The Option Investor Newsletter Tuesday 12-12-2000 Copyright 2000, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/121200_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 12-12-2000 High Low Volume Advance/Decline DJIA 10768.30 + 42.50 10856.30 10703.80 1.08 bln 1272/1593 NASDAQ 2931.77 - 83.33 3002.53 2930.99 1.92 bln 1559/2424 S&P 100 728.91 - 14.84 733.41 727.52 totals 2831/4017 S&P 500 1371.18 - 9.02 1380.27 1370.27 41.3%/58.7% RUS 2000 477.76 - 9.47 487.23 477.73 DJ TRANS 2905.27 - 33.10 2944.72 2904.12 VIX 28.28 + 1.77 28.40 26.36 Put/Call Ratio 0.71 ****************************************************************** Traders vote for a new earnings recount! The Nasdaq struggled valiantly to hold 3000 but the flood of earnings warnings on top of two days of strong gains and the election nightmare was too much to bear. The Dow soared +126 points to 10856 on the strength of Proctor & Gamble and Colgate before falling prey to warnings and the election. The longer the wait for the Supreme Court answer, the more investors worried that there would be a messy ruling that would force a complete recount in Florida and delay the eventual result for up to several more weeks. The Alfred Hitchcock like twists and turns and the daily cliff hanger rulings continue to take all the wind out of any positive market momentum. With no positive sentiment every negative event becomes larger than life and the result is renewed selling. Earnings warning season is alive and well and in full swing. The flood of warnings today came from almost every sector. From giant corporations like GM to the smallest like RAZF. It appears the only ones immune today were PG and CL. Both affirmed their growth targets and said good things about their business. Still +7% growth will not get a tech investor excited but value investors did manage to add +2.88 to PG and +2.43 to Colgate. That was the end of the good news. Beginning with GM which warned as expected the day just got worse as time passed. GM announced plans to close, restrict, reduce and restructure plants world wide but the biggest news was the death of the Oldsmobile product line. Olds was the oldest U.S. manufacturer at 103 and second oldest to Mercedes world wide. The most popular car in the 1970's, the Cutlass, will now go the way of the Delorean and the Edsel. Analysts actually liked the move as one less competitor in the crowded space. Even though produced by the same parent, GM, the brand competed with Buick, Chevy and Cadillac brands and dealers found themselves fighting for market share within the GM space as well as against the other major brands like Ford and Honda. By reducing product models internally the company expected to increase prices and reduce costs. The biggest company, GE, affirmed estimates going forward but did speculate that we would see a possible mild recession. Their latest acquisition, Honeywell, however warned that earnings would disappoint and GE dropped -2.50 on the news and HON dropped -3.19. The warning as discussed by analysts was actually do to a scrubbing of the financials by GE prior to the merger. GE is very conservative with their accounting and the changes were made to bring the struggling Honeywell into line with GE accounting procedures. Still both stocks finished the day down on the news. Another Dow component, EK, warned that sales were slowing and profits would be down. Eastman Kodak has not been in the forefront of the earnings parade for some time and had been expected to warn again. This was their second warning this quarter. The actual news and explanations produced a relief bounce of +1.50 in EK. Go figure! IBM was down on the day slightly at -1.50 after saying confusing things about product mix going forward. The CEO said infrastructure will be critical and they would outsource more in the future. The CEO declined to comment on earnings and only focused on the challenges he saw going forward. He felt IBM was well positioned to do well but the market place was changing. Analysts are expecting another processor announcement soon if IBM is going to pull out of the earnings worries now hitting other companies. Saying the challenge to connect the 700 million PCs and about a trillion Internet devices would occupy IBM for some time. There was so much negative news today I could not begin to cover it but I will try and hit some of the high spots. ARBA was downgraded, dropping -$10 and taking ITWO with it for -$6. TQNT was downgraded by CSFB and it lost -$12 taking the semiconductor sector down again. AMD warned last night but everybody expected that after Intel. Compaq warned after the close today but again, everybody knew it was coming. CPQ only lost -.88 in after hours. DCLK warned, RAZF warned, RSYS warned, NAVI warned, ONNN warned, COVD warned, DPH warned, getting the picture? ENGA posted a bigger than expected loss. Something about the Internet advertising revenue model? SUNW went public with a disclaimer that they had no accounting problems. Period. SUNW stock down to $33 from $48 just last week had been hit by short seller rumors of all kinds and from all sides. Unfortunately, when they said no accounting problems they did not say no earnings problems. Would have been a perfect opportunity but they didn't. You guessed it, if you can't deny then there must be a warning coming. SUNW tested $32.25 again for the second day. Personally I think this is a screaming buy but not until everyone else thinks so too. While I am tempted to try and imagine a bottom today and justify buying some I am also constrained by the same question about the lack of earnings affirmation. While I would like to think that SUNW is a heavyweight in the PC sector and not subject to the soft retail PC demand, I will wait until a new trend develops indicating that there are more buyers than sellers, or a positive earnings statement from SUNW. Aggressive buyers could beat us to the punch here but with the flood of earnings all negative there could be a surprise in their future. I think I can, I think I can. Rumors today speculated on NOK making an offer for Lucent. Lucent market cap is $65 billion even at its severely depressed stock price. Lucent rallied +$2 on the news to $18.75 but analysts said it was not likely to be true. NOK does not normally go for the super big targets but picks off the smaller niche players on its way to world telecommunications dominance. Lucent and Nokia would fit well together but the deal would have too many roadblocks and the scale could cause NOK problems in digestion. Still it was nice to see a +12% bounce in LU stock! Even though the volume was low today with only 1.9 billion on the Nasdaq and 1.1 billion on the NYSE it was not a bad day. Decliners beat advancers on both exchanges but price drops were not bad. Considering the Nasdaq had gained +500 points in the last eight days in the face of negative earnings and negative election news I am not surprised we struggled at 3000. Had the election news been completed with a final ruling from the Supreme Court I think the outcome would have been very different. Remember CPQ did not drop in after hours trading after its warning. GM went up after warning. Big gainers over the last week in numbers approaching +$50 like JNPR, BRCM, BRCD only dropped back -$2 to -$3 on profit taking. While looking at possible plays with the editors for tonight’s newsletter there were very few real pullbacks. Most just settled as traders took profits and waited on the court. It was almost impossible to find puts. You would think that the flood of earnings warnings and the negative market would have given us dozens to chose from. They did not exist. There were pullbacks but not drastically or with no major change of trend. Although I am disappointed the Nasdaq kept its string intact of not being able to put three positive days back to back since Labor day, I am still positive that there is an explosion ready to happen. The only thing in our way I feel is the court decision. If the court makes a ruling out of left field that extends the pain and confusion for several more days or even weeks then the market will react negatively. The market is ready for a winner regardless of who it is. On Wednesday we start loading up on economic reports and a series of market friendly numbers will set the stage for the Fed rate meeting next Tuesday. Tomorrow we get Import/Export prices and Retail Sales. Thursday PPI, Friday CPI, Capacity Utilization and Industrial Production. Without a favorable court decision that stops the process in favor of somebody, traders are likely to wait on the sidelines for the economic reports to pass as well. With an election stopping decision traders are likely to buy the economic reports hoping for a positive announcement at the Fed meeting. The bottom line, no decision, traders will wait. A knockout punch by the court and traders are likely to buy. Technically we are at a make or break point on the Nasdaq chart. The recent rally brought us right up to the descending down trend line for the last three months at 3000. We must break this down trend line this week or be doomed to retest at least the 2700 lows again. The fuse is lit and the court can fan the flames or douse the fire. What you do with this analysis is of course up to you but I would buy any dip unless the court hits us with another delay of game penalty. Good luck and don't buy too soon. Jim Brown Editor ********************* 2001 Renewal Offer!!! Our best offer ever!! ********************* Long time readers know that each December we offer our subscribers an extra value package as a thank you for their support. The package this year contains: 