The Option Investor Newsletter Wednesday 01-10-2001 Copyright 2001, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/011001_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 01-10-2001 High Low Volume Advance/Decline DJIA 10604.30 + 31.80 10611.60 10472.50 1.29 bln 1868/1052 NASDAQ 2524.18 + 82.88 2525.28 2376.49 2.46 bln 2558/1256 S&P 100 684.78 + 5.33 685.13 671.59 totals 4426/2308 S&P 500 1313.27 + 12.48 1313.76 1287.28 65.7%/34.3% RUS 2000 475.45 + 11.50 475.45 461.54 DJ TRANS 3070.13 + 1.53 3081.34 3050.69 VIX 30.15 - 0.64 32.09 30.01 Put/Call Ratio 0.57 ****************************************************************** The Markets Turn Bad News Into Good Prior to the open this morning, NASDAQ futures were down 40 points on a CIBC World Markets downgrade of tech bellwether CSCO. But this type of scenario set up the perfect opportunity for the market to prove itself. And prove its relative strength it did. The NASDAQ traded at the low of the day right off the open and yesterday's momentum re-emerged, shaking off the bad news. Today's action not only represented the first back-to-back positive days for the NASDAQ this year, but also a glimmer of hope for what appears to be a stealth rally. As more and more talk circulates about a possible NASDAQ bottom, one thing is certain: the NASDAQ has been attracting buyers even in the face of disconcerting news. While the euphoria over last week's rate cut has subsided, the technical outlook for the NASDAQ continues to improve. It has been lingering in deeply oversold conditions and the initiation of Fed easing policy is the exact catalyst that the market needed. With the economic effects of this recent rate cut six to nine months away, the effect on the market psyche is immediate. Just take a look at the NASDAQ's morning climb to 2521. This 145 point climb came to a halt when John Chambers, CSCO CEO, essentially warned of a slowdown in revenues going forward. His concern is that revenue visibility will remain tough in the next quarter. The stock and the NASDAQ swiftly sold off on the news of Chambers comments which were disseminated on the Internet. But even this bad news for the market was short-lived as buyers were waiting in the wings to gain entry points. Volume was huge in CSCO today, 211 mln shares, which is the second heaviest volume for a stock in one day in NASDAQ history. CSCO rallied into the close and recaptured most of the morning's gains. Other networking stocks managed similar recoveries: RBAK(+5.44), NT(+0.31), and JNPR(+2.13) which traded in a $19 range today. NASDAQ advancers beat decliners 2-1. While the markets whipsawed today on every bit of news, YHOO traded up fractionally in anticipation of its earnings report after the bell. The Internet portal announced in-line earnings of 13 cents for the 4th quarter as expected but all eyes were on the revenue guidance for the year 2001. On the conference call, YHOO stated that they foresee 1st quarter revenue to be lower-than-expected at $220 - $240 mln. This will be significantly lower than today's reported $310 mln for the 4th quarter, which was just shy of the expected $315 mln. In addition, YHOO severely cut its EPS for the full year 2001 to $0.33 - $0.43 from previous forecasts of $0.57. They cited slowing Internet advertising as the culprit. As a result of this shift in guidance, YHOO shares plummeted 20% in after-hours trading, finishing at $24.63. This is the first of the high profile NASDAQ stocks to come clean about the upcoming year's projections. MOT also matched its downwardly revised earnings estimates, but saw revenues fall short. Tomorrow's open will reflect the decline with NASDAQ futures currently down 32 points. The NASDAQ will be tested again to prove its resilience. Will buyers take advantage of the dip? The California energy crisis continued to deteriorate today as PG&E, Pacific Gas & Electric, teeters on the brink of bankruptcy. Unable to obtain cash loans to pay its bills, PG&E took the drastic step to suspend its dividend and without any immediate government relief, the company may be forced into default. They also announced that their 4th quarter earnings will be delayed. This raises the issue of credit risk on the West Coast and a possible recession in California. Richard Berner, chief economic strategist with Morgan Stanley Dean Witter, clearly thinks California is going into recession and that the utility problem could spread outside of the state and beyond the sector. Yet, the market remained strong. DaimlerChrysler(DCX) warns that it that it is out of cash. And the market remains strong. It is evident that the current economic conditions are beginning