The Option Investor Newsletter Thursday 10-26-2000 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/102600_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 10-26-2000 High Low Volume Advance/Decline DJIA 10380.10 + 53.60 10454.80 10265.10 1.29 bln 1451/1397 NASDAQ 3272.18 + 42.61 3286.29 3081.36 2.29 bln 1919/1983 S&P 100 720.62 + 1.48 725.32 705.51 totals 3370/3380 S&P 500 1364.44 - 0.46 1372.72 1337.77 49.9%/50.1% RUS 2000 479.76 + 4.55 479.79 466.56 DJ TRANS 2491.90 + 53.09 2492.67 2436.42 VIX 31.05 + 1.16 34.00 29.13 Put/Call Ratio 0.65 ****************************************************************** Another buying opportunity brought to you by Nortel Just like the IBM and Intel prompted market events of the last several weeks the Nortel earnings brought us a surprise Halloween buying opportunity. The Canadian fiber optic vendor said sales had cooled somewhat to only +90% over the prior year. Still the rocketing fiber optic sector which thought fiber would eventually replace steel as the building material of choice took it hard. The market penalized the sector for only an outlook of +100% growth going forward with a -$128 billion drop in sector market cap. This drop today was simply a PE compression event as growth expectations came back to earth. JDSU gave back -$21 billion in market cap before their earnings release tonight. JDSU beat the street by +$.02 cents and had a glowing conference call. Investors who ran for cover and trashed JDSU over the last two days are probably going to have a serious bout of sellers remorse on Friday. After trading as low as $62 today and closing around $74 after the market rebound, JDSU is trading up about +$10 in after hour to $84. Look for momentum to come back into JDSU on Friday and also to SDLI. With JDSU paying almost 4 shares for every 1 of SDLI the change in SDLI will be dramatic. Almost 100 million shares of JDSU traded today. The market reaction to all the negative news the last two days provided yet another retest of the October lows. The bottom today was 3081 on the Nasdaq and the resounding rebound was huge. From -142 to +42 in about an hour, if you blinked you missed it. Imagine working at nights and sleeping during the day. Going to bed as the market was opening up +60 points in the morning and waking up after the close at +42. Just another boring day in the market for day sleepers. For us who are keenly and painfully aware of the market movements during the day we are clinging to the fact that there are only three days left in October. With most tax selling by funds completed the remaining impact may be light but there is still those three days left for selling into rallies and capturing that last dollar from the losers. Amgen will undoubtedly be on the list on Friday. After beating estimates today after the close they warned that sales were slowing on several of their drugs and earnings for next year would be lower. After rebounding almost +5 to close at $69 AMGN fell to $59 in after hours trading. WCOM also got a disconnect from investors today as they posted far less revenue than analysts expected. The telecom sector has now come full circle again. The breakup of AT&T into the baby bells and then the consolidation last year has led into, you guessed it, a breakup again. Both AT&T and WCOM have announced breakup plans to create multiple companies from the newly consolidated group. Seems the lack of profits has put profits into a lockbox (election humor) and the only way to get them out is break up the box. Good luck! With T trading at a 52 week low of $22 and WCOM close to that low as well there may be even lower numbers for the parents in the future. Take value out of a $22 stock and what do you get? I know, I know, you get two or four stocks for the price of one but the parent will be trading in single digits if something does not change soon. Just when you thought it was safe to go back into Internet stocks after AMZN and EBAY posted better than expected numbers, Lehman Brothers came out with an "avoid" rating on AMZN. After analyzing cash flow for Amazon they feel the amount of cash on hand is not enough to service debt and run the company for the next year. OOPS! Here comes another Amazon.bomb story in Barrons. I can just see that writer frothing at the mouth with anticipation. Last week Barrons slammed CSCO and started the weakness in the Nasdaq. AMZN traded down -$2 from the close in after hours after being up +5 during regular trading. If you thought investing in tech stocks was volatile and went into consumables instead then the profit warning by Kellogg today was probably disturbing. Of course with K trading at a nine year low of $22 there was not much downside. However the acquisition of Keebler today put a positive spin on the news that maybe the company is finally doing something to turn the business around. Keebler is the number two cookie company and the merger of those two will add distribution outlets to both and the stock actually closed up. Inktomi however was not so lucky. They announced earnings after the close and warned that next quarter may come in at half of the current estimates. They dropped -$10 in after hours and will probably continue the dive tomorrow. They tripled their revenue but will suffer going forward with acquisition problems. The economic news today was good. The Employment Cost Index fell again to only a +0.9% increase for the 3Q. 2Q was +1.0% and 1Q +1.4%. With employment cost increases rapidly decreasing the Fed will have a tough time making the case that the tight job market is adding to inflation. This will help keep the Fed on hold. The reverse of this story was the headline SUNW made today saying the only thing wrong with their outlook was the inability to hire almost 7000 workers they currently need do to the tight job market. Only one report can be right and analysts point to things like benefits and stock options not being counted in the ECI numbers. Add in those figures and the employment costs may be skyrocketing. The next major report is the GDP tomorrow. With estimates clocking in at +3.5% growth the markets will be looking for some signal that the soft landing is not turning into a crash. Any number under 3% will be seen as a possible crash and could have negative results. A number over 3.5% will be seen as the light at the end of the tunnel of pessimism but a much larger number could re-ignite the Fed fears. It is a tightrope that must be treaded carefully. Iraq played its "hole" card today. Iraq threatened to withhold its 2 million plus barrels of oil beginning November 1st if they had to receive payment in American dollars. Dollars is the world standard for oil payments. He wants payment in Euros. This is in retaliation for the U.S. support of Israel and a purely political move. Still 2+ million barrels of the 75 million daily world output is a significant amount. OPEC has said they would make up any shortfall but the news event caused yet another hike in oil prices. Another 500,000 barrels per day are coming to market next week under the OPEC price control policy. In any 20 day period that oil trades over $28 they will bump production to stabilize the price. Production is not the real problem today. Problems at refineries and world shipping capacity running over 95% are both adding to the consumer shortage. The market event today was purely fiber related. During the dip back to 3081 several mainline Nasdaq big caps were stubbornly positive. Microsoft opened positive and never looked back to close at $64.50 +3.19. Intel opened up, gave back some ground at midday but never went negative and closed up +3.44. Dell gapped up from a sub $26 close yesterday and finished +1.88 at $27.75. CSCO went negative only briefly to touch $50 again but roared back to close near $54. About the only Nasdaq big cap to suffer was SUNW which closed +7 off its low but still -6.63 for the day. SUNW was seen as being susceptible to earnings problems due to business slowdowns. With servers their major product any crash landing would impact server sales. I don't believe it but that is the reason given in the media for the drop. More likely would be a couple mutual funds scrambling to take profits to offset major losers in other areas. If you had any of the Internet or fiber stocks in your fund portfolio and were forced to sell during the recent drops