The Option Investor Newsletter Sunday 12-03-2000 Copyright 2000, All rights reserved. 1 of 5 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/120300_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 12-01 WE 11-24 WE 11-17 WE 11-10 DOW 10373.54 - 96.69 10470.23 -159.64 10629.87 + 26.92 -215.00 Nasdaq 2645.29 -259.09 2904.38 -122.81 3027.19 - 1.80 -422.59 S&P-100 695.99 - 15.17 711.16 - 13.93 725.09 + 5.98 - 32.59 S&P-500 1315.23 - 26.54 1341.77 - 25.95 1367.72 + 1.74 - 60.71 W5000 12037.40 -316.20 12353.60 -306.30 12659.90 - 28.90 -694.10 RUT 456.84 - 15.03 471.87 - 10.74 482.61 + 1.71 - 26.85 TRAN 2763.15 - 86.74 2849.89 + 32.59 2817.30 +113.08 - 57.53 VIX 31.59 + 2.01 29.58 + 1.73 27.85 - 4.65 + 6.19 Put/Call .61 .59 .89 .83 ****************************************************************** I hate it when that happens! By Jim Brown A promising rally dies a slow death as every talking head over analyzes each falling point. Still the day went just about the way we had choreographed it. The bounce continued at the open and the Nasdaq ran up about +130 points before falling back before the Supreme Court event. Once it was apparent there was no clear victor in court the rally continued once again but the fear of weekend court announcements created a serious desire to go into the weekend flat. It was a struggle and the Dow traded on both sides of positive late in the day before finally succumbing to selling pressure at the close. Bargain hunters that missed out on some of the big gainers from the morning took the opportunity to nibble at the close when most of those stocks came very close to where they opened the day. The end of day bounce was weak but provided a glimmer of hope for those wanting a Monday rebound. The Nasdaq closed positive for the first time this week and that makes two Fridays in a row buyers found oversold conditions too tempting and they broke the down trend. The day started with the NAPM report which at 47.7 was a decrease of -0.6 from October and the third month in a row under 50 which indicates a contraction in the economy. Only once since Greenspan has been in power (1993) has the Fed failed to reduce rates after the third month. However it does not always take place at the very next meeting but the next change is a cut. The sentiment is building for the meeting on the 19th to at least change the bias to neutral and then follow with a rate cut in January when the political climate has cooled somewhat. Hopefully Greenspan will give us some indication of his thought process, that is of course assuming we could understand it, when he speaks next week on Tuesday. The speech will be televised and watched with rapt attention by most traders. The rumor mill was very active on Friday. The one that got the most attention was that Tim Koogle was leaving Yahoo. When questioned Yahoo made a statement that went something like, "if he was we would be required to issue a press release and we have not issued one." Say what? Eventually they just came out and denied the rumor but not until YHOO had lost almost -$5 off the intraday high and the rally had been blunted. Good going guys, you just cost your share holders several million more dollars trying to be cute. The next rumor involved a coming earnings warning from Dow component SBC. After dropping almost -$4 intraday on the rumor SBC finally came out and reaffirmed their estimates, although about two cents shy of what the street consensus had been, and the stock firmed some. The most sinister rumor came after a downgrade of Intel by CSFB. The rumor was that Intel was going to warn in the next two weeks and they were waiting for a market bounce before doing the deed. Traders ran for cover and INTC dropped -4 to close at $34.12 which was a new 52-week low. After considering the possibilities I bought some DEC-30 puts for $.94 at the close as a lottery play. We also featured that in the lottery play section of the newsletter this weekend. There were a couple of strange earnings warnings on Friday. Ford warned that they would miss estimates by a dime and said they were cutting production by 145,000 units yet the stock gained +1.44 on the news. The analysts said the automotive stocks were so beat up that finally knowing the real numbers was almost a relief and the stock was bought as a value play. Daimler Chrysler also said they would cut production by -146,000 units and GM is expected to cut production next week also. Just another sign of the falling economy some analysts saying they could build as many as 2,000,000 more light trucks than needed over the next three years. That is a lot of heavy metal. The other warning was from Transocean (RIG) as they said costs had exceeded estimates. However there was a major upgrade of the oil drillers and service companies today even in the face of Iraq threatening to cut off its oil. The combination of events lifted RIG +$5 from the days low closing it positive. Oil prices dropped -1.80 to close at $32.02 today. The U.S. said it was considering tapping the strategic reserves if needed to cover any Iraq shortfall. One warning that did not end positive was Raytheon, the number three defense contractor. They said earnings could run -.15 less than expected in 2001 and the stock dropped -$8 at the open but closed only -$5. Lockheed Martin and General Dynamics both lost over -$2 on the news. Compaq went head to head with the analysts downgrading their stock. Saying their Thanksgiving sales were robust and their main product, servers, was not even a consumer product. They felt the stock was cheap. To emphasize this fact they announced a one billion share buyback. CPQ was up +2.50 intraday but pulled back to close only +1.30. Xerox better get started making copies of their stock soon because they are going to need it to pay creditors. Moodys downgraded their debt to junk bond status and the stock closed at a new 52-week low of $6.19. Somebody please buy them and put them out of their misery. The Supreme Court heard the opposing lawyers debate the merits or demerits of the action taken by the Florida Supreme Court and it was clear from the start that they did not want the case and there would not be a quick or clear decision. The court was broken evenly in three camps, those that thought Florida might have strayed, those that thought Florida did no wrong and those that did not care and did not want to be put in the position of having to rule on the complicated case. The ruling, when it comes, will probably be a 5:4 or 6:3 split decision or they could simply decide not to decide and let the current ruling stand. The Florida Supreme Court did make some rulings late Friday and Gore lost on all three counts. Basically they denied another recount on a specific lot of ballots and said the butterfly ballot would stand dismissing two cases in that genre. The worst November ever for the Nasdaq is now history and December has started a positive trend for the troubled index. Does this mean that blue skies are ahead? We would all like to think so but the facts are building that we are not out of the woods yet. The legal landmines will continue to keep investors cautious and mostly on the sidelines until the final result is known. Fortunately that is only about seven more trading days at the most. On December 12th that problem as we know it will be over one way or another. By then that may be the least of our worries. The flood of earnings warnings has drowned the Nasdaq in bad news but the worst news may be yet to come. What if Intel warned? How about IBM, MSFT, JDSU, a fiber optic stock or two, a B2B stock or two, YHOO? There are some big names that are on the bubble and any of them could cause much more stress in the market than Gateway. Hardly a day goes by that a warning comes from an unexpected source. Take RIG on Friday. How can an oil service company fail to make money when drilling is at a ten year high and oil over $32 a barrel? We are hearing rumblings from Asia about market turmoil. Oil and Euros are still a problem for the big multinationals. Could JNJ or PG be next? Will retailers start complaining about slow holiday sales by next weekend? The point here is there are a lot more possibilities for problems over the next two weeks. The lack of a fall rally is causing many technical problems. There is a lot of margin selling causing instability across the board. Getting a margin call on SDLI for instance may cause investors to sell other stocks instead. If investors believe strongly in SDLI and they don't want to close their position at $200 if they bought in at $300 then they sell GE or MOT or XYZ which will not cause such a big tax loss and also not as big a real loss. For stock investors it is not a loss until you sell it and true believers always think their favorite tech stock will come back. Still to raise money they must sell something. Multiply this by hundreds of thousands of investors and thousands of favorite stocks and you see the problem. Another problem is simply the coming tax loss selling. With no rally many investors will choose to sell the current losers to offset the wins from the first quarter. The closer we get to year end the stronger the selling will be if we have no rally to fuel their hopes. Funds are now starting to stock pile cash for redemptions expected when investors start getting their statements showing disappointing losses and even tax bills. Many investors will be pulling money out of the volatile stock market funds and moving into the safety of money markets and bond funds after suffering their biggest loss since becoming investors. Margin calls, tax selling, earnings warnings are just the main reasons the bloodshed may not be over. The light at the end of the tunnel may not be until the Fed meeting on Dec-19th. The election will be history and warning season will be half over. The big names may be behind us and only the Fed ahead of us. Fed Governor, Edward Gramlich said today that he personally felt the economy was heading for a stronger than expected landing. If this view is typical of the rest of the current Fed then relief should be on the way soon. Abby Cohen was on CNBC late Friday night pounding the table on the undervalued tech stocks and we appreciate her efforts but until she gets out of the carefully scripted formats her message will not carry as much weight as others in the past. Her words are chosen with more care than Alan Greenspan's and at least we can understand her. Come on Abby, loosen up. Make a real market call. Where is Ralph Acompora when we need him? Ralph, a Nasdaq 2000/5000 call could really turn this market around right now! The bounce from Thursday on strong volume did not carry through on Friday. The volume was decent at 2.3B for the Nasdaq and 1.2B for the NYSE but traders still sold into the rallies. Most big cap stocks rose into their resistance and failed. Traders thought the Thursday bounce was short covering and bargain hunting only and the lack of follow through today was evidence. I disagree somewhat since the urge to be flat over the extremely political weekend is very strong. I was encouraged by the small bump at the end of the day. However, it matters not whether I want a rally or a rout since the market will give us what it wants anyway. It will be our task next week to trade which ever trend appears. If the Nasdaq looks like it wants to run then we should trade in that direction. If we get more warnings and more selling then grab a couple puts and hang on. It is not up to us to try and trade our bias when it conflicts with the market bias. You don't go to play baseball with a tennis racquet and you don't play calls in a down market. You will get the same results and it will not be pretty. When we were picking plays Friday night there were literally dozens of $10-$20 stocks on a vertical descent to zero which anyone who could afford a $2 option could play puts with almost zero risk. There is no reason for anyone to be missing out on the incredible profit opportunities in this market. The only reason is personal choice. If you chose to only play calls then that is your choice. Hey, my name is Jim Brown and I made money shorting the QQQ today! If I can play both sides anyone can! I am happy to announce that as of today www.IndexSkybox.com, the replacement for the Oex Skybox, has finished two months of beta testing and is now publishing winning trades every day. Our team of several hundred beta testers have been wringing out all the kinks over the last two months and report "this is the best index option service on the web." The IndexSkybox uses multiple trading methods to trade multiple indexes on a daily basis. You are not stuck waiting for just the OEX to make move when other, sometimes more profitable indexes, are making new highs and lows and generating profit for the traders. With multiple intraday updates targeted to index traders and multiple real time trading plays per day you are missing out if you have not taken the free trial. Please read the intro by Austin Passamonte below and go take a look. Trade smart, don't buy too soon. Jim Brown Editor IndexSkybox - Winning Trades For All Market Conditions As managing editor for IndexSkybox.com, I'm frequently asked what we have to offer new and experienced traders. The answer is "everything"! Where do we begin? In a nutshell, IndexSkybox.com is designed and enhanced to include four separate trading strategies that target index and sector options. But that's not all. You will find the IndexSkybox chock-full of educational and entertaining articles found nowhere else focusing on trading in general and indexes in particular. Did you know that true index options (including the OEX, SPX, SOX,BTK and others) are taxed on a 60% long-term/40% short-term capital gains base? Index options on true underlying indexes are treated as "1256 events" in accordance to commodity futures markets by current IRS rules. Could a possible income-tax savings on equal dollars earned equate to more profit realized after tax? Just one of many reasons why professional and institutional traders choose index options as their preferred trading vehicle. Let's start with our live trading models. IndexSkybox continues to operate a modified version of the inherited OEX Benchmark system previously found in OIN, and also one that tracks the NDX/QQQ. This is merely one of four live trading models inside. The IndexSkybox Swing Trade system trades the QQQ, OEX and SPX indexes with frequent plays designed to capture small moves in three of the most active & liquid markets of all. Friday's closed QQQ play with a +66.7% gain and OEX play with a +35.6% gain are examples of what we do. The IndexSkybox Position Trade model looks to buy distant-month index calls on dips and distant-month puts on extended rallies to capture future value and big wins in current market conditions. The IndexSkybox Spread Trade model focuses on credit spreads, a true option investment approach. With odds of probability in our favor it's merely a question of proper account management to all but guarantee positive results over time. Although we trade credit (and debit) spreads on numerous symbols, the IndexSkybox Spread Trade model is about to add a simple section for methodically trading the SPX you won't want to miss. For those with spread-trade margin clearance, you'll be able to use specific suggestion of exactly which spreads to sell and for how much at the proper entry. No time to monitor the markets? You may choose to simply enter instructions with a live broker who works in harmony with us and let your orders execute accordingly. Hate to lose money and love boring, methodical profits over time? SPX Spread Trade might be for you. Four diverse live trading models. Market forecast & educational articles. Multiple Intraday market updates and alerts. Everything the active trader needs and more. Feel free to visit us and see what we have to offer you. The two-week trial is on us and we think you'll like what you discover. See you inside before the bell! Austin Passamonte, Editor/Trader http://www.IndexSkybox.com ***************** REGIONAL SEMINAR ***************** Here is your chance to learn from the pros. Three days of Technical Analysis, Stock and Option education. Don't miss it! At less than the cost of a bad trade you can learn how to analyze stocks and trade options like the pros. Don't wait, do it now. Date City 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************************* Get 10 FREE Issues of Investor's Business Daily, the research tool for self directed investors. http://www.sungrp.com/tracking.asp?campaignid=1041 ************************************************************** ************** EDITOR'S PLAYS ************** This was a fairly simple week as far as my trading went. I was flat on my back since last Saturday night with the flu bug. I only rolled out of bed to type my commentary on Tuesday and then right back to bed again. On Thursday when I woke and saw the Nasdaq headed to 2500 I struggled to sort the cobwebs out of my head and decide what to buy if it bounced. I only managed to pick three stocks and sell some deep in the money puts before succumbing to the bug again and going back to bed. Fortunately I had the luck to have picked the almost exact bottom to climb out of bed. It would not have made much difference what I picked since almost everything went up from there. I made a comment about having long plays that might last more than 24 hours in the Thursday night commentary but it did not happen. I guess I could have held over but when I saw the market top on Friday I rolled out of bed again and closed all my positions. As I sit there flat with an more than an hour of trading to go I saw the QQQ start to roll over. I was trying to decide which stock to buy puts on for a short term play but the QQQ looked like a natural. Remember I am still bullish and I just wanted something to capture the end of day dive I was expecting. I wanted to be flat for the weekend so I would not be handicapped at the open on Monday by possibly being on the wrong side of the market. BRCD - DEC $220 Naked Put My busted play for the week. It started off well but a profit taking dip shortly after the open on Friday stopped me out for about a $5 loss per share. I had sold the DEC $220 Naked Put on Thursday and had I not placed the stops I would have been ok. (this time) It is the price we pay to not get hammered with a double digit drop when you are not looking. I will gladly take the $5 loss compared with the possible rewards. BRCM DEC $140 Naked Put This was about as perfect as it could have been for a one day play. I sold the $140 naked put on Thursday and closed it at the roll over on Friday. I could have left the play open since I was very profitable but without knowing when the Friday drop might stop I elected to take the money off the table. For a 24 hour play I netted about $15K. JNPR DEC $175 Naked Put I like Juniper and wanted really bad to jump back into this trade in the $128 range when it bounced at the end of the day. However, not knowing what the weekend would bring I elected to wait patiently for another entry point next week. When looking for tops I use the one minute real time chart and as you can see $140 was definitely a challenge. By itself I would probably have held longer but all my other charts were showing the same thing on other stocks I was watching. The Nasdaq was also starting to fail and that was the final confirmation. Of course once I closed the play it started to rally again and I could see it hitting $150 when it spiked over $140 for a minute. Once it pulled back again it was all over and I breathed easier. However, I will be leary of the $140 barrier if I re-enter the play again on Monday. It has resistance there and it might be a good spot to sell again. I can always re-open the play if it breaks say $142. INTC DEC $30 PUT @ $.94 This was just a lottery play at the close based on the rumor that they were going to warn next week. It may be true or not but for $.94 it is not much of a risk. If it does go against me I can turn it into a credit spread by selling the Dec $35 put against my $30 puts and might even make a profit. We will see. QQQ Short @ $65.75 I was just looking for something to buy puts on for the afternoon drop and the QQQ popped up. Rather than buy puts and then have premium spreads to deal with I shorted the QQQ at $65.75 and rode them down. It was only about 45 min but enough to make a couple bucks while I was watching the market wind down. **************** My game plan for next week is to play the trend. I think we have some really good calls and puts this weekend and I am going to queue up some of both on Monday morning and see which ones look best. It is terribly important to not try and bet against the market right now. Moves are fast and steep and surprises can come out of nowhere with the rash of earnings warnings. Be patient, you will make more money. I had a good week and I spent almost all of it sick in bed. Is this a great country or what! Jim ***********************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=1038 ************************************************************ **************** MARKET SENTIMENT **************** Hot Porridge? Cold Porridge? By Austin Passamonte Just like Goldilocks in the "Three Bears" fable, we've been tasting cold porridge at place settings for the Dow, Nasdaq and S&P indexes once again all week. Late Thursday & early Friday gave chance for one hot serving many hoped would last but lest we forget, this is the bear's house we're in. Be careful choosing which bed to sleep in overnight! The recent trading approach to sell every rally has worked for those who attempt it 100% of the time over the past several weeks. Can such a repeatable pattern continue forever? No, but buying puts on every feeble rally might be the easiest money option traders have made since buying calls on feeble dips exactly one year ago. Signs of market strength? Not on our charts. For a long-term look we visited our monthly/weekly charts again just for fun (?). While we didn't expect to see outright bullish signals, a guess at our worst-case downside support can be viewed by looking at Bollinger band extremes. This fluctuating tool that measures current market deviation values could indicate where downside targets lie. Most weekly charts have index price action pressing the lower B- band already except for the Dow, so we will list values of all index monthly-chart lower B-band values as they rest today: Dow: 10,000 NDX: 1,642 Comp: 1,992 SPX: 1258 OEX: 639 QQQ: 41 We realize market bulls may find these numbers shocking. So do western New Yorkers when TV weather reports forecast 24" of snow overnight but reality is we can see that & more (40+ inches in Buffalo, one storm this year). Watching meteorologists forecast the possibility doesn't warm many hearts but does save lives indeed. So too can these unbiased chart forecasts if we heed storm warnings in each direction. A day will come when charts warn of a pending heat wave that will melt any open shorts who remain overdressed in thick bear coats. It works both ways, for now to warn of more downside. A number of MS articles ago (11/16) we posted similar charts when the Comp was above 3,000 that warned of the Comp testing 2,000. At that time CNBC reported unnamed technicians were forecasting "rock-solid" support at the 2850 level. Hmm, define rock-solid please? Speaking of market analysts, did Ralph Acampora (remember him?) ever think we might see 2,000 before 6,000 on the Comp? Has Joe Battapaglia been buying every dip since September 1st? Have Mary Meeker and Dan Niles upgrades at the top and downgrades near the bottom made much money? Will the SPX hit 1575 by year's end? Will it reach 1650 in twelve months? Quite likely, but we may be able to buy bullish plays from below 1250 first. OIN's Molly Evans asked us to review some daily/hourly/30 min charts of the DRG.X drug index and a couple of individual stocks within the sector earlier this week. As noticed by her, we also saw all chart symbols topped out and ready to roll over. She bought puts, set stops and waited. We made a mental note to do the same, which was worth the paper it was written on (none). Very next day, analysts upgraded the entire sector across the board. CNBC repeated this every 20 minutes for good measure. Prices went up but chart signals did not. Retail was buying but with no underlying strength. Who was selling? Now look where prices went since then We would never say that some analysts could have institutional clients with vested interests to enter/exit positions, but how does one explain a subsequent DOWNGRADE of this very same sector on Friday? What happened in only two trading sessions that could possibly cause several solid companies to warrant an upgrade on Wednesday and downgrade on Friday in the very same week? Market Sentiment would be the last on earth to suggest market manipulation occurs; we merely claim inability to understand conflicting facts behind public statements made in fair- disclosure forums. The potential to adversely affect small traders is what concerns us, as it is their interest we stand 100% behind. We support the approach of ignoring all non- technical analysts without exception and trust our own chart signals objectively drawn in front us. Weekly COT data shows the S&P 500 commercials continued the record pace of net-short positions and that was before Wednesday and Thursday's action. They are collectively holding incredible gains with probable vision of a sub 1,300 level on the SP00S in mind real soon. The VIX has spiked to 34 but released on the last failed rally. It is easier to call a market top with the VIX below 20 than a bottom above 30, as we can readily see 40+ or higher and have done so before. Our weekly forecast remains the same: more downside is the high odds pick, possibly to new lows once again. It will take massive amounts of good news to move us up and one or two bits of bad news to continue the fall. A rally emerging from nowhere to surprise one & all can never, ever be ruled out but signs of lasting market strength are absent to our view at this time Fortunes were made and lost last week as the markets offer equal profits in both directions. Trade carefully and strive to follow the daily trend! ***** VIX Friday 12/01 close; 31.59 30-yr Bonds Friday 12/01 close; 5.63% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Saturday (12/02/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 735 - 720 13,184 5,772 2.28 715 - 700 6,967 8,556 .81 OEX close: 695.99 Support: 690 - 675 995 9,902 9.95 670 - 650 23 10,594 460.61*** Maximum calls: 740/5,828 Maximum puts : 640/9,890 Moving Averages 10 DMA 708 20 DMA 722 50 DMA 734 200 DMA 773 NASDAQ 100 Index (NDX/QQQ) Resistance: 73 - 71 21,379 20,721 1.03 70 - 68 86,539 32,865 2.63 67 - 65 40,199 32,832 1.22 QQQ(NDX)close: 64.00 Support: 63 - 61 8,702 8,696 1.00 60 - 58 9,568 18,263 1.91 57 - 55 5,551 1,733 .31 Maximum calls: 70/58,139 Maximum puts : 75/33,647 Moving Averages 10 DMA 67 20 DMA 72 50 DMA 78 200 DMA 91 S&P 500 (SPX) Resistance: 1375 32,359 24,560 1.32 1350 16,350 33,203 .49 1325 6,185 16,913 .37 SPX close: 1315.23 Support: 1300 7,471 22,480 3.01 1275 1,938 16,965 8.75 1250 7,283 31,536 4.33 Maximum calls: 1400/64,520 Maximum puts : 1400/50,971 Moving Averages 10 DMA 1337 20 DMA 1367 50 DMA 1388 200 DMA 1437 ***** CBOT Commitment Of Traders Report: Friday 12/01 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader's direction. Small Specs Commercials DJIA futures (Current) (Previous) (Current) (Previous) Open Interest Net Value +103 -138 -3136 2462 Total Open Interest % (+1.14%) (-1.94%) (-11.59%) (-9.76%) net-long net-short net-short net-short NASDAQ 100 Open Interest Net Value -1888 -363 +673 -223 Total Open Interest % (-8.21%) (-1.76%) (+1.17%) (-0.42%) net-short net-short net-long net-short S&P 500 Open Interest Net Value +70473 +68303 -81,194 -79145 Total Open Interest % (+31.99) (+34.74%) (-12.00%) (-11.76%) net-long net-long net-short net-short What COT Data Tells Us: The disparity remains between Commercial positions and Small Specs on the S&P 500. The DJIA sees the Commercials increasing their net-shorts while the Small Specs turn net-long. The reverse is true on the NASDAQ 100 with the Commercials turning to a net-long position and the Small Specs increasing their shorts. Data compiled as of Tuesday 11/28 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://members.OptionInvestor.com/marketposture/120300_1.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=1057 ************************************************************** *************** ASK THE ANALYST *************** It's All About The Charts By Eric Utley Let's forget about the fundamentals this weekend and turn to the technicals for guidance through these perilous waters. Buying and selling stocks based on fundamental research is turning into a dangerous proposition. And while the underlying fundamentals of a company obviously matter over the long-term, in the near-term, it's price that rules. And with that, let's review some of our past triumphs and tragedies. This weekend's column will feature two stocks we reviewed not too long ago, along with two new targets. Send your stock requests to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- CIENA - CIEN (revisited) Just last week, we reviewed CIEN. The stock was trading above $100 at the time and had formed a unique descending wedge pattern. Last week's review included the following: After gapping down to the $120 level in late October, shares of Ciena have formed a textbook descending wedge with solid support established at $84 (triple bottom). As you will see below, the stock closed right at its descending line at $102. If (that's a big if) the NASDAQ rebounds early next week and Ciena breaks above that line, I think the stock will easily trade up to $115 if not $120 in short amount of time. Conversely, if the triple bottom at $84 is broken Ciena would turn into an excellent short with possible downside to the $65 level. In contrast though, a pullback and fourth retest of the $84 level might provide additional trading opportunities to the upside. Ciena will be a great stock to watch in the coming weeks, especially if it breaks to the upside. Last Week's Chart Sure enough, CIEN gapped higher at the opening bell last Monday, but that move proved to be a devious bull trap. The stock subsequently rolled over at the $105 level and didn't stop falling until last Thursday, when it traced a near-term low at $66.50 (pretty close to the $65 downside objective). I may have been a little too wishful for a breakout last week and I sincerely hope none of our readers got trapped in the head fake. Conversely, I do hope that a few of our readers capitalized on CIEN's failure at $84, which could have produced some solid profits from the short-side. Not by coincidence, CIEN rolled over at its previous support at $84 last Friday during the NASDAQ's rally attempt. Given the fact CIEN failed to move back above $84, I wouldn't be surprised to see the stock retest its near-term lows around $66. Should the $66 level fail, CIEN could give put buyers an opportunity to profit from a potential move down to the $60 mark. On the flip side, if the NASDAQ does actually advance next week, call buyers might find profits if CIEN bursts back through $84, which has now become resistance. ---------------------------- Research In Motion - RIMM (revisited) We reviewed RIMM about a month ago, when the stock had traced a near-perfect head-and-shoulders top. As expected, RIMM has fallen far below its month-ago levels. Here's what I wrote of RIMM: The bears have brought the valuation question to the forefront recently, which has snuffed out [RIMM's] momentum. Despite the company's bullish future and exponential growth, the stock got ahead of itself and now looks poised for an extended pullback. How do we know a big pullback is in order? Take a look at the chart below and notice the peculiar pattern formed over the past two months. The big head-and-shoulders top indicates lower prices. Last Month's Chart Substantial profits could have been had by put buyers after RIMM broke below its neckline at roughly $85. The stock came very close to reaching the bearish price objective of $45, which was calculated using my rudimentary numbers. The relative low traced by RIMM last Thursday was $51.75. That's not a bad move - $88 to $51 - if you'd bought puts. RIMM made an impressive advance over the course of last Thursday and Friday. In fact, RIMM's counterparts in PALM and HAND also followed suit. If the trading late last week in PALM, HAND, and RIMM truly signals a bottom in the hand-held sector, RIMM could continue its rally, possibly back up to the $85 level. However, the stock will need to break above its descending trend-line, which it rolled over at during last Friday's rally. If RIMM's recent rally attempt fails, the stock will probably retest its near-term lows. ---------------------------- Schering Plough - SGP I know a lot of drug stocks have been doing well, but what do you think of the SGP chart? - Craig Shares of SGP have had a nice rally since early September, when the tech sector turned for the worse. Despite the infinite election uncertainty, the drug sector as a whole has been providing profits from the long-side. For its part, SGP had been bouncing between $50 and $54 for about eight weeks and finally broke from that base early last week. The stock peaked last Thursday at the $57.56 mark and then turned south as the tech sector (NASDAQ) began its rebound. It's obvious that the drug sector is a defensive play in times of uncertainty in the broader equity markets, especially the tech sector. If the NASDAQ continues to decline, I see no reason why SGP can't continue advancing. Yes, the stock has rallied quite a bit over the past three months. However, the fact remains that money has to be put to work in this market and if the tech sector doesn't turn around any time soon that capital will continue to flow into drug stocks. People need medicine in good times and bad (expansions and recessions). Until the NASDAQ reaches a definitive bottom and rebounds, it's highly likely that traders can take profits from SGP. But, in this type of market environment, I feel that it's best to let the stock come to you instead of chasing it higher. That means letting SGP pull back to a strong support level and waiting for a bounce higher. SGP has serious congestion around the $52 level, which may be a good spot to look for a bounce. Although, it could fall to $50 before rebounding. It was apparent last Friday that investors we willing to let SGP fall so far before stepping in and propping the stock up. To reiterate, until the NASDAQ conclusively rebounds, I think we'll continue to see the buyers step into SGP. ---------------------------- Silicon Storage Technology - SSTI Great job Eric. Would you like to make any comments on SSTI? - Thanks, Chris I would like your viewpoints on EMC and SSTI. SSTI has had extremely strong numbers every quarter but continues to get slammed. I have to ask what good is [having] everything good when you are only going to fall. Also, please comment on the large pool of shorts in the market. The big players are actually adding to their positions. - Shane Before I get started on SSTI's chart, I'd like to thank Chris for his kind compliments. Feedback is always welcome! In late 1998, during the last market drop, shares of Silicon Storage were trading for less than $1, on a split adjusted basis. Why do I bring that up? Well, the stock is currently hovering around $13, and it could fall a lot further. There are two things that I find disconcerting about SSTI. The first is the stock's charts. It's just plain ugly! The big rounding top traced over the course of this year may foreshadow lower prices for the stock. Plus, support levels are breaking as if they were made of glass. What's more, as Shane pointed out, there is a huge amount of stock sold short. According to the most recent figures, a full 17 million shares of SSTI have been sold short. That equates to nearly 23% of the stock's float. Those numbers only run through the middle of October, and I'm sure they've increased as Shane added. So where does it leave SSTI? We know the stock is in a definite downtrend and there are a bunch of traders in the stock attempting to drive its price lower. When a stock is as heavily shorted as SSTI, two things can happen. The shorts can get squeezed, which would result in a massive covering rally. Or, the shorts hang tough and defend their positions and sell the stock lower. Barring a major reversal in the NASDAQ, I don't see a massive short covering rally in SSTI, other than the usual natural reaction that accompanies a steep decline such as SSTI has experienced. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* Teaser: Chain store sales reported heavy volume last week and now we'll see how e-tailing sectors are holding up with next Tuesday's Index of Online shopping data. Wednesday's Semiconductor Billings could impact the sector, plus the Employment Situation and Jobless Claims reports could provide the final insight into the likelihood of a Fed rate cut. For the week of December 4, 2000 Monday ====== New Home Sales Oct Forecast: 920K Previous: 946K Leading Indicators Oct Forecast: -0.10% Previous: 0.00% Tuesday ======= NAPM Services Nov Forecast: NA Previous: 58.00% Factory Orders Oct Forecast: -0.30% Previous: 1.60% Vehicle Sales Nov Forecast: 16.8M Previous: NA Online Shopping Index Nov Forecast: 150.2M Previous: NA Wednesday ========= Productivity-Rev. Q3 Forecast: 3.50% Previous: 3.80% Beige Book 2:00 pm NA Forecast: NA Previous: NA Oil and Gas Inv. 1-Dec Forecast: 290.1MB Previous: NA Semiconductor Billings Oct Forecast: 1.9% Previous: NA Thursday ======== Initial Claims 2-Dec Forecast: NA Previous: 358K Consumer Credit Oct Forecast: $7.2B Previous: $6.5B Friday ====== Nonfarm Payrolls Nov Forecast: 150K Previous: 137K Unemployment Rate Nov Forecast: 4.00% Previous: 3.90% Hourly Earnings Nov Forecast: 0.30% Previous: 0.40% Average Workweek Nov Forecast: 34.3 Previous: 34.3 Week of December 11th ==================== Dec 11 Wholesale Inventories Dec 13 Retail Sales Dec 13 Retail Sales ex-auto Dec 13 Export Prices ex-ag. Dec 13 Import Prices ex-oil Dec 14 PPI Dec 14 Core PPI Dec 14 Initial Claims Dec 14 Business Inventories Dec 14 Current Account Dec 15 CPI Dec 15 Core CPI Dec 15 Industrial Production Dec 15 Capacity Utilization Dec 15 Michigan Sentiment ************************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=1068 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 12-03-2000 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/120300_2.asp ************** TRADERS CORNER ************** A Time for Change? By Lynda Schuepp This week has been a horrendous week for moves, especially to the downside. Vix has been steadily increasing, but you never know when high is high enough to buy. Next week we are moving into a new house and have been packing non-stop for a week in advance of the moving truck. I keep peeking at CNBC and my screen to slip in a trade or two, but it has been a tough week to make money. Because I can't be watching the screen every minute, I have been swing trading. One system I use to trade the QQQ's is to use volume reversal signals. These signals are not long lasting, and it's not like you can walk away and forget about everything, but they have been working pretty well for me, so I thought I'd like to share them with you. Daily Chart of the QQQ's: The first thing to look at is volume and average volume. Note that the average volume has been rising (using a 50 day simple moving average) since the beginning of October. During this time the QQQ's have dropped from about 85 on October 5th (first candle on the chart above) to about 62 on November 30th (second to the last candle). During that time however, it hasn't been a straight line down. There have been some nice ranges you can trade. These days I am reluctant to buy puts because, being the ultimate optimist that I am, I am hard pressed to believe we can go much lower. Of course, I've been saying that for quite a while, but one of these days it's got to be true. My system is quite simple. Buy Signals: A buy signal is created by looking at extreme volume days and buying current calls at the close with at least two weeks to expiration. An "extreme" volume day is when the volume is in excess of 50 million shares and at least 20% greater volume than the day before. The volume must be at least as high as the previous "extreme" volume day. There were four such days in the last 2 months: 10-18, 10-26, 11-13, and Thursday of this past week (11-30). Basically you can find one of these signals every two weeks. Strike Selection: I usually select the next 10-band strike up at the close and buy 40 contracts, usually for a price between one and two dollars. For instance, if the QQQ's were closing at 62, I would buy the 70 calls, as I did on Thursday. They cost me a 1-1/8, or $4500 for 40 contracts plus commissions. The holding period is generally only 2 to 5 days. This is not a long-term strategy; it is simply a way to swing trade inexpensively for a few points. However those few points translate to 100 to 400% returns! Stop Loss Selection: I use the low of the day I buy the calls as my stop. On October 18th, 74.5 was the low; October 26th-73.625; November 13th-68.25 and Thursday the low was 60. I purchased calls near the close on Thursday for 1-1/8. If the QQQ's drop below 60, the low on Thursday, I would simply sell my calls at a loss and move on. Although I have to admit, I haven't always done this, but I am getting better. Sell Signal: A sell signal is generated when the volume of the QQQ's drops down close to or below the 50 day moving average on volume, or at my stop loss. Looking at the chart above, you can see that sell signals were created on 10-23 at a price of 86; 11-2 for 82 and 11-15 at 77-3/8. The gains on these 3 trades were 4 points, 1 point, and 3 points. My current trade was as high as 2-1/4 on Friday. Had I been watching, I might have been tempted to