The Option Investor Newsletter Tuesday 02-06-2001 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/020601_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 02-06-2001 High Low Volume Advance/Decline DJIA 10957.40 - 8.40 11035.10 10932.20 1.05 bln 1660/1405 NASDAQ 2664.49 + 21.28 2705.59 2640.23 1.79 bln 2020/1771 S&P 100 708.52 - 1.14 714.96 707.48 totals 3680/3176 S&P 500 1352.26 - 2.05 1363.55 1350.04 53.7%/46.3% RUS 2000 505.76 + 5.02 507.46 500.65 DJ TRANS 3061.72 - 7.99 3105.65 3061.05 VIX 23.82 - 0.57 24.58 23.44 Put/Call Ratio 0.71 ****************************************************************** Waiting On A Friend Tech stocks are on trial after the bell today, as its hero steps before the jury disheveled, battered and feeling only a fraction of its former self (55.31% of its former self to be exact). With earnings winding down and economic data on the lighter side this week, Cisco Systems (NASDAQ:CSCO) takes center stage as investors try to decide which way the NASDAQ is going to head in the short run. Headlining after hours action, Cisco actually missed earnings estimates of $0.19/share, coming in with earnings of $0.18/share. This is the first time in 14 quarters that Cisco missed estimates. Cisco also disappointed with its top line revenue number as well, coming in with revenues of $6.75 billion as opposed to estimates of $7.11 billion. In addition, inventories were up 25% sequentially and John Chambers said he is "cautious" about the "brief pause" in the economy. The big networking company has an effect on more people than are probably aware, since it is owned by thousands of mutual funds. Moreover, it makes up about 7% of the NASDAQ, so we may be in for a rough ride in techland tomorrow. In addition to Cisco's news, we received good news on the M&A front, with the Justice Department's approval of the JDSU Uniphase (NASDAQ:JDSU) and SDL, Inc. (NASDAQ:SDLI) merger. Its been a long time in the making, with SDLI shareholders certainly wishing that the merger was consummated months ago when JDSU was trading at almost three times today's closing price of $51.81. The $18 billion merger ($41 billion when it was announced last summer) will finally go through since JDS Uniphase has agreed to sell off its Zurich manufacturing plant to Nortel Networks (NYSE:NT) for $3 billion. This merger approval has created a juggernaut within the fiber-optics arena. By acquiring SDLI, JDSU has proved to investors that it will continue to do whatever it takes to remain on the cutting edge of its industry. The above merger serves as an excellent segue into my thoughts behind why the tech sector is not going to race back to its March highs any time soon, but instead remain in a fairly wide trading range. Tech stocks trade on uncertain future cash flows. These cash flows are uncertain because the tech industry is extremely fast moving. Who knows where we will be in three years let alone in six to seven years? All a tech company can hope to do is remain ahead of the innovation curve. It does this by buying up small companies who are designing the "next" big thing. Sun Microsystems (NASDAQ:SUNW) has used this strategy to grow earnings, as has Cisco, Microsoft (NASDAQ:MSFT) and the above-mentioned JDS Uniphase. The problem with the current tech downturn is that stock prices are no longer at levels that enable mergers to take place. This is because tech companies commonly use their stock as currency in a merger. In addition, with the recent M&A craze having just ended last year, many tech companies have increased their share float, a result of issuing more stock in conjunction with the mergers. Companies traditionally institute a systematic share buyback program after mergers to prevent their shares from getting diluted. Just imagine how many shares outstanding a Cisco would have if it didn't repurchase on the open market after its multiple acquisitions over the past three years! Bottom line to all this is that tech companies are currently strapped for cash due to the economic downturn and have suspended many of these systematic buyback programs. Guess what happens when a Cisco or a Sun Microsystems stops buying millions, even billions of shares over a period of time on the open market? Right. The natural "floor" or "support" disappears and so do the sky-high stock prices. This spiraling downturn becomes a cycle that is only remedied when tech companies re-grow their earnings to the point where their stock prices rise enough to commence "buying" growth again. It takes time, of course, to grow earnings without the aid of acquisitions, but the recent rate cuts should help and are aimed at speeding up the cycle and getting us back to a healthy M&A environment. Today's Markets The NASDAQ (COMPX) held up fairly well considering most market participants were sitting on their hands, waiting for the news out of Cisco. The index moved up 21.28, or 0.81%, to close at 2664.49. The morning optimism in the big cap techs made way for afternoon pessimism, as the NASDAQ slipped away into the close. Volume came in at 1.7 billion shares. Advancers beat decliners 2015 to 1772. The DOW (INDU) spent the afternoon above the 11,000 mark but couldn't hold on, ending the session down 8.43 to 10957.42. The financial stocks were a drag on the old-economy index all day and picked up steam on the downside towards the close. DOW component J.P. Morgan Chase (NYSE:JPM) finished off $2.32, to $52.28 and American Express (NYSE:AXP) closed down $1.42, to $46.99. Breadth remained positive, with NYSE advancers beating decliners 1662 to 1401. Bond prices weakened after a worse than expected auction of 5- year notes dampened buyers' spirits. The benchmark 10-year treasury ended off 9/32, to yield 5.21% and the 30-year bond closed down 11/32, to yield 5.51%. Stocks and Sectors on the Move It wasn't all tech in the news today. The oil service stocks gushed higher amid wide spread optimism of increased exploration and heightened pricing power throughout the industry. The Philadelphia Oil Services Index (OSX.X) has just broken out of a double bottom formation, as have some of its component stocks. Weatherford Int'l (NYSE:WFT) posted a new closing high of $52.99 after rising $2.49 today. Tidewater (NYSE:TDW) also broke out of a wide base formation, having lifted $1.04 to close at $50.00. Late Monday, Etoys (NASDAQ:ETYS) was the latest of the dot- coms to essentially call it quits. The e-tail company announced that it has finally given up hope of funding from a potential buyer. Being a new dad, this news hit home. Going to the toy store is a treat, but it was just too darn easy to order up the latest dolly on-line and have it come to the door. Besides, when we take a trip to the toy store, guess who ends up with the most toys? Anyway, ETYS is still talking with Goldman Sachs (NYSE:GS) about a possible merger or restructuring. Keep your fingers crossed. The AMEX Biotech Index (BTK.X) bounced off oversold levels today, rising 23.09, to close at 60.3.97. The index has been putting in lower highs and lower lows since November so it probably isn't time to take the plunge just yet. A standout on the day, however, was Immunomedics, Inc. (NASDAQ:IMMU). The company announced that it received a patent extension on its cancer-fighting antibodies. The company has licensed the antibodies for use by Amgen (NASDAQ:AMGN) to fight non- Hodgkin's lymphoma. IMMU closed up $1.69, or 11.25%, to $16.69. Looking Forward, Always Forward We don't get much in the way of economic news until the Initial Jobless Claims, which is reported Thursday. However, investors will have their hands full dealing with the news out of Cisco. We shall see if the earnings news will be shaken off, like so many other misses this last quarter or if investors will focus on the report as