The Option Investor Newsletter Wednesday 01-17-2001 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/011701_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 01-17-2001 High Low Volume Advance/Decline DJIA 10584.30 - 68.40 10705.90 10545.30 1.33 bln 1591/1330 NASDAQ 2682.78 + 64.23 2756.63 2668.48 2.82 bln 2370/1600 S&P 100 691.98 - 1.07 703.15 689.61 totals 3961/2930 S&P 500 1329.47 + 2.82 1346.92 1325.41 57.5%/42.5% RUS 2000 493.46 + 0.18 501.05 493.22 DJ TRANS 3062.49 - 2.25 3075.50 3047.55 VIX 28.51 + 0.33 28.77 26.93 Put/Call Ratio 0.49 ************************************************************* Blackouts, earthquakes and IBM beats earnings estimates! That title sounds like a multiple choice question you would hear on a TV game show. Name three things that cannot happen on the same day. If that was your answer, you lost. After a huge gap up at the open the Nasdaq gave back over half of the gains before the day ended. The Dow traded above 10705 only briefly before losing ground to close down -68 points. It was a frustrating day. The huge gap up was untradable and then the slow point burn as the day progressed offered no real opportunity to go long. Fear of the IBM earnings due after the bell today kept tech stocks from holding their gains. Before the bell today JPM announced earnings that missed estimates by -.08 cents. After dropping to a low of 52.13 at the open JPM actually rallied to close almost flat for the day at $53. There was no dramatic drop or investor flight. Evidently the bad news was already priced in and traders breathed a sigh of relief that it was not worse. The biggest loser on the Dow today was MMM which dropped over -$5 after reporting earnings of $1.12 instead of the expected $1.20. MMM claimed the missed earnings were a result of a significant slowdown in the U.S. economy. Their plans going forward include significant restructuring and layoffs. The impact to the Dow was about -30 points at the worst level but MMM rallied off its lows to close down only -3.50. Other Dow stocks reporting included GE which announced earnings inline as expected and EK which also matched estimates. Boeing beat estimates by a dime and had an upbeat forecast but still lost -2.25 as investors moved on to other trades. GM also announced earnings that beat estimates by three cents but warned that there was trouble ahead. The estimates had already been cut by -75% from earlier numbers so it was no surprise that GM beat them slightly. Estimates for 2001 of $.91 were guided down by GM to zero or a break even for the year. The big earnings winner for the day was IBM. Widely expected to warn and didn't, IBM announced earnings that beat the street by two cents AND said they were comfortable with analysts estimates for all of 2001. Incredible and totally unexpected. IBM was widely seen as suffering from currency issues, PC slowdowns, IT spending restrictions and a host of other problems. Instead they beat the estimates and said good things about the future. Just shows that nobody can predict the future. IBM stock soared over +$10 in after hours trading which if it holds in pre-market tomorrow will provide a significant lift for the Dow. However the futures are not showing that as of 7:PM. Other major earnings tonight included ITWO who beat estimates by a penny and EXTR which announced inline with estimates. AAPL announced its first loss in three years but pledged to do whatever necessary to move back into profitability. AMD missed estimates by -$.02 but said it was still gaining market share from Intel at about 2% per quarter. SYMC beat estimates by a nickel and continued its breakout from the under $30 bottom from last month. BGEN also beat estimates by a penny as well as RBAK. RBAK sees revenues increasing going forward but margins shrinking. Only one day after the semiconductor earnings rally began, Dan Niles from Lehman Brothers, broadcast negative comments to his firm. Calling it a sucker rally he cautioned that there was more downside to go before the semiconductor sector could rally. He fells the weakness in PC sales will continue into the summer and not pickup until fall. The rally by the chip equipment manufacturers on the news that Intel would invest almost $8 billion in new equipment was misplaced optimism according to Mr. Niles. Chip stocks ignored his comments with AMCC +10, PMCS +11, AMAT +3.50, VTSS +8. All in all this has been a very positive earnings week. Most big name companies have met or exceeded estimates when almost everyone expected a very rocky quarter. We are not out of the woods yet but the forecast is good. The economic reports out today were positive with the CPI only gaining +0.2% as expected. The core rate was only up +0.1% which was less than the expected 0.2%. The report continued to show inflation trending upward but not at a rate that would mean trouble to the economy or the Fed. Industrial Production fell faster than expected at -0.6%, the largest decline in more than two years. The weakness in the industrial sector is broadening and the pace of the decline is accelerating. The Beige Book today showed a further slowdown in economic activity. Retail sales have slowed, inventories are beginning to rise, manufacturing activity is weakening and some pressure is beginning to ease in labor markets. Bond traders today indicated that these reports nudged the possibility of another -.50% rate cut much closer to 100%. Actually there is a rumor making the rounds that there is a secret (sure) and unscheduled Fed meeting either Thursday or Friday of this week. (Wonder what market maker started this rumor?) I have heard it several times today and if they really meet it will either be to talk about the California energy crisis or another inter- meeting rate cut. Now that would be a real shocker! The market internals continue to be good. Advance/declines are still positive with up volume on the Nasdaq swamping down volume by 10:1 in early trading. New