The Option Investor Newsletter Tuesday 01-09-2001 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/010901_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 01-09-2001 High Low Volume Advance/Decline DJIA 10572.50 - 48.80 10680.70 10531.10 1.20 bln 1617/1285 NASDAQ 2441.30 + 45.38 2474.16 2406.08 1.97 bln 2243/1561 S&P 100 679.45 + 2.14 686.65 676.07 totals 3860/2846 S&P 500 1300.80 + 4.94 1311.72 1295.14 57.6%/42.4% RUS 2000 463.95 + 2.31 466.40 461.39 DJ TRANS 3068.60 - 73.43 3142.03 3047.44 VIX 30.79 - 2.56 32.61 30.36 Put/Call Ratio 0.89 ************************************************************* Look out below, Barton Biggs is bullish! What went wrong today? The Nasdaq actually finished in positive territory. Was there a solar eclipse or huge sunspot? Even more astounding the Nasdaq bucked a negative Dow to do it! Did investors actually start selling old economy stocks and buying techs? I would not make that leap of faith just yet. Still it was an encouraging day. The +90 point rally off the lows of the day on Monday and then a positive day today, what more could we ask for? The Nasdaq gapped open and ran for a gain of +75 points before pulling back as the Dow faltered early. Even with an upgrade to T and a +2.44 gain as well as almost a +$3 gain by MSFT the Dow just could not recover. The top six stocks on the Nasdaq set a one day streak of positive closes with DELL, MSFT, INTC, CSCO, ORCL and WCOM all green for the day. The Nasdaq rally, notice how quickly we attach the rally tag to any positive day, was helped by of all things, the Internet sector. Posting a +5% gain today on good news from AMZN and EBAY even YHOO was up +$3 only one day before they announce earnings. Earnings which almost everyone expects them to miss estimates I might add. Simply incredible. Do you think the bad news is priced in or are retail investors still in denial? AOL joined the crowd with almost a $3 gain. Another sector that has been abused recently and outperformed today was the biotechs. HGSI, INCY and MLNM were upgraded by AG Edwards and the entire sector gained. The telecom sector rallied on the upgrade to AT&T and the improved outlook for VZ and SBC. This is encouraging that bargain hunters are moving into the sectors most ignored over the last several weeks. Amazon.com must be on to something. One day after AMZN affirmed their earnings estimates and improved outlook, their competitor BNBN warned that slow holiday sales would impact earnings. BGRP had already warned for the same reasons. Amazon, with $1.1 bil in cash, looks like they won the book war. The fact that they are winning the Internet sales battle and appear to be on track to be a successful Internet story, gave new life to the Internets. EBAY, who just announced a cash purchase of a Korean auction site, is also flush with cash and reported a growing client base. The Internet is not dead it just needed pruning. Remember PCLN? The almost defunct name your price website won a court ruling on a patent infringement suit. MSFT through its travel site, Expedia, will pay PCLN an undisclosed sum to settle the case. PCLN jumped +.35 in after hours trading. Don't laugh that is a +20% gain for the remaining PCLN shareholders. Now if only YHOO could meet estimates on Wednesday and not warn about future problems. Well, one can at least wish! One area that did not win today was the cell phone manufacturers. Nokia warned that they only sold 128 million phones last year which was a +64% increase but well short of the 140 million they were expecting. NOK dropped -$4 but the news rippled through the entire sector including their suppliers. A shortage of 12 million units sold means there were quite a few suppliers with millions of parts either unmade, unfilled or unsold. QCOM bore the brunt of the selling with a -4.63 loss. Financial stocks also took a hit today for reasons not quite clear. Many analysts pointed to the California energy crisis as the culprit. It is true California banks bore the brunt of the selling but even the credit card issuers like COF, PVN and KRB were weak and I don't see how a PG&E bankruptcy would impact them. More likely the rate cut bounce is over and traders are moving on to other stocks. This would not bode well for the expected rate cut on Jan-31st. Do you think they are already discounting that as a done deal? The earnings warnings have slowed with only a couple after hours today. Cymer was the most visible and one that could impact the trading for tomorrow. Cymer said sales of their semiconductor manufacturing equipment had slowed. This could throw cold water on the semiconductor makers if investors feel the slowdown was due to weak chip sales. Companies like AMAT, NVLS, KLAC, PMTC had been firming as of late and don't need any negative news. Still, after 594 earnings warnings so far this quarter, as reported by First Call, there are not many companies left to warn. This is 91% more warnings than this time last year. Fortunately not all companies are warning. The EMC CEO said today that despite the economic slowdown sales were good and he did not think EMC would have any trouble hitting sales targets foe 2001. JDSU was reported on CNBC today as having affirmed estimates but I could not find it reported anywhere else. JDSU lost -1.56 so I doubt the origin of that story. If warnings are about over then worry about real earnings is about to take center stage. This is a good news bad news story. If companies hit estimates and do not caution on future results then the market should recover quickly. If headline companies start missing estimates on a daily basis and warning that the outlook is grim then look out below. The next three weeks will be crucial to market direction the next three months. The Fed may cut rates again in three weeks but if every headline is bad earnings news then we have our work cut out for us. The leading contrarian indicator for the last two years, Barton Biggs, Chairman of Morgan Stanley Asset Management, says the Nasdaq is very oversold and ready for a +40% to +50% rally. Wow! What a turnaround. Barton has been negative on the Dow for the last 5000 points and the Nasdaq since passing 2000. He was wrong on both counts for the last two years. If he has now capitulated and thinks the Nasdaq is currently a buy then that has to be a contrarian indicator. Let's hope not! Maybe in reality he was just having a hard time getting people to let his firm manage their assets after being bearish for two years. A positive day, I am speechless. Advances beat declines on both exchanges with new highs far out stripping new lows. The S&P-500 again closed over 1300 which is seen as a critical level. The Nasdaq rallied back over 2400 again and held the gains from Monday's lows. It is tough to be negative considering the past month of declines. Volume was moderate but there was no conviction. We have been basing or moving sideways on either side of 2400 since Dec-21st. Until we can put several positive days together it is too early to call today's move a rally. As traders we need to start new long positions only as long as the Nasdaq is over 2400. Aggressive traders could risk buying any dip to 2300 again but very carefully and very selectively. There are quite a few small cap stocks with new up trends forming and the Russell-2000 appears to have support at 460. I am cautiously optimistic but you should proceed with care. Choose smaller positions than normal and possibly fewer positions until a real trend is established. A nice breakout and close over 2550 would be really ideal and would confirm to me that better days may be ahead. Good Trading, Don't buy 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 **************** It Slices & Dices By Austin Passamonte Today's market action defined chop to a "T." We basically went nowhere at all and spent the entire session getting there. Is anyone surprised that Monday's powerful short squeeze at the close failed to hold into the next session? Market opinions are polarized and getting wider. Just like Tuesdays' divergent action, one camp feels we're close to a bottom while the other fears new market lows lie straight ahead. We happen to think either scenario has the chance to materialize, with a slight bias to the downside. That bearish outlook exists from a number of technical and fundamental studies. Where to begin? Poor earnings, currency crisis, power company defaults and negative investor sentiment weigh heavily on the market. From a technical standpoint there is very little bullish news except for the multiple bottoms we are logging, especially in the NASDAQ indexes and to a lesser extent other markets. It will take some surprisingly bad news to drive us further down from there. Which could happen. Rumors persist about big-caps missing numbers and no word of correction or guidance up have emerged from any in self-defense yet. This Friday evening after the markets close could be an opportune time for an 11th hour warning in the event one should be coming forth. Bearish technical bias? All major indexes are below any moving average that matters. Most have chart signals mixed to bearish with a procession of lower highs and lower lows to battle through as well. Nothing we can see on the charts that moves us to load up on calls at this time. Nor are we ready to buy puts. This mixed action could continue into the week as buyers & sellers match up. However, it is likely that at least one of the remaining three will be a large-range day allowing for excellent trade opportunities. Which one or ones? We never can tell without hindsight. Escaping further damage as the FOMC nears could be a catalyst for rallied markets soon. We still don't see the long-term reversal signs needed to confirm any bottom to us, but a tradable rally that can hold beyond part of one session would certainly be a welcome event