The Option Investor Newsletter Monday 01-29-2001 Copyright 2001, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/012901_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 01-29-2001 High Low Volume Advance/Decline DJIA 10702.20 + 42.20 10725.10 10612.50 1.03 bln 1970/1170 NASDAQ 2838.34 + 57.04 2840.02 2742.50 1.97 bln 2322/1572 S&P 100 711.55 + 2.44 712.56 705.71 totals 4292/2742 S&P 500 1364.17 + 9.22 1365.54 1350.36 61.0%/39.0% RUS 2000 507.91 + 9.23 507.91 498.67 DJ TRANS 3001.33 + 45.14 3012.89 2955.01 VIX 24.93 - 0.21 25.76 24.80 Put/Call Ratio 0.48 ****************************************************************** Enter The Fed For the second time this month, John Chambers, CEO of Cisco Systems (NASDAQ:CSCO), warned of a possible slowdown in business. As a result of Chambers' guidance, Lehman Brothers lowered its revenue estimates and price target on shares of the leading networking gear maker this morning. Chambers attended the World Economic Forum over the weekend, held in Davos, Switzerland, where he made the remarks concerning a possible slowdown in business due to lower cap-ex spending by major telecom carriers. Earlier this month, Chambers presented to analysts at a tech conference and warned in a similar fashion. The cautious comments from Chambers over the weekend were not all that surprising. After all, PMC Sierra (NASDAQ:PMCS), one of Cisco's key suppliers, guided lower during the company's conference call last Thursday evening. So it makes sense that if PMC Sierra is experience a slowdown, its largest customer in Cisco should also be experiencing a slowdown. However, what was surprising in today's trading was the market's recently-acquired ability to shrug off bearish news. Amid the disconcerting tones of Chambers and Lehman Brothers this morning, the broader networking sector as measured by the AMEX Networking Index (NWX.X), was able to shrug off the bears and pair the majority of its earlier losses into the close of trading. In fact, several of Cisco's competitors finished with substantial gains, including shares of CIENA (NASDAQ:CIEN) and Redback Networks (NASDAQ:RBAK). Had Cisco warned a month or two ago, during the peak of the great bear market of 2000, its stock would have been taken apart. However, for shares of Cisco to finish only -$1.13 lower on a day its CEO effectively warned is a testament to the shift in market sentiment and psychology, which has everything to do with the Federal Reserve. Alan Greenspan, and his soldiers at the FOMC, effectively killed the Bear of 2000 with their surprise rate cut earlier this month. And the bulls will turn to Greenspan again this week as the FOMC conveys for its two-day meeting, which begins tomorrow and culminates with an official announcement on interest rates Wednesday afternoon. At this point, a cut in rates is next to guaranteed. What's uncertain, however, is the magnitude of the expected rate cut. The majority of market participants and economists expect the Fed to cut by another 50 basis points. To emphasize that view, the fed funds futures are currently discounting a 90 percent chance of the Fed cutting by 50 basis points. With that said, if the Fed only moves by 25 basis points, I would expect the market to substantially sell-off on disappointment. But that's rather obvious. What's not obvious is how to trade around a 50 basis point cut. Jim is of the belief that if the Fed does cut by 50 basis points the market will pullback on a "sell the news" thesis. Whereupon the dip can be bought. I tend to lean towards Jim's beliefs. However, I do think there exists the possibility of the market substantially rallying on the news of a 50 basis point cut. And I believe that for two reasons. The first reason is that the Fed announcement will take place on the last day of the month - a time when fund managers are particularly cognizant of end-of-the month performance reports. The second reason the market might rally on a 50 basis point cut is because of the large amount of cash sitting on the sidelines and the continued influx of cash into equity mutual funds. And after last year's drubbing, fund managers are very willing to put that cash to work in an attempt to NOT miss any big advance in the broader market averages. In short, if the Fed only cuts by 25 basis points it'll probably be safe to hit some bids or enter some puts for the near-term disappointment reaction. However, if the 50 basis point cut is realized, it's going to be harder to game. And when uncertainty exists, the only thing any trader should employ is discipline. And if that means standing aside and waiting for an edge, so be it! But for those unable to stand still (myself included) before the Fed's announcement Wednesday, we should address a few points. The Nasdaq Composite's (COMPX) impressive rebound this morning and subsequent advance above the 2800 level set the tech-heavy index to retest resistance at 2840. That level has been a site of