highs are beating new lows by 5:1. Sounds like a very positive picture. However, I am concerned about the Nasdaq roll over this afternoon. Sure, there were significant profits to be taken and investors were afraid to hold over night again with IBM expected to miss earnings. The fragile market is still afraid of the evening darkness. On one hand JPM misses earnings by -.08 and nothing happens, AMD misses by -.02 cents and rallies +$1 in after hours but nobody wants to hold over night. This fear of holding is a serious problem. It means there is no conviction in the markets. Traders rush in at the open and rush out at the close. Remember last week when we dipped at the open and rallied into the close? That was funds buying not retail investors. The current reverse scenario means investors are again selling into rallies. Historically, as I mentioned last Sunday, there is a market dip at the end of this week. The earnings excitement is starting to wane and investors who played the earnings runs will move to the sidelines and decide what to do next. Earnings are far from over but the big headline names will be mostly done. IBM, INTC, MSFT, etc, will be history. The only thing to move the markets from this point is expectation of another rate cut on Jan-31st. That expectation, two weeks from today, is a driving force. That expectation can make investors quickly forget weak earnings on selective stocks, bad decisions on previous trades and fear of a slowing tech sector. With most tech earnings coming in above expectations and the Fed in our future it is entirely possible there will not be a pull back this year. Still we need to be focused and ready to capture any move and/or protect ourselves should it move against us. The California energy crisis is rapidly approaching a flash point. While it may be just another news item for most of us in states that have no problem, it is our problem as investors. With BAC and JPM facing a bankruptcy of the entire California utility system and billion of dollars of debt, we have no way to tell how that may impact the Fed or the economy. With the California governor talking about "eminent domain" meaning a government takeover of private assets, that alone could cause serious repercussions. My point here is that just because we are warm and comfortable in our homes and offices we need to keep an eye on the blackouts in California and the impact on the markets. The stock market outlook looks too good to be true and when that happens something always shows up to spoil the picnic. OPEC voted to cut -1.5 million bbls of oil as expected so energy prices for the rest of us are not going down any time soon either. Just to emphasize my point there was an earthquake today in an area that could seriously impact your trading profits had it been any worse. Where? Queens New York and Newark New Jersey. There were no injuries and no serious damage reported but add several points on the Richter scale and you would have had a real problem for the NYSE and trading in general. Now you can't plan for something like this but as traders we should NEVER be 100% committed as long as Murphy is alive and well. Earthquakes, blackouts, government takeover of private companies. Shucks, and all you thought we had to worry about was hitting earnings estimates! Alan, you have our approval to hold that unscheduled meeting but only if you promise to cut rates again this week. No rate cut and we will move your office to California! Enter passively, exit aggressively! 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=1436 ************************************************************** ************* NEW CALL PLAY ************* RATL - Rational Software $50.06 +5.38 (+2.84 this week) Rational Software Corporation, the e-development software company, helps organizations develop and deploy software for e-business, e-infrastructure, and e-devices through a combination of tools, services, and software engineering best practices. Rational's e-development solution helps helps organizations overcome the e-software paradox by enhancing time to market while improving quality. After falling from $70 in September to a low of $27 in November, RATL rallied with the markets after the Fed's rate cut on January 3. However, the real catalyst for RATL's strength this week may have been a superb earnings report released on January 10, as well as upwardly revised 2002 forecasts, and multiple analyst upgrades. RATL beat the estimates by a wide margin for the third quarter and nine months ending December 31, reporting third quarter net income up 57% from the year ago quarter. RATL's CEO Paul Levy stated on an analyst conference call that he expects the company to earn 85 to 90 cents per share in fiscal year 2002, 10 cents above the analysts' expectations. RATL is one of the companies which can directly benefit from a slowing economy, as their products enhance clients' competitiveness by reducing costs. As the analysts jumped to upgrade RATL, the stock easily crossed its 50-dma of $40.55 last week. Prudential, First Albany, and Dain Rauscher Wessels upgraded RATL, and Goldman Sachs picked up coverage last week. RATL had been struggling all week to cross resistance at $47, just above the 200-dma of $46.24, and on Wednesday, the stock made a critical break and closed above this level on strong volume. RATL may pull back to $48, which would be a possible entry point, as it begins its ascent to the next resistance levels at $52.44, and $60. Watch the software index for an indication of sector strength, and set stops at $44. BUY CALL FEB-45 RAQ-BI OI=837 at $ 8.75 SL=6.50 BUY CALL FEB-50*RAQ-BJ OI=223 at $ 6.13 SL=4.25 BUY CALL FEB-55 RAQ-BK OI=140 at $ 4.13 SL=2.50 BUY CALL APR-50 RAQ-DJ OI=201 at $10.25 SL=7.50 BUY CALL APR-55 RAQ-DK OI=230 at $ 8.38 SL=6.25 www.premierinvestor.com/oi/profile.asp?ticker=RATL ************* NEW PUT PLAYS ************* LH - Laboratory Corp. of America $129.94 -4.31 (-5.00 