to wear on Corporate America. But, with the Fed on our side again, aggressively cutting rates, the market claws from its oversold levels. The INDU even rallied impressively into the close, finishing at 10604. Financials and consumer cyclicals led the rally: JPM(+2.25), C(+1.75), HD(+1.56), and UTX(+1.63). Both INTC(+0.75) and MSFT(+1.06) contributed as well. The entire market is going to be curiously and nervously watching the earnings announcements as the season begins. We are at a very precarious point for the market. Reiterating what Jim said last night, we could see companies announce in-line earnings like YHOO, but have dismal outlooks for the coming quarters. With the time for pre-earnings warnings past, the market's strength will be tested as it digests Corporate America's 2001 economic outlook. While the NASDAQ has not given any clear signals of a true reversal or bottom, it is technically acting well. How it deals with YHOO's report tomorrow will be very telling. Tomorrow's open certainly will be soft. Look for tests of support on the NASDAQ at 2425 and 2400 where the buyers have been showing up. When initiating any trades, watch these key levels for upside intraday reversals like we saw today at 2425. Friday's PPI and Retail Sales reports will be closely monitored for further economic visibility and foresight into how the Fed will act at the next FOMC meeting. Traders will be positioning themselves tomorrow ahead of Friday's reports. On the earnings slate tomorrow after the close are ARBA, CREE, DCLK, and RMBS. To minimize overnight risk during this earnings season, consider closing positions during the day to avoid opening gaps based on the previous night's reports. Trade smart. Matt Russ Editor ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.sungrp.com/tracking.asp?campaignid=1347 ************************************************************ ************* NEW CALL PLAY ************* SLR - Solectron Corporation $36.05 +0.15 (+2.02 this week) Founded in 1977, Solectron Corporation is the world's largest electronics manufacturing services company offering a full range of integrated supply-chain solutions for the world's leading electronics original equipment manufacturers. Solectron's integrated technology solutions, materials, manufacturing and operations, and global services offer customers competitive outsourcing advantages, such as access to advanced manufacturing technologies, shortened product time-to-market, reduced total cost of ownership and more effective asset utilization. The maturity of the PC industry and fears of decreased capital expenditures did little to help SLR's stock price late in the year 2000, as the company's shares got caught in a downward spiral, making a series of lower highs and lower lows. However, speculation in December that the Fed could ease interest rates going forward along with a Buy rating from CIBC helped the stock to break a downtrend that had been in place since this past October. Recently, stock has drifted up, carried higher by its 5 and 10-dma and a bullish outlook from Merrill Lynch. The 50 basis point cut last Wednesday turned hope for better rates into reality and with further rate cuts projected ahead, the improving fundamental backdrop gave SLR enough strength to close above its 50-dma for the first time since last October. For aggressive traders, a pullback to the 5-dma at $35.17 or support at $35 could provide for an entry, but confirm a bounce with buying volume. Support at $34.50 could provide for an ideal target to shoot for, with the 10 and 50-dma currently converged at that level. We are placing a protective stop just below at $34. A close below this price could mean a reversal of SLR's recent upward momentum. If buying pressure increases, powering SLR through the $36.50 level, this could allow conservative traders to take a position. From there the stock would be poised to challenge formidable resistance at $40, with the 100 and 200-dma converged at that point. When making a play, keep a close eye on competitors CLS, FLEX, JBL to gauge sector sentiment. ***January contracts expire next week*** BUY CALL JAN-30 SLR-AF OI=2683 at $6.60 SL=4.75 BUY CALL JAN-35 SLR-AG OI=2651 at $2.55 SL=1.25 BUY CALL FEB-35*SLR-BG OI= 327 at $4.30 SL=2.75 BUY CALL FEB-40 SLR-BU OI= 588 at $2.10 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=SLR WCOM - WorldCom, Inc. $21.25 +1.44 (+2.81 this week) WorldCom is a new kind of communications company. WorldCom combines financial strength and a depth of resources to pursue the industry's best growth opportunities with an advanced global network built for the data-intensive era of