The Option Investor Newsletter Wednesday 10-25-2000 Copyright 2000, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/102500_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 10-25-2000 High Low Volume Advance/Decline DJIA 10326.50 - 66.60 10462.00 10306.60 1.30 bln 971/1892 NASDAQ 3229.57 -190.22 3376.33 3210.74 2.17 bln 1258/2727 S&P 100 719.14 - 19.28 737.48 718.21 totals 2229/4619 S&P 500 1364.90 - 33.26 1393.29 1362.21 32.5%/67.5% RUS 2000 475.21 - 12.64 487.85 474.29 DJ TRANS 2438.81 - 32.28 2471.69 2435.40 VIX 29.89 + 3.67 30.15 27.48 Put/Call Ratio 0.58 ****************************************************************** Insatiable Demand Turns To Demise Investors ran for the exits today as the once untouchable fiber optic stocks felt the heat. What catalyzed the selling on the NASDAQ today was Nortel's(NT) seemingly decent earnings report. How does a Canadian company listed at the NYSE affect the mighty tech index? It's that "insatiable demand" for the "red hot fiber optic sector." Remember those sound bites. Well, fiber optic counterparts on the NASDAQ were sold off in sympathy with NT, but the implications are far greater than simply the sector. In what investors considered a do-no-wrong sector, the fiber stocks are starting to fall and raising concerns as this last pocket of strength withers. First it was the semis, then it was the hardware stocks, and now it is the optical networking stocks. These are the stocks that managed to maintain their most lofty levels even through some of the roughest times recently. Today's market action creates concerns and questions about which sector is going to lead the NASDAQ. It was disastrous and quite frankly, a bit overdone. But, today's panic selling says something about this fickle market. Everything is priced to perfection based upon previous performance. I know it's a mouthful but the point is that anything short of perfect is swiftly and harshly punished. Look at the fallout on the NASDAQ from the NT news: SDLI(-81.81), AMCC(-50.31), PMCS(-37.75), MMCN(-31.38), NEWP(-31.00), CIEN(-27.00), JDSU(-24.06), JNPR(-22.56), and the list goes on. Those are massive losses in market capitalization! A sector wide devaluation as such seriously raises the question of whether the environment will return to its once rosy picture. Regardless, we are continuing to see clues of an economic slowdown that is clearly undeniable. Those losses above added up on the NASDAQ and the index closed down 190 points at 3228. Yesterday was the technical precursor for today's move when the NASDAQ put in a triple top at 3520 and just gave up into the close. Throw in NT's disappointment and you have a recipe for a huge retracement. The gap up from last Thursday has been covered for the most part, but there is still 51 points to go. Wishful thinking would be that we cover that, bounce back and sail off into the sunset, but it's never that easy. JDSU is scheduled to report earnings after the close tomorrow and this could potentially rock the markets one way or another. Given that NT's revenue numbers weren't up to par and that NT is one of JDSU's larger customers, investors fear the carnage could continue. Then again, JDSU could be the calming effect that this market needs so much. Breadth was decidedly negative on the NASDAQ with decliners crushing advancers by a 2-1 margin. Volume clocked in at 2.1 bln, indicating that there was no doubt about the seriousness of the selling. One bright spot on the NASDAQ today was from AMZN. What!? Can you believe it, AMZN bucked the trend today! The stock jumped 8% today after reporting a lower-than-expected loss, better-than-expected revenues and a rosy outlook going forward. At one point, AMZN was up 22% but finished higher by $2.31 at $31.88. AFFX also posted earnings Tuesday after the bell and was generously rewarded today. The biotech company was expected to post a loss of 12 cents but surprised the Street by reporting a profit of $295,000 for a breakeven result on a per share basis. Investors loved it and AFFX gained $16 to $68.38, a whopping 30%! As for the INDU, it fared better than the NASDAQ only losing 66 points to finish the session at 10326. On the first chart below, it looks like a nice day of consolidation after four consecutive days of gains after extremely oversold conditions when it hit 9654. The INDU did, however, break the trendline on which it has diligently traded the past five days. A little consolidation is nothing to complain about, particularly if the INDU