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Daily Newsletter, Monday, 12/04/2000

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The Option Investor Newsletter                   Monday 12-04-2000
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        12-04-2000        High      Low     Volume Advance/Decline
DJIA    10560.90 +187.40 10604.50 10319.30 1.09 bln   1426/1439
NASDAQ   2615.75 - 29.54  2671.18  2567.18 1.86 bln   1428/2521
S&P 100   701.27 -  1.29   706.14   693.44   totals   2854/3960
S&P 500  1324.97 +  0.28  1332.06  1310.23           41.9%/58.1%
RUS 2000  450.39 -  6.45   456.89   450.39
DJ TRANS 2767.77 +  4.62  2776.01  2733.63
VIX        30.31 -  1.28    32.19    29.94
Put/Call Ratio      0.68
******************************************************************

Equities Rally In After-Hours On Court Decision

It feels really good to write the word "rally."  The markets were
all over the map today as they anticipated every Election
announcement.  Many dubbed the INDU's rally today the "Bush Rally."
Whether or not this is entirely warranted is now irrelevant as
Leon County Circuit Court Judge Sanders Sauls ruled in favor of
the Bush camp today after the close.  Finally, something that we
can call a catalyst.  Equities just loved the news, and many of
our favorite NASDAQ names are ticking across the Time & Sales a
couple bucks higher than their closes.  This should make for an
interesting trading day tomorrow.

In addition to Judge Sauls decision against the Gore team's contest
of Election results in South Florida, the U.S. Supreme Court also
released their ruling after hearing oral arguments on Friday.
The higher Court's ruling, stating that it finds "considerable
uncertainty as to the precise grounds for the decision[that of the
Florida Supreme Court]," essentially throws that ball back into
the State Court again.  Initially, the markets reacted with a
jump to the upside, yet the rhetoric was deliberately vague, and
true victory was not clearly spelled out.  The INDU managed to
sustain the rally throughout the day, while the NASDAQ whipsawed
on the continued uncertainty.

In the chart below, the INDU hit its low for the day right after
the open and mounted a rally that showed little sign of weakness.
The bounce came at 10319 and established a higher low relative to
last Thursday's low of 10292.  Trading in almost a 300 point range
today, the INDU encountered resistance at 10600 as it had all last
week.  The catalyst that it needs to move through that 10600
level came today with the Judge Sauls decision.  A gap up on the
open tomorrow will take out this resistance, yet it may be tested
as support if traders sell into strength.  But the implications
of the decision are bright for the markets, and although Gore's
team will appeal it, this is another step toward reconciling
uncertainty in the Election and the markets.  Tomorrow will be a
very telling day as the market digests all of the news and Bush
draws closer to a Presidential victory.  Will the real "Bush
Rally" that everyone has spoke about even before the Election
truly materialize?  Or will news of Gore appeals cast doubts on an
expeditious remedy?  S&P futures are up 14 points as of 7pm ET,
and NASDAQ futures have soared 92 points in after-hours.  All is
pointing to an explosive day tomorrow.  The markets will need to
sustain that strength to remain optimistic.




Old cyclical stocks led the INDU today as investors remain cautious
about the tech sector.  The rotation continued and buyers poured
into names like:  Caterpillar(CAT: +2.63), Dupont(DD: +3.06),
United Tech(UTX: +2.06), Wal-Mart(WMT: +2.63), P&G(PG: +1.44), and
3-M(MMM: +5.38).  Those are significant moves for lower volatility
stocks.  This is also a sign that investors are seeking the
relative stability of this cyclical sector as opposed to the tech
sector.  The momentum in the INDU will likely fare just as well
tomorrow.  Look for the components that did not participate in
today's gains to act up tomorrow:  AXP(-2.25), BA(-1.00), C(-1.13),
INTC(-1.19), MSFT(-0.19), and DIS(-0.56).  Tomorrow could be that
broad based rally that could help investor morale.

And as excited as I am about having "rally" in my wrap title
without a negative connotation, there was some bad pieces of news
out today.  Rumors continued to circulate on the Street that INTC
might miss earnings estimates in the coming quarter.  Yet, Bob
Pisani on CNBC reported that the company(INTC) told him that they
were on track to make their previous guidance and in no way were
revising it.  So that may just be a rumor.  Regardless, the simple
notion creates nervousness in the stock and the already fickle
Semi sector.  On that same note, XLNX came out after the close
today and lowered its sequential sales growth forecast for the
December quarter to 5-7% from a previous 12%.  That's not a rumor.
XLNX attributes this shortfall to weaker-than-expected bookings
in November from some of its North American customers.
International orders remained on track.  An indiction of slowing
demand in the U.S.  This occurs just one week after Lehman Bros.
lowered their earnings projections on XLNX, citing...guess what?
Slower demand for November.  I guess sometimes these analysts are
on the right track.

