The Option Investor Newsletter Sunday 02-04-2001 Copyright 2001, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/020401_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 2-2 WE 1-26 WE 1-19 WE 1-13 DOW 10864.10 +204.12 10659.98 + 72.39 10587.59 + 62.21 -136.63 Nasdaq 2660.50 -120.80 2781.30 + 10.92 2770.38 +143.88 +218.85 S&P-100 705.48 - 3.58 709.06 + 3.83 705.23 + 17.35 + 6.17 S&P-500 1349.47 - 5.48 1354.95 + 12.40 1342.55 + 24.00 + 20.20 W5000 12450.10 - 77.20 12527.30 +143.40 12383.90 +202.60 +308.80 RUT 501.50 + 2.82 498.68 + 10.59 488.09 + 2.34 + 22.61 TRAN 3092.76 +136.57 2956.19 + 2.90 2953.29 - 48.69 -112.01 VIX 24.75 - .39 25.14 - 1.15 26.29 - 1.33 - 4.41 Put/Call .60 .59 .48 .60 ****************************************************************** OOPS! By Jim Brown Thursday OIN, "There is no reason for the markets to fall other than a disaster from CSCO or a Jobs Report tomorrow showing several hundred thousand more jobs than the 90,000 expected." OOPS! The Jobs report showed an increase in new jobs of +268,000, substantially more than the expected +90K. Many analysts had whisper numbers that had actually been negative. Surprise, surprise, surprise, as Gomer Pyle would say. The Dow, ready to breakout over resistance at 11,000 was suddenly looking for support much lower. The Nasdaq, held up for a week by the Dow, found no support from the blue chip index and headed south as well. What a difference a day makes! Just a number or two, a few extra zeros, an extra decimal place and wham! The Fed induced rally is turned instantly into a bear trap and investors everywhere are wondering what hit them. The Dow finished -165 points below its high as investors worried that the aggressive Fed had turned back into teddy bear due to signs of an economic rebound where one was not expected. The huge jump in new jobs over what had been expected was mostly due to the construction area. New home sales are rising and +145,000 of the new jobs were in construction. This was the biggest jump in construction jobs since 1978. Manufacturing is still in a recession showing a loss of -65,000 jobs but the headline number was all that investors could see. The unemployment rate climbed to 4.2% which is the highest rate in sixteen months. The higher unemployment is welcome as it reduces the wage creep but it was not enough to offset the market shock. The problem is simple. Investors were ready to buy stocks because the Fed was on the rate cut trail not because earnings from stocks were so compelling they just had to buy. With the Fed now assumed to be on the sidelines until the March-20th meeting the reasons to buy just shrunk. The 100 basis point drop in the last month is already priced into the market with the big gains since Jan-3rd. The next cut, if it is a cut at all, is now over six weeks away. If the economy is really rebounding then the Fed may wait instead of possibly overheating the economy again. The premise of a series of rate cuts was instantly eradicated and now we are faced with buying stocks on fundamentals and as we all know the fundamentals look pretty bad. Just how bad will be tested on Tuesday when Nasdaq:CSCO announces earnings and more importantly gives the equivalent of the state of the union address on the tech sector. Only 3.50 away from its 52-wk low of $32, CSCO is widely expected to warn. When John Chambers was asked last week if January was a little challenging, John said that it was MORE than a little challenging. This brings up the specter that CSCO may actually miss earnings although nobody is actually saying that out loud. Still the guidance going forward is absolutely crucial. With literally every major tech stock already warning and those warnings, ala PMCS, becoming increasingly drastic, the importance of the CSCO guidance becomes even more important. The NYSE:NSM warning from Thursday took a toll on the chip sector with Nasdaq:RMBS, Nasdaq:INTC, Nasdaq:XLNX, Nasdaq:AMCC and Nasdaq: PMCS all finishing lower. The chip stocks, many of which sell to CSCO are all sliding weakening as investors worry about a negative forecast. Retail stocks also fell on Friday as investors reacted to the dropping consumer confidence and now a possible halt in the rate cuts. No sector, other than possibly Drugs as a defensive play, appears to be immune to the new negative market sentiment. The only positive was the low volume on a negative day. The NYSE only managed slightly over one billion shares and the Nasdaq a meager 1.6 billion. The volume on the Nasdaq is not something we can count on. They are switching from a double counting system to a single counting process like the NYSE. Because not every trade on the Nasdaq was double counted the actual impact of the change is very hard to determine. Many analysts claim the impact will only be a ten percent drop but the 1.6 billion today was about a 35% drop from recent days. Was it simply low volume or a change in counting? We may never know and can't use the volume indicator for confirmation of any move for several weeks until new averages are created. Declines were negative on both indexes but new 52-week highs beat out new lows by 440:55 on all exchanges. This is not a negative trend. So now we are faced with conflicting scenarios. Did the markets really turn over and are about to retest old lows OR did traders simply decide to take profit on some negative economic news? For the last two days I have been telling you we could have a dip as investors sold the rate cut news. We got the dip. I suggested buying any rebound from under 2700 and we are under 2700 but not yet rebounding. From the looks of the Nasdaq chart at the close on Friday we are not finished dipping yet. The CSCO earnings are looming large in our future. Even if the Jobs Report had not clouded the picture it is unlikely Monday would have been a big up day. Nobody wants to take a position before the CSCO event. Since 2700 only held for about two hours the next support to be tested it about 2575. I could see this happening on Monday. Other than the CSCO earnings the next week is pretty flat as far as market moving events are concerned. Earnings are slowing and the economic calendar is positively weak. Monday is the NAPM non-manufacturing report which is not a market mover. Wednesday is the Productivity report and Wholesale Inventories on Friday. A pretty bland week. As traders we need to be conservative. We are faced with a bipolar market. The Nasdaq struggled all week and ended Friday with more apparent weakness ahead. The Dow failed at 11,000 again after a four day rally but showed a little pulse at the close. Our long term outlook is still weighted toward the Fed cutting rates again in March. The recession in manufacturing is not over. We may not get an intra-meeting cut but we should get something in March. This is the underlying foundation for the market. If the market starts crashing again we may see the maestro of money pull another surprise rate cut out of his hat to reinforce that floor. Greenspan does not want to admit it but much of the current budget surplus comes from stock market profits. Kill the market and kill the surplus. Kill the surplus and the tax cut fails as well. A real problem for the king of green. My previous guidance still holds. Aggressive traders buy any rebound from under 2700. For conservative traders wait for a breakout above 2700 again. (yes I lowered it from 2870) All traders should wait for the CSCO earnings to make sure there is not a hidden market bomb. Don't fret if there appears to be a rally between now and the announcement. If it is real it will still be there after the earnings. According to Austin the commercial traders added to their short positions yet again. This is not encouraging considering this is a lagging indicator. What do they know that we don't? Regardless of what happens over the next couple weeks, if you stick to the strategy listed above your risk will be minimal. It is simple, stay short or flat under 2700 and long over 2700. Got it! Now relax! In non-trading news I have several great announcements. You may have seen over the last week Renee White has returned to OIN and is writing in the Traders Corner again. She is an old hand here at OIN having written for over two years now. The guys in the crowd are saying "so what?" Well I have another surprise for you. Janar Wasito has also returned to writing for OIN and our sister site IndexSkybox.com starting this Sunday. Renee and Janar are two of the most read writers we have ever had and I am really glad to welcome them back! It is with even more excitement that I get to announce the preliminary list of guest speakers for the April Expo. You will not believe the heavyweights we have lined up for this event. Get ready to be amazed! Tom DeMark, author of "Day Trading Options", "New Market Timing Techniques" and "The New Science of Technical Analysis." Tom has been a distinguished authority on stock, option trading and market timing for over 30 years. He manages a $4 billion hedge fund and has been a consultant to George Soros, Morgan Bank, Citibank, Goldman Sachs, etc. Jon Najarian, "Doctor J" as he is called at the CBOE. Jon started at the CBOE in 1981 where he found his discipline, quick reflexes and competitive nature, developed while a running back for the Chicago Bears, were well suited to the demands of floor trading. DRJ's success in the pit led him to found Mercury Trading in 1989. The firm currently makes markets in more than 90 high-tech and biotech stocks and trades between 25,000 - 40,000 options per day. Jon appears daily on "FOX News in the Morning," serves as the noon anchor on "Webfn.com" and can be heard four times a day on CBS radio. Mark Leibovit - Chief Market Strategist at VRTrader.com, his technical expertise is in volume analysis, providing short term, high performance stock trades and market timing based on his proprietary "VOLUME REVERSAL" (tm) trading program. Mark is the number one market timer for the last six months as ranked by Timer Digest. He was a market consultant ("Elf") on Louis Rukeyser's Wall Street Week televison program for seven years. Richard W Arms, Jr., Editor of ArmsInsider.com is a financial consultant to institutional investors and a private portfolio manager based in Albuquerque. He is a noted expert in the field of technical and market analysis, the 1995 winner of the prestigious Market Technicians Award and the author of several best selling books and articles on his ground breaking theories in volume analysis and market forecasting. This key technical tool for understanding market price movement is listed daily in the Wall Street Journal and is flashed once a minute on CNBC. Mark Skousen, Ph.D, Editor of FORECASTS & STRATEGIES since 1980 is a professional economist with an uncommon knack for turning his understanding of economics into highly valuable investing advice. Since 1980 he has lead hundreds of thousands of subscribers to unique investing opportunities often ignored or overlooked by other investing advisers. Skousen is best-known for his advice to subscribers to "sell all stocks and mutual funds" less than six weeks before the 1987 stock market crash that wiped out billions in investors' wealth. He has consistently been on the right side of major investing trends in his career with F&S and, before that, with Inflation Survival Letter. Steve Nison - Steve Nison is not only the world's foremost expert on Candlestick Charting techniques, he's the author of the two top selling, definitive books on the topic: Japanese Candlestick Charting Techniques and Beyond Candlesticks. He has trained and lectured investors and investment firms around the world on how to integrate these methods into their investment strategies. Jim Crimmins - Jim is president of TradersAccounting.com and a noted authority on tax issues for traders. Jim is an expert on gaining Trader Status and puts on seminars on "Tax Free Trading" around the country. If you have been to a money show, you have probably seen Jim with flocks of people around him. Jim is the authority on tax accounting for traders! Jim will be speaking on Trader Status, Mark to Market and IRS do's and don'ts for traders. ******************* Is that a great lineup or what! We are still waiting on confirmations from several other possibles which will help make this the best seminar we have ever produced. In addition to the speakers above the OIN staff you read every day will also be teaching in-depth money making stock and option strategies. Over 20 professionals in one spot dedicated to providing a quality educational experience. Any two of the speakers above would be worth the money and you will learn from over 20. Can you afford not to come? Click here for more info: https://secure.sungrp.com/workshop/april01/index.asp Trade smart, enter passively, exit aggressively! Jim Brown Editor ************************************ Spring Options Workshop and Bootcamp April 5th-9th, Denver Colorado ************************************ OptionInvestor is proud to announce our third annual Spring option workshop in Denver Colorado. This power packed five-day event is structured to fully educate you on advanced option strategies and will make you a better and more profitable trader. If you attended the March Denver Expo last year and thought it was the best function you had ever attended.. You haven't seen anything yet! Great food, entertainment, education and just plain fun in sunny Denver. The biggest complaint in March was the massive weight gain experienced by the attendees from the gourmet menu. We know how to put on a function. Ask anyone who came last March! We guarantee the speaker lineup to be second to none. In the October seminar not only did we have Jim Brown and over 15 of the OIN staff but Steve Nison, the father of modern candlestick charting. Also, Dick Arms, creator of the Arms Index or the Trin Indicator, Gregory Spear, author of the Spear Report, Stan Kim, founder of the Snail Trader System and Jim Crimmins, president of TradersAccounting.com. We promise the lineup this April will exceed your expectations again! This is not a beginner seminar but if you feel the need to brush up on the basic trading strategies then we have an optional boot camp the day before the four day seminar begins. If you have traded options before and you are comfortable with the basic strategies then this seminar will take you to a new trading level. If you have been trading options for sometime and are ready to broaden your knowledge and improve your trading results in all kinds of markets then this is for you. Meet and interact in a small group setting with the writers you have seen in OptionInvestor for the last four years. We are starting the seminar with an optional one day boot camp which will cover all the basic strategies, calls, puts, leaps, covered calls, naked puts, spreads, straddles, etc. This will help investors not familiar with all the basic strategies get up to speed before the intensive education and the advanced material in the main seminar. The boot camp will be 8 hrs of personal instruction by the OIN staff. The main seminar will begin with a reception, dinner and entertainment on Thursday night and continue non-stop until noon on Monday. We mean non-stop. We don't quit until you do and many optional sessions last until 10:PM or later. The detailed schedule will be posted in about two weeks. There will not be individual breakout sessions during the day. Each topic will be covered in 1-2 hr general sessions taught by one or more OptionInvestor staff and presented on three giant screens. In the evening we will offer five of our popular chalk talk sessions for that personal question and answer interaction. The list of instructors is led by Jim Brown and will include many OIN staff with outstanding guest speakers during lunch and dinner each day. The Spring Denver Expo seminars fill up fast and seating is limited! SIGN UP NOW or risk missing out on this opportunity. Unlike other seminars with only two or three instructors, you will get in-depth knowledge from many different instructors who are experts in their field. The cost for the four-day workshop, April 6th to 9th is only $2995 (spouse only $1495). This includes breakfast, lunch and supper each day. All course materials, a CD of all the presentations and a professional video package of the entire seminar so you can review the material at home in the comfort of your living room. There is also a $500 discount if you have attended a prior OIN seminar. This is not a prepackaged presentation that gets repeated over and over with stale information. This is a one-time production and everything is fresh, live and as current as we can make it. The videos will have your real time questions and answers and not some from a prior class. Where else can you get intensive yet personalized options education like this? Do not delay as seating is very limited. We guarantee you will not be disappointed! You can pay for your education one bad trade at a time or you can invest less money one time to learn how to do it right. Click here for more info: https://secure.sungrp.com/workshop/april01/index.asp If you have not been to one of our Denver Expo seminars before here are some comments from previous attendees: The words herein are totally inadequate to express what I am feeling about you and all the OptionInvestor organization. But this medium is all I have. Thank you more than these few simple words can say. Wow, what a seminar! In my 25 years of investing I have attended many instructional conferences, but I have never, never experienced one like your Options Expo. The instructors were absolutely tops. Subjects, generally were on target. Especially for me, the Skybox, index funds/options and the early morning strategies and trading were particularly great. The attention to the many details and nuances were especially evident, and I guess most of the credit that area goes to your great support team. Now, the real challenge is to apply and implement the powerful knowledge I was exposed to. Sincerely and warmly, Kevin Hughes, Denver ************ Jim & Staff, I am sitting in the hotel room after a great 3 days in your seminar. I can't tell you how pleased I am and want to thank each of you for a job well done. Having been responsible for events like this, albeit on a much smaller scale, I can recognize all the hard work that went into the seminar. Each member of the staff is to be congratulated!! The seminar confirmed my belief that the OIN staff really cares about the success of their subscribers. Jim, you all should be proud of the work you do to enrich the lives of so many people. It is one thing to amass a personal wealth. It is a much higher calling to help others meet their goals in life. I was very impressed that you were emotional in your closing remarks. You have so much to be proud of -- helping people fish all over the world! Thanks again and I look forward to attending another seminar in the future. My best regards, Jim Boettcher Austin, Texas ************** I must say, that your seminar was outstanding!!! Sign me up for next year. It is rare that a person of your position would share so generously your knowledge of his trade. I hope that I will be able to put into place much of what you taught. Every aspect of the seminar was first class, from the hotel, to the food, the instructors and the luncheon speakers. One of the biggest surprises was your generosity in handing out material, and gifts. Two weeks ago I attended a competing option seminar in Chicago and all I got from the was coffee at the morning break, No handouts, no food and half of the final day was promoting their web site and additional classes. I must say your seminar far exceeds what I got from them. Sincerely yours, Mike Lillis *************** Please pass on my thanks to the entire OIN group for a fabulous EXPO. The seminar far surpassed any expectation that I would have fathomed, had I attempted to! OIN has the right attitude and the obvious ability to be a leader and I look forward to many years of positive experiences with you folks. Kind regards, Gwen Richardson **************** GREAT JOB TO EVERYONE! I described this event to my friends as a life changing event! (options aside) ,the quality of people, dedication, sacrifice of their time (the second 40+ hours a week they don't have to work but do) they do this because they care, wanting to help others change their life dramatically (My wife thinks I was oxygen deprived up there !) I came back a different person for those who know me that says a lot. Now for the options side I have to admit there was so much info to absorb, most of it came to me on the 2000+- mile ride home it all started to fall into place I feel Very confident (yes Jim this can be bad but I know this now!) Notice the patience here guys! that's one change I have a plan to stick to ! THANK YOU !!! Allan O'Neill ************** Need we say more? If you want to learn how to be a better trader, making more and losing less then you should come to this seminar. We guarantee you will not be disappointed! For more info: https://secure.sungrp.com/workshop/april01/index.asp ********************* EARNINGS SCHEDLUE Feb-5th to Feb-9th ********************* The earnings calendar is too large to email. Please visit the website for the complete list. