The Option Investor Newsletter Sunday 01-28-2001 Copyright 2001, All rights reserved. 1 of 5 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/012801_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 1-26 WE 1-19 WE 1-13 WE 1-5 DOW 10659.98 + 72.39 10587.59 + 62.21 10525.38 -136.63 -124.84 Nasdaq 2781.30 + 10.92 2770.38 +143.88 2626.50 +218.85 - 62.87 S&P-100 709.06 + 3.83 705.23 + 17.35 687.88 + 6.17 - 4.74 S&P-500 1354.95 + 12.40 1342.55 + 24.00 1318.55 + 20.20 - 21.93 W5000 12527.30 +143.40 12383.90 +202.60 12181.30 +308.80 -294.50 RUT 498.68 + 10.59 488.09 + 2.34 485.75 + 22.61 - 20.39 TRAN 2956.19 + 2.90 2953.29 - 48.69 3001.98 -112.01 +167.39 VIX 25.14 - 1.15 26.29 - 1.33 27.62 - 4.41 + 1.80 Put/Call .59 .48 .60 .63 ****************************************************************** Kiss those fractions goodbye! By Jim Brown A new era in trading is about to begin and an old era comes to a close. After 208 years of trading in fractions, stocks will switch to decimals on Monday morning. Lets hope we can mark that day in the win column and not as a loss. After a morning opening drop of -68 points as a result of an absolutely horrible PMCS earnings announcement, the Nasdaq rebounded yet again. After the initial dip to 2686 the index bounced back over and then skidded to a stop at 2700 and then rallied to close positive. The sentiment was clear. The market shrugged off bad news and rallied higher even after a +500 point gain over the last three weeks. Bullish anyone? Nasdaq:PMCS was the story stock of the day. After a horrible conference call, where the company said they had not received a new order in eight weeks, the stock traded as low as $62 or -$32. After the initial drop the stock rallied back to close at $73.75 regaining one third of the loss. Other companies in the sector suffered as well but NASDAQ:BRCM closed up almost +$6 even after being downgraded by Robertson Stevens. It appears investors were looking behind the news and shifting into the stocks that had good individual earnings while avoiding the weaker issues. PMCS was hit by multiple downgrades and several were serious. CSFB cut estimates from $1.70 to $.88, JPM from $1.67 to $.92 and GS from $1.66 to $1.01. Obviously room for an upside surprise now! Nasdaq:JDSU rebounded after the initial drop after reporting earnings on Thursday that beat the street but then lowering expectations going forward. Investors decided the warning was not material and jumped on the stock as a lifeboat in a sea of more serious earnings disasters. Nasdaq:ERICY was the ugliest story of the day after announcing that they lost over $1 billion in their cell phone business last year. They said that 2001 would be even weaker. They are making changes to reduce the losses and those changes include turning over the manufacturing of cell phones to Nasdaq:FLEX. The move will save $1.6 billion next year. ERICY lost -13% today. Nasdaq:CSCO fell after the PMCS warning when they said sales to CSCO, their biggest customer, were slowing. Several analysts came out and cautioned about CSCO earnings which are due out on Feb-6th. They are not worried about them missing the numbers but warning about growth going forward. As the largest supplier of routing equipment CSCO is seen as a barometer of the tech sectors health. CSCO recovered about $2 of the initial drop and closed down only -.94 cents. NYSE:DY, Dycom Industries fell Friday after the telecommunication provider said sales from major customers were slowing drastically. They said major customers were postponing or even canceling some projects. They said earnings could drop as much as -25%. The stock dropped from $31 to $20 at the open but regained some by the close. The economy is losing the financial Superbowl. This week alone job cuts for big name companies were over 40,000 jobs. The leaders in the layoff bowl included Nasdaq:WCOM -7000, NYSE:LU -16,000, NYSE:JCP -5,000, NYSE:AOL -2,000, NYSE:SLE -7,000. If the Fed needs any more indication of weakness they only need to look here. It is not a question of "if" the Fed will cut rates next week but by how much. Alice Rivlin said today that the Fed would go all the way and cut 50 points. That would be great if she was still a voting member but she isn't. Others say the Fed will hold to a gradualist policy and only drop 25 points. This would be the equivalent of Greenspan standing on the edge of the cliff and yelling down at the falling economy and saying "I cut rates, I cut rates!" That is nice but it would not be enough to cushion the sudden stop at the bottom. Things are grim by Greenspan's own admission. Saying the economy is currently at zero and falling, implies that a recession is imminent. This has traders worried. With earnings dropping through the floor the Fed must take decisive action. First Call said earnings estimates for tech companies in the S&P for next quarter have fallen from +11% as of Jan-1st to only +2% today. Greenspan said he was now in favor of a tax cut but that a cut would not jump start the economy fast enough to avoid a crash landing. This has stimulated the analysts to speculate that Greenspan thinks things are bad enough to cut by a full 50 points. This and Rivlin's comments today are what pulled the techs off the bottom and revived the market. If you look at many charts and CSCO is a prime example, you will see a spike at 1:30 which is when the Rivlin statement appeared in the press. Another spike intraday was credited to Abbey Joseph Cohen who said on CNBC that the leading companies in the "data storage sector" and the "Internet infrastructure sector" were significantly undervalued. She would not identify them by name but traders read between the lines and bought CSCO, JNPR, NTAP and EMC shortly after 1:PM. The Fed will have a strong economic calendar to deal with next week. The surprisingly strong Durable Goods Report on Friday is not likely to continue with next weeks reports. Durable Goods rose +2.2% when they were expected to fall by -2.0%. The difference was a strong jump in aircraft and electronic components. If you took out transportation orders the index would have dropped -1.4%. Next week we have Consumer Confidence on Tuesday, GDP, Chicago PMI, New Home Sales on Wednesday. Thursday has Personal Income/Spending, Construction Spending, NAPM Index and Friday the big Non-Farm Payrolls, Factory Orders and Michigan Sentiment. You can bet the Fed will have advance notice of the Payroll numbers to help them with their decision. The top 24 bond dealers were surveyed and they were unanimous in expecting a -50 point cut. This is setting us up for a dangerous situation. If the Fed cuts by 50 points, the market has already priced it in and we could actually have a sell on the news event. Also if the Fed does cut 50 points there may be a sell off due to worry about the economy being worse off then we know. What do they know that we don't know? If the Fed only cuts 25 points there will definitely be a sell off on the fear that the economy will not recover quick enough. Initially it looks like a lose/lose situation. However, with either cut the long term market direction will be up. The markets always follow the Fed and while there may be a day or two of market instability the eventual direction should be up. TrimTabs said $10 billion of new cash came into stock funds last week but that is only a drop compared to the $600+ billion already on the sidelines. With earnings almost over, more than half of the S&P has announced and 20 of the 30 Dow stocks, they are only waiting for the Fed before they move. The fact that the market is shrugging off bad news left and right is evidence of money coming back into the market. With no dip events in sight, other than the FOMC meeting, buying opportunities are dwindling. You have heard us say several times that some situation had brought the market to a pivotal point. Well this is the REAL PIVOT point. This is the defining moment for the market in 2001. The normal post earnings depression meets a possibly aggressive Fed. The shootout at the O.K. Corral. There are analysts screaming that the market is overbought and ready to crash back to 2200. I really hope they are wrong but we have to be ready for that possibility as well. Monday is likely to be up but after that all bets are off. The fear of the unknown could increase volatility substantially and even though everyone expects a rate cut, no one knows what to expect after that. Will traders sell into the rally or will they start throwing money at the market? Did you know that historically the day after a rate cut is normally down? Just another piece of market trivia that can cost traders money. No guarantees but plan accordingly! The Superbowl hype is on with 120 million expected viewers. With ads running $2 million dollars the field of advertisers has narrowed considerably. Only three of the seventeen dot coms that advertised last year are returning. Etrade, Hotjobs.com and Monster.com are the only repeat Internet companies willing to cough up the money for a 30 sec advertisement. Hotjobs.com who will be advertising for their third Superbowl in a row said they spent their entire annual advertising budget on the Superbowl two years ago. This year the same ad time only amounted to 5% of their annual budget! Is Etrade so flush with cash that they can pay two guys in plaid and a chimp to do nothing for 30 seconds and laugh about it? Their total profit last quarter was $1.4 million and they are spending $2 million on a horrible ad. Go figure! Trade smart, enter passively, exit aggressively! Jim Brown Editor ************************************ 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 TradersAccounting.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 ********************* EARNINGS SCHEDULE Jan-29th to Feb-2nd ********************* The earnings calendar is too large to email. Please visit the website for the complete list. ************************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=1486 ************************************************************** ************** EDITOR'S PLAYS ************** I was tempted but I resisted! The -$32 drop in PMCS was a strong temptation. I had several readers email me saying they were going to write naked puts on it at the open. If they did then they are probably up over $10 today. The drop to $62 from $95 was a classic entry point for a naked put or even deep in the money calls. There is a strong possibility for a dead cat bounce on a market favorite that gets killed by some significant event. If you bought calls or sold puts then congratulations. I chickened out. At the office we listened to the conference call and it was less than awe inspiring. It was very depressing. No new orders in eight weeks? That is scary! If you are playing this stock I urge you to keep your stops tight. The dead stop at $75 in the afternoon is a dead giveaway that there is still some selling pressure. I got quite a few emails from readers on the high profit covered call strategy from last Sunday. This is good! It shows that some of you are looking for returns not just the excitement from trading. Here are a couple of other candidates for the same type of strategy. The returns are assuming you are called out and are on margin. COHR $ 52.31 MAR-$ 50 Call $6.88 = 17% return EMLX $106.75 FEB-$110 Call $7.38 = 20% return CHKP $155.00 FEB-$160 Call $10.25= 20% return NUFO $ 48.50 FEB-$ 50 Call $5.38 = 28% return RIMM $ 71.56 FEB-$ 75 Call $5.63 = 25% return GSPN $ 40.69 FEB-$ 40 Call $4.75 = 20% return GSPN $ 40.69 FEB-$ 45 Call $2.63 = 36% return For those of you who are afraid of covered calls because the stock might drop there are ways to avoid all but the most serious disasters. I am not talking about stop losses. The best way to prevent a serious problem is to sell deep in the money calls. This lowers the risk considerably but also lowers the return. Ray practices this in the Covered Call section of the newsletter. Many times he will suggest a call that is 25% in the money or more. The return is normally around 7-11% per month but the stock has to drop 25% or more to lose money. For instance in the list above NUFO is $48.50. You could buy NUFO on margin and sell the FEB-$40 Call for $10.75. Your return called out would be 9% (10.75-8.50/24.25=9%) NUFO would have to drop below $40 for you to lose money. That would be a -17% drop which of course is possible but not likely without a market event to drag the stock down. For traders the possibilities next week are endless. With the market likely to be up on Monday/Tuesday and then wild and crazy on Wednesday the best course of action would be something that takes advantage of the market moves without having to pick stocks. The obvious choice is the QQQs. They closed at 65.50 and the high on Wednesday was $69.13. Currently the bid on the Feb-69 call is $2.00. If the QQQ rallies back to Wednesday's high of $69 before the Fed meeting then the bid would be over $3.50 for a return of +75% for a two day play. Simple and profitable. Even cheaper but less exciting would be the DJX-108 calls at $1.40. A +200 point jump in the Dow (10864) would result in a $1 gain or a 71% profit. Considering that next week may be volatile you could also pick a stock that is not expected to jump around with the markets. CPN at $42 is an energy stock that stands to benefit from the resolution of the energy crisis in California. The $40 call is only $3.88 and it is $2 ITM already. Any gain by CPN of more than $1.88 puts you into a 100% Delta situation. A move back to last months high of $47 gives you almost a 100% gain. The comment by Abbey Joseph Cohen on Friday that leading "data storage" companies were under valued brought a flood of interest into EMC. The $70 Jan call option had a volume of over 10,000 contracts. This option is $9.06 ITM and the price is $11.13. That makes the real cost only $2.07 for a fast moving stock that is likely to gain over $10 in the next three weeks. I like DITM options with 100% Delta and this would be my choice for EMC. Lottery play: Here is a sleeper for you. NOVL is currently $8.41. The Feb-$10 Call is only a quarter ($.25). Earnings are not until late February and a Nasdaq rally could easily add a couple dollars to NOVL's price. This is strictly a lottery play but it would not take much of a bounce to get a double or better here. Other than the normal aggressive calls/puts that can be found in the regular newsletter, I would consider the plays listed above to be low risk. With the entire fate of the market resting on the FOMC meeting on Wednesday it is difficult to predict market direction. The closer we get to 2:15PM on Wednesday the more fragile the market will become. I am a gambler but I only like to play when I can get the odds more or less in my favor. Good Luck Jim Brown *************************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=1476 ************************************************************ **************** MARKET SENTIMENT **************** Rumor Becomes News, Snakes In The Grass By Austin Passamonte All things are new under the sun. Greenspan's a proponent of tax cuts, rate cuts, haircuts... you name it. We wonder how long & hard he might have hammered on President Gore for that tax cut had a few hundred pregnant chads given birth on those Florida ballots? Bullish fundamental divergence: Investors shrug off bad news and buy suffering stocks anyway. Earning warnings? Ah forget about it. No worries. Interest rates are coming down and the bull-run is ready to resume. Sounds great to us; we'd love just one more shot at 1999 in our lifetime. Wouldn't you? A nice rally to new highs and beyond would be mighty fine indeed. However, there may just be a snake or two slithering in those pastures bulls are ready to run rampant in. The VIX and VIXN being two little garter snakes. VIXN? Yes, it is CBOE's newest sentiment product that tracks the Nasdaq 100. Where'd they hide this one for so long? Anyways, it seems to trade in a recent range from 60 to 90 with 60 being a bearish signal near tops and 90 a bullish value near bottoms. Take a wild guess where we are tonight? Yes, both VIX and VIXN (male & female? Will they offspring VIXS for the SPX? We digress) are near bearish reversal readings and need monitoring from here. Moving the herd over to balmy palmetto pastures where eastern diamondback rattlers lurk, we have the reality of earnings season drawing towards a close. That and the FOMC rumor of how many basis points will soon become news, and we know the old saw about that one. It's our opinion that a 50-basis point cut is already priced in and nothing short of 75-bp cut will push markets higher on its own. That leads us to cattle grazing on the African plains with lush grasslands head-high and full of nourishment, but watch out for those black mambas moving about. This long, thick and fearless viper may also be found at the top of our daily index chart stochastic signals where fast bars are currently crossing down through slow bars, threatening to poison the current rally. Don't look now but daily tech charts are showing stochastic values at higher relative highs than respective price action stalled at lower respective highs. Easy rule to remember; divergence that occurs in overbought zones are bearish. Divergence in oversold zones are bullish. We are now deep in overbought range and divergence is waiting to confirm. This suggests a return to recent lows or lower if the patterns complete. That would happen in the next few sessions without reaching new relative price highs first. But the biggest constrictor on planet earth is the Anaconda. Found in South American wetlands, this colossal behemoth makes an entire meal out of cattle. One per year is all that's necessary to sustain. This might be akin to S&P 500 commercial traders who continue to build an all-time historic, net-short position. Many South Americans never see a single Anaconda in their lives and therefore dismiss the danger. Sure, it's been mentioned many times before but none have been found in the backyard pool so what of them? Well, we wouldn't suggest wading about in waist- deep water through backcountry swamps nonetheless. To put things in dollar perspective, S&P 500 commercial traders currently hold about $100 Billion (with a "B") long futures contracts and $135 Billion (another "B") short futures contracts. Simple math tells us they hold a staggering $35 billion in net- short risk. Let us put our shoes & socks back on, it's kind of drafty in here tonight. There. Comfy toes again. Now where were we? Oh yes, $35 billion at risk. In the SP00S pit. Belly of the beast. Pulse of the market. Can these people be that daft? Are they stone stupid? Someone needs to tell them we've got rate cuts going on around here and this market is headed UP! $35 billion is a nifty chunk of change to get caught in the midst of a short-squeeze on. Hate to have retail volume spook them out of there with such a loss. There wives might get pretty upset. Ours would $35 billion. How many of the top Nasdaq 100 giants would it take to equal that sum in annual earnings? You know, real money, bottom line earnings? IndexSkybox's Buzz Lynn (a.k.a. "Fundamentals Guy") could tell us for sure but we're willing to bet it takes a few. Would you wager to guess that all those big-cap NDX companies added together equaling this in annual earnings employ some pretty sharp minds? Is it fair to assume the minds that control this money in one of the world's most volatile markets (other than Nordstrom's 50% off tables on December 26th) are brighter than the average bulb? Market Sentiment would venture "yes." So there you have it. Every market guru on CNBC says were a lead- pipe lock to go higher. Techs are too cheap. Bargains abound. The bottom lies safely behind us. Etc, etc. Abbey-Cohen, Joe Battapaglia & friends; Please watch where you step. And enjoy the summer sunshine but stay out of waist-deep water. You might not want to see what lurks just beneath those beautiful, blossoming lily pads. Wednesday is right around the corner, and faint rattling in the distance catches our ear. ***** VIX Friday 01/26 close: 25.14 VXN Friday 01/26 close: 62.46 30-yr Bonds Friday 01/26 close: 5.61% 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. Saturday (01/27/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 750 - 735 6,661 318 20.95 730 - 715 7,294 1,518 4.81 OEX close: 709.06 Support: 705 - 690 6,335 8,574 1.35 685 - 670 1,893 5,027 2.66 Maximum calls: 740/3,126 Maximum puts : 650/4,340 Moving Averages 10 DMA 703 20 DMA 694 50 DMA 702 200 DMA 759 NASDAQ 100 Index (NDX/QQQ) Resistance: 75 - 73 19,885 3,181 6.25 72 - 70 74,846 4,964 15.08 69 - 67 21,364 7,020 3.04 QQQ(NDX)close: 65.54 Support: 64 - 62 26,891 19,390 .72 61 - 59 13,371 54,949 4.11 58 - 56 10,772 12,738 1.18 Maximum calls: 70/56,113 Maximum puts : 60/47,217 Moving Averages 10 DMA 65 20 DMA 62 50 DMA 64 200 DMA 83 S&P 500 (SPX) Resistance: 1425 19,450 4,734 4.11 1400 15,643 1,854 8.44 1375 12,692 6,575 1.93 SPX close: 1354.95 Support: 1325 14,489 12,918 .89 1300 1,674 12,772 7.63 1275 414 8,325 20.11 Maximum calls: 1425/19,450 Maximum puts : 1325/12,918 Moving Averages 10 DMA 1344 20 DMA 1329 50 DMA 1335 200 DMA 1418 ***** CBOT Commitment Of Traders Report: Friday 01/26 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 +426 +1909 -7528 -8322 Total Open interest % (+5.66%) (+20.07%) (-30.35%) (-34.26%) net-long net-long net-short net-short NASDAQ 100 Open Interest Net Value +1262 +1131 -4061 -4045 Total Open Interest % (+8.36%) (+6.51%) (-5.90%) (-6.39%) net-long net-long net-short net-short S&P 500 Open Interest Net Value +69952 +69254 -91053 -89836 Total Open Interest % (+37.54%) (+37.35%) (-12.11%) (-11.84%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: The disparity between Commercials and Small Specs remains huge on the S&P 500. Small Specs have reduced their net- long positions on the DJIA while Commercials are showing a modest reduction in DJIA net-short positions Interest Rates: Commercials are moderately short T-Bond and T-Note futures. (mildly Bearish) Currencies: Commercials continue to build five-year net-short Euro futures while small specs build net long. (Bearish) Energies: Commercials are net-long crude & oil. 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 yearly net-long in Gold. 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 near 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 01/23 3:00pm Central by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/012801_1.