resistance on three occasions in the past two weeks, with today's intraday high of 2840.02 marking the third test. If the COMPX clears 2840 early tomorrow, it might make a run for 2900, especially if the anticipatory Fed-related buying continues. As I've mentioned before, after 2900, it's a clear shot to 3000 for the COMPX. And if the COMPX breaks 2900, some of those fund managers I alluded to earlier may be induced to step in and buy. If the COMPX is going to breakout above 2900 anytime soon, I feel that the Philadelphia Semi Index (SOX.X) will need to cooperate. The SOX.X acted very well in today's session despite the Cisco-related ramifications. The chip index has been consolidating for about two weeks, after staging a nice run in the first half of the month. The SOX.X has had trouble with resistance between roughly 725 and 735. If the SOX.X can hurdle that range of resistance, it will then have to clear major resistance at 750. And if that happens, the SOX.X should trade up to 800 and carry the COMPX well above 2900. Along with the tech sector, traders might want to take a look at two very interest rate dependent sectors ahead of the FOMC announcement Wednesday. The two sectors I'm think of are the banks and brokers. Both groups of stocks staged a solid performance today, and both are poised to breakout above key resistance levels. Traders might consider zoning in on the S&P Banks Index (BIX.X) tomorrow and Wednesday morning as it approaches resistance at the 680 level. One stock in the group that has been acting well, hence its inclusion on the OI call list, is J.P. Morgan Chase (NYSE:JPM). Like the bank index, the AMEX Securities Broker/Dealer Index (XBD.X) is approaching a key resistance level. Traders might want to pay attention to the XBD.X as it approaches the 650 level. And a stock in this group that has been acting well, hence the inclusion on the OI call list, is Goldman Sachs (NYSE:GS). I'm by no means suggesting to our readers to recklessly enter into any of the sectors or individual issues I've mentioned this evening. My intentions, however, are to give our readers several variables to watch for ahead of the FOMC announcement on Wednesday. Furthermore, the tech and finance sectors typically dictate the direction of the broader market averages. And if traders have a handle on those two sectors the plan of attack should be made much easier. So now that I've given our readers a few metrics to monitor before the Fed announcement, I must reiterate my stance on trading at the actual time of the announcement. When the Fed releases its move in interest rates, liquidity will be very thin, at best! That said, it'll probably be best to stand aside after the initial reaction to the news and wait for the real trend to show itself - whether it be up or down. Looking beyond the Fed announcement this week (it's hard to do that, I know) I see very encouraging signs. The merger and acquisition space is beginning to pick up. Just this morning, Ariba (NASDAQ:ARBA) agreed to pay a hefty premium for Agile Software (NASDAQ:AGIL) - unfortunately and coincidentally, OI was on the wrong side of that announcement. Also, Maxim Integrated (NASDAQ:MXIM) said it would buy Dallas Semiconductor (NASDAQ:DS). There's nothing like a little consolidation to get the tech bulls running! Furthermore, the equity and debt markets have welcomed new issues with open arms. Most recently, Peet's Coffee (NASDAQ: PEET) debuted last week with a warm reception. The stock was offered in the secondary market for $8.13 - it closed at $16.13 today. Not too bad for a coffee maker! Finally, and most importantly, the Fed is on the move. If Greenspan delivers the expected 50 basis point cut this Wednesday and promises subsequent cuts, the broader market averages could be set to rally BIG! Reflecting on the action in Cisco Systems today, it sure is nice to have the Fed back on the bulls' side. Make sure to tune in Tuesday evening to get Jim's take on the tape and how to trade around the Fed's announcement the following day (Wednesday). Eric Utley Assistant 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 ************************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=1468 ************************************************************** ************* NEW CALL PLAY ************* AFFX - Affymetrix Inc. $72.88 +2.88 (+2.88 this week) Affymetrix is a leader in developing and commercializing systems to acquire, analyze and manage complex genetic information in order to improve the quality of life. The company's GeneChip(R) system consists of disposable DNA probe arrays containing gene sequences on a chip, reagents for use with the probe array, a scanner, and other instruments to process the probe arrays and software to manage and analyze genetic information. The company's spotted array system enables individual researchers to create and analyze custom microarrays on an easy-to-use cost efficient platform. The biotech