The Option Investor Newsletter Sunday 12-17-2000 Copyright 2000, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/121700_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 12-15 WE 12-8 WE 12-01 WE 11-24 DOW 10434.96 -277.95 10712.91 +339.37 10373.54 - 96.69 -159.64 Nasdaq 2653.27 -264.16 2917.43 +272.14 2645.29 -259.09 -122.81 S&P-100 689.48 - 37.58 727.06 + 31.07 695.99 - 15.17 - 13.93 S&P-500 1312.15 - 57.74 1369.89 + 54.66 1315.23 - 26.54 - 25.95 W5000 12093.90 -572.60 12666.50 +629.10 12037.40 -316.20 -306.30 RUT 458.03 - 21.04 479.07 + 22.23 456.84 - 15.03 - 10.74 TRAN 2698.68 -181.27 2879.95 +116.80 2763.15 - 86.74 + 32.59 VIX 31.20 + 5.07 26.13 - 5.46 31.59 + 2.01 + 1.73 Put/Call .94 .59 .61 .59 ****************************************************************** The most important man in the U.S., Gore? Bush? ...Greenspan !! By Jim Brown Will the real Alan Greenspan please stand up! It appears Alan will will get to wear the Superman suit, the Santa suit and even the presidential seal if he wanted. The vote is in and if Alan cuts rates on Tuesday he could run for president and we would not need a recount. After the Microsoft meltdown on Friday it appears he is our only hope for the rest of December. The markets did not rebound after the Microsoft warning like the Intel bounce from last week. There was no rebound or even a hint of one as MSFT, a major component of the Dow, Nasdaq, S&P-100 and 500, was dumped by traders on all sides. MSFT traded over 163 million shares and dropped over -$6 at the close. Actually down over -$8 at the low of the day MSFT set a new 52-week low at $47.75. By itself MSFT would have been bad enough but persistent downgrades of other tech stocks helped fuel the markets drop. EMC and SUNW were downgraded before the open and SUNW hit a new 52-week low of $27.50 as well. Down -$4 or over -10% at midday SUNW traded over 116 million shares but rallied back at the close on bargain hunting. EMC dropped almost -$10 by midday on the downgrade but rallied back to close only -6.50 which was bad enough. There was just nothing to cheer about until about 3:PM but even the brief short covering rally was hammered by waves of selling at the close. Volume was huge with 2.6 billion shares traded on the Nasdaq and over 1.5 billion on the NYSE. Much of this volume was related to the reshuffling of the S&P with 12 stocks being replaced. Triple witching and short covering before the weekend also contributed to the volume. Advances were severely beaten by decliners on the Nasdaq all day with a 1:3 ratio which improved only slightly to 1:2 at the close. The meltdown brought about by the first warning in a decade by Microsoft rippled through the entire tech sector and there were very few survivors. Intel and IBM added to the Dow drop with a -2.69 and -4.63 drop respectively. IBM is currently favored as the next big warning target and investors are gun shy. As if Microsoft warning for the first time in a decade was not enough there is a strong rumor that the biggest company on the Dow may have to take back recent earnings affirmations and warn. GE is said to be experiencing problems across all its divisions and that conditions have deteriorated in just the last two weeks. When it rains it pours! Just last week GE said it was comfortable with estimates as long as we only had a mild recession. Jack Welch predicted that there was a 20% chance of a recession in 2001. The Industrial Production report today was yet another wake up call that things are bad on Main Street as well as Wall Street. Industrial Production dropped -0.2% in Nov compared to estimates of a gain of +0.1%. This is the third monthly decline since a gain of +0.7% in August. Capacity Utilization fell to 81.6% based entirely on weakness in manufacturing. The rate is now below its 1967-99 average. Both these numbers are not yet alarming but strong confirmation that the economy is falling faster than most would like. The CPI report Friday met estimates of +0.2% on the headline number but the core rate was slightly higher due to higher tobacco taxes and medical care expenses. A positive new trend in oil prices will help all of these numbers in future months. Oil dropped from near $35 to the mid $27 range in the last three weeks and the pricing pressure is starting to ease. Cisco took a serious hit Friday dropping to $47.13 at midday on news that the Executive Vice President of World Operations was leaving and not to take another job. Rumors are rampant that CSCO is losing market share and business is suddenly slowing at an alarming rate. Talk about the kiss of death. The one point everyone keeps coming back to is the growth of the Internet as the goose that is laying the golden eggs of future profits. After all the existing warnings of PC weakness, should CSCO warn of dropping Internet equipment sales it would be lights out for any remaining tech hopes. The warning by MSFT of lower corporate spending on a global basis has set the stage for a new disaster. Oracle CEO Larry Ellison of course adamantly denies the MSFT story saying it is not an Internet slowdown but a MSFT slowdown. Hopefully he is right and CSCO will not warn. The Bear Stearns downgrade of EMC and SUNW was based on the corporate slow down worries since those vendors do not sell to retail customers. A second blow to CSCO was a news report near the close that they had increased loss reserves from $75 million to $275 million to cover potential losses from customers who cannot pay their bills. This almost four fold increase indicates yet another tech risk factor. The Microsoft meltdown on Friday was more critical in my opinion due to the seriousness of the drop. The Nasdaq had closed at 3015 on Monday on hopes of a final election winner and a coming rate cut. Once the warnings flood gates opened on Tuesday the index had already dropped -300 points by Thursday's close. -300 points is a significant drop and the Nasdaq was already in oversold territory. The -129 point drop to the lows on Friday on top of the -300 prior points was a real blow to the bulls. Confidence was shaken and there was not any midday bounce. There were no buyers. Traders have no faith in the market when a -400 point drop draws no buyers. On the Dow side the tech wreck coupled with the JPM disaster knocked -461 points off the high of 10914 on Wednesday. A -461 point drop in three days. There was no bounce and the Dow closed only +20 points off the low of the day. When I say there was no bounce that is not entirely true. As we told traders all day in the intraday alerts, we expected a short covering rally after 3:PM as traders booked profits and went into the weekend flat. Fears by the shorts that some Fed head would say something over the weekend or before the open on Monday about cutting rates caused many to cover. Once the shorts covered the market died another quick death. Longs had the reverse fear that another big name would warn after the close or before the open on Monday and gap them down unexpectedly. When longs want out of the market after shorts have already covered nothing good can happen. Even the massive buying at the close by the S&P index funds to rebalance their portfolios could not create a rally. Those twelve stocks all spiked up substantially at the close but they were among the very few. The only good side I can paint to this picture is the excessive negative sentiment in front of the Fed meeting. Over 10% of the Nasdaq-100 set new 52-week lows! These are the big caps of the Nasdaq. There were 234 new lows in the Nasdaq Composite. This is a real portfolio flush. Almost nothing is sacred. The +19% gain the Nasdaq had from last week was almost completely erased at the low of the day (2596) when we were only +73 points from the Nov-30th 2523 low. A +500 point gain in two weeks erased in only four days. The volume was huge at 2.6 billion shares. Traders were questioning whether we had a capitulation event but the answer kept coming up no! Yes, stocks were down, lots of them. But, there were no big losers. There were very few stocks down double digits. It is just that almost everything was down some. Dick Arms came out again with a market bottom call based on the oversold conditions and this was repeated every five minutes on CNBC to no effect. It probably helped the short covering bounce some but it quickly died. He said the indicators showed the market to be at the same levels of oversold as on the Oct-26th and Nov-30th bottoms. Those bottoms produced +12% and +20% rebounds respectively. The S&P-500 closed at a 52-week low of 1312 and far from Abbey Cohen's 1575 year end target. There was widespread reporting of tax selling by funds and institutions. With only nine trading days left in this year, no rally in sight and more large cap warnings expected next week, the race was on to dump losers and flush portfolios before the FOMC meeting next week. If there is going to be a rate cut the funds want to be ready to reposition themselves in winners and forget the pain from this year. Nine days to clean the decks and dress up those all important year end statements. Next year is shaping up to be a mutual fund war with very few victors. It is going to be a contest of "we lost less than the other guys" in promotional advertising. Actually the market drop this week brought in +$8.4 billion into equity funds according to TrimTabs.com. Investors wanting to capture the cheaper prices are sending money in the hope that averaging down still works. So we are back to the same spot we were last Friday. Waiting on the pivotal news event that could turn the market around. Only this weekend it is not a court case or election results but probably the most important FOMC meeting in many months. Alan has pressure building from both sides. The hawks are still saying the economy is easing smoothly and the doves are screaming fasten your seatbelts. The numbers all point to a GDP of less than +2% growth and depending on who you listen to even a negative growth. Greenspan has said we will not have a crash landing on his watch and it is time to put up or shut up. Many analysts feel that by waiting until next year to start the cut process will be too late and the Fed will have to play catch up and risk overheating the economy on the rebound. Many are calling for a cut on Tuesday to draw a line in the sand. Then wait for another month or two to see what else is needed. Lyle Gramley said today he felt the chances of a cut were better than 50/50 on Tuesday. Alice Rivlin said she did not think the time was right yet. Fed follower and Washing Post writer John Barry riled traders Friday morning with an article saying the Fed would not cut next week. Obviously there are as many opinions as there are analysts. The problem for us is not so complicated. If the Fed does not cut rates there will not be many presents in traders Christmas portfolios this year. There are no major economic reports next week. Just the dribble of month end stuff but with the FOMC meeting out of the way Tuesday nobody will care. This boils our week down to one day. Make or break Tuesday. Without a pre-Fed rally any rate cut SHOULD be met with a relief rally. I shudder to think where we would be if we got a sell the news event on a rate cut or no cut all. Like Art Cashin said today, the Fed better wake up. Mob psychology is heating up and there is an increasing fear that somebody will start yelling fire in a crowded market and the Fed will not be able to react quick enough. The good news was that there was almost no bad news after the close today. ETYS was the only name company to warn after the close and at $1.03 per share they are not likely to impact the market on Monday. JNJ did affirm estimates after the close but they made an effort to stress that they would not hit the top of their range. Sellers did not stop at the close. There was a strong imbalance of sell on close orders on the NYSE and that does not bode well for Monday. Over 100 million Nasdaq shares traded after the regular session. I did not see a large change in prices in after hours. I checked a couple dozen fast movers like JNPR, BRCD, BRCM, SDLI, QCOM and others and most closed after hours almost exactly where they closed the regular session. Still after the huge day this does not lead us to any positive or negative indications for Monday. At this point Monday is a toss up. We are going to be at the mercy of any pre-market news, continued tax selling and any comments from Fed heads about impending policy. The VIX closed over 31 for only the fourth time in the last two months. The last time it was this high was the bottom on Nov-30th. Actually it spiked to almost 35 intraday on the 30th after closing at 30 the night before. The put/call ratio spiked to .94 at the close and indicates a high level of fear in the market. Both of these indicators can go higher, much higher, but normally these levels indicate a bottom is near. The TRIN spent most of the day over 2.0 indicating an oversold condition. Nothing in these indicators prevent the market from selling off even more on more negative news. What we need to look for next week is a sign that not only the selling has stopped but for a sign that funds are starting to buy again. One key will be the large caps. Funds will buy them first due to their liquidity. Easy in, easy out should the need arise. The Russell-2000 is showing the strain. Only +12 points from a 52-week low there is no evidence of fund buying. The euphoria from the +500 point gains from the last two weeks was smashed along with the gains. Traders pinning their hopes on the election bounce were blindsided by almost 100 earnings warnings this week ending with the Microsoft meltdown. The only thing we have to look forward to is the Fed meeting and the realization that tax sellers will eventually run out of stock. A small consolation indeed! Traders are going to love next week just like last week. Everybody else will be grabbing the Maalox. Stocks are cheap but nothing says they can't get cheaper. PE ratios on the leaders are mere shadows of their previous lofty levels. For instance, MSFT 27, SUNW 45, DELL 25, INTC 19, ORCL 25. The thought process goes like this. Is SUNW at $30 cheap? Sure but Dell was cheap at $32 last month. It was cheaper at $17 last week. Will SUNW set another new low on a warning next week? Who knows? If your stock time horizon is years it should not matter and SUNW is a screaming buy. If your option time horizon is four weeks then I would be very cautious. We can be right on direction, UP, right on distance, $50, and still lose on the play if our time horizon is too short. A JAN $35 SUNW call option may be only -$5 out of the money on Monday with four weeks to go and end the month being $10 out of the money with only two weeks to go after a warning. Once the tide turns positive everyone knows the big caps will rally and stocks like SUNW have a huge following. My point here today for call buyers is buy more time than normal. You don't have to use it. If your option doubles after four weeks on a three month option it is perfectly acceptable to close the position for a profit. The extra time give you a little more safety. I did not say you should let a $10 option decline to $1 just because you have time. You should still practice safe trading by using stop losses. I would simply give yourself a little more wiggle room than normal. Successful traders take losses constantly. Small losses! We already know January earnings will be a disaster. What we do not know is how much of the disaster is already overstated. With the new Reg FD (Full Disclosure) companies are actually overstating possible problems. This is causing analysts to be overly cautious with their forecasts. If January earnings turn out better than expected then the March earnings period will benefit from increased estimates. For option traders who have been beaten up trying to trade this bear market a prudent choice would be a March or April option on a stock like SUNW that has been beaten senseless. Give yourself the gift of time for Christmas. You will save yourself a lot of stress and possibly make more money. What have you got to lose? We have a new feature starting tonight. Many readers have asked for a resource to help unravel the complexities of accounting for your trading activities. Options trading can be very profitable but also carries potential risk for serious tax problems if you do not fully understand the rules. Jim Crimmons starts a new series tonight to explain all the common problems and solutions. As an added benefit he has agreed to answer any tax question you have for subscribers to OIN. Check out his first question and answer session in the Options-101 section today! Also Preferred Trade has announced a new feature for OptionInvestor subscribers, the availability of OCO, or Order Cancels Order, through their new Preferred Trade Live offering. They also offer complete management of Skybox trades for active traders. Tell them what you want, Swing Trade, Position Trade or Benchmark Trade and they will place and manage all the orders for you. They will also place your spreads, straddles and butterflys and monitor your positions. Put the pros on your team and remove some stress from your life. Check out the announcement from Preferred Trade Live in the Options 101 section today. Trade smart, 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 mouse pads 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 ************************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=1129 ************************************************************** ************** EDITOR'S PLAYS ************** If you have been reading my commentary all week you know I was waiting to buy the rebound off any post election dip. Man! That was a long week! I finally pulled the trigger Friday but only cautiously. When the Nasdaq skidded to a stop at 2600 this afternoon I was convinced that a -400 point drop would create a relief rally and short covering before the close. With a Fed meeting on Tuesday I was speculating the bargain hunters would be out in force. Secondly the addition of 12 Nasdaq stocks to the S&P could have helped spark a rally. Yes, we got a bounce but it was really wimpy. I came real close to closing all my open positions before the close but greed got the best of me. After watching off and on all week I wanted to play so bad I decided to speculate in some cheap December calls after the morning drop along with some naked puts for January. Hoping for a bounce into next week I sold naked puts on BRCD, BRCM and SCMR. BRCD - Jan $250 Naked Put @ $59.62 Remember my strategy on selling naked puts is to sell deep in the money to capture a 100% delta on any upward movement of the stock. It is not my intention to wait for BRCD to reach $250 or for January options to expire before closing the position. My target on this play would be something in the $225-$230 range which would provide about a $35 profit from the launch point just above $190. Any unused premium would simply be returned and I get an interest credit for the time