The downfall of the Semi sector has been a tremendous burden on
the NASDAQ.  CSCO has been another drag on the tech index as of
late.  Sliding to close at $45.81 today, CSCO is now virtually
unchanged from December 1st of last year.  But on the upside,
CSCO CEO John Chambers did not change the companies guidance for
the coming quarter in an analyst call today.  He remains bullish
on CSCO's sales outlook as uncertainty looms about networking and
telecom growth.  As a result of the lack of earnings visibility
for NASDAQ stocks, the index has continued rolling lower.

Notice the downtrending channel that has possessed the NASDAQ.
While a massive recovery is unlikely for now, a consolidation
after hitting a low of 2523 could be in store.  This would be
extremely welcomed.  Trading today was volatile as the NASDAQ hit
2567 before rally back on the Supreme Court's ruling this morning.
That represents a higher low from Thursday.  In conjunction with
the aforementioned decision from the Leon Cty. Circuit Court after
the bell, a rally tomorrow could very well challenge Friday's
high of 2749.  Once again, we will definitely see a gap up on
tomorrow's open, barring any drastic selling of the futures
overnight, but the conviction of tomorrow's rally will lie in
whether traders sell into strength.  This has been the trend lately
so sustained gains tomorrow would be encouraging to the beaten
down NASDAQ.  As for the actual trading, expect it to be volatile
and choppy.  It just may be one of the most heated battles in a
while between the bulls and bears, given that the bulls have what
appears to be a real catalyst.




Looking ahead, futures are indicating a big open tomorrow so watch
for sustained buying activity or selling into strength.  The first
hour will be hectic.  It may be prudent to wait until things
settle after that first hour.  Techs should get a relief rally
tomorrow.  It will be a very telling session.  Wednesday has the
revised Productivity number coming out and will be closely watched.
Friday's Unemployment report will also be an important event.  But
the real catalysts this week that will drive trading are the
Election and earnings prospects.  Warning season is upon us and can
be the bearer of bad news.  Expect volatility this week and trade smart.

Matt Russ
Editor


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*****************
STOP-LOSS UPDATES
*****************

BRCM - call play
Adjust from $89 up to $100

RSAS - call play
Adjust from $41 up to $43

NTAP - call play
Adjust from $45 up to $50

JNPR - call play
Adjust from $109 up to $119


*************
DROPPED CALLS
*************

CMGI $9.69 -0.44 (-0.44)  Today the NASDAQ whipped back and forth
today as a slew of Election announcements came and went.  But at
the end of the trading day, CMGI settled below our $10 stop loss
level.  During the intraday, CMGI found support at $9.50 but rolled
over as it tried to challenge the $10 level late in the session.
This level will pose as resistance.  A pro-Bush verdict in Leon
Cty. Circuit Court very well may bring relief to the NASDAQ, yet
we will be dropping this Lottery Play today.


************
DROPPED PUTS
************

ITWO $88.00 -11.38 (-11.38) The ongoing multiple compression of
richly valued tech stocks continues to hamper ITWO.  The
valuation-related selling was obvious this afternoon when ITWO
rolled over near the $96 level and subsequently slid into the
close of trading.  In fact, the stock closed right near its low
of the day.  Despite the continued weakness in shares of ITWO, we
are dropping coverage on the play tonight as the stock is set to
split in the coming days.  ITWO is expected to begin trading on
a split-adjusted basis after the close of trading tomorrow,
although the date has not yet been confirmed.  Use any
continued weakness related to the earnings warnings this evening
to exit existing positions before the close tomorrow.


**************
TRADERS CORNER
**************

Three Steps Forward, One Step Back
By Austin Passamonte

We left our discussion last week sharing ideas about how to
manage trading accounts based on a percentage of gain/loss. The
core of this approach is no different than managing any other
business model we can think of. Business expense or cost is
capped with greater profits in relation. This creates a positive
cash accrual over time.

A fast-food franchise uses food as its cash-flow vehicle. A
percentage of capital cost (inventory) is cooked and served in
exchange for a greater percentage return from consumers buying
this (net profit). Agreed?

Notice how various sandwiches are priced for sale according to
size. Let's assume this is based on percentage of loss contained
within the ingredients versus expected return from their sale.

A reason why three little cheeseburgers are priced the same total
cost as one triple-decker with everything. Did you think this was
based on fat-calorie count? If so, they'd be priced much higher
for sure!

