The Option Investor Newsletter Thursday 01-04-2001 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/010401_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 01-04-2001 High Low Volume Advance/Decline DJIA 10912.40 - 33.40 11028.00 10888.40 2.11 bln 1600/1363 NASDAQ 2566.83 - 49.86 2644.80 2549.83 2.61 bln 2193/1797 S&P 100 700.92 - 3.05 709.68 698.58 totals 3793/3160 S&P 500 1333.34 - 14.22 1350.24 1329.14 54.6%/45.4% RUS 2000 477.20 - 7.19 484.39 475.90 DJ TRANS 3145.65 +130.58 3157.44 3011.78 VIX 29.96 + 1.29 30.48 28.47 Put/Call Ratio 0.55 ************************************************************* Did you buy the dip? If you were anticipating the bottom on Wednesday as we had suggested and bought either dip recovery from the morning 2251 or the afternoon higher low of 2264 then you should be a happy camper. We all know what happened at 1:15PM and the explosion that resulted. Today's wimpy profit taking sell off was a big win and should go down as a plus instead of a minus. Volume was huge again with the NYSE trading over two billion shares for the first time ever. The Nasdaq volume was 2.6 billion with advances beating decliners on both exchanges even though both finished the day slightly negative. This was simply a consolidation day after both exchanges set records on Wednesday. Traders took profits while investors bought stock for the long term. Companies up high double digits on Wednesday managed to hold onto most of their gains. CIEN +19 only lost -2.44 today, BRCM +30 only lost -6.63 today. Give me $30 and take back $6 any day! With the Nasdaq up +17% from the Wednesday low the only -1.9% retracement today was a non-event! The keyword for today was rotation. Every defensive stock, which had benefited from investors moving into apparent safety over the last two months, suffered today as those same investors dumped them to raise cash for the anticipated rally. BUD dropped -$5 at the low of the day, MRK accelerated the drop started with the Fed announcement yesterday with a -$5 loss intraday. Biotechs looked more like lepers with most taking big losses. PDLI led the loser list at -10 with GENZ, ABGX, AFFX, IMCL, CRA, DNA following closely. LH, Laboratory Corp, which I highlighted on Tuesday as a capital gains tax sale loser, finally bounced at $130 today after dropping -$53 from last Thursday's high. Forest Labs also found a bottom at $113 after falling -$26. The good news has got to be there is only one day left in this week. Tax sellers are normally done by Friday's close and that money will be put back to work next week. Investors still holding these previous high flyers will start to breathe easier as the bleeding stops. As if financial stocks needed any more good news other than the Fed rate cut, Lehman and Bear Stearns both announced earnings today and both beat estimates easily. LEH beat estimates by +.20 and BSC by +.25 on increased trading volume in Nov/Dec. This helped revitalize the brokerage community which had been decimated by the lack of volume in our bear market. NITE gained +15%, AMTD +20%, EGRP +13%. The major financials managed to hold onto or even add to their gains from yesterday with C and JPM the standouts. Lest you think everything was rosy today there were the usual problems. Some of the warnings today included WGRD, RSNT, CYBS, SAPE, NXTV, ETYS, KEYN, BRKT and SMTC. Just cutting rates has not waved a magic wand over earnings and there are still dozens of warnings coming. YHOO was widely rumored to be the next major Internet to warn but the company has been quiet. Since it takes six months for rate hikes or cuts to filter through the economy and end up as earnings we can expect at least two more quarters of problems. However the market will discount that fact and short of specific disasters stocks should trade higher. First Call said today that there have been 92% more warnings this quarter than for the same quarter last year. Real earnings begin next week but other than YHOO and ARBA there are not any high profile releases due out. The following week however is when the flood gates open and investors will be reacting to real news, not speculation. Economic reports today continued to confirm the slowing economy with the Initial Jobless Claims at 375,000 posting their fourth consecutive increase. The really key report is the Jobs Report on Friday. The outcome is probably already known based on the Fed rate cut. Since they get advance information you could bet that the Jobs Report will be weak and point to more economic declines. It remains to be seen if the actual release will have any direct impact on the market. With the pressure already off and no Fed action anticipated on the release the market may just ignore it and focus on rebuilding portfolios. Still part of the weakness at the close today could have been traders closing positions in front of the unknown Jobs impact. George W, call Alan before making important decisions. That was basically the message Alan sent to President elect Bush with the -.50% rate cut on Wednesday. Do you think it was just a coincidence that Alan announced the cut while Bush was holding an economic summit in Austin designed to build support for his $1.6 trillion tax cut? What was the purpose of announcing in the middle of the week, in the middle of a trading day? In the past this type of action occurred after the Jobs Report. Just a coincidence that it was two days early and during the summit, right? Alan has said in the past that tax cuts should be delayed to continue reducing the debt. A massive tax cut could be seen as a lack of confidence in Greenspan's ability to control the economy. With a war of words and methods shaping up between Alan and George, Alan fired the first shot with an aggressive cut and effectively drew a line in the sand. Squaring off against Bush may be good for us but may have a career shortening long term result. Of course, how much career does Greenspan have left anyway? It is not like he needs the job. For traders the result may be a more aggressive Fed posture than in the past as the FOMC team tries to pump the economy back up quickly to reduce reasons for a massive Bush tax cut. Go for it Alan, we will be happy to get another -.50% cut at the Jan-30th meeting. I doubt it but I would take it. Many analysts speculate that Alan could step down as early as this year and go out at the height of his popularity instead of waiting for the next disaster to knock him off. If this is his plan then launching an aggressive series of rate cuts to fire up the economy before he leaves makes sense. An economy running at 5% GDP and producing low unemployment is harder for any political party to screw up quickly with bad economic choices. Essentially Greenspan's destiny is in his own hands and the next six months should be interesting and traders should benefit. For traders Friday is a toss up. The Jobs Report is a wild card with no real impact. There should not be a lot of tax sellers left. There is no real reason to sell stock and plenty of reasons to buy. With the Fed on our team and another meeting only three weeks away the prospects are bright. Money on the sidelines has now gotten everything they wanted. A double bottom on Dec-21st and again this week along with a rate cut. The future is clearly in the Fed's hands and the Fed has said they will continue cutting until the economy is under control again. There is little downside. Historically January rallies begin next Monday as fund managers put retirement cash to work. This historical fact could provide a bullish bias to Friday's trading considering our current mostly oversold conditions. Traders still on the sidelines should consider any dip on Friday as a buying opportunity. Good Luck, Sell too soon! Jim Brown Editor ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1288 ************************************************************** **************** MARKET SENTIMENT **************** The Bull Is Back In Town(?) By Austin Passamonte Yesterday's sudden and some have said drastic rate-cut by the Fed has traders looking that gift-horse right in the mouth. What prompted such a sudden action? Are we about to receive extremely bad economic news? Will the "soft" landing break only half the bones in our body? Paranoid minds want to know. Market Sentiment wonders what the problem is. Traders bid stock prices to the moon in 1999 with no hope of making any profit, let alone their whisper numbers soon. How bad could earnings news be this year that would whack near-term performance in relation to all those back in the bubble? The answer is none, but everyone has now admitted the emperor is naked. No longer will investors totally ignore earnings while price action screams up a chart. That's why new market highs in the tech sector will wait a long time before being challenged once again. Good news for bullish action is that the Fed has not forgotten us after all. Disdain for short-term traders maybe, but they do care about long-term investors despite recent behavior. Questions have been raised about the timing of this cut, and frankly we were of the many who did. How bad could the