index has been strong for the last several weeks, and genomic companies have helped to lead the charge with their vast array of exciting new products in development. Last week, a bellwether biotech stock Amgen won a key patent infringement lawsuit against a competitor, which was interpreted as a significant victory for the industry. On Thursday, Affymetrix won a significant court victory of its own, and since then, has cleared a key technical hurdle. On January 25, the U.S District Court for the Northern District of California issued a Markman ruling confirming the broad scope of four U.S. patents that Affymetrix had asserted in litigation against Incyte Genomics, Inc, and Hyseq, Inc. The court accepted Affymetrix' position on four key issues regarding their proprietary arrays containing nucleic acids, and software computer programs which identify a base using hybridization. This news propelled AFFX over a stubborn resistance level at its 50 dma of $64.74 last week. The momentum continued today, and was strong enough to push AFFX above its 200 dma of $68.72, which has eluded the stock since late December. Good earnings and upbeat forecasts from biotech and pharmaceutical bellwethers Elan and Amgen have helped this sector, and will likely help AFFX start a strong earnings run into its own earnings date next Monday Feb. 5. All of the biotech stocks are volatile, so play this one very carefully. Aggressive traders might want to take positions on a pullback to support at $72, if it is accompanied by strength in the biotech index BTK.X. Ideally, we are looking for a break above the next heavy levels of resistance at $74, and $76, which could lead AFFX on a trajectory up to $80. Conservative traders might want to wait for a breakout. Watch others like HGSI, and BGEN for an indication of sector strength, and set stops at $68. BUY CALL FEB-70 FIQ-BN OI=917 at $ 8.38 SL=6.00 BUY CALL FEB-75*FIQ-BV OI=436 at $ 7.13 SL=5.00 BUY CALL MAR-70 FIQ-CN OI= 14 at $12.13 SL=9.00 BUY CALL MAR-75 FIQ-CO OI= 45 at $ 9.88 SL=7.00 http://www.premierinvestor.com/oi/profile.asp?ticker=AFFX PPRO - PurchasePro.com, Inc. $29.31 +3.81 (+3.81 this week) PurchasePro.com is a provider of Internet business-to-business electronic commerce services. The company's e-commerce solution is comprised of public and private communities or "procurement networks," where businesses can buy and sell a range of products and services over the Internet in a competitive and cost-effective manner. PPRO's solution leverages the growth, pervasiveness, low costs and community building nature of the Internet as a unique basis for e-commerce for the broad business-to-business market. So far, this has been a great year for shares of PPRO. Moving back above all its major moving averages this past month, the stock has been breaking through key levels of resistance with support from its 5 and 10-dma. Morgan Stanley recently initiated coverage with an Outperform rating. That along with a string of good news from the company in the form of new product announcements and customer wins has helped the stock to power forward. Today, Lehman Brothers re-iterated their Strong Buy rating on the stock, with a $60 price target, calling the stock at current levels an attractive buying opportunity as they anticipate strong forth quarter results on February 12 when the company reports its earnings. What's more, a deal previously made with AOL has expanded in scope, with higher than expected revenues going forward. With that, PPRO surged almost 15 percent today on over 155% of ADV. Now within striking distance of formidable resistance at $30, a break through this level on volume would allow for an entry on strength and from there, could quickly head to $35. For traders targeting entry points on pullbacks, look for support from the 5 and 10-dma at $26.10 and $23.05 respectively. Horizontal support can also be found at $28.50, $27, and the 100-dma and our stop price of $25. In both cases, use Merrill Lynch's B2B HOLDR (BHH) as a measure of sector strength when making a play. BUY CALL FEB-25 PXZ-BE OI=2214 at $5.88 SL=4.00 BUY CALL FEB-30*PXZ-BF OI=1660 at $2.94 SL=1.50 BUY CALL FEB-35 PPU-BG OI= 375 at $1.25 SL=0.75 BUY CALL MAR-30 PXZ-CF OI= 326 at $5.00 SL=3.00 BUY CALL MAR-35 PPU-CG OI= 10 at $3.13 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=PPRO RIMM - Research In Motion Ltd. $74.50 +2.94 (+2.94 this week) Based in Waterloo, Ontario, Canada, Research In Motion Limited is a leading designer, manufacturer and marketer of innovative wireless solutions for the mobile communications market. Through development and integration of hardware, software and services, RIMM provides solutions for seamless access to time-sensitive information including email, messaging, Internet and intranet-based applications. RIMM technology also enables a broad array of third party developers and manufacturers in North America and around the world to enhance their products and