The Option Investor Newsletter Wednesday 01-31-2001 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/013101_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 01-31-2001 High Low Volume Advance/Decline DJIA 10887.40 + 6.20 10957.50 10832.60 1.26 bln 1769/1371 NASDAQ 2772.73 - 65.62 2872.47 2772.35 2.38 bln 1767/2066 S&P 100 715.20 - 3.26 725.42 714.30 totals 3536/3437 S&P 500 1366.01 - 7.72 1383.37 1364.66 50.7%/49.3% RUS 2000 508.34 - 3.32 515.22 508.03 DJ TRANS 3107.76 + 48.98 3118.24 3053.68 VIX 24.29 - 0.91 25.91 24.04 Put/Call Ratio 0.61 ************************************************************* Looking for an entry point! The excitement is over. The FOMC meeting is history. The "sell on the news" event happened just as we expected. Now the fun begins! The Dow came within 43 points of hitting 11000 for the first time since the surprise rate cut back on Jan-3rd but rapidly sold off to close back under 10900 yet again. The Dow gave back -70 points in the post Fed sell off but still managed to close slightly positive. Earnings are still lingering and AOL was the Internet mover today. Nyse:AOL beat analysts estimates by a penny at $.15. Combined earnings from AOL/TWX were $.28 compared with $.24 last quarter. AOL added +2.1 million subscribers to bring their total to 26.7 million members. Growth for the merged company is expected to be in the +18% range and AOL affirmed these estimates. Nyse:MO missed estimates by a penny and closed down slightly at $44. Philip Morris has been on a run since it was apparent that George Bush was going to become president. NYSE:KO also announced earnings that were inline with estimates and closed flat for the day. Nasdaq:PSFT dropped -$8 after posting strong earnings on Tuesday. While several analysts were busy upgrading PSFT based on their guidance, Morgan Stanley shot it down with a comment that it was likely to "remain stagnant in the near term." PSFT held to previous estimates and even raised them slightly but investors evidently wanted something higher. Proving it is all in the call and outlook, Nasdaq:ERTS gained $5.75 to $45.81 after missing estimates but offering encouraging comments going forward. They missed estimates by -10% but still rocketed on the outlook. ADBE followed through with the drop started after the close on Tuesday with a -$9 loss. Using the "slowing economy" excuse they said sales had slowed in all areas. Bill Gates decided that he need some spare change and filed to sell another three million shares. This was on top of the ten million shares he has sold in the last three months. That nets him about $795 million after commissions. The street did not take this well and MSFT lost -$2.31 on the news. Don't feel sorry for him, he still has 750 million shares left. Not all the earnings news today was bad. The stage was set for a possible Nasdaq rebound soon with the following positive results. Nasdaq:STOR beat by estimates by +.08, ARXX +.02, WEBM +.04, CERN +.02, MPPP +.08, CLS +.08 and DIGL led the list beating estimates by a whopping +.14. CLS warned slightly but peppered the warnings with positive comments and jumped +$6 in after hours trading. Only 50 points? You would have thought they dropped a dime in our tin cup by the way the market and analysts reacted. Only 50 points? Why you would have thought they expected a full point or more. The Chicago PMI report came in today at only 40.2 its lowest point in eighteen years. As a leading indicator for the NAPM report due out tomorrow it suggests there is serious trouble in the economy. Still the prices paid index rose to 62.9% in January which is the second month in a row. This suggests that inflation is still present with a slowing economy. The double whammy! The GDP report showed the economy grew only +1.4% in the fourth quarter which was below expectations. This was the weakest quarter since Q2-1995 and is the clearest sign that economic growth is decelerating rapidly. These factors prompted the Fed to cut 50 basis points even when it appears that more was needed. The fear that investors would worry the Fed was out of control kept them from making a stronger cut. The language of the official statement was strong, the economy is slowing at a pace that "requires a rapid and forceful response." The full language suggested this was just another cut in a series of cuts. 22 of 25 primary bond dealers are now factoring in another 50 point cut by the March 20th FOMC meeting. There is a 34% chance of an inter-meeting rate cut in February. Alice Rivlin, former Fed member and Andrew Brimmer, former Fed governor both said the Fed would cut again soon and could be behind the curve. With the Consumer Confidence erosion that Greenspan specifically mentioned last week the path of the economy is clear, down! What does all of this mean? We are not on Fed watch any more. We are on "Entry Point" watch. The day after a Fed meeting, cut or hike, is normally down as traders take profits from the pre-Fed hype and run up. With the Fed's path clear to cut rates for the next several months the market is now free to run as well. When the Fed cuts rates the market rallies. We should look at every dip now as a buying opportunity. The key here is to wait for the bounce, not try and catch the falling knife. There is a good possibility we will see a dip on Thursday and maybe even Friday but I would not count on it being a serious one. The funds got the green light today to throw money at the market. Historically this is the perfect scenario for them with a high probability of a big win. Trust me, they will do it. There was a