The Option Investor Newsletter Tuesday 01-23-2001 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/012301_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 01-23-2001 High Low Volume Advance/Decline DJIA 10649.80 + 71.57 10679.10 10553.80 1.22 bln 1973/ 861 NASDAQ 2840.39 + 82.48 2845.39 2736.28 2.28 bln 2393/1456 S&P 100 712.04 + 8.87 713.45 700.39 totals 4366/2317 S&P 500 1360.40 + 17.50 1362.90 1339.63 65.3%/34.7% RUS 2000 502.06 + 11.91 502.07 490.08 DJ TRANS 3002.00 + 32.15 3003.91 2960.23 VIX 23.86 - 2.08 26.37 23.77 Put/Call Ratio 0.60 ************************************************************* Is That A Rally About To Breakout? After an opening dip caused by weak earnings reports on Monday night the markets rallied on various reports and upgrades by late morning. The volume was light but the bullish sentiment is building. Dell warned yesterday and was up +.88 today. Stocks are rising on bad news and that is a sure sign of a bottom. Advances beat declines by more than a 2:1 ratio and new highs are beating new lows 7:1. The expected pull back on profit taking from the +500 point gain over the last two weeks was wimpy at best. The barely negative showing on Monday was severely trounced by the strong gains today. Buyers are coming off the sidelines and there are no sellers. Up volume on all markets today was 2.55 billion and down volume only 914 million, almost a 3:1 margin. The dip at the open, driven mostly by the Dell, TXN and AXP warnings, was jumped on by buyers anxious to put money to work before the coming Fed meeting. We will not know if it was the right decision until after the speech by Greenspan on Thursday. The fact that buyers came into the market after three serious warnings is nothing short of bullish. Earnings remain center stage but if investors have decided to ignore the bad news then any good news should power us higher. The earnings parade continued today with some outstanding winners. Compaq, who had already warned, beat the reduced estimates by two cents. They did say they were going to take a charge of $1.8 billion which was mostly due to the decline in their investment in CMGI. CPQ gained +$3 in after hours after affirming full year guidance of +20% to +25%. They did say the next quarter would be difficult but expected a recovery for the next two quarters. BRCM also announced earnings that beat the street by a penny and the CEO said this was their best quarter ever. With revenues at $1.1 billion they raised their guidance for analysts and estimated better than +100% growth for 2001. Even though that sounds great it is actually a decrease from their historical +30% per quarter growth but we all know bigger is slower. BRCM was up +9 in after hours at $141 and a long way from the $122.63 intraday low. That would have been a great entry point for an aggressive naked put! Another fallen angel that announced today was EMC. After trading at -50% off their yearly high on worries about slowing sales, EMC announced profits that beat the street by two cents on revenue that soared by +40%. Profits grew by +50% in the same period. The company said rising software sales was creating a strong demand for storage devices and this was their strongest fourth quarter ever. The CEO said there was simply no slowdown in sight and business was booming. The stock had been plagued lately with persistent rumors they would miss earnings and traded as low as $53 this month. EMC closed at $79.56 today. SEBL also announced earnings that beat the street by a nickel and jumped about +10% in after hours. SEBL posted $.20 which beat estimates of $.15 by a nickel on revenue that more than doubled. Earnings of $106 million far outstripped the $39 mil earned last year in the same quarter. SEBL was up over +$8 in after hours to $85.94. QLGC announced earnings that beat the street by two cents and LRCX beat estimates by a nickel. There were no major earnings disappointments today and that helped the bullish sentiment and drove the markets higher. AXP, which warned yesterday, was upgraded today by Merrill Lynch and gained +1.50. Dell warned and gained +.88. Investors are ignoring the bad news with the idea that the Fed is going to cut rates, the economy will soar and 201Ks will turn back into 401Ks again. Is that storm clouds I see in our future? The generally accepted concept is that the Fed will cut rates another -.50% next Wednesday. This event is quickly being priced into the market. The problem is the likelihood that it will not occur as expected. The Fed tends to telegraph its intentions far in advance of the actual event. I know there was no advance warning on the -.50% cut several weeks ago but that was a political event not an economic event. The problem I see is the over whelming positive sentiment from the Fed members. Seven Fed officials have recently dismissed fears of recession and are preaching calming words about an economic rebound soon. Michael Moskow, president of the Chicago Fed, said recently that job growth was strong and the economy was not heading into a recession. Echoing that same sentiment was Anthony Santomero, president of the Philadelphia Fed, and Cathy Minehan, president of the Boston Fed, both of which see moderate but positive growth for the economy in 2001. Robert McTeer, president of the Dallas Fed, expressed doubt that the economy would shrink and Jack Guynn, president of the Atlanta Fed said the low unemployment rate would act as a safety net for consumer confidence. Probably the most vocal opponent is William Poole, president of the St Louis Fed who said that growth prospects remain excellent. Now here is the scenario as I see it. Greenspan has a chance to talk to the markets during his testimony to the Senate Budget Committee on Thursday. Investors were worried that Alan saw something coming in the economy that no one else saw when he cut rates by 50 basis points. Inquiring minds want to know what it was. While I maintain it was the Bush tax cut proposal he took aim at, he may use this event as an opportunity to answer those questions. The Fed normally has a blackout period of one week before a FOMC meeting. Still, Greenspan is likely to take the center stage spotlight this Thursday and either try and fix the misguided worry about the unseen monster under the bed OR make another political statement about a dangerous (his words) tax cut. In either case I expect Greenspan to say something that will cool the market, not heat it up. If the rest of the Fed is talking down a recession then it is unlikely that they will cut by 50 basis points. If the last cut was political then even more reason not to rush into another 50 point cut. The problem with all of this stems from the assumed 50 basis point cut already being priced into the market. While a cut of 25 basis points would be good long term it would produce a "buy the rumor, sell the news" drop. Perish the thought that the almost +600 point Nasdaq rally from the January lows would cause the Fed to think the market was heating up too fast and not cut rates at all! That would be a disaster. My guess is a 25 point cut to keep the pressure on Bush to justify the tax cut and to take pressure off the economy. My point to all of this is Greenspan has rocked the markets both ways by hundreds of points many times in the past. Just remember back to the "irrational exuberance" speech and the disaster that followed. Any time Greenspan is in the spotlight we should have our hands in our pockets protecting our meager bankrolls until the danger is passed. I would strongly suggest you protect yourself against a possible verbal bomb on Thursday. It has happened several times in the past and will happen again as long as Greenspan is in power. With the Nasdaq up +25% from its January lows, it would not be unthinkable that Greenspan would want to "talk" the market back into a more gradual assent. With the VIX at 23.86 and at three month lows we should already have our finger on the sell trigger. Were you thinking about buying or selling tomorrow? Should you reconsider? The April seminar speaker list is already shaping up nicely. We already have four nationally known speakers, names you see and hear on CNBC constantly, and several more we are working with. If you are thinking about attending don't wait long. Every spring seminar we have ever had sold out. See below for details. Enter passively, exit aggressively! Jim Brown Editor www.OptionInvestor.com ************************************ Spring Options Workshop and Bootcamp April 5th-9th, Denver Colorado ************************************ OptionInvestor is proud to announce our third annual Spring option workshop in Denver Colorado. This power packed five-day event is structured to fully educate you on advanced option strategies and will make you a better and more profitable trader. If you attended the March Denver Expo last year and thought it was the best function you had ever attended... You haven't seen anything yet! Great food, entertainment, education and just plain fun in sunny Denver. The biggest complaint in March was the massive weight gain experienced by the attendees from the gourmet menu. We know how to put on a function. Ask anyone who came last March! We guarantee the speaker lineup to be second to none. In the October seminar not only did we have Jim Brown and over 15 of the OIN staff but Steve Nison, the father of modern candlestick charting. Also, Dick Arms, creator of the Arms Index or the Trin Indicator, Gregory Spear, author of the Spear Report, Stan Kim, founder of the Snail Trader System and Jim Crimmins, president of TradersAcounting.com. We promise the lineup this April will exceed your expectations again! This is not a beginner seminar but if you