services with wireless connectivity. When fundamental and technical forces converge, this can lead to strong moves in stock price. It is with this in mind that we are initiating coverage on RIMM and adding it to our call play list. The economic environment as a whole appears to be in the process of improving for the company. Following Alan Greenspan's lead, Canada recently cut its interest rates as well, helping equities trading on the Toronto Stock Exchange move higher. On a more company-specific level, RIMM has recently been aggressively expanding its sales channels, helping to greatly boost revenue outlook going forward. A distribution deal with IBM in which Big Blue will sell RIMM's BlackBerry wireless devices and services to its enterprise-level clients was a big win for the company. In the retail space, prominent e-tailer Buy.com announced that it would also offer BlackBerry products on its web site. The technical picture agrees with the fundamental outlook, as the stock broke above its key 200-dma (now sitting at $67), thanks to support from the 5 and 10-dma (at $70.35 and $64.36). Today's gain of over 4 percent resulted in a close above the 50-dma ($72.91) for the first time since last December. For aggressive traders, look for the aforementioned moving averages to serve as support but in buying off a bounce, make sure RIMM closes above our stop price of $68. For a more conservative entry, wait for continued upward momentum to carry the stock past $75.50 on volume, with sector sisters HAND and PALM confirming upward direction. BUY CALL FEB-70 RUL-BN OI=351 at $ 9.75 SL=7.00 BUY CALL FEB-75*RUL-BO OI=740 at $ 7.00 SL=5.00 BUY CALL FEB-80 RUL-BP OI=943 at $ 4.88 SL=3.00 BUY CALL MAR-75 RUL-CO OI=161 at $11.75 SL=9.00 BUY CALL MAR-80 RUL-CP OI=249 at $ 9.50 SL=6.50 SELL PUT FEB-65 RUL-NM OI= 82 at $ 2.88 SL= 5.00 (See risks of selling puts in play legend) http://www.premierinvestor.com/oi/profile.asp?symbol=RIMM ************ NEW PUT PLAY ************ ADBE - Adobe Systems $54.00 -4.06 (-4.06 this week) A long-time leader in desktop publishing software, ADBE provides graphic design, publishing, and imaging software for Web and print production. Offering a line of application software products for creating, distributing, and managing information of all types, the company generates nearly 75% of sales through publishing software products such as Photoshop, Illustrator, and PageMaker. Its Acrobat Reader, which uses portable document format (PDF) is popping up all over the Internet, as businesses shift from print to digital communications. In addition, ADBE licenses its industry standard technologies to major hardware manufacturers, software developers, and service providers, as well as offering integrated software solutions to businesses of all sizes. A long ways south of its November highs north of $87, ADBE finally succumbed to the incessant selling pressure in the Technology sector in general, and Software stocks specifically. While it looks like we may have a bottom in place on the NASDAQ, that doesn't mean a retest of the lows is out of the question, and the same follows for our new play, which could fall another $10 before finding bottom. Despite a strong fourth quarter, which was followed by analyst upgrades, shares of the software company have been under pressure ever since. After struggling to keep its head above the 200-dma (then at $64), ADBE fell as low as $44 before finding any help from buyers. While the stock benefited from the recent NASDAQ recovery, that buoyancy seems to have disappeared, and left on its own, ADBE seems destined to slide downhill for a bit. The enemies arrayed against ADBE are legion, with solid resistance at $60 appearing like a brick wall. Additionally, we have the descending 30-dma ($57.25), daily stochastics rolling over from the overbought zone, and coupled with today's 7% loss on heavy volume, ADBE looks like it is headed further south. We want to play the downward trend while it lasts, so we are putting a tight stop at $58. Any intraday bounces that fail to take this level out look attractive for new entries, while more conservative players will want to jump into the play as the stock falls below $53, just below today's low. BUY PUT FEB-55*AXX-NK OI=1416 at $4.88 SL=3.00 BUY PUT FEB-50 AEQ-NJ OI=2853 at $2.69 SL=1.25 BUY PUT FEB-45 AEQ-NI OI=1889 at $1.44 SL=0.75 http://www.premierinvestor.com/oi/profile.asp?ticker=ADBE ***************** STOP-LOSS UPDATES ***************** BBY - call play Adjust from $45 up to $46 CPN - call play Adjust from $39 up to $40 RATL - call play Adjust from $48 up to $50 BGEN - call play Adjust from $64 up to $65 ************* DROPPED CALLS ************* HAL $39.90 -0.85 (-0.85) HAL's chart almost mirrored that of the OIX.X over the last two days. Halliburton is maintaining the slow upward trend which started early in December, but was unable to penetrate very heavy resistance at the 200 dma of $41.81. While a