then you might be forced to sell winners to improve your fund performance. It is a dog eat dog world in the fund sector and overall performance is everything. We may never know what is causing the volatility in specific stocks that have not warned but just keep saying to yourself, three more days and October will be over. Then funds will be forced to put that money back to work as well as the massive influx of cash that occurs over the next four months. Good times are ahead, somewhere! Several traders were blaming the rebound today on yet another short squeeze. Could be but I think a better answer is simply money on the sidelines waiting for October to be over could not believe their luck and jumped at the chance to buy near the bottom again. The three day losing streak on the Nasdaq was snapped in climatic fashion and the low from the 18th was not touched. GE bottomed at $49 and started back up. CSCO bottomed at $50 again. INTC bounced off $42 for the fourth time in the last six days and looks headed for $50 tomorrow. IBM ended a six day slide and appears to have bottomed. Dell ended a four day slide. With the fiber optic sector poised to explode again on Friday and most of the big caps showing signs of successful bottoms I just don't see any major risk from this point. Sure there could still be three days of tax selling but it is a buying opportunity not a crisis. The GDP report will probably come in close to estimates and not be a major factor but that is always a wild card. Advance/declines today finished dead even and volume was good. Considering the decliners were beating advancers 2:1 Thursday morning this was a significant turnaround. Remember the rebound from last Wednesday's drop to near 3000? More importantly remember the Thursday/Friday rally? I think tomorrow will be a repeat as long as we don't get slammed by something out of the blue. Futures are up strong at +8.00 for the S&P and +40 for the Nasdaq. Looks like a good day to sell some naked puts or buy leaps while they are on sale. I plan on bargain hunting in the morning but the likely gap open may take some bargains off the shelf before we even get in the store! A point of interest, Dick Arms, a market timer, inventor of the TRIN indicator AND a speaker at the Denver Options Workshop this weekend, was quoted numerous times on CNBC today as calling this a successful retest of last weeks bottom. He reported that he was calling his clients all afternoon and telling them to buy based on his research. As a market historian and market technician he is widely respected for his market calls. He has been doing it for 35 years and that is longer than most investors today have been alive. Dick of course called us to get our opinion before making his prediction. (just kidding!) Great planning on our part to get him as a speaker the day after a major market call. I will be looking forward to see if Steve Nison, the Candlestick charting guru, agrees with him. Now don't you wish you had signed up for the seminar? http://www.OptionInvestor.com/workshop Good luck and sell too soon. Jim Brown Editor *********************** FREE LUNCH IN PHILADELPHIA November - 8th. *********************** OptionInvestor.com, Preferred Trade and E-Signal will hold a FREE seminar complete with handouts, freebies, door prizes and over six hours of solid information which can improve your trading results. Lightning trades, real time quotes, the best option strategies and a FREE BREAKFAST and LUNCH! How can you go wrong? It is free but you have to register so we can order food. http://www.OptionInvestor.com/seminar/free ************************* REGIONAL SEMINAR SCHEDULE ************************* The next Technical Analysis, Stock and Option Seminar is in Phoenix on Nov 02-04th. Here is your chance to learn from the pros. It is three days of in-depth education that will make you a better investor. If you live in the Phoenix area don't miss it! Some comments from recent attendees: I want to thank Chris, Steve and Scott for the excellent workshop held in Detroit last week. Having been to the Expo in Denver in March (which was fabulous), I was ready for a smaller, hands-on approach to hone my less-than-perfect skills. I was not disappointed. One can never get too much education in options investing, and Chris and Steve offer terrific, unique approaches. Laurie Chris & Steve, I would like to thank both of you for a great experience at the Atlanta Workshop. I learned more in the three days of the workshop about investing and trading than all of my undergraduate and graduate courses combined. It was a lot of information in a short time and I hope to put it to use very soon. Mike I attended the Atlanta seminar and wanted to forward my positive comments. The seminar "really lit my fire". I have been a trader for 20 years and often go to seminars and this was the first one that really taught me the most. Dr Lloyd Jim, I had the good fortune of attending the meeting in Orlando. Like your newsletter, it was a CLASS ACT. Chris and the others did a great job. Chris was by far the best performer but the gentlemen beside me was an option trader with several seminars under his belt and almost freaked out when Chris finished his Index Presentation. JC I am writing this note to compliment you and your staff on the great job they did in Atlanta. But more importantly I would like to single out Steve Rhoades as one of the finest speaker/teacher on technical analysis that I have ever had the pleasure of hearing. I am doing my best to persuade other members of the two investment clubs that I belong to, to attend the Detroit seminar. Sincerely, ML We guarantee you will not be disappointed. The class size is small so you will get plenty of individual attention from Chris Verhaegh, Steve Rhoads and staff. At less than the cost of a bad trade you can learn how to analyze stocks and trade options like the pros. Don't wait, do it now. Date City Nov 02-04 Phoenix Nov 09-11 Miami FL Dec 07-09 Philadelphia Dec 14-16 San Antonio Has the market been beating you up? Did you give back your gains from April/August? Would you like to understand all the technical indicators our writers use? Does the alphabet soup of technical terms like RSI, DMA, MACD, ROC, Stochastics, Bollinger bands, sound like Greek to you? You can learn from the experts how to interpret all these indicators, read charts, pick stocks and which option strategies to use on those stocks for less than the cost of one bad trade. Reserve your seat now for one of our regional seminars. Click here for more info: http://www.OptionInvestor.com/seminar/seminar.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=776 ************************************************************** **************** MARKET SENTIMENT **************** Back To The Bear Cave? By Austin Passamonte Just when we saw a firm bottom try to shore up behind us the next test of recent lows has emerged. How dumb are these lows? Can't they pass the test our first time around and leave it at that? New market highs must be much smarter because we haven't felt the need to repeatedly test them in quite some time. Market Sentiment certainly isn't calling for new highs any time soon and perhaps not within the measurable future. However, we like the chances of higher-highs being posted soon. Extreme volatility, heavy volume and repeated bounces point to the fact that we could be close. The VIX has spiked above 33 again today and 35+ would pierce its daily chart upper Bollinger band, a strong buy signal for bullish plays. Overhead and underlying put/call ratios across the broad indexes have reached the highly-bullish skew again. Long-term chart oscillators on weekly charts are within oversold range and in the process of reversing, although these moves take time. Numerous technical studies suggest our next major move leans to the upside. But first we face tomorrow. Earnings reports, Iraqi oil games, a sick euro, GDP report, rumors everywhere of Argentina possibly defaulting on debts and a host of other news will be dissected, digested and plugged into the equation before our next bell rings. We believe Friday will be another volatile large-range day. That's the easy part. Which direction is the tricky one! It's vital to hold above Thursday session lows and move forward from here. A break below them will send us right back to last Wednesday