The Option Investor Newsletter Wednesday 11-15-2000 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/111500_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 11-15-2000 High Low Volume Advance/Decline DJIA 10707.60 + 26.50 10799.40 10635.90 1.07 bln 1653/1188 NASDAQ 3165.49 + 27.22 3208.95 3104.57 1.70 bln 1839/2069 S&P 100 733.53 + 3.86 738.13 725.19 totals 3492/3257 S&P 500 1390.04 + 7.09 1395.96 1374.75 51.7%/48.3% RUS 2000 491.79 + 4.88 493.04 485.61 DJ TRANS 2841.01 + 17.93 2842.53 2808.72 VIX 28.77 - 1.47 30.76 28.23 Put/Call Ratio 0.62 ****************************************************************** No knight in shining armor today! Greenspan passed up the opportunity to swoop down from his FOMC meeting on high and appear like a knight in shining armor and save the markets from the election 2000 morass. But instead of a knight he turned into the Thanksgiving turkey and announced no change in policy and the markets ran for cover. The Fed said that business demand was falling but the easing demand was not sufficient to warrant a change in posture. The Fed still sees the inflation monster under the bed even when almost every earnings release this quarter has complained about slowing demand. Could Alan be taking a parting shot at Bill Clinton and his legacy? Did Bill tell him to keep the pressure on until the election was resolved? There must be a conspiracy here somewhere that will turn this slow news day into a tale of mystery and deception. The truth is out there but we may never know it. Where is Mulder when you need him. Back to reality, the Fed nightmare is not over after all. You just thought you woke up. While the Fed did not raise rates again we are still laboring under the impact of the last six hikes. By carrying the inflation worry forward we are still two meetings away from a rate cut. One meeting to change the bias and then cut at the next meeting. This scenario along with the prospect of a real crash landing without preemptive Fed support knocked -217 points off the Dow intraday sending us back down to 10582 or to almost the -100 level at 3:PM. Fortunately investors shook off the bad news and the Dow and Nasdaq clawed their way back to positive territory just before the close. Investors have grown so accustomed to bad news over the last several weeks that this was just one more event to choke down and then buy the dip. The election crisis deepened again today with more than a dozen suits in progress and seemingly no end in sight. The real deadline for the decision is still the announcement of the tally for the absentee ballots which will probably occur on Saturday. If the results are lopsided by several thousand votes as expected then the multiple recounts to gain a vote or two are likely to cease. Once we have a winner we should be able to go back to business as usual. Speaking of business as usual Bank of America said today that they could charge off as much as double the amounts from last quarter for loan losses. Are you listening Alan? The financial sector, which had been sliding since the election, took another dip with JPM the leader posting a -5 loss. BAC lost -3.88. With banks increasing their loss reserves the outlook for the next quarter should start dropping. Bankruptcies are expected to increase and tax payments contributing to the surplus are going to decrease also as a result of the bear market. Does this look like an inflation risk Alan or the beginning of a recession? Network Appliance suffered the fate of negative earnings guidance with a -20 points drop to $76. After warning that gross margins going forward could decrease and citing the law of large numbers as the reason they could not continue to grow over +100% forever Bear Stearns downgraded them to an attractive from buy. They posted revenue of $261 million for last quarter and expect between $285 and $300 million for this quarter. More important is the worry by investors that the new EMC product code-named Chameleon will impact the NTAP product sales. The market may be big enough for both but it will take some time to prove that concept. Today's earnings leader was Applied Materials which announced earnings of $.77 beating estimates by a penny with revenue of $664 million compared to $303 million last year. Sales rose to $2.92 billion compared to $1.61 billion last year. All in all a banner quarter for a chip stock in a month that chip stocks have been beaten bloody. The AMAT CFO said that the fourth quarter would also be strong but approximately the same pace. The same pace would be less than current estimates but still a good quarter. After spiking several dollars in after hours AMAT pulled back to near the close as the session ended. With a market cap more than the next 13 chip equipment makers combined AMAT needs a lot of buyers to move it but closing today only +3 off the 52 week low means there is a lot of room above and not much risk below. The 52 week high was $115, about $75 higher than today's close. The biggest market moving news other than the election was simply the Fed announcement. They cited unusually high unemployment and higher energy prices as possible fuel for inflation going forward. They also said that softer spending by businesses and consumers, as well as declines in the stock market, suggest that the economy could expand without causing inflation. Sounds like doublespeak to me. With economic growth down to +2.7% in the July-Sept quarter from the 5.6% growth rate in the second quarter, it is still below the average rate of 4.4%. Looks like a calming to me but Alan may have other things on his mind. Consumer sales have slowed with a big decline in