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=1493 ************************************************************** *************** ASK THE ANALYST *************** Dynamic Rotations By Eric Utley They're big. They're fast. And they're very profitable. What I'm referring to, of course, are the dynamic sector rotations in the marketplace currently. I've heard the media and several colleagues label the recent action as a "traders market" or "range bound" trading. Neither labels, in my opinion, do justice. I like to visualize the markets as one giant pool of capital. A portion of that capital is fixed, meaning it is committed to longer term positions. Other portions of that pool are more mobile and dynamic. And that mobile capital is in constant search of the most efficient places to go to work (read: profits). The ebbs and flows of the mobile pool of capital are closely tied to cycles, both long- and short-term. These cycles I refer to incorporate the business cycle, industry developments, even analyst actions. In short, the cycles are as varied as they are innumerable. Nonetheless, these cycles are easy to detect and can be incorporated into a traders top-down thesis, including near-, intermediate- and long-term opinions. Dick Arms, the proprietor of the Arms Index, presented at our Denver Options Seminar last fall and made an interesting point. The influential Mr. Arms noted that institutions have become far more active in recent years with their operations in the market. In essence, Mr. Arms opined that instituitions have become active traders. That fact might stem from the increased velocity of information flow, and the equally increased accuracy of that flow. For our purposes, though, never mind why these dynamic rotations have come about. Simply know that they exist and make sure your trades are on the correct side of the rotations. To bring my rambling full circle, let's illustrate an example of a micro-cycle/short-term rotation that took place last week. As of last Wednesday's close, the Nasdaq Composite (COMPX) had risen roughly 16 percent year-to-date. An amazing rebound if you ask me! And as hard as it is to believe, the COMPX had risen to an overbought condition and was due for a pullback. Refer to whichever indicator you'd like, it was easy to tell during last Wednesday's action that the leaders of the COMPX were tired and due for a pullback. So if we knew the COMPX was ripe for consolidation, we could've reasoned that the mobile capital in the market would search out other short-term alternatives in an attempt to profit while the techs rested. And if the techs were going to pullback, it would make sense to search out the sectors which have polar correlations, such as drug stocks. Sure enough, after Wednesday's tired action in techs, the Nasdaq Composite subsequently slid early Thursday morning and the drug stocks began to perk up. And after the PMC Sierra (NASDAQ: PMCS) blowup Thursday evening (we'll elaborate on that below), the drugs were poised to gap higher Friday morning, giving anticipatory traders easy profits. And what happened Friday afternoon? Well, after the Nasdaq inspiringly digested the badness from PMCS, it began to recoup its earlier losses as the mobile capital flowed back into tech and out of the drugs. The flow of capital is easily discerned from the chart below of drug bellwether Johnson and Johnson (NYSE:JNJ). Send your stock requests to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- Homework After last week's brief discussion of trading books, I received a flood of requests to elaborate upon my library. So I've provided a few of my favorite reads below per readers' requests. Hi Eric, which in your opinion is the best book to learn about credit spreads (e.g. bull put-spread), as described by Jim in Sunday's article, also in regards to butterfly spread. - Thanks, Kurt The two best books I've read on spread techniques were written by Larry McMillan and Sheldon Natenberg. To reiterate my view of Natenberg's Option Volatility & Pricing from last week, it's an all-inclusive, one-stop options book, which provides a solid foundation. Furthermore, Natenberg's book brings a bit more of a professional twist. By that I mean, the book is a bit more geared to on-floor traders. Option Volatility & Pricing by Sheldon Natenberg McMillan's Options As A Strategic Investment on the other hand, is more geared to retail traders. McMillan's book brings another aspect to the table that's a little different from Natenberg's. Options As A Strategic Investment by Lawrence McMillan Could you recommend a good book on candlesticks please? Thanks a bunch! - Sharon Hi Eric. Read your write up on books on options. I shall be taking your advise and ordering the book. I like to consider myself a swing trader, i.e. 3-5 days position. Hence, I like to depend on technicals. One of the concepts recommended in your newsletter was candlestick charts. Apparently, there is a book by a Japanese author listed on your bookstore. Do you recommend the book? Thanks and regards, Mehdi If you're looking for education on candlestick charting techniques, Sharon and Mehdi, I would recommend reading Steve Nison. I had the opportunity to meet Mr. Nison last fall at our seminar in Denver and quickly realized that he is the authority on candlestick charting methods. His two books will teach you everything about candlesticks and the various nuances associated with the old-school Japanese method. Japnese Candlestick Charting Techniques by Steve Nison ---------------------------- PMC Sierra - PMCS (revisited) I've made a few bad calls this year, and I haven't been shy in admitting this much as my readers know. And for the readers who've stayed with me, you might've received some redemption last week. In last weekend's column, I promised that I'd reverse my string of bad calls. And while I probably didn't help my readers make any money last week, I might have saved them some. If you recall, I reviewed PMC Sierra (NASDAQ:PMCS) last week for our long-time and highly esteemed reader, Sunil. He asked about the idea of trading calls on PMCS and I offered the following: "If Cisco is experiencing a slowdown, wouldn't it make sense that PMC Sierra is also seeing a slowdown? After all, Cisco is one of PMCS' largest customers." "To be perfectly honest...I think the most prudent approach would be to wait for PMCS' earnings report this Thursday. Listen very closely to the guidance the company gives and pay close attention to how the market receives its report." My valued colleague, Matt Russ, and I were on the PMCS conference call last Thursday evening. And I've got to tell you that the call was one of the worst I've heard in quite some time. It was pure badness! At one point, the PMCS executives said something along the lines of the second quarter being a complete tossup. What the hell is that? The PMCS folks proceeded to say that their visibility for the second quarter was non-existent. Ouch!!! I've got to be honest with my readers, at one point during the call, Mr. Russ and I were laughing at how bad it really was. But our laughter subsided when we saw the reaction in shares of Cisco Systems (NASDAQ:CSCO) and PMCS' competitors. We then began to wax rational about the broader impact of PMCS' blowup. Mr. Russ and I collectively feared the worst. As it turned out, our fears were short-lived. And to keep with my honesty policy, I was amazed at the Nasdaq's ability last Friday to absorb the PMCS news. Aside from my efforts in redemption, the REAL reason I wanted to revisit PMCS this weekend was to reinforce how well the market is currently digesting bad news. Furthermore, the rebound in the tech sector was confirmed last Friday by the rollover in the drug sector, among other defensive groups, as I previously alluded to in Johnson & Johnson. And if last Friday's action is indicative of future movements in the Nasdaq, I would speculate the dip down to 2700 in the COMPX marked a relative low ahead of the tech proxy's advance to 3000. Which may happen very soon with cooperation from the Fed next week. ---------------------------- Qualcomm - QCOM Please advise your views on QCOM if the stock has commenced the upwards trend? - Thanks, Sunil Sunil, as always, thanks for providing such a good request. And the reason I think shares of Qualcomm (NASDAQ:QCOM) provide such a pertinent study currently is because of the stock's highly visible head-and-shoulders top traced last winter. By my judgment, I put QCOM's head at roughly $105 and its neckline at roughly $80. Those numbers will vary among traders, but they'll serve our purposes. Taking the difference from head ($105) to neckline ($80) we're left with $25. Taking the difference of $25 from the neckline ($80) we get a bearish price objective of $55. And you'll notice that QCOM never reached that objective. The lowest the stock recently traded was $67 and change - about $10 off the objective. That may be close enough for the bears in this case. Qualcomm's earnings report was obviously well received by the market judging by both volume and price action last Friday. The stock emerged from a solid base off the $70 level. Now that QCOM is sailing above its base around $70 - $75, on big volume no less, I would expect the next major resistance to be near the $85 level. As you can see on the chart below, shares of QCOM have been loosely trading around a trend line that began back in early August. The trend line has acted as a site of support in the past, and may now serve the purpose of resistance. If QCOM breaks above $85, I'd expect a quick advance up to $90, if not $100. ---------------------------- Protein Design Labs - PDLI PDLI what is the future for this stock? - Thanks, Sunil Again, Sunil, thanks for the good timing. I chose another of Sunil's requests because I think shares of Protein Design Labs (NASDAQ:PDLI) will help to reinforce my earlier mantra of rotations and cycles. Last summer and fall, capital sailed into the biotech sector as market participants took refuge from the ailing tech sector. But since last winter, the mobile capital, as I refer to it, has been flowing out of the biotech space and back into the broader tech and finance sectors, along with retailers and cyclicals, among others. So, what's changed in the biotech business over the last three months? In my opinion, not much. It's pretty much business as usual. What has changed, however, is the participants' views on sectors away from biotech. That is, with lower interest rates ahead, the market is discounting improving business for tech, finance, and the other groups already mentioned. As such, those groups of stocks now serve as the most efficient places to put capital to work - places where participants can expect to make the most money. However, if we're witnessing the beginning of a new bull market, (In my opinion, we are) I wouldn't necessarily recommend shorting the biotech sector. It's too hard to fight the overwhelming trend! And why do I put so much stress on sector movements? In my opinion, the sentiment and flow of a stock's sector is just as important as the individual company's underlying fundamentals, when trading, of course. So with all that said, I would suggest paying heed to the broader biotech sector when gaming PDLI. And you'll notice on the charts below that both the Amex Biotechnology Index (BTK.X) and PDLI are facing severe down trends. The questions with the BTK.X right here should be: Do you fight the trend and game a breakout above its descending line? Do you bet on a failure and short the BTK.X right here? Or, do you sit on the sidelines and wait? In my personal opinion, I think the best course of action is to stand aside. I think there are other trades currently with similar reward potential but less risk. PDLI's chart does paint a conflicting picture. The stock, like the BTK.X, is facing a nasty down trend. But, the near-term picture is a bit more bullish judging by the flag formed last week. If PDLI breaks out from its three-day consolidation, I wouldn't be surprised to see the stock trade up to $80 or $90. But I think the BTK.X will need to substantially breakout for PDLI to substantially advance. ---------------------------- Cardinal Health - CAH Hi Eric, thanks for doing such a great job helping us objectively plan our trades. My question concerns a potential to short CAH. Thanks in advance for your comments! - Frank Frank, like those from Sunil, your request is perfectly timed. Shares of Cardinal Health (NYSE:CAH) fit in nicely with my idea of sector rotation and cycles. The stock has been a place of solace since the dawn of the 2000 Bear ten months ago. By the nature of its business, CAH is a defensive stock in times of turbulence in the broader markets. And if I'm correct in my idea of a new bull market emerging, it would make sense that CAH would under perform over the next twelve to eighteen months. But let me qualify that statement. I would expect CAH to under perform, not necessarily get whacked. Nevertheless, CAH may be a good short at current levels as we can easily define risk and potential reward. If a trader were to put on a short at current levels, a stop could be put in place at $105. While the potential reward could be derived from the head-and-shoulders top that appears to be forming on the chart. Using the same process as the Qualcomm example earlier, I'd put CAH's head at $105 and neckline at $90. The difference being $15, and when subtracted from the neckline at $90, gives us a bearish price objective of $75. In short, at current levels, the risk of putting out some stock is $5 while the possible reward is $15 (reward-to-risk ratio of 3). And to quickly clarify, I have nothing against Cardinal the company, in fact, I don't follow the firm that closely. Instead, my ideas are based solely on sector rotation and the flows of capital. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ******************************************** Do you like OptionInvestor? Then vote for us as a favorite site: http://www.investorlinks.com/vote.html Thanks for your support! ******************************************** ************* COMING EVENTS ************* For the week of January 29, 2001 Monday ====== None Scheduled Tuesday ======= Consumer Confidence Jan Forecast: 125 Previous: 128.3 FOMC Meeting, Day 1 Forecast: NA Previous: NA Wednesday ========= Agricultural Prices Jan Forecast: NA Previous: 0.0% Oil & Gas Inventory 26-Jan Forecast: NA Previous: 44.7 GDP-Adv. Q4 Forecast: 2.30% Previous: 2.20% Chain Deflator-Adv. Q4 Forecast: 2.10% Previous: 1.60% FOMC Meeting, Day 2 Forecast: NA Previous: NA Chicago PMI Jan Forecast: 43.00% Previous: 45.20% New Home Sales Dec Forecast: 895K Previous: 909K FOMC Announcement Forecast: NA Previous: NA Thursday ======== Auto Sales Jan Forecast: 5.8M Previous: 5.8M Truck Sales Jan Forecast: 6.7M Previous: 6.7M Initial Claims 27-Jan Forecast: NA Previous: 316K Personal Income Dec Forecast: 0.20% Previous: 0.40% PCE Dec Forecast: 0.20% Previous: 0.40% Construction Spending Dec Forecast: -0.50% Previous: -0.60% NAPM Index Jan Forecast: 43.80% Previous: 44.30% Friday ====== Nonfarm Payrolls Jan Forecast: 80K Previous: 105K Unemployment Rate Jan Forecast: 4.10% Previous: 4.00% Hourly Earnings Jan Forecast: 0.30% Previous: 0.40% Average Workweek Jan Forecast: 34.1 Previous: 34.1 Factory Orders Dec Forecast: -0.50% Previous: 1.70% Mich Sentiment-Rev. Jan Forecast: 94 Previous: 93.6 ECRI Future Inflation Jan Forecast: NA Previous: -6.1% ECRI Wkly Leading Idx 26-Jan Forecast: NA Previous: -3.6% Week of February 5th ==================== Feb 05 NAPM Services Feb 07 Productivity-Prel Feb 07 Consumer Credit Feb 08 Initial Claims Feb 08 Wholesale Inventories ************************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=1495 ************************************************************** 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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 01-28-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/012801_2.asp ************** TRADERS CORNER ************** Protecting Your Backside Without Limiting Your Upside By Lynda Schuepp Collars are used by professional traders to protect their portfolios. A collar is comprised of owning stock, owning a long put and being short a call. Typically, the investor buys an at-the-money put or slightly out-of-the-money put depending on one's risk tolerance and sells an out-of-the-money call that is used to pay for the puts. The investor's profits are protected by the put. In fact, the put is nothing other than a protective put. If the stock tanks 10 points, the puts will go up in value almost dollar for dollar because of an increase in volatility and increase in intrinsic value. The short call is nothing other than a covered call on the stock you own. By selling the calls against the stock, you can actually pay for the protective puts. The only downside to this strategy is if the stock runs away to the upside. The profits would be limited to whatever the strike price is of the call, just like in a covered call. How would you like to have to cake and eat it too? Larry McMillan writes about a variation of this strategy in his book, McMillan on Options, a book I would highly recommend for any option trader interested in moving beyond simple directional plays. Instead of buying the same number of calls and puts as is done in a conventional collar, you would buy enough puts to protect your entire investment of stock, but you would sell only enough calls to pay for the puts. An example is probably in order here. Weekly Chart of AOL with 10-, 50-, and 200-period moving averages: From the chart above, you can see that AOL has made a tremendous ride up since the beginning of January. The stock has gone from $32 to $54 in one month! However, it has also come down from its high of $74 at the end of March. AOL currently sits at the 10-period moving average, which may be resistance going forward. If you had purchased the stock back at the beginning of January at $32, you might be concerned about protecting your profits. AOL closed at $54.59 on Friday. There are many ways to create this trade but we will look at one. Looking out as far as you can go, we would pick the Jan '03 options. On Friday, the at-the-money puts (55 strike price) were selling for $11.40 and the Jan '03 calls with a strike price of 60 were selling for $14.40. The cost to protect the downside would be $11,400 based on 10 contracts. That would be pretty expensive insurance if you didn't have any way to help pay for that. By selling enough Jan '03 60 calls to pay for the 55 puts, you would see that you would only need to sell 8 contracts. Now if AOL goes down from here, you would lock in your current profits. Let's see how that is calculated. Summary of Important numbers: Buy AOL at $32 Buy 10 Jan '03 55 puts for $11.40, total cost $11,400 Sell 8 Jan '03 60 calls for $14.40, total received $11,520 Scenario 1: If AOL goes down 20 points. At $35, you could sell your put (for a profit) and buy back your call (for a profit) and sell the stock (at a loss). The profits from the options would offset your loss in the stock and probably result in a small profit. This would not be the recommended course of action. The recommended path would be to simply exercise your put and buy back your short call. The net result would be that minimally you would get $55 for the stock (the strike price of the put) and make $23,000 for a stock (55 strike less 32 stock cost). The cost to buy back the call would probably be about 6 points on 8 contracts or $4,800, based on current pricing. Note that the protection cost you no money, but you still made $18,200! Not bad for a stock that tanked 20 points. Scenario 2: If AOL stays at $55. At $55, the 60 call option and the 55 put would expire worthless and you would get to keep the stock with the locked in profit from $32 to $55. You could then roll out the strategy and buy puts and sell calls with longer expiration dates or sell the stock for the 23 point profit and move on. Scenario 3: If AOL goes up 20 points. If AOL closes at $75 at expiration, your upside would be capped. The puts would expire worthless but you sold 8 contracts of the 60 calls. That means that 800 of your 1000 shares would be capped at $60 (the call strike), resulting in a $22,400 profit (60 strike less $32 cost of stock times 800 shares). That is the risk of covered calls, but 200 shares would not be capped and you would realize the full profit on those 200 shares. Your profit on the 200 shares would be $8600. Therefore, your total profit would be $31,000,which would be $12,000 less than if you simply held the stock without any collar. Remember, there is a price for protection, but as you can see in this example, your downside protection exceeds what you give up on the upside. It is important to understand when a strategy should be used. This strategy should be used on stocks where you have doubts that the stock can continue at the same rate of upward growth or if there were a possibility that the stock could tank. Examples of stocks like this would be stocks that ran up because of a proposed merger but has the potential to fall through, or drug stocks where a decision is impending regarding approval of a new drug etc. In other words, stocks that are expected to go sideways or slightly up but have a potential for a big downturn. Every strategy has its risk/reward scenario and is appropriate for certain market conditions. Learn which strategy best fits for the current conditions and go for it. ***** Another 50 Basis Point Rate Cut, Good News or Bad? By Renee White "If it seems too good to be true, it probably is." Strange voices are whispering these words in my head. I hope they go away soon. Two big rate cuts in one month should be good, right? Am I hearing my own fear of uncertainty and caution for the near-term, or quiet whispers from a market that may be near a short-term top? I'm not sure, but I do know that thinking through the bigger picture helps one's trading decisions. Last weekend, I wrote that I was beginning to have confidence that a 50 basis point rate-cut was in the works due to poorer than expected economic reports released that week. After listening to Mr. Greenspan's speech this past Thursday, I firmly believe this now, as do many others. He is such an eloquent speaker, always in control of a room that demands silence as people try to both listen and understand his intent through his unique use of the English language. At times though, I feel like his soft-spoken words are actually screaming through the silent room. That is what I heard this time and this is what concerns me. More on this later. This has been an interesting week for traders. The second week of earnings reports gave both the bulls and bears opportunities to profit as I predicted. The tug of war that played out between these two opinions should tell us a lot. For the week, NASDAQ closed on a doji, which should make both sides cautious. The market was ripe for profit taking; yet buyers continued keeping the effects of selling barely noticeable. I was very impressed how well it held up. I would have expected selling to be stronger once it began but before lunch on Friday, caution was thrown out as buyers showed up in the candy store again. I would have preferred more fear going into the FOMC meeting this week, but there is just too much money coming into the market right now, typical in January. A healthy sell-off going into the meeting would have had me playing for a short relief rally afterwards. However, a weak pullback