indeed! Trade the trend and prosper carefully. ***** VIX Tuesday 01/09 close: 30.79 30-yr Bonds Tuesday 01/09 close: 5.44% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Tuesday (01/09/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 720 - 705 13,699 4,078 3.36 700 - 685 12,455 6,733 1.85 OEX close: 679.45 Support: 675 - 660 4,014 10,037 2.50 655 - 640 217 9,128 42.06 Maximum calls: 700/6,487 Maximum puts : 640/5,488 Moving Averages 10 DMA 686 20 DMA 692 50 DMA 712 200 DMA 766 NASDAQ 100 Index (NDX/QQQ) Resistance: 67 - 65 115,991 21,728 5.34 64 - 62 53,700 35,974 1.49 61 - 59 97,227 49,913 1.95 QQQ(NDX)close: 57.25 Support: 56 - 54 38,342 35,328 .92 53 - 51 3,655 28,093 7.69 50 - 48 8,407 20,571 2.45 Maximum calls: 60/75,915 Maximum puts : 60/39,320 Moving Averages 10 DMA 59 20 DMA 61 50 DMA 68 200 DMA 85 S&P 500 (SPX) Resistance: 1375 9,449 10,466 .90 1350 38,604 31,559 1.22 1325 9,678 11,508 .84 SPX close: 1300.78 Support: 1275 454 11,419 25.15 1250 1,315 13,530 10.29 1225 104 14,154 136.10 Maximum calls: 1350/38,604 Maximum puts : 1350/31,559 Moving Averages 10 DMA 1315 20 DMA 1319 50 DMA 1351 200 DMA 1427 ***** CBOT Commitment Of Traders Report: Friday 01/05 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 -2008 -818 -2167 -2589 Total Open interest % (-25.35%) (-12.51%) (-9.59%) (-11.60%) net-short net-short net-short net-short NASDAQ 100 (Current) (Previous) (Current) (Previous) Open Interest Net Value -1028 +1428 -1825 -2569 Total Open Interest % (-4.77%) (+8.65%) (-3.45%) (-4.43%) net-short net-long net-short net-short S&P 500 (Current) (Previous) (Current) (Previous) Open Interest Net Value +59586 +67807 -81851 -85776 Total Open Interest % (+29.89%) (+38.16%) (-11.09%) (-11.94%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: The Commercials show a minimal decrease in their net-short positions on the DJIA, NASDAQ 100, and the S&P 500 Small Specs show a dramatic increase their net-short positions on the DJIA. 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/010901_1.asp *********** OPTIONS 101 *********** Let's Start At The Beginning By Lee Lowell This being my first article of the New Year, I'd like to begin from the top and explain some basics of options trading. Some of you might find this elementary, some of you might find this as a nice review, and some of our new readers might find this as your first step. We know that there are two types of options: calls and puts. What you can do with them is practically endless. Each one can be bought or sold as a single contract or can be combined to form almost any strategy to fit your risk profile and time frame. I'm not going to discuss all the types of strategies you can create with options at this time, but I will discuss what an option is and how its premium is derived. The price of an option that is bought or sold on the options exchanges is called the "premium." The premium isn't a number that is magically pulled out of the air. It's a number that is mathematically calculated using a pricing formula that can be solved with an options calculator. There are a few different option pricing models, but the first and most popular one is called the "Black-Scholes" model. This is named after the two gentlemen that created the formula. The pricing model takes into account six different inputs that are used to derive the option's premium. They are: 1. underlying stock price 2. strike price of the option 3. days until option expiration 4. volatility 5. current interest rates 6. dividends of the stock Once all these inputs are fed into the model and calculated, the resulting number is the premium of your option. Let's take a closer look at some of the inputs. The first two items are self explanatory but there is a name for the relationship between these two numbers. It is called "intrinsic value." The relationship between the stock price and strike price will determine if the option is in-the-money, at-the-money, or out-of-the-money. Any option that is in-the-money (call or put), has intrinsic value. Any option that is at-the-money or out-of-the-money has no intrinsic value. A call option has intrinsic value and is in-the-money if the strike price is lower than the stock price. A put option has intrinsic value and is in-the-money if the strike price is higher than the stock price. A call option has no intrinsic value and is out-of-the-money if the strike price is higher than the stock price. A put option has no intrinsic value and is out-of-the-money if the strike price is lower than the stock price. Example: YHOO trading at $30 per share $25 call=$8, is $5 in-the-money, so it has $5 of intrinsic value $35 call=$3, is out-of-the-money, so it has $0 of intrinsic value $35 put=$8, is $5 in-the-money, so it has $5 of intrinsic value $25 put=$3, is out-of-the-money so it has $0 of intrinsic value To figure out the in-the-money portion, just take the difference between the stock price and the strike price. Whatever amount of points the option is in-the-money, that's how much intrinsic value it has. The last four inputs on the list also have a name for their relationship to the option premium. It is "extrinsic value" (or "time premium"). These inputs add extra value to the option above and beyond its intrinsic value. "Days to expiration" and "volatility" are really the ones that add the extra value whereas "interest rates" and "dividends" play a very small role. So I will only concentrate on days to expiration and volatility. Going back to our YHOO example: YHOO trading at $30 per share $25 call=$8, $5 of intrinsic value and $3 of extrinsic value $35 call=$3, $0 of intrinsic value and $3 of extrinsic value $35 put=$8, $5 of intrinsic value and $3 of extrinsic value $25 put=$3, $0 of intrinsic value and $3 of extrinsic value No matter what, all options have extrinsic value, but only options that are in-the-money will have intrinsic value. Intrinsic + Extrinsic = Option Premium Figuring out the intrinsic value is the easy part. Figuring out the extrinsic value is a little tricky so I will spend some time clarifying it. We all know that longer dated options have more time until expiration. The more time we have, the more the underlying stock can move in our favor. Thus, we will pay higher prices for the opportunity to get it right. If you are bullish on a stock but not sure when it will move higher, then you should buy some LEAP calls. This gives you plenty of time to be right. But the extra months of time will add more extrinsic value to the premium. For example, a one month out-of-the-money call option may have $1 of extrinsic value whereas a 12 month LEAP call may have $6 of extrinsic value. You're paying $500 more for that option for the extra eleven months of opportunity. Just remember, the intrinsic value (or in-the-money value) will always be the difference between the stock price and the strike price. But the extrinsic value is constantly changing because the days to expiration are always getting smaller. "Volatility" is the other important component of the extrinsic value and is the most difficult to quantify. It too adds extra value to the option just as the "days to expiration" do. Volatility is a term that signifies the erraticness of the stock in question. The more erratic the stock, the higher the volatility. The less fluctuations of the stock, the smaller the volatility. The volatility number is derived from its own formula using past closing prices of the stock and is expressed in % terms. Once this number is figured out, it is then added into the option calculator along with the other five inputs. A higher volatility number will bump up the extrinsic value level and a lower volatility number will decrease the extrinsic value. Example: YHOO trading $30 per share with 45% volatility: $25 call=$8, $5 of intrinsic value and $3 of extrinsic value $35 call=$3, $0 of intrinsic value and $3 of extrinsic value YHOO trading $30 per share with 85% volatility: $25 call=$12, $5 of intrinsic value and $7 of extrinsic value $35 call=$6, $0 of intrinsic value and $6 of extrinsic value As you can see, as we bump up our volatility number, the price of the option goes up from the extrinsic portion. It is very important that you get a handle on how to figure and use volatility because that will help you to better price the option correctly. So that's it. In a nutshell, the price of the option is comprised of six components. Two of which are considered intrinsic value and four are considered extrinsic value. The relationship between the stock price and the strike price, the days to expiration, and the volatility of the stock are the most important features. I hope this review hasn't bored too many of you. It's always good to re-visit the basics. Good luck. ************** TRADERS CORNER ************** Are Valuations High or Low? By Scott Martindale Another day, another lack of direction. It's evident that investors want to put their money back to work, but they're afraid. Are valuations still too high, or are we looking at bargains right now? Will the economy enter a prolonged recession or just a brief (and necessary) slowdown prior to the next economic boom? No doubt about it, fear and uncertainty on the Street continues to run rampant, especially after the lack of follow-through in the wake of the surprise Fed announcement and resultant euphoria (and short-covering). By the way, it's lamentable that every gesture or utterance by one man (Mr. Greenspan) can have such impact on the markets. This is the ultimate in speculative, directionless, news-driven uncertainty. When fear balances greed, we have this kind of market. Daily charts of the indices and most stocks are of little value since market sentiment determines the trend and sentiment changes daily. It seems you have to be a day trader to play the market these days, but even day traders are