large items such as cars. The Beige book survey showed that 10 of the central bank's 12 regions reported slowing growth. Industrial production fell -0.1% in October as well, only the second decline in this year. With inventory levels growing and spending slowing Alan will have to be ready with the defibrillator on a moments notice as we go forward. Investors are concerned that waiting another 2-3 months before beginning rate cuts will put the Fed behind the curve and chasing the economy into a serious crash landing. Alan is rapidly approaching reaction mode instead of preemption mode and that is what the market is worried about. Speaking of the market, the fact that we rebounded significantly after the dip and finished positive bodes well for our chances once the election crisis is over. Traders are ready to buy the dip even in the face of the negative election news. This was a good sign. With hundreds of billions of dollars on the sidelines and only six weeks left in this year, mutual funds are starting to sweat. They need to buy something but they would really like to know who is going to be president before deciding what sectors they should buy. A quandary, with verbal barbs from the political parties thicker than mosquitoes in Minnesota and the race still too close to call, there is no clear direction for them. But there were still buyers. Not many with volume on the Nasdaq only 1.7 bil again. The buyers were probably bottom fishers who are hoping to get in ahead of the crowd. Our task is to decide if we should join them or sit on the sidelines and watch. The easiest way to solve this problem is to pick a benchmark and only trade if the index is above that benchmark. The Dow has had a problem with 10800 dating back to June but most of our readers are not playing Dow stocks anyway. The benchmark I would pick for the Nasdaq is 3200. If we can trade and hold over 3200 I would go long. If the market falls back under 3200 I would close those long positions. We bounced off 3208 today so this is not that far away. The relief rally from the Monday dip is over and where we go from here depends on real buyers and sellers not dip traders. Advance declines on the Nasdaq were almost dead even so there is still no conviction. By using the benchmark system you save yourself the brain damage of deciding when to get in and when to get out. I would also caution you to wait until after amateur hour before making your play. Trust me, the election will eventually go away and when it does you want to have money available to invest. Right? Plan your strategy and wait for the right time to execute your plan! Good luck and don't buy too soon. Jim Brown Editor ************************* REGIONAL SEMINAR SCHEDULE ************************* Only one seminar left. Here is your chance to learn from the pros. The three day Technical Analysis Stock and Option Fall Seminar Series. Three days of in-depth education. Don't miss it! Date City Dec 07-09 Philadelphia 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=948 ************************************************************** ************* NEW CALL PLAY ************* IDPH - IDEC Pharmaceuticals $181.81 +10.94 (-17.88 this week) IDPH researches and develops therapies for the treatment of cancer and autoimmune and inflammatory diseases. IDEC was the first-ever to received FDA approval of a monoclonal antibody, called Rituxan, that is now the most widely used treatment of non-Hodgkin's lymphomas in the U.S. The company has two other anti-cancer drugs in the approval process and five more are in the pipeline. A Barron's article over the weekend effectively shook the beejeezis out of the biotechnology shares, which have held up well in recent weeks as the broader tech arena tumbled. As a result, the latest "bulletproof" stock group received harsh punishment on Monday. Many Biotech indexes lost +10% of their value in a mere session as the uncertainty of developmental drugs getting FDA approval resurfaced amid broad earnings' concerns. Sounds like an introduction to a put play, now doesn't it? Well, quite to the contrary. After IDPH took it on the chin and fell to the mat with a $30.19, or 15.2% cut, but the shares have shown signs of a revival. The encouraging action today was enticing - IDPH rose $10.94, or 6.4%. After the severe lashing on Monday, the issue stabilized at a shorter-term support of $170 on Tuesday. News of its cancer drug Rituxan, used in combination with chemotherapy, effectively proved that patients could survive a year without the non-Hodgkin's lymphoma progressing or relapsing. This positive report perhaps boosted investors' confidence, too. You might take a stake in this recovery play if gains can extend into higher territory. The immediate resistance is at today's intraday high of 184.38. A conclusive push through this level would warrant an entry. The more aggressive looking to enter on dips might use the 50-dma ($174.24) area as a launching pad. OIN considers the $170 level dangerous. Our Stop is adamantly set at $170 - a weak close at this level and we'll exit the play. BUY CALL DEC-175 IHD-LO OI= 30 at $22.50 SL=16.75 BUY CALL DEC-180 IHD-LP OI= 5 at $19.75 SL=14.50 BUY CALL DEC-185*IHD-LQ OI= 6 at $17.50 SL=12.75 BUY CALL DEC-190 IHD-LR OI=1020 at $15.13 SL=11.00 BUY CALL JAN-190 IHD-AR OI= 807 at $23.63 SL=17.75 BUY CALL JAN-195 IHD-AS OI= 443 at $20.88 SL=14.75 http://www.premierinvestor.com/oi/profile.asp?ticker=IDPH AMGN - Amgen, Inc. $67.38 +3.25 (+2.81 this week) The biggest of the Biotech big guns, AMGN makes and markets therapeutic products for hematology, oncology, bone and inflammatory disorders, as well as neuroendocrine