flood of buy orders on the afternoon dip as money came into the market as fast as profit takers wanted out. We should be proactive in buying any bounce. Nasdaq 2700 should be a floor but remember we do not want to try and pick the bottom. Wait for a bounce on strong volume and make your entry. If the Nasdaq falls below 2700 then wait for the rally back over that level before buying. If it fails to dip that far and you want to be sure then wait for a breakout over 2870 which was today's high. To repeat, aggressive traders buy any rebound around 2700, or conservative traders wait for a breakout over 2870. Rate cuts are coming, tax cuts are coming and there is over $600 billion in cash on the sidelines! The only pothole in our immediate future is the non-farm payrolls on Friday but unless several hundred thousand jobs just appeared out of thin air it should be a non-event. Fasten your seatbelts, this ride could be fun! 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 ************************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=1524 ************************************************************** ************* NEW CALL PLAY ************* COST - Costco $46.25 +2.50 (+4.44 this week) Costco Wholesale Corporation operates membership warehouses based on the concept that offering members very low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories will provide high sales volumes and rapid inventory turnover. Costco's warehouses generally operate on a seven day, 68-hour week, and are open somewhat longer during the holiday season. After being trapped in a tight trading range between $32 and $38 for most of last year, Costco made a break above both its 50 and 200-dma in December. Since then, Costco has remained range bound between strong support at $40.44 and impenetrable resistance at $44. However, Wednesday seems to have been a key turning point, fueled by stimulus from multiple upgrades, strength in the retail sector, and an anticipation of an increase in consumer confidence due to the Federal Reserve's rate cuts. Costco basked in the glory of three new analyst upgrades this week, as JP Morgan picked up initial coverage, Dain Rauscher Wessels upgraded Costco to a strong buy, and AG Edwards upgraded Costco to accumulate. On Tuesday, Costco's trading range narrowed to a tight wedge between $43 and $44. On Wednesday, Costco burst out above $44, and never looked back. By 10:30 Costco had cleared $46, where it spent most of Wednesday, only touching the $45.13 level immediately after the rate cut decision. Costco appears ready to shoot all the way up to the next resistance level at $50, which hasn't been visited since last March. Wednesday's volume was robust with over 9 million shares trading. The impact of the rate cut seems to have been factored in to many sectors of the market, but consumer confidence is still low, and retailers may be moving on an anticipation of an increase several months from now. Traders can take positions at current levels, or at a possible pull back to $45. Watch the retail sector (RLX) for strength, as well as other retailers like CC and HD, and set stops at $44. BUY CALL FEB-45 *PRQ-BI OI=1274 at $2.81 SL=1.50 BUY CALL FEB-47.5 PRQ-BW OI=1946 at $1.56 SL=0.75 BUY CALL MAR-45 PRQ-CI OI= 88 at $4.13 SL=2.50 BUY CALL MAR-47.5 PRQ-CW OI= 85 at $2.94 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=COST ************ NEW PUT PLAY ************ IDPH - IDEC Pharmaceuticals $58.81 -3.81 (-4.50 this week) IDPH is a biopharmaceutical company engaged primarily in the research, development and commercialization of targeted therapies for the treatment of cancer, autoimmune, and inflammatory diseases. The company's first FDA-approved product, Rituxan, treats non-Hodgkin's lymphoma. Delivered intravenously, Rituxan is a monoclonal antibody used in place of chemotherapy or radiation. IDPH is also developing products for the treatment of various autoimmune diseases such as psoriasis, rheumatoid arthritis and lupus. Combine a weakening sector, weak technicals, and post-earnings depression, and you get the makings of an attractive put play. That's exactly the setup we are presented with in IDPH. After running up more than 40% between its early January lows and its earnings announcement on January 29th, our new play was due for a bit of profit taking. As expected, it began to materialize yesterday, despite a positive earnings report. The Biotech index (BTK.X) has also gotten a bit overextended lately, and its weakness weighed heavily on shares of IDPH today, turning normal profit taking into a nice selling opportunity for the bears. The stock gave up nearly $4 today, adding to a more than $4 loss yesterday, and the combined effect dropped the stock through its ascending trendline (now at $62), and pulled the daily stochastics down from overbought territory. Volume clocking in at nearly double the ADV is just icing on the cake, and it appears that all our signals are converging in favor of the bears. We'll play the emerging trend for all it is worth, so we are placing our stop at the $62 level, right at the trendline that was violated today. Aggressive traders can consider new entries on any intraday rally that fails to penetrate this level. More conservative traders will want to wait for selling pressure to drive the stock down through the $57 support level before initiating new positions. Regardless of your entry strategy, confirm weakness on the BTK.X before playing. BUY PUT FEB-60*IHD-NL OI=342 at $5.25 SL=3.25 BUY PUT FEB-55 IDK-NK OI=107 at $2.94 SL=1.50 BUY PUT FEB-50 IDK-NJ OI=175 