sell, making a quick 100% in one day, buy I wasn't around when the QQQ's peaked, so I am currently holding. Volume dropped on Friday but not anywhere near the moving average, so I will remain in the trade until such time or a maximum of 5 days. The reasoning is this: if the QQQ's haven't moved in 5 days, my time value is eroding any potential profit I might make, so it's better to go home with half of my candy than none. Extrapolating for the OEX: OEX prices (bottom) and QQQ prices (top) and QQQ volume (middle): For those of you who like to trade the OEX, you can see from the chart above that the OEX is closely correlated to the QQQ's. Using the QQQ's extreme volume signals to trade the OEX, similar results could have been had. The buy signal on 10-18 for the OEX shows a close at 706 and the sell signal was given on 10-23 at 734. Thursday the OEX closed at 697, it will be interesting to see if these signals can be used to trade the OEX. I'll keep you filled in. Happy Trading. ************************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=1058 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* JNPR - Juniper Networks $131.88 (-0.50 last week) See details in sector list Put Play of the Day: ******************** ITWO - i2 Technologies $99.38 (-13.63 last week) See details in sector list ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily, the research tool for self directed investors. http://www.sungrp.com/tracking.asp?campaignid=1073 ************************************************************** ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS AMGN $64.81 (-1.25) While it was encouraging to see AMGN bounce at its ascending trendline 2 weeks ago, since then our play has been as exciting as watching grass grow. After three attempts to break through the $69 resistance level, support for Drug stocks fell apart over the past 2 days, dragging AMGN back below the 200-dma. This failure completes another lower high for AMGN, and it now that it has broken south of its month-long ascending trend, it looks like a good time to throw in the towel. After 2 weeks of being unable to sustain any upward movement, we have simply lost patience with AMGN. Rather than wait for our stop to get taken out next week by further weakness in the Drug sector, we'll drop it this weekend to make room for more promising plays. SGP $53.63 (+0.13) Drug stocks finally lost their lustre Friday, and SGP followed the sector lower on volume 60% over the ADV. Maybe Goldman Sachs can be used as the ultimate contrarian indicator. With many Drug stocks trading at or near 52-week highs on Wednesday, the company initiated favorable coverage on a basket of drug stocks including MRK, SGP, and MRK. It makes you wonder where they were 3 months ago, before these stocks began their run. As if in response to the upgrade, the Drug Index (DRG.X) turned on a dime and headed lower for the past 2 days. Following the sector lower on Friday, SGP gave up nearly 5%, and although our $52 stop is still intact, the bullish trend suffered some serious damage. The final straw was Friday's UBS Warburg downgrade. We don't want to play Goldman's game anymore, so were are moving SGP to the drop list this weekend. LLY $90.06 (+5.25) LLY gave a great presentation at the Robertson Stephens Medical Conference last week. The positive coverage added to LLY's already growing list of proponents. While LLY's strong momentum took it through the $97 level on Thursday and promised of more to come, the bullish sentiment swirling around the drug sector changed tune overnight. Friday morning, LLY fell like a lead balloon. The stock's current position, almost smack on our $90 stop loss, and leaves us no choice but to exit. While this Bush play ended sooner than expected, let's keep an eye on this split candidate for future trading opportunities. PUTS MVSN $47.75 (-1.38) Continuing to trade in sympathy with the NASDAQ, MVSN tagged along for the ride as the stock gapped up at the open just above our stop price of $43. Trading higher for the remainder of the day, the stock closed to gain $6.25 or over 15 percent on strong volume, 145% of ADV. The stock was also helped by news of a new customer. BBC Worldwide will license MVSN's SafeCast copy protection technology as part of their marketing plan for releasing digital content. With a large back catalog of highly popular TV shows to be released, the deal could prove to be a significant windfall for MVSN. While the stock failed to close above its 10-dma at $47.92, a break through resistance seems likely. With our stop price triggered, we are dropping coverage of this play. NEWP $69.25 (-2.00) After making a presentation at CS First Boston's annual Tech conference on Thursday night, analysts apparently liked what the CEO and CFO had to say about the company's prospects going forward. Coverage was initiated by First Union Securities with a Buy rating. Along with a relief rallying NASDAQ, the stock gained $12.25 or over 21 percent on over 165% of ADV. While the stock closed below our stop price of $71, today's close above the 10-dma (currently at $66.42) for the first time in over a month has us inclined to take our still substantial gains on this highly successful put play. With that, we say so long and thanks for the profits. HAND $52.06 (-6.06) It was certainly lucrative to play HAND's steadfast decline from the $80 level, but the inevitable has arrived. Friday's strong 12%, or $5.56 bounce indicated that HAND may have found a bottom during Thursday's very bearish session. That day, HAND saw a clean break of the $50 level and an intraday low of $41.50 before buyers started nibbling. While it true that HAND didn't violate our stop loss of $58, we believe the play is over. Volume was 2.4 times the norm during the strong upswing and HAND kept its bullish gains at Friday's close. Therefore, we've decided to drop HAND this weekend and move on to more favorable opportunities. If you have open positions, consider exiting on any intraday weakness. AGIL $49.63 (-2.31) The signs are unmistakable. Two days of advances on better-than-average volume and it's time to cut bait. In light of AGIL's swift decline to the $35 level - which was certainly a nice reward! - we'd lowered our stop from $50 to $48 to avoid getting snagged on an oversold bounce. To our dismay, there was a multitude of buyers lined up to take advantage of AGIL's attractive share price. And like a loyal soldier, AGIL traced the NASDAQ in higher territory. In consideration of the powerful rebound and the violation of our stop loss, we're exiting the play this weekend. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** NTAP - Network Appliance $53.94 (-9.06 last week) The idea was inspired, yet simple. Separate storage from an application server and put all that data on a special "appliance" tasked with serving data at high speeds. In 1992, Network Appliance originated this high-performance network appliance concept. Today, they are a recognized leader in data storage and access. Corporations and ISPs use their solutions to reduce the cost and complexity of managing their mission-critical data. Shares of Network Attached Storage (NAS) leader Network Appliance have fallen sharply amidst valuation concerns and the possibility of competition. Down more than 50% in November, with the stock now deep into oversold territory, a rebound in the NASDAQ could see this stock moving up in sympathy, and for good reason. At present, Storage is with little doubt the fastest growing sector in Technology. According to recent estimates, 75% of all information technology hardware budgets will consist of storage hardware by the year 2003. If these estimates hold, then growth in the Storage sector could easily exceed that of the Fiber Optic sector and at its peak, could be many times larger than the PC boom of the 90's. Most recently, EMC announced a new product, code-named Chameleon, putting the company in direct competition with NTAP. While this has been a source of concern, analysts have suggested that EMC's product cannot compete with NTAP on price. As well, NTAP recently announced support for IBM's high-end mainframe computers and DB2 database software, putting it in the higher margin turf of EMC. It appears that the battle lines are being drawn but considering the growth rate of the sector as a whole, this town is certainly big enough for both companies. Now back above its 5-dma at $52, a bounce off this level as well as $50 could provide aggressive traders with an ideal entry. Support can also be found at our stop price of $45 but make sure the stock closes above this level. For a safer play, wait for NTAP to clear the 10-dma, currently at $57.41, backed by strong buying before jumping in. As NTAP's movements are largely affected by the NASDAQ, we would recommend entering only if there is strength in the Tech index. ***December contracts expire in two weeks*** BUY CALL DEC-50 NUL-LJ OI=1334 at $8.00 SL=5.75 BUY CALL DEC-55*NUL-LK OI=2032 at $5.13 SL=3.00 BUY CALL DEC-60 NUL-LL OI=2057 at $3.38 SL=1.75 BUY CALL JAN-55 NUL-AK OI= 217 at $9.25 SL=6.25 BUY CALL JAN-60 NUL-AL OI= 332 at $7.25 SL=5.00 http://www.premierinvestor.com/oi/profile.asp?ticker=NTAP RSAS - RSA Security $46.13 (+2.81 last week) RSA Security Inc. helps organizations build secure, trusted foundations for e-businesses through its RSA SecurID two-factor authentication, RSA BSAFE encryption and RSA Keon public key management systems. With nearly a half billion RSA BSAFE-enabled applications in use worldwide, more than seven million RSA SecurID users and almost 20 years of industry experience, RSA Security has the proven leadership and innovative technology to address the changing security needs of e-business and bring trust to the new, online economy. Shares of RSA Security may have had a difficult month, but the company itself has been making some positive moves. With a rebounding NASDAQ and a focus on valuation, shares of RSAS could become in demand. The company has been signing up large customers, most notably Adobe, Electronic Data Systems, the Swedish Municipal Workers' Union and Texas Instruments. The company's encryption keys have become pervasive, residing in a variety of formats including smart cards, cable modems, ATM bank machines, e-business software, smart phones, cross-platform documents, email systems, and private networks. In fact, a quick glance in the preferences of your favorite web browser will likely reveal the presence of RSAS encryption keys. With over a billion products shipped worldwide and alliances with Cisco and Intel, the company has no shortage of high-profile customers. In early October, the company announced that it would repurchase up to four million shares of stock over the next 12 months. RSAS' low PE, only 13.15, and lack of long-term debt makes this an attractive alternative to peers such as CHKP and VRSN. On Friday, a rebounding NASDAQ helped RSAS close up on average volume. With the 5 and 10-dmas converged at the $43 mark, a pullback to that level as well as support at our stop price of $41 could give aggressive traders a target to shoot for. If continued buying in the NASDAQ helps lift RSAS higher on Monday, a break above $47 with conviction could allow for a conservative entry, with the next level of resistance overhead coming from the 50-dma at $48.83. In entering this play make sure there is strength in the NASDAQ to confirm upward momentum. ***December contracts expire in two weeks*** BUY CALL DEC-40 QSD-LH OI= 0 at $7.00 SL=5.00 Wait for OI!! BUY CALL DEC-45*QSD-LI OI= 32 at $3.25 SL=2.50 BUY CALL DEC-50 QSD-LJ OI=399 at $1.31 SL=0.75 BUY CALL JAN-45 QSD-AI OI=324 at $5.75 SL=3.75 BUY CALL JAN-50 QSD-AJ OI=325 at $3.63 SL=1.75 http://www.premierinvestor.com/oi/profile.asp?ticker=RSAS IMCL - Imclone Systems $48.94 (+1.31 last week) Engaged in the research and development of novel cancer treatments, IMCL focuses on growth factor inhibitors, therapeutic cancer vaccines and angiogenesis inhibitors. The company's lead product candidate, IMC-C225, is a therapeutic monoclonal antibody that inhibits stimulation of a receptor for growth factors upon which certain tumors depend. Phase I/II clinical trials have been promising. The lead candidate for angiogenesis inhibition, IMC-1C11 is an antibody that binds selectively and with high affinity to KDR, a principal Vascular Endothelial Growth Factor (VEGF) receptor, thus inhibiting angiogenesis. A rarity in the Technology sector, Biotech stocks are one of the few groups that have not wiped out all of their gains from last winter. Sure they lead the decline in March, but since then have held up rather well. Mirroring the action of the Biotechnology index (BTK.X), IMCL has been vacillating around its 200-dma (currently $47.19) for the past 2 weeks as the bulls and the bears duel for control. If the NASDAQ is going to hold the 2500 level and recover from there, the Biotechs (as one of the strongest sectors) should lead the charge. Although the company missed their earnings target for the third quarter (reported on November 15th), investors seem to have been encouraged by the revenue growth number, which came in at 460% year-over-year. Ironically, one of the things that may be helping Biotechs to maintain their current valuations is the fact that their future revenue streams cannot yet be quantified. Remember when future revenue for the Internets was unknown and it seemed like the sky was the limit? Biotechs seem to be in a similar mode, with strong, but undefined future growth rates for many of the industry leaders. IMCL has targeted its research and development efforts on the treatment of various cancers, an area that seems to get investor's attention. IMCL has solid support at $44, backed up by the even stronger $40 level. Resistance is equally well defined, sitting just overhead at $51, and providing a good trigger point for conservative players to establish new positions. While aggressive investors can consider buying the dips to support, make sure that both the sector and the NASDAQ are moving in the positive direction before pulling the trigger. ***December contracts expire in two weeks*** BUY CALL DEC-45 QCI-LI OI=198 at $6.63 SL=4.50 BUY CALL DEC-50*QCI-LJ OI=733 at $3.88 SL=2.50 BUY CALL DEC-55 QCI-LK OI=520 at $2.06 SL=1.00 BUY CALL JAN-50 QCI-AJ OI=141 at $6.38 SL=4.25 BUY CALL JAN-55 QCI-AK OI=107 at $4.38 SL=2.25 http://www.premierinvestor.com/oi/profile.asp?ticker=IMCL MLNM - Millennium Pharmaceuticals $53.50 (-0.56 last week) Through an integrated approach called "gene to patient", MLNM is engaged in the development of breakthrough drugs and predictive medicine products for the treatment of major human illnesses. By discovering disease-related genes, the company seeks to produce validated drug targets and develop new, proprietary drugs to treat cancer, metabolic disease (including obesity) and inflammation. MLNM's LeukoSite subsidiary has developed Campath, a potential leukemia treatment that has received FDA fast-track status. The company also has significant programs in infectious diseases, cardiovascular diseases and diseases of the central nervous system. MLNM derives its revenue from research and development alliances with such companies as Bayer AG, Pharmacia and American Home Products. Although it looks like MLNM fell off a cliff the day after the election, the picture is definitely starting to brighten for this leading Biotechnology company. At the Robbie Stephens Medical Conference on Tuesday, the company's chief business officer told investors that the company feels "very good about the likelihood of approval" for Campath, which treats chronic lymphocytic leukemia. An advisory committee to the FDA is scheduled to meet on December 14th to evaluate the application submitted by MLNM. While most Biotechs, including MLNM are still not profitable, the market is valuing the stocks based on the valuable intellectual property and patents that have a lot of inherent value. The benefits of genomics research are beginning to be seen as drugs based on this information can be targeted at the underlying genetic ailment, rather than just treating the symptoms. According to Banc of America securities analyst James Reddoch, "If the worldwide market for all drugs is $300 billion, genomics has the potential to double that." With Campath and 7 other drug candidates currently in the pipeline, MLNM expects to capture its own piece of that pie. After hitting a low of $41 two weeks ago, MLNM has managed to recover back above the $49-50 support level. Stronger support sits at $44, prompting us to pick that level to place our stop. Make no mistake, Biotechs are on thin ice along with the rest of the NASDAQ. But, given their superior performance relative to the overall Technology sector, these stocks are likely to lead any recovery in the near term. Aggressive investors will want to target shoot dips to support for initiating new positions, while those with a lower risk tolerance will use a breakout above the 200-dma ($55.94) as their entry trigger. In either case, make sure that strong buying volume in MLNM is confirmed by positive movement in the overall Biotech sector before taking the plunge. ***December contracts expire in two weeks*** BUY CALL DEC-50 QMR-LJ OI=366 at $7.88 SL=5.50 BUY CALL DEC-55*QMR-LK OI=304 at $5.25 SL=3.75 BUY CALL DEC-60 QMR-LL OI=434 at $3.38 SL=1.75 BUY CALL JAN-55 QMR-AK OI=135 at $9.50 SL=6.75 BUY CALL JAN-60 QMR-AL OI=132 at $7.75 SL=5.50 SELL PUT DEC-45 QMI-XR OI=523 at $1.75 SL=3.50 (See risks of selling puts in play legend) http://www.premierinvestor.com/oi/profile.asp?ticker=MLNM MUSE - Micromuse $94.13 (+1.25 last week) Founded as a network management solutions reseller, Micromuse today is a leading provider of real-time fault and service- level management software. Its Netcool suite helps telecommunications and Internet service providers ensure the uptime of network-based customer services and applications. The company's software is used in the OSS and NOC centers of many of the world's leading service providers such as AOL, Cellular One, and Charles Schwab. Micromuse's share price was launched off its devastating low of $70 as the positive sentiment flowed from CSFB's Technology Group Annual Technology Conference and the NASDAQ rose from the trenches on Thursday. While the NASDAQ powered higher into Friday's session and ultimately managed to stay afloat of 2600, the synergy of rallying markets combined with positive coverage powered MUSE up a substantial 35%, or $24.13 over the two trading sessions. CSFB also reiterated a Strong Buy recommendation and issued a $190 price target, to boot. Indeed, MUSE is positioned for a momentum run upwards of the century mark; however, there's absolutely no question that OIN will only look to begin new plays if the NASDAQ continues to strengthen. Market corroboration and bullish moves within the networking sector are essential if MUSE is to trend higher and maintain the advances. We have our stop currently set at $82, just above the former $80 resistance. On the low end of recent intraday trading, $85 sustained the share price on dips; although it's likely $90 should strengthen as the shorter-term support, if the uptrend takes hold. The cautious types will want to wait for a raging NASDAQ to break MUSE out above the psychological $100 level before taking positions. ***December contracts expire in two weeks*** BUY CALL DEC- 90 QVM-LR OI= 43 at $14.88 SL=11.00 BUY CALL DEC- 95*QVM-LS OI= 27 at $12.38 SL= 9.25 BUY CALL DEC-100 QVM-LT OI= 71 at $10.50 SL= 7.50 BUY CALL JAN- 90 QVM-AR OI=236 at $25.00 SL=19.50 BUY CALL JAN- 95 QVM-AS OI= 11 at $22.13 SL=17.25 BUY CALL JAN-100 QVM-AT OI= 44 at $19.50 SL=14.00 http://www.premierinvestor.com/oi/profile.asp?ticker=MUSE MEDX - Medarex Inc $42.63 (+4.88 last week) Medarex is a human monoclonal antibody-based company with integrated discovery, development and manufacturing capabilities, utilizing the Company's genetically engineered mice to create fully human monoclonal antibodies. Several of their therapeutic products, which target cancers, tumors, and leukemia, are in clinical trials. Major clients include Centacor, Merck, and Aventis Behring. It's been rather dicey for MEDX in recent times. A successful split run brought shares upward to $75 before the tech woes took MEDX off its pedestal. Its sharp break under the 200-dma, near the $45 level a couple weeks ago, sent shares as low as $30. A narrow trading range followed the retraction with MEDX finding a tough line of opposition at $40. Friday's breakout through this upper resistance, and its subsequent bounces off it intraday, set MEDX up for a potential run into next week. Simply put, we're entering a play on MEDX for its upward potential over the short-term. It'll be essential for the NASDAQ to establish a positive trend if we're to see lucrative profits. On the analyst front, MEDX rates well. In November the stock received a Buy from Josephthal & Co and Strong Buy recommendations from Dain Rauscher Wessels and SunTrust Equitable. Nevertheless, take entries only if you have a cooperating market! Bullish confirmation