1.) Two of our 2001 Option Expiration Calendar Mousepads (one for home and one for your office) 2.) The expanded 2001 Stock Traders Almanac 3.) A one month subscription to www.IndexSkybox.com 4.) A three month subscription to www.SplitTrader.com 5.) And of course the annual subscription to OptionInvestor.com This package has a retail value of almost $519 which includes $169 of free merchandise in addition to the annual subscription to the Option Investor Newsletter. The total price for this offer is still only $349 which is the regular annual subscription price for the newsletter. The additional $169 of merchandise and subscriptions are free as an added value! Click here for more info: http://secure.sungrp.com/01renewal.asp The terms of the offer are simple. Just renew your OptionInvestor subscription for the annual rate of $349 ($29.08/mo) by Dec-31st and you will get all the free stuff. The supply of mousepads and almanacs is limited so renew now to avoid any delay. You know the newsletter is the best source for option plays, timely market commentary and educational articles. Don't wait until the supplies are gone! Renew now! http://secure.sungrp.com/01renewal.asp ************************************ JOHN DESSAUER "Dream Seminar at Sea" ************************************ You have seen me write about John Dessauer, a newsletter editor with a 20-year history. John spoke at our March Expo here in Denver to about 600 attendees. John uses a common sense bottom up method of stock picking and has been very successful. He has asked me to speak at his "Dream Seminar at Sea" in March. The itinerary looks more like a vacation than a seminar with stops in Aruba, Caracas, Grenada, Dominica, St Thomas and San Juan but John will manage to keep us busy. If you have interest in this event visit this link: http://www.cruzproductions.com/dessauer/ *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself: http://www.sungrp.com/tracking.asp?campaignid=1090 ************************************************************ **************** MARKET SENTIMENT **************** Continual Decay By Austin Passamonte That's what our short-term open plays have done this week while we remain mori-bound by circumstances MS refuses to discuss out of exasperation. Hopefully these words reach you after the unmentioned decision but it didn't arrive in time to save early market action in either direction to speak of. Lost in the expectations of our eventual leadership selection is the plain, simple fact that business in the U.S. stinks right now. At least it has through Q3, Q4 and threatens to extend into 2001 as well. European exposure has not been favorable for those on this side of the Euro as well. With bitter cold weather sweeping the lower 48 in time to tap Christmas shopping budgets, retail may not lead the charge into January either. All this could be bad news for bulls or good news for bears as the case may be. The choice in which direction to play is 100% applicable to a trader's outlook. As we will continue to state until blue in the face, profits will flow in equal measures regardless which direction any markets or indexes choose to go. Market Sentiment considers the following price levels important near-term support: Dow: 10,698 NDX: 2,834 QQQ: 70 Comp: 2,900 SPX: 1363 OEX: 725 A break below these could signal to protect longs or open short positions. Overhead resistance is stacked at numerous levels. Right now highest odds lie to the downside unless surprising news above & beyond expectations is delivered. Triple-Witch week is traditionally a positive close. Historical upside bias could be negated by persistent downside pressure. A tradable rally is possible on any given day but we see numerous signs of continued weakness in the general markets. The week following Triple-Witch is historically down. Coupled with continual negative sentiment could make action beyond the next three sessions interesting for downside players. Plenty of analysts are calling recent market lows a possible bottom. Those may very well be price levels tough to break but a revisit to those depths is much more likely than a test of early September highs first. As traders we can only judge where highest odds lie to give us a slight edge for long-term profit success. Clouding this with market noise or bias stacks already formidable odds further against us. Each recent rally has been sold into with vigor. While the next to emerge may be tradable, Market Sentiment considers the near term trend to remain down until solid proof of strength are clear in the charts. Trade carefully with clear market trends! ***** VIX Tuesday 12/12 close; 28.28 30-yr Bonds Tuesday 12/12 close; 5.55% 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. Tuesday (12/12/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 765 - 750 13,166 941 14.00*** 745 - 730 20,953 5,244 4.00 OEX close: 728.91 Support: 725 - 710 10,194 17,035 1.67 705 - 690 732 10,488 14.33 Maximum calls: 730/9,900 Maximum puts : 710/7,090 Moving Averages 10 DMA 715 20 DMA 716 50 DMA 728 200 DMA 773 NASDAQ 100 Index (NDX/QQQ) Resistance: 81 - 79 64,447 36,283 1.78 78 - 76 22,567 8,274 2.73 75 - 73 49,183 66,253 0.74 QQQ(NDX)close: 71.65 Support: 70 - 68 79,789 54,442 0.68 67 - 65 28,132 56,813 2.02 64 - 62 14,233 22,200 1.56 Maximum calls: 70/42,801 Maximum puts : 75/46,600 Moving Averages 10 DMA 67 20 DMA 69 50 DMA 75 200 DMA 90 S&P 500 (SPX) Resistance: 1450 30,308 20,210 1.50 1425 28,462 14,892 1.91 1400 53,640 49,694 1.08 SPX close: 1371.18 Support: 1350 41,511 48,704 1.17 1325 6,699 16,983 2.54 1300 7,054 20,369 2.89 Maximum calls: 1400/53,640 Maximum puts : 1400/49,694 Moving Averages 10 DMA 1348 20 DMA 1352 50 DMA 1377 200 DMA 1437 ***** CBOT Commitment Of Traders Report: Friday 12/08 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 -283 +103 -770 -3136 Total Open Interest % (-3.13%) (+1.14%) (-2.64%) (-11.59%) net-short net-long net-short net-short NASDAQ 100 Open Interest Net Value -3324 -1888 +2120 +673 Total Open Interest % (-13.52%) (-8.21%) (+3.23%) (+1.17%) net-short net-short net-long net-long S&P 500 Open Interest Net Value +76502 +70473 -86468 -81,194 Total Open Interest % (+42.45%) (+31.99) (-12.36) (-12.00%) net-long net-long net-short net-short What COT Data Tells Us: The disparity remains between the Commercial positions and Small Specs on the S&P 500. The Commercials are showing a gradual increase in their net-long positions on the NASDAQ 100 while the Small Specs have advanced their net-short positions. Data compiled as of Tuesday 12/05 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://members.OptionInvestor.com/marketposture/121200_1.asp *********** OPTIONS 101 *********** Let's Be Crazy And Think Bull Market! By Lee Lowell Eventually the stock market will continue its long-term uptrend. For those option traders who like to trade with the trend, they have witnessed a whole new ballgame. It's been a rough ride trying to handle the volatility and gyrations. The calls that you bought yesterday were looking good for a few hours but then the market collapsed. You sold out of your position only to see the market turn around and go back up. You take a chance and sell some put spreads (bullish), and then the market tanks again. You decide to buy back the short put spreads for a loss and of course the market then turns higher again. Losses on all sides. It's been happening to me recently. It's been a tough market to say the least! The days of just buying any old calls and watching the market go higher are over. We've hit a phase in the market where it's so volatile, that you have to take your profits when they are there. Recently, that means you must be glued to the screen because the profits can happen at any time and then slip away. If you can't watch the computer all day, then you either stay out, or concentrate on long-term strategies. I've had multiple positions these past few weeks that I could've taken small profits on, but I got greedy. Some of them have now turned into small losers. Since I trade only option spreads, I know exactly what my maximum loss can be. The uptrend has not formed yet, so you have to trade the swings if you can. Like my title says, let's be bullish and talk about some bullish strategies. (when the day comes) The first and easiest strategy to implement is the "long call." This is the position of choice for most novice traders and much of the general investing public. If you think the market is going up, you buy a call option. It's cheaper than buying the stock outright and the percentage return can be many times greater. Simple, right? Not really. There are a few things to consider before parting with your hard-earned money. You must decide which expiration month and which strike price to choose. The "closer to expiration" options will be cheaper in dollar terms, but they also have less time to be correct. You have to have precise timing to make consistent profits with short-term options. Even if you don't choose a front-month option, you still must decide if you want to trade a three-month, six-month, nine-month, leap, etc. Only you can decide. Personally, I like to give myself at least six months worth of time. My timing has never been stellar, so I'd rather pay a little more to get that extra chance. The next step is choosing which strike price to pick. An "out- of-the-money" (OTM) option will be the cheapest but it will have the least probability of profit. An "in-the-money" (ITM) option will be more expensive but it has a greater chance of being profitable. This is because it has a higher delta and it moves in tandem with the moves of the underlying stock. An OTM option is