breakout may occur in the near-term future, Halliburton is scheduled to release earnings after the close on January 30th, and so we are dropping it tonight as we don't recommend holding over earnings. ARBA $38.38 -1.63 (-1.63) Shares of Ariba fell today when the company announced that it would acquire AGIL for about $2.5 billion in a stock deal. Paying a hefty premium of over 25 percent, ARBA gapped down at the open, and while the stock spent the remainder of the day heading higher, analysts are concerned with the price being paid. Piercing our stop price of $38 intra-day, ARBA managed to make it back above that level before the end of the day, but with the uncertainty surrounding this deal, we are going to lean on the side of caution drop coverage on ARBA tonight. PFE $43.30 -1.01 (-1.01) As has been the pattern lately, every time we jump into a trend, that nasty sector rotation jumps up to foil our plans. As Techs began to weaken and the Drug sector came back to life, PFE put together a nice move, clearing the 200-dma last Thursday. Well, Friday's gap up kept us from playing and turned out to be the last positive move for the stock, as the sector rotation took effect. Techs seem to be back in favor, so that cash is flowing back out of defensive stocks like PFE. Although our $43 stop has yet to be violated, it looks like all but certain to happen tomorrow, so we'll say goodbye to PFE tonight. ************ DROPPED PUTS ************ AGIL $50.38 +7.56 (+7.56) News that Agile Software would be acquired by B2B giant Ariba was music to the ears of shareholders. Under the terms of the deal, each share of AGIL would be exchanged for 1.35 of ARBA stock, a premium of roughly 26 percent. This resulted in a gap above our stop price of $44 at the open and from there the stock broke through 50-dma resistance at $49.29 and then the psychological $50 barrier. Now with less than $1.50 arbitrage spread between the two stocks, AGIL's stock should now closely track ARBA's. Based on the uncertainty of the deal and ARBA's languishing stock price, we are dropping coverage of this play. ******************************************** Do you like OptionInvestor? Then vote for us as a favorite site: http://www.investorlinks.com/vote.html Thanks for your support! ******************************************** ************** TRADERS CORNER ************** Proper Account Allotment By Austin Passamonte We've covered the topic of strategic account management in depth here recently but perhaps missed an important step before that. How we divide and apply our total balance is certainly square one. Let's explore some ideas from here with a book report at the end (fast forward for those who get bored). Option trading attracts a wide range of personalities but one core group comprises the bulk: People with small amounts of capital and equally large dreams. The massive leverage and quantified risk option trading offers appeals to this group who have little money and are anxious to make it big. Count me in as one of those for sure. Exacerbating this quandary is shameless hype spread by those with interest of self-promotion. Promise of easy riches and high odds to get there have lured more new traders to their fiscal death than all other factors combined. Once this seed of low risk (fear of loss) and vast reward (greed of gain) is planted in a trader's sub-conscious it's all but impossible to verbally dislodge. Of course we've heard all the caveats and warnings from our family, friends, SEC and the people we care most about, option website writers. We don't even bother to read all that SEC mumbo- jumbo cluttered between signature lines when opening our new trading account. Enough of such negativity... that's for other people. I'm destined to be rich! A four-color flyer arrives by bulk mail touting its "super-secret system" that never loses trading options. An automatic ticket to fiscal success. I'll sure look good sitting in my own foreign convertible sports car parked in front of my new lavish mansion. Won't my in-laws be jealous? They've had it coming for a long time anyway. This is going to be easy... I've dreamed of it so long... it must be real... I need it to be real! Believe me, words of warning exist for a reason. Statistical odds alone for any trader's success are impossible to overcome. I firmly believe that all traders who have a financial account must divide it into an ideal ratio for long-term survival and growth through all market conditions. It should be heavily skewed to option investing with a small percentage used for option speculating. 