The Option Investor Newsletter Wednesday 12-20-2000 Copyright 2000, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/122000_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 12-20-2000 High Low Volume Advance/Decline DJIA 10318.90 -265.50 10581.00 10318.90 1.43 bln 1010/1933 NASDAQ 2332.78 -178.93 2432.83 2312.51 2.84 bln 828/3292 S&P 100 661.50 - 25.35 686.85 660.62 totals 1838/5225 S&P 500 1264.74 - 40.86 1305.60 1261.16 26.0%/74.0% RUS 2000 443.80 - 19.45 458.78 442.32 DJ TRANS 2729.77 - 47.99 2775.22 2686.25 VIX 35.70 + 4.97 36.75 32.85 Put/Call Ratio 0.80 ************************************************************* Was it? Could it be? Should we dare hope? The debris from the Foundry explosion started falling back to earth at the open this morning and continued raining on the markets all day. Merrill Lynch added rocket fuel to the already roaring fire with a downgrade of HWP, IBM and CSCO. These big cap leaders were already under pressure and the additional weight of the high profile downgrade sent them all to new 52-week lows. CSCO dropped -5.25 to $36.50, IBM -4.12 to $86 but HWP recovered to close only -.88 at $30.63 after saying on CNBC that they saw no reason to change their current guidance. How refreshing, a box maker that is comfortable with estimates. Still IBM and CSCO remain the biggest potential problems with worries about impending warnings from each. The Dow gapped down to 10375 at the open, tried weakly to rally and then rolled over to close at almost the low of the day at 10327, a -265 point loss. The Nasdaq faired only slightly better closing only +20 points off the low of 2312 and a drop of -178 points. The total loss for the last seven days is almost -700 points or a -22% drop. The bad news that drove the markets Wednesday is not over. After the close another flood of bad news hit the wires. AT&T warned that they would miss earnings and cut their dividend for the first time in their over 100 year history. Not that anybody expected AT&T to come roaring back from the brink of disaster after several quarters of problems but it was just confirmation of bad news. RealNetworks warned that weaker than expected Internet related spending would cause them to miss estimates going forward. TRW warned that earnings would fall about -33% on recall charges and payment defaults by customers. Cendant warned earnings would miss as well. SmartDisk, SMDK, warned that earnings would miss based on slowing Apple Computer sales. They said they were working on trying to increase their Windows product sales to compensate for the Apple platform weakness. Not a tech stock but IP warned today as well that slowing sales and increased energy costs would cause reduced earnings. ZRAN warned after the close that slowing worldwide demand in the DVD and PC markets would cause them to miss estimates as well. After the close Micron announced earnings that missed street estimates by two cents on sales that dropped -30% for the quarter. Citing weak demand as the problem MU dropped -$5 on the news. Several analysts warned against buying MU even at these levels until computer sales growth begins to rise again. The two major tech problems from yesterday FDRY and JBL were taken out and shot with FDRY losing -57% and JBL -24%. PALM also announced earnings after the close that beat street estimates by a penny but the stock got hammered in after hours trading for -$6. Analysts were concerned about sales growth and margins. RIMM also fell -$5 on the news. Once the hot PDA products run out of steam after the holiday buying season it remains to be seen if corporate IT spending will take up the slack. The biggest problem other than the warnings and missed earnings was really the downgrade from Merrill Lynch. Citing a survey of IT professionals MER said that in just the last two weeks the number of companies planning new IT expenditures had dropped substantially. Just Dec-4th Merrill had issued a note saying spending was on track and looking good. What a difference two weeks makes and we still have not heard from IBM or CSCO on their possible earnings problems. The Nasdaq was really ugly today. Really ugly! In many analysts eyes this was a really good day. The complaint for weeks was that there was no capitulation event to signal a real bottom. Sure everyone wanted to put a bottom label on every three day dip in that period of time but the qualification sentence was always there. Today came as close to capitulation as we have had in a very long time. One measure of a "C" event as recognized by most long term analysts is the number of new lows. Normally something in the area of 1000 is a normally accepted threshold. Today there were 921 new lows on the Nasdaq. Another measurement is the advance decline ratios. At the low of the day today the decliners were overpowering advances by over 5:1. This is also a normally accepted capitulation ratio. The volume was also significant. At 2.8 billion shares traded on the Nasdaq there was no shortage of sellers wanting out at any price. The real tell tale sign imbedded within that number was the up volume compared to down volume. At a little after 3:PM, just as the last dip began the Up volume for the day was only 134 MILLION shares compared to over 2 BILLION shares of down volume. That is a 15:1 ratio of down to up. Capitulation anyone? The Nasdaq is on track to post its worst year ever. Currently down -54% from the high and -42.7% from Jan-1st it is considerably worse than the -35% drop in 1974. The Nasdaq took five years after that 1974 bottom to recover and make a new high. Market analysts comparing