at $1.44 SL=0.75 http://www.premierinvestor.com/oi/profile.asp?ticker=IDPH ***************** STOP-LOSS UPDATES ***************** MUSE - call play Adjust from $73 up to $78 CNC - call play Adjust from $15 up to $16 ACF - call play Adjust from $33 up to $35 NITE - call play Adjust from $21 up to $22 QCOM - call play Adjust from $76 up to $80 UBS - call play Adjust from $170 up to $173 FDRY - call play Adjust from $20 up to $21 COHR - call play Adjust from $48 up to $50 CTXS - call play Adjust from $32 up to $34 MEDI - put play Adjust from $45 down to $43 SPW - put play Adjust from $109 down to $104 ADBE - put play Adjust from $58 down to $46 ************* DROPPED CALLS ************* BGEN $64.50 -2.13 (-1.63) Having moved up to a higher range ahead of the Fed meeting, BGEN looked poised to rally but the stock has now fallen back below both its 5 and 10-dmas (at $66.53 and $64.60 respectively). While volume to the downside so far has been weak, the break below our stop price $65 and a stumbling Biotech sector suggests that BGEN may be headed lower to fill a gap in the low-60's. As a result, we are dropping coverage of this play. MERQ $86.88 -8.88 (-8.06) The psychological $100 resistance level is proving to be formidable indeed. With the bulls attempting unsuccessfully to break through this barrier yet again, the sellers took control today, as the stock, gave up almost 9 percent of its value on 140% of ADV. In doing so, MERQ dropped below not only support at the $93 level with the 5 and 10-dma converged at that level, but also our stop price of $90. In light of this weakness, we are no longer recommending this play. PPRO $26.19 -1.25 (+0.69) We are taking pre-emptive measures to protect our capital in our PPRO call play. While still above our stop price of $25, the first signs of a rollover are already beginning to show, with the stochastics curling southward and today's close below the 5-dma at $26.50. With sector leaders such as ARBA and ITWO also showing weakness, PPRO could find itself moving lower on sympathy in the B2B space. While there is support from the 10-dma just below at $24.88, that support is tenuous at best. Keeping in mind that capital preservation is key to a successful trading strategy, we are taking our money off the table. RIMM $65.81 -4.63 (-5.75) It appears that RIMM's recent test of the 50-dma while successful, was without conviction. The low volume with which it surpassed the moving average (now at $72.21) on Monday, resulting in a quick retrace back below that level on Tuesday. Today, with the 50-dma acting as opposition, the stock retreated further, ending the day below its 5 and 10-dma at $69.35 and $66.86. With the loss of upward momentum and the close below our stop price of $68, we do not recommended taking any new positions. MSFT $61.06 -2.31 (-2.94) As the techs sold off after the Fed announcement today, so did MSFT. At first glance it appeared to be simple profit taking, but it increased into the close as the stock finished just near the day low. News in after-hours sent MSFT lower to $60.50. It was announced that MSFT CEO Bill Gates filed with the SEC to sell 1.5 mln shares, estimated to be worth $92.7 mln. This added to the downward pressure that the stock experienced during the day. Buyers might be stepping away while profits are taken, as are we this evening. CPN $39.91 -1.83 (-2.09) Profit takers came in today and book their hard-earned winnings from last week. While this was a Low Volatility play, today's action to the downside represented an almost 5% move. The stock bounced from its 50-dma at $38.64 and may continue to act as support. This evening's announcement that the CA Legislature will allow the State to purchase energy by selling general revenue bonds should help bolster this call play. However, today's close was under our stop of $40 and we are dropping it tonight. CIEN $90.06 -7.94 (-0.50) The Fed delivered the 50 basis point cut that was expected this afternoon, and the CIEN bulls were handed another failed rally. After testing the $102-103 area this morning, our play began deteriorating by lunch time and accelerated its decline into the close, ending just slightly above the 50-dma. While our $89 stop is still intact, it seems silly to keep CIEN on the call list, especially given the fact that the stock plunged through its descending trendline again. Although volume was a bit on the light side, the vast majority of it was on the sell side, dropping CIEN by 8% and making a strong case for removing the play from our list before an apparent entry point materializes. GS $113.75 -4.88 (-0.94) The "sell the news" gang is alive and well and came out to punish the bulls in Financial stocks today. While it wasn't an unbridled selloff, our GS play finally got out of its narrow range today and broke below its ascending trendline near $115, and closed near the low of the day. Everything looked good until the interest rate announcement came out, but then we watched GS give up more than $4 in the final 90 minutes of trading, to close very near its low of the day. So let's see - violated our stop, broke its ascending trendline, Stochastics rolling over, closing near the low of the day - yep, definitely a drop tonight. ************ DROPPED PUTS ************ NKE $55.02 +2.00 (+1.88) Nike offered several profitable opportunities to put players over the last week with rolls from $54.31 and $53. However, today's pattern demonstrated uncharacteristic strength with a clear break over our stop level of $54 in the morning, and $55 in the afternoon. Retailers rallied after the Fed rate cut