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1525 ************************************************************** ************** EDITOR'S PLAYS ************** Right call, wrong timing! This never happens to anyone else, right? I bought SPX puts on Wednesday to capture the anticipated post FOMC sell off. Everything was looking good until the small rally into the close on Thursday night. I closed the position thinking the Dow might actually break 11,000 on a good Jobs Report Friday morning. Everyone knew the Jobs Report was going to be very recessionary, right? Still, I closed the position just to be safe. The rest is history. The bad Jobs Report doubled the price of the puts, AFTER I had already closed the trade. Surely this never happens to anyone else! The coming week is tough to predict. The market has already priced in the 100 basis point rate cut and the possibility of an earnings problem from CSCO is strong. It would appear that the direction could be down. However the Fed did cut rates and they will probably do it again. This will be on the minds of fund managers. Up? Down? Sideways? My advice would be to stand aside and watch until after the CSCO announcement and then decide which way to play. Because our readers are mostly type-A personalities they do not want to hear this and only want a couple killer plays in spite of the market indecision. Because of that I would class these plays as lottery plays and very high risk. Use your own judgment! AMCC - Put AMCC is tanking with the rest of the semiconductor sector but could rebound at any minute on any positive comments from an analyst. AMCC just broke a trend of higher lows and fell below the uptrend line. Support is probably in the $60 range. The Feb-$60 put is only $2.69 and another serious Nasdaq down day could provide a couple dollar gain. ************** CSCO - $35 Straddle About the only thing for sure on Tuesday after the CSCO earnings is that CSCO is likely to move strongly in one direction or the other. With the bad news already priced in to CSCO at $36 many analysts think we could see an immediate rebound if the guidance is not too bad. Others think JNPR is stealing market share faster than expected and CSCO will drastically warn. CSCO at $25, could be, but it could also be $42 again real soon. The conservative way to play this would be a straddle. Buying a call and a put at the same time. You profit from a strong move in either direction but lose one side in a weak move. With CSCO likely to move at least $5 up or down the risk to this play is minimal. Your cost of entry is only $5 and either option will be $5 or more with a move in a single direction. The risk is a flat report and a flat stock hovering around $35 for three more weeks. Still should that happen you could close the position for a small loss within a day or two of the announcement. If you must play before the announcement this would be a fairly safe play. ******************* QQQ - Straddle Using the same straddle concept on the QQQs would produce a profit with a strong move in either direction. We all agree this is likely to happen but we just do not know which direction. The net cost of the Feb straddle is only $5.40 and one side should win. **************** If you must play, two of these three options give you some safety and yet a chance for a big win if the market moves somewhere quickly on the CSCO announcement. Good Luck Jim Brown *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1512 ************************************************************ **************** MARKET SENTIMENT **************** Groundhog Day By Austin Passamonte Punxatawny Phil, woodchuck weather prognosticator extraordinaire emerged from his winter slumber on Friday and couldn't decide whether he saw his shadow or not. It was almost a shadow but not quite full penetration so nobody could tell which... oops, sorry, wrong parable. That saga took place in Florida not long ago. Nope, Phil decided winter was over and ambled off away from his den to share lush green pastures with frisky bulls kicking up their heels. Farmer Al came to deliver sweet feed Wednesday afternoon at 2:16pm and all the bulls gathered round. Quickly the feed was spurned and bulls scattered to all four corners of the wind, nary to be seen again. Poor Phil sat all alone & helpless in the grass when along came Recession grizzly bear to gobble him down like a party hors d'oeuvre. Bulls are gone, Phil was lunch and the grizzly ambles on. Are those storm clouds on the horizon? Looks a little dark over Stochastics mountain and a low pressure system threatens to push down the slopes. Lower temperatures and turbulent wind is in the forecast. The daily news report plots this weather system's movement from here. Better bundle up and put a few logs on the fire, it could be awhile until warmth returns. Actually, the VIX & VXN barometers have been hanging at multi- month lows the past few days. Release from there could signal fair weather soon, so we'll keep an eye on them. A tropical storm is beginning to form offshore as well. Only visible to the well-trained eye, if Hurricane CSCO develops as feared it could easily be a category-five storm. Batten down the hatches and head for high ground, if this one strikes land late Tuesday night it will blast the landscape apart on Wednesday and possibly beyond. The imperfect storm. Early February is often the coldest month with March one of our stormiest. Can't rule out the Recession blizzard spreading a blanket of snow across the nation and freezing things to a crawl. Farmer Al may have delivered the feed truck a bit too late this time. Hungry bulls needed several pounds of feed each day to sustain life, vigor and health. Starving them for many months has left the herd in poor shape. Dumping a ton of feed on the ground cannot undo all of the damage malnutrition caused before, day after growth-slowing day. Very neglectful, Al. Those who believe you're a brilliant farmer that ably protects his spread may soon find out modern times have long since passed you by. Hindsight is perfect and the horizon is beginning to clear across the vast prairie lands looking dead flat this year, to use your words. We hear word that your feed truck may be passing this way again real soon, but malnourished bulls haven't begun to digest the last heap you piled in front of them. Remember Al, it takes time for all that feed to work its way through the system. Did you starve your bulls way too long? Force-feeding will not, cannot and does not make up for many months of neglect and abuse. And so we wait to see if the bulls, gaunt from scarce feed and ribs sticking out can fatten themselves in the week ahead. Or will winter return with a vengeance to claim more lives and settle across the land in a thick blanket of ice and frozen snow? The End (or just the beginning?). ****** VIX Friday 02/02 close: 24.75 VXN Friday 02/02 close: 63.75 30-yr Bonds Friday 02/02 close: 5.48% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Saturday (02/03/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 745 - 730 9,266 819 11.31 725 - 710 7,730 5,965 1.30 OEX close: 705.48 Support: 700 - 685 5,319 10,566 1.99 680 - 665 1,698 7,626 4.49 Maximum calls: 740/3,968 Maximum puts : 700/4,968 Moving Averages 10 DMA 711 20 DMA 700 50 DMA 701 200 DMA 757 NASDAQ 100 Index (NDX/QQQ) Resistance: 71 - 69 75,075 7,663 9.80 68 - 66 45,043 16,677 2.77 65 - 63 46,552 61,081 .76 QQQ(NDX)close: 61.55 Support: 60 - 58 16,847 62,419 3.71 57 - 55 8,048 27,056 3.36 54 - 52 2,297 21,692 9.44 Maximum calls: 70/59,934 Maximum puts : 60/50,255 Moving Averages 10 DMA 65 20 DMA 63 50 DMA 63 200 DMA 82 S&P 500 (SPX) Resistance: 1425 15,765 4,704 3.35 1400 15,485 1,990 7.78 1375 9,706 7,443 1.30 SPX close: 1349.47 Support: 1325 11,225 12,117 1.08 1300 2,964 13,771 4.65 1275 486 10,714 22.05 Maximum calls: 1425/17,765 Maximum puts : 1350/15,376 Moving Averages 10 DMA 1360 20 DMA 1340 50 DMA 1334 200 DMA 1416 ***** CBOT Commitment Of Traders Report: Friday 02/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader’s direction. Small Specs Commercials DJIA futures (Current) (Previous) (Current) (Previous) Open Interest Net Value -467 +426 -5599 -7528 Total Open interest % (-6.18%) (+5.66%) (-22.99%) (-30.35%) net-short net-long net-short net-short NASDAQ 100 Open Interest Net Value +1810 +1262 -6642 -4061 Total Open Interest % (+11.61%) (+8.36%) (-10.94%) (-5.90%) net-long net-long net-short net-short S&P 500 Open Interest Net Value +73434 +69952 -93215 -91053 Total Open Interest % (+39.86%) (+37.54%) (-12.53%) (-12.11%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: The disparity between Commercials and Small Specs remains intact on the S&P 500. Small Specs have moved from net- long to net-short on the DJIA while the Commercials have increased their net-short positions on the NASDAQ 100. Interest Rates: Commercials are moderately short T-Bond and T-Note futures. (mildly Bearish) Currencies: Commercials continue to build heavily short Euro futures while small specs build net long. Small specs are betting on interest rate reduction while commercials remain skeptical. (Bearish) Energies: Commercials are net-long crude & oil products at one year extremes. These producers are hedgers and almost always take the opposite side of expected market action to lock-in production prices. They expect lower prices from here (Bearish) Metals: Commercials are moving to net-long in Gold, Silver and Copper from short positions. This has happened quickly and they expect higher precious metals soon. (Bullish) COT/CRB: This commodity index measures the entire spectrum of commodities in overall bullish or bearish outlook. It is now at a one-year high for commercial bullishness, meaning the outlook for commodities is long-term positive while equities as a mirror are considered long-term negative. Data compiled as of Tuesday 01/30 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/020401_1.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1534 ************************************************************** *************** ASK THE ANALYST *************** Input - Output By Eric Utley My role here at OptionInvestor is to add value, educate, and ultimately help our readers take money out of the market. It's a good role, but one that needs to evolve. So I'm asking the readers of this column, both the newbies and seasoned pros, for input on ways I can improve upon my weekly commentary and review. To the detriment of this column, I don't have the best grasp on exactly who my audience is. And if there's one thing my writing teachers stressed, it's to know your audience. It may be a fault of the medium with which I present my commentary, or just my fault for not asking, but I need to get a better grasp on the demands from this column. What I would like from my audience are suggestions, complaints, insights, demands, requests...anything to let me know what is wanted. The more participation I get in this request, the better I can tailor the column to meet the needs and wants from my readers. I know for a fact that A LOT of people read this column judging by the Internet monitoring trends I receive. But for some reason I don't get very many complaints or disagreements from the readers. To be honest, I can take criticism, and I sure as hell deserve some considering subscribers to OptionInvestor pay $40 a month. It's rather simple, the more my readers demand the more value I can add. In an attempt to better inform readers of my strengths, thus value adding abilities, let me elaborate a bit on my market operations. My specialty trades are high probability, low risk operations that are very short in duration (day trading). To emphasize that point, 85% of my trades thus far in 2001 have been profitable. I have put on exactly 20 trades this year and have lost money on three: twice in Cisco calls and once in Microsoft calls. I usually don't hold positions over night, but that depends a lot upon the current market conditions and sentiment. I trade almost every sector of the market except energy stocks; for some reason I find that sector hard to game, especially the supply/demand characteristics and risk/reward profiles. And if I don't understand it, I don't trade it! Both my trading and investment decisions are based upon a top-down bias, which I develop by monitoring A LOT of different metrics. This includes global markets, currencies, interest rates, the bond market, political uncertainty, emerging businesses, sector rotation, sentiment, market psychology, among other variables. In essence, I live, eat, breathe, and often sleep stocks. I'm a professional market participant that writes, not the other way around. As such, I feel sometimes my messages and observations are a bit convoluted. And that's where the readers of this column need to voice opinions, concerns, and/or demands. The more input I receive, the better output I can deliver. I'd also like to make it clear that I'm not bragging, and I'm by no means conceited. I follow innumerable data points and their relation to stocks every day. I've studied this stuff day and night for a long, long time. Everyone is capable of taking money out of the market if they put in enough time and work, and that's all I've done. So if the readers of this column have any suggestions, advice or complaints, please let your voices be heard. The only reason I ask is so I can improve the product I deliver every weekend. Send your comments and don't forget stock requests to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- Electro Scientific Industries - ESIO Thanks for taking the time to answer my question. Please give me your opinion on ESIO. - Thanks, Sid Thanks for the request, Sid. Electro Scientific (NASDAQ:ESIO) is a smaller player in the chip industry with a market cap of roughly $890 million. Its products are used by manufactures of wireless communication chips, computers, automotive electronics, among other electronics. Electro's products improve upon semiconductor technologies and increase efficiencies in the manufacturing process. Its competitors include SCI Systems (NYSE:SCI) and Vishay Intertechnology (NYSE:VSH). Judging by Electro's most recent earnings report, one might draw the conclusion that the company is not experiencing any slowdown. The company earned a full $1 per share during its most recent quarter while analysts were forecasting a profit of 87 cents per share. That was a nice 15 percent surprise to the upside. The company has a stellar earnings history with solid quarter-over-quarter and year-over-year numbers. Shares of Electro trade with a trailing price-to-earnings ratio of 11 and a forward-looking PE in the single digits. That's some pretty cheap stock considering Electro's expected earnings growth. The only real cause for concern that I could find with Electro is the fact that estimates for the current quarter are trending lower. What's more, the analysts' numbers for next year are substantially lower than those for this year. Obviously Wall Street is expecting Electro's earnings growth to decelerate in 2002. However, if the company continues to surprise to the upside as was the case last quarter, Wall Street will be proven wrong and shares of Electro will return a handsome profit to investors. The stock is undervalued relative to the broader tech sector, considering the company's earnings growth. The only reason the stock isn't trading higher right now is because of Wall Street's expectations for lower growth ahead. Again, if Electro continues to beat estimates, its share price will catch up with the fundamentals. Finally, the company has a debt-free balance sheet and a nice position in cash. Now let's segue to the chart. ESIO staged a big rebound from its near-term lows late last December. The stock nearly doubled in the space of just one month. It's due for a breather. I'd like to see the stock settle into a range between its current level and maybe $30, consolidate, then breakout above near-term highs. Notice the decrease in volume that has accompanied ESIO's pullback, which confirms that the recent move is normal profit taking. ---------------------------- Bell Microproducts - BELM Should I hold this stock or sell the 22.50 call? - Herb While you know I cannot give specific advice on trading strategies, Herb, I'd be more than happy to comment on your request and review the chart. Bell Microproducts (NASDAQ:BELM) is another company with various operations in the semiconductor business. The company sells a variety of products to manufacturers along with value-added services. The idea of selling a covered call on BELM is well-founded, Herb, especially around the $22.50 level. As easily seen on the chart, the $22.50 level, for one reason or another, has been a historical site of resistance. Add to the fact that BELM is still battling a long-term descending trend line and selling covered calls might not be a bad strategy right here, especially if the broader tech sector remains under pressure. However, I'd point out that Bell is announcing earnings on February 7th, which may present some risk in putting some calls out. The company does have a history of surpassing estimates by healthy margins - but the guidance going forward will be the most crucial in price direction. As for the longer term outlook on the BELM chart, let me make a few quick points. The stock has staged a nice rebound along with the broader chip sector thus far in 2001. BELM is now pulling back and consolidating its recent gains on very light volume, which is normal. Similar to the ESIO chart above, I'd like to see a key support level hold right here for BELM - in this case, the $20 support level for BELM. The stock could very well settle in a range between $20 and $22.50 in an attempt to consolidate recent gains before the next catalyst takes BELM higher, which may or may not be the firm's earnings announcement next week. ---------------------------- Broadcom - BRCM Please advise your views on BRCM? When do you think [the] stock would halt the downward trend? - Thanks and regards, Sunil Broadcom (NASDAQ:BRCM) is, of course, a highly-visible, much- loved company on Wall Street. As such, I won't bore you with the details of the company or the underlying fundamentals of the business. Instead, let me make a few general and technical observations in an attempt to convey my opinions on Broadcom. Expectations for Broadcom are very high. And although the Street's expectations for Broadcom have come down over the last three months, I wonder how much hope is still priced into the stock? If Broadcom were to miss estimates in a coming quarter, lower guidance, or blowup similar to the PMC Sierra (NASDAQ:PMCS) incident I think the result would be very painful because of the high regard with which the market views Broadcom. I also noticed that several insiders have been selling shares in Broadcom over the last three months. I don't know if that fact is a cause for concern, but it's something to be aware of. Now let's address your attempt in picking the bottom in shares of Broadcom, Sunil. It looks as if BRCM may trace an inverse head-and-shoulders bottom. The low, or the head, of the chart formation is set at $75, with the left shoulder in place at $85. I think if BRCM continues to pullback under pressure from the Nasdaq, a good entry point would be a bounce off the $85 level. The $85 level would provide a solid entry into BRCM because the risk is easily quantifiable, and the potential reward outweighs the risk, assuming Broadcom continues to deliver. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ******************************************** Do you like OptionInvestor? Then vote for us as a favorite site: http://www.investorlinks.com/vote.html Thanks for your support! ******************************************** ************* COMING EVENTS ************* For the week of February 5, 2001 Monday ====== NAPM Services Jan Forecast: 55.00% Previous: 61.10% Idx of Online Shopping Jan Forecast: NA Previous: 250.5 Tuesday ======= None Scheduled Wednesday ========= Productivity-Prel Q4 Forecast: 2.50% Previous: 3.30% Consumer Credit Dec Forecast: $8.5B Previous: $12.9B Oil & Gas Inventories 2-Feb Forecast: NA Previous: 282.6MB Semiconductor Billings Dec Forecast: NA Previous: -2.0% Thursday ======== Initial Claims 3-Feb Forecast: NA Previous: 346K Wholesale Inventories Dec Forecast: 0.50% Previous: 0.40% Chain Store Sales Jan Forecast: NA Previous: 0.7% Friday ====== ECRI Wkly Leading Idx 2-Feb Forecast: NA Previous: -1.5% Week of February 12th ==================== Feb 13 Retail Sales Feb 13 Retail Sales ex-auto Feb 14 Business Inventories Feb 15 Initial Claims Feb 15 Export Prices ex-ag. Feb 15 Import Prices ex-oil Feb 15 Philadelphia Fed Feb 16 PPI Feb 16 Core PPI Feb 16 Housing Starts Feb 16 Building Permits Feb 16 Capacity Utilization Feb 16 Industrial Production Feb 16 Mich Sentiment-Prel. ************************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=1541 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 02-04-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/020401_2.asp ************** TRADERS CORNER ************** The Perfect Storm By Janar Wasito After a long hiatus to do some traveling, I asked Jim whether it would be OK to write some articles for Optioninvestor again. One of the secrets of improving as a trader is to keep some kind of journal to evaluate your trading decisions and to improve as you go on. I found that writing for the newsletter helped me to do this. I am basically a very novice option trader, but I have found the newsletter to be very helpful in laying out an array of strategies. I am going to focus my articles on the new subscriber-- how to read the newsletter; how to set up your own trading logistics; how to think, in general terms, about asset allocation and strategy allocation. But first, let's go back a few years and talk about risk. In "The Perfect Storm," George Clooney and crew head out to the Flemish Cap to catch some fish. If you read the book, you find that they are risking their necks for a few thousand dollars, and this last trip of the season promises to be the big catch. They end up deciding to try to head back to Massachusetts through the storm of the century so the fish won't spoil -- and, so to speak, they lose their account. Sound familiar? When you look back on it, Oct 1998 to March 2000 was the prelude to "The Perfect Financial Storm." Greenspan cut rates 3 times in quick succession to head off the Long Term Capital Management situation and Russian debt default in the Fall of 1998. Predictably, that sparked a rally, and inflation, which the Fed had to fight beginning in mid-1999. But, there was this little thing called Y2K that everyone got worked up about, including Big Al, and he skipped a tightening in Dec 1999. That caused our friend, the NAZ, to put in a pretty mean blow off top between Nov 1999 and Mar 2000. 2000 points in 4 months. Remember the old axiom, Don't Confuse Brains and a Bull Market. The third and final ingredient to the prelude to the Perfect Storm was the dot-com boom and bust. Oh yeah, the signs were there. I remember seeing The Internet Bubble at Bucks in Woodside in Nov 1999. A venture capitalist looking every bit the teenager sat waiting for a breakfast date, probably with some merry band of entrepreneurs. But that didn't stop me from day trading options on internet stocks on my wireless modem while sitting through the last year of graduate school. In any case, the fallout from The Perfect Storm was record volatility, mostly on the downside, all throughout the last 9 months of 2000. You could trade it, but it was a tough environment to learn. Bonds, anyone? But, just as everyone is getting conservative, hurting for cash for monthly expenses, and taking a very protective position, the best opportunities occur. George Clooney and crew could have pushed out towards Europe to ride out the storm and come back to port with a cargo of spoiled fish, but they would still have a boat. The question is whether you still have a tradable account, and maybe even some of your gains from 1999. That's the mark of a pro, and that is a matter of asset allocation and discipline. I didn't do everything right, but as I review where I have come in a little over 2 years of option trading, these are the questions I am asking myself. I suspect that with a new Fed easing cycle started that the economy will pick up this year, particularly towards the second half. However, I also suspect that we have not yet seen the lows in some sectors and indexes. We won't know whether Alan overshot until later this year. But in this environment, there will probably be a new crew of newsletter subscribers, and that is where I will try to focus my efforts. If you have a boat, and are still willing to take a risk, stay tuned. ****** Recession Indicators: Paul Harvey, The Super Bowl & Groundhogs By Renee White There seems to be a lot of uncertainty out there. One day I hear relief with optimism for the future, followed by fear and despair over an impending recession. Let's review with the help of Paul Harvey, the Super Bowl and Ground Hogs. As though times weren't confusing enough, I was driving home listening to the radio Friday when I heard something that annoyed me. Anyone who has ever listened to talk-radio has probably heard Paul Harvey and his famous line "and NOW you know, the rest of the story." I've always enjoyed his stories but not today when he threw out a comment something to the effect: "It's official. We're in a Clinton Recession. We have 6 months of decreases in manufacturing jobs." Excuse me. Did he say we were officially in a recession? Phooey!!! Many people are bored to death with economics, so I will try to keep the details pertinent to traders. Understanding the bare basics of economics gives traders an edge when looking beyond day-trading strategies. After hearing Mr. Harvey's comment, I think it's an important time to review the definition of a recession and how it relates to business cycles. According to the U.S. Commerce Department, the economy is in a recession when there is a decline in Gross Domestic Products (GDP) lasting for 2 consecutive quarters (6 months) or more. My Webster's dictionary defines it "as a temporary falling off of business activity." Temporary. Compare this to a depression, which is defined as "a decline in GDP for 6 consecutive quarters (18 months)." To put a recession in perspective, we need to realize that for almost 10 years (should I thank Mr. Clinton for at least part of that?), we have had a booming, exploding economy with barely a hiccup. That's what's so unusual. Naturally, a pullback from 4-6% growth to Thursday's GDP number of 1.4% is going to hurt. That pullback sends many screaming, "Fire" in the darkness of the night because they fear the worse when they first smell smoke. We are definitely in a pullback but we are not yet in a recession, nor do I think we will get there soon. However, I can certainly trade the fear and profit from it. Understanding normal business cycles to make investment decisions, can greatly improve ones investment returns with little effort. Business cycles go through four stages: Expansion, Peak, Contraction, Trough. Guess how many of those stages we hit in year 2000? Economists call mild short-term business Contractions, "recessions." Longer and more severe Contractions are "depressions." During Peaks, it is easy for all to feel a little exuberate, obviously, irrationally. Sometimes, when you reach the top of the mountain, you forget how hard it was to get there. Once declining business activity begins during the Contraction phase, both businesses and ndividuals start feeling pain, sometimes, also irrationally. Once business activity stops declining and levels off, the cycle makes its Trough. If you're not careful, the choppiness during the Trough phase is where traders can lose money from the whipsaw action of the market before the next upturn begins. Yet this is also where investors with a longer-term perspective, can do well. This is why I always like to think through the big picture, while making short-term trading decisions. Those economic numbers we report weekly are so important to follow. When monkeys can throw darts and pick stocks as well as you, most likely we are in an Expansion phase, which is characterized by: increasing consumer demand for goods & services, increasing industrial production, rising stock markets, rising property values, and an increasing GDP. Another words, people are buying cars, homes, computers, going on vacations and companies are selling all products; corporate earnings are great. Have you noticed that during the recent downturn in the business cycle, we have heard nothing from that dart-throwing monkey? The Contraction phase (correlating with downturns) is characterized by: rising number of bankruptcies, bond defaults (lights out California?), falling stock markets, rising inventories (due to slackening consumer demand), and a decreasing GDP. So we have it. We've been in a Contraction. We've had not only slackening retail consumer demand but also slackening business demand as capital expenditures by businesses, slow also. That slower demand causes a decreasing GDP. Makes sense, doesn't it? It is important to note that our 4th quarter GDP was NOT negative. As a trader or investor, I can use these business cycle phases, to help me time my longer-term market moves. This week we heard that the unemployment rate had jumped to 4.2%. Mr. Harvey was right, we have had 6 months of decreasing manufacturing jobs, almost 225,000 since last June. What he didn't mention was the increase in hours worked (factory work week) by those remaining employees or the huge (145,000) gain in construction jobs, which was the highest since 1978. That inconsistency is enough to confuse anyone, including the Fed. Certainly, job growth in construction corresponds also with the recently reported strength in the housing industry. I don't know about you, but it sounds like someone is making money somewhere if they are building, buying houses, and hiring workers due to demand. Could this be sector rotation in real life? Watch these numbers because reports of increasing jobs being created, with other strong indicators, will not hurry the Fed to consistently and aggressively cut taxes. With some numbers showing strength while others show weakness, he could decide to sit and wait for more data. That's important because all traders should know by now, if the Fed disappoints us on a decision day, it's a sure sell-off. But never fear. We have other indicators to look at. According to Reuters News Service, The Super Bowl Stock Market Predictor has correctly forecast yearly stock performances based on the winner of the American professional football championship game over 80% of the time. The predictor says if the team can trace its roots to the original National Football League, and wins on Super Sunday, major stock market indices will rise in the calendar year the game is played. But, if a winning team's roots are in the American Football League, the Dow, S&P 500, and the NYSE composite, will fall. According to Bob Stovall the developer of the Predictor, "Over a period of 34 years, it has outperformed any packet of Nobel prize winners or team of strategists that I can think of." There's no confusion about the direction of the economy with this indicator. What's exciting here is that this year, both the Baltimore Ravens and the New York Giants got their starts in the original NFL. So, bring back those dart throwing monkeys, it's party time! Then we have the Ground Hog Day Predictor and Indicator. According to this indicator, if he doesn't see his shadow, spring is near, birds will sing and stocks will fly. Money and life will be easy, we are back to expensive restaurants and economic expansion. If he does see his shadow, it's time for TV dinners, continued shopping on Ebay, and dreams about retirement in 100 years. Uh oh, another indicator with confusing data. Punxsutawney Phil, the world's most famous reporting groundhog, did see his shadow on Friday. Bummer! Hey Phil, my friend, you let me down here! Luckily, there was another groundhog in another part of the country, which didn't see his shadow, so a return to easy life near-term is undecided by conflicting data also. Last weekend I explained why I was taking positions, expecting a sell-off for the week. Although the week started out strong, it ended with a loud whimper and my bias proved profitable. Since we closed at the lows, I decided to hold positions over the weekend. Depending on the opening rotation action & news Monday morning, I will either take profits on a strong gap down with broken support levels, or if weakness continues, I may wait awhile but exiting before CSCO's earnings are released. My thinking is that fears of CSCO missing their routinely stellar earnings whispers may keep the markets suppressed going into that number. I'm having a hard time expecting much of a rally before those numbers are known. Therefore, if I am right, I will take profits while the fear is high, before they are released. If Nasdaq stays weak going into those numbers, and they meet expectations but not the whisper number, a relief rally MAY occur. On the other hand, if buyers come back Monday and there is market strength going into CSCO's numbers, beware of a potential sell-off if anything from the report disappoints the market. Personally, I feel the downward pressure in the market, which may take us to nice lows for long-term entry points. Times may be choppy in the markets for a while, if we are in the Trough phase as I expect. But with an unbelievable 100 basis point worth of easing in one month, and a probably successful retroactive income tax rate cut on the horizon, I'm feeling good about next year's Santa Claus rally already. Corporations are readjusting their balance sheets already. Homeowners aren't the only ones who refinance for lower rates. It was reported Friday that Nabors Industries (AMEX:NBR) was locking in long-term borrowing opportunities, when they didn't even need the funds yet, just to take advantage of the low financing rates. I don't know about you, but I had to wonder, Why now? Why not wait another 6 months when rates are supposed to be lower? Hmmm. That suggests to me that somewhere along the way during this recovery, we as traders might expect a rate cut, and not get it. Big business is starting to lock in rates now. Ask yourself this, if there were thoughts of an impending recession by big business in the near future, would they lock in money now that they don't need yet, at today's rates? ************************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=1526 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* MWD - Morgan Stanley Dean Witter $86.26 (+3.76 last week) See details in sector list Put Play of the Day: ******************** NEWP - Newport Corporation $75.56 (-13.25 last week) See details in sector list *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1513 ************************************************************ ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS COST $43.94 (+2.06) Costco struggled to push past $46.25 on Wednesday and Thursday, and made it as far as $46.38 Friday morning. Unfortunately, severe weakness in the broad market indexes, as well as a loss of over 2% in the retail sector on Friday took its toll. The retail sector (RLX.X) started selling off early Friday morning, and dropped below support at 920. Costco fell to support at $44 shortly after the RLX broke down, and held there for most of the day. However, a drop in both the Dow and the Nasdaq of over 100 points near the market close overwhelmed any strength Costco had left, and it dropped below our stop price of $44. Thus, we are dropping our play this weekend. NITE $22.00 -1.25 Nite showed impressive strength on Thursday in the wake of the post-Fed meeting slump. On Friday, Nite managed to stay above $22.40 for most of the day, in keeping with the pattern of higher lows it had been establishing. However, when the Dow broke below 10,900, and the Nasdaq dropped below 2680, Nite couldn't hold up, and closed at our stop price of $22, so we are dropping it this weekend. EMC $72.20 (-6.86) The scrimmage between the bulls and the bears was resolved on Friday, and it was a decisive victory for the bears. After threatening for most of last week to break below our $76 stop, the top-heavy nature of the broader markets took a big bite out of EMC's market capitalization on Friday. Not only did the $75-76 support level give way, but shares of the enterprise storage leader fell as low as $71, plunging through the 50-dma. The positive effects of the company's outstanding earnings report seem to have been fully dissipated, to be replaced by the continuous stream of negative news from the broader technology sector. With the sharp technical violation, there is no point in keeping EMC on the playlist, so we are moving on to healthier plays. CTXS $34.81 (+0.94) Throughout CTXS' steady ascent in the month of January, the 5 and 10-dma (now at $35.53 and $34.86) provided