economy have looked yesterday compared to a couple weeks ago with the SPX at 1250? Did clueless Al consider the massive negative shift of wealth (or the lack thereof) that would surely occur in the final weeks of December? One week earlier could have saved a few billion dollars of tax- loss selling. Three hours later could have saved shorts from getting slain, bulls from being locked out of live action and senseless volatility from occurring without reason. We wonder if any market-makers filed complaints in protest? We are convinced beyond shadow of doubt that the Fed harbors no love for short-term traders. They seem to take every opportunity to teach us a lesson on the danger and downside of speculation. Thanks for the parental thought, but we have challenges enough trying to deal with adverse conditions beyond anyone's control, let alone those that can easily be prevented. A session of consolidation was in order, especially in front of our next vital report. Friday will either dissuade or confirm suspicions of gravity for economic condition, and traders may be ready to play in either direction accordingly. Record volume on one massive up-session and one moderate pullback set us up for a bullish follow through before long. We could see massive amounts of cash flowing from the sidelines tomorrow, and a break above recent highs with all markets positive past 10:00am could be the green light traders have waited for. The rate cut behind us and others soon to come have us shifted into bullish territory, but we don't have all four hooves in the pasture just yet. Let's see a bit more proof that all is well before declaring the bears hibernating for a long, cold winter. Friday will be one important step in that direction for sure! ***** VIX Thursday 01/04 close: 29.96 30-yr Bonds Thursday 01/04 close: 5.46% 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. Thursday (01/04/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 740 - 725 9,528 2,082 4.58 720 - 705 11,488 3,815 3.01 OEX close: 700.92 Support: 695 - 680 5,437 7,865 1.45 675 - 660 3,372 8,151 2.42 Maximum calls: 720/5,682 Maximum puts : 640/5,437 Moving Averages 10 DMA 684 20 DMA 698 50 DMA 714 200 DMA 768 NASDAQ 100 Index (NDX/QQQ) Resistance: 71 - 69 72,026 17,748 4.06 68 - 66 93,637 11,189 8.37 65 - 63 57,165 32,931 1.74 QQQ(NDX)close: 61.32 Support: 60 - 58 56,308 49,624 .88 57 - 55 26,817 24,124 .90 54 - 52 4,030 15,046 3.73 Maximum calls: 70/52,446 Maximum puts : 60/39,768 Moving Averages 10 DMA 59 20 DMA 63 50 DMA 69 200 DMA 86 S&P 500 (SPX) Resistance: 1400 17,899 9,191 1.95 1375 10,712 10,425 1.03 1350 37,938 33,049 1.15 SPX close: 1333.29 Support: 1325 6,028 6,613 1.10 1300 6,394 15,335 2.40 1275 401 12,761 31.82 Maximum calls: 1350/37,938 Maximum puts : 1350/33,049 Moving Averages 10 DMA 1310 20 DMA 1328 50 DMA 1355 200 DMA 1431 ***** 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/010401_1.asp ************** TRADERS CORNER ************** The 2001 Trading Plan By Molly Evans As promised, I have devised a business plan for a personal guidance of trading in the New Year. Out with the whimsical plays, out with the impulsive and risky "can't miss on this one" trades, and out with the "ahh I'll just give it one more day" concessions. If you hadn't read the introductory article to business trading plan necessity - here is the link for your quick review: http://members.OptionInvestor.com/archive/traderscorner/121400_1.asp I'll admit, this was more difficult than I thought it would be. Each trader's methods are highly individualized. Each trader's resources are highly personal. This was NOT easy for me to commit myself. I don't like being told what to do even when it's myself doing the telling! These are rules and they're not meant to be broken. They're designed to keep myself out of trouble but in doing so they take out much of the wild ride potential. The market isn't the place to be getting one's kicks though. I guess I'll just have to go spend a few days in Vegas to get my wild side tended to. I want and need to survive the casinos here so I submit for your inspection, a business trading plan. I don't think that this will be the final version that I settle upon for the year. Rather, I believe this plan is going to be a work in progress for the entire year. I thought that I had spent all of last year learning my own style. Of course I did but it becomes readily obvious that trading isn't something you just pick up one day and become wildly successful on the next. This will be something a long time in evolving and aspects of this plan are going to be shown to be too restrictive in some situations and too lenient in others. It is a start though. In the previous article, I had asked a series of questions to stimulate one's thought processes in considering all types of situations in trading. The market is so dynamic though! What worked last year, doesn't this year. What worked last week doesn't work this week! The only constant variable is the self and if we are honest, we will admit that even we are far from static. So, the best we can do is to ask the questions and visualize ourselves in reaction to a scenario. We must "see" ourselves successfully orchestrating our trades and building our own wealth. We have to be able to fall back onto something concrete, "this is how I handle this situation; it's in my business plan because..." The "because" may be a dictum out of experience or out of a book's recommendation. The key is to have a conceived tactic and preparation for any and every situation. In devising this plan I did have a sort of revelation about my personal trading: I try too hard. I overanalyze. I read everything. I try to conjure up every scenario towards relationships: If this, then that; if that, then this. This causes me headaches and brain damage. Trading is hard but jeez Louise, it's not THAT hard. I'm tired of being on the wrong side of the trade because I've overanalyzed a situation and thought that if it was "so obvious" I must be wrong and I then go for the opposite side of what I thought in the first place. Seriously! I've DONE that! No more though! I'm sticking to the plan and charts. If it's overbought, AND the bias is down, I'm buying puts. If it's oversold and unloved but fundamentally "ok" - I'm buying it. Example - and I'm probably going to look like a hypocrite here: I wrote the wrap for Index Skybox site last night. In that missive, I showed two charts of the Healthcare Index and the Pharmaceutical Index. The two were being crushed by the rotation out of defensive stocks and into sexies. It's true what they say, they come down a lot faster than they go up. And - well, now I see they're already oversold - at least on the 60-minute charts - so I put in a low ball order for ONE March contract (those babies are expensive) and what do you know? I got filled near the lows of the day. In fact, right now I'm green on both of them and they haven't even begun to bounce. Might they go down further? You betcha. And I'll step into my other half of it if it does go appreciably further. I may end up being the biggest fool that ever was but seriously, I think these are high-odds plays and I'm willing to take the chance in this uncertain market environment. Healthcare and drug stocks are defensive plays and once this rate hike news becomes a yawn, we might just see some renewed interest there again. Oh, I should add that the MRK puts I had were a double on their way down. Yes! How about that? We CAN play both ways! A Trader's Business Plan For 2001 Markets to Trade: Lean more towards: The S & P The OEX > options The Nasdaq Q's Individual Equities or sector indices may be entered upon a very convincing entry setup originated by fundamental and technical indications. May enter equities for scalps when the technical indicators are conducive to either shorting or going long. These are very short term trades and thus should be out of these by the end of the day. If there is a compelling reason to stay long or short, then exit the stock and enter the options for a longer-term play. Position Size: $3000 - $6000 on options positions For equity scalps --- 100 - 500 shares depending on the stock price. This is for days that the market is range bound. 