further proof of an economic downturn. A gap down in the COMPX tomorrow, followed by a strong recovery would go a long way to at least holding the NASDAQ in its upper trading range in the short run. Trade has been healthy in tech recently, but we certainly don't get the feeling that all the big institutional buyers are on board at this point. Volume on down days in tech is telling us that investors are still skittish and not willing to hold through bouts of uncertainty. I think this next month or two will be defined by sector rotation, as investors react to economic news and rate cuts. The key is going to be to stay ahead of the rotating and to remain nimble. Keep profit and loss targets tight and keep your eye on the financials and retailers to see if investors still believe that the Fed will be able to drag us out of the doldrums. Craig Seidler Contributing Editor ************************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=1522 ************************************************************** **************** MARKET SENTIMENT **************** 180-Degree Reversal? More Of The Same? By Austin Passamonte Quite often these days major indexes take turns trading in opposite directions. Take your pick; up one day, down the next as tired money chases sectors and sidelined cash thickens its layer of moss. All we've heard recently is a close over 11,000 in the Dow and a green light is lit to test new index highs. Oh really? Those words ring a bell in Market Sentiment's muddled mind. Let us see... the cobwebs are clearing... oh yes - now we recall! It was almost a year ago when the Nasdaq Comp tested mile-high altitude near 5,000 and everyone knew it was a cinch to break that, converting resistance to firm support. Some guy named Ralph Acampora (remember him?) said that 6,000 was merely a foregone conclusion the day it first broke above 5,000. Right on CNBC he said that, too. If we remember correct it closed above there once, countless investors backed up the truck to buy every bullish play in sight and we've never returned since. Now Ralph is only seen on the back of milk cartons and those truckloads of bullish plays were not prime beef but merely by-product left behind by the bulls. Seems like another bullish benchmark was a clear signal to buy as well. Could it be Intel (NASDAQ:INTC) reaching all-time highs at $75? Plenty of investors bought back then... after all, isn't the best time to load up on a "strong" stock right when it posts new highs? We don't know about that, but check out INTC's daily chart from there and see how many times it tested & closed above $75. Once. A lot of buy & hold investors pushed each other out of the way to load up during the bullish breakout. How'd that turn out from there? Let's not be too hasty drawing trend lines in the sand about where bulls & bears will take over. We need more evidence than that. Our daily-chart signals tell us the Dow is very top heavy and due for a decline. How far? No one can say but the Nasdaq daily charts are approaching oversold in a hurry. Could we see the same tired dollars chasing sectors once more from old economy to new? The VIX and VNX are posting lower levels than any point since October 9th, 2000. Plenty of call buyers out there loading up in front of the rally that's sure to ensue once the Dow closes above 11,000. VIX is towards the lower end of its bearish zone and a break below 21.50 would be a clear downside signal at this time. All of our trusted chart signals are pointing towards further weakness tomorrow but CSCO influence and trader's sentiment over a good night's sleep will affect them at the open. Early action is up, down, flat and down by the post-market momentum rangers. We can assure everyone of one thing; should the Dow fail to close above 11,000 for several sessions on a retest soon, it will have posted a triple-top failure spanning last October until current. Now THAT would be a market-moving event back down to 10,500 where a bottom support price magnet lies in wait. Bottom line; too early to tell. We remain near-term bearish until daily-chart signals reach oversold and begin to reverse from there. This should happen within the leading sectors first and we will watch them carefully and report those findings as they occur. Sideways markets are an ideal time to write credit spreads and watch those premiums expire profitably within our accounts as well. Until the next direction emerges, trade the daily-trend with care! *** VIX Tuesday 02/06 close; 23.82 VXN Tuesday 02/06 close; 60.70 30-yr Bonds Tuesday 02/06 close; 5.52% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Tuesday (02/06/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 745 - 730 9,932 830 11.97 725 - 710 10,079 6,170 1.63 OEX close: 708.52 Support: 705 - 690 6,686 10,544 1.58 685 - 670 1,901 8,969 4.72 Maximum calls: 720/3,586 Maximum puts : 700/4,685 Moving Averages 10 DMA 712 20 DMA 703 50 DMA 701 200 DMA 757 === NASDAQ 100 Index (NDX/QQQ) Resistance: 71 - 69 74,738 7,808 9.57 68 - 66 48,298 13,233 3.65 65 - 63 66,485 55,915 1.19 QQQ(NDX)close: 61.75 Support: 60 - 58 19,213 61,447 3.20 57 - 55 8,434 28,976 3.44 54 - 52 2,478 22,065 8.90 Maximum calls: 70/60,083 Maximum puts : 60/45,319 Moving Averages 10 DMA 64 20 DMA 64 50 DMA 63 200 DMA 82 === S&P 500 (SPX) Resistance: 1425 15,788 4,713 3.35 1400 13,886 2,014 6.89 1375 9,045 7,403 1.22 SPX close: 1354.31 Support: 1325 10,778 11,787 1.09 1300 2,899 13,652 4.71 1275 486 10,901 22.43 Maximum calls: 1425/15,788 Maximum puts : 1350/16,656 Moving Averages 10 DMA 1361 20 DMA 1345 50 DMA 1335 200 DMA 1415 ***** 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/020601_1.asp *********** OPTIONS 101 *********** The Four Questions By Lee Lowell There are basically four nagging questions that every option investor must face before putting on a position: 1. Which way do I think the underlying stock is going to move? 2. How much time do I want to give myself? 3. Which strike price do I choose? 4. Are the options overpriced or underpriced? (volatility) Nobody said it was easy. To be truly successful in this arena, you must go through this checklist. The days of just buying any old call and watching it go up, are over. That internet bubble has burst. Shall we break it down? The first thought of most option investors is which way they think the stock is going to move. Ultimately, wherever the stock ends up on expiration day will determine how much you will make or lose on your position (if held to expiration). Remember, you do not need to hold your position until expiration day. You can sell out your longs or buy back your shorts at anytime. Most likely, your target points will be hit sometime before expiration. Don't be afraid to trade it. The best ways to get a handle on possible future movement is to do some technical analysis on the stock, check the fundamentals, and keep tabs on the news. Hopefully this will help you form an opinion on future direction. If for some reason you don't have an opinion on direction but have a feeling of an impending move on a stock, then the strategies of choice are neutral option plays such as straddles and strangles. Once you have formed an opinion on direction, you need to decide about the time frame in which you think your prediction will work out. This is one of the hardest decisions. Knowing how long it might take for a stock to make a desired move is almost impossible to predict. If you buy short-term options, your investment will be small and your overall risk will be low. But if the move doesn't happen right away, you can lose the whole premium. If you buy longer-term options (leaps), your investment is larger but you will have less daily decay and you can wait out the move. Once again, the move may never occur, but at least you're giving