The Option Investor Newsletter Wednesday 11-29-2000 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/112900_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 11-29-2000 High Low Volume Advance/Decline DJIA 10629.10 +121.50 10646.20 10480.80 1.12 bln 1463/1397 NASDAQ 2706.93 - 28.05 2770.18 2642.89 2.05 bln 1388/2551 S&P 100 712.47 + 4.00 718.33 704.92 totals 2851/3948 S&P 500 1341.93 + 5.84 1352.38 1329.28 41.9%/58.1% RUS 2000 454.60 - 4.42 459.86 451.55 DJ TRANS 2799.42 + 3.01 2812.86 2777.73 VIX 30.20 - 0.19 31.15 29.58 Put/Call Ratio 0.82 ****************************************************************** The Pain Has Begun The late-day rebound in the NASDAQ and triple digit gains in the Dow Jones Industrial Average gave the bulls a glimmer of hope near the close of trading. However, that hope was dashed after the market closed when two earnings warnings rocked the tech sector in the evening trading session. The story is beginning to unfold. The broader market indices have been foreshadowing a slowdown in the US economy since late last summer. This morning, the Commerce Department reported downwardly revised third-quarter gross domestic product (GDP) figures and confirmed the market's suspicions. Third-quarter growth in domestic goods and services produced was lowered to 2.4% from the previously reported 2.7%. Take note that the 2.4% GDP growth recorded during the third-quarter is the lowest rate of growth since 1996. I hope Doc Greenspan is content with his work! The effects of the slowing US economy were immediately reflected in the tech sector this evening. Gateway warned that revenue and profits for its fourth-quarter would fall well short of Wall Street's previous estimates. The PC maker cited weak consumer spending on personal computers thus far in the holiday shopping season. Even more detrimental, Gateway said it expected demand for its computers to remain weak for the next 12 to 18 months. Shares of Gateway were hammered in the evening session of trading. The stock finished regular trading at $29.02 - it was trading at $19.75 at time of writing. It gets worse. Altera (ALTR), a leading maker of programmable chips, announced it would fall short of analysts' consensus estimates for revenues during its fourth-quarter. The chip company said that sales in November were soft across all of its business lines, which resulted from a slowdown in orders from its digital subscriber line (DSL) customers. Moreover, Altera reported that inventory among its customers had built up dramatically in the past months, which would result in slower sales in the coming quarters. Shares of Altera settled at $25.94 in the regular session. After the stock was released from its halt in after hours trading it fell to $18.50 at the time of writing. The warning from Altera will surely send a shock through the Philadelphia Semiconductor Index (SOX.X) tomorrow as nearly every leading chip stock fell in sympathy during after hours trading. The SOX recently broke below a significant support level at 600 and will most likely see more downside on the heels of Altera's warning. To digress from the doom, not all earnings news was bearish after the close. The once-high flying Brocade (BRCD) reported bullish fourth-quarter numbers that edged past Wall Street's consensus estimates by two cents. The company said its business remained strong and provided solid guidance going forward. Despite the bullish tone to Brocade's conference call, the stock bounced around in after hours trading, dipping as low as $143, or $10 below its 4:00 EST close of $153.81. However, at time of writing, shares of Brocade had rebounded from its evening session lows and had stabilized near its closing price. Brocade could provide a lift to select pockets of tech tomorrow if, and only if, the bulls overpower the bears who have all but crushed the stock over the past two weeks. The fact is shares of Brocade are still richly valued and the current market environment is not favorable to such valuations. Ahead of the earnings news this evening, the NASDAQ had an impressive rebound off its intraday lows around the 2650 level. Before the late-day rebound, the NASDAQ was inflicting increased amounts of pain across several sectors. A glance over several charts this afternoon revealed that momentum and tech investors are really beginning to feel the heat. Take a look at the charts of ITWO, CIEN, and VRTS. All three stocks lost over $10 today, and all three stocks share something in common: high valuations. These previous mentioned leaders of the COMPX are weighing heavily on the tech-infested index and will continue to drag it lower if the buyers don't step in soon. Historical support levels are giving way with increased frailty and the bottom of the COMPX has not yet been found. As much as I hate to write it, the path of least resistance is still lower for the COMPX. The above chart presents three levels which are likely to provide support for the COMPX. Although the NASDAQ continues along its path of relative lows, it doesn't mean you can't trade the rallies off support. A word of caution though, if you're going to trade the upside in this market pick your trades with scrutiny and practice professional money management. That means defining potential reward and clearly defining risks by setting stop losses. It's clearly evident that the NASDAQ is in a bear market, and a common characteristic of bear markets are violent and massive rallies over the course of two or three days. To reiterate, there is potential to make money on the upside but it requires discipline. While I'm on the topic of bear markets, it may behoove us to review a history of the Ursa. In the last century, the average bear market lasted roughly 400 days. The average bear market over the last 100 years typically eroded 27% of the market. The current bear in the NASDAQ is only 270 days old, but it has taken away nearly 50% of the gains from the index's March peak at 5132. Judging by past bear markets, the current Ursa is one of the most violent in recent times, and it's still relatively young. While much damage has already been