 of its shares for each share of Honeywell. Our bullish position was unavailable after the news. BCHE, EYE and HAND all slumped during the session, allowing favorable entries in each position. Broadcom traded in relatively large range, providing a reasonable opening credit in the (short) strangle. Portfolio Plays: Blue-chip stocks rallied today amid strong earnings from market bellwethers and the Honeywell merger announcement. On the Dow, SBC Communications (SBC) was a big winner, rising over $3 to $54 after reporting third-quarter profits which exceeded consensus estimates by a penny. SBC also said fourth quarter and yearly earnings are on target and company officials may consider share repurchases in 2001. Major drug issues moved higher after Merck (MRK) rallied on stronger-than-expected earnings and 3M (MMM) led the industrial group, rising almost $3 to $89 after posting third quarter profits which topped the Street's estimates. 3M said it also expects to meet fourth quarter and 2001 earnings estimates. Shares of Honeywell (HON) boosted the blue-chips on Monday, rising $4 to a recent high near $50 after General Electric (GE) agreed to acquire the company in a tax-free merger valued at $45 billion. Technology stocks rallied after a slow start, with semiconductor pacing the group's gains. Biotechnology issues were also strong but computer software stocks fell, with Microsoft (MSFT) slumping over $3 to $62 after last week's big advances. Internet and B2B backpedaled, with Amazon.com (AMZN) leading the way ahead of its earnings report Tuesday. In the broad market, defense, computer retailing and photo imaging companies moved higher while trucking, healthcare and oil drilling stocks retreated. The downward move in oil issues was unexpected with crude futures rising as clashes between Israel and Palestinians near Jerusalem renewed fears about supply from the oil-rich Middle East. ****************************************************************** - STRATEGIES - One of our new subscribers requested an explanation of the recent Bear Stearns (BSC) diagonal spread position. ****************************************************************** The options market offers a number of tools and techniques that can help the astute trader construct a powerful portfolio; one which possesses a high degree of safety with consistent returns. Through the use of combinations, the trader has a vehicle to pursue a wide variety of strategies. The complete option player can profit with bullish and bearish plays in situations that dictate either aggressive or conservative positions. With an understanding of the risk/reward relationships between long and short options at different prices in varying time periods, he can benefit from the most advanced techniques available in the market. The majority of traders utilize spreads to reduce the cost and the risk of option ownership. They construct combination plays with partially offsetting option positions to reduce the potential for capital loss. Spreads can be designed to generate return diagrams of almost any character but unfortunately, the fundamental benefit of this type of trading is also its downfall; the potential gains are limited. The most popular types of combination positions are: Price spreads - the purchase of an option at one strike price and the sale of another option with a different strike price. The potential profit in this strategy is based on the correct forecast of the direction of the market. Time (calendar) spreads - the purchase of an option with one expiration month and the sale of another option with a different expiration month. This type of spread benefits from the faster decay in the time value of the short-term option. The diagonal spread is a combination of price and time (calendar) spreads. The most common version of this strategy requires the purchase of a long-term call and the sale of a short-term call at a higher strike price. In most cases, the initial debit of the position should be less than the spread between the two options, eliminating the possibility of loss in an upside break-out. The primary advantage of this strategy is the cost basis of the long position is reduced by the sale of the short-term option. The spread achieves maximum profit (at expiration) if the stock price remains above the sold option's strike price. The position can also profit (before expiration) if the underlying issue advances significantly after the play is opened. In most cases, a diagonal position is an improvement over the standard price spread. If the stock price remains relatively unchanged or falls slightly, the long option will retain more value because of its extended maturity. If the near-term (sold) call expires, the position can be reestablished with the sale of a new call. If the long option is current month, the position can be converted to a normal price spread. If the underlying issue rises above the sold strike price, the spread will be profitable. With longer-term options, the character of the spread can be adjusted to match the outlook of the underlying issue. A neutral or bearish position can be established with the sale of an ATM option or