The Option Investor Newsletter Wednesday 02-07-2001 Copyright 2001, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/020701_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 02-07-2001 High Low Volume Advance/Decline DJIA 10946.70 - 10.70 11004.00 10911.30 1.15 bln 1620/1460 NASDAQ 2607.82 - 56.67 2636.07 2554.76 2.06 bln 1490/2226 S&P 100 700.77 - 7.75 708.53 697.13 totals 3110/3686 S&P 500 1340.89 - 11.37 1351.80 1334.26 45.8%/54.2% RUS 2000 507.08 + 1.32 507.47 502.67 DJ TRANS 3034.67 - 27.05 3068.00 3025.15 VIX 24.52 + 0.70 25.04 24.14 Put/Call Ratio 0.58 ****************************************************************** Simply Short-Covering Or New Relative Low? After Networking giant Cisco's (NASDAQ:CSCO) disappointing earnings report last night, we were all wondering how the market would absorb the news. Would the news already be discounted in the lower stock price, or would it create a panic across the market? Looking at the tape tonight, we got a little of both, giving traders the option to play both ways today. Fortunately, it happened in the order of panic, then rebound, and not vice versa. Because of this fact, the market is setting up for a decent day tomorrow. Considering the magnitude of CSCO's influence over the market, whether real or overstated, missing earnings by a penny had the potential to disrupt the 2001 recovery. But as investors, we must read between the lines and understand that the market is priced to perfection. As Eric Utley mentioned in the Wrap on Monday, CSCO CEO John Chambers informally talked down guidance and admitted that visibility was, indeed, difficult. The market priced this into the stock price prior to the announcement as Chambers telegraphed what was confirmed in last evening's conference call. Even the Networking behemoth is not immune to the slowing economy and lower forecasted IT spending. This lack of visibility is exactly what makes this market difficult to trade. The tape has been tough to read lately, but today's action gives hope for the coming days. CSCO traded down to its key support level of $30, a base dating back to June 1999. When it hit that level, big money stepped up to defend the stock and increasing volume pushed the stock higher into the close. CSCO traded 281 mln shares today! Second highest for a single equity in one day. The NASDAQ reversed its course at that time, bouncing from 2554. Was this just a short covering rally or will this new relative low anchor the bottom of a trading range? Volume on NASDAQ favorites grew heavier on that rebound, indicating more than just short covering. Take a look at Ciena (NASDAQ:CIEN), Dell (NASDAQ:DELL) and Veritas (NASDAQ:VRTS). While this recovery was impressive, we must still be weary of the overall NASDAQ health. Since trading near 2900 last week, the tech-heavy index has retreated to the lower-end of this new range. The question is where is the bottom of this range? Critical support was at 2600. It broke below that level today, yet the afternoon rebound afforded a close above that level. Still, notice in the chart below that the downtrend line is intact. A strong, sustained move tomorrow toward 2700 would indicate that the NASDAQ is making its way higher in the range between 2500 and 2900. 2500 is KEY critical support. A break of that level could bring a retest of January lows. We continue to watch the sector rotations vigilantly. Following the money trail is essential in determining the next move. During the past month, we have seen sector rotation occurring on a much more frequent basis. It happens quickly and furiously. Only the nimble players can keep up. Unfortunately, given the current market environment, i.e. no defined trend, rangebound trading, institutions are making their moves much quicker as well. This creates more exaggerated moves as money is churned. Let's take a look at some sectors. Of course, as CSCO goes, so do the other Networkers(NWX.X). Players in this space suffered a similar fate to that of CSCO: Juniper(NASDAQ:JNPR), Redback (NASDAQ:RBAK), and Sycamore(NASDAQ:SCMR). CSCO cited a slowdown in telecom carrier spending and that means that companies like Nortel(NYSE:NT), Nokia(NYSE:NOK), Lucent(NYSE:LU), and SBC(NYSE:SBC) will struggle. Biotechs(BTK.X) had some short covering yesterday after five consecutive down days. Today's late session failure to break above 600 may lead to continued downward pressure as the short players reassert themselves. Drug stocks were down today as well, while Oil Service stocks continued their advance. Retail stocks performed well ahead of Retail Sales numbers next Tuesday, which are expected to be slightly above expectations. The Internet Index(IIX.X) continues to be weak as the entire business model is questions. EToys. Enough said. CSCO, NTAP, and GLW all hit 52-week lows today. The next two