done to the NASDAQ, it could still trade lower until all the bad news is discounted. If you're holding on to big losses in some of the bear targets remember that it's never too late to sell and preserve capital - and stay alive to play the game! But enough with the bearish talk for a moment. There are select areas of the market which continue to trade higher in spite of the weakness in the broader markets. If you're searching for upside look no further than the drug and food sectors. The obvious defensive positioning resulting from a slowdown in the US economy has sent several big drug and food names to new 52-week highs recently. Among some of the notable names trading at new highs include shares of Abbot Labs, Merck, Schering-Plough, Hershey, Wendy's, and WM Wrigley. As long as the economy continues slowing and earnings warnings stream from the tech sector, the aforementioned groups of stocks should produce trading profits as they provide a safer place to put capital to work. Remember that there's still a lot of capital sitting on the sidelines in the form of money markets. Professional money managers will need to put that money to work before the end of the year in order not to upset shareholders with such large cash positions. With the tech sector teetering, that capital could continue to work its way in the drug and food stocks. Speaking of money managers, the end of the month is upon us tomorrow, which generally coincides with new cash coming into funds. Again, that cash will need to be put to work. Furthermore, there exists the possibility for a window dressing induced rally tomorrow despite the warnings from Gateway and Altera. Fund managers might try to administer some damage control to their portfolios tomorrow by running stocks up and improving their performance for the end of November results sent to large shareholders. As contradictory as I might sound, it wouldn't be surprising to see a rally tomorrow as November comes to an end. Furthermore, the NASDAQ has fallen 300 points from its intraday high at 3000 Monday and it's just plain ugly out there. One of the bear market rallies I mentioned above might be in the mix in the coming days. I know that our readers don't like hearing bearish commentary; I don't like writing bearish commentary. However, I must be realistic. The NASDAQ is hurting big time, US economy is slowing, FED has not yet provided any relief, election is still a mess, and fourth-quarter earnings warning season is upon us. The combination of these events is inflicting a lot of pain in the tech sector to those who have bought dips and fought the trend over the past 12 weeks (myself included). The strategy here is defensive, which has been witnessed in the food and drug sectors. In a bear market, the name of the game is survival and patience. A bull will return and when it does it's better to have capital than not. While my bias is still obviously bearish, here are a few things for the remaining bulls to think about. The bottom-line for the NASDAQ is that the pessimism is getting pretty thick, which is a good thing. Only when the maximum amount of pain is inflicted in tech sector will the bull be ready to run again. It may be several more months before the sentiment in the tech sector shifts and the bears start feeling pain and lose the valuation debate. Then again, it could be next week. The key is to watch for climatic selling in which EVERY stock gets taken out and shot. A big whoosh down to the 2300 level for the NASDAQ could very well be the bottom. Also, pay heed to the levels of the CBOE Market Volatility Index (VIX.X). The VIX is commonly referred to as the fear gauge of market participants and is a good tool to use when attempting to spot the bottom. A spike in the VIX above 35 or higher to the 40 level could very well be indicative of a bottom in the NASDAQ. And while I hesitate to use the word bottom, the selling has got to stop somewhere. Doesn't it? Eric Utley Assistant Editor ***********************ADVERTISEMENT************************ From the hottest IPO to the latest market trends, you won't find more extensive business and financial news on the web than by signing up for Individual.com, the personalized FREE service that lets YOU choose what's news. Register at Individual.com now! http://www.sungrp.com/tracking.asp?campaignid=1037 ************************************************************ ************* NEW CALL PLAY ************* LLY - Eli Lilly & Co $94.50 +2.75 (+5.81 this week) Eli Lilly discovers, develops, and manufactures pharmaceutical products for humans and animals. They are the makers of the best-selling anti-depressant drug, Prozac; however, it's set to begin losing its US patent protection in 2001. The company is looking to its drug pipeline, which boasts 40+ potential products) to produce another market winner. The big pharmaceuticals and biotechs are trading up this week on Florida's certification of Republican candidate George W. Bush as winner of the presidential election in the Sunshine State. When Bush was declared the winner, the concerns of price controls were eased and buyers moved into the sector. Recall that Gore's healthcare platform condemned the climbing drug prices and suggested Medicare reform, which would have adversely effected the drug makers. The political news and an upgrade to Buy from Hold by ING Barings positioned LLY for a jump off its lengthy trading channel on Monday. Trading activity kicked up another gear as the momentum was also fueled by additional news events and upgrades this week. Yesterday, Eli Lilly reported that Phase II data was presented for its impotence pill, Cialis, in Australia at the 9th World Meeting on Impotence Research. Eli Lilly, in a joint venture with Bayer AG, hopes Cialis will become the challenger to Pfizer's (PFE) best-selling impotence drug, Viagra. The news was well received by the Street. After nearly two months of being capped by the staunch resistance at the $92 level, LLY broke out with a dash of momentum. Volume topped the charts at 1.5 times the ADV and LLY saw an advance to $92.81 at one point intraday. Today's action