feel the need to brush up on the basic trading strategies then we have an optional boot camp the day before the four day seminar begins. If you have traded options before and you are comfortable with the basic strategies then this seminar will take you to a new trading level. If you have been trading options for sometime and are ready to broaden your knowledge and improve your trading results in all kinds of markets then this is for you. Meet and interact in a small group setting with the writers you have seen in OptionInvestor for the last four years. We are starting the seminar with an optional one day boot camp which will cover all the basic strategies, calls, puts, leaps, covered calls, naked puts, spreads, straddles, etc. This will help investors not familiar with all the basic strategies get up to speed before the intensive education and the advanced material in the main seminar. The boot camp will be 8 hrs of personal instruction by the OIN staff. The main seminar will begin with a reception, dinner and entertainment on Thursday night and continue non-stop until noon on Monday. We mean non-stop. We don't quit until you do and many optional sessions last until 10:PM or later. The detailed schedule will be posted in about two weeks. There will not be individual breakout sessions during the day. Each topic will be covered in 1-2 hr general sessions taught by one or more OptionInvestor staff and presented on three giant screens. In the evening we will offer five of our popular chalk talk sessions for that personal question and answer interaction. The list of instructors is led by Jim Brown and will include many OIN staff with outstanding guest speakers during lunch and dinner each day. The Spring Denver Expo seminars fill up fast and seating is limited! SIGN UP NOW or risk missing out on this opportunity. Unlike other seminars with only two or three instructors, you will get in-depth knowledge from many different instructors who are experts in their field. The cost for the four-day workshop, April 6th to 9th is only $2995 (spouse only $1495). This includes breakfast, lunch and supper each day. All course materials, a CD of all the presentations and a professional video package of the entire seminar so you can review the material at home in the comfort of your living room. There is also a $500 discount if you have attended a prior OIN seminar. This is not a prepackaged presentation that gets repeated over and over with stale information. This is a one-time production and everything is fresh, live and as current as we can make it. The videos will have your real time questions and answers and not some from a prior class. Where else can you get intensive yet personalized options education like this? Do not delay as seating is very limited. We guarantee you will not be disappointed! You can pay for your education one bad trade at a time or you can invest less money one time to learn how to do it right. Click here for more info: https://secure.sungrp.com/workshop/april01/index.asp If you have not been to one of our Denver Expo seminars before here are some comments from previous attendees: The words herein are totally inadequate to express what I am feeling about you and all the OptionInvestor organization. But this medium is all I have. Thank you more than these few simple words can say. Wow, what a seminar! In my 25 years of investing I have attended many instructional conferences, but I have never, never experienced one like your Options Expo. The instructors were absolutely tops. Subjects, generally were on target. Especially for me, the Skybox, index funds/options and the early morning strategies and trading were particularly great. The attention to the many details and nuances were especially evident, and I guess most of the credit that area goes to your great support team. Now, the real challenge is to apply and implement the powerful knowledge I was exposed to. Sincerely and warmly, Kevin Hughes, Denver ************ Jim & Staff, I am sitting in the hotel room after a great 3 days in your seminar. I can't tell you how pleased I am and want to thank each of you for a job well done. Having been responsible for events like this, albeit on a much smaller scale, I can recognize all the hard work that went into the seminar. Each member of the staff is to be congratulated!! The seminar confirmed my belief that the OIN staff really cares about the success of their subscribers. Jim, you all should be proud of the work you do to enrich the lives of so many people. It is one thing to amass a personal wealth. It is a much higher calling to help others meet their goals in life. I was very impressed that you were emotional in your closing remarks. You have so much to be proud of -- helping people fish all over the world! Thanks again and I look forward to attending another seminar in the future. My best regards, Jim Boettcher Austin, Texas ************** I must say, that your seminar was outstanding!!! Sign me up for next year. It is rare that a person of your position would share so generously your knowledge of his trade. I hope that I will be able to put into place much of what you taught. Every aspect of the seminar was first class, from the hotel, to the food, the instructors and the luncheon speakers. One of the biggest surprises was your generosity in handing out material, and gifts. Two weeks ago I attended a competing option seminar in Chicago and all I got from the was coffee at the morning break, No handouts, no food and half of the final day was promoting their web site and additional classes. I must say your seminar far exceeds what I got from them. Sincerely yours, Mike Lillis *************** Please pass on my thanks to the entire OIN group for a fabulous EXPO. The seminar far surpassed any expectation that I would have fathomed, had I attempted to! OIN has the right attitude and the obvious ability to be a leader and I look forward to many years of positive experiences with you folks. Kind regards, Gwen Richardson **************** GREAT JOB TO EVERYONE! I described this event to my friends as a life changing event! (options aside) ,the quality of people, dedication, sacrifice of their time (the second 40+ hours a week they don't have to work but do) they do this because they care, wanting to help others change their life dramatically (My wife thinks I was oxygen deprived up there !) I came back a different person for those who know me that says a lot. Now for the options side I have to admit there was so much info to absorb, most of it came to me on the 2000+- mile ride home it all started to fall into place I feel Very confident (yes Jim this can be bad but I know this now!) Notice the patience here guys! that's one change I have a plan to stick to ! THANK YOU !!! Allan O'Neill ************** Need we say more? If you want to learn how to be a better trader, making more and losing less then you should come to this seminar. We guarantee you will not be disappointed! For more info: https://secure.sungrp.com/workshop/april01/index.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1434 ************************************************************** **************** MARKET SENTIMENT **************** Floating Towards Judgment Day By Austin Passamonte When was the last time you remember flat markets at the heart of earning's season? We've either rallied or plunged in the past but tough to recall a recent period like this. All eyes are focused on next week's FOMC and nothing else really matters right now. Poor earnings report? "That's O.K., wait until Tuesday" seems to be the consensus. The markets seem poised for full rally mode from now until then. This Thursday should be a prelude to next week's action as Greenspan will be pounced upon by reporters jostling to be first at popping the big question. They'll ask what the Fed intends to do and who knows, maybe Al will flat-out tell us ahead of time. Zero chance of that and even if he did, who could understand the language anyway? We've yet to find a Thesaurus that lists half the words that man's vocabulary spans. Everyone expects a rate reduction by the Fed to open sideline cash flood gates and usher in a powerful rally. While that would be great and Market Sentiment will welcome such with mile-wide open arms, we still reserve our customary suspicions. First of all, daily-chart stochastic values are already at or above 80% overbought levels in the NDX, SOX, SPX and OEX. While they could remain pinned up there for days & weeks on end, it does warn of underlying price action weakness. Anything short of very good news from here will not support further upside, and the only news markets care about now arrives next Tuesday. Secondly, the same daily charts are forming very clear price action/stochastic value bearish divergence. Stochastics are posting higher highs while price action fails to do so. This would be negated by further upside above respective highs or confirmed by a downturn or slow stochastic bar turning down below the 80% overbought range The listed indexes must exceed these price levels before daily stochastic values turn below 80% to negate a powerful bearish reversal setup: NDX: 3,000 CMP: 3,050 SPX: 1385 OEX: 740 Thirdly, the VIX is threatening to push outside it's daily-chart lower Bollinger band. That would indicate call buying is excessive and another "toppy" warning. Lastly, commercial traders stubbornly cling to every last short futures contract with vigor. They are voting $Billions that we do not shoot into the stratosphere after the Fed announcement and earnings season fade away. On a bullish note, the Dow alone has daily-chart stochastic values trying to emerge from extreme oversold and could easily run to 11,000+. The big