in a hurry. A move up to break recent highs will pass this latest test and resume the next leg up each chart. These markets aren't out of the cave and into green pastures just yet but we're getting there. Small positions, day trades and quick profits are a good idea. Puts on a break below today's lows or calls above today's session highs with tight stops in place may be the next high-odds entry points from here. ***** VIX Thur 10/26 close; 31.39 30-yr Bonds Thur 10/26 close; 5.73% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 760 - 745 6,543 4,606 1.42 740 - 725 10,235 7,891 1.30 OEX close: 720 Support: 715 - 700 1,306 7,784 5.96 695 - 680 129 4,362 33.81** Maximum calls: 740/5,501 Maximum puts : 602/8,601 Moving Averages 10 DMA 725 20 DMA 736 50 DMA 776 200 DMA 779 NASDAQ 100 Index (NDX/QQQ) Resistance: 85 - 83 24,458 42,557 .57 82 - 80 30,165 27,034 1.12 QQQ(NDX)close: 79.88 Support: 79 - 77 3,820 30,242 7.92 76 - 74 7,695 20,673 2.69 Maximum calls: 84/14,499 Maximum puts: 73/25,308 Moving Averages 10 DMA 81 20 DMA 82 50 DMA 89 200 DMA 94 S&P 500 (SPX) Resistance: 1450 9,781 8,676 1.13 1425 9,214 10,914 .84 1400 14,162 20,871 .68 1375 11,915 18,131 .66 SPX close: 1364 Support: 1350 8,054 22,496 2.79 1325 1,987 10,734 5.40** 1300 1,206 16,941 14.05** Maximum calls: 1400/14,162 Maximum puts : 1350/22,496 Moving Averages 10 DMA 1374 20 DMA 1139 50 DMA 1445 200 DMA 1442 ***** CBOT Commitment Of Traders Report: Friday 10/20 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader's direction. Small Specs Commercials DJIA futures Open Interest Net Value -91 -5 Total Open Interest % (7.19% net-short) (2.86% net-short) NASDAQ 100 Open Interest Net Value +300 -85 Total Open Interest % (1.73 net-long) (.21% net-short) S&P 500 Open Interest Net Value +55,273 -66,352 Total Open Interest % (17.89% net-long) (10.75% net-short) What COT Data Tells Us: Commercial positions in S&P 500 added to five-year extreme short levels while small specs 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 next week. Bullish: Fed's finished Benign government reports Oversold market levels Disparity in overhead call/put ratios VIX well above 30 Bearish: Oil Prices COT reports Recent pre-warnings, downgrades and shortfalls Broad market's break of critical M/A support Market leaders breakdown Daily technical chart indicators ************** MARKET POSTURE ************** As of Market Close - Thursday, 10/26/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,380 9,650 10,600 SPX S&P 500 1,364 1,305 1,420 COMPX NASD Composite 3,272 3,000 3,650 OEX S&P 100 720 700 750 RUT Russell 2000 479 455 500 NDX NASD 100 3,167 2,950 3,550 MSH High Tech 891 825 990 BTK Biotech 737 640 780 XCI Hardware 1,222 1,100 1,310 GSO.X Software 407 360 440 SOX Semiconductor 705 600 805 NWX Networking 991 925 1,180 ** INX Internet 346 275 400 BIX Banking 552 520 575 XBD Brokerage 584 550 630 IUX Insurance 767 720 805 ** RLX Retail 736 715 775 DRG Drug 427 395 440 HCX Healthcare 885 840 900 XAL Airline 134 124 140 OIX Oil & Gas 302 296 328 ** Three alerts were triggered in the past two sessions, with the IUX triggering an alert at resistance. Lowering support (NWX, OIX). Lowering resistance (NDX, BTK, GSO.X, NWX, BIX, XBD, RLX). Raising support (OEX, BTK, GSO.X, BIX, RLX, HCX). Raising resistance (IUX). There's work to be done, but the bulls look like they're making progress. ************** TRADERS CORNER ************** The Key To Trading Is In The Mind By Molly Evans Exceptional traders, according to Jack Schwager, author of The Market Wizards books, have both a real desire to actively participate in the market and confidence in their abilities to achieve success through trading. Schwager, who interviewed dozens of Wall Street's most successful traders, asserts that winning in the markets is a matter of skill and discipline, not luck. In fact, at the end of The New Market Wizards, Schwager catalogues forty-two generalized observations that he gleaned from his in-depth immersion in the markets and meticulous interviews with the great traders. It's interesting to note that the overwhelming theme of this appendix addresses the psychology and discipline of the trader. This was the essence of the interviews with these highly successful people. The reader learns little to nothing of any particular trader's styles or methods. Instead, Schwager made good strides in showing us not only the history and socialization of his wizards but was able to capture their thought processes as well. What caused them to act and react as they did? How and when did they learn discipline? Why did they gravitate to a certain market or trading vehicle or abandon another? The reason I bring up Schwager's endeavors, apart from the sincere affection I feel for his books, is that I very recently had the privilege of seeing and meeting one of those profiled market wizards. Linda Bradford Raschke is, I believe, the only female trader to attain the distinction of Schwager wizardom. Having read her story no less than three times in the past year, I was especially thrilled to learn that she would be speaking at a trading seminar held in Dallas a couple of weeks ago. It was a bit disappointing when I read her topic would be "Slump Busting Techniques." Figuring that this would be an hour of "rah rah" and "you can do it" themes instead of solid trading tactics or methodologies, I only casually strolled in to find my seat. Apparently, many others were excited to see the market maven live too. The room was packed. I wonder just what she could have discussed that would have made a better topic. Raschke is not only a great trader, she's a dynamic speaker and motivational powerhouse. I hadn't really considered myself to be in a slump as far as my personal trading goes but the fact stands on its own that when I left that conference room, I couldn't wait to get back to my trading station at home. It's nothing short of amazing to experience what a booster shot of self confidence and excitement can add to your profitability in trading. From this one hour of lecture, I learned that without a doubt, the market is the land of opportunity and what you get out of it is entirely up to you, not the market, not your broker, and not your trading buddy. It's up to you. Raschke's didactic was in truth, rather simple. She spared us the "cut your losses quick and let your winners run" tirade. Yet, she talked about how as traders we must recognize when we are in a slump and know that the battleground is in our own heads, not the market. The most successful traders are the ones who have lost the most money. Does that mean we have to lose our portfolio to eventually become that great trader? No, of course not. We all lose in trading but it's the reaction to those losses that put us on the path to our destiny. It is assumed that as a trader, you already have a trading method and established money management rules. Yet, for various reasons, even seasoned traders go through long flat periods or even a string of losses. How do we make our own V bottom or stop spinning our wheels to breakout of our bands? That answer, as you would probably suspect, lies within. A self assessment is in order. What is the problem? Are you distracted? Are you stressed in your life outside of your trading? Are you self- defeating? Are you unprepared? Have you abandoned your own rules or tried to counter the market? You must first identify problems with your style or your read of the market. Recent market dynamics for Nasdaq followers have seemed to be most advantageous for scalp traders. No one disputes that this present market is tough. It's whipsawing both ways but you can see that happening. You can recognize setups and alignment of indicators for trading in both up and down directions. Over on the NYSE, long position trades in pharmaceuticals and medical/insurance stocks or their respective sectors would have returned handsomely in recent weeks. Is your mind open to trading the short and the long side? Do you look at the charts of stocks across the markets and in the various sectors? An open mind is so important to trading. One must fight to be objective in their analysis of the market, in looking at the patterns of the chart and to various trading vehicles. Linda Raschke would argue that just as importantly, you must have the confidence that you are going to win. You must have a