manages to hold support at 10300. But when looking at a longer term picture for INDU in the second chart, we can see that the dominant downtrend from September has not been broken yet. The major question is whether this is consolidation for the INDU or the mother of all bull traps. In assessing this, it appears that the INDU capitulated last Wednesday, visiting the 9650 area, and the buyers have been in control of the INDU for the most part. Yet, in this current volatile environment, we must remain skeptical, using the NASDAQ's action as an example. Draining most of the life out of the INDU was HWP(-5.69) and IBM(-3.88). Also weighing on the INDU was AT&T's(T) stock performance in light of its recent announcement to break up into four separate entities. An uncharacteristically subdued C. Michael Armstrong outlined this morning a complex rescue plan to save the fledging behemoth. This is an obvious response to a sickly stock performance and unsuccessful bet on cable that Armstrong made a couple of years ago. The main culprit for T, however, was the long-distance business which is losing revenues faster than expected, even with its massive customer base. Ma Bell will be broken up into the following firms: Wireless, Business, Broadband, and Consumer. All will bear the AT&T name and are expected to be operational in 2002. T lost $3.50 today to close at $23.38. After the bell tonight, VRSN reported earnings of 18 cents, beating Street estimates by 12 cents. Revenues were $173 mln for the quarter, a 660% increase year-over-year. Yet, oddly enough, VRSN traded as low as $138.63 in after-hours, nearly $9 lower than the NY close. Someone got a bargain though, realizing the strong earnings report, as VRSN closed the after-hours session at $157. This should bode well for the NASDAQ, which is due for an oversold bounce tomorrow. Let's not forget that the trading day is long and volatile, so watch your positions. Looking forward, tomorrow morning before the bell will be the ECI report, the Employment Cost Index. The market expects a 1.0% increase. GDP is expected on Friday so traders will be paying close attention to the economic calendar. Dallas Fed President Robert McTeer spoke today and said to expect "a fairly dramatic slowdown in Friday's numbers." We are beginning to see a slowdown in revenue growth for S&P companies so a reflection in our economic numbers wouldn't be a surprise. The Euro is once again at all-time lows and concerns are growing about its future and stability. In trading, all eyes will be on JDSU tomorrow and after the close when they report earnings. This most likely will be a major market mover going into Friday so use caution in positioning tomorrow. Good luck and expect volatility. Matt Russ Editor ***************************** OCTOBER OPTIONS WORKSHOP DENVER - Oct 27-30th ***************************** ONLY a few Spots Left For The Denver Options Expo! Don’t Miss It ! We have had a great response for this event! Coming out of the summer lows is perfect time to learn just a few more ways to tweak your trading for better success. If you have not made plans to attend this event, Don’t Hesitate! We are down to only a few rooms and 2 days before the BIG KICKOFF! Sign Up Now, 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=778 ************************************************************** ************** TRADERS CORNER ************** Market Orders May Be Appropriate Sometimes By Mary Redmond On Monday morning I was interested in purchasing GE LEAPs. GE opened a few minutes after the market opened. Many NYSE stocks will open several minutes late if there is order imbalance, often caused by news events. Usually, the LEAPs will open in sequence, with the first year LEAPs opening first. On Monday, the Jan 03 50 LEAPs opened at $13.50 to $14. The ask dropped to $13.50 in a few moments. I put in an order to buy 10 LEAPs at the ask price of $13.50. The order was not filled a few minutes later. The market had changed to $12.38 to $12.88. I changed the order to buy 10 LEAPs at $12.88. The order was still not filled. Finally, a few minutes later I put the order in as a market order and it was filled immediately at $12.88. If there are a lot of limit orders pending, market orders will generally be filled first. By noon, over 450 Jan 03 50 LEAPs had traded, and over 900 Jan 02 50 LEAPs had traded. This is very high daily trading volume for two and three year LEAPs. Many LEAPs will only trade one or two contracts per day. The high volume of