question is; would this come merely with rotation of tired dollars from sector to sector or will money finally flow into the markets? Tech earnings pleased the street past closing bell and after- hours markets are buzzing. Wednesday's session should start off strong and bulls are hopeful it can ascend from there. Bottom line: A .50 basis-cut next week by the Fed should fuel us higher. Less than that could easily send us lower. All other market news is on hold and doesn't affect price action at this point in time. Until then, the next long-term direction is on hold. Today's surprise rally, feelings on the floor, CNBC yadda means absolutely nothing. We've seen these sessions at least once a week for over a month and all were followed by downdrafts next session. This one "feels" different, but which of the previous ones didn't? The rest of this week and especially beginning of next promise to be active with numerous daily trades. Where we go long-term promises to come clear next Wednesday morning. Trade carefully until then! ***** VIX Tuesday 01/23 close: 23.86 30-yr Bonds Tuesday 01/23 close: 5.58% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Tuesday (01/23/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 750 - 735 4,777 293 51.37 730 - 715 5,605 1162 4.82 OEX close: 712.04 Support: 710 - 695 5,848 4,390 .75 690 - 675 3,566 4,976 1.40 Maximum calls: 700/3,171 Maximum puts : 650/4,151 Moving Averages 10 DMA 695 20 DMA 691 50 DMA 703 200 DMA 760 NASDAQ 100 Index (NDX/QQQ) Resistance: 77 - 75 10,801 2,469 4.37 74 - 72 17,832 1,261 14.14 71 - 69 47,099 5,049 9.33 QQQ(NDX)close: 67.76 Support: 66 - 64 40,344 19,493 .48 63 - 61 20,954 14,797 .71 60 - 58 18,462 45,396 2.46 Maximum calls: 70/42,338 Maximum puts : 60/39,226 Moving Averages 10 DMA 63 20 DMA 61 50 DMA 65 200 DMA 83 S&P 500 (SPX) Resistance: 1425 19,994 4,730 4.22 1400 13,624 1,408 9.68 1375 9,888 6,473 1.53 SPX close: 1360.40 Support: 1350 14,213 12,130 .85 1325 12,037 8,615 .72 1300 1,667 14,472 8.68 Maximum calls: 1425/19,944 Maximum puts : 1300/14,472 Moving Averages 10 DMA 1330 20 DMA 1323 50 DMA 1336 200 DMA 1420 ***** CBOT Commitment Of Traders Report: Friday 01/19 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader's direction. Small Specs Commercials DJIA futures (Current) (Previous) (Current) (Previous) Open Interest Net Value +1909 -108 -8322 -5438 Total Open interest % (+20.07%) (-1.37%) (-34.26%) (-21.58%) net-long net-short net-short net-short NASDAQ 100 Open Interest Net Value +1131 +1861 -4045 -3982 Total Open Interest % (+6.51%) (+11.29%) (-6.39%) (-7.13%) net-long net-long net-short net-short S&P 500 Open Interest Net Value +69254 +59586 -89836 -86815 Total Open Interest % (+37.35%) (+37.29%) (-11.84%) (-11.19%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: The disparity between the Commercials and Small Specs has increased on the DJIA with Commercials showing a significant increase in their net-short positions and the Small-Specs moving net-long. Interest Rates: Commercials are moderately short T-Bond and T-Note futures. (mildly Bearish) Currencies: Commercials continue to build heavily short Euro futures while small specs build net long. Small specs are betting on interest rate reduction while commercials remain skeptical. (Bearish) Energies: Commercials are net-long crude & oil products at one year extremes. These producers are hedgers and almost always take the opposite side of expected market action to lock-in production prices. They expect lower prices from here (Bearish) Metals: Commercials are moving to net-long in Gold, Silver and Copper from short positions. This has happened quickly and they expect higher precious metals soon.(Bullish) COT/CRB: This commodity index measures the entire spectrum of commodities in overall bullish or bearish outlook. It is now at a one-year high for commercial bullishness, meaning the outlook for commodities is long-term positive while equities as a mirror are considered long-term negative. Data compiled as of Tuesday 01/16 by the CFTC. www.OptionInvestor.com ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/012301_1.asp *********** OPTIONS 101 *********** Do You Know What Volatility Is? By Lee Lowell Last week I discussed what the basic inputs are to arrive at an option's premium. They are broken up into two categories: "intrinsic value" and "extrinsic value." Intrinsic value is the portion of the premium that is "in-the-money" and extrinsic value is the portion that is "out-of-the-money." The extrinsic value is comprised of "time until expiration" and "volatility." Since we know that time until expiration is easily calculated (each option has only a set number of days in its life), we don't need further discussion of that part. What I would like to discuss further is the tricky concept of volatility. As many new traders dive into the world of options trading, they are consumed with the idea of making a killing. Just buy a few call (or put) options at a fraction of the cost of the underlying stock price and wait for the stock to move. That's all well and good if you have perfect timing. But since a majority of us don't have exact timing, we need to make sure that when we do buy or sell options, that we do it when the premium is at a favorable volatility level. Most people don't even know what volatility is when it comes to options trading. You can be correct about the direction of the market and still lose money on your option contracts. This is due to bad timing, and/or not picking the correct strike price, and/or not taking volatility into consideration. Since we know that timing is easily figured by the amount of days left and picking the correct strike price is a matter of personal preference, we still need to figure how we can tell if volatility is allowing us to buy undervalued or overvalued options. This is what volatility tells us about an option - whether it's cheap, expensive, or fairly valued. Let's find out how. Volatility as it applies to the marketplace is a term that describes the movement of individual stocks, indices, and options. The movements can be big, small, fast, slow, sideways, etc. Volatility gives us a way to measure those movements. There are two basic types of volatility: "historical" (or statistical) and "implied." Historical volatility (HV) tells us how the underlying stock or index has been moving over some period in the past. Each day's closing price of the stock or index is used in a calculation to give us the historical volatility figure. HV is quoted as a % number and can be figured for any amount of time you wish. Wall Street usually defaults to a 20-day or 30-day HV. It is like a moving average using each day's closing price as the inputs. HV gives us an idea of how the stock has moved in the past and how it can move in the future. If IBM has an HV of 55%, that tells us that over the next year we can expect it to fluctuate in a range of +/- 55% of its present price with a 68% degree of accuracy. If you want to see how IBM has moved over the last 30 days, then you would only use the most recent 30 days of data. There are places on the web where you can retrieve any stock or index's HV which can help you predict how the stock might move in the future. Needless to say, a stock with bigger fluctuations will have a higher volatility reading and vice versa. "Implied volatility" (IV) is a number that corresponds with the options only. Each option on a stock or index has a component called IV. It is also a % number that tells us where the market thinks the underlying stock will move in the future over the life of the option. In essence, the option's market is making a prediction of where the stock will move. IV is also an indicator of expensiveness or cheapness of options. IBM's $100 call has an IV of 60% compared to its HV of 55%. This is telling us that the option's market thinks that IBM will move around more than what it has done in the past. Why? Maybe because its earnings are due very soon or because the Fed is meeting and nobody knows what the outcomes will be. In most cases, HV and IV will be different and that's where the trading opportunities can occur. Some people like to compare HV to IV and this is how you tell if an option is cheap or expensive. Some sell options when IV is greater than HV and buy options when IV is lower than HV. That may work for some people, but I like to concentrate on using IV alone. I consider the professionals on the option's exchanges to have all the most recent and pertinent information regarding a stock's options, so I will use their prices as the most reflective of where the stock might go. So what I do instead, is to compare current IV levels to past IV levels of the options. There are also places on the web that can give you past IV readings along with graphical analysis. What you will come to see is that each stock's options has a range that its IV has been trading in over some period in the past. Most of the information I use spans back two years in time. When the IV is currently much higher than its normal range, then I know that the options are currently very expensive for some reason. When the IV is currently much lower than its normal range, then I know options are relatively cheap compared to its past and option buying opportunities can exist. What usually happens is that over time, the IV will move back into its "normal" range after it has gotten really high or low. As the IV moves, it takes the option premiums with it. When IV is high, then premiums are high too. When IV is low, premiums are cheaper than normal. Example: IBM $100 call with 55% IV = $10 IBM $100 call with 25% IV = $5 You can see that IV has an effect on the premium. This doesn't mean that 55% is overpriced