this week) Laboratory Corporation of America Holdings (LabCorp) is the #2 clinical laboratory service in the world, behind Quest Diagnostics. LH performs 2000 types of tests for more than 100,000 clients, including health care providers, pharmaceutical firms, physicians, government agencies and employers. With 25 major laboratories and some 1200 service sites nationwide, the company emphasizes specialty and niche testing such as allergy tests, HIV tests, blood analyses, and substance abuse screenings. After a stellar December performance to close out what had been a stellar year, LH started the new year in free fall. Investors that wanted to postpone the pain of taxes for another year, held their breath and waited for the beginning of a new year. Sellers attacked the stock with a vengeance on January 2nd, and the bleeding didn't stop until LH reached apparent support near $131-132. LH investors were stunned as they watched their stock hit for a 25% loss, off nearly $50 from its late-December high. Recovering from the oversold zone last week, LH was actually starting to look a little healthier until it rolled over near the $150-152 resistance level. The important thing about this level is that it is also the level of the ascending trendline that had supported LH's rally going all the way back to April of last year. The stock's inability to climb back over this level is disconcerting for the bulls, as it indicates that the emerging weakness is now more serious than simple profit taking. Volume is confirming the strength of the selling, climbing today to 50% over the ADV. So what is the driver behind the recent losses, you ask? Looking at a daily chart of the Health Care Index (HCX.X), it provides a nearly perfect mirror image of the price action of LH over the past several months. This sector saw some great gains last year, and it is now time for that cash to move to another sector. As options traders, we don't have to figure out where it is going to profit. We can simply focus on where it is coming from and profit from the trend. With that in mind, it looks like we are about to be awarded with a nice conservative entry point. The $130-132 support level is in the process of being violated and selling that drops the stock below today's low ($127.50) looks like a good trigger for new entries. Intraday resistance sits at $135, followed by $140. We are placing a fairly tight stop between these two levels ($138), and would use any failed rally below our stop as an opportunity to initiate more aggressive positions. Confirm sector strength by monitoring the HCX.X before playing. BUY PUT FEB-130 LH-NF OI= 11 at $12.88 SL=9.75 BUY PUT FEB-125*LH-NE OI= 57 at $10.50 SL=7.75 BUY PUT FEB-120 LH-ND OI=245 at $ 8.38 SL=5.75 http://www.premierinvestor.com/oi/profile.asp?ticker=LH DGX - Quest Diagnostics $96.87 -6.63 (-4.38 this week) Based in Teterboro, New Jersey, Quest Diagnostics is the nation's leading provider of diagnostic testing, information and services, with annualized revenues of over $3 billion. Quest Diagnostic's gene based testing focuses on infectious disease, oncology, and hereditary conditions, and helps physicians target individual treatment regimes and monitor resistance to therapies. Quest is experiencing profit taking with the rest of the medical products and services sector. This sector, along with the managed care, pharmaceuticals, and hospital management sectors, is selling off as investors rotate money back into the more dynamic technology sector. The superb earnings report from Juniper, and positive guidance going forward from a number of technology companies has served as a catalyst for a sector rotation out of the defensive health care stocks which rallied last year. Quest announced yesterday that their earnings would be on target to meet expectations, and revised expectations for next year. However, today's market shows that Quest is now selling on good news, a bearish indicator. Having fallen below the 50-dma of $117.65 on January 4th, Quest is now resting right on the 200-dma of $96.61, and looks like it will break beneath this support level. With a P/E of 79, and a revenue growth rate of between 7 and 8 percent, Quest is starting to look unattractive to investors. A break below $96 on strong volume would be an excellent put entry, as it could lead Quest to the next major support level at $88. More aggressive traders might look for a failed rally at $101.50, or $102.50. Keep stops set at $104, and watch others in the medical services sector, like LH and HRC for sector movement. BUY PUT FEB-100*DGX-NT OI=98 at $13.50 SL=10.75 BUY PUT FEB- 95 DGX-NS OI= 1 at $10.38 SL= 7.75 BUY PUT MAY- 95 DGX-QS OI= 3 at $13.75 SL=11.00 BUY PUT MAY- 90 DGX-QR OI=13 at $11.50 SL= 9.00 www.premierinvestor.com/oi/profile.asp?ticker=DGX ***************** STOP-LOSS UPDATES ***************** Q - call play Adjust from $43 up to $44 GX - call play Adjust from $19 up to $21 NETE - call play Adjust from $40 up to $42 VRSN - call play Adjust from $78 up to $82 LRCX - call play Adjust from $18.50 up to $20 BRCM - call play Adjust from $114 up to $120 SLR - call play Adjust from $35 up to $37 WCOM - call play Adjust from $18.50 up to $20 BEAS - call play Adjust from $59 up to $62 ************* DROPPED CALLS ************* SFA $55.19 +3.94 (+4.19) SFA burst out of resistance at $54 early Wednesday morning as the exuberance from Juniper's excellent earnings, as well as a benign CPI report, ignited investors' interest in networking and communications equipment stocks. SFA rode all the way up to $57.50 before settling down as the profit takers brought a sense of reality back to the markets. SFA reports earnings Thursday after the close, so we are dropping it tonight. Traders should take profits and close positions before the close of trading on Thursday to avoid any extreme volatile moves. MSFT $52.94 +0.38 (-0.56) As mentioned last night, we are dropping our call play on Microsoft ahead of