contracts also decreased the spread between bid and ask to less than $1.00. Many LEAPs have spreads of between $1.5 and $2.00. Market orders for options are often dangerous. The market changes so quickly nowadays that a stock can rise a few points in a few seconds. You could enter a market order to buy an option at $10 and it could be filled at $11. However, at times you might enter a market order after the market opens if you want immediate execution at the ask price and your limit order is not filled. You also need to become familiar with the trading pattern of individual stocks. For example, GE dropped from over $55 last week to under $50 on Monday after the takeover of Honeywell was announced. GE was not likely to jump up two or three points in a few seconds Monday morning since it is a very large company, and there was market uncertainty regarding the merger's impact on the stock price. If the technical indicators are pointing to a stock that is highly likely to move up or down rapidly, you may want immediate execution. In these cases, it is usually best to enter a limit order at the ask. If the market is moving very quickly, the ask may move up a quarter of a point by the time you enter the order. If you think QQQ call options will double by the end of the day and they are currently $2.125 to $2.25, you could put in an order to buy at $0.125 above the ask. This order would almost certainly be executed. Another case in which a market order may be appropriate is when you are closing a spread position the Friday before expiration. Once I was closing a put spread the day before expiration. The short put was $0.125. I put in the limit order to buy at $0.125 and the report came back nothing done fifteen minutes later. I put in the order at the market and it was executed immediately. It will be interesting to watch GE over the coming year. Some analysts have given GE a target price of $100. GE has a market capitalization of $524 bln at $53 per share. A $100 price would give it a market capitalization of almost $1 trln. The largest market capitalization any company has achieved so far is less than $600 bln. At some point we will probably have a trillion dollar company on the exchange. It will be intriguing to watch which one makes it first, as Cisco, Microsoft, GE, and EMC have all been called potential trillion dollar companies. It is often difficult for stocks to increase their market capitalization at a fast rate when they become very large. GE might be worth a trillion dollars someday, but it may not be for several years. This is one of the reasons many companies choose to spin off subsidiaries or divide their companies when the stock prices are down. However, this can also be interpreted as a sign of desperation when a company's stock is weak. The latest slashing victim in the technology market wars was NT, which lost over $46 bln in market capitalization today, after reporting sales at the lower end of estimates. Some analysts have said that the optical networking stocks were priced to perfection and needed downward adjusting. However, in this case, the selling itself may have been overdone. Consider the fact that NT was $48 last December, with a market capitalization of $148 bln. At the time, their sales were $6.57 bln. The current market capitalization is $137 bln and their sales are $7.3 bln. Their gross profit margin increased slightly from this time, and their net income is considerably higher. Consider that NT was worth over $270 bln at its peak this summer. Even before the earnings were reported it had lost over $80 bln of market value. JDSU was worth over $150 bln last spring. It is now worth less than half of that. In addition, NT is valued at a much lower level than Cisco. NT's sales totaled $28.5 bln over the last twelve month. Cisco's trailing twelve month sales were $18.9 bln. Cisco currently trades at twelve times 2001 estimated sales, and has a market value of over $350 bln. At $45, NT is trading at less than four times 2001 sales. Is Cisco overvalued or is NT undervalued? The wire line telecom equipment system group averages 4.6 times 2001 sales and 48 times projected 2001 earnings estimates. It seems that investors are floundering, trying to determine what an appropriate valuation for a company is. Many premier tech stocks have increased their earnings and revenues, and yet decreased in value considerably in the last six months. Were they overvalued previously or undervalued currently? Only time will tell. It doesn't seem