self assurance that you can rely upon your own decision making process. And so, we're back to ourselves. It is imperative to develop a very positive self image as a trader. Visualize yourself succeeding but fight the urge to beat yourself up if you make a mistake. Mistakes happen in this business. You can't take it back but you can get right back on the horse with a positive mental attitude. As Raschke said, "There is nothing you can do to undo the damage that has been done. It is like cheating on a diet. Once you have eaten the chocolate cake, all you do is get back to exercising to work it off. So it is with trading and making back losses. Get back to making trades. The sooner you can clear your mind and start trading again, the faster you will make up yourlosses." And speaking of exercise, Raschke is in great physical shape. She works out regularly and takes being mentally and physically fit very seriously. Burnout comes from sitting in front of the computer all day and night. It's not healthy. How can we expect to be the master of our own universe if we are tired, beaten and full of self doubt or misery? The list goes on and on about how we must have a positive self image and confidence in our own abilities to succeed. This obviously isn't limited to success as a trader. Visit the self-help section of the bookstore. Look for titles by Tony Robbins, Napolean Hill or another motivational author. Personally, I like to get books on tape and listen whenever I'm out buzzing around in life or before I drift off to sleep at night. One of Linda Raschke's favorite books is "Winning Ugly" by Gilbert. He was Andre Agassi's personal coach and penned the trials of mental attitude in overcoming obstacles in the very competitive world of tennis. No matter where you are in your trading career, a burning desire to succeed must be accompanied by a positive self image and confidence. This article could go on and on. While there are many facets to addressing issues of self motivation, awareness and success, it always boils down to a few themes of mentality in all "how to succeed" discussions and books. It can never hurt us to review these pearls of wisdom. Those who are successful in their endeavors all share common traits: Burning Desire: We must have a passion and driving motivation to become successful at the task. Faith: We must believe that our goals are attainable and that obstacles are but bumps in our path. Strategy: We must have a solid game or business plan that addresses the achievement of our goals. Think of any business plan; isn’t it true that lack of preparation and organization are the main reasons for failure? Values: Personal integrity is vital to self esteem. Know who you are what you do and don’t stand for. Commitment: This provides you the strength and fortitude to stay on your game and keep moving in a positive direction each day. I wish that I could convey to you the enthusiasm for the markets and for trading that Raschke emanates. We should all have our role models and as a female trader, I had previously sought positive living proof that a woman too could be a shark in the waters of the market. I just didn't know that I'd be so positively influenced upon seeing and meeting my own role model. ************************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 Wed Thu Week Dow 10380.12 45.13 121.35 -66.59 53.64 153.53 Nasdaq 3272.18 -14.45 -48.90 -190.22 42.61 -210.96 $OEX 720.62 -3.81 4.07 -19.28 1.48 -17.54 $SPX 1364.44 -1.15 2.35 -33.26 -0.46 -32.52 $RUT 479.76 2.51 -2.11 -12.64 4.55 -7.69 $TRAN 2491.90 -32.21 34.23 -32.28 53.09 22.83 $VIX 31.05 -0.44 -0.76 3.67 1.16 3.63 Calls HAND 95.47 -3.56 2.38 0.31 7.03 6.16 Winner!!! IDPH 190.19 6.63 3.88 -13.75 3.19 -0.06 Profit taking MSFT 64.44 -3.06 -0.63 -0.25 3.19 -0.75 New RSAS 55.06 -1.81 -1.56 -0.88 1.56 -2.69 Dropped AGIL 68.00 2.19 2.88 -4.81 -4.81 -4.56 Dropped EMC 86.00 -0.06 -4.25 -5.69 -4.00 -14.00 Standing RIMM 102.50 5.84 -4.47 -12.63 -3.63 -14.88 TSE effect BRCM 214.13 9.56 -12.75 -21.13 -3.75 -28.06 Come back! NTAP 116.81 -8.25 -6.69 -11.44 -5.44 -31.81 Grab your hat BRCD 216.00 14.19 -6.63 -19.00 -25.00 -36.44 Rebound!!! JNPR 190.13 -7.13 -6.75 -22.50 -5.50 -41.88 Found support CIEN 103.00 -7.38 -6.75 -27.00 -5.38 -46.50 Buying oppt Puts VTSS 58.63 -2.63 -6.75 -11.50 2.63 -18.25 Downgraded TIBX 57.00 -3.06 -0.13 -5.13 -4.75 -13.06 New FCEL 65.69 -2.09 -1.78 -8.69 2.88 -9.69 Breakdown PVN 93.69 -2.31 -2.50 0.50 -5.06 -9.38 Rolled over PHCC 51.25 6.94 -3.38 -1.00 0.31 2.88 Steady 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: ***** AGIL $68.00 -4.81 (-4.56) Despite holding support near $71 yesterday afternoon, anybody cheering the victory woke up to an unpleasant surprise this morning. Due to continuing weakness in the technology sector (largely from the Optical group) AGIL moved sharply lower this morning, falling all the way to $60 before finding support. Although the recovery looked decent, the technical violation places the stock below every moving averaged except for the 200-dma, and this will present formidable resistance going forward. We may consider AGIL again in the future, but until sentiment improves, we will err on the side of caution and drop it tonight. RSAS $55.06 +1.56 (-2.69) The bulls have taken a beating this week, with many stocks giving up as much as 35% due to rampant investor fears. RSAS has actually held up fairly well, putting in a mild bounce this afternoon at the $52 level. The problem is that the recovery ran out of steam near $55, which was previous support. The stock's inability to hold support and move higher, changes our outlook for the near future. Despite positive news and competitor VRSN announcing strong earnings, the bulls just can't seem to get our play moving. Rather than wait for a significant technical violation, we'll take our money off the table first, and look for better plays. PUTS: ***** No dropped puts today ********************************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 Thursday 10-26-2000 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/102600_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 ******************** BRCM $214.13 -3.75 (-28.06) What a come back! Today's play by play action in the market would have best been suited for a sports caster, due to the dramatic and dynamic swings that occurred. BRCM appeared to be on the way out, hampered by the weakness in the markets due to a lack of buyers. The stock was trading well below the 200-dma with a momentous negative trend. Then the buyers came as the NASDAQ bounced off the 3100 mark. BRCM rallied $34.50 on the spree, and has given us a very bullish bounce sign with a kite tail on the chart. Another bullish factor to the play, is the fact that the strength is on the heels of a 3-day pull back. The other very bullish aspect to this play is the addition of BRCM to the NASDAQ 100 on Monday. The event should also attract many buyers to the play. Due to the volatility of the markets, traders should wait for BRCM to trade above $225 on continued volume and market support. At this mark, BRCM should develop enough momentum to retest the $260 resistance channel. BRCD $216.00 -25.00 (-36.44) While Nortel is in the Networking sector and BRCD is in the Storage sector, our play fell victim to the "shoot first, ask questions later" mentality as traders headed for the exits after NT's revenue miss. Because both the Storage and Networking sectors are high growth areas with high expectations, a high premium and valuation was assigned to leading stocks in both sectors. The bear argument was these stocks were priced to perfection, which brought in the sellers. With that, BRCD fell $19 or 7.31% yesterday on 130% of ADV. Today, selling reached a fever pitch as BRCD went below $200 but finding support at the $190 level, came back with a vengeance. Despite closing down over 10%, the high volume (almost three and half times ADV) and dramatic recovery intra-day would suggest that today may have been the climax. Support for BRCD can be found in increments of $5 all the way down to $190. Aggressive traders can target shoot their entries depending on their risk tolerance at these levels but it is best to confirm a bounce with volume before entering. Conservative traders will want to wait for BRCD to make it back above its 50-dma ($226.71) confirmed with a rising