yourself the opportunity to be right. Some traders don't like to tie up that much capital for long-dated options such as leaps. So you can either buy a mid-term option (6-9 months out) or just buy near-term options every month. Buying front-month options each expiration for 12 months might end up costing you the same as buying 1 leap option at the very start. It'll actually cost more with commissions added in. This is a very difficult decision to make but I always like to give myself the extra cushion and usually choose options at least six months out. There's nothing more aggravating than seeing the stock make the expected move right after your options have expired! Ok, you've got an idea (maybe) of where the stock might move to and you've picked the duration. The next step is to pick the appropriate strike price. Not many people give this one much thought. They go after the least expensive one. This usually results in picking a far out-of-the-money option with very little probability of becoming profitable. If you look at the deltas of these options, you'll see them with a value of anywhere from 1% - 10% depending on how far OTM they are. Delta tells us how much the option price should move along with a 1 point move of the stock. If your option has a delta of 5%, that means for every 1 point move in the stock, your option price will move less than 1/16 of a point! That's not the kind of movement you're looking for. By the time the stock has made it's expected move, your option will only have given you a few measly points. The delta also tells us the probability of your option finishing in-the-money. Do you want an option that has a 5% chance of finishing in-the-money? Plus, finishing ITM doesn't guarantee a profit. Example: IBM is at $100. You buy the 110 calls for $4. IBM closes at $111 on expiration day. Your option is ITM, but only by 1 point. So you really ended up losing 3 points on this play. Buying OTM options are lottery plays that hardly ever pay off. Sure it's fun to play every once in awhile because there's always that chance, but it rarely happens. Playing ITM or ATM options will give you more bang for your invested dollars. You will have a delta anywhere from 50% - 90% which will give you good option movement. Sure the option costs more, but your probability of walking away with a profit is bigger. Take a look at a probability calculator on some websites. You'll see your chances of either making a profit or your chances of just getting to the break-even point. It all comes down to: do you want a cheaper option with a small chance of profitability or something that costs more but has a greater chance of yielding a profit. Again, it is a personal decision. I like to choose mostly ATM or slightly ITM options when I put on a position. Lastly, and of course my favorite step: check the option's volatility. This will give you an idea of how fairly priced the options are. If you read my article from last week, you'll gain a greater understanding of this concept. In short, volatility lets us know how expensive or cheap the options are when compared to past volatility levels. If you are a buyer of options, try to make sure the implied volatility levels are low compared to its past readings and vice versa for option sales. Looking at charts of historical volatility levels will give you an idea of how your option stands today. Succeeding in the world of options trading is difficult for anyone. Take these steps into account and you're sure to increase your bottom line. Good luck. ************** TRADERS CORNER ************** Another Sector for Your Watch List - Power Producers By Scott Martindale I have written in the past on various volatile but high-potential sectors to watch for possible options plays. Today I'll talk about another technology sector comprising a handful of solid, high-growth companies sporting lots of buzz, lots of promise, and lots of upside potential, but with relatively little further downside risk: Power Producers. The unusual feature among these companies compared with some other hot sectors I've profiled is that they have real earnings and reasonable P/E's, as well as relatively modest historical volatility (mostly in the 40's). First, however, let me comment on my short-term trading, I have been looking to jump on weakness in former high-fliers for writing naked puts. Network Appliance (NASDAQ: NTAP), Adobe Systems (NASDAQ: ADBE), Serena Software (NASDAQ: SRNA), Oracle (NASDAQ: ORCL), Siebel Systems (NASDAQ: SEBL), and Applied Micro Circuits (NASDAQ: AMCC), just to name a few, all look quite enticing at their depressed prices. Other stocks that are showing signs of recovery from extreme weakness include Copper Mountain (NASDAQ: CMTN), Portal Software (NASDAQ: PRSF), and Superconductor Technologies (NASDAQ: SCON). Regarding AMCC, my Feb 80 call play is dead and buried, but on the bright side this fine company is getting down to a more attractive price level for accumulating shares or writing puts. PRSF and CMTN are providing another possible entry point after rebounding very quickly in January. I put in an order to sell Feb 25 naked puts at $2.50 on SRNA this morning, but I missed the early dip and never got filled as the stock climbed above $25 and held up. We'll see what kind of renewed weakness we get tomorrow. Okay, let's talk about independent power producers, including power generators, distributors, wholesalers, and natural gas producers. Like the alternative energy companies I've written about here, this sector is well-positioned to capitalize on the current and developing power crises we are seeing in this country, and in fact around the world. Independent power producers (IPP) are the electrical power utilities filling the gaps created by surging demand and the deregulation (or quasi-deregulation) of much of the traditional regulated utility industry. They develop, purchase and operate plants to provide power that is often sold in the open market to the regulated utilities. Rapid growth in the new economy is creating incredible growth in electricity demand. Internet data traffic is increasing 100% every 100 days. The rising demand for clean, uninterruptible power for data centers alone dramatically changes the outlook for power requirements and magnifies the already burgeoning shortage of capacity. It is a trillion-dollar- plus gold mine. These power needs will be met unregulated electricity producers like AES Corp. (NTSE: AES), NRG Energy (NYSE: NRG) and Calpine Corp. (NYSE: CPN), power wholesalers like Dynegy (NYSE: DYN), Enron (NYSE: ENE) and Reliant (NYSE: REI), and natural gas companies like EOG Resources (NYSE: EOG), El Paso Energy (NYSE: EPG) and Western Gas Resources (NYSE: WGR). These companies will be depended upon to provide the answer to crises like what we are seeing in California, e.g., brownouts and rolling blackouts. Independent power is forecast to grow from less than 5% of domestic daily power capacity in 1996 to over 50% by 2008. AES is the world's largest independent power producer, owning and operating a diverse portfolio of electric power plants with a total capacity of 36,675 megawatts. However, CPN is my favorite play among the IPP's. It has interests in 46 plants with a total capacity of about 5,500 megawatts and projects under construction throughout the country. A subsidiary has 430 billion cu. ft. natural gas equivalent of proven reserves. A one-year chart of CPN shows its strength coinciding with the California power crisis. It has been consolidating around $40, and has strong support at $35 and $30. Notice that the stochastic is poised for another upswing. If you look at a one-year chart of ENE, REI, and DYN, their patterns all track quite similarly, although REI and DYN have managed a greater price progression over the