less responsive to moves of the underlying stock. An "at-the- money" (ATM) option has a strike price that is equal to the price of the underlying stock at that moment in time that you initiate the position. If the stock is trading at $100, then the ATM strike is the $100 call. An ATM option has a 50/50 chance of profiting. And of course you must check the implied volatility (IV) levels of the options against its past levels. If you buy options when IV is high compared to previous levels, you are immediately put at a disadvantage. This is because you are buying an overpriced option. The options will eventually revert back to trading within their "normal" range and it will take the option premiums down with it no matter which way the stock moves. Even though the stock might move in your favor, your option position might not gain in value. Another bullish strategy to implement is called a "call spread." It's a little more sophisticated as it entails two simultaneous transactions. A long call spread is achieved by buying a lower strike call option and selling a higher strike call option on a single ticket within the same expiration month. The price of the spread is the difference between the two individual option premiums. The strikes can be as far apart or as close together as you like. You can do a front-month spread or a leaps call spread. The long leg can be ITM and the short leg can be OTM, or both legs can be ITM or both can be OTM. The choices are great and it all depends on your risk tolerance and time frame. My personal preference is to have the long leg ATM or slightly ITM and the short leg OTM. Again, my duration is about six months. The farther apart the strike prices, the more expensive the spread will be. But that also gives you a chance for a bigger profit. The spread will also cost more by having the long leg ITM and the short leg OTM, but the long leg will gain value faster because it will have a higher delta. Just for example sake, here's what a bull call spread would look like. The stock is at $100. You could purchase a three-month $95/$125 call spread for 13 points. (hypothetical) The long leg is the $95 call which slightly ITM and costs $25 and the short leg is the $125 call which is OTM and costs $12. Since the spread is 30 points wide ($125-$95), and the total cost of the trade is 13 points, ($25-$12), the maximum gain could be 17 points. The maximum loss is always the amount that you paid for the spread. In this case it's 13 points. Your breakeven price is figured by taking the long leg and adding the cost to it. $95 + $13 = $108. This spread starts to become profitable once the underlying stock moves past $108. This is only 8 points away from where it is now ($100). The pros of initiating a call spread versus an outright call purchase is the lower outlay of cash. A spread will always cost less than an outright purchase, if you are considering using the same strike. The $95 call by itself in the example above costs $25, whereas the whole spread only costs $13. Some see a spread as a hedge against a long call. Say you wanted to own the $95 call but craved a little insurance against it in case your market prediction was wrong. Here's where selling the $125 call comes into play. You now have 12 points of downside protection against your $95 call. Some traders will implement the short leg of the spread at a later time, but that is risky too because the market may tank before you get a chance to put on the short leg. That is not advisable unless you really know want you're doing. I always put on a spread with both legs at the same time on a single order ticket. The only downside to using a call spread is that your profits are capped once the underlying stock has moved past your short leg. If our hypothetical stock starts trading at $130, we still can only make 17 points on the whole trade. If we purchased the $95 call outright, then we can participate in any major move that is made. It all comes down to how you feel about the market in terms of its magnitude and duration. These are two of the most basic option strategies to use when participating in a bullish market. In this environment of whipsaw moves, it's best to pick expiration months as far out in time as possible. This will give you more margin for error in case the market isn't too cooperative. At this writing, those options would be for the January '03 expiration. Good luck. ************** TRADERS CORNER ************** Trends To Watch In 2001 By Scott Martindale Well, well, well. Thanks to the Florida Supreme Court, the only court in which Vice President Gore has found a sympathetic ear (twice!), here I am again writing my weekly column for the fifth time since I first declared the election uncertainty finally over on November 7th. It still amazes me that opinions on whether to continue counting votes fall firmly along party lines -- as if no one is capable of an objective viewpoint. It seems logical to me that one should follow verbatim the procedures and deadlines written in existing laws and statutes rather than appeal to multiple courts looking for liberal "interpretations." But I supposed I’m just as biased as the next guy. No matter how it turns out, the market desperately wants to run -- at least for a little while. But like the antsy sprinter in the starting blocks, it keeps false starting in anticipation of the starting gun. Today, some competitors got impatient and dropped out of the race. I sometimes write about volatile high-potential companies and fledgling industries that are purely news-driven, but lately the whole market seems to be news-driven. Upside alerts, downside alerts, yields are down, gold is up, Nasdaq is weak, Dow is strong -- wait, a gold downside alert -- or was it vice-versa? I can’t take it anymore. This too shall pass, eventually. And when it does, what can we expect for the balance of 2000 and into 2001? My personal predictions are: 1. Earnings shortfalls have already been priced in across the board, so new warnings won’t have broad market-killing impact, i.e., Nasdaq will not fall to 2000 (but may revisit 2500). 2. The markets will rally with a Bush victory and may sell off briefly with a Gore victory, but will indulge in an overdue relief rally either way, so long as there is an election decision. 3. The FOMC will change the bias to neutral on 12/19, in preparation for a 0.25 point rate cut in January, followed by another 0.25 point shortly thereafter. The Fed has given a lot of lip service to the risk of inflation, but the threat of a dreaded recession is now all too real, and the Fed will do whatever is necessary to avoid that. 4. After a Santa Claus/New Year’s/FOMC/post-election rally/celebration, the markets will show renewed weakness early next year as investor fear again outweighs greed. 5. U.S. rate cuts will help prop up the Euro, which will continue to strengthen against the dollar, helping boost sales for U.S. companies in Europe. In fact, you will be able to make money in currency markets next year by betting on a weakening dollar vs. the Euro and the yen. [Depending upon your long-term investment strategy, you might even want to consider buying bonds now.] 6. There will be a new leg up for technology stocks, although not in the dot-coms of the past run-up. Although tech stock valuations are still relatively high despite the steep correction, there are pockets of exceptional value right now. And when you consider that 40% of corporate spending is technology-related, there will be better times ahead. 7. I will be accurate on no more than half of my predictions (kind of like flipping a coin). Yes, I think there will be money to be made in the markets next year, although not with the reckless abandon of 1999. Where to invest? Let’s look at some areas that market-watchers are high on for 2001, as well as some that are on the "avoid" list. Stocks that might benefit also are shown. Here are some trends to consider for covered calls, buying stocks and LEAPS, selling naked puts, and spread trading: * As the information economy grows, with Internet traffic and transmission capacity doubling annually, so grows the need for data storage systems (EMC, NTAP, BRCD, MCDT, VRTS, SEG, EMLX). * E-commerce software infrastructure will continue to see demand growth, even in a slowing economy, as industry harnesses the proven cost reduction and efficiencies of the Internet (ORCL, BEAS, CHKP, MSTR, PRSF, SEBL, VIGN, ARTG, ARBA, ADBE, CMVT). * Semiconductor growth will escalate as they continue to power virtually all new technologies (AMAT, LSI, TXN, TSM, PMCS, AMCC, IRF, CY, TQNT, BRCM). * Distributed computing, including peer-to-peer (P2P), grid computing, and distributed information technology infrastructure, will make great strides in harnessing the true power and efficiency of the Internet (CSCO, INTC, SUNW, INKT, AKAM, MUSE). * There will be continued development and introduction of wireless communications protocols and associated application software, services, and equipment (QCOM, ARTT, BRCM, MOT, NOK, SCON). * The shift in communications from electronic to optical networking to build a broadband infrastructure for voice and data transmission will accelerate (CSCO, GLW, JDSU, DIGL, CIEN, AVNX, CORV, JNPR, SCMR, MRVC, FNSR, TLGD, NT, NEWP, ADCT, AFCI). * The telecommunications shift from voice & data transmission to high-bandwidth services will accelerate (GX, Q, WCOM, COVD, LBRT). * We will see a stronger move towards international regulation of the Internet, including taxation, privacy, virus-protection, and backbone protocols (VRSN, ENTU, CHKP, CSCO, NT, TMWD, NETA, CA). * More rapid implementation of alternative energy sources like solar and fuel cells as petroleum prices remain high and new technologies become more economic (APWR, BLDP, MKTY, FCEL, F). * Biotech research will continue to feed off its successes, especially the rapid development of commercial applications for the breakthrough human genome mapping (CRA, AFFX, MLNM, ABI). The ones to avoid? Anything that depends upon or seeks to profit from the following: the integrity of intellectual property and the prevention of piracy; Internet incubators; online trading and ECN’s; online retailing; PC’s and PC software; Linux; DSL carriers and equipment; video-on-demand; high-definition TV (HDTV); video- conferencing; and Internet advertising. Also, there seems to be some disagreement on the near-term potential of Bluetooth wireless protocol, wireless Internet devices, and Application Service Providers (ASP’s). Some say they are on the verge of commercial breakthrough, while others say commercial success will be limited at best. Finally, I’ll note that George Gilder was quoted at the recent Red Herring Conference to say: "Before, unemployed people in Silicon Valley used to call themselves consultants. Now they call themselves VC’s. Tomorrow they'll call themselves angels." Hey, George, who are you calling unemployed? ************************Advertisement************************* Try Investor's Business Daily today! Click here for 10 FREE issues. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1120 ************************************************************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** NT $38.75 -4.24 (-4.18) NT presented a superb opportunity for day traders to profit on Monday, when it broke out above resistance at $42.50 to reach a high of $45.63 during the mid morning market rally, and close at $43. Accordingly, we adjusted our stop level to $39.00. Unfortunately, the overall environment of market uncertainty overwhelmed the bullish momentum, and NT closed below our stop level on Tuesday. While it may rally with the indexes on any relief from election uncertainty, the high volume on Tuesday is disturbing. Thus, we are dropping NT for now, and devoting our capital to other opportunities. IDPH $207.50 -10.50 (-5.81) Despite back-to-back days of all- time highs for IDPH, the stock finally gave up ground this afternoon. IDPH dropped below our stop level of $208 and we will let the play go for now. It's not that we don't like the recent uptrend either, but the stock may fall to the 10-dma at $194 before finding support. This level coincides with the $195 support IDPH found last week. There is no need to suffer the $12 down if the stock is set on revisiting that price. There was no news to spur this recent move, just a bit of profit-taking. As always, we will keep a close eye on IDPH for new plays in the future. QCOM $89.81 -9.69 (-13.44) Unable to break through resistance at $107, it appears that QCOM may need to test some lower levels of support before it can go higher. Yesterday the stock closed down $3.75 or 3.63 percent on stronger than average volume on news that it would take an $80 million charge because the company would have to share certain royalties in South Korea. Today, with a down day on the NASDSAQ, investors continued to sell on the news, with the stock falling another 9.74 percent, this time on even higher volume. Having tripped out stop price of $95 and closing below a key support level at $90, we are no longer recommending this play. ARBA $76.69 -10.19 (-5.81) The strong market action and news of a software alliance with DiCarta sent shares of Ariba upward to the $90 level during Monday's session. Subsequently, we raised our stop loss to $78 to reflect the solid gains and higher intraday support level at $85. Unfortunately, the combined synergy of a slight pullback in the NASDAQ and a neutral rating from Lehman Brothers today took ARBA down for the count. The selling, which took ARBA through our exit point today, was accompanied by zealous trading activity. Other B2B stocks that have risen in recent sessions, such as PPRO and even CMRC (who received an Outperform rating and $55 price target from Lehman Brothers, too), also took it on the chin. If you didn't pocket the gains in yesterday's session, then consider selling into strength on a rally to repair losses. PUTS: ***** No dropped puts today ************************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=1104 ************************************************************** 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 www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "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 Tuesday 12-12-2000 Copyright 2000, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/121200_2.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1105 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** EXTR $82.25 -6.50 (-0.19) After staging such an impressive run over the past two weeks, EXTR was due for a little profit taking and consolidation, which is exactly what happened during Tuesday's session. Volume came in at a mere 2.5 million shares, far lower than the 6+ million share days EXTR experienced during its recent rally. What's more, the buyers stepped in near the 50-dma at $80, and lifted EXTR off its lows into the close of trading. Today's dip is not that disconcerting considering the light volume and general weakness in the tech sector. However, we'd like to see the buyers return with strong volume either Wednesday or Thursday. That said, if EXTR resumes its rally, make sure to confirm strength in the NASDAQ and look to enter on a move back above the $85 level. The more conservative might wait for EXTR to burst through the $90 level on heavy trade. Remember that our stop has been set at $79, and we'd close positions if EXTR settled below that level. BRCM $141.06 -1.75 (+12.88) A positive day for Semiconductor stocks all across the board on Monday allowed BRCM to lead the charge, up $14.36 or over 11 percent on 125% of ADV. News of a broad strategic alliance with COMS in which the two companies will co-develop new products, cross-license technology, and share in marketing and supply-chain management duties certainly added fuel to the rally. Today, the stock gave back a little, just 1.49 percent, in sympathy with a downgrade of TQNT by CS First Boston. But there's good news. Banc of America Securities reiterated their Strong Buy rating on BRCM, saying that the company's earnings were on track going forward and saying that the company's unique position puts it in a position of having no rivals but itself. Despite today's pullback, the up-trend is firmly intact. For aggressive traders, look for a bounce off the 5-dma at $127.66 as a possible target to shoot for. There is also support in increments of $5 from $140 to $125 but be aware of our stop price at $129. For an entry on strength, look for a break through $147 on volume, confirmed by a strong Chip sector (SOX) and NASDAQ. NTAP $82.69 -1.69 (-4.50) After gaining over 60 percent last week, it's no surprise that NTAP is taking a little breather, allowing time for some possible entry points before its next big move. Yesterday, the stock pulled back $2.81 or 3.23 percent on average volume, finding support at $80 as well as its 5-dma. This was despite news that TXN has selected NTAP as its storage solution in its research and development center in India. Today was another day of consolidation, as NTAP edged lower by 2 percent, this time on declining volume, less than 70% of ADV. In the past three sessions, the stock has traded in a range, with support at $80 and resistance at $90. Look for a bounce off $80 as a possible aggressive entry point. NTAP's current uptrend can support a pullback to our stop price at $75 as well, but make sure the stock closes above this point. For a conservative entry, wait for momentum to carry NTAP through $85, confirmed by a strong NASDAQ and Storage sector, with peers BRCD, EMC, VRTS posting gains, before making a play. PALM $52.50 -4.13 (-1.69) Excitement on the first day of PALM's annual developers conference on Monday helped the stock move higher, up $2.44 or 4.5 percent on over 120% of ADV. CE Unterberg pointed out that the possibility for new product announcements would likely lead to more upside over the course of the conference. Apple's software division Filemaker announced a Palm-based companion, which would allow handheld computing devices to interface with its flagship database application. HealtheTech also announced that it would bundle Palm m100 devices with its personal-health suite of applications. Today. despite a positive keynote address from the CEO and news for Samsung would license Palm OS for use with its next-generation smart phones, the stock pulled back in sympathy with a weak NASDAQ. However, PALM's bounce off its 50-dma support at $50.22 was a positive sign. Aggressive traders could target-shoot that level of support as well as the 5-dma at $51.21 and our stop price at $50. A safer entry however, would be to wait for buying volume to life PALM above $54, backed by a strong NASDAQ and positive momentum in peers HAND and RIMM. RSAS $53.13 +0.00 (+3.25) Our patience with RSAS was duly rewarded on Monday, as its recent consolidation at the 50-dma level resolved itself with a positive day. Closing up $3.25 or 6.52 percent on higher than average volume, on the heels of a positive announcement from the company. RSAS introduced a new product, the RSA Kean Web Passport, which will allow users to more easily conduct secure e-commerce transactions across multiple platforms and applications. Today, news that smart card solutions provider