the original spread can be duplicated (at a lower cost basis) with the sale of a new OTM option. In either scenario, the long-term diagonal spread benefits from the sale of additional options throughout the life of the (long) position. The majority of advantages in a diagonal spread are obvious but there is one characteristic that most traders overlook. In a debit spread, if the stock advances substantially and the options trade at parity, the maximum potential profit will be limited to the difference between the strike prices. With a diagonal spread, the long option has more time premium. Thus, when the underlying issue trades near the strike price at expiration, the value of the position will grow beyond the theoretical profit range. With that in mind, it's easy to see why the maximum potential for profit (at expiration) occurs at the strike price of the sold option. Another method that is commonly used to increase the probability of profit in this strategy requires an understanding of relative value and implied volatility in option pricing. When opening or adjusting any type of spread, it's important to take advantage of the highest relative premium to create the best possible position. The exploitation of option pricing disparities is also paramount. In the majority of OIN positions, we try to open new spreads only when there is a disparity in pricing (most likely excess value in the sold option). This technique allows us to enter plays with a theoretical edge, at a discount. For the investor who is not familiar with spread trading, this strategy offers an excellent opportunity to learn the basics in a low risk environment. The concept of the diagonal spread is easy to understand and once established, the position can be managed with little difficulty. The occasional adjustments also provide the necessary background for more advanced techniques. Those who enjoy aggressive directional trading can construct positions to fit their style as well. Although the potential for upside profit is reduced, the limited downside exposure provides a favorable risk/reward ratio for the majority of investors. Good Luck! Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - Today's Spreads/Combos candidates are generously provided by our new staff member, Ahmad (Sami) Abualsamid. ****************************************************************** HD - Home Depot $39.25 *** Upside Potential! *** The Home Depot, Inc. is the world's largest home improvement retailer and the third largest retailer in the United States. As of January 2000, the Company was operating 913 Home Depot stores and 15 EXPO Design Center stores. Home Depot Stores sell a wide assortment of building materials and home improvement and lawn and garden products. EXPO Design Center stores sell products and services primarily for design and renovation projects. Additionally, the Company operates two Villager's Hardware test stores, which offer products for home enhancement and small projects. The Company also offers products through two direct marketing subsidiaries: Maintenance Warehouse and National Blinds & Wallpaper. Over the years Home Depot stocks have been one of the few constants on Wall St. Once you bought the stock you pretty much were guaranteed over +40% average annual return, year in and year out. As of late with the increased volatility in the market and the addition to the Dow Jones Industrial Average the stock has seen more volatility than the norm. It had a good run up to the $60 range, but then it missed the earnings by 3 pennies and the stock got trashed. The price fell all the way down to the mid $30's for a new 52 week low. That was a good time to buy a LEAP or two. As with everything else the market over-reacted to the Home Depot news and after only several days at that level, it started its climb back up the chart. The fundamentals on the company are still very sound as both net income and net sales keep growing at a very healthy level. I visited one of their stores lately three times to check for myself and the place was full of people every time. The employees where very helpful and the merchandise was top notch. It all fits together, over-reaction on the down side, good company, good fundamentals, and an over all good stock. There is more than one way to place a bullish play on Home Depot. In order to illustrate the price spread concept that Ray discusses today we will open up a bullish put credit spread. PLAY (conservative - bullish/credit spread): BUY PUT JAN-36.63 HDW-MK OI=825 A=$2.50 SELL PUT JAN-43.38 HDW-MM OI=569 B=$5.75 INITIAL NET CREDIT TARGET=$2.25 TARGET ROI=100% B/E=$41.13 The credit is a premium that we keep. The maximum that we can loose is the difference in the strikes minus the credit we took in. If Home Depot is over $41.13 by expiration in January then we break even. It closed today at $39.25 so we are not far off. A close over $43.38 and we finish at maximum profit. Selecting strong stocks is important in this strategy as we will gladly be assigned the stock if the price is below $36.63 in January. In that case, we will start selling covered calls against the