like we had along with buying going into the meeting may give me a different set-up and one that I am still pondering. Need a job? Selling unemployment insurance might be a good choice. In a previous article, I mentioned that the post-earnings conference calls would be important this earnings season. Leading CEOs would be projecting their opinions of their own business growth prospects, leading analyst expectations for 2001 lower or higher. As expected, significant layoffs have been announced and I doubt we have seen the end of it. In my local paper, advertisements for bankruptcy sales have shown up in retailers Montgomery Wards and select Palais Royal stores. Belt tightening layoffs have recently been announced in several manufacturing, retail and entertainment companies. Recent victims include: WorldCom (NASDAQ:WCOM), JP Morgan Chase (NYSE:JPM), AOL/Time Warner (NYSE:AOL), Lucent (NYSE:LU), Sara Lee (NYSE:SLE), and JC Penny (NYSE:JCP), while Brunswick Corp (NYSE:BC), the world's largest maker of pleasure boats, announced the closing of 4 plants. AMC Entertainment (AMEX:AEN) announced the closing of up to 548 theatres in select areas and Loews Cineplex (NYSE:LCP) continued banking negotiations on large loans that are teetering. So, how bullish do you feel now? Doesn't sound good, does it? Unfortunately, I expect many more in the weeks and months to come. So much for a tight labor market! Still, layoffs are a very effective cost cutting strategy. And cutting your leg off helps you lose weight too. In my local newspaper, a furniture store advertisement read: "No Payments Till January 2003." Before I became a trader, I would have jumped on that. Now I realize they are suckering people into their own company financing. No payments all right, but the interest keeps building up month after month for 2 years! What a clever way to disguise locking customers into a high interest rate (probably more than the company could make on CDs), right when the Fed is aggressively lowering rates. Isn't it funny how trading teaches you to look beyond the "for sale" signs? At Christmas, Home Depot (NYSE:HD) had large 50% off sales before Christmas, just weeks before they announced for the second quarter in a row, of an earnings shortfall. In the future when I first start seeing these things, I will think, "It's time to do research and possibly buy the sale, short the stock." As traders, we saw and felt the pain of economic weakness last year while the general public went on their merry way oblivious to the economic downturn to come. In fact, consumer confidence levels have not yet felt the impact that these recent lay-offs will certainly bring. The stock market is a leading indicator of economic health. Consumer confidence is a lagging indicator. Their fear and uncertainty usually peaks when the best sales and bargains are all around. Great prices, but people will be concerned enough to not want to take the bait. Besides, some of these workers are sitting on expensive houses, bought with inflated options from their tech employers, who are now cutting back. Many are just learning what living on a budget really means. That leads us to California, which may present an even bigger problem soon. This state makes up a large part of our national wealth and economy. A threatened real crash of that state's economy, should have everyone's attention. Not only have their luscious techs been hit with a sledgehammer, but also companies with now deflated previously fat PEs, are being hit with an energy crisis. Don't think it's over yet. Today I heard a forecast of a hotter than normal summer on both the East and West coasts this year. Summer air-conditioning anyone? Yep, if I were in management out there, I would be investing in headache medicine and possibly alcoholic beverages. Let's review: decrease capital spending, inventory build-up, slowing sales, slowing payments, profit margins being squeezed due to sales and energy costs, orders lagging, too many expensive workers hired at a premium when labor was tight and money was easy, high electric bills with utility prices ready to explode if the lights even stay on, and of course everyone is in a bad mood. Oh, should I mention that this is the current state of affairs before they guided analyst's expectations down going forward? Doesn't sound good, does it? Ever wanted to live in California? Hold on, you may be able to pick up some real estate bargains soon. I would think their real estate markets would go on red alert once any large tech companies started relocating to other states. Talk about a potential price deflation! Resolution of this energy crisis is something all traders should keep an eye on. I can't conceive a return to an enjoyable sustained bull market run, if the economies of California and now potentially New York, falter due to constant blackouts and energy concerns. Welcome to the White House, Mr. President! Which, all leads me back to Mr. Greenspan. His early January abrupt 50 basis point rate cut was shocking because it came just weeks after he jumped from an inflationary bias, to a recession lookout. Six weeks earlier, he still maintained an inflationary bias. What changed so quickly? I'm beginning to see how the dots connect with this potentially serious economic crisis that could occur if California's situation does not stabilize soon. Many companies would be affected by defaulting loans, not just the suppliers of gas. Since utilities are one of the highest leveraged industries, banking problems due to loan defaults, real estate, and a broad market down-turn with bankruptcies due to profit margin squeezes from both electric bills and general economic slow-down, is no small problem for an economy as large as California's. You think the prices of movie tickets are high? Think of their electric bills at those locations. Think of that when you only see 5-10 people watching that movie. No wonder some locations will close. This energy crisis would certainly affect us all. With oil remaining high, natural gas reserves depleting, and projected higher prices eminent throughout summer this year, and a serious crisis in possibly more than one state, all coupled with economic numbers that continue to show slower sales and weaker growth for the near term, surely has Mr. Greenspan concerned on a very deep level. I found it interesting that he did not connect the dots for all of us, but chose to speak on each of these areas separately. It wasn't until he mentioned we were near zero growth right now, then clearly stating that he was for an income tax rate cut, that I hear his message become louder and louder. My interpretation was a 50 basis point cut was assured, but in addition, instead of hearing that and feeling good, I heard it mentioned with a quivering voice of concern. Just like you can't have a recession in a tight labor market with higher wages, you also can't have big growth if people are losing their jobs, defaulting on loans, delaying orders and can't pay their mortgages or rents regardless how cheap the credit, or how low interest rates are. Making credit cheap quickly to assist corporate loans, and adding liquidity in all forms, is the reaction I think we are seeing here this January. It's like pouring a bucket of water on an impending fire, instead of squirting it with a squirt bottle. Will it work quickly enough? Who knows? It may well be another few months before we know for sure. But with a host of economic reports coming out this week including the Employment Report, GDP, Consumer Confidence, and the NAPM, I would caution traders from too aggressively loading up with plays that they can't watch carefully. A 50 basis point cut rally could be short lived, if followed by some shocking economic numbers later in the week. If it is, just play the downside. All is not gloomy though. There is good news. Lots of money flowed into the markets all week. Buyers were around every corner when sellers were dumping. Bad news changed to good news and punishment was short lived. Even Abby J. Cohen said she was over-weighted now in technology. Thank you Abby! It was almost one year ago that she under-weighted the sector and needless to say, few traders listened. Perhaps we should listen this time. The other piece of information that I hope everyone heard was Mr. Greenspan's off-hand comment, something to the effect that this may just be the 1st inning of our tech revolution, akin to the early 1900s. I have always felt this, but hearing him say it at that important time, reminded me that as long as we approach the markets with a long-term perspective, we should be okay by choosing good solid growth companies. Speculative trading of high-risk stocks, those without proven track records, high PEs compared to their sectors, and those who are still profitless, should only be played by very aggressive traders who can watch their plays and recognize they are speculating on short-term movements. Money can be made with either attitude, but it is important to ask yourself what your perspective is, and trade accordingly. While I have you thinking, remember that techs are a sector that helps lead out of a weakening economy, but it may be choppy for a while before leadership is established. That means possibly a few more months of range bound trading. This week, both defensive issues and techs won in a bull and bear debate. This tug of war will end soon, either by the techs rolling back over again for a while, or by slowly starting to lead us out of the mud with consistent strength through major resistance levels. As I said before, I want to see how February plays out, before I'm convinced our bottom is solid. Interest rate cuts starting in the global markets would also give me more confidence. Until then, my radar is still on alert for the near term. I took profits on some shorts today and continued to hold others. I have mixed feelings about the coming week. I'm still thinking about CSCO's (NASDAQ:CSCO) earning's report due the following week on February 6th. Will they beat again by a penny, or disappoint the markets causing a sell-off? Does anyone remember the first time DELL quit growing at 50% and the whooping they got when they guided estimates lower to the mid 40% growth range? Trust me, it was very ugly! In the meantime, I'm making my list and checking it twice. Who knows if a retest of lows will occur? I think it will though not sure when. I will be very happy if I am wrong. A retest of recent NASDAQ lows would find me buying those companies who beat their earnings estimates and guided analyst with revised estimates higher going forward from here. A tech that revises higher in a weak economy sounds good to me! They should sink in sympathy with the overall market on a retest of market lows. If they are established companies, I'll add them to my long-term leap portfolio. If they are newer, I'll pick off some deflated calls for the next earnings cycle. If we rally hard from here and defensive issues take a hit with money rotation, I will be looking for entry points on natural gas opportunities. Regardless of which way we go, next earnings season in April, may still prove worse than this one before things turn around. And remember, NASDAQ started falling well before April. ************************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=1487 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* GS - Goldman Sachs Group $114.69 (+3.75 last week) See details in sector list Put Play of the Day: ******************** PWER - Power-One, Inc. $45.00 (-0.25 last week) See details in sector list *************************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=1477 ************************************************************ ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS SNPS $51.75 (-1.44) Overall, SNPS gave us a nice run from the mid-forties to a peak of $56.50 on January 23rd. Unfortunately, SNPS wasn't able to resume its run after profit taking earlier in the week. On Friday, the share price slid under our $52 protective stop and finished in the negative. For now, the momentum has sizzled and we're exiting the play this weekend. Synopsis is expected to report earnings in late February. EBAY $49.88 (-0.25) Mid-week, we saw investors push shares of EBAY up to $55.13 on respectable volume; however, the 200-dma capped the momentum. Our anticipation was for EBAY to make a big breakout through the formidable resistance whilst maintaining its position above the $50 level. But as it turned out, negative sentiment took EBAY to $47.56 on Friday. Plain and simple, there weren't enough interested buyers to give EBAY the boost it needed to regain upside momentum; although some analysts currently believe the stock is undervalued. PLAB $32.75 (-0.88) After playing peek-a-boo with the $35 resistance line, PLAB fell victim to market conditions on Friday. It's true that PLAB demonstrated some spunk with a definitive rebound off the $32 exit level. However, its inability to return to a respectable position above the converged 5 and 10 DMAS, near $34, prompted us to close the play. Time is money, so let's move on to more lucrative opportunities. If you have open positions, sell into strength as PLAB approaches the $35 level, which is currently serving as a formidable line resistance. AETH $51.44 (+2.38) While the bulls managed to keep AETH afloat for another positive week, the picture is definitely becoming more bearish for our play. The 50-dma turned out to be impenetrable resistance, and the rollover from this level picked up steam in the latter half of the week with negative news coming from big names like GLW and PMCS. This pressured the NASDAQ and helped to push AETH down as low as $45.63 on Friday, well below our stop, and the real damage can be seen in the Stochastics oscillator which has now dropped out of the overbought zone. Despite an afternoon recovery that pushed our play above the half-century mark, the bulls once again stopped their charge at the 50-dma, allowing the stock to give back $3 in the final hour. With the violated stop and deteriorating technicals, it is time to take our leave of AETH. WCOM $21.31 (-0.69) We mentioned on Thursday that WCOM had been bouncing off its key support (and our stop price) of $20 recently. While this level has so far held up, we are seeing some early signs of weakness in the stock. First, the stochastics have already begun to roll over. Although the stock price has held up, this divergence, combined with moving average resistance from the 10-dma (at $21.55) makes a move higher difficult at best. Add to that an inability to definitively break through and stay above its 100-dma ($21.31) and it appears that the technicals have waned. With that, we are closing out this play. GX $21.68 (-3.19) The bottom fishing-buying in the telecom carriers earlier this month ceased to exist last week as the group pulled back in synch. We still like the major and regional telecom carriers six months out, but the near-term may lead to more consolidation. As such, we're dropping coverage on the nice player of the group in the form of Global Crossing. The stock has pulled back in recent sessions on light-volume profit taking. And although the recent action is no more than a natural reaction, we're moving onto better plays. Use any lift above the $22 level early next week to close existing positions. ASYT $17.56 (-1.00) Following its disappointing earnings announcement last week, ASYT was slapped with a downgrade by AG Edwards. The downgrade induced a sharp gap down last Friday which caused serious technical damage to our play. And although ASYT rebounded into the close of trading, we don't like the damage that has already been done. That said, use any bounce or extension of short covering early Monday to exit positions. PUTS AT $59.88 (-7.88) We were a little disappointed and shocked last Friday morning to discover AT was set to announce earnings. As our OI readers know, we discourage holding positions over earnings announcements in an attempt to minimize risk. We had contacted the investor relations people at AT and had been told the company wouldn't announce earnings until next week. Unfortunately, we were mislead. Fortunately, the company didn't please Wall Street during its conference call and the stock got clobbered Friday. We're going to drop coverage on AT this weekend and exit open positions early Monday in order to take advantage of the big sell-off last Friday. CHKP $154.94 (-5.13) Surprise! The bulls are back in town. Before we even got a chance to play, the bulls charged onto the scene, proving that the decline over the past two sessions was merely profit taking. Opening at the low and closing at the high is definitely a bullish sign, and when those two levels are more than $10 apart, all bears should be on notice to head back to their caves. Driving the sharp recovery was the company's bullish outlook, which they presented at their annual investor day on Thursday. The event was heavily attended, and on Friday morning, analysts began gushing about how strong the company's product demand is, despite a potential IT spending slowdown. With such a strong move, we have no choice but to step aside to avoid being trampled by the bulls. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** FLEX - Flextronics International $39.00 (+1.00 last week) One of several "contract manufacturers" serving the telecommunications, networking, consumer electronics, and computer industries, FLEX provides its customers with the opportunity to outsource a complete product. The company takes responsibility for engineering, supply chain management, assembly, integration, test and logistics management. FLEX provides complete product design services, including electrical and mechanical, circuit and layout, radio frequency, and test development engineering services. Among FLEX's long list of customers are Cisco, Hewlett-Packard, Lucent, Microsoft, Nokia, Motorolla, and Palm Computing. Contract manufacturers like FLEX have been recovering nicely the past few weeks, and solid earnings certainly doesn't hurt. Although the company only beat estimates by a penny on January 18th, the numbers were well received both by investors and analysts. First Union was the first out of the gate, reiterating their Strong Buy rating, and that was followed this past week by upgrades from Robertson Stephens (Buy to Strong Buy) and Morgan Stanley (Outperform to Strong Buy). The lone dissenter is Merrill Lynch, who dropped their near-term rating from Buy to Accumulate due to the recent rise, but kept their long-term rating at a Buy. The bullish outlook helped the stock to rally to the $38-39 resistance level before consolidating for much of last week. The bulls came charging back on Friday though, on news that ERICY would be outsourcing all of their cell phone manufacturing to the company, and the stock rallied sharply on volume 50% above the ADV. As companies attempt to tighten their belts, the contract manufacturers are likely to continue to see demand for their services increase, and that means increasing revenue and profits. The $36 support level is starting to solidify, and intraday dips have been contained at $34.50. We are looking for a continuation of the rally next week, so we are placing a tight stop at $36. Aggressive traders can start to nibble at new positions on any intraday bounce near this level, so long as the buying volume looks solid. As long as buyers continue to support FLEX (and competitors JBL and CLS), the stock looks like it could be getting ready to test its highs near $45. More conservative traders will want to wait for FLEX to top $39 on solid volume before taking a position. BUY CALL FEB-35 QFL-BG OI=4752 at $5.38 SL=3.25 BUY CALL FEB-40*QFL-BU OI=4753 at $2.25 SL=1.00 BUY CALL FEB-45 QFL-BH OI=1834 at $0.88 SL=0.00 High Risk!! BUY CALL APR-40 QFL-CH OI= 123 at $3.88 SL=2.25 BUY CALL APR-45 QFL-CI OI= 274 at $2.06 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=FLEX INCY - Incyte Genomics $30.63 (+4.81 this week) Formerly known as Incyte Pharmaceuticals, INCY is a provider of that hot commodity known as genomic information-based products and services. The company focuses on providing an integrated platform of information technologies designed to assist pharmaceutical and biotechnology companies in the understanding of disease and the discovery and development of new drugs. The company's products include database products, genomic data management software tools, microarray-based gene expression services, and genomic reagents. Biotech stocks have been in recovery mode lately, helped in no small part by bullish news from industry leader AMGN. While it came in a penny shy on earnings, the stock has been rallying on news of a legal victory, and positive guidance on new drug developments. This helped the Biotech sector to continue its recovery, a wave that our new play, INCY has been riding recently. Now up nearly 30% since its early January lows, the stock has been riding the upper Bollinger band for more than a week now, so we need to keep an eye out for profit taking. Stochastics are buried deep in overbought territory, but anticipation of the company's earnings report should keep the stock moving strongly over the next several days. Due to the proximity of earnings (confirmed for February 1st, after the close), this will be a quick play, where we are looking to jump onto the established trend and harvest a tidy profit. Intraday support near $29 (also the location of our stop) needs to provide a springboard for the stock to continue its rally into earnings. And in order to keep it moving in that direction, we will need the cooperation of the broader Biotech sector - watch the Biotech Index (BTK.X) for confirmation that this trend is still intact before playing. Aggressive entries can be considered on a bounce from the $29-30 level, but conservative players will want to wait for the stock to push through $31 before taking a position. BUY CALL FEB-30*IPQ-BF OI=327 at $3.63 SL=2.00 BUY CALL FEB-35 IPQ-BG OI=160 at $1.56 SL=0.75 BUY CALL MAR-30 IPQ-CF OI=605 at $5.13 SL=3.00 BUY CALL MAR-35 IPQ-CG OI=144 at $3.25 SL=1.75 BUY CALL MAR-40 IPQ-CH OI=393 at $1.88 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=INCY QCOM - Qualcomm Inc. $81.00 (+10.63 last week) Qualcomm Incorporated is a leader in developing, delivering, and enabling innovative digital wireless communications products and services based on the Company's digital technologies. As the pioneer of Code Division Multiple Access (CDMA), the technology of choice for next-generation wireless communications, Qualcomm continues to lead the industry in the development of voice, data, and wireless Internet products and solutions. Qualcomm is also transforming industries through its various satellite businesses and technology partnerships. In the midst of report card season, this is a time when analysts and shareholders alike take extra care in evaluating their investments. With Qualcomm reporting earnings this past Thursday, the market took a closer look and judging