moving average support while connecting the highs and lows during that time revealed an upward trending regression channel. On Friday, the stock fell almost 4 percent in sympathy with a soft NASDAQ. While volume was light, less than 80% of ADV, the close put CTXS below its two aforementioned moving averages as well as its upward trend-line and our stop price of $35. This break suggests that the up-trend has been broken and as such, the chances favor sideways to negative price action going forward. With upside potential now less likely, we are closing out this play. FDRY $20.25 (-2.63) It appears that the Cisco effect is weighing heavily on our call play in FDRY. Comments made by CEO John Chambers have been seen as bearish by the market, which has led to weakness to CSCO's stock price, affecting the entire Networking sector. FDRY ended the week lower, falling almost 9 percent on Friday. Trading volume was light, a little over half of ADV but by the day's end, the stock has fallen below its 5 and 10-dma (at $21.97 and $21.50). CSCO's earnings is fast approaching, as the Tech bellwether will be reporting this Tuesday, adding an element of increased uncertainty in the near term. That and the close below our stop of $22 puts FDRY on the drop list. IBM $110.27 (-3.92) With the Dow Jones Industrial Average pulling back triple digits on Friday, Big Blue retreated $3.78 or 3.31 percent on fears of the slowing economy eating into corporate profits. While the adage of not fighting the Fed may still hold true, the recent rate cuts may take some time to work themselves into the market. In the meantime, as option investors, we are well aware of time decay and its effects on a play. With IBM's close below its 5 and 10-dma ($113.58 and $112.09) as well as our stop price of $111, with stochastics pointing towards the likelihood of further downside, we are no longer recommending taking new positions. RMBS $49.06 (-0.06) While still above our stop price of $49, we are taking RMBS off our call play list, as the stock is falling under the swoon of sector sympathy. With the Philadelphia Semiconductor Index (SOX) and Merrill Lynch's Semiconductor HOLDR both breaking below their recent up-trend lines and stochastics curling southward, the Chip stocks appear to be in the process of rolling over. During RMBS's climb in January, the stock has shown higher relative strength than its peer group but at this point, with strong overhead resistance at $50.35 from the converged 5 and 10-dma and the Semiconductors stumbling, we are taking our money off the table. UBS $173.79 (+1.34) The anemic volume and narrow range trading we have seen in shares of UBS over the past couple of weeks has given little sign of what the stock wants to do next. With support at $170 and resistance at $176, this play would have been dropped long ago if not for the low option prices relative to the stock price allowing enough leverage to trade the range. On Wednesday, the stock managed to close above the $176 level but with little buying conviction to support the move, UBS quickly pulled back. Our stop at $173 remains in place but in light technical weakness in the charts of competitors BSC and LEH, we are stepping aside. Look for strength in Monday trading to exit open positions. SUNW $29.19 (-2.06) Our long-term play on shares of Sun Microsystems came to an abrupt halt last Friday as the stock came under heavy selling pressure. The pullback in the Nasdaq Composite caused SUNW to fall below our protective stop at the $30 level, subsequently forcing us to drop coverage on the play. For those with open positions, look to exit plays on a rebound back up to the $30 level. BBY $43.69 (-3.81) Our play on retailer BBY had been sailing along smoothly ahead of last Friday's jobs report. The report revealed an unexpected large increase in new jobs, which led market participants to feel the Fed would not cut interest rates before its meeting at the end of March. As a very interest rate sensitive company, BBY took the news on the chin and rolled over. BBY fell well below our stop at $47, but for those with open positions use any relief rally early Monday to exit plays. TYC $60.28 (-1.84) After breaking out to new highs earlier in January, TYC found resistance at the $63 level, subsequently rolling over and recently bouncing off our stop at the $60 level. Instead of risking TYC stopping us out, we're dropping coverage on the play this weekend as the technical picture remains weak. Use any bounce off $60 to exit positions. PUTS No dropped puts this weekend *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** TLAB - Tellabs, Inc. $65.00 (+4.06 last week) TLAB designs, manufactures, markets and services data, voice and video transport, switching/routing and network access systems that are used worldwide by public telephone companies, long-distance carriers, alternate service providers, cellular service providers, cable operators, government agencies and utilities. Through its various acquisitions, the company is also able to offer voice-quality enhancement products for wireless, satellite-based, cable communication and wireline telecommunications, as well as managed high-speed transport solutions which operate in Synchronous Digital Hierarchy and Dense Wavelength-Division Multiplexing (DWDM) environments. The rally that had stagnated a little over a week ago, received new life when TLAB announced earnings on January 23rd that were in line with analyst estimates. The lack of bad news seemed to cheer the bulls and they continued to bid the price higher, helped out this past Tuesday when Gruntal & Co. initiated coverage of the company with an Outperform rating. The coverage came a day after TLAB announced that they would acquire Future Networks, a voice and data cable modem company, for $181 million cash. The company expects the acquisition to shore up its position in the cable data and telephone markets. Apparently investors liked the deal, despite the fact that it is expected to dilute earnings by 6 cents in 2001 and a nickel in 2002. Technically TLAB is looking a bit overextended, so we need to keep an eye out for profit taking. Stochastics have now flattened out in overbought territory and with the price bumping up against the upper Bollinger band, we are going to need strong buying interest to keep the rally alive. While momentum players might be inclined to buy further strength, they need to play with caution, as they may find themselves in the unfortunate position of buying at the high of the day. But if this fits your style, look to buy a breakout over the $66 resistance level, with an eye to further resistance between $67-68. If you can exercise a bit of patience, look for small pullbacks to support near $63, or the vicinity of our stop at $61. Whatever your entry strategy, monitor the health of the Telecom sector for signs of weakness, by keeping an eye on Merrill Lynch's Telecom HOLDER (AMEX:TTH). BUY CALL FEB-60 TEQ-BL OI=3063 at $6.25 SL=4.25 BUY CALL FEB-65*TEQ-BM OI=4058 at $3.00 SL=1.50 BUY CALL FEB-70 TEQ-BN OI=2474 at $1.13 SL=0.50 BUY CALL MAR-65 TEQ-CM OI=2885 at $5.13 SL=3.00 BUY CALL MAR-70 TEQ-CN OI=2528 at $3.25 SL=1.75 BUY CALL MAR-75 TEQ-CO OI=6822 at $1.94 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=TLAB *********************** NEW LOW VOLATILITY CALL *********************** CTX - Centex Corporation $41.88 (+3.75 last week) The top home builder in the U.S., CTX operates in 20 states and Washington DC, as well as in Latin America and the UK. The company builds almost 19,000 homes a hear with an average price tag of $190,000 for both first-time and move-up buyers. The company has subsidiaries that offer home security systems and pest-control services, as well as construction contracting for hospital, school, office building and hotel projects. Rounding out the picture, CTX has interests in land development, mortgage banking, commercial real estate, and construction supply manufacturing. How bad can the U.S. economy be, if one of the country's largest home builders is able to beat earnings estimates by a dime while continuing to increase revenue growth? That is an apt description of the company's most recent earnings report on January 23rd. Apparently this strong performance hasn't been lost on investors, as they have been continuing to bid the stock higher for months now. Since breaking out last July, the stock has been moving nicely in an ascending channel, the current range of which is from $38 to $44. Now that CTX has crested the $40 resistance level, there are very few obstacles overhead. First we have the $43 resistance level, and then the all time highs near $45, before the stock is in blue sky territory. The stellar earnings report got the attention of the analyst community as well, and on January 25th, DB Alex Brown initiated coverage with a Strong Buy rating. The last 2 weeks saw the stock bounce at $36 and rally a solid 16%, bringing it up to kiss the upper Bollinger Band ($42.38) on Friday before pulling back a bit at the close. As we attempt to jump into this established trend, we are looking for conservative entries to materialize as the stock pushes through $42. Aggressive players can look for intraday dips as a means to grab a more attractive entry point, but only if CTX can hold above our stop, placed at $41. BUY CALL FEB-40 CTX-BH OI=167 at $3.20 SL=1.50 BUY CALL FEB-45*CTX-BI OI= 7 at $0.80 SL=0.00 BUY CALL MAR-40 CTX-CH OI= 6 at $4.40 SL=2.75 BUY CALL MAR-45 CTX-CI OI= 2 at $2.05 SL=1.00 BUY CALL APR-45 CTX-DI OI= 79 at $3.40 SL=1.75 http://www.premierinvestor.net/oi/profile.asp?ticker=CTX LGTO - Legato Systems, Inc. $17.88 (+1.13 last week) Legato Systems, Inc. is a worldwide leader in the enterprise storage management software market. Legato products help companies leverage their business-critical, corporate data assets. At Legato Systems we have developed a range of solutions - named the Legato Continuum - that ensures the highest levels of data protection, availability and storage resource management. Founded in 1988, Legato provides storage management software products that have become the recognized industry standard with the largest installed base representing over 60,000 customers. Early last year, Legato Systems fell into dishonor, as the company reduced announced revenues for the 1999 fiscal year. With the SEC investigating into accounting irregularities and reports of $7 million in unauthorized deals made by its sales representatives, shares of LGTO feel sharply and deeply. Since then, the company has been in the process of regaining shareholder trust. Posting a strong earnings report this past week with higher than expected revenue numbers, the company provided a bullish outlook in its conference call. It appears that analysts have put the stock back on their radar screen as well. Prudential Securities maintained their Hold rating while JP Morgan H and Q upgraded the stock from a Market Perform to a Long Term Buy, citing that they are "cautiously optimistic following the early operational success of new management". LGTO's stock price has already more than doubled so far this year, putting the shares back above all its major moving averages. Pullbacks to the 5 and 10-dma at $17.61 and $17.09 may provide aggressive traders with targets for entry. As well, support may be found in increments of $0.50 from $17.50 to our stop price of $16. For a more conservative entry, wait for LGTO to break above $18.25 on volume before taking a position. While the stock has been rallying in spite of weakness in the storage sector, strength in peers BRCD, EMC and VRTS would make it easier for LGTO to move higher. BUY CALL FEB-15 EQN-BC OI=3610 at $3.63 SL=1.75 BUY CALL FEB-17.5*EQN-BW OI=4115 at $1.81 SL=1.00 BUY CALL FEB-20 EQN-BD OI=2010 at $0.75 SL=0.00 BUY CALL MAR-17.5 EQN-CW OI=1420 at $2.81 SL=1.50 BUY CALL MAR-20 EQN-CD OI=2451 at $1.56 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=LGTO ************************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=1535 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 02-04-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/020401_3.asp *************************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=1514 ************************************************************ ****************** CURRENT CALL PLAYS ****************** JPM - JP Morgan Chase $54.64 (+0.45 last week) JPM is a premier international banking firm headquartered in the US. It is a holding company for subsidiaries engaged in global banking and investment. They offer services to corporations, institutions, and the very wealthy. Recently they merged with the Chase Manhattan Corporation. The anticipation of the Fed meeting last week saw many of the financial stocks move toward the highs of their respective trading ranges. JPM quickly solidified a near-term support level at $52 and has since established a higher launching pad at the $54 mark. This week, the financial stocks have essentially flowed with the gyrations of the marketplace. Mid-week JPM and other heavyweights like Citigroup (C) and Merrill Lynch (MER) flirted with their current resistance levels, but ended lower by Friday as a result of the significant declines in the broad market. The profit taking was expected and offers traders the opportunity to take call positions in a variety of sectors. Specifically to our play on JPM, we're looking for a momentum wave to push the share price through the opposition at $59.19. Pertinent elements for success include a bullish market environment combined with broad advances across the banking sector. The Philadelphia Bank Sector Index (BKX.X) is presently finding support at 950. A break through 960 and 965 would signal sector strength and thus, provide better confirmation going forward. Be patient. Reasonable entries might be found after JPM moves through the 5-dma ($55.32) and $56 on strong volume; although some traders might want to lock in gains as JPM approaches the $60 level. You can always jump back in later for another round instead of trying to catch that big break! BUY CALL FEB-50 JPM-BJ OI=13981 at $5.30 SL=3.25 BUY CALL FEB-55*JPM-BK OI=17674 at $1.88 SL=1.75 BUY CALL MAR-50 JPM-CJ OI= 7975 at $6.40 SL=4.25 BUY CALL MAR-55 JPM-CK OI=14091 at $3.10 SL=1.50 BUY CALL MAR-60 JPM-CL OI= 6832 at $1.20 SL=0.50 High Risk! http://www.premierinvestor.net/oi/profile.asp?ticker=JPM MUSE - Micromuse Inc $82.75 (+4.69 last week) Founded as a network management solutions reseller, Micromuse today is a leading provider of real-time fault and service- level management software. Its Netcool suite helps telecommunications and Internet service providers ensure the uptime of network-based customer services and applications. The company's software is used in the OSS and NOC centers of many of the world's leading service providers such as AOL, Cellular One, and Charles Schwab. So there's some of you out there that wouldn't touch a telecom software play with a ten-foot pole. Well let's remember that we're not in for the long-term, but rather to play the current uptrend. And at this time, some traders feel it's a good time to snap up some of the leading players like MUSE, ONI Systems (ONIS), OpenWave Systems, and even Portal Software (PRSF) because of the dropping interest rates and inevitable build-out of the broadband networks. MUSE's recent run-up is also directly related to its stellar earnings report announced on January 18th. Pro forma earnings came in at $0.10 p/s, blowing away the consensus estimate of $0.08 by 25%! The analysts rushed out to spew their positive recommendations. Bear Stearns, Janney Montgomery Scott, and First Albany all reiterated Buy ratings the next day. This week, CSFB came forward with a Strong Buy recommendation too. Technically, MUSE is currently poised for further advancements; and from a historical perspective, MUSE has been a good play during strong technology rallies. This HIGH-RISK and VOLATILE momentum play offers the more aggressive traders entries off the $80 support, but make sure there are buyers before you take positions off this mark. We'll exit the play if MUSE fails to maintain a bullish disposition above the $80 level. A more cautious approach might be to look for entries on strong bounces from $82 and $83, which corresponds with the 5-dma ($83.21) line. The immediate resistance stands at $88.75, last Tuesday's intraday peak. BUY CALL FEB-75 UZQ-BO OI=450 at $11.13 SL= 8.25 BUY CALL FEB-80*UZQ-BP OI=396 at $ 7.38 SL= 5.25 BUY CALL FEB-85 UZQ-BQ OI=230 at $ 4.75 SL= 2.75 BUY CALL MAR-80 UZQ-CP OI= 30 at $13.63 SL=10.25 BUY CALL MAR-85 UZQ-CQ OI= 4 at $10.25 SL= 7.25 BUY CALL MAR-90 UZQ-CR OI= 35 at $ 8.25 SL= 5.75 http://www.premierinvestor.net/oi/profile.asp?ticker=MUSE MWD - Morgan Stanley Dean Witter $86.26 (+3.76 last week) MWD is the #2 retail broker in the US only after Merrill Lynch. The 1997 merger of Morgan Stanley and Dean Witter created an investment banking and retail brokerage powerhouse. The company is now a global financial service firm with three primary business segments: securities, asset management, and credit services. Its Discover unit has been one of the leading credit card issuers. MWD has more than 430 branches in the US and some 30 more abroad. Its clients include both individuals and institutions. A second interest rate cut in less than a month and a positive market bias provide a profitable climate for bankers and brokerage houses alike. Consider the recent trading trends of the financial heavyweights like JP Morgan (JPM), Merrill Lynch (MER), and Citigroup (C). It's really quite simple, lower rates benefit the group. And on Friday, there was speculation of another takeover within the financial circle. Heavy call activity was reported that stemmed from market rumors linking American Express (AXP) to potential suitors, namely Morgan Stanley Dean Whitter. The speculation follows the firm's confirmation that its president and COO, John J. Mack, was stepping down in March as the result of an internal power struggle with former Dean Whitter head Philip Purcel, who's now in charge of company operations. In recent weeks, MWD shares suffered as a result of the announcement; although they quickly rebounded after last Tuesday's analyst meeting. The company's top executives soothed analysts' concerns about leadership and the potential for more turnover at the firm with assurances that they foresee little need for "massive staff cuts" and that they were continuing to look for ways to advance its global platform in key markets. MWD's confident trading at the $84 and $86 levels coupled with Thursday's fantastic 6%, or $5.00 breakout prompted our immediate coverage. Friday's mild pullback with the broad markets and the Banking Sector (BKX.X) demonstrated the stock's strength and offered enterprising entry points near the $86 level. We've set our protective stop at this mark too in an effort to protect future profits and capital. The growing momentum and rising near-term support levels also provide bullish confirmation going into next week. The more cautious types might consider buying on intraday dips near $88 if MWD breaks to the upside of $90 on strong volume. BUY CALL FEB-80 MFZ-BP OI=10574 at $8.00 SL=5.75 BUY CALL FEB-85*MFZ-BQ OI= 4288 at $4.00 SL=2.50 BUY CALL FEB-90 MFZ-BR OI=15423 at $1.75 SL=0.75 BUY CALL MAR-85 MFZ-CQ OI= 170 at $7.00 SL=5.00 BUY CALL MAR-90 MFZ-CR OI= 1072 at $4.40 SL=2.75 BUY CALL MAR-95 MFZ-CS OI= 1149 at $2.40 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=MWD