communications. WorldCom's strategy is to capitalize on the industry's fastest growing segments. It has a unique set of attributes to pursue this strategy, including approximately 77,000 employees based in more than 65 countries, comprising an expert workforce of Information Age architects and sales and service specialists. As one of the four horsemen of the NASDAQ, shares of WCOM were less than equine last year, with the stock languishing in the lower reaches of the Tech index for the year 2000. Hitting a local top of $50 in mid-July, the stock fell into pronounced downtrend, as can be seen by connecting the highs during that time. But with a new year comes new life for the stock, as WCOM broke its long-term downtrend line on the very first trading day of 2001. Since then the stock has rallied with conviction, breaking through its 50-dma, a level it hasn't traded above in almost half a year. A combination of heavy short covering, desire amongst investors for long term value plays with attractive growth potential and a friendly Fed all helped the Telecom sector move strongly higher. Morgan Stanley Dean Witter upgraded peer AT&T yesterday, giving a further boost to Phone stocks across the board. Having moved so far so fast, a pause to consolidate gains is quite possible, allowing for entries on support at $20, the 5-dma near $19.50 and our stop price at $18.50, but make sure buying volume confirms the bounce. If the stock continues to power forward on positive momentum, then a break through resistance at $21.50 could allow for an entry on strength, confirming positive direction with Merrill Lynch's Telecom HOLDR (TTH). WCOM's break from its long-term downtrend could mean the beginning of a significant move up. Because of the low option prices and the leverage that this affords, we recommend buying more time, allowing this play enough room to appreciate. ***January contracts expire next week*** BUY CALL JAN-15 JQD-AC OI=40356 at $6.38 SL=4.50 BUY CALL JAN-17.5 JQD-AW OI=43166 at $3.88 SL=2.50 BUY CALL JAN-20 *LDQ-AD OI=57892 at $1.88 SL=1.00 BUY CALL FEB-20 LDQ-BD OI= 7583 at $3.00 SL=1.50 BUY CALL FEB-22.5 LDQ-BX OI=11468 at $1.81 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=WCOM ************ NEW PUT PLAY ************ No new puts today. ***************** STOP-LOSS UPDATES ***************** NKE - call play Adjust from $53 up to $55 Q - call play Adjust from $41 up to $43 LU - call play Adjust from $12 up to $15 VZ - call play Adjust from $51 up to $53 SBC - call play Adjust from $47 up to $50 BRCM - call play Adjust from $84 up to $93 AEOS - call play Adjust from $43 up to $44 CTXS - call play Adjust from $23 up to $25 LRCX - call play Adjust from $16 up to $18.50 MMC - put play Adjust from $113 down to $108 CB - put play Adjust from $80 down to $77 ************* DROPPED CALLS ************* No dropped calls tonight. ************ DROPPED PUTS ************ PDLI $56.00 +5.75 (-3.50) Good news from the company and a bounce in the Biotech space helped shares of PDLI to gain over 11 percent on almost twice the ADV today. PDLI announced that its SMART Anti-Gamma Interferon Antibody, engineered to treat Crohn's disease, had entered Phase I/II testing,. Upgrades to peers DNA, HGSI, MLNM helped lift the entire sector, especially Genomics issues, with PDLI joining in on the rally. While the stock closed below our stop price of $57 and resistance from the 5-dma (currently sitting at $57.57), we are taking profits on this play. With such a large gain today, look for a possible dip tomorrow to close out open positions. ************** TRADERS CORNER ************** Liquidity Trends And Corporate Yields By Mary Redmond The markets seem to be poised in suspended animation, as traders wait for a strong bullish trend to develop. We need to remember that it may take some time to recuperate from the severe damage which was inflicted on the markets last year. We may need to see a higher level of cash flowing into equity funds and the market before a true sustainable rally can develop. Studies have shown that there is a very close correlation between the four week moving average of cash to equity funds and the movement of the market. The Nasdaq and NYSE have reported that institutions generally account for approximately 20% of the volume on the exchanges. However, individual investors tend to buy in their brokerage accounts at the same time they are making deposits to their mutual funds. Tracking fund flows can be an informative tool to gauge investor sentiment and market liquidity. It is almost impossible to track daily flows of cash into the thousands of equity funds, which is why the four week moving average of