NASDAQ before considering a play. EMC $86.00 -4.00 (-14.00) As one of the last remaining big cap stocks left standing, EMC presented a tempting target for profit-takers and bears alike. All they needed was an excuse. Yesterday, with the NASDAQ down 190 points, EMC was unable to hold on. Gapping below the 10 and 50-dmas (now at $94.50 and $95.05, respectively), the stock fell as the sellers were out in force, especially targeting the recently strong sectors such as Storage. This was not helped by subsidiary MCDT, as it too headed lower. Today, EMC continued to move down, but twice it was able to bounce off support at $80. From there, a late day rally allowed the stock to significantly narrow its loss to close down 4.44% on over twice the ADV. At this point it appears that the worst may be over. With strong support at $80, a bounce off that level as well as support at $85 would be a possible target to shoot for as an aggressive play. For the more risk adverse, a break above the 100-dma $87.53 on strong volume would provide a safer entry point. IDPH $190.19 +3.19 (-0.06) Unable to hold $200, and with a strong downdraft in the NASDAQ, as well as the Biotech sector, traders took their profits yesterday, bringing the stock down $13.75 or 6.85% on almost twice the ADV. As a result, IDPH closed below its 5-dma (now at $193.14) for the first time in almost two weeks. Today, with even more selling in both the Tech index and the Biotechs, IDPH headed lower. But each time the sellers came in, so too did the buyers. Despite getting as low as $178 intra-day, a late day rally allowed IDPH to close 1.70% higher on over 135% of ADV. Fans of candlestick technical analysis will note that today's action formed a hammer pattern, with a long tail. It means, that despite the sellers' attempt to bring the stock down, the buyers were stronger; it is a bullish sign indeed. However, such a formation requires confirmation. If IDPH can break through resistance at the 5-dma tomorrow on volume, this would likely be enough confirmation for conservative traders can take a position. For the more aggressive, a bounce off the 10-dma, now near $185 would provide a better, but higher-risk entry point. RIMM $102.50 -3.63 (-14.88) As one of the larger cap stocks on the Toronto Stock Exchange (TSE), what happens to other TSE giants such as NT and JDSU has a significant affect on RIMM. With this in mind, the stock was clearly effected by the fallout of Nortel's revenue shortfall. With the TSE closing down over 900 points yesterday, RIMM followed in sympathy, losing $12.63 or over 10% on over twice the ADV. This put the stock below both its 5 and 10-dmas, currently converged near the $114 level. Today, as NT and JDSU continued lower, so did RIMM as it fell another 3.42% on over 250% of ADV. However, it did manage to close above the psychologically important $100 mark. Support can be found in increments of $5 with the 50-dma just below the $90 level. Aggressive traders looking to buy on a possible pullback can target shoot these levels but confirm with volume. At this point, conservative traders will want to make sure that RIMM can break above its 5 and 10-dmas before entering the play, with overhead support also in increments of $5. With JDSU reporting earnings tonight, tomorrow will surely be a volatile day for RIMM so when considering a play, confirm with sentiment in the TSE and only enter if the buyers return in force. JNPR $190.13 -5.50 (-41.88) After the carnage that we saw in the Optical Networking sector in the aftermath of NT's earnings disappointment, it seemed a foregone conclusion that JNPR would be a drop tonight. But then, after giving up nearly 27% of its market cap between Tuesday's close and this morning's low of $159.38, our play staged a near-miraculous recovery, managing to eke out a close above $190. Today's low should act as good strong support, but beware of changing sentiment. Volume today came in north of 22 million shares, dwarfing yesterday's 14 million, and most of it was on the sell side. The NASDAQ dropped mid-day to test it's intraday lows, and fortunately managed to post an impressive recovery. Most of the selling over the last 2 days was directed at Optical stocks, and this same sector led the recovery into the close this afternoon. Use extreme caution in trading JNPR as the sentiment is shifting with amazing rapidity. Anticipation of JDSU's earnings after the close contributed mightily to the recovery, and fortunately the report was strong. But there is a lot of darkness between now and tomorrow's open. If traders sell the good news, we could see a rapid return of the negative sentiment that has plagued Optical stocks over the past 2 days. Only those that like to live dangerously should consider buying intraday dips to support. We have seen solid support levels (200, 190, 180, 170) cut asunder in the past 2 days, so unless the buying volume is strong on the bounce, wait to buy strength on a breakout. $200 looks like a logical place for JNPR to convince us that it is on the road to recovery. Stop losses are a must if you are going to play in this volatile sector. CIEN $103.00 -5.38 (-46.50) The last of the Internet high-flyers finally got their wings clipped. The instigator? Nortel's (NT) relatively decent earnings report. At the onset, the fiber- optics started to tumble in sympathy, but the selling within the sector turned into a frenzy. Investors got cold feet and didn't want to try to catch the falling knife. CIEN was knocked down 25%, or $27 before the closing bell put a stop to the slide. Today, CIEN fell lower and hit a bottom at $84. The stock proceeded to trade sideways with over 39 mln shares exchanging. It wasn't until the NASDAQ turned around later in the day that CIEN managed a slight recovery and closed above the century mark. Needless to say, the fiber-optic saga is currently disastrous, but that's not to mean the play is over. The silver lining might be a capital buying opportunity tomorrow. Look for a strong rebound on the NASDAQ to propel CIEN off the current level. A convincing move through the 50-dma ($112.58) would provide some confirmation that CIEN can resume an uptrend. NTAP $116.78 -5.47 (-31.81) Did you have time to grab your hat on the way out the door? Many of the networking stocks took big hits as a result of Nortel's (NT) earnings report. The punishment for not being perfect put many stocks to the test. On Wednesday, the 50-dma buoyed NTAP around the $120 level, but that safety net failed during today's extended downdraft. Concerns about the valuation of storage stocks added the salt to the bleeding wound. A heavy-duty parachute would have helped soften NTAP's crash landing; however, stop losses worked better to minimize losses. Whether it was the oversold conditions or a combination of other market variables, the current changed on the NASDAQ and a late day rally ensued. NTAP was on the buy list and it recouped the majority of today's losses. The advance places it back in the vicinity of the supportive 50-dma line ($119.59). As a result of today's action and in consideration of the upside potential, we're keeping NTAP on our call list tonight. Now if selling resumes tomorrow as a result of JDS Uniphases' (JDSU) earnings report (despite its good marks), wait for the market to stabilize then look for a strong volume recovery through $120 before taking a position into the upward momentum. Network Appliance also has its own earnings release scheduled in just a couple of weeks. The announcement is scheduled for November 14th, after the market. HAND $95.47 +7.03 (+6.16) Oh yes, it's true. There were a few stocks that bucked the selling trend and moved into the positive. HAND was on that short list and gave a stellar performance during the past two sessions. On Wednesday, HAND was steadfast and traded at higher levels for most of the day. The stock continually tested the all-time resistance of $99.31, but the NASDAQ pressure eventually took HAND back down to $88 by the close. Today when the selling finally subsided and investors started picking and choosing, we were presented with a prime buying opportunity. Strong momentum bounces off the 10- dma line and the $85 level followed by high-volume moves through $90 provided a variety of opportunities to take entry. Look for the trend to continue tomorrow. Definitive moves through $95 