The Option Investor Newsletter Sunday 12-31-2000 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/123100_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 12-29 WE 12-22 WE 12-15 WE 12-8 DOW 10786.85 +151.29 10635.56 +200.60 10434.96 -277.95 +339.37 Nasdaq 2470.52 - 46.50 2517.02 -136.25 2653.27 -264.16 +272.14 S&P-100 686.45 + 2.22 684.23 - 5.25 689.48 - 37.58 + 31.07 S&P-500 1320.28 + 14.33 1305.95 - 6.20 1312.15 - 57.74 + 54.66 W5000 12167.00 +185.50 11981.50 -112.40 12093.90 -572.60 +629.10 RUT 483.53 + 20.54 462.99 + 4.96 458.03 - 21.04 + 22.23 TRAN 2946.60 + 96.67 2849.93 +151.25 2698.68 -181.27 +116.80 VIX 30.23 - 1.29 31.52 + .32 31.20 + 5.07 - 5.46 Put/Call .67 .61 .94 .59 ****************************************************************** A fitting end to trading in 2000. By Jim Brown In a fitting end to trading for 2000 investors threw in the towel at the close and went home in disgust. After struggling all day both major indexes saw selling accelerate as the closing bell approached and huge order imbalances loomed over the markets. The imbalances turned out to be pretty evenly mixed and not a major factor but the selling was still widespread with the exception of biotechs. The tech leaders still up strongly for the year suffered the most with investors trying to take some profits in the same year as losses for tax purposes. JNPR, BEAS, SDLI, BRCM, NTAP, RBAK, JPM all up strongly for the year fell at the close but the volume was light. JNPR -12, BEAS -8, SDLI -9, BRCM -8, NTAP -8. Simply put, investors with losses in other stocks took profits while they could do it tax free. The year the bubble burst was the name being used by the talking heads on Friday. It fit well with the Nasdaq dropping -39% for the year and wiping out all the gains from the speculative bubble started in 1999. The Nasdaq went into the record books with the biggest loss for a major market index since 1937. The Nasdaq drop took -$3.3 trillion dollars out of investor accounts since Jan-1st. This could have paid off 58% of the national debt and this negative wealth effect is being felt in all areas of the economy. The Dow finished down -6% and was the first yearly loss for the Dow in ten years. The S&P-500 finished down -10% and the Russell 2000 finished the year with a -4% loss. The transports only lost -1% and the Dow Utilities were up +45%. This was the first time since 1990 that the Dow, Nasdaq and S&P all finished negative for the year. Still the only index most traders care about is the Nasdaq and the frustration Friday was so bad it was like a cloud over traders everywhere. The lack of a material year end rally and tax selling right up to the bell, soured hopes for a rousing start next week. Traders went home worried that when the earnings warnings start to fly next week the Nasdaq may retest the December lows. What a way to start the New Year! This of course is simply speculation and may be the pessimism we need to close out this sell off. Traders now fear that the expected January rate cut is now priced into the market with the +300 point Nasdaq bounce and now we will move into a wait and see mode. With earnings dropping to near negative numbers there is nothing to power a January rally. First Call said the earnings estimates for the first quarter have now fallen to only +4% from +28% in the same quarter this year. JPM Chase said on Friday that they were expecting only a +1.8% GDP growth for all of 2001, down from over +5% in 2000. JPM Chase is forecasting a hard landing but no recession AS LONG AS the Fed starts cutting rates in January. This is not my gloom and doom forecast, I am only reporting what happened on Friday. There was further confirmation of the softening economy with the release of the Help Wanted Index which fell to levels not seen since 1993. Lack of job advertisements indicate that jobs are dropping and unemployment is rising. The Non-Farm Payroll Report will be out next Friday and investors will be watching with great interest. This is a key factor in the Fed's decision to cut rates and traders are hoping for a number that will cause the Fed to cut rates BEFORE the next FOMC meeting on Jan-30th. This could be a pivot point in the market if the report is Fed friendly. In the 1991 recession the Fed cut rates four times between meetings and did so when the payroll numbers were announced. For a day that was supposed to be fairly quiet before the long weekend the volume was huge. The Nasdaq managed almost 2.5 billion shares and the NYSE over 1 billion. Advance/declines were dead even on both exchanges but of the 300 stocks I follow on a daily basis only 37 were positive. I view that as positive because it means money was flowing into stocks that are not market leaders. Near the close there was a flood of money into low priced biotech stocks. Almost every biotech under $20 experienced a significant spike of several dollars. This was obviously window dressing by funds trying to show diversification out of techs on their year end statements. The Nasdaq has been having trouble for two days now because of weakness in the big cap leaders. CSCO pulled back to within $2 of its 52-week low of $35.63. Same with MSFT at $42. Dell fell within .75 of its low at $16.25. SUNW closed down -$5 from the $32 bounce of last Monday and only $1 off its 52-week low. INTC did close at a new 52-week low of $30.13 after trading under $30 intraday. Even ORCL which had been holding up well after a strong earnings report earlier in the month also fell almost -$3 from the intraday high of almost $32. Nothing was sacred with JDSU slipping another -2.44 at the close. This weakness in the big caps is especially disturbing to traders. The big caps should hold up best since they are the most liquid. When funds decide to move back into the markets the big caps will be consume a large amount of their cash. They can move in and out with relative ease should their entry point prove wrong. As long as big caps are showing weakness these funds will stay on the sidelines. Sure there is nibbling around the tech edges but nobody is seeing money flow into the big techs yet. The good news is still the speed at which this can all change. There is literally hundreds of billions in cash sitting on the sidelines. Once the starting gun is heard this money will be invested and stocks will go up. My view is that all the bad news is priced into the market already. 4% earnings, 1.8% GDP, how much worse can it get short of a real economic disaster? Do you think the Fed will let it get much worse before they act aggressively? I doubt it. They are already behind the curve and are likely to try and catch up in the first quarter. Stocks would react strongly to several back to back rate cuts. The biggest bad news already priced in is the earnings. Many feel that with Reg-FD in force companies have been warning more than before in order to protect themselves from shareholder lawsuits. Many of these warnings and lowered estimates have been more severe than necessary. This has set the stage for a lot of upside surprises. Upside surprises will produce higher earnings estimates for the next quarter and the cycle will start over. As investors going forward into 2001 we should be very excited. At 2400 the Nasdaq is back at June 1999 levels and we have the opportunity to buy stocks at a very reasonable price. The huge speculative excesses from the Internet bubble have been eliminated. We have had some huge moves in almost every stock on the Nasdaq and nobody can complain that there was not any trading opportunities. Volatility was huge. In 1999 there were only 10 days that the Nasdaq traded in over a 100 point range. In 2000 there were 160 days of triple digit ranges. As traders anything that does not bankrupt us makes us stronger. After the market moves in 2000 we should be Olympic class traders. In 1998/1999 you could pick almost any Nasdaq stock, buy calls and have a 75% chance of making money. Many investors felt they were market gurus based on their returns during this period. After 2000 many of these "experts" are no longer investors, having busted out trying to apply bull market strategies in a bear market. If you are reading this you have not busted out. You have not given up. You should be excited about 2001 and you are making plans to be even more successful than you were in 1998/1999. Is it possible? You bet! You are at the right place at the right time with the right plan. Will it be easy? Not hardly. The Nasdaq ran up +100% from 1999 lows on the Internet bubble. That bubble is over just like all the other bubbles before it. The next driving force has yet to appear. Maybe it will be biotechs, maybe a new wave of Internet appliances like smarter PDAs or smaller portable computers. Whatever it is we need to be ready to capitalize on it. Will the Nasdaq hit 5000 again in 2001? Most doubt it. Historically it takes 2-3 years to recover old highs after a major tech wreck. Most estimates for Nasdaq 2001 follow historical norms and fall into the +25% to +30% gains. This would put the index in the 3100-3400 range. After 5000 even 3400 sounds really boring but did investors become millionaires in the past with even smaller moves? You bet! What I think we will see in 2001 is a return to a stock pickers market. Those investors that spend the time and effort to find the right stocks at the right time will profit handsomely. Those that simply throw money at the old favorites again will have mixed results. Another by product of a more sedate market will be lower option premiums. The volatility of 2000 placed option premiums on fast moving stocks into the range of margin rates instead of option premiums. Paying $25 for a current month call $15 out of the money is obscene. Many of you remember premiums from say 1996/97 when you could buy calls at or in the money on decent stocks for well under $10. That does not mean you made less money unless of course you were writing covered calls. I am looking forward to 2001. That is an understatement. I am REALLY looking forward to 2001! A stock pickers market is a gold mine for traders who know how to find good plays and have the time to do the research. For those who don't have the time to do their own research we provide an invaluable team of over 35 researchers which scan thousands of stocks daily for our suite of investment newsletters. There is no reason for any investor to NOT profit handsomely in 2001. Sure there will be losers as well as winners but active traders should easily beat the market substantially. Experienced option traders routinely place in the top 10% of all investors. The leverage is the key. We don't need the $40-$50-$60 moves of 2000 to double and triple our investments. Actually we do our best investing in options that move from $3 to $6, or $5 to $10, not from $25 to $50. We should not be depressed because the Nasdaq lost -39% in 2000. We should not complain if we get another flood of earnings warnings next week. The market may make the rules but it is how we play the game that counts. We should focus on market cycles, stock cycles, entry points, exit points, money management and diversification. We should practice patience above all else. We should enter trades carefully and only after examining all the factors. We should exit trades aggressively and take profits whenever our targets are hit. We should not be greedy. Above all we should be thankful for the opportunity to be option traders. Many millions of investors are denied the opportunity we take as a right. Whether by account size, experience, broker limitations or risk profile, millions of traders only look into our world and wish. Option traders are the elite and our returns make others pale by comparison. Now shake off that frustration from mistakes made in 2000 and make your first new years resolution not to repeat those same mistakes in 2001. Regardless of your account size today, $10,000, $100,000 or over $1 million, and regardless of where the Nasdaq ends 2001, you have the capability of doubling or tripling those funds next year. Resolve now to 1) set a goal, 2) plan a strategy to hit that goal, 3) execute that plan aggressively. After that pep talk you would expect me to tell you that the mother of all rallies was going to breakout on Tuesday morning. Sorry, it may not happen. There will be tax selling next week. Surprised? But 2000 is over? Yes, but investors with profits in stocks they do not want to own any longer will put off selling until next week to shift profits and taxes into the new tax year. Hopefully they can sell the stocks they feel have topped out for a profit, invest that profit in hot new candidates and pay their taxes out of profits on the new stocks. It is the eternal circle. Investors have been doing this for years and it is a never ending loop. Can we capitalize on this trend? You bet! The Nasdaq dropped -481 points from the Jan-3rd high to the Jan-7th low this year. But remember the Nasdaq was also up +1560 points in the previous 73 days. With the Nasdaq down -39% for the year at the close on Friday, a drop of the same magnitude is highly unlikely. So now we are back to the buyer/seller tug of war again. Buyers on the sidelines waiting for a bottom will be looking for entry points next week. Sellers will be hoping that prices hold until they can bail out. The only sure thing is another week of volatility as investors restructure their portfolios to begin the New Year. For the markets the Jobs report on Friday could be the starters gun for a rally on the following Monday. Our task is to line up the stocks we want to play and look for signs next week that a support level for those stocks has been reached. Stocks already beaten severely should not suffer much and may rally right off the bat. Stocks up strongly for 2000, even though they may be well off their highs, will be likely targets for dip buying. An example would be JNPR which started 2000 at $57 and although well off its yearly high of $244 at $126 it is still up over 100% for the year. CIEN started 2000 at $28 and closed the year at $81 for almost a 200% profit. Stocks like this could see tax selling. I would buy either once the selling stops. To recap I would not be as concerned about market direction on Tuesday as I would be concerned about my trading strategy for the year that begins on Tuesday. Make your first three new years resolutions now to 1) set a goal, 2) plan a strategy to hit that goal, 3) execute that plan aggressively. Once you have a plan you are ready to take the trades the market gives you. Rest assured there will be plenty of trades in 2001! It will be a Happy New Year! There are only TWO days left to take advantage of our special annual renewal offer and get all the free stuff. Don't wait any longer! You get over $160 of free stuff including (2) 2001 option expiration calendar mouse pads and a 2001 Stock Traders Almanac. TIME IS UP - DO IT NOW! http://secure.sungrp.com/01renewal.asp Trade smart, choose your entry points carefully! Jim Brown Editor ******************** ONLY TWO DAYS LEFT!! - 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 Mouse pads (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********************* 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=1240 ************************************************************ ************** EDITOR'S PLAYS ************** Because this is the New Year and I feel many readers are frustrated with their performance last year I am not going to do an editors plays this week. Instead I am going to give you the "Exact Instructions" for being successful as an Option Trader in 2001. If your results in 2000 were not as good as you had hoped then read this article carefully. This is the same article I wrote in December 1999 and the principles have not changed. This is the second most requested article on the website. Profit from it! Click here for the full article "Exact Instructions": http://members.OptionInvestor.com/options101/123100_2.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1246 ************************************************************** **************** MARKET SENTIMENT **************** December Effect Unexpected By Austin Passamonte 1575 for the SPX? Market bulls would have happily settled for 1375 instead. First things first. We fully expected a session-ending rally on Friday and were caught totally by surprise when the slide intensified. A choice to sit out the tumultuous action was wise, considering we had the market direction all wrong! Next week's forecast? That's a tough one to call right now. Friday's afternoon sell off was unsettling. We fully expected the waves of selling earlier in the day and then a rally into the close. Forget window dressing... they broke the glass by 3:30pm. Apparently we had some serious retail selling pressure to unload stocks at the last minute when all hope was lost for a rally. We didn't close on the lows but it was torrid for awhile. We expected a round of bargain-hunting to ensue as often seen before holiday weekends and quarterly-ends as well, but not even close. Can we assume that a larger than expected number of traders hung in there until the last possible minute? Funny how people think they are one of the few with a simple idea. Trying to squeeze the last few ticks out of their losers, the first wave of sellers met with a buyer's boycott opened the floodgates from there. Will this incredible rush to the exits set us up for a powerful "January effect" rally next week? Remains to be seen. Any lasting rally from here must survive continued selling pressure and numerous fundamental challenges. The driving force will always be investor sentiment. The exact- same market crisis have been present but ignored by irrational market mentality. When reality arrives it often pushes scales to extreme opposites, and indeed we now have sobering fear of every negative factor previously ignored. The latest COT report shows commercial S&P 500 net-short interest remains at historical proportions. Remember, the number of contracts held is irrelevant; the percentage of net position is what we need to focus on. We find this surprising, but it tells us that institutions are waiting to see the same things we are... the first rate cut, a stabilized economy and improved investor's sentiment to return. Long-term chart signals remain positive but do not show solid strength from here. Failure to penetrate first levels of overhead resistance indicates we could pull back a bit before making the next rally run. By the same token, everything appears "cheap" at current prices on its face and sideline cash may spark a strong retail rally beginning Tuesday. January 2001 is a crossroads. We'll either begin the rally from here or revisit new market lows once again. Time will certainly tell, and we need to follow any short-term trend until the next long-term trend emerges once again. ***** VIX Friday 12/29 close: 30.23 30-yr Bonds Friday 12/29 close: 5.42% 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 (12/30/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 725 - 710 11,393 3,287 3.47 705 - 690 8,571 5,836 1.47 OEX close: 686.45 Support: 680 - 665 2,651 10,526 3.97 660 - 640 380 10,912 28.72 Maximum calls: 720/5,276 Maximum puts : 600/9,253 Moving Averages 10 DMA 684 20 DMA 701 50 DMA 717 200 DMA 769 NASDAQ 100 Index (NDX/QQQ) Resistance: 68 - 66 76,653 11,259 6.81 65 - 63 50,268 34,025 1.48 62 - 60 77,990 59,886 1.30 QQQ(NDX)close: 58.37 Support: 57 - 55 19,991 24,140 1.21 54 - 52 1,333 11,901 8.93 51 - 49 5,241 15,537 2.96 Maximum calls: 70/48,867 Maximum puts : 60/38,633 Moving Averages 10 DMA 60 20 DMA 64 50 DMA 71 200 DMA 87 S&P 500 (SPX) Resistance: 1400 17,969 9,252 1.94 1375 10,801 10,021 1.08 1350 35,831 34,890 1.03 SPX close: 1320.28 Support: 1300 4,376 15,491 3.54 1275 507 14,792 29.18 1250 1,328 16,225 12.22 Maximum calls: 1350/35,831 Maximum puts : 1350/34,890 Moving Averages 10 DMA 1308 20 DMA 1330 50 DMA 1360 200 DMA 1433 ***** CBOT Commitment Of Traders Report: Friday 12/29 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 -818 -588 -2589 -1646 Total Open interest % (-12.51%) (-7.52%) (-11.60%) (-8.22%) net-short net-short net-short net-short NASDAQ 100 Open Interest Net Value +1428 +3385 -2569 -4239 Total Open Interest % (+8.65%) (+19.05%) (-4.43%) (-8.24%) net-long net-long net-short net-short S&P 500 Open Interest Net Value +67807 +66148 -85776 -81998 Total Open Interest % (+38.16%) (+36.56%) (-11.94%) (-11.60%) net-long net-long net-short net-short What COT Data Tells Us ---------------------- Indices: The disparity remains between Commercial positions and Small Specs on the S&P 500. Commercials and Small Specs have increased their net-short positions on the DJIA. (Bearish) Interest Rates: Commercials are still moderately short T-Bond and T-Note futures. (Bearish) Currencies: Commercials heavily short Euro futures while small specs build net long. Small specs are betting on interest rate reduction while commercials remain skeptical. (Bearish) Energies: Commercials