Datakey would use the RSA BSAFE software for its encryption did little to ignite buying interest, as the stock closed unchanged on less than half the ADV. Considering that the NASDAQ closed in the red, we'll this day of rest. For aggressive traders, look for a bounce off support at $52, the 5-dma at $50.63, $50 and our stop price at $48, just above the 10-dma as possible entry points but confirm with volume. If buying momentum in the stock comes back, look for a break through $54 on volume, backed by a rallying NASDAQ and positive sector sentiment in peers such as CHKP and VRSN as a possible conservative entry point. JNPR $161.06 -2.94 (-5.06) The high-octane fuel that has been powering JNPR's ascent has been the combination of the stock's oversold condition, optimism that the worst may be behind the Technology sector, and hope that the election may soon be over. Don't look now, but all three sources are showing signs of depletion. JNPR has moved from Oversold to Overbought on the daily stochastics, earnings warnings continue to flow in, and the election situation is still showing signs of dragging out. The effect can be seen in JNPR's chart, as the stock ran out of upward momentum this week, and fell back under profit taking pressure in the broader Networking Sector (NWX.X). Yesterday, the company agreed to acquire Micro Magic Inc. (MMI) for approx. $260 million, in an effort to deepen its expertise in IP infrastructure technology. The recent rise pushed our play through the 200-dma ($148.50), resistance at $156-157, and the 30-dma ($158.31). JNPR is currently consolidating above the 30-dma, and a strong bounce at this level looks attractive for new entries, especially if confirmed by strength in the NWX.X. Of course, any profit taking that halts and reverses above our $150 stop can be considered a viable entry for aggressive traders. Just make sure it is a bounce (check the buying volume and sector strength) before playing. Any closure to the election could provide a boost to JNPR, and a rally through the $170 resistance level could provide a decent conservative entry point. A $57.25 -0.50 (-2.19) The stock's recent move above the $57 mark and its attempt to grab the $60 brass ring demonstrates a very bullish sentiment. Since mid-November's recovery from the underside of the $40 level, the upward trendline continues to remain steadfast. The share price is currently consolidating at the higher levels between $57 and $60 on respectable volume. Taking into account the narrow range, we're maintaining our $53 stop loss on this play. In the coming days, the election saga and the Feds will act as volatile catalysts across the broad markets. Keep stops tight. If you're planning an entry, look for A to break to the upside of the formidable resistance ($60) before initiating new plays. If a rally ensues, the next level of contention is at the 200-dma ($69.22) line. MEDX $46.88 -4.88 (-1.38) At the Monday morning bell, the bulls stepped in and took MEDX to the $54 level in a flash. All look good for a day of strong action, but as we've heard again and again - never take positions until AFTER amateur hour! Well, here's a prime example of what can happen. In despite of the rallying market yesterday, MEDX's upward momentum subsided a bit following the mild profit taking which ensued. While the previous resistance at the $51 level supported the share price on the downdraft, it failed to buoy the share price during today's extended profit taking. Our elevated stop loss at $45 was not however violated and thus, MEDX remains on our call list. Please don't assume doom and gloom. If take a look at a daily chart, you can see that this biotech is faring well at the higher trading levels. Others in its sector, like BGEN and HGSI, are also demonstrating relative strength at there respective support levels. Look for a convincing bounce, in an ascending marketplace, from the current price level if you're interested in a more aggressive entry. Otherwise, stay in cash until MEDX moves back through the 30 & 50 DMA lines at $48.50 and 51.26, respectively. Buying into strength as MEDX overcomes the recent intraday high of $54 offers even better confirmation for the risk-adverse traders that momentum can take the share price higher. Today UBS Warburg started new Buy coverage on MEDX. MUSE $144.50 -1.31 (+8.88) This week's trading action gave momentum traders the green light to take entries into this volatile Internet. MUSE blasted through the $140 level and the corresponding 200-dma technical ($140.05) as the NASDAQ said "Hello 3000!". Gains extended throughout Monday's session with the share price hitting $151 before finishing in the positive $10.19, or 7.5% for the day. A healthy pullback today would not have been unwarranted; particularly in light of the tremendous advances of late. However as the day unfolded, the bears couldn't take MUSE below $140.50 and by late afternoon, MUSE was challenging the intraday resistance at $145. Under rallying conditions, bounces off the 50-dma ($144.81) offer reasonable entries into the building momentum. If a deep pullback is in the stars, then look to take a lower and more enterprising entry near our stop of $128 or the 5-dma, currently trailing at $132.56. In the news, Micromuse announced that Cidera Inc., the Internet Broadcast Backbone, has selected the Netcool. suite as its core network operations management solution. ADBE $70.69 -3.44 (+2.31) As if on cue, ADBE found support right on the 200-dma ($62.75) on Thursday, and launched higher with the market recovery on Friday. The rally in shares of ADBE continued through yesterday's trading, as investors focused on the upcoming earnings report, scheduled for Thursday after the market close. General lack of enthusiasm due to the unresolved state of the election, mixed with a few more earnings warnings kept technology stocks under pressure today, providing aggressive bulls with one more chance to buy the dip before the earnings report Thursday night. While earnings are expected to be strong, we would only advocate new positions for aggressive traders, and even they need to wait for the stock to bottom and head higher again. Consider buying a bounce at $70, $68, or even $65, but confirm positive market direction first. We'll be dropping ADBE tomorrow night to provide traders with an opportunity to exit any open positions prior to the earnings announcement. BRCD $217.75 -7.38 (-2.00) What was gained in Monday's extended tech rally, BRCD gave back during today's pullback. However, let's look at it the bigger picture. Today's return to the near-term support level around $215 and the correlating 50-dma ($217.75) offers traders another opportunity to ride a bullish wave upward. Of course the market must cooperate, but the potential for another run up ahead of the stock split on December 22nd looks good. Consider taking additional positions from the above-mentioned level if BRCD resumes an uptrend backed by strong volume. We have upped our exit point to the $210 level to protect against a severe backlash, but nonetheless are anticipating BRCD to challenge the new intraday high of $231 in coming sessions. Overall, other networking infrastructure stocks like CFLO and NTAP also demonstrated strength in today's downdraft in the NASDAQ. ******************* PLAY UPDATES - PUTS ******************* SBC $52.25 +1.44 (-0.56) A sector rally helped pull SBC out of a free-fall that began last Thursday. This rally stemmed from the FCC beginning the sale of new airways for mobile wireless use. Many of the big names were bidding millions of dollars to secure these new lines and the market reacted positively to the news. Although not a major bidder, SBC rallied on Tuesday with the sector. Another factor that weighed in on Monday's trade was continuing rumors of SBC merging with AT&T. SBC would be the acquirer in the transaction. This is not a new rumor, but did add support to the stock. Typically, a company doing the purchase would be expected to see their stock fall, but AT&T is considered a valuable prize worth the cost. SBC found support at $51 on Monday on the news. We need to see SBC rollover again and break this level. If so, we expect the trip to $48 to continue. Nevertheless, we have our stop in place at $55.00 just in case another rally ensues. BBOX $51.81 -0.60 (-0.88) Bouncing off support at $50 yesterday, BBOX closed down fractionally on higher than average volume, despite help from a rallying NASDAQ and positive announcements from the company. A minor new product release and its UK subsidiary being named "Best All-Round Catalogue Business" did little to excite investors. Today the stock drifted ever lower, closing down 1.31 percent on anemic volume, less than half of ADV. What appears to be happening at this point is a digestion Of recent losses. With the 5 and 10-dma (now at $54.71 and $55.87 respectively) moving lower and newfound resistance at the $53 level, it could just be a matter of time before BBOX falls below the key support of $50. A break through this point, backed by strong selling interest will allow conservative traders to take a position. For those willing to take a little more risk, look for a failed rally above resistance at $53, the 5 and 10-dma and our stop price near the 50-dma at $58 as a possible entry. EMC $82.13 -7.88 (-4.81) As difficult as it can be to play puts on a stock with the strong fundamentals that EMC has, in this market you can't afford to ignore the technicals. After recovering sharply with the rest of the technology-related market last week, EMC banged its head into the upper Bollinger band at $92, and the profit taking appeared almost