by its reaction the next day (up over 7 dollars or almost 10 percent on roughly twice the ADV), the prognosis is good. While revenue figures for the quarter were considered light, earnings per share came in at 29 cents per share, beating Street estimates by a penny. During the conference call, CEO Irwin Jacobs said that he expected further growth for the year with increasing focus on third-generation CDMA. As an investor in GSTRF, news that the satellite phone network service provider suspended its debt payments acted as a lodestone, weighing down on QCOM's stock price. Writing off the entire investment of $680 million was seen as a relief. However, with $2.4 billion in cash and marketable securities on hand, this was a loss that QCOM was able to readily absorb. Friday's surge put QCOM back above three moving averages, the 5, 100 and 200-dma, all converged in the $76.50 area. A test of this key support level would provide aggressive traders with an ideal entry point. As a precaution, we are placing a protective stop just below at $76. A break above its last major moving average of resistance, the 50-dma at $82.70, could give conservative players a chance to jump in. As QCOM is one of the top 10 stocks in the NASDAQ by virtue of capitalization, keep track of movements the NASDAQ 100 (NDX, QQQ) to ascertain sentiment in the large cap Techs BUY CALL FEB-75 AAF-BO OI=11145 at $9.00 SL=6.25 BUY CALL FEB-80*AAF-BP OI=10322 at $6.00 SL=4.00 BUY CALL FEB-85 AAF-BQ OI= 8057 at $3.88 SL=2.50 BUY CALL MAR-80 AAF-CP OI= 2281 at $9.00 SL=6.25 BUY CALL MAR-85 AAF-CQ OI= 1060 at $6.75 SL=5.00 http://www.premierinvestor.com/oi/profile.asp?ticker=QCOM COHR - Coherent, Inc. $52.25 (+6.00 last week) Coherent is a global leader in the design, manufacture, and sales of lasers, laser systems, precision optics and related accessories. Founded in 1966, Coherent sells products in over 80 countries and today has 23 production, research, and service facilities worldwide. Coherent is a world leader in the design and manufacture of lasers and systems for commercial, scientific, medical, and telecom markets. Coherent pioneered the development of lasers used in medical applications 30 years ago and remains a global leader and innovator in this market. What makes COHR an interesting company to invest in is its diversity when it comes to its laser products. Serving the medical and well as the fiber optics industry, the company's lasers have a wide range of uses from optical networking to body hair removal. COHR reported earnings this past week, and it did not disappoint. Beating the Street by 5 cents, the company posted record quarterly results, with a gross profit up to 49.3 percent and a 91 percent increase in orders year-over-year. Earlier in the year, US Bancorp Piper Jaffray gave COHR a Buy rating and a price target of $65. While there are concerns over sales in its medical division going forward, it appears that traders are focused on the fiber. Since clearing its 100-dma (now at $44.08), the stock has so far rallied on support from its 5-dma ($49.18). Look for a bounce off this moving average as a potential opportunity for an aggressive entry. Support may also be found at our stop price of $48. A break above its recent high of $53.50 on increased buying volume would allow conservative traders to take a position, but be aware that the 200-dma lies just above, at the $55 level and could act as formidable resistance. Keep an eye on GLW and JDSU to gauge the overall health of the fiber optics sector. In the medical laser space, peers EYE and QLTI could help in discerning investor interest. BUY CALL FEB-50*HRQ-BI OI=341 at $5.75 SL=3.75 BUY CALL FEB-55 HRQ-BK OI= 77 at $3.00 SL=1.50 BUY CALL FEB-60 HRQ-BL OI= 65 at $1.69 SL=0.75 BUY CALL MAR-50 HRQ-CJ OI= 88 at $7.38 SL=5.25 BUY CALL MAR-55 HRQ-CK OI= 0 at $4.88 SL=3.00 Wait for OI!! http://www.premierinvestor.com/oi/profile.asp?ticker=COHR FDRY - Foundry Networks $22.88 (+4.00 last week) Foundry Networks is a performance and total solutions leader for end-to-end switching and routing including Internet routers, Layer 2/3 LAN switches, and Layer 4-7 Internet traffic and content delivery switches. Foundry's 3,000+ customers include the world's premier ISPs and enterprises, portals, search engines, e-commerce sites, and universities along with the leading entertainment, pharmaceutical, government, financial, and manufacturing companies. Some of these customers include: AOL, EarthLink, AT&T WorldNet, MSN, and Cable & Wireless, Yahoo!, LucasFilm, U.S. Army, Air Force and Navy, NASA and NIH. A well-received earnings report, a strengthening Networking sector, and oversold conditions have helped put shares of FDRY on its way to recovery. After pre-announcing late last year of slowing profit growth, shareholders exited the stock on mass but it appears now that investors are willing to jump back in. The company made up for its recent confessions by beating reduced estimates when it posted results for the fourth quarter, with sales revenue almost doubling year-over-year. What's more, the company announced a stock repurchase program, which could mean a reduction of float by as many as 5 million shares. In the near term, the stock looks to be headed for the $30 level, with the 50-dma sitting just above at $32.14. Such a move would fill a gap that was created this past December when the company's shares fell on its earnings warning. Analysts are mixed on the stock, with Robertson Stephens upgrading FDRY from a Long Term Attractive rating to a Market Performer while Epoch Partners issued a downgrade. What matters at this point is not what is said but rather, the price/volume action, as the stock has been advancing on increasing volume. FDRY ended the week on a high note by closing up almost 4 percent on almost twice the ADV. Pullbacks to the 5 and 10-dma (at $21.03 and $19.93 respectively) could allow aggressive traders to take a position. Just make sure that FDRY stays above our stop price of $20. If upward momentum takes FDRY above resistance at $23.75, conservative traders may enter, as long as the AMEX Networking Index (NWX) and rival EXTR confirm upward momentum. BUY CALL FEB-20 OUJ-BD OI=1249 at $4.50 SL=2.75 BUY CALL FEB-22.5*OUJ-BX OI= 993 at $3.13 SL=1.50 BUY CALL FEB-25 OUJ-BE OI=1261 at $1.94 SL=1.00 BUY CALL MAR-22.5 OUJ-CX OI= 175 at $4.63 SL=2.75 BUY CALL MAR-25 OUJ-CE OI= 304 at $3.63 SL=1.75 http://www.premierinvestor.com/oi/profile.asp?ticker=FDRY MSFT - Microsoft Corp $64.00 (+3.00 last week) Microsoft is the #1 software company in the world. They develop, manufacture, license, and support a broad range of software products including Windows operating systems, server applications, the popular MS Office suite, and a Web Browser. CEO and co-founder, Bill Gates still owns 15% of Microsoft. We're beginning coverage on this software monster for its recent technical developments and building momentum following the company's solid earnings report on Thursday, January 18th. Being a favorite amongst the tech investors and the NASDAQ's rally are also pertinent factors too! MSFT opened strong at the $60 resistance level on that succeeding Friday and accomplished two major milestones thereafter. First, the stock closed the trading gaps from October, November, and December's declines; and second, it established a very bullish level of near-term support at $61. Going forward, look for the momentum to intensify and propel the share price higher. Friday's strong close at $64, just a fraction from the intraday high ($64.31), combined with the bullish volume levels indicates there could be more buying on Monday, but wait until after amateur hour before jumping into this momentum play. Of course, keep in mind that taking entries on high-volume bounces from $61 or even the 5-dma ($61.89) can be more risky then buying into the momentum on breakouts above $64 or the resistive 200-dma ($65.78). Stops are always a good protective device to consider. Our stop loss is currently set at the $61 mark. On the wire, there was a rush of news this week about the Microsoft Corp getting hit by so- called "denial of service" attacks. Nevertheless, the negative press didn't thwart investors from bidding up shares of MSFT! BUY CALL FEB-60*MSQ-BL OI=37298 at $5.38 SL=3.25 BUY CALL FEB-65 MSQ-BM OI=28698 at $2.13 SL=1.00 BUY CALL FEB-70 MSQ-BN OI=12259 at $0.63 SL=0.00 High Risk!! BUY CALL MAR-60 MSQ-CL OI= 8843 at $6.63 SL=4.50 BUY CALL MAR-65 MSQ-CM OI=15625 at $3.63 SL=1.75 BUY CALL MAR-70 MSQ-CN OI= 4615 at $1.59 SL=0.75 http://www.premierinvestor.com/oi/profile.asp?ticker=MSFT JPM - JP Morgan Chase $54.19 (+3.63 last week) JPM is a premier international banking firm headquartered in the US. It is a holding company for subsidiaries engaged in global banking and investment. They offer services to corporations, institutions, and the very wealthy. Recently they merged with the Chase Manhattan Corporation. On January 2nd, JP Morgan Chase opened for business! The mega- merger and resulting 4Q earnings report of January 17th found the stock's support level established at the $50 level. Last week, shorter-term solidified at $52. Although most securities firms are being cautious because of expectations for slower growth in the world markets and general concerns about a cooling market, JPM is currently trading at the higher end of its spectrum. We're anticipating JPM can muster enough momentum to make a big breakout in an advancing market, whether it be before or after the Fed Meeting. Our objective is to play a momentum wave and lock in gains on high-volume breakouts as JPM trades above $55 and challenges the upper resistance at $59.19. Some traders may want look for lower entry points below our $53 stop, but that's a much riskier strategy. Other stocks in the coveted financial circle to keep an eye on include Citigroup (C), Morgan Stanley Dean Whitter (MWD), Merrill Lynch (MER), and Bank One Corp (ONE). BUY CALL FEB-50 JPM-BJ OI=14081 at $5.25 SL=3.25 BUY CALL FEB-55*JPM-BK OI=17182 at $1.88 SL=1.00 BUY CALL FEB-60 JPM-BL OI= 1942 at $0.56 SL=0.00 High Risk!! BUY CALL MAR-50 JPM-CJ OI= 7962 at $6.25 SL=4.25 BUY CALL MAR-55 JPM-CK OI=13709 at $3.12 SL=1.50 BUY CALL MAR-60 JPM-CL OI= 3302 at $1.38 SL=0.75 http://www.premierinvestor.com/oi/profile.asp?ticker=JPM **************************** New Low Volatility Call Play **************************** CPN - Calpine Corp. $42.00 +1.56 (+4.31 last week) Calpine Corporation is dedicated to providing customers with reliable and competitively priced electricity. Calpine is focused on clean, efficient combined-cycle, natural gas-fired generation and is the nation's largest producer of renewable geothermal energy. Calpine was founded in 1984 to participate in the new power industry as competition was beginning to replace regulation. After suffering serious losses amid the energy debacle in California, shares of Calpine have been on the mend in recent weeks and look as if they want to continue advancing. Perhaps it's the reasoning that California, along with the rest of the United States, is in serious need of electricity. And as a leader in operating power generation facilities, Calpine stands to take advantage of the increased demand for electricity. Add the fact that the new administration in Washington is viewed as energy-friendly, and we have the ingredients for a momentum-based advance into earnings. Calpine is scheduled to release numbers on February 6th, and the anticipation of strong results combined with bullish guidance may continue to carry the stock higher. New positions can be had at current levels early Monday morning, after confirming strength in Calpin competitors including AES and NRG. More conservative traders might wait for a volume- backed advance past resistance at $44 before entering new positions. We have set our protective stop at $39, and would cease coverage on CPN if it were to close below that level. BUY CALL FEB-35 CPN-BG OI= 725 at $7.75 SL=4.50 BUY CALL FEB-40*CPN-BH OI=3022 at $3.38 SL=4.50 BUY CALL MAR-45 CPN-CI OI= 407 at $3.38 SL=4.50 http://www.premierinvestor.com/oi/profile.asp?ticker=CPN ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 01-28-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/012801_3.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=1488 ************************************************************** ****************** CURRENT CALL PLAYS ****************** ENE - Enron Corporation $82.00 (+8.75 last week) Enron Corporation is an energy and communications company. Enron's operations are conducted through its subsidiaries and affiliates, which principally are engaged in the transportation of natural gas through pipelines to markets throughout the United States, the generation, transmission, and distribution of electricity to markets in the northwestern United States, and the marketing of natural gas, and commodities. Enron is also involved in the development, construction and operation of power plants, and the development of an intelligent network platform to provide bandwidth management services. Enron stayed flat on a day when most of the stocks in the natural gas sector experienced some profit taking, which is a sign of strength. Traders who bought at the mid morning dip price of $81.13 could have taken a small profit, but considering the stock's trend line, it is likely that we will see further upward momentum continue next week. Enron's volume is a particularly strong indicator, as the ten day average volume is nearly 50% stronger than the three month average volume. On Friday, CSFB raised their 2001 price target to $128, and their earnings forecast to $1.80 per share, citing the sustainability of current growth, as well as improved capital margins. Enron's wholesale services subsidiary has been the fastest growing area over the last several years, and the company has also shown dramatic growth in the electricity, natural gas, and broadband communications area. The $82.50 level has proven to be very tough resistance for four months, but Enron looks as if it is determined to break through this level, and may just do so with a little help from the natural gas sector. Intra day support is found at $81, and a bounce off this level could be a good entry point going forward. More conservative traders might want to wait for a break above $82.50 on strong volume, as this could lead Enron up to $85. Continue to set stops at $78, and monitor others like WMB and CRP for strength. BUY CALL FEB-80 ENE-BP OI=3254 at $4.75 SL=3.00 BUY CALL FEB-85*ENE-BQ OI=1958 at $2.25 SL=1.25 BUY CALL MAR-80 ENE-CP OI= 189 at $6.75 SL=4.75 BUY CALL MAR-85 ENE-CQ OI=1714 at $4.50 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=ENE HAL - Halliburton Company $40.75 (+3.00 last week) Founded in 1919, Halliburton Company is the world's leading diversified energy services, engineering, energy equipment, construction, and maintenance company. In 1999, Halliburton's consolidated revenues were $14.9 billion, and it conducted business with a work force of approximately 100,000 in more than 120 countries. The oil drilling and equipment sector experienced profit taking today, as OIX.X dropped nearly one percent. However, the solid upward trend which was established on January 19 is still in place, and support is strong at $40. HAL is scheduled to report earnings Jan 30 after the market close, and, with help from the oil sector, the stock is poised to spurt into its earnings. The 200 dma of $41.83 is stubborn resistance for HAL, as it bounced off this level on Thursday and Friday. However, most of the other stocks in the oil and gas drilling and equipment sector, including SLB, BHI and RDC are above their 200 dmas, and HAL is likely to catch up. Earnings have been way above expectations for the most part in this sector, as well as in the integrated oil sector, as higher oil and gas prices stimulate company spending on exploration and production. In addition, companies have raised their expectations going forward for the most part. Traders can take positions at current levels, or at a clear movement above $42, which could lead HAL up to $44 before earnings are released. Remember to monitor OIX.X for strength before initiating positions, and set stops at $40. Traders will want to close positions prior to the market close on Tuesday. BUY CALL FEB-35 HAL-BG OI= 420 at $6.25 SL=4.25 BUY CALL FEB-40*HAL-BH OI=3918 at $2.44 SL=1.25 BUY CALL MAR-40 HAL-CH OI= 432 at $3.63 SL=1.75 BUY CALL MAR-45 HAL-CI OI=1495 at $1.56 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=HAL RATL - Rational Software $50.38 (+3.51 last 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. Rational may run the risk of being accused of irrational exuberance, considering its strong performance over the last week. Rational closed higher every day this week except Wednesday, when it rested at support at $47.25, just under the 10 dma of $48.38. A look at the monthly chart shows that a bullish wedge pattern has been emerging since January 16, with higher lows at $44.69, $46.75 and $47.25, and strong resistance at $50.58. Considering the excellent news which RATL released in their last earnings report, it seems that the stock is a strong candidate to break above resistance at $50.58. In an environment in which many different technology companies have been warning of slowing growth going forward, Rational's management team reported their highest revenue growth rate ever, and even raised their forecasts for the coming year. Since then, several Wall Street firms raised their price targets going forward, including Goldman Sachs and CSFB. Rational's market capitalization of $9.6 billion puts the company in the mid cap range, which allows plenty of room for rapid expansion. In addition, the S & P mid cap index (MDY) has been in an upward trend since early January, and is now well positioned above its 50 and 200 dmas. Traders can take positions at support levels of $49, or $50. Ideally, we are looking for a breakout above $50.58, which may very well arrive this week. Monitor the software index by watching stocks like MSFT and ORCL for an indication of sector movement. Move stops to $48. BUY CALL FEB-50*RAQ-BJ OI=523 at $4.75 SL=2.75 BUY CALL FEB-55 RAQ-BK OI=653 at $2.69 SL=1.25 BUY CALL APR-50 RAQ-DJ OI= 24 at $6.88 SL=4.50 BUY CALL APR-55 RAQ-DK OI=230 at $4.88 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=RATL ARBA - Ariba Inc $40.00 (+1.75 last week) Ariba is a provider of Internet-based B2B e-commerce network solutions for operating resources. Their Web-based procurement software helps manufacturers, retailers, and distributors to track and manage supply purchases over the Internet. Blue chip clients include Dupont, Federal Express, and Hewlett-Packard. ARBA continues to show progress as it recovers off the recent lows of $30. Currently the $38 level, which also marks our exit point, is buoying the stock on pullbacks. This level, which correlates with the 10-dma line, offers the more aggressive traders a nice launching pad; however a bold move through the 5- dma ($39.54) provides better confirmation. If you do take a more enterprising entry, be sure the buyers step in before taking additional positions. The volume remained respectable last week; although the current momentum may need a shot of adrenaline going forward. ARBA needs to demonstrate a bit of dynamism and battle the resistance at $43, $45. The ultimate objective is for the stock to challenge January 11th's intraday high of $47.25 and return to the higher trading levels above $50. In the news this week,, Ariba and Vignette (VIGN) inked a B2B strategic alliance to bundle their respective solutions together and provide greater efficiency. To get a feel of how the overall sector is responding to market conditions, keep an eye on stocks like I2 Technologies (ITWO), WebMethods (WEBM) and Commerce One (CMRC). BUY CALL FEB-35 IRU-BG OI=2388 at $7.50 SL=5.25 BUY CALL FEB-40*IRU-BH OI=4942 at $4.50 SL=2.75 BUY CALL FEB-45 IRU-BI OI=9805 at $2.13 SL=1.00 BUY CALL FEB-50 IRU-BJ OI=4684 at $1.25 SL=0.50 http://www.premierinvestor.net/oi/profile.asp?ticker=ARBA PFE - Pfizer, Inc $44.31 (+2.94 last week) Pfizer develops, markets and manufactures technology- sensitive products in the field of medicine. Pfizer is the leading US maker of pharmaceuticals. It developed the ever so popular anti-impotence drug, Viagra. They also are top producers in Animal Health and Consumer Health care products. Some brands you may be familiar with are BenGay muscle rub and Visine eyedrops. Last week, Pfizer investors bid up the stock's share price up in front of the company's earnings' release on Wednesday. We added the stock to our call list when we saw PFE wasn't selling on the news, but instead was continuing to make significant advances. The subsequent technical developments above the intersected 30, 50 & 200 DMAs, at the $43 and $44 levels, further defined PFE's overall strength and traders' interest. Dominant leaders in the industry, namely Merck (MRK) and Bristol Myers (BMY) also posted solid earnings last week, which gave drug stocks across the board a nice boost. Specifically, if a deep pullback were to occur amid a declining market, the $43 level should keep PFE afloat. If PFE broke down further and failed to resurface, we'd quickly exit the play and move on. However, Friday's distinct bounce off $44 provided the bullish confirmation we were looking to attain. Going forward, the first line of opposition to penetrate next week is at $46 and $47. And just a fraction under the $50 level is PFE's 52-week record high at $49.25. For those traders who err more on the side of caution, you may want see PFE shatter these barriers before beginning new plays. And if you have open positions at this time, consider locking in gains as PFE approaches the $50 resistance. You can always jump back into subsequent momentum. BUY CALL FEB-40 PFE-BH OI= 2100 at $4.75 SL=2.75 BUY CALL FEB-45*PFE-BI OI= 7337 at $1.13 SL=0.50 BUY CALL MAR-40 PFE-CH OI= 912 at $5.50 SL=3.50 BUY CALL MAR-45 PFE-CI OI=18405 at $2.13 SL=1.00 BUY CALL MAR-50 PFE-CJ OI= 9650 at $0.56 SL=0.00 High Risk! http://www.premierinvestor.net/oi/profile.asp?ticker=PFE BRCD - Brocade Communications $108.38 (+3.88 last 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. We knew there was profit taking in the future for BRCD, but after three consecutive days, we were beginning to wonder if it was ever going to stop. It looked bad again on Friday morning, with a gap below our stop and a recovery that ran out of steam by the end of amateur hour. But then the bulls charged, and boy did they charge! Stepping in to support the price near $98, they spent the rest of the day driving BRCD higher, allowing it to settle just north of $108. Those of you that jumped in to grab the entry point are smiling now. While resistance looms just overhead at $110-112, it was encouraging to see the bulls stage such a solid rally in the face of the bearish comments from Networking leaders like GLW and PMCS. Demand for the company's SAN products seems to be strong, despite fears of