or that 25% is underpriced. This is because we don't know what IBM's past IV levels have been. Say that IBM's past 2 year average IV has been 85%. This means that both of these options are undervalued when compared to IBM's past, except that one is MORE undervalued than the other. If IBM's past 2 year average IV had been 45%, then the 55% option would be overvalued and the 25% option would be extremely undervalued. If you have a real-time data feed with good options data, the IV should always be available. But not all vendors will have the past IV levels. This is the way that I price any option before I decide to buy or sell. My gauge is to always compare current IV levels to that of the past. Ultimately, the price of the stock on expiration day will decide if you are profitable or not on your position, but knowing whether you started out by buying or selling undervalued or overvalued options can increase your returns by a few points. If you bought an IBM $100 call at $5 when IV was at 70%, and IBM closes at $110, then you made $5. But if you bought that same call when IV was at 40%, then you might have only paid $2.50 for it and made a profit of $7.50. Even though you were correct in your direction of IBM's movement, the profit % could've been different. Now if IBM closed at $95 on expiration day, you would either have lost $5 or $2.50. So when you are wrong about the direction, your loss % can be different too. That's it! I hope this helps some of you become more aware of what volatility is and how to use it to your advantage. Good luck. www.OptionInvestor.com ************** TRADERS CORNER ************** Review of My January Plays By Scott Martindale January was a terrific month to be a bullish options trader, with some nice buyable dips. But I was reminded that one or two bad plays can put quite a dent in an otherwise fruitful game plan. I sold and profitably closed naked put positions in Portal Software (NASDAQ: PRSF), Extreme Networks (NASDAQ: EXTR), Capstone Turbine (NASDAQ: CPST), MRV Communications (NASDAQ: MRVC), and Ariba (NASDAQ: ARBA), although not without some significant heartburn. After being tortured by PRSF in November, I figured lightning wouldn't strike twice. So I sold PRSF Jan 7.5's in late December when it looked like it had found a base after that horrid November slam. I bought them back when the stock spiked to nearly $10 on Jan 12 for 0.25. I sold Jan 40 puts on EXTR on Dec 22 after it had sold off in reaction to a negative pre-announcement from a competitor, and then began to recover. EXTR consolidated laterally for awhile, and I bought the puts back on Jan 9 at about the same stock price, but by then much of the time premium had eroded. This is a great example of how fearful sell offs often can provide great entry points for naked puts (volatility creates high premiums that erode quickly); whereas buying calls (with their equally high premiums) might not pay off. Of course, the downside risk of naked puts is still much greater. CPST was actually my favorite play for the month because it didn't depend on an unusual sell off. The technicals were turning up on Dec 22 as the stock bounced off strong support at $20, so I sold the Jan 20 puts. As the stock moved up strongly in response to the California energy crisis, I closed the position on Jan 12 as the stock approached $35 when the puts hit my standing limit order to buy back at 0.125. I always put in a limit buy-to-close order on my naked put positions at a nominal level like 0.125, 0.25, or 0.50, and I'll often adjust the price up to close a position early if the situation warrants. I'm getting to like MRVC, which gave me another month of high premium while holding the line. In December, I sold the $15 level and it held until expiration before dipping to near $10. At that level, I felt very confident selling the Jan 10 puts on Dec 26 for 1.0625. On Friday they expired worthless. In my column last week, I mentioned my play on ARBA, and it worked out great. After reporting great earnings, analysts brought up some questions regarding the "quality" of their revenues (lots of outstanding receivables), and the stock sold off a bit. On Jan 12, I sold the Jan 35 puts for 2.125, and $35 turned out to be nice support as I let the options expire worthless. However, I gave back too much of my gains on two bad plays. One play in particular frustrated me: Jan 17.5 naked puts on Tumbleweed (NASDAQ: TMWD). You'd think that I would have learned my lesson about succumbing to the tempting premiums on these highly speculative software plays, no matter how well positioned they might appear. But no, after my debacle with PRSF at the $40 level in November, I again ventured in during an uncertain time. And why not? TMWD seemed to have survived the worst of the Nasdaq sell off, holding steady in the $20 range for over two months during the Nov/Dec market weakness. I felt pretty good about TMWD at $19 on Dec 28 while other stocks were enduring heavy tax loss selling, so I sold the Jan 17.5's for 2.0625. But on the first trading day of the New Year, TMWD dropped suddenly when they announced that their end of year sales efforts failed to hit targets, and I was caught by surprise with a $7 price drop. Did I learn anything from my previous experience with PRSF? Yes I did. Rather than wait for a little bounce on another day, I closed the position for 8.0. This saved me the pain of another $7 drop the next day, and today it still hasn't recovered much. Did I learn anything from my prior experience with PRSF? Yes, indeed! This time I contained my losses early rather than waiting for the elusive bounce, and eschewed rolling out to the next month, instead focusing on other more appealing plays. My other naked put loser was RF Micro Devices (NASDAQ: RFMD), which I sold on Dec 28 based on a mention in OIN coupled with favorable technicals. When the stock was around $29.50, I sold the Jan 30's for a juicy 3.50, but later closed the position at 7.25. It didn't crater like TMWD -- it just didn't work out. Actually, I can handle these on occasion. They're an expected part of the game. It's the big gap-down sell offs that are hard to take. I continue to hold Feb 80 calls on Applied Micro Circuits (NASDAQ: AMCC), although they are still around the same price I bought them even though the stock price has gone up substantially. This is why I prefer to sell premium. Also, I'm holding Feb 10 calls on PRSF, which I bought at year-end after selling the shares (that were put to me in late November) for tax losses. I anticipated a recovery of this important company after tax loss selling subsided. In my long-term account, my expectation of a near-term trading range prompted me to lock in some gains in January with covered calls to generate some cash for buying any significant weakness. [Like I mentioned last week, I was heavily invested at year-end.] I sold Jan 25 calls on BMC Software (NASDAQ: BMCS), Jan 35's on CPST, Jan 160's on Biotech Holders Trust (AMEX: BBH), Jan 30's on Intel (NASDAQ: INTC), and Jan 60 calls on JDS Uniphase (NASDAQ: JDSU), and I was called out of all but BBH. All but INTC had seen nice short-term run-ups when I sold calls, and they have all gone up further since. Nonetheless, in this market climate, I'm choosing to sell into strength at opportune times. JDSU provided an interesting pre-earnings play. Although I love JDSU, I expected some weakness on expiration day after such a strong three-week run-up. I sold Jan 60's for 1.6875 at the close on Jan 18 (after purchasing the shares on Dec 22 for an incredibly cheap $40). Rather than buy back the calls on Friday's closing profit-taking, I allowed them to be called at $60, and then bought more shares today at $58. Lately, I've been shopping for good buys in my long-term account. I've picked up some drugs and biotechs. However, I have hesitated and missed some good buys, as well. Over the past week or so, I liked Calpine (NYSE: CPN) at $30, Enron (NYSE: ENE) at $70, and Qualcomm (NASDAQ: QCOM) at $70, but was filled on none. Maybe I'll have another chance soon. Last week I mentioned that I was near-term cautious going into earnings season. Although many of the big tech names have reported less than stellar earnings, this was apparently already priced in, and many emerging leaders like AMCC and EMC (NYSE: EMC) have been terrific. So, this week I upgraded my near-term outlook to "cautiously optimistic" going into the Fed meeting. www.OptionInvestor.com *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1410 ************************************************************ PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** NETE $47.44 +2.31 (+2.31) The time has come to make preparations and close out any open positions. Today's 8.6%, or $3.87 climb to $49 offered an excellent opportunity to lock in gains. If you still have calls in play, consider selling into subsequent strength during the next two days. Netegrity is scheduled to report earnings this Thursday, January 25th after the market close. We're dropping the call play this evening to provide ample opportunity to strategize your exit. OI never recommends holding over an announcement as it's not worth the risk of getting caught in a post-earnings' decline. CMCSK $43.06 -1.00 (-1.88) A day of sideways movement for the markets translated into a day of sideways movement for shares of CMCSK yesterday as the stock pulled back 1.95 percent on 60% of ADV. The close put the stock just below its 5-dma, now at $44. Today, that moving average acted as a resistance point as CMCSK headed lower, falling 2.27 percent on 75% of ADV. While the stock found support intra-day, bouncing at our stop price at $42, moving average resistance appears to be