unrealistic to value premier growth companies at a premier level. There are very few sectors in which stocks are able to increase their earnings higher than 10% or 12% per year. The real issue in investor sentiment these days is the exaggeration of fear and greed, and investor impatience. ************************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=810 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** HAND - Handspring Inc $89.00 +0.31 (+0.94 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. Most Recent Write-Up 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. COO Bernard Whitney also told analysts that predicted sales in the current quarter will also top earlier estimates. Besides the obvious demand for its product, the continued expansion in the U.S. 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. 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. Comments Today, HAND looked strong for most of the day until the overall NASDAQ pressure dragged the stock lower into the close. If the selling continues tomorrow, look for bounces from $85 where buyers have been showing up. Below that, the 10-dma at $83 has been providing support for HAND. More conservatively, a strong volume move through $90, or even $95, could give a momentum entry. BUY CALL NOV-85 HQA-KQ OI= 87 at $14.75 SL=11.50 BUY CALL NOV-90*HQA-KR OI=189 at $12.38 SL= 9.50 BUY CALL NOV-95 HQA-KS OI= 73 at $10.25 SL= 8.00 BUY CALL DEC-90 HQA-LR OI= 5 at $16.25 SL=12.50 BUY CALL DEC-95 HQA-LS OI= 0 at $14.38 SL=11.00 Picked on Oct 24th at $88.13 P/E = N/A Change since picked +0.88 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 ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** POP! A bursting bubble drags the Nasdaq back down.... Technology stocks led the market lower today as investors rotated into defensive measures. The Nasdaq endured precipitous losses in the wake of a major sell-off in the Networking sector after a disappointing earnings report from fiber-optic leader Nortel Networks (NT). Late Tuesday, Nortel registered a third-quarter profit that was a penny ahead of the consensus estimate, however investors focused on the company's revenue, which was about $200 million short of the expected amount. The stock plunged 25% to $46 and the company's comments about rising customer inventories and potential problems in the supply chain raised questions about the entire networking industry. Shares in JDS Uniphase (JDSU), Ciena (CIEN), Cisco (CSCO), and Lucent (LU) all fell on the news. Semiconductor issues extended their recent slump while losses in Internet stocks were reduced by a better-than-expected report from E-tailer Amazon.com (AMZN). At the same time, the Dow Industrials slid lower even as investors dumped technology stocks in favor of healthcare and consumer staples. The blue-chip leaders included Boeing (BA), Coca-Cola (KO), Johnson & Johnson (JNJ), American Express (AXP), Procter & Gamble (PG) and Eastman Kodak (K). A new round of tax-loss selling by mutual fund managers put pressure on industrial shares but the downdraft was limited due to interest in bank and financial stocks. In the broader market, biotechnology shares moved higher thanks to some bullish earnings reports and drug and health-care stocks also climbed as investors looked for companies whose earnings are expected to rise even if the economy slows. Overall, trading was heavier than normal and almost two stocks fell for each one that rose on the New York Stock Exchange. The bearish activity doesn't bode well for the short-term outlook so this week we will focus on positions with a high probability of returning a favorable monthly income. Remember, our approach is directed at achieving consistent portfolio profits, regardless of market conditions. In the current period of earnings-related volatility, we are not interested in stock ownership, just steady growth in the value of our brokerage account. Summary of Previous Picks: NOTE: October prices as of Friday's Expiration Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return HAND OCT 55 53.62 89.31 $1.38 8.7% OSIP OCT 45 42.06 72.06 $2.94 5.7% ALXN OCT 85 80.25 99.50 $4.75 4.9% Positions Closed Early: VECO (suprise recovery), NMSS Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return HAND OCT 45 44.31 89.31 $0.69 16.3% DCTM OCT 45 44.31 92.25 $0.69 15.5% CMRC OCT 45 44.44 70.00 $0.56 14.8% PWER OCT 55 54.44 84.66 $0.56 13.2% RIMM OCT 85 83.63 117.38 $1.38 11.5% ALXN OCT 80 76.75 99.50 $3.25 11.4% ITWO