that recovery with a recovery from the current levels estimate that it will take three years to return to the 5000 level. (Their estimates not mine.) This assumes a historical +28% compounded growth rate. I can't imagine it would take that long simply based on the current and projected tech advancement but without the Internet driving change we will need a new leadership group or two to fuel faster growth. It only took one day and the rumors of a rate cut are heating up again. After the market rocking news last night and the significant drop today there is a new cry for an intermeeting rate cut. Pointing to the increasingly intense earnings news analysts are calling for Grinchspan to acknowledge they made a bad call and cut rates immediately. I would not hold my breath if I were you. He can do it but I can't imagine that he would do it before sometime in January. The Fed will want to see the final results from the holiday season as well as gauge any market movements between now and Jan-2nd. Once the Employment numbers are announced in January we could see a change but I doubt before then. So was it the big "C" today? No one knows. Remember there is a lot of year end tax selling and I doubt everyone has completed it yet. There were a few stocks that rebounded some just before the close but very few. As a technician you would be hard pressed to paint anything but a serious case for a relief rally very soon. -700 points in seven days on huge volume with overwhelming new low advance/decline ratios. The VIX spiked to 36, a number only seen four times this year and each time represented the exact bottom of the current trend. Still it could go higher. The put/call ratio is hovering at .80 and indicates the higher level of caution that is present near market bottoms. Still there is no real conviction just severe turmoil. Last week there was a positive inflow of cash into equity funds and this week the trend reversed with -$9.5 billion flowing out of funds in the last five days. Investors throwing in the towel is also an indicator of market bottoms. The Raging Bull website, a leader in the investor chat room fad, was put up for sale by CMGI. It seems that investors are not as excited with talking about how much money their stocks are losing as they were bragging about their wins in a bull market. A sign of the times that investor sentiment has changed. Again, another indicator that we are near a bottom. History has not changed, just the speed at which we record it. Was today the bottom, the capitulation event? Will the historical trend of the next five days being bullish hold? We can only hope the answer to both of those questions is yes but until the trend actually changes nobody can say for sure. As traders we do not want to try and catch the falling knife. Either go with the trend or step aside. I loved the Art Cashin analogy today that traders are so paranoid about getting beaten again that are not even trying to catch falling safes. They want to see them hit bottom, crack open and then look at the contents before placing a bid. That pretty much sums up the days trading. With down volume 15:1 over up volume it is clear there were no buyers. Repeat, no buyers. With three more weeks of earnings warnings ahead of us and tax selling in full swing, other than bottom fishing, there is simply no reason for traders to jump into the market. Investors yes, but even they are unsure if CSCO is a buy at $36 or $30. Remember when CMGI, down from $163, was a buy at $40, it is now $5. AKAM, down from $345, a buy at $50, now $24. There is no shortage of value available but until more stocks start trading at ASK than BID we will not know the worst is over. There are still hundreds of billions in cash on the sidelines. Big cap techs will benefit when this cash is put to work but nobody has turned on the spigot yet. I agonized all afternoon about buying the dip. I wanted it bad but there were no positive signs. Sectors were in flames, stocks were not bouncing. Even those down double digits for several days were still skidding lower. I could not bring myself to buy puts after seven down days and -700 points. Even though IndexSkybox is raking in money on a daily basis I felt I would be buying puts on the bottom. There was several reports of some huge blocks of S&P futures being closed this afternoon. Could this be the institutions finally closing their short positions for huge profits? Let's hope so! The Nasdaq hit the very bottom of the down trend channel at 2312 which could be seen as technical support. Does the term "grasping at straws" come to mind? As we go to press tonight the S&P futures are actually up about +4 and the Nasdaq futures are +8. None of the after hours news events have had any material affect on trading other than on individual issues. Maybe that is a positive sign. Still, until the trend changes, trade in the direction of the trend or stand on the sidelines and wait. Cash is king and patience is a very important virtue. Good luck and don't buy too soon. Jim Brown Editor ******************** TIME IS RUNNING OUT ! 