100 - 150 shares for stocks over $200/share 200 shares for stocks over $125 - $150 300 shares for stocks $75 - $100 400 shares for stocks $60 - $75 500 shares for stocks $50 - $60 600 - 800 shares for stocks $30 - $50 1000 shares for stocks $15 - $30 May not go over $30,000 into one equity on a scalp. May go under but not over. Capital: Building through profits. No paycheck until there is $500K in the account. At that point may take out $50K (10%) to live on. NO $ to be added to these accounts. At the $1M mark - go out and buy that Jaguar S - write a check and take another $50K to live on. Order Entry: Limit orders only. NO chasing whether on options or on scalp trades. For the options order - put on half or 1/3 of the desired position at a reasonable oversold or overbought point - whether it be on the daily, 60 or 30-minute chart, should be at least two of the three lining up. If it goes more oversold or overbought within the entry window - (daily, 60, 30 - reevaluate the play and put on the other half or third of the position or exit.) If the play is immediately profitable, reevaluate it within the time frame that it was entered --- 30 minute chart = reevaluate at 30 minutes - 60 - daily = same. If the play is still viable - initiate the other half / thirds of the position or exit, taking the profit. Get SMALLER!! Reduce Risk! Reduce Exposure! Loss Management: When the bid is at 30% loss of my entry on the entire option position, AND the chart has turned out of the oversold/overbought condition, must exit. Can always get back in but need to get out, re-evaluate the play and determine the better entry points and profit potential. If a position is at a loss by end of the third day - exit. Scalp losses - need to be very careful here. Have a reason for the entry! The stock is on a support/resistance level and showing strength or weakness or is perhaps in a full-blown breakout or breakdown. This is where can get killed with multiple small losses and no winners. If the stock doesn't do what you thought it was going to do immediately get out immediately. If traded on the five-minute chart and it turns the trend within that five minutes, exit. If the candle on entry is superseded to my detriment in the next candle - out. To let winners run, take off half the position when get a 50% gain, let the house money run. If have multiple positions open - and taking profits on a winner, consider taking off an equal amount of a losing position. Drawdowns to less than $3000 / day. You hit this - you're done - get out for the day. Shutdown Rules: Shut down for 2 weeks if have two losing weeks in a row. You're out of sync, need some fresh air and quiet reflective time. Reflection and Evaluation: Each day discussed in journal - no matter how brief - grade on trades. Personal Attributes - Strengths/Weaknesses Strength = Risk tolerance - high pain threshold. Weakness = Impatience. The strength of the risk tolerance allows me to not get shaken out so easily. I can be a strong long or short. To be so requires that I have very good money and risk management. To maximize this strength - must overcome the weakness of impatience. I have to develop the patience to WAIT for the proper time to instigate the trade. Then, must have the patience when the trade is working for me not to give it up too soon. Strength = Contrarian Weakness = Contrarian. Again, patience will be rewarded. Entry points don't come everyday - they might come once in a week. Be watching - ready to pounce only when the technicals indicate siding with the play I see. Strength - unconventional - Weakness = too big of a risk taker Simply can't do it. Must cut myself off at predetermined levels. Rome wasn't built in a day and you've got to be here to trade another day. Don't risk it all on a couple plays. PERIOD. Environment: If start to trade futures, going to have to have a better quote service. Market Preparation: Each day, plan for what to watch, which markets, which levels constitute entry/exit Label bias and expectations for the day - how it will go - note the degree that it does or doesn't and the newsworthy items that caused it to do so or to go against. This Plan is a WORK IN PROGRESS, needs revision, needs tweaking, needs re-evaluation and is a binding contract. MKE ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1279 ************************************************************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** SEPR $73.06 -3.00 (-3.31) While Sepracor held up well on Wednesday, the Federal Reserve's surprise decision to cut interest rates changed the sector favorites around almost instantaneously. Health care stocks, particularly the major pharmaceuticals, are losing ground to technology, telecom and financials, and the biotech index is suffering along with health care. Sepracor has closed below our stop level of $74, thus we are dropping it tonight and moving on to plays which are likely to benefit directly from the interest rate cuts. ASFC $51.38 -0.88 (-2.94) Shares of Astoria Financial have had a great run since last October and now appear to be in need of a breather. Since we initiated coverage on the financial play, the stock ran up to the $55 level but was unable to advance above that resistance area. It appears ASFC now may be due for some consolidation and we are dropping coverage on the play in search of better opportunities in the financial space. Use any strength early tomorrow morning to exit existing positions. CTAS $49.75 -0.31 (-3.44) After tracing a new all-time high last week, shares of Cintas have pulled back into consolidation mode so far this week. In the process of pulling back, CTAS fell below our protective stop at the $50 level this morning and have forced us to drop coverage on the play. Look for a pop above the $50 level early tomorrow morning and exit any existing positions on strength. RJR $45.69 -2.56 (-3.06) Following the surprise cut in interest rates yesterday, shares of the defensive RJR sold off as the growth areas of the market rallied on the positive Fed news. We liked the fact that RJR held above its 10-dma yesterday, but unfortunately that 10-day gave way to more selling today. The posturing by big fund managers back into the growth areas of the market is leaving RJR to the bears and we're dropping coverage this evening before the selling gets worse. Use any short covering or relief rally tomorrow to exit any open call positions. SLC $22.75 -1.69 (-3.88) Over the past two sessions of trading, SLC fell victim to the vicious profit takers. The stock has had a very bullish run since early fall, perhaps predicting the Fed's actions yesterday. But since the cut in rates yesterday, SLC has continued to drop. The stock sold-off in today's session all the way down to the 50-dma on very heavy volume. En route to finding its way to the 50-dma, SLC violated our protective stop at $23.50, and because of that slide, we're dropping coverage tonight. Use a bounce off the 50-dma around $22.50 to exit any open positions. WFC $52.00 -1.13 (-3.69) Over the last two days, shares of Wells Fargo have received two consecutive downgrades. Yesterday, Sanford Bernstein downgraded WFC on a "valuation basis." And this morning, Prudential downgraded WFC for the same reason - its valuation. We don't like these valuation-based downgrades of WFC, especially in light of the friendlier interest environment ahead. We still like WFC over the next three to six months in light of the lower interest rates ahead, but in the near-term we don't like the technical damage done from the downgrades. Use any relief rally early Friday morning to exit open call positions. RE $62.25 -6.31 (-9.38) The insurance sector has been a place of profits over the last six months and now looks like it may need time to consolidate. Over the last six months, shares of RE have followed its sector's trend and have risen steadily. However, over the past four trading sessions, it appears traders have been locking in profits earned over the last six months and causing RE to sell-off dramatically. The stock fell below our protective stop during today's session and we are saying goodbye to RE this evening. Use any bounce off the 50-dma at $62 to exit existing positions. PUTS: ***** SNDK $31.00 +0.56 (+3.25) Most technology stocks benefited from the surprise interest rate reduction yesterday, and SNDK was among them, posting a nearly 25% intraday gain. The bulls failed to take out our $31 stop though, so we let it ride one more day. Today saw more gains, and although it gave most of them back, the stock ended right on the $31 level, prompting us to follow our discipline and eject it from the playlist. The stock still looks weak, but the action over the past two days has weakened the downtrend. With plenty of better plays out there, we'll chase them instead of waiting for SNDK to give us an entry. *************************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=1309 ************************************************************ 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. 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The Option Investor Newsletter Thursday 01-04-2001 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/010401_2.