OCT 135 133.88 186.88 $1.13 10.5% OSIP OCT 40 38.56 72.06 $1.44 10.0% VRTS OCT 105 104.19 166.81 $0.81 9.6% EXTR OCT 83 81.38 99.38 $1.13 9.5% PPRO OCT 30 29.60 33.00 $0.41 8.8% Adj 2-1 Split ELNT OCT 80 78.62 104.63 $1.38 8.5% CTIC OCT 45 44.19 73.50 $0.81 8.4% AGIL OCT 60 58.56 72.56 $1.44 8.3% VRTS OCT 110 108.31 166.81 $1.69 7.5% VRTS OCT 110 107.94 166.81 $2.06 7.0% EXTR OCT 85 83.75 99.38 $1.25 7.0% NTAP OCT 115 112.81 148.63 $2.19 6.8% MEDX OCT 48 46.81 57.25 $0.69 6.8% Adj 2-1 Split RMBS OCT 60 58.50 63.75 $1.50 6.7% PDLI OCT 73 70.87 121.66 $1.63 6.6% RIMM OCT 60 58.37 117.38 $1.63 6.4% EXTR OCT 83 81.06 99.38 $1.44 6.2% BLDP OCT 90 88.50 100.50 $1.50 6.2% PALM OCT 40 39.12 59.38 $0.88 6.1% JNPR OCT 145 143.69 232.00 $1.31 5.8% Positions Closed Early: VECO, METHA, AVNX, RBAK, NMSS (Murphy's Law was in full effect as every position but NMSS recovered). APWR NOV 40 38.56 48.00 $1.44 10.8% DCTM NOV 50 48.44 84.00 $1.56 9.0% HAND NOV 50 48.75 88.44 $1.25 6.5% VRTS NOV 110 108.13 132.00 $1.88 5.9% HGSI NOV 70 68.94 88.69 $1.06 5.1% No play on SEPR - due to pre-open drop last Thursday. Sell Straddles: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return PMCS OCT 165 163.31 204.50 $1.69 7.4% PMCS OCT 260 261.38 204.50 $1.38 6.0% EXAR NOV 43 40.50 45.50 $2.00 15.4% Adj 2-1 Split EXAR NOV 63 65.19 45.50 $2.69 20.5% Adj 2-1 Split Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return GMST OCT 90 90.50 70.00 $0.50 13.0% TUTS OCT 120 122.31 32.38 $2.31 9.8% MRVC OCT 85 86.00 41.13 $1.00 8.2% AETH OCT 145 146.31 106.88 $1.31 7.8% RBAK OCT 180 181.00 137.56 $1.00 6.6% New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** AVCT - Avocent Corporation $67.88 *** Technicals Only! *** Avocent is a top supplier of connectivity solutions for enterprise data centers, service providers and financial institutions around the world. The company was formed earlier this year following the merger between Apex and Cybex Computer Products Corporation. Apex is a leader in server console management and switching technology. Cybex is a leading provider of network hardware used to manage servers and data centers. The combined company's branded products include a range of switching, extension, remote access and video display solutions. Avocent has been "on the move" in recent weeks and the company's outstanding quarterly results have helped boost its share value to new highs. Now the issue is trading in "Blue Sky" territory and there is no indication of any slowdown in the bullish momentum. The current technical outlook is favorable and our position offers an excellent reward potential at the risk of owning this leading issue at a favorable cost basis. AVCT - Avocent Corporation $67.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put NOV 60 QVX WL 441 1.50 58.50 9.5% *** Sell Put NOV 65 QVX WM 0 3.00 62.00 14.5% ***** KREM - Krispy Kreme $92.75 *** Speculation Only! *** Krispy Kreme is a branded specialty retailer of premium quality doughnuts. The company's principal business is owning and franchising Krispy Kreme doughnut stores for the high volume production and sale of over 20 varieties of premium quality doughnuts, including its signature Hot Original Glazed. Krispy Kreme differentiates itself by combining quality ingredients, vertical integration and a unique retail experience featuring its stores' fully displayed production process, or doughnut making theater. Each of these stores is a doughnut factory with the capacity to produce from 2,400 dozen to over 6,000 dozen doughnuts daily. The company's doughnut stores are versatile in that most can support multiple sales channels to fully utilize production capacity. In addition to retail stores, the company produces doughnut mixes and manufactures a range of equipment, which all of its stores are required to purchase. The company also operates a distribution center that provides Krispy Kreme stores with essentially all supplies for the critical areas of their business. The company's vertical integration allows it to maintain the consistency and quality of its products throughout its system, utilize volume buying power which helps lower the cost of supplies to every store, and enhance profitability. Krispy Kreme makes a great doughnut but the price of its stock is governed primarily by supply and demand. Company insiders hold more than 77% of the outstanding shares, and institutions hold another 15%. With less than 10% of the total market float available for individual investors, the issue is