and neurodegenerative diseases. Anti-anemia drug Epogen and immune system stimulator Neupogen account for about 95% of sales. Its Infergen has been commercialized as a treatment for hepatitis C, and Stemgen is approved for stem cell therapy in Australia, Canada, and New Zealand. The company has a strong pipeline of new drugs in various stages of development as well as research and marketing alliances with Hoffman-La-Roche and Johnson & Johnson. In the scary market environment that existed just before Halloween, AMGN spooked investors with its earnings report on October 26th. While the company beat estimates for the third quarter, they also warned that profit for the year will "be at the low end of its previous guidance." Investors wasted no time selling the stock, slashing the price by as much as 25% before buyers began to reappear for a little bargain hunting. Since then the stock has consistently moved higher, helped by persistent strength in Pharmaceutical stocks. On November 8th, AMGN hosted an analyst meeting in New York, outlining its business strategy for its new product cycle, and pointed to accelerating earnings growth in 2001 and beyond. Apparently it was what analysts were looking for, as the next day saw positive comments from the likes of Chase H&Q, Lehman Brothers and Robertson Stephens. The subsequent investor reaction has resulted in a sharp upward move in the past week, with the stock moving decisively above the 200-dma ($65.38) in today's trading. This puts the Biotech stock back above all of its moving averages, and within a fraction of filling the post-earnings gap from late October. Aggressive traders can use any intraday dip to support as attractive entry points, as long as the bounce comes on solid volume. Support is seen first at the 200-dma, then $64, and finally $62. The descending trendline connecting the highs over the past several months is currently resting at $69, and it will likely present some resistance going forward. Once the level is cleared, it will represent a solid breakout from the recent bearish trend, and will clear the path for a run at resistance at $72 and then $75. Cautious investors will wait for buyers to push AMGN through the $69 level before initiating new positions. A break down and close below $62 would stop us out of this play. BUY CALL DEC-65*YAA-LM OI=4447 at $7.13 SL=5.00 BUY CALL DEC-70 YAA-LN OI=2229 at $4.00 SL=2.50 BUY CALL DEC-75 YAA-LO OI=2566 at $2.50 SL=1.25 BUY CALL JAN-70 YAA-AN OI=8465 at $6.50 SL=4.50 BUY CALL JAN-75 YAA-AO OI=5934 at $4.75 SL=3.00 SELL PUT DEC-60 YAA-XL OI=3275 at $2.38 SL=3.75 (See risks of selling puts in play legend) http://www.premierinvestor.com/oi/profile.asp?ticker=AMGN **************************** NEW LOW VOLATILITY CALL PLAY **************************** NEON - New Era Networks, Inc. $21.25 +2.06 (+3.38 this week) NEON is a leading provider of e-Business integration software and services for the New Economy. Drawing on proven core technology and years of experience, NEON integrates and automates e-Business processes, helping companies bring end-to-end business functionality to the Internet in the shortest possible time frame. In addition, NEON products help companies establish direct, electronic links with customers, suppliers and partners; build and participate in Net markets; and distribute and access information using wireless technology. This lower priced B2B stock has come down a long way from $80 in March. For most of October, NEON managed to stay in a holding pattern while the rest of the NASDAQ was getting clobbered. NEON has been building gradually, rounding out a nice bottom at $15. What attracted us to this call play was NEON's break above its 50-dma at $20.71 on heavy volume. Today's gain was 10% so look to enter into this low volatility play on a pullback. Look for bounces from $20 or lower at $18, accompanied by good buying volume. If you look on the chart, during the month of November NEON has made nice runs, pulled back slightly(about $2), and then reenergizing with buyer support. This pattern shows higher highs and lower lows, indicating that an entry point may be just a day away. A pullback would provide an entry point near the 50-dma at $18.88. Resistance is overhead at $22. We have set a stop loss close of $18, as we view $18 as a key support area. BUY CALL DEC-20*QNO-LD OI=240 at $3.38 SL=1.75 BUY CALL DEC-25 QNO-LE OI= 32 at $1.50 SL=0.75 BUY CALL JAN-20 QNO-AD OI=669 at $4.38 SL=2.75 BUY CALL JAN-25 QNO-AE OI=940 at $2.56 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=NEON *********** DAILY DROPS *********** RSAS $48.06 +1.13 (+2.06) As the broader markets moved higher in advance of the results of this afternoon's FOMC meeting, RSAS went along for the ride, creeping above the $49 level shortly after the lunch hour. The Fed left interest rates and their bias unchanged, and the bubble of optimism promptly burst, with the markets quickly giving up their early gains. Despite the sharp decline this afternoon in the broader markets, RSAS refused to move back below $48. Our play has now posted solid gains for three days in a row, and the increasing volume is eroding the case for a bearish bias. Our stop at $50 has not been violated yet, but it looks like it is only a matter of time, so we will take this opportunity to close the play before it turns sharply against us. DGIN $15.38 +2.13 (+1.88) Monday provided a nice trade, dipping as low as $10.50. But DGIN found relief with the rest of the market and rallied the past two days on much heavier volume. With a strong close today, the stock finished over our stop loss at $15. As a result, we are dropping the