are net-short all oil products. These producers are hedgers and almost always take the opposite side of expected market action to lock-in production prices. (Bullish) Metals: Commercials are moving from net-long towards neutral in Gold, could be under distribution. Silver, Copper and Platinum are net-short. (Mixed to Bearish) Data compiled as of Tuesday 12/26 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://members.OptionInvestor.com/marketposture/123100_1.asp ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1273 ************************************************************** *************** ASK THE ANALYST *************** Deviations From The Mean By Eric Utley The Nasdaq Composite gained 85 percent in 1999. The Nasdaq Composite lost approximately 40 percent in 2000. Over the past two years of trading, we've witnessed the two most historic years in the Nasdaq stock market since its inception in 1971. To confound traders, those two years were back to back! But was it really that surprising that the Nasdaq came crashing back to earth this year since it nearly doubled its value in 1999? Obviously I didn't have the vision to see it coming, but in retrospect, a correction was in order. By the way, I hate the idea of retrospect when discussing financial matters. Rear-looking observations have an evil way of reinforcing errors. But history can also be a wonderful teacher. Since the dawn of capitalism, free markets have been filled with excesses both to the upside and downside. On that note, I think it may be an appropriate time to recall the Dutch tulip craze in 1637 and its subsequent cascade that carried Holland and the majority of Europe into a credit crisis. Also worth remembering was the South Sea Bubble in early 1700's England, which ruined numerous nouve speculators and caused severe political unrest. In my very humble opinion, I don't think the U.S. financial markets or economy are headed into significant trouble as has been the case in historically excessive periods such as the aforementioned events. But the historical list of excesses in free markets and subsequent crashes was just made longer after the last two years in the Nasdaq. And for those who have participated in the Nasdaq over the past two years, know that you are part of a fascinating historical event in capitalism. As for what the immediate future holds for the Nasdaq, I'm not going to bore you with any predictions. But I will say that I'm a long-term believer in technology - the essence of the Nasdaq - and its devices to improve the human way of life. As far as Nasdaq-related traders and investors are concerned, I think it would be prudent to consider the ramifications of the last two years and how they have changed the psychology and strategy in the marketplace. Trading and investing are serious businesses and should be viewed as such. In review of the past year in the market, I think a quote from one of my personal idols sums up the action pretty well. The speculator icon, Jesse Livermore, once wrote, "Wall Street never changes, the pockets change, the suckers change, the stocks change, but Wall Street never changes, because human nature never changes." Remember those words when delving into future market operations. Send your stock requests to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- SDL Incorporated - SDLI What is your short and long-term outlook for SDLI? This stock appears to be trading below any meaningful support and did not participate in the tech updraft last Friday. Is this still a good candidate for puts? Thanks for your column, it's great. - Jeff SDLI opinion? - Richard Thank you very much for the compliment, Jeff, and thank you, Richard, for taking the time to write in! Before we delve into the chart of SDLI, let's make it known that the company is set to be acquired by JDS Uniphase. Quite some time ago, JDS Uniphase offered 3.8 of its shares for every share of SDLI. That means for those holding shares of SDLI, they will receive 3.8 shares of JDS Uniphase if and when the deal closes, which brings us to an interesting point. It also means that those trading SDLI must be very cognizant of the action in shares of JDS Uniphase. Until last week, the merger was expected to be completed during the month of December. However, due to regulatory concerns, the date was pushed back to January. I do believe the deal will receive approval as JDS Uniphase has a history of appeasing regulators with an example being the E-Tek Dynamics merger early last year. But the rolling back of the official merger date by regulators should be known. I've reviewed both JDS Uniphase and SDLI in the past, and my long-term opinion on the two remains bullish. Let's think about this...JDS Uniphase is the #1 fiber optic component maker and SDLI is #2. The combined entity will create a - I hate to use the word - monopoly in the optical component space. And that's the reason, I suspect, that regulators pushed back the merger date while the two companies make the "necessary" adjustments to complete the deal. The worldwide optical network is far from completed and JDS Uniphase and SDLI are right in the middle of that effort and will make a ton of money as the build-out progresses. As the premier provider of components, the combined entity WILL have pricing power! While the long-term outlook for SDLI, I feel, is bullish, the short-term is somewhat harder to game. The slowdown in capital spending from the major telecom carriers is still suppressing both JDS Uniphase and SDLI. Until we see a significant pickup in spending I think SDLI will remain a bit dicey to game from the long side. Furthermore, if you're looking to short shares of SDLI, or buy puts for that matter, be aware that there still exists a narrow spread between it and shares of JDS Uniphase. As of last Friday's closing prices, there was about a $10 spread between shares of JDS Uniphase and SDLI. That spread will narrow as the merger comes to a close. But without any clear relief in shares of JDS Uniphase, SDLI might be a good short right here for a near-term trade. Obviously a lot of what happens in shares of JDS Uniphase and SDLI will depend upon how the Nasdaq trades in the coming weeks. SDLI - the acquired JDSU - the acquirer ---------------------------- Caterpillar - CAT Here are two stock for your comments: CAT and CMGI. - Thanks, Ben Given the action in the Internet sector last year, Ben, I'll take your first request in Caterpillar. The "Big Cat" is one of the many companies that will benefit from a more friendly interest rate environment and it will be one of the first to benefit from a pickup in the business cycle. Furthermore, the recession in the price of oil from its lofty levels over the past year will aid the heavy equipment maker in the coming quarters. As is currently the case with shares of many cyclical companies, those of Caterpillar have had a nice run over the last quarter and looked poised for a continued advance. Cat's shares formed a nice double bottom around the $30 level last fall and have since climbed towards the $50 level. Some consolidation is in order and I think that's exactly what the Cat was doing last week around the $47 area. As I feel the cyclicals still have upside potential, Cat may provide investors with a nice return over the next six to nine months. The stock's all-time high is around the $65 level, which may provide the bulls with a realistic price objective. At this point in the move, it's best to wait for pullbacks to major support levels or trend lines, where the institutions will be sitting and accumulating shares. Let us take a look at the chart! ---------------------------- Healthsouth - HRC How does HRC look? - David Healthsouth provides outpatient services through its network healthcare facilities around the country. The company has a decent history of earnings growth and its shares trade at a reasonable valuation. Its business should benefit from the shifting demographics over the next decade as the U.S. population ages. That fact in itself should make shares of Healthsouth a good long-term investment for say, five maybe ten years for those with patience. But aside from the long-term prospects for Healthsouth, let us focus on its chart as I feel it presents a compelling case study. Shares of Healthsouth bottomed at the beginning of 2000 around the $5 level. The stock subsequently staged an impressive second-half rally en route to becoming one of the best performing S&P 500 components of 2000. As of last Friday's close, shares of Healthsouth were sitting near a now triple-top resistance level at $17. The question at this point is whether the shorts in the stock are willing to defend their positions or actually cover and send shares above resistance. According to the most recent data, there are approximately 7.25 million shares sold short in Healthsouth. That's not a lot of stock, but it may be enough to drive shares up to $20 should the bears decide to cover. Finally, should shares of Healthsouth actually trade above the $20 level I think the stock could reach $30 in a relatively short amount of time! ---------------------------- Carnival - CCL Carnival Corp. (CCL) is one of my two choices to benefit most from the anticipated benefits expected in 2001. After looking at its chart, it seems as though CCL has finally "broken out," and after taking into consideration the effects of lower oil prices, the possibility of lower taxes for customers and/or interest rates, and the number of lesser competitors claiming Chapter 11, the future looks good in my eyes for CCL. Maybe too good. - Keep up the good work and thanks, Jeff I appreciate the kind words, Jeff, and also appreciate the help in reviewing Carnival. By that I mean you covered a lot of what's good with Carnival right now in your request. To reiterate your words, Jeff, shares of Carnival look technically strong and the company will benefit from the lower cost of oil, which is obviously a large part of the ship operator's expenses. Furthermore, lower interest rates (cheaper money) is good for virtually every business! After hitting rough seas early last year, shares of Carnival are sailing smoothly and could visit the $45 level in 2001. I know the pun is cheesy, but I couldn't resist! As I've been preaching with many of the non-tech names that have graced this column recently, wait for pullbacks to major support areas before entering into the likes of Carnival. ---------------------------- Success I really enjoy your Ask the Analyst Column. Following this newsletter in 1999 and early 2000, I ran my six digit account into seven digit. Hats-off to your service! I'm a full time speculator now. For past eight months, I've been reluctant to trade with all my capital. I've started to enter bull call spreads on NOK, GLW, TXN, ADI, WCOM and BBY using their Jan 2003 leaps. Please review these names and comment if these names will likely outperform the next bull market. Also, please name a few likely winners that I may consider entering in this clearance sale in tech stocks. Thanks in advance. - Sanjay After reading Sanjay's request and of his successes as a market operator, I asked him if he could share some of his secrets. Sanjay graciously agreed to share his story with the rest of us, and here it is: My story is very straight forward...I started to subscribe to OI in early 1998. In 1998 and early 1999, I'd pick calls and puts from your play list and do decently and watch the plays take off after I'd exit them for some profit or loss. Mr. Murphy was alive and well and was watching my every move - Jim says this all the time and I agree with him 100%. I modified my strategy in the latter half of 1999. Using this strategy, I'd buy calls in the money by at least 4 strikes and with expiry four to six months away. This I'd do to avoid paying 10% or more premium for at the money calls expiring in less than a month. I'd start with 5 - 10 calls. If they would go up in price in next few days, I'd buy another 10 - 20 calls. A little more up and I'd add a few more calls using any pull back by looking at daily price volume charts and 10 and 20 day moving averages. Volume and price had to move in synch. Otherwise I'd take my profit or loss by putting in market order. I found that way multiplying my investment dollars. I'd like to personally thank Sanjay for his story and I hope it inspires the rest of our readers. Sanjay is proof that money can be taken out of the market! As for Sanjay's request, I think he's touched upon something that would be beneficial to most of our readers. Namely, what stocks have bottomed and which names will outperform when the next bull emerges, especially in the tech sector? I think it would be a good idea over the next few weeks to closely examine several high-profile tech names and what to look for in a bottom in their share prices and some strategies to capitalize over the next several years. I'll begin the review of some of the names Sanjay requested next week and would be open to any other ideas our readers might have. Thanks again, Sanjay! We'll get started on your requests next week! ---------------------------- 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 January 01, 2001 Monday ====== None Scheduled Tuesday ======= Auto Sales Dec Forecast: 6.3M Previous: 6.5M Truck Sales Dec Forecast: 7.1M Previous: 7.2M NAPM Index Dec Forecast: 47.1% Previous: 47.7% Wednesday ========= Construction Spending Nov Forecast: 0.2% Previous: 0.9% Thursday ======== Initial Claims 12/30 Forecast: 350K Previous: 333K Factory Orders Nov Forecast: 1.0% Previous: -3.3% Friday ====== Nonfarm Payrolls Dec Forecast: 133K Previous: 94K Hourly Earnings Dec Forecast: 0.3% Previous: 0.4% Unemployment Rate Dec Forecast: 4.1% Previous: 4.0% Average Workweek Dec Forecast: 34.3 Previous: 34.3 New Home Sales Nov Forecast: 925K Previous: 928K Week of January 8th =================== Jan 08 Consumer Credit Jan 10 Wholesale Inventories Jan 11 Initial claims Jan 11 Export Prices ex-ag. Jan 11 Import Prices ex-oil Jan 12 PPI Jan 12 Core PPI Jan 12 Retail Sales Jan 12 Retail Sales ex-auto Jan 12 Mich Sentiment-Prelm. ************************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=1255 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 12-31-2000 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/123100_2.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1247 ************************************************************** *********** OPTIONS 101 *********** Tax Tips For Active Traders By Jim Crimmins Taxes can consume 50% of your trading profits. Because most traders do not know how to manage this huge expense we are providing this short column on how taxes can affect our trading accounts. It will appear every other week in this newsletter, and will try to address information which we feel will be both of interest to you, and that type of information which may save you money on your tax bill each year. Click here for the full article on Tax Tips: http://members.OptionInvestor.com/options101/123100_1.asp ***** Exact instructions By Jim Brown Hi Jim, You wrote: "I believe that a trader who will follow instructions EXACTLY can net $50,000 on a $10,000 account every year without fail. Notice I said follows instructions EXACTLY." If you give me your exact instructions I would follow them. I seem to be floundering in the wind with the worst picks, worst entries, and worst exits. I actually do worse now that I think I know something. So what are those Exact instructions? (sentiments sent by dozens of different readers after reading that comment in a newsletter) Now before you read this article, remember I said EXACTLY. If you have decided that buying options has profit possibilities but you just do not seem to be able to get the right combination of techniques to work in your favor then maybe it is time for the teacher to appear. Many readers find us, take the trial and then just start blindly buying options just like they would stock. This is not the same as stock investing. It is not even close. This is also why the returns are so much greater. Readers that blindly buy call options on faith after reading two or three newsletters have about as much chance of success as a novice bettor walking up to a craps table in Vegas and putting $2,000 down on the pass line. Actually your odds would be better on the craps table. An educated options trader however should profit from 70% of their trades. It is all a question of timing. Like a surfer facing endless waves or a batter in batting practice, eventually you will get that perfect setup. You may swing at a few extra pitches that were not perfect out of boredom but if you wait long enough that perfect pitch will arrive. A surfer on a calm day may sit on his surfboard for long periods of time waiting on the best wave. The memory of the time and effort he spent just getting to his launch point hundreds of yards off the coast will force him to wait for the right one. So our task is to prepare ourselves to execute and execute only when the time is right. I know I lost half of the readers with that last sentence. The type "A" personalities would rather throw money at dozens of plays, hoping that the winners made up for the losers, instead of only playing the winners. In reality they need to make more money, more often in order to make up for those losers. This is failure at a fast pace. It never ceases to amaze me how so many people can read the same play recommendation and get a different answer. People emailed me asking for "exact instructions" because they were losing on almost every play and others are emailing us with success stories on the same plays. Janar Wasito, an ex marine who wrote Traders Corner articles in the past, was the best newsletter reader I have ever seen. I don't know if it is his marine training or something else but when he read the newsletter he "read" the newsletter. He followed the instructions exactly on each play and posted huge gains every month. In his case the key is discipline. He waited for the entry points, EXACTLY. He sold for a profit. He cut his losses quickly. He was not in the market every day. The data you need to have successful investments is in the newsletter. It is up to me to show you how to use it like Janar does. These are the points you need to focus on in order to succeed. I will cover each in detail. Selection Targets Plays Entry point Stop loss Expectations Selling for a profit Selection: The type of stock YOU decide to play is crucial to your success. A fact we have discovered since we started publishing the newsletter is people with small accounts take the biggest risks. Investors with large accounts tend to be less aggressive and manage risk better. I think the people with only $5,000 are so driven to double or triple their capital that they will play only the high risk - high reward plays. The large account holders are content with 20%-30% per month safely because they don't need the money to make their mortgage payments or Porsche lease. This proves the old axiom "the rich get richer and the poor get poorer" again but on a different scale. Since the number of emails I received appeared to be from traders that were not having much success I am going to slant this article to traders with less than $10,000 to invest. If you use more than that to trade options this will still give you a basic understanding of the right way to trade. When selecting a stock/option trade you need to take into account the difference between the bid and ask (spread) on the options. If you can only afford to lose $500 on a trade then a stock like BRCD with a spread of $2.00 is not where you want to be. Yes, options on BRCD can be profitable due to the trading range but the spread is tough to overcome when the trade goes against you. If there is a $2 spread when the stock is moving up, then there is likely a $5 hit when the stock turns sharply down. I know you have seen it. Take this example: BRCD $92 FEB-95 call GUF-BS Bid=$10.13 x Ask=$12.38 You buy the call and immediately you are down -$2.00 from the spread alone. If the stock turns down and you know BRCD can drop $5 in mere seconds, the ask may drop to $10 and the Bid to $8 before you can even see it and react. If you have several contracts you can be down -$2,000 in a heartbeat. Don't even take into account stop losses on this stock until you are profitable. The intraday option price swings can be $10 and will knock you out for a loss and then rebound in seconds. This is a stock not to play with a $10,000 account. Does this mean you can't score the big gains? Of course not. Using the example above only 2 contracts would cost you $3,600 or 1/3 of your trading capital. Using the same capital in a lower risk stock will let you sleep better and you can still make the same returns. Example: VOD $34 - FEB-35 Call VOD-BG Bid=$3.25 Ask=$3.50 You can buy longer calls (FEB) and get 10 contracts for less money. ($3,250) Now a $2.00 move in VOD x 10 will net you the same as a $10 move in BRCD x 2 contracts. Now