struggling. However, there are individual stocks that have managed to sustain uptrends beyond one or two days. In fact, my quick perusal came up with the following stocks that have shown pretty sustained uptrends over the past three months: ADM, ASO, CCR, CNC, HLT, NWL, PLB, and WMI. Note that none of them are sexy tech stocks. However, there are a number of tech stocks that for a variety of reasons have managed to hold the line over the past three months, such as USIX, TTN, ORCL, TXN, and MOT. I'll come clean now that I was more heavily invested at year-end than I wanted to admit to you readers last week. I bought stocks and some calls and sold OTM naked puts the last couple of days of the year in anticipation of some market relief, after tax-loss selling and with renewed optimism. [Premiums were too high and rally timing was too uncertain to buy many calls.] Although I wasn't exactly predicting a Fed rate cut so soon, at the same time I couldn't believe that our leaders would just stand around and let our markets (and their associated impact on consumer spending, i.e., "the economy") continue to crumble without doing something. After all, this is the U.S. of A. by golly! We're not passive victims -- we act when we must! I can't say that my bullish strategy has paid off in proportion to the risk I took on, but I'm up nonetheless, and my stops are in place. I was disappointed in the lack of follow-through after the Fed acted. The initial euphoria was met with worry that things must be more dire than most everyone previously thought, thus prompting the Fed to act quickly. [Of course, many of us thought that the Fed never should have made the last couple of rate hikes in the first place!] How do we know whether the market is currently under or overvalued? Of course, nobody can point to one measure as the definitive indicator, but I'll touch briefly on three: price to earnings ratio (P/E), P/E to earnings growth rate ratio (PEG), and the "enterprise value" to earnings ratio (EVE). P/E is the old standby with which we are all familiar, and you often see analysts use a company's forward earnings projection for the next year (four quarters) rather than trailing earnings. The historical value for the S&P 500 had been around 15 for a long time, and many market watchers still consider that to be the valuation target. Moreover, bears like to point out that in 1995 the Nasdaq 100 had a P/E of 23, but today still trades around 130 even after the 50 percent decline. However, many value plays can be found that trade at apparently reasonable multiples, such as WCOM, AMAT, INTC, MO, TX, CHV, CAT, JCP, AHC, HWP, and VZ. However, many analysts believe that you must look at high-growth stocks differently, particularly those with little or no earnings. Thus, the PEG ratio was invented, which generally looks at the projected annual growth rate in earnings per share over the next five years. By this measure, the S&P tech index is now selling below 1.0 while the rest of the S&P index is valued around 1.2. Many analysts believe that certain dominant high- growth companies can justify multiples of two to three times projected earnings growth rates. For example, CSCO at $37 and with a 25 percent estimated growth rate has a PEG of less than 2.0, which many consider to be reasonable (or even cheap) given CSCO's industry dominance and proven sustained growth. However, it is definitely speculative to buy JNPR around $120, with its triple-digit P/E and PEG over 3.0, although many still believe in it. But some conservative analysts believe that both P/E and PEG miss an important component of a company's financial health -- its debt load. The Jan/Feb issue of Bloomberg Personal Finance talks about an "enterprise value" to earnings ratio for checking a stock's valuation. Enterprise value per share is computed by taking the stock's market capitalization (equity) plus its long- term debt, minus its cash on hand, divided by the number of outstanding shares. This is then divided by EPS to get EVE, which can be evaluated similarly to P/E. Many of the speculative stocks have little debt (non-interest rate sensitive), so EVE is very close or even less than P/E. However, the Bloomberg article points out that many apparent "value" stocks are not so cheap when considered in this way, and mentions JCP as a particular example in that its P/E is 13, which seems low, but its EVE is 34, which seems quite high. On the other hand, INTC has both a forward P/E and EVE of around 20. Hey, look at that: INTC also has a PEG of only 1.0. I don't know when it will start moving up, but unless we enter a prolonged recession, I'd be willing to bet it will eventually. ************************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: ***** NOK $39.31 -3.81 (-3.81) Nokia reported today that they sold 128 million cell phones in 2000, up 64% from 1999, and topping overall market growth. However, some analysts had given guidance in the range of 140 million handsets, and thus the market perceived the reported number as a disappointment. This is one of the reasons it is always best to assess the market's reaction to news released on each company before taking positions, and to take bullish positions only on a positive reception to news and analysts forecasts. While Nokia did not revise their guidance for next year's estimates, the stock closed below our stop price of $40 on heavy volume, and we are dropping it tonight. ONE $37.94 -0.44 (-0.81) Another failed attempt to burst through the $40 resistance level has left ONE weak and vulnerable to the bears' latest assault. Although our $35 stop is still intact, credit concerns are weighing heavily on the entire Financial sector, and ONE is feeling this pressure. All of the technical signals are pointing to further downside, and if the credit concerns are valid, this is a train we don't want to be on when it derails. If you are in the play, use any strength as an opportunity to exit at a more favorable level, but don't initiate new positions on the bounce. The odds are stacked against a significant rally in ONE in the near future. UBS $170.75 -5.22 (-3.16) Despite a down day for the markets yesterday, UBS managed to buck the trend and trade higher, closing up $2.06 or 1.18 percent. Volume however, was light, at only 75 percent of ADV. As a result, we are still awaiting an entry point for this play. The gap between $165 and $170 is something we are watching closely. While not all gaps fill, a majority of them do, providing traders with an ideal entry point. Today the stock successfully tested the $170 support level, closing down about 3 percent. At this point if buying volume picks up, taking UBS back above its 5-dma at $171.15, an entry on strength could be had. Aggressive traders will most likely continue to watch the gap, waiting for a bounce of support at our stop price of $165, reinforced by the 10-dma at $166, for an ideal place to taking a position, provided that other stocks in UBS' sector such as BSC, LEH, MWD confirm upward movement. TBL $66.81 -6.13 (-3.69) We raised our protective stop on TBL just in time yesterday as the stock sold off today on heavy volume. The sell-off today stemmed from the weakness in the broader retail sector, which fell for the fourth consecutive session, measured by the S&P Retail Index. The pullback we've witnessed over the past four sessions may be no more than normal profit taking. Nevertheless, we're dropping coverage on TBL this evening and would exit any open positions on a bounce early Wednesday morning. BBT $35.63 -1.13 (-1.50) Continued weakness in the broader finance sector combined with a rollover at the $38 resistance level have caused us to drop coverage on BBT tonight. No to mention the fact the stock is quickly approaching our protective stop at $35. BBT closed its acquisition of FCNB corp. today, which may have caused some of the weakness, but we tend to feel the concerns in the finance sector accounted for the majority of the losses. Use any bounce off the $35.50 level early tomorrow morning to exit any open positions. EMN $46.13 -1.56 (-0.88) Eastman Chemical slid lower today along with the broader chemical sector (CEX.X). It appears investors are rotating out of the chemical space into other growth sectors of the market, which has hampered EMN since the beginning of the year. Although EMN bounced off its 50-dma today, it did close below our protective stop at $47, and with that failure we're dropping the play tonight. Exit open positions on any strength early tomorrow morning. PUTS: ***** CELG $20.63 -3.19 (-4.06) Right on track, CELG has continued to decline through one support level after another, arriving this morning at a new 52-week low. The $18-19 support level was our downside target, and given the heavy buying volume that ensued in the afternoon, it looks like CELG may have run its course to the downside. Rather than hold on and attempt to squeeze a little more profit out of the play, we are content to lock in our profits here and look for another high-odds play. TQNT $35.69 -3.63 (-6.31) Analysts and investors alike got spooked this morning when Nokia (NOK) issued preliminary sales figures that were slightly below expectations. Despite the fact that the figures do not represent a significant change from the company's prior guidance, shares of both NOK and its component suppliers spiraled lower. TQNT gapped down by more than $5 (13%) this morning before more rational thinking prevailed and buyers began appearing. For our part, the drop today looks like an over-reaction due to a skittish marketplace. We are looking as the drop as a gift, and are glad to take a little extra profit out of the play. It's time to take our profits and run, before the bulls wake up and decide to take them back. ARTG $20.50 +1.50 (+2.56) Support at $17.50 continued to hold on Monday as a bounce off