2001 Renewal Offer!!! Our best offer ever!! ******************** Long time readers know that each December we offer our subscribers an extra value package as a thank you for their support. The package this year contains: 1.) Two of our 2001 Option Expiration Calendar Mousepads (one for home and one for your office) 2.) The expanded 2001 Stock Traders Almanac 3.) A one month subscription to www.IndexSkybox.com 4.) A three month subscription to www.SplitTrader.com 5.) And of course the annual subscription to OptionInvestor.com This package has a retail value of almost $519 which includes $169 of free merchandise in addition to the annual subscription to the Option Investor Newsletter. The total price for this offer is still only $349 which is the regular annual subscription price for the newsletter. The additional $169 of merchandise and subscriptions are free as an added value! Click here for more info: http://secure.sungrp.com/01renewal.asp The terms of the offer are simple. Just renew your OptionInvestor subscription for the annual rate of $349 ($29.08 mo) by Dec-31st and you will get all the free stuff. The supply of mousepads and almanacs is limited so renew now to avoid any delay. You know the newsletter is the best source for option plays, timely market commentary and educational articles. Don't wait until the supplies are gone! Renew now! http://secure.sungrp.com/01renewal.asp ************************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=1212 ************************************************************** ************* NEW CALL PLAY ************* IVGN - Invitrogen Corporation $78.58 +2.67 (-0.17 this week) Invitrogen develops, manufactures and markets research tools in kit form and provides other research products and services to corporate, academic and government entities. These research kits simplify and improve gene cloning, gene expression and gene analysis techniques and are used for genomics and gene-based drug discovery, among other molecular biology activities. Founded in 1987, Invitrogen is headquartered in San Diego, California and has operations in Huntsville, Alabama, Groningen, Netherlands, and Heidelberg, Germany. One of the metrics most investors focus on when analyzing a Biotech company is the cash burn rate, which as the term implies, is the rate at which a firm spends its cash reserves. For many such companies, it is a race against time, to come up with an effective, viable, and FDA-approved product before the money runs out. This uncertainty and risk no doubt contributes to the volatility of Biotech issues, but as a pick and shovel play of the Biotechs, IVGN finds itself in a unique position. No matter which company develops a revolutionary new drug or treatment, they will most likely do so with the help of IVGN's kits. The completion of the Human Genome Project this year has only helped the stock, as investors are banking on this to be a driver of increased research efforts, which would likely increase demand for IVGN's research products. Connecting the lows since mid-October reveals that IVGN has maintained a solid uptrend despite the recent market turmoil. There are a number of minor support levels for the stock, at $76, $75 and $74. The 50-dma (now at $71.80) would be the strongest support for IVGN. We are placing our stop price just above this level at $72. A bounce off support could provide for an aggressive entry but confirm with volume. For a safer entry, wait for the buyers to return, with momentum carrying IVGN above the 10-dma at $80, before jumping in. Confirm sentiment and direction with that of the AMEX Biotech Index (BTK) or Merrill Lynch's Biotech HOLDR (BBH). It might also be a good idea to keep an eye on competitors such as AFFX, CRA and QGENF. BUY CALL JAN-75 IUV-AO OI=475 at $11.13 SL=8.25 BUY CALL JAN-80*IUV-AP OI= 22 at $ 8.63 SL=6.00 BUY CALL JAN-85 IUV-AQ OI=454 at $ 6.63 SL=4.50 BUY CALL FEB-80 IUV-BP OI=598 at $11.25 SL=8.25 BUY CALL FEB-85 IUV-BQ OI= 36 at $ 9.25 SL=6.25 SELL PUT JAN-70 IUV-MN OI= 0 at $ 4.25 SL=6.00 Wait for OI!! (See risk of selling put in play legend) http://www.premierinvestor.com/oi/profile.asp?ticker=IVGN *********************** NEW LONG TERM CALL PLAY *********************** SUNW - Sun Microsystems, Inc. $27.44 +0.50 (-3.00) Since its inception in 1982, a singular vision "The Network Is The Computer(TM)" has propelled Sun Microsystems, Inc., to its position as a leading provider of industrial-strength hardware, software and services that power the Internet and allow companies worldwide to dot-com their businesses. Today the market was horrid. The NASDAQ had little to be encouraged about after the Fed didn't gift the economy with a rate cut. Yet, relative to this disappointing sell off, SUNW proved resilient right from the open. It gapped down near the day low and managed a nice recovery. Even as the NASDAQ sold off into the afternoon, SUNW consolidated and tested intraday support at $26. This test was successful and the stock rallied into the close. On top of that, the volume today was three times its ADV at a hefty 100 mln shares. We are not picking the bottom on the market tomorrow, but SUNW acted extremely well considering the carnage that was occurring. Not to mention, SUNW shook off a downgrade from AG Edwards today. We are adding SUNW as a Long Term Call because of its attractive valuation and its upside potential. While both IBM and HWP were downgraded by Merrill Lynch today, HWP issued a statement that the company is on track to meet its previous guidance and was not adjusting it in anyway. If true, this bodes well for SUNW in the server market. Look to enter this play on pullbacks and bounces from intraday support at $25, where buyers stepped in this morning. SUNW has not traded this low since October 1999. There is longer term support at $23, which is our stop loss level. When timing entry into this Long Term Play, watch for SUNW's action relative to the NASDAQ. BUY CALL JAN-25 SUQ-AE OI= 4800 at $5.13 SL=3.25 BUY CALL JAN-30 SUX-AF OI=15504 at $2.63 SL=1.25 BUY CALL FEB-30*SUX-BF OI= 715 at $3.63 SL=1.75 BUY CALL FEB-35 SUX-BG OI= 1409 at $2.13 SL=1.00 BUY CALL MAR-35 CJT-CG OI= 1303 at $3.13 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=SUNW ************ NEW PUT PLAY ************ No new puts today ***************** STOP-LOSS UPDATES ***************** IBM - put play Adjust from $92 down to $90 EMC - put play Adjust from $69 down to $62 SANM - put play Adjust from $74 down to $69 PMCS - put play Adjust from $98 down to $90 ARBA - put play Adjust from $66 down to $55 CELG - put play Adjust from $45 down to $40 AMCC - put play Adjust from $68 down to $65 SBC - put play Adjust from $49 down to $47.50 ************* DROPPED CALLS ************* QCOM $77.13 -6.31 (-2.44) The good news is, there were many positive announcements in the company's favor today. A licensing deal with RIMM, a successful next generation CDMA2000 transmission test with LU and higher sales in Japan in 2001 were all good reasons to buy QCOM today. The bad news is, all of this failed to get investors interested, as they headed for the exits en masse on a down day for the NASDAQ. By the end of the day, QCOM fell 7.57 percent on over 130% of ADV and in doing so, closed below our stop price of $78. With the possibility of further downside now that key support has been broken, we are dropping coverage of this play. CVC $79.94 -3.81 (-4.38) This stock got caught up in the selling today and lost 4.5%. As a result, CVC fell below its 10-dma at $81.41 and our stop loss level of $80. We are dropping this play tonight for violating our stop, however, CVC did receive some late buying. A move back above $80 would be encouraging, but the inability for CVC to get back above that level would be a warning. Use tight stops to limit additional downside. ************ DROPPED PUTS ************ No dropped puts today ************** TRADERS CORNER ************** Advantages Of Day Trading By Mary Redmond In many ways, day trading is actually safer than holding a position for several days or weeks in today's market. This is particularly true with short term options. Holding a short term option overnight can be a dangerous way to trade. The market has whipsawed traders around more this year than ever before, and the factors which have contributed to this seem likely to increase in the future. Today's financial markets subject traders to unprecedented levels of volatility. This provides the opportunity for short term profits, but also poses unprecedented levels of risk. It only takes one influential analyst to down grade a stock, and almost every other stock in the sector can be severely damaged. It only takes one earnings warning by a bellwether company to damage the entire market. An example of this occurred on Monday. Terayon warned that their earnings would be lower-than-expectations, and in addition, Goldman Sachs downgraded the internet infrastructure sector. Sycamore, Ciena, JDSU and NT all suffered as a result of this. This seems totally illogical, as all four of these companies stated that they were on target to meet or exceed expectations for the coming quarter. However, in a nervous market, investors are very quick to dump stocks at any sign of weakness in the sector to avoid being burned severely. An interesting phenomenon occurred on Tuesday morning, when the market rallied before the Federal Reserve announced the decision. Ciena dropped substantially after it announced it was acquiring Cyras Systems in a stock deal. In sympathy, SCMR and RBAK dropped, even while the Nasdaq rallied. However, JDSU, GLW and NT rallied. Why? Possibly because stocks often trade in tandem with the other stocks in their sector with similar market capitalizations. On Tuesday morning, the networking stocks with market capitalizations of over $100 bln rallied and the small cap networking stocks fell. Most company news, earnings reports, and analyst upgrades or downgrades are released after the market closes, or before it opens. This is the reason that holding positions over night can be dangerous. It is impossible to predict which companies will release good and bad news, or how the market will respond to it. However, if you get in and out of positions the same day, you may subject yourself to lower risk. There are many different technical tools used in day trading. You need to experiment to find the technical indicators which work best for you, and which stocks you feel most comfortable day trading. However, there are a few good rules to remember and methods which work consistently well. Try to avoid the temptation to buy at the first few minutes of the market open if you plan on holding the position for a few hours. It is almost always a very bad idea. Many stocks often gap open at a high level, then level off. This is because there are frequently imbalances between buy and sell orders at the open since the market has been closed for several hours. In addition, the element of hope persists. Investors and traders want the market to move up. It's part of human nature. We always hope that today will be the day that we start a new rally. Even experienced traders who profit from put plays may feel this way, as most people hold stocks in their IRAs for retirement. While it is possible to profit in a down market, it seems easier and more fun to make money on the upside. This can fuel excessive optimism at the market open, particularly if the futures are high. If the futures are way up, people often assume that the market will rally all day. However, the futures are usually only indicative of the open of the market, and are a poor indicator of the daily market direction. There are many days when the futures are higher into the