course of the past year. This is primarily because ENE was already sporting a high valuation a year ago due to its widely trumpeted reputation as a conservative high-tech play from its broadband capacity trading and services. All of the stocks I have discussed are not only are good to watch for short-term options plays, but they are also great for long- term equity positions or LEAPS due to the fundamental importance of the sector to the world's continued economic growth. They have been consolidating recently after some strong gains, and all are poised for further upside in the near term with minimal downside risk. These likely will not perform as explosively as some of the other sectors I've written of, such as alternative energy or superconductors, as evidenced by their relatively modest historical volatility, but they likely will not disappoint to the downside either. *************************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=1509 ************************************************************ PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** JPM $52.28 -2.32 (-2.36) On Monday, news hit the wire that JPM along with Citigroup (C), Bank of America (BAC), and First Union (FTU), were named in congressional hearings as the major US Banks holding accounts for foreign counterparts who launder millions of dollars of dirty money. The announcement cast a shadow over the financial sector and in response, the broad negative sentiment took the Banking Index (BKX.X) below the benchmark 950 level for a devastating close at 936. Specifically, JPM suffered a high-volume sell-off that sent the share price through our $54 protective stop within hours of the opening bell. MWD $84.95 -1.55 (-1.31) Morgan Stanley Dean Witter holds $665.6 mln of Sunbeam's approximately $1.7 bln bankruptcy debt. Although the bank supports Sunbeam's six-to-nine month reorganization plan, the negative bias already effecting the financial sector this week sent shares of MWD into bearish territory. Today, MWD freefell through the $86 level during amateur hour. The bulls initially regained control and pushed MWD topside, but the combination of broad market and sector-wide influences were uncompromising. Stops should have taken out your positions. The company is expected to report earnings around March 20th. QCOM $82.94 -3.50 (-3.88) It appears that QCOM is having a tough time closing above $87. We mentioned that a close above this resistance level would allow conservative traders to enter this play. While the stock made it above this point intra-day on Monday's trading, the move was without buying conviction and as a result, QCOM ended the day below $87. Today the stock retreated a little over 4 percent on about half of ADV and in doing so, put itself below the 5-dma at $85.10 as well as our stop price of $83. Now teetering on the ledge of support at the $82.75 area where the 10 and 50-dma are converged, we are dropping coverage of this play. FLEX $36.88 -1.13 (-1.06) Contract manufacturing stocks have lost their way over the past week, and FLEX's inability to clear the $40 resistance level had us taking a cautious stance on the FLEX play. Despite bullish comments from both the company and analysts about a positive impact to FLEX's business due to the current economic slowdown, the bears wrested control from the bulls and killed our play today. The weakness from the past several days turned into an ugly gap down and then decay, as our play went right through our $37 stop and fell almost to $35 before finding any support. Unfortunately FLEX is history before it ever really got moving. PUTS: ***** NEWP $81.94 +3.25 (+6.38) We never had the opportunity to get an entry into NEWP this week. After the first hour of trading on Monday, NEWP cycled in the $74 and $77 range followed by a surge of buyers stepping in at the end of the session. NEWP rallied to a strong close, just shy of our $80 exit point. A rollover never transpired today. The violation of our protective stop and very bullish disposition above $85 clearly indicates the stock found a bottom. JDSU $51.81 +1.81 (+1.81) Investors see a win-win situation! JDSU announced this morning that it received the regulatory approvals for its mega merger with fierce rival, SDL (SDLI). As required, JDS Uniphase agreed to sell its Zurich, Switzerland subsidiary to Nortel Networks (NT) for about $3 bln in Nortel stock and enter into a supply agreement through 2003. The deal is expected to close next week. The merger news coupled with an expected update of its financial forecast next week elevated investors' confidence. In contrast to yesterday's strong downside action where JDSU saw $47.44 by mid-afternoon, today's trading was very bullish. JDSU found intraday support at the opening price of $52 with spikes through the $53 level amid active trading. The inclination of a positive bias for the near-term gives us notice to exit the play this evening. SPW $103.75 +4.81 (+4.25) SPW offered put players good opportunities since we picked it at $112.93 However, the stock has shown uncharacteristic strength in the last two days. After dipping as low as $97.84 on Monday, SPW rallied today with a number of capital goods stocks which seem to have found strength. Whether this is the start of a new trend, or a one day respite from an oversold condition remains to be seen. However, SPW closed above our stop level and therefore we are dropping it tonight. YHOO $36.38 +1.31 +3.70 Yahoo rallied over the last two days despite the fact that some of the stocks in the internet sector faltered. On Tuesday, HHH found some strength, although it is still below the 50 dma. Yahoo may have a long way to go before it can be considered a stock in an upward trend, but it closed above our stop price, and we are therefore dropping it tonight. ************************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=1532 ************************************************************** 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. 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The Option Investor Newsletter Tuesday 02-06-2001 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/020601_2.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=1523 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** TLAB $64.38 -2.63 (-0.63) Finally succumbing to the NASDAQ weakness today, TLAB came down and gave aggressive traders a tasty entry point this afternoon. After closing above the upper Bollinger band yesterday with daily stochastics deep in overbought territory, it seemed only logical that we would see some profit taking soon, and that is what we got today as the stock fell to bounce just fractionally below our $64 stop. This level held up very well for the remainder of the day, but we need to beware of the CSCO effect tomorrow. The tech bellwether missed estimates by a penny, and the collateral damage could be significant tomorrow. Of course, this bipolar market might just take it all in stride and use the small earnings miss (a penny) as an excuse to rally. Who knows... Let's let the market tell us which way to go from here. A continued bounce from the $64 support level looks like a good aggressive entry point, but make sure it is being supported by strong volume and a positive move in the Telecom stocks. Merrill Lynch's Telecom HOLDR (AMEX:TTH) is a good yardstick for measuring the sector. ******************* PLAY UPDATES - PUTS ******************* VRTS $86.13 -3.75 (-0.88) Shares of VRTS got a low volume technical bounce yesterday from oversold conditions, allowing moving average resistance some time to catch up with the stock price. Today, horizontal resistance at the $92 level acted as the barrier that halted the bulls' attempted advance. From there, the stock fell back to close down