play tonight. ***************** STOP-LOSS UPDATES ***************** No stop-loss adjustments today. ************** TRADERS CORNER ************** Probability And Risk Management By Mary Redmond Most traders weight the risk/reward relationship every time they buy a stock or option. Usually, it is best to trade if the potential reward at least equals the risk of the trade. For example, if you buy a short term or expiring option then the risk is usually equal to 100% of the option's price. For that reason, most traders would only buy a short term option if the reward could potentially equal 100% of the amount at risk. You need to consider the length of time you plan to hold the option. If you buy a short term option, and plan to hold it only an hour or two then your risk may be limited under most circumstances to between 20 to 50% of the price of the option. It is also important to consider volatility when assessing the risk and reward of a position. The risk of an option is the highest when its implied volatility is high as compared to the historic volatility of the stock. Many stocks, which are down significantly for the year have options which may be considered overpriced strictly by a volatility standpoint. Straddles can be a great strategy to use when volatility is low. Ideally, you would like to try to find a period when the VIX.X is low, and the implied volatility of the options is low. For example, consider the price of the OEX options in September when the VIX was 21. On September 11th, the Oct 820 OEX call was $21.75 and the OEX Oct 820 put was $19.25. The total cost of this straddle was $41. The maximum potential risk was $41, and the probability of success was realistic, considering that the VIX had not historically stayed under 22 for a long period of time. The OEX was 738 on the Friday before this straddle expired, which means the profit would have been 41 points, or 100%. The VIX.X spiked up to over 27 that week. A straddle on the OEX at the current prices would have a possibility of success, but a low probability of making any more than a small profit. The OEX Dec 730 calls are $26 and the OEX Jan 730 puts are $19.25 If the OEX was over 778 by December, then the spread would be successful. However, it does not seem realistic to risk the total cost of the straddle if the maximum potential profit is less than the potential risk. While volatility analysis is important for position trading, it can also be useful for daily trading. For example, Ciena has had a beautiful move up over the last several days. There were many excellent entry points, which yielded profits of 20% or more with in an hour. Ciena's options have an implied volatility of 97, which may be high for some stocks, but is low compared to their historic volatility last month of 127. Since Ciena has not reported earnings yet, the options are somewhat less risky than most stocks which have reported earnings. For example, NTAP and SCMR both reported earnings yesterday after the close. Both stocks reported excellent earnings. SCMR closed up $4, and yet the Dec 65 option only increased by $0.50. Today was an example of why it is a good idea to close open option positions before a Fed announcement. It is possible that the investment community was anticipating a change to a neutral bias. When that was not announced, the disappointment was obvious. However, many more analysts are pointing to evidence which indicates that a Fed rate cut is probable in 2001. Today, Bank of America announced that they could suffer higher losses than expected from net charge-offs. The bank is not alone. First Union announced that their credit losses could be up as much as 30% in the next quarter. If the financial stocks cannot rally then we may have a difficult time in the market without an easing by the Fed. To compound the problem, the IPO market has been very light. This is no surprise, considering the public's anxiety with the election uncertainty. However, a weak IPO market may mean weak earnings for the brokerage and investment banking stocks in the coming quarters. These issues may not be severe enough to cause an economic recession. Analysts are still divided on the issue of whether we will see a "soft landing" for the economy or a "hard landing." We have already seen a phenomenal slowing in the GDP if you consider that it was over 7% in the beginning of 2000. However, it is highly likely that we could see a financial recession, in which financing for small company stocks simply dries up. Many analysts are trying to call a bottom in the market. If we are not at the bottom, it is terrifying to think where it could be. One indicator of a high level of fear in the market is the continuing high flows of cash to money market funds. Last week the Investment Company Institute reported that money market funds took in over $20 bln in total. Under ordinary circumstances, at least some of this cash would go into the market. Some analysts have stated that Europeans may be withdrawing money from the American markets because of political uncertainty. However, this trend is not likely to continue. The Euro remains weak, and the election uncertainty has not weakened the dollar by enough to make the American stock and bond markets unattractive to foreigners. Even if you trade when the odds are in your favor, extraordinary circumstances can arise. For example, in a country of over 200 mln people with over 100 mln voting, the odds of the race for President coming to less than 500 votes is extraordinarily low, almost zero. Would you have bet on that? ************************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=971 