it is in my account. BRCM - Jan $170 Naked Put @ 55.88 This play got a little more lift than BRCD. BRCM had bounced off support at $110 at the open an then remained positive most of the day. I sold the Jan-$170 put for $55.88 and my target on this one is around $145 which could provide resistance again. I launched the play on the bounce at around $115 and $145 would give me a $30 profit. SCMR - Jan $100 Naked Put Time will tell here but hopefully the market will cooperate and the upgrade from Friday will help relaunch the stock. This is more of a leap of faith than BRCM and BRCD since there is no real support at $50. I sold the Jan-$100 put for $47 and my target is something in the $70 range for about a $20 profit if everything works out next week. Speculative Calls Please let there be a massive drop and rebound on every option expiration Friday. The possibilities are endless! While I was sitting waiting for the expected end of day relief rally I picked out several stocks that I thought might run for several dollars across the next strike price and then I bought December calls at that strike for a nominal amount of money. Cheap gambling to keep me from losing a pile of money should the market turn down instead of up. Greed kept me from doubling these plays even more because I did not close them at the first sign of the roll over at 3:30. Just a dip, the Nasdaq is going positive. WRONG! It easily cost me a dollar or two on each play. My positive bias got in the way. Still I can't complain. I made a ton on each. Just wish I had bought more! BRCM - Dec-$120 calls - Average $1.19 each NTAP - Dec-$65 calls @ $.69 CIEN - Dec $100 Calls @ $1.25 MUSE - Dec $115 Call @ $.88 My plan for Monday is hold my breath on the open and then watch for any weakness and bail from my naked puts if I need to. The closing sentiment on Friday was more negative than I had hoped and now I find myself holding longs over a weekend. I came very close to going flat but BRCM, BRCD and SCMR were all closing at the high of the day. I hope it was not another sucker punch. If the market cooperates and we don't get any high profile warnings I will probably look for a few more naked put plays. I am hoping a Fed rate cut is in the cards and that will turn around the tax selling and cause funds to start window dressing for year end. Possible wish full thinking on my part I am sure. I wish SUNW would warn and drop another -5 points so I can load up on some calls as well. I am a believer, what can I say? Good Luck, good trading Jim Brown *************************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 at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1163 ************************************************************ **************** MARKET SENTIMENT **************** Dear Media: Please Stop Crying By Austin Passamonte Watching CNBC and other news programs is becoming very painful. Their market bias is blatant and understandable considering where viewership and advertising sentiment lies. Still, we have all we can do not to scream each time one of the anchors laments the next round of selling. Enough already! Just go with the trend and BUY SOME PUTS!!! Therein lies the problem; just a fraction of financial traders even realize option trading even exists. What a shame. If most actually knew the power options trading offers versus all else, market celebrities and pundits may have a better outlook. We don't forecast any sudden rallies to emerge just yet. A wildcard many traders are hanging onto is the possibility of a rate cut this Tuesday by the FOMC. We wouldn't be surprised for a Monday/Tuesday rally into the event by bottom fishing hopefuls. That would be a tradable rally indeed but only until 2:20pm EST on Tuesday if no rate cut is announced. Then OTM puts would have more value than platinum. We are just at the brink of confession season now and the lineup has turned hopeful bulls to ground chuck. The way things look from here, market bears can forego a diet of salmon and to continue fattening up on abundant beef instead. Is all bullish hope lost? Never! We will rally long & hard one fine day, rest assured. When will that happen? Beats us. Market Sentiment will never have any market bias. We may have a bullish, bearish or neutral sentiment as action progresses but never care what the markets choose to do. It is not our job to care; it is our job to profit from current market action along with you. That being said, a long-term bottom is closer than long-term top. Where exactly is the question. Many leadership tech stocks have been beaten down to the point becoming value stocks instead of growth. There is a bottom to everything but perhaps everything has not yet found a bottom. Technically the charts are very bearish. As stated in the Thursday edition here, all daily-chart signals are in the early stages of rolling over. Does this mean they will for certain? No. Are the chances far better than 50%? In our opinion; absolutely. We trade full-time putting thousands of dollars at risk in the markets in hopes of greater return as a result. What better way to base trade entries on than simple, basic technical analysis? Tarot cards? Tea leaves? Analyst recommendations who upgrade YHOO at $235 and downgrade it at $35? Our position this week is very clear: we will buy calls on market strength after the FOMC meeting only if an actual rate cut is announced. We will buy puts on everything with a symbol at first sign of weakness if markets rally into the meeting and no cut is announced. We will place tight stops on all plays and take modest profits when offered. That is Market Sentiment's best defensive hope with a clear downtrend in all major indexes. Calls or puts - profit flows equally both ways. Please be careful and trade the right direction as market action dictates. ***** VIX Friday 12/15 close: 31.20 30-yr Bonds Friday 12/15 close: 5.44% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Saturday (12/15/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 730 - 715 4,518 2,642 1.71 710 - 695 5,951 3,387 .87 OEX close: 689.48 Support: 685 - 670 30 7,774 259.13*** 665 - 650 9 3,104 344.89*** Maximum calls: 730/3,357 Maximum puts : 600/9,042 Moving Averages 10 DMA 717 20 DMA 713 50 DMA 725 200 DMA 772 NASDAQ 100 Index (NDX/QQQ) Resistance: 73 - 71 33,173 10,198 3.25 70 - 68 63,337 18,381 3.45 67 - 65 17,736 21,353 .83 QQQ(NDX)close: 63.87 Support: 62 - 60 5,977 25,420 4.25 59 - 57 1,843 5,818 3.16 56 - 54 839 7,826 9.33 Maximum calls: 70/50,643 Maximum puts : 70/12,673 Moving Averages 10 DMA 68 20 DMA 67 50 DMA 74 200 DMA 89 S&P 500 (SPX) Resistance: 1375 8,277 10,228 .81 1350 28,778 36,004 .80 1325 1,863 5,168 .36 SPX close: 1312.15 Support: 1300 1,502 16,535 11.01 1275 187 9,159 48.98 1250 943 8,804 9.34 Maximum calls: 1350/28,778 Maximum puts : 1350/36,004 Moving Averages 10 DMA 1353 20 DMA 1348 50 DMA 1373 200 DMA 1437 ***** CBOT Commitment Of Traders Report: Friday 12/15 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 +179 -283 -2089 -770 Total Open Interest % (+2.24%) (-3.13%) (-5.50%) (-2.64%) net-long net-short net-short net-short NASDAQ 100 Open Interest Net Value -1438 -3324 +1316 +2120 Total Open Interest % (-4.45%) (-13.52%) (+2.11%) (+3.23%) net-short net-short net-long net-long S&P 500 Open Interest Net Value +80633 +76502 -90398 -86468 Total Open Interest % (+29.41%) (+42.45%) (-11.61%) (-12.36) net-long net-long net-short net-short What COT Data Tells Us: Disparity remains between Commercials and Small Specs on the S&P 500. The historical holding of net-short SP01H futures contracts by the biggest players continues and likely for good reason. Commercials have increased their net-short positions on the DOW while Small specs have turned net-long. Data compiled as of Tuesday 12/12 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://members.OptionInvestor.com/marketposture/121700_1.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1142 ************************************************************** *************** ASK THE ANALYST *************** Tough Game By Eric Utley You're not alone. It's been a tough year to trade and invest. However, barring a major recession, I think the worst in the equities markets is about over. And, although I have a distaste for Doc Greenspan right now, I don't think the Fed chief will let the U.S. economy slip into a prolonged recession. But I can't place all the blame on the Maestro. Greenspan couldn't foreshadow the skyrocketing energy prices when he went on an interest rate raising binge. And he surely didn't see the election debacle, which, in my very humble opinion, did afflict the U.S. capital markets due to a flight or foreign capital. I'm not calling the bottom in the NASDAQ - won't even attempt to this weekend. But stepping back, and viewing the bigger picture, I think there are a few things both traders and investors should make note of. The recent action in the bond market suggests the Fed will lower interest rates by at least 50 basis points by next spring. Whether those cuts begin next week or in January really doesn't matter - that's not the point. The point is the Fed WILL begin lowering interest rates in the near future and that alone will take the lid off equities. A more favorable interest rate environment will directly stimulate business and help companies to boost earnings - the last of the dreadful e's. What's a market participant to do? I'll put it plainly: It's prudent to own equities ahead of interest rate cuts! Almost all equities will benefit from lower money costs. The obvious choice ahead of a rate cut are financial shares that aren't exposed to the credit risks recently exposed in the likes of Chase and JP Morgan. But what if you're looking for higher earnings growth? Where are you going the find it? Well, historically speaking, the technology sector has consistently generated the highest earnings growth and highest return on investment. And I don't see any reason for that trend to not continue over the next several years. While earnings warnings may continue to plague the NASDAQ in the near-term, I do feel that investors will be rewarded a few years out for taking the risk in technology shares now. As this nasty and historical year comes to an end, know that the recent pain in the NASDAQ will pass and investors will once again reap rewards from technology shares. Patience and discipline will prevail over emotion and the bear. And the game will get easier. The inbox reserved for stock requests has been growing thin in the recent weeks, hence the two charts. Let's fill it! Send your stock requests to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- HomeStore.com - HOMS Please advise us your views on HOMS. Is this a good cyclical play? Can you name some similar cyclical plays which could be easy to play for current market? - Thanks, Sunil Thanks for the request, Sunil. I don't know if HomeStore is your typical cyclical play, per se. However, the company could benefit from an ease in interest rates, which could stimulate the purchase of homes and real estate. And, as the leading provider of Web-based realty services, HomeStore would like to see an increase in home buying. HomeStore operates some of the Web's best sites for locating and purchasing real estate. I regularly visit their Realtor.com site in search of a ranch in the great state of Montana and have found it easy to use and very helpful. I think HomeStore is a good example of why the Internet is such a great medium. Unlike many of the already failed Internet businesses, I sincerely believe that HomeStore is providing a quality and highly valuable service to consumers. They have made it mush easier to locate, finance, and purchase real estate to a consumer's exact specifications. HomeStore has integrated virtually every aspect of purchasing real estate into one concise site. Of course, you will still have to visit the property, but you get the idea. But enough with the fluff. Let's get to the fundamental picture. HomeStore turned a profit, for the first time, last quarter by surprising analysts by two pennies. The company was expected to lose one cent, and actually earned one cent. What's more, that earnings growth is expected to blossom next year with consensus estimate ranging between 30 and 37 cents. It gets better. The company is expected to grow its bottom-line by about 38% over the next few years. Plus it has about $3.50 per share in cash, and no debt! HomeStore generates sales through selling subscriptions and advertising on its site. The subscriptions it sells to professional realtors account for about 55% of the company's revenues. And during its last reporting quarter, which ended September 30th, the company had grown its paying realtor base by 54%. If HomeStore can sustain that growth rate of subscribers, the company should easily meet its long-term profit projections and return handsome profits to patient investors. In the near-term, though, HomeStore has to contend with the fact it has .com attached to the end of its name. And by that I mean its shares have received undue pressure as a result from so many Internet companies going under. As it turns out, it's hard to sell toys, furniture, and cars, among other items, over the Internet. And as long as the shakeout in the Internet sector rolls on, I believe shares of HomeStore will remain suppressed. But to be quite honest, I like HomeStore over the long-term. To reiterate, I believe they are providing a solid and valuable service to consumers. Furthermore, its shares are still in double digits unlike those of CMGI, Etoys, Pets.com, Mothernature.com, Webvan...anyway, that has to be a sign of a lasting Internet company. If you're looking to get into HomeStore for the long-term, it may be prudent to wait a quarter or two and see if the company can establish earnings credibility. If it does, I believe it to be a long-term winner on the Web. And let's quickly address your question regarding cyclicals, Sunil. Cyclical stocks fluctuate with the business cycle. They go up when business is robust and fall when growth slows. Some examples of cyclicals might include auto makers and consumer product makers, among many others. To be quite frank, I don't know how much of a slowdown has been discounted into their share prices and conversely, how much of a pickup in growth has already been discounted. It's important to keep in mind that the market tends to discount future events out to six or nine months. If there's an interest by our readers in cyclicals, I could do some research in the coming week and try to compile a list of likely winners when the economy picks back up. Let me know! ---------------------------- Global Crossing - GX Hi there. I was wondering if you could give me your short-term outlook on Global Crossing. - Thank you, Denise In light of my lengthy rambling about HomeStore, Denise, I'll try to keep the review of Global Crossing more concise. The short-term outlook for Global Crossing still looks a little dicey. Its shares are fighting a strong downtrend, which has lasted since its peak last spring around the $60 level. The poor performance in shares of Global Crossing is a direct reflection of the concerns over the high levels of debt in the telecom industry, and the ability of issuers to meet its requirements. Global Crossing is no exception. The company took on a large amount of debt in order to build its undersea network that is intended to connect the world at the speed of light. Global Crossing is the premier player in its space, and if it succeeds in building its high-speed intercontinental network, it should make a lot of money. The company has the potential to connect the world in ways never imagined. But it has a lot of hurdles to clear before achieving its goals and profitability, for that matter. The company is expected to continue to lose money from operations well into the coming years. And without profitability, I think the stock will remain under pressure. Of course, a quick shift in sentiment in the telecom sector could lift shares of Global Crossing from its recent mire. In short, Denise, I would expect Global Crossing to remain under pressure. But, the long- term prospects for the company are phenomenal, if and only if, it can successfully implement its undersea network. Because shares of Global Crossing were recently moved to the NYSE from the NASDAQ, I've included two charts below to better illustrate its recent price action. NASDAQ: GBLX NYSE: GX ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* For the week of December 18, 2000 Monday ====== None Scheduled Tuesday ======= Trade Balance Oct Forecast:-$33.2B Previous:-$34.3B FOMC Meeting NA Forecast: NA Previous: NA NAHB Housing Index Nov Forcast: 65 Previous: NA Wednesday ========= Oil & Gas Inventory 8-Dec Forecast:288.7MB Previous: NA Housing Starts Nov Forecast: 1.550M Previous: 1.532M Building Permits Nov Forecast: NA Previous: 1.537M Treasury Budget Nov Forecast:-$23.7B Previous: -$27.0B SEMI Book-to-Bill Oct Forecast: 1.17 Previous: NA Thursday ======== GDP-Final Q3 Forecast: 2.40% Previous: 2.40% GDP Chain Deflator Q3 Forecast: 1.90% Previous: 1.90% Initial Claims 16-Dec Forecast: NA Previous: 320K Philadelphia Fed Dec Forecast: 4.00% Previous: 5.20% FOMC Minutes NA Forecast: NA Previous: NA Friday ====== Durable Orders Nov Forecast: 1.30% Previous: -5.50% Personal Income Nov Forecast: 0.40% Previous: -0.20% PCE Nov Forecast: 0.30% Previous: 0.20% ECRI Weekly Index 8-Dec Forecast: -3.1% Previous: NA Week of December 25th ==================== Dec 26 Existing Home Sales Dec 26 Consumer Confidence Dec 27 Leading Indicators Dec 28 Initial Claims Dec 28 Help-Wanted Index Dec 29 Chicago PMI Dec 29 Michigan Sentiment ************************Advertisement************************* Tired of waiting on trades to execute? 