what is the difference in risk? The spread is only $.25 -NOT- $2.00. You can set a stop at -$.50 below the ask and not get thrown out on intraday swings. If you do get stopped out you only lose $500 not 1/3 of your investment. If you buy farther out, April, July, etc, it will cost you more money and lower your margins but you have the implied safety of time working for you. Personally I feel more than two months out is a waste of money because you should never hold an option for two months under any circumstances. If it is flat you should sell it and enter another play. If it goes up over 200% you should sell it and use half of the money to enter a higher strike. You have no risk at the higher strike because you already took your initial investment off the table. If you keep the first position your entire investment is still at risk. Invest smart not greedy. When VOD was $41 a couple weeks ago the VODBG option was $6.25. Remember, we are going to buy it at $3.50 while VOD is at $34.00. If it hits $41 again next week the option will again be $6.00. That is a 75% return on your investment in two weeks or less and it is very safe. Why would you want to be reckless? Recap: To get a 400% return on your investment in one year you need to invest WISELY not recklessly. Minimize spreads, maximize contracts to get the same returns safely. TARGETS: When a duck hunter has a flock of ducks fly overhead he does not just jump up and start firing at the whole flock. He must single out one bird, identify it as to type, lead it according to range and speed and then fire. The same is true with the 3,000 optionable stocks. You must narrow your universe to a manageable number. Normally ten stocks is all a normal person can follow without missing the moves. The more you follow, the more you miss. The fewer you follow the more you get to know the individual characteristics of each stock. There are people who make a good living only trading AOL. Many others only trade Dell. They may only be in a trade one or two weeks out of the month but when they are in a trade they know exactly what to expect and when to get out. Pick five stocks you want to trade from the current newsletter plays. Watch them carefully for a week. Chart their support and resistance. See how close you can come to timing their next pull back. Practice, practice, practice. Recap: To get a 400% return on your investment in one year you need to invest WISELY not recklessly. Narrow your targets to only 5-7 choices and study them closely. PLAYS: If does not make any difference how much money you have to invest. We have found that the more positions you try to manage the smaller your overall returns. To maximize your returns on a $10,000 account you should never play more than three positions at any time. Two positions at $3,500 each is optimal for a $10,000 account. This does not put all your capital at risk. It gives you "breathing room" and lets you sleep at night. Only having two positions will not impact your returns over a years time. If you trade according to the plan you should be out of every position every two to three weeks or less. With two positions every two weeks you have 52 trades per year. If 25% are stopped out for a 25% loss and the other 75% avg a 40% gain using $3,500 as an average position you will have a $43,225 gain at year end. 52 * 25% = 13 losers @ 25% = -$ 875 x 13 = -$11,375 52 * 75% = 39 winners @ 40% = +$1400 x 39 = +$54,600 Net profit = $43,225 + $10,000 capital = $50,000 Yes, this is just an example. Yes, the ratio of losers/winners may vary BUT not by much if you follow the plan. Yes, there may be some plays that are flat but there will also be some plays that will rocket for more than the 40%. What if you owned CIEN last Monday? Yes, this is only calculated on 2 open plays of $3500 each at any one time for one year. Yes, you could increase your position size (and risk) or the number of open plays (and amount of risk). Increasing the size of your positions is acceptable within limits. Increasing the number of open positions over three is not acceptable. The more you have at risk, the more likely you will lose it. Recap: To get a 400% return on your investment in one year you need to invest WISELY not recklessly. No more than three positions and preferably only two. ENTRY POINT: A good entry point is 90% of the trade. Failing to wait for a good entry point causes 90% of the losses. If you did not read my Entry Point article in the Options 101 archive please GO BACK AND READ IT before going forward. You can pick the best stocks at the wrong time and still lose money. Repeat after me - Every stock will correct. Nothing goes up in a straight line. I can wait, I can wait, I can wait. You need to remind yourself of this every trading day. The penalty for not waiting is loss of money. If you rush into a position you will have to rush out as well. If you wait for the proper entry point then everything else is easy. (not a current chart, example only) This chart of Nokia shows two great entry points in ten days. I you bought on five of those ten trading days you would have been profitable. If you bought on the other five days you could have been stopped out when the stock corrected. (not a current chart, example only) This chart shows a great entry point when the stock pulled back to support at $80. The previous entry point on the 12th-16th would also have provided a good profit. EVERY CHART YOU LOOK AT WILL SHOW YOU PAST POINTS OF ENTRY IT IS YOUR RESPONSIBILITY TO PICK THE NEXT ONE BASED ON THE 3-5-7 DAY RULES. That means every stock cycles every 3-7 days and all you have to do is WAIT for the next cycle. Do you remember the cartoon with the two vultures sitting high up in a tree and the caption was "To hell with patience, I am going to kill something"? In the markets "If you don't have patience, you will get killed". If you can't stand to wait then expand your possibles list and look at more stocks. In any ten stocks there should be at least one at an entry point every day. Recap: To get a 400% return on your investment in one year you need to invest WISELY not recklessly. You MUST wait for an entry point before making a play. STOP LOSS: I am not going into this very deep since I have covered it in previous Options 101 articles. The most important thing to remember is to set a loss limit before you enter a trade. The thought process should be something like, "If I buy this for $3.50 then my stop will be $2.50 for a -$500 loss" I can live with that. Once you make the buy then place your stop. Don't change it downward! Once the play starts moving upward then you can move your stop loss up higher each day as well. When the play finally corrects you will be stopped out for a profit. This is called a trailing stop. If you are using plays like the VOD mentioned above then a -25% stop loss is more than adequate. That is -$850 on a $3380 position. It would take a major event to drop the price that far in one day. On a play like BRCD it can drop that far on one large order. The most important thing about stop losses is to have one and stick to it. Money management is the only thing between you and a broken account. If you can't force yourself to sell a losing position then you do not need to be trading options. Get a high performing, high tech mutual fund and let them make the decisions for you. Recap: To get a 400% return on your investment in one year you need to invest WISELY not recklessly. You must use stop losses to save capital in case of a bad entry or serious news event. EXPECTATIONS: Be realistic in your expectations about the play. Every play is not going to double in the next two weeks. It may never double. Expectations start with the stock. Using the VOD example and the chart below a reasonable expectation would be for VOD to trade in the $52-53 range in the next week or so. It may have trouble breaking out of that range but a close over $53 could signal a move to a new and higher range. I would not go into the play expecting $60. My expectation would be to plan on closing the play on any weakness around $53. If it ran up to $53 and then started dropping again I would close and wait for another entry. There is a nice pattern of higher lows shaping up. $42 was the low in Oct, $43 in early Nov, $46 in late Nov. The next pull back could bring it back to $48. I would look to re-enter the play with a bounce off $52-53 around $48-49. The pattern on VOD should be to take a $2-3 profit in the option price and wait for another entry point. If you go into a play with unrealistic expectations you will lose. You will always be waiting for that big bounce that never comes. (read the turkey hunter article at the bottom) If your expectation is to just make $2-3 profit in each play then you will be more successful than the person that is expecting a homerun on every play. (not a current chart, example only) Recap: To get a 400% return on your investment in one year you need to invest WISELY not recklessly. You must lower your expectations to something realistic and plan your trades accordingly. SELLING FOR A PROFIT: This is one of the most difficult things to do in beginning option trading. The greed factor is running full speed and coupled with the hype factor it is almost a guaranteed failure. Traders do not make 100%-200%-300% profits in option trades on purpose. It does happen but it is an accident. In every major stock move somebody bought at the previous low and then sold at the exact high. This lucky person should buy a lottery ticket. Unless they had insider knowledge AND were psychic to know exactly where the top was going to be then they were just lucky. The other 98% of us have to be content with grabbing a profit out of the middle and then setting up for the next play. More likely than not the trader with the windfall 400% win will put it all back in trying to pick bottoms and tops of the next ten stocks they play. It is like the new slot machine gambler who walks in to the casino and gets $20 in coins. They walk up to a bank of machines and "invest" a few. Suddenly the bells start ringing and they have thousands of coins falling into their tray. Did they have inside knowledge? No. Did they have a special technique? No. Could they do it again if they played every day for a month? No. They were lucky but the casino will get tens of thousands of dollars of advertising for the couple thousand the player won. The promise of big winners lures thousands to the casino ready to reap the same rewards as player X. Did the casino really lose the money? No. Did you know that 94% of the people who win jackpots put the money right back into the machines and go home with less money than they came with? This is the same with huge gains in options. Once a new trader scores a double or triple they are ruined as traders. Their sights are now set on the stars and they will swing for the fences with every play, no longer content with the already huge 25%-40% monthly returns that normal traders take home routinely. Fighting the greed factor is hard work. After you have been burned over and over with large gains evaporating before your eyes, you will start to view selling for a profit in a different light. Once you understand the idea of cash flow and compounding you will see that 25% gains every two weeks really does add up to big numbers over a years time. 25% every two weeks is 650% per year with out compounding. That means if you only invested $3500 in every play and only made one play every two weeks and all were successful (this is just an example) you would have almost $25000 in 12 months. You need to learn to treat option trading like a weekly paycheck and not like a lottery ticket. After all, how many readers do you think won the lottery last week? But almost all of them got a paycheck from somebody! Recap: To get a 400% return on your investment in one year you need to invest WISELY not recklessly. You must sell for a profit before the profit becomes a loss. Conclusion: This may seem very basic for many readers but there are many people who still think this is a get rich quick scheme. It is a get rich scheme but just not as quick as most would hope. If it was as easy as some claim then there would be no profit in it. With every investment there are not equal parts of risk and reward. If that was the case then you would be better off throwing darts at the Wall Street Journal options page to decide your next play. Option trading is very profitable to those who will listen, learn and then put into practice what they learned. Option trading is very expensive for traders who think they know it all and don't bother to learn the rules. Which path you take is entirely up to you and nobody but you will ever know. Do you want to trade or do you want to be successful? There is a difference. Be successful! Jim Brown Editor If this article helped you then do you want to miss out on future educational articles in what is going to be an exciting 2001? Renew at the annual rate today and don't take a chance on missing that important key to your trading success. There are only TWO days left to take advantage of our special annual renewal offer and get all the free stuff. Don't wait any longer! You get over $160 of free stuff including (2) 2001 option expiration calendar mouse pads and a 2001 Stock Traders Almanac. TIME IS UP - DO IT NOW! http://secure.sungrp.com/01renewal.asp ******************** HUMAN NATURE The Turkey Story from Fred Kelly's classic book Why You Win or Lose. "I learned that men (or women) win or lose not so much because of economic conditions as because of human psychology." It dawned on me that my behavior was almost exactly the same as that of an old man I knew in boyhood. He had a turkey trap, a crude contrivance consisting of a big box with the door hinged at the top. This door was kept open by a prop to which was tied a piece of twine leading back a hundred feet or more to the operator; a thin trail of corn scattered along a path lured turkeys to the box. Once inside, they found an even more plentiful supply of corn. When enough turkeys had wandered inside the box, my friend would jerk away the prop and let the door fall shut. Having once shut the door, he couldn't open it again without going up to the box, and this would scare away any turkeys lurking outside. The time to pull away the prop was when as many turkeys were inside as one could reasonably expect. I remember going out with the old man one day and seeing a dozen turkeys in his box. Then one sauntered out, leaving eleven. 'Gosh, I wish I had pulled the string when all twelve were there,' said the old man. 'I'll wait a minute and maybe the other one will go back.' "But while he waited for the twelfth turkey to return, two more walked out on him. 'I should have been satisfied with eleven,' the trapper said. 'Just as soon as I get one more back, I'll pull the string.' "But three more walked out. Still the man waited. Having once had twelve turkeys, he disliked going home with less than eight. He couldn't give up the idea that some of the original number would return. When finally only one turkey was left in the trap, he said: 'I'll wait until he walks out or another goes in, and then I'll quit.' "The solitary turkey went to join the others, and the man returned empty-handed." Know anyone like this? Does this sound like your exit strategy? The purpose of trading is to make money, not get all the turkeys or the highest price. Kelly wrote his book in 1930. Most of it could have been written yesterday. Are we turkey hunters or turkeys? ***************** If this article helped you then do you want to miss out on future educational articles in what is going to be an exciting 2001? Renew at the annual rate today and don't take a chance on missing that important key to your trading success. There are only TWO days left to take advantage of our special annual renewal offer and get all the free stuff. Don't wait any longer! You get over $160 of free stuff including (2) 2001 option expiration calendar mouse pads and a 2001 Stock Traders Almanac. TIME IS UP - DO IT NOW! http://secure.sungrp.com/01renewal.asp ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* BRCD - Brocade Communications $91.81 (+6.75 last week) See details in sector list Put Play of the Day: ******************** VSTR - VoiceStream Wireless $100.63 (-4.88 last week) See details in sector list ************************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=1263 ************************************************************** ************************** 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 AOL $34.80 (-3.48) News of the Federal Communications Commission's move to delay its approval of the mega media merger between America Online and Time Warner last week caused investors to become uneasy about the prospects of the deal. The delay in approval caused shares of AOL to slide lower into the weekend and unfortunately the stock closed below our protective stop at $35. With the regulation risk now clear and present and the violation of our stop we're dropping coverage on AOL this weekend, despite its long-term status on the play list. Use any short-covering or relief rally early next week to exit existing positions. PUTS NO dropped puts this weekend *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** SEPR - Sepracor $80.13 (+8.25 last week) Sepracor is a specialty pharmaceutical company that develops and commercializes improved versions of widely prescribed drugs. Referred to as Improved Chemical Entities (ICEs), Sepracor's Pharmaceuticals are being developed as proprietary, single-isomer or active metabolite versions of these leading drugs. ICE Pharmaceuticals are designed to offer meaningful improvements in patient outcome through reduced side effects, increased therapeutic efficiency, and in some cases, the opportunity for additional indications. Sepracor exhibited very bullish behavior last week, particularly on Friday, a day when the broader market and biotech index were weak. After a steep correction in October, Sepracor has been basing, and found strong support at $69.75, which has held for the last month, even when the Nasdaq dropped below 2400. The stock found heavy resistance at the 50-dma for the last several weeks. However, the catalyst for Sepracor's climb last week appears to have been excellent news which was released Dec 21st. Sepracor announced that Schering-Plough Corporation had filed a NDA (New Drug Application) with the FDA for approval of Sepracor's non-sedating antihistamine desloratadine, as a treatment for seasonal allergic rhinitis. Sepracor and Schering-Plough announced a licensing agreement for this drug in 1997, in which Sepracor will receive fees in exchange for marketing rights. The NDA is the last step in the FDA approval process, and is often processed in six to twelve months, which could potentially mean an increase in Sepracor's earnings next year. This news sparked buying interest in Sepracor, and the stock closed higher every day last week. On Friday, Sepracor cleared the 50-dma of $79.00, and appears poised to move higher next week. Traders can consider taking positions at the current level, or waiting for a bounce from light support at $79.00, or support at $75.00. The next resistance level is $82.50, and if Sepracor can clear this, it could be on its way to the 200-dma of $87.88. Sepracor bucked the down trend in the biotech index (BTK.X) on Friday, however, more conservative traders should wait for strength in this index and the biotech holders (BBH) before taking positions. Set stops at $74. BUY CALL JAN-80 ERQ-AP OI=1162 at $ 6.63 SL=4.50 BUY CALL JAN-85*ERU-AQ OI=1260 at $ 4.75 SL=3.00 BUY CALL FEB-80 ERQ-BP OI= 35 at $10.38 SL=7.50 BUY CALL FEB-85 ERU-BQ OI= 43 at $ 8.25 SL=6.00 http://www.premierinvestor.com/oi/profile.asp?ticker=SEPR GILD - Gilead Sciences $82.94 (+9.56 last week) Gilead Sciences Inc, headquartered in Foster City, CA, is an independent biopharmaceutical company that seeks to provide accelerated solutions for patients and the people who care for them. Gilead discovers, develops, manufactures and commercializes proprietary therapeutics for challenging infectious diseases (viral, fungal, and bacterial infections) and cancer. Gilead has been trading in an ascending channel since Dec 21st, And it's not surprising, since a flood of exciting news has been released in December. On December 5th, Gilead entered into an agreement with Glaxo Wellcome, which gave Gilead exclusive worldwide rights to market Glaxo's thymidylate synthase inhibitor for treatment of cancer. On December 14th, Gilead and Hoffman-LaRoche received FDA marketing approval for pediatric indication of tamiflu, the number one selling influenza treatment. On December 18th, Gilead entered into a licensing agreement with Southern Research Institute for marketing a nucleoside analogue cancer treatment. The real catalyst for the rally may have been an announcement made on the 21st that Gilead is initiating Phase 2 Trials of their