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** QCOM - Qualcomm $84.19 +3.81 (+10.25 this week) Qualcomm Incorporated is a leader in developing, delivering, and enabling innovative digital wireless communications products and services based on the Company's digital technologies. As the pioneer of Code Division Multiple Access (CDMA), the technology of choice for next-generation wireless communications, Qualcomm continues to lead the industry in the development of voice, data, and wireless Internet products and solutions. Qualcomm is also transforming industries through its various satellite businesses and technology partnerships. Most Recent Write-Up To paraphrase Mark Twain, the reports of QCOM's demise have been greatly exaggerated. While shares of the CDMA giant have languished over the summer months, hitting a low of $51.50 in early July, the stock has since been making a comeback, with higher lows and higher highs. A number of factors have helped QCOM to rebound, especially in the month of November. A well-received earnings report, a bright outlook from company executives, positive comments from Deutsche Bank, a Buy rating from Lehman Brothers and a Strong Buy from First Union Securities all have helped the stock to push ever higher. Today, QCOM shot up over 7 percent on news that the company will form a venture capital fund of $500 million. The money will be used to buy stakes in startup companies that use QCOM's patented CDMA technology. This has proven to be a highly profitable venture in the past, as some of the companies QCOM has funded include Handspring, RF Micro and Phone.com. Because QCOM's main source of revenue is through royalties generated from the sales of chips and royalties from its CDMA patents, this move will likely generate as well as increase demand for QCOM's goods and services. At one point well below all its major moving averages, QCOM has been hard at work this month, putting itself back on the right side of the 50 and 100-dma (now at $71 and $66.36 respectively). With the 200-dma at $89.86 its last line of moving average resistance, a break through $83 resistance on volume could allow conservative traders to enter this play. For the more aggressive, an entry on a bounce off $80 is one possibility. Another entry possibility would be on a bounce off the 5-dma at $74. There is strong support at $70, with the 10 and 50-dma converged at that point but make sure QCOM closes above our stop price of $75. Comments The follow through to the break above $80 came today and held quite nicely. Volume was particularly strong as traders didn't want to miss the technically significant move. Resistance was encountered at the $85 level. Look for bounces from $80, or $75 on a bigger pullback for entry. If buyers come back in force tomorrow, look for a breakout over $85 to attract more buyers. BUY CALL DEC-75 AAF-LO OI=7675 at $13.38 SL=10.75 BUY CALL DEC-80*AAF-LP OI=5161 at $10.00 SL= 7.50 BUY CALL DEC-85 AAF-LQ OI=2766 at $ 7.50 SL= 5.75 BUY CALL JAN-80 AAF-AP OI=8112 at $13.50 SL=10.75 BUY CALL JAN-85 AAF-AQ OI=6732 at $11.13 SL= 8.75 SELL PUT DEC-70 AAO-XN OI=2638 at $ 2.06 SL= 3.25 (See risk of selling put in play legend) http://www.premierinvestor.com/oi/profile.asp?ticker=QCOM ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** The Market turns green after Mr. Greenspan stays the course... The stock market edged higher today, after the Federal Reserve announced it would keep key U.S. interest rates unchanged, but warned inflation still poses a threat to the slowing economy. The widely expected decision by the policy-setting Federal Open Market Committee leaves the federal funds overnight lending rate at 6.50%, where it has been since a half-percentage point hike in May. Immediately after the news, the major stock indexes pulled back from sizable gains, returning to more neutral levels. Technology stocks had led the market higher amid upbeat earnings reports but as the day wore on, investors became worried about higher interest rates as they ultimately cut into a company's bottom line by increasing borrowing costs. On the Nasdaq, chip stocks bolstered the early advance, as did biotechnology issues. Semiconductors were supported by a bullish report from Analog Devices (ADI), which rallied after the company topped Wall Street estimates, saying it believes 10% sequential revenue growth is achievable in the upcoming quarter and that revenues are likely to be constrained by supply, not demand. The Biotech group also recovered in the wake of positive comments from SG Cowen, after witnessing a substantial sell-off on Monday. While the sector's advances were broad-based, the heaviest buying interest was seen in genomics-related issues. On the downside, computer hardware, networking and Internet stocks all fell amid profit-taking. On the Dow, a range of issues enjoyed favorable activity with Walt Disney (DIS), Wal-Mart (WMT), Philip Morris (MO), Intel (INTC), Microsoft (MSFT) and Caterpillar (CAT) among the strongest issues. In broader market, bank stocks extended their recent losses after the Fed's announcement to retain a "tightening" bias. The group has been under pressure due to concerns over credit quality. The worries emerged late Tuesday, when First Union revealed that it expected an increase in non-performing loans due to one large syndicated credit exposure totaling about $500 million. With the continued uncertainty over the outcome of the election and the Fed remaining hawkish on inflation, it is unlikely that we will see another significant rally like that which occurred Tuesday. However, there are still favorable opportunities in a a number of specific issues and we will focus on conservative positions that offer a high probability of profit in the current uncertain market. Summary of Previous Picks: Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return NTIQ NOV 85 83.75 102.88 $1.25 5.0% EMLX DEC 120 113.56 159.50 $6.44 4.7% Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return PCYC NOV 45 43.62 47.00 $1.38 14.2% NTIQ NOV 80 79.31 102.88 $0.69 10.7% AVCT NOV 60 58.50 60.13 $1.50 9.6% CVTX NOV 70 69.50 77.69 $0.50 9.1% DCTM NOV 25 24.22 41.94 $0.78 9.0% Adj 2-1 Split AFFX NOV 70 69.56 76.88 $0.44 8.2% VRTX NOV 70 68.81 73.63 $1.19 7.7% MANU NOV 60 59.06 113.22 $0.94 7.4% Splits 2-1 DEC 8 EMLX NOV 120 119.31 159.50 $0.69 7.4% HGSI NOV 75 74.25 76.31 $0.75 7.1% EPNY NOV 40 39.54 56.69 $0.46 6.6% Adj 3-2 Split ELNT NOV 75 74.25 82.06 $0.75 6.5% HAND NOV 50 48.75 75.00 $1.25 6.5% KREM NOV 65 64.06 80.88 $0.94 6.4% VRTS NOV 110 108.13 129.69 $1.88 5.9% HGSI NOV 70 68.94 76.31 $1.06 5.1% APWR NOV 40 38.56 36.88 -$1.68 0.0% Key moment PDLI NOV 105 104.12 96.50 -$7.62 0.0% 150 dma bounce? CRGN DEC 45 43.69 41.88 -$1.81 0.0% Sell Straddles: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return EXAR NOV 42.5 40.50 38.38 -$2.12 0.0% Adj 2-1 Split EXAR NOV 62.5 65.19 38.38 $2.69 20.5% Adj 2-1 Split Note: As a combined position, EXAR is at its break-even point. Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return RBAK NOV 120 120.75 79.94 $0.75 14.1% JNPR NOV 230 231.50 177.50 $1.50 13.0% NEWP NOV 190 191.69 86.94 $1.69 8.9% NEWP NOV 165 166.00 86.94 $1.00 8.6% JNPR NOV 260 261.56 177.50 $1.56 7.8% BRCM NOV 280 282.19 169.69 $2.19 6.3% JNPR NOV 280 281.56 177.50 $1.56 5.1% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status AFFX $87.25 $76.88 DEC50P/60P $1.12 $58.88 $1.12 OPEN AGN $90.75 $90.88 DEC70P/75P $0.75 $74.25 $0.75 OPEN Put-credit spreads are profitable if the stock price closes above the sold option's strike price at expiration. Call-credit spreads are profitable if the stock price closes below the sold option's strike price at expiration. 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 & Combinations *************** ADBE - Adobe Systems $81.19 *** Industry Leader! *** Adobe Systems is a provider of graphic design, publishing, and imaging software for Web and print production. The company offers a line of application software products for creating, distributing, and managing information of all types. Adobe licenses its industry-standard technologies to major hardware manufacturers, software developers, and service providers, and offers integrated software solutions to businesses of all sizes. Earlier this month, Adobe announced that product sales will rise at least 25% in its fiscal fourth quarter and in 2001. Chief financial officer Murray Demo said Adobe's sales of publishing software will rise 30% in fiscal 2001, while additional software sales will increase 65%. Also, Adobe System's operating margin, a measure of profitability, is expected to reach 32% next year. Analysts were bullish on the news, moving their estimates to the higher end of the guidance provided by the company, based on the belief that Adobe's guidance does not fully reflect the size and growth of the digital media convergence and their unique ability to profit from it. In short, analysts believe that the company's ability to benefit from the needs of publishers, corporations, and consumers is still not fully reflected in the current share value. Our opinion is simply that Adobe Systems is an industry leader and a technology stock we would love to have in our long-term growth portfolio. ADBE - Adobe Systems $81.19 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call DEC 67.5 AXX LU 37 16.75 64.44 4.8% *** Sell Call DEC 70 AXX LN 152 15.00 66.19 5.8% Sell Put DEC 55 AXX XK 265 1.00 54.00 5.9% *** Sell Put DEC 57.5 AXX XY 176 1.25 56.25 7.2% Sell Put DEC 60 AXX XL 151 1.69 58.31 9.6% Sell Put DEC 62.5 AXX XZ 453 2.00 60.50 11.1% Sell Put DEC 65 AXX XM 646 2.44 62.56 13.2% ****** AET - Aetna $66.06 *** Health Sector Rally! *** Aetna and its subsidiaries constitute one of the nation's largest health benefits companies, based on membership, and one of the nation's largest insurance and financial services organizations. Aetna Incorporated, is the parent corporation of Aetna Services, and Aetna U.S. Healthcare. The company's business operations are conducted in the following segments: Aetna Healthcare, Financial Services (formerly Aetna Retirement Services), International and Large Case Pensions. Aetna Healthcare offers health products, group life and disability insurance and long-term care insurance. Aetna Financial Services provide financial services products. Aetna International offers primarily life insurance, health insurance and financial services products. Large Case Pensions involves retirement products. The healthcare sector is performing well and Aetna is one of the leading companies in the industry. In addition, shares of most heathcare companies have traded near recent highs on expectation of a George Bush presidential victory and the recent election of a Republican majority in congress. A Republican congress is viewed as more favorable by the industry because the group is expected to favor managed care companies in legislation known as the patient's "bill of rights;" a law that threatens to increase an individual's right to sue health maintenance organizations for improper denial of care. We simply favor the bullish technical indications and our conservative position offers a method to participate in the future movement of the issue with relatively low risk. AET - Aetna $66.06 PLAY (conservative - bearish/credit