over 4 percent on 75% of ADV. It appears that high expectations on the part of investors in the Storage sector continues to weigh on VRTS. The weak volume in recent trading suggests bulls are not completely ready to step in, giving the bears the upper hand on this stock. Look for a failed rally above the 5-dma near $90 as well as at our stop price of $90 as potential entry points for aggressive traders. For an entry on weakness, look for a break below $85 support, backed by strong selling volume for a more conservative play. Correlate entries with movement in peers BRCD, EMC, NTAP. HGSI $54.56 +3.25 (-0.88) The early morning rally in Biotech stocks couldn't muster anything approaching follow through as the day wore on, and the Biotech index (BTK.X) gradually fell back as the afternoon progressed. Going along for the ride, our HGSI play rallied sharply this morning, hitting $56.50 before the bears could corral the runaway bulls. The fact that the decline lasted right up to the end of the day, has us thinking that it was a good aggressive entry point, and not a reason to drop the play; at least not yet. Fortunately the close was back under our $55 stop, so we can keep the play for another day. Recall that we have mentioned HGSI is scheduled to release earnings on February 13th (according to Briefing.com). Well, the word 'scheduled' may be inappropriate. Estimated may be a better description, as Investor Relations informed us this morning that the company's policy is to not pre-announce their earnings date. This is a common theme with many Biotech stocks, so be forewarned that if you play them, you can get surprised by an earnings release when you aren't expecting it. With that being said, we'll proceed under the assumption that the February 13th date is fairly close. A continued rollover from current levels looks attractive for new entries, but make sure it is confirmed by move weakness on the BTK index. More conservative players will want to target a drop below $51 for initiating new positions. IDPH $59.00 +1.50 (-1.78) So, are you holding your breath, wondering if that was an entry point this morning. IDPH gapped open this morning and rallied sharply for the first hour, moving fractionally above our $60 stop before the bears reasserted their control. How about this for interesting though - more than double the stock's normal 1.1 million share volume traded hands, and there appears to have been no news. The entire Biotech index (BTK.X) experienced a similar move, gaining 4% and lending credence to the statement that most of a stock's movement is due to sector movement. Despite the 1-day rally, IDPH is still locked in a persistent downtrend, defined by the descending trendline, now between $60-61. Aggressive traders can continue to initiate new positions as IDPH bounces south from the trendline, while more conservative players will want to wait for the $57 support level to fail to contain the bears' assault. Keep an eye on sentiment in the broader sector by watching the BTK index. If it is headed south, look for IDPH to follow suit. IDTI $40.88 +1.13 (-1.69) Don't you just love it when a new play gives you a good entry point on its first day? IDTI delivered for us today, moving up to find resistance near $42 before rolling over after the lunch hour. The bulls didn't even have enough momentum to challenge the $44 resistance level (also the location of our stop) before the bears chased them off. This gave aggressive traders a decent entry point on the rollover, and despite a small late-day bounce (likely in anticipation of the CSCO earnings tonight after the close), it looks like it has plenty of downside available. Volume was a bit light today, indicating there wasn't much conviction in the bulls' camp. Speaking of the CSCO's earnings, the response to the numbers tomorrow morning will likely have a significant effect on the NASDAQ. For the first time in recent history, the company failed to beat estimates by a penny; in fact they came in a penny shy. If the bears decide to go on a rampage in the morning, use a drop below $38 to initiate conservative plays. And for you aggressive players, intraday rallies to the $42-44 area are still attractive for new entries, so long as there is no follow through. If the markets ignore CSCO's earnings miss, then IDTI could move up through our stop, and put a premature end to the play, so watch CSCO and the NASDAQ in the morning for indications of market and sector sentiment. *************************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=1510 ************************************************************ ************** NEW CALL PLAYS ************** AGGRESSIVE: NKE - Nike Inc $56.85 +1.55 (+1.90 this week) NIKE is the world's #1 shoe company and controls more than 45% of the US athletic shoe market. The company sells its shoes and line of athletic wear and equipment to approximately 20,000 US retail accounts, in about 140 countries, and via Internet. Co-founder Phil Knight retains about 34% ownership of the firm. Nike buyers' weren't discouraged by the DOW's failure to crack the 11,000 mark today. Instead, the stock's robust trading volume sent it through the $56 resistance right out of the gate. The investors' penchant for shares of NKE saw the price level tagging $57 before the closing bell capped the advances. NKE's strong moves off the 5-dma ($55.37) and subsequent development of near-term support above the $55 level this week demonstrates its individual strength within the retail sector. Take a look at a daily chart to visually confirm the bullish disposition. Another mover is Nike's direct competitor, Reebok International LTD (RBK), the world's #2 shoemaker. Last Thursday, Reebok reported that its 2001 profits could surge as much as 25% as the result of a trendy brand makeover. Keep a watch on this stock too. The call coverage on NKE is the result of its steady, momentum-driven climb and recent technical developments. Traders might consider taking entries into this more conservative type play if NKE can maintain a strong stance above our protective stop of $54 and make a charge for $60.06, the 52- week high set on January 9th. Nike is expected to report its 2Q earnings around March 20th. ***February contracts expire in two weeks*** BUY CALL FEB-50 NKE-BJ OI= 483 at $7.30 SL=5.00 BUY CALL FEB-55 NKE-BK OI=1867 at $3.10 SL=1.50 BUY CALL FEB-60 NKE-BL OI=1215 at $0.85 SL=0.00 BUY CALL MAR-55*NKE-CK OI= 101 at $4.90 SL=3.00 BUY CALL MAR-60 NKE-CL OI= 420 at $2.70 SL=1.25 BUY CALL MAR-65 NKE-CM OI= 64 at $1.30 SL=0.50 http://www.premierinvestor.com/oi/profile.asp?ticker=NKE DELL - Dell Computer $26.88 +2.44 (+1.69 this week) DELL is the world's largest direct computer systems company. The company offers its customers a full range of computer systems, including desktop computer systems, notebook computers, workstations, network servers and storage products, as well as an extended selection of peripheral hardware, software and related services. DELL's direct sales model offers in-person relationships with corporate and institutional customers, as well as telephone and Internet purchasing, built-to-order computer systems, telephone and online technical support, and onsite product service. Now that is the kind of action we haven't seen from DELL in awhile. Gaining more than 9% on volume that topped the ADV by 25%, shares of the leading box maker had a great day today. So what drove the move, you ask? There are several factors to point at, but the most likely catalyst was the positive comments from analyst Steve Fortuna at Merrill Lynch. Citing additional penetration into the small business market and increasing Windows 2000 upgrades as near-term growth catalysts, Fortuna reiterated his Buy rating. Also in the news was DELL's announcement that its