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The Option Investor Newsletter Sunday 12-17-2000 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/121700_2.asp ************** TRADERS CORNER ************** Moving Day Luck? By Lynda Schuepp Moving before Christmas should only be allowed for the certifiable nut cases or idiots like myself. These past two weeks have been crazy, to say the least. We were having the floors in the new house sanded and were hoping they'd be done before the movers came, but alas, that was not to be. On Wednesday and Thursday of the previous week, the movers packed and transported the contents of our old house to our new house. I was computer-less until last Sunday. Not only was I computer-less, but I was also CNBC-less. Since the day we moved in (December 7th), I have spent my time moving boxes and furniture out of one room and into another, as my floor guy proceeds through the house, making a layer of fine wood dust as he goes. Before the move, I had purchased December 70 calls on November 30th for $1.13, based on my trading system that I wrote about on 12/03. Needless to say it was difficult to follow my system without my tools. During this time of technical isolation, I kept in contact with my broker several times a day, and wasn't really worried. I was counting and "re-counting" on a final decision for president. I figured the courts would have a hard time setting a precedent for future elections, based on dimples, chads and "voter's intention." Because I didn't have a computer to read my charts, I missed my sell signal on 12/07, thank God. Had I been in touch, I would have sold my options for about a one-point profit. The QQQ's closed at $66.50 but the next day they gapped up to 71 at the open. Sometimes you just get lucky. When my $1 option went to $5, I sold; I didn't wait for any special confirming signs, not that I could have seen them if I wanted to. Again, I was lucky. The QQQ's traded as low as $67.63 that day. The next day, however, they gapped up at the open and closed near $74.38, the high of the day. Oh well, you can't have it all. I'm very happy with my measly 400% increase. This past week has also been a bust for me for trading. Although, my computer is up and running, I have no furniture in place. Kneeling on the floor and watching the screen which is sitting on an empty cardboard box reminds me too much of a prayer position and that certainly can't be a healthy sign, in my profession. Let's take a look at a couple of charts and see if we can come to any conclusions. Looking at the weekly chart first, we can see that if the QQQ's hold here at about $63.75, it would make a nice bottom because there is lots of support at this level going back to September and October 1999 where they met with lots of resistance. This level is VERY significant because these levels were held for such a long time on weekly charts. Based on Friday's candle, a doji, we may be close to another short- term bottom. But doji's ALWAYS need a confirmation, and I have found that they are less reliable at bottoms. I don't like the increase in volume on Friday's trading because of the downside pressure on prices. I wish the volume had been much bigger then maybe it would indicate a key reversal. At best the signals say to me--indecision and maybe sideways action for a while. When looking at the OEX however, it looks worse that the QQQ's. Note that Friday's close is lower than the lows on December 1st and 4th. I don't like that. It could signal trouble. Hey, I thought we knew who our next president is going to be? Thought it was going to be off to the races. Oh well, I guess maybe we can now concentrate on mundane things like earnings, sales growth, etc. Maybe "value" stocks will be more in favor in the future. Based on these charts, my goal this weekend is to get my office set up and all my clothes unpacked. I can live without pots and pans, but office furniture and underwear are definitely over the edge. ************************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=1130 ************************************************************** *********** OPTIONS 101 *********** ***NEW SERVICE FROM PREFERRED TRADE LEARN TO TRADE WITH A COACH*** What You Need: Live Options Brokers And Preferred Trade By Alan Knuckman Many traders need Live Option Brokers at a reasonable price to help them create the disciplined trading plan necessary for trading success. Both Alan Knuckman and Andrew Aronson of Preferred Trade are Licensed Option Principals. Less than 4% of all stockbrokers are option principals, ready to help you with your option trading. Most brokers do not have the necessary experience or education in options to adequately inform and assist their customers. What is important for us is to facilitate our clients to have every opportunity for success in trading options. The ability to place stops AND OCO (One Cancels Other) exit contingencies prior to entering a trade allows us to execute your plan, and you the time to enjoy life. Helping customers better understand the probability analysis of different expiration months and varying strike prices can dramatically increase success rates. Many newsletter writers and market educators prefer Live Option Brokers to help customers implement and execute their ideas and recommendations. Many times the option picks must be customized dependant upon the customers' objectives, suitability, and experience. A better understanding of option probability and proper asset allocation can dramatically increase profitability and limit losses. Live Option Brokers can offer guidance and implement a trading plan while helping to prevent emotional reactions to market conditions. Live Option Brokers educate and teach discipline, generally facilitating the learning of option basics and to ease traders into the dangerous waters of trading. Fear of the markets can lead to indecisiveness and inaction, many people quit even when armed with the best market research. Worse yet is when new traders learn their lessons the hard way through repeated failure to execute a trading plan. Preferred Trade now offers Live Option Brokers to help address one of the fastest growing segments of the financial community... retail option traders. The combination of professional assistance and unparalleled electronic execution puts the tools in option traders' hands so they have more time to address life's real concerns. Customer's graduate to different levels of broker assistance based on need of service and market experience. The weaning process will lead to a breed of traders that are better prepared to succeed. The ability to trade online may lead to disastrous consequences if not handled properly and respectfully. Option trading is not a game but a very serious venture not to be treated lightly. Your success depends on hard work and the ability to create and execute a disciplined trading plan. Option traders need explanation and assistance... Newsletter writers need implementation, customization and execution of their ideas... Preferred Trade now offers Live Option Brokers to supplement the electronic execution and to prepare customers for the realities of online trading... The tools are here; it is nice to be needed. Please note that options are not suitable for all investors and investing in options carries substantial risk. To obtain a copy of the Options Disclosure Document contact Alan Knuckman at 1-888-281-9569 PREFERRED TRADE LIVE Toll Free 1-888-281-9569 Alan Knuckman and Andrew Aronson Licensed Options Principals Offered by Preferred Capital Markets, Inc. Member NYSE, SIPC, MSRB and other principal exchanges ***** Tax Accounting Made Simple By Jim Crimmons Our new column having to do with the taxation of your trading account begins today, and will be featured twice a month. Since taxes are the largest expense an active successful trader will have it is appropriate that we feature this information for you to use. Our tax column is written by TradersAccounting.com a tax and accounting firm which specializes in preparing tax returns for active traders. In addition they have a department within the company that does tax planning for all levels of traders. To reach them you should go to their web site at http://www.TradersAccounting.com., or email your tax questions to firstname.lastname@example.org for a free answer. They feature some free items on the web site. As with any general information you should not rely upon the information given here to fit your own tax situation. Always consult with a professional on any tax matter. Since this is the first of ongoing columns we will start with the basics today. The start of basics is insuring that we talk in the future about options in the same manner. Therefore, while it may seem kindergartenish, we must start with a few definitions, because the tax code is based around these definitions. To be a successful trader you have been taught that the most important item is to have a trading plan. Part of your trading plan must be a plan that takes into consideration your largest expense, that of the taxes you pay. We will give you the information over the next few weeks that will help you to add tax strategies to your trading plan. What is an Option? For the purpose of the IRS, an option is a contract in which an individual investor, a trader, or a business doing trading within an entity, in return for consideration of some type, grants for a specified time to a purchaser of the option, the privilege of purchasing from or selling to certain specified property at a fixed price to the grantor. Under this contract, only the grantor (or writer) is obligated to perform the purchaser may choose to exercise the option, or may allow it to lapse. The property specified in the option is referred to as the "underlying property, or security". What is the difference between an option and a cash settlement option? In a cash settlement option, the settlement may be settled in cash or property, other than the underlying property. For example, an option on a stock index, which contemplates that cash rather than stock is transferred if the option holder elects to exercise the option, is a cash settlement option. How are options classified for purposes of the Federal Income Tax? Options are categorized as listed or unlisted options, also as equity or non-equity option. LISTED OPTIONS-A listed option is an option that is traded on or subject to the rules of (1) A national securities exchange registered with the SEC; (2) a domestic board of trade which has been designated as a contract market by the Commodities Future Trading Commission (CFTC); or another exchange, board of trade, or market designated by the Secretary of the Treasury. A listed option covers 100 shares of a particular stock, specifies a fixed (strike) price per share for exercise, and has a fixed expiration date. The premiums paid by the purchaser of the option and the transaction costs are not fixed. NON-LISTED OPTIONS-All other options are considered unlisted, and are traded over the counter. They generally have no fixed elements such as the number of shares covered, strike price premium and expiration and each of these elements are negotiated between the writer and purchaser. Here is no intermediary organization; therefore the writer and purchaser have the contract between themselves until it is settled. EQUITY OPTIONS-An option is an equity option, whether it is listed or not, if it is an option to buy or sell a stock, or its value is determined by reference to a particular stock. NON-EQUITY OPTION-If the CFTC has designated a contract market for trading such options or if the Treasury has determined that the requirements for the CFTC designation have been met, then the option is a non-equity option. Each of the above definitions will become important to our study as each column is written. Can Wash Sales be present when I am trading options? What is an Wash Sale? A wash sale is a sale in which the seller, within a 61-day window, which begins 30 days before and ends 30 days after the date of a sale of a stock or security for a loss, replaces the stock or security by acquiring (purchase or exchange), or enters into a contract or option to acquire substantially identical stock or securities. It therefore would seem that if you either sold an option or a stock at a loss, and then replaced it with a similar or identical security or option you would be saddled with the wash sale rule. As can be seen from the above table in transaction two we would have a cumulative $10 per share loss because we sold stock (or options) at $90 while we had purchased them at $100. The next day our stock hit our technical entry point where we believed we should buy in again. At this point, because the transactions, first a loss, then the re-purchase of the identical stock, was within the window of time described above, (a 61 day window) we no longer have a loss to report, we have only adjusted our basis. You can see that if we continue to trade the same stock or options throughout the year that we possibly would never realize a loss, but would be adding to our basis on each purchase. CAUTION: The wash sale rule can greatly influence the profit or loss from your trading account. I have had clients who have thought they had a loss in their trading account for the year, only to examine the wash sales they have had and realize that they have had a paper gain, although their cash flow does not show it. REMEDY: The only remedy, other than staying on the sideline in our favorite stock(s) during the complete month of December, for those of us who trade the same stocks and options throughout the year is to claim the mark to market method of accounting. This election can only be filed for by those of us who trade as a business, either a sole proprietor (traders status) or in a formalized business such as an LLC or partnership. When we use the mark to market method of accounting it does away with the wash sales. However, as in anything there are pros and cons as to whether you want to take this election. Next time we will go more in depth on both Traders Status and Mark to Market. If you have questions about your taxes with respect to your trading, as a subscriber to this newsletter please send an email to the address below, and you will receive a personal answer within two business days. Please go to email@example.com. Jim Crimmons http://www.tradersaccounting.com ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* CIEN - CIENA Corporation $100.72 (-13.28 last week) See details in sector list Put Play of the Day: ******************** KO - Coca-Cola Company $53.50 (-7.38 last week) See details in sector list *************************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 at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1164 ************************************************************ ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS AIG $95.75 (-7.94) We're reluctantly dropping coverage on AIG this weekend after the stock closed below our protective stop at the $96 level last Friday. Albeit AIG just missed our stop by $0.25, we're remaining disciplined. The stock has briefly dipped below its 50-dma on a few occasions this year, and if history is any guide, may snapback rather quickly next week. Existing positions could be exited on a move back up to the $100 level. However, if AIG does quickly rebound early next week, traders might consider holding positions if the momentum buyers return to the insurance sector. PUTS BBOX $53.25 (+0.56) When a stock goes up on volume in a down market, traders take notice. Despite a soft NASDAQ and shares of BBOX have found their way higher in the past trading sessions. On Friday, the stock ended the day up $1 on 180% of ADV and in doing so, closed above resistance and our stop price of $51.50. With the possibility of further upside for BBOX if market conditions improve, we are stepping aside, as fighting an up-trend is no way to make money on a put play. Look for a possible test on Monday of support at $51.56 as an opportunity to exit. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** SCMR - Sycamore Networks Inc. $55.19 (-8.49 last week) Founded in 1998 and headquartered in Chelmsford, MA, Sycamore Networks is focused on developing the transport, switching and management products required to create a flexible, intelligent, end to end optical network. Addressing the current limitations of the public network infrastructure to grow bandwidth and support new services, Sycamore leverages existing fiber optic resources by bringing intelligence to the optical domain. Sycamore has had a wild ride since it went public with much fanfare in late 1999. The shares hit a high of $200 last March before falling with the Nasdaq to a low of $50 in April. SCMR rebounded to $160 in late August, and made a 52-week low of $39.25 on November 30. Sycamore has released a continuous stream of excellent news in the last month, and, if the market conditions permit, the company should be poised for an excellent rebound. SCMR reported earnings above expectations on November 14th, and was one of the few stocks which actually rallied after reporting. Since then, SCMR has announced a significant number of new contracts. At a recent analyst meeting, Sycamore announced a multi year $40 million contract with Vodafone, as well as plans by 360Networks to deploy Sycamore's products in support of their network build. Last Thursday, the company unveiled a new product based on Carrier-Class EtherOptic technology to expand Ethernet connectivity across all segments of the intelligent optical network. Sycamore's chairman Desh Deshpande reiterated the company's bullish outlook at an interview on Dec 5th, and stated that the company saw no slowdown in the demand for their optical networking products by telecommunications carriers. Most Wall Street analysts love Sycamore. CSFB has given SCMR a twelve month price target of $150, as the shares trade at a lower multiple to 2001 sales than its peers in the industry. On Friday, Bank of America Securities initiated coverage with a buy rating. SCMR drifted down from a high of $72 on Tuesday, as the Nasdaq and the networking sector (NWX.X) slid. However, the stock rebounded from very strong support at $50 on Friday afternoon, and, most importantly, held onto its gains although the Nasdaq and many other stocks retreated in the last half hour of trading. SCMR is resting above the 10-dma of $54. Aggressive traders might consider taking positions on a rebound from that level. Conservative traders should wait for a break above resistance at $60. A break above this level on heavy volume could lead SCMR past the 5-dma of $62.46, and up to light resistance at $65, and strong resistance at the 50-dma of $69.85. Watch for strength in NWX.X, and others like JDSU and CIEN before taking positions. Critical support at $50 must be maintained, so set stops at $49. BUY CALL JAN-55 SMZ-AK OI=210 at $ 9.13 SL= 6.50 BUY CALL JAN-60*SMZ-AL OI=462 at $ 6.38 SL= 4.50 BUY CALL MAR-55 SMZ-CK OI=142 at $13.63 SL=10.25 BUY CALL MAR-60 SMZ-CL OI=325 at $11.87 SL= 9.00 http://www.premierinvestor.com/oi/profile.asp?ticker=SCMR CIEN - CIENA Corporation $100.72 (-13.28 last week) Helping to satisfy our insatiable demand for bandwidth, CIEN makes dense-wavelength division multiplexing (DWDM) systems for use with long-distance fiber-optic communications networks. CIEN offers optical transport, intelligent switching and multi- service delivery systems that enable service providers to deliver and manage high-bandwidth services to their customers. The company's MultiWave DWDM systems allow optical fiber to carry up to 40 times more data and voice information without requiring more lines. Amid a flood of earnings warnings and fears of a slowdown in the Telecom industry, CIEN stands on high ground, continuing to grow revenues at a breakneck pace. Keeping that trend alive, the company reported impressive earnings on December 7th, beating estimates by 2 cents and increasing year-over-year revenue growth to 103%. If the sector is slowing down, it sure is hard to see it by looking at the revenue and earnings growth of the leading Optical stocks. Like everything else with a high valuation, CIEN came under pressure beginning with the NT earnings report in late October, and since then has