FLEX - Flextronics International $37.94 (-1.06 last week) One of several "contract manufacturers" serving the telecommunications, networking, consumer electronics, and computer industries, FLEX provides its customers with the opportunity to outsource a complete product. The company takes responsibility for engineering, supply chain management, assembly, integration, test and logistics management. FLEX provides complete product design services, including electrical and mechanical, circuit and layout, radio frequency, and test development engineering services. Among FLEX's long list of customers are Cisco, Hewlett-Packard, Lucent, Microsoft, Nokia, Motorolla, and Palm Computing. Recently renewed investor attention came to FLEX, when Ericsson (ERICY)announced that it would outsource all of its mobile phone production to the company. This was just the most recent indication that as companies look for ways to streamline their operations, they are increasingly looking to the contract manufacturers like FLEX as a means to an end. Then on Thursday, shares of FLEX were up an additional percent on very heavy volume, as the Singapore-based company offered 27 million shares to the public in a secondary stock offering. The market's positive reception of the availability of additional shares indicates they understand that the company is well positioned to take advantage of the changing economic climate. Or, as DB Alex Brown analyst Chris Whitmore said, "As end-market demand slows, companies are increasingly looking to outsource and FLEX is certainly well-positioned to take advantage of these opportunities." He stated that his rough estimates indicate the ERICY deal could add 20 cents to calendar year 2002 earnings. With all that being said, FLEX is in a precarious technical position, holding just above the critical $37 support level (also the location of our stop). Adding to the case that the bears are taking control, is the fact that Stochastics dropped out of the overbought region on Friday. We need to see a strong sign from the bulls to get FLEX moving again, and strong buying volume would be a great start. While aggressive traders can consider new positions on a bounce from the $37 level, more conservative traders will want to wait for a decisive move through the $40 resistance level before initiating any new positions. Measure sector sentiment by monitoring other contract manufacturers like JBL and CLS - if all three are in rally mode, that will be a strong endorsement of the bulls' case. BUY CALL FEB-35*QFL-BG OI=5335 at $4.13 SL=2.50 BUY CALL FEB-40 QFL-BU OI=6396 at $1.19 SL=0.50 BUY CALL MAR-35 QFL-CG OI= 636 at $5.63 SL=3.75 BUY CALL MAR-40 QFL-CU OI= 848 at $3.88 SL=2.25 BUY CALL MAR-45 QFL-CH OI= 942 at $1.19 SL=0.50 BUY CALL APR-40 QFL-DH OI=2122 at $4.38 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=FLEX QCOM - Qualcomm Inc. $86.81 (+5.81 last week) Qualcomm Incorporated is a leader in developing, delivering, and enabling innovative digital wireless communications products and services based on the Company's digital technologies. As the pioneer of Code Division Multiple Access (CDMA), the technology of choice for next-generation wireless communications, Qualcomm continues to lead the industry in the development of voice, data, and wireless Internet products and solutions. Qualcomm is also transforming industries through its various satellite businesses and technology partnerships. QCOM's strength this past week relative to the Tech sector is a bullish sign, considering the choppiness in the NASDAQ over the past five trading sessions. Breaking its last major moving average resistance, the 50-dma (now at $82.75) on Monday, the stock has since found support at this level. The company has had a number of positive developments recently, improving its overall fundamental picture. A key patent dispute ruling in QCOM's favor against Motorola could pave the way to the company winning lawsuits against Ericsson and Nokia. QCOM also posted a well-received earnings report, beating Street estimates by a penny and in the conference call, was bullish, citing next generation wireless building as a driver for increased revenue growth. The company also washed its hands of a failed investment in Globalstar, writing off the loss and providing some much-needed relief as well as a lower tax rate going forward. Lehman Brothers re-iterated their Strong Buy rating on QCOM, citing better than expected chipset and licensing revenues. JP Morgan H and Q followed suit, re-iterating their Long-Term Buy rating. Investor interest could carry over into next week, with news that the company may be announcing a new wireless software package. Successful tests of the 50-dma as well as the 5-dma at $85.72 and horizontal support at $85 and our stop price of $83 could allow aggressive players to enter this play. For an entry on strength, a close above $87 would allow conservative traders to take a position. In both cases, a strengthening NASDAQ would provide a more hospitable environment for QCOM to rally. BUY CALL FEB-80 AAF-BP OI=11444 at $8.88 SL=6.25 BUY CALL FEB-85*AAF-BQ OI=12537 at $5.50 SL=3.50 BUY CALL FEB-90 AAF-BR OI=10726 at $2.81 SL=1.50 BUY CALL MAR-85 AAF-CQ OI= 1465 at $9.00 SL=6.25 BUY CALL MAR-90 AAF-CR OI= 2853 at $6.75 SL=5.00 http://www.premierinvestor.net/oi/profile.asp?ticker=QCOM ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1500 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 02-04-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/020401_4.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1527 ************************************************************** ************* NEW PUT PLAYS ************* YHOO - Yahoo!Inc. $33.00 (-4.75 last week) Yahoo!Inc. is a global internet communications, commerce and media company that offers a comprehensive branded network of services to more than 120 million users per month worldwide. As the first online navigational guide to the World Wide Web, www.yahoo.com is a major guide in terms of traffic, advertising, household and business user reach, and is one of the most recognized brands associated with the internet. The company also provides online business services designed to enhance its clients web services and web sites tools and services. It has been a long way down from YHOO's 52-week high of $205.63 reached on March 22 of last year, and, considering the market's response to recent news, YHOO looks like it has further to drop. YHOO suffered a serious decline with the internet sector this fall, and fell below its 50 and 200 dma in September. The culmination of bad news reached its peak in January, when YHOO reported an in-line December quarter, with sharply lowered guidance for 2001. Yahoo met earnings estimates of 13 cents per share, with revenues on the low end of the $310 -$318 million guidance. However, management stated that they had lowered their estimates for 2001 earnings to between 33 and 43 cents, from the previous expectations of 57 cents per share. YHOO also lowered their sales expectations by 5%, to $1.2 to $1.3 billion, down from $1.42 billion. The following day Yahoo reached a 52-week low of $24.13, as numerous analysts downgraded the stock. CSFB lowered their revenue estimates to $1.13 billion for 2001, and reduced their March quarter revenue by 26% quarter to quarter, and 3% year over year. YHOO's advertising revenue is 90% of their total revenue, and the slowdown in online advertising is not expected to pick up in the first half of 2001. Given the low near term visibility of the growth necessary to drive stock performance, YHOO shareholders may be in for additional selling pressure. YHOO tried to rally with the Nasdaq in the post Fed rate cut rally during January, and poked its head through the 50 dma of $39.69 temporarily on January 30, before rolling over. Additional attempts to rally past $36 were thwarted in overall market weakness last week. YHOO is now poised to roll over from $33, which could lead to the next support levels at $30.50. Traders could take positions at current levels, or at a roll over from $30.50 which could lead YHOO to its next support level at $27. Below that, we could retouch the 52-week low of $24.13. Watch the internet sector (HHH) for an indication of weakness, and set stops at $36. BUY PUT FEB-35*YHQ-NG OI=1360 at $3.63 SL=1.75 BUY PUT FEB-30 YHQ-NF OI=8081 at $1.13 SL=0.50 http://www.premierinvestor.net/oi/profile.asp?ticker=YHOO NEWP - Newport Corporation $75.56 (-13.25 last week) The Newport Corporation is a global supplier of precision components and automated assembly, measurement, and test equipment for use in the fiber-optic communications, semiconductor equipment, computer peripherals, and scientific research markets. The Company's high precision products enhance productivity and capabilities of the Fortune 500 corporations, government agencies, and the other technology clients it serves. Optical components and devices for vibration and motion control account for about two-thirds of the company's sales. The negative bias currently effecting the fiber optics' sector and other related industry stocks becomes distinctly evident when you consider the recent performance of NEWP. Stepping back a bit into January, NEWP fell from its lofty pedestal and crashed through the century mark the correlating 200-DMA ($100.36) on the heels of its earnings' report. After reporting record growth in its core markets and posting substantial year- over-year combined with sequential sales' increases in both the fiber optic communications and semiconductor equipment markets, the shares dived a whopping $24.50, or 23% on January 25th. The reason for madness? On a conference call with analysts, company officials stated that it only expected sales to rise 40% in 2001 in contrast to the 50% forecast from three months ago. This week's market gyrations couldn't give NEWP the boost it needed to resurface above the psychological $100 level, but the broad market decline at the end of week certainly had a devastating impact. Shares of NEWP along with others like GLW, JDSU, and NT quickly sold-off in heavy trading on Wednesday, bringing the stock well below its relative support at $90. Subsequent activity saw the share price battling to recover a position above converged 5, 30 & 50 DMAs, at $84 and $85. Friday's crucial slide through $80 and bearish close almost literally on its intraday low offers downward confirmation going forward. We're keeping our protective stop tight at the $80; although more aggressive entries might found on high-volume rollovers in that price vicinity. Otherwise, consider buying into further weakness if there's volume on the decline. Expect some light support as NEWP approaches the $70 level. You may want to note your calendars. On February 5th, 15th and 21st, executives will review the company's operations, financial performance and discuss the company's position as a leader in the design and manufacture of high precision testing equipment for the fiber optic communications and semiconductor industries at respective conferences in the US. BUY PUT FEB-80 NZZ-NP OI=256 at $9.50 SL=6.50 BUY PUT FEB-75*NZZ-NO OI=650 at $6.75 SL=4.75 BUY PUT FEB-70 NZZ-NN OI=966 at $4.63 SL=2.75 BUY PUT FEB-65 NZZ-NM OI=213 at $3.00 SL=1.50 High Risk! http://www.premierinvestor.net/oi/profile.asp?ticker=NEWP JDSU - JDS Uniphase Corp $50.00 (-9.63 last week) JDS Uniphase provides advanced fiber optic equipment and modules for the telecommunications and cable television industry worldwide. Products include source lasers and components that modify and switch signals, and modules that amplify and transmit signals. Clients include Alcatel, Ciena, Lucent, and Nortel. In an ongoing effort to expand its reach, JDS Uniphase is buying rival SDL (SDLI) for about $17 bln. It's not looking too rosy for the fiber optics as the concerns of a slowing US economy make technology investors somewhat nervous. And in particular, the telecommunication industry stocks continue to preside as the market "whipping boy". However, not is all to blame on pure emotions either - facts are facts. The industry may very likely experience some softening in the first part of the year. For instance, JDS Uniphase and Corning (GLW), who is the world's biggest producer of optical fiber and cable, both announced lower expectations for 2001. Corning recently came forward too with specific news that some of its customers like Nortel (NT) and Lucent (LU) may order less optical fiber and components in an effort to cut costs, which effectively sent fiber-optic shares lower. The bleak outlook has investors singing the blues across the board. In response to the growing concerns, CE Unterberg Towbin and Adams Harkness both downgraded JDSU to a Buy from Strong Buy. This week the broad-based declines knocked JDSU for a loop. The $55 support level, which is bolstered by the 5 and 10 DMAs at $55.49 and $55.71, failed to buoy the shares amid the market adversity this time around. A 10.6%, or $9.00 freefall on Friday saw JDSU crash land on $49.87 for a devastating finish. Further weakness below the 30-dma ($50.87) would provide additional bearish confirmation for the more cautious types. For those who like to enter on rollovers, consider using the $54 level as a practical measurement guide. Strength above $54 indicates a potential reversal and we'll exit the play if JDSU manages a close above that mark. BUY PUT FEB-55 UQD-NK OI=14112 at $6.63 SL=4.50 BUY PUT FEB-50*UQD-NJ OI=15720 at $3.50 SL=1.75 BUY PUT FEB-45 NQD-NI OI= 5615 at $1.56 SL=0.75 High Risk! http://www.premierinvestor.net/oi/profile.asp?ticker=JDSU VRTS - Veritas Software Corp. $87.00 (-12.75 last week) VERITAS Software Corporation is a leading provider of data availability software solutions that enable customers to protect and access their business-critical data. Founded in 1989, the Mountain View-based company offers solutions to manage the explosion of data and the growing complexity and scalability of networked environments that exist in today's New Economy. Enabling companies to ensure Business Without Interruption, VERITAS is the market's leading innovator of data protection, file system and volume management, clustering, replication, SAN (storage area network) and application software solutions that continuously deliver data when and where needed. The Storage sector, like the Networking space, has been a favorite area for growth investors. With net-related traffic flow multiplying at exponential levels, the demand for storage has also increased, benefiting companies such as BRCD, EMC, NTAP and VRTS. However, analysts have recently been aggressively downgrading the sector, resulting in a technical breakdown in charts of Storage stocks across the board. NTAP appears to have suffered the most punishment, with Goldman Sachs, Credit Suisse First Boston, Robertson Stephens and Saloman Smith Barney all downgrading its shares. Concerns over valuation and near-term revenue growth in the current economic climate have managed to trump bullishness of stellar earnings reports. VRTS beat Street estimates by 2 cents on record revenues and was upbeat in its conference call. With the highest of expectations already priced into the stock, it appears that even the best of performances is not enough to surpass investor benchmarks. As a result, shares of VRTS have now plunged below all the major moving averages. For higher risk players, failed rallies above its 5-dmam now at $95.83, could provide an ideal entry but confirm a rollover with selling volume before making a play. As well, make sure the stock closes below our stop price of $94. Resistance may also be found at $90 and $88. For an entry on weakness, if the bears return in force, taking VRTS below $85 with conviction, this would allow for a more conservative play. Before jumping in, keep an eye on the aforementioned peers to gauge sentiment in the Storage sector. BUY PUT FEB-90 VUQ-NV OI=1573 at $7.25 SL=5.00 BUY PUT FEB-85*VUQ-NU OI= 809 at $4.38 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=VRTS ***************** CURRENT PUT PLAYS ***************** SPW - SPX Corporation $99.80 (-9.20 last week) SPX Corporation is a $2.7 billion global provider of technical products and systems, industrial products and services, service solutions and vehicle components. SPX has operations in 19 countries with the worldwide headquarters in Muskegon, Michigan. The company designs, manufactures and markets fire detection systems, data networking equipment, broadcast antennas and automatic fare collection systems. SPX Corporation also designs, manufactures and markets power transformers, industrial valves, electric motors, and components for the light and heavy duty motor vehicle markets. After gapping down at the open on Monday morning, SPW experienced selling pressure the entire week. The downward stair step pattern offered several put entry points, as SPW rolled over from $109.25, $107.25, $104, and $102.11. The market obviously did not like the news that SPW had added $425 million to its bank credit and priced $500 million in LYON zero coupon senior notes, and Friday's selling took SPW below the critical support level of $100, which had held since last May. SPW attempted to rally over $100 at the close, but failed, and is now poised to roll over from current levels to the next support level at $98.50. Viewed on a monthly chart, SPW's pattern looks like a big dome, and if support at $100 does not hold next week, the next major support level is $95, and then $80. One of the keys here will be volume. The 10 day average volume of approximately 500,000 shares is nearly double the three month average volume of 260,000 shares. If this volume continues or increases, and coincides with weakness in the overall market and the capital goods sector, SPW could be positioned for a major fall. The weakest NAPM report in nearly ten years indicated that the manufacturing sector of the economy is in a recession, and this hits companies like SPW particularly hard. SPW's CEO has already stated that their earnings growth in a slowing economy would be lower than expected. SPW is scheduled to report earnings on February 13, so traders have a week left for this put play. Consider taking positions on a failed rally at $100, or a break below $99 on heavy volume. Watch others in the capital goods sector like TYC for an indication of sector strength, and set stops at $102. BUY PUT FEB-100*SPW-NT OI=18 at $4.40 SL=2.75 BUY PUT FEB- 95 SPW-NS OI=20 at $1.95 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=SPW ADBE - Adobe Systems $43.56 (-14.50 last 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. It's nice to be at the right place at the right time, and we got into the ADBE play just in time. Added last Monday, we got one day to get into the play before the software company shocked the street with an earnings warning. Tuesday evening after the market close, management raised took up the battle cry of so many other technology companies before them, "weakness across all business and geographic segments". Following their confessional, ADBE fell more than $10 the next day, helped along by a USB Piper Jaffray downgrade. Prudent investors took their profits Wednesday after the sharp drop, taking advantage of the increased volatility, and then looked for a new entry point. We got just that on Friday morning as the stock traded as high as $46.44 before spending the rest of the day selling off again. The dead-cat bounce was to be expected, and