prone to major moves on thin volume and exposure to volatility based on demand by short-term traders. Technically, the issue appears to be successfully completing a consolidation phase and we expect the share value to continue higher in the coming sessions. Those of you who favor the outlook for the company can use this position to speculate conservatively on the future movement of its stock. KREM - Krispy Kreme $92.75 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put NOV 65 EKU WM 25 0.94 64.06 6.4% *** Sell Put NOV 70 EKU WN 6 1.38 68.62 9.2% Sell Put NOV 75 EKU WO 106 2.25 72.75 13.8% ***** PCYC - Pharmacyclics $57.38 *** Earnings Rally! *** Pharmacyclics, is a pharmaceutical company developing products to improve upon current therapeutic approaches to the treatment of cancer, atherosclerosis and retinal disease. The company's lead texaphyrin-based product candidates are XCYTRIN, a molecule to enhance the effects of radiation and chemotherapy in treating cancer; LUTRIN, a molecule for use in photodynamic therapy of cancer; ANTRIN, a unique molecule to treat atherosclerosis via photoangioplasty and OPTRIN, a molecule to treat age-related macular degeneration, which is a disease of the retina caused by growth of small blood vessels that can lead to blindness. PCYC has also developed CITRA VU, an oral magnetic resonance imaging contrast agent. In the past few months, Pharmacyclics has reported favorable results from clinical trials involving a number of drug products and bullish momentum from the news has boosted the issue to a new trading range. In addition, earnings are due on or about November 2 and most of the other companies in the group have exceeded analysts' consensus estimates with outstanding results. Our conservative position offers a method to participate in the outcome of the report with relatively low risk. PCYC - Pharmacyclics $57.38 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put NOV 45 QPY WI 0 1.38 43.62 14.2% *** Sell Put NOV 50 QPY WJ 20 2.75 47.25 19.8% ***** VRTX - Vertex Pharmaceuticals $96.06 *** Entry Point! *** Vertex Pharmaceuticals designs, develops and commercializes novel small molecule drugs that address significant markets with major medical needs, including the treatment of viral diseases, cancer, autoimmune and inflammatory diseases and neurological disorders. The company has discovered and advanced nine drug candidates into clinical development, including one product, the HIV protease inhibitor Agenerase (amprenavir), which has reached the market. Vertex has a broad product pipeline, with seven drug candidates in Phase II clinical development and significant collaborations with Glaxo Wellcome, Aventis, Schering AG (Germany), Eli Lilly, Kissei and Taisho. These relationships provide it with financial support and valuable resources for research programs for the development of its clinical drug candidates and for the marketing and sales of the company's marketed products. This company is simply one of our favorites for long-term stock portfolios and the demand for drug manufacturers has helped the issue remain relatively bullish in the midst of recent selling among a number of industry-leading stocks. Regarding Vertex, the fundamental outlook is very positive; revenues are expected to grow substantially in the coming year and the company should see higher share values in the future. The current technical trend is favorable and we offer this position as an entry point, based on the chart indications. Obviously, the issue is prone to a correction with the broad market but a reasonable cost basis exists near the previous support area at $70. VRTX - Vertex Pharmaceuticals $96.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put NOV 70 VQZ WN 175 1.19 68.81 7.7% *** Sell Put NOV 75 VQZ WO 1304 1.81 73.19 11.4% Sell Put NOV 80 VQZ WP 186 2.44 77.56 13.0% *************** BEARISH PLAYS - Naked Calls The issues are excellent candidates in the premium-selling category of options trading. Based on analysis of historical option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for profitable naked-calls. Each issue has robust option premiums, a well defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. Many traders may favor a more aggressive approach, selling options that are closer to the current price of the issue, to produce a higher initial return. While that technique may be more attractive, it also increases the theoretical risk of loss. Only you can know what plays are suitable for your