Nope, these prices are based according to a cost for the sandwich
to be produced versus expected return. The franchise owner
doesn't care if they sell nine little cheeseburgers or three
giant "heart-attack specials;" profit margin remains the same.

Now I'm hungry! Does this analogy help with our little exercise?
If you're balancing a diet would you eat three little burgers or
one big one, or could you scarf three little or three big burgers
with equal results? Yuck...now I'm queasy!

To franchise owners, sandwiches are merely business inventory.
The building, equipment and employees are operational costs of
doing business. Making sandwiches is capital loss while selling
them is cash-flow profit.

To traders, option contracts are business inventory. Computers,
software, commissions and education (OIN, IndexSkybox) are
operational costs. Taking small losses on stopped plays is
capital loss while capturing greater gains on performing plays is
cash-flow profit. No difference in business model approach.

It's important to balance your purchases based on respective
price just like the sandwich shop owner bases his price on
respective sales. Both serve to ensure a higher percentage of
profit returned for inventory cost outlay.

This is accomplished by developing a trading model with more
wins than losses, higher % of profit than loss or preferably both
features combined. Selecting how many contracts you purchase based
on defined dollar risk ensures you will always hold the right
amount of options to maximize profit and minimize loss.

There are numerous account management models to follow but we
will examine the one I use as requested by email from traders.
First let me outline the approach and why a customized version
may be best for you.

I'm an active swing-trader who looks for frequent profitable
plays in the market. I find my share of those along with
inevitable losers to boot. Surviving the losers to enjoy the
winners is of course the goal.

My objective in this approach is to win two of three trades on
average. Each trade uses disciplined stops to protect plays with
sell targets that yield a greater return than loss percentage
risked.

If I'm looking at trading QQQ contracts with a bid/ask price of
3.87/4.00, the first order of business is to decide where my stop
should be. A good rule of thumb for short-term swing trades is
25% loss risked with a stop set at 3. That's all I need to know
when deciding how many to buy.

I'm willing to risk $1 on each contract for total loss. Profit
targets are irrelevant right now... how much we are willing to
lose is all that matters. I will buy as many total QQQ contracts
as my risk balance allows. That is usually a mere 5% of my
overall account balance.

A $10,000 account balance would have a maximum risk to lose on
any single play of 5% or $500. I could afford five of these QQQ
contracts regardless of purchase cost or profit target based
solely on what I'm willing to lose.

After each executed trade I recalculate 5% from the subsequent
balance and make the next purchase accordingly. Using this
approach makes it almost impossible to reduce an account to zero
balance when followed with discipline. It's very easy to do so by
forsaking discipline as well.

Most trading models take several wins and several losses in a row
by natural behavior. It is unusual to see a system that takes one
win, one loss, one win, one loss consistently over time due to
laws of random chance. Re-balancing our account after each trade
plays into this rule as well.

Scaling our percentage of overall account balance for risk up
after wins and down following losses has us take the next loss
in a string of wins with maximum capital used. From there we are
scaling down in size until the next win. That is taken with a
minimum of capital used, and then we're scaling up from there.

That doesn't mean I'm immune to losing more. Stop-loss slippage
or gap-against market action can result in greater loss than the
$500 target. Our theoretical risk is 100% of total purchase cost
but reality is different. We control this factor to a degree on
what we target and buy.

Many astute traders buy ITM options and/or pay great heed to
pricing values using option Greek computations. There are many
very good trading approaches where all this matters, but not with
mine. The only option Greek I factor in is "Gamma."

I'm a Gamma trader. I swing-trade when indexes in my estimation
are about to move and buy OTM option contracts with hope for
selling them when they reach ATM or slightly ITM. I do not care
how high implied volatility is or "overpriced" they are; if I'm
right about market action these contracts are about to become a
whole bunch more valuable than currently priced.

I trade index options, which seldom have outrageous valuations
like volatile tech stocks can. Indexes are also far less likely
to suffer a price-killing drop as individual equities more
frequently do. This reduces my chance of dangerous exposure to
capital in play, although I NEVER use more capital (any longer)
to buy options than willing to lose most or all of.

Buying $2,000 worth of those $4 QQQ options means I could lose
20% of my entire $10,000 balance should disaster strike. In
reality, how?

Buying OTM index options with enough time left until expiration
means it's almost impossible for total loss no matter how far the
underlying moves against. They'll still be worth something
greater than zero and I will STOP THEM OUT with no hesitation if
calamity strikes.