NX211 for patients with small lung cell cancer. This is more news than many pharmaceutical companies release in six months, and investors have started to become excited, as potential cancer cures always offer the potential of huge financial rewards for companies and their shareholders. Gilead is now above the 200-dma of $79.59, and is just about to poke its head through the 50-dma of $83.19, which is the lower end of its current upward channel. A typical daily trading pattern for the last few days has been a morning rally, an afternoon rollover, and a rally at the close. Since Friday's volume was light, additional buying next week could push Gilead over resistance at $84.30, and $85.00. Traders might want to take positions at a clear move over $83.19, or wait for a possible breakout over $85. Ideally, you should wait for strength in the biotech index (BTK.X) before initiating positions, and set stops at $78. BUY CALL JAN-80 GDQ-AP OI= 37 at $ 9.63 SL= 6.50 BUY CALL JAN-85*GDQ-AQ OI=732 at $ 7.25 SL= 5.00 BUY CALL FEB-80 GDQ-BP OI=133 at $13.38 SL=10.00 BUY CALL FEB-85 GDQ-BQ OI= 4 at $11.13 SL= 8.50 http://www.premierinvestor.com/oi/profile.asp?ticker=GILD ESRX - Express Scripts Inc $102.25 (+11.75 last week) Express Scripts is an independent, full-service pharmacy benefit management and specialty managed care company serving over 40 mln members throughout North America. The Company's customers include managed care organizations, insurance carriers, third- party administrators, employers, and union-sponsored benefit plans. Express Scripts provides a combination of benefit management services, including retail drug card programs, mail pharmacy services, drug formulary management programs and other clinical management programs. Unlike its major rivals, Express Scripts is not owned by a drug manufacturer or retailer, assuring wider purchase options for the company. This in itself gives the company a competitive edge against leader in the industry like Merck (MRK), who recently saw 3Q profits rise significantly as a result of its own pharmaceutical benefit services through Merck-Medco Managed Care. We're beginning coverage on this lesser-known stock based on its own technical credentials and the positive sentiment within the healthcare sector. Take a look at a one-month chart to visually confirm the solid uptrend ESRX established amid the capricious markets of December. Once the stock broke the historical resistance at the $80 level, ERSX didn't look back. The trailing 5 and 10-dmas offered support on the climb through the century mark; and it's here that we begin our play. Set up for entries on pullbacks to the 10-dma ($96.03), which is currently in-line with our $96 stop mark, as long as there's continued buying interest in the New Year. A strong breakout from the century mark and the 5-dma ($100) also offer viable entries in an advancing market; although beware of the staunch resistance at $107. This mark proved frustrating in Thursday's and Friday's session. Open Interest is rather low, so the more conservative types might want to wait increased trading activity as well as a strong momentum move through the upper resistance. BUY CALL JAN- 95 XTQ-AS OI=364 at $10.63 SL=7.50 BUY CALL JAN-100 XTQ-AT OI= 33 at $ 7.25 SL=5.00 BUY CALL JAN-105*XTQ-AA OI= 75 at $ 4.63 SL=2.75 BUY CALL FEB-100 XTQ-BT OI=321 at $ 9.13 SL=6.25 BUY CALL FEB-105 XTQ-BA OI= 0 at $ 6.75 SL=4.75 Wait for OI! http://www.premierinvestor.com/oi/profile.asp?ticker=ESRX CEPH - Cephalon Inc $63.31 (+7.25 last week) Cephalon is a biopharmaceutical company that develops and markets products to treat neurological disorders and cancer. Most of the company's sales are derived from its drug, PROVOGIL, which treats excessive daytime sleepiness associated with narcolepsy. The are trying to extend the drug's use, eying possible applications for other sleep-related conditions and Alzheimer's disease. As we cautiously move into 2001 and leave behind the battered remnants of technology stocks, the healthcare stocks and old economy types continue to gain the respect of investors. Hence, many stocks like BMY, JNJ, MRK and others such as BA, MO, MMM, and IP have all experienced fantastic runs as investors fled the tech sector. CEPH is currently poised to challenge $83.63, July's 52-week high going forward. Friday's high-volume break out of $4.63, or 8% through the $60 mark forecasts an overall bullish sentiment going into next week. Our protective stop at $58, bolstered by the 10-dma ($56.86) and 5-dma ($58.28), provides a reasonable entry gauge for the more enterprising player. It's true that many traders would find this type of entry too risky. A more safeguarded approach is too stay in the wings until CEPH moves to the upside of $65 in heavy trading. The company's earnings aren't expected until around February 22nd, so don't plan on earnings' excitement to drive the stock higher over the near-term. Instead pay attention to the stock's individual developments in conjunction with the sector sentiment and market direction. BUY CALL JAN-60 CQE-AL OI= 49 at $7.00 SL=5.00 BUY CALL JAN-65*CQE-AM OI= 23 at $4.50 SL=2.75 BUY CALL JAN-70 CQE-AN OI=1084 at $2.69 SL=1.25 BUY CALL FEB-65 CQE-BM OI= 85 at $8.38 SL=6.00 BUY CALL FEB-70 CQE-BN OI= 229 at $6.38 SL=4.50 http://www.premierinvestor.com/oi/profile.asp?ticker=CEPH ************************ NEW LOW VOLATILITY CALLS ************************ WPI - Watson Pharmaceuticals $51.19 (+3.19 last week) Focused on niche pharmaceutical products that are hard to make, WPI is engaged in the development, production, marketing and distribution of both generic and branded drugs. The company's branded drugs are primarily in dermatology (acne medication), women's health (contraceptives and hormone regulation), and general products (antihypertensives and antipsychotics). WPI offers generic versions of hormone replacement therapies Estrace and Ogen, analgesics Vicodin and Lortab, and ulcer drugs Zantac and Carafate. The company is also engaged in the development of advanced drug delivery systems, primarily designed to enhance the therapeutic benefits of pharmaceutical products. It took awhile for WPI to get with the program, but the stock is finally headed north with the rest of the Pharmaceutical sector. Although the Drug index (DRG.X) has been headed north since Labor Day, WPI ran into overhead resistance near $67 in early October, and proceeded to plummet more than 25% over the succeeding 2 months. Part of the problem was news on November 1st that the company received a non-approval letter from the FDA concerning the new drug applications on an Estradiol/Progestin transdermal combination patch. The other shoe dropped on November 13th, when the company announced earnings that were shy of expectations by a penny, and the selling resumed. The net result was that by early December, WPI was resting at major support in the $42-44 range, while other Pharmaceutical companies were setting new yearly highs. Over the past 3 weeks, WPI has really been rocking, gaining enough ground to help it climb above the 200-dma ($52.25) for a brief period this past week. Given the trading on Friday, it is clear that our new play will have to find new strength in order to scale the combined resistance of the 50-dma and 200-dma, converged near the $52-53 historical resistance level. Thursday's close above the upper Bollinger band required some profit taking, and that's what we got on Friday. Not only that, but it could continue into next week as we allow the band time to expand, before the next stage of the rally commences. Aggressive traders can target shoot dips to the $49-50 support level, while more conservative players will wait for the buyers to scale the $53 resistance level before initiating new positions. Wait for the buying volume to pick up again before playing, and confirm sector strength by monitoring the DRG.X. BUY CALL JAN-50 WPI-AJ OI= 522 at $3.75 SL=2.25 BUY CALL JAN-55*WPI-AK OI= 744 at $1.50 SL=0.75 BUY CALL JAN-60 WPI-AL OI=1334 at $0.56 SL=0.00 BUY CALL FEB-55 WPI-BK OI= 459 at $3.25 SL=1.75 BUY CALL FEB-60 WPI-BL OI= 336 at $1.81 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=WPI GD - General Dynamics $78.00 (+3.31 last week) General Dynamics, headquartered in Falls Church, Virginia, employs approximately 44,000 people worldwide and has annualized sales of approximately $10 billion. The company has leading market positions in telecommunications, ship building and marine systems, land and amphibious combat systems, information systems, and business aviation. General Dynamics spent the first quarter of 2000 out of favor with investors, and dipped below the 50 and 200-dmas at a 52- week low of $37 in March. However, since the end of June, General Dynamics has stayed steadily above its major moving averages on a slow upward trend line, which faltered slightly only once in October. The slow, steady moves exhibited by this stock contribute to the low volatility of its options, which is a bonus to options buyers. In the last several weeks, GD was awarded several significant new contracts, and investors have started to notice that this may be more than just a play on the defense sector. Earlier in the month, GD's Overseas Marine Division won a $24.8 million contract from the U.S. government. Two additional defense contracts totaling $739 million were awarded to GD from the U.S. Navy, and the U.S. Naval Sea Systems Command. However, the most exciting news may have come from General Dynamics' Worldwide Telecommunication Systems Unit, which won an award to design and construct a complex telecommunications fiber optic infrastructure system for the Haradh Gas Plant in Saudi Arabia. This seems to have alerted investors to the realization that GD is involved in the dynamic field of fiber optic communications, without the high valuation of other telecommunications equipment stocks. GD made a substantial move last week, so consolidation is likely. A possible entry point could be a pullback to support at $77.75. Support is strong at $76, and the 5-dma of $76.75, aggressive traders may want to wait for a possible pullback to this level as an entry point, but set stops at $75. BUY CALL JAN-75 GD-AO OI=637 at $4.63 SL=3.00 BUY CALL JAN-80*GD-AP OI=133 at $2.00 SL=1.00 BUY CALL FEB-75 GD-BO OI= 28 at $6.00 SL=4.00 BUY CALL FEB-80 GD-BP OI=142 at $3.38 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=GD FRNT - Frontier Airlines, Inc. $30.94 (+1.81 last week) Denver-based Frontier Airlines commenced operations on July 5, 1994. Frontier is a low-fare, full service airline and is the second largest jet service carrier of Denver International Airport with an average of 114 daily system-wide departures and arrivals. Service features include advanced seat assignments, electronic ticketing, quality inflight snacks and participation in Continental Airlines' OnePass frequent flyer program. Frontier offers all of its seats at various discount fares, cutting the cost of travel in its markets by as much as 60 percent. Shares of FRNT have been flying the friendly skies all year long, tracing new all-time highs. Up 200 percent in the year 2000, the stock has steadily advanced, forming a technically beautiful lower left to upper right pattern. Despite a rocky year for most airline issues, with rising oil prices, strikes and other distractions, FRNT's stock price has not only survived, but has flourished. As a small airline, FRNT's high-caliber management has been able to effectively use the advantage of its agility, resulting in courteous, professional employees and a loyal client base. Savings from low promotion expenses and overhead have been passed to the customer. With ten consecutive profitable quarters under its belt and a growth rate of 131 percent year-over-year from its last earnings report and upward revisions of earnings estimates, shares of FRNT have continued their ascent. Support can be found at $30.50, the 5-dma near $30 and the 10-dma near our stop price of $29. Bounces off these levels could serve as aggressive entry points but confirm with volume. If continued buying momentum carries FRNT through $31, this could allow conservative traders to take a position, but correlate entries with direction in peers SKWY and LUV. BUY CALL JAN-25 FUO-AE OI= 30 at $6.25 SL=4.25 BUY CALL JAN-30*FUO-AF OI=236 at $2.00 SL=1.00 BUY CALL FEB-25 FUO-BE OI= 72 at $6.50 SL=4.50 BUY CALL FEB-30 FUO-BF OI= 30 at $2.88 SL=1.50 BUY CALL MAY-35 FUO-EG OI= 25 at $2.06 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=FRNT ************************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=1256 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 12-31-2000 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/123100_3.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1248 ************************************************************** ****************** CURRENT CALL PLAYS ****************** NOK - Nokia $43.50 (-0.19 last week) Nokia is the world leader in mobile communications. Backed by its experience, innovation, user-friendliness and secure solutions, the company has become the leading supplier of mobile phones, and a leading supplier of mobile, fixed and IP networks. By adding mobility to the Internet, Nokia creates new opportunities for companies, and further enriches the daily lives of people. Nokia spent last week trading in a narrow range from support at $42.44 to resistance at $44.69. A five day pattern of higher lows developed, with Nokia's base of support moving from $42.50 to $43.50. Considering Friday's sell-off, and the fact that Nokia's volume each day this week was approximately half the normal daily volume, this pattern bodes well for the week ahead. Good news has continued to be released. CSFB upgraded Nokia to one of their top picks for the year. In addition, on Friday, Nokia announced that they had signed an agreement with China Mobile Communications Corporation to supply GPRS core network infrastructure for four provincial networks. China is already Nokia's second largest market, and this deal may expand their network in China by an even larger degree. Nokia is now at the rare technical convergence of the 200, 50, 10 and 5-dmas, which are all between $43.50 and $43.71. Traders can consider taking positions at current levels, as the most probable breakout will be to the upside. Alternatively, a more conservative move would be to wait for a breakout above $44.50, from which Nokia could easily break above the next resistance levels at $47.30, and $50.00. Watch the wireless telecommunications sector before initiating positions, particularly QCOM, and ERICY, and continue to set stops at $40. BUY CALL JAN-42.5*NZY-AV OI=30434 at $3.50 SL=1.75 BUY CALL JAN-45 NZY-AI OI=22485 at $2.13 SL=1.00 BUY CALL FEB-40 NZY-BH OI= 650 at $6.50 SL=4.50 BUY CALL FEB-45 NZY-BI OI= 863 at $3.75 SL=2.00 http://www.premierinvestor.net/oi/profile.asp?ticker=NOK COST - Costco - $39.94 (+2.56 last week) 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 provide high sales volumes and rapid inventory turnover. Costco's warehouses generally operate on a seven day, 68-hour week, and are open somewhat longer during the holiday season. What a breakout! As if on cue, Costco surged out of its tight six-month trading pattern with a burst of momentum, which carried it as high as $41.50 on Friday morning. Overall market weakness and profit taking held Costco back at the close. However, it held above $38.87, which is an important support level to maintain. Costco was helped by strength in the retail sector (RLX.X) and a rotation of investor's money out of tech stocks. The important point is that Costco has now released itself from the shackles of the tight trading range of $30.25 to $38.38 that it had been trapped in from June to December. It is now well positioned to move higher, and we can consider taking additional positions at the current level of $39.89, or at Friday's support level of $38.87. A pullback to the 5-dma of $37.83 might provide a more aggressive entry point. A breakout over the resistance at $41.50 would be very bullish, and could lead Costco to the levels it has not visited since last April. Monitor the retail index for strength before taking new positions, and continue to set stops at $34. BUY CALL JAN-35 PRQ-AG OI=7149 at $5.75 SL=3.75 BUY CALL JAN-40*PRQ-AH OI=2170 at $1.88 SL=1.00 BUY CALL FEB-35 PRQ-BG OI= 102 at $6.63 SL=4.50 BUY CALL FEB-40 PRQ-BH OI= 212 at $3.38 SL=2.25 http://www.premierinvestor.net/oi/profile.asp?ticker=COST COF - Capital One Financial $65.81 (+4.13 last week) As one of the top 10 credit card issuers in the U.S., Capital One's secret weapon is its vast databases. The company uses this data to match a potential Visa or MasterCard customer to any one of its thousands of cards, varying in annual percentage rates, credit limits, finance charges and fees. Ranging from platinum and gold cards for preferred customers to secured and unsecured cards for customers with poor credit histories, the company has a credit card for just about anyone. Watching shares of Financial stocks over the past couple weeks, it is clear that investors are convinced of an imminent interest rate reduction by the Fed. COF has been in rally mode along with the broader Financial Sector, gaining as much as 16% since the Fed meeting on December 19th. The rally was due to run into problems eventually, and this time, they came in the form of the upper Bollinger band. After closing above this level on Thursday and then continuing higher on Friday morning, a pullback was inevitable, and that is what we got as the week and year came to a close. Volume was decidedly light, coming in at less than half the ADV, as our play fell back to close right at the low of the day, while still posting a fractional gain over Thursday's close. We are looking for a bit more consolidation next week before COF gets moving back into rally mode, as we need to wait for the bands to expand a bit first. The logical areas for consolidation are the historical support levels near $64, followed by $62 (also the location of our stop). Wait for a return of buyers to give us a bounce off of one of these two levels before initiating new positions. Don't forget to use the Banking Index (BKX.X) to confirm buying interest is still strong in Financial issues before playing. BUY CALL JAN-65*COF-AM OI=1613 at $4.13 SL=2.50 BUY CALL JAN-70 COF-AN OI= 165 at $1.88 SL=1.00 BUY CALL JAN-75 COF-AO OI= 0 at $0.81 SL=0.00 Wait for OI! BUY CALL MAR-70 COF-CN OI= 512 at $4.88 SL=3.00 BUY CALL MAR-75 COF-CO OI=1179 at $3.00 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=COF LH - Laboratory Corp. of America $176.00 (+10.06 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. The way LH has been moving, you'd think they had invented the cure for cancer, but the truth is far more mundane. As the #2 clinical laboratory service in the world, LH is simply executing their business plan well, and happens to be firmly planted in a rapidly growing industry. We have been racking up some nice gains in the past week as LH rallied through $170, and didn't pause to catch its breath until clearing the $180 level. When the bulls paused, they quickly noticed the altitude to which they had driven the stock, (above the upper Bollinger band), and decided to take some profits off the table as the year drew to a close. LH dropped on Friday to hit a low of $169.50 (a great entry point for those bold enough to take it), before recovering in the afternoon. As the day came to a close, LH was trading just above $171. Just after the regular close, over 100,000 shares traded at $176, giving the price quite a boost to close out the year. The bounce near $170 was quite a gift and the late day pop indicates that there is likely more upside to come. Our stop is still sitting at $170, and we would consider any solid bounce near this level to be an attractive entry point for aggressive players. We normally don't focus on after-hours session unless something significant happens. This would seem to qualify, as LH rarely trades in the extended session. Given the late day anomaly, LH could open anywhere between $171-176 after the holiday weekend; adjust your trading plan accordingly. More conservative traders will wait for confirmation that LH is still in favor by moving up through the next level of resistance (either $173 or $177, depending on the open) on solid volume. Regardless of your entry strategy, confirm sector strength by watching competitors DGX and PPDI; if all three are moving up the chart, it seems like a good sign that the rally still has legs. Finally, make sure to wait for open interest to accumulate in the newly issued strikes for both January and February option contracts! BUY CALL JAN-180 LH-AP OI=0 at $ 9.00 SL= 6.25 Wait for OI! BUY CALL JAN-185 LH-AQ OI=0 at $ 6.63 SL= 4.50 Wait for OI! BUY CALL JAN-190 LH-AR OI=5 at $ 5.00 SL= 3.00 BUY CALL FEB-180 LH-BP OI=0 at $16.13 SL=11.50 Wait for OI! BUY CALL FEB-185 LH-BQ OI=0 at $14.50 SL=10.75 Wait for OI! SELL