its earnings report, due tomorrow after the close. Helped by Intel's well-received earnings report, shares of MSFT gapped up at the open this morning, moving higher until hitting resistance at the $55 level. From there the buyers took a break resulting in a pullback, but Mr. Softee finished the day up fractionally on 70 percent of ADV. For traders currently with an open play, we recommend closing positions before tomorrow's announcement to avoid any volatile moves. Look to support at $52.50 as a key level. If MSFT bounces and sentiment in the NASDAQ is positive, aggressive traders could make one last play, but be aware of overhead resistance at $55 and our stop price below at $51. ************ DROPPED PUTS ************ AIG $85.00 +0.19 (+2.81) The question we posed in last night's update (entry point or end of the play?) was unequivocally answered at the open this morning as AIG gapped right through its stop. Early strength across the broader markets had no follow through as all of the major indices gave back the lion's share of their early gains. AIG followed this pattern, bouncing south from the 200-dma, but still managed to keep from falling back below our stop. While the stock did look weak coming into the close, we need to follow our discipline and call an end to the play. Use any weakness tomorrow morning as an opportunity to grab a more attractive exit point. ************** TRADERS CORNER ************** Trading Wedges By Mary Redmond Bullish wedges have been popping up all over the place in the last few weeks, and they can be one of the most easily identifiable and potentially profitable trading strategies. A bullish wedge is generally characterized by a pattern of at least three higher lows, and at least two attempts to break out above resistance at a particular price. Once the resistance is penetrated, the stock almost always makes a strong pop up to the next major resistance level. Traders who take positions on a breakout of a bullish wedge have a high probability of success. We have had a number of call plays over the last few weeks which were bullish wedges, and presented many opportunities for profit. One of these was Costco(NASDAQ: COST). One of the keys is timing and accuracy. You need to watch the stock carefully, and to be able to distinguish a strong breakout from heavy resistance. Resistance is usually heavy when a stock has made repeated attempts to penetrate the price over a period of time. A strong breakout is usually characterized by heavy volume which is much higher than the average daily volume. In addition, a stock's technical pattern is generally stronger when it is above the major moving averages, which are generally considered the 50- and 200-dma, as well as the 50- and 200-period moving averages. Trading from a technical pattern in a stock is generally easier when it accompanies the same technical pattern in the stock's index. Stocks in certain sectors are more susceptible to sector movement. For example, there are so many diverse retail stocks that it is difficult to gauge the strength of one stock by that index. However, the semiconductor stocks tend to move very closely in tandem, as do the networking stocks. A daily chart of NWX.X looks very similar to a daily chart of JDSU, or SCMR. Within the financial sector, there are many individual sectors which move in tandem. For example, the major regional banks, the savings and loans, the consumer finance stocks, and the broker dealer stocks tend to move as individual sectors. However, sometimes you can identify situations in which a stock and a sector both appear poised for a breakout. If the breakout occurs simultaneously, the bullish stock trade is more likely to be profitable. Profits should be taken quickly, as a breakout from a bullish wedge does not necessarily mean that the stock will continue to rise ad infinitum. Nortel presented an opportunity to profit from a bullish wedge in November, but the stock retreated shortly afterward. After having been burned in treacherous markets last year, traders are more likely than ever to take profits quickly. This is particularly important when trading options. A 20% return on a short-term option can be a good profit level to aim for, although experienced option traders frequently trade for 50 to 100% profits. A bearish wedge pattern also offers the potential for profits for put players. A bearish wedge looks like a bullish wedge upside down. If a stock has been trading in a downward channel for a period of time, with strong support holding, it can be profitable to buy a put if the support level is broken. This is articularly effective in a down market. For example, CSC(NYSE: CSC) offered the potential for a profitable put play last week, even while the market rallied. However, traders needed to take profits quickly, as put profits can evaporate quickly in a rising market. Cash levels in money market funds are now higher than they have ever been, and higher as a percentage of the total stock market than they have been since 1991. The amount of cash held in money market funds is now equal to 15% of the Wilshire 5000. This is a highly bullish indicator. Despite the fact that consumer spending on certain items may be decreasing, individuals do not lack buying power when it comes to the stock market. During the month of December, the four week moving average of cash to equity funds was negative, as funds suffered redemption. There have only been a few months in the last decade in which funds suffered net redemption, and each of these was a good buying opportunity for long-term investors. It is also important to note that the stock market has performed well in the past when the ten-year government bond yield dropped to 5% or below. Lower yields from treasury bonds, CDs, and money market funds can increase the comparative yields of dividend paying equities. In addition, the reduction of high interest payments on corporate debt can show up in certain company