days should bring continued weakness in the Biotech sector, and strength in the Retail stocks like American Eagle (NASDAW:AEOS), Nike(NYSE:NKE), Abercrombie & Fitch(NYSE:ANF). Financials have fallen prey to profit-takers after this recent run-up on Fed-easing euphoria. And after the tech rebound, we are looking for this momentum to attract buyers the next two days. But, remember that being in a trading range means consolidation, so be selective in choosing entry points and exits. Using this sector rotation thesis, we don't just want to plow into any old tech stock. We have learned the hard way during the past year, and promised ourselves not to make the same mistake twice. We are in an environment with a value-focus rather than a growth-focus, and following that idea, traders should look to quality tech names. Both IBM(NYSE:IBM) and Microsoft(NASDAQ:MSFT) are perfect examples. These two stocks helped buoy the Dow(INDU)in the afternoon, lifting it from a low of 10911. 11000 proved to be intraday resistance once again today for the INDU. A close over that magic number was elusive for another day as investors sold Financials and Drugs. Even in this rate-cutting environment, which has been the INDU catalyst, this psychological resistance level proves to be resilient. The previous close above 11000 was September 14th, 2000. This level has loomed overhead since November and the INDU has been rangebound between 10300 and 11000 since Halloween. The longer that it takes to close above 11000, the stronger resistance becomes. If the INDU fails on the next attempt, it will likely fall back to recent support levels near 10850 or 10800. It will be essential for the Financials to participate on the upside for the INDU to achieve this feat. Watch the BIX.X and the BKX.X as they settle back to support. Looking ahead, we are constantly monitoring the sector rotations as the market continues to churn in a sideways motion. The fact is that bad news is still expected in the coming months, yet the question is will stocks absorb it? While the euphoria of a rate cut is immediate, the economic effect is not. What the economy is feeling right now is that 50 basis point rate hike from last May. This is evident in the widespread tightening of the corporate belt. Given the new economic environment and a very different market than we grew accustomed to in the 1990's, we must analyze the market with different outlooks and ideas. I cannot stress enough sector rotation and the churning that's indicative of a sideways market. As the market changes, so must our thought process and trading techniques. Be nimble, trade the ranges, stick with works working, and when it doesn't, look for another sector. We have entered a value market rather than the explosive growth market, but money is still there to be made. One thing that my trading mentor, a former option market-maker, taught me was that consistently taking small profits will outperform swinging for the fences in the long-run. Less risk, consistent performance. Trade smart. Matt Russ Editor www.OptionInvestor.com ************************************ 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 *************************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=1573 ************************************************************ ************* NEW CALL PLAY ************* AEOS - American Eagle Outfitters $58.25 +1.13 (+2.38 this week) American Eagle Outfitters, Inc. is a specialty retailer of casual apparel, accessories and footwear for men and women between the ages of 16 and 34. The company designs, markets, and sells its own brand of versatile, relaxed, timeless classics like jeans, cargo and T-shirts, under the American Eagle Outfitters and Bluenotes brands, providing high quality merchandise at affordable prices. The company currently owns 556 American Eagle Outfitters stores in 47 states and the District of Columbia. Shares of AEOS are soaring, due to the strength in the retail sector, as well as a stream of excellent news recently released by the company. Early in January, AEOS reported that total sales for the five weeks ending December 30 increased 45.1% to a record $231 million from $159.8 million from the year ago quarter. Last week, the good news continued, as AEOS hit a 52-week high of $59.25 on January 31, amid high confidence that the pattern of strong sales growth would continue in 2001. Marcia Aron of Deutsche Bank Alex Brown rated the company a strong buy, and retail analysts at CIBC Oppenheimer stated that AEOS is well positioned among retail stocks. The company's unique market niche and franchise is attracting both customers and investors, and, with earnings expected to be released on March 15, as well as a 3 for 2 stock split to be distributed on February 23, the stock is well positioned for a strong run into