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1289 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** NOK $44.25 -.44 (+3.31) Like most tech stocks that made large percentage gains yesterday, Nokia consolidated today, after trading as high as $45.63. Strong support was found at the converged 200 and 50-dmas of $43.53 when the Nasdaq dropped to its lowest point of the day. According to a CSFB report, the spending on wireless infrastructure will continue at a pace of 20-30% annually, even in an economic slowdown, and Nokia is one of the top five leading vendors positioned to benefit from this. Nokia has taken a leading share in the major technology standards GSM, CDMA and TDMA. Subscriber growth continues to demand Capacity upgrades just to handle voice, and carriers continue to invest in new spectrum. We want to see resistance at $44.56 and $45 broken, which could be a potential entry point. After this, the next resistance level is $50, and Nokia appears well positioned to reach this level. Continue to monitor the wireless equipment sector, and set stops at $40. MER $73.31 -0.18 (+5.44) In adding this call play yesterday, we mentioned that a pullback was likely, after Wednesday's rally of $7.69 or almost 12 percent on over twice the ADV. Today, we got just that, as the stock found horizontal support at $72.25. While MER did attempt to rally, resistance at $75 was strong, with sellers outnumbering buyers at that level. At the end of the day, MER closed pretty much unchanged, down fractionally on volume of once again, over twice the ADV. Despite today's pause, the 5-dma, at $69.80 still needs to catch up with the stock price, as does the 10-dma at $67.09. Patience is the name of the game in entering this play. An entry on a pullback is still likely, with support at $72.25, $70, and the 5-dma as possible targets, but confirm a bounce with strong buying volume. For an entry on strength, wait for a break through $75 with conviction before taking a position, correlating entries with direction in peers GS and LEH. As a note, we are maintaining our protective stop at the $68 level. COST $43.63 +0.94 (+3.63) Right on target, Costco burst out of its trap of $38.38 last week, and hasn't looked back since, except for a brief pause at $39.30 on Tuesday. The Fed's surprise interest rate cut stimulated buying interest in Costco, and the stock is now strongly positioned above previous heavy resistance at $40. Today's volume was more than triple the daily average, and Costco is now well situated to break the next resistance level at $45. Profit taking will likely follow, and positions can be taken on bounces off support at $42.50, $42.00, and the 5 dma of $41.14. A sharp pullback to the 10-dma of $38.64 is possible, but not likely at this point. Continue to monitor the retail sector index (RLX.X) for strength and to set stops at $35. ONE $39.81 +0.25 (+3.19) As expected, the strength of the Financial rally yesterday was insufficient to produce a sustained rally in ONE without some consolidation. Statistics always wins in the long run, and the stock needed to pull back from the upper Bollinger band before continuing the rally that began 3 weeks ago. After surging as high as $41.56 this morning, profit taking hit hard, dragging the stock almost down to $39 before some late day buying boosted the price for a fractional gain at the close. Volume today came in at a whopping 13 million shares (more than 3.5 times the ADV), lending credence to the theory that this move has legs. Just beware that further profit taking is possible whenever the price extends too far into the upper Bollinger band (currently $39.69). Given that reality, the most prudent course for new entries is to buy the intraday dips, but ONLY after the bounce is confirmed by strong buying volume. We would look for support to hold near $36-37 on any profit taking, and have placed our stop at $35 to protect against any unforeseen events. A bounce near this level would make for a great entry as ONE gets set to rally into its earnings announcement. That's right, the company is set to release its quarterly numbers on January 17th before the opening bell, giving us just 2 weeks in which to play. SBC $51.75 +0.75 (+4.00) The Telecoms really kicked into rally mode earlier this week and got an additional kick from the positive change to the interest rate environment in yesterday's session. For its part SBC has largely ignored the wild swings seen in many Technology names. Its investors seem more content to string together consistent profits, and the tally so far this week sits at better than an 8% gain. Volume is running significantly over the ADV, as the bulls attempt to take out the $52-53 resistance level. In the improving interest rate environment, it seems investors have forgotten the company's earnings warning in mid-December, and have begun to focus on conciliatory analyst comments to the effect that the current shortfall is an aberration that will work itself out in the next couple quarters. Conservative traders will want to wait for a sustained move through the $53 level before opening new plays. For the less risk-averse, consider initiating new positions on a bounce from support in the $49-50 area. This is just above our $47 stop, and should provide a good entry for the next leg of the rally. ******************* PLAY UPDATES - PUTS ******************* FRX $114.63 -6.88 (-18.25) When we started this put play yesterday, we noted that the stock was perched precipitously above its 100-dma, after closing down $6.69 or 5.22 percent on over twice the ADV in the face of an up market. Today the selling continued, as the stock fell through it's 100-dma and key support level of $120 in the early going and from there, spent the rest of the day heading deeper into negative territory to close down 5.66 percent on over twice the ADV. Overhead resistance now abounds, at $115, $118 and $120. Look for failed rallies at these levels as aggressive targets to shoot for. In order to protect an already profitable play, we are moving our stop price down, from $130 to $120. Make sure that FRX closes below this level as a close above could signal a halt in downward momentum. For an entry on weakness, look for a break below today's low of $113 on volume as a signal to jump in, confirming direction with Merrill Lynch's Pharmaceutical HOLDR. P $54.88 -0.69 (-2.00) Our put play in Phillips got some help yesterday, as a downgrade from Prudential Securities, from a Strong Buy to a Hold rating resulted in a negative close for the stock despite an up market, closing down $1.50 or 2.63 percent on 112% of ADV. In doing so, the stock closed below its 10-dma (currently sitting at $55.78), which should now act as resistance going forward. Today was a volatile day for shares of Phillips as the stock gapped down at the open and from there, sold off buy finding support at $53. Helped by the possibility of higher oil prices in the near term, Phillips rallied into the close but for the day, closed down 1.25 percent on stronger than average volume. Look for failed rallies off resistance at the 5-dma ($56.51) and the 10-dma as well as our stop price, moved down from $59 to $57, as possible opportunities for entry. For the more risk averse, wait for a break below $54.50 on volume, making sure that rivals TX and XOM and heading lower before jumping in but be aware of support at $53. CELG $25.31 -4.69 (-7.19) The problems at CELG are not going to be fixed with a reduction in interest rates, and that became clear this morning, as investors continued to sell the Biotech issue. The $30 support level finally gave way under the bears' onslaught, and with the heavy selling volume (more than double the ADV again), it didn't take long before the $24-25 support level was being tested. While the stock did manage a slight bounce, the stock closed very near the low of the day, posting more than a 15% loss. So what should we expect tomorrow? Continue watching the Biotech Index (BTK.X), as it was weak again today. CELG has been under performing the sector of late, so as long as the Biotechs are weak, expect more selling of CELG to follow. We are looking for the bears to take another run at the current support level, as they set their sights on the $21 level followed by $19. A continuation of the downward trend is entirely possible, with the lower Bollinger band currently positioned below $18. A drop below today's low of $24.50 can be used for opening new positions, but be on the lookout for profit taking by the shorts. Waiting for a failed rally near $30 may be the better course of action. Our stop is still sitting at $35, right at the next resistance level. It looks unlikely that the bulls will be able to challenge this level in the near term, and as long as the selling continues, look for our stop to ratchet lower this weekend. TQNT $46.38 -1.31 (+2.69) Yesterday's short-covering rally in TQNT ran into a brick wall, right at the $49 resistance level (also the location of our stop) and the bulls didn't have any better luck scaling that level today. Even yesterday's Buy rating from Wit SoundView didn't have any staying power today, as the markets needed time to digest their record gains. Technology sectors like the Semiconductors had a hard time holding onto their gains, and the current lack of upside pressure could be setting us up for a great entry point on our play. Although the consolidation could continue into the weekend, TQNT is still susceptible to a selloff, whether news or economic related. Aggressive traders will want to initiate new positions as the stock rolls over from current levels on increasing selling volume, while more conservative players will want to wait for the $45 level to fall victim to the bears again. The 10-dma, 30-dma, and 200-dma are all clustered between $43-44.50, and once the selling breaches this level, look for another drop to the ascending trendline near $39 as the next major level of