online marketplace would be closing due to its poor performance. After bottoming near $16 in late December, the stock price has moved up sharply, running up to almost $29 last week, before profit taking began to emerge. With earnings approaching on February 15th, buyers began stepping up today to support the stock price, and it is making a good show of putting in a higher low near $24. Buyers showed up first thing this morning, and pushed DELL higher right into the close, giving the impression that they might try to challenge the $30 level before the company releases its earnings report. Any CSCO related market weakness could give us a nice aggressive entry point if DELL can bounce above our $25 stop. More conservative traders will want to buy continuing strength, as we watch for confirmation of this emerging strength in the Stochastics oscillator, which is looking like it will reverse and head higher without dipping into the oversold region. A continuation of today's rally looks buyable if the bulls can push the price above $27.50 on continued strong volume. Of course, if the NASDAQ can shake off the CSCO earnings disappointment and rally, it will be a good confirmation that the market wants to rally, and DELL should benefit. ***February contracts expire in two weeks*** BUY CALL FEB-25 DLQ-BE OI=21851 at $2.63 SL=1.25 BUY CALL FEB-27.5 DLQ-BY OI=20764 at $1.06 SL=0.50 BUY CALL MAR-25 DLQ-CE OI= 1838 at $3.25 SL=1.75 BUY CALL MAR-27.5*DLQ-CY OI= 2742 at $1.94 SL=1.00 BUY CALL MAR-30 DLQ-CF OI= 4399 at $1.00 SL=0.00 http://www.premierinvestor.com/oi/profile.asp?ticker=DELL ************* NEW PUT PLAYS ************* AGGRESSIVE: SCMR - Sycamore Networks $27.00 -1.06 (-1.93 this week) Founded in 1998 and headquartered in Chelmsford, MA, Sycamore Networks is focused on developing the transport, switching and management products required to create a flexible, intelligent, end to end optical network. Addressing the current limitations of the public network infrastructure to grow bandwidth and support new services, Sycamore leverages existing fiber optic resources by bringing intelligence to the optical domain. Sycamore's intelligent optical networking solutions will relieve current network congestion and lay a foundation for the next generation's telecommunication infrastructure. Once a darling of Wall Street, Sycamore has established a serious bearish trend over the last several weeks, and has closed lower every day for the last seven days. Sycamore fell below the 200 dma last September, and has failed at repeated attempts to establish a sustainable upward trend since that time. Sycamore tried to poke its head through its 50 dma on December 14, but was not able to, and retreated to form a 52-week low at $26.75 on December 21. Then, Sycamore rallied with the Nasdaq and networkers during January, and tried once more to clear its 50 dma of $51.38 on January 23, to no avail. The fiber optic stocks have exhibited weakness since Corning warned of an industry slowdown during their last earnings report. However, the real short term killer to this sector may very well be the Cisco earnings report, which was released after the market close on Tuesday. As most market watchers know by now, Cisco missed the analysts' earnings expectations for the first time in 14 quarters, and reported revenues and gross margins on the low side of expectations. This report will most likely have a huge impact on the entire technology sector, and the fiber optic and networking companies in particular. Sycamore closed just a quarter point above its 52-week low of $26.75, and is likely to open lower on Wednesday, which could put Sycamore at a new all time low since its IPO in October of 2000. Watch the networking index's reaction to Cisco, and consider taking positions if NWX.X falls below support at 750, and Sycamore falls below $26.75. An aggressive trader might wait for Sycamore to roll over at $27.63, but only with weakness in NWX.X and others like JDSU and CIEN. Sycamore is scheduled to report earnings February 13, so traders have a week for this play. Set stops at $29. ***February contracts expire in two weeks*** BUY PUT FEB-30*SMZ-NF OI=2093 at $4.88 SL=3.00 BUY PUT FEB-25 SMZ-NE OI=1359 at $1.88 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=SCMR GS - Goldman Sachs Group $108.95 -3.15 (-5.01 this week) Goldman Sachs is a leading global investment banking and securities firm, providing a full range of investing, advisory, and financing services worldwide to a substantial and diversified client base, which includes corporations, financial institutions, governments, and high net worth individuals. Founded in 1869, they are one of the oldest and largest investment banking firms. After more than a century as a private partnership, the firm became a public company in 1999. The Goldman Sachs Group, Inc. is headquartered in New York and has 42 offices in over 20 countries. It's no secret that an environment of lower interest rates is good news for the Financial sector. Interest rates simply put, represents the cost of borrowing money, and with the cost of doing business reduced, this means less interest expense and a more healthier bottom line. As a result, shares of leading investment banker Goldman Sachs had been rallying early this year on the anticipation of rate cuts. But with a full 1 percent ease already realized, it appears now that investors may be selling on the news. Having failed to break through resistance at $120, where the upper Bollinger band currently resides, GS has since slipped below its 5 and 10-dma, currently at $113.39 and $114.76 respectively. So far this week, despite the low volume, it's the sellers that are in control, as a break below $111 support has led to further weakness in the stock. Today, GS gave up another 2.81 percent and while volume was low, the direction was clearly down. A break below $108 on volume could allow for an entry on weakness but with support at $107, the more conservative may want to wait for this level to be taken out before jumping in. Once below $107, there is little support until the $100 area where the 50 and 200-dma are currently converged. GS may get a technical bounce at this point, so aggressive traders may target failed rallies above resistance at $110 and our stop price of $111. In both cases, confirm direction with rivals BSC, LEH, MWD. ***February contracts expire in two weeks*** BUY PUT FEB-110*GS-NB OI=1735 at $4.80 SL=3.00 BUY PUT FEB-105 GS-NA OI=1003 at $2.80 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=GS ******************************************** Do you like OptionInvestor? Then vote for us as a favorite site: http://www.investorlinks.com/vote.html Thanks for your support! ******************************************** ********************* PLAY OF THE DAY - PUT ********************* VRTS - Veritas Software Corp. $86.13 -3.75 (-0.88 this 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. Most Recent Write-Up Shares of VRTS got a low volume technical bounce yesterday from oversold conditions, allowing moving average resistance some time to catch up with the stock price. Today, horizontal resistance at the $92 level acted as the barrier that halted the bulls' attempted advance. From there, the stock fell back to close down over 4 percent on 75% of ADV. It appears that high expectations on the part of investors in the Storage sector continues to weigh on VRTS. The weak volume in recent trading suggests bulls are not completely ready to step in, giving the bears the upper hand on this stock. Look for a failed rally above the 5-dma near $90 as well as at our stop price of $90 as potential entry points for aggressive traders. For an entry on weakness, look for a break below $85 support, backed by strong selling volume for a more conservative