both. Now positioned solidly above both the 200-dma of $35.70 and the 50-dma of $45.79, AEOS has momentum to run. Traders could consider taking positions on a dip to support at $57.50. Resistance is strong at the $60 level, and a break above this would be an excellent entry point, as it could set AEOS on a path to a possible new all time high. Watch the retail sector (RLX.X) for an indication of sector strength, and set stops at $56. ***February options expire in less than two weeks*** BUY CALL FEB-55 AQU-BK OI=2471 at $4.63 SL=2.75 BUY CALL FEB-60 AQU-BL OI=3297 at $1.81 SL=1.00 BUY CALL MAR-55*AQU-CK OI= 161 at $7.75 SL=5.75 BUY CALL MAR-60 AQU-CL OI= 148 at $5.13 SL=3.00 http://www.premierinvestor.com/oi/profile.asp?ticker=AEOS CIEN - CIENA Corporation $81.88 -0.81 (+1.88 this week) Helping to satisfy our insatiable demand for bandwidth, CIEN makes dense-wavelength division multiplexing (DWDM) systems for use with long-distance fiber-optic communications networks. CIEN offers optical transport, intelligent switching and multi- service delivery systems that enable service providers to deliver and manage high-bandwidth services to their customers. The company's MultiWave DWDM systems allow optical fiber to carry up to 40 times more data and voice information without requiring more lines. CIEN's customers include long-distance carrier, competitive local exchange carriers (CLECs), Internet service providers and wholesale carriers. Maybe the third time is the charm. We've played CIEN on a couple of false breakouts recently, as it has flirted with its 12-week descending trendline. The last breakout attempt, at the end of January, failed to hold above the formidable $100 level and once again the bears went on a rampage. Falling back with the rest of the NASDAQ, CIEN has now dropped back near the $80 support level. What is encouraging about the stock is the fact that even in light of CSCO's earnings miss last night, the stock gave up less than $1 today, and intraday charts show strong buying volume throughout the afternoon. So, let's try a different strategy this time around. Instead of waiting for the stock to break out before adding it to the playlist, we'll start coverage of it tonight, with the caveat that it is an aggressive play. With earnings a week away (February 15th before the open), this will also be a quick play, custom made for aggressive nimble traders. Accordingly, we are placing a tight stop at $78, just above today's lows, and are going to require that CIEN be on its best behavior to avoid an early ejection from the game. Aggressive entries can be considered on a volume backed bounce above our stop, and ideally above $80. Although this play is not for the faint of heart, more conservative players may want to wait for the stock to continue its rise before playing. In this case, wait for strong buying volume to push CIEN through $84 on strong volume. Keep an eye on the Networking index (NWX.X) for confirmation that CIEN doesn't have a lead weight tied to around its waist. After all, even if the company is doing great, it will have a hard time bucking a bearish sector. ***February contracts expire in two weeks*** BUY CALL FEB-80*UEE-BP OI=1567 at $ 6.88 SL=4.75 BUY CALL FEB-85 UEE-BQ OI=2177 at $ 4.50 SL=2.75 BUY CALL FEB-90 UEE-BR OI=2383 at $ 2.81 SL=1.50 BUY CALL MAR-80 UEE-CP OI= 69 at $11.50 SL=8.75 BUY CALL MAR-85 UEE-CQ OI=1188 at $ 9.13 SL=6.25 BUY CALL MAR-90 UEE-CR OI= 599 at $ 7.13 SL=5.00 SELL PUT FEB-75 UEE-NO OI=1946 at $ 2.44 SL=4.00 (See risks of selling puts in play legend) http://www.premierinvestor.com/oi/profile.asp?ticker=CIEN RE - Everest Re Group $64.03 +2.03 (+4.53 this week) Engaged in the underwriting of property and casualty reinsurance on a treaty and facultative basis, RE provides its services to insurance and reinsurance companies in the United States and selected international markets. The company writes reinsurance both through brokers and directly with ceding insurance companies, giving it the flexibility to pursue business regardless of the ceding company's preferred reinsurance purchasing method. Bulls are hoping that RE is gearing up for a repeat of last year, and have started buying the stock after a 6-week hiatus. During the recently ended calendar year, RE shot up from a low near $22 to a high of $74.75, for a gain of 240%. Not bad for an insurance stock, huh? Well, after the first of the year, tax selling emerged again as investors locked in their profits. Before it was all over and done with, our new play had dropped to $54.50, right at the 38% retracement of the prior year's gains. Since then the stock has been gradually recovering its footing, climbing back over the 30-dma ($62.88) and the 50-dma ($63.06). The bulls have now managed to post a higher low at the end of January, and today's strong move has all the