bullishly extended the gains beyond the $95 mark. There was also a boost from Goldman Sachs who upgraded LLY to their Recommend List today, although no analyst's comments were available. The century mark may pose some opposition, so look for strong volume to move LLY through this level. Beyond July's 52-week high at $109 there isn't anything to hold LLY back from entering new territory. Traders might consider taking positions into this momentum play as LLY moves through $95 with some conviction. Or consider buying on intraday dips or pullbacks to the $90 level, buoyed by the intersecting 5 and 10-dmas at $89.31 and $88.79, respectively. But beware this type of entry is much more risky than buying into the strength. We have a stop set at the above-mentioned $90 level in the event of a sharp reversal in traders' sentiment. BUY CALL DEC- 90 LLY-LR OI=3945 at $6.13 SL=4.00 BUY CALL DEC- 95*LLY-LS OI=4376 at $2.94 SL=1.50 BUY CALL DEC-100 LLY-LT OI=1738 at $1.13 SL=0.25 BUY CALL JAN- 90 LLY-AR OI=5167 at $8.75 SL=6.25 BUY CALL JAN- 95 LLY-AS OI=2907 at $6.00 SL=4.00 BUY CALL JAN-100 LLY-AT OI=5892 at $3.88 SL=2.50 http://www.premierinvestor.com/oi/profile.asp?ticker=LLY ************ NEW PUT PLAY ************ SEBL - Siebel Systems $71.75 -5.75 (-14.69 this week) Providing sales automation and customer service software through its main product, Siebel Sales Enterprise, SEBL offers its customers the ability to access client information and decision- making support across a corporation's global computer network. The company's e-commerce applications deliver the first entirely Web-based, enterprise class family of sales, marketing and customer service applications. Among the company's heavyweight clientele are Lucent Technologies, Glaxo Wellcome, and Prudential Insurance. Welcome to the exciting world of PE compression. As the NASDAQ continues to set new yearly lows, the few remaining high-valuation stocks are coming under heavy selling pressure. Of course it doesn't help that SEBL plays in both the Internet and Software sectors, two of the biggest recent victims of the Technology Bears. This is the reverse of the technology run-up that we saw last year at this time. Then, it didn't matter what the news or earnings were, investors could only find the BUY button on their keyboards. Now, it doesn't seem to matter how good the news is, or how strong the earnings and revenue projections are, investors only have a functional SELL button. Investors seem to be targeting stocks that still have hefty 3-digit PE ratios, and with theirs sitting at 385, SEBL has taken a beating over the past 3 weeks. On election day (seems like more than 3 weeks ago, doesn't it?) the bulls were trying to push the stock through the $120 resistance level, and since then the stock has given up 40%. While not a direct cause for the decline, the election uncertainty is keeping the buyers on the sidelines. The real problem is earnings and the economy, and with the approach of earnings warning season, investors are taking a wait and see attitude before jumping in to buy stocks, even those that continue to impress the street. Just this week SEBL has given up nearly $15, and has crashed through the 200-dma ($80.25) for the first time since late 1998. This is despite beating October earnings estimates by 25% and posting accelerating revenue growth north of 130% year-over-year. Selling volume has been on the rise too, with today's session seeing 14.5 million shares trade hands, nearly double the ADV. The late-day NASDAQ recovery helped SEBL to bounce from the $69 support level, but given the current market weakness, this looks like a waypoint on the stock's trip south. Conservative entries can be had as SEBL drops through the $68 level on continued heavy volume. Intraday resistance is solidifying between $78-80, with the 200-dma looming just overhead. $80 will be a pivotal level; providing entry points for aggressive investors on a failed rally, and stopping us out of the play if buyers can penetrate this level on a closing basis. Let the action of the broader Technology sector be your guide, as the stock has traded in tandem with the NASDAQ since early November. BUY PUT DEC-75 SGW-XO OI= 948 at $9.00 SL=6.25 BUY PUT DEC-70*SGW-XN OI=1419 at $6.25 SL=4.25 BUY PUT JAN-70 SGW-MN OI= 805 at $9.75 SL=6.75 BUY PUT JAN-65 SGW-MM OI=1176 at $7.38 SL=5.25 http://www.premierinvestor.com/oi/profile.asp?ticker=SEBL ***************** STOP-LOSS UPDATES ***************** HAND - put play Adjust from $63 down to $58 AGIL - put play Adjust from $50 down to $48 MVSN - put play Adjust from $49 down to $43 VRTS - put play Adjust from $109 down to $95 ITWO - put play Adjust from $111 down to $100 ************* DROPPED CALLS ************* SUNW $79.75 -1.50 (-5.13) Our latest attempt to capitalize on SUNW was abruptly halted after the stock sank sharply for the second consecutive session in sympathy with the NASDAQ. Rumors of weak sales for the fourth-quarter due to a slowdown in orders from resellers sent shares of SUNW well below its critical support at the $80 level in Wednesday's session. Although the stock rallied well off its intraday lows, the fact SUNW broke below our stop at $80 and couldn't settle back above that level has prematurely ended our play. Use any strength or relief rally to exit existing positions, and pay close attention to how SUNW acts near the $80 level should the stock advance tomorrow. CGP $78.94 -4.56 (-3.25) A report on rising inventories of oil sent fears streaming through the futures markets that the price of crude will crash. Additionally, news from China revealed the country was exporting far more oil than the market had previously discounted. The fears of a collapse in oil prices hammered the broader energy sector and ended our attempt to capitalize on CGP's low volatility. The stock crashed from the open of trading this morning and continued falling throughout the session, closing just off its day lows. With CGP falling back below our stop at $80 we are dropping coverage on the play. ************ DROPPED PUTS ************ No dropped puts today ************** TRADERS CORNER ************** Implied Volatility In Calls and Leaps By Mary Redmond The real winners in this election have been the TV networks. They have been airing non-stop top-notch court room and political drama all day long on every channel. Their ratings and fees for commercials are probably soaring. Some channels are probably going to try to put this on pay per view and charge for re-runs. Viewers are going to be disappointed to have to go back to watching Judge Judy and The People's Court for excitement. We have an interesting interplay between the stock and bond markets' favorite candidates. While the stock market seems to favor a Bush win at the present time, the bond market favors a Gore win, as news of Gore victories in the last few weeks have sent the 30 year Treasury yield down. A Bush victory would probably mean that a new Treasury secretary no longer continue to repurchase government bonds. Either way, the levels of partisan animosity and divisiveness are unprecedented, and most analysts agree that we will have four years of gridlock. The election uncertainty has undoubtedly contributed to market fear and uncertainty. The VIX has been high for the last couple of weeks. This signals fear in the market, and has historically been a sign of a impending bottom. In addition, the implied volatility of many stocks’ options is relatively high, as individual implied volatility tends to rise when the overall market volatility rises. This doesn't necessarily mean that the options would be poor candidates for those who are anticipating a market rebound. However, most of the time, it is best to try to find call options which have an implied volatility which is lower than the historic volatility of the stock, and lower than the historic implied volatility of the option. Volatility almost always rises in the market after a sell off. This is because market sell-offs are almost always sharper than bull markets. Fear is stronger than greed. In addition, buyers have the luxury of time whereas selling frequently occurs very quickly when people panic. The call options of many oversold stocks like JNPR, PMCS, and BRCM have high implied volatility. Ideally, we would like to buy options when the VIX.X is high, and we can find options which have low implied volatility. This is difficult to find. However, an option with a high implied volatility can still increase if the stock rises substantially enough. There is no mathematical formula to show exactly how much an option will rise or fall if the implied volatility increases or decreases. There are many other factors to consider. For example, we need to consider overall market trends, good and bad news which is reported on a company, economic reports which could indicate future Fed action, and many unpredictable events. We need to consider the fact that the GDP was increasing at a rate of 8.3% at this time last year. It is currently growing at a rate of 2.4%. The Fed actually decreased the rate of economic growth by 71% year over year. This is a phenomenal decrease for any economy. In addition, earnings forecasts have been revised to 10% earnings growth in 2001 from 14% five months ago. The stock market can still rally in an environment of decreasing earnings, as long as inflation is decreasing, and interest rates stay low. However, it is a jolt to investors, many of whom had not experienced a bear market before this year. An option's implied volatility is a reflection of the market's expectations of how much the stock will move over the life of the option. If the stock has been very active, the IV will tend to rise. For example, PMCS has sold off over 140 points in the last few weeks. The stock may be undervalued, but the options are very expensive, as the implied volatility of the Dec 100 calls is 165% and the implied volatility of the Dec 100 puts is 175%. The options may still be possible day trading candidates, as the calls went up a few points when PMCS jumped from $97 to $104 on Wednesday morning. However, they seem over valued from a practical standpoint. The options expire in 2 weeks and 2 days, and the calls are $15.8. In this market, we would have to have an incredible rebound for the stock to be higher than $116 in two weeks. In addition, the options would probably lose about a dollar a day in time value for the next two weeks. However, if you examine the Jan 02 100 leaps, you will see a change in implied volatility to 95% from 165%. The Jan 02 100 calls are $41. This may be a more realistic bet, as the stock could easily be 41 points higher in a year. Generally, leaps have lower implied volatility than short term options. This is partly because the stock does not have to move as quickly in order for the leaps to become profitable. The implied volatility of the PMCS Dec 100 calls is implying that this option is priced so that the stock will have to move at a rate of 165% annually or higher in order for it to become profitable. The leap’s implied volatility is lower, as the leap could be profitable if the stock moved at a much lower annual rate. It is also interesting to note that the price of the short-term option is approximately 40% of the price of the leap. You might think that a six month option would be priced at 40% of the leap’s price. However, if you look at the prices of many oversold stocks, you will see a disparity between the prices of near term options and leaps. The odds in most cases strongly favor leap buyers for people who anticipate a market turn around. While the liquidity has improved in the market from several weeks ago, the money does not yet seem to be going into the Nasdaq. It is not always possible to obtain a precise estimate of the amount of cash which goes into equity funds each week, however the flows have averaged around $4 to $5 billion weekly. The IPO schedule has moderated significantly from last year’s pace. In addition, the Investment Company Institute reported that money market funds took in over $15 billion last week, and the Federal Reserve reported that savings accounts and CDs took in $64 billion from the beginning of October through November. Savings accounts and money market funds have nearly $4.7 trillion in investor’s cash. ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily, the research tool for self directed investors. http://www.sungrp.com/tracking.asp?campaignid=1040 ************************************************************** ************* READERS WRITE ************* Pfizer "Bear-Call Spread" From 11/26 Combos By Ray Cummins Dear OIN, I'm sure that I am overlooking a simple factor that is causing me to misunderstand the trade. Reel me back in. The trade is a "bearish position," so I don't understand why the breakeven is at 45.31 when the price of the stock is 42.31. I should think the B/E would be somewhere below 45.31, because profits are taken as the stock moves down. Thanks for your explanation... ******** Concerning the Pfizer Bear-Call (call-credit) Spread: The bear-call spread involves the purchase of one call (higher strike) and the sale of a lower strike price call. An investor would use this strategy when he believes that the stock price will remain below the strike price sold at the end of the strike period. The position will yield a credit and this is the maximum amount of profit the investor can earn with this strategy. Because the spread is a "credit" spread, a broker will require the investor to provide collateral for the transaction. The spread is at maximum profit if the underlying security closes below the lower strike price and the objective is for both options to expire worthless. PLAY (conservative - bearish/credit spread): BUY CALL DEC-47.50 PFE-LM OI=6094 A=$0.25 SELL CALL DEC-45.00 PFE-LI OI=19112 B=$0.50 INITIAL NET CREDIT TARGET=$0.31-$0.38 ROI(max)=14% B/E=$45.31 Our original plan was to open the position with a $0.38 target, but with the Presidential election activity (Sunday's vote certification) favoring George W. Bush, we had to adjust our target slightly higher - as drug stocks are expected to perform well initially under a Republican controlled Congress and White House. The credit we achieved was $0.50 against a collateral of $2.00. That produces a 25% return if the stock finishes below $45. Our break-even is now $45.50 - the cost to buy back the sold option would be $0.50 if the stock finished at $45.50 on expiration day. If the stock breaks above the resistance area near $45 on increasing volume, we will buy back the short option and hold the long option until the rally begins to fade, with the hope of achieving a small profit on the roll-out. Roll-outs... To roll-out of a bearish credit spread, place an order to close the short option anytime the stocks trades (and preferably closes) above technical resistance or a well-established trend line (moving average) on heavy volume. There are other, more precise signals that can be used but the technique is based on the probability that the stock should continue to move in that direction. After the sold (short) position is repurchased, wait for the stock to lose momentum and sell the long position to close the entire play. It is a difficult technique to perform when emotion enters the formula but it works well once you become experienced at it. The key to success is using the method at known support levels or after obvious reversal signals, otherwise you are simply speculating about the stock's next move. The great thing about spreads; once you understand them, you can turn many losing plays into winning ones with the effective use of STOPS and by rolling out-of/into new positions when the stock moves against you. When you do lose, at least you have reduced your losses by leveraging against another position. In all cases where an attempt to recover a losing position is made, you must be prepared for further draw-downs and have thorough knowledge of the strategy. As with any technique, it must also be evaluated for portfolio suitability and reviewed with regard to your basic approach and trading style Here are my suggestions for the best books on the subject. The rules haven't changed in years and the bibles remain the same; "Options as a Strategic Investment" (McMillan), and "Option Pricing and Volatility" (Natenburg), both available in the OIN bookstore. Good Luck! ********************* PLAY OF THE DAY - PUT ********************* MVSN - Macrovision Corporation $39.22 -3.28 (-9.91 last week) Macrovision Corporation was founded in 1983 to develop and market innovative video and communications security technologies for major motion picture studios and independent video producers. During 1983-1984, Macrovision was granted several key patents that laid the foundation for the company's future growth, including a United States patent that described what is now widely known as the Macrovision Copy Protection Process. Most Recent Write-Up It's been very quiet on the news front lately for MVSN and with that, the stock has traded in sympathy with the NASDAQ. Gapping up at the open on Monday morning, the stock encountered resistance at $54. From there, the sellers took control, moving the stock lower for the rest of the day, closing the morning gap and then some. At the end, MVSN closed down $1.38 on heavy trade. The selling continued today as MVSN encountered resistance at the 5-dma, now at $47.47. From there, the stock headed deeper into the red but found support just below the $40 level. Despite a slight bounce at the end of the day, the stock closed down almost 11 percent on above average volume. Another failed test of the 5-dma could provide aggressive traders with an entry as well as a failed rally above resistance at $47 and $50 but be aware that our stop price has been moved down to $49. A break below $40 on strong selling volume would allow traders to jump in for a solid entry. Comments No news continues to be bad news for MVSN. The stock traced yet another relative low in Wednesday's trading by falling through critical support at the $40 level. Additionally, MVSN closed just off its intraday low at $38.50, unlike many of its NASDAQ counterparts who rallied into the close of trading. New entries could be taken if MVSN rolls over at previous support near the $40 level. Otherwise, look to enter