been trading in a range between $85 (now the site of the 200-dma) and $120. With the exception of the late November, pre-earnings dip to $70, CIEN has a solid looking chart that holds out the promise of a near-term return to the vicinity of $120. The post earnings rally drove CIEN up through its 6-week descending trendline on a volume-backed recovery in Optical Networking stocks. Then the flood of high-profile earnings warnings resumed, pulling our Optical hero back to earth, testing support at the descending trendline again on Thursday and Friday. Friday's strong gain in the face of severe weakness on the NASDAQ certainly looks like a good sign to us, but the week ahead is fraught with peril. The bottom line is, this is a high-risk play, but with high risk comes the possibility of high rewards as well. CIEN has substantial intraday support between $90-94, and any solid intraday bounce in this region looks attractive for new entries, but ONLY if the NASDAQ and Networking sector (NWX.X) are also moving in a positive direction. We have set a fairly tight stop at $91, as any close below the descending trendline will indicate a technical failure and call into question the likelihood of a continued recovery. Entering new positions on strength may be the more prudent approach for now. If that fits your trading style, look for CIEN to trade through $105 on solid volume and sector strength. BUY CALL JAN-100 UEE-AT OI=7576 at $14.00 SL=10.50 BUY CALL JAN-105*UEE-AA OI=3063 at $11.75 SL= 8.75 BUY CALL JAN-110 UEE-AB OI=3044 at $10.13 SL= 7.00 BUY CALL APR-105 UEE-DA OI= 565 at $21.25 SL=16.00 BUY CALL APR-110 UEE-DB OI= 977 at $19.13 SL=13.75 SELL PUT JAN- 85 UEE-MQ OI=3946 at $ 6.25 SL= 9.00 (See risks of selling puts in play legend) http://www.premierinvestor.com/oi/profile.asp?ticker=CIEN BRCM - Broadcom Corporation $123.13 (-5.06 last week) Broadcom Corporation is a provider of highly integrated silicon solutions that enable broadband digital transmission of voice, video and data to and throughout the home and within the business enterprise. These integrated circuits permit the cost-effective delivery of high-speed, high-bandwidth networking using existing communications infrastructures that were not originally designed for the transmission of broadband digital content. Having just booked some substantial gains in our recent BRCM call play, we are adding the stock back in based on the positive price volume action on Friday as well as a bounce of its ascending support line. Our profit-taking was based on a close below our stop price, which we may have set a little too tight, but this conservative risk management strategy now affords us with the capital to ride this stock again. Connecting the highs and lows since late November, we can see that BRCM bounced strongly off its lower channel line on Friday, as it closed up $5.88 or over 5 percent on 170% of ADV, bucking the trend of a falling NASDAQ. Adding a horizontal resistance line at $150 earlier in the week reveals a bullish ascending triangle. Resistance levels to watch for are the 5 and 10-dma, currently at $132.50 and $124.68 respectively. A break above the 10-dma with conviction could allow conservative traders to enter on strength. From there it could be a quick trip to the 5-dma. There is room in the triangle for BRCM to pull back a little, allowing aggressive traders to enter on bounces off support at $120 and $115 but make sure the stock closes above our stop price at $113. Considering the buying interest in BRCM on Friday despite a red day for the NASDAQ, if the Tech index finds some strength Monday and rallies, BRCM could be one of the high-flyers leading the charge. So confirm direction with market sentiment as well as with the Philadelphia Semiconductor Index (SOX) when making a play. Continued positive comments from analysts, such as Banc of America's reiteration of a Strong Buy rating on Tuesday, would also be a welcome driver to BRCM's stock price. With the top of the stock's trading channel now at $158 and rising, a bouncing NASDAQ could mean yet another highly successful BRCM call play. BUY CALL JAN-120 RDW-AD OI= 314 at $20.50 SL=14.75 BUY CALL JAN-125 RDW-AE OI= 639 at $18.25 SL=13.00 BUY CALL JAN-130*RDW-AF OI= 522 at $16.00 SL=11.50 BUY CALL FEB-125 RDW-BE OI= 153 at $22.50 SL=16.25 BUY CALL FEB-130 RDW-BF OI= 374 at $20.38 SL=14.75 SELL PUT JAN-115 RDW-MC OI= 434 at $12.63 SL=17.50 (See risk of selling put in play legend) http://www.premierinvestor.com/oi/profile.asp?ticker=BRCM RBAK - Redback Networks $83.00 (-10.75 last week) Founded in 1996 and headquartered in Sunnyvale, Calif., Redback Networks is a leading provider of advanced networking solutions that enable carriers, cable operators, and service providers to rapidly deploy broadband access and services. The company's market-leading Subscriber Management Systems (SMSs) connect and manage large numbers of subscribers using any of the major broadband access technologies such as Digital Subscriber Line (DSL), cable, and wireless. Companies in the Networking space are usually referred to in a broad sense, yet this is a sector of intricacies and distinctions, with companies competing in related yet different categories. To borrow from the Superhighway analogy, there are firms that pour the concrete, others that install the lights, signs, and even companies that paint the lines on the road. While CSCO and JNPR battle it out for market share in the router space, JDSU and GLW are going head-to-head in Fiber optics. There are also a number of smaller niche players such as FDRY and FFIV. However, RBAK finds itself in a unique position. As the "last mile" in networking, it doesn't matter who wins the router or Fiber Optics war because as the largest provider of DSL equipment, RBAK has a high level of control over the end user experience. Recent forays into China have proven to be successful and will most likely be a key area of growth going forward. While the decrease in capital spending has made traders nervous, there are certain expenditures, which companies can't afford not to spend money on. With shortening life cycles of products and continued demand, infrastructure remains an area of growth. On Friday, Banc of America Securities initiated coverage of RBAK with a Buy rating and a price target of $100, helping the stock close the day up $5.06 or 6.5 percent on almost twice the ADV in a down market. At this point, support for RBAK can be found at $80 and $75, but make sure the stock closes above our stop price of $74 when buying on a bounce. Overhead, resistance can be found at the 5 and 10-dma, at $88 and $85.43 respectively. An entry on strength can be had if sustained buying pressure lifts RBAK above the 10-dma. When taking a position, make sure that the NASDAQ is moving in your favor and confirm direction with that of other Networking issues. BUY CALL JAN-80 BUK-AP OI= 182 at $14.50 SL=10.50 BUY CALL JAN-85*BUK-AQ OI= 277 at $12.13 SL= 9.00 BUY CALL JAN-90 BUK-AR OI= 150 at $10.00 SL= 7.00 BUY CALL APR-85 BUK-DQ OI= 752 at $21.63 SL=15.50 BUY CALL APR-90 BUK-DR OI= 107 at $19.75 SL=14.50 SELL PUT JAN-75 BUK-MO OI= 215 at $ 8.00 SL=11.00 (See risk of selling put in play legend) http://www.premierinvestor.com/oi/profile.asp?ticker=RBAK ****************** NEW LOW VOLATILITY ****************** FRE - Freddie Mac $66.36 (+2.69 last week) Freddie Mac is a shareholder-owned corporation whose people are dedicated to improving the quality of life by making the American dream of decent, accessible housing a reality. They accomplish this mission by linking Main Street to Wall Street - purchasing, securitizing and investing in home mortgages, and ultimately providing homeowners and renters with lower housing costs and better access to home financing. The premise behind this new play is quite simple. The interest rate environment is expected to become a lot more friendly in the near future. And Freddie Mac is a direct beneficiary of lower interest rates. Shares of Freddie Mac have been discounting a rate cut for quite some time noting the stock's impressive rally from its $40 base traced last summer. The momentum driving Freddie's shares higher has been very consistent for the last four months, and we're looking to jump on the train and profit from its cheap options. New positions can be added on a pullback to support at $65, or slightly lower at $64, which is also the site of the 10-dma. We have set our protective stop at $62, slightly below the 10-dma, and would exit positions if shares settled below that level. If the stock continues plowing higher early next week, look to enter on an advance past $66.75 - the stock's intraday high last Friday. But make sure to confirm higher prices with heavy volume. BUY CALL JAN-65*FRE-AM OI=3086 at $4.25 SL=2.50 BUY CALL JAN-70 FRE-AN OI=4444 at $1.94 SL=1.00 BUY CALL APR-70 FRE-DN OI= 323 at $5.00 SL=3.00 BUY CALL JUL-70 FRE-GN OI= 258 at $7.00 SL=5.00 http://www.premierinvestor.com/oi/profile.asp?ticker=FRE WFC - Wells Fargo $50.44 (+1.00 last week) Wells Fargo and Company is a $263.5 billion diversified financial services company providing banking, insurance, investments, mortgage and consumer finance services through 5,700 stores, its Internet site and other distribution channels across North America as well as internationally. Wells Fargo represents another attempt to capitalize on the expected lowering of interest rates. Plus, the options on Wells Fargo are quite cheap. Shares of Wells Fargo have been trading in what has amounted to a 15-month base since October of 1999 when the stock reached a peak of $50. Just last Friday, shares broke above the pivot point and closed above $50 - marking an all-time high. What's more, volume was extraordinarily high during the stock's advance above the $50 level. We're looking to get in early on the breakout, and with that, new positions could be added early Monday on continued strength in shares. Additionally, a pullback to support at $50 or the 10-dma at $49 could provide for solid entry points. We have set our stop at the $48 level to provide the stock with room to operate. BUY CALL JAN-45 WFC-AI OI=11196 at $6.25 SL=4.25 BUY CALL JAN-50*WFC-AJ OI=18005 at $2.63 SL=1.25 BUY CALL APR-50 WFC-DJ OI=23665 at $4.75 SL=3.00 BUY CALL JUL-55 WFC-GK OI= 3195 at $4.00 SL=2.50 http://www.premierinvestor.com/oi/profile.asp?ticker=WFC ************************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=1143 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 12-17-2000 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/121700_3.asp ************************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=1131 ************************************************************** ****************** CURRENT CALL PLAYS ****************** LH - Laboratory Corp. of America $157.06 (+9.31 last week) Laboratory Corporation of America Holdings (LabCorp) is the #2 clinical laboratory service in the world, behind Quest Diagnostics. LH performs 2000 types of tests for more than 100,000 clients, including health care providers, pharmaceutical firms, physicians, government agencies and employers. With 25 major laboratories and some 1200 service sites nationwide, the company emphasizes specialty and niche testing such as allergy tests, HIV tests, blood analyses, and substance abuse screenings. Relative strength is the name of the game in this market. While the major indices cratered again on Friday, LH managed to eke out a gain on the day. Granted, it was only $0.06, but a gain is a gain. As the #2 clinical laboratory service in the world, LH has ridden the wave of enthusiasm for Medical stocks for a nearly 300% gain since the April lows. The new growth industry seems to be anything tied to the Health Care industry, and LH is winning big time, providing the tests necessary for everything from blood tests to HIV testing. Driving the increase in the stock's value has been good old earnings. The company has handily beat estimates the last 2 quarters, and with the current demand for medical testing and services, this looks like a trend that will continue. The up-trend that has been in place since the April lows has continued to provide a predictable trading range, and looks like it will continue to do so into the end of the year. The sharp drop in the broader markets on Friday dragged our play down to test our $149 stop, from which it sharply rebounded, gaining back all of its intraday losses, plus a little bit extra by the close. This was an ideal entry point for aggressive traders, as the same pattern could be seen in the share prices of competitors DGX and PPDI. Additional intraday dips that are met with strong buying look attractive for new entries in the week ahead. Watch LH's primary competitors, DGX and PPDI, for confirmation of strength in the Medical Testing sector. More timid players will want to wait for LH to trade through the $160 resistance level before taking a position, and then ride the stock up to the top of the channel, near $168. BUY CALL JAN-155 LH -AK OI=877 at $14.38 SL=10.75 BUY CALL JAN-160*LH -AL OI= 33 at $12.13 SL= 9.00 BUY CALL FEB-150 LH -BK OI= 50 at $20.88 SL=15.50 BUY CALL FEB-160 LH -BL OI= 1 at $18.25 SL=13.25 SELL PUT JAN-140 LH -MH OI= 50 at $ 5.25 SL= 7.50 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=LH SGP - Schering-Plough Corporation $57.94 (+2.69 last week) Schering-Plough develops and markets pharmaceutical products and treatment programs worldwide. It operates in three principal product lines: prescription drugs, animal health products, and over-the-counter (OTC) drugs. At the top of the company's pharmaceutical inventory is the world's leading antihistamine, Claritin. Some OTC drugs that you may be familiar with include brand names Afrin, Dr. Scholl's and Coppertone. Along with Merck (MRK) and Pfizer (PFE), Schering-Plough (SGP) is a leading developer and marketer of the world's principal drugs. During this last week of trading, SGP edged fractionally higher for four out of five sessions, setting new 52-week records. Friday's action set the upper resistance at $58.69. In its entirety, the end to the election drama played out quickly in the marketplace; although the ushering in of a Republican administration bodes well for the drug makers. The issues of rising drug prices and Medicare reform can now be put on the back burner. Earnings for SGP and its rival, MRK, are also expected to be sound and meet the financial forecasts next month. We're looking for continued strength in the sector and for SGP to generate more upside momentum as it continues to flirt with the $60 level. Our protective stop is currently set at $55, which parallels the 10-dma ($55.81). If the negative sentiment of the broader market managed to drag SGP below this mark at the closing bell, we'd exit the play and move on to more lucrative opportunities. The more cautious bull traders will want to see SGP blast through the upper ceiling at $60 before taking positions. If your preferred strategy is to enter on dips, then look for strong bounces off $55, the above-mentioned "break it or make it" point. BUY CALL JAN-55*SGP-AK OI=9069 at $4.75 SL=2.75 BUY CALL JAN-60 SGP-AL OI=6358 at $2.00 SL=1.00 BUY CALL FEB-55 SGP-BK OI=3262 at $5.75 SL=3.75 BUY CALL FEB-60 SGP-BL OI=3340 at $3.00 SL=1.50 BUY CALL FEB-65 SGP-BM OI= 259 at $1.50 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?symbol=SGP A - Agilent Technologies Inc $56.88 (-2.56 last week) Agilent is a diversified technology company that provides solutions to high growth markets within the communications, electronics, healthcare and life sciences industries. They're a leading maker of analysis equipment with 51% of sales deriving from its Test and Measurement Unit. Recently Philips Electronics agreed to buy Agilent's Healthcare Solutions for $1.7 bln. Customers include AT&T, Cisco, and Pharmacia. I think can, I think can, or can I? While the question of a breakout above the critical $60 mark hangs over us, the outlook appears promising. The ascending wedge formation favors an upside explosion through $60, if the bulls can generate enough momentum to break out of the current consolidation range! Look for a more positive market environment to facilitate this bold upside move. Most certainly, there's no doubt this stock's been consistently tacking on gains since mid-November, but we're at a critical point in the play. On the one side of the coin, Friday's downdraft to $54.50 and subsequent close at $56.88 back fills the sharp upward gap that occurred on December 7th. Take a look at a daily chart to visually confirm this statement. Therefore, look at it from a technical perspective, Friday's pullback offers great entry opportunities going into next week. But the more conservative approach is still to wait for the upside confirmation, then enter aggressively on dips or buy into the strength as A moves into the higher trading realms of last summer. Good news for the sector came by way of Tektronix, the #2 maker of electronics-testing equipment. They set the tone for the sector's earnings with solid numbers last week. The company saw 2Q profits from its continuing operations more than double on soaring sales. BUY CALL JAN-55 A-AK OI=2340 at $6.25 SL=4.25 BUY CALL JAN-60*A-AL OI=4257 at $4.00 SL=2.50 BUY CALL JAN-65 A-AM OI=3022 at $2.56 SL=1.25 BUY CALL FEB-60 A-BL OI= 891 at $5.75 SL=3.75 BUY CALL FEB-65 A-BM OI= 431 at $4.38 SL=2.75 http://www.OptionInvestor.com/oi/profile.asp?ticker=A MEDX - Medarex Inc $48.69 (+0.44 last week) Medarex is a human monoclonal antibody-based company with integrated discovery, development and manufacturing capabilities, utilizing the Company's genetically engineered mice to create fully human monoclonal antibodies. Several of their therapeutic products, which target cancers, tumors, and leukemia, are in clinical trials. Major clients include Centacor, Merck, and Aventis Behring. We initiated coverage on this biotech a couple weeks ago on its strong recovery potential. Traders have subsequently been amply rewarded by its strength amid the market adversity and wide variety of trading opportunities. But going forward, MEDX needs to shatter the immediate resistance lying at $50 and challenge Monday's intraday high of $54. A cautious trader might consider waiting for a momentum-backed breakout above $54 before strategizing additional plays. Other more assertive traders could look at Friday's transgression below our $45 protective stop and subsequent rebound as a bullish forecast going into next week. Put another way, MEDX moved off its own firmer support at $43 as the NASDAQ bounced off its at 2600. A synchronized coincidence? NO! About 75% of all stock gyrations are the result of broader market action and sentiment. Therefore, high-rollers looking to cash in on a sharp upswing, might take entries on intraday dips near the 30-dma ($46.73) or even a bit lower, if your portfolio can handle the risk. Three influencial brokerage firms initiated positive coverage on MEDX this week. On Tuesday, UBS Warburg came forward with a new Buy and on Friday, Chase H&Q and Goldman Sachs