open, and the markets close down for the day. Often, very fast moving stocks offer the opportunity for small profits on imbalances at or near the market open, particularly for adroit traders who can buy and sell within a few minutes. However, it is generally not a good idea to trade this way with options. During the first hour of trading, market makers typically price the options with high volatility when the stock is moving quickly off the open. After the stock settles a bit, the market makers will either decrease or increase volatility in the option, depending on whether the public is buying or selling them. It always tends to go against you, and naturally in favor of the market makers. Waiting until around 10:00 or 10:30 will minimize this risk. If it is a real rally, it will last past the first hour and you have to trade what you're given. If the averages are trending down, it is generally best to buy puts, although certain stocks may buck the trend. As an example, PMC Sierra was a very weak looking stock on Tuesday and Wednesday. Although the company had not warned of a slowdown in earnings, many analysts had downgraded the sector, and the stock was way below all its major moving averages. SMH, which is the holding stock for the semiconductor sector, was trading down, and did not show any sign of technical strength. The following is an example of a profitable entry point. As a side note, it is informative to watch the amount of cash that is going into both equity and money market funds on a monthly and weekly basis. The weekly reports on equity funds in December reflect capital gains distributions as an outflow, and are often lower than the actual amount. However, the four week moving average of cash to equity funds is a negative $4.5 bln, according to AMG Data Services. We have only had one other month in the last ten years in which equity funds showed a net redemption, and that was in August of 1998. Most equity fund investors do not redeem their funds, even in bear markets. This is indicative that many market participants may be starting to panic. However, we have enough cash in money market funds to sustain a market rally, when the time comes that investors feel comfortable buying stocks. The Investment Company Institute reported that money market funds currently hold $1.869 trln, as of December 13th, an increase of $24.8 bln from the previous week. Money market funds have taken in $258 bln in the last twelve months, or an average of $21 bln per month. During the months of January through March of 2000, we saw between $40 and $50 bln per month deposited into equity funds, and the majority of the money was deposited to technology funds. This was partly responsible for the phenomenal Nasdaq rally we saw during those months. Since we have had more losses this year, it is possible that the tax selling is more intense. However, the real catalyst for a rally may be decent first quarter earnings reports, as well as a rate cut from the Fed. *************************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=1203 ************************************************************ ********************* PLAY OF THE DAY - PUT ********************* IBM - Int'l Business Machines $86.00 -4.13 (-1.81 this 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. Most Recent Write-Up Greenspan spun a tale of good cheer for the New Year, but the predisposition couldn't lift the technology sector out of its recent slump. The market confusion intensified and IBM shares, which had rallied to $94.44 ahead of the Fed Meeting, did an about-face on the news. A swift decline to the underside of our protective stop at $92 kept IBM in play. It's also important to be aware of other vendors in the industry, like DELL and HWP, for an overall picture of sector direction and investor sentiment. More specifically to our play on IBM, the intraday bounces first at $92, and then at $90, brought up previous concerns of these levels developing as support while the market finds its footing. Although the recent trading behavior keeps us on alert, our negative bias remains intact. Today's convincing slide through the 10-dma ($93.02) constituted a sense of confidence in regard to the downtrend line and at the same time, offered aggressive entry opportunities. But without sounding like a broken record, a definitive break through Friday's intraday low of $87.31 would provide better confirmation for the more conservative types. Comments "Beam," as we called it on the floor, got hit with a downgrade today from Merril Lynch, along with HWP. HWP issued a statement reaffirming its guidance while IBM kept mumm. Could a warning be around the corner? Quite possibly. IBM is technically pinned between support at $85 and resistance at $88, which it challenged three times today. Look for entry on rollovers from $88 and watch for buyers at the $85 level. A break above $88 and look for resistance at $90. BUY PUT JAN-90 IBM-MR OI=16359 at $8.38 SL=6.50 BUY PUT JAN-85*IBM-MQ OI=13909 at $5.88 SL=4.25 BUY PUT JAN-80 IBM-MP OI=10540 at $4.00 SL=2.50 http://www.premierinvestor.com/oi/profile.asp?symbol=IBM ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Merry Christmas...but where are the presents? The stock market was hammered today with blue chip technology issues pacing the decline amid a slew of negative analysts' comments. Merrill Lynch set the stage for a bloody session, issuing downgrades on bellwethers Cisco (CSCO), International Business Machines (IBM) and Hewlett-Packard (HWP). The drop in Nasdaq valuations was quick and decisive, and the selling pressure was