new positions if the stock falls below its intraday low at $38.50. Take note that we have lowered our protective stop down from $48 to $43, and would close existing positions if the MVSN settled above that level. BUY PUT DEC-45*MVU-XI OI=24 at $8.00 SL=5.75 BUY PUT DEC-40 MVU-XH OI= 0 at $4.38 SL=2.75 Wait for OI!! http://www.premierinvestor.com/oi/profile.asp?ticker=MVSN ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Zero isn't that far away (for many stocks)... The technology sell-off continued today as investors demonstrated their affection for old economy issues. The Nasdaq fell to yearly lows amid a slew of downgrades and speculation that it will now take many months to repair the damage from the recent free-fall. Fiber-optic stocks were among the biggest losers with Ciena (CIEN) leading the way on concerns that Sprint, a major customer, may add a second supplier. Similar companies in the group endured notable losses and the selling pressure quickly spread to other sectors. Strangely enough, semiconductor shares were among the strongest performers after Merrill Lynch said longer-term investors should be comfortable owning high quality communications chip companies at the current prices. UBS Warburg also commented that demand for communications semiconductors continues to be healthy and current valuations in the group are attractive. On the Dow, industrial stocks managed solid gains as investors focused on an economic report that suggested the Fed will leave interest rates unchanged at its December meeting. A revised report regarding the nation's gross domestic product (GDP) offered evidence that the economy is slowing, but not as much as analysts had feared. The news led to some excellent advances in drug, retail and consumer stocks, and the financial sector also rebounded, with banking shares among the top performers. In the broader market, oil and oil service issues moved lower in sympathy with crude prices while favorable advances were seen in the chemical industry. 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 ADBE DEC 67.5 64.44 64.31 -$0.13 0.0% Time to go? EMLX DEC 120 113.56 110.50 -$3.06 0.0% Exit on Rally? Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return FNSR DEC 22.5 21.94 27.81 $0.56 10.7% CHIR DEC 35 34.31 43.75 $0.69 9.6% PWAV DEC 40 39.00 51.50 $1.00 8.3% SAWS DEC 35 34.12 53.63 $0.88 8.0% CMVT DEC 85 83.37 89.69 $1.63 6.7% Key moment! QCOM DEC 65 63.81 82.63 $1.19 6.7% ADBE DEC 55 54.00 64.31 $1.00 5.9% SCMR DEC 40 39.31 46.75 $0.69 4.9% New Low?!? CRGN - Position closed. Sell Straddles: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return CFLO DEC 165 172.13 46.50 $7.13 23.2% CLFO - short-put covered by shorting stock. Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return MANU DEC 135 136.75 72.00 $1.75 13.0% EMLX DEC 185 187.19 110.50 $2.19 10.9% CIEN DEC 140 141.25 73.00 $1.25 8.3% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status AFFX $87.25 $62.06 DEC50P/60P $1.12 $58.88 $0.88 Alert AGN $90.75 $92.31 DEC70P/75P $0.75 $74.25 $0.75 Open AET $66.06 $67.13 DEC55P/60P $0.56 $59.44 $0.56 Open APA $62.44 $57.00 DEC50P/55P $0.63 $54.43 $0.63 Alert BMY $67.94 $72.19 DEC60P/65P $0.88 $64.13 $0.88 Open Alert - Be ready to close (or offset) the position on further weakness. 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 - Combination/Spreads *************** ELN - Elan $53.38 ** On The Rebound! *** Elan is a worldwide specialty pharmaceutical company. Elan's principal research and development, manufacturing and marketing facilities are located in Ireland, the United States and Israel. Elan has focused mainly on the development and commercialization of products for pharmaceutical industry clients utilizing its proprietary drug delivery systems. In recent years, Elan has continued to focus on drug delivery systems, but has embarked on a strategy to expand its therapeutic focus through the development and commercialization of new pharmaceutical products for selected target markets, including the areas of neurology, pain management and oncology. There's not much news on ELN to explain today's continued rally but the technical indications suggest the issue has successfully completed a recent consolidation and is poised for future gains. In addition, the fundamental outlook for the company is excellent and the drug sector is performing very well; both factors that lead us to a bullish position in the issue. The premiums in the spread also help provide a low risk cost basis with a reasonable expectation of profit. ELN - Elan $53.38 PLAY (conservative - bullish/credit spread): BUY PUT DEC-$47.50 ELN-XW OI=786 A=$0.62 SELL PUT DEC-$50.00 ELN-XJ OI=584 B=$1.00 INITIAL NET CREDIT TARGET=$0.43-$0.50 ROI(max)=20% ****** XL - Xl Capital $80.00 *** New Trading Range? *** XL Capital is an insurance and financial services company. The company's operations are organized into four main underwriting segments: insurance, reinsurance, Lloyd's Syndicates and other inancial services. Xl Capital provides both excess and primary insurance globally through these subsidiaries: XL Insurance, XL Europe, XL Insurance Company of New York, Greenwich Insurance, Indian Harbor Insurance, ECS and Intercargo. The company, with NAC Re and XL Mid Ocean Re, provides a broad range of property and casualty reinsurance products on a global basis. Business is written on both a proportional and excess of loss basis. The company's Lloyd's operations are primarily conducted by Brockbank and Denham. XL Capital Products also provides credit enhancement coverages in the form of financial guaranty insurance and credit default swaps and reinsurance on asset-backed, municipal and select corporate risk obligations. Xl Capital is widely recognized as a leading provider of many types of non-life insurance, which includes various property and casualty segments, and other lines of personal and commercial insurance. Companies in this industry assume property or third party risk, such as liability insurance or workers' compensation insurance, rather than mortality risk or health risk and the size of the market is fairly substantial. In