stock. ****************************************************************** MSFT - Microsoft $61.50 *** Winning their battle! *** Microsoft Corporation develops, manufactures, licenses and supports a wide range of software products for a multitude of computing devices. Microsoft software includes scalable operating systems for servers, personal computers and intelligent devices, server applications for client/server environments, knowledge worker productivity applications, and software development tools. The Company's online efforts include the MSN network of Internet products and services and alliances with companies involved with broadband access and various forms of digital interactivity. Microsoft also licenses consumer software programs, sells hardware devices, provides consulting services, trains and certifies system integrators and researches and develops advanced technologies for future software products. The Company is divided into three main areas: the Business Divisions, the Sales, Marketing and Support Group, and the Operations Group. Microsoft shares fell from the grace as the department of justice kept hammering on them, the general weakness in the market did not help either. However since then we had several events that changed the complexion of this story. Assistant Attorney General Joel Klein head of the DOJ team against Microsoft quit his job making people think that the DOJ's momentum against Microsoft will slow down. America Online (AOL) acquired Netscape showing that the industry and technology change much faster than lawyers can keep up with. Finally, the Supreme court is taking actions that are interpreted as favorable to Microsoft as they are refusing to hear the case at this stage and referring the case to the Appeals court. The Appeals court historically judged in favor of Microsoft. Outside the legal case, Microsoft is still doing a great job in taking care of its business. Microsoft Windows 2000 is better than ever and the Data Center edition will venture into the very high end server markets. Microsoft development suite, Visual Studio version 7 is soon to be released embarking on many new changes to aid in E-commerce development. Microsoft claims that its new database server, SQL Server 2000 achieved the highest performance ever in terms of TPC benchmarks. Their other ventures such as the Expedia travel web site, and the MSN network are stronger than ever. The market is reacting well to all these news as Microsoft stock is back on the climb and now would be a good time to play a bullish call. Technicians will always tell in cases like this that you should wait for the turning point before entering a new position. Well, do not blink now because the stock just turned the corner. PLAY (conservative - bullish/LEAPS/CC's): BUY CALL JAN 03-50 VMF-AJ OI=1706 B=$23.63 SELL CALL DEC-65 MSQ-LM OI=190 B=$3.13 INITIAL NET DEBIT TARGET=$20.50 TARGET ROI(26 months)=100% Another strategy discussed by Ray today is Calendar spreads. In this case, we buy a LEAP that is 26 months away from expiration. By purchasing the $50 strike we are already $11.50 in the money, and thus we are paying a mere $10 for all this time. The long side of the spread will be profitable on its own if Microsoft is over $73 by January 2003. By selling covered calls against the LEAP we reduce our cost with every call we sell. In fact, we should be able to reduce our cost on the LEAP to $0 within about a year or so. ************** BROKERS CORNER ************** Are You Looking Ahead... By Robert Norman The markets won't go down forever! You have already heard about the Naked Call strategy which I started talking about in March. Now we need a plan for a good market because I believe we are close to the bottom. If the Nasdaq dipped below 3,000 to 2,800 or 2,500 which stocks would you trade with? Do you have your list ready? Do you know how to create a list? Here are a few ideas to help you prepare for a robust winter. As you all know, I rely on Investor's Business Daily for a lot of the information that I use for my trading. Okay, here we go: 1. I like stocks that have an EPS rank of 90 or better 2. Relative Strength of 90 or higher 3. Accumulation / Distribution rank of A 4. Group relative strength of 85 or higher 5. Number of Outstanding shares of 200 mm or fewer (the lower the better). Float 175 mm or fewer 6. Growth rate (annual compound) 25% or higher 7. Consecutive yearly earnings increase 8. Earnings increases last 2 quarters of 25% or higher 9. Last 4 quarterly sales increases 20% or more 10. No debt or very low debt (less than 30%) 11. Top 2 - 4 stocks in same industry possess high RS rankings (90 or higher) 12. Institutions own a total of 5% or higher. Hopefully this helps? After you have made your list of stocks, wait for a big up day on the Nasdaq with big volume. Then within 3 - 4 days look for a follow-through, day when you see both of these go ahead and start trading. If you have questions, don't hesitate to email me at: Contact Support Good Luck! Robert L. Norman V. P., Investments J. Michael-Patrick, LLC ************************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. 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