PUT JAN-165 LH-MM 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 BRCD - Brocade Communications $91.81 (+6.75 last week) Brocade is leading the way in a new category of networking: providing a scalable, reliable foundation for storage environments. They are the market leader in Fibre Channel Fabric switches-the essential framework for networking servers and storage systems. Brocade switches deliver the flexible and secure "Fabric" that supports the tremendous information and storage demands of today's leading companies. Brocade Fibre Channel fabric switches and software provide a networking foundation for storage area networks (SANs). When investors first became aware of slowdowns in capital equipment spending, this caused enterprise-level Tech stocks to fall across the board. Shares of almost any company that sold anything to businesses large and small were marked down with impunity, as the market factored in lower revenues going forward. But a funny thing happened on the way to the fire sale. It seems that while firms are indeed tightening their budgets, they are doing so selectively. There are items that companies can do without, such as new computer upgrades when current models will suffice, much to the well-known detriment of PC makers. However, there are products and services that are so vital in generating and maintaining business that a company would could not function without them. Storage, it appears, is one such necessity. Imagine how a bank, a hospital, or Amazon.com would operate without sufficient storage capacity. Business would quite simply, grind to a halt. Positive comments to that effect from Merrill Lynch and Gartner Dataquest, along with a survey conducted by Morgan Stanley Dean Witter has helped BRCD to rebound strongly this past week, The stock has formed a solid up-trend channel during this time, making consistently higher highs and higher lows. While BRCD pulled back on Friday amidst a weak NASDAQ, with support from the 5 and 10-dma (now at $89.20 and $86.76 respectively) holding up firmly. Support can also be found at the 200-dma, now at $90.58, making bounces off these levels as aggressive opportunities for entry. Just make sure that BRCD closes above our stop price of $88. For a safer play, wait for BRCD to clear $95 on volume before jumping in, and confirm sector sympathy with peers EMC, NTAP and VRTS. BUY CALL JAN-85 GUF-AQ OI=12158 at $14.00 SL=10.50 BUY CALL JAN-90 GUF-AR OI= 3844 at $10.38 SL= 7.50 BUY CALL JAN-95*GUF-AS OI= 2722 at $ 7.00 SL= 5.00 BUY CALL FEB-90 GUF-BR OI= 42 at $14.50 SL=10.75 BUY CALL FEB-95 GUF-BS OI= 26 at $12.38 SL= 9.00 SELL PUT JAN-80 GUF-MP OI=12619 at $ 3.00 SL= 5.00 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?symbol=BRCD IVGN - Invitrogen Corporation $86.38 (+7.00 last 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. The Biotech sector has been one of the few bright spots for a much-beleaguered NASDAQ, with the AMEX Biotechnology Index posting gains of over 60 percent for the year. The completion of the Human Genome Project has brought new hope and excitement, not only to doctors and patients, but to investors as well. While Biotech stocks have certainly had their share of volatility, the final score will note that this has been a good year. With so much data mining left to do in the genomics space, the gold rush is on for companies to turn that information into an FDA-approved blockbuster treatment. As an arms dealer in the battle of the Biotechs, it doesn't matter which companies succeed and which ones fail because win or lose, IVGN's research tools are a necessary part of the process. Being a pick-and-shovel player gives IVGN the advantage of being cash flow positive and exempts the company from being a direct victim of the dreaded cash burn rate syndrome. There is no race against time for IVGN to come up with the goods before funding runs out because part of the funds that flow out of Biotech companies finds its way into IVGN's coffers. At this point, the stock looks poised to take out its all time high near the psychological $100 level, provided it breaks through resistance at $87 with conviction, which should provide conservative traders with an entry point. For the more aggressive, look for bounces off support at $85, the 5-dma at $82.45, the 10-dma at $80.63 and our stop price of $79. Look to peers ABI, AFFX and CRA for guidance before initiating a play. BUY CALL JAN-80 IUV-AP OI= 61 at $11.63 SL=8.50 BUY CALL JAN-85 IUV-AQ OI= 457 at $ 8.75 SL=6.00 BUY CALL JAN-90*IUV-AR OI= 575 at $ 6.63 SL=4.50 BUY CALL FEB-85 IUV-BQ OI= 26 at $12.38 SL=9.00 BUY CALL FEB-90 IUV-BR OI=3017 at $10.00 SL=7.00 SELL PUT JAN-75 IUV-MO OI= 50 at $ 2.63 SL=4.00 (See risk of selling put in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=IVGN MWD - Morgan Stanley Dean Witter $79.25 (+5.00 last week) Morgan Stanley Dean Witter & Co. is a preeminent global financial services company and a market leader in securities, asset management, and credit services. The company's top-ranked research, along with world class product origination, asset management and other extensive resources create a unique combination of capabilities that provide both individual and institutional clients with access to the most comprehensive array of high quality products and services in the financial services industry today. The Company has offices in New York, London, Tokyo, Hong Kong and other principal financial centers around the world and has over 450 branch offices serving individual investors throughout the United States. Despite a host of unfavorable fundamental forces, MWD has ended the year higher. Faced with rate hikes, fears of deteriorating credit quality in corporate bonds, a weak IPO market, a slowing economy, and a less-than-stellar earnings report, shares of MWD ended the year on a positive note, up about 10 percent in Y2K. If the company can hold up this well in such an inhospitable environment, then the likelihood of a Fed rate cut, perhaps even a series of them, will certainly give a boost to its shares. It appears at this point that the aforementioned concerns have been factored into the stock price. The anticipation of an improving climate for the Financial sector could likely attract traders and investors alike. While it appeared that shares of MWD would end the year in the red in the beginning of December, the stock has rallied nicely, putting itself back on the right side of the 50-dma (currently sitting at $72.55). With the 100 and 200-dma looming overhead at $83.92 and $83.22, resistance could be formidable. A break through $80 could provide a possible entry point, setting the stock up to test those last two major moving averages. A more conservative play would be to wait for MWD to clear $84. For entries on a pullback, look for support at $78.50, $77.50 and $76.50. Additional support can be found at the 5 and 10-dma (at $77.20 and $73.36 respectively) and our stop price at $74 but make sure the stock closes above this price to ensure continued upward momentum. When making a play, look to peers AXP, MER and GS to confirm sector strength. BUY CALL JAN-75 MFZ-AO OI=10676 at $7.88 SL=5.75 BUY CALL JAN-80*MFZ-AP OI=11829 at $5.13 SL=3.00 BUY CALL JAN-85 MFZ-AQ OI= 4783 at $3.13 SL=1.50 BUY CALL FEB-80 MFZ-BP OI= 300 at $6.88 SL=5.00 BUY CALL FEB-85 MFZ-BQ OI= 308 at $4.75 SL=3.00 http://www.premierinvestor.net/oi/profile.asp?symbol=MWD RFMD - RF Micro Devices, Inc. $27.44 (+0.81 last week) RF Micro Devices, Inc. is a leading supplier of radio frequency integrated circuits (RFICs) for the wireless, broadband and cable communications industries. RFMD designs and manufactures components for many communications applications, from cellular to CATV. The ever-expanding RFMD(TM) product line includes power amplifiers, linear amplifiers, LNA/mixers, quadrature modulators/demodulators, upconverters, front ends, attenuators, switches and transceivers. It's been a rough year for shares of RFMD, of that there is no doubt. Hitting an all-time high of $92.25 in early March, the stock spent the rest of the year in a pronounced downtrend. Connecting the highs since then reveals to top of its regression channel, as well as the break above that formidable level of resistance this past month. A number of factors help RFMD to pull itself out of its downward spiral. Most important recently has been its partnership with CDMA giant Qualcomm. An alliance formed in February has so far been highly successful, resulting in the completion of two new products. The possibility that RFMD could play a key role in the deployment of QCOM's next generation wireless technology has brought renewed interest in the stock. What's more, a recent report that has RFMD is leading its field in sales per employee is an indication of the company's latent strength. Support for RFMD can currently be found at the 10-dma (now at $26.66) and our stop price of $25. Aggressive traders could target-shoot these levels for entry but confirm a bounce with volume. For an entry on strength, look for RFMD to move back above the 5-dma at $27.56 before making a play. From there the next level of resistance will be the 100-dma at $29.15. Look to trading in shares of related companies such as BRCM, CNXT and TQNT as a gauge of sector sympathy along with the Philadelphia Semiconductor Index (SOX). BUY CALL JAN-20 RFZ-AD OI= 229 at $8.38 SL=6.00 BUY CALL JAN-25 RFZ-AE OI=1167 at $4.75 SL=3.00 BUY CALL JAN-30*RFZ-AF OI=2373 at $2.19 SL=1.00 BUY CALL FEB-25 RFZ-BE OI= 677 at $6.13 SL=4.00 BUY CALL FEB-30 RFZ-BF OI=1342 at $3.88 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=RFMD TXN - Texas Instruments $47.38 (-0.25 last week) Texas Instruments Incorporated is a global semiconductor company and the world's leading designer and supplier of digital signal processing and analog technologies, the engines driving the digitization of electronics. TI is a leader in the real-time technologies that help people communicate. We are moving fast to drive the Internet era forward with semiconductor solutions for large markets such as digital wireless and broadband access. TI envisions a world where every wireless call, every phone call and every Internet connection is touched by a Digital Signal Processor (DSP). With the Philadelphia Semiconductor Index (SOX) down over 18 percent for the year, shares of TXN have fared relatively well, down less than 2 percent during the same period of time. While hardly immune, the bulk of the damage was done to makers of processors for personal computers such as AMD and INTC, both at or near their 52-week lows. TXN's recent bounce in December can be largely attributed to the Qualcomm effect, as one of the select few companies poised to benefit from its association with the wireless giant. A cross-licensing agreement with QCOM in which the two companies would share the contents of their respective patent portfolios was exciting news indeed. The deal would allow both companies to produce and supply integrated circuits across all wireless standards. This is especially important since Ericksson and Nokia are large customers, a relationship that TXN could leverage in providing CDMA-based solutions, thereby greatly enhancing earnings prospects going forward. On Friday, both A.G. Edwards and UBS Warburg offered their outlook on the market for 2001, both naming TXN as a top stock pick. While TXN fell $2.38 or 4.77 percent on Friday in sympathy with other Chip stocks, volume was light, less than 70% of ADV. At this point, a bounce off support at from the 10-dma at $47.11 and the 50-dma at $45.25 could allow aggressive traders to take a position, but be aware that we have placed a protective stop at $46. For a more conservative play, look for TXN to break back above its 5-dma at $48.30. From there the stock may encounter resistance at $49 and $50, so confirm strength in TXN with volume and sector sympathy using the SOX and Merrill Lynch's Semiconductor HOLDR (SMH). BUY CALL JAN-40 TXN-AH OI=25319 at $8.75 SL=6.25 BUY CALL JAN-45 TNZ-AI OI= 6709 at $5.00 SL=3.00 BUY CALL JAN-50*TNZ-AJ OI=12788 at $2.56 SL=1.25 BUY CALL FEB-45 TNZ-BI OI= 441 at $7.13 SL=5.00 BUY CALL FEB-50 TNZ-BJ OI= 930 at $4.63 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=TXN JNJ - Johnson & Johnson $105.06 (+3.56 last week) Johnson & Johnson is one of the world's largest and diversified makers of healthcare products. JNJ has three distinct business segments serving the consumer, professional, and pharmaceutical markets. As a consumer you're probably most familiar with their over-the-counter brands like Tylenol, Band-Aids, and "no tears" baby shampoo. But Johnson & Johnson reaches beyond that realm and expands all aspects of its product lines through acquisitions. A blue-chip rally put JNJ on this week's winner's list! Along with other drug stock competitors, Merck (MRK) and Bristol Myers (BMY), JNJ's been making steadfast gains. The nice follow- through days provided conclusive evidence for conservative traders to take entry on the upswing. Early in the week, JNJ shattered the $102 resistance and quickly established a higher level of near-term support at $104. In addition to the rallying DOW, JNJ announced its own news, which was well received by analysts and investors. On Wednesday, JNJ announced it completed the $62.8 mln acquisition of Atrionix, a company that develops a system to treat heart disorder atrial fibrillation. Although the all cash deal ultimately results in the company taking a $0.04 charge from its net income in the 4Q, JNJ continued to make significant gains and to receive positive comments from the Street. Both UBS Warburg and CSFB reiterated Strong Buy recommendations and issued price targets of $115 and $125, respectively. On Friday, Gruntal & Co also restated a ST Market Perform and LT Outperform. Moving forward, our protective stop remains set at the $102 previous resistance with upper resistance now at the $106 mark. Strong bounces off the $104 support or the 5-dma ($103.88) provide reasonable entries in an advancing marketplace. Otherwise, wait for JNJ to move through $106 with conviction (lots of volume) before taking entry into this defensive play. As the month progresses, let's be aware of the company's earnings' date of January 23rd, scheduled for BEFORE the opening bell. This event may incite create some volatility of its own as the date approaches. BUY CALL JAN-100 JNJ-AT OI=10996 at $6.88 SL=4.75 BUY CALL JAN-105*JNJ-AA OI=11329 at $3.50 SL=1.75 BUY CALL JAN-110 JNJ-AB OI= 5973 at $1.31 SL=0.00 BUY CALL FEB-105 JNJ-BA OI= 575 at $5.13 SL=3.00 BUY CALL FEB-110 JNJ-BB OI= 743 at $2.88 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=JNJ UTX - United Technologies Corp $78.63 (+2.63 last week) United Technologies Corporation provides high-technology products and support services to customers in the aerospace and building industries worldwide. The Company's business segments include Pratt & Whitney aircraft engines, Otis elevators and escalators, Carrier heating and air conditioning, Sikorsky helicopters, Hamilton Sundstrand aerospace systems, and International Fuel Cell systems. United Technologies, which failed in a bid for Honeywell International, is however acquiring Specialty Equipment Companies. Once the DOW resurfaced from testing its lows at 10,300, the conglomerates and older economy stocks such as MMM, PG, MO, and JNJ came alive. UTX broke free from the leg irons at $76 in post-Christmas trading and has since maintained a steadfast position above $78. UTX made a strong show at the $79.75 to challenge $80 on Wednesday, falling back to the $76 level for support. After nearly a month of tight consolidation, the breakout to a new 52-week high ($79.75) was certainly a welcome occurrence. We're anticipating a breakout above the next level of opposition at $80 as UTX gains momentum in an advancing market and approaches its earnings' release this month. United Technologies Corp is confirmed to announce in just a couple of weeks on January 18th, BEFORE the market. Entries might be found on strong bounces off the 10-dma ($75.88), which is just BELOW our $76 stop loss; but this type of entry is rather aggressive. If you take this course of action, be sure there's enough buyers to power UTX upwards. A more conservative approach is to be patient for a high-volume breakout through the $80 resistance and buy into strength as UTX shatters the record books. BUY CALL JAN-70 UTX-AN OI=1034 at $9.50 SL=6.50 BUY CALL JAN-75 UTX-AO OI=1857 at $5.25 SL=3.25 BUY CALL JAN-80*UTX-AP OI=1878 at $2.25 SL=1.00 BUY CALL FEB-75 UTX-BO OI= 744 at $7.00 SL=5.00 BUY CALL FEB-80 UTX-BP OI= 291 at $4.00 SL=2.50 http://www.OptionInvestor.com/oi/profile.asp?ticker=UTX LVLT - Level3 Communications Inc $32.81 (+0.00 last week) Level3 Communications is a global telecommunications and information services company that is building an international fiber-optic network based on internet protocol (IP). Their focus is primarily on the business market. Services include local, long distance, and data transmission as well as other enhanced services. Currently they serve 20 cities in the US and Europe. LVLT also has its hands in the coal mining business. We initiated coverage on LVLT purely on the feasibility of a technical bounce. After a double bottom at $28 and $26.88 amid heavy volume, LVLT regained composure above the $30 support level. The relative strength at $32, and now $33, provided additional evidence of a potential breakout. Friday's bullish action amid a struggling NASDAQ also bodes well for this particular issue. LVLT cracked the immediate resistance at $34 with a fractional move to $34.50 early in Friday's session. A respectable close demonstrates strength and forecasts potential gains going into the New Year. A high-volume move off the triple-intersected 5, 10 & 30 DMAs, in the proximity of $32 and $33, warrant entries for the more speculative trader. The nice part of this play is the less expensive option prices, which could lure the more prudent traders to take an early entry, too. Nevertheless, a less risky strategy is to consider taking positions in is technical play only after LVLT clears the 50-dma ($36.49) obstacle. Take a look at a daily chart and you can confirm how this technical line capped the stock's run in early December. Remember the basics. Look for an advancing NASDAQ and strong sector movement to give you the best odds of success. Some stocks that are part of the "next generation" telecoms and warrant attention include GX, MFNX, MCLD, and ALGX. Take note that these particular stocks aren't currently making advances; therefore, there's additional risk playing a stock that's not moving with its relative sector. Our play on LVLT is based on its individual technical developments. BUY CALL JAN-30 HGY-AF OI= 545 at $5.25 SL=3.25 BUY CALL JAN-35*HGY-AG OI=3062 at $2.75 SL=1.25 BUY CALL JAN-40 HGY-AH OI=2295 at $1.25 SL=0.50 BUY CALL FEB-35 HGY-BG OI= 78 at $4.25 SL=2.50 BUY CALL FEB-40 HGY-BH OI= 129 at $2.75 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=LVLT CIEN - Ciena Corp $81.25 (+4.25 last week) CIENA Corporation's market-leading optical networking systems form the core for the new era of networks and services worldwide. CIENA's LightWork architecture enables next- generation optical services to transmit signals simultaneously over the same circuit. This multiplexing system changes the fundamental economics of service-provider networks by simplifying the network and reducing the cost to operate it. About 45% of sales come from outside the US markets. The aggressive and high-rolling traders were more apt to take an entry into this risky play last week, but oh what a payoff! We initiated coverage on CIEN after it fell a hefty 38% following its agreement to buy closely held Cyras Systems for $2.13 bln in stock and assumed debt. CIEN hit a lower-bottom of $59.56 on December 21st while getting a severe lashing from investors, who were already in panic mode amid the surrendering NASDAQ. We saw the opportunity to ride a potential recovery wave after CIEN's fantastic response to Santa's pre-Christmas rally. The large equipment stock recouped 28.6% of its value amid solid trading momentum at 1.4 times the ADV. The dynamic and bullish trading that followed last week confirms our outlook. As it is, the $70 level offers firm support; although, we have our protective stop set higher at $75 to protect existing profits going forward. The $80 obstacle and corroborating 5 and 10 DMA lines at $79.51 and $79.17, respectively, are now cleared. We're looking for CIEN to sustain a position above the 200-dma ($85.25) and aggressively challenge the daunting resistance at the 30-dma ($90.11). If Friday's earlier morning action is a prelude for next week, then this objective should be easily achieved. The more risk-adverse may want to wait for a convincing breakout before jumping into the recovering momentum, while others might target shoot for lower entries near $75 in a bullish environment. Look for other optical stocks like JDSU, GLW, and SCMR to help rekindle the optical sector as we move into the New Year. BUY CALL JAN-75 UEE-AO OI=1956 at $12.63 SL= 9.50 BUY CALL JAN-80 UEE-AP OI=3024 at $ 9.25 SL= 6.25 BUY CALL JAN-85*UEE-AQ OI=2430 at $ 7.38 SL= 5.25 BUY CALL FEB-80 UEE-BP OI= 172 at $14.75 SL=11.00 BUY CALL FEB-85 UEE-BQ OI= 273 at $12.50 SL= 9.50 http://www.premierinvestor.net/oi/profile.asp?ticker=CIEN ************************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=1264 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 12-31-2000 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/123100_4.