cash to equity funds is a more reliable indicator. The four week moving average of cash to equity funds was a negative $16.5 billion last week, according to AMG Data. The significance of this is the fact that this is the worst monthly redemption rate in over ten years. Studies by the Investment Company Institute of very long term patterns of fund investing show that the vast majority of equity fund investors are in for the long term and usually do not redeem their funds in bear markets. We have only had one other month in the last ten years in which investors redeemed their mutual funds, and that was August of 1998. However, the level of redemptions is far greater at this point. Since these statistics are a week delayed, it is possible that next week’s reports may show that money is starting to go back into equity funds in the levels we saw earlier in the year. This can become a self-perpetuating trend, as investors dip in a little bit at a time, until a true rally starts to develop. Most people buy equity funds in their retirement plans, and do not use funds as short-term trading vehicles. It seems that there may be a maximum pain threshold people can tolerate before they sell their funds and convert to cash. Most people who started investing in the 1990s had never been through anything as severe as this year's market, and many are still suffering from shock of losses they never would have believed possible. While most market investors suffered losses this year, the ICI and the Fed have reported that the levels of cash being deposited to money market funds, savings accounts, and CDs are higher than ever. In fact, money market funds have taken in over $100 billion in cash since October, and currently have over $1.87 trillion in deposits. All we need is to have a fraction of this deposited to the market to sustain a strong rally. Considering the high level of fund redemptions, the market's movement this week was very encouraging. If the market is stabilizing when fund flows are negative, then think what could happen if they become positive again. So what is the catalyst going to be? There are a number of important events which could trigger individual investors to begin to deposit money to funds again, which would stimulate buying by fund managers. The first is obviously the fact that the market must stop going down and start to stabilize. This has already started to occur on the Nasdaq. Earnings reports will be another stimulus. At this point it seems that the worst case scenario is priced in to earnings. We will need to assess the market's reaction to the earnings coming out this week. We need to consider that there is a very high short position in many NYSE and Nasdaq stocks, particularly in many telecom and technology stocks. Holding short positions when the Fed is lowering rates aggressively can be more dangerous than holding long positions during a rate hike cycle. These short positions will have to be covered, and this could be the start of a rally. Another point to remember is the sectors which tend to lead the market higher during rate decreases, financials and telecoms, will be directly impacted by lower corporate yields in the near term future. There is an interesting correlation between the VIX.X and the spread between high yield corporate bonds and Treasuries. This spread became widely distorted during the last rate hike cycle. C rated debt is considered high risk, and during most of the 1990s, has generally yielded between three hundred to four hundred basis points above the Treasury rate. But with this cycle of hikes, the rates soared to over 800 basis points above the Treasury rate. This phenomenon also occurred simultaneously with a high VIX.X during the summer of 1998, and more recently, this fall. There are a number of reasons why this could have happened. The stock and bond markets are inextricably intertwined, and both individual and institutional investors were highly risk prone during late 1998 and 1999. The issuance of high yield debt soared after the Fed's last cycle of rate cuts, and the IPO market issued more stock than ever before during 1999, an average of between $20 and $30 billion per month. While the investment grade corporate debt market yields rose roughly in tandem with the Fed's rate hikes, the high risk corporate yields rose by a much greater percentage toward the second half of 2000. Commercial and institutional investors started to shun risk oriented investments as the stock market declined, and these investors demanded a higher yield from companies which were increasingly perceived as high risk as their stock market values declined. The important point