a slowdown in IT spending. Possibly factoring into the sentiment towards the storage sector this past week was a rock solid earnings report and conference call from storage equipment leader EMC on Tuesday. Maybe things aren't as bad as investors feared just a few short weeks ago? At any rate, we want to play the short-term moves, and with that in mind, let's pick some entry points. Although BRCD is a volatile stock, and not for the faint of heart, there are more conservative ways to play it; try buying the breakout over the $112 level. For you more aggressive risk takers, look for any bounce north of $100 to provide solid entries ahead of the company's earnings announcement on February 14th. BUY CALL FEB-105 GUF-BA OI= 823 at $12.50 SL= 9.50 BUY CALL FEB-110*GUF-BB OI= 3120 at $ 9.00 SL= 6.25 BUY CALL FEB-115 GUF-BC OI= 752 at $ 7.00 SL= 5.00 BUY CALL APR-110 GUF-DB OI=15650 at $18.00 SL=13.00 BUY CALL APR-115 GUF-DC OI= 535 at $15.75 SL=11.25 BUY CALL APR-120 GUF-DD OI= 1512 at $14.00 SL=10.50 SELL PUT FEB- 95 GUF-NS OI= 1025 at $ 3.88 SL= 5.75 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=BRCD EMC - EMC Corporation $79.06 (+1.75 last week) EMC wants to be your storage solution. The company designs, manufactures and markets a wide range of enterprise storage systems, software, networks, and services. The company's products store, retrieve, manage, protect and share information from all major computing environments including mainframe, UNIX, and Windows NT. With offices around the world and a 35% growth rate for the first 9 months of the year, EMC is effectively filling its role as the worldwide storage leader. "I think I can. I think I can", you can almost hear EMC chant. After a stellar earnings report last week, along with a bullish outlook for the future, the enterprise storage leader is making a mighty effort to crest its 200-dma ($79.94) as it continues to recover from the December selloff that took the price all the way down to $53. The company beat estimates by 2 cents, and posted revenue growth just under 40%. Reading between the lines, you could almost hear management saying "What slowdown?". As we head into the FOMC meeting where the only question seems to be how much of an interest rate cut we will get, look for EMC to continue to shine. Once it crests the 200-dma, along with the $80 resistance level, all its moving averages will be in the rear-view mirror, and the bulls can take aim at resistance at $85 and then $90. Support seems to be solidifying near $75, so we are raising our stop to that level, and aggressive traders can consider new entries on any intraday bounce above there. Watch out for the bears, though. The daily stochastics have now dipped out of overbought, and without a move higher in the near term, downside pressure could begin to build. More conservative investors will want to wait for a decisive move through $80, backed by solid volume, before taking a position. Although not a NASDAQ stock, monitor this index to confirm positive sentiment is still intact. If the tech sector rolls over ahead of the FOMC meeting, it will be tough for EMC to buck the trend and march higher. BUY CALL FEB-75 EMB-BO OI= 8294 at $7.25 SL=5.00 BUY CALL FEB-80*EMC-BP OI=10863 at $4.25 SL=2.50 BUY CALL FEB-85 EMC-BQ OI= 9951 at $2.00 SL=1.00 BUY CALL APR-80 EMC-DP OI= 9411 at $9.25 SL=6.50 BUY CALL APR-85 EMC-DQ OI= 4858 at $7.00 SL=5.00 BUY CALL APR-90 EMC-DR OI=12050 at $5.25 SL=3.25 SELL PUT FEB-75 EMB-NO OI= 5490 at $2.63 SL=4.25 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=EMC GS - Goldman Sachs Group $114.69 (+3.75 last week) The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net-worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments, which includes fixed income, currency and commodities, equities and principal investments. GS recently completed the acquisition of Spear, Leeds & Kellog, which is engaged in securities clearing, execution and market making, both floor-based and off-floor. Despite a little bit of profit taking towards the end of last week, the rally in Brokerage stocks is still intact as seen on the daily chart of the Brokerage index (XBD.X). Resistance turned back the bulls near the $640 level last week, but if the bulls can remain in control we could see a breakout in the week ahead. GS is riding this uptrend and is itself attempting to break over the $118 resistance level. Things were looking a little dicey as the stock fell below the ascending trendline ($113) to touch $111.50 on Friday, but buyers stepped in to help our play close back above our $113 stop by the close. The recent upgrades from Merrill Lynch and Wit SoundView have certainly helped, but have likely already provided all the bullish incentive they can. Now all eyes are on the Fed, and the bulls are hoping that Uncle Alan will give us a 50 basis point rate cut a the FOMC meeting this week. The big question is if that is already factored into the price of the stock. If it is, then there could be a sell the news event, once it becomes known. In the meantime, use intraday bounces near support ($112-114) as a means to gain a more attractive entry point, but don't try to catch a falling knife. A failure to rally from current levels will spell a quick end to our play, so make sure you play with stop losses. More conservative traders will want to buy strength, initiating new positions as GS crests the $118 level on strong buying volume. Regardless of your entry strategy, keep an eye on the XBD.X to help you gauge investor sentiment towards GS and other brokerage stocks. BUY CALL FEB-110 GS-BB OI=3185 at $9.25 SL=6.25 BUY CALL FEB-115*GS-BC OI= 844 at $6.25 SL=4.25 BUY CALL FEB-120 GS-BD OI=3627 at $3.88 SL=2.25 BUY CALL MAR-115 GS-CC OI= 20 at $9.25 SL=6.25 BUY CALL MAR-120 GS-CD OI= 49 at $6.88 SL=4.75 BUY CALL APR-120 GS-DD OI=1673 at $9.88 SL=6.75 SELL PUT FEB-110 GS-NB OI= 741 at $3.63 SL=5.75 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=GS RMBS - Rambus, Inc. $49.13 (+1.75 last 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. It's been said that the NASDAQ rallies on the backs of the Semiconductors and the Biotechs. Strength in the Tech index this past month can be traced directly to Semiconductor issues. Despite words of caution about the Chip sector from analysts, well-received earnings reports from companies such as BRCM and LRCX have helped the sector to move higher. Despite a lack of material company-specific news recently, RMBS has been one of the leaders. While the company missed Street estimates in its earnings report by a penny two weeks ago, the stock has found willing buyers. It appears that the bad news had already been priced into the stock. While RMBS succumbed to some minor profit taking in the latter part of this week, key support levels are continuing to hold. Having broken through 50-dma (now at $46.89) resistance this past week, the stock has since found support at that level along with the 10-dma at $47.63. Bounces off these moving averages could allow aggressive traders to make a play, as long as RMBS closes above our stop price of $48. If the buyers return, taking the stock back above its 5-dma at $50.31, this would allow conservative traders to initiate a play. Sector sentiment will play a key role in RMBS' direction so make sure that the Philadelphia Semiconductor Index (SOX) and Merrill Lynch's Semiconductor HOLDR (SMH) are on you side before taking a position. BUY CALL FEB-45 BYQ-BI OI=1088 at $7.88 SL=5.75 BUY CALL FEB-50*BYQ-BJ OI=3495 at $5.00 SL=3.00 BUY CALL FEB-55 BYQ-BK OI=2499 at $3.13 SL=1.50 BUY CALL MAR-50 BYQ-CJ OI= 48 at $7.63 SL=5.25 BUY CALL MAR-55 BYQ-CK OI= 87 at $5.63 SL=3.50 http://www.premierinvestor.net/oi/profile.asp?ticker=RMBS UBS - UBS Warburg $172.45 (-1.30 last week) UBS Warburg is a business group of UBS AG, one of the largest financial services firms in the world with 78,000 employees in more than 40 countries. In the United States, UBS Warburg's securities activities are conducted through UBS Warburg LLC and PaineWebber Incorporated, U.S.-registered broker-dealers. The firm is a leader in equities, corporate finance, M&A advisory and financing, financial structuring, fixed income issuance and trading, foreign exchange, derivatives and risk management. UBS Warburg also offers a full range of innovative wealth management services through PaineWebber, and provides private equity financing through UBS Capital. We've been patient with our call play in UBS for the past couple of weeks, but we are looking for a major move in the near future. After the sustained rally this past December, the stock has traded between $160 and $176. That range has now tightened, with support at $170 and resistance at $176 continuing to hold. Connecting the highs and lows since late November reveals UBS' upward trending regression channel. The almost month-long sideways movement has allowed support to catch up to the stock price. At this point the stock is right at the bottom of its uptrend line. As well, UBS has been making lower highs this past week, with volume drying up, resulting in a neutral wedge formation. As a Financial stock, the FOMC meeting could act as a catalyst to drive UBS' stock price. Now sitting right at support, with the prospect of an improving fundamental picture from lowered interest rates, this could set UBS up for a breakout above resistance at $176. If this does indeed occur, with volume backing the move, this is where conservative traders would most likely want to enter this play. For those willing to take on risk to enter at current levels, make sure that our protective stop, placed at $170 holds, and keep an eye on other Financial stocks such as BSC, LEH, MWD as an early-warning system of any major moves. BUY CALL FEB-170 UBS-BN OI= 7 at $6.70 SL=4.75 BUY CALL FEB-175*UBS-BO OI=68 at $4.00 SL=2.50 BUY CALL FEB-180 UBS-BP OI=24 at $2.40 SL=1.25 BUY CALL MAR-175 UBS-CO OI=11 at $7.10 SL=5.00 BUY CALL MAR-180 UBS-CP OI=40 at $4.80 SL=3.50 http://www.premierinvestor.net/oi/profile.asp?ticker=UBS ITWO - I2 Technologies Inc. $57.25 (+3.56 last week) ITWO is a global provider of intelligent eBusiness solutions for supply chain management and enhanced business applications. On June 12, 2000 ITWO merged with Aspect Development (ASDV) to create one of the largest software providers for eBusiness and eMarketplace solutions. TradeMatrix, its Internet marketplace, provides an open digital community powered by i2's advanced optimization and execution capabilities that help manufacturers plan production and other related operations. Clients include 3M, Compaq, Ford and Nokia. There may have been a slowdown in corporate spending, but ITWO did not feel it. Faced with less working capital, companies had been tightening their belts, yet there are areas in which their dollars are well invested. Spending money to save money is one such expenditure. It seems that businesses are focusing on supply chain management as one key area that if streamlined, can enhance profits greatly. ITWO's market leadership in this space of B2B has allowed it to benefit handsomely, as could be seen in their stellar earnings report. Breaking the billion-dollar sales figure for the year 2000, total revenue was up over 95 percent, substantially higher than that of previous years. License revenues more than doubled and operating income more than tripled. In the conference call, the company did not expect slowdowns going forward despite any economic weakness. Analysts impressed with the results, took turns congratulating the company. This has helped ITWO's shares to rally strongly, as it broke above its 50-dma (at $53.16) for the first time this year. A bounce off this moving average, along with support from the 10-dma at $54.18 are potential entry points for aggressive traders, as long as ITWO closes above our stop price of $55. With the stock price now just below its 5-dma (at $57.35), a break back above this point with conviction would allow for a more conservative play. In both cases, keep close tabs on Merrill Lynch's B2B HOLDR (BHH) and rival MANU before pulling the trigger. BUY CALL FEB-55 QYJ-BK OI=1381 at $6.50 SL=4.50 BUY CALL FEB-60*QYJ-BL OI=2891 at $4.50 SL=2.75 BUY CALL FEB-65 QYJ-BM OI=2317 at $2.81 SL=1.50 BUY CALL MAR-60 QYJ-CL OI= 45 at $8.13 SL=5.75 BUY CALL MAR-65 QYJ-CM OI= 549 at $6.38 SL=4.50 http://www.premierinvestor.net/oi/profile.asp?ticker=ITWO MERQ - Mercury Interactive $94.94 (-0.44 last week) As a provider of integrated performance management solutions that enable businesses to test and monitor their Internet applications, MERQ is looking for growing e-commerce demand to continue to fuel its business. The company's products perform such tasks as analyzing and eliminating Web site performance bottlenecks and automating quality assurance testing. MERQ's client base spans a wide range of industries including Internet companies such as Amazon.com and America Online, infrastructure companies Ariba and Oracle, as well as Apple Computer, Cisco Systems and Ford Motor Company. Not only did MERQ handily beat Street estimates by 4 cents per share, but bullish comments from the company have powered the stock higher. During the conference call, the CEO noted, "Our visibility is the best ever. Our target market is much broader. The demand for our products and services is significantly higher. And our competitive position is strong than ever before." After a nice run-up of almost 40 points early this year, shares of MERQ have spent the week in consolidation mode, trapped between moving average support from its 50-dma at $86.65 and resistance from its 200-dma at the psychologically important level of $100. With a range of well over $10, bounces off support this week has made this a highly tradable play. The sideways action of this past week has given enough time for the 10-dma (at $89.42) to catch up with the stock price. The 5-dma at $93.31 provides additional support. At this point, it's make or break time for MERQ and with that, we are moving our stop price up from $88 to $90. We anticipate that with the stock will most likely make a large move one way or the other. The most conservative play would be wait for MERQ to take out $100 on volume before entering though a break above $95 if peers BMCS and RATL are also moving higher would could allow for an entry point. Higher risk players looking to buy on a dip could target moving average support, confirming bounces with buying volume. BUY CALL FEB- 90 RQB-BR OI=692 at $12.38 SL= 9.25 BUY CALL FEB- 95*RQB-BS OI=898 at $ 9.63 SL= 6.50 BUY CALL FEB-100 RQB-BT OI=620 at $ 7.50 SL= 5.25 BUY CALL MAR- 95 RQB-CS OI= 0 at $14.50 SL=10.75 Wait for OI!! BUY CALL MAR-100 RQB-CT OI=108 at $12.50 SL= 9.25 SELL PUT FEB- 85 RQB-NQ OI=956 at $ 4.38 SL= 6.50 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?symbol=MERQ BGEN - Biogen, Inc. $66.13 (+6.69 last week) Biogen, Inc., winner of the 1998 U.S. National Medal of Technology, is a biopharmaceutical company principally engaged in discovering and developing drugs for human healthcare through genetic engineering. Headquartered in Cambridge, MA, the Company's revenues are generated from worldwide sales of Avonex for treatment of relapsing forms of multiple sclerosis, and from the worldwide sales by licensees of a number of products, including alpha interferon and hepatitis B vaccines and diagnostic products. Biogen's research and development activities are focused on novel products for multiple sclerosis, inflammatory, respiratory, kidney and cardiovascular diseases and in developmental biology and gene therapy. Positive announcements from the company have recently given a boost to shares of Biogen. Posting a well-received earnings report in which sales of its leading multiple sclerosis drug Avonex reached record numbers, the stock also rallied on news that Antegren, its treatment for Crohn's Disease, will soon be entering Phase III trials. What's more, the company expects that its Psoriasis drug Amevive, already in Phase III, to be commercially available by mid-2002. Expanding the pipeline seems to be a theme for the company nowadays, with the CEO anticipating the number of drugs in its clinical pipeline to double this year. For traders looking to capitalize on a potentially large move, this could be the play to watch this week. Connecting recent highs and lows reveals a pattern of higher lows and lower highs on decreasing volume, culminating in a wedge formation. Such a pattern suggests that a large move one way or the other may soon come to pass. In light of this development, we are tightening our stop price from $62 to $64. If volume returns to the buy side, with BGEN rallying above the $68 level, this would allow for an entry on strength. For higher risk players looking to get in early, look for a bounce off the 5-dma at $65.47, along with the $65 and $64 levels as possible targets for entry. In both cases, correlate entries with upward movement in the AMEX Biotech Index (BTK) and Merrill Lynch's Biotech HOLDR (BBH). BUY CALL FEB-60 BGQ-BL OI=2303 at $8.00 SL=5.75 BUY CALL FEB-65*BGQ-BM OI=2457 at $4.25 SL=2.50 BUY CALL FEB-70 BGQ-BN OI=2226 at $2.00 SL=1.00 BUY CALL MAR-65 BGQ-CM OI= 144 at $6.50 SL=4.50 BUY CALL MAR-70 BGQ-CN OI= 416 at $4.13 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=BGEN *************************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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The Option Investor Newsletter Sunday 01-28-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/012801_4.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=1489 ************************************************************** ************* NEW PUT PLAYS ************* SPW - SPX Corporation $112.94 (-3.00 last week) SPX Corporation is a $2.7 billion global provider of technical products and systems, industrial products and services, service solutions and vehicle components. SPX has operations in 19 countries with the worldwide headquarters in Muskegon, Michigan. The company designs, manufactures and markets fire detection systems, data networking equipment, broadcast antennas and automatic fare collection systems. SPX Corporation also designs, manufactures and markets power transformers, industrial valves, electric motors, and components for the light and heavy duty motor vehicle markets. An option trader who looks at SPW's daily chart will have a hard time resisting the temptation to buy a put. The downward channel which commenced in September has taken SPW all the way from its 52-week high of $186 to a low of $94 in December. One catalyst may have been SPW's earnings release for the September quarter, which showed net revenues down by 1%, as well as overall weakness in the capital goods and automotive parts sectors. In December, SPW's CEO stated that their earnings growth in a slowing economy would be closer to 10% than the 15% originally projected. While SPX rallied from $97 to $116.75 in the two weeks following the rate cut announcement, the stock's underlying technical weakness stopped the rally in its tracks this week. After a failed attempt to break the downward channel by rallying to $116.75 on Monday, SPW rolled over to $112 on Wednesday. On Wednesday, the stock formed a lower high at $115.81, and rolled over once more. Friday's chart pattern shows a very round roll over from $114, and a quick rebound from the 50 dma of $112.29, which is not likely to last. The path of least resistance for SPW is clearly down, and a roll over from $112.94 looks highly probable. A break below the $112 level on strong volume would be a good put entry point, and would likely lead to the next support levels at $111 and $109. Watch others in the capital goods sector like TYC for an indication of sector strength, and set stops at $115. SPW is scheduled to report earnings on Feb. 13, so traders have plenty of time before this date. BUY PUT FEB-115 SPW-NC OI=0 at $7.63 SL=5.25 Wait for OI! BUY PUT FEB-110*SPW-NB OI=0 at $4.88 SL=3.00 Wait for OI! http://www.premierinvestor.net/oi/profile.asp?ticker=SPW WFII - Wireless Facilities Inc $38.00 (+2.75 last week) Wireless Facilities is in the outsourcing business. They offer planning services, design, and the actual deployment of wireless networks. They work with all major broadband and Internet wireless technologies and provide on-going related network management services, which includes day-to-day maintenance. They operate on a global basis and have blue-chip clients that include AT&T, Lucent, Motorola, Siemens, and Qwest. Considered a member of the Capital Goods Industry, Wireless Facilities got the shakedown from investors last week after a grand attempt to breakout. Technical and momentum traders initially took WFFI upwards to the $45 level, but the stock couldn't hold the gains. It quickly fell from the limelight and returned to sub-trading below the $40 resistance. The increasing energy costs are just too much of a burden on future revenues. As a result, many like companies are warning of lower earnings; especially with no relief in sight! Another dissenting component regarding WFII is it's California presence - and everyone's heard about their devastating energy crisis! We're looking for this stock's price to fall victim to the negative sentiment currently effecting the sector and it's own technical breakdown to generate additional downward momentum. WFII recently confirmed it's reporting 4Q earnings on February 14th, after the market close, so keep this mind as you strategize your plays. Now from a technical perspective, WFII is below the 50-dma and is on the verge of violating the converged 30 & 10 DMAs, at $37. There is some support at $35; therefore, it may be better to wait for WFII to move to the underside of this level before buying into a decline. But if you're willing to take a bit more risk, a reasonable entry point might be found on a high-volume rollover from $40 and the 5-dma ($40.70). We've initiated a protective stop loss at $41 to guard against a technical bounce. BUY PUT FEB-40*QUU-NH OI= 92 at $5.00 SL=3.00 BUY PUT FEB-35 QUU-NG OI=146 at $2.56 SL=1.25 BUY PUT FEB-30 QUU-NF OI=357 at $1.06 SL=0.00 High Risk! http://www.premierinvestor.net/oi/profile.asp?ticker=WFII ***************** CURRENT PUT PLAYS ***************** NKE - Nike Inc. $53.00 (-0.13 last 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 attempted to move above resistance at $54.38 three times this week without success. The third roll over at this level places Nike right in the middle of the downward channel which was established after a failed attempt to rally past $60 on January 9. After reporting second fiscal quarter earnings which met expectations on December 19, Nike's CEO stated that he expected to see the profit range for the following quarter in the 50 to 55 cents range, which was lower than the First Call consensus of 58 cents. Management stated that Nike expects to see their profits pick up in the second half of 2001, but they expect the current quarter growth to stay flat from the year ago quarter. There is little short term bullish momentum for the