earnings almost immediately. ***********************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=1423 ************************************************************ ************* READERS WRITE ************* Regarding the Motorola (MOT) Calendar Spread - Combos section 1/11/01: Dear OIN, Wow, I am having fun and making money but not getting carried away. I am interested in your recommendation on MOT. How do you play this Combo? Do you roll the Feb 25 short call out and up at some point around the price of 25? In short, how long do you intend to play this position? I have done a bullish calendar spread with recently with WCOM but bought an in the money LEAP to start and have had to happily roll the short option twice. It looks like it is ready for another roll right now assuming I want to hold the position long term. PH **************** Thanks for your question, PH. Concerning the Motorola position, a bullish calendar spread using LEAPS and Covered-calls: Here is a brief narrative on Calendar Spreads...and regarding MOT specifically, the range near $20 should be relatively comfortable for a month or so and then we will make adjustments based on changes in its technical character. The resistance near $25 should protect our upside (for now) and each month we will sell the option that appears most appropriate, based on our outlook for the underlying issue. The best information on the subject (which I would simply be repeating) can be found in "Options as a Strategic Investment" (McMillan), and "Option Pricing and Volatility" (Natenburg), both available in the OIN bookstore. Calendar Spreads: The Concept of Selling Time... A calendar spread (also known as a horizontal spread), involves the purchase of an option with one expiration date and the sale of another option with the same strike price but a different expiration date. The philosophy for using calendar spreads is that time will erode the value of the short term option at a faster rate than it will the long term option. A spread that is established when the underlying stock is at or near the strike price of the options used is a neutral spread. If the stock price remains relatively unchanged until the near-term option expires, the neutral spread will make a profit. It is important to understand how a calendar spread profits from the passage of time. When opening a horizontal spread, we buy a long term option and sell a short term option. Both options have the same exercise price, thus they have the same intrinsic value. Regardless of the movement of the stock, time value will always be less in the near term option. As long as the underlying stock price remains relatively close to the exercise price, the value of the spread will be determined by the time premium of each option. When we close the position at expiration, the remaining time value in the short term option will be very low relative to that of the long term option. A horizontal spread is completely dependent upon the relative behavior of time value decay in each of the option positions. Since the profitability of this strategy is determined solely by the difference in time values of the options, it is important for the underlying issue to remain near the strike price; where time premium is theoretically the highest. If the stock price is at the high or low extreme, the time values of both options will be low and the position will likely incur a loss; the remaining credit will be less than the opening debit. To the average trader, it would appear that this technique can't lose. One would simply buy the longer-term option and sell the shorter-term option. As both time values decayed, the spread would gain value. In reality, it's rarely that easy because the the underlying stock does not remain constant. One way to reduce the negative effects of a volatile stock is to establish the spread at least two to three months before the near-term option expires, capitalizing on the ability to sell a second position against the longer-term option. Ideally, the stock price would be just below the sold strike when the near-term option expires but if the options are in-the-money, they must be re-purchased to preserve the long-term position. Another method that is commonly used to increase the probability of profit in this strategy requires an understanding of implied volatility in option pricing. When opening any type of spread, it's important to take advantage of premium disparities to create the best possible position. (We try to open new plays when there is excess value in the sold option. This allows us to enter a position with a theoretical edge; a discount.) There is always the risk of early exercise in a calendar spread. The degree of risk depends on which options are bought and sold and the distance to the underlying stock price. The greater the time value in the sold option, the lower the probability of it being exercised. If it does occur, a trader can always fulfill the obligation by simply purchasing the underlying stock. The important issue is to be notified by the broker in a timely manner so that the appropriate action can be taken before the stock price increases. Ray Cummins Spreads Editor ********************** PLAY OF THE DAY - CALL ********************** MER - Merrill Lynch & Co., Inc. $74.56 +0.94 (+0.31 this week) Merrill Lynch & Co., Inc. has a strong client focus with a goal to deliver superior returns to their shareholders. They are determined to create value for their clients by providing wisdom and high quality services that meet their needs. Merrill Lynch has a track record of delivering strong returns to their shareholders, and has aligned employee and shareholder interests through a high level of employee stock ownership. They are leveraging the global investments they have made to sustain profitable growth. Most Recent Write-Up Despite closing down fractionally for the day, shares of Merrill Lynch made a new all-time intra-day high. Trading