100% of capital account should be divided as suggested: 70-80% in covered-calls/credit spreads 10-20% in buy & hold option strategies 10% or less in short-term buy & hold Now that I've alienated many small-capped traders and most type-A gamblers, let's rationalize with facts from here. Experience in the marketplace is the only thing that will shake new traders low on cash/high on dreams in a hurry for wealth to reality. This was a delayed event from late 1998 until early 2000 when a vast number of small accounts ratcheted huge returns. Count me amongst the bunch. I ran several accounts from $5,000 into much, much more. This allowed paying off massive debt and spoiling with material goods as well. Hey, this game is easy. Just one big cash machine that never ends. Know anyone who felt the same way? Know anyone who since learned otherwise? Does this mean option trading is pure folly or impossible to succeed at today? Certainly not! Just understand and manage the risk/reward first. Critical mass is a natural law. Once a body reaches certain size, survival hits the apex of likelihood on its bell-curve. This applies to everything under the sun, trading accounts included. We'll consider any account below $10,000 as small. An account below $2,000 has almost no chance of long-term success buying options long, in my opinion. I realize there are brokers who open accounts for anyone with $500 and a fogged mirror in hand but that doesn't mean they have a good chance for long-term success. Small accounts are in grave danger of going bust no matter what. Cost of doing business (commissions, slippage on stop-loss fills) is a significant drain. Buying one single option contract means we pay full commission price that eats into overall yield. Larger accounts can afford several contracts to average down commission cost versus overall profit/loss return. This means that a small account will struggle to post profits above & beyond operational costs. $10,000 and more give greater leverage to compound wins above the rate of operational cost. Secondly, small accounts must have favorable chance (luck) on their side as well. An early string of wins is necessary with an early string of losses debilitating indeed. No way to tell which will come first with foresight at the time of trade entries. Small accounts can grow over time to impressive size but it takes much longer than larger ones in relation. For example, we will open a $5,000 cash account within IndexSkybox and swing trade the QQQ, OEX and eventually the SPX as size permits. My preference was to start with $10,000 as a minimum balance for success. A number of readers requested we use less, which confirms what was already suspected of high-risk option trader's profile. I hoped to begin with $10,000 and target $100,000 by year's end. This was not a figure based on irresponsible hype; numerous past performance factors were used to determine what might be possible on the highest end. It would take favorable conditions to achieve, especially early on and may not be possible in such a brief time frame. The hardest part would be going from $10,000 to $50,000. Doubling that would be far easier indeed. It will be much tougher to take $5,000 and attempt $50,000 as a goal in the same span. From $5,000 to $25,000 will be a yeoman's effort when trying to overcome a poor trade cost/return leverage multiplier. Bell-curve analysis would tell us it takes much longer to multiply $5,000 account up 1,000% than it would a $10,000 or larger account. How long? Who knows! We'll have fun trying in full view of everyone and hope to demonstrate valuable trading lessons in the process. Whether we reach our lofty goals, run this account into the ground or settle somewhere in the middle, it promises to teach us more than countless words alone could. Traders with large accounts ($100,000 or more) are properly positioned for option investing with almost certain odds for success. Key word being investing. A 90/10 division of funds allocated in the following manner provides a semblance of expected rewards: $10,000 (10%) used for high-risk trades. $90,000 (90%) used for option investing. Covered calls or credit spreads with quantified risk... no naked shorts with massive downside risk! We will assume a blended 5% monthly return on capital compounded for simple math to illustrate a point: Month Balance 5% Return -------------------------- Jan $90,000 $4,500 Feb $94,500 $4,725 Mar $99,225 $4,961 Apr $104,186 $5,209 May $109,395 $5,469 Jun $114,864 $5,743 Jul $120,607 $6,030 Aug $126,637 $6,331 Sep $132,968 $6,648 Oct $139,616 $6,980 Nov $146,596 $7,329 Dec $153,925 $7,696 -------------------------- Total: $161,621 $71,621 Other: $ 10,000 $ X-value return I don't mean to project income here. Please don't expect to take $90,000 and duplicate these results exactly. We might do better or worse in live action. I would expect a 7% monthly return 10 out of 12 months with the other two months ending flat. Your risk/reward parameters would dictate personalized results. Here's the point: If you enjoyed any similar return like this on 90% of your account, would it really matter if the other 10% languished or soared? While loss is never painless it can be muted when placed in perspective. Year two finds us with $160,000 in our option investing account and X-value in the