earmarks of a stock that is set to post a higher high tomorrow. The only fly in the ointment right now is the fact that RE is bumping up against its upper Bollinger band ($64.06). With earnings set for February 21st after the close, the timing looks ideal for a bullish play. The Insurance sector seem to be on the rebound as well, as seen by the Insurance index (IUX.X), which bounced from its 200-dma in the middle of January and is threatening to start posting higher lows and higher highs again. Intraday support looks pretty solid at $62, so that is the level of our stop and we are looking for new entries to materialize on a pullback and bounce between $62-63. It seems logical that we will get some sort of a pullback from the Bollinger band before continuing higher, but if the bears get carried away and penetrate our stop, then we'll have to stand aside. Conservative players may want to buy the breakout over $65, but keep an eye out for profit taking until we get a bit of a pullback from the Bollinger band. Check the strength of the Insurance sector by monitoring the IUX.X before initiating new positions. ***February contracts expire in two weeks*** BUY CALL FEB-60*RE-BL OI= 27 at $4.80 SL=3.00 BUY CALL FEB-65 RE-BM OI=604 at $1.90 SL=1.00 BUY CALL MAR-65 RE-CM OI= 0 at $3.10 SL=1.50 BUY CALL APR-65 RE-DM OI=110 at $4.60 SL=2.75 BUY CALL APR-70 RE-DN OI=580 at $2.80 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=RE ************ NEW PUT PLAY ************ AETH - Aether Systems Inc. $36.86 -6.75 (-8.70 this week) Aether Systems Inc. is a leading provider of wireless and mobile data products and services allowing real time communications and transactions across a full range of devices and networks. Using its engineering expertise, the ScoutWare family of products including the Aether Intelligent Messaging (AIM) software platform, and its network operations and customer care center, Aether seeks to provide comprehensive, technology independent wireless and mobile computing solutions. Aether develops and delivers wireless and data mobile services across a variety of industries and market segments both in the United States and internationally. Aether has taken quite a tumble from its 52-week high of $345 last March. After two failed attempts to clear its 50-dma in January, Aether's downward trend has accelerated in the last two days. On February 6, Aether reported a net loss of 90 cents per share for the fourth quarter, which was lower than the analysts' consensus by ten cents per share, and revenues of $29.8 million, an increase of 59% from the third quarter. While the initial reaction in the after hours trading was positive, the market responded poorly to the forward looking guidance given to investors by the company management. Aether's management stated that they expected to see a much wider than expected loss in 2001 of $3.90 to $3.98 per share, versus the $2.25 per share loss predicted by First Call. Aether stated that they plan to increase spending and investments in an aggressive strategy to reach profitability two quarters earlier than expected, in the third quarter of 2002. All investors needed to hear was a wider than expected loss predicted to trash the shares, and Aether sold off on Wednesday on over three times the average daily volume. There may be some short covering tomorrow, which could give traders a possible entry point on a rollover from resistance at $38, or $39. More conservative traders might want to wait for a break below $36 on heavy volume, which could lead Aether on a path to its 52-week low. Watch the wireless sector for weakness, and set stops at $41. ***February options expire in less than two weeks*** BUY PUT FEB-40*HIZ-NH OI= 453 at $4.88 SL=3.00 BUY PUT FEB-35 HIZ-NG OI=1022 at $1.88 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=AETH STT - State Street Corp. $108.31 -1.20 (-2.43 this week) State Street is a bank holding company and is one of the world's leading specialists in serving institutional investors. The company provides a full range of products and services for portfolios of investment assets. Customers include mutual funds and other collective investment funds, corporate and public pension funds, corporations, unions and non-profit organizations both in and outside of the United States. Starting out the new year on the wrong foot, STT managed to drop nearly 25% between the first of the year and its earnings announcement on January 18th. By that time the stock had retreated back to major support between $98-100, and investors uttered a collective sigh of relief that the company's earnings weren't worse. The company missed estimates by 2 cents, and buyers lined up the next day to begin a rally that took STT right up to the 200-dma (then at $114.38) last week. That was all the bulls could muster though, and after