support. As always, confirm market (NASDAQ) and Sector (SOX.X) direction before playing. *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1310 ************************************************************ ************** NEW CALL PLAYS ************** AGGRESSIVE: VZ - Verizon Communications Inc $54.69 +1.56 (+4.44 this week) Verizon Communications is the largest wireless-telephone company in the US; although they have operations worldwide. They provide wireline voice and data services, wireless services, Internet services, and published directory information. In addition, the company provides network services such as business phone lines, data services, telecommunications equipment, and payphones for the federal government. In a rate-cut rally, Verizon (VZ), AT&T (T) and Vodaphone (VOD) rang in the New Year with merriment. And more specifically, Verizon Wireless, the venture company of Verizon Communications and Vodaphone, announced today it added more than 1.2 mln customers in the 4Q, representing a 6% increase from the same period a year ago. For the year 2000, the wireless entity had 16% more users than the year before for a grand total of 27.5 mln customers. This good news gave VZ the competitive edge in the marketplace. The issue saw a conclusive break through the $50 level with a $2.88, or 5.7% move in yesterday's historic run up. The high-volume gains extended into today's session, which is where we start our coverage on VZ. Near-term support is firming at $53 and $54, a strong technical development at the converged 30 and 50 DMAs. Strong bounces off these levels offer reasonable entries into this sector play. More aggressive entries might be found lower at previous support ($50) or at our $51 exit point on deep pullbacks. Whatever your strategy, look for high-volume to sustain the momentum over the shorter-term. The upcoming earnings' release may also offer some trading excitement over the next few weeks. Verizon is confirmed to report on February 1st, BEFORE the market. Keep stops tight while the markets digest the recent economic events. BUY CALL JAN-50 VZ-AJ OI=10387 at $5.13 SL=3.00 BUY CALL JAN-55*VZ-AK OI= 9003 at $1.75 SL=0.75 BUY CALL JAN-60 VZ-AL OI= 7716 at $0.38 SL=0.00 BUY CALL FEB-55 VZ-BK OI= 521 at $3.25 SL=1.50 BUY CALL FEB-60 VZ-BL OI= 378 at $1.25 SL=0.00 http://www.premierinvestor.com/oi/profile.asp?ticker=VZ CIEN - CIENA Corporation $82.44 -2.50 (+1.19 this week) Helping to satisfy our insatiable demand for bandwidth, CIEN makes dense-wavelength division multiplexing (DWDM) systems for use with long-distance fiber-optic communications networks. CIEN offers optical transport, intelligent switching and multi- service delivery systems that enable service providers to deliver and manage high-bandwidth services to their customers. The company's MultiWave DWDM systems allow optical fiber to carry up to 40 times more data and voice information without requiring more lines. CIEN's customers include long-distance carrier, competitive local exchange carriers (CLECs), Internet service providers and wholesale carriers. If you love volatility, then the Optical stocks are the place for you. As the sector has undergone valuation compression over recent months, the price swings have been violent, providing lots of profit opportunity for aggressive traders. Make no mistake, this sector and our new play on CIEN are for high risk players, and stop losses are a must. With that being said, let's look at the chart. CIEN has been caught in a persistent downtrend since late October, but it looks like the tide is finally turning, thanks in no small measure to Uncle Alan finally giving us the drop in interest rates we have been waiting for. Yesterday's low, if it holds, represents the first higher low for the stock since NT cratered the entire sector in late October with their earnings report. After soaring as much as $23 (37%) from its intraday low yesterday, it would have been surprising to see the rally continue unabated today. So it was actually reassuring to see the stock stop to catch its breath, but not sell off sharply. With the change in investor sentiment created by yesterday's Fed move, we are looking for CIEN to break out of its downtrend, and clear its 3-month descending trendline in the $89-90 area. This is also the site of significant historical resistance (prior support), but first the bulls have to clear the 200-dma ($85.38), which has proved a tough nut to crack in recent weeks. Consider target shooting intraday dips in the vicinity of support near $80, or even $76-77, but don't get carried away. Our stop is sitting at $75, and a violation of this level will call into question the validity of our play. A more conservative approach will be to wait for CIEN to break above the 200-dma before committing cash to the play. Of course, we need to see any positive move confirmed by the Networking sector, so watch the NWX.X for a gauge of market direction. BUY CALL JAN-80 UEE-AP OI=3248 at $10.13 SL= 7.00 BUY CALL JAN-85*UEE-AQ OI=2644 at $ 7.88 SL= 5.75 BUY CALL JAN-90 UEE-AR OI=3324 at $ 6.00 SL= 4.00 BUY CALL FEB-85 UEE-BQ OI= 485 at $13.75 SL=10.25 BUY CALL FEB-90 UEE-BR OI= 751 at $11.63 SL= 8.75 BUY CALL FEB-95 UEE-BS OI= 331 at $ 9.75 SL= 6.75 SELL PUT JAN-70 UEE-MN OI=2980 at $ 3.25 SL= 5.25 (See risks of selling puts in play legend) http://www.premierinvestor.com/oi/profile.asp?ticker=CIEN LOW VOLATILITY: ACF - Americredit - $29.19 +1.19 (+1.82 this week) Americredit is the largest independent middle market automobile finance company in North America specializing in purchasing and servicing automobile loans. Americredit specializes in extending credit to customers who are unable to obtain financing from traditional sources. Americredit purchases loans made by franchised and select independent auto dealers through their extensive North American branch network, as well as through strategic alliances with select auto groups and banks. This is a play on a low volatility, high growth stock in the specialty finance sector, which is likely to benefit quickly and directly from the Federal Reserve's past and future interest rate cuts. Americredit's propensity toward slow gradual moves gives a low implied volatility to its call options, a plus for call option buyers. The key issue is that the Fed's rate cuts will lower spreads on corporate borrowing, and stimulate higher business volume for consumer finance companies. This cycle of easing is different from previous cycles in that it has occurred before any significant evidence of consumer credit deterioration has showed up. A lower cost of funds works its way very quickly into these companies' earnings. The auto finance sector stands to benefit because lower market rates improve the affordability of cars, and stimulate buying. While Americredit, and the other specialty finance stocks rallied on the anticipation of rate cuts, the Fed's action spurred heavy buying, as today's volume was double the average daily volume of 500,000 shares. Americredit is now solidly above the 200-dma of $22.00, and the 50-dma of $25.00. Today's close above heavy resistance at $29 is a bullish indicator, and traders can take positions at current levels, or at a breakout over $30. As an alternative, consider waiting for a possible pullback to support at $28.50, or the 5-dma of $27.90. Watch others in the sector like PVN, and COF for strength, and set stops at $27. BUY CALL JAN-25 ACF-AE OI=1675 at $4.75 SL=3.00 BUY CALL JAN-30*ACF-AF OI= 389 at $1.56 SL=0.75 BUY CALL FEB-25 ACF-BE OI= 701 at $5.38 SL=3.50 BUY CALL FEB-30 ACF-BF OI=1785 at $2.38 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=ACF ASD - American Standard Cos Inc $51.25 +2.63 (+1.94 this week) American Standard is a leading maker of air-conditioning systems, plumbing products, and automotive braking systems. Its air-conditioning unit accounts for 60% of company sales, with plumbing fixtures trailing at 25%. The automotive braking systems are sold through its WABCO subsidiary to OEM's such as DaimlerChrysler and Volvo. Most people are familiar with the American Standard name - it's stamped on many toilets across the globe! But let's not dwell on that branding. During 2000, ASD saw a very respectable 7.5% increase in its share price and is currently poised to rise over the short-term. On December 28th, the company announced "operational consolidation and streamlining actions" to improve overall productivity and enhance efficiency. In other words, 1200 job cuts across the board. The reduction will effect all three business units and involve closing the Hamilton Township, New Jersey plant in a plan to cut $50 mln in expenses. Overall, the actions will result in a pre-tax charge of approximately $82 mln in the 4Q 2000. You'd think this would scare off investors, but to the contrary. ASD has seen significant advances since the announcement. The trump card is simply that the charge will be fully offset by a gain from the recently announced sale of its Calorex water heater business; and thus, the bottom-line is secure. Today's strong break through the $49 resistance and the $50 all-time high compelled us to take