accompanied by rallying market conditions could portend a momentum entry tomorrow, but be wary of traders selling into the strength. Keep stops tight. ******************* PLAY UPDATES - PUTS ******************* FCEL $65.69 +2.88 (-9.69) When we started this play last Sunday, one of the main technical signals we were looking for was a break below the neckline of FCEL's head and shoulders formation. Yesterday, thanks to an overall shaky market after the Nortel news, FCEL gapped down at the open. In doing so, it opened below the critical $70 neckline support level and from there, spent the rest of the day heading lower. By the end of the day, FCEL had lost $8.69 or 12.15% on over 125% of ADV. Today, with oil moving higher due to comments from Iraq, threatening to hold back production, FCEL was able to move slightly higher but serious technical damage has already been done, making this an attractive put play. Failed rallies above $70 resistance and the 5 and 50-dmas at $69.63 and $75, respectively can provide aggressive entry points while a break below $60 with conviction should give conservative traders a target to shoot for. As this play is driven by oil-related news, make sure sentiment confirms direction before jumping in. PVN $93.69 -5.06 (-9.38) Our play on PVN is performing nicely, aided by downside pressure in the Financial sector. Yesterday's attempted rally failed right at the 5-dma (then at $102), and the afternoon rollover turned into a rapid downhill descent on the back of the overall bearish sentiment this morning. After falling to test major support at $86, PVN managed to attract some buying interest and recover to close fractionally above the 200-dma (currently $93.50). This level will be pivotal for our play going forward. If it can hold as support, our play will have run out of gas, but the declining 5-dma will continue to pressure the stock, and rollovers near this level will continue to make for good entries. Strong volume has accompanied the recent selling, with today's session seeing nearly 4 times the ADV change hands. Below current levels, look for support to materialize at $83, and then $79. The more conservative entry strategy will be to wait for continued selling pressure to violate the 200-dma before initiating new positions. For those of you with open positions, keep your stops tight in case the bulls manage to stage a recovery from current support levels VTSS $58.63 +2.63 (-18.25) No use crying over spilt milk, as we missed a great entry on VTSS earlier this week. We missed the majority of the move yesterday due to the large gap down, but sentiment is still favoring the bears. It was bad enough that the solid earnings report last week was not received, but bearish sentiment aimed at just about any stock in the Communications arena has not been kind. Heaping more misery on VTSS yesterday afternoon was Lehman Brothers, downgrading the stock from Buy to Outperform. Caught between the pain being felt by the Optical and Semiconductor sectors, VTSS will have a hard time moving higher and should make for a fairly easy mauling target for the bears. Buyers tried to step in this morning, but were quickly turned back at the bottom of yesterday's gap (near $60) and this level should act as resistance, especially as the month of October continues to spook investors. The late-day recovery began to give the bulls hope, as volume picked up. Above $60, VTSS will see solid resistance at the top of the gap ($67.50), reinforced by the sharply declining 5-dma ($66.69). Consider new entries as our play rolls over from resistance, or for a more conservative play, wait for continued selling volume to penetrate intraday support near $53. PHCC $51.25 +0.31 (+2.88) PHCC is currently epitomizing the phrase, "steady as she goes". Now granted this is certainly not something option traders want to hear, but that's how PHCC has traded in recent sessions. On one hand there wasn't any major event to precipitate further losses, yet on the flip side, it doesn't appear PHCC is poised to bounce higher either. The stock is simply trading sideways and consolidation at this lower level. Both yesterday and today, $52.25 served as a tough line of upper resistance in contrast to the much higher ceiling of $56.50, established earlier in the week. This developing pattern of lower highs is encouraging. Better evidence of a trending breakdown would be convincing moves back under the $50 level on strong volume. Wait for the confirmation before beginning new plays and keep stops tight while the market struggles for direction. ************************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 ************** MSFT - Microsoft $64.44 +3.19 (-0.75 this week) Microsoft is the largest software stock traded on the U.S. stock exchanges measured in market capitalization. They develop, license, manufacture and support many different software products for various client applications. Their best known products include Windows 2000 and Windows NT. In addition, their MSN internet service is widely successful. Their business has three main divisions: sales, marketing and support, and business operations. The vast majority of computers in the US and the world use Microsoft software. Microsoft has had a difficult time for the last twelve months. However, due to several factors, including a superb first quarter earnings report, the stock seems to be making a dramatic recovery. At its peak in January of 2000, the company had a market capitalization of over $550 billion and a P/E of over 100. The market crash in April coincided with the verdict in the widely publicized monopoly trial, and pushed the stock below its 200 DMA for the first time since 1996. The trial is no longer making headlines, and since Joel Klein resigned from the case, many analysts have stated that the outcome of the trial may have little significance in valuing the stock over the long term. Investors seem to have forgotten about it. MSFT hit a two year low on October 16th of $49.56. However, a blowout earnings report released on October 18th seems to have had the power to reverse the downtrend. Microsoft reported that their profit in the first fiscal quarter rose 18% to $2.5 billion, or 46 cents per share, primarily due to the success of their Windows 2000, and shrinking expenses. This new earnings report gives them a P/E of 37.6 and a market cap of $339 billion. This is quite impressive for a company with revenues of over $23 billion annually. In this market environment, investors are running away from companies with no profit and P/E ratios in the hundreds. They want growth, safety and reliability, and need look no further than MSFT. Today, MSFT surged over 3 points on strong volume to poke through the 50 DMA at $62.36. Aggressive traders could look to enter new positions at current levels early tomorrow if the NASDAQ shows signs of rallying. If MSFT pulls back, look for bounces off $64 and lower near the $62.50 level. A more conservative entry might be found if MSFT trades above the $66 level. In the news today, MSFT announced the long awaited release of new database software for hand held electronic Internet devices. In addition, the Wall Street Journal reported that CSFB joined forces with MSFT to broaden its distribution channels. BUY CALL NOV-60 MSQ-KL OI=25487 at $6.13 SL=$4.13 BUY CALL NOV-65*MSQ-KM OI=33918 at $3.13 SL=$1.63 BUY CALL NOV-70 MSQ-KN OI=37920 at $1.31 SL=$0.50 BUY CALL DEC-60 MSQ-LL OI= 422 at $7.38 SL=$5.38 BUY CALL DEC-65 MSQ-LM OI= 2701 at $4.38 SL=$2.88 SELL PUT NOV-65 MSQ-WM OI=11698 at $3.38 SL=$1.56 (see risk of selling puts in play legend) Picked on Oct 26th at $64.44 P/E = 38 Change since picked +0.00 52-week high=$119.9 Analyst Ratings 6-10-2-5-0 52-week low=$ 48.43 Last earnings 10/18 est= 0.40 actual= 0.46 Next earnings 01-18 est= 0.49 actual= 0.47 Average daily volume = 28.6 mln ************* NEW PUT PLAYS ************* TIBX - Tibco Software $57.00 -4.75 (-13.06 this week) Tibco Software helps companies get a ride on The Information Bus (TIB). Tibco's software products enable businesses to link internal operations, business partners and customer channels in real-time. The Company's software products allow multiple distinct applications, Web sites, databases and other content sources to be integrated and managed within a common framework. By licensing their software, TIBX