stock price at this point. Nike looks as if it is ripe to roll over from the 5 dma of $53.38, which would likely lead to the next support level at $52. A break below $52 would be a very bearish indicator, and a good entry point. If the pattern continues, Nike will likely drop below the 50 dma of $50.35 in the near future, and conservative put players may want to wait for this drop. The next support levels after that are $48, and $46.69, which could likely be visited. It can be helpful to monitor other athletic footwear companies like RBK and SCNYB for an indication of sector strength. We are moving our stop price down to $54, as a break above this level could mean that NKE had regained strength. BUY PUT FEB-60 NKE-NL OI= 93 at $7.63 SL=5.50 BUY PUT FEB-55*NKE-NK OI=3097 at $3.88 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=NKE AGIL - Agile Software Co $42.81 (-2.13 last week) Agile develops and markets product content management software, which is software that enables companies to collaborate over the Internet by interactively exchanging information about the manufacture and supply of products and components. Agile's collaborative suite of software products is designed to improve the ability of all members of the manufacturing supply chain. Since their start in 1996, they have licensed their products to approximately 300 customers including Gateway, Texas Instruments, Lucent Technologies, and Solectron. About 40% of sales come from additional material procurement applications, consulting, implementation, support, and training services. We began coverage on AGIL due to its subsequent breakdown below the $40 level. Although it's important to note that this put play engages a high level of risk in that other stocks in the sector are actually faring quite well under the current market conditions. For instance, leading Internet software stocks Ariba (ARBA) and I2 Technologies (ITWO) are sustaining the higher trading range for their respective price levels. Therefore, it's especially important to pay attention to AGIL's individual price/volume activity if you take positions in this put play. Entries into the decline will ultimately depend on your personal risk portfolio; although a more conservative approach is to enter as AGIL resumes a downtrend under the $40 level or on a high-volume rollover near the 5-dma ($42.36). If you take a look at a chart with a 30-dma line, you can visually confirm how this technical measurement has kept a tight lid on any rallies, so far. Traders might find an aggressive entry around $44 or $44.50, but beware of a breakout through $46. Recently, $46 marked the high end of the stock's narrow consolidation range ($43 to $46). No matter how you plan to execute your entries and exits, it'd be wise to use protective stops to guard against the type of run ups we saw in Friday's session. Our stop is set firmly at $44. We'll exit the play if AGIL closes above this mark. BUY PUT FEB-45*AUG-NI OI=110 at $7.13 SL=5.00 BUY PUT FEB-40 AUG-NH OI= 77 at $4.38 SL=2.75 BUY PUT FEB-35 AUG-NG OI= 14 at $2.44 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=AGIL IDTI - Integrated Device Tech. $46.81 (-3.44 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. Proving that they might be down but not out, the bulls came back on Friday in a buying mood. Although you can't really see that from the paltry gain on the NASDAQ, in light of the bearish comments from GLW and PMCS this past week, it is amazing that the Networking (NWX.X) and Semiconductor (SOX.X) sectors managed to hold their ground on Friday. IDTI had been slowing its descent, and on Friday managed to reverse its early loss to post a $1.25 gain. While the white candle was a refreshing pause for the bulls, we would caution them to not get overly excited. The upward move ran out of steam near the end of the day near the $47.50 resistance level. This could turn out to be a tasty entry point for new positions, especially if there is no follow through on Monday. Aggressive traders may even get a better entry if buyers push the price closer to our $50 stop before they run out of steam. With significant historical resistance at this level, the bulls will have to muster a lot of conviction ahead of the FOMC meeting in order to push through it. Friday's bounce came right at $42 support, and more conservative traders will want to see the price fall through this level before initiating new positions. The stochastics still have a ways to fall before reaching oversold, and given the current market sentiment, this should help to drag the price through the next level of support near $40, also the site of the 30-dma and 50-dma. Use the SOX.X and NWX.X to gauge investor sentiment before playing. BUY PUT FEB-50 ITQ-NJ OI=785 at $6.25 SL=4.25 BUY PUT FEB-45*ITQ-NI OI=621 at $3.25 SL=1.75 BUY PUT FEB-40 ITQ-NH OI=943 at $1.63 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=IDTI PWER - Power-One, Inc. $45.00 (-0.25 last week) Power-One is one of the ten largest power supply manufacturers in the world, excluding the personal and consumer markets. Products include DC rack-power-systems for telecom and Internet Service Providers (ISPs) and embedded OEM power supplies for communications equipment manufacturers. Management expects that 70-75% of Q4 sales will be to the communications industry. Power-One also supports key customers in the semiconductor-test capital-equipment industry and other high-end industrial markets. Technical weakness in a strengthening market is just one of the reasons that landed PWER in our put play list. Despite reporting record earnings, the stock failed to test the 200-dma (now sitting at $54.15), with investors selling the stock on volume. Since then, PWER has slipped back below the 50-dma (at $48.33). The recent failed rally corresponds to a downtrend line that can be traced back to October of last year. While many NASDAQ stocks have already broken above this level, PWER remains mired in its downtrend. During the conference call, the CEO mentioned that the company would be looking towards an acquisition strategy going forward. Investors appear to be spooked by fears of share dilution. Connecting the lows for the month reveals a short-term uptrend line. Having fallen below this support level on Thursday, PWER encountered resistance at this very point. Currently, the stock is not only below all its major moving averages, also but its 5 and 10-dma (at $47.36 and $45.60 respectively). Failed rallies above moving average resistance from the 5, 10 and 50-dma could allow aggressive traders to enter, confirming a rollover with the return of selling volume. We are placing a protective stop at $48. To ensure continued downward momentum, we would like to see PWER staying below this level. For an entry on weakness, look for a break below current levels on volume, with competitors BLDP and FCEL also moving lower. BUY PUT FEB-50 OGU-NJ OI=114 at $7.38 SL=5.25 BUY PUT FEB-45*OGU-NI OI=292 at $4.38 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=PWER ******************************** WEEKLY UPDATES FOR VARIETY PLAYS ******************************** LONG-TERM: SUNW $31.19 +0.00 (+0.31 last week) SUNW has steadily climbed since we picked it on December 20th. Trending higher with the broader NASDAQ, SUNW has advance slowly. But that's alright because the premise of this Long-Term play is to obtain attractive entry points into quality issues that we expect to perform well in 3 to 6 month time horizon. This week SUNW tested and held support at $30, which is also our stop loss on the play. Entry points can be obtained on bounces from that level. Looking overhead, the descending 50-dma at $34.92 will be a challenge. In addition, on January 18th, SUNW ran up to a recent high of $35.13 before its earnings report, so sellers may be hiding at the $35 level. BUY CALL MAR-35 SUX-CG OI=2730 at $1.56 SL=0.75 BUY CALL APR-35*SUX-DG OI=8184 at $2.75 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=SUNW LU $18.00 +0.00 (-2.56 last week) Profit takers came for their hard earned money in LU this week after peaking on Friday the 19th at $21.13. Yet, this is not totally unexpected considering LU's fantastic run that started at the end of the year. Having taken LU for a ride since $14.50, slight pullbacks like this are opportunity to enter this Long-Term play. On a positive note, LU's greater-than-expected losses last Wednesday were absorbed rather well by the stock, indicating that much of the bad news is already priced in. The company's cost-cutting efforts by laying-off 10% of its workforce is good news for Wall Street but bad news for Main Street. With the 50-dma beginning to flatten out, LU has that support at $17.30. In Friday's action, buyers stepped in around that level to bring the stock back to $18. Overhead, resistance will be encountered at the 100-dma of $23.25. Our stop remains at $16.50. BUY CALL FEB-15 ULU-BC OI=9315 at $3.50 SL=1.75 BUY CALL MAR-15*ULU-CC OI= 99 at $3.88 SL=2.50 BUY CALL MAR-20 LU-CD OI=8961 at $1.13 SL=0.50 http://www.premierinvestor.net/oi/profile.asp?ticker=LU GE $44.63 -1.31 (-2.38 last week) While it has been a concern that GE has not responded to the interest rate cutting environment like many of the other diversified stocks, we are still positive on this bellwether in the long-run. A Fed easing of rates will eventually be reflected in GE's stock price, however, right now there appears to be some downward pressure stemming from the HON deal, expected to close in March. On January 17th, GE reported record results for earnings, revenues and cash generation, proving that its emphasis on globalization, diversification and growth in services is paying off. Technically, the $44 level is good support yet our stop is set at $43 to allow for leeway in this Long-Term play. The downtrending 50-dma lies at $49.33. Options are reasonably priced for GE. BUY CALL MAR-45 GE-CI OI=5646 at $3.00 SL=1.50 BUY CALL JUN-50*GE-FJ OI=8859 at $2.69 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=GE LOW VOLATILITY: ACF $34.94 +0.88 (+1.94 last week) ACF has been our best performer this month as a Low Volatility play. Since the Fed rate cut on January 3rd, this lender has benefited quite nicely and will likely perform well in this current interest rate environment. ACF continues to trend upwards with simple consolidation ahead of its next up move. Right now, resistance lies at $35. While the stock looks like it may consolidate after Tuesday's move through $34, the Fed's actions this Wednesday could very well boost ACF through $35. Look for entry points on pullbacks ACF's recent base near $33.50, also the site of the 10-dma. A run-up into the Fed meeting could be played if the stock breaks through $35 with strong volume. BUY CALL FEB-35*ACF-BG OI=3105 at $1.94 SL=1.00 BUY CALL MAR-35 ACF-CG OI= 0 at $2.94 SL=1.50 Wait for OI! http://www.premierinvestor.net/oi/profile.asp?ticker=ACF BBY $47.50 +0.31 (+4.69 last week) BBY has been ascending from its depths of December, especially helped by the interest rate environment. This play looks promising from both a fundamental and technical standpoint. Loosing monetary policy should have positive implications for consumer spending. And the prospects of a tax cut in the near future would bode well for retail stocks as disposable income increases. Technically, BBY has solid support at $41, but the converging 10-dma and 100-dma at $44.75 and $44.30, respectively offer support closer to its current level. A pullback to this $44- $45 level would present a nice entry point. Also, a break above intraday resistance at $48 could attract buyers. BUY CALL FEB-45*BBY-BI OI= 519 at $4.38 SL=2.75 BUY CALL MAR-50 BBY-CJ OI=1610 at $3.63 SL=2.00 http://www.premierinvestor.net/oi/profile.asp?ticker=BBY CNC $17.94 +1.50 (+3.88 last week) What a run last week! CNC just blew up. While many of the larger insurance concerns sold off this past month and are now rebounding, CNC has remained very consistent and steady. This is in part due to their diversified products outside of insurance, including investments and managed assets. Fundamentally, CNC is poised to perform well especially with an expected rate cut coming this week, and more in the near future. To play this Low Volatility call, look for a pullback near the 10-dma at $15.19, which might be too opportunistic considering CNC could rally into the Fed meeting on Wednesday. Buyers showed up on Thursday at $15.50, but Friday they were back earlier at $17. A break above $18 would also warrant entry on strong volume. BUY CALL FEB-15 CNC-BC OI=9944 at $3.25 SL=1.75 BUY CALL MAR-15*CNC-CC OI= 301 at $3.75 SL=2.25 http://www.premierinvestor.net/oi/profile.asp?ticker=CNC TYC $62.13 -0.06 (+1.06 last week) Another diversified company was added this week for the same reason as the others: favorable interest rate environment. TYC has broken out above long-term resistance of $60, to boot. We will watch for this stock to see how it reacts before and after the Fed meeting this week. Volume has been robust during TYC's ascent since the January rate cut. To play this, look for pullbacks to the $61 level, which also happens to be near the 10-dma at $60.75. With TYC at all-time highs, watch for increased buying interest with strong volume and a break out above $63, the area in which sellers showed up on Friday. BUY CALL FEB-60*TYC-BL OI=18999 at $3.50 SL=1.75 BUY CALL MAR-65 TYC-CM OI= 4049 at $2.25 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=TYC *************************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=1479 ************************************************************ ***** LEAPS ***** In An Uncertain Market, Money Management Is Critical By Mark Phillips Contact Support Have you been profiting from some of our recent LEAPS plays? More importantly, have you been locking in those profits with judicious use of stop losses and profit targets? In case you haven't noticed this is not the market we enjoyed a year ago, and with all the economic concerns facing investors, we are not so lucky as to watch our favorite stocks double in the space of a few weeks without profit taking coming around to take a big fat bite out of those gains. Just because we have lots of time value in our LEAPS doesn't mean that we shouldn't lock in our profits when the stocks become overextended. Taking profits leaves us in a cash-rich position, so that we can take advantage of the next entry point rolls around. Even more important, it keeps us from letting a winning trade become a loser, when conditions take a downward turn. Ok, I know that money management isn't the most exciting topic, but if you are still reading this, instead of scrolling straight down to the plays, you understand that it is THE MOST IMPORTANT DIFFERENCE between profitable trading and frustration. Let's look at a couple of recent examples, so that we can insure we get to keep our profits in the future. In mid-September, we added QCOM back onto our playlist when it was consolidating near $66. After awarding vigilant traders with a couple of juicy entry points, the stock took off and by early December had rocketed over the century mark and spent the better part of a week stretching the upper Bollinger band. At the same time, both daily and weekly stochastics had moved into overbought territory. This upward move was accompanied by a sharp increase in volume, and when it began to fall off, prudent investors should have ratcheted their stops up near the $95 support level to prevent giving back their profits. Sure enough, QCOM entered a sustained 8-week downtrend from which it is just beginning to emerge. Our 2002 LEAP increased in value to more than 100% over our initial price before falling back very near where we initially selected it, and the stock is once more ready for fresh entries. QCOM is this week's Spotlight Play, but if you held the position through the recent decline, you didn't make any progress over the past four months. Those that locked in profits are now in a position to step back into the play and do it all over again. How about a more recent example? Agilent (A) gave us a couple of great entry points in the low $50's before shooting as high as $68 a couple weeks ago. Its sharp rise took it right through the upper Bollinger band and the daily stochastics once again moved into overbought. Sure enough, profit taking emerged and in just the past 5 sessions, those that were holding positions without stop losses watched a nearly 50% gain turn into a loss. Why do we let this happen? Is it greed, complacency, or ego? It doesn't really matter, does it? This is likely the kind of pattern we can expect to see going forward, and we need to change our habits to take advantage of the profits that are consistently offered. Alright, let's look at one more that appears to be materializing before our very eyes. DELL finally began to firm near the $16-17 level in early January, and accordingly, we added it to the playlist. Since then, the stock has staged an impressive rally, scaling resistance at $20, $22, and then $25 before finally running out of steam near $27. After spending 8 full days flirting with the upper Bollinger band as the daily stochastics moved solidly into overbought territory. At the same time, our 2002 LEAP has grown by 80%. Nobody should give back an 80% profit, no matter how much time value is left. So where is your stop loss on DELL? How much of the gain are you willing to give back if the NASDAQ takes a turn for the worse? Hopefully you are talking back to your computer right now, telling me you don't need to hear about stop losses, because you already have them in place, and you have been locking in your profits. If you have, then congratulate yourself for being a smart options trader and learning to be profitable, despite a difficult market environment. Alright, before I leave you, I think we need to cover a few items related to what to expect going forward. First off, you know that I talk about the VIX every week, and how important it is for forecasting near-term market tops and bottoms. For those just joining us, the basic rule of thumb for LEAPS investing is to buy new positions when the VIX is high (above 30), and lock in profits (or tighten stops) when the VIX is low (below 20). Recall that the VIX is a measure of implied volatility on the OEX index. While it is indicative of the bullishness or bearishness of the overall market, we are still lacking a measure that we can apply directly to the NASDAQ market. Many thanks to Mary Redmond for pointing out that the CBOE has come through again. In her Trader's Corner article last Wednesday, she pointed out that the CBOE has introduced a new volatility index, VXN.X which tracks the volatility of options on the NASDAQ market. I highly recommend reviewing her article for more details on this index. If I was a betting man, I would wager that the VXN will become highly useful to those of us that prefer to trade options on NASDAQ listed stocks. For the record, the VIX has declined significantly over the past few weeks, dropping as low as 23.77 early last week, and ending the week right smack in the middle of its historical range at 25.48. It is hard to draw any conclusions about future market direction from this value right now, but given the uncertainty surrounding the pending FOMC meeting and the current technicals on both the NASDAQ and OEX (rolling over from upper Bollinger bands, and Stochastics threatening to drop out of the overbought zone), I am looking for some near-term weakness. Of course, both of these important indices have cleared and found support at their respective 50-dmas, indicating that last week's weakness could just be a prelude to the next leg up. Either way, it promises to be another exciting week, with plenty of trading opportunities. One final cautionary note on the playlist. We have 3 plays which we are placing on probation, AXP, TXN, and NOK. All three have been performing poorly of late, and if they violate their near-term support levels, will be ejected from the playlist in short order. For the record, these levels are $45 for AXP, $35 for NOK, and $37 for TXN. Adjust your trading plan accordingly, and we will re-evaluate them next week. Trade smart, and take profits when they are offered. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2002 $ 45 WUE-AI $ 9.50 $40.50 326.32% 09/17/00 JAN-2003 $100 VUE-AT $32.75 $21.38 -34.72% CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $ 7.13 -35.23% 11/26/00 JAN-2003 $ 60 VYC-AL $16.63 $ 7.25 -56.39% NT 11/28/99 JAN-2002 $37.5 WNT-AU $15.13 $10.38 -31.39% 09/10/00 JAN-2003 $ 75 ODT-AO $27.50 $ 5.38 -80.44% AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $ 7.20 -61.35% 08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $16.50 - 5.71% AXP 03/12/00 JAN-2002 $46.6 WXP-AQ $ 9.33 $ 8.75 - 6.22% WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $22.63 320.63% 10/22/00 JAN-2003 $ 45 VWI-AI $ 7.88 $14.75 87.30% NOK 05/21/00 JAN-2002 $ 50 IWX-AJ $17.25 $ 5.25 -69.57% 07/30/00 JAN-2003 $ 50 VOK-AJ $17.75 $ 8.88 -49.97% C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $13.13 27.35% 10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $11.38 - 7.10% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $33.25 94.10% JAN-2003 $ 70 OZG-AN $23.13 $42.00 81.58% QCOM 09/17/00 JAN-2002 $ 70 WBI-AN $22.50 $29.13 29.44% JAN-2003 $ 70 VLM-AN $29.63 $37.50 26.56% TXN 10/22/00 JAN-2002 $ 50 WTN-AJ $13.75 $ 7.75 -43.64% JAN-2003 $ 50 VXT-AJ $18.38 $12.50 -31.97% BGEN 11/05/00 JAN-2002 $ 70 WGN-AN $17.25 $16.50 - 4.35% JAN-2003 $ 70 VNG-AN $25.00 $24.25 - 3.00% MU 11/26/00 JAN-2002 $ 45 WGY-AI $13.13 $13.25 0.95% JAN-2003 $ 45 VGY-AI $17.25 $18.63 8.00% A 12/03/00 JAN-2002 $ 55 YA -AK $16.88 $16.25 - 3.70% JAN-2003 $ 60 OAE-AL $19.88 $19.75 - 0.63% ORCL 12/10/00 JAN-2002 $ 35 WOK-AG $ 7.75 $ 6.88 -11.29% JAN-2003 $ 35 VOR-AG $11.13 $10.25 - 7.91% QQQ 12/10/00 JAN-2002 $ 70 WNQ-AR $15.13 $11.75 -22.34% JAN-2003 $ 75 VZQ-AW $19.25 $15.38 -20.10% WMT 12/24/00 JAN-2002 $ 55 WWT-AK $ 9.63 $ 9.38 - 2.55% JAN-2003 $ 55 VWT-AK $14.00 $14.00 - 0.00% DELL 01/07/01 JAN-2002 $ 20 WDQ-AD $ 5.25 $ 9.88 88.10% JAN-2003 $ 25 VDL-AE $ 5.63 $ 9.63 70.96% WCOM 01/14/01 JAN-2002 $ 25 WQM-AE $ 5.00 $ 4.25 -15.00% JAN-2003 $ 25 VQM-AE $ 7.38 $ 6.50 -11.86% CPN 01/21/01 JAN-2002 $ 40 YLN-AH $10.50 $13.00 23.81% JAN-2003 $ 40 OLB-AH $15.38 $17.63 14.67% Spotlight Play QCOM - Qualcomm, Inc. $81.00 Investors and analysts alike cheered QCOM's solid earnings report and bullish forecast for the CDMA market. The company's CEO, Irwin Jacobs said demand was strong and still growing for the company's technology, and he anticipates further growth both domestically and internationally during the next year, with particular focus on third generation CDMA deployment. After falling from the $106 level in early December, shares of the company had retraced back to the $70 support level, and then began to recover leading up to the earnings announcement. After the news was released, QCOM continued its recovery, tacking on nearly 10% on Friday to close back over the 200-dma (now at $76.75). Friday's rally was confirmed by very strong volume, coming in at nearly double the ADV, and indicating that there is likely more to come. Aggressive traders will want to target shoot any dips to the $76-78 level while more conservative players will want to wait for a continuation of the rally that takes the stock through 50-dma ($82.75) or even the $84 resistance level. Just watch out for profit taking near the upper Bollinger band ($88.50). As long as the NASDAQ can keep from selling off in the wake of next week's FOMC meeting, QCOM should be able to continue its ascent back towards triple digit status. BUY LEAP JAN-2002 $85.00 WIJ-AQ at $23.00 BUY LEAP JAN-2003 $90.00 VLM-AR at $30.88 New Plays ARBA - Ariba, Inc. $40.00 After a rough 4 months, B2B stocks appear to be showing some signs of life, and as one of the leading stocks in the sector, ARBA is providing us a rare bargain. The company provides software, network access and commerce services that enable corporations to electronically automate and optimize business with their buyers and suppliers. ARBA offers commerce services such as content management, electronic payment, electronic sourcing and logistics, among others. After declining more than 80% from its September highs near $170, ARBA has started building a base near $32-34, giving us a solid level where we can place our stop. Since closing just above $34 in early January, ARBA has been gradually moving higher, creating a nice, gradual uptrend that should continue as it becomes clear that the company is one of the emerging winners in the B2B market. The ascending trendline (currently $37.50) is the most likely level where aggressive traders will want to consider new positions, although a bounce from the $35 support level could provide an even better entry. Just make sure that this support level is being defended by solid buying volume before playing. With weekly stochastics flattening out in oversold territory, and daily stochastics beginning a tenuous recovery, this looks like a great level to initiate new positions for the next run higher as the company moves into profitability later on this year. Speaking of profits, ARBA posted a sharp increase in earnings earlier this month, and solid revenue growth. It seems that every analyst under the sun stepped up to downgrade the stock on concerns about a change in the company's accounting practices, and fears of slowing growth. Despite the downgrades, the stock behaved well, and looks poised to have a stellar year of growth. More conservative entries can be had as the stock crests its first level of resistance near $43. Although ARBA can have dramatic swings in price, the recent decrease in volatility combined with solid support, allows us to limit our downside risk by placing a fixed stop at $32. BUY LEAP JAN-2002 $45.00 YYR-AI at $14.25 BUY LEAP JAN-2003 $45.00 OLR-AI at $19.00 Drops None ************************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=1494 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 01-28-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/012801_5.asp ************* COVERED CALLS ************* Fear and Loathing in the Market: Gauging Anxiety By Mark Wnetrzak One of our subscribers asked about the new volatility indices at the CBOE and the AMEX, and the way they can be used to help determine market direction. This week, the Chicago Board of Options Exchange launched a new volatility index to estimate the amount of fear in the technology market through the prices of a specific index options contract. Never one to be outdone, the American Stock Exchange also began its volatility index based on NASDAQ 100-related options. Index options on the NASDAQ 100, or NDX, trade at the CBOE, while at the AMEX, options trade on the NASDAQ 100 unit trust, or QQQ. The CBOE's new technology volatility index has the ticker symbol VXN (already labeled "The Vixen") while the AMEX volatility index has the ticker symbol QQV. The demand for a VIX (a volatility index based on the S&P 100 or OEX options) style indicator for NASDAQ stocks has increased in recent years, in part because volume in OEX options has declined and because gauging the volatility in the technology segment has become more important to contrarian traders. Implied volatility, a key factor in an option's price, is the annualized measure of how much the market thinks a stock or index can potentially move. It is a critical factor and generally measures uncertainty about the prospects for the underlying stock or index. The relative value of the VIX reflects the market's overall anxiety by rising when put-option buying increases on OEX options, thus reflecting an increasing desire to hedge for downside movement. Analysts interpret the VIX using a theory of inverse proportion, meaning low values on the VIX are bearish, while high values are bullish. Both of the new volatility trackers will be based on the top 100 NASDAQ stocks, extending the reach of current anxiety measures to leading technology issues. As with the traditional VIX, there is an inverse relationship to the price of the NASDAQ 100 Index (or unit trust) and the VXN or QQV. When the volatility in either gauge moves higher, the market is expected to fall. Before you decide to include the VXN (or QQV) as part of your daily trend analysis, it's important to understand how these gauges determine market sentiment. In the case of the VXN, it is constructed in the same basic way as the VIX, substituting implied volatility in NDX options for the OEX. When volatility spikes to extreme highs, that usually indicates a rapidly falling market. It is a sign of panic and when the VIX finally reaches a peak, everyone who is going to sell has probably already done so, thus it is probably a good time to buy. When the VIX reaches extremely low levels, it means that traders are complacent. Option buyers are timid while sellers are aggressive, and both for similar reasons: nobody is anticipating much movement in the market. Of course, when the majority of people agree on a particular outlook, the opposite generally happens and in this instance, upside surprises are a rare occurrence. Over the past few months there have been extremely large swings in the prices of stocks quoted on the major exchanges. Experts have tried to put forward theories to explain this phenomenon and more still have tried to use these rationale in order to predict future market character. As it stands, analysts cannot agree on whether or not it is economic or psychological realities that are the major cause of price fluctuations in the stock market. While it's important to be aware of the reasons behind this volatility, most investors would do better to simply understand the historical relationships between popular indicators and market direction, and use this knowledge to become a more successful trader. Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return GEN 10.50 11.00 FEB 10.00 1.50 *$ 1.00 12.1% ANTC 11.25 12.31 FEB 10.00 2.25 *$ 1.00 9.9% XLA 8.38 9.63 FEB 5.00 3.88 *$ 0.50 9.9% CLRS 7.88 8.63 FEB 5.00 3.25 *$ 0.37 8.7% RDRT 7.56 9.50 FEB 5.00 2.88 *$ 0.32 7.4% HOTT 22.13 23.75 FEB 17.50 5.88 *$ 1.25 6.9% SCON 7.13 8.44 FEB 5.00 2.44 *$ 0.31 5.9% ENTU 20.31 17.69 FEB 15.00 6.00 *$ 0.69 5.2% ASTSF 16.31 16.00 FEB 12.50 4.38 *$ 0.57 5.2% CPST 34.19 36.06 FEB 25.00 10.50 *$ 1.31 4.9% MCCC 20.00 18.50 FEB 17.50 3.25 *$ 0.75 4.9% BKHM 22.56 17.00 FEB 17.50 6.13 $ 0.57 3.8% ATHM 8.72 6.47 FEB 7.50 2.00 $ -0.25 0.0% *$ = Stock price is above the sold striking price. Comments: Read-Rite (NASDAQ:RDRT) came through with great earnings - maybe just buying a few call options would've been best. ASE Test Limited's (NASDAQ:ASTSF) move on Friday is a bit worrisome - a close watch next week is in order as a test towards the 50 dma could unfold. It remains to be seen if Bookham Technology (NASDAQ:BKHM) and At Home Corp. (NASDAQ:ATHM) will survive after warning this week. Bookham expects to show a greater loss than previously expected mostly due to acquisition costs when it reports in February. ATHM, which on Thursday reported earnings in-line with estimates, warned of higher than expected losses next quarter. Are these a couple of early exit candidates? NEW PICKS ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return FNSR 36.38 FEB 30.00 FQY BF 7.50 287 28.88 21 5.6% GEN 11.00 FEB 10.00 GEN BB 1.31 51 9.69 21 4.6% ISLD 6.13 FEB 5.00 SUH BA 1.50 1947 4.63 21 11.6% ONNN 8.00 FEB 7.50 NMQ BU 1.56 1150 6.44 21 23.8% PGNX 27.38 FEB 20.00 GUB BD 8.13 14 19.25 21 5.6% SFAM 8.63 FEB 7.50 FQF BU 1.88 129 6.75 21 16.1% VPHM 22.13 FEB 17.50 HPU BW 5.38 105 16.75 21 6.5% Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ONNN 8.00 FEB 7.50 NMQ BU 1.56 1150 6.44 21 23.8% SFAM 8.63 FEB 7.50 FQF BU 1.88 129 6.75 21 16.1% ISLD 6.13 FEB 5.00 SUH BA 1.50 1947 4.63 21 11.6% VPHM 22.13 FEB 17.50 HPU BW 5.38 105 16.75 21 6.5% FNSR 36.38 FEB 30.00 FQY BF 7.50 287 28.88 21 5.6% PGNX 27.38 FEB 20.00 GUB BD 8.13 14 19.25 21 5.6% GEN 11.00 FEB 10.00 GEN BB 1.31 51 9.69 21 4.6% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** FNSR - Finisar $36.38 *** Earnings Rally *** Finisar (NASDAQ:FNSR) is a provider of fiber optic subsystems and network performance test systems that enable high-speed communications over Gigabit Ethernet LANs and Fibre Channel based storage area networks (SANs). FNSR's optical subsystems convert electrical signals into optical signals (light pulses) for high speed, reliable transmission over fiber optic lines. The company sells its optical subsystems to manufacturers of networking and storage equipment that in turn develop and market systems based on Gigabit Ethernet and Fibre Channel technology. In November, Finisar beat analysts' expectations and now it appears investors believe a repeat performance will occur. Finisar reports earnings February 20, the week after February options expire. Two potentially profitable fiber-optic products in the pipeline, Transviewer and Opticity, and the company's recent acquisitions should bode well for the future. FEB 30.00 FQY BF LB=7.50 OI=287 CB=28.88 DE=21 MR=5.6% /charts/jan01/charts.asp?symbol=FNSR ***** GEN - GenRad $11.00 *** Stage I *** GenRad (NYSE:GEN) develops, manufactures and markets advanced performance-assurance technologies. GenRad has four business units, bringing to market integrated hardware, software and service solutions that empower always-on services and business applications. Last week, GenRad's public relations service went into overdrive as the company announced several partnerships and the introduction of several new services and products. This week the company announced some new service awards and investors appear to be pleased as stock has moved higher on heavy volume. The company anticipates a revenue growth of 10% to 30% for 2001. We favor the Stage I base and improving technical signals. FEB 10.00 GEN BB LB=1.31 OI=51 CB=9.69 DE=21 MR=4.6% /charts/jan01/charts.asp?symbol=GEN ***** ISLD - Digital Island $6.13 *** Cheap Speculation! *** Digital Island (NASDAQ:ISLD) is the leading provider of managed Internet infrastructure for enterprises that need to give their customers a great Web experience in order to drive e-Business transactions. The company integrates managed hosting, content delivery and network services to bypass Internet congestion and guarantee fast and relevant interactions. Is Digital Island putting in a technical bottom? Will the company's earnings report (due Wednesday) please Wall Street? Is there still a possibility the company will be bought out for $15-$20 a share? These are questions to answer - for our more speculative investors. FEB 5.00 SUH BA LB=1.50 OI=1947 CB=4.63 DE=21 MR=11.6% /charts/jan01/charts.asp?symbol=ISLD ***** ONNN - ON Semiconductor $8.00 *** Bottom Fishing *** ON Semiconductor (NASDAQ:ONNN) is a global supplier of high- performance broadband and power management integrated circuits and standard semiconductors used in numerous advanced devices ranging from high-speed fiber optic networking equipment to the precise power management functions in today's advanced portable electronics. In December, ON warned that sales for the their 4th-quarter are expected to be lower as they are experiencing the same softness in the computing, communications and consumer markets that has emerged throughout the sector. With the bad news now priced-in, investors appear to be looking past the near-term as the stock has exited a Stage IV downtrend. A reasonable cost basis for those investors who retain a bullish outlook on the company and believe Wednesday's earnings report will be void of any negative surprises. FEB 7.50 NMQ BU LB=1.56 OI=1150 CB=6.44 DE=21 MR=23.8% /charts/jan01/charts.asp?symbol=ONNN ***** PGNX - Progenics Pharma $27.38 *** New Drug Speculation *** Progenics Pharmaceuticals (NASDAQ:PGNX)is a biopharmaceutical company focusing on the development and commercialization of products for the treatment and prevention of cancer, viral, and other life-threatening diseases. The Company's lead HIV product, PRO 542, has completed two Phase I/II clinical trials, and two follow-on HIV products, PRO 367 and PRO 140, are preparing to commence Phase I/II trials. The Company's most advanced product, GMK, is a cancer vaccine in pivotal Phase III clinical trials for the treatment of malignant melanoma. Progenics is also prepared to commence Phase II trials with a second cancer vaccine, MGV, with broad application to a variety of cancers. On Wednesday, Progenics published favorable results for this MGV vaccine: the production of antibodies to both components of MGV without significant toxicity. A reasonable cost basis from which to speculate on the Progenics drug pipeline. FEB 20.00 GUB BD LB=8.13 OI=14 CB=19.25 DE=21 MR=5.6% /charts/jan01/charts.asp?symbol=PGNX ***** SFAM - SpeedFam-IPEC $8.63 *** Post-Earnings Rally *** SpeedFam-IPEC (NASDAQ:SFAM) is a pioneer and innovator in the manufacture of chemical mechanical planarization (CMP) systems used in the fabrication of next-generation semiconductor devices, with the world's largest installed base. The company also markets and distributes parts used in CMP and precision surface processing. SpeedFam reported 2nd-quarter earnings in December showing revenue up 49% to $82.9 million. With the company expecting to begin shipping its revolutionary Momentum(TM) CMP system this quarter, SpeedFam is achieving results that are better than they had originally forecast. The stock has rallied strongly off its December low and is on the verge of moving above the November high. In other words, the downtrend has ended and the basing phase has begun. FEB 7.50 FQF BU LB=1.88 OI=129 CB=6.75 DE=21 MR=16.1% /charts/jan01/charts.asp?symbol=SFAM ***** VPHM - ViroPharma $22.13 *** Trading Range *** ViroPharma (NASDAQ:VPHM) is a pharmaceutical company engaged in the discovery and development of new antiviral medicines for the treatment of diseases caused by RNA viruses including: viral respiratory infection (VRI); viral meningitis; hepatitis C; and respiratory syncytial virus (RSV) diseases. The company has recently completed enrollment in their ongoing VRI Phase III studies, and expects to announce results in April. Pending favorable results, the company expects to file for a NDA later this year. The company has been in a Stage I base for about a year and technicals suggest the current trend will continue. A favorable short-term profit at the risking of owning ViroPharma at a price near long-term technical support. FEB 17.50 HPU BW LB=5.38 OI=105 CB=16.75 DE=21 MR=6.5% /charts/jan01/charts.asp?symbol=VPHM ***** ***************** SUPPLEMENTAL COVERED CALLS ***************** The following group of issues is a list of additional 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 and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return SBL 46.44 FEB 45.00 SBL BI 3.75 496 42.69 21 7.8% VARI 41.13 FEB 35.00 IUA BG 7.75 19 33.38 21 7.0% VECO 57.50 FEB 45.00 QVC BI 14.50 45 43.00 21 6.7% GNSS 17.00 FEB 15.00 QFE BC 2.50 354 14.50 21 5.0% RDRT 9.50 FEB 7.50 RDQ BU 2.25 6833 7.25 21 5.0% PRIA 30.19 FEB 25.00 UXQ BE 6.00 552 24.19 21 4.8% ************************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=1490 ************************************************************** *********************** CONSERVATIVE NAKED PUTS *********************** Option Trading Mechanics: Spin-offs and Stock Splits By Ray Cummins Our recent position in Sorrento Networks (NASDAQ:FIBR) provoked an inquiry about the conflicting option symbols for that issue. The different series are the results of a common practice in the market; a spin-off of common stock for a new company. The question was, "Why are there two separate option symbols for Sorrento Networks, and what happens to the original strike price after there is a spin-off?" In the case of FIBR, the new option series was initiated after the company announced the spin-off of communications equipment maker Entrada Networks (NASDAQ:ESAN). Under the terms of the transaction, each shareholder of Sorrento common stock received 0.25 shares of ESAN for each share of FIBR held on the date of record, November 20, 2000. Thus, an investor with 1000 shares of FIBR received 250 shares of ESAN and the two option series reflect the adjusted basis; one includes ESAN stock, one does not. With regard to the new option (strike) prices, the concept is that the value of the underlying prior to a spin-off will equal the value of the underlying after the spin-off. For example, you own FEB-$15 call options before the spin-off, the underlying component of your option will be adjusted to include 100 of the original shares plus 25 shares in ESAN, and you can sell the position with the knowledge that your underlying interest has been maintained. After the shares are issued, an adjustment to the original series is initiated, and those options generally trade with a new ticker symbol; to indicate the change in basis. Occasionally, new symbols may be added (after the ex-date) that are identical to the series that traded prior to the adjustment. These option contracts do not include the shares of the spin-off company, thus it is important to make sure that when you close a position established before the new shares were issues, you use the correct option series symbols. Normally, when a company makes an announcement concerning a stock split or spin-off, the option exchange (CBOE, AMEX, or PHLX etc.) will publish an explanation of how the current class and series will be adjusted to account for the distribution of new shares. Since every transaction of this nature has its own unique aspects, it is important to understand the effects on the current options before you initiate a position. An important note for option traders: The next phase of decimalization is approaching. On January 29, the remaining exchange-listed securities, all exchange-traded funds, index notes, trust preferred securities, and PHLX index options will begin trading in decimals. The underlying options for securities in this phase will also trade in decimal format. For options, premiums for these securities equal to or greater than $3 will be priced in ten-cent increments, and premiums less than $3 will be priced in five-cent increments. Trading should be fully decimalized by April 2001. Good Luck! *** WARNING *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return FIBR 26.38 26.00 FEB 17.50 0.69 *$ 0.69 12.6% JNIC 29.00 21.63 FEB 17.50 0.75 *$ 0.75 12.4% RATL 47.88 50.38 FEB 35.00 1.25 *$ 1.25 10.3% TVLY 20.69 20.88 FEB 15.00 0.38 *$ 0.38 9.1% SMTC 27.75 27.06 FEB 17.50 0.63 *$ 0.63 9.1% GMST 52.69 52.69 FEB 35.00 1.19 *$ 1.19 9.1% PLUG 19.94 25.06 FEB 12.50 0.44 *$ 0.44 8.9% ISSI 17.75 18.13 FEB 12.50 0.38 *$ 0.38 8.7% PPRO 22.31 25.50 FEB 12.50 0.38 *$ 0.38 8.5% MFNX 18.69 16.06 FEB 12.50 0.38 *$ 0.38 8.3% AVCI 37.13 31.25 FEB 20.00 0.69 *$ 0.69 7.6% BMCS 32.13 29.19 FEB 22.50 0.44 *$ 0.44 7.0% EXFO 50.44 42.69 FEB 30.00 0.69 *$ 0.69 7.0% MU 46.44 43.94 FEB 35.00 0.56 *$ 0.56 6.2% *$ = Stock price is above the sold striking price. Comments: JNI Corp. (NASDAQ:JNIC) looks worrisome with a post-earnings drop. A violation of the early January low should mark this candidate for an early exit. Many of the above candidates are consolidating after recent gains yet still appear to be in a bullish phase. Excessive pullbacks should raise a warning flag, especially if a key support area is violated. NEW PICKS ********* Sequenced by Company ***** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ARTG 34.50 FEB 25.00 AYQ NE 0.69 59 24.31 21 13.2% EXPE 16.25 FEB 12.50 UED NV 0.31 0 12.19 21 12.6% GLGC 23.88 FEB 17.50 CYV NW 0.31 78 17.19 21 8.8% PRIA 30.19 FEB 22.50 UXQ NX 0.38 442 22.12 21 8.6% SPCT 21.94 FEB 17.50 QCS NW 0.38 45 17.12 21 11.5% TER 39.56 FEB 32.50 TER NZ 0.56 713 31.94 21 8.7% VECO 57.50 FEB 30.00 QVC NF 0.56 110 29.44 21 6.7% Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ARTG 34.50 FEB 25.00 AYQ NE 0.69 59 24.31 21 13.2% EXPE 16.25 FEB 12.50 UED NV 0.31 0 12.19 21 12.6% SPCT 21.94 FEB 17.50 QCS NW 0.38 45 17.12 21 11.5% GLGC 23.88 FEB 17.50 CYV NW 0.31 78 17.19 21 8.8% TER 39.56 FEB 32.50 TER NZ 0.56 713 31.94 21 8.7% PRIA 30.19 FEB 22.50 UXQ NX 0.38 442 22.12 21 8.6% VECO 57.50 FEB 30.00 QVC NF 0.56 110 29.44 21 6.7% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ARTG - Art Technology Group $34.50 *** Great Earnings! *** Art Technology Group (NASDAQ:ARTG) offers an integrated suite of Internet customer relationship management and e-commerce software applications, as well as related application development, integration and support services. The company's solution enables businesses to manage and build online customer relationships and to market and support products and services over the Internet more effectively. The company's Dynamo product suite includes an application server that is specifically designed to enable and support Web applications, as well as e-commerce and other customer management applications. ARTG soared after reporting higher than expected earnings last week, and Deutsche Banc Alex. Brown analyst Tim Dolan raised his earnings outlook on the company for the next two years. The positive outlook is based on a belief that ARTG's momentum is strong, with top-notch technology that positions the company favorably with respect to its larger peers. We like the bullish change in character and the chance to own the issue at a discount. FEB 25.00 AYQ NE LB=0.69 OI=59 CB=24.31 DE=21 MR=13.2% /charts/jan01/charts.asp?symbol=ARTG ***** EXPE - Expedia $16.25 *** Earnings Play! *** Expedia (NASDAQ:EXPE) is a leading provider of branded online travel services for leisure and small business travelers. The company operates its own website, located at Expedia.com, with localized versions in the United Kingdom, Germany and Canada. The company also operates Travelscape.com, LVRS.com, VacationSpot.com and Rent-a-Holiday.com, and a Travelscape/LVRS sales call-center in Las Vegas. The company offers one-stop travel shopping and reservation services, providing reliable, real-time access