and NKE broke above its 10-dma at $53.48. While NKE was readying to break one way or the other, today's action made it clear that our put play is dead. PWER $47.06 +2.19 (+2.06) After spending the early part of the week trading sideways on low volume, shares of PWER finally picked a direction. Gaining almost 5 percent on above average volume, this move put the stock back above its 5 and 10-dma, at $45.46 and $46.13 respectively. While today's attempt to close above the 50-dma (at $47.37) was thwarted, the intra-day pierce above that level could be a sign of things to come. The action of the last four trading days puts PWER in a minor uptrend and as such, we are closing out this play before it closes above our stop price of $48. WFII $40.88 +3.06 (+2.88) An 8% gain on a day that the NASDAQ cracked after the Fed announcement and with no news anywhere. After flatlining at $38 yesterday, there didn't seem to be any apparent catalysts for this stock. Yet, this morning, right off the open strong volume bid up the stock and WFII climbed $2 in the first half hour of trading. This should have triggered warning signals. The rollover at $41 did afford and quick put trade, but you had to be nimble to close before the buyers showed up again at $39. WFII climbed higher into the close and finished near our stop of $41. This renewed and unexpected buying interest has led us to close this position tonight. ******************************************** Do you like OptionInvestor? Then vote for us as a favorite site: http://www.investorlinks.com/vote.html Thanks for your support! ******************************************** ************** TRADERS CORNER ************** Market Cap And Volatility By Mary Redmond In addition to monitoring a stock's sector for an indication of strength, traders may find it useful to monitor the index which corresponds to the market capitalization of the stock. It is also informative to pay attention to the money flows and volatility levels of stocks in different market capitalization categories. For example, during 1998 through 1999 and the first quarter of 2000, we witnesses huge gains in certain market indexes and stock sectors to the exclusion of others. For the most part, the largest gains occurred within the Nasdaq 100, which is the index of the 100 largest stocks in the Nasdaq measured by market capitalization. Stocks like Cisco, Microsoft, and Intel grew to enormous market capitalizations while the majority of the small- and mid-cap stocks underperformed. The best performing mutual funds during that time period were the large-cap technology stock funds, many of which doubled and tripled. This led to a self-perpetuating trend in the levels of cash flows which were deposited to various sectors. For example, during January, February and March of 2000, large- cap technology growth funds took in approximately $40 to $50 billion per month. Growth and income funds, which generally refer to dividend paying stocks, suffered substantial redemption. It seemed the only way to profit during this time period was to buy stocks like Cisco and EMC. For a while, nobody paid any attention to valuation ratios like P/E because it didn't seem to matter. The Investment Company Institute reported that equity mutual funds took in over $309 billion during 2000, and money market funds took in $159 billion. There is still plenty of money coming into the market. However, the last few month's trends indicate that money is being fairly evenly distributed to different sectors. Aggressive growth funds are still taking in money, but not to the exclusion of growth and income funds. Ultimately, this is a healthier trend, as a sustained rally needs to include more than one sector. It is also important to note that the small- and mid-cap sectors have shown excellent gains and opportunities since the Fed rate cut, and may offer better opportunities than large-cap stocks in the coming months. One of the reasons why this may occur is due to the fact that small-cap stocks are generally hurt the most when the Fed raises rates, and often benefit to a larger degree when the Fed lowers rates. This is partly due to the impact the rate changes have on the credit markets. The spread between Treasuries and high yield debt has narrowed significantly since the first rate cut. Several telecom and CLECs have successfully issued high-yield bonds, which would have been impossible a few months ago, since the market for such debt instruments had dried up. Small company stocks are generally more dependent on the debt markets to finance their expansion than large, profitable companies. The spreads are still wide by historical standards which indicates that there may be further downside to the spreads, and would benefit small cap stocks even more. Also, investors may be becoming bored with the slow growing behemoths like Cisco, which have been range bound for months. While very small companies with market caps of $500 million or less are often less liquid, which can be a disadvantage to traders, mid-cap stocks in the range of $2 to $5 billion can usually grow at a much more rapid pace than the Ciscos of the world. This is because a stock with a market cap of $250 billion or more requires a huge inflow of money to significantly impact the stock price. An added advantage of trading small- and mid-cap stocks is the lower level of volatility of these indexes, compared to the volatility of the QQQ, as measured by the VXN.X. For example, the implied volatility of the S&P mid-cap sector, MDY, is currently 21.90, significantly lower than the VIX.X at 25 and the