put in their two cents. The latter firms started MEDX with a Buy and Market Outperform, respectively. The Fed meeting is Tuesday. This event may be all the bulls need to jumpstart a rally. But if a true rally doesn't transpire, you might want to consider staying in cash until there's more confidence in the markets. BUY CALL JAN-45 MZU-AI OI= 112 at $11.75 SL=9.00 BUY CALL JAN-50*MZU-AJ OI=1235 at $ 8.63 SL=6.00 BUY CALL JAN-55 MZU-AK OI= 236 at $ 6.75 SL=4.75 BUY CALL FEB-50 MZU-BJ OI= 331 at $10.38 SL=7.50 BUY CALL FEB-55 MZU-BK OI= 329 at $ 8.50 SL=6.00 http://www.premierinvestor.net/oi/profile.asp?ticker=MEDX *************************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 at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1165 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 12-17-2000 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/121700_4.asp ************************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=1132 ************************************************************** ************* NEW PUT PLAYS ************* KO - Coca-Cola Company $53.50 (-7.38 last week) Coca-Cola is the world's top soft-drink company, commanding more than 50% of the global market. On the charts, the company takes the #1 spot with Coke and the #3 slot with its diet Coke sales - Pepsi is sandwiched in between. Some other brands you may be familiar with include Minute Maid, Fruitopia, or Dasani Water. The firm manufactures, distributes, and markets its 230 brands of soft drinks and syrups, but does no actual bottling of the products. About two-thirds of its sales revenue is derived from outside the US. Coke may be the "real thing" and top the list as the world's #1 soft-drink, but the company's stock is taking a pounding in the marketplace. KO is typically seen as a conservative, non- cyclical play; so a $7.38, or 12.1% loss in five sessions certainly raises eyebrows. Last week, the share price slipped under its higher support level of $60 and more importantly, violated a November low of $55.25 on strong volume during Friday's session. The critical dive, which took KO to $53.50, was amid phenomenal volume of 13.6 mln shares exchanging. Even last November's news of the company's $192.5 mln discrimination settlement and collapsed acquisition deal for Quaker Oats (OAT) couldn't effectively take KO below the $55 mark. The negative market conditions this week however, did. We're looking for more market uncertainty and negative sentiment, in conjunction with the stock's own bearish technicals, to take it lower over the short-term. A potential pitfall is the upcoming Fed meeting on Tuesday, which could incite some bullish action, so let's keep our exit point set firmly at $56. A high-volume rollover at the recently violated 200-dma ($54.94) offers riskier entries into the decline, yet offers more potential for profit, if KO challenges historical support at the $50 level. BUY PUT JAN-55 KO-MK OI= 7256 at $3.30 SL=1.75 BUY PUT JAN-50*KO-MJ OI=10468 at $1.25 SL=1.00 BUY PUT JAN-45 KO-MI OI= 3723 at $0.50 SL=0.00 High Risk! http://www.premierinvestor.net/oi/profile.asp?ticker=KO ***************** CURRENT PUT PLAYS ***************** SBC - SBC Communications $53.69 (+2.00 last week) BellSouth Corporation is an integrated communications services company headquartered in Atlanta, GA serving more than 41 million customers in the United States and 16 other countries. BellSouth, consistently recognized for customer satisfaction, provides residential, business and wholesale customers with integrated voice, video and data services to meet their communications needs. BellSouth is a Fortune 100 company with total revenues exceeding $26 billion. A barrage of sellers at the close on Friday helped to breathe life back into our put play. In the last update we cautioned that SBC had to stay below resistance at $55, and the stock did just that. This has been a tough level for SBC as traders have clearly been selling it there. The barrage of sellers at the close came in the form of large blocks, knocking the bid lower. Trades of 60K, 173K and 231K forced the price down. This is likely related to the triple-witching activity, but SBC is now moving in the right direction. The key will come Monday as we will see if it was all option related or not. If the selling continues, we are in good shape for both our current plays and for new entries. On the other hand, if SBC bounces right back to the $54.50-$55.00 range it has been in for the past few sessions, then we will be looking for an exit. The 10-dma at $53.15 will be an important support level we would like to see fail on Monday. A close under that level will bring new sellers into the stock. Another interesting fact to watch is to see if SBC starts to fail as the Nasdaq recovers. Many traders supporting the stock this week have done so on a value basis and as a safe haven from the high- techs. The stop remains at $55 and we will wait for SBC to make up its mind early next week. BUY PUT JAN-55*SBC-MK OI=7955 at $3.88 SL=2.00 BUY PUT JAN-50 SBC-MJ OI=7177 at $1.69 SL=0.88 http://www.premierinvestor.net/oi/profile.asp?ticker=SBC EMC - EMC Corporation $68.13 (-18.81 last week) EMC wants to be your storage solution. The company designs, manufactures and markets a wide range of enterprise storage systems, software, networks, and services. The company’s products store, retrieve, manage, protect and share information from all major computing environments including mainframe, UNIX, and Windows NT. With offices around the world and a 35% growth rate for the first 9 months of the year, EMC is effectively filling its role as the worldwide storage leader. This market environment is a bear's delight. All you have to do is find a solid high-valuation company that has been a stellar performer over the past year and wait for the slightest hint of weakness. Then buy some front month puts and wait for the seemingly-inevitable decline. EMC has been a perfect example of this over the past week as it declined from $91.25 Monday morning to an intraday low of $65 on Friday. The leading indicator for this play was the rollover the prior week at the top of the 2-month descending channel. The 200-dma (then at $79) was looking vulnerable and boy, was it ever! Dragged lower by general technology weakness, prompted by the rapidly expanding list of earnings warnings, EMC was the baby thrown out with the bathwater last week. The stock is being punished by the poor performance of other technology titans like MSFT, and headed sharply lower throughout the week. The final blow was delivered by Bear Stearns on Friday, as the firm downgraded EMC from Buy to Attractive on concerns of a slowdown in corporate IT spending. Despite the fact that EMC reiterated its guidance (unchanged, I might add) for the current quarter and all of 2001, investors jumped ship like lemmings, handing the stock a $6.50 loss on volume nearly triple the 12 million share ADV. While there may be more weakness in store (Stochastics have not yet reached oversold), Friday's action penetrated both the lower Bollinger band and the lower channel line, making a relief bounce likely in the days ahead. Accordingly, we have lowered our stop to $72 - if the bulls can mount a recovery that clears the bottom of Friday's gap, then it will be time to leave our very profitable play. While aggressive players can consider a rollover from the $72 area for new entries, we think the best approach right now is to watch for further weakness before initiating new positions. If $65 fails to hold as support, that would be a good entry point for more conservative traders, as it could indicate EMC is headed for its next level of support near $60. Remember the FOMC meeting on Tuesday, which could create a positive market bias, and only trade with the broader technology market. If the NASDAQ is in rally mode, EMC is likely to go along for the ride, making new put plays an unwise choice until the bears regain control. BUY PUT JAN-75 EMB-MO OI= 5722 at $11.63 SL=8.75 BUY PUT JAN-70*EMB-MN OI=13036 at $ 8.38 SL=6.00 BUY PUT JAN-65 EMB-MM OI= 3664 at $ 6.00 SL=4.00 http://www.premierinvestor.net/oi/profile.asp?ticker=EMC IBM - Intl Business Machines Corp $87.81 (-9.19 last week) IBM develops, manufactures, and sells advanced technology processing products. They are the world's top provider of computer hardware including PCs, mainframes, and network servers. IBM is also an industry leader in software and peripherals, second only to Microsoft. The company owns software pioneer Lotus development, maker of Lotus Notes. The increasing evidence of a slowing economy is clearly having an effect on technology stocks. Last week, three major players lowered their earnings forecasts. Compaq Computers (CPQ), the biggest maker of PCs, Microsoft (MSFT), and chipmaker Advanced Micro Devices (ADV) were the latest in a series of companies that rocked the Street with warnings. Moving forward, some analysts believe it's only matter of time before other big caps like IBM (we can wish!), DELL, or perhaps SUNW confess their own discouraging outlooks. If another round of companies announced scaled-back projections, the impact would devastate the broader markets. Just take a look at the recent carnage of Big Blue. IBM's shed a hefty 9.5% since slipping below $95 and the underlying 10-dma ($95.13) last week. That's quite a significant amount for a company who's generally surrounded by positive press and maintains a leadership position within the PC and hardware sectors. The increasing weakness exhibited in Friday's session, which brought IBM down to $87.31 on the decline, eased our concerns of an impending bottom at the $91 and $92 levels. In light of Friday's breakdown, we've lowered our stop to the $92 mark to protect against a buying frenzy. A strong rollover at near the 5-dma, currently at $92.09, offers an aggressive entry into the downward momentum; although a break of the near-term support at the $87 level would set a more bearish tone. BUY PUT JAN-90 IBM-MR OI=16394 at $7.50 SL=5.25 BUY PUT JAN-85*IBM-MQ OI=14196 at $5.50 SL=3.50 BUY PUT JAN-80 IBM-MP OI= 8152 at $3.75 SL=2.25 http://www.premierinvestor.net/oi/profile.asp?symbol=IBM ARBA - Ariba, Inc. $67.13 (-15.38 last week) As a leading provider of B2B solutions and services to leading companies around the world, including more than 20 of the FORTUNE 100, Ariba helps companies cut through the complexity of opportunities presented by the new economy. Ariba provides the most comprehensive and open commerce platform to build B2B marketplaces, manage corporate purchasing, and electronically enable suppliers and commerce service providers on the Internet. Made up of a complete set of integrated commerce solutions and open network-based commerce services, the Ariba B2B Commerce Platform offers a single system for managing buying, selling, and marketplace eCommerce processes. It's no surprise that when businesses suffer, so does B2B. It's a vicious circle that feeds upon itself. A slowing economy means less goods and services are demanded, leading to weaker-than- expected sales, resulting in a lower bottom line causing earnings multiple compressions, layoffs, cutbacks and the dreaded negative wealth effect, thereby reducing customer purchasing power all across the board. This equates to less goods and services demanded, which starts the cycle all over again. With Election uncertainty finally resolved, that was no longer an excuse for the markets not to rally. Yet ARBA hit resistance at $90 on Monday and from there it's been almost straight down. Coverage initiated on the company by Lehman Brothers on Tuesday, a Neutral rating, did not inspire confidence in this former high-flyer. As well, questions regarding ARBA's ability to compete based on its product line, deemed a little too narrow by analysts, is also weighing on the stock. On Friday, ARBA got a small dose of relief, as it closed up fractionally on 118% of ADV, helped by Oracle's positive earnings report. But at this point, it appears that a re-test of recent lows in the low 50's is quite possible, with resistance from the 5 and 10-dmas at $73.63 and $72.28, respectively. A failed rally above these levels as well as our stop price at $73 could provide for an aggressive entry. For the conservative, wait for ARBA to break below $65 support on volume, before making an entry. In both cases, confirm sector sympathy with Merrill Lynch's B2B HOLDR (BHH) and Tech market sentiment with the NASDSAQ before taking a position. BUY PUT JAN-70 IUR-MN OI= 728 at $13.00 SL=9.75 BUY PUT JAN-65*IUR-MM OI=1656 at $10.13 SL=7.00 BUY PUT JAN-60 IUR-ML OI= 816 at $ 7.75 SL=5.75 http://www.premierinvestor.net/oi/profile.asp?ticker=ARBA CELG - Celgene Corp. $44.75 (-19.31 last week) Celgene is a pharmaceutical company with a major focus on the discovery, development and commercialization of small molecules for cancer and immunological diseases. Celgene's medical research and development team is working to extend the boundaries in the areas of small molecule immunotherapeutic and biocatalytic chiral chemistry by developing pure versions of existing drugs. One of the great risks of investing in a Biotech is that even in the rare case where a company has successfully parlayed its pipeline into a blockbuster treatment, over-reliance on just one or two drugs as its revenue source can make for a volatile situation. It's a simple case of having too few eggs and too much basket. With that in mind, shares of CELG had been running up all year long, based on the revenue growth of its star drug Thalomid. Touted as the do-it-all cancer drug, CELG has been quickly gaining market share as it has been found to be successful in treating numerous forms of cancer. The stock had been moving higher recently thanks to the annual American Society of Hematology (ASH) meeting recently, where excitement of what could happen at the show brought in traders and investors alike. However, with the show now concluded, the news has all but dried up for the company and with that, investor interest. Not only that but the prospect that Campath, a drug developed by IXLO and MLNM, could cut deeply into the sales of Thalomid has investors scared, as seen by the recent sell-off on high volume. In fact, the stock has now broken its up-trend line from late December 1999. This could mean more downside but for now, with the 5-dma all the way up at $51.61, the stock could take a little breather before continuing lower. Overhead resistance levels abound for this stock at $45, $46, $47 and our stop price of $49, which is also where the stock found a bottom on two occasions in mid-November. This level should be formidable. Failed rallies above resistance should provide aggressive traders with an entry point. For those looking to enter on weakness, look for CELG to fall below $43 on volume for a possible entry. Confirm sentiment with the AMEX Biotech Index (BTK) or Merrill Lynch's Biotech HOLDR (BBH) when making a play. BUY PUT JAN-50 LL-MJ OI=193 at $9.00 SL=6.25 BUY PUT JAN-45*LL-MI OI=327 at $5.88 SL=4.00 http://www.premierinvestor.net/oi/profile.asp?ticker=CELG *************************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 at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1166 ************************************************************ ***** LEAPS ***** Do You Believe In Santa Claus? By Mark Phillips Contact Support Remember the first time when doubts were raised in your mind about whether the jolly old fat man was fact or fiction? I remember clearly when my younger brother and I snuck out of bed one Christmas eve to peek down the stairs as we heard rustling near the fireplace. Sure enough, we could see the familiar looking person filling the stockings with care, and it was exactly who we expected to see. My mother has always been Santa in our family, and rightly so. Nobody could possibly do the job better! Maybe it has something to do with the fact that she was born on Christmas day, and her parents had the foresight to name her Carol. No matter what the cause, I want to take a moment to say "Thanks for keeping the magic of Christmas alive." Investors have been similarly questioning whether the Santa Claus rally is really going to happen this year. First they looked to the resolution of the election to provide an upside bias, but as we saw last week, that was not to be. All the major indices sold off sharply, driven primarily by the rapidly growing list of high-profile earnings warnings. Couple that with downgrades of previously untouchable stocks like MSFT, EMC and SUNW, and you can see why the bulls are having a hard time making any headway. Concerns are mounting that we could see a warning from CSCO, an event that would definitely have a negative effect on the markets as a whole. After all, CSCO is like the Energizer Bunny...it keeps going and going, and never misses its earnings target. While such an event does not seem likely, 2 months ago it seemed unlikely that we would ever see NT trading below $50, and now we are waiting for it to regain that level. As you can see from the Market Sentiment section, the Commercials are continuing to add to the record net short positions in the S&P500, and rightly so. One sector after another has fallen from grace, as the impact of the economic slowdown is being felt throughout the markets. Our last chance for that year-end rally seems to hinge on the FOMC meeting on Tuesday. Given the consistent signs of slowing economic growth and non-existent inflation, it is widely expected that Greenspan and company will change their bias at that meeting. That outcome is likely already factored into the market. What investors want to see is an actual reduction in interest rates - if he delivers that, it will be party hats and horns for everyone, and we will likely see at least a tradable rally into the end of the year. The more likely scenario however, is that the reduction in interest rates won't come until early next year, and investor disappointment could result in a fresh batch of selling as we wind down the year 2000. The VIX is once again above 30, ending the week at 31.15. This has become very familiar territory over the past 2 months, and clearly is insufficient to signal a market bottom in the absence of a change in either economic conditions or policy. While many of the pundits on CNBC are still calling for the NASDAQ to have solid support at the 2500 level, the action last week does not bode well for the bulls' chances in the near term. Now before you think I have gone crawling into Molly's bear cave to hibernate for the winter, let me reassure you that nothing could be further from the truth. As a LEAPS investor, I see opportunities for profit around nearly every corner. We have time on our side and when these leading stocks begin to recover, the profits we gain could be truly impressive. The catch is that we MUST wait for the recovery to begin. We can't be trying to buy that next dip, just because the stock is soooo cheap now. Not long ago, INTC was cheap at $50, and NT seemed cheap at $60. How about the bargain of buying JDSU at the bargain basement price of $85, only to see it hit $50 two weeks ago. Buying LEAPS at those levels turned into a disastrous exercise, especially if you neglected to use stop losses. As a LEAPS investor, Daily and Weekly charts are our friends. When a solid stock begins to recover from selling that has pushed Stochastics into oversold in both of those time frames, it is a strong indication that a recovery is about to begin. Couple that with positive sentiment in the broader market AND the specific sector, you have a recipe for a great entry point for the next leg to the upside. Wait for the signals to materialize, and don't try to force your trades. In this market, they will come to you, and it is highly unlikely that the stock you want will run away from you. This is not last year's market, and we can't approach it like we did last year unless we only want a lump of coal in our stocking next year. Invest wisely over the coming weeks, and next year could prove to bring us a VERY MERRY CHRISTMAS. I still think the bottom on the NASDAQ is VERY close and I'm watching carefully for entry points to buy my favorite stocks. But I've been burned enough times in the past few months that I am waiting for all the signals to align before pulling the trigger. I'd rather miss out on the first few points of the move than get pulled into a play I never should have entered in the first place. While we are waiting to see whether we will get an early Christmas present from Uncle Alan, take the time to reflect on who has always been YOUR Santa Claus over the years. Make sure you let them know how much you appreciate them. Sure, making money in the markets is great, but what good is it if we neglect the relationships that are TRULY important in our lives. I'm keeping my fingers crossed for Greenspan to wear a big red suit on Tuesday...that may be a more likely event than an actual interest rate reduction. But that doesn't mean I can't hope...after all, Christmas is a magical season. Anything can happen! Have a great week! Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2002 $ 45 WUE-AI $ 9.50 $32.63 243.42% 09/17/00 JAN-2003 $100 VUE-AT $32.75 $16.75 -48.85% CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $14.50 31.82% 11/26/00 JAN-2003 $ 60 VYC-AL $16.63 $13.63 -18.05% NT 11/28/99 JAN-2002 $37.5 WNT-AU $15.13 $12.88 -14.90% 09/10/00 JAN-2003 $ 75 ODT-AO $27.50 $ 6.75 -75.45% SUNW 12/19/99 JAN-2002 $ 90 WJX-AR $22.00 $ 9.88 -55.11% 11/05/00 JAN-2003 $120 VSU-AD $39.50 $ 5.25 -86.71% AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $ 5.70 -69.40% 08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $13.30 -24.00% AXP 03/12/00 JAN-2002 $46.6 WXP-AQ $ 9.33 $15.25 63.45% WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $20.25 276.39% 10/22/00 JAN-2003 $ 45 VWI-AI $ 7.88 $12.88 63.49% JDSU 04/16/00 JAN-2002 $ 80 YJU-AP $39.63 $14.00 -64.67% 08/27/00 JAN-2003 $130 VEQ-AF $55.25 $12.38 -77.60% NOK 05/21/00 JAN-2002 $ 50 IWX-AJ $17.25 $10.50 -39.13% 07/30/00 JAN-2003 $ 50 VOK-AJ $17.75 $15.00 -15.49% C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $ 9.50 - 7.86% 10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $ 8.38 -31.63% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $37.88 121.10% JAN-2003 $ 70 OZG-AN $23.13 $46.13 99.42% EXDS 08/06/00 JAN-2002 $ 55 WZZ-AK $20.75 $ 7.00 -66.27% JAN-2003 $ 60 VTQ-AL $25.38 $10.38 -59.12% FRX 08/13/00 JAN-2002 $ 95 WRT-AS $31.38 $52.00 65.71% JAN-2003 $100 VFB-AT $37.38 $58.75 57.17% QCOM 09/17/00 JAN-2002 $ 70 WBI-AN $22.50 $29.50 31.11% JAN-2003 $ 70 VLM-AN $29.63 $37.63 26.98% TXN 10/22/00 JAN-2002 $ 50 WTN-AJ $13.75 $12.75 - 7.27% JAN-2003 $ 50 VXT-AJ $18.38 $17.63 - 4.08% ADBE 10/29/00 JAN-2002 $ 80 YEJ-AP $23.50 $15.50 -34.04% JAN-2003 $ 80 VAE-AP $30.75 $22.63 -26.42% BGEN 11/05/00 JAN-2002 $ 70 WGN-AN $17.25 $10.25 -40.58% JAN-2003 $ 70 VNG-AN $25.00 $16.63 -33.50% MU 11/26/00 JAN-2002 $ 45 WGY-AI $13.13 $ 9.75 -25.71% JAN-2003 $ 45 VGY-AI $17.25 $13.88 -19.57% A 12/03/00 JAN-2002 $ 55 YA -AK $16.88 $19.25 14.07% JAN-2003 $ 60 OAE-AL $19.88 $22.50 13.21% ORCL 12/10/00 JAN-2002 $ 35 WOK-AG $ 7.75 $ 7.00 - 9.68% JAN-2003 $ 35 VOR-AG $11.13 $10.25 - 7.91% QQQ 12/10/00 JAN-2002 $ 70 WNQ-AR $15.13 $12.38 -18.21% JAN-2003 $ 75 VZQ-AW $19.25 $16.13 -16.23% Spotlight Play AOL - America Online $48.96 The news we have all been breathlessly awaiting finally arrived this week. No, I'm not talking about the election results. The Federal Trade Commission (FTC) finally granted their approval of the AOL/TWX merger, removing the cloud of uncertainty that surrounded the creation of a true media giant. With that hurdle out of the way, investors are now left to try to figure out how to value shares of the combined company. This is no small feat, given the wide disparity between valuations normally assigned to Internet companies (AOL) and mainstream media companies (TWX). AOL has built a solid base near $40, from which it began a solid recovery in early December. Moving up during the past week has been no small feat, given the abuse that has been heaped on just about any technology-related stock. News of the FTC merger approval gave the bulls one more shot in the arm, allowing them to push AOL briefly above the $50 level on Thursday. MSFT-induced technology weakness caused the stock to gap down at the open on Friday, but then the stock managed to rally right into the close. Recall that our play appeared to have rock-solid support between $48-51 from February through September, but when the NASDAQ cratered in October, AOL got dragged down as well, hitting an intraday low of $37. More volatility in the last two weeks of the year could provide aggressive traders with an attractive entry on a bounce at either the $45 or $40 support levels. If you are going to target shoot these dips, wait for the stock to bounce on solid volume before playing and keep those stops in place. If AOL falls out of favor and violates the $40 level then this play will be history. Buying on strength is definitely a safer way to play, especially in this market - a breakout above $52 looks like a good conservative entry point. BUY LEAP JAN-2002 $50.00 WAN-AJ at $10.80 BUY LEAP JAN-2003 $55.00 VAN-AK at $13.30 New Plays None Drops SUNW $30.44 Leading the way in what turned out to be another dismal week on the NASDAQ, SUNW fell through major support at $35 on Monday amidst extremely heavy volume. Investors responded to rumors of accounting irregularities (the death sentence for any stock in this market) by selling the stock first and asking questions later. Despite the company's assertion that the rumors were false, the stock continued to fall throughout the week on very heavy volume. Hobbled by downgrades from Banc of America Securities and Bear Stearns early in the week, the selling frenzy was just getting started. Next came Merrill Lynch, removing SUNW from their Techfolio amidst concerns of slowing growth. Continued earnings warnings (most notably MSFT on Thursday) overwhelmed the positive earnings reports from ORCL and ADBE to drive the NASDAQ below 2600 on Friday, and SUNW suffered as well, hitting a new 52-week low of $27.50 before the bargain hunters began to show up. While it was a relief to finally see the stock bounce near the close, the technical damage was done, making SUNW the latest casualty on our playlist. Support at $35 is now going to act as resistance, and the next historical support level to provide some relief is down below $25. In the year that SUNW has been on our playlist, the stock soared from below $40 to over $60, before succumbing to the overall technology weakness. The stock's 50% decline in the past 5 weeks is just the latest reminder of why we must always play with stop losses. Juicy profits were on the table, but unless we "sold too soon" to lock them in, they evaporated in the recent market sell off, leaving us nothing but the memories. *********** SPLIT PLAYS *********** Can Greenspan Set Stock Prices Free? By Matt Russ Oh, how the markets are waiting for the Fed meeting on Tuesday! Even a shift in bias to Neutral would be welcomed. It is the only real remedy to the market's primary concern: earnings. After the Microsoft warning, it is apparent that even the untouchables of the market are vulnerable to the slowing economy. It is widely expected that the Fed does shift their bias as a precursor to an anticipated rate cut in late January. The combination of these two events will likely set stock prices free; free from the fear of a slowing economy and free from downward trading pressure. It ought to make for an interesting 2001, but we're not out of the woods yet. In the meantime, we'll keep our eyes open for those stealth split candidates. Current Split Run Plays None Current Split Candidate Plays LH BRCM Candidates That Are Not Current Plays ALXN CHKP CMVT GENZ PMCS VRTS FRX 10 Most Recent Announcements We Predicted BRCD - 11/29 (most recent announcement) MANU - 11/08 MUSE - 10/25 AMCC - 10/11 DNA - 10/05 LEH - 09/20 ORCL - 09/14 SUNW - 08/17 GLW - 08/16 HWP - 08/16 Major Announcements So Far This Month = 11 HWEN GMCR BOBJ DFXI FSCR HOTT SANM SEIC SCHL GGG EAT For our complete stock split calendar, click here... http://members.OptionInvestor.com/splits/index.asp Symbol Company Name Splits Payable Executable BARZ - BARRA, Inc. 2:1 12/18/2000 12/19/2000 MUSE - Micromuse, Inc. 2:1 12/19/2000 12/20/2000 ILI - Interlott Technologies 2:1 12/20/2000 12/21/2000 BRCD - Brocade Comm 2:1 12/21/2000 12/22/2000 UNH - UnitedHeath Group Inc. 2:1 12/22/2000 12/26/2000 SPIR - Spire Corporation 2:1 12/22/2000 12/26/2000 IWOV - Interwoven 2:1 12/29/2000 01/02/2001 CRY - CryoLife 3:2 12/27/2000 12/28/2000 HOTT - Hot Topic Inc. 2:1 12/27/2000 12/28/2000 USPH - U.S. Physical Therapy 2:1 01/05/2001 01/08/2001 SANM - Sanmina Corp. 2:1 01/08/2001 01/09/2001 HWEN - Home Financial Bancorp 2:1 01/10/2001 01/11/2001 GMCR - Green Mountain Coffee 2:1 01/11/2001 01/12/2001 DFXI - Direct Focus, Inc. 3:2 01/15/2001 01/16/2001 EAT - Brinker International 3:2 01/16/2001 01/17/2001 SCHL - Scholastic Corp. 2:1 01/16/2001 01/17/2001 IDPH - IDEC Pharmaceuticals 3:1 01/17/2001 01/18/2001 AJG - Arthur J. Gallagher & Co. 2:1 01/18/2001 01/19/2001 SWWC - Southwest Water 5:4 01/19/2001 01/22/2001 TALX - TALX Corp. 3:2 01/19/2001 01/22/2001 GGG - Graco Inc. 3:2 02/06/2001 02/07/2001 ************************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=1144 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 12-17-2000 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/121700_5.asp ************* COVERED CALLS ************* Trading Strategies: More Q&A with the Covered-calls Editor By Mark Wnetrzak This week's questions concern long-term portfolio diversity with covered-calls and strategy selection for new traders. Question: As a conservative investor who uses covered-calls as part of a long-term growth strategy, I have often wondered if there is an advantage to selling different strike options on my portfolio stocks, to achieve a better risk/reward balance overall. In those cases where I have enough shares to make the technique viable, should I divide the sold options among various strikes, such as half of the calls "at-the-money" and half of the calls "out-of-the-money" to allow for increased profit potential at the risk of further downside loss? Answer: There is definitely something to be said for diversity, even with regard to combined covered-write positions in a single portfolio. The goal of the covered-call writer is to have a good combination of high potential returns and adequate downside protection. The problem is; selling an out-of-the-money call may offer higher returns but affords only a modest amount of downside protection. Selling an in-the-money call will provide more downside cushion but generally offers a lower return. Some traders try to overcome this dilemma by writing out-of-the-money calls on some stocks and in-the-money calls on others. This may work occasionally but will not produce superior results on a consistent basis. Conservative traders may do best by choosing a favorable issue and writing half of the position in-the-money and the other half out-of-the-money. By spreading out the options, the writer may be able to acquire a favorable return potential as well as adequate downside protection. Investors that hold large positions in a specific stock can choose even greater diversification by spreading the sold calls over time as well as different strike prices. One can gain several benefits by writing a portion of the calls near-term and the remaining calls further in the future. In the event of significant stock price movement, all of the various positions will not need to be adjusted at the same time. This may include either having the stock called away, or buying back one written call and selling another. Another advantage is that the level of option premiums may become more favorable than when the original series of calls were written. At worst, only one group of options would be sold when the premiums are low and hopefully they would increase in value before the next expiration period. This type of diversification will also allow you to own various positions at different strike prices, smoothing the portfolio balance as the market fluctuates cyclically. This also prevents all of one's stock from being committed at a single price. It's obvious that the "combined" write offers an excellent balance between potential return and favorable downside protection. Question: I'm a relatively seasoned investor but an absolute novice when it comes to option trading. Almost every trading article I have read suggests that buying stock and selling "covered" calls is one of the most conservative strategies available with options. The OIN offers a number of different approaches to trading, but I want to find a specific technique that generates reasonable returns over the long haul, is easy to understand and requires relatively little maintenance. Are covered-calls for me? Answer: The first step in developing a practical method for participating in the market is to determine your comfort threshold and stress level. Think about the unique emotional effects of your trading activities and managing an investment portfolio. Are you usually a cautious person or do you feel comfortable traveling at warp speed? How will a specific type of trading affect you mentally? Can you handle the volatility of day-trading options or are you happier with conservative, longer-term plays. After you identify the appropriate trading attitude, it is important to decide what type of market activity is most favorable to your personal style. Some traders prefer strategies that profit from trending markets such as those characterized by a sustained advance or decline. Techniques that benefit from this type of movement include Put or Call buying and high potential spreads or combinations. Another tactic might be to focus on changes in volatility. Traders using this approach buy or sell premium in an attempt to profit from transitions in market character. Some utilize neutral positions such as calendar or ratio spreads when the technical outlook for the underlying issue is range-bound or static. Regardless of the method you prefer, each category of price action demands a unique type of trading system. The key to success is to specialize in a specific kind of market activity and utilize trading strategies that perform well in that particular environment. Investors usually write covered-calls to generate monthly income, collecting the premium for the sale of an option against a stock position in his or her portfolio. This conservative strategy can be used effectively on all type of stocks as long as the outlook, fundamental or technical, for the issue is favorable. One of the advantages to this approach is that it allows new investors to learn successful trend-trading techniques with a small margin of safety while managing the combined position for upside profit and downside risk. The underlying basis for this strategy is a high probability of limited profit. The major advantage to a novice trader is the technique is easy to use and the resultant position is more conservative than outright stock ownership. In writing an option on the stock, the investor has insured the issue against a future drop in value. Regrettably, the downside risk in ownership is not eliminated, only reduced. In addition, the actual cost of opportunity loss or potential upside movement can be substantial. There are other, more subtle benefits and disadvantages but these are the most common reasons that investors choose (or avoid) this strategy. Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return BSTE 40.00 36.94 DEC 35.00 6.75 *$ 1.75 11.4% AVID 15.94 18.63 DEC 15.00 2.19 *$ 1.25 9.9% CPRT 18.00 18.69 DEC 17.50 1.06 *$ 0.56 7.2% MTIC 6.00 5.56 DEC 5.00 1.44 *$ 0.44 7.0% SUPG 21.47 19.56 DEC 17.50 5.25 *$ 1.28 6.9% BCGI 26.31 28.38 DEC 22.50 5.38 *$ 1.57 6.5% PSUN 20.94 23.50 DEC 17.50 4.13 *$ 0.69 5.9% LNCR 45.25 51.81 DEC 42.50 3.88 *$ 1.13 5.9% ADSK 27.00 27.63 DEC 25.00 2.63 *$ 0.63 5.6% MME 17.75 18.75 DEC 17.50 1.31 *$ 1.06 5.6% MPPP 6.13 4.81 DEC 5.00 1.44 $ 0.12 5.6% MTSI 17.38 20.94 DEC 12.50 5.63 *$ 0.75 5.5% MU 33.75 35.88 DEC 27.50 7.50 *$ 1.25 5.2% JDEC 29.00 25.63 DEC 22.50 7.25 *$ 0.75 5.0% HPC 18.44 17.63 DEC 17.50 1.88 *$ 0.94 4.9% PLNR 24.00 27.13 DEC 20.00 4.75 *$ 0.75 4.2% ISIP 11.56 9.50 DEC 10.00 2.31 $ 0.25 2.9% LGTO 11.88 9.50 DEC 10.00 2.38 $ 0.00 0.0% DZTK 8.13 7.00 DEC 7.50 1.06 $ -0.07 0.0% MRVT 16.88 13.25 DEC 15.00 2.56 $ -1.07 0.0% TTN 20.94 15.69 DEC 17.50 4.13 $ -1.12 0.0% GLGC 21.25 17.88 JAN 17.50 5.25 *$ 1.50 6.8% EXFO 32.00 26.44 JAN 22.50 11.25 *$ 1.75 6.1% EDGW 5.63 6.06 JAN 5.00 1.00 *$ 0.37 5.8% ARQL 33.75 27.25 JAN 25.00 10.00 *$ 1.25 3.8% QTRN 18.38 16.69 JAN 17.50 2.06 $ 0.37 1.6% CVD 11.38 9.50 JAN 10.00 2.00 $ 0.12 0.9% MRVT 17.94 13.25 JAN 15.00 4.13 $ -0.56 0.0% RFMD 36.38 27.25 JAN 30.00 8.50 $ -0.63 0.0% *$ = Stock price is above the sold striking price. Comments: A very volatile week indeed! Re-evaluate your long-term outlook on any issues that will be added to your portfolio on Monday and act accordingly. Miravant Medical (MRVT) has weakened quickly in front of Monday's Healthcare Conference - a key moment. Covance (CVD) is meeting some selling pressure and has moved down to its 150 dma. Rf Micro Devices (RFMD) appears to be suffering some collateral damage on the Qualcomm (QCOM) slump and is nearing support at the November high. Positions Closed: VRTA, MU (DEC-$35 Call), SNWL, MTIC, WATR Murphy's Law is alive and well as several of the previously closed positions have rallied into profitable territory. NEW PICKS ********* Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return GZMO 14.19 JAN 12.50 QGG AV 2.69 34 11.50 35 7.6% CRK 11.44 JAN 10.00 CRK AB 2.19 338 9.25 35 7.0% BCGI 28.38 JAN 22.50 QGB AX 7.25 2 21.13 35 5.6% CPRT 18.69 JAN 17.50 KQJ AW 2.19 3 16.50 35 5.3% HSIC 30.63 JAN 30.00 HQE AF 2.31 126 28.32 35 5.2% AVID 18.63 JAN 17.50 AQI AW 2.06 80 16.57 35 4.9% WMS 19.69 JAN 17.50 WMS AW 3.00 1030 16.69 35 4.