particularly heavy in Internet, computer hardware and networking shares. There was little positive activity on the Dow, with Walt Disney (DIS), Microsoft (MSFT), American Express (AXP), Home Depot (HD) and International Paper (IP) among the worst performing industrial issues. In the broader market, defensive sectors experienced small pockets of upward movement with utilities, precious metals and healthcare among the strongest performers. At the same time, financial, paper and biotechnology endured substantial losses. Even with the bearish activity, analysts say there is potential for further downside movement in the coming weeks. In addition, any lows that are established in the next few sessions will have to be tested before a recovery can begin. With the potential for a technology washout before years-end, technicians believe that a move to 2,100 is likely for the Nasdaq and a Dow retreat to 10,000 is not inconceivable. Regardless of your opinion for the future, it's not a pretty picture for those who had hopes that the bottom was near. Summary of Previous Picks: NOTE: December prices as of Friday's Expiration Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return EMLX DEC 120 113.56 139.69 $6.44 4.7% ADBE DEC 67.5 64.44 62.44 -$2.00 0.0% Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return BEAS DEC 55 54.50 71.38 $0.50 11.0% FNSR DEC 22.5 21.94 35.06 $0.56 10.7% CHIR DEC 35 34.31 42.94 $0.69 9.6% IDPH DEC 155 153.94 209.44 $1.06 8.8% PWAV DEC 40 39.00 60.19 $1.00 8.3% SAWS DEC 35 34.12 65.00 $0.88 8.0% GENZ DEC 75 74.19 93.81 $0.81 6.9% CMVT DEC 85 83.37 105.38 $1.63 6.7% QCOM DEC 65 63.81 79.56 $1.19 6.7% ADBE DEC 55 54.00 62.44 $1.00 5.9% FRX DEC 125 123.69 135.38 $1.31 5.8% PVN DEC 35 34.75 44.94 $0.25 5.0% Adj 2-1 Split SCMR DEC 40 39.31 55.19 $0.69 4.9% CRGN - Position closed. IVGN JAN 60 58.50 78.56 $1.50 7.0% DCTM JAN 40 38.94 50.16 $1.06 6.8% EMLX JAN 45 43.69 65.56 $1.32 6.3% Adj 2-1 Split NOK JAN 40 39.25 41.13 $0.75 4.7% Key Moment Sell Strangles: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return CLFO - Short-put position closed. CFLO DEC 165c 172.13 49.00 $7.13 23.2% MANU DEC 33p 32.16 47.44 $0.35 11.7% Adj 2-1 Split MANU DEC 70c 70.25 47.44 $0.25 8.4% Adj 2-1 Split IMPH JAN 35p 33.25 56.94 $1.75 11.7% IMPH JAN 80c 82.75 56.94 $2.75 17.0% GMST JAN 25p 24.37 40.06 $0.63 5.8% GMST JAN 65c 65.75 40.06 $0.75 6.8% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return MANU DEC 135 136.75 47.44 $1.75 13.0% CIEN DEC 110 111.00 100.72 $1.00 12.2% EMLX DEC 185 187.19 139.69 $2.19 10.9% IWOV DEC 115 115.50 68.38 $0.50 10.6% EMLX DEC 175 176.06 139.69 $1.06 8.7% CIEN DEC 140 141.25 100.72 $1.25 8.3% VRTS JAN 160 161.69 80.38 $1.69 6.1% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status AFFX $87.25 $65.00 DEC50P/60P $1.12 $58.88 $0.88 Expr AGN $90.75 $91.81 DEC70P/75P $0.75 $74.25 $0.75 Expr AET $33.03 $33.00 DEC28P/30P $0.28 $29.72 $0.28 Expr * APA $62.44 $59.13 DEC50P/55P $0.63 $54.43 $0.63 Expr BMY $67.94 $68.09 DEC60P/65P $0.88 $64.13 $0.88 Expr ELN $53.38 $50.50 DEC47P/50P $0.50 $49.50 $0.50 Expr XL $80.00 $80.69 DEC70P/75P $0.62 $74.38 $0.62 Expr * Split adjusted ESRX $88.88 $93.75 JAN65P/70P $0.50 $69.50 $0.50 Open Debit Straddles: Stock Pick Last Position Debit G/L Status FITB $55.25 $54.00 DEC55C/55P $3.00 $-2.00 Clsd * * Closing the Straddle on DEC 6 provided a $0.62 credit - a 20% return in one day. New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations *************** AFFX - Affymetrix $63.63 *** Looking For A Bottom! *** Affymetrix is engaged in the field of DNA chip technology. The company has developed and intends to establish its GeneChip system as the platform of choice for acquiring, analyzing and managing complex genetic information in order to improve the diagnosis, monitoring and treatment of disease. The GeneChip system consists of disposable DNA probe arrays containing gene sequences on a chip, certain reagents for use with the probe arrays, a scanner and other instruments to process the probe arrays, and software to analyze and manage genetic information from the probe arrays. Affymetrix is one of the leaders in the field of Genomics and investors, as well as industry experts, are bullish on the company's outlook. Analysts say that Affymetrixs' GeneChip probe arrays could significantly reduce the cost and time required for high-volume polymorphism analysis, which is currently performed through more labor intensive sequencing techniques. The GeneChip probe array technology and systems integrate chip fabrication techniques, solid phase chemistry, molecular biology, software and robotics. Affymetrix currently is selling a portfolio of custom and standard expression monitoring GeneChip arrays including some unique products that monitor the expression of the majority of full length and partial gene sequences contained in publicly available sequence databases that correspond to human, mouse, rat and yeast organisms. The current pattern of consolidation has produced a relatively stable trading range and a reasonable cost basis exists near the current support area at $50. Our conservative position offers a method to participate in the future movement of the issue with low risk and favorable reward. AFFX - Affymetrix $63.63 PLAY (conservative - bullish/credit spread): BUY PUT JAN-40 FIQ-MH OI=0 A=0.88 SELL PUT JAN-45 FIQ-MI OI=27 B=1.50 INITIAL NET CREDIT TARGET=$0.68-$0.75 ROI(max)=15% ****** IDPH - IDEC Pharmaceuticals $184.06 *** Entry point! *** IDEC Pharmaceuticals is a biopharmaceutical company engaged in the research, development and commercialization of targeted