volume was average and it appears that traders were willing to take some gains off the table as MER headed higher into blue-sky territory. However, the uptrend since late November is still firmly intact, with the 5- and 10-dma continuing to serve as support. Look for pullbacks to these two moving averages (currently at $72.83 and $71.95 respectively) as potential aggressive targets to shoot for, along with horizontal support at $73.50, $72 and our stop price of $70. As always, confirm bounces with buying volume before initiating a play. For an entry on strength, if the buyers return with conviction, taking MER definitively through the $75 mark, this could allow conservative traders to take a position, but in doing so, make sure that competitors GS and LEH are also moving in the same direction. Comments Financial stocks have been acting well in anticipation of another rate cut by the end of the month, along with the benign CPI data this morning. MER broke above resistance at $74 and closed the day at an all-time high. The stock has been building a bullish wedge and today's record close occurred on stronger than average volume. We are looking for a follow through on this move. Look for entries into this call play on either a pullback and bounce from intraday support at $73, or on a break above resistance at $76. BUY CALL FEB-70 MER-BN OI=1887 at $7.63 SL=5.75 BUY CALL FEB-75*JMR-BO OI=2739 at $4.50 SL=2.75 BUY CALL FEB-80 JMR-BP OI=2260 at $2.31 SL=1.00 BUY CALL APR-75 JMR-DO OI=5380 at $7.63 SL=5.75 BUY CALL APR-80 JMR-DP OI=7776 at $5.25 SL=3.50 http://www.premierinvestor.com/oi/profile.asp?ticker=MER ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Earnings season: Technology investors begin to test the waters... Technology stocks led the rally today as investors responded positively to benign economic data and an upbeat earnings report from Intel (INTC). The chip giant posted its quarterly results late Tuesday, announcing fourth-quarter profits that were a penny ahead of the consensus estimates. The company also reported that it increased planned 2001 capital expenditures to $7.5 billion, lending optimism to the outlook for a potential industry recovery in the second half of the year. Among the technology segments affected by the news, semiconductor equipment and communications stocks were the best performers, but virtually every NASDAQ sector moved higher. A favorable economic report also helped boost the market in early trading. The consumer price index rose by 0.2% in December while the core index, which excludes the food and energy components, edged up 0.1%. The numbers suggest that the economy is moderating at a relatively stable pace and provides room for an expected improvement in business conditions in the latter half of 2001. On the Dow, trading activity was less confident as a number of industrial companies posted mediocre revenues due to a stronger dollar and the slowing U.S. economy. Among the blue-chip losers were Minnesota Mining (MMM), Merck (MRK), Boeing (BA), Home Depot (HD), and General Motors (GM). The newly-merged J.P. Morgan Chase (JPM) also slumped after announcing fourth-quarter revenues that were well below consensus estimates, due to declines in trading and private equity and increased spending on investment banking. Technology stalwarts Hewlett-Packard (HWP), Microsoft (MSFT), and International Business Machines (IBM) kept the Dow's losses to a minimum. Among the broader market groups, brokerage shares edged higher but oil service, major drug, paper and biotechnology issues generally retreated. Analysts say that expectations are for lower growth and stock prices have likely discounted much of the current outlook. That sets the stage for bullish activity, even for those companies that just meet the lowered forecasts. With that idea in mind, we will continue to focus on positions that have good upside potential along with a high probability of a reasonable profit and relatively low risk. 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 94.94 $2.44 7.4% IMPH JAN 45 42.69 48.38 $2.31 5.5% Key moment Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return XLNX JAN 30 29.62 48.31 $0.38 11.9% NEWP JAN 55 53.88 94.94 $1.13 11.2% JNPR JAN 70 69.25 136.19 $0.75 10.3% QCOM JAN 70 68.50 73.00 $1.50 10.2% 2 days to go? DPMI JAN 40 39.62 72.50 $0.38 9.7% AFFX JAN 55 53.81 61.44 $1.19 9.6% IMPH JAN 40 38.87 48.38 $1.13 9.2% LEH JAN 55 54.12 78.88 $0.88 7.8% JNPR JAN 70 68.94 136.19 $1.06 7.3% IVGN JAN 60 58.50 66.94 $1.50 7.0% Looking weak! DCTM JAN 40 38.94 49.00 $1.06 6.8% IDPH JAN 120 117.50 163.31 $2.50 6.4% 3-1 split 01/18 EMLX JAN 45 43.69 97.19 $1.32 6.3% Adj 2-1 Split BGEN JAN 50 49.37 56.00 $0.63 6.3% MWD JAN 65 64.44 80.88 $0.56 6.2% NOK JAN 40 39.25 40.19 $0.75 4.7% Own it? Sell Strangles: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return BRCM JAN 45 43.75 128.69 $1.25 8.6% BRCM JAN 160 161.06 128.69 $1.06 7.4% CEPH JAN 40 39.06 55.19 $0.94 8.2% CEPH JAN 70 71.19 55.19 $1.19 10.1% CMVT JAN 75 74.37 112.13 $0.63 10.2% CMVT JAN 125 125.63 112.13 $0.63 10.2% Getting Close EMLX JAN 55 54.44 97.19 $0.56 11.8% EMLX JAN 98 98.06 97.19 $0.56 11.8% Ready to Cover? GMST JAN 25 24.37 54.63 $0.63 5.8% GMST JAN 65 65.75 54.63 $0.75 6.8% IMPH JAN 35 33.25 48.38 $1.75 11.7% IMPH JAN 80 82.75 48.38 $2.75 17.0% ITWO JAN 30 29.50 53.88 $0.50 16.7% ITWO JAN 70 70.56 53.88 $0.56 18.6% MERQ JAN 60 59.31 80.94 $0.69 6.7% MERQ JAN 140 141.00 80.94 $1.00 9.6% NTIQ JAN 50 49.44 61.25 $0.56 12.6% NTIQ JAN 105 105.56 61.25 $0.56 12.6% RIMM JAN 50 48.44 57.13 $1.56 12.1% RIMM JAN 115 115.94 57.13 $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 57.13 $1.06 13.4% QLGC JAN 130 131.50 78.00 $1.50 10.1% BEAS JAN 85 86.25 65.56 $1.25 10.1% ADBE JAN 80 81.00 53.50 $1.00 8.1% IVGN JAN 100 100.63 66.94 $0.63 7.7% VRTS JAN 160 161.69 91.75 $1.69 6.1% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status ESRX $88.88 $89.50 JAN65p/70p $0.50 $69.50 $0.50 