is that high risk yields have dropped significantly in the last couple of weeks, since Fed Chairman Greenspan hinted of rate cuts in December. Since that time, a number of telecom companies have successfully issued high yield bonds, and the telecom sector is showing signs of recuperation. We may need to wait until most of the major financial stocks start to report earnings before investors start to commit funds to this sector. Considering the Fed’s actions taken the last time we experienced very high credit spreads, it is likely that this may have been their primary motivation for easing rates, and not some phantom menace plaguing the markets, as some the rumors would have had one think last week. ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1361 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** BRCM - Broadcom Corporation $110.00 +13.00 (+23.00 this week) Broadcom Corporation is a provider of highly integrated silicon solutions that enable broadband digital transmission of voice, video and data to and throughout the home and within the business enterprise. These integrated circuits permit the cost-effective delivery of high-speed, high-bandwidth networking using existing communications infrastructures that were not originally designed for the transmission of broadband digital content. Using unique proprietary technologies and advanced design methodologies, the company designs, develops and supplies integrated circuits for a number of the most significant broadband communications markets. Most Recent Write-Up 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). Comments With the NASDAQ shaking off bad news today, BRCM found some strong buying to push the stock through the century mark. Although YHOO is trading down in after-hours, the probable dip tomorrow will be met again with buyers. Look for an entry point on bounces from intraday support at $100. If profit-taking is more severe, the 10-dma at $93.84 would be the next area of support. Watch the sentiment in the NASDAQ for direction. The NASDAQ's technically oversold condition has sparked a stealth rally. ***January contracts expire next week*** BUY CALL JAN-105*RDW-AA OI=3807 at $12.00 SL= 9.50 BUY CALL JAN-110 RDW-AB OI=1494 at $ 9.00 SL= 6.75 BUY CALL JAN-115 RDW-AC OI=2991 at $ 7.13 SL= 5.25 BUY CALL FEB-110 RDW-BB OI= 310 at $18.00 SL=14.00 BUY CALL FEB-120 RDW-BD OI= 495 at $14.00 SL=11.25 http://www.premierinvestor.com/oi/profile.asp?symbol=BRCM ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Traders see a light! Is it the end of the tunnel or another train? The stock market battled its way to a positive finish Wednesday, even as unruly bears tried valiantly to push the Nasdaq lower in the wake of another downgrade of bellwether Cisco Systems (CSCO). Networking issues were among the biggest losers in the group as CIBC World Markets issued a bearish outlook for Cisco, saying the company is not ready to meet future changes in the telecom market. Analysts also suggested it is unlikely Cisco will meet consensus revenue estimates in fiscal year 2002 and the company's strategy of acquisition-based expansion must give way to internal growth. Among other popular groups, software issues continued to recover and semiconductor issues rebounded from early selling to achieve favorable gains. Many technicians believe chip companies will be one of the first groups to complete a bottoming process and move back to a bullish trend. Stocks in the Internet infrastructure and wireless telecom groups were mixed after a report from Lehman Brothers portrayed a "challenging environment for telecom capital expenditures with uncertainty over enterprise spending levels." At the same time, pure Internet issues continued to rebound with shares of America Online (AOL) and EBay (EBAY) leading the rally. On The Dow, bank and brokerage issues enjoyed substantial gains, with Citigroup (C) and J.P. Morgan Chase (JPM) among the leaders on the blue-chip average. Merrill Lynch identified JPM as a new "Focus One" stock, indicating that the company's shares appear to be undervalued when viewed as an emerging global securities play. On the downside, Wal-Mart (WMT), Caterpillar (CAT) and General Motors slumped during the session. In S&P 500 sectors, oil and natural gas service, telecom carriers and biotechnology companies generally moved higher while paper, chemical, utility, transport, retail and drug issues struggled in the rising market. Overall, the technical pattern unfolding in the Nasdaq suggests a rally may be in the making but the optimism could be short-lived as a pair of important quarterly reports are due after the close of trading. Motorola (MOT) and Yahoo! (YHOO) will announce results for the past three months and they will be the first technology companies to report in the final quarter of 2000. Analysts will be looking for guidance in the coming year and Thursday's session will likely be driven by the market's reaction to these earnings. Summary of Previous Picks: Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return NEWP JAN 65 62.56 77.13 $2.44 7.4% IMPH JAN 45 42.69 55.31 $2.31 5.5% Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return NEWP JAN 55 53.88 77.13 $1.13 11.2% QCOM JAN 70 68.50 72.44 $1.50 10.2% Key Moment AFFX JAN 55 53.81 56.69 $1.19 9.6% Support? IMPH JAN 40 38.87 55.31 $1.13 9.2% LEH JAN 55 54.12 77.31 $0.88 7.8% JNPR JAN 70 68.94 119.31 $1.06 7.3% IVGN JAN 60 58.50 70.31 $1.50 7.0% DCTM JAN 40 38.94 48.69 $1.06 6.8% IDPH JAN 120 117.50 158.13 $2.50 6.4% 3-1 split 01/18 EMLX JAN 45 43.69 77.63 $1.32 6.3% Adj 2-1 Split BGEN JAN 50 49.37 51.31 $0.63 6.3% Be Ready! MWD JAN 65 64.44 86.00 $0.56 6.2% NOK JAN 40 39.25 39.56 $0.31 1.9% Key Moment Sell Strangles: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return BRCM JAN 45 43.75 109.94 $1.25 8.6% BRCM JAN 160 161.06 109.94 $1.06 7.4% CEPH JAN 40 39.06 49.00 $0.94 8.2% CEPH JAN 70 71.19 49.00 $1.19 10.1% GMST JAN 25 24.37 44.63 $0.63 5.8% GMST JAN 65 65.75 44.63 $0.75 6.8% IMPH JAN 35 33.25 55.31 $1.75 11.7% IMPH JAN 80 82.75 55.31 $2.75 17.0% MERQ JAN 60 59.31 69.75 $0.69 6.7% MERQ JAN 140 141.00 69.75 $1.00 9.6% RIMM JAN 50 48.44 52.56 $1.56 12.1% Alert RIMM JAN 115 115.94 52.56 $0.94 7.6% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return RIMM JAN 110 111.06 52.56 $1.06 13.4% QLGC JAN 130 131.50 73.00 $1.50 10.1% BEAS JAN 85 86.25 56.25 $1.25 10.1% ADBE JAN 80 81.00 45.75 $1.00 8.1% IVGN JAN 100 100.63 70.31 $0.63 7.7% VRTS JAN 160 161.69 91.06 $1.69 6.1% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status ESRX $88.88 $89.91 JAN65p/70p $0.50 $69.50 $0.50 Open AFFX $63.63 $56.69 JAN40p/45p $0.69 $44.31 $0.69 Open VAR $62.00 $61.13 JAN50p/55p $0.50 $54.50 $0.50 Open FCEL $72.25 $56.50 JAN45p/55p $0.56 $49.44 $0.56 Alert MRK $89.13 $83.19 JAN100c/95c $0.62 $95.62 $0.62 Open New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Naked Puts *************** DPMI - Dupont Photomask $64.00 *** On The Rebound! *** Dupont Photomask is one of the largest photomask manufacturers in the world. Photomasks are high-purity quartz or glass plates containing precision images of integrated circuits and are used as masters by semiconductor manufacturers to optically transfer these images onto semiconductor wafers. Photomasks are also a necessary component in the production of semiconductors, and advanced photomask technologies are critical to enabling the manufacture of increasingly complex semiconductor devices. The company manufactures a range of photomasks based on customer supplied design data, including photomasks that meet critical design specifications required by semiconductor manufacturers. There's little news to explain the recent bullish activity in DPMI but one thing is clear, investors are willing to support the price of the issue in its new range. The stock has traded higher in each of the last four sessions and volume has also increased during the rally. The company's quarterly report is due after the January options expiration, so it is unlikely that earnings are driving the share value. In any case, the current technical outlook is favorable and our position offers an excellent reward potential at the risk of owning this issue at a favorable cost basis. DPMI - Dupont Photomask $64.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JAN 40 DUD MH 60 0.38 39.62 9.7% *** Sell Put JAN 45 DUD MI 20 0.44 44.56 11.2% Sell Put JAN 50 DUD MJ 203 0.56 49.44 14.2% /charts/jan01/charts.asp?symbol=DPMI ******* JNPR - Juniper Networks $119.31 *** Entry Point! *** Juniper Networks is a provider of Internet infrastructure solutions that enable Internet service providers and other telecommunications service providers, to meet the demands resulting from the rapid growth of the Internet. Juniper delivers next generation Internet backbone routers that are specifically designed, or purpose-built, for service provider networks. The company's flagship product is the M40 Internet backbone router, and it recently introduced the M20, an new Internet backbone router purpose-built for emerging service providers. The company's Internet backbone routers combine the features of the JUNOS Internet Software, high performance ASIC-based packet forwarding technology and Internet-optimized architecture into a unique, purpose-built solution for service providers. Networking