therapies for the treatment of cancer and auto-immune and inflammatory diseases. The company's first commercial product, Rituxan, and its most advanced candidate, Zevalin, are for use in the treatment of certain B-cell non-Hodgkin's lymphomas. The company is also developing products for the treatment of various auto-immune diseases, such as psoriasis, rheumatoid arthritis and lupus. IDPH shares tumbled today along with other leading issues in the biotechnology group and the move has investors wondering whether the stock is a "buy" at the current levels. Banc of America Securities is one of the company's primary supporters and today they issued a new recommendation to look beyond the expected seasonal weakness and focus on a strong 2001. Shares of the company's stock have slumped in recent sessions due to concerns about limited upside in the fourth-quarter Rituxan sales estimates. BofA says that unique factors contributed to the seasonal weakness of Rituxan sales in the fourth quarter and that future revenues will be unaffected by the near-term decline. Traders who favor the company's overall outlook can "target shoot" an entry point in the issue with these conservative positions. IDPH - IDEC Pharmaceuticals $184.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JAN 120 IDK MD 806 2.50 117.50 6.4% *** Sell Put JAN 125 IDK ME 133 3.00 122.00 7.6% Sell Put JAN 130 IDK MF 1388 3.63 126.37 9.1% ****** IMPH - Impath $56.94 *** S&P 600 Addition! *** Impath specializes in providing patient-specific cancer diagnostic and prognostic information, with an expertise in difficult to diagnose tumors, prognostic profiles in breast and other cancers, and lymphoma/leukemia analysis. The company currently works with more than 7,400 physicians specializing in the treatment of cancer patients, in 1,785 hospitals and 409 oncology practices. Impath's database currently contains more than 550,000 patient profiles. In addition, Impath can link its information with that of its tumor registry business to provide data on the full continuum of care, from diagnosis through treatment and the outcomes on many patients. Impath is working on more than 50 projects with over 20 different pharmaceutical/biotechnology companies including 21 U.S. based and four international clinical trials. Impath made the list last week as a potential "premium selling" position and today the issue rallied above a recent trading range near $50, with the provider of cancer information scheduled to replace Lilly Industries (LLY) in Standard & Poor's Small-Cap 600 Index after the close of trading. The final hour of the session was very active as fund managers moved to acquire the issue for their index-tracking portfolios and now the question is whether the stock can build on today's gains. A study of chart patterns and historical trends suggests that current option premiums are overpriced and that "out-of-the-money" positions can be sold with a favorable theoretical advantage. Traders who have a bullish outlook for the issue can speculate conservatively on its future movement with these positions. IMPH - Impath $56.94 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JAN 45 QPH AI 70 14.25 42.69 5.5% *** Sell Put JAN 40 QPH MH 24 1.13 38.87 9.2% *** Sell Put JAN 42.5 QPH MV 7 1.69 40.81 13.1% Sell Put JAN 45 QPH MI 15 2.31 42.69 17.1% ****** VAR - Varian Medical Systems $62.00 *** Hot Sector! *** Varian Medical Systems is engaged in the design and production of equipment for treating cancer with radiation, as well as high-quality, cost-effective x-ray tubes for original equipment manufacturers, replacement x-ray tubes and imaging subsystems. Its oncology systems line encompasses a fully integrated system of products embracing not only linear accelerators, but also sophisticated ancillary products and services to extend their capabilities and efficiency. In addition to developing medical hardware, VMS also develops clinical software products and devices that enhance productivity and quality. The company's products are divided into three major categories, comprised of oncology systems, x-ray products and breakthrough technologies. There's not much news on Varian to explain the recent activity but the Scientific and Medical Instruments group is performing very well and technical indications suggest VAR has successfully completed a recent consolidation and is poised for future gains. In addition, the fundamental outlook for the company is excellent and the recent rally to new highs has been on increasing volume; both factors that lead us to a bullish position in the issue. The favorable option premiums also help provide a conservative, low risk position with a reasonable expectation of profit. VAR - Varian Medical Systems $62.00 PLAY (conservative - bullish/credit spread): BUY PUT JAN-50 VAR-MJ OI=0 A=0.43 SELL PUT JAN-55 VAR-MK OI=41 B=0.88 INITIAL NET CREDIT TARGET=$0.50-$0.56 ROI(max)=11% *************** Neutral Plays - Straddles & Strangles *************** CEPH - Cephalon $53.69 *** Trading Range? *** Cephalon markets PROVIGIL Tablets for treating excessive daytime sleepiness associated with narcolepsy. Cephalon has completed studies using PROVIGIL in patients suffering from fatigue that is associated with multiple sclerosis, and excessive daytime sleepiness due to obstructive sleep apnea, as well as a study to demonstrate improvement in performance and alertness in a simulated shiftwork environment. The company has initiated a new study to investigate PROVIGIL's use in treating attention deficit hyperactivity disorder in adults and a second study in obstructive sleep apnea. In