enables enterprises to extend their information technology infrastructures and business processes across the Internet to conduct all forms of electronic business. Where have all the buyers gone? Caught in a down-trending channel for more than 3 months now, TIBX just can't seem to get the bulls to come back in strong enough numbers to keep up the bears in check. Even the 200-dma (then at $81.94) couldn't stem the selling, and TIBX has now confirmed several times that this level will be a tough obstacle to overcome. Our new play could be the poster child for the lower high/lower low pattern that is becoming more and more common in the Internet sector. Many technical factors have coalesced to confirm the degree of weakness we can expect from TIBX. The most recent rollover took place in the middle of the downtrending channel, rather than the top, and oscillators like MACD and Stochastics have been posting continually weaker peaks for the past 3 months. The most recent breakdown has pushed the stock solidly below all of its shorter moving averages, with the 5-dma clear up at $64.35. This coincides nicely with violated historical support (now resistance) between $64.65. Support near the $51 level was tested and held this morning, but further NASDAQ weakness could be the straw that breaks that camel's back. Pick the entry strategy that fits your trading style such as a rollover at resistance or a violation of support, but in either case, let volume be your guide. If today's late-day recovery is any indication, we will likely test resistance first. BUY PUT NOV-60*PAV-WL OI=124 at $8.88 SL=6.25 BUY PUT NOV-55 PAV-WK OI=177 at $5.75 SL=3.75 Average Daily Volume = 1.71 mln ********************** PLAY OF THE DAY - CALL ********************** CIEN - Ciena Corp $103.00 -5.38 (-46.50 this week) CIENA Corporation's market-leading optical networking systems form the core for the new era of networks and services worldwide. CIENA's LightWork architecture enables next- generation optical services to transmit signals simultaneously over the same circuit. This multiplexing system changes the fundamental economics of service-provider networks by simplifying the network and reducing the cost to operate it. About 45% of sales come from outside the US markets. Most Recent Write-Up The last of the Internet high-flyers finally got their wings clipped. The instigator? Nortel's (NT) relatively decent earnings report. At the onset, the fiber-optics started to tumble in sympathy, but the selling within the sector turned into a frenzy. Investors got cold feet and didn't want to try to catch the falling knife. CIEN was knocked down 25%, or $27 before the closing bell put a stop to the slide. Today, CIEN fell lower and hit a bottom at $84. The stock proceeded to trade sideways with over 39 mln shares exchanging. It wasn't until the NASDAQ turned around later in the day that CIEN managed a slight recovery and closed above the century mark. Needless to say, the fiber-optic saga is currently disastrous, but that's not to mean the play is over. The silver lining might be a capital buying opportunity tomorrow. Look for a strong rebound on the NASDAQ to propel CIEN off the current level. A convincing move through the 50-dma ($112.58) would provide some confirmation that CIEN can resume an uptrend. Comments JDSU's bullish earnings report could set the optical sector a light. CIEN's $7 burst in after hours trading could portend a bigger rally early tomorrow with cooperation from the economic data scheduled to be released. Aggressive entries could found if CIEN charges out of the gates above $105 tomorrow morning. A more conservative approach might be to wait for CIEN to build momentum, thereafter target shooting for entries upon a rally above the $110 level. If shares pull back, a bounce off $100 might provide a solid entry. BUY CALL NOV-100 UEE-KT OI=2803 at $14.50 SL=10.75 BUY CALL NOV-105*UEE-KA OI= 545 at $12.25 SL= 9.25 BUY CALL NOV-110 UEE-KB OI=3476 at $10.38 SL= 7.25 BUY CALL DEC-110 UEE-LB OI= 177 at $15.13 SL=11.00 BUY CALL DEC-115 UEE-LC OI= 215 at $13.38 SL=10.00 Picked on Sep 24th at $120.75 P/E = 736 Change since picked -17.75 52-week high=$151.00 Analysts Ratings 9-9-0-0-1 52-week low =$ 15.13 Last earnings 06/00 est= 0.17 actual= 0.19 Next earnings 11-16 est= 0.24 versus= 0.03 Average Daily Volume = 8.57 mln ********************************Advertisement******************** American Express. Cardmembers are buying online Find out more! http://www.sungrp.com/tracking.asp?campaignid=824 ***************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ Market Volatility Continues... Wednesday, October 25 The stock market plummeted today after a disappointing forecast from Nortel Networks (NT) sent technology stocks into a downward spiral. Industrial issues also slumped on worries of a slowdown in future earnings. The Nasdaq closed down 190 points at 3,229 and the Dow was down 66 points at 10,326. The S&P 500 index was down 33 points to 1,364. Activity on the Nasdaq was heavy at 2 billion shares exchanged, with declines trouncing advances 2,734 to 986. Trading volume on the NYSE reached 1.29 billion shares, with declines beating advances 1,901 to 970. In currency trade, the Euro fell to a new low of 82.46 cents amid ebbing confidence in the European Central bank. In the bond market, the 30-year Treasury fell 16/32, pushing its yield up to 5.74%. Tuesday's new plays (positions/opening prices/strategy): Microsoft MSFT LJAN50C/DEC65C $20.50 debit LEAPS/CCs Home Depot HD JAN36P/JAN43P $3.25 credit bull-put Our new pair of spread candidates experienced favorable activity during today's session. Both plays were available at the target entry prices and the underlying issues held up well considering the bearish market movement. (Congratulations to our new staff member for some excellent selection over the past two weeks!) Portfolio Plays: Technology issues crashed lower Wednesday as worries about the future performance of the networking sector weighed heavily on investors. The sell-off in Nortel (NT), whose shares fell 29%, sent shock waves through the Nasdaq as analysts scrambled to unravel the effect of NT's shortfall in optical network system sales on other industry issues. Nortel's performance was well below analysts' consensus forecasts of 120% growth and concerns that other networking companies will show similar sales declines affected a number of the leading communication companies. Most semiconductor and Internet stocks also retreated as news of NT's deficiency began to take its toll on other technology sectors and a significant drop in shares of AT&T (T) pulled the telecom group into the foray. The #1 U.S. long-distance phone company cut its growth outlook and announced plans to separate its wireless units, broadband, business services, and consumer long-distance, marking the biggest reorganization of the corporation since the breakup that created the Baby Bells. The Dow industrial average was also pressured by losses in Hewlett-Packard (HWP) and International Business Machines (IBM). At the same time, stocks supporting the blue-chip index included "Old Economy" companies in the consumer products, pharmaceutical, and banking sectors, all of which were well received by investors fleeing the troubled technology group. Johnson & Johnson (JNJ), Merck (MRK) and Coca-Cola (KO) led the gainers on the Dow. In the broader market, biotechnology issues moved higher thanks to bullish earnings reports and health-care stocks also edged upward as investors looked for companies whose earnings are expected to rise even if the economy slows. Portfolio Plays: In Tuesday's session, we enjoyed a number of winning positions. The industrial group was our most productive category and plays in the financial sector dominated the portfolio winners. Bear Stearns (BSC) jumped to a mid-day high near $66 and eventually closed up $5 at $63 on momentum from the recent takeover rumors. Our bullish diagonal spread returned an enormous two-week profit for traders that rolled the long-term play to November options. Allstate (ALL) finished up $2.31 at a recent high near $36 and those of you in the bullish synthetic position are starting to achieve excellent returns. Knight Trading Group (NITE) also rebounded with the online brokerage sector and now the issue is above $30, our original cost basis in the synthetic