would of course be for MEDX to break to the upside of the 200-dma ($44.75) with intensity. Although, some aggressive traders might consider taking positions on high-volume bounces off the $36 level, which is where we have our stop loss set. An entry of this kind can be quite risky, but offers more upside potential. ***December contracts expire in two weeks*** BUY CALL DEC-40 MZU-LH OI= 73 at $6.63 SL=4.50 BUY CALL DEC-45*MZU-LI OI=210 at $4.00 SL=2.50 BUY CALL DEC-50 MZU-HJ OI=223 at $2.25 SL=1.00 BUY CALL JAN-45 MZU-AI OI= 30 at $6.88 SL=5.00 BUY CALL JAN-50 MZU-AJ OI=200 at $4.88 SL=3.00 http://www.premierinvestor.com/oi/profile.asp?ticker=MEDX *********************** NEW LONG TERM CALL PLAY *********************** COF - Capital One Financial $56.88 (+6.25 last week) Capital One is one of the major financial service providers on the Internet, with online account decisioning, real-time account numbering, online retail deposits and a growing number of customers serviced online. Capital One's subsidiaries collectively had 29.4 million accounts and $24.2 billion in managed loans outstanding as of September 30th, 2000. When the National Association of Purchasing Manager's number was released Friday showing yet another contraction in the manufacturing section, it paved the way for a move from the Fed. A reading under 50 signals a slowdown and this was the fourth straight month that occurred. Now, it isn't an exact science trying to read the Greenspan tarot cards, but when there has been three straight numbers under 50 in the past he has always lowered rates (except for once in 1993 when rates were already very low). If you top this with the fact that all the talk this past week was of a "hard landing" for our economy and even the R-word (recession), you have to conclude the December Fed meeting will be a big one. This will be the first time since June when the Fed hiked rates by 50-basis points that there is real potential for action. Whether it will be directive bias back to neutral or an actual lowering of rates is still uncertain, but either will be good for the economy and stock market. Who typically benefits most within the market on this kind of Fed action? Yep, Financials. And they don't wait for the outcome either. Financial stocks are beginning to turn now in anticipation of some degree of relief. That is why we are adding COF to our Long-term play list. The stock has turned back above the 5, 10 and 200-dmas. The volume has begun to pick- up and it's breaking out of a two month slumber. Choose your entry points on the dip and watch for a move above the 50-dma at $62 to really confirm the move. Also, we are setting a stop loss at $53 to protect against a reversal. ***December contracts expire in two weeks*** BUY CALL DEC-55 COF-LK OI=627 at $3.88 SL=2.25 BUY CALL JAN-55 COF-AK OI= 3 at $6.00 SL=4.25 BUY CALL JAN-60*COF-AL OI=926 at $3.63 SL=2.00 BUY CALL MAR-60 COF-CL OI=383 at $5.75 SL=4.00 http://www.premierinvestor.com/oi/profile.asp?ticker=COF ********************* NEW LOTTERY CALL PLAY ********************* MFNX - Metromedia Fiber Network $13.75 (-0.50 last week) Metromedia Fiber Network is a leading provider of end-to-end optical network solutions. By offering virtually unlimited, unmetered bandwidth at a fixed cost, Metromedia Fiber Network is eliminating the bandwidth barrier and redefining the way broadband capacity is sold. They are extending metropolitan fiber-optic infrastructure to the end-user in strategic top- tier markets, enabling its customers to implement the latest data, video, Internet and multimedia applications. Friday finally brought some relief to both the Nasdaq and the Fiber-optics sector, which is what brings us to MFNX. The recent carnage in the Fiber sector may have finally reached a stage of capitulation this past week. MFNX did too as it traded in the single-digits for the first time in nearly two years. While that may sound bearish to some degree, a change in sentiment is occurring. The sector obviously has the potential to rally with a vengeance based on a previous track record. With Ciena set to report earnings this Thursday, we have a catalyst for a big move. Throw in the fact that MFNX's CEO and COO bought one million shares on the open market on Wednesday and we have some momentum building. That is why it has traded back up to the 10-dma at $14.00. As it is still under that level, the risk remains high, but it is called a lottery play for a reason. A close over $14 would be confirming, otherwise choose your entry points selectively on the dips. The DEC options are active and should allow for good liquidity. The stop loss is set at $9.50. ***December contracts expire in two weeks*** BUY CALL DEC-10 QFN-LL OI= 243 at $4.25 SL=2.50 BUY CALL DEC-12 QFN-LN OI= 354 at $2.50 SL=1.25 BUY CALL DEC-15*QFN-LC OI=1365 at $1.38 SL=0.50 BUY CALL JAN-15 QFN-AC OI=1028 at $2.75 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=MFNX ************************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=1069 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 12-03-2000 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/120300_3.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=1059 ************************************************************** ****************** CURRENT CALL PLAYS ****************** BRCM - Broadcom Corporation $104.75 (-12.38 last week) Broadcom Corporation is a provider of highly integrated silicon solutions that enable broadband digital transmission of voice, video and data to and throughout the home and within the business enterprise. These integrated circuits permit the cost-effective delivery of high-speed, high-bandwidth networking using existing communications infrastructures that were not originally designed for the transmission of broadband digital content. Using unique proprietary technologies and advanced design methodologies, the company designs, develops and supplies integrated circuits for a number of the most significant broadband communications markets. Thanks to a smart acquisition, bullish comments from the CEO, a rebounding NASDAQ and words of praise from a number of analysts, Broadcom appears to have bounced off of support at $85. Earlier in the week, BRCM acquired Israeli-based video chipmaker VisionTech using shares of its own stock. Fear of dilution along with weakness in the Tech sector caused BRCM to head lower but analysts came out and applauded the deal, calling the acquisition a good strategic fit. In fact, the purchase of privately held VisionTech signals BRCM's entrance to the important emerging digital video industry. Analyst Mark Edelstone from Morgan Stanley Dean Witter upgraded the stock to a Strong Buy from an Outperform rating, citing attractive valuation as well as strong business conditions. WR Hambrecht analyst Jim Liang reiterated his Buy rating, based on the VisionTech acquisition and the anticipation that BRCM would outperform its peer group over the next 12 months. On Friday, in sympathy with a relief rallying NASDAQ, the stock closed up $7.25 or 7.44% on 265% of ADV. Upbeat comments from CEO Henry Nicholas were well received, with no inventory concerns and growth in demand for cable modem chip sets for 2001, expected to exceed 2000 figures. As well, a faster than expected deployment of new interactive set top boxes, containing three times the number of Broadcom chips as a standard broadcast-only box will mean higher sales and revenue figures for the company going forward. For aggressive traders, a bounce off support at $100 as well as the 5-dma at $96 are possible targets to shoot for. There is also support at $95 and $90 but keep in mind our stop price, now at $89. For a more conservative entry, wait for momentum to carry BRCM over the 10-dma near $110. In either case, confirm direction with strength in the NASDAQ as well as the Semiconductor Sector (SMH, SOX.X). ***December contracts expire in two weeks*** BUY CALL DEC-100 RDZ-LT OI=1208 at $14.13 SL=10.50 BUY CALL DEC-105 RDW-LA OI= 595 at $10.88 SL= 8.25 BUY CALL DEC-110*RDW-LB OI=1784 at $ 8.50 SL= 6.00 BUY CALL JAN-105 RDW-AA OI=2530 at $19.88 SL=14.50 BUY CALL JAN-110 RDW-AB OI= 288 at $18.25 SL=13.00 SELL PUT DEC- 95 RDZ-XS OI= 397 at $ 6.13 SL= 8.50 (See risk of selling put in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=BRCM CELG - Celgene Corp. $62.02 (+1.64 last week) Celgene is a pharmaceutical company with a major focus on the discovery, development and commercialization of small molecules for cancer and immunological diseases. Celgene's medical research and development team is working to extend the boundaries in the areas of small molecule immunotherapeutic and biocatalytic chiral chemistry by developing pure versions of existing drugs. Trading last week in CELG has largely been focused on the American Society of Hematology (ASH) meeting, which began last Friday. A shaky NASDAQ earlier in the week provided traders with an ideal entry point as the stock bounced off strong support at $55 to end the week with reversal pattern. This is a bullish sign and with the ASH meeting continuing until Tuesday December 5th, positive comments from Biotech companies could result in a sector-wide rally. CELG will also be presenting scientific data on their star drug Thalomid, and its use for treating multiple myeloma and melanoma. A large part of CELG's earnings growth can be attributed to the diverse range of diseases that Thalomid has effectively treated. Aside from numerous forms of cancer, Thalomid has also been used to treat certain types of skin diseases including leprosy. As well, it has also been effective in some cases in treating AIDS patients. New uses for the drug have spurred earnings estimates going forward to higher than expected levels, allowing CELG to not only break even in its most recent earnings report, but to become cash flow positive. Now back above the $60 level, where the 5, 50 and 100-dmas currently reside, a pullback to that level could provide aggressive traders with a solid entry point. Additional support can be found at the 10-dma ($57.52), $55 and $50 but confirm the bounce with volume and make sure CELG closes above our stop price of $52. If momentum in the stock continues, a break through $64 on volume could allow the more risk adverse to enter this play. In doing so, confirm momentum with sentiment in the Biotech sector, using the Biotechnology Index (BTK) and Merrill Lynch's Biotech HOLDR (BBH). ***December contracts expire in two weeks*** BUY CALL DEC-60 LL-LL OI= 318 at $6.00 SL=4.00 BUY CALL DEC-65*LL-LM OI= 250 at $3.75 SL=2.75 BUY CALL DEC-70 LL-LN OI= 157 at $1.88 SL=1.00 BUY CALL JAN-65 LL-AM OI=3771 at $7.25 SL=5.00 BUY CALL JAN-70 LL-AN OI= 442 at $5.25 SL=3.25 http://www.premierinvestor.net/oi/profile.asp?ticker=CELG JNPR - Juniper Networks $131.88 (-0.50 last week) As a provider of Internet infrastructure solutions, JNPR serves Internet service providers and other telecommunications service providers, helping them to meet the demands resulting from the rapid growth of the Internet. The company delivers next generation Internet backbone routers that are specifically designed for service provider networks. JNPR's flagship product is the M40 Internet backbone router, which complements the recently-introduced M20, which is a router built specifically for emerging service providers. The routers provided by the company combine the features of the JUNOS Internet Software, high performance ASIC-based packet forwarding technology and Internet-optimized architecture into a purpose-built solution for service providers. Despite the NASDAQ's inability to hold onto most of its gains Friday, the Networking sector (NWX.X) managed to post a solid gain, validating our logic for adding JNPR to the call list on Thursday night. While still a high risk play, it seems the valuation compression that this stock has suffered is excessive, especially given the rate at which the company is growing revenue and earnings. Revenue growth in the most recent quarter came in just shy of 600% year-over-year, and the company posted earnings of 17 cents versus a loss of 9 cents in the year-ago period. That is rapid growth no matter how you slice it, and once the NASDAQ starts to get healthy again, stocks like JNPR should be favorites with the momentum investors. The follow through from Thursday's rally, pushed our play as high as $140.50 before the profit taking set in. Giving up nearly $9 in the final 90 minutes is not exactly encouraging, but there are some bright points to consider. The sector was positive, JNPR closed back above the descending trendline ($128) and the 10-dma ($124.13) for the first time since the election, and the gains came on volume 50% over the ADV. Daily stochastics have turned up and emerged from oversold territory, and even MACD has crossed back into positive territory. Resistance is now clearly formed near $140, and the stock closed right in the middle of the $131-132 resistance level we mentioned on Thursday. While aggressive traders can consider buying dips near the $125 support level, anything below that will indicate serious weakness, and we would advocate standing aside. With the recent volatility in the high-flying Networking stocks, it wouldn't take long for the bears to push JNPR low enough to take out our stop at $109. Current levels look attractive for more conservative entries, but don't fight the trend. Wait for the Networking stocks to re-enter rally mode before initiating any new positions. ***December contracts expire in two weeks*** BUY CALL DEC-130 JUY-LF OI= 946 at $13.88 SL=10.50 BUY CALL DEC-135*JUY-LG OI= 383 at $10.63 SL= 7.50 BUY CALL DEC-140 JUY-LH OI= 891 at $ 9.00 SL= 6.25 BUY CALL JAN-135 JUY-AG OI= 681 at $22.38 SL=16.75 BUY CALL JAN-140 JUY-AH OI= 379 at $19.63 SL=14.25 BUY CALL JAN-145 JUY-AI OI= 446 at $18.00 SL=13.00 SELL PUT DEC-110 JUY-XB OI=1042 at $ 4.50 SL= 6.50 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=JNPR A - Agilent Technologies $53.00 (+2.06 last week) Agilent is a diversified technology company that provides solutions to high growth markets within the communications, electronics, healthcare and life sciences industries. They're a leading maker of analysis equipment with 51% of sales deriving from its Test and Measurement Unit. Recently Philips Electronics agreed to buy Agilent's Healthcare Solutions for $1.7 bln. Customers include AT&T, Cisco, and Pharmacia. Agilent's been a beacon of light in the gloomy tech sector of late. Coming from under the $44 level following a stellar earnings report on November 16th, the stock has attracted lots of investor interest and a list of rating upgrades. The latest coverage was initiated on Friday by First Union Securities with a Buy. Agilent started out the week with a major acquisition announcement that forecasts accelerated growth projections over the long-term. The strategy to enhance its software offerings through its cash acquisition of Objective Systems Integrated (OSII) will however initially cut Agilent's earnings by about $0.02 p/s in fiscal 2001. The deal is valued at approximately $665 mln and is expected to close in about 6 weeks. The news didn't effect A's bullish trading and the momentum continued to edge the price level higher. Volume's been moderate to strong with robust activity attempting to bring A through the formidable resistance at the $54 level. With the potential of a rebound in the tech sector continuing next week, A continues to be a favorable trade. But take note that some of the others in this sector like Sanima (SANM) and Solectron (SLR) aren't faring as well as A; therefore it's of the utmost importance to confirm strength in the NASDAQ before you go long. Additionally, consider waiting for a breakout above resistance at $54 before opening positions. Aggressive traders might buy into strength off the current levels, but this is more risky, particularly if you don't have tight stops in place for protection. We are however, still maintaining a lower exit point at $44 to allow for a significant intraday pullback. ***December contracts expire in two weeks*** BUY CALL DEC-50 A-LJ OI=2924 at $4.50 SL=2.75 BUY CALL DEC-55*A-LK OI=4397 at $1.94 SL=1.00 BUY CALL DEC-60 A-LL OI= 332 at $0.75 SL=0.00 BUY CALL JAN-50 A-AJ OI=5918 at $7.38 SL=5.25 BUY CALL JAN-55 A-AK OI=2021 at $5.13 SL=3.00 BUY CALL JAN-60 A-AL OI=3493 at $3.38 SL=1.75 http://www.OptionInvestor.com/oi/profile.asp?ticker=A BRCD - Brocade Communications $167.88 (-21.56 last week) Brocade Communications Systems is a supplier of open Fibre Channel Fabric solutions that provide the intelligent backbone for Storage Area Networks (SANs). Brocade's family of SilkWorm switches enables a company to manage growth of its data storage requirements, improve the data transfer performance, and increase the size of its SAN. Brocade's products are primarily sold in the US with 70% of sales derived from Compaq, Data General, Dell, McDATA, and Sequent. We're looking for BRCD, along with the likes of JNPR and BRCM, to lead the techs back into the limelight next week. On Thursday, traders took BRCD up $14.19, or 9.2% on the heels of its solid earnings report and 2:1 stock split announcement. 4Q results beat consensus estimates by two cents coming in with a net profit of $27.2 mln, or $0.22 p/s, on sales of $132.1 mln. CEO Greg Reyes commented that BRCD's market should grow to $7 bln by 2004 with the current SAN market accelerating faster than expected. The predicted sales growth was reported in excess of 150% for the 2001 fiscal year. This favorable outlook coupled with the upcoming 2:1 stock split, payable on December 22nd, should generate additional momentum in the coming weeks. Of course, we'll only look to enter new positions only after confirming strength in the NASDAQ. While your entry point is determined by your personal risk tolerance, keep in mind our stop is set at $159. A more enterprising entry could be found on deep dips to $160, but the $165 level appears to be developing as a solid launching point. Friday's action saw BRCD repeatedly bounce off this level as it challenged the immediate resistance at $175.50. Other traders might find a high-volume move through $172 and higher, at $177, a more judicious level to take entry. Whatever your ultimate plan may be, take profits quickly and remember to confirm direction and overall market sentiment before jumping into this HIGH-RISK tech play. ***December contracts expire in two weeks*** BUY CALL DEC-165 GUF-LM OI= 101 at $13.88 SL=10.50 BUY CALL DEC-170*GUF-LN OI=2723 at $11.25 SL= 8.50 BUY CALL DEC-175 GUF-LO OI= 748 at $ 9.13 SL= 6.25 BUY CALL JAN-170 GUF-AN OI= 800 at $21.25 SL=16.25 BUY CALL JAN-175 GUF-AO OI= 81 at $18.88 SL=13.75 BUY CALL JAN-180 GUF-AP OI= 626 at $17.00 SL=12.25 http://www.premierinvestor.net/oi/profile.asp?ticker=BRCD ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily, the research tool for self directed investors. http://www.sungrp.com/tracking.asp?campaignid=1074 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 12-03-2000 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/120300_4.