Open AFFX $63.63 $61.44 JAN40p/45p $0.69 $44.31 $0.69 Open VAR $62.00 $60.00 JAN50p/55p $0.50 $54.50 $0.50 Open FCEL $72.25 $68.75 JAN45p/55p $0.56 $49.44 $0.56 Alert MRK $89.13 $81.25 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 - Covered Calls, Naked Puts, & Combinations *************** A - Agilent $61.88 *** On The Rebound! *** Agilent Technologies is a diversified technology company that provides enabling solutions to high growth markets within the communications, electronics, life sciences and healthcare industries. The company provides test instruments, standard and customized test, measurement and monitoring systems for the design, manufacture and support of electronic and communication devices, and software for the design of high frequency electronic and communication devices. The company also provides fiber optic communications devices and assemblies, integrated circuits for wireless applications, application-specific integrated circuits, optoelectronics and image sensors. Agilent manufactures patient monitoring, ultrasound imaging and cardiology products and other systems. In addition, they make analytical instruments, systems and services for unique technologies such as chromatography, spectroscopy and bio-instrumentation. Agilent likes to call itself the original Hewlett-Packard, since the company came into being when HWP spun off its testing and measurement equipment and semiconductor businesses in late 1999. The company also received control of HWP's health care solutions and chemical analysis businesses and its research labs are also considered among the best in the commercial world. Now Agilent is focused on becoming a "one-stop shop" for a range of unique communications systems and they have potential for tremendous impact in the industry. Those of you who favor the outlook for the company can use this position to speculate conservatively on the future movement of its stock. A - Agilent $61.88 PLAY (conservative - bullish/credit spread): BUY PUT FEB-45 A-NI OI=534 A=0.38 SELL PUT FEB-50 A-NJ OI=1810 B=0.81 INITIAL NET CREDIT TARGET=$0.50-$0.56 ROI(max)=11% /charts/jan01/charts.asp?symbol=A ***** EMLX - Emulex $97.19 *** Break-out! *** 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. This company is simply one of our favorites for long-term stock portfolios and the demand for data storage technology has helped the issue remain relatively bullish in the midst of selling among a number of industry-leading issues. The fundamental outlook for Emulex is very positive; revenues are expected to increase in the coming year and the company should see higher share values in the future. The current technical trend is favorable and we offer this position as an entry point, based on the recent bullish chart indications. EMLX - Emulex $97.19 Sell Covered Call or Naked Put: Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call FEB 70 UEL BN 112 30.25 66.94 4.6% *** Sell Call FEB 75 UEL BO 152 26.38 70.81 6.0% Sell Put FEB 55 UMQ NK 60 1.25 53.75 6.1% Sell Put FEB 60 UMQ NL 225 2.06 57.94 9.7% *** Sell Put FEB 65 UMQ NM 56 2.75 62.25 12.6% Sell Put FEB 70 UEL NN 114 3.63 66.37 16.0% Sell Put FEB 75 UEL NO 70 4.25 70.75 18.2% /charts/jan01/charts.asp?symbol=EMLX ***** IDTI - Integrated Device Tech. $52.94 *** Earnings Rally! *** Integrated Device Technology designs, develops, manufactures and markets a broad range of high-performance semiconductor products and modules. Applications for their products include networking and telecommunications equipment, such as routers, hubs, switches, cellular base stations and other devices; storage area networks (SANs); other networked peripherals and servers, and personal computers. The company operates in two main business segments: Communications and High Performance Logic and SRAMs. The recent recovery in semiconductor stocks continued today as investors returned to the group amid confidence that most of the bearish news about earnings has been factored into prices. The big mover in the sector was Elantec Semiconductor (ELNT), which rallied $10 to $50.50 after posting a quarterly profit of $0.37 per share, beating the consensus estimate. The firm also said it sees future earnings above the current estimates and that bodes well for other issues in the group. IDTI's earnings are due out tomorrow, and we may be able to establish a position at a better than expected cost basis, if the issue endures a brief sell-off. IDTI - Integrated Device Tech. $52.94 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put FEB 35 ITQ NG 224 0.56 34.44 5.1% *** Sell Put FEB 40 ITQ NH 593 1.25 38.75 10.7% Sell Put FEB 45 ITQ NI 309 2.50 42.50 16.1% /charts/jan01/charts.asp?symbol=IDTI ***** VSTR - Voicestream $129.44 *** On The Move! *** VoiceStream Wireless, through its subsidiaries, provides personal communications services under the VoiceStream brand name in a number of urban markets across the United States. The company holds over 100 broadband PCS licenses covering 62 million people. VoiceStream Wireless' services and include rate plans, prepaid services, wireless e-Mail, wireless data, and text messaging. In addition to offering home coverage in the aforementioned markets, the company provides national and global roaming. They also offer phones and accessories manufactured by Nokia, Mitsubishi, Ericsson, and Bosch; and hands-free Jabra earsets. The planned buyout of Voicestream moved closer to reality today after German telecommunications giant Deutsche Telekom AG said it had reached an agreement with U.S. authorities regarding national security and law enforcement matters. The Justice Department and the Federal Bureau of Investigation wanted assurances about the ability to conduct lawfully-authorized surveillance of domestic calls and those calls that begin or end in the United States. Officials also said they wanted to prevent foreign-based or other illegal surveillance of the nation's telecommunications system that could be a