formidable with the 5-dma overhead as well as today's close below the 10-dma (at $43.60). With the stochastics also rolling over, we are taking this stock off our call play list. NETA $8.38 +0.13 (+0.13) NETA is inching higher, but its slow pace has caused a bit of concern. Instead of waiting around for the stock to move and see our time premium decay, we're dropping coverage in search of more movement. Traders may choose to exit positions at current levels early tomorrow or wait for a lift up to the $8.50 level. WCG $18.00 -0.63 (-1.88) Last week, we witnessed WCG stall at the $20 level, and we had speculated that movement was no more than normal consolidation. Unfortunately, WCG fell from its base yesterday and continued sliding lower today. Volume has been relatively light in this week's sell-off. However, the lack of buying interest has left us no choice but to drop coverage. Use any rebound Wednesday morning to exit positions. OPTV $16.13 -0.63 (-2.13) We're dropping coverage on OPTV this evening due to the rollover at the $20 level last Friday. The resistance level proved too strong and subsequently snuffed out OPTV's momentum. The stock is now sliding lower along its 50-dma which now stands at $16.55. Use any bounce off that level to exit open positions early tomorrow morning. PUTS: ***** MMC $104.13 +4.13 (+4.82) It's been a fun and very profitable ride down from the $110 level, so you can understand the disappointment of having to end the play on MMC. Although we continued to have circulating cycles of intraday spreads from which to procure lucrative gains, Friday's intraday dip to $97 was the end of the line. Thereafter, the stock consolidated around $99 and $101. Today's high-volume move to the upside not only shot MMC through our protective stop at $104, but it also left no doubt the downtrend line had hit bottom. WLP $97.69 +4.19 (+8.82) Wellpoint provided some opportunities for put players on Friday and Monday, with roll overs from the $88, $89, and $93 levels. However, strength returned to the HMO stocks today. It remains to be seen whether this is the start of a new lasting trend in the sector, or recovery from oversold levels, but WLP closed above our stop level at $97 today, and we are dropping it tonight. AFL $62.25 +2.25 (+4.75) An upgrade to a strong buy from Banc of America Securities and Lehman Brothers put the brakes on our put play. We have been seeing some sector rotation back into insurance company stocks in the last two days. It is premature to attempt to determine if this is a new trend, or a rebound from an oversold level, but Aflac closed above our stop price and we are dropping it tonight. DGX $106.13 +4.00 (+8.70) While the rally in DGX's shares was on very low volume for the last few days, and the stock may very well rollover with weakness in the medical products sector, DGX closed above our stop level at $104, and so we are dropping it tonight. As a safety precaution, we always recommend that traders check for weakness in the sector before initiating put positions. CB $73.38 +1.44 (+4.69) Shares of Chubb rallied yesterday, as traders became a little tentative ahead of Alan Greenspan's speech on Thursday, parked some money back into the defensive issues. Moving strong higher in early morning trading, the stock spent the rest of the day trading sideways in a tight range to close up $3.25 or 4.73 percent on slightly higher than average volume. Today, the company that it would bid for British insurer Hiscox. The market appears to favor such a move, as the stock closed up over 2 percent on over twice the ADV. In doing so, our stop price of $73 was tripped and with that, we are taking our profits and dropping coverage. LH $131.50 +7.50 (+10.31) It looks like the bulls finally charged the bears, and the bears flinched. After declining for much of the past 3 weeks, LH saw some solid buying which helped the stock to move up nearly 8% today, closing the session just below our stop at $132. Technically, it looks like the downhill ride may be over, as LH has now moved through its descending trendline after bouncing from solid support near $120. Combine this with solid volume and a daily stochastics oscillator threatening to turn up out of oversold, and the signs are clear. It is time to take our profits and run, especially since any open positions should have been stopped out during today's strong upward move. PMI $53.81 +1.69 (+4.88) As we mentioned on Sunday, PMI will release its earnings tomorrow morning before the open, bringing an end to our play. The pre-earnings jitters gave us a nice ride down all the way through Friday's session, when we hit rock-bottom near $49. This week has been a mirror image, with the stock recovering some of the ground it lost, actually moving through our $53 stop early today. So whether you got out because of earnings or a violation of our stop, all positions should be closed by now. ***********************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=1421 ************************************************************ FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Tuesday 01-23-2001 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/012301_2.asp ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1396 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** RATL $50.57 +2.76 (+3.70) Rational rallied with the Nasdaq on Tuesday, and most importantly, cleared tough resistance at $50, which has been eluding the stock for weeks. Strength in the software index, and good company earnings from other technology companies are helping our play. Today's volume was about 20% higher than the three month average, and could possibly propel RATL up to its next major resistance levels at $52.50, and $60. Intra day support is found at $47, and $48, both of which could be entry points for aggressive traders. Continue to watch the software index and other software stocks like ORCL and MSFT for strength, and to set stops at $46. ARBA $41.78 +4.97 (+3.53) A nice rally in the NASDAQ and a robust earnings report from rival, FreeMarkets (FMKT), gave shares of ARBA a big boost today. By mid-afternoon, a burst of volume saw buyers taking ARBA through the $40 resistance to a pinnacle of $42.25. The heavy trading into the close could indicate more buying tomorrow in an advancing marketplace. But whatever you do, wait until after amateur hour before buying into the building momentum! And please, consider putting stops in place. In response to ARBA's breakout, we've raised our stop to $38 from $32 to guard our existing profits. On the downside, some back filling could occur in the coming sessions if traders look to take profits; however, the $39 and $40 levels should emerge as support on a pullback and thus; offer a variety of entry points. On the upswing above $42, there's no real resistance until ARBA approaches $50 and the correlating 50-dma ($50.94). A $62.75 +0.00 (-2.78) Consolidation in its truest form. After rising to the occasion on Thursday and Friday with peaks at $68 and $67.50, respectively, shares of A experienced a mild pullback to the $62 and $63 levels this week. The profit taking was typical and actually provided us with viable entry points into potential upside momentum. The current consolidation level sits above the critical 200-dma line ($60.82) and our $61 protective stop. With that in mind, a more conservative approach would be to wait for another high-volume breakout through the 5-dma line ($64.11) along with convincing action above the former $64 resistance level before taking positions. SNPS $55.13 +0.06 (+1.94) The breakout through the $52 level on Friday generated enough momentum to carry SNPS even higher this week. On robust volume, SNPS extended its price level upwards of $55 for a 3.7% overall gain. The rallying NASDAQ was an obvious catalyst, but a Buy rating from Dain Rausher Wessels along with an upgraded price target to $70 from $56 also had a bullish effect. Going forward, look for $54 and $55 to buoy the share price during market fluctuations or periods of consolidation. If SNPS experiences a breakout through the $56.50 resistance, look for entries into the momentum off the above-mentioned levels. A riskier approach is to target shoot on deep pullback to the 5-dma ($52.76), which is just above our $52 protective stop. If you choose this more aggressive strategy, keep stops tight. PLAB $34.19 +0.44 (+0.56) Shares of PLAB rose off the $33 support on three times the average trading volume! The shot of adrenaline came from a Merrill Lynch Buy recommendation. The resumption of bullish activity is a good sign that PLAB can make a big breakout through the $35 ceiling. The building wedge formation also indicates a major move to the upside is forthcoming; but of course, there's never any guarantees in the marketplace. The more risk-adverse traders should wait for the momentum to carry PLAB upwards of the $35 resistance before beginning new plays; although strong moves off the 5-dma ($33.60) also offers a reasonable entry level. In an effort to reduce risk, we've tightened our stop and upped it to $32 in accordance with the trailing 10-dma ($32.11). MERQ $94.81 +3.25 (-0.56) Strong moving average support has allowed shares of MERQ to hold up these past few sessions as it consolidates its recent gains. Bouncing without fail off the 50-dma (currently sitting at $88.10) the past few sessions, tests of this level have proven themselves to be ideal entry points. The stock appears to be encountering resistance at the psychological $100 level but support below is building, with the 5-dma (now at $90.63) now caught up and the 10-dma (at $82.66) quickly moving higher. Today the stock advanced 3.55 percent, buoyed by a rising NASDAQ and news that the company would guarantee to double web site performance for customers who use their hosted load testing service. If continued upward momentum allows MERQ to break above $95, this would allow for an entry on strength while pullbacks to support from the 5 and 50-dma as well as our stop price of $88 would give higher risk players a lower entry price. In both cases, confirm direction with that of competitors BMCS and CPWR before making a play. SLR $40.41 -0.33 (-1.54) On a flat day for the market yesterday, shares of Solectron drifted lower, retreating $1.21 or 2.88 percent on 90% of ADV. Despite the pullback, the stock found support from its 5-dma line though it appears that it also encountered resistance at the $42 level. Today, the company announced that it would acquire an OEM manufacturer Centennial Technologies for about $108 million in stock. This caused the stock to gap down at the open but SLR spent the rest of the day moving higher, closing down fractionally on average volume. At this point, what we would like to see is buying volume carry SLR back above its 5-dma at $40.63, allowing conservative traders to take a position. For higher risk players, a bounce off the 10-dma at $38.94 could allow for an entry point with additional support at $38 and our stop price of $37. Considering the light volume these past couple of sessions, we would recommend waiting for volume and sector sympathy to confirm direction before making a play. So keep an eye on CLS, FLEX, JBL to gauge sector sentiment. UBS $174.85 +0.80 (+1.10) Ever since successfully filling the gap and testing support at $165, shares of UBS have been trading sideways in a tight range, between support at $171 and resistance at $175. Trading volume continues to be light and Monday's action was no exception. The stock closed up fractionally on less than 30 percent of ADV to start off the week. Today was yet another example of sideways movement. Closing fractionally once again, volume was less than 20 percent of ADV. In doing so, it appears that there is some minor resistance just above $175, at the $175.15 area. What would give traders a definitive entry point would be a strong move above its recent highs of $176.50, with rallying in sector peers such as BSC, LEH, MWD. We are moving our stop up from $165 to $170. A bounce off this level as well as support from the 5 and 10-dma at $173.51 and $171.33 respectively) could allow aggressive traders to jump in. WCOM $20.69 -0.13 (-1.31) Profit taking has been the theme so far this week for WCOM, as traders sitting on substantial gains have been taking some money off the table before Fed Chairman Alan Greenspan's speech on Thursday. On Monday WCOM gave back $1.19 or 5.4 percent on less than 85% of ADV. Today the stock successfully tested support at our stop price of $20 finishing pretty much unchanged for the session on less than 70 percent of ADV. The low volume on the pullbacks so far this week is healthy considering the massive run-up so far this year. Another bounce off the $20 level could allow aggressive traders to initiate a play but before doing so, wait for the buyers to return in force. If WCOM can move back above the $21 level, this would allow for a more conservative entry, correlating positive direction with Merrill Lynch's Telecom HOLDR (TTH). From there WCOM could find resistance from its 5 and 10-dma at $21.85 and $21.53 respectively. AETH $55.34 +3.41 (+6.28) Off to a running start, our AETH play managed to track higher again today, helped along by a steady rally on the NASDAQ, and blowout earnings from OPWV last night. Continuing to ride the upper Bollinger band upwards, AETH clawed its way through the $55 resistance level, but the battle isn't over yet. After solidifying this victory, the bulls will need to scale the 50-dma (looming at $58.06), followed by historical resistance between $59-60. AETH will need the support of a positive NASDAQ to continue its rally as stochastics are now solidly in overbought territory, and today's closing price is nearly $3 above the upper Bollinger band. After a 26% rise in the past 3 sessions, a bit of profit taking is likely looming ahead, although it has been encouraging to see volume remain well above the ADV. With a little over 2 weeks until the company reports earnings on February 7th, there is time to wait for a pullback before initiating new plays. In order to protect our gains, we have raised our stop to $50, and as long as the stock doesn't drop below this level, we would look to open new positions on any intraday dips. BRCD $109.63 +3.13 (+4.63) Solid earnings from enterprise storage leader EMC, along with other leading technology stocks, helped BRCD to extend its gains again today. BRCD is now up more than 40% in the past 2 weeks, and the leading fibre-channel switching solutions provider is still looking strong, with volume running 75% above the ADV. Of course, we always have to watch out for profit taking, and with stochastics now solidly in the overbought region, the stage is set. The downtrend has now solidly been broken, but with the stock riding the upper Bollinger band, the most prudent entry strategy for new positions would be to target shoot intraday dips to the $104-105 support level. We have moved our stop up to $100, and this will be our last line of defense against profit taking. As long as the NASDAQ can continue to rally, and storage stocks remain strong, BRCD should continue to behave well as we await positive developments from next week's FOMC meeting. CIEN $102.66 +1.78 (+2.15) The bulls have stopped to catch their breath after helping CIEN to charge higher over the past two weeks. The breakout above the descending trendline (now at $98) is still intact, as the stock is consolidating its recent gains. After the strong upwards move, it is encouraging that profit taking didn't take a bigger bite out of the stock's recent climb. Mirroring the consolidation that is taking place in the Networking index (NWX.X), CIEN could be preparing for its next upwards surge as investors hold their breath ahead of next week's FOMC meeting Volume has weakened somewhat this week, and we are now waiting for confirmation that the rally still has legs. The bulls will need to sharpen their horns as we continue through this critical 2nd major week of earnings, and we will look for new entries as CIEN bounces from the $100 support level and heads back towards the upper Bollinger band. Our stop is still resting at $94, and a bounce near this level looks like a gift we are unlikely to get unless we see significant weakness in the Networking sector. More conservative entries may appear if the bulls charge ahead from current levels, driving CIEN through resistance near $105 resistance, accompanied by strength on the NWX.X. NUFO $53.25 +0.31 (-1.38) Networking stocks have been leading the NASDAQ higher over the past 3 weeks, and NUFO has been in the thick of it all along. After rallying nearly 60% last week, the bulls needed to pause and catch their breath. Profit taking appeared yesterday, and it is amazing how limited this activity was. Volume dropped off to near the ADV, and the stock didn't get anywhere near our stop. The sellers ran out of steam near the $50 level, and bargain hunters appeared, driving the stock back up near the upper Bollinger band. Given the stock's strength this week, we are raising our stop to $48, and we would use any intraday dip to support between $50-52 as an aggressive entry point. More conservative players will want to wait for buying volume to pick up again, driving NUFO through the congestion zone between $57-60. Keep in mind that the stochastics are sitting in overbought, and given the proximity of the upper Bollinger band, any negative developments in the Networking sector could have a sharply negative effect on our play. Anticipation of the company's earnings on January 30th should continue to provide a positive bias, but make sure the Networking index (NWX.X) continues to look strong before initiating new positions. ******************* PLAY UPDATES - PUTS ******************* TEVA $51.94 -1.13 (-1.62) Teva experienced heavy selling over the last two days. After rolling over from $56 on Monday, and closing down on three times the average daily volume, Teva rolled over from $52.60 on Tuesday and dropped to a low of $48.88 during the mid morning. The second major roll over occurred from $52.13, on nearly seven times the average daily volume, and Teva is well positioned to drop below $50 on strong volume. The series of lower highs is consistent with the unmistakable down trend the stock established earlier this month, and Teva bucked the strength in the biotech and pharmaceutical stocks today. Traders can look for another roll over from $51.50, or a break below strong support at $50, which could be an entry point for more conservative put players. Keep stops at $55. BA $57.50 +1.50 (+1.81) Resistance is holding, but just barely. After the sharp drop in shares of BA last week, prompted by disappointing earnings, the stock needs to take some time to consolidate its gains. The question is whether it is a temporary resting point before heading south again, or if the stock will put in a bottom in the mid-$50s and recover from here. After 3 tests of the $55-56 level in the past 4 sessions, we are seeing this level solidify as support. There have been no significant news developments this week, so BA is likely to follow the lead of the broader market, and the fact that the "old economy" index managed to post a solid gain today tilts the balance in favor of the bulls. Our stop remains in place at $58, and although aggressive traders can consider new entries if BA rolls over from there, we need to play