the bearish pressure in the Technology sector helped the bears to maintain the upper hand. Now below all of the moving averages, it seems that historical support is the only thing capable of stopping the effect of gravity. The lower Bollinger band (now at $41.96) will help to reinforce the historical support near $41-42, but the real support looks to be resting at $38. Look to initiate new positions on any weak rally that fails to break through our $46 stop. As long as the NASDAQ continues to slide, ADBE will have a hard time mounting a serious recovery. Of course, continued weakness that pushes ADBE below $43.50 (Friday's low), will present a more conservative entry opportunity. BUY PUT FEB-50 AEQ-NJ OI=4295 at $7.13 SL=5.00 BUY PUT FEB-45*AEQ-NI OI=2871 at $3.63 SL=2.00 BUY PUT FEB-40 AEQ-NH OI=3467 at $1.56 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=ADBE HGSI - Human Genome Sciences $55.44 (-7.38 last week) Possessing one of the largest human and microbial genetic databases, HGSI licenses its database of knowledge to pharmaceutical heavyweights like GlaxoSmithKline and Merck. Management has chosen to forgo the race to decode the entire human genome, and has instead focused on finding and patenting genes involved in developing gene-based therapeutics. Its four compounds currently in clinical trials are intended to limit the toxic effects of chemotherapy, promote the repair of damaged cells, stimulate antibody production, and spur regrowth of blood vessels. In the absence of any significant news, HGSI investors have been subject to the whims of the broader Biotech sector, and lately those whims have been decidedly bearish. After running out of steam right at the 665 resistance level early last week, the Biotech index (BTK.X) rolled over with gusto. In the past four days, the BTK has given up nearly 12%, but if you think that is bad, then look at HGSI, which has given up more than 19%. Sounds like a great recipe for a put play - pick a weak sector to pick on, and then pick the weakest stock in the sector. So what is going on with HGSI? After rolling over last week at the 200-dma (then at $68), our play has plunged through all its remaining moving averages and support at $59-60, coming to rest on tenuous support at $54-55. The bears appear determined to take out this support level, and when they do, conservative traders will be flashed the all-clear for new entries, so long as the BTK is still falling. Earnings are approaching on February 13th (estimated date, and we are waiting for confirmation from Investor Relations), but unless the sector gets healthier, we are looking for HGSI to continue to deteriorate. With Stochastics still falling and the lower Bollinger band flat-lining near $48 (also the site of the early January lows), HGSI definitely has more room to fall, and we want to enjoy the ride. One thing to take note of is that volume has weakened considerably over the past week, and we are now seeing daily volume at slightly more than half the ADV. When volume picks up again, watch the direction carefully, as that move is likely to be strong. More aggressive entries can be had on intraday bounces near the most-recently violated $59-60 support (now resistance) level. Just make sure that our stop, now located at $59, is still intact before playing. BUY PUT FEB-60 HHA-NL OI=336 at $7.88 SL=5.50 BUY PUT FEB-55*HHA-NK OI=412 at $4.88 SL=3.00 BUY PUT FEB-50 HHA-NJ OI=761 at $2.75 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=HGSI IDPH - IDEC Pharmaceuticals $57.22 (-6.09 last 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. As the Biotech sector continues to rollover, IDPH is going along for the ride, driven by deteriorating investor sentiment and accelerated by the poor technicals on the chart. Even analysts are having a hard time saying anything nice about the stock. Although there haven't been any negative comments, the best bullish comments they could muster came from First Union Securities last Wednesday, when the firm said their outlook remains relatively unchanged at present and they raised their price target from $68 to $70. And this was only 2 days after the company reported strong earnings (up 140% over the past year), and with strong revenue growth driven by robust Rituxan sales. It looks like the "sell the news" crowd showed up just in time to take advantage of the stock when it was a bit overextended. Nearing the upper Bollinger band last Tuesday with the Stochastics in overbought territory and on the day of earnings was just too tasty a morsel for the bears to pass up, and they sold the news vigorously, quickly driving the stock down through its ascending trendline. Although much of the downside pressure has now been released, it looks like there could be more to come. The dominant factor is likely to be the broader market and Biotech sector. If they continue to move lower, then expect IDPH to break below the $57 support level, and challenge the next level near $51. Aggressive traders can target shoot new entries on intraday rallies that fail to break through the $61-62 resistance level, so long as our $62 stop is not violated. More timid players will want to wait for the bears to push IDPH below $56 on solid volume before adding new positions. Ride the trend for all it is worth, but keep an eye on the Biotech index (BTK.X) - when sentiment starts to change, it should show up there first, giving us an early warning to tighten up our stops or exit any open positions. BUY PUT FEB-60 IHD-NL OI=355 at $5.88 SL=3.75 BUY PUT FEB-55*IDK-NK OI=183 at $3.13 SL=1.50 BUY PUT FEB-50 IDK-NJ OI=189 at $1.44 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=IDPH ******************************** WEEKLY UPDATES FOR VARIETY PLAYS ******************************** LONG-TERM: LU $17.73 -1.27 (-0.27 last week) LU seems to be settling into a consolidation range between $17 and $19. The stock was poised to challenge resistance at $19 on Thursday, but the stronger Job Report ignited a market wide sell-off on the concern that we may not get an intermeeting rate cut. With that said, we will be watching for LU to hold support around $17 - $17.50, where buyers have been showing up. Being a Long-Term play, a strong move through $19 would indicate another run at the $20's. Take your pick on the entries, either a bounce off support or a break through resistance. Consider your time horizon and look for a market catalyst to bring the buyers back to LU. We moved the stop loss up to $17. BUY CALL FEB-15 ULU-BC OI= 8690 at $3.10 SL=1.50 BUY CALL MAR-15*ULU-CC OI= 217 at $3.60 SL=2.25 BUY CALL MAR-20 LU-CD OI=14209 at $0.90 SL=0.00 High Risk! http://www.premierinvestor.net/oi/profile.asp?ticker=LU GE $46.28 +0.05 (+1.66 last week) GE ran up nicely on Tuesday ahead of the anticipated rate cut on Wednesday. It was typical buy the rumor, sell the news, but the buying that went on was much needed as GE seemed to be drifting sideways. At these levels, GE is a good long-term buy, but it may not be fixing for any big moves as it hammers out its bottom in the $45 area. Resistance lies overhead at $47, $48, and $49. Therefore, the best entry opportunity would be on a break out with renewed buying interest, i.e. strong volume. Consider the longer term options to avoid time decay. The stop loss remains at $43. BUY CALL MAR-45 GE-CI OI=13767 at $3.50 SL=1.75 BUY CALL JUN-50*GE-FJ OI=13203 at $3.10 SL=1.50 BUY CALL SEP-50 GE-IJ OI= 1503 at $4.60 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=GE LOW VOLATILITY: CNC $16.24 +1.50 (+3.88 last week) Four days of profit taking have taken this OI favorite down from the $18 range. We are looking to see CNC consolidate its recent gains a bit. In doing so, we believe $16 is a level which CNC should hold as support during this stage. In fact, buyers supported this level on both Thursday and Friday, and it happens to be our current stop loss level. Volume on the downside has been lighter than that of the upside. Buying interest may be just a day or two away, so look for a break above $17 for an entry. If this occurs, CNC will likely challenge the $18.50 on another run higher high in this recent uptrend. BUY CALL FEB-15 CNC-BC OI=13481 at $1.75 SL=0.75 BUY CALL MAR-15*CNC-CC OI= 341 at $2.45 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=CNC *************************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=1515 ************************************************************ ***** LEAPS ***** The $64,000 Question - How Severe Will It Be This Time? By Mark Phillips Contact Support We've been watching the markets with fascination over recent weeks as they have continued to move up in the face of continuing bad news. Earnings warnings, earnings misses, abysmal economic reports, energy crisis in California - all of these have had a damping effect but the markets have still rallied, as all eyes have been on the Fed. Going into the FOMC meeting last Tuesday, it was pretty much a sure thing that we would get a 0.50% interest rate reduction, with prospects of more cuts in the months ahead. This was clearly priced into the market already, and then the talking heads started spouting nonsense like a 75 basis point cut, and its likelihood, yadda, yadda, yadda. Yep, that's about when I hit the mute button, because for those that were paying attention to more than the talking heads on CNBC, this was just pie in the sky fantasy. The problem was that investors were listening and once the 50 basis point cut was announced Wednesday afternoon, those that foolishly hoped for more were actually disappointed! Imagine that! Then, in the wake of the 0.50% rate cut, we had, can you believe it, Disappointment? It took a couple days for it to materialize, but by Friday, all the major indices were selling off from their overextended positions, and we are now left wondering...Is there really a bottom somewhere beneath us? If so, where is it? So, did you take advantage of last week's musings about some of our recent LEAPS plays and how to actually 'play' them? Sure enough, QCOM continued its rebound from the $70 level, and is now beginning to test $90. If you bought again near support, you should be ratcheting up those stops. Why actively manage this position when you have a 2003 LEAP, you ask? Because the current market will give you a little, and then take a good portion of it back before giving you a little more and repeating the process. Personally, I don't want to give very much back on the pullbacks, which could happen soon due to the proximity of the upper Bollinger band ($88.75), so I have my stop resting just below the $84 support level. Ok, so we were right about QCOM, and are thus vindicated in selecting it as the Spotlight play last week. What about the other two plays we mentioned. Recall that we also mentioned Agilent (A) as a play that had moved sharply upwards and was in a retracement mode. A looked weak to me, and with the Stochastics oscillator on the daily chart still falling, I cautioned that the stock likely had more downside before finding a new bottom. Granted it, really took until Friday to get moving to the downside, but then with the added pressure of a declining NASDAQ, the stock fell through the 50-dma, and closed just fractionally above $52, the stock's lowest level in almost a month. And even though daily stochastics appear to have reached bottom, the weekly stochastics has just gotten started in its descent. If the broader technology market continues to weaken, it wouldn't be surprising to see further weakness in A. Finally, we have DELL. Recall we were cautioning that even though it had moved up nicely, it was looking vulnerable to profit taking in the near term. Sure enough, we got one more sharp move upwards on Monday, before spending the rest of the week in the red. You could have used the information in one of two ways; one would have been to take profits off the table when weakness began to emerge, while the other would have been to keep you from initiating new positions when the stock was looking top heavy. As we have said many times in recent months, pick your entry strategy and then wait for the market to deliver it to you. I reviewed those plays to hopefully give a better idea of what to watch for in order to more successfully manage your LEAPS positions and increase your profits over time. So what is going on this week? After looking at dozens and dozens of charts, we came to the conclusion that there was nothing that looked healthy enough to warrant being added as a new play. There is lots of weakness out there, and with CSCO's earnings coming up this week, we felt it was better to sit this week out. As a bellwether for the Technology sector, if CSCO has an impressive report and sounds like it is in a strong position, this could give new life to the whole market. As nice as that sounds, it is not the most likely scenario. More realistically, especially given the recent cautionary comments from John Chambers, the company's CEO, CSCO is likely to talk of the impact that the Telecom slowdown is having on revenues, underscoring that the slowdown affects everyone. The prudent approach will be to wait for the news to become known and trade after we see what the market reaction is. So, as much pain as we have seen in the markets in the past several months, we must be cautious not to allow the recent rally to fool us into thinking the bears have gone into hibernation for good. Remember how painful it was to continue to buy every dip from Labor Day through the end of the year. Lots of falling knives, and lots of severed fingers. So, we've entered another downturn, but the Fed is finally in our corner. If the NASDAQ can put in a higher low, and many of our LEAPS plays can follow suit, then I will feel pretty confident saying that we've turned the corner and entered the beginning stages of the next leg of the great bull. But we need to see that higher low form. Posting a lower low (unlikely in my opinion) would be a very bad sign, and the downside from there would be unpleasant, but it would make the $64,000 question that much more poignant. And I think the guidance from CSCO will be critical to that near-term question. Not only were there no new plays to list this week, but it was difficult to find one of our current plays to feature as the Spotlight play, so for the first time in many months there is no new play or Spotlight play this week. Then our good old friend, the VIX is still meandering along in the middle of its historical range, ending the week at 24.75. Rather than force a bad play, we'll let the chips fall where they may, and re-evaluate conditions next week. In the meantime, protect your capital, and take profits when they are offered. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2002 $ 45 WUE-AI $ 9.50 $34.40 262.11% 09/17/00 JAN-2003 $100 VUE-AT $32.75 $16.80 -48.70% CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $ 5.38 -51.14% 11/26/00 JAN-2003 $ 60 VYC-AL $16.63 $ 5.88 -64.66% NT 11/28/99 JAN-2002 $37.5 WNT-AU $15.13 $ 9.00 -40.52% 09/10/00 JAN-2003 $ 75 ODT-AO $27.50 $ 4.70 -82.91% AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $ 4.30 -76.92% 08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $11.70 -33.14% AXP 03/12/00 JAN-2002 $46.6 WXP-AQ $ 9.33 $ 9.90 6.11% WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $22.40 316.36% 10/22/00 JAN-2003 $ 45 VWI-AI $ 7.88 $14.30 81.59% NOK 05/21/00 JAN-2002 $ 50 IWX-AJ $17.25 $ 2.95 -82.90% 07/30/00 JAN-2003 $ 50 VOK-AJ $17.75 $ 6.00 -66.20% C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $13.30 29.00% 10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $11.60 - 5.31% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $29.25 70.75% JAN-2003 $ 70 OZG-AN $23.13 $37.75 63.21% QCOM 09/17/00 JAN-2002 $ 70 WBI-AN $22.50 $32.63 45.00% JAN-2003 $ 70 VLM-AN $29.63 $41.25 39.22% TXN 10/22/00 JAN-2002 $ 50 WTN-AJ $13.75 $ 8.30 -39.64% JAN-2003 $ 50 VXT-AJ $18.38 $13.30 -27.62% BGEN 11/05/00 JAN-2002 $ 70 WGN-AN $17.25 $13.75 -20.29% JAN-2003 $ 70 VNG-AN $25.00 $21.13 -15.50% MU 11/26/00 JAN-2002 $ 45 WGY-AI $13.13 $11.30 -13.90% JAN-2003 $ 45 VGY-AI $17.25 $16.60 - 3.77% A 12/03/00 JAN-2002 $ 55 YA -AK $16.88 $14.40 -14.67% JAN-2003 $ 60 OAE-AL $19.88 $17.70 -10.94% ORCL 12/10/00 JAN-2002 $ 35 WOK-AG $ 7.75 $ 5.00 -35.48% JAN-2003 $ 35 VOR-AG $11.13 $ 8.50 -23.63% QQQ 12/10/00 JAN-2002 $ 70 WNQ-AR $15.13 $ 8.90 -41.18% JAN-2003 $ 75 VZQ-AW $19.25 $12.50 -35.06% WMT 12/24/00 JAN-2002 $ 55 WWT-AK $ 9.63 $ 9.80 1.82% JAN-2003 $ 55 VWT-AK $14.00 $14.30 2.14% DELL 01/07/01 JAN-2002 $ 20 WDQ-AD $ 5.25 $ 8.63 64.29% JAN-2003 $ 25 VDL-AE $ 5.63 $ 8.63 53.20% WCOM 01/14/01 JAN-2002 $ 25 WQM-AE $ 5.00 $ 3.50 -30.00% JAN-2003 $ 25 VQM-AE $ 7.38 $ 5.75 -22.03% CPN 01/21/01 JAN-2002 $ 40 YLN-AH $10.50 $11.70 11.43% JAN-2003 $ 40 OLB-AH $15.38 $16.20 5.37% ARBA 01/28/01 JAN-2002 $ 45 YYR-AI $14.25 $ 9.75 31.58% JAN-2003 $ 45 OLR-AI $19.00 $14.25 25.00% Spotlight Play None New Plays None Drops NOK $32.60 It has been a painful slide for NOK shareholders over the past 2 months. Early December was the last time the stock was looking healthy. After getting a bit ahead of itself, it began pulling back, testing and retesting $40 support until it finally broke for good a couple weeks ago. Then earnings came out, and it was effectively all over. Even though the fourth quarter results were better than expected, the conference call pointed to trouble ahead due to the broader economic picture, and investors promptly sold the stock in response to the numerous analyst downgrades. NOK is the last of the 3 major handset makers to fall from grace, and until the fundamentals in the handset market improve, it seems unlikely that we will see much upside in NOK's share price. ************************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. 