VXN.X at 63. The MDY's volatility range this year has been much lower than that of the other sectors. Many of the options in this sector have less expensive premiums. The implied volatility of the Russell 2000, RUT is currently 28, and is oscillating toward the mid to high level of its yearly trading range. The IV of the RUT actually dropped to under 10 at one point last year, and spiked to over 40 early in January. In contrast, the high implied volatility of the VXN.X increases the premiums of the options on the QQQ, and thus increases the risk. While they can still be appropriate for aggressive trading strategies, traders might want to balance their option risk with some of the less expensive, lower volatility calls on smaller stocks. It is also important to note that options within the individual stock's chain have often have widely different implied volatility. For example, WCG has a 30-day historic volatility of 107.53. The average IV of its options chain is 87. However, the May 17.50 calls(at-the-money) have an implied volatility of 63, whereas the August at the money 17.50 calls have an implied volatility of 53. The May 17.50 calls are $2.75, and the August 17.5 calls are $3.10. The difference in price is primarily attributed to volatility. It appears that in this case, the August calls are undervalued relative to the May calls. Looking forward, it is important to realize that liquidity trends are far more powerful in this investing period than ever before. Despite the fact that last year was one of the worst years for the indexes in history, equity funds still took in over $300 billion in investors cash. It is possible that we may even see a higher level of cash flow to the markets this year, which will most likely increase volatility levels further. Nowadays, traders need to keep an eye on fixed income markets, liquidity trends as well as the volatility and sector of the stocks they are trading. *************************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=1511 ************************************************************ ********************** PLAY OF THE DAY - CALL ********************** RATL - Rational Software $51.94 -2.94 (+1.56 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. Most Recent Write-Up What a breakout! Rational burst out of its bullish wedge pattern on Monday morning with a clean move above $52.50. From there it was smooth sailing up to $55, at which point profit taking ensued. On Tuesday, Rational pulled back to support at $53 before consolidating at $54.50 for the afternoon. Strength in the mid-cap index (MDY) helped as old resistance became new support. Depending on the Nasdaq's reaction to the FOMC meeting, Rational may very well clear heavy resistance at $55, which could potentially position the stock to sail all the way up to $60. A pullback to support at $53 could be an entry point, as well as a break above $55. Watch the software index for signs of strength before initiating positions, and keep stops at $50. Comments After Monday's breakout from the $50 level, today's action is no more than light volume profit taking in the face of the Fed announcement. Previous resistance at $50 should be a solid support level now, buoyed with the 10-dma at $50.34. Bounces from here would provide an attractive entry point. On the upside, resistance lies at $54 and a breakout from that level would also warrant entry. BUY CALL FEB-50*RAQ-BJ OI= 567 at $4.75 SL=3.00 BUY CALL FEB-55 RAQ-BK OI= 747 at $2.50 SL=1.25 BUY CALL APR-50 RAQ-DJ OI= 401 at $9.50 SL=7.00 BUY CALL APR-55 RAQ-DK OI=1030 at $7.50 SL=5.75 http://www.premierinvestor.com/oi/profile.asp?ticker=RATL ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Onward and upward - after some collective profit-taking... Investors breathed a collective sigh of relief today after the Federal Reserve did exactly what the market expected by lowering its target for the federal funds rate by 50 basis points to 5.5%. In a statement released after the meeting, the Fed announced that "Consumer and business confidence has eroded further, exacerbated by rising energy costs that continue to drain consumer purchasing power and press on business profit margins." With inflation now contained, the Fed believes the current circumstances call for a rapid and forceful response of monetary policy and retaining its easing bias. By the end of the session, the NASDAQ had actually retreated into the negative, but the sell-off was attributed to profit-taking rather than a bearish outlook for equities. Within the technology segment, buying interest remained in semiconductor, networking, and select Internet shares while retail, transport and cyclical issues were the best performers in the broader market. Stocks had advanced ahead of the announcement, but quickly pulled back after the rate cut became public knowledge in a classic "sell the news" effect. In the final hour of trading, investors moved out of hi-tech issues and into defensive and cyclical shares. The prevalent attitude at the close was an optimistic outlook for the future with most analysts boosting their target ratios for equity holdings in long-term portfolios. On another subject, one of our subscribers asked why the number of Covered-call positions had declined over the past few months. It was a very practical question, and one that deserves mention for the benefit of all of our readers. First, I must apologize to all the traders who have been unable to participate in the more aggressive plays (based on broker requirements, not overall risk) in the section. The past few months have