with caution, as a solid move through that level will spell the end of our play. If you have been waiting for a solid entry signal, the conservative approach will be to wait for the price to drop through the $55 support level, preferably accompanied by solid volume. CCU $60.69 +1.31 (-1.06) When we started our put play in CCU yesterday, we cited strong overhead moving average resistance from the 200-dma (at $64.74) and the 5-dma as well as the violation of its recent uptrend line along with negative sector sympathy. Closing down $2.38 or 3.85 percent on a little over 85% ADV, volume was light but the trend violation was difficult to ignore. Horizontal resistance appears to be building as well, with the $61 level acting as a glass ceiling so far this week. While the stock gained 2.21 percent today, the low volume (less than 75% of ADV) illustrates the lack of buying conviction. Look for a failure to break above resistance at $61, the 5-dma at $61.76, $63, and our stop price at $64 as potential targets for entry but wait for selling volume before jumping in. If CCU moves strong below its 10-dma near $60, this could allow for an entry on weakness, provided that rivals INF and VIA are also heading lower. ************************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=1435 ************************************************************** ************** NEW CALL PLAYS ************** AGGRESSIVE: SCMR - Sycamore Networks $51.38 +5.25 (+1.45 this week) Founded in 1998 and headquartered in Chelmsford, MA, Sycamore Networks is focused on developing the transport, switching and management products required to create a flexible, intelligent, end to end optical network. Addressing the current limitations of the public network infrastructure to grow bandwidth and support new services, Sycamore leverages existing fiber optic resources by bringing intelligence to the optical domain. Sycamore's intelligent optical networking solutions will relieve current network congestion and lay a foundation for the next generation's telecommunication infrastructure. The optical networking stocks are starting to light up the Nasdaq once more, after being out of favor for most of the fall. Investors are finding that their worst fears of a slowing economy destroying the growth in this sector are, for the most part, unfounded. Excellent earnings from the optical networking bellwether Nortel last week, as well as multiple analyts upgrades of this dynamic sector, have stimulated buying interest, which helped Sycamore close above resistance at $50, which held the stock back for weeks. Sycamore is now resting just a quarter point underneath the 50 dma of $51.50, and a break above this level would be an excellent entry point. Sycamore is scheduled to report earnings on February 13, which gives traders time to scale into positions prior to an earnings run. Sycamore's earnings came in well above the expectations for the last quarter, and analysts have ranked SCMR as one of the optical stocks with the highest possibility of beating analysts expectations. The small and mid cap networking stocks have shown particularly strong momentum lately, and have been outperforming the slower growing giants like Cisco. Sycamore has announced a significant number of new contracts and products in the fourth quarter of 2000, the most recent of which was an announcement of CoreExpress's deployment of SCMR's SN16000 optical switches, in a multi year agreement. Analysts have stated that SCMR's broadening client base should increase earnings going forward. Traders can take positions at current levels, or at a possible pullback to $50, or the 5 dma of $48.25. The next major resistance level is $55, and with help from the NWX.X SCMR may visit this level soon. Watch others in the sector like JDSU and CIEN and set stops at $44. BUY CALL FEB-50 SMZ-BJ OI=1521 at $ 6.63 SL=4.50 BUY CALL FEB-55*SMZ-BK OI= 757 at $ 4.88 SL=3.00 BUY CALL MAR-50 SMZ-CJ OI=1733 at $10.00 SL=7.00 BUY CALL MAR-55 SMZ-CK OI= 305 at $ 7.88 SL=5.75 http://www.premierinvestor.net/oi/profile.asp?ticker=SCMR EBAY - eBay Inc $52.38 +2.94 (+2.25 this week) eBay is an Internet auction service in which users buy and sell personal property. The sellers pay a fee to have their items placed on the company's Web site and the buyers get to browse and make bids on the merchandise. If an item sells, eBay charges the seller a percentage of the closing price. The company's rivals in the auctioning arena are Yahoo! and Amazon.com. A clean break through the $45 resistance saw EBAY into its earnings' announcement on January 18th. The company easily surpassed the Street's estimates and dazzled the analysts with a rosy forecast. The extended gains have pushed the share price upwards of $50 in the past three sessions. The sustained momentum indicates EBAY could challenge the overhead opposition at the 200-dma ($55.67) in the very near-term. To take it a bit farther, a break through the more formidable $60 level and EBAY could potentially experience significant advances on pure momentum. The ascending pattern of higher-lows at $46, $48, and $50 levels offer the discriminating trader a variety of aggressive entries into this momentum play. And for those who'd rather buy into a rally, look for an opportunity to take positions as EBAY moves through $53 and the above-mentioned 200- dma. It's essential that volume remains strong amid an advancing market and others in the sector like Yahoo! (YHOO) demonstrate strength. We have a protective stop set at $46, which is currently sandwiched between the 10-dma ($43.93) and the 5-dma ($48.43). In the news this week, the world's biggest Internet auctioneer formed a partnership deal with London-based Icollector that lets users place live bids on artwork, antiques and collectibles at over 300 auction houses worldwide. BUY CALL FEB-50 QXB-BJ OI=1622 at $5.75 SL=3.75 BUY CALL FEB-55*QXB-BK OI=1788 at $3.50 SL=1.75 BUY CALL FEB-60 QXB-BL OI=1137 at $2.00 SL=1.00 BUY CALL MAR-50 QXB-CJ OI= 42 at $8.13 SL=5.75 BUY CALL MAR-55 QXB-CK OI= 20 at $5.88 SL=4.00 BUY CALL MAR-60 QXB-CL OI= 77 at $3.88 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=EBAY RMBS - Rambus, Inc. $49.19 -0.19 (+1.81 this week) Rambus designs, develops, licenses and markets high-speed chip- to-chip interface technology to enhance the performance and cost- effectiveness of computers, consumer electronics and other electronic systems. They license semiconductor companies to manufacture and sell memory and logic ICs incorporating Rambus interface technology, and market their products to systems companies to encourage them to design Rambus interface technology into their products. They have been aggressive in this respect, licensing more than 100 patents to around 30 semiconductor companies. Bouncing off the $33 level at the beginning of the year, shares of Rambus have moved ever higher. While this is not particularly surprising considering the recent strength in Semiconductor issues, RMBS has advanced in the face of company-specific bad news. Reporting earnings less than two weeks ago, the company missed Street estimates by a penny. Analysts commented that the earnings picture going forward was difficult to ascertain due to its royalty revenue model and the company itself warned of higher legal costs in upcoming quarters. While the stock did take a minor post-earnings stumble, investors were willing to buy into the dip and since that time, RMBS has erased those losses, and then some. It seems that all the bad news had already been priced into the stock and with that, traders focused on the bright side, such as the five-fold year-over-year revenue growth, the 35 percent sequential growth and the signing of a license agreement by Mitsubishi. Connecting the lows since the beginning of the year, the stock is clearly in a strong uptrend. Having closed above 50-dma resistance yesterday, this moving average line provided support today. Now converged with the 5-dma, look for this level, now at $47.50 to act as support. Pullbacks to this point as well the 10-dma at near $46, $45 and our stop price of $43 could allow aggressive traders to enter this play, provided that the dip buyers continue to lend their support. Continued sector strength, gauged by action in the Philadelphia Semiconductor Index (SOX) as well as Merrill Lynch's Semiconductor HOLDR (SMH) could allow RMBS to power through resistance at $50. If the bulls can break and close above this level with conviction, this would allow for a more conservative play. BUY CALL FEB-45 BYQ-BI OI= 918 at $8.25 SL=5.75 BUY CALL FEB-50*BYQ-BJ OI=3339 at $5.38 SL=3.50 BUY CALL FEB-55 BYQ-BK OI=1576 at $3.38 SL=1.75 BUY CALL MAR-50 BYQ-CJ OI= 24 at $8.50 SL=6.00 BUY CALL MAR-55 BYQ-CK OI= 29 at $6.63 SL=4.50 http://www.premierinvestor.net/oi/profile.asp?ticker=RMBS LOW VOLATILITY: TYC - Tyco International Ltd. $62.06 +1.44 (+0.94 last week) Tyco International Ltd., a diversified manufacturing and service company, is the world's largest manufacturer and installer of fire and safety systems, the largest provider of electronic security services in North America and the United Kingdom and has strong leadership positions in disposable medical products, packaging materials, flow control products, electrical and electronic components and underwater telecommunications systems. The Company operates in more than 80 countries around the world and has expected fiscal 1999 revenues in excess of $22 billion. Slow and steady would be a fairly accurate description for the movement in TYC's stock price over the past year. While many Tech shares suffered losses in the year 2000, TYC traded in a wide range from the low 40's to resistance at the $60 level to end Y2K in the