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The Option Investor Newsletter Sunday 02-04-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/020401_5.asp ************* COVERED CALLS ************* Charting Terms and Definitions: Stages Explained! By Mark Wnetrzak Each week we receive a number of questions regarding terms that are commonly used when describing the technical character of an issue. One of the most well-known techniques for chart analysis comes from "Secrets for Profiting in Bull and Bear Markets", by Stan Weinstein. He describes the condition and outlook for most stocks in terms of stages. Here is a brief description of each category and how it can be used in selecting bullish candidates (such as those used in Covered-Call and Naked-Put positions) and some hints for timing your entry and exit transactions. Stage I is the basing stage that could last for months (or even years). It is usually defined by little or no vertical movement with a long-term moving average that is basically flat. A common axiom suggests that, "The longer the base, the stronger the case" when an issue breaks-out and issues with this type of pattern have relatively low risk as there is little downside potential remaining. Stage II is when the issue begins to exhibit signs of a new upward trend. The stock price closes above a long-term moving average (150-200 dma) with the average turning up, and that is the ideal time to enter a bullish play. Investors should look for the next resistance level to identify any potential "failed rally" points. Try to focus on stocks that have room to run, picking only those issues that are in stage II climbs and buying on pullbacks to technical support (or recent trend-lines). Some Stage II signs to look for: Volume - This is vital! Rallying stocks climb on substantially larger volume, much more than that which occurs any time during the basing stage. This volume should not be short lived as the change in stock price is the result of supply and demand; those who want to buy versus those who want to sell. The key point is that a rise or fall in price on a small volume of shares traded is far less important than a move supported by heavy volume. If there is heavy trading on an upward move, buyers are in control of the market, and their enthusiasm for the stock often pushes it even higher. In addition, most experts say that volume precedes the direction of a stock's price and when reviewing candidates, we favor issues with bullish trends that have good volume support. Relative strength - When a stock breaks out of a base, relative strength should cross up above the zero line into positive territory. The higher the climb to cross above the zero line, the higher the probability of a continued upward movement. The "Runner's Crouch" or building steam - A move often seen before the stock breaks out. It's usually a small dip to gather strength for the upward push above the moving average. After the issue crosses above the top of the basing area (resistance), it should also climb above the moving average. This action will start to turn the moving average up. Then the stock should begin to climb significantly and as it corrects back to the moving average, the next rally should create a new near-term high. Stage III is the area where the stock begins to encounter weakness and fails to make new highs. It is defined by sideways trend in the issue and a crisscrossing of the moving averages. This is the place to tighten stop losses and take profits if the rally fails to continue. Always allow for a possible resumption of stage II. Stage IV is when an up-trend breaks down completely, with the stock falling through it's long-term moving average and then failing to rebound above it. The moving average will turn downward as the stock continues to fall and make new lows. When a stock enters Stage IV, there is usually a last chance to sell on a move back up, towards the long-term moving average. When entering bearish positions look for support areas so as to make sure a stock has room to fall before "shorting" the stock or buying a put. Many traders will use rallies to resistance areas to initiate shorts and then cover as a stock approaches a support area. Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return SFAM 8.63 8.41 FEB 7.50 1.88 *$ 0.75 16.1% ONNN 8.00 7.13 FEB 7.50 1.56 $ 0.69 15.5% GEN 10.50 12.48 FEB 10.00 1.50 *$ 1.00 12.1% ANTC 11.25 12.50 FEB 10.00 2.25 *$ 1.00 9.9% XLA 8.38 8.29 FEB 5.00 3.88 *$ 0.50 9.9% CLRS 7.88 8.31 FEB 5.00 3.25 *$ 0.37 8.7% RDRT 7.56 9.31 FEB 5.00 2.88 *$ 0.32 7.4% HOTT 22.13 24.50 FEB 17.50 5.88 *$ 1.25 6.9% ISLD 6.13 4.84 FEB 5.00 1.50 $ 0.21 6.6% VPHM 22.13 24.50 FEB 17.50 5.38 *$ 0.75 6.5% SCON 7.13 9.06 FEB 5.00 2.44 *$ 0.31 5.9% PGNX 27.38 24.75 FEB 20.00 8.13 *$ 0.75 5.6% FNSR 36.38 32.81 FEB 30.00 7.50 *$ 1.12 5.6% ENTU 20.31 17.03 FEB 15.00 6.00 *$ 0.69 5.2% ASTSF 16.31 15.19 FEB 12.50 4.38 *$ 0.57 5.2% CPST 34.19 41.00 FEB 25.00 10.50 *$ 1.31 4.9% MCCC 20.00 18.75 FEB 17.50 3.25 *$ 0.75 4.9% GEN 11.00 12.48 FEB 10.00 1.31 *$ 0.31 4.6% ATHM 8.72 6.00 FEB 7.50 2.00 $ -0.72 0.0% BKHM 22.56 14.06 FEB 17.50 6.13 $ -2.37 0.0% *$ = Stock price is above the sold striking price. Comments: Both Bookham Tech (NASDAQ:BKHM) and At Home Corp. (NASDAQ:ATHM) continue to weaken, though they haven't violated their recent lows. In the interest of prudent money management, we suggest you exit these positions and we will reflect that action in next week's summary. You may consider rolling ATHM down to a JUL-$5 strike for a new cost basis of $4.66 and rolling down BKHM to a JUN-$15 strike for a new cost basis of $13.55, depending on your long-term outlook. Monitor On Semiconductor (NASDAQ:ONNN) as it tests its 50 dma - a move towards $6.00 appears probable. Will Digital Island (NASDAQ:ISLD) endure the post-earnings downgrades? If your long-term outlook has changed, maybe it is time to close the position. What's up with Viropharma (NASDAQ:VPHM) and the heavy volume on Friday? Finisar's (NASDAQ:FNSR) recent price action is worrisome (falling on heavy volume) and a test of the bottom of its recent trading range near $25 may be forthcoming. NEW PICKS ********* Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return NERX 10.06 MAR 7.50 XUO CU 3.62 443 6.44 42 11.9% NXCD 11.38 MAR 10.00 DQX CB 2.31 13 9.07 42 7.4% ESCM 16.00 FEB 15.00 QFC BC 1.44 179 14.56 14 6.6% ELON 24.44 FEB 20.00 EUL BD 5.00 523 19.44 14 6.3% LGTO 17.88 MAR 15.00 EQN CC 3.88 2830 14.00 42 5.2% ATRX 23.00 MAR 20.00 OQF CD 4.00 0 19.00 42 3.8% CSTR 17.06 MAR 15.00 QLR CC 2.75 9 14.31 42 3.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ATRX - Atrix Laboratories $23.00 *** Onward and Upward! *** Atrix Laboratories (NASDAQ:ATRX) is engaged primarily in the research, development and commercialization of a broad range of medical, dental, and veterinary products based on its proprietary drug delivery systems. With the acquisition of ViroTex, Atrix has a broad-based platform of drug delivery technologies that provides for parenteral, transmucosal and topical drug delivery. The company's flagship product, ATRIDOX, is a minimally invasive pharmaceutical treatment for periodontitis that employs the ATRIGEL system containing the antibiotic doxycycline. Atrix recently licensed the North American marketing rights to its Leuprogel products to Sanofi-Synthelabo and they have also received an exclusive option from Tulane University Health Science Center to license human growth hormone releasing peptide-1, a new patented growth promoting compound. We favor the bullish technicals as the stock remains in a Stage II climb, recently reaching a multi-year high. With earnings due in the next few days, we prefer a lower risk entry point closer to support. MAR 20.00 OQF CD LB=4.00 OI=0 CB=19.00 DE=42 MR=3.8% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ATRX ***** CSTR - Coinstar $17.06 *** Rally Mode! *** Coinstar Inc. (NASDAQ:CSTR) and its subsidiaries, Meals.com and Coinstar International, use technology to deliver time and money saving services to consumers in their local supermarkets. The company's 8,500 strong network of machines is currently available to 130 million consumers in 45 states and the District of Columbia, as well as in Canada and the United Kingdom. Meals.com Inc. connects consumers, grocery stores and manufacturers through online and in-store technologies that provide shoppers with relevant information and special offers based on their personal preferences. Coinstar recently announced it has served its 100 millionth customer, proving the more and more Americans are using Coinstar. This week, the stock made a bullish move; rallying up and out of an ascending triangle. The activity suggests the issue has further upside potential, but we prefer a conservative entry point with a cost basis below technical support. MAR 15.00 QLR CC LB=2.75 OI=9 CB=14.31 DE=42 MR=3.5% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=CSTR ***** ELON - Echelon $24.44 *** Bottom Fishing! *** Echelon Corp. (NASDAQ:ELON) is the world leader in networking everyday devices. The company offers a comprehensive line of hardware and software products for automating building, home, industrial, transportation, and utility applications using LONWORKS networks, an international, cross-industry, open standard for interoperable device networks. In January, ELON reported earnings, meeting current estimates with revenues of $49.3 million; an increase of 24% over last year. Net profit for the quarter ended December 31 was $1.1 million, or $0.03 per share, compared to a loss of $0.03 last year. Investors appear pleased as the stock continues to rally on increasing volume. Banc of America's has initiated coverage with a "buy" rating and Prudential has re-iterated their "strong buy" rating. This short-term play takes advantage of the current bullish momentum as Echelon begins to forge a Stage I base. FEB 20.00 EUL BD LB=5.00 OI=523 CB=19.44 DE=14 MR=6.3% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ELON ***** ESCM - ESC Medical Systems $16.00 *** Earnings Rally! *** ESC Medical Systems (NASDAQ:ESCM) develops, manufactures and markets medical devices utilizing state-of-the-art proprietary intense pulsed light source and laser technology. Its systems are used in a variety of aesthetic, surgical and medical applications, including the non-invasive treatment of veins and other benign vascular lesions, pigmented lesions, hair removal and skin rejuvenation, as well as ENT, OB/GYN and neurosurgery. No warning here! In early January, ESC Medical announced that it expects to meet estimates with 4th-quarter revenues of approximately $46 million, which would be a 15% increase over the same quarter last year. The stock rallied strongly on the news and has now moved above the December high, ending ESCM's downtrend. This play offers reasonable short-term speculation for those investors with a long-term bullish outlook on the issue. FEB 15.00 QFC BC LB=1.44 OI=179 CB=14.56 DE=14 MR=6.6% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ESCM ***** LGTO - Legato Systems $17.88 *** Impressive Revenue! *** Legato (NASDAQ:LGTO) is a worldwide leader in enterprise storage management and application availability. Helping companies leverage business-critical, corporate data assets, Legato's products and services enable information continuance, a seamless approach to the movement, management and protection of data throughout an enterprise. Legato reported earnings this week with revenues of $58.4 million as compared to $54.2 million last year. The company is poised for growth with a a strong balance sheet and positive business pipeline going into 2001. Investors were pleased with the strong 4th-quarter report even after an impressive pre-earnings rally. With a new version of its flagship product, NetWorker 6.0, and its Celestra product, being successfully deployed with select customers, the future looks bright. We favor a conservative cost basis that allows for a brief post-earnings pullback. MAR 15.00 EQN CC LB=3.88 OI=2830 CB=14.00 DE=42 MR=5.2% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=LGTO ***** NERX - NeoRx $10.06 *** Speculators Only! *** NeoRx Corp. (NASDAQ:NERX) develops innovative biopharmaceutical products designed to improve treatments for patients with cancer. In addition to STR for multiple myeloma, NeoRx is conducting a phase I trial of its Pretarget. Technology in lymphoma, and currently plans to test STR indications in breast and prostate cancers once its clinical hold is lifted. The company suffered a setback in November when it had to suspended accrual and treatment under its phase III clinical trial for patients with multiple myeloma and other Skeletal Targeted Radiotherapy (STR) studies. The company is providng the FDA with addition information and hopes to resolve the matter soon. A reasonable cost basis for those who wish to speculate on the decision. MAR 7.50 XUO CU LB=3.62 OI=443 CB=6.44 DE=42 MR=11.9% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=NERX ***** NXCD - NextCard $11.38 *** Bracing for a Rally? *** NextCard, Inc. (NASDAQ:NXCD) is considered the leading issuer of consumer credit on the Internet. The Company was the first to offer instant online credit card approval, a choice of customized credit card offers, and exceptional online customer service. NXCD has continued to innovate with its NextCard Concierge(SM) online shopping service, online bill payment services, and comprehensive rewards program. NextCard reported solid earnings in January, with operating revenue increasing to $62.0 million for the quarter. A 346% (26% sequential) increase over last year isn't too shabby. The company originated over a billion dollars in new loans through the Internet during 2000, consistently scaling the business ahead of expectations, and NXCD is on-track to achieve profitability by the end of this year. Obviously Wall Street was pleased and we simply favor the support area near our cost basis. MAR 10.00 DQX CB LB=2.31 OI=13 CB=9.07 DE=42 MR=7.4% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=NXCD ***** ***************** SUPPLEMENTAL COVERED CALLS ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return HPOW 8.06 FEB 7.50 HQF BU 1.25 164 6.81 14 22.0% MDR 15.29 FEB 15.00 MDR BC 1.20 426 14.09 14 14.0% SERO 18.00 FEB 17.50 QEO BW 1.31 112 16.69 14 10.5% GEN 12.48 MAR 12.50 GEN CV 1.25 2 11.23 42 8.1% PRGN 29.75 MAR 27.50 GQP CY 4.50 120 25.25 42 6.5% LIN 37.25 FEB 35.00 LIN BG 3.00 70 34.25 14 4.8% RCII 38.50 MAR 35.00 RQG CG 5.63 73 32.87 42 4.7% ************************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=1528 ************************************************************** *********************** CONSERVATIVE NAKED PUTS *********************** Option Trading Basics: Arbitrage and Making a Market By Ray Cummins One of the most common questions we receive from new traders concerns the manner in which floor brokers participate in the options market. The majority of methods employed by floor specialists to profit from trading in options and their associated stocks are based on pricing theory and statistical probability. There are also a number of scalping techniques; the most common of which occurs when heavily traded options are bought at the bid and sold at the ask, generating a spread credit for the market maker. Specialists who participate in risk-free transactions also utilize various arbitrage techniques. A large number of specialists favor box-spreads and conversions or reversals (reverse conversions). A box spread consists of two call options with different strike prices and two put options with strike prices equivalent to the calls. Box spreads are initiated when the options are mis-priced on a relative basis. The price risk of the call spread is offset by the opposite position in the put spread thus guaranteeing a risk-free profit. In addition, the specialist does not need to purchase the underlying issue to participate in the technique. Unfortunately, opportunities for this type of position are available primarily to floor traders who can instantly exploit the disparities among the options, and the ongoing execution of orders in a liquid market eventually returns the prices to their relative fair values. Conversions involve calls, puts, and the underlying stock. For example, the conversion is used when a retail trader is interested in buying a call option. To offer the position, a specialist will buy an under-priced put and sell an overpriced or fairly priced synthetic put (a short call and long stock position). The initial profit is achieved when the transaction yields a credit. If the value of the (sold) call option goes up, the (long) stock position will offset the change. If the value of the (long) stock falls, the put is exercised to cover the loss. In this manner, the floor broker trades risk-free and profits from the initial transaction. Of course, funds must be borrowed to finance the purchase of the stock and the current interest rate is always figured into the overall position. The technique for a reversal (reverse conversion) is simply the opposite. When a retail trader desires to sell a call option, a floor broker will attempt to buy the call at a discount and sell an overpriced or fairly priced synthetic call (a short put and short stock). The initial credit received is risk-free profit. In the case of a reversal, the funds received from the (shorted) stock are placed in a risk-free, short-term investment. At expiration, the call will be exercised to purchase the underlying or the stock is received via assignment, replacing that which was borrowed in the initial transaction. There are no up-front funds needed for this technique but because of the rules (sales on the up-tick only) and difficulty in short selling, specialists generally do not receive all of the funds from the short sale. All of these techniques are risk-free transactions since the price change on the option purchased is offset with the sale of synthetic positions. The knowledge of option pricing is the primary manner in which the specialist profits from these transactions. Simple box spreads and conversions are the most common forms of option arbitrage and once you understand the basics of each method, your relationship with the market-maker will be a much happier one. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return ARTG 34.50 34.25 FEB 25.00 0.69 *$ 0.69 13.2% EXPE 16.25 16.56 FEB 12.50 0.31 *$ 0.31 12.6% FIBR 26.38 23.50 FEB 17.50 0.69 *$ 0.69 12.6% JNIC 29.00 18.94 FEB 17.50 0.75 *$ 0.75 12.4% SPCT 21.94 24.75 FEB 17.50 0.38 *$ 0.38 11.5% RATL 47.88 48.94 FEB 35.00 1.25 *$ 1.25 10.3% TVLY 20.69 24.88 FEB 15.00 0.38 *$ 0.38 9.1% SMTC 27.75 28.81 FEB 17.50 0.63 *$ 0.63 9.1% GMST 52.69 48.69 FEB 35.00 1.19 *$ 1.19 9.1% PLUG 19.94 25.56 FEB 12.50 0.44 *$ 0.44 8.9% GLGC 23.88 22.75 FEB 17.50 0.31 *$ 0.31 8.8% TER 39.56 39.38 FEB 32.50 0.56 *$ 0.56 8.7% ISSI 17.75 17.88 FEB 12.50 0.38 *$ 0.38 8.7% PRIA 30.19 30.75 FEB 22.50 0.38 *$ 0.38 8.6% PPRO 22.31 25.13 FEB 12.50 0.38 *$ 0.38 8.5% MFNX 18.69 14.06 FEB 12.50 0.38 *$ 0.38 8.3% AVCI 37.13 34.50 FEB 20.00 0.69 *$ 0.69 7.6% BMCS 32.13 28.31 FEB 22.50 0.44 *$ 0.44 7.0% EXFO 50.44 42.88 FEB 30.00 0.69 *$ 0.69 7.0% VECO 57.50 50.13 FEB 30.00 0.56 *$ 0.56 6.7% MU 46.44 41.20 FEB 35.00 0.56 *$ 0.56 6.2% *$ = Stock price is above the sold striking price. Comments: JNI Corp. (NASDAQ:JNIC) isn't making it easy; but the position can be exited for a $0.25 loss or rolled down to the MAR-$15 strike for a net credit of $1.25 ($13.75 basis). It hasn't yet violated the early January low and the selling pressure appears to be abating. A tough call - do I stay or do I go now? Watch Gemstar-TV Guide (NASDAQ:GMST) as it has violated its 50 dma. A move to $35 seems unlikely (at this time) but stranger things have happened. We may soon find out why Integrated Silicon's (NASDAQ:ISSI) FEB-$12.50 strike was overpriced (very volatile). Metromedia Fiber (NASDAQ:MFNX) continues to weaken and should be monitored closely. The position could be closed for an $0.18 loss (a MAR-$10 strike isn't available yet). It appears Micron Tech (NYSE:MU) will test the support area near $35 - so its time to evaluate your options (no pun intended). NEW PICKS ********* Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return MLI 26.88 FEB 25.00 MLI NE 0.65 287 24.35 14 14.8% CBT 33.18 FEB 30.00 CBT NF 0.55 1517 29.45 14 11.2% MDR 15.29 MAR 12.50 MDR OV 0.60 20 11.90 42 11.1% TPTH 12.75 MAR 10.00 TPU OB 0.44 20 9.56 42 10.7% ABMD 25.44 MAR 15.00 IBU OC 0.50 56 14.50 42 6.5% NAUT 19.19 MAR 17.50 NQT OW 0.56 0 16.94 42 6.2% SPCT 24.75 MAR 17.50 QCS OW 0.44 0 17.06 42 5.9% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ABMD - Abiomed $25.44 *** A Change of Heart? *** Abiomed (NASDAQ:ABMD) is a developer, manufacturer and marketer of medical products designed to safely and effectively assist or replace the pumping function of the failing heart. The company has been developing and is preparing to enter human clinical trials for the AbioCor Implantable Replacement Heart, a unique, battery-powered totally implantable replacement heart system, which may eventually become the first such device for end-stage heart failure patients. Abiomed currently manufactures and sells a temporary heart assist device, which is approved by FDA as the only device for the temporary treatment of patients with failing but potentially recoverable hearts. Abiomed shares rallied last week after the company said it received permission from the U.S. FDA to begin initial trials of its replacement heart. ABMD also withdrew its offer to buy Thermo Cardiosystems (AMEX:TCA), which suggests they are confident of the success of the new procedure. MAR 15.00 IBU OC LB=0.50 OI=56 CB=14.50 DE=42 MR=6.5% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ABMD ***** CBT - Cabot $33.18 *** Chemicals Sector Hedge *** Cabot (NYSE:CBT) has businesses in chemicals, performance materials and specialty fluids. The Chemicals business manufactures carbon black, fumed metal oxides, and inkjet colorants for the automotive, construction, consumer products, electronics and rubber industries. The Performance Materials segment produces tantalum, niobium and their alloys for the electronic materials and refractory metals industries, and cesium, germanium, rubidium and tellurium for a wide variety of industries including the fiber optics and specialty chemicals industries. The Specialty Fluids business produces and markets cesium formate as a drilling and completion fluid for use in high pressure and high temperature oil and gas well operations. Cabot revenues fell below the consensus estimates for the quarter but the company said that earnings for the fiscal year 2001 should be about 50% higher, due to increasing prices and volumes and its ore position. Investors applauded the news, driving CBT's shares to an all-time high and it appears the rally will continue. FEB 30.00 CBT NF LB=0.55 OI=1517 CB=29.45 DE=14 MR=11.2% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=CBT ***** MDR - Mcdermott Intl. $15.29 *** Oil Sector Hedge *** McDermott International (NYSE:MDR) operates in four business segments: Marine Construction, Power Generation, Government Operations and Industrial Operations. Marine Construction provides services to customers in the offshore oil and gas exploration and production and hydrocarbon processing and to other marine construction companies. Power Generation provides services, equipment and systems to generate steam and electric power at energy facilities worldwide. Government Operations is the sole supplier of nuclear fuel assemblies and major nuclear reactor components to the U.S. Navy for the Reactors Program. The Industrial Operations segment provides unique services to customers in a wide range of industries. MDR participates in a number of industrial segments and the recent technical breakout suggests the issue is poised to return to its past valuations. MAR 12.50 MDR OV LB=0.60 OI=20 CB=11.90 DE=42 MR=11.1% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=MDR ***** MLI - Mueller Industries $26.88 *** Metals Sector Hedge *** Mueller Industries (NYSE:MLI) is a leading manufacturer of copper, brass, plastic and aluminum products. The range of these products includes copper tube and fittings; brass and copper alloy rod, bar and shapes; aluminum and brass forgings; aluminum and copper impact extrusions; plastic fittings and valves; refrigeration valves and fittings; and fabricated tubular products. Mueller's plants are located throughout the United States, and in Canada, France and Great Britain. The company also owns a short line railroad in Utah and natural resource properties in the Western United States. With the recent profit-taking in the broad market, a few hedge plays in the portfolio isn't such a bad idea. This position has merit technically, but the company's earnings will likely have an effect on the outcome. The report is due on 2/13. FEB 25.00 MLI NE LB=0.65 OI=287 CB=24.35 DE=14 MR=14.8% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=MLI ***** NAUT - Nautica Enterprises $19.19 *** Rally In Progress! *** Nautica Enterprises (NYSE:NAUT) designs, sources, markets, and distributes apparel under the following brands: Nautica; Nautica Competition; NST-Nautica Sport Tech; Nautica Jeans Company; John Varvatos; E. Magrath; and Byron Nelson. These products feature classic and contemporary styling, quality and functionality. The company's in-store shop programs for the Nautica collections are an integral part of its marketing ploy for its wholesale business. In addition to its wholesale business, the company operates outlet stores to provide an additional sales channel for Nautica products and allows for the organized distribution of excess merchandise. The company also strategically extends its brands and broadens the international distribution of its apparel through other license arrangements. NAUT is one of the leading Specialty Retailers and investors are plowing money in to the sector in expectation of a recovering economy. On Friday, the issue moved to a new high and our cost basis seems like a reasonable price at which to own the stock. MAR 17.50 NQT OW LB=0.56 OI=0 CB=16.94 DE=42 MR=6.2% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=NAUT ***** SPCT - Spectrian $24.75 *** Record Revenues! *** Spectrian (NASDAQ:SPCT) is a leading designer and manufacturer of single-carrier and multi-carrier high-power RF amplifiers for the worldwide wireless communications industry, utilized in both data and voice applications. Spectrian supports AMPS, CDMA, TDMA, GSM and 3G technologies for mobile and fixed wireless networks. The company achieved record revenues this quarter by doubling their multi-carrier amplifier sales from the previous period. Spectrian has also been officially selected by Nortel Networks as a supplier of UMTS MCPA amplifiers; an event which will have positive effects on the company's future earnings. Our cost basis in the issue is near the most recent technical support area, thus providing a low risk entry point. MAR 17.50 QCS OW LB=0.44 OI=0 CB=17.06 DE=42 MR=5.9% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=SPCT ***** TPTH - TriPath Imaging $12.75 *** On The Move! *** TriPath Imaging (NASDAQ:TPTH) develops, manufactures and markets products to improve cancer screening. Improved slide preparation technology is delivered through the AutoCyte PREP System, a unique automated thin-layer cytology sample preparation that produces specimen slides with a homogeneous, thin-layer of cervical cells, and is one of only two sample preparation systems approved by the FDA as a replacement for the conventional Pap smear. TriPath also delivers visual intelligence technology to increase accuracy and productivity in medical testing procedures through the AutoPap Primary Screening System, which utilizes proprietary technology to analyze Pap smears. TriPath reported fourth quarter revenues of $9 million, an 11% increase from the third quarter of 2000 and a 41% increase from the fourth quarter of 1999. This capped a year in which revenues increased by 77% and investors appear to favor the fundamental improvement in the company. MAR 10.00 TPU OB LB=0.44 OI=20 CB=9.56 DE=42 MR=10.7% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=TPTH ***** *********************** SUPPLEMENTAL NAKED PUTS *********************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return SERO 18.00 FEB 17.50 QEO NW 0.81 5 16.69 14 23.4% LIN 37.25 FEB 35.00 LIN NG 1.00 65 34.00 14 15.9% EX 10.10 MAR 10.00 EX OB 0.90 0 9.10 42 13.5% LFG 48.15 FEB 45.00 LFG NI 0.60 0 44.40 14 7.8% MLTX 19.00 MAR 15.00 UXM OC 0.44 20 14.56 42 7.5% PKS 20.20 MAR 17.50 PKS OW 0.55 1106 16.95 42 6.7% SLOT 53.44 MAR 45.00 QLT OI 0.94 12 44.06 42 4.9% *************************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=1516 ************************************************************ ************************ SPREADS/STRADDLES/COMBOS ************************ Entry Point or Exit Opportunity? Traders sold for profits today, driving the major indices lower after a week of bullish activity. Friday, February 2 Traders sold for profits today, driving the major indices lower after a week of bullish activity. The NASDAQ slid 122 points to end at 2,660 and the Dow closed down 119 points at 10,864. The S&P 500 index finished down 24 points at 1,349. Trading volume on the NYSE hit 1.04 billion shares, with losers beating winners 1,708 to 1,378. Activity on the NASDAQ was light at 1.7 billion shares exchanged, with declines beating advances 2,495 to 1,367. In the bond market, the 30-year Treasury fell 23/32, pushing its yield up to 5.50%. Thursday's new plays (positions/opening prices/strategy): Clorox (NYSE:CLX) JUL40C/FEB40C $2.30 debit calendar Cabletron (NYSE:CS) JUL25C/FEB25C $2.70 debit calendar Hewlett (NYSE:HWP) JAN02-40C/F40C $6.25 debit calendar The bearish market activity allowed entries at the target prices in all of our new positions. Portfolio Plays: Stocks moved lower today as traders took profits from the recent broad-market rally. Analysts said the robust employment report added to the negative sentiment but the selling pressure came on thin volume, suggesting there was little concern over the bearish activity. In the technology group, telecom shares led the losers while networking, Internet and semiconductor equipment companies also experienced large percentage losses. Among blue-chip issues, International Business Machines (NYSE:IBM), Intel (NASDAQ:INTC) and Minnesota Mining (NYSE:MMM) weighed on the Dow while General Motors (NYSE:GM), Johnson & Johnson (NYSE:JNJ) and financial giant American Express (NYSE:AXP) saw cautious buying. The leading S&P 500 groups were Healthcare, Pharmaceutical and Oil Service. The Spreads Portfolio experienced little bullish activity during the session and only a few issues made significant gains. Qualcomm (NASDAQ:QCOM) was the technology standout in the big-cap category while Portal Software (NASDAQ:PRSF) led the lower-priced issues. AES Corporation (NYSE:AES) paced the industrial group, up $1.25 as investors moved back into safety stocks. It appears that our speculative offering in the issue may yield a profit, even though we did not initiate any positions in the play. Of the stocks that moved lower, only Molex (NASDAQ:MOLX) was a concern and with the issue moving below recent technical support (and the 30-DMA), we decided to exit the bullish position with a small loss. The short option (FEB-$40) was easily closed for $1 and we will attempt to offset the remaining debit with the sale of the long (FEB-$35) Put in the coming sessions. One of the issues that we mentioned last week, Lennar (NYSE:LEN) is still showing signs of a failed rally but it has managed to remain above our sold (short) Put at $35. As noted on Monday, we were looking for a favorable exit opportunity and near mid-week the issue provided a closing debit of $1.00 (offered as low as $0.95) for the FEB-$35 Put. Now the long option at $30 can be sold to cover, or partially offset the small loss. The Straddles section was again the most active group and our Reader's Request position in AOL Time Warner (NYSE:AOL) finally achieved the target return on a simultaneous order basis. The issue fell to a low of $46.75 during the session, providing a $7.75 credit overall on $5.90 invested in less than two weeks. Another position in that category, Omnicom (NYSE:OMC) moved out of its recent trading range near $90 after the company announced it sold $750 million of 30-year zero-coupon convertible bonds in the 144a private placement market. The sale was increased from an originally planned $500 million and that may have surprised some of the company's long-term investors. Our neutral position in Triad Hospitals (NASDAQ:TRIH) has yet to produce a profit but the issue provided new hope on Friday, falling to a recent low near $27. The next downside target is $25.75 and a successful test of that range would likely signal an exit in the bearish portion of the play. We noticed the price of Lyondell Chemical (NYSE:LYO) has made a nice recovery from the mid-January lows near $12.75 and traders who did not take the early-exit profit may consider closing the bullish portion of the position if the recent rally fails near current resistance at $17. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** ENZN - Enzon $56.13 *** Reader's Request! *** Enzon (NASDAQ:ENZN) is a biopharmaceutical company that develops and commercializes enhanced therapeutics for life-threatening diseases through the application of its two proprietary platform technologies: polyethylene glycol (PEG) and single-chain antibody. The company applies its PEG technology to improve the delivery, safety and efficacy of proteins and small molecules with known therapeutic efficacy. Enzon applies its single-chain antibody technology to discover and produce antibody-like molecules that offer many of the therapeutic benefits of monoclonal antibodies, while addressing some of their limitations. Enzon's quarterly earnings are due on February 7, 2001. One of our new readers identified this issue for bearish play and asked if we might offer some suggestions on how to speculate on the potential downside activity in a conservative manner. A review of the option premiums and Implied Volatility suggests that an ITM or ATM Put-debit spread is in order, and the small disparities in option pricing will help us open the position at a discount. PLAY (conservative - bearish/debit spread): BUY PUT FEB-65 QYZ-NM OI=392 A=$9.62 SELL PUT FEB-60 QYZ-NL OI=417 B=$5.62 INITIAL NET DEBIT TARGET=$3.75-$3.88 ROI(max)=28% B/E=$61.12 - or - PLAY (aggressive - bearish/debit spread): BUY PUT FEB-55 QYZ-NK OI=551 A=$3.25 SELL PUT FEB-50 QYZ-NJ OI=537 B=$1.75 INITIAL NET DEBIT TARGET=$1.50 ROI(max)=230% B/E=$53.50 http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ENZN ****************************************************************** NAV - Navistar $29.18 *** New Merger Rumors! *** Navistar International (NYSE:NAV) operates in three principal industry segments: truck, engine and financial services. The company's truck segment is engaged primarily in the manufacture and marketing of medium and heavy trucks, including school buses. The engine segment is engaged in the design and manufacture of mid-range diesel engines. The truck segment operates primarily in the United States and Canada as well as in Mexico, Brazil and other selected export markets while the engine segment operates primarily in the United States and Brazil. Based on assets and revenues, the truck and engine segments represent the majority of the company's business activities. The financial services operations consist of Navistar Financial Corporation, and its domestic insurance subsidiary along with the company's foreign finance and insurance subsidiaries. Despite Friday's sell-off in technology issues, I received some favorable comments regarding the new assortment of time-selling positions and now we have another candidate for that strategy. Navistar is an old favorite in our portfolio, having produced a number of profitable positions amid past takeover rumors. The speculation of a potential merger has once again attracted the attention of retail option traders and the interest has pushed the front-month Implied Volatility to extreme levels. Those of you who enjoy speculative calendar spreads can attempt to profit from the recent hype with this bullish, time-selling position. Note: The company's earnings are due on February 15, the last trading day for February options. Plan to close or adjust the position prior to the announcement. PLAY (speculative - bullish/calendar spread): BUY CALL APR-30 NAV-DF OI=2733 A=$3.80 SELL CALL FEB-30 NAV-BF OI=8630 B=$2.25 INITIAL NET DEBIT TARGET=$1.45-$1.50 TARGET ROI=25% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=NAV ****************************************************************** SHRP - Sharper Image $16.50 *** Earnings Rally? *** The Sharper Image (NASDAQ:SHRP) is a specialty retailer that is nationally and internationally renowned as a leading source of new, innovative, high-quality products that make life easier and more enjoyable. Sharper Image operates approximately 100 stores throughout the United States and also sells its product through direct mail, mailing millions of its catalogs each month. The company's products may also be purchased on the Internet via its online store at sharperimage.com and also at an online auction site where consumers can place bids to win Sharper Image products at lower prices. A significant and growing proportion of sales are of proprietary products created by their product development group, Sharper Image Design. The company's quarterly earnings announcement is expected on February 15, 2001. Shares of Sharper Image have been on the rebound during the past few sessions and there is little news to explain the rally. Some traders say its the company's share buy-back program while others believe the upcoming earnings are reason behind the move. With little public information to explain the activity, it's difficult to have confidence in a bullish position. In addition, there is substantial resistance at the current price and then again near last year's highs ($18-$20). At the same time, we can't pass up the inflated option premiums, so we have decided to bet against the retail trader with this bearish position. If the issue moves above $19 on increasing volume, we will cover the sold option with the purchase of stock or close the play for small loss. PLAY (aggressive - bearish/credit spread): BUY CALL FEB-22.50 SAU-BX OI=306 A=$0.43 SELL CALL FEB-20.00 SAU-BD OI=246 B=$0.93 INITIAL NET CREDIT TARGET=$0.56-$0.62 ROI(max)=29% B/E=$20.56 http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=SHRP ****************************************************************** - STRADDLES - ****************************************************************** UNM - UNUMProvident $29.67 *** Earnings Play! *** UNUMProvident Corporation is the parent holding company for a group of insurance companies that collectively operate throughout North America and in the United Kingdom, Japan, and Argentina. The company's principal operating subsidiaries are Unum Life Insurance Company of America, The Provident Life and Accident Insurance Company, The Paul Revere Life Insurance Company, and Colonial Life & Accident Insurance Company. Through its many subsidiaries, Unumprovident is the largest provider of group and individual disability insurance in North America, the United Kingdom, and Japan. The company also provides a complementary portfolio of life insurance products, including long-term care insurance, life, employer- and employee-paid group benefits, and related services. Based on analysis of UNM's historical option pricing and current technical background, this position meets the basic criteria for a favorable debit straddle. The stock has inexpensive options, a history of adequate price movement to make the play profitable, and upcoming events (quarterly earnings) that may generate future volatility in the issue. In addition, the recent chart pattern (an ascending triangle) in UNM suggests that significant price activity may occur in the coming sessions. PLAY (conservative - neutral/debit straddle): BUY CALL FEB-30 UNM-BF OI=397 A=$0.90 BUY PUT FEB-30 UNM-NF OI=105 A=$1.30 INITIAL NET DEBIT TARGET=$2.00 TARGET ROI=15%-20% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=UNM ************************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=1537 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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