offered some excellent opportunities in what has been one of the most productive periods since we began offering the weekly "BIG CAP" section. While we have received far more requests for "premium selling" plays (maybe because Jim talks about it so much), the reason for the lack of Covered-calls is very simple: When the market began to decline (in a broad sense) last year, the relative premiums for call options started to fade, and as we moved further into the bearish trend, we found fewer and fewer favorable positions. Generally, we look for a 4-6% monthly return with at least 15-20% downside protection and even when the market is in a neutral trend, that can be a difficult task. Writing covered-calls is not a favorable strategy in bearish markets and the time value for call options remains at historical lows. Until the speculative option buyer returns to the market, that fact won't change. In addition, if we don't have confidence in what we have to offer, it won't be published, and that's really the overriding measure of any play we list in the section. We all hope the market will soon return to its long-term upward trend, so we can get back to playing the old way; Covered-calls - both with stocks and LEAPS, diagonal spreads, ATM put-credit spreads and of course, buying speculative call options. Good Luck! Summary of Previous Picks: Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return EMLX FEB 70 66.94 93.00 $3.06 4.6% Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return EMLX FEB 60 57.94 93.00 $2.06 9.7% VSTR FEB 105 102.75 123.94 $2.25 7.7% EMLX FEB 65 63.94 93.00 $1.06 6.5% IDTI FEB 35 34.44 48.91 $0.56 5.1% Sell Strangles: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return AFFX FEB 50p 49.19 66.63 $0.81 7.4% AFFX FEB 98c 98.31 66.63 $0.81 7.4% VECO FEB 30p 29.06 56.72 $0.94 7.3% VECO FEB 95c 96.13 56.72 $1.13 8.7% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return OSIP FEB 85 86.13 64.03 $1.13 8.6% BRCD FEB 135 136.25 90.31 $1.25 7.4% CIEN FEB 145 146.00 90.06 $1.00 6.2% MYGN FEB 100 100.69 72.13 $0.69 6.1% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status A $61.88 $54.55 FEB45p/50p $0.56 $49.44 $0.56 Alert CMVT $121.63 $113.31 FEB95p/100p $0.75 $99.25 $0.75 Open ITG $45.81 $47.01 FEB35p/40p $0.69 $39.31 $0.69 Open Debit Straddles: Stock Pick Last Position Debit G/L Status AC $55.44 $58.10 FEB55c/55p $3.50 $0.75 Closed 1/30 * * Profit target met and we will show the position closed. New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations *************** ADI - Analog Devices $62.60 *** Bullish Reversal! *** Analog Devices (NYSE:ADI) is engaged in the design, manufacture and marketing of high-performance analog, mixed-signal and digital signal processing integrated circuits (ICs). The company's broad line of high-performance ICs incorporate analog, mixed-signal and digital signal processing technologies that address a wide range of real-world signal processing applications. The company has a generic list of approximately 2,000 products and many of their products are proprietary, while equivalents to other products are available from a limited number of other suppliers. The company also designs, manufactures, and markets a wide range of assembled products. Analysts say that chip companies will be the sector that leads the NASDAQ back to its previous stature and ADI has a head start on the group. Although the company has revised downward its estimates for the first half of 2001, analysts expect sequential revenue growth beginning in the third quarter as ADI begins to benefit from new production builds in key high-volume communications programs. The company believes it is realistic to assume that revenues could grow 20% to 25% in 2001, with pro forma earnings increasing about 30% from last year's results. Traders who want to own a great company in the semiconductor group should consider these bullish positions. ADI - Analog Devices $62.60 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call FEB 55 ADI BK 1310 8.90 53.70 4.6% *** Sell Put FEB 50 ADI NJ 485 0.45 49.55 6.6% Sell Put FEB 55 ADI NK 2826 1.20 53.80 12.2% *** /charts/jan01/charts.asp?symbol=ADI ****** CMVT - Comverse Technology $113.31 *** Bracing for a Rally? *** Comverse Technology (NASDAQ:CMVT) designs, develops, manufactures, markets and supports computer and telecommunications systems and software for multimedia communications and information processing applications. The company's products are used in a broad range of applications by wireless and wireline telephone network operators, government agencies, call centers, financial institutions and many other public and commercial organizations worldwide. They provide unique enhanced services platform products, digital monitoring and recording systems for call centers, a range of customer management applications, public networks and government agencies, network signaling software for wireless, wireline and web communication services known as Signalware, and many other telecommunications hardware and software products and services. The recent rally in Comverse Technology started early in January after analysts at US Bancorp Piper Jaffray initiated coverage on the company with a "strong buy" rating and a short-term target price of $130. ABN AMRO and Raymond James also issued positive reports on the company and the bullish outlook propelled the stock out of an old trading range to an all-time high near $120. CMVT shares have since consolidated and the recent downward movement has boosted the premiums for OTM Puts. Traders who are bullish on the stock can