position. Last week's downward adjustment to the NOV-$25 Put appears to have been too conservative but at least the position will end without major losses. Long-distance carrier Bellsouth (BLS) continued higher, closing near $43 amid subtle strength in the telecom group and the bullish synthetic play is now offering a $1.50 profit with three months remaining until the long option expires. Carter Wallace (CAR) was the surprise of the session, climbing almost $2 to a high near $30 as traders speculated on a potential buyout of the issue. Our new diagonal spread produced a short-term profit of $1.06 on $2.94 invested and the position does not expire until January. Wednesday's trading was fraught with apprehension and investors showed their true outlook for the technology group, dumping all but the most attractive issues. Share values dropped across the board and the capitalization of many market leaders was reduced by substantial amounts. Applied Micro Circuits (AMCC), one of last month's candidates, dropped $50 during the volatile session. Juniper Networks (JNPR) and Broadcom (BRCM) were the big losers in our portfolio and the bullish positions in those issues will need to be monitored closely (for exit or adjustment) over the next few days. Maxtor (MXTR) was the lone standout, rising $1.12 to $9.62, and the unexpected move boosted our bullish calendar spread to profitability. The long option expires in January. Another small-cap issue, Fairfield Communities (FFD) also moved in opposition of the trend and our recent synthetic position is beginning to exhibit excellent potential. Thursday, October 26 No plays today...(on the road!) Questions & comments on spreads/combos to Contact Support ****************************************************************** - STRATEGIES - A recent commentary by staff writer Chris Verheigh in Options 101 prompted a request from one of our readers for information on the popular strategy of "Butterfly Spreads." ****************************************************************** Butterfly Spreads: Overview The butterfly spread is generally a neutral position that is a combination of both a bullish spread and a bearish spread. The spread is designed primarily for the instrument that will not experience much of a net rise or decline before option expiration. The most common approach involves spreads with a relatively small investment and has limited risk as well as profits. The strategy can be costly in terms of commission fees so you should consider playing these combination strategies with a low cost (discount) broker. That is, of course, unless you trade with a professional who has direct access to the exchange floor and can easily return he cost of personal service in the form of better executions. There are three strike prices involved in a standard butterfly spread. With calls, (the spread can also be initiated with puts) the butterfly spread consists of buying one call at the lowest strike price, selling two calls at the middle strike price and buying one call at the highest strike price. Here are the basic characteristics of the strategy: 1. The maximum amount of profit is realized when the stock price ends the expiration period at the strike price of the written options. 2. The risk is limited both to the upside and to the downside, and is equal to the amount of the net debit required to establish the spread. 3. There is a profit range within which the butterfly spread makes money. Outside this profit range, losses will occur at expiration, but these losses are limited to the amount of the original debit. 4. The collateral investment required for the butterfly spread is equal to the sum of the requirements for the bullish position and the bearish position. The following formulae can be used to quickly compute the important details of this spread: Collateral required = distance between strikes + net debit Maximum profit = distance between strikes - net debit Downside break-even = lowest strike + net debit Upside break-even = highest strike - net debit Here is a profit graph of the Butterfly Spread: http://www.numa.com/derivs/ref/os-guide/os-033.htm Ideally, one would want to establish a butterfly spread at the smallest debit possible in order to limit his risk. At the same time, most traders try to initiate the position with the stock or index value near the middle strike price (in the area of maximum profit) to benefit from those cases in which the instrument remains relatively unchanged. Some traders will try to obtain a small debit by taking an opinion on the underlying issue. These are the smallest debit positions as the stock price is usually some distance from the middle (short) strike price. For example, if the stock price is close to the higher strike price, the debit would be small, but the investor would also have to be somewhat bearish on the issue. The instrument would have to decline in price (towards the sold options) for the maximum profit to be realized. When the issue begins closer to the lower strike price, the investor also open the spread for a small debit but he would now have to be bullish on the underlying stock in order to try to realize the maximum profit. Thus, if the butterfly spread is to be established at a very low debit, the trader will have to make a decision as to whether he intends to be bullish or bearish on the underlying issue. Most professionals prefer to stay as neutral as possible on the instrument in this strategy. This approach will lead to slightly higher (initial) debits but it will theoretically have a greater probability of returning a profit if the stock price remains relatively unchanged. In my experience, the best butterfly spreads are generally found on the more expensive (and volatile) stocks with strike prices at least 10-20 points apart. The potential return in these positions is large enough to overcome the commission costs and the probability of profit is somewhat higher, relative to lower priced stocks with options strike spreads of $5 or less. Butterfly Spreads: Follow-up Strategies The butterfly spread has limited risk by its construction and there is usually little that the spreader must do in the way of follow-up action. The only portion of the spread that is subject to assignment is the (short) option at the middle strike. If the price of the issue is near the middle strike after a reasonable period of time, and one feels that the stock is about to make a big move, it may be advantageous to close the spread to protect the available profits. If the original debit was large and the stock price is beginning to move above the higher strike or break down below the lower strike, the trader may want to close the spread to limit losses. There is a common method of legging out of a butterfly spread that is often used by more experienced traders. If the price of the underlying issue moves significantly, early in the life of the spread, the bullish portion (or the bearish portion, depending on which way it moves) of the play might be closed-out near its maximum profit potential. The trader may want to take advantage of this situation in order to increase position profits if the issue reverses direction and returns to the original target range. By increasing his risk slightly, he may be able to improve his position significantly, converting the butterfly spread to a vertical (or price) spread. Although the chances of such a trend reversal cannot be considered great, it does not cost the trader much to restructure himself into a position with a much broader (maximum) profit range. Butterfly Spreads: Strategy Summary The butterfly spread is an attractive low-cost strategy with limited profit potential and limited risk. One can keep his initial debits to a minimum by taking a directional posture on the underlying stock. To remain neutral, he will normally have to pay a larger debit to open the spread, but may have a better chance of making money. If the stock experiences a large move prior to expiration, the trader may want to close the profitable side of his butterfly spread near its maximum potential and thus be able to capitalize on a stock price reversal, should one occur. Good Luck! ************************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=792 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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