a week of nibbling away at the recent gains, the bears got serious over the past 2 days, pushing our new play back below the $110 support level, where we now expect STT to find resistance. Due to the pivotal importance of this level, we are placing our stop just above, at $111. Volume, which had been declining since the stock traced its low on January 19th, is back on the rise, topping the ADV today, and underscoring the bearish move on the daily Stochastics. This oscillator has now dropped back out of the overbought zone, and looks like it is ready to do some downhill sledding. Other institutional financial services stocks such as LEH, JPM, GS and MWD are looking vulnerable as well. Watch these stocks for an indication of sentiment in this group; as long as the group is weak, look for STT to follow the path of least resistance, which at this time appears to be down. While aggressive investors may want to wait for a failed rally at the $110-111 resistance level before initiating new positions, more conservative players may be the first to get an entry, as STT drops below $107.50 (just below today's low) under continued selling pressure from the bears. ***February contracts expire in two weeks*** BUY PUT FEB-110*STT-NB OI=646 at $4.50 SL=2.75 BUY PUT FEB-105 STT-NA OI=105 at $2.45 SL=1.25 BUY PUT MAR-110 STT-OB OI= 8 at $8.00 SL=5.75 BUY PUT MAR-105 STT-OA OI= 15 at $5.40 SL=3.50 http://www.premierinvestor.com/oi/profile.asp?ticker=STT ***************** STOP-LOSS UPDATES ***************** NKE - call play Adjust from $54 up to $55 SCMR - put play Adjust from $30 down to $25 GS - put play Adjust from $111 down to $107 IDTI - put play Adjust from $44 down to $41 ************* DROPPED CALLS ************* TLAB $62.50 -1.88 (-2.50) The CSCO effect turned the tables on bullish traders today, pushing most technology stocks sharply lower, and dropping our TLAB play through our $64 stop. The volume wasn't excessive, but you could see that there just weren't enough traders willing to hold their shares in light of the change of sentiment from CSCO's stunning disappointment. The bulls attempted to rally shares of TLAB after the gap down, but there was just too much selling pressure, as seen in the past hour, when the stock dropped to new lows for the day. With sentiment and technicals (stochastics rolled out of the overbought zone today), it is time to say goodbye to TLAB. ************ DROPPED PUTS ************ VRTS $82.06 -4.06 (-3.63) The widespread, Cisco-related selling induced shares of Veritas to gap down this morning and caused a subsequent visit to the $80 level, where buyers stepped up in a big way. Given the short-covering into the close of trading, and the apparent floor in place at the $80 level, we're dropping coverage on VRTS this evening in an attempt to lock in profits. Open positions can be exited either near resistance at $83, or a breakdown below the $82 level, with the latter case obviously being the most favorable. ******************************************** Do you like OptionInvestor? Then vote for us as a favorite site: http://www.investorlinks.com/vote.html Thanks for your support! ******************************************** ************** TRADERS CORNER ************** Following A Successful Put Play By Mary Redmond In the last week, there have been several stocks which offered the opportunity to profit from put options. It is important to watch as many technical indicators as possible, as well as to track the long and short-term trading pattern of each stock. It's also helpful to monitor the stock's sector and the overall market conditions while trading options. For example, the volatile biotech sector(BTK.X) demonstrated a head and shoulders pattern from December to January. While the initial Fed rate cut did boost the sector temporarily, it rolled over toward the end of January and made a precipitous drop. When it dropped, most of the stocks in this sector dropped with it. You can track the BTK.X or the BBH, which is the holders trust for the biotech sector. You see how the BTK formed a head and shoulders pattern in December and January? That was a warning sign for technical weakness. Then, the sector tried to rally with the Nasdaq in the post Fed rate cut rally, but failed to clear the 50-dma on January 29th. While this is a historical pattern of the sector, it can also be useful when trading on a short-term basis. It gives us a background for short-term trades. For example, considering the underlying sector weakness, biotech puts may have had a higher probability of success in the last two weeks. Last week, some analysts and technicians had been warning that we could see a post-Fed rate cut drop, possibly because the Nasdaq had risen over 12% from the low of the year, and also because the VIX had dropped significantly from the 35 level to 25 