a closer look. The steadfast trendline and recent gains offer the more risk-adverse trader a good opportunity to lock in profits. Currently, the $48 mark at the 5-dma technical line is considered the more aggressive level to take positions in an advancing marketplace. But keep in mind, this $48 level also represents our exit point if ASD were to close down. A less risky prospect might be to buy into strength as ASD continues to rally above the $50 mark. ASD's bullish close on the new 52-week high ($51.25) promotes a promising outlook going forward - and what a nice touch to a great day in the markets! BUY CALL JAN-45 ASD-AI OI= 92 at $6.63 SL=4.50 BUY CALL JAN-50*ASD-AJ OI=109 at $2.56 SL=1.25 BUY CALL FEB-45 ASD-BI OI= 0 at $7.25 SL=5.00 Wait for OI! BUY CALL FEB-50 ASD-BJ OI= 4 at $3.75 SL=2.00 http://www.premierinvestor.com/oi/profile.asp?ticker=ASD PSUN - Pacific Sunwear of CA $28.06 +2.25 (+2.44 this week) Pacific Sunwear provides fashion wear for the skaters, surfers and snow bunnies. The specialty retailer offers hip-hop type threads and accessories for the more trendy young men and women of the world. Their stores feature clothing by JNCO, Mudd, Billabong, Rusty, and Stussy, as well as footwear by Vans and Skechers. PacSun and d.e.m.o. also sells its own private-label merchandise in its 560 mall-based stores in 48 states and Puerto Rico. The historical rally and company-specific internals launched this specialty retailer into new territory. PSUN reported record sales of $99.5 mln for the 5-week holiday season, a 32.9% increase over sales of $74.9 mln for the comparable period ended January 2nd, 2000. The same-store sales numbers also increased 5.7% overall with PacSun sales up 5.3% and d.e.m.o. sales up 10.8%. Basically, Pacific Sunwear's business is booming and investors see the long-term profit opportunities. Over the shorter-term PSUN, is likely to see gains as the broad-based rally entices investors to take additional positions. On the analyst front, First Security Van Kasper recently initiated new Buy coverage and a bullish price target of $38 going forward. We're anticipating steady gains as the market relishes in the rate-cuts and a less dismal economic future. If you can afford a more aggressive entry into the momentum, an intraday dip to the 5-dma ($25.68) or previous resistance at $26 might be viable entries if there's volume on the bounce. Otherwise, consider taking entries as PSUN moves the $28 level. We'll exit on a close below $25. The company's earnings aren't expected until late February, so don't anticipate an announcement to incite a run up. This low-volatility play is based purely on sector strength and the stock's own technical merits. BUY CALL JAN-20 PVQ-AD OI= 10 at $8.38 SL=6.00 BUY CALL JAN-25*PVQ-AE OI= 72 at $4.00 SL=2.50 BUY CALL JAN-30 PVQ-AF OI= 40 at $1.38 SL=0.00 BUY CALL FEB-25 PVQ-BE OI=404 at $5.50 SL=3.50 BUY CALL FEB-30 PVQ-BF OI= 0 at $2.88 SL=1.50 Wait for OI! http://www.premierinvestor.com/oi/profile.asp?ticker=PSUN CAT - Caterpillar Inc $48.69 +2.19 (+1.38 this week) Caterpillar designs, manufactures, and markets construction, mining, agricultural, and forestry machinery. The company operates in three principal business segments: Machinery, Engines and Financial Products. They distribute their products through a worldwide organization of dealers under the names Caterpillar, Cat, Solar, Barber-Greene, MaK, Perkins, F.G. Wilson and Olympian. The stunning rate-cut yesterday enticed investors to jump into the capital goods industry. CAT and DE were obvious choices in light of their blue-chip reputation amongst the old economy stocks. CAT saw a whopping 3+ point jump off intraday lows on the Fed announcement yesterday. The mid-day move to the upside returned CAT to a respectable position, in-line with the 10-dma ($46.61). Investor enthusiasm continued drive the share price higher today with another $2.19, or 4.7% advance. The issue demonstrated strength at the $48 level throughout the trading session and now, $49.63 represents immediate resistance. In light of the stocks general lack of volatility, the more conservative option traders might consider taking entry into this play amid an advancing market. Strong upside moves off the $48 level offer practical entries if CAT can generate enough momentum to break through the $50 level first. Another possible strategy is to enter on pullback near the 10-dma line; but take note that this is much more risky. OIN will exit the play on a close below the $46 mark. There is good news on the horizon. The US and Yugoslav governments are renewing economic ties, which could bring $1 bln into US private investment and offer new opportunities for US companies as Caterpillar and General Electric (GE). Closer to the home front and our trading time- frame, CAT's earnings are quickly approaching. The company is confirmed to report in just a couple weeks on January 18th, BEFORE the opening bell. This event and today's Buy reiteration from Bear, Stearns & Co should help send shares of CAT higher over the short-term. The brokerage firm also issued a $55 target price, a mere fraction from the stock's 52-week high of $55.13, established in January 2000. BUY CALL JAN-40 CAT-AH OI=2916 at $9.00 SL=6.25 BUY CALL JAN-45 CAT-AI OI=2782 at $4.25 SL=2.50 BUY CALL JAN-50*CAT-AJ OI=1631 at $1.06 SL=0.00 BUY CALL JAN-55 CAT-AK OI=1033 at $0.19 SL=0.00 High Risk! BUY CALL FEB-45 CAT-BI OI= 958 at $5.00 SL=3.00 BUY CALL FEB-50 CAT-BJ OI= 213 at $2.25 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=CAT ************* NEW PUT PLAYS ************* AGGRESSIVE: ARTG - Art Technology Group $17.94 -6.06 (-12.63 this week) Art Technology Group offers an integrated suite of Internet customer relationship management and e-commerce software applications, as well as related application development, integration and support services. The Company's solution enables businesses to understand, manage and build online customer relationships and to market, sell and support products and services over the Internet more effectively. About 40% of sales are derived from Web site design, consulting, and other support services. Global clientele include Forbes and General Motors. Once the darling of the High-Tech world, the B2B sector has languished in a pronounced downtrend since their highs in the summer of 2000. The B2B space has always been a controversial and volatile one, a battleground between hope and doubt about the future, as earnings were factored in and out faster than one could say "eCommerce." The bull argument was that as businesses both old and new ventured online, they would need the help of B2B companies for management software, to create marketplaces and to act as transactional intermediaries. With three potentially lucrative revenue streams, shares of B2B stocks were bid up enthusiastically as the sector became the shining star of the dotcom industry. But as time progressed, competition in the software industry became more fierce, companies found that they could create their own marketplaces, and they did not need an electronic middleman to conduct transactions online. With this in mind, sentiment clearly shifted in favor of the bears. Now over 85 percent off its all-time high, shares of second-tier player ARTG continues to slide deeper into negative territory on accelerating volume. Recently, the company was forced to withdraw a 4 million-share secondary offering, citing market conditions. With the stock at current levels, it appears that fundraising efforts for ARTG will be difficult at best. While already a low-priced stock, if the share price of peers such as ICGE and VERT are any indication, then even a deep in the money put could become highly profitable. A failed rally off resistance at $19, $20 and our stop price at $21 could offer aggressive targets to shoot for while a break below today's low of $17.56 on volume could allow for an entry on weakness. Make sure that market sentiment is on your side, using Merrill Lynch's B2B HOLDR (BHH), when initiating a play. BUY PUT JAN-30 AYQ-MF OI=46 at $13.50 SL=10.00 BUY PUT JAN-25*AYQ-ME OI=57 at $ 8.38 SL= 6.00 http://www.premierinvestor.com/oi/profile.asp?ticker=ARTG UNH - UnitedHealth Group Inc. $53.19 -4.00 (-8.19 this week) UnitedHealthcare designs and operates health benefits systems with commercial, Medicare and Medicaid products. Today, the company serves approximately 8.6 million individual consumers as members of its health service systems. On behalf of these members, the company arranges access to care with more than 340,000 physicians and 3,500 hospitals across 44 U.S. markets and several international markets. UnitedHealthcare helps members achieve improved health and well-being by designing innovative, people-oriented health benefit plans and services that value individual choice and control in accessing health care. While it's been said that nothing goes straight up, shares of UNH came as close to that as a stock could go, gaining over 330 percent in the year 2000. But now, it appears that the very factors which helped UNH to rise this past year are in the process of reversing, turning the stock's