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** AVID - Avid Technology $18.63 *** Breakout Coming? *** Avid Technology is an industry-leading provider of digital media creation and distribution solutions. The company gives customers the power to communicate to multiple audiences with creativity and ease. Avid solutions, which span a wide range of markets and price points, are used for Web, special effects, video, audio, film, television, broadcast news, corporate communications, music, the Internet and games. Avid recently won an Emmy award for pioneering development of full motion broadcast-quality PC video and compression plug-in cards for the manufacture of non-linear editing systems or video servers. Several recent alliances will fortify Avid's attempt to deliver a scalable, high performance streaming media hosting services. Investors were pleased with Avid's strong 3rd-quarter results as the stock has continued to rally even during a general market decline. We favor the bullish up-trend with technical support near our cost basis. JAN 17.50 AQI AW LB=2.06 OI=80 CB=16.57 DE=35 MR=4.9% ***** BCGI - Boston Communications $28.38 *** New High! *** Boston Communications Group operates in the following segments: Prepaid Wireless Services, Teleservices, Roaming Services, and Systems Divisions. Quarterly earnings were reported in October and the numbers were favorable. BCGI recently sold its customer care division to TeleTech in a cash transaction valued at $15 million with options for additional $20 million. This month, the Company was added to the S&P SmallCap 600 Index as well as the S&P SmallCap 600 Telecommunications (Cellular/Wireless) industry group. The technical outlook remains bullish as BCGI continues to rally to new highs. We prefer a more conservative entry point with a cost basis near technical support. JAN 22.50 QGB AX LB=7.25 OI=2 CB=21.13 DE=35 MR=5.6% ***** CPRT - Copart $18.69 *** Earnings Rally! *** Copart provides vehicle suppliers, primarily insurance companies, a full range of services to process and sell salvage vehicles through auctions, principally to licensed dismantlers, rebuilders and used vehicle dealers. Copart recently reported 1st quarter earnings with net income of $8.9 million which generated a 45% increase in earnings per share, on revenues of $57.1 million. The results were ahead of expectations due to strong performance from new and existing stores, and continued growth of Internet sales. We simply favor the strong rally above the September high, which completes a short-term "double-bottom" formation. JAN 17.50 KQJ AW LB=2.19 OI=3 CB=16.50 DE=35 MR=5.3% ***** CRK - Comstock Resources $11.44 *** Oil Sector Hedge *** Comstock Resources is a growing independent energy company based in Frisco, Texas and is engaged in oil and gas acquisitions, exploration, and development primarily in Texas, Louisiana and the Gulf of Mexico. Comstock reported strong 3rd-quarter earnings with revenues up almost 100%, driven by increased production and higher oil and gas prices. Comstock's board of directors just authorized a stock repurchase plan providing for the purchase of shares of its common stock in the open market, with an aggregate purchase price of up to $10 million. The move should enhance shareholder value over the long term and this position offers an excellent Energy sector hedge. JAN 10.00 CRK AB LB=2.19 OI=338 CB=9.25 DE=35 MR=7.0% ***** GZMO - Genzyme Molecular Oncology $14.19 *** Stage I Base *** Genzyme Molecular Oncology, a division of Genzyme Corp., is developing a new generation of cancer products focusing on cancer vaccines and angiogenesis inhibitors. It is shaping these new therapies through the integration of its genomics, gene and cell therapy, small-molecule drug discovery, and protein therapeutic capabilities. GZMO currently has a licensing agreement with Purdue Pharma related to the discovery and product development of up to 20 cancer antigens. This agreement has the potential to provide GZMO with more than $330 million provided all 20 antigens are ultimately developed and approved for sale. Genzyme Molecular Oncology has been forming a Stage I base for 9 months with signs of strong accumulation. A reasonable cost basis for those who maintain a bullish outlook and have performed their due diligence. Genzyme will release 2001 financial guidance for GZMO on Thursday, December 21. JAN 12.50 QGG AV LB=2.69 OI=34 CB=11.50 DE=35 MR=7.6% ***** HSIC - Henry Schein $30.63 *** Stage II Up-trend *** Henry Schein is the largest distributor of healthcare products and services to office-based healthcare practitioners in the combined North American and European markets. The Company serves more than 400,000 customers worldwide, including dental practices and labs, physician practices and veterinary clinics, as well as government and other institutions. This month, the Company's ProRepair. Division achieved ISO 9002 and EN 46002 certification for the repair of dental handpieces, and other small dental, medical and veterinary equipment. Analysts have stated that the company's acquisitions and increased systems interface with its customer should continue to boost its business profit profile. Both Lehman Brothers and UBS Warburg have recently upgraded their recommendations on Henry Schein to a "Buy" and we favor the bullish Stage II chart. JAN 30.00 HQE AF LB=2.31 OI=126 CB=28.32 DE=35 MR=5.2% ***** WMS - WMS Industries $19.69 *** On The Rebound! *** WMS Industries designs, manufactures and markets video and reel- spinning gaming machines and video lottery terminals. Its gaming machines are installed in all of the major gaming jurisdictions in the U.S. and in numerous foreign jurisdictions. WMS conducts its gaming machine business through its subsidiary, WMS Gaming. Talk about a post-earnings drop! WMS dropped almost 50% after posting strong earnings November 1st, as analysts worried over deceleration in sold units and installed game base. The stock has since rallied back above its 150 dma and Bear Stearns has recently upgraded their recommendation. Last Thursday, WMS reported that it continues to outpace its internal sales goal of 4,000 units for fiscal 2001 due to high customer acceptance of its products, resulting in rapid penetration of the California marketplace. A conservative entry point for traders who have a bullish outlook and believe the sell-off was overdone. JAN 17.50 WMS AW LB=3.00 OI=1030 CB=16.69 DE=35 MR=4.2% ***** ************************** SUPPLEMENTAL COVERED CALLS ************************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return PCLE 8.91 JAN 7.50 PUC AU 2.19 165 6.72 35 10.1% QTRN 16.69 JAN 15.00 QRT AC 3.13 671 13.56 35 9.2% GETY 30.50 JAN 25.00 QGT AE 7.13 200 23.37 35 6.1% CNC 9.00 JAN 7.50 CNC AU 1.94 9072 7.06 35 5.4% CRUS 20.19 JAN 15.00 CUQ AC 6.00 1035 14.19 35 5.0% ************************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=1133 ************************************************************** ************************* NAKED PUT PERCENTAGE LIST ************************* Naked Put Percentage List By Matt Russ Stock Stock Strike Option Option Margin Percent Support Symbol Price Price Symbol Price At 25% Return Level ADBE 62.44 55 AXX-MK 4.13 1561 26% 55 BRCD 200.00 190 GUF-MR 13.75 5000 28% 190 BRCM 124.06 110 RDW-MB 10.88 3102 35% 110 CIEN 100.69 90 UEE-MR 8.13 2517 32% 94 DNA 79.56 70 DNA-MN 2.88 1989 14% 72 EXTR 72.50 60 EUT-ML 5.13 1813 28% 60 GLW 70.00 60 GRJ-ML 2.69 1750 15% 60 IDPH 209.44 195 IHD-MS 13.88 5236 27% 195 JNPR 128.88 105 JUY-MA 8.75 3222 27% 118 JPM 160.00 150 JPM-MJ 5.25 4000 13% 150 MERQ 95.06 80 RQB-MP 7.63 2377 32% 82 PDLI 87.00 75 RPV-MO 6.50 2175 30% 76 PMCS 103.38 90 SDL-MR 8.38 2585 32% 95 QCOM 79.56 75 AAF-MO 5.88 1989 30% 75 RBAK 82.50 70 BUK-MN 6.25 2063 30% 70 RIMM 85.81 75 RUL-MO 6.50 2145 30% 75 SCMR 55.19 45 SMZ-MI 3.50 1380 25% 50 SEBL 77.25 65 SGW-MM 4.75 1931 25% 70 SEPR 74.56 65 ERQ-MM 3.88 1864 21% 67 TLGD 54.00 50 TQK-MJ 5.13 1350 38% 50 *********************** CONSERVATIVE NAKED PUTS *********************** Market Terms: This Triple Witching Day is scarier than most... By Ray Cummins One of our new subscribers asked for an explanation of the volatility that is associated with the simultaneous expiration of stock, stock index and futures options. "Triple Witching Day" occurs every quarter on the third Friday of March, June, September and December, when investors rush to unwind their positions in stock, index and futures options, all of which are expiring on the same day. The final trading hour of that day is also known as the "Triple Witching Hour" and that period often produces some major price swings as institutional investors buy and sell both the derivatives and the underlying securities. For those who are unaware of the volatile activity that can occur during these sessions, "Triple Witching" can seem like a trader's worst nightmare. Most professional traders use options to enhance their portfolio returns or decrease the risk of their investments losing value over time. There are basically three types of options: Equity Options, Index Options, and Futures Options (on commodities and currencies). These instruments are available to the public but the most common index option and futures traders in the market are institutions (insurance companies, banks, and brokerages) that need to protect large positions in stocks and mutual funds. The portfolios for these types of investors generally include positions in many different instruments. By diversifying their stock holdings, they hedge the risk of loss if one issue drops in value. The gains on other components in the portfolio are used to offset such a loss. The problem with this practice is the lack of protection for a market-wide or across-the-board loss, in which the majority of the securities in a portfolio are affected by a major downturn. This is where index futures are most useful. Institutions purchase futures contracts on the indexes whose composition resembles the mix of stocks in their portfolio. The futures contract provides the necessary downside protection without exposing the stock portfolio to excessive risk and is used as a hedge against the loss of inventory value. In addition to the institutional "insurance" buyers, speculators and other position traders will attempt to profit by taking outright long or short positions in futures contracts. This type of activity helps maintain a mechanism of risk transfer for investments in farming, industry, and other financial instruments. Computerized trading systems originated in the early 1980s, when personal computers began to offer access to trading information in real time. Clearly, this technology has made the market more efficient; portfolio managers, institutional traders and retail investors are able utilize the very latest information. Hedgers, arbitrageurs, and speculators can trade with the most up-to-date prices and forecasts. The reaction time to market-influencing news and events has been reduced to mere seconds. In addition, computers allow brokers and institutional traders to manage their portfolios effectively. Using today's technology, fund managers can compose complex profit strategies that are less affected by market unknowns. They can engineer scenarios that limit downside risk with precise options management and portfolio manipulation. The design and implementation of these complex schemes is often called "winding" a position and as with any systematic approach, the potential success of these trading programs may be enhanced or weakened by the market cycle and changing economic conditions. Because options expire on a regular basis, portfolio managers are required to make periodic adjustments and close or cover specific positions as conditions dictate. When an equity or index option is closed or covered, it is generally described as "unwinding" a position. Thus, "Triple Witching" sessions will almost always undergo substantially increased volatility and transaction volume because institutional traders must exit or adjust their positions in expectation of options expiration. For retail traders, the key is to realize that the market will be influenced briefly, in a variety of ways, but the activity has few lasting results. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return QTRN 17.00 16.69 DEC 15.00 0.50 *$ 0.50 20.5% AMZN 28.94 22.88 DEC 17.50 0.63 *$ 0.63 14.2% ARQL 25.38 27.25 DEC 17.50 0.50 *$ 0.50 13.0% AVID 15.31 18.63 DEC 12.50 0.56 *$ 0.56 12.6% CMOS 20.88 21.13 DEC 15.00 0.38 *$ 0.38 12.1% ECLP 22.75 21.50 DEC 17.50 0.63 *$ 0.63 10.6% IDXC 29.38 27.94 DEC 22.50 0.75 *$ 0.75 9.8% QCOM 83.00 79.56 DEC 65.00 0.75 *$ 0.75 9.4% PSUN 22.19 23.50 DEC 17.50 0.38 *$ 0.38 8.6% PWAV 56.38 60.19 DEC 40.00 0.44 *$ 0.44 8.2% MTON 18.94 23.00 DEC 15.00 0.38 *$ 0.38 7.9% HNT 22.25 21.13 DEC 20.00 0.50 *$ 0.50 7.6% CAR 30.06 29.81 DEC 25.00 0.38 *$ 0.38 7.5% WGR 25.69 24.50 DEC 22.50 0.31 *$ 0.31 6.1% OXHP 37.38 37.56 DEC 30.00 0.56 *$ 0.56 6.0% WLL 49.38 47.25 DEC 45.00 0.38 *$ 0.38 5.2% TLB 49.81 42.00 DEC 40.00 0.50 *$ 0.50 5.1% KMI 43.25 48.81 DEC 40.00 0.56 *$ 0.56 4.2% AEOS 40.94 33.88 DEC 35.00 1.06 $ -0.06 0.0% CTXS 30.88 24.25 DEC 25.00 0.63 $ -0.12 0.0% NEM 16.25 16.19 JAN 15.00 0.88 *$ 0.88 8.9% AEIS 24.38 23.31 JAN 20.00 0.69 *$ 0.69 8.2% SPF 25.44 22.56 JAN 22.50 0.69 *$ 0.69 6.3% CORR 48.94 37.50 JAN 32.50 0.81 *$ 0.81 5.5% TXCC 47.88 43.44 JAN 25.00 0.75 *$ 0.75 5.3% KLAC 35.94 30.38 JAN 22.50 0.56 *$ 0.56 5.2% SNPS 42.13 40.25 JAN 35.00 0.88 *$ 0.88 5.2% CCR 41.69 45.50 JAN 35.00 0.75 *$ 0.75 5.1% FNSR 37.50 35.06 JAN 22.50 0.56 *$ 0.56 5.0% OXY 22.56 21.19 JAN 20.00 0.56 *$ 0.56 4.9% *$ = Stock price is above the sold striking price. Comments: Both Citrix Systems (CTXS) and American Eagle Outfitters (AEOS) offer the opportunity to roll down to a January covered-write position. With the weakening Retail sector and the deteriorating technicals in AEOS, a quick exit might be a more prudent move. Cor Therapeutics (CORR) reversed course rather quickly this week and should be monitored closely. Standard Pacific (SPF) is testing its 30 dma after falling four days in a row to a key support area. Positions Closed: BVSN, ANF, IMG, SMSC, VLNC NEW PICKS ********* Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return CHTR 22.00 JAN 20.00 CUJ MD 0.81 353 19.19 35 9.3% ADVP 39.50 JAN 30.00 QVD MF 0.81 15 29.19 35 8.1% MU 35.88 JAN 25.00 MU ME 0.69 6330 24.31 35 7.6% LFG 38.38 JAN 35.00 LFG MG 1.00 0 34.00 35 6.7% BSTE 36.94 JAN 22.50 BQS MX 0.50 0 22.00 35 5.5% BCHE 28.38 JAN 25.00 BQX ME 0.50 3929 24.50 35 5.1% ADLAC 40.81 JAN 30.00 ADU MF 0.50 57 29.50 35 5.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ADLAC - Adelphia Communications $40.81 *** On The Move! *** Adelphia Communications is a leader in the telecommunications industry with cable television and local telephone operations. Adelphia's operations consist of providing telecommunications services primarily over networks, which are commonly referred to as broadband networks because they can transmit quantities of voice, video and data by way of digital or analog signals. After hinting about several important strategic initiatives at investor conferences last week, the company announced that its Adelphia Business Solutions (ABIZ) will significantly scale back its network expansion. Adelphia also formalized plans to divest its cable systems in Puerto Rico and explore the sale of other non-strategic systems. Investors appear to favor the announcement and a recent upgrade has helped propel the stock to a 6-month high. Target a higher premium to open the play. JAN 30.00 ADU MF LB=0.50 OI=57 CB=29.50 DE=35 MR=5.0% ***** ADVP - AdvancePCS $39.50 *** Recovery In Progress! *** AdvancePCS is the nation's largest independent provider of health improvement services, touching the lives of 75 million Americans and managing over $18 billion annually in health care spending. The company offers health plans a comprehensive array of highly effective pharmacy benefit and health benefit management services designed to build better health. ADVP's capabilities include integrated mail service and retail pharmacy networks, innovative clinical services, disease management programs, clinical trials and outcomes research, information management, and prescription drug services for the uninsured. Fortune magazine recently named AdvancePCS to its list of the 100 fastest growing companies and Forbes listed the company in its Platinum series of the nation's fastest growing and top earning corporations. The consolidation has taken its course and now ADVP is ready to resume a long-term up-trend. Investors who favor the Health Services group can use this play to speculate conservatively on its future performance. JAN 30.00 QVD MF LB=0.81 OI=15 CB=29.19 DE=35 MR=8.1% ***** BCHE - BioChem Pharma $28.38 *** Buyout Announced! *** BioChem Pharma is an international biopharmaceutical company involved in the research, development, and manufacturing of products for the prevention, detection and treatment of human diseases. Their most advanced therapeutic product candidates are being developed principally for use in the treatment of cancers and infectious diseases. BioChem is also engaged in the research, development and production of vaccines for human use. Last week, Shire Pharmaceuticals Group plc and BioChem Pharma announced that they have entered into an agreement to merge the two groups to form a leading global pharmaceutical company. The merger will be achieved through an exchange of shares, which values each BioChem share at $37 or 0.7839 of the Shire ADS price, depending on the average closing value of a Shire ADS during the last fifteen trading days ending on the third trading day prior to the closing of the deal. The merger is expected to close in the second quarter of 2001. JAN 25.00 BQX ME LB=0.50 OI=3929 CB=24.50 DE=35 MR=5.1% ***** BSTE - Biosite Diagnostics $36.94 *** FDA Approval! *** Biosite Diagnostics serves clinical needs in emergency medicine by speeding the flow of critical diagnostic information. Through its integrated discovery and diagnostics businesses, Biosite is developing rapid diagnostic tests that improve clinical outcomes for acute diseases. Biosite's Triage. products are used in 45% of U.S. hospitals and in 40 international markets. On November 22, Biosite announced that it had received FDA clearance to market the Triage. BNP Test in the U.S. This is the first blood test to be cleared in the U.S. as an aid in the diagnosis of congestive heart failure. Investors cheered this news as the stock rallied above its 150 dma on strong volume. A brief consolidation took the issue back to a recent support level and now it appears the up-trend is ready to resume. This position offers a favorable risk/reward outlook for traders who are interested in drug sector speculation. JAN 22.50 BQS MX LB=0.50 OI=0 CB=22.00 DE=35 MR=5.5% ***** CHTR - Charter Communications $22.00 *** A New High! *** Charter Communications is the fourth largest operator of cable systems in the United States, serving over 6 million