high-risk. We can subtract $10,000 and add it to the high-risk balance (value-X), and compound $150,000 safely in the same manner we did before. Does that make fiscal sense? The problem is not option trading. The problem is option traders. Too many of us aren't satisfied earning $70,000 annual returns on a $90,000 capital nest-egg while using the remaining $10,000 to speculate wildly. Nope, that just won't do. Takes too long to reach a million like that (six years?) so we better risk the entire $100,000 and swing-trade that to make our million by this summer. Maybe, maybe not will be the result but allure of massive gain calls like a siren's song to those who've won a few big trades with small amounts of capital. Newsletter editors get plenty of email. As editor of IndexSkybox I enjoyed hundreds and hundreds of letters from ecstatic traders who multiplied their speculative accounts greatly the last four months of 2000. Some were ready to name their next-born child after me (or Wendy... better idea as she is gorgeous and I ain't) in gratitude. Then January came along to knock me around a bit and others as well. A bit of recent mail has been filled with names, but none fit for children. I can't speak for Jim or the excellent editors here at OI, but I get two diverse streams of feedback. One from patient new and veteran traders who invest most of their accounts into steady, methodical methods such as covered calls and/or credit spreads. They don't like to endure losing streaks in their speculative accounts any more than the next person, but it's merely a nuisance in the overall scheme of things. The second stream of mail comes from people just like I was for so very, very long: high-risk gamblers with low tolerance for loss. Much, most or all of these trading accounts are applied in speculative methods and emotions swing wildly as account balances do. Whether $2,000 or $200,000 no trader ever wants to suffer one penny's draw down from the apex. One of human nature's core emotions is fear of loss. We naturally hate to lose, and it is painful. If our entire account is at risk and gyrates wildly the pleasure/pain emotions that follow can be debilitating at best or financially terminal at worst. Traders who eschew option investing for any of various reasons to concentrate on speculating will eventually experience their own "freak out" stage. Sometimes it takes longer but eventually happens to everyone. In 1999 it was greatly delayed while call- buyers got real adept at buying every dip. When this one- dimensional approach with no hope for longevity ran it's course, numerous five, six, seven and eight-figure accounts melted down to fractions or zero in personal capitulation. Had these traders built small accounts large during times of plenty and rotated most of their capital to option-investing strategies, total loss and ruin may have been avoided. Which brings us to the #1 question: If a trader only has $5,000 scraped together for trading, what is the best approach to safely growing it big? Let me begin by insisting that time, caution and discipline are of the utmost importance. I'll end by leaving the topic for complete discussion next week, same time & channel. (Note: Two easy-to-read books on trading options and in general are an absolute "must-have" for beginners and veterans alike. "How I Trade Options" by Jon Najarian is a floor-trader & market maker's 20-year experience and instructions. "Technical Trading Online" written by Roth & Trader X is a hilarious read that will improve any trader's long-term results. Both books produced by Wiley are instructional products you don't want to miss!) Best Trading Wishes! Contact Support *************************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=1469 ************************************************************ ********************** PLAY OF THE DAY - CALL ********************** EMC - EMC Corporation $79.89 (+0.83 this 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. Most Recent Write-Up "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. Comments EMC is once again on the brink of breaking out. With cooperation from the Nasdaq Tuesday morning, EMC could be set to fly. The stock edged up to the $80 level near the close of Monday's session, which happens to be the site of the stock's 200-dma. Monitor direction in the Nasdaq and look to enter new positions on a strong move above $80 backed by heavy volume. The more conservative traders might wait for EMC to hurdle its intraday high at $80.40 before entering new positions. BUY CALL FEB-75 EMB-BO OI= 8025 at $7.50 SL=5.25 BUY CALL FEB-80*EMC-BP OI=11832 at $4.20 SL=2.50 BUY CALL FEB-85 EMC-BQ OI=10401 at $2.10 SL=1.00 BUY CALL APR-80 EMC-DP OI= 9480 at $9.70 SL=6.75 BUY CALL APR-85 EMC-DQ OI= 4856 at $7.50 SL=5.00 http://www.premierinvestor.com/oi/profile.asp?ticker=EMC ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. 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