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1249 ************************************************************** ************* NEW PUT PLAYS ************* TQNT - Triquint Semiconductor $43.69 (+0.13 last week) A leading global supplier of a broad range of high performance integrated circuits, TQNT offers standard and customer specific products as well as foundry services. The company uses gallium arsenide (GaAs) instead of silicon as the substrate (base) for its analog, digital, and mixed-signal integrated circuits (ICs). GaAs ICs operate at greater speeds than silicon chips, or at the same speeds with less power consumption, making them ideal for all sorts of gadgets, such as cell phones, pagers, fiber-optic and satellite telecom equipment, and data networking devices. Largely due to its stellar earnings report on October 19th, TQNT has been bucking the trend of the Semiconductor sector (SOX.X) over the past 2 months. Valiantly struggling higher, TQNT has put in a series of higher highs and higher lows, bringing the stock as high as $61.56 2 weeks ago - that's quite a recovery from the October low of $21! With such a strong recovery, you are likely wondering what this play is doing in the Put section. Simply put, it appears that the move is an example of "too far, too fast", combined with a prominent downgrade. The high 3 weeks ago punctured the upper Bollinger band, and that, combined with a CSFB downgrade from Buy to Hold based on valuation, was the catalyst for the pullback and bounce near $33. The succeeding rally took our play back up to $49 before rolling over again, but with Friday's nearly 11% decline, TQNT is looking decidedly weak again. With several moving averages (10-dma, 30-dma, and 200-dma) clustered around the $43-44 support/resistance level, this is likely to be a pivotal area. Conservative traders can consider new positions on further weakness that pushes our play below $43. The next level of support below that will appear near $40, reinforced by the 50-dma at $40.63. More aggressive players will be looking to buy puts as the stock rallies and then rolls over from the vicinity of Friday's high near $49. This is where we have placed our stop, and short of a sharp reversal of fortune, such as a miraculous recovery in the Semiconductor sector, we should be well protected. Trade with the trend and watch for weakness in the SOX.X and NASDAQ before initiating new positions. BUY PUT JAN-45 TNN-MI OI=347 at $5.63 SL=3.50 BUY PUT JAN-40*TNN-MH OI=312 at $3.13 SL=1.50 BUY PUT JAN-35 TQN-MG OI=172 at $1.56 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=TQNT VSTR - VoiceStream Wireless $100.63 (-4.88 last week) Having expanded with the acquisitions of Omnipoint and Aerial Communications, VoiceStream provides digital PCS to more than 2.5 million customers on its GSM (global system for mobile communications) networks. It will expand into the southeastern US with the acquisition of fellow GSM operator Powertel. In the rapidly changing Telecom world, VSTR itself agreed to be acquired by Deutsche Telekom in July, 2000. Ever since accepting the acquisition offer by Deutsche Telekom in July, shares of VSTR have been caught in a bearish downtrend that has gotten even uglier in the past week. The Telecom sector has been under pressure over the past several months, and that helped to force VSTR into a broad consolidation between $100-135. The trend is definitely down though, as each rally attempt is being turned back at lower and lower levels, with the most recent rejection less than 3 weeks ago at $122. We are looking for the increase in selling volume we saw the past few days to continue into next week and pressure the stock below $100. Use any volume-backed move below the century mark as an opportunity to enter the play, but beware of a head-fake. Should the Telecom sector (AMEX:TTH) or NASDAQ enter into rally mode, it will be tough for the bears to push the stock very far below its current support level. The wild card in this play is that Deutsche Telekom shares have now declined below the level at which VSTR can walk away from the deal, with no penalty. It does however seem unlikely that VSTR would call off the merger, even in light of the declining value of the deal. As investors become increasingly concerned about profits, VSTR will need an international partner to boost customer numbers while saving money in back-office operations. We have placed our stop at $106, as there is significant intraday resistance between $104-106. Any rally that fails to penetrate this level on a closing basis, will provide aggressive traders with better entries as the bears take another run at the $100 support level. Just remember that we really need to see this level fail as support for our play to come to fruition. BUY PUT JAN-105 UVT-MA OI=3902 at $9.50 SL=6.75 BUY PUT JAN-100*UVT-MT OI=4804 at $7.00 SL=5.00 BUY PUT JAN- 95 UVT-MS OI= 160 at $5.25 SL=3.25 http://www.premierinvestor.net/oi/profile.asp?ticker=VSTR P - Phillips Petroleum Co. $56.88 (-2.38 last week) Phillips Petroleum Company is headquartered in Bartlesville, Okla., where the company was founded in 1917. Phillips 66 - the company's trademark red and white shield - is recognized around the world as the trademark of a major energy company. An integrated oil company, the Phillips of today has worldwide operations. The company's core activities are: 1. Petroleum exploration and production on a worldwide scale; 2. Natural gas gathering, processing and marketing in the United States and Petroleum refining, marketing transportation, primarily in the United States; 3. Chemicals and plastics production and distribution worldwide. With the average price of oil over 30 dollars a barrel this past year - the highest since 1983 - it's no wonder that oil service and energy stocks have rallied. However, despite the continued rising of oil prices and a fossil fuel friendly President-elect, shares of Phillips Petroleum have been trending lower. Lawsuits recently have been both a blessing and a bane to the company. On December 18th, Phillips received a favorable ruling, where damages due to a refinery explosion were reduced from $118 million to about $12 million. The next day however, the company found itself back in the throes of legal uncertainty, as Greenpeace filed a lawsuit to prevent Phillips from proceeding with an Arctic oil exploration project, citing inadequate oil spill planning. Unable to break through resistance in the $68-70 area, the stock has since made lower highs and lower lows. Connecting the highs since mid-October reveals a downtrend line and formidable resistance at the $59 level, with the 50-dma, the top Bollinger band and its intermediate downtrend line all converged at that point. Candlestick fans will note that Friday's close, down $1.31 or 2.24 percent on 78% of ADV, reveals a doji evening star reversal pattern. While confirmation and volume is still necessary, the signs of a possible rollover are already apparent. For aggressive traders, a failed rally off the key resistance level of $59 could provide for an ideal entry point, but confirm a rollover with volume. For the more risk averse, wait for Phillips to break below the 5-dma (now at $56.78) on strong selling pressure before making a play. Sector sympathy for a commodity-dependent company such as Phillips usually plays an important role in direction so keep a close watch of rivals TX and XOM on when planning an entry. BUY PUT JAN-60*P-ML OI=209 at $4.13 SL=2.50 BUY PUT JAN-55 P-MK OI=422 at $1.50 SL=0.75 http://www.premierinvestor.net/oi.profile.asp?ticker=P ***************** CURRENT PUT PLAYS ***************** SNDK - Sandisk Corp. $27.75 (-4.31 last week) What's in a name? SNDK provides computer storage sans disk. The company is a leading provider of flash memory storage devices - integrated circuits that retain data when power is off. The company is involved in all aspects of flash memory process development, chip design, controller development, and system-level integration. SNDK has customized its products to address the needs of many emerging applications in the consumer electronics and industrial/communications markets, including digital cameras, smart phones, personal digital assistants (PDA), and MP3 portable music players. Another day, another 52-week low. After a valiant attempt to break out of its months long downtrend in early December, SNDK seems to be setting new yearly lows on a daily basis and Friday's decline made it 6 in a row. The latest round of bad news came a week ago Thursday when Merrill Lynch downgraded the stock from Buy to Accumulate, resulting in a one-day loss of $10, or 23%. This shattered the $36 support level, and the slide continued unabated over the past week, tracing a new low of $27.50 on Friday. Despite weak market-wide volume, SNDK is seeing the selling intensify, and actually traded 3 million shares today vs. the ADV of 2.7 million. The bad news got worse Thursday as Dan Auclair, SNDK's senior VP of business development and licensing, announced that he will end his extended leave of absence by retiring on December 31st. While it may not have any material affect on the company, it just seemed to add to the negative sentiment affecting the company. The slowdown in the PC sector, and weakness in holiday sales of handheld devices such as MP3 players, PDAs, digital cameras and smart phones has been the dominant negative effect, and despite a single-digit PE ratio, investor sentiment towards SNDK isn't showing any signs of getting better in the near term. The price is now resting precariously above the $26-28 support level, and if it is penetrated, SNDK could easily fall below $20. All of the moving averages and near-term support levels are in the rear-view mirror, so all we have to focus on is support between $18-20, which dates back to the first part of 1999. Conservative traders will wait for the bears to push prices below the $26 support level before opening new positions. Our stop is still sitting at $31, and aggressive players can target shoot failed rallies to the $30 resistance level in an attempt to gain a better entry point on our play. Just make sure the NASDAQ is continuing to struggle, and selling volume on SNDK is keeping the bulls on the defensive before jumping into the fray. BUY PUT JAN-30 SWQ-MF OI= 830 at $5.13 SL=3.00 BUY PUT JAN-25*SWQ-ME OI= 677 at $2.50 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=SNDK SFA - Scientific-Atlantic Inc $32.56 (-2.19 last week) Scientific-Atlanta provides products and services for advanced communications networks that deliver voice, data and video. The company is one of the largest makers of set-top boxes (those cable boxes that sit on your TV), which accounts for about 40% of sales. SFA is currently moving out of the satellite networking business and focusing on digital broadband equipment to fuel growth. Interactive TV stocks saw incredible gains earlier in this year, but investors have now realized that consumers aren't buying these services as quickly as anticipated. The combination of a struggling NASDAQ and investors abandoning stocks like SFA, LBRT, TIVO and GMST resulted in a hard and fast decline since late summer. The holiday week started off with additional losses across the sector. As the week progressed, SFA experienced significant moves to the downside. By Thursday, SFA shattered the intraday support at $33.03 and moved to $32 on 1.3 times the normal volume. On the upside, intraday gains were limited by the $36 level, but at present, the $34 level is keeping a tight lid on intraday gyrations. This pattern of lower-highs and lower-lows is definitely a bearish sign. Although at this point in the play, let's look for a breakdown below the $30 level in heavy trading for extended confirmation. The depressed shares are merely 8+ points away from 52-week low of $24.41, so be prepared bargain hunters looking to make longer-term investment as we enter the New Year. We've maintained our $38 protective stop on the upside, but be weary of taking entries at this level. Instead it may be wiser to look below the 10-dma line and enter on high-volume rollovers from the 5-dma ($34.44) or simply buy into subsequent weakness below the $30 mark in a decline market environment. BUY PUT JAN-40 SFA-MH OI=5286 at $9.50 SL=6.50 BUY PUT JAN-35*SFA-MG OI= 410 at $5.75 SL=3.75 BUY PUT JAN-30 SFA-MF OI= 121 at $3.13 SL=1.75 http://www.premierinvestor.net/oi/profile.asp?ticker=SFA ************************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=1265 ************************************************************** ***** LEAPS ***** Lessons Learned By Mark Phillips Contact Support Another year has come and gone, and what a turbulent year it has been. We began with absolute euphoria in the Technology market, with names like QCOM eliciting 12-month price targets of $1000 just prior to the bursting of the speculative bubble. The dot.com craze has run its course with literally hundreds of high-profile Internet startups going the way of the Do Do bird. The first wave of technology selling this past Spring cut some valuations, but left the vast majority of stocks in leading sectors like the Semiconductors and Networking virtually untouched. As we close out the year, these sectors are trading near their lows of the year, their valuations severely trimmed on concerns of a slowdown in demand for their products. Ironically, the sector that first felt the pinch of profit taking in the Spring, Biotechnology, has managed to hold its own fairly well in the most recent round of technology selling. So what can we learn from all of this? First off, profits do matter, and the old laws of supply/demand and economic cycles have not been repealed, just because of the latest hot IPO. The Internet bubble burst, not because of a lack of capitalization, but due to many companies with a lack of a sound business plan. Once the music stopped playing, it became clear there were no chairs to sit in, and everyone wanted out of the room. Is the Internet economy dead? Not by a long shot, but in the future, investors will require a plan for achieving profitability before risking their hard earned cash on a wide-eyed entrepreneur's dream. We also learned that the "old economy" stocks are not dead, despite the premature pronouncements to that effect as the NASDAQ was charging to new highs in March. Look at old Philip Morris, up more than 100% since the end of March, while our current spotlight play (WM), a boring old band stock has delivered more than 350% returns in the same time frame. It is a cliché, but worth repeating. "The more things change, the more they stay the same." Greed and fear still drive stock prices in the short-term, but profits drive them over the long haul. Our job as LEAPS investors is to identify stocks that have come to the end of the short-term fear cycle and jump aboard for the long-term recovery driven by increasing profitability. Technology will continue to drive our economy forward, and those companies that are well managed will reap the rewards. Broad economic cycles are intact and cyclical stocks will also have their time in the spotlight as we have seen recently in names such as IP, MMM, and AA. Anticipation of an easing in interest rates is a significant catalyst, but you can see that the moves in these stocks LED the bias change by the Fed. The markets are fluid and dynamic, but if we pay attention, they will tell us which way the train is headed, before we can even hear the whistle. So in the year ahead, we will endeavor to focus on those stocks that provide the best possible returns, regardless of whether it is an exciting industry or not. We don't care whether it is a boring old paper stock or an exciting Biotech that promises the cure for cancer. All we want is a favorable economic climate (and it looks like that is just about to be served up by Uncle Alan), a well run and undervalued company, and the availability of LEAPS. A couple quick notes on the playlist before we finish up for another week. We haven't dropped any plays this week, but we are placing 2 of them on injured reserve. ADBE has been unable to get moving north since violating the 200-dma near its earnings report. It is building a pretty ugly downtrend, and if $55 fails to provide support, we will likely jettison the play. AOL is our other recent victim of the bears, pressured by the poor performance of its merger partner TWX. Add to that the disappointment that the merger will not be completed in tax year 2000, and investors seem more interested in selling the issue. The lows keep getting lower, with a fractional violation of the $35 level on Friday. If buyers can't lift the stock from its current levels, we will be logging off of AOL as well. While the near-term direction is unclear, it seems we are near a longer-term inflection point for the markets, and this promises to make for an exciting year for LEAPS investors. Many solid stocks are ridiculously cheap, and when it becomes clear that the economy is still healthy, money will come pouring in as investors strive to not miss the next wave. Set your sights on the plays you want to be in, but don't jump the gun. Wait for the big money to tell us that the tide is changing (Austin's Market Sentiment is the tool to use on this front), and then execute your game plan with gusto. Have a Happy New Year! Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2002 $ 45 WUE-AI $ 9.50 $30.38 219.79% 09/17/00 JAN-2003 $100 VUE-AT $32.75 $15.38 -53.04% CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $ 8.38 -23.82% 11/26/00 JAN-2003 $ 60 VYC-AL $16.63 $ 8.00 -51.89% NT 11/28/99 JAN-2002 $37.5 WNT-AU $15.13 $ 8.00 -47.12% 09/10/00 JAN-2003 $ 75 ODT-AO $27.50 $ 4.00 -85.45% AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $ 1.50 -91.95% 08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $ 5.90 -66.29% 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 $24.63 357.81% 10/22/00 JAN-2003 $ 45 VWI-AI $ 7.88 $16.63 111.04% NOK 05/21/00 JAN-2002 $ 50 IWX-AJ $17.25 $ 8.50 -50.72% 07/30/00 JAN-2003 $ 50 VOK-AJ $17.75 $12.88 -27.44% C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $10.88 - 5.53% 10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $ 9.50 -22.45% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $34.75 102.86% JAN-2003 $ 70 OZG-AN $23.13 $43.13 86.47% EXDS 08/06/00 JAN-2002 $ 55 WZZ-AK $20.75 $ 2.31 -88.87% JAN-2003 $ 60 VTQ-AL $25.38 $ 4.25 -83.25% QCOM 09/17/00 JAN-2002 $ 70 WBI-AN $22.50 $30.88 37.24% JAN-2003 $ 70 VLM-AN $29.63 $39.00 31.62% TXN 10/22/00 JAN-2002 $ 50 WTN-AJ $13.75 $12.75 - 7.27% JAN-2003 $ 50 VXT-AJ $18.38 $17.75 - 3.43% ADBE 10/29/00 JAN-2002 $ 80 YEJ-AP $23.50 $12.88 -45.19% JAN-2003 $ 80 VAE-AP $30.75 $19.75 -35.77% BGEN 11/05/00 JAN-2002 $ 70 WGN-AN $17.25 $14.00 -18.84% JAN-2003 $ 70 VNG-AN $25.00 $21.63 -13.48% MU 11/26/00 JAN-2002 $ 45 WGY-AI $13.13 $ 9.38 -28.56% JAN-2003 $ 45 VGY-AI $17.25 $13.38 -22.43% A 12/03/00 JAN-2002 $ 55 YA -AK $16.88 $17.50 3.67% JAN-2003 $ 60 OAE-AL $19.88 $20.13 1.26% ORCL 12/10/00 JAN-2002 $ 35 WOK-AG $ 7.75 $ 6.88 -11.23% JAN-2003 $ 35 VOR-AG $11.13 $10.25 - 7.91% QQQ 12/10/00 JAN-2002 $ 70 WNQ-AR $15.13 $ 9.50 -37.21% JAN-2003 $ 75 VZQ-AW $19.25 $12.75 -33.80% WMT 12/24/00 JAN-2002 $ 55 WWT-AK $ 9.63 $ 9.88 2.60% JAN-2003 $ 55 VWT-AK $14.00 $14.13 0.93% Spotlight Play WM - Washington Mutual $53.06 WM is a case study in patience and riding the trend. Over the past few months the stock has moved up the charts and it has been no slouch about it either. A boring banking stock, WM now leads our portfolio with the largest percentage gain, currently sitting at 357%. Looking at a chart, it becomes clear that this is a stock that investors like. Since mid-June, the stock has been in rally mode, periodically finding support at the 50-dma (currently $46), as it posts a series of higher highs and higher lows. With the easing of the Fed's bias on interest rates and the chances of an actual rate cut increasing by the day, WM's rate of ascent increased over the past 2 weeks, and it is now far ahead of its 50-dma. Each pullback over the past several months has found support at the previous high, providing for a new entry prior to the next leg of the rally. Following that reasoning, we are looking for the current round of profit taking to reverse near the early December high of $50. Wait for the selling to wind down, and then nibble at new positions as WM bounces from support on increasing volume as it continues its quest for new highs. Keep an eye on the Banking sector as a whole, (BKX.X), and use this sentiment to confirm the health of our play. WM will release its quarterly earnings results on January 16th, so take the normal pre-earnings rise and post-earnings drop into account when planning your trade. BUY LEAP JAN-2002 $55.00 WWI-AK at $ 7.63 BUY LEAP JAN-2003 $55.00 VWI-AK at $11.25 New Plays None Drops None *********** SPLIT PLAYS *********** At Least The Year Is Over By Matt Russ Well, ummmm, it wasn't a very fun ride unless you were short since April, but at least we are free to focus on a New Year. Today's close seemed a suitable finish to the year as the shorts added insult to injury. But, let's be positive and focus on the opportunities that lie ahead in 2001. There were no split announcements this holiday week as the markets whipsawed. Window dressing and tax-loss selling caused some volatile moves and even drove some of our split candidates to new 52-week highs. Dominating the list this week are NYSE stocks which have been the out-performers. While they are not the high flying types, they certainly have the momentum typical of pre-split announcement moves. In addition, many of them are reaching historical split levels: SWY, JNJ, AFL, and CAH. It can be profitable to play these types of stocks prior to the anticipated announcement. For more information on the stages of split trading, visit www.splittrader.com. Current Split Run Plays None Current Split Candidate Plays ESRX JNJ LH RE Candidates That Are Not Current Plays AFL CHKP CMVT CAH GENZ LTR RKY SWY UHS VRTS WLP WWY 10 Most Recent Announcements We Predicted FRX - 12/18 (most recent announcement) BRCD - 11/29 MANU - 11/08 MUSE - 10/25 AMCC - 10/11 DNA - 10/05 LEH - 09/20 ORCL - 09/14 SUNW - 08/17 GLW - 08/16 Major Announcements So Far This Month = 15 HWEN GMCR BOBJ DFXI FSCR HOTT SANM SEIC SCHL AREM GGG EAT FRX DUK STT For our complete stock split calendar, click here... http://members.OptionInvestor.com/splits/index.asp Symbol Company Name Splits Payable Executable IWOV - Interwoven 2:1 12/29/2000 01/02/2001 USPH - U.S. Physical Therapy 2:1 01/05/2001 01/08/2001 SANM - Sanmina Corp. 2:1 01/08/2001 01/09/2001 AREM - AremisSoft 2:1 01/08/2001 01/09/2001 HWEN - Home Financial Bancorp 2:1 01/10/2001 01/11/2001 FRX - Forest Labs 2:1 01/11/2001 01/12/2001 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 DUK - Duke Energy 2:1 01/26/2001 01/29/2001 GGG - Graco Inc. 3:2 02/06/2001 02/07/2001 BOBJ - Business Objects 3:2 02/22/2001 02/23/2001 SEIC - SEI Investments 2:1 02/28/2001 03/01/2001 FSCR - Federal Screw Works 5:4 04/02/2001 04/03/2001 ************************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=1257 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 12-31-2000 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/123100_5.asp ************* COVERED CALLS ************* Resolved: 10 ways to be successful in the New Year! By Mark Wnetrzak The road to success is in the stock market is not an easy one and each of us must work very hard to overcome our emotions and think independently. At the same time, it's important to reflect on our past failures and use that knowledge to avoid the same mistakes in the future. Here are some of the most important concepts I have learned over the past year. Hopefully, I won't be including any of these items in a forthcoming discussion on my personal trading lessons. 1. Trading demands foresight, flexibility, patience, common sense and above all, sound judgment in a timely manner. 2. Trade with a plan, and know your limits before you open any position! Predetermine each potential entry and exit target. 3. Manage your losses successfully, and profits will soon follow! 4. Buy on weakness, and add to your position as the rebound above a trend-line (or moving average) confirms the upside potential. 5. Sell on strength, and close out winning positions at the first sign of hesitation. Protect your profits with trailing stops. 6. Distribute risk with portfolio diversity, and avoid financial uncertainty with hedged positions. 7. Don't be influenced by outside forces, including friendly advice. Ignore the crowd and think for yourself! 8. When hope becomes a major part of your outlook, it's time for a break. Fall back, take inventory, define your motives and try again . 9. Don't over-trade! In addition, be careful not to increase your trading after a string of winners - savor your success! 10. Whenever you expect something to occur, remember that the market is famous for doing the unexpected. Happy New Year! PS: And don't trade naked! 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 MCOM 10.75 10.06 JAN 7.50 3.88 *$ 0.63 10.0% MCLD 14.69 14.13 JAN 12.50 3.00 *$ 0.81 7.5% CRK 11.44 14.75 JAN 10.00 2.19 *$ 0.75 7.0% GLGC 21.25 18.38 JAN 17.50 5.25 *$ 1.50 6.8% FNSR 27.00 29.00 JAN 22.50 5.75 *$ 1.25 6.4% EXFO 32.00 26.13 JAN 22.50 11.25 *$ 1.75 6.1% KLAC 31.81 33.69 JAN 25.00 8.13 *$ 1.32 6.1% EDGW 5.63 6.50 JAN 5.00 1.00 *$ 0.37 5.8% BCGI 28.38 27.88 JAN 22.50 7.25 *$ 1.37 5.6% CPRT 18.69 21.50 JAN 17.50 2.19 *$ 1.00 5.3% PHI 17.56 17.81 JAN 15.00 3.25 *$ 0.69 5.2% QTRN 18.38 20.94 JAN 17.50 2.06 *$ 1.18 5.2% HSIC 30.63 34.63 JAN 30.00 2.31 *$ 1.68 5.2% AVID 18.63 18.27 JAN 17.50 2.06 *$ 0.93 4.9% WMS 19.00 20.13 JAN 17.50 2.25 *$ 0.75 4.9% MLHR 26.81 28.75 JAN 25.00 2.88 *$ 1.07 4.9% CVD 11.38 10.75 JAN 10.00 2.00 *$ 0.62 4.8% WMS 19.69 20.13 JAN 17.50 3.00 *$ 0.81 4.2% ARQL 33.75 32.00 JAN 25.00 10.00 *$ 1.25 3.8% RFMD 36.38 27.44 JAN 30.00 8.50 $ -0.44 0.0% GZMO 14.19 9.19 JAN 12.50 2.69 $ -2.31 0.0% *$ = Stock price is above the sold striking price. Comments: Finisar's (FNSR) drop on Tuesday provided an even lower cost basis than shown above. More conservative investors could have written a JAN-$20 call. But you had to be quick! The question to ask yourself with Avid Technology (AVID): Should I have used the rally to exit the position? Depends on your long-term outlook. Rf Micro Devices (RFMD) appears to be losing strength as it approaches its 150 dma - maybe it's time to start looking for an early exit. Genzyme Molecular Oncology (GZMO) dropped quickly to support after its warning - a key moment. Exiting on any further weakness may be prudent. The weakness could be collateral damage after its parent company, Genzyme (GENZ) received some negative news from the FDA. Now, time for a fresh start with a New Year! Positions Closed: Miravant (MRVT) NEW PICKS ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return CHMD 12.13 JAN 10.00 HQC BB 2.50 252 9.63 21 5.6% FIBR 16.06 JAN 12.50 FIV AV 4.75 10 11.31 21 15.2% GETY 32.00 JAN 25.00 QGT AE 7.75 237 24.25 21 4.5% LEXG 16.63 JAN 15.00 EIU AC 2.75 89 13.88 21 11.7% MATX 17.13 JAN 15.00 UOD AC 2.69 10 14.44 21 5.7% NRGN 35.13 JAN 30.00 NQO AF 6.75 180 28.38 21 8.3% PHSY 15.00 JAN 12.50 HYQ AV 2.94 149 12.06 21 5.3% Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return FIBR 16.06 JAN 12.50 FIV AV 4.75 10 11.31 21 15.2% LEXG 16.63 JAN 15.00 EIU AC 2.75 89 13.88 21 11.7% NRGN 35.13 JAN 30.00 NQO AF 6.75 180 28.38 21 8.3% MATX 17.13 JAN 15.00 UOD AC 2.69 10 14.44 21 5.7% CHMD 12.13 JAN 10.00 HQC BB 2.50 252 9.63 21 5.6% PHSY 15.00 JAN 12.50 HYQ AV 2.94 149 12.06 21 5.3% GETY 32.00 JAN 25.00 QGT AE 7.75 237 24.25 21 4.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** CHMD - Chronimed $12.13 *** Hey, What's Up? *** Chronimed is an integrated healthcare company also specializing in pharmacy services and disease management for people with chronic health conditions. In addition to the development, manufacture, and marketing of diagnostics products, Chronimed distributes pharmaceuticals and provides specialized patient management services nationwide for people with long-term chronic conditions such as HIV/AIDS, diabetes, organ transplants, and diseases treated with injectable medications. Earlier this month, the company announced a litigation settlement with Bayer and the sale of their Diagnostic Product subsidiary. Is that why the stock price spiked on heavy volume the last couple days? Something is up, and it just isn't Chronimed's price. A reasonable cost basis for those speculators who believe the "tape" doesn't lie. JAN 10.00 HQC BB LB=2.50 OI=252 CB=9.63 DE=21 MR=5.6% ***** FIBR - Osicom Technologies $16.06 *** Buyout/Merger? *** Osicom is a developer and marketer of metropolitan optical networking systems, through its optical networking subsidiary Sorrento Networks. Osicom reported consolidated revenues for its 3rd-quarter of $10.8 million. After recently merging its subsidiary, Entrada Networks with Sync Research, Osicom's stock rallied Friday amid speculation Sycamore Networks was in talks to acquire Sorrento Networks. An Osicom spokesman has declined to comment on the rumors. The rumors speculate that with FIBR's recent low stock price, Sorrento could be obtained at a bargain. Investors cheered the idea, pushing Osicom up almost $4. This position offers a conservative entry for those inclined to speculate on the rumor. We favor the long-term support near our cost basis. JAN 12.50 FIV AV LB=4.75 OI=10 CB=11.31 DE=21 MR=15.2% ***** GETY - Getty Images $32.00 *** Earnings Expectations? *** Getty Images is a global visual content provider, offering imagery and related products over the internet and through a diverse set of distribution channels and media including digital downloads, CD ROMs, demonstration reels and catalogs. The Company estimates that it controls over 70 million still images and more than 30,000 hours of film footage. Last quarter, Getty beat estimates when it reported a net loss of $26.4 million. Revenues grew to $127 million from $60.8 million with Internet sales up 131 percent from a year ago. Getty expects sales for the fourth quarter to come in between $133 million and $135 million. Investors seem pleased with the results as the technicals point to strong accumulation. The stock continues to forge a Stage 1 base with long-term support near our cost basis. JAN 25.00 QGT AE LB=7.75 OI=237 CB=24.25 DE=21 MR=4.5% ***** LEXG - Lexicon Genetics $16.63 *** Something Up? *** Lexicon Genetics is a leader in defining the functions of genes for drug discovery using large-scale knockout mouse technology. Complementary to its gene-specific custom knockout technology, Lexicon has invented high-throughput genome-wide gene trapping technology to discover thousands of genes and expand its OmniBank library of tens of thousands of knockout mouse clones. The Company uses an integrated platform of functional genomics technologies to accelerate large-scale analysis of mammalian gene function for drug discovery. Last quarter, Lexicon reported that total revenues increased 691%, and recent sublicense agreements with Eli Lilly and Roche Bioscience should bode well for future earnings. We simply find the rally this week interesting. There was no news and the stock has now made a positive test of the previous lows in May and June. The next test will be the November high which will negate the downtrend. JAN 15.00 EIU AC LB=2.75 OI=89 CB=13.88 DE=21 MR=11.7% ***** MATX - Matrix Pharmaceutical $17.13 *** Break-out! *** Matrix develops novel local and systemic cancer treatments to improve, extend and save the lives of cancer patients. MATX has completed two registration-directed Phase III trials of IntraDose in patients with recurrent or refractory head and neck cancer and has been granted Orphan Drug designation and fast-track status by the FDA for that indication. The company is in the process of completing an NDA submission. In the systemic treatment arena, Matrix is developing tezacitabine (FMdC), a next-generation nucleoside analogue for treatment of solid tumors and hematologic malignancies. No recent news to explain this week's strong volume supported rally which moved the stock to a new 5-month high. We simply favor the strong support near the sold strike on the stock, but do not neglect your due diligence. JAN 15.00 UOD AC LB=2.69 OI=10 CB=14.44 DE=21 MR=5.7% ***** NRGN - Neurogen $35.13 *** Drug Sector! *** Neurogen is a leader in both the discovery and development of new drug candidates to treat large market psychiatric, metabolic and inflammatory disorders, and in the development and integration of new drug discovery technologies with its Accelerated Intelligent Drug Discovery program. Neurogen has generated a growing portfolio of compelling new drug programs that promise improved efficacy and reduced side effects. NRGN recently announced that its research collaboration with Pfizer has successfully resulted in the start of a Phase II efficacy study of Neurogen's lead drug candidate to treat anxiety disorders, NGD 91-3. NGD 91-3 represents the next generation of drugs to treat anxiety. Neurogen has been in a 2-year up-trend and the recent strength suggest more upside potential. JAN 30.00 NQO AF LB=6.75 OI=180 CB=28.38 DE=21 MR=8.3% ***** PHSY - PacifiCare $15.00 *** Bottom Fishing! *** PacifiCare Health Systems is one of the nation's largest managed health care services companies. Primary operations include managed care products for employer groups and Medicare beneficiaries in nine states and Guam, serving approximately four million members. PacifiCare took the plunge in October after warning that earnings would not meet estimates due to higher-than-anticipated commercial and Medicare health care costs. The usual lawsuits have followed and the CEO was ousted, recently replaced by Howard G. Phanstiel. Investors apparently have faith the Mr. Phanstiel will restore PacifiCare's strength and earnings power, as he has implemented workforce reduction and restructuring. We simply favor the Stage 1 base and improving technical signals. JAN 12.50 HYQ AV LB=2.94 OI=149 CB=12.06 DE=21 MR=5.3% ***** ***************** 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 SBGI 10.03 JAN 10.00 JQO AB 0.63 43 9.40 21 9.2% ACLS 8.88 JAN 7.50 ULS AU 1.81 176 7.07 21 8.9% SHRP 15.38 JAN 12.50 SAU AV 3.38 146 12.00 21 6.1% GMST 46.13 JAN 35.00 QLF AG 12.38 330 33.75 21 5.4% DS 25.63 JAN 22.50 DS AX 3.88 10 21.75 21 5.0% NAV 26.19 JAN 22.50 NAV AX 4.38 2636 21.81 21 4.6% ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1250 ************************************************************** ************************* 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 58.19 55 AXX-MK 3.88 1455 27% 55 AFFX 74.44 65 FIQ-MM 3.38 1861 18% 65 AGN 96.81 90 AGN-MR 2.31 2420 10% 90 CMVT 108.63 95 CQZ-MS 3.00 2716 11% 90 DNA 81.50 75 DNA-MO 2.13 2038 10% 75 ESRX 102.25 90 XTQ-MR 2.00 2556 8% 90 FCEL 68.56 55 FQG-MK 2.38 1714 14% 57 GILD 82.94 70 GDQ-MN 2.44 2074 12% 70 GLW 52.88 50 GLW-MJ 3.25 1322 25% 50 GS 106.94 95 GS-MS 2.63 2674 10% 95 HGSI 69.31 60 HHA-ML 3.38 1733 20% 60 IDPH 189.50 170 IHD-MN 8.88 4738 19% 170 LH 176.00 165 LH-MM 4.25 4400 10% 167 MERQ 90.19 75 RQB-MO 4.00 2255 18% 70 MLNM 61.94 55 QMR-MK 3.25 1549 21% 55 NEWP 78.63 60 NZZ-ML 4.25 1966 22% 65 PDLI 85.88 75 RPV-MO 4.75 2147 22% 70 RIMM 80.00 65 RUL-MM 3.25 2000 16% 65 SEPR 80.13 70 ERQ-MN 2.13 2003 11% 67 SUNW 27.81 25 SUQ-ME 1.50 695 22% 25 *********************** CONSERVATIVE NAKED PUTS *********************** The January Barometer: Will the Bear Market Continue? By Ray Cummins History suggests the first five days of January will determine the market's direction in the coming year. In fact, the month of January has predicted the annual course of the S&P 500 Index with amazing accuracy, achieving a perfect record of forecasting market direction in odd-numbered years. Since 1950, almost every time the month of January ended negative, a bear market occurred. We all know that the stock market moves in identifiable cycles, and to be a successful investor, you must be able to determine the current phase of activity. This allows you to formulate an accurate perception of the overall trend and manage the positions in your portfolio with the appropriate outlook. It is also very important to be familiar with the common technical indicators used to determine the overall movement of financial issues and apply this knowledge as a practical part of your trading strategy. The most accurate index for measuring broad-based market trends is Standard & Poor's list of 500 stocks and a popular indicator for technical analysis with this index is the advance/decline line. There are several ways to use a statistical summary of advances and declines. Weekly figures offer a perspective for long-term investment analysis while daily numbers can be charted to indicate reversals of a short-term nature, suitable for trend-trading or scalping. The methods of A/D interpretation are basic to chart analysis and the results are accurate and easy to understand. One of the most common evaluations is based on the divergence of the A/D line and other market indices. Another successful indication involves the use of long-term moving averages of the daily data. A well-known axiom suggests that a trend in motion can be expected to continue until it reverses. Utilizing a long-term average of the A/D statistics can help identify this trend and recognize the true momentum of the market. Interpreting this type of indicator is similar to other momentum-based techniques in that the primary signal is a crossing (in either direction) of the median line. A move from one area to the other confirms a trend in that direction and the longer the period that the gauge has been either above or below the median, the more meaningful the signal when it occurs. The most significant trends are those indicated when a move has come from deep in positive or negative territory. In a bearish market, this indicator will usually achieve new lows before any of the major indices and a preemptory buy signal is identified by a sharp spike from the lowest range while it's still in negative territory. The most significant buy signals occur when the gauge has been in the lower region for extended periods and reached the furthest extreme before finally issuing a bullish signal. This unique indicator can help identify the beginning of a character change well before the future trend surfaces and when utilized on a regular basis, it can provide added insight into the strength and character of the current cycle. The ability to recognize fundamental changes in the market outlook is a requirement for successful investing. 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 PLNR 28.88 24.88 JAN 22.50 0.63 *$ 0.63 10.7% CHTR 22.00 22.69 JAN 20.00 0.81 *$ 0.81 9.3% BSTE 37.50 40.44 JAN 25.00 0.69 *$ 0.69 9.2% NEM 16.25 17.06 JAN 15.00 0.88 *$ 0.88 8.9% AEIS 24.38 22.50 JAN 20.00 0.69 *$ 0.69 8.2% ADVP 39.50 45.50 JAN 30.00 0.81 *$ 0.81 8.1% HCR 19.69 20.63 JAN 17.50 0.44 *$ 0.44 7.8% MU 35.88 35.50 JAN 25.00 0.69 *$ 0.69 7.6% ADLAC 48.56 51.63 JAN 35.00 0.69 *$ 0.69 7.2% CPRT 20.25 21.50 JAN 17.50 0.38 *$ 0.38 7.2% LFG 38.38 40.44 JAN 35.00 1.00 *$ 1.00 6.7% PPDI 48.19 49.69 JAN 40.00 0.69 *$ 0.69 6.4% SPF 25.44 23.38 JAN 22.50 0.69 *$ 0.69 6.3% TXN 47.63 47.38 JAN 32.50 0.56 *$ 0.56 6.0% CORR 48.94 35.19 JAN 32.50 0.81 *$ 0.81 5.5% BSTE 36.94 40.44 JAN 22.50 0.50 *$ 0.50 5.5% NKE 51.19 55.81 JAN 45.00 0.75 *$ 0.75 5.4% TXCC 47.88 39.13 JAN 25.00 0.75 *$ 0.75 5.3% KLAC 35.94 33.69 JAN 22.50 0.56 *$ 0.56 5.2% SNPS 42.13 47.44 JAN 35.00 0.88 *$ 0.88 5.2% BCHE 28.38 32.00 JAN 25.00 0.50 *$ 0.50 5.1% CCR 41.69 50.25 JAN 35.00 0.75 *$ 0.75 5.1% FNSR 37.50 29.00 JAN 22.50 0.56 *$ 0.56 5.0% ADLAC 40.81 51.63 JAN 30.00 0.50 *$ 0.50 5.0% OXY 22.56 24.25 JAN 20.00 0.56 *$ 0.56 4.9% *$ = Stock price is above the sold striking price. Comments: Planar System's (PLNR) bearish move Friday could just be year- end profit taking. Watch the position closely as it moves into its support area near our sold strike. Advanced Energy (AEIS) continues to display weakening technicals - will the selling abate in the New Year? Pharmaceutical Products (PPDI) had a bearish ending to this week. First support area should be around $45.00, though a move towards $40 seems probable. Standard Pacific (SPF) still isn't out of the woods as Friday's heavy volume indicates. Cor Therapeutics (CORR) continues to weaken technically and a move below the December low should trigger an exit signal. Ok, I'm ready, bring on the New Year! NEW PICKS ********* Sequenced by Company ***** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ALSI 33.63 JAN 25.00 AIU ME 0.44 253 24.56 21 8.9% CNF 33.81 JAN 30.00 CNF MF 0.69 169 29.31 21 9.6% INSUA 39.88 JAN 35.00 ISQ MG 0.44 2 34.56 21 5.5% KLAC 33.69 JAN 25.00 KCQ ME 0.75 949 24.25 21 14.5% PHCC 40.81 JAN 32.50 UHP MZ 0.50 2 32.00 21 8.4% PHI 17.81 JAN 15.00 PHI MC 0.50 429 14.50 21 15.0% STAT 26.44 JAN 22.50 TAQ MX 0.44 50 22.06 21 9.0% Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return PHI 17.81 JAN 15.00 PHI MC 0.50 429 14.50 21 15.0% KLAC 33.69 JAN 25.00 KCQ ME 0.75 949 24.25 21 14.5% CNF 33.81 JAN 30.00 CNF MF 0.69 169 29.31 21 9.6% STAT 26.44 JAN 22.50 TAQ MX 0.44 50 22.06 21 9.0% ALSI 33.63 JAN 25.00 AIU ME 0.44 253 24.56 21 8.9% PHCC 40.81 JAN 32.50 UHP MZ 0.50 2 32.00 21 8.4% INSUA 39.88 JAN 35.00 ISQ MG 0.44 2 34.56 21 5.