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=1060 ************************************************************** ************* NEW PUT PLAYS ************* CREE - Cree $61.94 (-26.56 last week) Cree is the world leader in the development and manufacture of Silicon Carbide (SiC), which is a base material used in the fabrication of the company's blue light emitting diodes, wafers, and gemstone materials. The company was formed in 1987 by a group of researchers from North Carolina State University, who were pioneers in the development of a single crystal silicon carbide. Cree's vertical integration throughout the manufacturing process from crystal growth to package device, allows total control over all aspects of the production process. Products currently under development include microwave transistors, power devices and lasers. CREE dropped below the 50-dma and 200-dma on November 17th, and since that time, the chart has resembled a steep cliff. Volume has been heavy on the down days, and there have only been two days in the last two weeks when the stock closed up. The selling could have been partly related to the news that CREE will be purchasing UltraRF, a division of Spectrian Corporation, for approximately $30 million in cash and an additional portion of CREE stock. At the time, CREE was trading at $92, which means that the terms of the deal may have to be reassessed. The takeover was valued at approximately $100 million, which is slightly less than CREE's annual revenues, and seen as an expensive takeover. Since that time, the electronics, semiconductor and equipment manufacturing sectors have taken a big hit, with Altera being the latest company to warn of a slowdown in sales. Many analysts have downgraded the chip sector, stating that inventories are at high levels, and only a few semiconductor and chip-related stocks have been able to buck the trend. CREE may have to wait until its P/E drops from high values to a more realistic level, as investors are seeking growth and value these days. CREE is well below the 200-dma of $109 and the 50-dma of $98. While CREE closed up last Friday, the chart actually shows that the stock attempted to reach its 5-dma of $69.25, but only reached $66.94 before rolling over. Consider taking a position on another failed rally attempts past $66, and set stops at $68. Watch the semiconductor and electronics components sector for weakness before taking positions. ***December contracts expire in two weeks*** BUY PUT DEC-60*CQR-XLE OI= 4 at $7.00 SL=5.00 BUY PUT DEC-55 CQR-XKE OI=57 at $4.63 SL=2.87 http://www.premierinvestor.net/oi/profile.asp?ticker=CREE AKAM - Akamai Technologies $27.00 (-8.06 last week) Akamai Technologies enables businesses to prosper in a competitive Web-centric marketplace by providing solutions that optimize Web site performance, deliver broadcast-caliber streaming media, and provide interactive application services. Akamai's mission is to transform the delivery of Internet content so that Web congestion is a thing of the past. Akamai provides businesses with dependable, high-performance delivery of streaming media, rich Web content and Internet applications through services that are scalable, easily implemented and easily managed. Faster than the company can serve up rich media to its end-users, shares of Akamai have been heading deeper into negative territory. A failure to hold the 50-dma in the early part of November has left the stock to bleed ever lower on the backs of the 5 and 10-dmas now at $30.46 and $33.43, respectively. Valuation concerns in the Internet sector have played a large role in AKAM's decline, especially in four letter dot com stocks with losses instead of earnings. With shares of the company down 92% from its all-time highs and competitor Digital Island (ISLD) down 97%, overhead resistance is formidable and any strength in the stock has been heavily sold into. Most recently, analysts have been defending the stock. Robertson Stephens initiated coverage with a Buy rating and a price target of $52. First Union Securities reiterated their Strong Buy rating and $65 price target. Dain Rauscher Wessels initiated coverage with a Buy Aggressive rating and Lazard Freres a Buy. On Friday UBS Warburg initiated coverage with a Buy rating. Despite all the positive comments, AKAM continues to be weak, as the stock lost another $1.75 or over 6 percent on 110% of ADV to end the week. For aggressive traders, failed rallies above our stop price of $31 as well as the 5-dma could be a target to shoot for. AKAM has found support at $26.75 in the past couple of trading sessions. A break below this level on strong volume could be a safer bet. When taking a position, confirm sentiment with the NASDAQ and sector sympathy with Merrill Lynch's Internet HOLDR (HHH) when initiating a play. ***December contracts expire in two weeks*** BUY PUT DEC-30*RUG-XF OI=854 at $4.88 SL=3.00 BUY PUT DEC-25 RUG-XE OI=182 at $1.94 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=AKAM BLDP - Ballard Power Systems $70.00 (-7.88 last week) Doing their part to make gas-guzzlers a thing of the past, BLDP makes emission-free proton exchange membrane (PEM) fuel cells and fuel cell systems designed to be quiet, efficient alternatives to internal combustion engines. A fuel cell is an environmentally clean power generator that combines hydrogen fuel with oxygen, without combustion, to produce electricity, with pure water and heat as the only by-products. The company is currently developing PEM fuel cells for use in transportation, stationary power generation and portable applications. Along with everything Technology-related, BLDP had an amazing runup early in the year, culminating with a blowoff top in early March. Since then, we have seen a persistent and violent bear market develop on the NASDAQ, and until recently, it has been encouraging to see BLDP's resilience. Recovering from the spring lows near $60, driven by enthusiasm for anything that promised to alleviate our dependence on foreign oil, BLDP began posted a series of higher lows, culminating with the early October bounce at the 200-dma. Unfortunately, that is where the good news ends, as the highs described a picture perfect head-and-shoulders top by the time we went to the polls to elect a new president. The election uncertainty seems to have been the straw that broke the camel's back, as it took less than a week for the bears to cut through both the ascending trendline (which began last December) and the 200-dma (then at $92.25). Ever since its March highs, BLDP has performed much better than the other fuel cell stocks (FCEL and PLUG), due in large part to its significant alliances with the major auto manufacturers. Unfortunately, these alliances work both ways and in a slowing economic environment, the weakness of the automakers is turning out to be an albatross around the stock's neck. The low on Thursday came within striking distance of taking out the $60 support level, and given the anemic nature of the recovery, it looks very likely that this support level will fail. Intraday resistance near $74 capped the enthusiasm of the bulls on Friday, and the selling volume picked up right into the close. We have placed our stop up at $76, as we think it will take a serious change in sentiment (not just short-covering) to challenge that level. Tenuous support at $70 is going to have a hard time holding up next week, and conservative traders will want to consider new positions as the stock falls below $67 on continued strong volume. More aggressive players can attempt to target shoot new entries on any failed rallies to resistance, but confirm weakness in the broader Technology market as well as increased selling volume on BLDP before jumping into new positions. ***December contracts expire in two weeks*** BUY PUT DEC-70*DFQ-XN OI= 95 at $5.38 SL=3.25 BUY PUT DEC-65 DFQ-XM OI=256 at $2.88 SL=1.50 BUY PUT JAN-70 DFQ-MN OI=102 at $8.75 SL=6.25 BUY PUT JAN-65 DFQ-MM OI=425 at $6.25 SL=4.25 http://www.premierinvestor.net/oi/profile.asp?ticker=BLDP FMKT - FreeMarkets Inc $28.81 (-5.31 last week) FreeMarkets creates B2B online auctions for buyers of industrial parts, raw materials and commodities and services, providing access to the online auction marketplace to industrial buyers and suppliers. Its BidWare software links buyers with sellers in reverse auctions in which suppliers place bids to fill an order in more than 70 other categories. Blue chip clients include Quaker Oats and SmithKline Beecham. Earlier in the week, B2B enablers rose on the back on Commerce One's announcement that it would build a new e-marketplace in Korea. The likes of FreeMarket (FMKT) and its sidekicks Ariba (ARBA), VerticalNet (VERT), and PurchasePro (PPRO) all saw some gains, however the sector failed to maintain any upward momentum. Chase H&Q also started new coverage on FMKT at the beginning of the week. They cited strong business momentum and growing revenues along with a new Buy rating and $100 price target. Baird & Co's followed-up with a bit more conservative price target of $45, but nonetheless started FMKT with a Market Outperform. While Chase's positive comments likely helped take shares higher to the $36 and $38 levels, they had no sustaining effect on trading later in the week. On Thursday, FMKT fought to rise off the $28 and $29 levels as the NASDAQ rallied late afternoon. But even though the small gains extended into Friday's session, FMKT hit a wall at $34 quicker than the NASDAQ's strength faded into the weekend close. Granted FMKT's break under the $30 level is bearish and forecasts possible weakness going into next week; however it's imperative to confirm not only the stock's direction, but also a bearish marketplace before beginning new put plays. Aggressive entries on rollovers at the 5 and 10-dmas lines at $32.21 and 33.28 are certainly viable; although, buying into continued weakness from Friday's new 52-week low of $28.69 may be a better approach for others. The markets are no doubt struggling for direction, so keep stops tight and take profits quickly. If FMKT demonstrates bullish behavior, we'll exit at the above-mentioned $34 level. ***December contracts expire in two weeks*** BUY PUT DEC-40 FAQ-XH OI= 14 at $11.63 SL=8.75 BUY PUT DEC-35 FAQ-XG OI=112 at $ 7.00 SL=5.00 BUY PUT DEC-30*FAQ-XF OI=230 at $ 3.25 SL=1.50 http://www.premierinvestor.net/profile.asp?ticker=FMKT IBM - International Business Machines $95.63 (-4.31 last week) International Business Machines Corporation uses advanced information technology to provide customer solutions. The company operates primarily in a single industry using several segments that create value by offering a variety of solutions that include, either singularly or in some combination, technologies, systems, products, services, software and financing. Organizationally, the company's major operations comprise three hardware product segments, Technology, Personal Systems and Server; a Global Services segment; a Software segment; a Global Financing segment and an Enterprise Investment segment. Shares of Big Blue have left investors feeling blue lately. Having failed twice to break through resistance at $105 in the month of November, the stock has since traded lower. Falling below its ascending channel support (connecting the lows since mid-October) this past Thursday, rumors that IBM could warn of lower than expected earnings next week could lead to further downward pressure. The goal of this play is to take advantage of the low put prices and strong overhead resistance, thanks to the 5-dma ($97.05), the psychological $100, our stop price of $102 and the 10-dma ($103.59). Just the idea of IBM warning could send traders scrambling towards the exits, making for quick and significant gains. As always, the possibility of high reward goes hand in hand with high risk. Aggressive traders might consider entering new positions on a failed rally above the aforementioned resistance levels. A break below $95, backed by strong selling volume could see the stock testing the low 90's in a hurry. ***December contracts expire in two weeks*** BUY PUT DEC-95*IBM-XS OI=4389 at $3.50 SL=$1.75 BUY PUT DEC-90 IBM-XR OI=5299 at $1.88 SL=$1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=IBM INTC - Intel Corporation $34.13 (-9.81 last week) Intel Corporation, a semiconductor chip maker, supplies the computing and communications industries with chips, boards, systems and software that are integral in computers, servers and networking and communications products. The company's major products include microprocessors, chipsets, flash memory products, networking and communications products, embedded processors and micro controllers, and digital imaging and other PC-peripheral products. Intel sells its products to original equipment manufacturers, PC and computing appliance users, industrial and communications equipment manufacturers, and businesses, schools and state and local governments. The PC Sector continues to struggle. This past Thursday, box maker Gateway warned that holiday sales would be weaker than expected, citing lower demand for new personal computers. What's more, it appears that consumers are gravitating towards wireless handheld computing devices. As the leading supplier of chips for PCs, this can only be bad news for Intel. Rumors that the company could warn next week caused the stock to drop below the critical support level of $35 on Friday, a level that had held up, even in the darkest days of October. Continuing negative sentiment in the PC and Semiconductor sectors could drive the stock much lower, especially if the rumors of the earnings warning come to pass. The low option prices makes this an especially attractive but also risky play that could yield a high return in a short amount of time. We are setting our stop at $39, with strong resistance from the 5, 10 and 50-dmas near this level. There is also resistance at $36 and $35, giving aggressive traders a number of possible entry points. Continued weakness leading to a break below $32 with volume could be the signal to take a position but confirm sector sympathy with the Philadelphia Box Maker Index (BMX.X) and the Semiconductor Index (SOX.X) before jumping in. ***December contracts expire in two weeks*** BUY PUT DEC-35*INQ-XG OI=14867 at $3.00 SL=$1.50 BUY PUT DEC-30 INQ-XF OI= 1347 at $1.00 SL=$0.00 http://www.premierinvestor.net/oi/profile.asp?ticker=INTC *************************** NEW LOW VOLATILITY PUT PLAY *************************** IRF - International Rectifier $30.69 (-8.19 last week) International Rectifier is a world leader in power management devices and systems that enable information technology and other end products to improve functionality, speed, compactness, and portability. IR is the pioneer and market leader in the $3.5 billion power MOSFET industry, and more than 20 companies are licensed under its power MOSFET patents. As long as the broader chip sector remains in its funk, shares of IRF are likely to head lower. The stock has been precipitously dropping since early September, taking out one key support level after another. After rolling over at the $33 level last Friday, IRF now sits just above yet another key support level at the $30 mark. Should the $30 level fail, like it did last Thursday, IRF could very well head to its 52-week low at the $20 level. With its modestly priced options, we're looking to take advantage of IRF's technical weakness and the bearish sentiment surrounding semi sector. New positions could be added on a move below $30 on volume exceeding two million shares for the day. Make sure to confirm weakness in the broader chip sector by monitoring the trading in IRF's competitors. Confirm weakness in AMCC, PMCS, and VTSS before entering new plays. The more aggressive traders might consider entering new put positions upon another failed rally attempt. Watch for IRF to rollover at resistance near the $33 level or lower around $32. We've established a protective stop at $34, and would drop the play if IRF settled above that level. ***December contracts expire in two weeks*** BUY PUT DEC-35 IRF-XG OI=5334 at $5.50 SL=3.50 BUY PUT DEC-30*IRF-XF OI= 244 at $2.50 SL=1.25 BUY PUT DEC-35 IRF-MG OI= 45 at $7.13 SL=5.00 BUY PUT DEC-30 IRF-MF OI= 268 at $4.00 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=IRF ***************** CURRENT PUT PLAYS ***************** SLR - Solectron $29.00 (-5.25 last week) Solectron Corp. is one of the world's largest supply chain facilitators for customized electronics technology, manufacturing and service solutions. Founded in 1977, Solectron's integrated technology solutions, materials, manufacturing and operations, and global services offer customers competitive outsourcing advantages, such as access to advanced manufacturing technologies, shortened product time to market, and more effective asset utilization While Solectron moved up one point on Friday, it did not break the strong down trend the stock has exhibited over the last few weeks. The daily chart shows an attempt to rally to the 5-dma of $31.50 in the morning, when all the major indexes were up strongly, then a rollover at $30.50 and a long slow decline in the afternoon. On balance volume spiked up slightly in the morning, but is still very weak. SLR has been on a decline for weeks, and the stock would need a major turnaround accompanied by heavy volume in order to break the trend. Another failed attempt to clear the 5-dma might be a possible entry point, but set stops at $32, as this could indicate the stock was starting to gain momentum. Pay particular attention to the electronics components sector, and other stocks in the original equipment manufacturers sector for market direction. This sector has been weak lately, however, if we see a major turnaround in the chip sector, this could change. Other stocks in this sector include JBL and FLEX, which, like SLR, are far below the 50 and 200 dmas. If we see a major market rally, as some analysts are expecting, it is wise to enter puts only if the sector and stock are declining. That said, another possible entry point might be provided if SLR falls below its near-term support at $28, which happens to be the stock's 52-week low. ***December contracts expire in two weeks*** BUY PUT DEC-35 SLR-XG OI= 802 at $6.63 SL=4.50 BUY PUT DEC-30*SLR-XF OI=1834 at $2.69 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=SLR YHOO - Yahoo $38.94 (-1.94 last week) Yahoo! is an industry leader in providing live audio and video streaming media services for a wide range of customers, including sports leagues, media and entertainment companies, television and radio stations, corporations, advertisers and merchants. Yahoo! delivers millions of hours of live and on demand programming each month through a highly scalable streaming distribution network designed to deliver high-quality audio and video to large audiences accessing the Internet through both dial-up and broadband connections. With one of the worst months ever for Net stocks behind us, it is time to see if Yahoo continues its fall during December. It started the month off on the right foot by dropping in the face of a healthy Nasdaq rally. Granted, it was mostly short-covering, but you have to wonder why Yahoo didn't participate. The blame for Friday's action likely rests on SG Cowen Securities analyst Scott Reamer. He opened the day by lowering his revenue estimates for Web portal Yahoo and advertising network DoubleClick in the fiscal year 2001, largely because of a deflation in online ad spending. This is the same broken record story we have heard from every other analyst in the past month, but it keeps any YHOO rally in check. While it works out nicely for our play, we need to be cautious due to what was essentially a week of consolidation for Yahoo. In fact, SG Cowen's comments probably stopped YHOO from trading above our stop on Friday. That stop loss remains at $40 and the 10-dma is not far above that at $41.75. The support is obvious at $36 and you may want to allow YHOO to fall through that level before initiating any new plays. ***December contracts expire in two weeks*** BUY PUT DEC-45 YHQ-XI OI=2638 at $7.75 SL=4.75 BUY PUT DEC-40*YHQ-XH OI=3022 at $4.38 SL=2.75 BUY PUT DEC-35 YHQ-XG OI=1927 at $2.13 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=YHOO ITWO - i2 Technologies $99.38 (-13.63 last week) ITWO is a global provider of intelligent eBusiness solutions for supply chain management and enhanced business applications. On June 12, 2000 ITWO merged with Aspect Development (ASDV) to create one of the largest software providers for eBusiness and eMarketplace solutions. TradeMatrix, its Internet marketplace, provides an open digital community powered by i2's advanced optimization and execution capabilities that help manufacturers plan production and other related operations. Clients include 3M, Compaq, Ford and Nokia. Even with news of shareholder approval for a 2-for-1 stock split for December 5th, shares of leading Internet supply chain management software maker ITWO have been continuing lower. The stock has already had a split of its own, as share value has been more than cut in half for the month of November. A failure to hold the 50-dma, now all the way up at $155.53, has led to sustained selling pressure on increasing volume, with resistance from the 5 and 10-dmas, now at $100.23 and $107.75, respectively. Negativity in Tech stocks, especially Internet stocks across the board, has been a driving force to the downside. The likely deterioration of ITWO's alliance with Ariba and IBM has also weighed on the stock, as has news of COO Bob Evans resigning. Merrill Lynch and Credit Suisse First Boston's efforts to defend the stock have had little effect in curbing ITWO's slide. Now well below all its major moving averages, any rally for the stock will likely be met with strong overhead resistance. The downtrend for ITWO is strong indeed. Despite Friday's positive close, up $2.88 or almost 3 percent 164% of ADV, resistance at the 10-dma and failure to close above the 5-dma as well as the psychological $100 level, also our current stop price, suggests further selling ahead. A failed rally above these levels on Monday could allow aggressive traders to take advantage, but make sure the sellers return before initiating a play. If the stock opens lower to start the week, a break below $95 on volume would allow for a more conservative play. When making a play, keep an eye on Merrill Lynch's B2B HOLDR (BHH) to confirm sector sympathy. Also make note that we'll be dropping coverage on ITWO ahead of its stock split next Tuesday as to minimize risk holding over the actual stock dividend. Aggressive traders may consider holding over the split event if the NASDAQ and B-2-B sector show signs of weakness early next week. However, the split may cause a brief reprieve in shares of ITWO, which does present some risk. ***December contracts expire in two weeks*** BUY PUT DEC-105 QYJ-XA OI=351 at $13.63 SL=10.00 BUY PUT DEC-100 QYJ-XT OI=864 at $10.50 SL= 7.25 BUY PUT DEC- 95*QYJ-XS OI= 89 at $ 8.25 SL= 5.75 http://www.premierinvestor.net/oi/profile.asp?ticker=ITWO SEBL - Siebel