Equity options can go from $4 to $0.13 in one fell swoop if the
stock gaps against in a violent move. Trading an entire index
gives much more insulation from these occurrences. Not immune but
greatly reduced.

The following examples of how this approach works was pulled
straight from our live trading "Swing-Trade" model within
IndexSkybox. These are prices of trades we recently took from
11/20 until 12/4 as they occurred from entry to execution. The
hypothetical account balance of this article is an easy to follow
round number for example only. Feel free to make that any value
you want when crunching these figures yourself.

****

Trade #104: QQQ Put
Contract cost: 3.50
Stop: 2.50 (-29% of cost)
Target: 5.25 (+50% of cost)
Results: stopped @ 4.00

$100,000  balance, 5% risk ($5000)
- 17,500  50 contracts cost ($100 per contract stop x 50)
+ 20,000  50 contracts sold (+14% on trailed stop-loss)
--------------------------
$102,500 balance

****

Trade #107: QQQ Put
Contract cost: 2.75
Stop: 1.75 (-36% of cost)
Target: 4.00 (+45% of cost)
Results: sold @ 4.00

$102,500  balance, 5% ($5125)
 -14,025  51 contracts cost ($100 per contract stop x 51)
 +20,400  51 contracts sold (+44.5% on sell-limit)
--------------------------
$108,875 balance

****

Trade #110: QQQ Call
Contract cost: 2.75
Stop: 1.75 (-36% of cost)
Target: 4.00 (+45% of cost)
Results: stopped @ 1.75

$108,875  balance, 5% risk ($5443)
 -14,850  54 contract cost ($100 per contract stop x 51)
 + 9,450  54 contract sold (-36.4% stopped out)
--------------------------
$103,475 balance

****

Trade #113: QQQ Call
Contract cost: 3.00
Stop: 2.00 (-33% of cost)
Target: 5.50 (+66% of cost)
Results: sold @ 5.50

$103,475 balance, 5% risk ($5173)
 -15,300 51 contracts cost ($100 per contract stop x 51)
 +28,050 51 contracts sold (+66.7% sell-limit)
--------------------------
$116,375 balance

****

Trade #116: QQQ Put
Contract cost: 1.75
Stop: .75 (-57% of cost)
Target: 4.00 (+128% of cost)
Results:

$116,375 balance, 5% risk ($5818)
 -10,150 58 contracts cost ($100 per contract stop x 58)
 + 8,700 58 contracts sold (-14% on trailed stop loss)
--------------------------
$114,925 balance

We took five trades total - three wins, two losses and ended with
a positive account balance in part by cutting losses short,
targeting greater percentage gains and always balancing our 5%
risk amount after each play.

Aggressive traders who used 10% of their account balance would
have doubled these two-week results. Others may have opted for a
smaller percentage of risk/return as well.

How would your present account management have fared? More, less
or the same profits made respectively?

Let me warn you, this won't work if you play QQQ, OEX and SPX
puts together using 5% of your account balance for each. That's
risking 15% total drawdown for the exact same trade split in
three separate forms!

It's fine to use part of the remaining balance on different
option plays. I like to sell credit spread with most of my
account and swing-trade a small balance accordingly.

I encourage you to run many different scenarios using this
approach to see what it can offer you. Go back and recalculate
some of your own historical trading sequences within these
parameters and see where it might have your account today versus
where it actually is to merit consideration.

I figured this stuff out on my own too late for salvation from
strings of small wins and a few large losses to wipe out all
progress and more. At least I learned eventually. Hopefully this
arrives in plenty of time to point you in the proper direction
first!

See you here next Monday & Best Trading Wishes,

Contact Support


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**********************
PLAY OF THE DAY - CALL
**********************

RSAS - RSA Security $46.50 +0.38 (+0.38 this 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.

Most Recent Write-Up

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.

Comments

With a nice three day trend, RSAS bucked the trend today and
stayed in the green as the NASDAQ sold off into the close.  Given
today's Leon Cty. Circuit Court judgment in favor of Bush, the
NASDAQ will likely find some relief tomorrow.  Look for entry into
RSAS on any bounces from support at $46 or $45.  A continued push
through resistance at $47 on strong volume would also warrant
entry.

***December contracts expire next week***

BUY CALL DEC-45*QSD-LI OI= 53 at $3.38 SL=1.50
BUY CALL DEC-50 QSD-LJ OI=408 at $1.13 SL=0.50
BUY CALL JAN-45 QSD-AI OI=325 at $5.75 SL=4.00
BUY CALL JAN-50 QSD-AJ OI=319 at $3.50 SL=1.75

http://www.premierinvestor.com/oi/profile.asp?ticker=RSAS


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