addition, revenues for Xl Capital benefit as prices increase in these segments and the balance sheet for the company has historically been very good. The company is very innovative and they are moving into other growth opportunities such as financial-related products. The technical outlook for XL is favorable and our conservative position offers an excellent way to participate in the future movement of the issue with relatively low risk. XL - Xl Capital $80.00 PLAY (conservative - bullish/credit spread): BUY PUT DEC-70 XL-XN OI=10 A=$0.43 SELL PUT DEC-75 XL-XO OI=0 B=$0.93 INITIAL NET CREDIT TARGET=$0.56-$0.62 ROI(max)=12% *************** BULLISH PLAYS - Naked Puts *************** FRX - Forest Laboratories $139.00 *** Rally Underway! *** Forest Laboratories develops, manufactures and sells both branded and generic ethical drug products that require a physician's prescription, as well as non-prescription pharmaceutical products sold over the counter. Forest's most important United States products consist of branded ethical drug specialties marketed directly, or detailed, to physicians by Forest Pharmaceuticals, Forest Therapeutics and Forest Specialty Sales forces. Their products include Celexa, for the treatment of depression; the respiratory products Aerobid, Aerochamber and Tessalon; Tiazac, Forest's once-daily diltiazem for the treatment of hypertension and angina; Infasurf, a lung surfactant for the treatment and prevention of respiratory distress syndrome in premature infants, and Cervidil, used for the initiation or continuation of cervical ripening. There's little news to explain the recent bullish activity in FRX but today the issue moved above the current trading range amid continued buying pressure and excellent volume. Traders say the rally may be related to the recent announcement that Forest Laboratories will replace Seagate Technology (SEG) on the widely tracked S&P 500 Index. Seagate is being bought by Veritas Software (VRTS), which is already part of the S&P 500 Index, but the date for the index exchange has not been set. The S&P 500 is tracked by fund managers and changes to the index are generally followed by heavy trading in shares of the companies affected as funds holdings are adjusted to match the popular market gauge. Regardless of the reason, FRX is once again established in a bullish trend and those who favor the drug manufacturing sector can use this position to speculate conservatively on the future movement of the issue. FRX - Forest Laboratories $139.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put DEC 125 FRX XE 32 1.31 123.69 5.8% *** Sell Put DEC 130 FRX XZ 67 2.38 127.62 9.2% ****** GENZ - Genzyme General $89.31 *** On The Move! *** Genzyme General develops and markets therapeutic products and diagnostic products and services, with an emphasis on therapies for genetic diseases. Genzyme General primarily consists of two business units, Therapeutics and Diagnostics. The Therapeutics business unit focuses on developing and marketing products for genetic diseases, including a family of unique diseases known as lysosomal storage diseases, and specialty therapeutics. The Therapeutics business unit has three therapeutics products on the market and several other products in varying stages of development. The Diagnostics business unit develops, markets and distributes in vitro diagnostic products and genetic testing services. Genzyme General is a division of Genzyme Corporation and has its own common stock intended to reflect its value and track its financial performance. Genzyme General and BioMarin Pharmaceutical recently announced they are beginning a pivotal Phase III study of Aldurazyme (laronidase), and expect to treat the first patient in the trial by early December. The product, recombinant alpha-L-iduronidase, is an enzyme replacement therapy for patients with MPS-I, also known as Hurler, Hurler-Scheie and Scheie diseases. Genzyme and BioMarin have received Orphan Drug designation and Fast-Track status for Aldurazyme from the U.S. FDA. In an initial clinical trial, Aldurazyme has shown safety and promising results and if the trial confirms the initial profile of the drug, the companies will submit the compound for marketing approval, to provide a new therapy to the thousands of patients who currently suffer from the life-threatening disease. In addition, Genzyme General just announced that it has entered into a license agreement for a class of small-molecule compounds that may be useful in treating lysosomal storage disorders. The agreement with the University of Michigan covers a series of U.S. and foreign patents and other patent applications related to certain ceramide-based compounds and their therapeutic use. Analysts agree with the company's positive future and investors have pushed the issue up $15 in just one week. In addition, the recent trading range support near $75 defines this position as a relatively safe entry into the volatile biotechnology sector and our cost basis allows a conservative entry in an issue with a bullish technical outlook. GENZ - Genzyme $89.31 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put DEC 75 GZQ XO 3392 0.81 74.19 6.9% *** Sell Put DEC 80 GZQ XP 152 1.69 78.31 11.4% ****** PVN - Providian Financial $93.00 *** Blue-Chip Play! *** Providian Financial, operating through its subsidiaries, is a leading provider of lending and deposit products to customers throughout the United States and offers credit cards in various countries around the world. The company also serves a broad, diversified market with its loan products, which include other financial and membership services products. The company, with its more than $27 billion in assets under management, also offers a number of unique financial services to over 15 million customers. Providian Financial was also recently named one of America's Most Admired Companies by Fortune magazine, the nation's top financial institution by U.S. Banker magazine and one of the most technologically innovative companies in the U.S. by Information Week magazine. With a commitment to customer satisfaction, Providian helps