use this conservative position to participate in the future movement of the issue with low risk and favorable reward. CMVT - Comverse Technology $113.31 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put FEB 85 CQZ NQ 428 0.75 84.25 6.1% Sell Put FEB 90 CQZ NR 541 1.19 88.81 9.5% *** Sell Put FEB 95 CQZ NS 593 1.81 93.19 11.9% /charts/jan01/charts.asp?symbol=CMVT ****** CTLM - Centillium Communications $48.56 *** Rumors Abound! *** Centillium Communications (NASDAQ:CTLM) provides technologies that enable broadband communications to the home and business enterprise. Their system-level products integrate programmable digital signal processors, its communications algorithms, its highly integrated mixed-signal chip, its highly integrated digital chip and unique related software. The company provides broadband equipment vendors with system-level products for the DSL market and are leveraging its technology to develop products for complementary markets which share common technologies and customers. They also have near-term plans to release products that target the voice-over-packet and home networking markets. Centillium surprised analysts last week, beating the consensus earnings expectations for the fiscal fourth quarter by posting a narrower-than-expected loss. Revenue grew 38% on a sequential basis, rising from $17.7 million in the 2000 third quarter, with the growth in sales of Centillium's unique chipset solutions used in various communications applications. But, the real reason for the stock's recent bullish activity may be the short-covering that has occurred in the wake of a buyout rumor involving Intel (NASDAQ:INTC). In any case, the rally has come on heavy volume and we see this position as a relatively conservative speculation play for traders who are bullish on the issue. CTLM - Centillium Communications $48.56 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call FEB 35 UUM BG 93 14.50 34.06 5.2% *** Sell Call FEB 40 UUM BH 124 10.88 37.68 11.7% Sell Put FEB 30 UUM NF 122 0.38 29.62 7.2% Sell Put FEB 35 UUM NG 34 1.06 33.94 18.7% *** Sell Put FEB 40 UUM NH 98 2.44 37.56 34.9% /charts/jan01/charts.asp?symbol=CTLM ****** FTE - France Telecom $92.25 *** Portfolio Play! *** France Telecom (NYSE:FTE) is a telecom operator that provides consumers, businesses and telecommunications carriers with a full range of services, including local, long-distance and international telephony, as well as data, mobile telecommunications, Internet, cable television, broadcast and value-added services. France Telecom has a network of approximately 34 million telephone lines, including almost 4 million ISDN channels, connected to homes and businesses. France Telecom's Itineris GSM service had more than 10 million subscribers as of the beginning of the year and with respect to the Internet, FTE's Wanadoo sports over a million subscribers. For Internet portals, France Telecom is also a giant with 8 million pages viewed per day at last count, through Wanadoo Voila, its general-public portal, and other thematic and professional portals. France Telecom also develops Internet content, including online games, directories and itineraries. One of our readers asked for a blue-chip company in the Telecom Services group and the ensuing search produced this candidate. Although it's not an American company, there is plenty of reason to own the issue and the most obvious is the growth potential for the industry in Europe. In addition, analysts have a favorable outlook for the company, based on fundamental data, and the recent technical indications suggest the issue has established a solid Stage I base near $85. Since our cost basis is near the middle of this support area, we believe the position offers favorable upside potential with reasonable downside risk, for traders who wouldn't mind owning the issue. FTE - France Telecom $92.25 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call FEB 85 FTE BQ 0 9.20 83.05 4.5% *** Sell Call FEB 90 FTE BR 201 5.90 86.35 8.0% Sell Put FEB 85 FTE NQ 0 1.30 83.70 8.0% *** Sell Put FEB 90 FTE NR 2 2.95 87.05 14.9% /charts/jan01/charts.asp?symbol=FTE ****** NUFO - New Focus $60.19 *** On The Move! *** New Focus (NASDAQ:NUFO) designs, manufactures and markets fiber optic products for next-generation optical networks under the Smart Optics for Networks brand. The company's fiber amplifier products are widely deployed in optical networks to enable the transmission of an increased amount of information at very high speeds over extended distances. Fiber amplifiers enhance the strength of optical signals. The company's wavelength management products, which process and control the many wavelengths on an optical fiber, enable network equipment providers to increase the number of channels transmitted and to accurately, efficiently and reliably manage a vast number of optical signals. The company sells its products to major companies including Agilent, Alcatel, Avanex, Corning, Corvis, JDS Uniphase, Lucent Technologies, and Nortel Networks. NUFO shares rallied today after the company reported higher than expected fourth quarter earnings and predicted a 60% increase in revenues for the coming year. Company officials also elevated NUFO's earnings guidance, citing strong demand for its unique products, and analysts agreed with the optimistic outlook. Dain Rauscher Wessels analyst Sanjiv Wadhwani upgraded New Focus stock to a "strong buy" with a $100 price target and U.S. Bancorp Piper Jaffray analyst Conrad Leifur reiterated his "strong buy" rating on the issue. Today's rally was on increasing volume; a