green. Now, with an easing Fed and a willingness in investors to put money into growth at a reasonable price, TYC has broken above formidable resistance at $60 and is making new all-time highs. Also helping the stock is analyst Brian Langenberg of Credit Suisse First Boston, re-iterating his Strong Buy rating on the company and raising his share price target from $65 to $80. With resistance now support, we are placing our stop price just below, at $59. Pullbacks to moving average support from the 5 and 10-dma at $60.72 and $59.30 could allow dip buyers to take a position while an entry on strength could be had if TYC advances above today's high of $62.37 on volume, backed by positive momentum in peers JBL and CLS. BUY CALL FEB-60 TYC-BL OI=18659 at $3.75 SL=2.25 BUY CALL FEB-65*TYC-BM OI= 7667 at $1.13 SL=0.00 BUY CALL MAR-60 TYC-CL OI= 18 at $5.00 SL=3.00 BUY CALL MAR-65 TYC-CM OI= 273 at $2.50 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=TYC BBY - Best Buy Co Inc $46.81 +3.06 (+4.31 this week) Best Buy Company is a specialty retailer of name-brand consumer electronics, home office equipment, entertainment software and appliances. The company operates its stores throughout the US. BBY is a shining star amid the sometimes darkening sky of the retail sector. Coming off December lows in the $20 range, BBY leaped into the new year like with a flash. The narrowing cycling at the $40 and $45 consolidation levels seemed almost infinite. But as usually happens with a coiling spring pattern, there was a sharp breakout. In today's session, BBY saw a $3.06, or 6.5% jump through the upper resistance. Volume was respectable at 2.3 mln shares exchanging hands. Now that November's bearish gap is closed and BBY emerged unscathed, we're anticipating a steady recovery as the stock heads into earnings' season. Best Buy is expected to announce solid numbers around March 13th. Look for pullbacks near our $43 protective stop or more conservatively, off the supportive 5-dma ($44.39) for entries into the uptrend. It'll be important to keep an eye on other retails stocks like Walmart (WMT), Circuit City (CC), Office Depot (ODP) and Kohl's (KSS) to see how the overall sector is responding to market conditions over the short-term. BUY CALL FEB-40 BBY-BH OI= 460 at $7.38 SL=5.25 BUY CALL FEB-45*BBY-BI OI= 517 at $4.38 SL=2.75 BUY CALL FEB-50 BBY-BJ OI= 336 at $2.13 SL=1.00 BUY CALL MAR-45 BBY-CI OI=1138 at $6.25 SL=4.25 BUY CALL MAR-50 BBY-CJ OI=1536 at $4.00 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=BBY ************* NEW PUT PLAYS ************* AGGRESSIVE: NKE - Nike Inc. $53.13 +0.19 (+2.26 this week) Nike Inc. designs, develops and markets high quality footwear, apparel, accessories and equipment products. Nike is the largest seller of athletic footwear and athletic apparel in the world. the company sells its products to approximately 19,000 retail outlets in the U.S., and through a mix of independent licensees, distributors, and subsidiaries in approximately 140 countries around the world. Nike has had a huge run up from a low of $36 in October to a high of $59 in January, and is now poised to correct. A head and shoulders pattern developed in January, with the left shoulder at $57.38, the head at $59.44, and the right shoulder at $56. This week, technical strength deteriorated further. A downgrade by Morgan Stanley Dean Witter from outperform to neutral on Friday sparked heavy selling, and Nike lost 2.5 points on double the average daily volume. This week, an additional news release was poorly interpreted by investors. On Monday, the Wall Street Journal reported that Nike would install a monitoring device into a factory of one of their subcontractors in Mexico City, since allegations of worker mistreatment had been reported by a Human Rights organization. On Tuesday, Nike and Nordstrom announced a deal to market Nike's Tiger Woods signature line in Nordstrom stores, however, this news did little to boost the stock price. Last week, Nike rolled over from $56.50 twice, and fell sharply to $52. The last two days had Nike rolling over from lower highs at $54, $53.50, and $53.20. A rollover from its current level could be an entry point. In addition, Nike looks as if it will break below the 50 dma of $49.98 soon, which would be an excellent entry point for more conservative traders. Set stops at $56. BUY PUT FEB-60 NKE-NL OI= 83 at $7.75 SL=5.50 BUY PUT FEB-55*NKE-NK OI=3080 at $4.00 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=NKE IDTI - Integrated Device Tech. $47.19 -2.44 (-3.06 this week) Integrated Device Technology designs, develops, manufactures and markets a broad range of high-performance semiconductor products. The company serves up products for data networking and telecommunications equipment such as routers, hubs, switches, cellular base stations, storage area networks, networked peripherals, servers, and personal computers. About 70% of sales are from communications and high-performance logic components such as embedded RISC microprocessors, specialty memory, logic and clock management circuits, and networking devices. After leading the NASDAQ off of its late December lows, the Networking (NWX.X) and Semiconductor (SOX.X) sectors are taking a break to consolidate their recent gains. Operating in both sectors, IDTI went along for the ride during the first three weeks of the year, but got knocked back on its heels Friday after reporting disappointing earnings. Coming in a nickel shy of estimates, and showing a significant slowdown in revenue growth was not what investors wanted to hear, and they whacked the stock for a 10% loss last Friday. The rollover occurred right at the 200-dma ($57.25), and has continued this week, as the stock has now fallen to tentative support near $47. Although volume has dropped back to near the ADV after last Friday's selling frenzy, the technicals are not looking pretty. MACD has rolled over and entered negative territory, and stochastics have now dropped out of the overbought zone. Investors are looking for strong stocks in this market, and IDTI clearly doesn't fit the bill. As cash leaves the stock, it should fall through the $46-47 support level on its way back towards its next support level near $43, followed by $40. Depending on how ambitious the bears are, they could drag our new play down for a retest of the recent lows between $28-30. Of course irrational behavior seems rampant lately; should the bulls win the current battle, our exit signal will be a rally that manages to clear our stop at $51. Aggressive traders can look for entries as the bulls attempt to rally the stock; a rollover near the $50 resistance level would make for a great entry point. More conservative players will want to wait for selling pressure to violate the $46 level before jumping into the play. Keep an eye on the SOX.X and NWX.X. If these indices should roll over, that will give us a nice confirming signal and IDTI will likely be one of the first stocks to suffer. BUY PUT FEB-50 ITQ-NJ OI=725 at $6.50 SL=4.50 BUY PUT FEB-45*ITQ-NI OI=456 at $3.63 SL=2.00 BUY PUT FEB-40 ITQ-NH OI=740 at $1.94 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=IDTI ********************** PLAY OF THE DAY - CALL ********************** BRCD - Brocade Communications $109.63 +3.13 (+4.63 this week) Brocade Communications is a provider of Fibre Channel switching solutions for Storage Area Networks (SANs), which apply the benefits of a networked approach to the connection of computer storage systems and servers. The company's family of SilkWorm switches enables companies to cost-effectively manage growth in their storage capacity requirements and improve the performance between their servers and storage systems. This provides the ability of increasing the size and scope of a company's SAN, while allowing them to operate data-intensive applications, such as data backup and restore, and disaster recovery on the SAN. Most Recent Write-Up Solid earnings from enterprise storage leader EMC, along with other leading technology stocks, helped BRCD to extend its gains again today. BRCD is now up more than 40% in the past 2 weeks, and the leading fibre-channel switching solutions provider is still looking strong, with volume running 75% above the ADV. Of course, we always have to watch out for profit taking, and with stochastics now solidly in the overbought region, the stage is set. The downtrend has now solidly been broken, but with the stock riding the upper Bollinger band, the most prudent entry strategy for new positions would be to target shoot intraday dips to the $104-105 support level. We have moved our stop up to $100, and this will be our last line of defense against profit taking. As long as the NASDAQ can continue to rally, and storage stocks remain strong, BRCD should continue to behave well as we await positive developments from next week's FOMC meeting. Comments BRCD continues higher and is once again looking like its old self. The advances have been steady, and EMC's stellar earnings this morning certainly helped. BRCD has support at $105, which is also the site of its 100-dma. Look for pullbacks to this level for a bounce. On the upside, BRCD will encounter resistance near $116. A break of that level could send the stock to $120. Watch the NASDAQ for overall sentiment. BUY CALL FEB-105 GUF-BA OI= 705 at $14.00 SL=11.25 BUY CALL FEB-110*GUF-BB OI= 2824 at $11.13 SL= 8.75 BUY CALL FEB-115 GUF-BC OI= 482 at $ 8.88 SL= 6.75 BUY CALL MAR-120 GUF-DD OI= 27 at $12.63 SL=10.00 SELL PUT FEB- 95 GUF-NS OI= 361 at $ 5.00 SL= 7.00 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=BRCD *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. 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