Systems $74.38 (-12.06 last 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. The bears scored another victory on Friday, as they dragged the bulls back from thoughts of a quick recovery. Resistance at $80 held firm, and vigilant put players were rewarded with a great entry point on SEBL as buyers were turned back right at the 200-dma ($80.38). The bounce from Thursday's lows ran out of buyers, and the bears rushed in to reassert their control as the NASDAQ failed to hang on to its gains on Friday. The bearish trend is obviously still intact, and if the NASDAQ heads down to test the 2500 level again, we would look for SEBL to test the $60 support level, and possibly post another lower low. The stock is one of those still retaining a relatively high valuation with a PE of 400, making a test of the $50 support level entirely possible. Even that doesn't necessarily constitute an absolute bottom, as SEBL's April low is south of $38, a level that would still represent a PE ratio above 200. Although buying volume was heavy during Thursday's recovery, the volume declined on Friday, right up until the final 90 minutes of trading when the stock began to sell off. Although there was plenty of positive company and sector specific good news over the past week, the only items that seem to have any staying power in this market are those pointing to the slowing economy and fears of more earnings warnings by leading technology companies. The trend is still our friend, and continued weakness in the NASDAQ and other B2B stocks will be a strong confirmation of any weakness in SEBL. Don't fret if you missed the entry point on Friday afternoon, as there will likely be more opportunities in the week ahead. Conservative players will jump into the play as the stock drops below the $69 intraday support level, while more aggressive players will wait for another failed rally in the vicinity of $78-80 before taking the plunge. Don't jump the gun though - a rally that clears our stop at $80 would represent a definite change in sentiment and would prompt us to stand aside from the play. ***December contracts expire in two weeks*** BUY PUT DEC-75*SGW-XO OI= 676 at $7.50 SL=5.25 BUY PUT DEC-70 SGW-XN OI=1746 at $5.00 SL=3.00 BUY PUT JAN-70 SGW-MN OI=1348 at $9.38 SL=6.50 BUY PUT JAN-65 SGW-MM OI=1197 at $7.25 SL=5.00 http://www.premierinvestor.net/oi/profile.asp?ticker=SEBL VRSN - VeriSign, Inc. $84.88 (-8.38 last week) VeriSign is the leading provider of Internet trust services and digital certificate solutions needed by Web sites, enterprises and individuals in order to conduct secure electronic commerce and communications over IP networks. VRSN has used its secure online infrastructure to issue over 100,000 of its Website digital certificates and over 3.5 million of its digital certificates for individuals. The company also offers the VeriSign Onsite service, which allows an organization to leverage the company's trusted service infrastructure to develop and deploy customized digital certificate services for use by an organization's employees, customers and business partners. To date, over 300 enterprises have subscribed to the OnSite service and VRSN has strategic relationships with industry leaders including Cisco, Microsoft ,RSA, Security Dynamics, and VISA. Anyone operating under the assumption that there would be a swift recovery for Technology stocks was in for a rude awakening Friday afternoon. The short-covering rally that began on Thursday had run its course, and with a lack of buyers willing to step up to the plate, VRSN faced the fate of many other four-letter stocks. Our play actually headed lower while the NASDAQ was attempting to rally, heading south even before the end of amateur hour and closing very near the low of the day. Resistance at $94 (right at the descending trendline) capped the recovery, creating yet another lower high on the daily chart, and pointing to a likely test of Thursday's $76 low in the week ahead. In the Internet security space, VRSN is definitely having a hard time relative to it peers. CHKP actually posted a small gain on Friday, with RSAS looking strong enough the past 2 days for the stock to show up on our Call list this weekend. What's the difference, you ask? Profitability. While VRSN has yet to fill in the missing 'E' in PE ratio, CHKP has a PE north of 100, and RSAS' ratio is a measly 14. I guess profits do matter. As long as the NASDAQ continues to languish from economic slowdown and earnings warning concerns, look for stocks like VRSN to continue their bearish trends. The descending trendline is now resting at $91 (coincident with the level of our stop), and any rally that fails near this level looks attractive for new entries. While we can still enter new positions on any weakness that pushes the stock back below the $84 intraday support level, keep in mind that the lower VRSN drops, the harder new lows will be to come by. This makes a good case for waiting for failed rallies before initiating new positions. In either case, only play with a declining NASDAQ that corresponds to an increase in VRSN's selling volume. ***December contracts expire in two weeks*** BUY PUT DEC-90 XVR-XR OI=444 at $12.25 SL= 9.25 BUY PUT DEC-85*XVR-XQ OI=510 at $ 9.75 SL= 6.75 BUY PUT DEC-85 XVR-MQ OI= 33 at $14.25 SL=10.50 BUY PUT DEC-80 XVR-MP OI=312 at $11.38 SL= 8.50 http://www.premierinvestor.net/oi/profile.asp?ticker=VRSN ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily, the research tool for self directed investors. http://www.sungrp.com/tracking.asp?campaignid=1075 ************************************************************** ***** LEAPS ***** How Cheap Is Cheap? By Mark Phillips Contact Support Where have all the buyers gone? Have you found yourself asking that question lately. This has been a truly amazing turn of events with the NASDAQ giving up 770 points since the election. Don't look now, but that is a whopping 22.5%! Without debating how much of the current weakness can be attributed to the election or the economy, suffice to say it has been a swift and merciless decline. Every time the bulls gingerly step in to buy "the bottom", they get mauled by the bears who are not ready to go into hibernation just yet. While the DJIA has held up better due to its defensive nature, the bears have had a field day there as well, slashing the "old economy" index by nearly 600 points, or 5% in the same period of time. As the title of my article points out, I find myself asking on a daily basis, "How low can some of these stocks go?" I think the answer lies in whether or not the economy is headed for a hard landing. The evidence for a significant slowdown is in plain view for all to see, but Alan Greenspan has been eerily silent. Let's hope that he and the Fed gang are ready to come forward with at least a change in their bias towards interest rates when they meet later this month. The consensus seems to be that their next move will be to drop interest rates, but will it be soon enough to prevent even more damage in the markets? I don't know, but you can bet I'm being very careful with my long-term positions. There really is no concrete relief in sight for what is ailing our markets, and rather than take up space here, I'd like to point you to Austin's Market Sentiment. He covers the details of the larger factors driving the markets up and down. If you are investing in LEAPS and not reading the information he provides, you are missing out on an invaluable tool. After failing to hold above 3000 on Monday, the NASDAQ was ripe for more bad news and GTW and ALTR delivered it in spades. Taking a huge swipe at the PC sector, GTW announced that holiday sales would be soft and warned that earnings for the fourth quarter would be 25 cents below the consensus estimates. That's quite an about face considering the bullish comments the company made a couple weeks ago, as they touted the merits of their "beyond the box" strategy. I guess it isn't quite ready for prime time yet. ALTR's earnings warning was the other shoe that investors were waiting for, and they dumped shares of anything silicon-related for the remainder of the week. So how does this affect our portfolio? Check out the drops this week. Technology giants INTC and MSFT were both taken out and shot by investors, and while these stocks may be approaching an attractive entry point, we don't want to stick around to find out. Barring some sort of miracle like a surprise cut in interest rates or a $10 drop in the price of crude oil, or even a resolution to the election follies, things do not look good for our markets. If you have open positions, please use stop losses. No matter how cheap a stock is, it can ALWAYS get cheaper. Look at WCOM, now sitting at $16. Is it a bottom yet? Only time will tell. How about ATHM? Did anyone else think it was a screaming Buy at any point over the past 6 months? Solid support formations at $18, $13, and $9 all failed to hold. Will $6 be the magic number, or does it lie somewhere below? If you are sitting on cash, wait for some consolidation and signs of positive movement (notably strong buying volume) on your favorite plays before dipping back into the market to establish new positions. This is the type of market that can make you wealthy IF you can wait for the solid entry points to form. It can also wipe you out if you repeatedly try to catch a falling knife. This is not the same situation we were presented with last fall, and even if we do get a year-end rally, it will not take off to the moon. Economic growth and liquidity injections from the Fed are notably absent this year. Technology stocks WILL rise again, like a phoenix from the ashes, and our job is to intelligently position ourselves in select positions AFTER it is clear that the bears are getting sleepy. Given the action over the past 2 weeks, it is clear that they are still on a rampage. As I have said many times before, LEAPS give us the time to be right, but it does us no good to buy before the bottom is in place, and a positive trend begins to emerge. Exercise patience and if you want to play technology stocks (don't we all?), wait for the NASDAQ to establish a solid bottom. It seems a pretty safe bet that we will test 2500 again this week. The $64,000 question is whether that will be the bottom or if it still lies somewhere below. Until the bottom appears, cash is king. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2002 $ 45 WUE-AI $ 9.50 $41.25 334.21% 09/17/00 JAN-2003 $100 VUE-AT $32.75 $23.13 -29.39% CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $15.00 36.36% 11/26/00 JAN-2003 $ 60 VYC-AL $16.63 $14.00 15.79% NT 11/28/99 JAN-2002 $37.5 WNT-AU $15.13 $12.50 -17.38% 09/10/00 JAN-2003 $ 75 ODT-AO $27.50 $ 6.38 -76.82% SUNW 12/19/99 JAN-2002 $ 90 WJX-AR $22.00 $17.75 -19.32% 11/05/00 JAN-2003 $120 VSU-AD $39.50 $17.13 -56.65% AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $ 3.70 -80.14% 08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $ 9.50 -45.71% AXP 03/12/00 JAN-2002 $46.6 WXP-AQ $ 9.33 $15.13 62.11% WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $17.88 232.25% 10/22/00 JAN-2003 $ 45 VWI-AI $ 7.88 $11.38 44.44% JDSU 04/16/00 JAN-2002 $ 80 YJU-AP $39.63 $12.63 -68.14% 08/27/00 JAN-2003 $130 VEQ-AF $55.25 $11.50 -79.19% NOK 05/21/00 JAN-2002 $ 50 IWX-AJ $17.25 $ 9.00 -47.83% 07/30/00 JAN-2003 $ 50 VOK-AJ $17.75 $13.00 -26.76% C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $10.13 - 1.79% 10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $ 9.13 -25.51% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $31.63 84.62% JAN-2003 $ 70 OZG-AN $23.13 $38.63 66.99% EXDS 08/06/00 JAN-2002 $ 55 WZZ-AK $20.75 $ 4.38 -78.92% JAN-2003 $ 60 VTQ-AL $25.38 $ 6.13 -75.87% FRX 08/13/00 JAN-2002 $ 95 WRT-AS $31.38 $52.38 66.91% JAN-2003 $100 VFB-AT $37.38 $57.88 54.83% QCOM 09/17/00 JAN-2002 $ 70 WBI-AN $22.50 $32.25 43.33% JAN-2003 $ 70 VLM-AN $29.63 $40.50 36.69% COMS 10/01/00 JAN-2002 $ 20 WTH-AD $ 6.38 $ 2.50 -60.78% JAN-2003 $ 25 VTH-AE $ 7.13 $ 3.38 -52.63% INTC 10/15/00 JAN-2002 $ 45 WNL-AI $ 9.50 $ 6.13 -35.53% JAN-2003 $ 45 VNL-AI $13.38 $ 9.63 -28.04% TXN 10/22/00 JAN-2002 $ 50 WTN-AJ $13.75 $ 7.63 -44.55% JAN-2003 $ 50 VXT-AJ $18.38 $12.00 -34.69% ADBE 10/29/00 JAN-2002 $ 80 YEJ-AP $23.50 $18.63 -20.74% JAN-2003 $ 80 VAE-AP $30.75 $25.88 -15.85% BGEN 11/05/00 JAN-2002 $ 70 WGN-AN $17.25 $11.50 -33.33% JAN-2003 $ 70 VNG-AN $25.00 $17.88 -28.50% MSFT 11/19/00 JAN-2002 $ 75 WMF-AO $12.63 $ 6.25 -50.51% JAN-2003 $ 75 VMF-AO $17.88 $11.13 -37.78% MU 11/26/00 JAN-2002 $ 45 WGY-AI $13.13 $ 7.25 -44.76% JAN-2003 $ 45 VGY-AI $17.25 $10.88 -36.96% Spotlight Play NOK - Nokia $43.56 As the only wireless handset maker that didn't trace new 52-week lows last week, NOK is standing head-and-shoulders above the competition. Continuing to grow revenues at a 50% rate, the Finnish phone maker is a favorite among investors and institutions and has held up fairly well in the recent technology-related selloff. Although a bit messy due to the recent market volatility, the inverse head-and-shoulders formation that has appeared over the past 4 months points to a solid recovery in the months ahead. As it upgrades its network in the U.S., AT&T Wireless (AWE) has turned to NOK and its Nordic rival, ERICY, for the latest in mobile phone technology. This move will give NOK an even stronger foothold on this side of the Atlantic, as AWE migrates to a GSM network from their current TDMA dinosaur. Resistance is pretty solid at $44-45, but given its recent strength, NOK should lead any recovery in the Technology sector. There is plenty of volatility and uncertainty left in the market though, and we would not recommend buying a breakout above resistance at this time. We would prefer to wait for a pullback to support, and the $40 area should serve nicely in that respect. Wait for the bounce before initiating new positions, and then enjoy the ride higher as technology investors return from hibernation. BUY LEAP JAN-2002 $45.00 IWX-AI at $10.75 BUY LEAP JAN-2003 $50.00 VOK-AJ at $13.00 New Plays A - Agilent Technologies $53.00 Spun off from technology giant Hewlett Packard just over a year ago, Agilent is a stealth player in the Optical Networking market. The company provides fiber optic communications devices and assemblies, integrated circuits for wireless applications, opto-electronics and image sensors. As a part of its efforts to focus on its technology business, A announced on November 17th that it would sell its Healthcare Solutions Group to Philips Medical Solutions for $1.7 billion, and then followed up 3 days later with a stellar earnings report. Investors were impressed (which is saying a lot in this market) by the company's ability to beat consensus estimates by 16 cents, and have been rewarding the company ever since. Salomon Smith Barney was impressed by the earnings as well, and did its part for the bulls by upgrading the stock from Neutral to Outperform. Last Monday, A announced that it will pay $665 million in cash to acquire Objective Systems Integrators (OSI), a provider of operation-system-support software for communications providers. Even the company's admission that the acquisition will cut its earnings by 2 cents a share in 2001, before becoming accretive in the out years couldn't dampen investor enthusiasm for the stock. First Union Securities threw their 2 cents in on Friday, starting coverage of the stock with a Buy rating. Ever since its earnings warning in July, A has been confined to a descending wedge, with rock-solid support at $40. Breaking above the descending trendline ($50) a week ago was the first sign that things were improving, and shares advanced another 4% last week in defiance of the 9% loss on the NASDAQ. Stochastics are starting to roll over in the overbought zone, so we would expect a bit of consolidation before the stock heads higher. Support at $48-50 looks like a good area for targeting new entries, but wait for buying volume to shore up support before playing. If the buyers can't keep A above its descending trendline (currently $48), stand aside from the play. This would represent a failed breakout, signaling the possibility of another test of $40 support. BUY LEAP JAN-2002 $55.00 YA -AK at $16.88 BUY LEAP JAN-2003 $60.00 OAE-AL at $19.88 Drops INTC $34.13 Believing that the perceived slowdown in the PC sector was already factored in to the stock price, we invited INTC onto our LEAPS play list 6 weeks ago. Twice we watched the stock recover from rock-solid (or so we thought) support at $35, and test resistance near $47, only to run out of steam and head back towards our entry point. We think things are different this time though. GTW's huge earnings warning last Wednesday is obviously the culprit in the most recent decline, as it confirmed the slowdown in PC sales was affecting all the box-makers and INTC sold off in sympathy right from the open on Thursday. Proving that cheap can always get cheaper, INTC then proceeded to give up over 10% on Friday while volume soared to more than 100 million shares. Breaking through support on huge volume is a bad sign, but it could portend even more problems. Earnings warning season is upon us, and if INTC warns (entirely possible with the solid evidence of slowing orders) it is entirely possible the stock could test the $25 level, not seen since spring of 1999. While it is possible that current prices will turn out to be a great entry point, we don't want to take the chance. That falls into the category of "catching a falling knife" and it's a game we don't want to play. MSFT $56.63 Another victim of slowing PC sales, and specifically the warning from GTW, MSFT shares fell off a cliff again this week, giving up nearly 20%. Investors figured out that the next occupant of the White House will have far less effect on the company's share price than the reality of sharply slowing PC demand. Less PCs means less copies of Windows shipping to end users, plain and simple. Shares of the software giant had already begun to fall from grace when GTW warned of sharply lower sales (and hence, earnings) Wednesday night. Investors ran first and asked questions later, creating the same effect as shouting "Fire" in a crowded theatre. MSFT got trampled in the process, falling through the $61 support level as though it didn't exist. With Friday's losses, it looks like Mr. Softee is headed down to fill the gap left behind in mid-October when the company impressed investors with its third quarter earnings report. That means a downside objective of $52 (possibly lower) and we don't want to be along for the ride. We'll jettison the stock from our play list this weekend and consider it again when the PC sector is well enough to leave the Intensive Care Unit. *********** SPLIT PLAYS *********** The Return Of The Split By Eric Utley Several high-profile stock splits were declared last week amid continued market volatility. Most notably was the 2-for-1 split set by Brocade, who reported exceptional fiscal fourth-quarter profits and raised 2001 revenue estimates. Brocade's declaration marks the third time since the spring of 1999 the company has split its shares. The split announcement also helped to land BRCD on the OI call play list last week. The confidence displayed by Brocade's management in its stock price may very well portend a rebound in tech shares over the coming weeks, which could lead to an increased number of split announcements. Also making the headlines last week was biotech heavyweight, IDEC Pharmaceuticals, who's stock has held up remarkably well amid the recent turmoil in the market. Current Split Run Plays BRCD MUSE Current Split Candidate Plays BRCM JNPR SWY Candidates That Are Not Current Plays CHKP CMVT PDII PMCS VSTR FRX LH 10 Most Recent Announcements We Predicted BRCD - 11/29 (most recent announcement) MANU - 11/08 MUSE - 10/25 AMCC - 10/11 DNA - 10/05 LEH - 09/20 ORCL - 09/14 SUNW - 08/17 GLW - 08/16 HWP - 08/16 CIEN - 08/15 Major Announcements So Far This Month = 1 HOTT For our complete stock split calendar, click here... http://members.OptionInvestor.com/splits/index.asp Symbol Company Name Splits Payable Executable CHRW - C.H. Robinson 2:1 12/01/2000 12/04/2000 PSC - Philadelphia Suburban 5:4 12/01/2000 12/04/2000 ITWO - i2 Tech 2:1 12/04/2000 12/05/2000 INOD - Innodata Corporation 2:1 12/01/2000 12/04/2000 TECH - Techne Corporation 2:1 12/01/2000 12/04/2000 SUNW - Sun Microsystems 2:1 12/05/2000 12/06/2000 SRDX - SurModics, Inc. 2:1 12/06/2000 12/07/2000 MANU - Manugistics Group 2:1 12/07/2000 12/08/2000 BEC - Beckman Coulter, Inc. 2:1 12/07/2000 12/08/2000 CREE - Cree 2:1 12/08/2000 12/11/2000 AREA - Area Bancshares Corp. 3:2 12/10/2000 12/11/2000 PENG - Prima Energy Corporation 3:2 12/11/2000 12/12/2000 ABK - Ambac Financial 3:2 12/12/2000 12/13/2000 INFA - Informatica Corp. 2:1 12/13/2000 12/14/2000 SYY - SYSCO Corporation 2:1 12/15/2000 12/18/2000 SGR - Shaw Group 2:1 12/15/2000 12/18/2000 COCO - Corinthian Colleges, Inc. 2:1 12/15/2000 12/17/2000 EMLX - Emulex Corp. 2:1 12/15/2000 12/18/2000 SKYW - SkyWest, Inc. 2:1 12/15/2000 12/18/2000 BARZ - BARRA, Inc. 2:1 12/18/2000 12/19/2000 ILI - Interlott