spread): BUY CALL DEC-55 AET-XK OI=322 A=$0.50 SELL CALL DEC-60 AET-XL OI=1546 B=$0.93 INITIAL NET CREDIT TARGET=$0.56 ROI(max)=12% B/E=$59.43 ****** CMVT - Comverse Technology $115.06 *** On The Move! *** Comverse Technology designs, develops, manufactures, markets and supports computer and telecommunications systems and software for multimedia communications and information processing applications. The company's products are used in a broad range of applications by wireless and wireline telephone network operators, government agencies, call centers, financial institutions and other public and commercial organizations worldwide. Comverse also provides enhanced services platform products, digital monitoring and recording systems for call centers, unique customer relationship management applications, public networks and government agencies, network signaling software for wireless, wireline and Internet communication services known as Signalware, and other telecom hardware and software products and services. On Monday, CSFB analyst Susan Passoni initiated coverage of CMVT with a "buy" rating and a 12-month target price of $128. In the commentary, Susan noted that Comverse is positioned to leverage its leadership position in "traditional enhanced services" into the emerging "next generation" wireless data services arena. The company also has high revenue visibility, with over 85% of its business coming from existing customers upgrading capacity or adding additional enhanced services. Investors appear to agree with the bullish assessment as the stock has moved up $10 in the last two sessions. Technically, the unique issue appears to be successfully completing a consolidation phase and we expect the share value to benefit significantly from the next market rally. CMVT - Comverse Technology $115.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put DEC 85 CQZ XQ 558 1.63 83.37 6.7% *** Sell Put DEC 90 CQZ XR 286 2.06 87.94 8.3% Sell Put DEC 95 CQZ XS 268 3.13 91.87 10.9% ****** PWAV - Powerwave $56.00 *** New Trading Range? *** Powerwave Technologies designs, manufactures and markets ultra linear radio frequency power amplifiers for use in the wireless communications market. Powerwave manufactures both single and multi-carrier RF power amplifiers for a variety of frequency ranges and transmission protocols. The company's products are being utilized in both cellular and personal communications services base stations in digital and analog-based networks. Powerwave's products support a wide range of digital and analog transmission protocols including CDMA, TDMA, GSM, AMPS and TACS. The company also produces RF power amplifiers for the wireless local loop market, which refers to wireless products designed for fixed or non-mobile applications that provide and/or replace traditional wireline telephone systems. Powerwave is "on the move" and today's rally to a recent high near $55 suggests there is further upside potential for the issue. The stock has excellent buying support near our cost basis and the favorable option premiums will allow traders to speculate, in a conservative manner, on the future movement of the company's share value. PWAV - Powerwave $56.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put DEC 40 VFQ XH 1081 1.00 39.00 8.3% *** Sell Put DEC 45 VFQ XI 25 1.88 43.12 14.4% ****** QCOM - Qualcomm $84.19 *** Bracing For A Rally! *** Qualcomm is a leader in developing and delivering innovative digital wireless communications products and services based on the company's CDMA digital technology. The company's business areas include integrated CDMA chipsets and system software; technology licensing; Eudora email software for Windows and Macintosh computing platforms; satellite-based systems including portions of the Globalstar system and wireless fleet management systems, OmniTRACS and OmniExpress. Qualcomm owns patents which are essential to all of the CDMA wireless telecommunications standards that have been adopted or proposed for adoption by standards-setting bodies worldwide. Qualcomm has licensed its essential CDMA patent portfolio to more than 80 telecom equipment manufacturers worldwide. Earlier this week, Qualcomm announced a newly created venture capital fund in which it will spend $500 million over the next four years to acquire stakes in startups that use or promote its patented digital wireless technology. The venture capital fund, Qualcomm Ventures, will make investments of $2 million to $10 million in emerging companies worldwide to promote the adoption of its CDMA technology. Qualcomm has invested similar amounts over the past three years in other companies, but the creation of an investment fund certifies its role as a promoter of CDMA technology. In other news, Banc of America Securites noted that subscriber additions in the company's Asian markets were higher in October, and they raised their rating on QCOM's stock based on the bullish outlook. We simply favor the recent technical trends and these positions offer a great way to speculate on the future movement of the issue in a conservative manner. QCOM - Qualcomm $84.19 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put DEC 65 AAO XM 2419 1.19 63.81 6.7% *** Sell Put DEC 70 AAO XN 2638 2.06 67.94 9.7% ****** SAWS - Sawtek $51.50 *** Solid Company! *** Sawtek designs, develops, manufactures and markets a range of electronic signal processing components based on surface acoustic wave (SAW) technology. Its primary products are custom-designed, high performance band-pass filters, resonators, delay lines, oscillators and SAW-based subsystems. These products are used in a variety of microwave and