immediately. In the past week, daily stochastics have rolled over and are just emerging from the overbought zone, while the stock price has dropped back below the 10-dma ($83), 30-dma ($85.38), and 50-dma ($87.97), and is sitting just above the $80 support level, supported by the 200-dma ($79.25). The series of lower highs is still in place and it looks like the stock will head lower again before it gets healthy enough to rally back above our stop, currently set at $92. The rollover at $91 yesterday was an almost perfect entry point, as EMC fell out of bed again today, trading as low as $81.50, before bouncing weakly at the close. Resistance is intact near the $90 level, and any rally that fails near this level looks attractive for new aggressive entries. More conservative players will want to wait for the sellers to come out in force and pressure EMC below the 200-dma before initiating new positions. EMC has been trading in sympathy with the broader technology sector lately, so use weakness on the NASDAQ to confirm market direction before initiating new positions. ABT $50.19 +0.13 (+0.50) Is that the bottom, or is ABT setting us up for a fresh entry point? After the sharp decline last week, buyers have stepped in to support the price near the $49, helping the stock to put in a mild recovery so far this week. The recovery has been weak though, and volume has been falling off too. This is a classic sign that we are headed for further declines, and all we have to do is wait for a confirmation signal from the stock. The conservative approach will be to wait for selling pressure to increase, dropping ABT below the $49 support level. Adding new positions here, will allow you to profit as the stock heads down for a test of the next support level, between $44-45. Adding to the downward pressure has been weakness in Drug stocks (DRG.X), and as long as this weakness persists, ABT should continue to decline. With the 50-dma ($51.50) resting just below our $52 stop, a rollover near this level look like a great place for starting new aggressive plays. Wait for selling volume to pick up and confirm weakness in the Drug Index (DRG.X) before playing. *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself: http://www.sungrp.com/tracking.asp?campaignid=1091 ************************************************************ ************** NEW CALL PLAYS ************** AGGRESSIVE: CMVT - Comverse Technology, Inc. $113.75 +1.88 (+7.81 this week) Comverse Technology Inc. is the world leader in multimedia telecommunications applications. Founded in 1984 and publicly-traded since 1986, Comverse Technology Inc. is based in Woodbury, Long Island, New York and is a NASDAQ-100 Index company. Through its Comverse Network Systems division, the market leader, the Company markets its Access NP and TRILOGUE Infinity Enhanced Services Platforms, which enable wireless, wireline, and internet companies to offer, to their residential and business customers, a growing range of revenue-generating enhanced services. Bouncing off its lows of $80 in late November, the stock has made a dramatic comeback so far this month. What's more, buying volume has been gradually increasing to match the stock's upward movement. Using support from the 5 and 10-dma, the stock has put itself back on the right side of all its major moving averages. The main theme last week for the company was earnings, as CMVT reported record third-quarter results on December 5th. For the quarter, the company beat Street estimates by 2 cents, matching the dreaded whisper number of 38 cents. With profits growing by 52 percent and sales up 37 percent year-over-year, investors were obviously pleased, as the company was rewarded with a richer valuation instead of the customary post-earnings sell-off. Positive comments from Goldman Sachs, Lehman Brothers and US Bancorp Piper Jaffray are also helping the stock, which appears poised to challenge its all time-high. Today, CMVT bucked the trend of a weak NASDAQ, closing up 1.68 percent on 157% of ADV. Support levels abound for the stock, with possible aggressive targets to shoot for at $110, the 5-dma at $105.37, the 50-dma at $102.56, the psychological $100 and 10-dma at $99. In buying off a bounce, make sure that the bulls are out in force before jumping in. Also, make sure that CMVT closes above our stop price of $106. For the risk averse, an entry on strength can be had if CMVT breaks through resistance at $115 with conviction. It would not be a bad idea to confirm direction and sentiment with the NASDAQ as well as with rival Openwave Systems (OPWV), formerly Phone.com and Sofware.com. BUY CALL JAN-110 CQZ-AB OI=3452 at $13.63 SL= 9.75 BUY CALL JAN-115*CQZ-AC OI=1817 at $11.25 SL= 8.25 BUY CALL JAN-120 CQZ-AD OI=2287 at $ 9.00 SL= 6.25 BUY CALL APR-115 CQZ-DC OI= 268 at $20.50 SL=14.50 BUY CALL APR-120 CQZ-DD OI=1628 at $18.63 SL=13.50 SELL PUT JAN-105 CQZ-MA OI= 564 at $ 6.25 SL= 8.50 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=CMVT NTIQ - NetIQ Corporation $109.38 +4.38 (+4.63 this week) Operating in the e-Business marketplace, NTIQ is a provider of eBusiness infrastructure management software that enables organizations to optimized the performance and availability of Windows 2000 and Windows NT-based systems and applications. Its AppManager suite detects and identifies bottlenecks, lags in e-mail response time, and other network problems; the software then makes the necessary corrections and issues the appropriate reports. NTIQ's customers include AT&T, Dell Computer, Charles Schwab, General Electric, Pfizer, and Microsoft. While the broader technology markets continue to struggle, NTIQ has shrugged it off. Not only is the stock running higher on a daily basis, but it has charged to new all-time closing highs the past 3 days. Not only that, but buying volume is confirming the price gains, coming in 75% above the ADV in today's session. The most recent surge up in the stock price began on December 5th, the day after the company began shipping the industry's first security management solution that combines both intrusion detection and vulnerability assessment capabilities for Windows NT and Windows 2000. Whether the new product release had any bearing on the stock price, it is clear that investors like the stock and have continued to bid it higher, despite the fact that the company has yet to achieve profitability. What really seems to be getting their attention is the fact that NTIQ is growing revenues north of 300% year-over-year. Buyers jumped in to support the price at the 50-dma (then at $78.31), and the increase in volume over the past 10 days confirms that it is more than a passing fad. It is particularly encouraging that NTIQ is making this run in the midst of weakness in the broader technology market. Support is resting at the $101-102 level, confirmed by the rising 5-dma (currently $101.81), and we are placing our stop just below this level, at $99. We are looking to jump into this momentum run, and when it slows, we will be looking to get off. For that reason, we don't want to look for dips below $100 as viable entry points. A mild dip to support is buyable, but keep an eye on the sentiment in the NASDAQ. If tech stocks begin to rally and NTIQ is falling back, it may be an early sign that the stock has exhausted its supply of buyers. More conservative players can enter on a breakout over $110, but only if strong buying volume is continuing to confirm the rally. BUY CALL JAN-105 CQT-AA OI= 95 at $17.63 SL=12.75 BUY CALL JAN-110 CQT-AB OI=125 at $15.50 SL=11.25 BUY CALL JAN-115*CQT-AC OI= 67 at $13.25 SL= 9.75 BUY CALL JAN-120 CQT-AD OI= 37 at $11.63 SL= 8.75 BUY CALL APR-115 CQT-DC OI= 0 at $25.63 SL=19.25 Wait for OI! BUY CALL APR-120 CQT-DD OI= 32 at $23.75 SL=17.75 SELL PUT JAN- 90 CQT-MR OI= 25 at $ 6.00 SL= 8.50 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=NTIQ NEWP - Newport Corporation $123.44 -1.56 (+11.81 this week) The Newport Corporation is a global supplier of precision components and automated assembly, measurement, and test equipment for use in the fiber-optic communications, semiconductor equipment, computer peripherals, and scientific research markets. The Company's high precision products enhance productivity and capabilities of the Fortune 500 corporations, government agencies, and the other technology clients it serves. Optical components and devices for vibration and motion control account for about two-thirds of the company's sales. The recent Buy coverage, and now surpassed $85 price target, given by First Union Securities on December 1st coupled with the NASDAQ's rise out of the trenches acted as a strong catalyst for NEWP's resurgence. The stock fell face-first off a cliff last October following a respectable earnings report on the 18th and a series of downgrades by the ever-so-influential brokerage firms. Most certainly, the black veil hanging over the broader markets during October offered no relief from the pounding. But now, the tables are turning in favor of NEWP and the share price is making a stellar recovery amid the market volatility. A return to a price level above $150 is attainable, if the bulls can take control of the NASDAQ and drive it through the technical resistance. Look for an advancing market to aid NEWP's run to the higher trading realms. After last Thursday's break through the 50-dma, now at $109.51, there's no technical lines to offer resistance; however, the first line of opposition sits at the $130, which is just a stone's throw from recent intraday highs near the $127 mark. Conservative traders want to see high-volume moves through these levels before strategizing for a