addition to its clinical program focused on PROVIGIL, Cephalon has other significant research programs that seek to discover and develop treatments for neurological and oncological disorders. This play is based on the current price of the underlying stock and its recent technical history. The probability of profit in these positions is also higher than other plays in the same strategy based on disparities in option pricing. We will use the recent volatility and the overpriced options to initiate a neutral position with a favorable premium. The probability of the share value reaching our sold strikes is rather low, but there is always the possibility of a break-out from the recent trading range, so monitor the position for changes in technical character. CEPH - Cephalon $53.69 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JAN 40 CQE MH 100 0.94 39.06 8.2% *** Sell Call JAN 70 CQE AN 502 1.19 71.19 10.1% *** -or- Sell Call JAN 65 CQE AM 10 2.00 67.00 15.9% Sell Put JAN 45 CQE MI 27 2.19 42.81 14.8% *************** BEARISH PLAYS - Naked Calls The issues are excellent candidates in the "premium-selling" category of options trading. Based on analysis of statistical option pricing and the underlying stock's technical history, these positions meet our fundamental criteria for profitable naked-calls. Each issue has robust option premiums, a well defined resistance area and a high probability of remaining below the target strike prices. However, current news and market sentiment will have an effect on these issues and, as with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. Some traders may favor a more aggressive approach, selling options that are closer to the current price of the issue, to produce a higher initial return. While that technique may be more attractive, it also increases the theoretical risk of loss. Only you can know what plays are suitable for your risk-reward tolerance and portfolio outlook. *************** ADBE - Adobe Systems $57.25 *** Technicals Only! *** Adobe Systems is a provider of graphic design, publishing, and imaging software for Web and print production. The company offers a line of application software products for creating, distributing, and managing information of all types. Adobe licenses its industry-standard technologies to major hardware manufacturers, software developers, and service providers, and offer integrated software solutions to businesses of all sizes. Professional Web designers use the company's web page layout, digital video, and digital imaging software to enable virtual presentations of products and services on the Web, to create brand differentiation and a satisfying Web browsing and online shopping experience for customers. Graphic designers, artists, technical writers, and pre-press professionals use the company's solutions for professional page layout, illustration, business publishing, and printing visually rich information. The Adobe Acrobat software allows users to publish and distribute business documents using corporate e-mail and intranets and the Internet. ADBE - Adobe Systems $57.25 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JAN 75 AXX AO 2025 1.75 76.75 13.4% Sell Call JAN 77.5 AXX AW 746 1.38 78.88 10.9% Sell Call JAN 80 AXX AP 1377 1.00 81.00 8.1% *** ****** BEAS - BEA Systems $56.50 *** Technicals Only! *** BEA Systems is a provider of e-commerce infrastructure software that helps companies of all sizes build e-commerce systems that extend investments in existing computer systems and provide the foundation for running a successful integrated e-business. The company's products have been adopted in a variety of industries, including commercial and investment banking, securities trading, telecommunications, airlines, retail, manufacturing, package delivery, insurance and government, in many cases using the Internet as a system component. The company's products serve as a platform or integration tool for applications such as billing, provisioning, customer service, electronic funds transfers, ATM networks, securities trading, Web-based banking, Internet sales, supply chain management, scheduling and logistics, and hotel, airline and rental car reservations. BEAS - BEA Systems $56.50 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JAN 80 BUC AP 2153 1.81 81.81 14.0% Sell Call JAN 85 BUC AQ 3456 1.25 86.25 10.1% *** ****** QLGC - Qlogic $67.44 *** Technicals Only! *** QLogic Corporation is a designer and supplier of semiconductor and board level input/output, or I/O, and management controller products. The company's I/O products provide an interface for the direct attachment or networking of computer systems and their data storage environments. The company provides these interfaces for all enterprise server and storage products including proprietary and open systems platforms, hard disk and tape drives, removable disk drives, RAID (redundant array of independent disks), subsystems and tape libraries. In addition, it designs and markets baseboard and enclosure management products that monitor and communicate management information related to components that are critical to computer system and storage subsystem reliability and availability. QLGC - Qlogic $67.44 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JAN 120 QLC AD 1167 2.13 122.13 13.8% Sell Call JAN 125 QOV AE 659 1.81 126.81 12.0% Sell Call JAN 130 QOV AF 985 1.50 131.50 10.1% *** ************************Advertisement************************* Try Investor's Business Daily today! Click here for 10 FREE issues. No obligation. 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