Technologies 2:1 12/20/2000 12/21/2000 BRCD - Brocade Comm 2:1 12/21/2000 12/22/2000 UNH - UnitedHeath Group Inc. 2:1 12/22/2000 12/26/2000 SPIR - Spire Corporation 2:1 12/22/2000 12/26/2000 IWOV - Interwoven 2:1 12/29/2000 01/02/2001 CRY - CryoLife 3:2 12/27/2000 12/28/2000 HOTT - Hot Topic Inc. 2:1 12/27/2000 12/28/2000 IDPH - IDEC Phamaceuticals 3:1 01/17/2001 01/18/2001 AJG - Arthur J. Gallagher & Co. 2:1 01/18/2001 01/19/2001 SWWC - Southwest Water 5:4 01/19/2001 01/22/2000 TALX - TALX Corp. 3:2 01/19/2001 01/22/2001 ************************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=1070 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 12-03-2000 Sunday 5 of 5 ************* COVERED CALLS ************* Trading Basics: Q&A with the Covered-Calls editor by Mark Wnetrzak This week, we discuss some of the more common questions from our new subscribers. Question: Why do you sell "in-the-money" options in the majority of your covered-call selections? Answer: The strategy we use in selecting these positions is a based on a conservative covered write using the "total return" concept that Lawrence McMillan adeptly describes in his book, "Options: As a Strategic Investment." With this conservative approach, an investor considers the covered write as a single entity and is not interested so much in stock ownership or bullish movement, but in obtaining a consistent (annual) return on investment. In other words, with an in-the-money covered write, the maximum profit potential is established when the position is opened. Some investors worry about the sold option being assigned early, but that's not a problem with our plays, as it simply means you will earn the maximum profit in a shorter amount of time. Of course there are situations where that may be a problem. Some investors have tax considerations with specific portfolio issues or they may simply want to retain the stock for longer periods. Generally, if there is any time value premium in the sold call, the issue will not be called away until expiration. Once the call begins to trade at parity (the issue moves deep ITM) or trades at a discount, the probability that the option will be assigned early rises significantly as arbitrageurs (floor traders who pay little or no commissions) move to take advantage of the situation. At expiration, if the stock is trading $0.25 or more above the sold strike, it will generally be called away. Question: I have used your "in-the-money" strategy with some of my long-term portfolio stocks and occasionally the issue will move well above the sold strike, putting my position at risk of assignment. How do I handle this situation? Answer: Unfortunately, there are no magic answers to this common problem. You do have several choices, but none of them are very popular. You can do nothing, accept the assignment, and collect the initial profit. You can also choose to close the sold option; obviously the call is trading near parity, so you simply evaluate the cost of additional commissions versus an increased annualized return. And finally, you may choose to roll the position up to a higher strike price and/or forward to a future expiration. If the stock is fairly volatile, a "net credit" order should be used in closing the covered write to ensure a proper exit. In that case, you would place an order to sell the stock and buy (to close) the call for a net credit value that is reasonably close to parity. Remember, when you roll up (buy back your current call and sell a higher strike), the profit potential is increased, but you give up downside protection. The downside "break-even" point will be raised by the amount of debit required to roll up (the cost of the call closed minus the premium of the new position). When rolling to a higher strike, a debit is incurred and this is considered by many to be an unfavorable transaction (putting more money on the table). It may be better to roll to a more distant expiration as it reduces the debit required and the overall cost basis. It is usually not advisable to roll up if a 10% correction in the stock price cannot be withstood (the percentage may be even higher in volatile issues). In all cases, you must evaluate the risk-reward ratio for each adjustment scenario and make a decision that fits your trading plan and your outlook for the underlying issue. Question: Some of the stocks you have selected in the past few weeks are trading below the sold strike and may not get called away. What do I do in that situation? Answer: If a stock from one of our current covered-call plays is not called-away at expiration, its technical character has likely changed, and the new outlook for the issue must be evaluated. If, after careful review of the recent chart patterns (and any other issues affecting the company or its sector/industry group), your outlook for the issue is neutral-to-bullish, you could simply sell a new call for the next month (or a longer time frame), lowering your cost basis and establishing a higher profit potential. Of course you could also sell the stock, taking the current loss (or profit when it's available) and move on to a new issue. Another possibility would be to roll down, or down and further out, to a lower strike (a defensive strategy), if the option premiums and the possibility of a future recovery justify holding the issue. In most cases, if your outlook is even slightly bearish, exiting the position now (selling the stock) is usually is best answer. Remember, you do not have to wait until expiration to exit a covered write position. Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return AVID 15.94 18.25 DEC 15.00 2.19 *$ 1.25 9.9% DZTK 8.13 7.75 DEC 7.50 1.06 *$ 0.43 8.8% ISIP 11.56 10.00 DEC 10.00 2.31 $ 0.75 8.8% MTIC 6.00 5.44 DEC 5.00 1.44 *$ 0.44 7.0% MRVT 16.88 17.94 DEC 15.00 2.56 *$ 0.68 6.9% SUPG 21.47 17.75 DEC 17.50 5.25 *$ 1.28 6.9% BCGI 26.31 22.63 DEC 22.50 5.38 *$ 1.57 6.5% PSUN 20.94 23.06 DEC 17.50 4.13 *$ 0.69 5.9% MME 17.75 21.00 DEC 17.50 1.31 *$ 1.06 5.6% MTSI 17.38 20.75 DEC 12.50 5.63 *$ 0.75 5.5% MU 33.75 30.94 DEC 27.50 7.50 *$ 1.25 5.2% JDEC 29.00 26.13 DEC 22.50 7.25 *$ 0.75 5.0% HPC 18.44 19.44 DEC 17.50 1.88 *$ 0.94 4.9% PLNR 24.00 22.50 DEC 20.00 4.75 *$ 0.75 4.2% LGTO 11.88 9.31 DEC 10.00 2.38 $ -0.19 0.0% TTN 20.94 16.25 DEC 17.50 4.13 $ -0.56 0.0% SNWL 24.25 18.25 DEC 20.00 4.88 $ -1.12 0.0% MTIC 8.13 5.44 DEC 7.50 1.38 $ -1.31 0.0% VRTA 23.38 15.00 DEC 17.50 6.63 $ -1.75 0.0% MU 40.88 30.94 DEC 35.00 7.38 $ -2.56 0.0% *$ = Stock price is above the sold striking price. Comments: Several of the above issues have broken through their technical support areas and are displaying bearish candlestick patterns. Evaluate your long-term outlook for the stock, as well as the overall sector and market. In the near-term, further downward movement appears likely and exiting losing positions early may turn out to be the most prudent move. Next week, we will show several of the above positions closed in the name of "capital preservation." NEW PICKS ********* Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return MPPP 6.13 DEC 5.00 PUM LA 1.44 475 4.69 14 14.2% BSTE 40.00 DEC 35.00 BQS LG 6.75 40 33.25 14 11.4% WATR 36.31 DEC 35.00 TQI LG 2.56 153 33.75 14 8.0% CPRT 18.00 DEC 17.50 KQJ LW 1.06 67 16.94 14 7.2% LNCR 45.25 DEC 42.50 LQN LV 3.88 5 41.37 14 5.9% ADSK 27.00 DEC 25.00 ADQ LE 2.63 309 24.37 14 5.6% MRVT 17.94 JAN 15.00 SQD AC 4.13 0 13.81 49 5.3% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ADSK - Autodesk $27.00 *** Earnings Rally! *** Autodesk, a leading design and digital content creation resource, provides software and Internet portal services to help customers drive business through the power of design. Autodesk is one of the largest software companies in the world with more than 4 million customers in over 150 countries. Autodesk reported favorable earnings this month, with a 31% jump in operating profits for the 3rd-quarter. Operating earnings were $21.9 million, or 38 cents a share, compared with $16.7 million, or 27 cents a year ago and sales rose 10%. The tape has become increasingly bullish, considering the overall market, and the September high is the next challenge. DEC 25.00 ADQ LE LB=2.63 OI=309 CB=24.37 DE=14 MR=5.6% ***** BSTE - Biosite Diagnostics $40.00 *** FDA Approval! *** Biosite Diagnostics serves clinical needs in emergency medicine by speeding the flow of critical diagnostic information. Through its integrated discovery and diagnostics businesses, Biosite is developing rapid diagnostic tests that improve clinical outcomes for acute diseases. Biosite's Triage. products are used in 45% of U.S. hospitals and in 40 international markets. On November 22, Biosite announced that it had received FDA clearance to market the Triage. BNP Test in the U.S. This is the first blood test to be cleared in the U.S. as an aid in the diagnosis of congestive heart failure. Investors cheered this news as the stock has rallied above its 150 dma on strong volume. A favorable cost basis for short-term momentum speculation. DEC 35.00 BQS LG LB=6.75 OI=40 CB=33.25 DE=14 MR=11.4% ***** CPRT - Copart $18.00 *** Earnings Rally *** Copart provides vehicle suppliers, primarily insurance companies, a full range of services to process and sell salvage vehicles through auctions, principally to licensed dismantlers, rebuilders and used vehicle dealers. Copart just reported 1st quarter earnings with net income of $8.9 million which generated a 45% increase in earnings per share, on revenues of $57.1 million. The results were ahead of expectations due to strong performance from new and existing stores, and continued growth of Internet sales. We simply favor the strong rally above the September high, which completes a short-term "double-bottom" formation. DEC 17.50 KQJ LW LB=1.06 OI=67 CB=16.94 DE=14 MR=7.2% ***** LNCR - Lincare $45.25 *** Blue Sky Territory! *** Lincare is one of the nation's largest providers of oxygen and other respiratory therapy services to patients in the home. The Company provides services and equipment to over 270,000 customers in 44 states. In November, Lincare announced record 3rd quarter earnings which reflect a continued overall strong performance, substantial improvements in their core business, and successful integration of strategic acquisitions completed during the first half of the year. Investors were obviously pleased with the results as they have now pushed the stock to a new all-time high. We favor the near term support at our cost basis on a bullish stock that is now in "Blue Sky Territory." DEC 42.50 LQN LV LB=3.88 OI=5 CB=41.37 DE=14 MR=5.9% ***** MPPP - MP3.com $6.13 *** Bottom Fishing! *** MP3.com has created an infrastructure for the storage, management, promotion and delivery of digital music. The company's web site hosts what it believes is the largest collection of digital music available on the Internet, with more than 698,000 songs and audio files posted from over 109,000 digital artists and record labels. Universal, the last of the five largest record companies, has signed a licensing pact with MP3.com. This deal with Universal will not affect its settlements with other labels, and MP3.com has promised to restart its once-controversial My.MP3.com online music service. Analysts are cautiously enthusiastic about the prospects for the company, cheered by the resolution of a year long copyright infringement lawsuit. Investors also appear to be pleased as the stock has rallied strongly off its October low. Short term speculation for those who agree on a bullish outlook. DEC 5.00 PUM LA LB=1.44 OI=475 CB=4.69 DE=14 MR=14.2% ***** MRVT - Miravant Medical $17.94 *** The Recovery Continues! *** Miravant Medical is engaged in the integrated development of drugs and medical device products for use in PhotoPoint, the company's proprietary technology for photodynamic therapy. Miravant is currently conducting trials in ophthalmology and oncology testing its leading drug candidate, SnET2 (tin ethyl etiopurpurin), and is developing products in collaboration with its corporate partners, including subsidiaries of Pharmacia & Upjohn. The recent recovery in MRVT's share value began after an announcement at the AMA meeting in New Orleans. The company announced that it has achieved positive results in studies of its PhotoPoint therapy for both the prevention of restenosis and the treatment of lesions arising from common procedures such as angioplasty and stenting. We favor the bullish move above the early November high which completes a short-term "double-bottom" formation. JAN 15.00 SQD AC LB=4.13 OI=0 CB=13.81 DE=49 MR=5.3% ***** WATR - Tetra Tech $36.31 *** Technical Beauty *** Tetra Tech is a leading provider of specialized management consulting and technical services in three principal business areas: resource management, infrastructure, and communications. The company's clients include a diverse base of public- and private-sector organizations serviced through more than 150 offices located in the U.S. and internationally. In November, Tetra Tech reported 4th-quarter net income that rose 61% over a year ago, beating forecasts, and said it expects strong revenue growth next year. This week, Tetra Tech announced that it has been selected to provide Broadnet, a leading pan-European provider of broadband wireless services, with turnkey network development services for its broadband wireless networks. We favor the bullish technicals and that fact that the stock has been climbing since 1992. Even in the face of a negative market, the stock has rallied to a new all-time high. DEC 35.00 TQI LG LB=2.56 OI=153 CB=33.75 DE=14 MR=8.0% ***** ***************** SUPPLEMENTAL COVERED CALLS ***************** The following group of issues is a list of additional 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 and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return CAR 31.25 DEC 30.00 CAR LF 2.13 85 29.12 14 6.6% DORL 20.06 DEC 20.00 QDL LD 0.63 0 19.43 14 6.4% ELY 18.13 DEC 17.50 ELY LW 1.00 193 17.13 14 4.7% INIT 8.56 DEC 7.50 IUT LU 1.50 107 7.06 14 13.5% TGT 31.44 DEC 30.00 TGT LF 2.06 1101 29.38 14 4.6% CVD 10.75 JAN 10.00 CVD AB 1.44 43 9.31 49 4.6% ************************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=1061 ************************************************************** *********************** CONSERVATIVE NAKED PUTS *********************** Put-Selling Strategies: Q&A regarding portfolio management By Ray Cummins It must be getting bad, because now the readers are asking me what I think... Question: What do I do if I have limited capital and find it impractical to participate in all of your recommendations? Answer: We recommend that new traders spread their portfolio efficiently among a few positions in different industry groups. By spreading out across industries, you can avoid the agony of violent swings in a particular stock or sector and limit losses when the unexpected occurs. When your capital is limited, you must manage your collateral effectively, and it has been our experience that most of the candidates in a specific sector will perform in a similar manner. For example, if one or two of the suggested issues in a given industry group perform as expected, the rest of the recommended stocks in that category also have a high probability of performing well. In contrast, when a stock performs poorly, the odds are high that the rest of the issues in that sector will react in a comparable manner. Some traders say the ideal portfolio contains positions that react to market changes in opposite ways. We identify these plays as "hedge" positions. One way to clearly illustrate the idea involves the oil sector. A conservative investor might hedge a portfolio by initiating positions in both an electric utility and a major oil service company. Higher fuel costs will have negative impact on the utility, but will boost the value of the oil service issue. Obviously the reverse is also true; lower oil prices will impact the oil company negatively while improving the utility's outlook. This strategy not only protects your portfolio against unexpected downturns in a particular industry, it also enables you to take greater risk with a few positions, which is likely to increase your total return. Regardless of the manner in which you diversify your portfolio, it's important to remember that the activity is more than just a one time event. In all cases, you will need a precise and well developed trading plan and you must adjust that process when it is warranted by changing market conditions. Question: I notice you publish a warning concerning the sale of naked puts and the use of trading stops; "Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading stops on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close stop at a price that is no more than twice the original premium from the sold option." I assume you mean "mechanical" as opposed to "mental" stops. Do you have a preference and is there a benefit to using one or the other? Answer: First, some definitions. A mechanical stop loss is an "order" to close a specific position any time it drops below a specified price. This order is placed electronically with your online brokerage or a through a personal broker, but the physical execution of the trade generally goes through a floor specialist at one of the major exchanges. A stop order to "buy" becomes a market order when the option contract trades, or is bid at or above, the stop price. A stop order to "sell" becomes a market order when the contract trades, or is offered at or below, the stop price. Using a mechanical stop order is generally the best method to limit losses or protect profits as it does not require the position to be monitored on a continuous basis. In contrast, using a mental stop loss places all of the responsibility on the trader. The investor determines a specific stop loss and closes the position if the option trades above that price. Considering the market activity we have experienced over the past few weeks, it's obvious one would need to constantly oversee the position. There is another alternative for investors who use proprietary systems (such as the one at Preferred Trade) that allow option orders to be triggered by the price of the underlying issue. In that type of system, the guidelines for establishing protective stops suggest that the initial or opening limit should be placed at a point where important technical support (or a recent trading range bottom) is evident. Most often, this will be a relatively small range reflecting the low of a basing pattern or trend-line established prior to entering the position. The most important objective of this initial stop loss is to preserve one's capital if the play goes badly and yet provide every opportunity for the position to achieve its potential. Good Luck! SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return AMZN 28.94 24.63 DEC 17.50 0.63 *$ 0.63 14.1% AEOS 40.94 40.06 DEC 35.00 1.06 *$ 1.06 17.8% ARQL 25.38 27.19 DEC 17.50 0.50 *$ 0.50 6.6% AVID 15.31 18.25 DEC 12.50 0.56 *$ 0.56 7.2% CMOS 20.88 21.13 DEC 15.00 0.38 *$ 0.38 7.9% ECLP 22.75 24.94 DEC 17.50 0.63 *$ 0.63 6.7% IDXC 29.38 28.63 DEC 22.50 0.75 *$ 0.75 12.0% CTXS 30.88 25.69 DEC 25.00 0.63 *$ 0.63 8.9% PSUN 22.19 23.06 DEC 17.50 0.38 *$ 0.38 5.8% MTON 18.94 17.13 DEC 15.00 0.38 *$ 0.38 5.8% HNT 22.25 22.88 DEC 20.00 0.50 *$ 0.50 3.7% CAR 30.06 31.25 DEC 25.00 0.38 *$ 0.38 8.6% WGR 25.69 24.69 DEC 22.50 0.31 *$ 0.31 3.2% OXHP 37.38 40.00 DEC 30.00 0.56 *$ 0.56 16.1% TLB 49.81 49.50 DEC 40.00 0.50 *$ 0.50 6.3% KMI 43.25 45.00 DEC 40.00 0.56 *$ 0.56 12.6% VLNC 17.31 11.56 DEC 12.50 0.31 $ -0.63 0.0% SMSC 25.00 17.30 DEC 20.00 0.44 $ -2.26 0.0% ANF 28.94 20.50 DEC 25.00 0.50 $ -4.00 0.0% BVSN 36.00 20.13 DEC 25.00 0.50 $ -4.37 0.0% *$ = Stock price is above the sold striking price. Comments: Eclipsys (ECLP) has rallied after testing its early OCT high. Broadvision (BVSN) and Abercrombrie & Fitch (ANF) have broken down on negative news this week and will be closed on the next rally. Standard Microsystems (SMSC) has also broken down (no news!) and will also be closed next week. Many of the above issues are testing near term support and should be monitored closely. Evaluate your long-term outlook for each issue and act accordingly. Positions Closed: Intermagnetics General (IMG) NEW PICKS ********* Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return QTRN 17.00 DEC 15.00 QRT XC 0.50 42 14.50 14 20.5% QCOM 83.00 DEC 65.00 AAO XM 0.75 3057 64.25 14 9.4% PWAV 56.38 DEC 40.00 VFQ XH 0.44 1121 39.56 14 8.2% WLL 49.38 DEC 45.00 WLL XI 0.38 2010 44.62 14 5.2% NEM 16.25 JAN 15.00 NEM MC 0.88 8410 14.12 49 8.9% SNPS 42.13 JAN 35.00 YPQ MG 0.88 0 34.13 49 5.1% OXY 22.56 JAN 20.00 OXY MD 0.56 980 19.44 49 5.