play. Correlate entries with movement in peers BRCD, EMC, NTAP. Comments The NASDAQ has been in a tight range the past two days, between 2600 and 2700. Given CSCO's earnings miss this evening, techs very well may be weak. Watch closely to see if buyers step in discounting the bad news as already priced into the NASDAQ or if they hammer it. Support should be around 2600. However, if the market doesn't like the news, watch for the NASDAQ and VRTS to move lower. Look to buy a further break below $85 on strong volume or on a rollover from resistance at $90. This play will be entirely determined on the NASDAQ direction so keep this in mind as you trade. A break of 2600 on the NASDAQ will likely drag VRTS to $80. BUY PUT FEB-90 VUQ-NV OI=1538 at $7.00 SL=5.25 BUY PUT FEB-85*VUQ-NU OI= 961 at $4.25 SL=2.75 http://www.premierinvestor.com/oi/profile.asp?ticker=VRTS ************************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=1533 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ Cisco Steals The Show! Technology stocks recovered from the recent selling pressure today, ahead of the all-important earnings announcement from Cisco Systems. Monday, February 5 Defensive stocks rallied today, leading the blue-chip industrial average to triple-digit gains. The Dow finished up 101 points at 10,965. The NASDAQ suffered from profit-taking, but closed well above its lowest levels for the day at 2,643. The S&P 500 index ended 4 points higher at 1,354. Trading volume on the big board reached 1.01 billion shares, with winners beating losers 1,638 to 1,444. Activity on the NASDAQ was light with 1.6 billion shares exchanged. Technology declines beat advances 2,223 to 1,581. In the bond market, the U.S. 30-year Treasury rose 10/32, pushing its yield down to 5.49%. Tuesday's new plays (positions/opening prices/strategy): UnumProvident (NYSE:UNM) FEB30C/F30P $2.00 debit straddle Navistar (NYSE:NAV) APR30C/F30C $1.60 debit calendar Enzon (NASDAQ:ENZN) FEB65P/F60P $3.88 debit bear-put Sharper Image (NASDAQ:SHRP) FEB22C/F20C $0.00 credit bear-call The UnumProvident straddle and the Reader's Request position in Enzon offered favorable entry opportunities today. The movement in Navistar also provided a reasonable cost basis, although the entry price did not meet our target debit on a simultaneous order basis. The option prices in the Sharper Image position were quickly adjusted at the open, preventing any entry in the bearish call-credit spread. Portfolio Plays: Old Economy stocks led the market higher Monday with investors focusing on defensive tactics amid recent selling pressure in technology issues. Analysts said traders were waiting for the quarterly earnings report from Cisco Systems (NASDAQ:CSCO) before considering a move back into the hi-tech segment. The networking company is expected to report a second quarter profit of $0.19 a share on Tuesday, and CSCO's stock price slid lower ahead of the announcement. Chip shares provided additional downward pressure on the NASDAQ after the Semiconductor Industry Association said the sector may not achieve a previous growth forecast of 22% in 2001, due to slowing overall demand. Software stocks were among the few technology segments achieving positive results during the session. On the Dow, International Business Machines (NYSE:IBM), Eastman Kodak (NYSE:EK), Exxon (NYSE:XOM) and Honeywell (NYSE:HON) led the blue-chip average higher while Intel (NASDAQ:INTC), Disney (NYSE:DIS), Wal-Mart (NYSE:WMT,) and Johnson & Johnson (NYSE:JNJ) limited its gains. In the broader market, oil service stocks rose along with healthcare and other defensive issues while specialty retail and biotechnology shares generally retreated. Our portfolio saw limited activity during the session with only a few significant moves. Among industrial issues, Atlantic Coast Airlines (NYSE:ACAI) was big winner, up over $2 to a recent high near $46 amid buying pressure before the company's upcoming stock split and positive comments for the regional airlines sector. Our bullish position at $40 is safe for now but the issue can be very volatile, so monitor it on a daily basis. Forest Labs (NYSE:FRX) rallied to a midday high near $68 after a brief consolidation at $65 and it appears the issue is poised for continued gains. Our new speculation play in Clorox (NYXE:CLX) is off to a good start with the stock edging upwards on strength in cyclical companies. Be prepared to roll into March options if the rally pushes the issue above the sold option at $40. Among lower-priced shares, Steven Madden (NASDAQ:SHOO) was a big winner, up almost $2 to a recent high at $12.25. Now we are woefully regretting the few extra pennies it took to enter the play. In the technology group, AT&T (NYSE:T) and Microsoft (NASDAQ:MSFT) were the only standouts, achieving small gains even as profit-taking in NASDAQ shares opposed their upward movement. In the Straddles section, a number of plays are expiring this month and a few of them have yet to provide a profit. The drop in Implied Volatility along with the range-bound activity in the major market indices have conspired to keep some positions in the negative. One issue that we spoke of on Friday, Triad Hospitals (NASDAQ:TRIH) made a valiant attempt to become profitable on the downside, but was met with renewed buying today as favorable profits were announced by other companies in the sector. The upside activity signaled an early exit in the bearish portion of the play and now we must hope for a significant rally to boost the value of our remaining (FEB-$30) call option. The position in Jefferson-Pilot (NYSE:JP) also enjoyed some bullish activity today after the company said its quarterly operating profits rose 8% on strong sales of its core individual annuity and insurance policies. The results beat analysts' average forecast by a penny and the share value rallied on the news. Unfortunately, the move was not enough to make the straddle profitable (on a simultaneous order basis) and now we will have to decide when to trade out of each position. Based on the (three) failed attempts to break through $69 during today's trading, that area is now short-term resistance and any future failures at that price will probably signal the beginning of a post-earnings slump. Tuesday, February 6 Technology stocks recovered from the recent selling pressure today, ahead of the all-important earnings announcement from Cisco Systems. The NASDAQ closed up 21 points at 2,664. The Dow industrials fell 8 points to 10,957 on weakness in the financial sector. The S&P 500 index finished down 2 points at 1,352. trading volume on the NYSE reached 1.05 billion shares, with winners beating losers 1,664 to 1,410. Activity on the NASDAQ was relatively light at 1.78 billion exchanged, with advances beating declines 2,020 to 1,772. In the bond market, the 30-year Treasury fell 8/32, pushing its yield up to 5.50%. Portfolio Plays: The Dow saw its recent gains evaporate Tuesday due to new selling pressure in industrial issues, while the NASDAQ managed a small gain before traders became cautious late in the session. Worries over the quarterly profit report from Cisco Systems (NASDAQ:CSCO) limited the advances in the technology segment and the pessimism spread to many of the recovering New Economy companies including Internet, networking and software shares. On the Dow, Walt Disney (NYSE:DIS) was among the blue-chip winners, up over a dollar after the entertainment conglomerate posted a quarterly profit of $0.16 per share, beating the consensus estimates by a penny. A number of bellwether technology issues also ended in the black with Intel (NASDAQ:INTC), Hewlett-Packard (NYSE:HWP), International Business Machines (NYSE:IBM) and Microsoft (NASDAQ:MSFT) ending higher. In broader market groups, biotechnology, oil