customers. The company offers its customers a full array of cable television services and programming and it has begun to offer advanced, high bandwidth services such as high-speed Internet access. Charter plans to continually enhance and upgrade these services, along with adding new programming and other telecommunications services, and will continue to position cable television as an essential service. Friday's move to a new 6-month high on increasing volume suggests this issue may have further upside potential and our position offers a cost basis near technical support. JAN 20.00 CUJ MD LB=0.81 OI=353 CB=19.19 DE=35 MR=9.3% ***** LFG - LandAmerica Financial Group $38.38 *** Rally Mode! *** LandAmerica Financial Group is engaged in the business of issuing title insurance policies and performing other real estate-related services for residential and commercial real estate transactions. The company issues title insurance policies through its various title underwriting subsidiaries. The company provides escrow and closing services to a broad-based customer group that includes lenders, developers, real estate agents, attorneys and homebuyers and sellers. They also offer a range of residential real estate services to the national and regional mortgage lending community through its LandAmerica OneStop operation. LFG has been "on the move" over the past two weeks and the rally has shown very little indication of weakness. Since the issue is well above its 30-dma, we will target a higher premium initially, to allow for a brief consolidation in the upward trend. JAN 35.00 LFG MG LB=1.00 OI=0 CB=34.00 DE=35 MR=6.7% ***** MU - Micron $35.88 *** Chip Sector Bottom Fishing! *** Micron, and its subsidiaries manufacture and market DRAMs, very fast SRAMs, Flash, other semiconductor components, memory modules, graphic accelerators, and personal computer systems. The chip sector appears to be putting in a bottom. Last month, Prudential Securities cut Micron's fiscal 2001 EPS estimates from $2.60 to $2.30, on fears of weak DRAM pricing and high OEM inventories. Chase H&Q followed that report with additional bearish comments but the stock has refused to move below $30 on the negative news and is trying to stage a pre-earnings rally. We know that next week's earnings will be lackluster, but this position offers a favorable cost basis for those investors who have a long-term bullish outlook on the company. JAN 25.00 MU ME LB=0.69 OI=6330 CB=24.31 DE=35 MR=7.6% *********************** SUPPLEMENTAL NAKED PUTS *********************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return VICL 21.75 JAN 17.50 VAQ MW 0.81 0 16.69 35 13.4% GETY 30.50 JAN 22.50 QGT MX 0.94 100 21.56 35 11.6% FNSR 35.06 JAN 25.00 FQY ME 0.69 88 24.31 35 7.8% ORCL 28.56 JAN 20.00 ORQ MD 0.44 9317 19.56 35 6.2% PBG 42.25 JAN 40.00 PBG MH 1.13 14 38.87 35 6.2% CCR 45.50 JAN 40.00 CCR MH 0.75 421 39.25 35 4.8% *************************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 at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1167 ************************************************************ ************************ SPREADS/STRADDLES/COMBOS ************************ Evil spirits come forth on Triple Witching Day... The market was crushed today as both industrial and technology issues succumbed to selling pressure amid growing worries of an economic recession. Friday, December 15 The market was crushed today as both industrial and technology issues succumbed to selling pressure amid growing worries of an economic recession. The Nasdaq dropped for a fourth consecutive session while Dow registered triple-digit losses after analysts slashed future earnings estimates on a slew of technology stocks. The Nasdaq closed down 75 points at 2,653 and the Dow ended down 240 points at 10,434. The S&P 500 index fell 28 points to 1,312. Trading volume on the NYSE was the heaviest on record, reaching 1.55 billion shares, due to the "triple-witching" expiration of options on stocks, indexes and futures. Declines edged advances by 1,607 to 1,309. Activity on the Nasdaq was the third highest on record, with over 2.6 billion shares exchanged. Technology declines beat advances 2,514 to 1,383. In the U.S. bond market, the 30-year Treasury was up 6/32, pushing its yield down to 5.43%. Thursday's new plays (positions/opening prices/strategy): PepsiCo PEP JAN42P/JAN45P $0.43 credit bull-put Sepracor SEPR JAN120C/JA57P $2.25 credit strangle Globo Cabo GLCBY FEB12C/FEB10P $0.25 credit synthetic The broad market sell-off provided favorable entries in all of the new combination positions. The Sepracor credit strangle traded well beyond the suggested premium and the PepsiCo credit spread reached our target entry price in the afternoon session. The new synthetic play in Globo Cabo did not see any trading activity but the recommended credit was easily achieved. Portfolio Plays: The "triple-witching" (simultaneous) expiration of options on individual stocks, stock indexes and futures did not have its usual bullish affect on the market today. Although volume was extreme, the majority of activity occurred on the supply side as investors continued to unload sluggish issues in the wake of new downgrades and sagging revenue forecasts. Within the technology group, hardware, networking and semiconductor stocks endured the worst selling pressure while the overall market saw losses among the retail, financial, drug, consumer and cyclical groups. The Dow tumbled on weakness in Microsoft (MSFT), which fell below $50 after the company said it expects second-quarter earnings to be well below analysts' estimates. Microsoft blamed a slowdown in personal computer and information technology spending as well as weakness in consumer online services and advertising. A number of other top-tier technology issues slumped during the session and the worst blue-chip performers were International Business Machines (IBM), Intel (INTC), Citigroup (C), Coca-Cola (KO) and Honeywell (HON). Disney (DIS), J.P. Morgan (JPM), Caterpillar (CAT) and Minnesota Mining & Manufacturing (MMM) were the Dow's only gainers. In the broader sectors, defensive issues such as gold and utility shares gained ground and oil service companies also advanced, as January crude futures rebounded from a recent decline. Today's bearish activity left little room for optimism in the market. However, there were a few favorable moves during the session and the Spreads/Combos portfolio enjoyed a relatively successful month, considering the poor performance of the major indices. Once again, the most popular section, Credit Spreads, was also the most profitable. Over 90% of the (new) positions expiring in December were successful. The Pfizer (PFE) spread was the only play that did not profit, but it did offer a number of favorable exit opportunities, and ended almost exactly at the break-even basis, with the last trade at $43.38. Of the plays that were carried forward from last month, Pharmacyclics (PCYC), Seagate (SEG), Juniper Networks (JNPR), and Vertex (VRTX) all expired successfully, while Curagen (CRGN) was rolled to January with a cost basis of $33.43. Another common trading strategy that is gaining popularity among our readers is the "synthetic" position and this month we enjoyed outstanding results in that category. Safeway (SWY), Safeco (SAFC), Medquist (MEDQ), MTI Technology (MTIC) and Miravant Medical (MRVT) provided excellent short-term profits. The neutral-outlook strategies provided a number of winning selections with outstanding returns seen in debit straddles on Alliance Capital (AC), Advanced Fibre (AFCI), Compass Bancshares (CBSS), Jefferson Pilot (JP), Unibanco (UBB), and potentially profitable results in Flowers Industries (FLO), Scm Microsystems (SCMM), and TD Waterhouse (TWE). Our solitary credit strangle in Voicestream (VSTR) closed at maximum profit and last month's adjusted position in Broadcom (BRCM) is near the (January) break-even price of $121. Carter Wallace (CAR) and Federal Express (FDX) were the top performing diagonal plays and among the conservative debit positions, Genesco (GCO) led the "bull-call" section and Pioneer Resources (PXD) was a close second with a 25% profit. Favorable calendar spreads have been hard to find with the lackluster call option premiums but we managed to identify a big winner with Biochem Pharma (BCHE) and positions in Mattel (MAT), Kellogg (K) and Ralston Purina (RAL) also provided profitable opportunities. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - Today's 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. ****************************************************************** OCR - Omnicare $18.38 *** Bracing for a Rally? *** Omnicare is a provider of pharmacy services to long-term care institutions such as skilled nursing facilities, assisted living communities and other institutional health care facilities. The company's Pharmacy Services segment provides distribution of pharmaceuticals, related pharmacy consulting, data management services and medical supplies to long-term care facilities. Omnicare's CRO Services segment provides comprehensive product development services globally to many client companies in the pharmaceutical, biotechnology, medical devices and diagnostics industries. Omnicare reported favorable earnings in the most recent quarter, generating $58 million in cash flow from operations, an all-time quarterly high, and year-to-date cash flow reached $118 million, 85% higher than the $63 million generated over the same period in 1999. The CEO said the sequential improvement in results was a testament to the value of the company's unique franchise in the geriatric pharmaceutical marketplace and their financial strength. Their continuing priority is to generate strong, positive cash flow and to maintain a solid financial position, and investors appears to favor that attitude. On Friday, Omnicare rallied to a new test of the 52-week high near $19 and if the recent bullish activity is any indication of its technical strength, this issue has excellent upside potential. PLAY (conservative - bullish/debit spread): BUY CALL JAN-15.00 OCR-AC OI=41 A=$4.00 SELL CALL JAN-17.50 OCR-AW OI=93 B=$2.00 INITIAL NET DEBIT TARGET=$1.88 ROI(max)=32% B/E=$16.88 ****************************************************************** PBG - Pepsi Bottling Group $39.88 *** Reader's Request! *** The Pepsi Bottling Group consists of bottling operations located in the United States, Canada, Spain, Greece and Russia. These bottling operations manufacture, sell and distribute Pepsi-Cola beverages including Pepsi-Cola, Diet Pepsi, Mountain Dew and other brands of carbonated soft drinks and other ready-to-drink beverages. Pepsi-Cola beverages sold by the company include PEPSI-COLA, DIET PEPSI, MOUNTAIN DEW, LIPTON BRISK, LIPTON'S ICED TEA, 7UP outside the United States, PEPSI MAX, PEPSI ONE, SLICE, MUG, AQUAFINA, STARBUCKS FRAPPUCCINO, and KAS. Pepsi Bottling Group also has the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in all or a portion of 41 states, the District of Columbia, eight Canadian provinces, Spain, Greece and Russia. One of our faithful readers pointed out this stock after we offered the bullish position in PepsiCo (PEP) last week. He noted that the issue is in a well established upward trend, but the options have little premium for disparity plays. However, there is a method that offers favorable speculation for traders who are bullish on the issue and the options are priced correctly for the strategy. Target a higher premium initially, to allow for a brief consolidation in the upward trend. PLAY (conservative- bullish/synthetic position): BUY CALL JAN-45 PBG-AI OI=65 A=$1.18 SELL PUT JAN-40 PBG-MH OI=14 B=$1.12 INITIAL NET CREDIT TARGET=$0.12-$0.25 TARGET ROI=20% Note: Using options, the position is equivalent to being long on the stock. The collateral requirement for the naked put is approximately $1,575 per contract. ****************************************************************** BOW - Bowater $52.69 *** Trading Range! *** Bowater Incorporated is engaged in the manufacture, sale and distribution of newsprint, uncoated groundwood specialties, coated groundwood paper, market pulp, lumber and timber. The company operates facilities in the United States, Canada and South Korea and manages or possesses cutting rights for over 16 million acres of timberlands to support these facilities. The company markets and distributes its various products in North America, South America and overseas. Including the company's Mersey, Dalhousie and Ponderay Operations, Bowater's annual production capacity of newsprint and uncoated groundwood specialties is approximately 2.7 million metric tons. With the South Korean newsprint mill, the company's annual production capacity of these products is approximately 3 million metric tons, or approximately 6% of the worldwide capacity total. The market for newsprint production and supply is a competitive arena and profit margins are expected to be very tight throughout the coming months. Analysts say the recent forecasts of slower advertising growth could significantly affect the outlook for companies in the group and Bowater would likely be one of the first issues to suffer from the slowdown. The technical history of the company's shares suggests that the stock has little buying interest above $55 and any negative news could drive the issue back to the bottom of a recent range near $45. Traders who agree with this outlook can use the favorable call option premiums to speculate on this outcome. PLAY (aggressive - bearish/credit spread): BUY CALL JAN-60 BOW-AL OI=80 A=$1.06 SELL CALL JAN-55 BOW-AK OI=16 B=$2.43 INITIAL NET CREDIT TARGET=$1.50 ROI(max)=42% B/E=$56.50 This position was discovered with one of our primary scan/sort techniques; identifying potentially failed rallies on issues with bullish options activity. In this case, the premiums for the (OTM) call options are slightly inflated and the potential for a successful (technical) recovery is significantly affected by the resistance at the sold strike price; a perfect condition for a bearish credit spread ****************************************************************** - STRADDLES - These positions have cheap option premiums and upcoming events or activities that may generate volatility in the underlying issues or their industries. As with any recommendations, they should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** AXF - AXA Financial $58.63 *** Cheap options! *** AXA Financial, with approximately $400 billion in assets under management, is one of the world 's premier financial services organizations through its strong brands: The Equitable Life Assurance Society, AXA Advisors, Equitable Distributors, Inc., Alliance Capital Management and Sanford C. Bernstein. AXA Financial is a member of the global AXA Group, which has operations in approximately 60 countries and has more than $900 billion in assets under management. Since the early part of November, AXA Financial has been consolidating or perhaps putting in a top. The volume picked up a bit last week as the financial services company began to see its price rollover. Some of the technical indicators are now approaching the oversold area. However, without something to keep the bulls interested, we could see AXF pullback to support near $50. If that's the case and $50 fails to hold, $45 could be the next rest stop. Whether the bulls return or profit taking continues, the option premiums are favorable and the April expiration should give this one time to grow. PLAY (conservative - neutral/debit straddle): BUY CALL APR-55 AXF-DK OI=2176 A=$1.88 BUY PUT APR-55 AXF-PK OI=364 A=$1.81 INITIAL NET DEBIT TARGET=$3.50 TARGET ROI=25% ****************************************************************** EQR - Equity Residential Properties Trust $53.25 Equity Residential Properties Trust (EQR) is America's number one apartment company. With more than 1,000 properties across 35 states, it is the largest publicly traded owner and operator of multifamily properties in the United States. The company seems to be building value for their shareholders, residents and employees by combining the resources of a large company and a national presence with strong local management and expertise. If you've owned stock in EQR since its run that began in late October, congratulations! In that time, shares of EQR have moved from $44.50 to a new high this past Tuesday at $54.75. On Friday, EQR gapped down at the open, losing as much as $1.75 intra-day, but managed to recover to $53.25 for a $1.13 loss. The volume was fairly light especially for an expiration day. We could soon see a retest of the last week's high and a technical filling of the gap. However some profit taking could certainly be in order after the nice $10 run up the chart. The pricing on the April options was simply too much to pass up this weekend. Whether EQR resumes its ascent to higher prices or the bottom begins to fall out we feel this new play could be in a position to profit quite handsomely from further movement in either direction. PLAY (speculation - neutral/debit strangle): BUY CALL APR-55 EQR-DK OI=5 A=$1.56 BUY PUT APR-50 EQR-PJ OI=76 A=$1.00 INITIAL NET DEBIT TARGET=$2.38-$2.50 TARGET ROI=25% ****************************************************************** - PREMIUM SELLING - ****************************************************************** COST - Costco $34.88 *** Range-bound! *** Costco Wholesale Corporation operates membership warehouses based on the concept that offering members very low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. This rapid inventory turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, enables Costco to operate profitably at significantly lower gross margins than most traditional wholesalers, discount retailers and supermarkets. Costco's warehouses usually operate on a seven-day, 68-hour week, and are open somewhat longer during the holiday season. Costco Wholesale posted earnings last week and their quarterly net income was essentially flat, matching analysts' expectations as sales rose by 10%. Net income in the period came in at $129.5 million, or $0.28 a share, compared with $129.3 million or $0.28 per share, in the same period a year ago. Analysts polled by First Call had expected the warehouse operator to report a profit of $0.28 a share, and it appears they were "on the mark" with respect to the company's financial performance. Investors had no opinion on the earnings announcement, as Costco's shares ended only $0.06 below Thursday's closing price. With that kind of indifference to the current outlook for the company, the stock should experience the same type of range-bound trading as it has over the past few months. PLAY (conservative - neutral/credit strangle): SELL CALL JAN-40 PRQ-AH OI=1849 B=$0.69 SELL PUT JAN-30 PRQ-MF OI=2158 B=$0.63 INITIAL NET CREDIT TARGET=$1.38 ROI(max)=15% UPSIDE B/E=$41.38 DOWNSIDE B/E=$28.63 ************************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. 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