oversold conditions helped ARTG to close up $1.06 or almost 6 percent on average volume. Considering the recent selling at over twice the ADV, up volume for the day was light and the stock was unable to break through resistance at the 5-dma. Today, the entire B2B sector got a lift, thanks to supply chain management software maker ITWO, when the company announced that they would surpass revenue and earnings estimates for the fourth quarter. The rising e-Business tide lifted shares of ARTG, which closed up almost 8 percent. Volume was average and the stock was unable to close above our stop price of $21. However, improving sentiment in the B2B space could carry ARTG higher and as such, we are dropping coverage of this play. FRX $121.50 +7.50 (+4.25) The brief pause in FRX's decline on Friday allowed the 5-dma to catch up to the stock price and hitting that line of resistance on Monday, the sellers came in force and with that, the stock closed down $3.25 or 2.77 percent on 140% of ADV. Today, the stock was upgraded by Lehman Brothers, from a Buy to an Outperform rating. This helped FRX to power through its 5-dma resistance at $117.77. While the stock encountered tough resistance from its 10-dma at $124, the close above our stop price of $120 suggests that the downtrend in FRX may be in the process of reversing. As a result, we are taking our profits and dropping this play. RIMM $48.94 +1.25 (+1.44) After losing almost 50 percent of its value last week, shares of RIMM are enjoying a brief respite from the recent selling pressure, with the stock closing relatively unchanged in yesterday's trading. Volume continues to be high, at 128 percent of ADV, but this is less than half of the amount of shares traded in sessions last week. Today, the stock continued to edge higher, closing up 2.62 percent on 70% of ADV. It appears at this point that the stock has found support at the $45 level. With selling volume drying up and the stock deeply oversold, a move to the upside appears likely. With that, we are taking our money off the table in search of higher-probability plays. UNH $54.31 +0.56 (+0.38) Consolidation is the name of the game so far this week, with shares of UNH trading in a tight range on declining volume after the sell-off on massive volume last week. In fact, the stock has traded between support at $53 and resistance at $55.50 for the past three sessions. Volume has moved back to average levels and with what looks to be firm support at the $53 level, it appears that the best we can hope for in this play is more sideways action, with the prospect of a large move favoring the up side. With a high risk of loss and low probability of gain, we are no longer recommending this play. *************************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. 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The Option Investor Newsletter Tuesday 01-09-2001 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/010901_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 ******************** COST $41.81 -0.13 (+1.00) Costco remains in a short-term upward trend, and is encountering resistance at $42, and stronger resistance at $44.69. With a little help from the market, Costco should be able to break resistance and forge higher. A break through the 5-dma of $42.27 on strong volume would be an excellent entry point, and could lead the stock to the next level of resistance at $44, and $44.69. The key here is volume, which was very heavy on Costco's strong days last week. Ideally, look for volume of over 10 million shares, and assess strength in the retail sector (RLX.X) before taking positions. Keep stops at $39. SBC $51.94 +1.81 (+1.94) Telecom stocks continued to march into positive territory today with a nearly 5% gain in the Merrill Lynch Telecom HOLDR (AMEX:TTH). SBC was a major contributor to today's move, as it received a positive ruling from the U.S. appeals court regarding its 1999 purchase of Ameritech. The court voided the condition that had originally required SBC to move its high-speed Internet operations into a separate affiliate. This seems to have been a positive sign for the industry as a whole, as noted above, and SBC benefited to the tune of 3.6%, keeping the recent up-trend intact. While the trendline is only about 2 weeks old, it is encouraging to see our play bounce at the 10-dma ($49.44), climb back over the converged 5-dma ($50.94) and 30-dma ($51.13), and post its highest close since the earnings warning on December 19th. Earnings are just over 2 weeks away, on January 25th, so use any profit taking dips as an opportunity to take advantage of any pre-announcement rally. Our stop at $47 is still in place and any bounce above this level, particularly near the $50 support level, looks like a good target for aggressive investors. Conservative players will still need to wait for the bulls to scale the $53 level before opening new positions, and all players will want to confirm strength in the sector before putting their cash at risk. BRCM $97.00 +3.56 (+10.00) Positive price-volume action was one of reasons we added BRCM to our call play list yesterday, as the stock rallied $6.44 or 7.40 percent on almost 120% of ADV despite a down day for the NASDAQ. The surge came on news that the company had acquired privately held chipmaker ServerWorks for about $1 billion in stock. This was a deal which analysts applauded, and for good reason, since this gives BRCM an entry into the lucrative server market. JP Morgan re-iterated their Long-Term Buy rating and offered bullish comments about the company going forward, helping BRCM to gain another 3.81 percent on 120% of ADV today. Currently sitting right on its 5-dma, an entry at these levels could be a good idea but make sure buying volume confirms positive direction before entering. A bounce off $95 and the 10-dma at $92 could also provide for aggressive entry points. There is also support at $90 and our stop price of $84, but make sure BRCM closes above this level. For an entry on strength, a break through today's resistance at $103 could be a possible play, but resistance at $105 is formidable so we recommend waiting for this level to be taken out before taking a position, confirming entries with the Philadelphia Semiconductor Index (SOX). LRCX $18.94 -0.33 (+0.63) A break from a downtrend line that has been in place since April of 2000 and the stock's recent advance on heavy volume were two of the factors which landed LRCX on our call play list on Monday, as the stock gained over 5 percent on 117% of ADV. Today, LRCX pulled back 1.7 percent on light volume, digesting its recent gains, bouncing off support from the 5-dma, a level which going forward, could provide aggressive traders with an entry point. Support from the 10 and 50-dma, now at $16.50 and $16.80 respectively, as well as our stop price of $16 provide additional support, and possible targets to shoot for but confirm bounces with volume. For more risk averse traders, a break through the 100-dma (now at $20.31) would be the signal to enter this play, but make sure that Merrill Lynch's Semiconductor HOLDR (SMH) is moving in the same direction. MER $70.25 -1.00 (-1.31) Ever since the huge up move last Wednesday courtesy of the 50 basis point cut in interest rates from the Fed, shares of MER have been digesting its gains as the stock has drifted lower on decreasing volume. Trading on Monday continued to reflect this pattern of consolidation, with MER closing down fractionally, less than half a percent on 90% of ADV. Today the stock headed lower, along with the rest of the financial sector, closing down 1.4 percent. Trading volume was light however, only 85 percent of ADV the bounce off the 10-dma, currently sitting at $69.36, was a good sign. Pullbacks to support from the 10-dma as well as $70 and our stop price of $68 could provide higher risk players with entry points while a break above its 5-dma (now at $72) on volume could allow for a safer play, but in doing so, make sure that the sector is also moving in the right direction by following rivals such as GS and LEH. AEOS $47.00 -0.44 (+0.56) Retail stocks across the board started the week rather flat. Overall, the likes of WMT, GPS and TLB hung on to last week's gains and experienced only mild profit taking. AEOS held steady at near-term support of $46 on respectable volume. The stabilization at the $46 level and consistent efforts to trade above $48 demonstrates the stock's individual spunk. A clean break through this first line of opposition followed by a rally through the pivotal $50 resistance would provide better confirmation. However, we continue to maintain our optimism of new highs going forward; and in light of the unfaltering developments above the advancing 5-dma ($47.76), we've raised our protective stop to $43. USB Piper Jaffray also made positive adjustments to its coverage on AEOS. The brokerage firm reiterated a Strong Buy recommendation and upped its 12- month price target to $59 from $50 p/s. A conservative approach is to wait for another breakout and buy into high-volume strength. CTXS $27.94 +1.56 (+1.25) Monday's test of the $25 support level followed by today's peak above the $28 resistance offers technical evidence that CTXS can rise to the occasion. The quickly approaching earnings' release, slated for January 17th (after the market), does impose a tight time frame to trade within; but nevertheless, the potential to profit exists. We're also looking for investors to rotate back into the techs and for CTXS to get swept up in the momentum buying. Depending on your personal risk factors and trading style, you could either buy on the intraday dips and lock in gains as CTXS challenges $28 and $30 or take positions as CTXS rallies through the 200-dma ($31.35). In recent weeks, both UBS Warburg and Gerard Klauer Mattison offered Buy