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ALSI - Advantage Learning Systems $33.63 *** On The Move! *** Advantage Learning Systems is a provider of learning information systems to kindergarten through senior high (K-12) schools in the United States and Canada. The company's learning information systems consist of computer software and related training to help improve student academic performance by increasing the quality, quantity and timeliness of performance data available to teachers and by facilitating increased student practice of basic skills. In addition, the company provides professional development for educators through its programs to educational publishers and software for training and management throughout organizations. The education services group is performing well and the issue is rallying to yearly highs on increasing volume. JAN 25.00 AIU ME LB=0.44 OI=253 CB=24.56 DE=21 MR=8.9% ***** CNF - CNF Transportation $33.81 *** Transport Hedge! *** CNF, formerly CNF Transportation, is a management company of global supply-chain services with interests in regional trucking, multi-client warehousing and expedited ground transport along with domestic and international freight, ocean freight, customs brokerage and logistics services; full-service management; postal sorting and transportation services, manufacturing and rebuilding of trailers, converter dollies and other transportation equipment. The operations of the company are primarily conducted in the U.S. but to an increasing extent are conducted in foreign countries. Friday's rally positions the issue for a test of the yearly high and the cost basis is favorable for traders who like the outlook for the transport industry. JAN 30.00 CNF MF LB=0.69 OI=169 CB=29.31 DE=21 MR=9.6% ***** INSUA - Insituform Technologies $39.88 *** Break-Out? *** Insituform Technologies is a worldwide provider of proprietary trench-less technologies for the rehabilitation and improvement of sewer, water, gas and industrial pipes. The company's primary technology is the Insituform process, a "cured-in-place" pipeline rehabilitation process that, during the most recent fiscal year, contributed approximately 76% of the company's revenues. Other offerings include the NuPipe process, a rehabilitation technology for repairing damaged pipes, and the TiteLiner process, a method of lining steel lines with a corrosion/abrasion-resistant pipe. The company has three major operating segments: rehabilitation, tunneling and corrosion and abrasion operations. The recent move above a 4-month trading range near $35 indicates that INSUA has excellent potential for future gains. JAN 35.00 ISQ MG LB=0.44 OI=2 CB=34.56 DE=21 MR=5.5% ***** KLAC - KLA-Tencor $33.69 *** Bottom Fishing! *** KLA-Tencor is the world's leading supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. Their portfolio of products and analysis services is designed to help IC manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final production yield analysis. KLA-Tencor's advanced products, coupled with its yield management consulting practice, allow the company to deliver the complete yield management solutions customers need to accelerate their yield learning rates, reduce their yield excursion risks and adopt industry-leading yield management practices. KLA-Tencor has shown resilience as the semiconductor sector slumped. The stock has begun to forge a Stage I base and has recently moved above its 30 dma. Earnings are due the third week in January, just before expiration. JAN 25.00 KCQ ME LB=0.75 OI=949 CB=24.25 DE=21 MR=14.5% ***** PHCC - Priority Healthcare $40.81 *** Hot Sector! *** Priority Healthcare is a national distributor of specialty pharmaceuticals and related medical supplies to the alternate site healthcare market and is a provider of patient-specific, self-injectable biopharmaceuticals and disease treatments to individuals with chronic diseases. The company also markets specialty pharmaceuticals and medical supplies to outpatient renal care centers and office-based physicians in oncology and other physician specialty markets. Through Priority Healthcare Pharmacy, the company fills individual patient prescriptions for self-injectable biopharmaceuticals. The Pharmacy segment also provides disease treatment for hepatitis, cancer, human growth deficiency, rheumatoid arthritis, Crohn's disease, respiratory syncytial virus infertility, and the complications of HIV. The healthcare sector is performing well and PHCC ended Friday's session at a new all-time high. JAN 32.50 UHP MZ LB=0.50 OI=2 CB=32.00 DE=21 MR=8.4% ***** PHI - Philippine L. D. Tele $17.81 *** Triple Bottom? *** Philippine Long Distance Telephone is the leading Filipino telecommunications provider. With operations centered in the Manila metro area, it maintains about 1.8 million access lines (60% of the country's total). With a nationwide fiber-optic network to support its digital microwave backbone, the carrier provides local, long-distance (national and international), data and network services using leased satellite and submarine cable capacity. The recent controversial political situation in the Philippines is part of the reason for the current rally and PHI appears to be making a stand at $15, forming a "triple bottom". We simply favor the strong support at the sold strike and the Friday's close at a 6-week high. Speculators only please! JAN 15.00 PHI MC LB=0.50 OI=429 CB=14.50 DE=21 MR=15.0% ***** STAT - i-STAT $26.44 *** Technicals Only! *** i-STAT Corporation develops, manufactures and markets medical diagnostic products for blood analysis that provide health care professionals with immediate and accurate critical diagnostic information at the point of patient care. The company's current products consist of portable, hand-held analyzers and single-use disposable cartridges, each of which performs combinations of commonly ordered blood tests in approximately two minutes. The i-STAT System uses a simple, one-step procedure, the results of which can be easily linked by infrared transmission to a health care provider's information system. i-STAT's primary customer is Abbott Laboratories and they also market products to customers in the United States, Japan, Europe, Canada, South America and Asia. Friday's close at a new 3-year high suggests the issue is poised for future gains. JAN 22.50 TAQ MX LB=0.44 OI=50 CB=22.06 DE=21 MR=9.0% ***** ***************** 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 PRGN 19.75 JAN 15.00 GQP MC 0.50 322 14.50 21 16.3% DS 25.63 JAN 22.50 DS MX 0.75 20 21.75 21 13.8% GETY 32.00 JAN 22.50 QGT MX 0.56 100 21.94 21 11.7% EMIS 25.00 JAN 20.00 MTQ MD 0.38 10 19.62 21 10.2% GMST 46.13 JAN 30.00 QLF MF 0.50 347 29.50 21 7.4% ICOS 51.94 JAN 45.00 IIQ MI 0.56 635 44.44 21 5.6% ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1266 ************************************************************** ************************ SPREADS/STRADDLES/COMBOS ************************ A Dismal Climax... The stock market ended the year on a somber note, with the Nasdaq enduring its biggest annual loss in history and the Dow recording its first loss in a decade. Friday, December 29 The stock market ended the year on a somber note, with the Nasdaq enduring its biggest annual loss in history and the Dow recording its first loss in a decade. The technology index closed down 87 points to 2,470 and the Dow Jones industrial average retreated 80 points to 10,787. The S&P 500 index fell back 13 points to 1,320. Breadth ended negative on the NYSE as declines outpaced advances 1,492 to 1,478 on volume of 1.03 billion shares. On the Nasdaq, advances edged declines 2,107 to 2,043 on volume of 2.5 billion shares. In the bond market, the U.S. 30-year bond dropped 8/32 to 111 13/32 amid year-end adjustments, raising its yield to 5.46%. Thursday's new plays (positions/opening prices/strategy): Alliance Cap. AC JAN50C/JAN50P $2.88 debit straddle Fifth Third FITB JAN60C/JAN60P $4.38 debit straddle Oceaneering OII JAN20C/JAN20P $1.93 debit straddle Our new straddles were a mixed lot with little trading activity during the subdued session. The target prices were achieved in both the Alliance Capital and Fifth Third Bancorp plays, but the Oceaneering position was more difficult to initiate. A debit of $1.93 was available more than once during the day, but with only 11 contracts traded in simultaneous orders it's difficult to say whether the target of $1.88 (or better) could have been achieved without separate entries. Portfolio Plays: Despite today's tax-loss selling, the Spreads portfolio enjoyed a number of favorable moves in technology and industrial issues. The surprise of the session was Conseco (CNC), climbing almost $2 to a recent high near $13.50 after a report that Warren Buffett's Berkshire Hathaway has purchased several hundred million dollars of the company's junk bonds. Conseco's bonds have slid recently amid weakened balance sheets and credit rating downgrades; their 9% notes maturing in October 2006 were recently offered at $0.73 after trading earlier this year in the mid-50s. The move pushed our synthetic position to a $1.75 profit after one week in play. Home Depot (HD) was a big mover, up $2 to a recent high near $46 on strength in the retail group and the long-term credit spread has now achieved profitability with a early-exit return of $2.12. Food and Beverage group issues were also popular and positions in Pepsico (PEP) and Pepsi Bottling (PBG) benefited from the upside activity. Ralston Purina (RAL) was also active and our bullish calendar spread is now positive with almost three months until the (long) options expire. American Airlines (AMR) rallied over $2 at mid-day, bringing our synthetic position to a $1.00 credit overall. In addition, the issue is poised to try for an all-time high in the coming sessions. In the premium-selling category, Sepracor (SEPR) jumped $7, bringing the issue squarely into the middle of our short-strangle, and the position can now be closed for a favorable early-exit profit of $1.50. Among our watch-list positions, Pfizer (PFE) rallied for most of the day, only to finish at $46; very near the top of its recent box pattern. With each failure at that resistance level, the likelihood of a successful breakout decreases. Bowater (BOW) was another issue that consolidated during today's bearish activity. The stock fell $2.12 after testing the upper limits of a recent trading range and for now, it appears the issue is content to remain near $56-$57. Costco (COST) was the standout, moving to $40 in the first few minutes of the day on solid volume. There was little we could do as the activity was at the open, but the indications suggest that the rally will continue and we plan to use a future consolidation to cover the long option. With our current short position at $40, the easiest strategy will be the purchase of stock, to offset the sold calls and allow for future adjustments in case the rally fails. Our cost basis, with the initial credit of $1.38, should be near $37-$38 and the upside profit limit will be at $40. Among downside movers, Qualcomm (QCOM) was a big loser and it will need to be monitored for any further bearish activity. With any luck, today's decline was simply due to position-squaring by portfolio managers and we are optimistic that the recovery will resume next week. Happy New Year! Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** AHC - Amerada Hess $73.06 *** Oil Sector *** Amerada Hess explores for, produces, purchases, transports and sells crude oil and natural gas. These widespread exploration and production activities take place in the United States, the United Kingdom, Norway, Denmark, Gabon, Indonesia, Azerbaijan, Thailand, and in certain other countries. They also manufacture purchase, transport and market refined petroleum and many other energy products. The company owns 50% of a refinery venture in the United States Virgin Islands, and another refining facility, terminals and retail outlets in the Eastern United States. Amerada Hess has been on the move in recent sessions, climbing almost 20% in one week to an all-time high near $75. Now the issue will likely consolidate over the next few days and with the favorable option premiums, this play offers a low-risk oil sector hedge for traders who participate in conservative credit spreads. Target a higher premium initially, to allow for a brief pullback in AHC's share value. PLAY (very conservative - bullish/credit spread): BUY PUT JAN-55 AHC-MK OI=314 A=$0.31 SELL PUT JAN-60 AHC-ML OI=216 B=$0.69 INITIAL NET CREDIT TARGET=$0.43-$0.50 ROI(max)=11% ****************************************************************** PRSF - Portal Software $7.84 *** Reader's Request! *** Portal Software develops, sells, and supports real-time, scalable customer management and billing software for companies that provide Internet-based services. Their Infranet software is a comprehensive platform that meets complex, mission-critical provisioning, accounting, reporting and marketing needs and the company's products enable the provisioning and reporting of many services, including such functions as account creation, user authentication and authorization, activity tracking, pricing and rating, billing and customer service, including self-service, all on a scale of up to millions of users. Portal Software's stock tumbled in November, after the company announced weak quarterly results and a revenue slowdown in North America. Portal did report higher-than-expected earnings for the fiscal year, but the announcement also suggested several problems relating to future revenue growth. Net income for the October quarter was $7 million, compared to a loss of $1.7 million in the same period last year, however gross margins were 75%, the lowest in four quarters. Deferred revenues rose $8 million to a record $45 million and the company signed up only 62 new customers last quarter, down from 83 new customers in the previous period. The concern for analysts was a slowdown in licensing fee collection, which company executives attributed to a reduction in orders from telecommunications clients. Despite the bearish report, there is optimism for the future and after a review of the data, analysts at Wit SoundView reiterated a "strong buy" rating on the company, while Chase Hambrecht & Quist and Thomas Weisel Partners issued "buy" ratings. Proponents say that Portal will eventually acquire a large part of the overall operations support systems, a market that is expected to hit $14 billion within the next several years. One of our readers requested some potential bottom-fishing plays in this issue and traders who favor speculative positions can use this limited-risk combination to benefit from any future upside activity. PLAY (speculative - bullish/collar): BUY STOCK - PRSF ASK=$7.88 SELL CALL FEB-12.50 PFR-BV OI=45 B=$0.62 BUY PUT FEB-5.00 PFR-NA OI=30 A=$0.56 TARGET COST BASIS=$7.62-$7.75 ROI(max)=60% RISK(max)=37% ****************************************************************** - STRADDLES - These positions meet our criteria for favorable straddles; cheap option premiums, a history of adequate price movement and future events or activities that may generate volatility in the issue or its industry. This selection process provides the foremost combination of low risk and potentially high reward. As with any recommendations, they should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** AFC - Allmerica Financial $72.50 *** On The Move! *** Allmerica Financial is a non-insurance holding company operating in three major segments. The company's Risk Management segment consists primarily of its property and casualty operations, which are generated through The Hanover Insurance Company and Citizens Insurance Company of America. Through its Allmerica Financial Services segment, the company provides investment-oriented life insurance and annuities to individuals and businesses throughout the United States. With the Allmerica Asset Management segment, the company offers Stable Value Products, including as Guaranteed Investment Contracts, to ERISA qualified retirement plans as well as other institutional buyers, such as money funds, and corporate cash management programs and securities collateral reinvestment programs. In addition to the three operating segments, Allmerica also has a corporate segment, which consists primarily of cash, investments, Corporate debt and Capital Securities. We have offered this position in the past, and with a potential change in interest rates in January, the financial group is sure to encounter volatility. AFC's options are priced favorably and the previous 30-day period has seen 3 cycles through a range that would yield a profitable outcome. The only problem that can't be overcome is the low Open Interest in the Put options. However, the current bid/ask spreads are acceptable and the trading volume in both series will certainly increase as we move into January. PLAY (aggressive - neutral/debit strangle): BUY CALL FEB-75 AFC-BO OI=211 A=$2.50 BUY PUT FEB-70 AFC-NN OI=2 A=$2.12 INITIAL NET DEBIT TARGET=$4.38-$4.50 TARGET ROI=20% ****************************************************************** CYT - Cytec Industries $39.93 *** Long-term Position! *** Cytec is a global specialty chemicals and materials company that serves major markets for water and wastewater treatment, mineral processing, paper manufacturing and recycling, automotive and industrial coatings, plastics, adhesives, aerospace adhesives and composites, and chemical intermediates. The company operates in four primary segments: water and industrial process chemicals, performance products, specialty materials and building block chemicals. Water and industrial process chemicals principally include water-treating chemicals, mining chemicals, paper and phosphine chemicals. Performance products principally include specialty resins, surfactants and specialty monomers and polymer additives. Specialty materials principally include aerospace materials and, before January 1999, molding compounds. Building block chemicals principally include acrylonitrile, acrylamide, ammonia, hydrocyanic acid, melamine and sulfuric acid. Cytec traded at a new 2-year on Friday, as investors maintained a recent interest in defensive issues, including stocks in the Specialty Chemicals sector. Now the issue has little overhead supply to restrict its upward movement and there will likely be a test of the all-time near $55 in the next few months. At the same time, unexpected problems with earnings (due in January) could be a catalyst for a retreat to the previous trading range near $30-$34. In any case, the option premiums are favorable and the history of movement suggests that this position will profit long before the expiration date in late May. PLAY (conservative - neutral/debit straddle): BUY CALL MAY-40 CYT-EH OI=202 A=$3.88 BUY PUT MAY-40 CYT-QH OI=200 A=$3.25 INITIAL NET DEBIT TARGET=$6.88-$7.00 TARGET ROI=50% ****************************************************************** SWS - Southwest Securities Group $25.88 *** Where To Now? *** Southwest Securities is a full-service securities and banking firm using technology to deliver a broad range of investment and related financial services to its clients, which include a number of individual and institutional investors, broker/dealers, corporations, governmental entities and financial intermediaries. The company's Brokerage Group provides clearing services to 200 correspondent broker/dealers and over 500 independent contract brokers, as well as full-service and online discount brokerage services to individual investors. Its Asset Management Group offers investment management, advisory and trust services through three subsidiaries. Under the Banking Group, the company offers full-service, traditional banking through First Savings Bank. Southwest Securities recently announced the termination of its exclusive agreement with financial advisor Bear Stearns and now plans to continue the vigorous pursuit of growth opportunities, both internally and externally. The CEO said he is confident and excited about the future, as the company possesses a unique state-of-the-art technology system that has capacity far greater than their present requirements. He also noted the firm is in a position to add new customers rapidly, effectively and profitably for the many financial services they offer. That sounds like a a good recipe for upcoming developments and with the company's earnings due on or about January 25, this position offers great "delta-neutral" speculation in the brokerage group. PLAY (conservative - neutral/debit straddle): BUY CALL MAR-25 SWS-CE OI=276 A=$3.12 BUY PUT MAR-25 SWS-OE OI=59 A=$2.43 INITIAL NET DEBIT TARGET=$5.31-5.43 TARGET ROI=25% ************************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=1258 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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