bullish indication, and this OTM Put-credit spread offers a conservative, low risk position with a reasonable expectation of profit. NUFO - New Focus $60.19 PLAY (aggressive - bullish/credit spread): BUY PUT FEB-40 DBE-NH OI=302 A=0.50 SELL PUT FEB-45 DBE-NI OI=343 B=0.93 INITIAL NET CREDIT TARGET=$0.56-$0.62 ROI(max)=12% /charts/jan01/charts.asp?symbol=NUFO *************** Neutral Plays - Credit Strangles *************** AFFX - Affymetrix $66.63 *** Technicals Only! *** Affymetrix (NASDAQ:AFFX) is engaged in the field of DNA chip technology. The company has developed and intends to establish its GeneChip system as the platform of choice for acquiring, analyzing and managing complex genetic information in order to improve the diagnosis, monitoring and treatment of disease. The GeneChip system consists of disposable DNA probe arrays containing gene sequences on a chip, certain reagents for use with the probe arrays, a scanner and other instruments to process probe arrays, and software to analyze and manage genetic information from the probe arrays. The company's earnings are due on This play is based on the current price of the underlying stock and its recent technical history. The pattern of consolidation started early last year and the issue has spent very little time outside the target profit range. The probability of profit in this position is higher than other plays in the same strategy based on inflated option premiums. In addition, the prospect of the share value reaching our sold strikes is rather low, but there is always the possibility of a break-out from the recent trading range, so monitor the position for changes in technical character. AFFX - Affymetrix $66.63 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put FEB 52.5 FIQ NX 276 0.69 51.81 9.4% *** Sell Call FEB 85 FUE BQ 1111 0.69 85.69 9.4% *** - or - Sell Put FEB 55 FIQ NK 396 1.06 53.94 12.5% Sell Call FEB 82.5 FUE BX 50 1.06 83.56 14.0% /charts/jan01/charts.asp?symbol=AFFX ****** VECO - Veeco Instruments $56.72 *** Second Chance! *** Veeco Instruments designs, manufactures, markets and services a broad line of equipment primarily used by manufacturers in the data storage, optical telecommunications and semiconductor industries. These industries help create a range of information age products for today and tomorrow, such as personal computers, network servers, fiber optic networks, digital cameras, set-top boxes and personal digital assistants. Veeco offers two primary product lines: Metrology and Process Equipment. A subsidiary of the company, CVC provides cluster tool manufacturing equipment used in the production of evolving tape and disk drive recording head fabrication, optical components, passive components, MRAM, bump metallization, and next generation logic devices. Veeco shares have rallied since early January on optimism from a rise in equipment orders and bullish comments by a US Bancorp Piper Jaffray analyst. The instrument maker said fourth quarter orders were approximately $184 million, exceeding its forecast of $150 million. Based on the strong fundamentals and valuation, we also favor the issue for a bullish position, but there are not many ways to approach the inflated option premiums and there are also some primary resistance areas to overcome as the share value moves higher. In this conservative premium-selling position, we will use the recent volatility and the inflated option prices to open a neutral play with a favorable premium. VECO - Veeco Instruments $56.72 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put FEB 35 QVC NG 3730 0.50 34.50 8.0% *** Sell Call FEB 80 QVC BP 7 0.63 80.63 10.0% *** - or - Sell Put FEB 40 QVC NH 388 0.75 39.25 11.8% Sell Call FEB 75 QVC BO 166 1.06 76.06 16.2% /charts/jan01/charts.asp?symbol=VECO *************** BEARISH PLAYS - Combinations *************** CEPH - Cephalon $58.50 *** Trading Range? *** Cephalon (NASDAQ:CEPH) markets PROVIGIL (modafinil) Tablets for treating excessive daytime sleepiness associated with narcolepsy. The company has completed studies using PROVIGIL in patients suffering from fatigue associated with multiple sclerosis, and excessive daytime sleepiness due to obstructive sleep apnea, as well as a study to demonstrate improvement in performance and alertness in a simulated shift-work environment. The company has initiated a study to investigate PROVIGIL's use in treating attention deficit hyperactivity disorder in adults and a second study in obstructive sleep apnea. In addition to its clinical program focused on PROVIGIL, the company has other significant research programs that seek to discover and develop treatments for neurological and oncological disorders. This position was discovered with one of our primary scan/sort techniques; identifying potentially failed rallies on issues with bullish options activity. In this case, the premiums for the (OTM) call options are slightly inflated and the potential for a successful (technical) recovery is significantly affected by the resistance at the sold strike price; a perfect condition for a bearish credit spread. The volatile daily activity of the issue should allow us to achieve the initial target credit in the position. CEPH - Cephalon $58.50 PLAY (conservative - bearish/credit spread): BUY CALL FEB-75 CQE-BO OI=1376 A=0.56 SELL CALL FEB-70 CQE-BN OI=382 B=0.88 INITIAL NET CREDIT TARGET=$0.50-$0.56 ROI(max)=11% /charts/jan01/charts.asp?symbol=CEPH ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1499 ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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