personal risk-reward tolerance and portfolio outlook. *************** BRCM - Broadcom Corporation $217.88 *** 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. This play is simply based on the current price or trading range of the underlying stock and its recent technical history. BRCM's recent downward movement has been on increasing volume and it is the 4th time the stock has failed at resistance near $270. The issue continues to trade in a range from $200 to $260, but its technical strength appears to be weakening. Consider covering the (short) position on any rally above $270, that is accompanied by strong volume - an unlikely occurrence. BRCM - Broadcom Corporation $217.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call NOV 270 YRL KN 2350 3.25 273.25 9.2% Sell Call NOV 280 YRL KP 1313 2.19 282.19 6.3% *** Sell Call NOV 290 YRL KR 891 1.50 291.50 4.4% ***** JNPR - Juniper Networks $195.63 *** Sector Slump! *** Juniper is a provider of Internet infrastructure solutions that enable Internet service providers and other telecommunications service providers, to meet the demands resulting from the rapid growth of the Internet. The company delivers next generation Internet backbone routers that are specifically designed, or purpose-built, for service provider networks. The company's flagship product is the M40 Internet backbone router, and it recently introduced the M20, a new Internet backbone router purpose-built for emerging service providers. The company's Internet backbone routers combine the features of the JUNOS Internet Software, high performance ASIC-based packet forwarding technology and Internet-optimized architecture into a solution for service providers. Technology investors ran for the exits Wednesday after Nortel Networks (NT) crushed the notion that fiber-optic networking stocks would lead the rally higher. Analysts believed optical equipment makers like Nortel wouldn't be able to keep pace with demand and would escape the slowdown plaguing personal computer makers and semiconductor manufacturers. Instead, Nortel proved that industries which were once considered bulletproof are now showing that they can be affected by the economy, and the recent slowdown in spending patterns. The weakness spread to many of the leading companies in the technology group, especially within optical manufacturing. Juniper was just one of the many issues hurt by the news and now it appears there is additional downside potential for the stock in the near future. JNPR - Juniper Networks $195.63 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call NOV 260 JUP KL 911 2.88 262.88 9.1% Sell Call NOV 270 JUP KN 4838 2.00 272.00 6.4% Sell Call NOV 280 JUP KP 1410 1.56 281.56 5.1% *** ***** NEWP - Newport $117.00 *** Breaking Down! *** Newport Corporation is a global supplier of high-precision test, measurement and automation systems and subsystems that enable manufacturers of fiber optic components, semiconductor capital equipment, industrial metrology, aerospace and other precision products to automate their manufacturing processes, enhance product performance, and improve manufacturing efficiencies and yields. Newport's high precision products enhance productivity and capabilities of test and measurement and automated assembly for precision manufacturing, engineering and research applications. This play is simply based on the current price or trading range of the underlying stock and its recent technical history. The near-term NEWP price trend is bearish and reflects a pronounced negative divergence from an intermediate-period moving average. In addition, the decline has come on increasing selling pressure and a major support level has been violated. With the failure at $165, a short-term "head-n-shoulders" formation is in place and it appears the share value has little chance of reaching our sold positions in three weeks. NEWP - Newport $117.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call NOV 175 NOQ KO 78 2.88 177.88 14.5% Sell Call NOV 180 NOQ KP 1352 2.38 182.38 12.2% Sell Call NOV 185 NOQ KQ 53 2.00 187.00 10.4% Sell Call NOV 190 NOQ KR 111 1.69 191.69 8.9% *** ********************************Advertisement******************** American Express. Cardmembers are buying online Find out more! http://www.sungrp.com/tracking.asp?campaignid=825 ***************************************************************** ******************* 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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