position. Our stop loss is set at $115, which leaves plenty of room for NEWP to gyrate in a choppy marketplace. The more enterprising traders might find viable entry points during pullback or intraday downdrafts, but if you take the more aggressive route, make sure the buyers step in first! BUY CALL JAN-120*NOQ-AD OI=202 at $22.25 SL=17.00 BUY CALL JAN-125 NOQ-AE OI= 0 at $19.25 SL=14.00 Wait for OI! BUY CALL JAN-130 NOQ-AF OI= 0 at $17.63 SL=12.50 Wait for OI! BUY CALL FEB-125 NOQ-BE OI=104 at $24.75 SL=19.25 BUY CALL FEB-130 NOQ-BF OI=184 at $22.13 SL=17.00 http://www.premierinvestor.net/oi/profile.asp?ticker=NEWP LOW VOLATILITY: EXDS - Exodus Communications $34.88 +0.63 (+4.25 this week) Founded in 1994, Exodus Communications pioneered the Internet Data Center market and in 1999 climbed from a rank of 76 to number 11 in Business Week's "Info Tech 100". Exodus is a leading provider of complex Internet hosting for enterprises with mission-critical Internet operations. The company offers sophisticated system and network management solutions, along with technology professional services to provide optimal performance for customers’ Web sites. Exodus manages its network infrastructure via a worldwide network of Internet Data Centers (IDCs) located in North America, Europe and Asia Pacific. Since bottoming out in late November, shares of Exodus have been quietly making a comeback. On Monday, the stock broke through its 50-dma, a level that it hasn't seen since late September. Recently, rumors that Sprint may be looking to acquire a web hosting company have helped the sector to move higher. Analysts have come in defense of EXDS as well, with Robertson Stephens giving the stock a Strong Buy rating and a target price of $66, recommending aggressive buying on any significant weakness. Today, US Bancorp Piper Jaffray initiated coverage with a Strong Buy rating and a $60 price target. This helped the stock to close in positive territory, with former resistance from the 50-dma now acting as support. For an aggressive entry point, a bounce off the 50-dma, now at $32.24 as well as the 5-dma just below at $31.32, are possible targets to shoot for. We would drop coverage however, if EXDS closes below our stop price of $31. A break through resistance at $36 on volume with a strong NASDAQ and positive sentiment in peers such as DIGX, LVLT and NAVI could allow for a conservative entry. BUY CALL JAN-30 DUB-AF OI=1597 at $8.38 SL=6.00 BUY CALL JAN-35*DUB-AG OI= 993 at $5.88 SL=4.00 BUY CALL JAN-40 DUB-AH OI=1520 at $3.88 SL=2.50 BUY CALL MAR-35 DUB-CG OI=1859 at $7.75 SL=5.50 BUY CALL MAR-40 DUB-CH OI=2636 at $6.00 SL=4.00 http://www.premierinvestor.net/oi/profile.asp?ticker=EXDS ************* NEW PUT PLAYS ************* LOW VOLATILITY: TRW - TRW Inc. $31.00 -0.19 (-0.94 this week) TRW provides advanced technology products and services for the global automotive, aerospace, telecommunications, and information systems markets. TRW's 1999 sales totaled approximately $17 billion. While TRW's aerospace operations are deemed valuable, the company's automotive business is considered less than attractive. The reason for the bearish sentiment: the slowing US economy. The broader automotive sector has fallen under pressure recently, as signaled Tuesday by the restructuring news from General Motors. And the selling in TRW may not abate until investors see an up-tick in the economy. In the meantime, we can profit from TRW's low-priced options and steady downtrend. New put positions can be added on a failed rally above the 10-dma at $32.25, which has been a site of solid resistance for the last four sessions. Additionally, entries could be taken on a breakdown below the $31 level. The more conservative might wait for TRW to plunge below support at $30 on heavy volume. We've set an upside stop at $33, and would exit positions if TRW closed above that level. BUY PUT JAN-35 TRW-MG OI= 81 at $4.88 SL=3.00 BUY PUT JAN-30*TRW-MF OI=438 at $1.75 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=TRW ********************** PLAY OF THE DAY - CALL ********************** JNPR - Juniper Networks $161.06 -2.94 (-5.06 this 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. 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. Most Recent Write-Up The high-octane fuel that has been powering JNPR's ascent has been the combination of the stock's oversold condition, optimism that the worst may be behind the Technology sector, and hope that the election may soon be over. Don't look now, but all three sources are showing signs of depletion. JNPR has moved from oversold to overbought on the daily stochastics, earnings warnings continue to flow in, and the election situation is still showing signs of dragging out. The effect can be seen in JNPR's chart, as the stock ran out of upward momentum this week, and fell back under profit taking pressure in the broader Networking Sector(NWX.X). Yesterday, the company agreed to acquire Micro Magic Inc.(MMI) for approx. $260 mln, in an effort to deepen its expertise in IP infrastructure technology. The recent rise pushed our play through the 200-dma ($148.50), resistance at $156-157, and the 30-dma ($158.31). JNPR is currently consolidating above the 30-dma, and a strong bounce at this level looks attractive for new entries, especially if confirmed by strength in the NWX.X. Of course, any profit taking that halts and reverses above our $150 stop can be considered a viable entry for aggressive traders. Just make sure it is a bounce (check the buying volume and sector strength) before playing. Any closure to the election could provide a boost to JNPR, and a rally through the $170 resistance level could provide a decent conservative entry point. Comments JNPR has been in a holding pattern between $155 and $165 for the past three days. This trading action is good to see since it is a sign of consolidation. With the 200-dma near $150, support is strengthening there. Look for bounces from this area on a pullback to enter the play. Otherwise a breakout over $168.50 on strong volume would also offer an entry point. BUY CALL JAN-150 JUY-AJ OI=1009 at $29.38 SL=23.00 BUY CALL JAN-160 JUD-AL OI=3418 at $24.13 SL=18.75 BUY CALL JAN-170*JUD-AN OI=1324 at $19.75 SL=15.50 BUY CALL JAN-180 JUD-DP OI=4087 at $16.25 SL=12.75 SELL PUT JAN-140 JUY-MH OI=1060 at $12.38 SL=16.25 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=JNPR ************************Advertisement************************* Try Investor's Business Daily today! Click here for 10 FREE issues. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1121 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ No Decision Yet... Industrial stocks enjoyed modest gains today as investors awaited the outcome of the presidential election. Tuesday, December 12 Industrial stocks enjoyed modest gains today as investors awaited the outcome of the presidential election. The Dow finished up 42 points at 10,768. The Nasdaq Composite retreated after recent advances, closing down 83 points at 2,931. The S&P 500 Index was down 9 points at 1371. Activity on the Nasdaq was moderate at 1.9 billion shares exchanged, with declines outpacing advances 2,425 to 1,563. Trading volume on the NYSE reached 1.07 billion shares, with declines beating advances 1,598 to 1,285. In the bond market, the 30-year Treasury was up 4/32, pushing its yield down to 5.53%. Sunday's new plays (positions/opening prices/strategy): American AMR JAN40C/JAN35P $0.38 debit synthetic Pennaco PN JAN15C/JAN12P $13.81 debit collar Hanover HC JAN30P/JAN35P $0.56 credit bull-put Pharma Prod. PPDI JAN30P/JAN35P $0.75 credit bull-put Based on Time and Sales data, the bullish play in Pharma Products and the Pennaco collar both traded at the suggested entry prices. The Hanover spread and the synthetic position in AMR Corporation were slightly beyond our recommended targets, but they did offer reasonably favorable entry opportunities. Monday's Portfolio Plays: The stock market moved much as expected on Monday, opening with a small sell-off in technology issues before the recovery rally began in earnest. At the close, the Nasdaq managed to retain a gain of 97 points, ending at 3,015. The Dow was less fortunate, finishing up just 12 points at 10,725, underpinned by advances in financial services and technology components. The world's #1 semiconductor maker, Intel (INTC) was a major catalyst in both indices and also posted the heaviest trading on the Nasdaq as it moved up over $3 to $37.43. The rally ensued after the company unveiled a leading-edge transistor, and investors shrugged off its recent warning of weak sales. The Spreads portfolio enjoyed a number of favorable moves, but I was not able to monitor the activity or participate in the rebound. I was at the OIN's home office in Denver to attend the annual Christmas Party and meet all the other researchers. There were many outstanding performances among hardware issues and stocks in the bank, brokerage, major drug and health care sectors also finished higher. One of the recent debit straddle positions achieved an outstanding early-exit profit in just two days. Allied Capital (AC) traded as high as $54.43 during the session and Sunday's debit straddle ended the day at $5.12 credit overall, a 24% profit. Biochem (BCHE) was another surprise, up $2 to $30 after Shire Pharmaceuticals (SHPGY) announced it will acquire the company for $37 in stock. The purchase would reduce Shire's dependence on its primary product, Adderall, a drug for treating hyperactivity. Our bullish calendar spread was closed near maximum profit for a 175% gain in just two months. One of the older debit spread candidates, McleodUSA (MCLD) experienced an unexpected rally ahead of an upgrade by CIBC World Markets. The issue jumped $2 to a high near $16.62 and the move provided a great opportunity to close the bullish call-debit spread at a break-even cost basis. Micron Technology (MU) was the leading performer in the semiconductor category, up almost $3 to a high near $37. Unfortunately, we had adjusted the position to reflect the recent bearish trend in the chip group and now we are faced with the potential liability of a short DEC-$37.50 call. Our plan is to cover the position with the purchase of stock on any close above $38 (on strong volume), as that area appears to be the current level of overhead supply. Tuesday's Portfolio Plays: The market ended mixed today as technology issues consolidated from the recent rally and blue chip stocks advanced in the face of additional profit warnings. I managed to catch some of the session, after returning from Denver to my home near Anchorage, Alaska on one of the early morning flights. The opportunity to meet all the members of the OIN research team was an incredible experience and I can say with confidence that we are fortunate to have such an extraordinary selection of writers, editors and staff members to help produce this newsletter. As a trader and strategist, I was humbled by the combined intellect and wisdom of the group and I have never before seen that level of market experience assembled at such a remote event. In any case, the market recap and "New Plays" will be somewhat limited as I was unable to observe much of today's trading activity. However, I did notice a few positions in the portfolio that may require attention before options' expiration on Friday. A number of calendar and diagonal spread plays will need to be adjusted, along with any short positions that are "in-the-money". The bearish call-credit spread in Pfizer (PFE) will also need to be monitored closely in the event of a George W. Bush presidential victory. In addition, we had another winner in the Straddles section. Unibanco (UBB) rallied to a recent high near $29 and the overall credit for the neutral position was $5.12, a $1.50 profit on $3.62 invested in less than one month. The straddle in Compass Bancshares (CBSS) also achieved a favorable turning point this week, with the long call option paying for the entire position as the issue approached a recent high near $22. With the stock trading near the top of a 30-day envelope channel and a 52-week high, probability suggests that moving to a risk-free bearish position (the APR-20 Put) is a viable adjustment to the original play. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** WAT - Waters $81.50 *** Reader's Request *** Waters Corporation, through Waters Technologies, operates in the analytical instrument industry, with extensive manufacturing and distribution expertise in three complementary technologies: high performance liquid chromatography instruments, chromatography columns and other consumables, and related services; and mass spectrometry instruments that can be integrated and used along with other analytical instruments, especially HPLC; and thermal analysis and rheology instruments. Instruments comprise about two thirds of the company's revenue, while consumable products and services comprise the remaining one third. A recent forward-looking article suggested that "smart money" is betting on health care and major drug stocks next year, because analysts say these sectors are least likely to be affected by a worldwide economic slowdown and high energy costs. Major drug producers and companies that make analytical instruments used by pharmaceutical developers will benefit significantly from this trend and based on the recent performance of WAT's stock, investors agree with that outlook. One of our readers suggested a position in this issue and with a favorable disparity in the January premiums, this "deep-in-the-money" debit spread offers excellent (conservative) speculation for traders who are bullish on the company. PLAY (conservative - bullish/debit spread): BUY CALL JAN-60 WAT-AL OI=0 A=$22.75 SELL CALL JAN-70 WAT-AN OI=270 B=$13.62 INITIAL NET DEBIT TARGET=$8.88-$9.00 ROI(max)=11% B/E=$69.00 ****************************************************************** T - AT&T $21.44 *** Reader's Request *** AT&T Corporation provides voice, data and video communications services to large and small businesses, consumers and government entities. AT&T and its subsidiaries furnish a range of domestic and international long distance, regional, local and wireless communications services, cable television and Internet services. AT&T also provides billing, directory and calling card services to support its communications business. AT&T's primary lines of business are business services, consumer services, broadband services and wireless services. In addition, AT&T's other lines of business include network management and professional services through AT&T Solutions and international operations and ventures. AT&T recently completed the acquisition of MediaOne Group and with the addition of MediaOne's 5 million cable subscribers, AT&T becomes the country's largest cable operator, with about 16 million customers. Telecommunications stocks rallied today, even as the majority of technology issues consolidated. Analysts say these stocks have not seen the sharp rebound that other Nasdaq issues have enjoyed over the last two sessions. AT&T, Sprint PCS and Worldcom were among the best performers and Lucent Technologies also climbed higher amid rumors that it may soon be acquired by Nokia. AT&T has endured some rough treatment this year, falling to long-term lows along with other giants in the telecom industry. But with the recent up-trend, there has been a spike in bullish options activity and traders are once again speculating on AT&T's future potential. One of our readers requested a "Covered-calls with LEAPS" play in the stock and since we already track the issue in the Spreads/Combos portfolio, we decided to augment our position as well. Traders who enjoy time-selling strategies can use the favorable option premiums to initiate a conservative, long-term calendar spread. Calendar Spread Basics: The basic premise in a calendar spread is simple; time erodes the value of the near-term option at a faster rate than it will the far-term option. A less neutral and more bullish type of calendar spread is when the underlying issue is some distance below the strike price of the options. The outlook is aggressive with low initial cost and large potential profits. Two favorable outcomes can occur: the stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the stock consolidates, allowing the sold option to expire and then eventually rallies above the long option strike price. The strategy is best initiated when the near-term options are trading at a premium with respect to longer-term volatility. Most investors prefer to establish these positions at least 3-5 months before the long options expire, to allow the sale of a number of short-term options. The basic concept in this type of spread is selling time value in the call options when they are overpriced (high implied volatility) and buying it back, if necessary, when the options return to intrinsic value. Ideally, the trader would like to have the stock finish just below the sold strike when the near-term option expires. However, when the short-term position is in-the-money on the last day of the strike period, you must buy it back so that you don't have to exercise the long-term options to cover your obligation; that would defeat the purpose of the strategy. At the beginning of each expiration period, you simply sell the next month's call to further reduce the cost basis of the long position. PLAY (conservative - bullish/calendar spread): BUY CALL JAN02-25 WT-E OI=18874 A=$3.62 SELL CALL JAN01-25 T-E OI=18320 B=$0.43 INITIAL NET DEBIT TARGET=$3.00 TARGET ROI=100% (12 months) Note: There is also a bullish credit spread; JAN17P/JAN20P that offers a favorable risk/reward ratio. ****************************************************************** - 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. ****************************************************************** AKSY - Aksys $17.00 *** Blue Sky Territory! *** Aksys provides hemodialysis products and services for patients suffering from end-stage renal disease (ESRD), commonly known as chronic kidney failure. The company has developed an automated personal hemodialysis system, known as the Aksys PHD Personal Hemodialysis System, which is designed to enable patients to perform daily hemodialysis at alternate sites, such as the patient's home, and to thereby improve clinical outcomes, reduce total ESRD treatment costs and enhance the patients' quality of life. There's not much news on AKSY to explain the recent recovery but the technical indications suggest the issue has successfully completed a recent consolidation and is poised for future gains. In addition, the technical outlook for the Medical Instrument group is excellent and the rebound has been on increasing volume; both factors that lead us to a bullish position in the issue. The favorable option premiums also help provide a low risk cost basis with a reasonable expectation of profit. PLAY (conservative - bullish/collar): BUY STOCK AKSY LAST=$17.00 SELL CALL JAN-17.50 KQK-AW OI=22 B=$1.62 BUY PUT JAN-15.00 KQK-MC OI=0 A=$1.00 TARGET COST BASIS=$16.25-$16.38 ROI=14%(margin) ************************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=1112 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "email@example.com"
Option Investor Inc