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** NEM - Newmont Mining $16.25 *** Gold is Good! *** Newmont Mining Corporation is engaged in the production of gold, the exploration for gold and the acquisition and development of gold properties worldwide. The company currently produces gold from mines in Nevada and California, and, outside of the United States from operations in Peru, Indonesia, Mexico and Uzbekistan. The company also produces copper concentrates from a copper/gold deposit at a location in Indonesia. Shares of precious-metals companies rose Friday, continuing on gains from earlier in the week, as investors continued to worry about the future of the equity market. The gold market has rallied recently, helped by slumping stocks and dollar weakness against the Euro amid further signs of economic weakness in the U.S. Gold is often used to hedge losses in the equities market and we will do the same with this position. JAN 15.00 NEM MC LB=0.88 OI=8410 CB=14.12 DE=49 MR=8.9% ***** OXY - Occidental Petroleum $22.56 *** Oil Sector Hedge *** Occidental Petroleum Corporation explores for, develops, produces and markets crude oil and natural gas and manufactures and markets a variety of basic chemicals, including chlorine, caustic soda, and ethylene dichloride, as well as specialty chemicals and vinyls, including polyvinyl chloride resins and vinyl chloride monomer. Occidental conducts its principal operations through its oil and gas and chemical subsidiaries and the company also has an interest in petrochemicals through its 29% stake in the Equistar Chemicals, LP petrochemical limited partnership. On Friday, Merrill Lynch raised its earnings estimates on several oil companies, including Occidental, citing an upward revision to its oil price forecast. The analyst said they continue to recommend an "over-weighted" portfolio position in a number of oil shares because of a belief that higher oil prices will persist longer than generally expected. We simply view this position as an excellent energy sector hedge. JAN 20.00 OXY MD LB=0.56 OI=980 CB=19.44 DE=49 MR=5.0% ***** PWAV - Powerwave Technologies $56.38 *** Ride the Wave! *** Powerwave 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 large variety of frequency ranges and transmission protocols. The company's products currently are being utilized in 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 and also produces RF power amplifiers for the wireless local-loop market. Powerwave announced that they have recently been named to Deloitte & Touche's Technology Fast 500, a ranking of the 500 fastest-growing technology companies in North America. In addition, Chase H&Q reiterated a "buy" rating on the company with $75 price target, based on a record level of backlog and a potential for higher than expected revenues in the coming quarter. DEC 40.00 VFQ XH LB=0.44 OI=1121 CB=39.56 DE=14 MR=8.2% ***** QCOM - Qualcomm $83.00 *** Big Cap Play! *** Qualcomm is a leader in developing and delivering innovative digital wireless communications products and services based on the company's CDMA digital technology. Their business areas include integrated CDMA chipsets and system software; technology licensing; email software for Windows and Macintosh computing platforms; satellite-based 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 is simply one of the OIN's favorites in the big-cap technology group and this position provides a favorable entry point for investors who are interested in owning the issue. DEC 65.00 AAO XM LB=0.75 OI=3057 CB=64.25 DE=14 MR=9.4% ***** QTRN - Quintiles Transnational $17.00 *** Healthcare *** Quintiles Transnational provides full-service contract research, sales, marketing and healthcare policy consulting and health information management services to the global pharmaceutical, biotechnology, medical device and healthcare industries. QTRN provides a broad range of contract services to help its clients reduce the length of time from the beginning of development to peak sales of a new drug or medical device. Quintiles said it is experiencing strong demand for its services from mid-size pharmaceutical companies, biotechnology companies, and emerging markets. In addition, Quintiles recently agreed to purchase a Swedish clinical development unit from Pharmacia, that includes a contract with the company for a specified number of services over a multi-year period, guaranteeing more than four years of revenues to Quintiles. The new company is expected to enhance Quintiles expertise in pharmacology, research, bio-statistics and data management, with a particular focus in the areas of ophthalmology, growth hormones, cardiovascular medicine, and urology. DEC 15.00 QRT XC LB=0.50 OI=42 CB=14.50 DE=14 MR=20.5% ***** SNPS - Synopsis $42.13 *** On The Move! *** Synopsys is a supplier of electronic design automation software to the global electronics industry. Synopsis develops, markets and supports integrated circuit design products that are used by designers of advanced ICs, including system-on-a-chip ICs, and the electronic products that use such ICs. Their products and services offer its customers the opportunity to reduce the time to market for new products and reduce manufacturing costs by improving the productivity of their IC designers and enhancing their design quality of results. Last week, Synopsis posted a loss of $21 million, or $0.33 a share, on sales of $133 million after implementing its new licensing model. Analysts expected the software developer to lose $0.45 a share in the quarter and the post-earnings reaction was very optimistic. The share value jumped 20% in two days and with solid support near the cost basis, this position offers an excellent opportunity to speculate on the future movement of the issue. JAN 35.00 YPQ MG LB=0.88 OI=0 CB=34.13 DE=49 MR=5.1% ***** WLL - Williamette $49.38 *** Hostile Takeover! *** Willamette Industries is a diversified, integrated forest product company that manufactures and sells lumber, plywood, particleboard, fiberboard, laminated beams and a wide variety of paper products. Willamette's paper mills, saw mills and manufactured lumber mills contribute a major portion of the industry's U.S. production. The company is the target of a buyout from Weyerhauser, who recently launched a hostile cash tender offer for Williamette, valuing the rival paper company at $48 a share, or $5.4 billion. The hostile bid comes in the wake of Willamette's rejection of Weyerhaeuser's original unsolicited offer, and it is a method for Weyerhaeuser to take its case directly to shareholders. Most analysts believe the deal will be consummated in the next few weeks at a price slightly higher than the current offer. DEC 45.00 WLL XI LB=0.38 OI=2010 CB=44.62 DE=14 MR=5.2% ***** ***************** SUPPLEMENTAL NAKED PUTS ***************** The following group of issues is a list of additional 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 and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return FNSR 25.88 DEC 20.00 FQY XD 0.50 314 19.50 14 19.1% PALM 40.69 DEC 25.00 UPY XE 0.38 297 24.62 14 9.7% RHD 23.25 DEC 22.50 RHD XX 0.38 0 22.12 14 9.2% IGT 45.38 JAN 40.00 IGT MH 0.63 15 39.38 49 2.9% IR 41.88 JAN 37.50 IR MU 0.69 10 36.81 49 3.3% MHK 24.69 JAN 22.50 MHK MX 0.50 0 22.00 49 3.8% SAFC 27.75 JAN 25.00 SAQ ME 0.50 44 24.50 49 3.5% ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily, the research tool for self directed investors. http://www.sungrp.com/tracking.asp?campaignid=1076 ************************************************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Searching for a bottom... The market closed mixed Friday with the Nasdaq rebounding from a string of negative sessions and the Dow falling on profit-taking after recent gains. Friday, December 1 The market closed mixed Friday with the Nasdaq rebounding from a string of negative sessions and the Dow falling on profit-taking after recent gains. The technology index ended well off its best levels for the day, closing up 47 points at 2,645. The blue-chip average finished down 40 points at 10,373. The S&P 500 index was relatively unchanged at 1,315. Trading volume on the Nasdaq was heavy for a second straight day at 2.2 billion shares exchanged, with advances beating declines 2,467 to 1,493. Trading volume on the NYSE reached a light 1.18 billion shares, with broad market advances beating declines 1,903 to 984. In the bond market, the 30-year Treasury fell 16/32, pushing its yield up to 5.64%. Thursday’s new plays (positions/opening prices/strategy): Fiserv FISV DEC45P/DEC50P $0.50 credit bull-put Skywest SKYW DEC55C/DEC60C $2.93 debit bull-call Both of our "Reader's Request" positions pulled back during the session, allowing entries at favorable prices. Portfolio Plays: Technology stocks closed higher today as investors looked for bargains in the wreckage of the recent sell-off. The Nasdaq advanced 150 points during the morning session while the Dow industrials managed a 110 point gain in early trading. But the optimism soon gave way to renewed selling pressure as investors remained skeptical about the Nasdaq's ability to sustain any rally given the recent indications that the economy is slowing faster than most economists had expected. In addition, rumors of a potential earnings warning from Motorola (MOT) and Intel (INTC) eroded the market's gains late in the day and a number of leading technology issues slumped after CS First Boston cut its outlook for the semiconductor group. The brokerage lowered revenue estimates on Applied Materials (AMAT), KLA-Tencor (KLAC), Novellus (NVLS) and Lam Research (LRCX) saying capital spending growth for the industry will be flat in the coming quarters. On the upside, Internet stocks edged higher and computer hardware issues recovered from Thursday's precipitous slide. Compaq (CPQ) rebounded to a mid-day high near $24 after announcing it would buy back over $1 billion in stock and Hewlett-Packard (HWP) and International Business Machines (IBM) also experienced upside activity. On the Dow, Boeing (BA) led industrial stocks lower and SBC Communications (SBC) slumped amid rumors it would issue a negative profit warning. Pharmaceutical stocks also retreated after a recent bullish streak and UBS Warburg downgraded a number of stocks in the group due to their rich valuations. Among broad market issues, oil shares were weaker as crude futures fell to $32.05 a barrel on Saudi Arabia's assurances it would offset any shortfall from Iraq's halt of exports and U.S. threats of more Strategic Petroleum Reserve oil pushed the market sharply lower. The on-again, off-again buyout of Quaker Oats (OAT) was back in the news as reports surfaced that PepsiCo (PEP) is now in talks to buy the U.S. sports-drink and cereals maker. The deal could be worth as much as $14 billion and Quaker's shares rallied to $88 after the announcement. Our bullish credit spread at $80 is expected to finish at maximum profit. In the technology group, Vertex (VRTX) was the leading issue in our portfolio, closing up $10 at $65 as investors speculated on the potential of a recent pact with Glaxo Wellcome to sell the company's protease inhibitor. Among big-cap issues, Juniper Networks (JNPR) was a popular play, closing up $7 at $131 in a third consecutive day of gains. Drug manufactures were among the bullish stocks in our portfolio with Pharmacyclics (PCYC) up $1.75 to $45 and Carter Wallace (CAR) up $1.25 to $31.25. Both of these positions are at maximum profit. In lower-priced issues, our speculation plays have performed very well and today Medquist (MEDQ) rallied another $1.50 to close at a recent high near $19.50. The bullish synthetic position is now trading at a $1.75 profit. Miravant (MVRT) also moved higher, up $0.75 to $17.94 and our bullish play is yielding a $0.50 return. Premium selling positions have provided favorable results and the calendar spread in Englehard (EC) benefited from today's $1.12 rally to $20.81. The position returns maximum profit with the stock price near the sold strike at $22.50. Mattel (MAT) eased back down to a recent comfort zone near $12.50 and the neutral spread is trading at maximum profit. We will plan to roll the neutral, time-selling position to the $12.50 strike for January. In addition, our bearish plays in Pfizer (PFE) and Phillips (P), and our recent downside adjustment in Micron (MU) are performing well. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** ABS - Albertsons $24.69 *** Earnings Due! *** Albertson's is one of the largest retail food-drug chains in the United States. They operate 2,492 stores in 37 Northeastern, Western, Midwestern, and Southern states. These stores consist of 1,326 combination food-drug stores, 802 stand-alone drug stores, 335 conventional supermarkets, 28 warehouse stores, and one e-commerce retail site. Retail operations are supported by 21 major distribution centers. Their distribution centers also provide product exclusively to its retail stores. Albertson's stores operate primarily under the names of Albertson's, Acme Markets, Jewel Food Stores, Seessel's, Super Saver, Max, Osco Drug, and Sav-On. Earnings are driving the market and investors are betting that Albertsons' earnings will be less than favorable when the company reports quarterly numbers on Monday after the market close. The implied volatility in Albertson's options rose substantially last week amid heavy put buying and there are a number of excellent premium disparities for traders who wish to speculate on the outcome of the report. PLAY (conservative - bearish/credit spread): BUY CALL DEC-30.00 ABS-LF OI=159 A=$0.25 SELL CALL DEC-27.50 ABS-LY OI=488 B=$0.50 INITIAL NET CREDIT TARGET=$0.31-$0.38 ROI(max)=14% B/E=$27.81 Note: This position is based on increased activity in the stock and underlying options. In this case, the premiums for the (OTM) call options are inflated and the potential for a successful (technical) recovery is significantly affected by the resistance at the sold strike price; a good situation for a bearish credit spread. Although the play offers favorable risk versus reward potential, it should also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. In addition, there is also a DEC-30P/DEC-27P debit spread with similar risk/reward characteristics. ****************************************************************** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is also higher than other plays in the same strategy based on disparities in option pricing. Current news and market sentiment will have an effect on these issues. Review each play individually and make your own decision about the future outcome of the position. ****************************************************************** SAFC - Safeco $27.75 *** Recovery In Progress! *** Safeco owns operating subsidiaries in segments of insurance and other financially related businesses. The company's insurance subsidiaries engage in two principal lines: property and casualty (including surety), and life insurance. Safeco property and casualty insurance operations is one of the largest in the United States. Through independent agents, the company's property and casualty subsidiaries write personal, commercial and surety lines of insurance. Coverages include automobile, homeowners, fire and allied lines, workers' compensation, commercial multi-peril, miscellaneous casualty, surety and fidelity. Products are sold in all states and the District of Columbia. Safeco's businesses operate on a nationwide basis. The insurance subsidiaries engage in property and casualty insurance, surety and life insurance, and generated approximately 95% of the company's revenues. Based on the recent technical trend, our outlook for the issue is bullish and the current upward momentum should propel the share value to a profitable range before the options expire. In the event of further consolidation, this company would also be an excellent candidate for any long-term portfolio. Target a lower debit (possibly even a credit) in the position initially, as the underlying issue will likely retrace some of its recent gains in the coming sessions. PLAY (conservative - bullish/synthetic position): BUY CALL JAN-30 SAQ-AF OI=995 A=$0.93 SELL PUT JAN-25 SAQ-ME OI=44 B=$0.62 INITIAL NET DEBIT TARGET=$0.00-$0.12 TARGET ROI=25% Note: Using options, the position is equivalent to being long on the stock. The collateral requirement for the naked put is approximately $885 per contract. ****************************************************************** TSG - Sabre Holdings $37.50 *** Reader's Request! *** Sabre Holdings Corporation is the world leader in the electronic distribution of travel through its SABRE computer reservations system. In addition, Sabre provides information technology solutions to the travel and transportation industries and also ulfills substantially all of the data processing, network and distributed systems needs of American Airlines and AMR other subsidiaries, Canadian Airlines International, US Airways, and industry customers. The SABRE global distribution systems are the principal means of air travel distribution in the United States and a growing means of air travel distribution in many international markets. Through the SABRE system, all travel agencies, corporate travel departments and individual consumers can access information about and book reservations with airlines and other providers of travel and travel-related products and services. One of our subscribers was kind enough to point out the bullish activity in this issue and he requested that we identify some favorable spread positions with an aggressive outlook. The easiest way to profit from any future upside movement usually involves the most common forms of spreads and with favorable disparities in the December premiums, this position offers a great speculation play for those who are bullish on the issue. PLAY (conservative - bullish/debit spread): BUY CALL DEC-35.00 TSG-LG OI=134 A=$2.88 SELL CALL DEC-37.50 TSG=LU OI=1 B=$1.00 INITIAL NET DEBIT TARGET=$1.62-$1.75 ROI(max)=42% B/E=$36.75 ****************************************************************** - STRADDLES - I received another request for debit straddles this week and for new investors, this strategy is a conservative, low risk option trading technique when the positions are established based on solid statistical analysis. ****************************************************************** RDA - Reader's Digest $39.25 *** Probability Play! *** Readers Digest Association is engaged in publishing and direct marketing, and the creation and delivery of products that inform, enrich, entertain and inspire, including magazines, books, recorded music collections and home videos. The company is best known for publishing its flagship Reader's Digest magazine. Reader's Digest is a general interest magazine consisting of original articles, previously published articles in condensed form and a condensed version of a published (or soon-to-be published) full-length book. Reader's Digest has a worldwide circulation of about 24 million and over 100 million readers each month. Reader's Digest is published in 48 editions and 19 languages. The company has four primary operating segments: Global Books and Home Entertainment, United States Magazines, International Magazines and Other Businesses. This position meets our criteria for a favorable straddle; cheap option premiums, a history of adequate price movement and future events or activities that may generate volatility in the issue or its industry. This selection process provides the foremost combination of low risk and potentially high reward. As always, review the position with regard to your strategic approach and trading style. PLAY (conservative - neutral/debit straddle): BUY CALL JAN-40 RDA-AH OI=560 A=$1.88 BUY PUT JAN-40 RDA-MH OI=34 A=$2.38 INITIAL NET DEBIT TARGET=$4.00-$4.12 TARGET ROI=20% ****************************************************************** CBSS - Compass Bancshares $20.50 *** On The Move! *** Compass Bancshares is an $18.9 billion Sunbelt-based financial services company with 323 full-service banking offices and more than 6,800 employees in Alabama, Arizona, Colorado, Florida, New Mexico and Texas. With the recently completed acquisition of Founders Bank of Arizona and the pending acquisition of FirsTier Corporation, Compass would have assets of more than $20 billion and operate 342 banking offices in the seven states. Through wholly owned subsidiaries, the company is engaged in providing insurance products to customers of its subsidiary banks and owning real estate for bank premises. The company's primary operating segments are Corporate Banking, Retail Banking, Community Banking, Asset Management and Treasury. Although this position may not rank near the top of list as far as option pricing, we feel that the overall risk/reward outlook is favorable due to the relatively unique nature of the stock's recent movement (increasing volatility in the rolling pattern) and the potential for substantial activity in the banking sector when the Fed releases its interest rate policy at the upcoming FOMC meeting on December 19. PLAY (conservative - neutral/debit straddle): BUY CALL APR-20.00 JQK-DD OI=209 A=$1.93 BUY PUT APR-20.00 JQK-PD OI=976 A=$1.06 INITIAL NET DEBIT TARGET=$2.75-$2.88 TARGET ROI=50% ************************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=1071 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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