service, natural gas and select consumer stocks advanced while banks and brokerages, gold, chemical, retail and paper issues consolidated after recent gains. Despite the mixed emotions in stocks today, the Spreads Portfolio experienced a number of favorable moves in both industrial and technology issues. Forest Labs (NYSE:FRX) was the top performer in the blue-chip group, up another $3 to a recent high near $70. Our bullish credit-spread at $60 should expire at maximum profit. Hewlett-Packard (NYSE:HWP) was the leading technology issue, up $1.50 to $36.80 and our new LEAPS with Covered-calls position is performing well. Varian (NASDAQ:VARI), Motorola (NYSE:MOT), and International Rectifier (NYSE:IRF) were also among the technology stocks that moved higher during the session. Among lower-priced stocks, NS Group (NYSE:NSS) and Steven Madden (NASDAQ:SHOO) were the portfolio leaders. It's nice to Murphy's Law at work again as one of the positions we fought so diligently to escape from; Lennar (LEN:NYSE) has begun to rebound. Late Monday, residential homebuilder Lennar received some positive comments from valuation analyst Michael Brush and investors responded appropriately. The article in MSN also exhibited an optimistic outlook from Merrill Lynch housing analyst Robert Curran, who thinks orders should grow at least at a mid-single digit pace during the first half of 2001 and then accelerate in the second half. The bullish activity pushed our credit spread back to profitability, and we are always happy to be wrong when it benefits the readers! In the Straddle section, our new position in UnumProvident (UNM) became profitable after just one day in play. The issue fell over $2 at midday, on no news, and the bearish portion of the straddle traded as high as $2.40, paying for the entire position with a gain of $0.40. In other delta-neutral plays, Jefferson-Pilot (NYSE:JP) reversed course dramatically, down almost $2 near the end of the session and Triad Hospitals (NASDAQ:TRIH) continued to rebound, moving back above a short-term resistance area near $30. For traders who are trying to leg out of these positions, predicting the next move in the underlying issues may require a crystal ball. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** LMNE - Luminent $9.25 *** Cheap Speculation! *** Luminent (NASDAQ:LMNE) designs, manufactures and markets a very comprehensive line of active and passive fiber optic components that enable communications equipment manufacturers to provide optical networking equipment for the rapidly growing intercity and intracity portions, or metropolitan segment, and business and home access segments of the communications network. The company is a wholly owned subsidiary of MRV Communications. Luminent's components offer high performance in many critical parameters, including laser power, linearity, receiver frequency response and cross talk between the laser and receiver. These components are used to provide a range of cable television, satellite distribution, data services and telephony, all over a single fiber for residential access. Luminent is a relatively new company, but their prospects for growth in the networking industry are huge! In late January, the company reported outstanding quarterly results and a very optimistic view for future profits. Revenues in the December quarter were up over 25% sequentially and gross margins were also excellent, increasing by 34%. The company guided analysts to sequential revenue growth of 5%-6% for the coming quarter and based on LMNE's strong position in metro and access optical markets, those numbers should be easy to achieve. Traders who want to speculate on an up-and-coming issue may find Luminent a suitable candidate. We will target a higher premium in this volatile stock initially, to lower our cost basis in the issue. PLAY (conservative - bullish/synthetic position): BUY CALL APR-12.50 ULN-DV OI=177 A=$1.25 SELL PUT APR-7.50 ULN-PU OI=25 B=$1.25 INITIAL NET CREDIT TARGET=$0.25-$0.50 TARGET PROFIT=$0.80-$1.00 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $320 per contract. http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=LMNE ****************************************************************** WFT - Weatherford International $52.99 *** A Big Day! *** Weatherford International (NYSE:WFT) is a leading provider of equipment and services used for the drilling, completion and production of oil and natural gas wells. Its operations are conducted in over 50 countries, and the company has more than 300 service and sales locations in substantially all of the oil and natural gas producing regions in the world. The company's products and services are divided into four operating business divisions: Drilling/Intervention Services, Completion Systems, Artificial Lift Systems and Compression Services. Weatherford International rallied today amid strength in the Oil Service sector and speculation on the petroleum supply report due out after the close of trading. The data came with little surprise, as last week's distillate inventories dropped slightly less than expected and crude inventories rose. On the bright side, an unanticipated drop in gasoline supplies helped hold March crude futures near their closing numbers and traders will now look to Wednesday's supply data from the U.S. Energy Department for further guidance. Analysts say the oil service group is poised for a major breakout between now and the second quarter of 2001, as accelerating exploration and production spending and significant pricing power begin to have an affect on the industry. The sector also has the second best earnings estimates for the coming year among all industry sectors, with earnings growth expected to be near 90%. Traders who want to speculate on the performance of the group in the near-term can do so with these bullish combination positions. Target a higher premium initially, to allow for a brief consolidation after today's rally. PLAY (conservative - bullish/credit spread): BUY PUT FEB-45 WFT-NI OI=2504 A=$0.15 SELL PUT FEB-50 WFT-NJ OI=956 B=$0.55 INITIAL NET CREDIT TARGET=$0.50-$0.60 ROI(max)=10% - or - PLAY (speculative - bullish/synthetic position): BUY CALL FEB-55 WFT-BK OI=746 A=$0.93 SELL PUT FEB-50 WFT-NJ OI=956 B=$0.55 INITIAL NET DEBIT TARGET=$0.00-$0.12 TARGET ROI=20% Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,900 per contract. http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=WFT ****************************************************************** CCMP - Cabot Microelectronics $85.31 *** Technicals Only! *** Cabot Microelectronics (NASDAQ:CCMP) is a supplier of slurries used in chemical mechanical planarization, or CMP, a polishing process used in the manufacturing of integrated circuit devices. The company has also begun selling new slurries for polishing of the magnetic heads and the coating on hard disks in hard disk drives. In addition, it recently began limited production of CMP polishing pads for customer evaluation and qualification. We found this position while scanning for charts of bullish issues with favorable option premiums. The plays is based on the current price or trading range of the underlying issue and the recent technical history or trend. Current news and market sentiment will have an effect on the issue so review the play thoroughly and make your own decision about the future outcome of the position. PLAY (conservative - bullish/credit spread): BUY PUT FEB-65 UKR-NM OI=69 A=$0.43 SELL PUT FEB-70 UKR-NN OI=67 B=$0.93 INITIAL NET CREDIT TARGET=$0.56-$0.62 ROI(max)=12% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=CCMP ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1498 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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