security risk for the U.S. In addition, Germany's stake in Deutsche Telekom, which the government has pledged to divest, has raised concerns among some in the U.S. Congress about the impact the German government could have on competition in the industry. All of these issues appear to have been resolved and VSTR's share value has moved above a recent trading-range top near $125. Based on recent technical indications, the likelihood of it retreating to our cost basis seems rather remote. VSTR - Voicestream $129.44 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put FEB 100 UVT NT 912 1.75 98.25 6.4% Sell Put FEB 105 UVT NA 150 2.25 102.75 7.7% *** Sell Put FEB 110 UVT NB 551 2.75 107.25 7.9% /charts/jan01/charts.asp?symbol=VSTR *************** Neutral Plays - Straddles & Strangles *************** VECO - Veeco Instruments $60.25 *** Probability Play! *** Veeco Instruments designs, manufactures, markets and services a broad line of equipment primarily used by manufacturers in the data storage, optical telecommunications and semiconductor industries. These industries help create a range of information age products for today and tomorrow, such as personal computers, network servers, fiber optic networks, digital cameras, set-top boxes and personal digital assistants. Veeco offers two primary product lines: Metrology and Process Equipment. A subsidiary of the company, CVC provides cluster tool manufacturing equipment used in the production of evolving tape and disk drive recording head fabrication, optical components, passive components, MRAM, bump metallization, and next generation logic devices. Veeco shares have rallied 25% during the past week in the wake of a rise in equipment orders and bullish comments by a US Bancorp Piper Jaffray analyst. The instrument maker said fourth quarter orders were approximately $184 million, exceeding its forecast of $150 million. Based on the strong fundamentals and valuation, we also favor the issue for a bullish position, but there are not many ways to approach the inflated option premiums and there are also some 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 open 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. VECO - Veeco Instruments $60.25 Credit Strangle: Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put FEB 30 QVC NF 168 0.94 29.06 7.3% *** Sell Call FEB 95 QVC BS 0 1.13 96.13 8.7% *** - or - Sell Put FEB 35 QVC NG 3730 1.13 33.87 8.7% Sell Call FEB 90 QVC BR 0 1.63 91.63 12.1% /charts/jan01/charts.asp?symbol=VECO *************** BEARISH PLAYS - Naked Calls *************** MYGN - Myriad Genetics $54.06 *** Biotechnology Bust? *** Myriad Genetics engages in the use of gene-based medicine to develop novel therapeutic and molecular diagnostic products. The company focuses on the emerging field of proteomics, which involves establishing the relationship between protein function and particular diseases by identifying disease-specific proteins. Myriad employs a variety of proprietary proteomic technologies to discover important disease genes and to understand the role these genes and their related proteins play in the onset and progression of disease. Using proprietary technologies, they have identified 22 drug targets to date. Myriad delivered some of these targets to its strategic partners based on its discovery of genes involved in breast cancer, brain cancer, prostate cancer, heart disease, dementia and other disorders. Their partners include Bayer, Eli Lilly and Company, Hitachi, Hoffmann-LaRoche, Pharmacia, Novartis, Schering-Plough and Schering AG. This play is simply based on the current price or trading range of the underlying stock and its bearish technical history. MYGN's recent downward movement has been on increasing volume and a major support level near $60 was violated. Now that range, along with the NOV-DEC lows, becomes "resistance" and it appears the share value has little chance of reaching our target position in one month. Consider covering the sold (short) position on any future rally above $90, accompanied by strong volume; a very unlikely occurrence. MYGN - Myriad Genetics $54.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call FEB 92.5 QGD BF 23 1.38 93.88 11.5% Sell Call FEB 95 QGD BS 509 1.13 96.13 9.6% Sell Call FEB 97.5 QGD BG 200 0.81 98.31 7.1% Sell Call FEB 100 QGD BT 324 0.69 100.69 6.1% *** /charts/jan01/charts.asp?symbol=MYGN ***** OSIP - OSI Pharmaceuticals $60.63 *** Stage III Top? *** OSI Pharmaceuticals is a pharmaceutical research and development organization that utilizes a comprehensive drug discovery and development capability to rapidly and cost effectively discover and develop novel, small-molecule drugs for commercialization by major pharmaceutical companies. The company conducts its drug discovery and product development programs independently, and in collaboration with major pharmaceutical companies. The company also has drug candidates in clinical trials and pre-clinical development. These drug discovery efforts are primarily focused in the areas of cancer, diabetes, cosmeceuticals and G-protein coupled receptor, or GPCR, directed drug discovery. OSIP 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 below the sold (short) strike prices. Based on historical analysis of option pricing and the underlying stock's technical history, the issue meets our fundamental criteria for selling naked calls and traders who agree with a bearish technical outlook can use this position to profit from further downside movement. OSIP - OSI Pharmaceuticals $60.63 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call FEB 75 GHU BO 18 2.38 77.38 16.6% Sell Call FEB 80 GHU BP 56 1.63 81.63 12.0% Sell Call FEB 85 GHU BQ 31 1.13 86.13 8.6% *** Sell Call FEB 90 GHU BR 714 0.69 90.69 5.5% /charts/jan01/charts.asp?symbol=OSIP ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1397 ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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