stocks have been under enormous pressure in recent weeks and today's acknowledgement form Cisco Systems (CSCO) that business slowed during the past month simply added to the bearish outlook. Cisco's CEO John Chambers told a Morgan Stanley Dean Witter conference this morning that business from both business and service provider customers slowed in mid-December. Of course Juniper will be affect by the slowing growth but the company has much better fundamentals and will likely emerge as the new leader in the industry. We see the current slump as a buying opportunity and with the incredible option premiums, it may be a good time to speculate on the future activity of this volatile issue. JNPR - Juniper Networks $119.31 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JAN 70 JUX MN 596 0.75 69.25 10.3% *** Sell Put JAN 72.5 JUX MV 188 0.81 71.69 11.1% Sell Put JAN 75 JUX MO 610 1.06 73.94 14.4% Sell Put JAN 77.5 JUX MW 186 1.25 76.25 16.8% /charts/jan01/charts.asp?symbol=JNPR ******* XLNX - Xilinx $52.00 *** Hot Sector! *** Xilinx designs, develops and markets complete programmable logic solutions, including advanced integrated circuits, software design tools, predefined system functions delivered as cores of logic and field engineering support. The company's programmable logic devices (PLDs) include field programmable gate arrays and complex programmable logic devices. These devices are standard products that customers program to perform desired logic functions. Their products are designed to provide integration and quick time-to-market for electronic equipment manufacturers, primarily in the telecommunications, networking, computing, industrial and consumer markets. The company offers complete software design tool solutions, which enable customers to implement their design specifications into its PLDs. Semiconductors are performing well and XLNX appears to be one of the stronger issues in the group, rallying to recent highs during the past week even as analysts announced new downgrades on the company's shares. With earnings due next week, no one knows how the market (or the semiconductor industry) will perform after the quarterly announcements, but we believe the cost basis in the target position is a reasonable price to pay for this issue in the long run. XLNX - Xilinx $52.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JAN 30 XLQ MF 1724 0.38 29.62 11.9% *** Sell Put JAN 35 XLQ MG 5764 0.56 34.44 17.3% Sell Put JAN 40 XLQ MH 4028 0.94 39.06 28.0% /charts/jan01/charts.asp?symbol=XLNX *************** Neutral Plays - Credit Strangles Many of our readers have asked for 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 week and these types of positions must be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** CMVT - Comverse Technology $101.63 *** Trading Range! *** Comverse Technology designs, develops, manufactures, markets and supports computer and telecommunications systems and software for a wide range of multimedia communications and information processing applications. The company's products are used in a number of applications by wireless and wireline telephone network operators, government agencies, call centers, financial institutions, and public and commercial organizations worldwide. The company provides enhanced services platform products, digital monitoring and recording systems for call centers, customer relationship management applications, public networks and government agencies, network signaling software for wireless, wireline and Internet communication services known as signalware, and other telecommunications hardware and software products and services. We like this issue for a premium-selling position because it has a relatively well-defined trading range and no apparent news or events that will substantially change its character prior to the January options expiration. The company's earnings announcement is not expected until early in March and our profit envelope is outside the most recent trading range at $85-$120. Our plan is to sell the OTM options for credit and use the earned income to offset any losses on the downside. If the price of the stock continues to move through the resistance area near $115 in the coming week, we will close the play at a small loss or buy the stock to cover our sold options. CMVT - Comverse Technology $101.63 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JAN 75 CQV MO 2604 0.63 74.37 10.2% *** Sell Call JAN 125 CQZ AE 2398 0.63 125.63 10.2% *** - or - Sell Put JAN 80 CQZ MP 1640 0.81 79.19 13.0% Sell Call JAN 120 CQZ AD 2301 1.13 121.13 16.3% /charts/jan01/charts.asp?symbol=CMVT ******* EMLX - Emulex $77.63 *** Range-bound! *** Emulex is a designer, developer and supplier of a broad line of Fibre Channel host adapters, hubs, application-specific computer chips (ASICs), 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 SAN configurations, system buses and operating systems, enhancing data flow between computers and peripherals. Emulex's products offer customers a combination of critical reliability, scalability, and high performance, and can be also 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 $54. The company's earnings are due on January 18. EMLX - Emulex $77.63 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JAN 55 UMQ MK 814 0.56 54.44 11.8% *** Sell Call JAN 97.5 UEL AM 471 0.56 98.06 11.8% *** - or - Sell Put JAN 57.5 UMQ MY 925 0.94 56.56 19.3% Sell Call JAN 95 UEL AS 1659 0.94 95.94 19.3% /charts/jan01/charts.asp?symbol=EMLX ******* ITWO - i2 Technologies $48.00 *** Solid Earnings! *** i2 Technologies is a global provider of intelligent eBusiness solutions that help enterprises optimize business processes both internally and among trading partners. Its solutions enable enterprises to significantly improve efficiencies, collaborate with suppliers and customers, respond to market demands and engage in dynamic business interactions over the Internet. The company has recently launched TradeMatrix, a robust platform of business-to-business solutions, services and marketplaces that will allow customers, partners, suppliers and service providers to do business together in real time. The company's RHYTHM product suite principally includes solutions for supply chain management, customer management, product lifecycle management, inter-process planning and strategic planning. ITWO rallied today in the wake of a positive earnings preview and an upgrade from Salomon Smith Barney. On Monday, i2 said its fourth-quarter revenues were seen in excess of $370 million, beating the consensus estimate of $342 million. Based on the strong fundamentals and valuation, analysts upgraded the maker of supply-chain management software to a "buy" and commented that i2 is one of the few companies well-positioned for 2001, given the gloomy projections for IT spending. We also favor the issue for a bullish position, but there are not many ways to approach the wide bid/ask spreads and there are two primary resistance areas to overcome as the share value recovers. 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. ITWO - i2 Technologies $48.00 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JAN 30 QYJ MF 1358 0.50 29.50 16.7% *** Sell Call JAN 70 QYI AN 1445 0.56 70.56 18.6% *** - or - Sell Put JAN 35 QYJ MG 756 0.88 34.12 28.4% Sell Call JAN 67.5 QYI AU 348 0.69 68.19 22.7% /charts/jan01/charts.asp?symbol=ITWO ******* NTIQ - NetIQ $72.44 *** Looking For A Bottom! *** NetIQ is a provider of eBusiness infrastructures management software that enables organizations to optimize the performance and availability of Windows NT and Windows 2000-based systems and applications. The company's Administration, Operations and Network Performance Management product lines are designed to help reduce the cost of operations and increase the security, performance and availability of unique eBusiness applications, directories, servers and networks. Internet infrastructure stocks slumped early in the month after investment bank Robertson Stephens slashed their ratings on a number of issues in the group. Analyst Dane Lewis' report cited a slowdown in spending on information technology as well as heightened competition that will likely squeeze margins in the coming months. His reasons for downgrading the sector are easy to understand, as corporate customers can do little to help the problem amidst their own spending concerns. NetIQ fell to a new 3-month low (near $58) on the news, but found excellent buying support near that range as the broader software industry began to recover from recent selling pressure. With today's Nasdaq rally, the issue has moved back above a short-term ceiling and the path of least resistance appears to be a bullish one. At the same time, the area near $100 has heavy overhead supply and the likelihood of the stock reaching that price in one week is statistically very low. NTIQ - NetIQ $72.44 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JAN 50 CQT MJ 185 0.56 49.44 12.6% *** Sell Call JAN 105 CQT AA 224 0.56 105.56 12.6% *** - or - Sell Put JAN 55 CQT MK 32 1.19 53.81 25.7% Sell Call JAN 100 CQT AT 187 0.88 100.88 19.4% /charts/jan01/charts.asp?symbol=NTIQ ************************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. 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