to schedule, pricing and availability information for 450 airlines, 65,000 lodging properties, and all major car rental companies. Expedia rallied in the wake of Travelocity's excellent earnings and traders are now waiting for the report from Expedia. If you think that earnings will be favorable, speculate on the outcome with this conservative position. FEB 12.50 UED NV LB=0.31 OI=0 CB=12.19 DE=21 MR=12.6% /charts/jan01/charts.asp?symbol=EXPE ***** GLGC - Gene Logic $23.88 *** Stage I Base *** Gene Logic (NASDAQ:GLGC) provides products and services in the areas of gene expression information, data management and bio-informatic software, and pharma-cogenomics. These products and services are all designed to improve the efficiency and effectiveness of the drug discovery and development process. They may also be applied to research and development in other sectors, such as diagnostics, animal health, and agriculture. The company's information products combine software tools with large-scale gene expression information, which specifies the degree to which genes are active in a broad range of normal, diseased, and treated conditions. This combination enables scientists to produce new biological knowledge by integrating this proprietary expression information with a growing array of biological information available on the Internet. Gene-Logic has moved back into a comfortable trading range near $20-$22 and it appears that a cost basis near $17 offers a high probability of risk versus reward. FEB 17.50 CYV NW LB=0.31 OI=78 CB=17.19 DE=21 MR=8.8% /charts/jan01/charts.asp?symbol=GLGC ***** PRIA - PRI Automation $30.19 *** Technicals Only *** PRIA (NASDAQ:PRIA) supplies automation systems for semiconductor manufacturers and OEMs whose mission is to improve productivity in semiconductor manufacturing. The company offers a broad range of integrated solutions consisting of factory automation hardware and software that optimize the flow of materials and data through the semiconductor fabrication facility. PRIA provides automation services including equipment layout & design; simulation; project management; installation; and, on-site support. PRIA reported excellent earnings last week and the issue was promptly upgraded by a number of analysts including Robertson Stephens and CIBC World Markets. We favor the improving technical signals as the stock moves out of a Stage I base. FEB 22.50 UXQ NX LB=0.38 OI=442 CB=22.12 DE=21 MR=8.6% /charts/jan01/charts.asp?symbol=PRIA ***** SPCT - Spectrian $21.94 *** On The Move! *** Spectrian (NASDAQ:SPCT) is engaged in the design, manufacture and sale of high-power radio frequency amplifiers and semiconductor devices, through its division that operates under the trade name UltraRF, for the global wireless communications industry. Their power amplifiers are utilized as part of the infrastructure for both wireless voice and data networks. The company's amplifiers boost the power of a signal so that it can reach a wireless phone or other device within a designated geography. Spectrian reported record revenues last week and investors showed their appreciation, driving the issue to recent highs. Spectrian achieved the results by doubling their multi-carrier amplifier sales from the previous quarter and the future outlook for sales in that product segment is excellent. A cost basis near $15 appears to be a relatively safe entry point in the issue. FEB 17.50 QCS NW LB=0.38 OI=45 CB=17.12 DE=21 MR=11.5% /charts/jan01/charts.asp?symbol=SPCT ***** TER - Teradyne $39.56 *** Own This One! *** Teradyne (NYSE:TER) is a leading manufacturer of automatic test equipment and other related software for the electronics and communications industries. Their products include systems to test semiconductors, circuit boards, telephone lines and networks, and software. Teradyne also is a leading manufacturer of back-planes and associated connectors used in electronic systems. As with all the semiconductor issues, Teradyne recently reported weak earnings and lowered their revenue estimates for the upcoming quarter. An analyst from Lehman Brothers said the current slowdown in business will remain for the next few months but has the potential for a sharp rebound later in the year. Apparently, the news has already been priced into the issue as the report has little affect on TER's share value. If want to own a solid company in the chip-equipment segment, Teradyne may be the stock for you. FEB 32.50 TER NZ LB=0.56 OI=713 CB=31.94 DE=21 MR=8.7% /charts/jan01/charts.asp?symbol=TER ***** VECO - Veeco Instruments $57.50 *** On The Rebound? *** Veeco Instruments (NASDAQ:VECO) 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 create a wide range of information age products for today and tomorrow, such as personal computers, network servers, fiber optic networks, digital cameras, TV set-top boxes and personal digital assistants. Veeco offers two principal product lines: Metrology and Process Equipment. A subsidiary of the company, CVC provides cluster tool manufacturing equipment for the production of evolving tape and disk drive head fabrication, optical components, passive components, MRAM, bump metallization, and next generation logic devices. Veeco shares rallied earlier in the month after the company said its fourth-quarter orders topped expectations. Now the question is what affect the orders will have on the company's earnings, due in mid-February. FEB 30.00 QVC NF LB=0.56 OI=110 CB=29.44 DE=21 MR=6.7% /charts/jan01/charts.asp?symbol=VECO ***** ***************** SUPPLEMENTAL NAKED PUTS ***************** The following group of issues is a list of additional 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 and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return PPRO 25.50 FEB 17.50 PXZ NW 0.56 422 16.94 21 14.3% GSPN 40.69 FEB 30.00 GLQ NF 0.81 518 29.19 21 13.1% AZPN 39.75 FEB 35.00 ZQP NG 0.75 20 34.25 21 9.1% AEOS 50.81 FEB 40.00 AQU NH 0.50 207 39.50 21 6.8% FLEX 39.00 FEB 30.00 QFL NF 0.38 392 29.62 21 6.7% GMST 52.69 FEB 35.00 QLF NG 0.44 443 34.56 21 5.8% *************************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=1480 ************************************************************ ************************ SPREADS/STRADDLES/COMBOS ************************ A Cautiously Optimistic Outlook For Stocks... Friday, January 26 Investors participated in the market with little enthusiasm today, unwilling to make any large bets ahead of the upcoming Federal Reserve policy meeting. The NASDAQ recorded a small gain, ending 27 points higher at 2,781 while the Dow ended down 69 points at 10,659. The S&P 500 index ended relatively unchanged at 1,354. Trading volume on the NYSE reached 1.08 billion shares, with losers beating winners 1,440 to 1,397. Volume on the Nasdaq was moderate at 2.27 billion shares exchanged, with declines beating advances 1,899 to 1,880. In the bond market, the U.S. 30-year Treasury fell 24/32, pushing its yield up to 5.64%. Thursday's new plays (positions/opening prices/strategy): Atlantic Air (NYSE:ACAI) FEB35P/40P $1.00 credit bull-put Aflac (NYSE:AFL) FEB75C/70C $0.50 credit bear-call HSBC Corp. (NYSE:HBC) FEB70P/75P $0.75 credit bull-put Atlantic Coast Airlines dropped over $2 at the open and continued lower for the first hour of trading. The move provided a great entry premium (as high as $1.12) for traders who are bullish on the issue. Aflac and HSBC Holdings were less volatile, but both positions provided reasonable entry opportunities. Portfolio Plays: The market traded in a small range today, with uncertainty over the FOMC meeting preventing any substantial movement. Traders say that stocks have factored in a rate cut of 50 basis points, but some analysts are worried that a smaller reduction will be the decision levied at next week's meeting. The anxiety led to a sell-off in broad market issues and the NASDAQ was unable to make any headway in the wake of the unexpected revenue warning from PMC-Sierra (NASDAQ:PMCS). Shares of the chip maker dropped 23% to $74 after the company said it expects quarterly earnings to be well below consensus estimates. On a positive note, JDS Uniphase (NASDAQ:JDSU) ended up almost 10% at $60 after posting a second-quarter profit that beat First Call estimates by $0.02. However, the company also announced that earnings for the next two quarters will be negatively impacted by slowing growth in the industry. Among other segments, networking, biotechnology and software shares were the best performers. On the Dow, United Technologies (NYSE:UTX), Exxon-Mobil (NYSE:XOM), and Minnesota Mining (NYSE:MMM) led the losers while technology bellwethers International Business Machines (NYSE:IBM), Intel (NASDAQ:INTC), and Microsoft (NASDAQ:MSFT) moved higher. Within the broader market groups, bank stocks gained ground while losses were seen in brokerage, paper, chemical, oil service and retail shares. Qualcomm (NASDAQ:QCOM) was the Spreads Portfolio leader, rising over $7 to $81 after reporting a first quarter profit of $0.29 a share, beating the consensus estimate of $0.28. The company also said it will meet second quarter and full year earnings estimates. At the same time, Ericsson (NASDAQ:ERICY), one of our Reader's Request plays, was a big loser, down almost $2 to $11.25 after announcing that earnings per share fell 72% in 2000 over 1999, and that it will no longer manufacture cell phones in-house. Ericsson, the world's third largest maker of mobile phones, also said it would only break even in the first quarter, and cut its forecast for global mobile phone demand in 2001. The news came as a surprise to a number of analysts, who later downgraded the issue. Our calendar spread in April at $15 is in no great danger as the initial debit was only $0.69 and we can make an adjustment with the March options. Another time-selling position, our LEAPS with Covered Calls play on Microsoft (NASDAQ:MSFT) is performing very well. Today the issue rallied $2.25 to a recent high near $64 and the long-term diagonal position (JAN02-$50C/FEB70C) is profitable. Among industrial shares, Household International (NYSE:HI) was one of the few stocks that enjoyed bullish activity and the issue now appears poised for a move to a new high. Our synthetic position at $55 is offering a $1 profit, but we expect the return to increase in the coming sessions. In the small-cap group, Conseco (NYSE:CNC) has exceeded all possible expectations, returning a $5 gain to traders who participated in the synthetic position. Another low-priced stock that continues to recover is Boston Scientific (NYSE:BSX) and our FEB-$15 call option (from this month's diagonal position) is now trading at a 50% profit. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** ATRX - Atrix Laboratories $23.13 *** Onward and Upward! *** Atrix Laboratories (NASDAQ:ATRX) is engaged primarily in the research, development and commercialization of a broad range of medical, dental, and veterinary products based on its proprietary drug delivery systems. With the acquisition of ViroTex, Atrix has a broad-based platform of drug delivery technologies that provides for parenteral, transmucosal and topical drug delivery. These patented technologies have capabilities of delivering small organic molecules, peptides, proteins, vaccines and other natural products. The company currently markets two drug products, two medical device products and two over-the-counter drug products. The company's flagship product, ATRIDOX, is a minimally invasive pharmaceutical treatment for periodontitis that employs the ATRIGEL system containing the antibiotic doxycycline. Atrix is a drug delivery and drug development company with some unique patented technologies. Atrix develops most of their drug products in-house and also partners with large pharmaceutical and biotechnology companies to apply its proprietary technologies to new chemical entities, or to extend the life cycle of existing products. Atrix has strategic alliances with a number of major pharmaceutical companies including Pfizer, Elan, and Novartis. The company recently licensed the North American marketing rights to its Leuprogel products to Sanofi-Synthelabo and they have also received an exclusive option from Tulane University Health Science Center to license human growth hormone releasing peptide-1, a new patented growth promoting compound. While all of these activities are crucial to the company's success, we simply favor the positive fundamental outlook and the bullish technical indications for the issue. With excellent option prices and plenty of time to become profitable, this position offers a great speculation play for traders who participate in time-selling strategies. PLAY (conservative - bullish/calendar spread): BUY CALL MAY-25 OQF-EE OI=10 A=$3.50 SELL CALL FEB-25 OQF-BE OI=7 B=$1.00 INITIAL NET DEBIT TARGET=$2.25-$2.38 TARGET ROI=50% /charts/jan01/charts.asp?symbol=ATRX ****************************************************************** VARI - Varian $41.13 *** On The Rebound! *** Varian (NASDAQ:VAR) develops, manufactures, sells and services a variety of scientific instruments and equipment, including those for studying the chemical composition of substances, nuclear magnetic resonance spectrometers and high vacuum products. The company is also a world leader in providing tools and unique technologies that enable advances in the life sciences, health care, semiconductor processing, and telecommunications industries. Although Varian, is a new company, it has a rich technological heritage dating back more than 50 years. Among other innovations, Varian was the first to commercialize the NMR spectrometer. The VacIon pump, invented by Varian for producing ultra-high vacuum environments, paved the way for important endeavors, including semiconductor manufacturing and space science research. A truly global enterprise, the company manufactures in 13 locations on three continents; operates sales and service offices in North America, Europe, and the Pacific Rim; employs some 4,100 people; and sells to more than 20,000 customers annually. Shares of Varian rallied last week after the company announced quarterly financial results which included strong growth in sales and operating profits. Sales for the first quarter of 2001 were up 20% to $191 million while operating earnings for the quarter grew 44% to $21 million, up from $14 million in the first quarter of fiscal 2000. The company expects to continue accelerating its revenue growth through the introduction of new products aimed at selective markets, and an increasing contribution from sales of consumable laboratory supplies and services. The company also expects to increase operating margin ratios by adjusting their product mix toward higher margin items, adopting a continuous program of sales-force improvement, and working to lower current administrative costs. The company's overall goal is to maintain the financial and operational flexibility to support a long-term growth strategy. Investors appear to support the company's optimistic outlook and traders who are bullish on the issue can speculate on its future performance with this moderately aggressive spread position. PLAY (aggressive - bullish/credit spread): BUY PUT FEB-30 IUA-NF OI=70 A=$0.62 SELL PUT FEB-35 IUA-NG OI=5 B=$1.43 INITIAL NET CREDIT TARGET=$1.00 ROI(max)=25% B/E=$34.00 /charts/jan01/charts.asp?symbol=VARI ****************************************************************** DIGE - Digene $38.38 *** Trading Range! *** Digene (NYSE:DIGE) develops, manufactures and markets proprietary DNA and RNA testing systems for the screening, monitoring and diagnosis of human diseases. The company has developed and is commercializing its patented Hybrid Capture Gene Analysis System and tests in three areas: women's cancers and infectious diseases, blood viruses, and genomics and pharmaceutical research. Digene's lead product, the Hybrid Capture II HPV Test, is currently the only FDA-approved test for the detection of human papillomavirus, which is the cause of greater than 99% of cervical cancer cases. In addition, DIGE has developed and launched tests internationally for the detection and viral load monitoring of major blood viruses, including cytomegalovirus and hepatitis B virus, and tests for the detection of two common sexually transmitted infections, chlamydia and gonorrhea. DIGE is an excellent candidate for option trading strategies that benefit from volatile movement in a limited range. The issue has inflated option prices and a well-defined historical pattern. In this case, we have decided to take advantage of a small premium disparity and initiate a bearish spread. Based on analysis of the underlying stock's technical history, DIGE has a high probability of remaining below the sold (short) strike price and traders who agree with a neutral outlook can use this position to profit from further sideways movement. The company's earnings are due on February 8, 2001. PLAY (conservative - bearish/credit spread): BUY CALL FEB-50 QDG-BJ OI=0 A=$0.31 SELL CALL FEB-45 QDG-BI OI=35 B=$0.81 INITIAL NET CREDIT TARGET=$0.56-$0.62 ROI(max)=14% B/E=$45.62 /charts/jan01/charts.asp?symbol=DIGE ****************************************************************** AES - AES Corporation $58.69 *** Reader's Request! *** The AES Corporation (NYSE:AES) and its subsidiaries are a global power engaged in electricity generation. Their electricity generation business consists of sales to wholesale customers (generally electric utilities, regional electric companies or wholesale commodity markets known as power pools) for further resale to end users. AES also sells electricity directly to end users; commercial, industrial, governmental and residential customers through its distribution business. In its generation business, AES operates and owns (entirely or in part) a diverse portfolio of electric power plants. AES also is currently in the process of constructing new plants. One of our readers asked we could search the utility group for any positions that might benefit from the recent recovery in the sector. While this issue did not suffer from the California energy crisis as much as most companies in the segment, it does appear to have excellent upside potential. Another argument in favor of AES is the possibility for a plant restart in Southern California, as the state tries to overcome its most severe power shortage in history. AES is seeking permission from the State Energy Commission to upgrade and restart units 3 and 4 of its Huntington Beach plant, hopefully in time to meet the peak power load expected in the summer. A decision is expected tomorrow, along with the company's quarterly earnings report. Traders who would like to speculate on the future movement of the issue can do so with this bullish synthetic position. Our opening target for the play will be a small credit of $0.12-$0.25, as we expect some profit-taking before the announcement. PLAY (very speculative - bullish/synthetic position): BUY CALL FEB-65 AES-BM OI=567 A=$0.62 SELL PUT FEB-50 AES-NJ OI=979 B=$0.38 INITIAL NET CREDIT TARGET=$0.12 TARGET ROI=25% Note: Using options, the position is equivalent to being long on the stock. The collateral requirement for the naked put is approximately $1,500 per contract. /charts/jan01/charts.asp?symbol=AES ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** NFB - North Fork Bancorp $24.19 *** Breakout Coming? *** North Fork Bancorp (NYSE:NFB) is a bank holding company. The company's primary subsidiary, North Fork Bank, operates through its full service retail banking facilities in the New York metropolitan area. The company's secondary bank subsidiary, Superior Savings of New England, a savings bank located in the Connecticut county of New Haven, operates from one location where it currently conducts a telebanking operation focused on gathering deposits throughout the New England region. The company, through its primary subsidiary North Fork Bank and its investment management and broker/dealer subsidiaries, Compass Investment Services and Amivest Corporation, provides a variety of banking and financial services to middle market and small business organizations, local governmental units, and retail customers in the New York metropolitan area. North Fork Bancorp meets our fundamental criteria for favorable debit straddle. The stock has cheap option premiums, a history of adequate price movement, and upcoming events (earnings and the FOMC meeting) that may generate future volatility in the issue or its industry. In addition, NFB's current technical pattern (a symmetrical triangle) suggests that a significant change in character may occur in the coming weeks. PLAY (conservative - neutral/debit straddle): BUY CALL MAR-25.00 NFB-CE OI=512 A=$0.75 BUY PUT MAR-25.00 NFB-OE OI=0 A=$1.43 INITIAL NET DEBIT TARGET=$2.00-$2.12 TARGET ROI=20% /charts/jan01/charts.asp?symbol=NFB ***************************************************************** TY - Tri Continental $22.69 *** Probability Play! *** Tri Continental (NYSE:TY) is a diversified closed-end investment management company. Though common stocks make up the bulk of investments, assets may be held in cash or invested in all types of securities, including bonds, debentures, notes, preferred and common stocks, rights and warrants, as well as other securities. The company does not make investments with a view to exercising control or management and does not invest in other investment companies, but it may purchase up to 3% of the voting securities of such investment companies. The company has no fixed policy with respect to portfolio turnover and purchases and sales in the light of economic, market and other investment considerations. Investment plans and other services which are available to investors include the Company's Automatic Dividend Investment and Cash Purchase Plan, Automatic Check Service, Share Keeping Service, Tax-deferred Retirement Plans, Tax-deferred Retirement Plans and Systematic Withdrawal Plan. This position is a speculative offering for new traders who would like to try a debit straddle but don't want to risk much capital. The options are inexpensive and the probability of the position reaching the break-even price is excellent. However, there is very little chance of a large return and while the short-term historical movement suggests plenty of volatility to make the play profitable, there is also the possibility that the issue will return to its past habit of limited, range-bound movement. This position should NOT be initiated for more than the target debit and new traders should consider closing the play if the options fall to 50% of their initial value. The target closing credit will be a very conservative $1.50, to coincide with the current volatility estimate. PLAY (speculative - neutral/debit straddle): BUY CALL MAR-22.25 TY-CV OI=40 A=$0.88 BUY PUT MAR-22.25 TY-OV OI=171 A=$0.38 INITIAL NET DEBIT TARGET=$1.00-1.12 TARGET ROI=30% /charts/jan01/charts.asp?symbol=TY ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. 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