ratings on CTXS and issued price targets of $28 and $40, respectively. VZ $55.50 +1.25 (+0.94) The telecoms got a nice boost from AT&T's (T) positive coverage today. The enthusiasm quickly spread to VZ and it saw a sharp uprising in early trading. The traders who took the more enterprising entries off yesterday's lows of $53, or even at the converged 5, 30 & 50 DMA lines near $54, reaped grand rewards today. VZ shattered the immediate resistance at $55 and peaked at $56.81 mid-day on robust volume. In addition, the bullish close above the formidable resistance and the elevating level of short-term support at $56 offers supplementary evidence of VZ's upward potential. Consider taking entries off the current level, if more buyers jump into the momentum and VZ makes the charge for $60. Otherwise, a pullback to the 10-dma ($52.18) might be an option for the more aggressive types who like to play the spreads. Continue to watch WCOM, VOD and T to forecast the sector sentiment and look for VZ to successfully penetrate $57 as it approaches its earnings' date. The company is scheduled to report on February 1st, before the market open. ******************* PLAY UPDATES - PUTS ******************* CSC $53.31 -2.63 (-4.25) After dropping below the support level of $60 last week, CSC drifted lower with the market on Monday, but failed to recuperate at the end of the day with the indexes. CSC suffered from an analyst downgrade on Tuesday, as CSFB cut the rating to hold, citing concerns about near term softness in consulting demand, and a lengthened translation of bookings signed into revenues generated. CSC is now at a 52-week low, and shows few indications that it will recuperate at any point in the near term future. CSC has a daily pattern of rolling over from key resistance levels at $56.50 and $53.50. The next support levels are $52.75 dating back to October of 1998 and $51.94 dating back to May of 1998. An aggressive trader could take positions on a roll over from $56.50, or the 5 dma of $57.92. Conservative traders can wait for a plunge below $51.56, which could lead CSC to $42.50. Move stops down to $59. CALP $28.00 -2.31 (-2.56) There's nothing like being in the right place at the right time. After giving up a whopping 38% in the prior week, CALP staggered under the weight of another huge down day for the entire Biotech sector on Monday. Although the sector stabilized today, CALP continued its losing ways, bringing it to the $25 level and putting it within striking distance of a new all-time low. The sweet spot of providing picks and shovels to the Biotech industry isn't so sweet lately, especially when the company is saddled with litigation concerns with a primary competitor (ACLA). Although the litigation has been settled, apparently to CALP's benefit, investors are not in a hurry to support the stock price. Until investor sentiment in the Biotech sector improves, there is little to suggest that CALP will be able to mount any sort of meaningful rally. Even competitor AFFX moved up today, highlighting the relative weakness of CALP relative to the rest of its industry. Our stop is still sitting at $35, and any rally that rolls over below this level looks like a good entry point for aggressive traders. More conservative players can consider new positions as the bears push the price below $25 on continued heavy volume. CB $74.06 -2.38 (-1.06) The sell-off in shares of CB late last week put CB deep into oversold territory, so it's no surprise that the stock needed some consolidation before making another major move. This is exactly what we got to start the week, with CB closing up $1.31 or 1.75 percent on light volume on Monday, making the second trading session in a row in which the stock traded in a range between support at $74.50 and resistance at $77.50. After being denied by the 5-dma today, the stock continued to slide lower, closing down 3.11 percent on 68 percent of ADV. Look for further tests of the 5-dma, now at $76.90, as a potential entry point as well as resistance at $75 and our stop price of $80. For an entry on weakness, a break below recent support at $73.50 with conviction could be a signal to jump in. When making a play, keep an eye on rivals CI and ALL to gauge sector sentiment. P $55.06 -0.88 (-0.81) After the recent volatility in shares of Phillips Petroleum, the stock enjoyed a day of rest as it traded in a right range to close pretty much unchanged on half the ADV on Monday. Today, P closed down 1.56 percent, thanks to falling oil prices, as can be seen in the AMEX Oil Index (XOI). The break in the XOI below its 50-dma could signal a further drop in oil prices in the short term, helping to take our put play deeper into profitable territory. Now back below its 5-dma ($55.46), a failed rally at this point as well as the 10-dma at $56.36 and formidable resistance at our stop price of $57 could allow aggressive traders to enter this play. For more conservative traders, if selling volume increases, taking P below support at $54.75, this could allow for an entry but wait for weakness in the XOI as well as in peers such as TX and XOM before making a play. PDLI $50.25 -2.00 (-9.25) Continued negativity in the Biotech sector helped to take our PDLI put play into high-profitable territory yesterday, as the stock fell $11.38 or over 19 percent on five and a half times the average daily trading volume. After such a huge sell-down, it's no surprise that shares of PDLI enjoyed a bounce off oversold conditions today, closing up 4.42 percent. While volume was over twice the ADV, it was light considering that recent selling was on three to four times the ADV. At this point, overhead resistance at our stop price of $57 should be heavy, with a test of this level as well as $55 resistance providing potential entries but confirm a rollover with volume. If the sellers return tomorrow and the PDLI falls below $45 on volume, this would allow conservative traders to pull the trigger, provided that AMEX Biotech Index (BTK) and Merrill Lynch's Biotech HOLDR (BBH) is moving in the same direction. IVX $31.55 -0.39 (+0.55) IVX maintained its bearish disposition this week; although it failed to penetrate the $31 level and rival Friday's $30.15 low. On the topside, IVX also couldn't rally through the 5-dma ($32.62) ceiling in despite of the Biotechnology Index (BTX.X) coming off its lows. The diverge from the sector benchmark illustrates IVX's weakened state. If the BTX.X moves to the underside of its 500 support that would be icing on the cake. In that scenario, IVX could very well see heavy losses forthcoming. As it is now, aggressive entries might be found on convincing rollovers near our protective stop at the $35 level. But if we're not afforded such an opportunity, then consider buying into weakness as sellers take IVX through the $30 historical support. In the news this week, IVAX Corp received approval from the FDA for its Abbreviated New Drug Application (ANDA) for Cefaclor extended-release tablets, which are the generic equivalent of Ceclor CD tablets. MMC $105.69 -0.88 (-1.31) Our new put play on MMC played out like a charm in today's trading session. For the second consecutive time, MMC broke through the previous day's low, while continuing to establish a pattern of lower highs. Early in the session, entries could be found around the $106 level. The confirmation was MMC's subsequent decline on heavy intraday volume. The stock easily slide through yesterday's bottom support at $105.06 and saw $103.06 before buyers came into the picture. As the bulls and bears battled it out, the $104 level provided intraday support. A strong upside surge was cut short at $107, which from our perspective, offered a nice entry for the more aggressive traders. Now if you're more the cautious type, wait for MMC to breakdown below $104 and look for more conclusive downside bias across the insurance sector. A good index to watch is the S&P's Insurance Index (IUX.X) - a move to the underside of 750 would indicate overall weakness. *************************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: SNPS - Synopsys Inc $49.25 +1.13 (+1.25 this week) Synopsys supplies electronic design automation solutions to the global electronics market. The Company provides design technologies to manufactures of advanced integrated circuits, electronic systems, and systems on a chip. Synopsys also provides consulting services and support to its customers to streamline the overall design process and accelerate time to market. In early December, SNPS began building a strong wedge formation. And now it appears, SNPS is poised to make a major move to the upside. A momentum breakout through the $50 and $51 resistance levels today prompted immediate coverage. The added endorsement from investors taking another look at the depressed chip sector also bodes well for our play on SNPS. Consider taking entries on a big breakout through the immediate resistance found at today's $51.25 peak or enter along the ascending support near $47 or $48 in an advancing market place. From a technical perspective, the 5 and 10 DMAs at $48.64 and $47.86, respectively, are bolstering SNPS on the climb, too. This is a bullish indication and also provides an additional method of gauging entry and exit points. Take a look at a daily chart for visual confirmation. Accordingly, our protective stop is set just below these technical measurement devices at $45. A close below that mark and we'll move on to more opportune call plays. ***January contracts expire next week*** BUY CALL JAN-45 YPQ-AI OI= 266 at $5.25 SL=3.25 BUY CALL JAN-50*YPQ-AJ OI=1731 at $1.88 SL=1.00 BUY CALL JAN-55 YPQ-AK OI= 604 at $0.50 SL=0.00 BUY CALL FEB-50 YPQ-BJ OI= 85 at $4.13 SL=2.50 BUY CALL FEB-55 YPQ-BK OI= 463 at $2.25 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=SNPS KLAC - KLA Tencor $41.50 +1.13 (+4.50 this week) KLA Tencor is the world leader in yield management and process control solutions for semiconductor manufacturing and related industries. The company's portfolio of products, software, analysis, services and expertise is designed to help integrated service manufacturers manage yield, throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. Like most stocks in the semiconductor sector, KLAC has had a difficult year. However, after hitting a 52-week low of $25.50 on October 10, KLAC has formed a rounded bottom pattern since November, which often portends a strong breakout. The stock cleared the 50 dma of $34.12 this week. A series of higher lows has been developing in the last two months, with support at $27.50, $29.94, $34.13, and the 10 dma of $36.87. We are looking for a breakout over resistance at $42.50, which could lead KLAC past the 200 dma of $43.69. After that, it could be smooth sailing up to the next resistance levels at $44.69 and $50. While the semiconductor index is still weak, certain semi stocks are starting to show patterns which can be indicative of the beginning of a new cycle, as the market generally looks forward one or two quarters to discount news. Semiconductor inventory levels can be drained much more quickly than in previous years, and a little strength in SOX.X could lead to a strong breakout for KLAC. Traders should consider taking positions on a breakout from $42.50, after monitoring SOX.X and SMH for strength. Set stops at $38. ***January contracts expire next week*** BUY CALL JAN-40*KCQ-AH OI=1583 at $4.00 SL=2.50 BUY CALL JAN-45 KCQ-AI OI=1332 at $1.75 SL=1.00 BUY CALL FEB-40 KCQ-BH OI= 759 at $6.75 SL=4.75 BUY CALL FEB-45 KCQ-BI OI= 180 at $4.50 SL=2.75 http://www.premierinvestor.com/oi/profile.asp?ticker=KLAC PLAB - Photronics Inc $28.88 +2.06 (+1.75 this week) Photronics manufactures photomasks, which are high precision quartz plates that contain microscopic images of electronic circuits. Photomasks are a key element in the construction of semiconductors. The Company's products are used to transfer circuit patterns onto semiconductor wafers during the fabrication of integrated circuits. US chip makers account for nearly 85% of sales; although Photronics operates manufacturing facilities in Asia, Europe, and North America. They recently acquired rival Align-Rite in a move to become the world's largest independent maker of photomasks. An explosive move with the semiconductors last Wednesday resulted in PLAB's clean break out of the tight trading range between $20 and $24. The building momentum took PLAB upwards of $27 by the end of the week. To top off the fantastic advances, bullish comments from CSFB on Friday provided the icing on the cake. The influential brokerage firm raised its 12-month price target on PLAB to $35 from $30 citing the company should benefit from an uptick in demand for its products - "the continuing shift to sub-wavelength (integrated circuit) processing is fueling demand for advanced photomasks". In this week's trading, PLAB continued to not only trade above the previous resistance at the $25 level and corresponding 200-dma, but it also tacked on additional gains. Today's pinnacle at $29.13 and strong close near that intraday high provided the bullish evidence we wanted before adding PLAB to our call list. You might take positions on a pullback to $25, which also designates our exit point, but make sure there's plenty of buying interest before taking that aggressive approach. A nice breakout through $30, which we believe would be quite a bullish turning point in this momentum play, offers a more conservative entry. Keep an eye on the Semiconductor Index (SOX.X) to foretell overall sector sentiment and remember, don't fight the trend. ***January contracts expire next week*** BUY CALL JAN-20 PQF-AD OI= 21 at $9.25 SL=6.25 BUY CALL JAN-25 PQF-AE OI= 45 at $4.38 SL=2.75 BUY CALL FEB-20 PQF-BD OI= 0 at $9.50 SL=6.50 Wait for OI! BUY CALL FEB-25 PQF-BE OI=457 at $5.25 SL=3.25 BUY CALL FEB-30*PQF-BF OI= 17 At $2.25 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=PLAB LOW VOLATILITY: GX - Global Crossing Ltd. $21.38 +1.88 (+2.38 this week) Global Crossing provides integrated telecommunications solutions over the world's most extensive global IP-based fiber optic network, which will have more than 100,000 route miles, reaching 5 continents, 27 countries and more than 200 major cities by mid 2001. Global Crossing serves many of the world's largest corporations, providing a full range of managed data and voice products and services. Global Crossing is one of several telecommunications companies which are growing so rapidly they needs constant infusions of cash to finance expansion. Earlier in the year, the Federal Reserve practically cut off the life line of many of these rapidly expanding companies with a series of aggressive rate hikes. Perhaps the most devastating impact of the rate hikes was felt in the credit markets, as the rates for high yield debt soared this year to levels not seen since the recession of 1991. However, the Fed's most recent rate cut had an immediate and dramatic impact on the credit markets, as many new high yield telecommunications debt offerings were issued just in the last few days. Lower interest payments means higher earnings for these companies, and, in addition, on Monday, GX released an optimistic revenue projection for 2001 of $7.1 to $7.2 billion. After hitting a 52-week low of $11.25 on November 29, GX has crossed the 50 dma of $17.77, and the 5 day moving average of $19.73. This stock has a very high short interest, which may lead to covering with more rate cuts. Entry points can be taken at current levels, or on a move above the next resistance level of $22, with a positive telecom sector(TTH). Watch others like MFNX for strength before entering new positions and set stops at $18. ***January contracts expire next week*** BUY CALL JAN 20 GX-AD OI=12996 at $2.44 SL=1.25 BUY CALL JAN 22.5 GX-AX OI= 5557 at $1.13 SL=0.50 BUY CALL FEB 20 GX-BD OI= 2653 at $3.75 SL=2.00 BUY CALL FEB 22.5*GX-BX OI= 1020 at $2.44 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=GX Q - Qwest Communications $44.88 +2.88 (-2.63 this week) Qwest is a leading broadband Internet communications company. Qwest's services include Internet, multimedia, data and voice services that are sold to business, consumer and government customers. Internet and multimedia services include Internet Protocol (IP) enabled services such as dedicated and dial up Internet access, web hosting, co-location access, voice over IP, application hosting and mass storage services. Qwest also provides high-volume voice and conventional private line services to other communications providers, as well as to Internet service providers (ISPs), and other data service companies. Since finding strong support at the $32 level in mid-December, shares of Qwest Communications have rebounded strongly. Improving sentiment in the Telecom sector has helped shares of competitors T and WCOM to definitively break through their long-term downtrend lines. Having recently pierced this level, Qwest appears poised to do the same. Connecting the highs and lows since late last year reveals an upward trending regression channel. A downgrade this past Friday by AG Edwards, from an Accumulate rating to Maintain, caused some low volume profit-taking but today, the stock not only bounced off the bottom of its uptrend line, but closed above its 100-dma at $44.85. The 200-dma, now at $46.24, represents the last line of moving average resistance, with a surge through this level on volume allowing more cautious traders to take a position. Support can be found at the 100-dma and the 5-dma at $43.98, providing for aggressive entries. The mid-41 level, with the 10 and 50-dma converged at that point, would be an ideal target to shoot for but make sure that Q closes above our stop price of $41. In planning a play, confirm market sentiment using Merrill Lynch's Telecom HOLDR (TTH). ***January contracts expire next week*** BUY CALL JAN-40 Q-AH OI=5675 at $5.38 SL=3.50 BUY CALL JAN-45*Q-AI OI=4633 at $1.81 SL=1.00 BUY CALL FEB-45 Q-BI OI=1112 at $3.75 SL=2.50 BUY CALL FEB-50 Q-BJ OI=1166 at $1.69 SL=0.75 BUY CALL APR-50 Q-DJ OI=2090 at $4.00 SL=2.50 http://www.premierinvestor.com/oi/profile.asp?ticker=Q COMS - 3Com Corporation $10.06 +0.56 (+1.03 this week) Specializing in straightforward solutions to complex networking challenges, COMS focuses on broadband connections, wireless network access, and Internet Protocol (IP) telephony. The company serves three primary customer markets: commercial enterprises with small- to mid-sized locations, consumers, and carriers and network service providers. COMS' commercial products include both traditional and advanced access products, Local Area Network (LAN)/Wide Area Network (WAN) infrastructure products, LAN telephony products, and services. The company's consumer product list include broadband connections, home networking products and Internet appliances. Unable to dodge the selling frenzy that hit Networking stocks in late October, COMS gave up 35% before confirming investor fears of an earnings shortfall. The company warned about their results for the current quarter on December 4th, and gave up another 32% by the time it hit its December low of $6.94. After beating reduced earnings estimates on December 21st, the stock has been gradually improving, and has now moved back over the 30-dma ($9.75), and has even regained the $10 level, although just barely. Stochastics have just re-entered the overbought zone, and with the upper Bollinger band looming just overhead at $10.56, don't expect the stock to have an uninterrupted rally. We are setting a nice tight stop at $9, a level which should provide solid support going forward. COMS looks like it should be able to