customers build, protect and responsibly use credit. The big financial services companies have been under-performing the broader market as of late but in recent sessions, the group is starting to show some life. Providian is one of the leaders in the sector and their recent quarterly earnings reflect that dominance. In early October, Providian announced record third quarter net income of $200 million, or $1.36 per diluted share, representing an increase in net income of 33% for the quarter. The Board of Directors also announced a two-for-one stock split in the form of a stock dividend, and increased its quarterly cash dividend by 20% to $0.06 per share, payable on a pre-split basis. For each Providian Financial share held at the close of business on the record date, one additional share will be issued. Both the distribution of the additional shares and the payment of the cash dividend will be made on December 1, to shareholders of record at the close of business on November 15, 2000. A pre-split rally is the likely cause of the recent upward trend and traders who agree with the bullish potential of the company can use this position to speculate on the future movement of its share value. PVN - Providian Financial $93.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put DEC 70 PVN XN 963 0.50 69.50 5.0% *** Sell Put DEC 75 PVN XO 177 0.88 74.13 8.3% Sell Put DEC 80 PVN XP 383 1.50 78.50 11.1% *************** BEARISH PLAYS - Naked Calls The issues are excellent candidates in the premium-selling category of options trading. Based on analysis of historical option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for profitable naked-calls. Each issue has robust option premiums, a well defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. Many traders may favor a more aggressive approach, selling options that are closer to the current price of the issue, to produce a higher initial return. While that technique may be more attractive, it also increases the theoretical risk of loss. Only you can know what plays are suitable for your personal risk-reward tolerance and portfolio outlook. *************** CIEN - Ciena $73.00 *** Networking Sector Blues! *** Ciena is engaged in the optical networking equipment market. The company offers products for tele- and data-communications service providers worldwide. The company's customers include long-distance carriers, competitive local exchange carriers, Internet service providers and wholesale carriers. Ciena also offers optical transport, intelligent switching and some unique multi-service delivery systems that enable service providers to provision, manage and deliver high-bandwidth services to their customers. The company has pursued a strategy to develop and leverage the power of disruptive technologies to change the fundamental economics of building carrier-class communications networks, thereby providing its customers with a competitive advantage. Ciena shares slid lower today as investors worried about new financial problems with a large customer, European carrier Global TeleSystems Group (GTS) and the possibility of lower sales to Sprint (FON). French equipment maker Alcatel (ALA) told analysts it had recently become a supplier for Sprint, one of Ciena's main customers. Ciena has been affected by financial problems with another customer. In September, the company said it would record a fourth-quarter charge for up to $28 million in debt payments it may be unable to collect from UK-based iaxis Ltd. The news was untimely for investors in the technology group and much of the drop in Ciena's shares can be attributed to comments from a BlueStone Capital telecom analyst who said the decision to lower the company's price target was based on a deteriorating financial condition at some carriers, as revenue growth is subsiding and cash flow is being reduced. The analyst also indicated that the overall health of telecom companies, especially long-distance carriers, is in a rapid decline. CIEN - Ciena $73.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call DEC 100 UEE LT 1623 1.94 101.94 22.3% Sell Call DEC 105 UEE LA 1378 1.44 106.44 17.0% Sell Call DEC 110 UEE LB 2716 1.00 111.00 12.2% *** ****** EMLX - Emulex $110.50 *** Technicals Only! *** Emulex is a designer, developer and supplier of a broad line of Fibre Channel host adapters, hubs, application-specific computer chips (ASICs), and software products that provide connectivity solutions for Fibre Channel storage area networks (SANs), network attached storage (NAS), and redundant array of independent disks (RAID) storage. Its products are based on internally developed ASIC technology, and are deployable across a variety of SAN configurations, system buses and operating systems, enhancing data flow between computers and peripherals. Emulex's products offer customers a combination of critical reliability, scalability, and high performance, and can be also customized for mission-critical server and storage system applications. This play is simply based on the current price or trading range of the underlying stock and its recent technical history. The near-term EMLX price trend is bearish and reflects a pronounced negative divergence from an intermediate-period moving average. In addition, the decline has come on increasing selling pressure and a recent support level near $125 has been violated. With the failure at $170 early in November, a short-term "triple top" formation is in place and due to the heavy overhead supply at that price, the share value has little chance of reaching our target position in two weeks. EMLX - Emulex $110.50 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call DEC 160 UEL LL 291 2.06 162.06 16.2% Sell Call DEC 165 UEL LM 264 1.69 166.69 13.5% Sell Call DEC 170 UEL LN 653 1.38 171.38 11.1% Sell Call DEC 175 UEL LO 365 1.06 176.06 8.7% *** ************************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=1056 ************************************************************** ******************* 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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