momentum from positive to negative. UNH and other Healthcare stocks served as an antidote to traders of ailing Tech stocks last year. With a tightening Fed and what was deemed an overvalued NASDAQ, investors focused on the Healthcare sector, driving up UNH and its peers. So strong was UNH's upward momentum that dips to the 50-dma were few and far in between, serving as Holy Grail entry points. But now, with an easing Fed and a much less richly valued NASDAQ, extended profit-taking has resulted in the stock closing below its 50-dma (now at $57.40) for the first time in half a year. Today, the selling continued as news of lowered growth estimates going forward are in the process of being factored into the stock price. With it's long-term uptrend line now definitively broken, UNH is now perched perilously above its 100-dma at $52.95. A break below this level on volume could allow conservative players to take a position, with its last line of moving average support from the 200-dma, way down at $45. For higher-risk players looking to enter on failed rally, resistance overhead can be found at $55, $57, the 50-dma, and our stop price at $60. In making a play, keep an eye on peers AET and CI to gauge sector sentiment. BUY PUT JAN-60 UNH-ML OI=3391 at $7.50 SL=5.25 BUY PUT JAN-55*UNH-MK OI= 983 at $3.63 SL=1.75 BUY PUT JAN-50 UNH-MJ OI=2416 at $1.25 SL=0.00 http://www.premierinvestor.com/oi/profile.asp?ticker=UNH ********************** PLAY OF THE DAY - CALL ********************** ONE - Bank One $39.81 +0.25 (+3.19 this week) Headquartered in Chicago, Illinois, Bank One is the #4 bank in the U.S., (after Bank of America, Chase Manhattan, and Citigroup). ONE operates some 1800 banking offices in 14 mostly Midwestern and Wouthwestern states, providing domestic retail banking, finance and credit card services. Its other business activities, which span the U.S. and more than 10 other countries, include commercial, corporate, and institutional banking, as well as loan and leasing services, and investment, brokerage, and insurance services. Most Recent Write-Up As expected, the strength of the Financial rally yesterday was insufficient to produce a sustained rally in ONE without some consolidation. Statistics always wins in the long run, and the stock needed to pull back from the upper Bollinger band before continuing the rally that began 3 weeks ago. After surging as high as $41.56 this morning, profit taking hit hard, dragging the stock almost down to $39 before some late day buying boosted the price for a fractional gain at the close. Volume today came in at a whopping 13 million shares (more than 3.5 times the ADV), lending credence to the theory that this move has legs. Just beware that further profit taking is possible whenever the price extends too far into the upper Bollinger band (currently $39.69). Given that reality, the most prudent course for new entries is to buy the intraday dips, but ONLY after the bounce is confirmed by strong buying volume. We would look for support to hold near $36-37 on any profit taking, and have placed our stop at $35 to protect against any unforeseen events. A bounce near this level would make for a great entry as ONE gets set to rally into its earnings announcement. That's right, the company is set to release its quarterly numbers on January 17th before the opening bell, giving us just 2 weeks in which to play. Comments ONE held strong today as the broader markets closed lower on profit-taking. Consolidation was to be expected after Wednesday's rally. Today, ONE challenged $41.50 and rolled over. A break of this level would certainly attract buyers and present an entry. An ideal entry would come on a pullback to intraday support at $38, accompanied by a bounce with good volume. Below that, the 10-dma at $37.33 has been providing support for the stock. BUY CALL JAN-35 ONE-AG OI=12330 at $5.25 SL=3.50 BUY CALL JAN-37.5*ONE-AU OI= 8649 at $3.00 SL=1.50 BUY CALL JAN-40 ONE-AH OI=15080 at $1.31 SL=0.50 BUY CALL FEB-37.5 ONE-BU OI= 2944 at $3.88 SL=2.25 BUY CALL FEB-40 ONE-BH OI= 4507 at $2.44 SL=1.25 BUY CALL FEB-42.5 ONE-DV OI= 743 at $1.19 SL=0.50 http://www.premierinvestor.com/oi/profile.asp?ticker=ONE ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1318 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ Time to fall back and regroup... Stocks consolidated today following a powerful rally Wednesday, after a surprise decision by the Fed to lower interest rates. Wednesday, January 3 Technology stocks achieved record gains today after the Federal Reserve made a surprise 50-basis-point cut in interest rates. The Nasdaq closed up 324 points at 2,616. The Dow industrials also rallied on record volume, ending up 299 points at 10,945. The S&P 500 index jumped 64 points to 1347. Volume on the NYSE was a record 1.87 billion shares, with advances ousting declines 2,305 to 788. Volume on the Nasdaq also reached record levels near 3.17 billion shares, with winners tripling losers 3,065 to 988. In the bond market, the 30-year Treasury plunged 2 12/32, pushing its yield up to 5.49% as investors rotated into stocks. Tuesday's new plays (positions/opening prices/strategy): Williams Sonoma WSM JAN17C/20C debit $1.93 bull-call Worldcom WCOM JAN12C/15C debit $2.00 bull-call Triad Hospitals TRIH FEB30C/30P debit $5.25 straddle All of our new positions offered favorable entries during the session, but you had to be aggressive with the Worldcom play as the underlying issue was a big mover. Fortunately, there were plenty of buyers for the sold option at $15 and it remained overpriced (even as it moved deep ITM) for most of the morning. Those of you who waited for an entry in the Amerada Hess credit spread were rewarded today as the position was offered at $0.38 near the end of the session. That may not seem like a great premium, but it does provide a 9% return for two weeks with a cost basis 15% below the current price of the issue. Portfolio plays: It was a strange day indeed as Federal Reserve decision-makers announced an unexpected shift in their monetary stance between regularly scheduled policy meetings, lowering the federal funds rate target by 50 basis points. The FOMC also signaled it is willing to reduce rates further if necessary and that statement led to a market rally with blue-chip technology issues leading the way. Among the best performers, Internet and chip shares surged over 20% while telecom and software issues rose 16% and computer hardware stocks enjoyed substantial gains. On the Dow, interest-rate sensitive companies moved higher with J.P. Morgan Chase (JPM) rising almost $7 to $50.62. Home Depot (HD) was another big winner as retail stocks rallied on the news. In the broader market, chip equipment, computer, telecom and investment brokerage issues saw major gains, while tobacco, healthcare and alcohol issues retreated. Utility and Precious Metals stocks, which performed well over the past few months, were also lower as investors exited the safety of defensive sectors. Today's market rally was a boon for the Spreads/Combos portfolio but it also signaled a possible end to the success of many plays in safe-haven groups such as Food and Beverage, Healthcare, Gold and Pharmaceuticals. Bullish positions in PepsiCo (PEP), Pepsi Bottling (PBG), Ralston Purina (RAL) and Kellogg (K) along with spreads on Laboratory Holdings (LH), Omnicare (OCR), Waters (WAT) and Placer Dome (PDG) should be reviewed carefully for potential exits or adjustments as the rotation out of defensive issues will likely drive their shares lower. As an example, PepsiCo offered a break-even exit in the bullish credit spread and Laboratory Holdings was a good "roll-out" candidate as it rebounded to $158 after Tuesday's giant sell-off. Omnicare provided a number of profitable opportunities when it was trading $5 ITM, and Ralston Purina and Kellogg have also offered favorable early-exits in the past month. On the bright side, transportation issues continued to rally and our bullish position in American Airlines Holdings (AMR) reached an overall credit of $2.50, a total profit of $2.12 in the play. Globo Cabo (GLCBY) traded as high as $12.38 during the session, providing a $0.75 profit to close the play. In the Straddles section, ADC Telecom (ADCT) was a big winner, spiking to a high near $21, and providing an overall credit of $1.12 on $5.50 invested in less than one month. Those of you remaining in Compass Bancshares also received a nice surprise as the straddle reached a new closing profit $2.00 on the original $2.75 invested in mid-December. Thursday, January 4 Stocks consolidated today following a powerful rally Wednesday, after a surprise decision by the Fed to lower interest rates. The Nasdaq closed 49 points lower at 2,566 and the Dow was down 33 points at 10,912. The S&P 500 index fell 14 points to 1,333. Volume on the NYSE was the heaviest on record Thursday, with 2 billion shares changing hands as advances beat declines 1,603 to 1,371. Exchange volume on the Nasdaq was heavy at 2.6 billion shares, with winners outpacing losers 2,197 to 1,795. In the bond market, the 30-year Treasury rose 24/32, pushing its