sustain the move already underway, and aggressive players can consider new plays on a bounce from support, while conservative players will want to wait for COMS to rally through resistance at $10. ***January contracts expire next week*** BUY CALL JAN-7.5 THQ-AU OI= 785 at $2.81 SL=1.50 BUY CALL JAN-10 THQ-AB OI=3281 at $0.69 SL=0.00 BUY CALL FEB-7.5 THQ-BU OI= 579 at $3.00 SL=1.50 BUY CALL FEB-10 *THQ-BB OI=7758 at $1.50 SL=0.75 BUY CALL FEB-12.5 THQ-BV OI= 183 at $0.63 SL=0.00 BUY CALL APR-10 THQ-DB OI=2280 at $2.25 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=COMS ************* NEW PUT PLAYS ************* AGGRESSIVE: PMI - PMI Group $54.00 -3.88 (-4.00 this week) PMI Group is a holding company that conducts its residential mortgage insurance business through its subsidiaries. PMI provides primary insurance coverage, insuring mortgage lenders and mortgage loan investors against borrower default on individual first mortgage loans. At the end of 1997, PMI began offering a pool insurance product, primarily to Fannie Mae and Freddie Mac, as a part of the company's value-added strategy. This product is also sold to state housing finance authorities, and is generally used as an additional credit enhancement for certain secondary market mortgage transactions to protect against loss on a defaulted mortgage loan which exceed the claim payment under the primary coverage. Insurance stocks have not gotten the new year off to a good start, but our new put play has something else working for it. Concerns are surfacing about an increase in loan defaults due to the slowdown in the economy. Despite the fact that the Fed is working to lower interest rates, many feel that it may be too little, too late. As PMI insures against defaulted mortgages, that buts the stock right in the bears' crosshairs, and they have been pressuring the stock mightily over the past 7 sessions, dropping it for a 22% loss as it fell right through the 200-dma ($58.75) and the early December low of $56.50. There is some support near current levels, but the first major support it found in the vicinity of $50-51. Barring a marked change in sentiment, it looks highly likely that the stock will break below this level as the bears set their sights on the $45 level. This decline is unlikely to come as fast as the drop over the past week though, as the stock is now resting on the lower Bollinger band. Until the bands expand further, PMI will have a hard time falling much below $52-53. With that in mind, we would advocate waiting for a relief rally to provide a better entry point. The concerns driving the decline aren't going to go away, so any rally is likely to be short-lived - open new positions as the rally loses steam and the bears reassert control. Just make sure the stock remains below the $58 intraday resistance level (also the location of our stop). Earnings are set to be released on January 24th, but in the current environment, we don't expect much of an anticipatory rally ahead of the numbers. One note of caution on this play is the extremely light open interest on all the options - take this into account when planning your trade. ***January contracts expire next week*** BUY PUT JAN-60 PMI-ML*OI= 2 at $6.38 SL=4.25 BUY PUT JAN-55 PMI-MK OI= 0 at $2.44 SL=1.25 Wait for OI! BUY PUT FEB-60 PMI-NL OI=12 at $7.25 SL=5.00 BUY PUT FEB-55 PMI-NK OI= 0 at $3.75 SL=2.25 Wait for OI! http://www.premierinvestor.com/oi/profile.asp?ticker=PMI ********************** PLAY OF THE DAY - CALL ********************** SBC - SBC Communications $51.94 +1.81 (+1.94 this week) With 61 million phone lines in 13 states, SBC is the #2 local phone outfit in the United States. It's not just a local operation either, as the company has stakes in Telecom operations in 23 other countries around the world. The services and products that SBC offers vary by market, and include local exchange services, wireless communications, long distance services, Internet services, cable and wireless television services, security monitoring, telecommunications equipment, messaging, paging, and directory advertising and publishing. Most Recent Write-Up Telecom stocks continued to march into positive territory today with a nearly 5% gain in the Merrill Lynch Telecom HOLDR(AMEX:TTH). SBC was a major contributor to today's move, as it received a positive ruling from the U.S. appeals court regarding its 1999 purchase of Ameritech. The court voided the condition that had originally required SBC to move its high-speed Internet operations into a separate affiliate. This seems to have been a positive sign for the industry as a whole, as noted above, and SBC benefited to the tune of 3.6%, keeping the recent uptrend intact. While the trendline is only about 2 weeks old, it is encouraging to see our play bounce at the 10-dma ($49.44), climb back over the converged 5-dma ($50.94) and 30-dma ($51.13), and post its highest close since the earnings warning on December 19th. Earnings are just over 2 weeks away on January 25th, so use any profit taking dips as an opportunity to take advantage of any pre-announcement rally. Our stop at $47 is still in place and any bounce above this level, particularly near the $50 support level, looks like a good target for aggressive traders. Conservative players will still need to wait for the bulls to scale the $53 level before opening new positions, and all players will want to confirm strength in the sector before putting their cash at risk. Comments SBC rallied with the rest of the Telecom sector on the heels of AT&T's upgrade. This pushed SBC solidly above its 100-dma near the $50 level. We are looking for the rotation into the beaten down Telecom stocks to continue. Look for entries off of bounces from intraday support at $51 or the 100-dma. With positive sector sentiment, SBC could break through the $52 and challenge resistance at the 50-dma of $53.54. ***January contracts expire next week*** BUY CALL JAN-45 SBC-AI OI= 3979 at $7.25 SL=5.50 BUY CALL JAN-50 SBC-AJ OI=10591 at $2.81 SL=1.50 BUY CALL FEB-50*SBC-BJ OI= 718 at $4.38 SL=2.75 BUY CALL FEB-55 SBC-BK OI= 1303 at $2.00 SL=1.00 BUY CALL APR-50 SBC-DJ OI= 8295 at $6.25 SL=4.50 BUY CALL APR-55 SBC-DK OI=16001 at $3.75 SL=2.00 http://www.premierinvestor.com/oi/profile.asp?ticker=SBC ************************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 ************************ Telecom, Software and Internet shares lead the way... The Nasdaq rallied today as technology stocks recovered from recent selling pressure. Monday, January 8 Stocks consolidated further today but ended above early lows as selling pressure abated in the final hour of trading. The Dow ended down 40 points at 10,621 and the Nasdaq closed 11 points lower at 2,395. The S&P 500 index finished almost unchanged at 1,295. Trading volume on the Nasdaq reached 1.8 billion shares, with losers beating winners 2,225 to 1,634. Volume on the NYSE was light at 1.10 billion shares, with declines edging advances 1,617 to 1,338. In the bond market, the 30-year Treasury fell 16/32, pushing its yield up to 5.43%. Sunday's new plays (positions/opening prices/strategy): Allergan AGN JAN100C/JA95C $0.50 credit bear-call Lyondell LYO MAR17C/MAR15P $1.69 debit straddle Mips Tech. MIPS JAN25C/JAN25P $3.50 debit straddle Orthodontic OCA JAN35C/JAN25P $1.38 credit strangle Boston Sci. BSX FEB15C/JAN17C $1.62 debit diagonal All of our new positions were available at (or near) the target entry prices. Allergan and Lyondell are the only positions that might be improved upon in the coming sessions. We feel that a debit of $1.62 is the most one should have paid for the Lyondell straddle, but will post the best (simultaneous) price observed until a lower debit occurs. The Allergan spread could also have been improved with a little patience and based on AGN's recent volatility, it will likely provide a better premium in the next few sessions. Portfolio Plays: Despite widespread selling pressure early in the day, stocks made a valiant recovery late in the session as investors began to speculate on a recovery in the technology segment. Several analysts said Monday that despite the negative outlook on the economy over the next six months, the market is beginning to price in better earnings and profit growth for the second half of the year. According to First Call, fourth-quarter earnings growth will average 2% to 4% and continue in the bottom of that range for the first quarter of 2001. Overall earnings growth among S&P 500 companies for the upcoming year is expected to be in the 10%-15% range. On the Dow, General Motors (GM), General Electric (GE), American Express (AXP), Walt Disney (DIS), and Home Depot (HD) were among the losers while Philip Morris (MO), Procter & Gamble (PG) and Alcoa (AA) rose as investors rotated money into defensive issues. Among Nasdaq companies, shares of JDS Uniphase (JDSU), Qualcomm (QCOM), Applied Materials (AMAT), Dell Computer (DELL) and Sun Microsystems (SUNW) led the index. Within the broader market, utility, semiconductor, networking and oil service issues moved higher while Internet, financial, biotechnology and retail shares generally consolidated. Broadcom (BRCM) was among the leaders in our portfolio, rising 7% to $93 after announcing it will buy ServerWorks Corporation as part of a new effort to enhance its semiconductor equipment capability. Our recent credit strangle is off to a good start. On the downside, BEA Systems (BEAS) was in the news headlines, falling over $7 to $47 after analysts at Prudential Securities lowered their 12-month price target for BEA shares to $85 from $100, citing valuation concerns. Separately, Wit Soundview cut its earnings estimates on BEAS, although the analyst firm kept its "strong buy" rating on the stock, with a $90 price target. Analysts cited the possibility of reduced spending by dot-com companies for the