radio frequency systems, such as Code Division Multiple Access and Global System for Mobile telecom digital wireless systems, digital microwave radios, wireless local area networks, cable television equipment, various defense and satellite systems and chemical sensors. Its products offer key advantages such as lower distortion, reduced size and weight, high reliability and precise frequency control compared to products based on alternative technologies, and address rapidly growing needs in communications, data communications, video transmission, military and space systems and other markets. In early October, Sawtek posted fourth quarter profits more than double the year-ago quarter, and said it sees continued strong growth in fiscal year 2001. The company reported net income of $41 million, or $0.95 per share, compared with $14 million, or $0.34 per share in the year-ago period. Analysts expected Sawtek to earn $0.37 per share during the quarter, well below the actual results. Sawtek foresees revenue growth of between 25% and 35% during fiscal year 2001 and the company expects profits to come from its handsets, data communications and broadband access segments. Based on the recent bullish technicals, investors agree that SAWS is one of the leading issues in the Electronics group and this company would certainly be a candidate for any long-term portfolio. SAWS - Sawtek $51.50 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put DEC 35 QWS XG 113 0.88 34.12 8.0% *** Sell Put DEC 40 QWS XH 164 1.56 38.44 13.3% ****** SCMR - Sycamore Networks $68.44 *** Bottom Fishing! *** Sycamore Networks develops and markets intelligent optical networking products that transport voice and data traffic over wavelengths of light. Sycamore combines significant experience in data networking with expertise in optics to develop unique intelligent optical networking solutions for network service providers. Sycamore's products are based on a common software foundation, enabling concentration on the delivery of services and end-to-end optical networking. Sycamore's products and product plans include optical transport, access and switching systems and end-to-end optical network management solutions. Regardless of the recent slump in share value, Sycamore is one of the top companies in the Networking Group and among many institutional investors, it is also one of the core holdings. The current technical outlook is recovering and our position offers an excellent reward potential at the risk of owning this industry-leading issue at a favorable cost basis. SCMR - Sycamore Networks $68.44 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put DEC 40 SMZ XH 0 0.69 39.31 4.9% *** Sell Put DEC 45 SMZ XI 0 1.31 43.69 8.9% *************** NEUTRAL PLAYS - "SELL STRANGLES" *************** CFLO - Cacheflow $120.25 *** Premium Selling Play! *** CacheFlow designs, develops and markets Internet caching tools that are purpose-built to accelerate and optimize the flow of information over the Internet. Their products are deployed by its customers throughout network infrastructures to improve the performance of their networks and reduce network costs, while enhancing network security. Customers for CFLO's products include large and small Internet service providers and corporate enterprises. All of the company's products are designed as integrated appliances, which are specialized hardware platforms coupled with the Company's CacheOS operating system. CacheFlow has specialized its products around several attributes including type of content (traditional Web or streaming), type of customer (service provider, enterprise or e-commerce), and the type of deployment (content provider or content consumer). CFLO is certainly a volatile issue, having moved through a $50 range three times over the past two months. Cacheflow's most recent activity started when the company made an unexpected acquisition, purchasing privately held Entera for $440 million in stock. Entera makes software that speeds the delivery of streaming audio and video files over the Web. The slump in technology stocks was the reason for the decline in October, but strong demand for caching products, particularly streaming media solutions, reversed the downtrend and produced a major rally in the group. Last week, concerns about valuations resurfaced and most technology stocks are now searching for a technical bottom after precipitous declines. Cacheflow has performed relatively well, considering the selling pressure among Nasdaq issues and with the company's earnings due next week, the stock will likely rally in the short-term. Traders that employ premium-selling strategies can use the recent volatility and the overpriced options to initiate a neutral position with a favorable credit. The probability of the share value reaching our sold strikes is rather low, but there is always the possibility of a break-out from the recent trading range, so monitor the position daily for changes in technical character. CFLO - Cacheflow $120.25 AGGRESSIVE (NEUTRAL) CREDIT-STRANGLE Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put DEC 75 FUJ XO 14 3.13 71.87 11.7% *** Sell Call DEC 165 FJO LM 30 7.13 172.13 23.2% *** Sell Put DEC 80 FUJ XP 35 3.63 76.37 13.3% Sell Call DEC 160 FUJ LZ 161 8.38 168.38 26.2% Sell Put DEC 85 FUJ XQ 4 5.00 80.00 17.5% Sell Call DEC 155 FUJ LY 30 9.38 164.38 28.4% ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.sungrp.com/tracking.asp?campaignid=985 ************************************************************ ******************* 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. 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