yield down to 5.44%. Portfolio Plays: The recovery in technology shares faded quickly today as traders sold for profits in the aftermath of Tuesday's giant rally. The selling was most notable in Internet, semiconductor and software shares while stocks in the computer hardware segment remained relatively unchanged. Inside the broader industries, investors continued to rotate out of traditionally defensive areas of the marketplace, such as drug, healthcare, utility, precious metals and consumer products stocks. Investors also shunned oil service, retail and biotechnology issues but added to positions in airline and financial shares. Analysts believe the rate cut may be the catalyst for better performance in technology stocks (that many investors have been waiting for) and the effect of the rotation was obvious in the Spreads portfolio. Among industrial issues, American Airlines Holdings (AMR) was again one of the big movers, up $1.50 to $43 on strength in the transport group. Our bullish synthetic position is now offering a $3 profit. Costco (COST) was another positive issue, climbing $0.93 to $43.50 on momentum from its recent technical breakout. One of the older Reader's Request positions, AT&T (T) is showing some spark as the issue moved back above $20 Thursday on heavy volume. In the small-cap category Aksys (AKSY), Conseco (CNC), Magnetek (MAG), Speedfam (SFAM), and Timken (TKR) all enjoyed upside activity. In the Straddles group, Allmerica Financial (AFC) was a surprise winner, dropping almost $5 during the day without any major news. The move provided a $3.12 profit on the $4.62 invested Monday, a 65% profit in less than three days! Another awesome opportunity was offered in Oceaneering (OII), as the issue dropped to $17 on weakness in the oil-service sector. Our new straddle traded as high as $3.00, a $1.06 return on $1.93 debit, also in less than one week. Sunday's play in Southwest Securities (SWS) was a big mover as the issue rallied to $29.62 with the bullish brokerage sector. The upside activity providing a 3-day profit of $1.00 on an investment of $5.31, an 18% return. Winnebago (WGO) hit a new high near $18.25 today, moving that straddle to a profitable area and Triad Hospitals (TRIH) has already traded in a $5.62 range since the "rolling options" position was offered in Tuesday's newsletter. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - One of our readers asked for some additional "premium selling" positions, based on the recent spike in market volatility and a belief that options premiums have reached a short-term climax. While we agree that there are a number of favorable candidates for neutral-outlook (credit) strategies, there is still a great potential for volatile activity in the coming weeks and these types of positions must be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** BEAS - BEA Systems $61.00 *** Sector Sell-off! *** BEA Systems is a provider of e-commerce infrastructure software that helps companies of all sizes build e-commerce systems that extend investments in existing computer systems and provide the foundation for running a successful integrated e-business. The company's products have been adopted in a variety of industries, including commercial and investment banking, securities trading, telecommunications, airlines, retail, manufacturing, package delivery, insurance and government, in many cases using the Internet as a system component. The company's products serve as a platform or integration tool for applications such as billing, provisioning, customer service, electronic funds transfers, ATM networks, securities trading, Web-based banking, Internet sales, supply chain management, scheduling and logistics, and hotel, airline and rental car reservations. Internet infrastructure stocks slumped today after warnings from two well-known companies in the sector. Inktomi (INKT) was one of the big losers, falling to a two-year low near $13 after the company said it expects to report a $0.01 per share profit in its fiscal first quarter, while the 24 analysts polled by First Call expect a profit of $0.03. Vitria Technology (VITR) also tumbled, dropping to an all-time low near $4 after saying it expects to post a fourth quarter loss of up to $0.03 a share. The consensus estimate was a profit of a penny a share. Fortunately, BEAS is one of the world's top e-business infrastructure software makers and it was recently honored as an industry leader for its unique e-business software in Interactive Week's "Fast 50." Interactive Week said the supplier of software to power business-to-business exchanges and application integration solutions leaped ahead on the strength of its improving profitability and the recognition it has won from investors. BEAS has also demonstrated momentum in its core market, increasing profits from basic operations on quarterly and annual basis, and is now positioning itself for a bright future. That sounds incredibly optimistic considering the current outlook for the group, but we like the possibility of owning of the issue near $38. If the price of the stock moves above its all-time high near $85 on a (heavy volume) rally, we will simply buy the issue to cover our sold options. PLAY (conservative - neutral/credit strangle): SELL CALL JAN-85 BUC-AQ OI=2456 B=$0.88 SELL PUT JAN-40 BUC-MH OI=2520 B=$0.75 INITIAL NET CREDIT TARGET=$1.75-$2.00 ROI(max)=12% UPSIDE B/E=$86.75 DOWNSIDE B/E=$38.25 /charts/jan01/charts.asp?symbol=BEAS ****************************************************************** BRCM - Broadcom $100.25 *** Revenge Play! *** Broadcom Corporation is a provider of highly integrated silicon solutions that enable broadband digital transmission of voice, video and data throughout the home and within the business enterprise. These integrated circuits permit the cost-effective delivery of high-speed, high-bandwidth networking using existing communications infrastructures that were not originally designed for the transmission of broadband digital content. Using their proprietary technologies and advanced design methodologies, the company designs, develops and supplies integrated circuits for a number of the most significant broadband communications markets, including the markets for digital set-top boxes, cable modems, high-speed office networks, home networking, direct broadcast satellite and terrestrial digital broadcast, and DSL (digital subscriber lines). Broadcom was one of our few losers in this category during last year's market slump and now it's time to start repaying the debt. We favor the issue for a bullish position but there are not too many ways to approach the wide bid/ask spreads, and the $30 rally on Tuesday will likely fall victim to some future consolidation. In this conservative premium-selling position, we will use the recent volatility and the inflated option prices to initiate a neutral play with a favorable premium. The probability of the share value reaching our sold strikes is rather low, but there is always the possibility of a significant change in character, so monitor the position on a regular basis. PLAY (conservative - neutral/credit strangle): SELL CALL JAN-160 RDU-AL OI=833 B=$0.88 SELL PUT JAN-55 RDZ-MK OI=845 B=$1.00 INITIAL NET CREDIT TARGET=$2.12-$2.25 ROI(max)=9% UPSIDE B/E=$162.12 DOWNSIDE B/E=$52.88 /charts/jan01/charts.asp?symbol=BRCM ****************************************************************** EMLX - Emulex $78.81 *** Trading Range? *** Emulex Corporation is a designer, developer and supplier of a broad line of Fibre Channel adapters, hubs, application-specific computer chips, and software products that provide connectivity solutions for Fibre Channel storage area networks (SANs), network attached storage (NAS), and redundant array of independent disks (RAID) storage. Its products are based on internally developed ASIC technology, and are deployable across a variety of storage area network configurations, system buses and operating systems, enhancing data flow between computers and peripherals. Emulex's products offer customers the unique combination of reliability, scalability, and high performance, and can be customized for mission-critical server and storage system applications. Emulex is an excellent candidate in the premium-selling category of options trading. The issue has great option premiums, a well defined trading range and a high probability of remaining between the sold (short) strike prices. Based on historical analysis of option pricing and the underlying stock's technical history, the issue meets our basic criteria for a favorable credit strangle, and we wouldn't mind having the issue in our portfolio at a cost basis near $48. The company's earnings are due on January 18. PLAY (conservative - neutral/credit strangle): SELL CALL JAN-105 UEL-AA OI=181 B=$1.12 SELL PUT JAN-50 UMQ-MJ OI=1292 B=$0.93 INITIAL NET CREDIT TARGET=$2.12-$2.25 ROI(max)=12% UPSIDE B/E=$107.12 DOWNSIDE B/E=$47.88 /charts/jan01/charts.asp?symbol=EMLX ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1326 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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