revision but Bill Coleman, chief executive of the e-business software company, touted their sales backlog and argued that BEA's business is bounding, regardless of economic worries that plague many software companies. He said that BEAS will enter its fiscal-first quarter having nearly all of its software license revenue already booked, and that the company is limited only by how fast they can build a sales channel and hire new people. In the industrial group, some the recently downtrodden issues have begun to recover, possibly offering another chance at a profitable exit for traders in those positions. Laboratory Holdings (LH) rebounded $4 to $136 and it appears to be on a technical comeback. The first test will be a resistance area near $140. Our position in Pharmaceutical Products (PPDI), which was never really in doubt, moved deep ITM following a $4 rally in the company's share value. PepsiCo (PEP) and Pepsi Bottling (PBG) rebounded from earlier selling pressure, and at least one of those plays (PEP) should expire profitably. In the small-cap category, a few bullish issues have started to retreat and should be monitored for further downside activity. Akysys (AKYS), Placer Dome (PDG) and Magnetek (MAG) are among the most obvious candidates for early exit. Of course Placer Dome (PDG) is a hedge play in the Precious Metals group, so it will generally move in opposition to the broader market. The Straddles section has been rather subdued this week, after offering a slew of big winners earlier in the month. Although British Telecom (BTY) has already provided a profitable early exit, it did not reach the downside breakeven point (trading to a low near $83). However, there is plenty of time for future returns and traders who used the "double bottom" formation to exit the bearish side of the play (APR-100 Puts) were rewarded with a nice profit. SCM Microsystems (SCMM) may be one of the few plays to achieve excellent profits both on the upside and downside. The issue is testing a three-year low near $25 and there is little support below that level. Tuesday, January 9 The Nasdaq rallied today as technology stocks recovered from recent selling pressure. The Dow industrials consolidated as cyclical, financial and retail issues declined on persistent worries about earnings growth. The Nasdaq ended up 45 points at 2,441 and the Dow finished 48 points lower at 10,572. The S&P 500 was up 4 points to 1,300. Volume on the NYSE hit 1.19 billion shares, with winners beating losers 1,622 to 1,291. On the Nasdaq exchange, trading activity was average with over 1.9 billion shares changing hands. Technology advances outpaced declines 2,249 to 1,563. In the bond market, the U.S. 30-year Treasury rose 5/32, pushing its yield down to 5.42%. Portfolio Plays: Technology buyers drove the Nasdaq to a positive finish today, interrupting its recent losing streak as investors shopped for bargains in telecom, computer software and Internet B2B shares. Chip stocks also advanced with semiconductor shares receiving the most attention from analysts. Experts say it's the place to be for traders looking for technology stocks as the sector is gaining internal momentum and has remained healthy despite the weakness in the Nasdaq. On the Dow, AT&T (T) jumped more than 10% after Morgan Stanley Dean Witter upgraded Ma Bell to a "strong buy," citing compelling valuation and the existence of significant catalysts for future share value growth. The brokerage set a price target of $35 on the stock, and our two Reader's Request positions in the issue profited substantially from the movement. DuPont (DD) was among the losers, falling $2 to $46 after J.P. Morgan downgraded the Chemicals group on valuation concerns and continued deterioration in the global macroeconomic environment. Also limiting blue-chip advances were losses in American Express (AXP), General Electric (GE), Procter & Gamble (PG), Honeywell (HON) and International Paper (IP). In the broader market, oil service, drug, biotechnology, and consumer products companies edged higher while chemical, airline, and utility shares generally retreated. Stocks in the paper segment also slumped after Goldman also slashed its cut estimates on Bowater (BOW), Georgia Pacific (GP) and Boise Cascade (BCC). Those of you in the BOW call-credit position should thank GS for their excellent timing. Overall, the tone in today's trading was a cautious one, ahead of the fourth quarter reporting season. Our portfolio enjoyed a relatively good performance all-around, with many sectors experiencing upside activity. However, there were few issues that made significant moves and almost no major activities were observed in the current positions. Of course, there were a number of good opportunities to make adjustments in the long-term plays and with any luck, most of the positions expiring this month will finish profitably. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** WCII - Winstar Communications $17.75 *** Reader's Request! *** Winstar Communications provides businesses with unique broadband services. Winstar offers its services across its own end-to-end broadband network in 60 major markets in the United States, including each of the top 30 U.S. markets. The Company also has services in 12 overseas markets, including London, Brussels, Buenos Aires and Tokyo. Winstar's broadband network allows it to offer an integrated suite of communications and information services, including local and long distance voice services; always-on and dial-up Internet access; ATM, frame relay and IP data transport services; web hosting and design and development services; online business content, including office.com, from the company's online business center; online application hosting services, including Microsoft Office 2000 Online; network and applications solutions for vertical business communities; and LAN and WAN systems integration. One of our readers requested a bullish position in this issue, based on the recovery in the Telecom Services sector. Winstar has rallied substantially in the past few sessions, but there is still much work to be done before it can move back to last year's trading range near $30-$40. In this case, the premium disparities for a bullish calendar spread are favorable and the potential for a successful (technical) recovery is affected by the resistance at the sold strike price; a perfect condition for a time-selling strategy. The basic premise in a calendar spread is simple; time erodes the value of the near-term option at a faster rate than it will the far-term option. A less neutral and more bullish type of calendar spread is when the underlying issue is below the strike price of the options. It is generally best to establish this type of spread at least 2 - 3 months before the long position expires, capitalizing on the ability to sell another option against the longer-term position. Ideally, the spreader would like to have the stock finish just below the sold strike when the near-term option expires. If the short options are ITM at expiration, he will have to repurchase (or offset) them to preserve the long-term position. PLAY (conservative - bullish/calendar spread): BUY CALL APR-20 WQS-DD OI=954 A=$3.62 SELL CALL JAN-20 USR-AD OI=162 B=$0.62 INITIAL NET DEBIT TARGET=$2.75-$2.88 TARGET ROI=25% /charts/jan01/charts.asp?symbol=WCII ****************************************************************** ABIZ - Adelphia Business Solutions $6.19 *** Low Cost Play! *** Adelphia Business Solutions is a majority owned subsidiary of Adelphia Communications Corporation that provides integrated communications services to business customers through its state-of-the-art fiber optic communications network. ABIZ has substantially completed the construction of its fully redundant, 18,000-mile long-haul fiber optic network in the eastern-half of the United States, which, combined with an estimated 8,000 local fiber route miles in its operating markets, will support ABS's full line of communication service offerings, including local and long-distance voice services, messaging, high-speed data and Internet services. Adelphia Business Solutions has endured a steady downtrend since early last year, falling to all-time lows just a few weeks ago near $3. Now the share value is finally establishing a base and the company is in the midst of growth and expansion restructuring intended to refocus success-based capital to connect customers to ABIZ's networks and ensure the completion of fiber construction in the markets in which the company will continue to operate. As a result of these changes, Adelphia Business Solutions expects revenue growth of 40%-45% in 2001 and their EBITDA is expected to improve to a positive $8-$12 million by the fourth quarter of the year. That sounds like a very optimistic outlook, but based on the recent technical indications, investors are confident that the end result will be favorable. PLAY (very conservative - bullish/collar): BUY STOCK - ABIZ ASK=$6.25 SELL CALL FEB-7.50 QPI-BU OI=235 B=$0.62 BUY PUT FEB-5.00 QPI-NA OI=5 A=$0.69 TARGET COST BASIS=$6.25 ROI(max)=20% RISK(max)=20% /charts/jan01/charts.asp?symbol=ABIZ ****************************************************************** - STRADDLES - ****************************************************************** FII - Federated Investors $24.69 *** Earnings Speculation! *** Federated Investors, along with its consolidated subsidiaries, provides investment management and related financial services. Federated sponsors, markets and provides investment advisory, distribution and administrative services primarily to mutual funds. Federated provided investment advisory services to over 100 funds that are offered through banks, broker/dealers and other financial intermediaries who use them to meet the needs of th
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