level. Let's take a look at the chart of HGSI, one of our recent put plays. You can see that the stock's chart shows its own head and shoulders pattern, similar to that exhibited by the index. The stock fell through its 200 and 50-dmas back in December. Then, it tried to rise above these major averages on January 24th, and again the 29th, and failed both times. So, we were setting the stage for a technically weak stock within a technically weak sector. Now, we can move in and take a closer look at the stochastics, the MACD and the VIX and VXN to see how we want to enter the play. On January 29th, the stock fell below its 50-dma of $67.81 after attempting to clear it. This is a bearish signal. You see how both the stochastic and MACD oscillator started to fall at this point? This could have been an aggressive put entry point, however, it is risky to buy options before a Fed meeting. A more conservative entry point might have been toward the end of the week. The Fed meeting was the 31st, and after the meeting, the Nasdaq, as well as the biotech index, the VIX, the QQQ, and HGSI gave strong sell signals. Due to some rumors which had been circulated prior to the meeting, some people had been expecting a 75 basis point rate cut. Since the 50 basis point cut had already been priced into the market, a sell off on the news was likely. You see how the VIX spiked out of its Bollinger bands to the downside? This can often be a signal to exit long positions, or possibly enter short positions. At the same time, the VXN also spiked to the lowest trading range on the Bollinger bands. At this point, the Nasdaq was falling below a critical support level at 2800, the QQQs were falling below a support level at $65, the Biotech index was falling below support at 630, and HGSI was falling below a support level at $62.50. In addition, the yields on the 10-year Treasury Note, TNX.X were dropping from 5.2%, which indicated that the market was likely to follow. The three bearish red candlestick pattern is also indicative of a stock which is likely to drop further. Thus, the end of the day on the 31st was a good entry point for this put play. We also had a good entry point on February 2nd, as shown above on the charts. At this point, the QQQs fell below the critical support level of $62, which was a signal of weakness. We had the VIX and the VXN spiking out of the Bollinger bands to the downside. We also had HGSI dropping below another support level at $58. This would have yielded excellent profits, as the stock dropped as low as $50 the next day. In summary, the more technical indicators point to a move in a stock, the stronger it is likely to be. If possible, try to use the market, the sector, the VIX and VXN, the bond yields and news released on the stock to give an indication of good entry points and exit points for profitable plays. None of these indicators are ever successful all the time, which is why it can be a good idea to use many indicators together for a sense of short-term direction. ************************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=1587 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** DELL - Dell Computer $26.50 -0.38 (+1.31 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. Most Recent Write-Up 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. Comments Today, DELL offered a nice entry point as the shorts covered on the NASDAQ in the afternoon. Volume picked up on the buyside as DELL bounced from intraday support at $25.25 and finished the day at $26.50. We are looking for the NASDAQ strength to continue tomorrow. Entry can be attained on a break through resistance at $27 or on a pullback to support at $25.25, also the site of the 100-dma. ***February contracts expire in two weeks*** BUY CALL FEB-25 DLQ-BE OI=22263 at $2.31 SL=1.25 BUY CALL MAR-25*DLQ-CE OI= 2126 at $3.00 SL=1.50 BUY CALL MAR-30 DLQ-CF OI= 4729 at $1.00 SL=0.00 http://www.premierinvestor.com/oi/profile.asp?ticker=DELL ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Cisco Earnings Provoke Technology Sell-off... Investors displayed their true feelings today as apprehension and fear spread throughout the market in the wake of the quarterly report from Cisco Systems. The networking giant posted a profit of $0.18 a share, missing the consensus estimates by a penny. The company also lowered its expectations going forward saying that revenue and sales will be flat in the near-term. Cisco had beat analysts' estimates in each of the past 14 quarters and the news of a shortfall was not well received. The stock was hit with a number of negative EPS revisions and most brokerages lowered the company's rating as well. The decline in Cisco's share value put additional pressure on the flagging NASDAQ and the pessimism was also felt in other segments of the market. The most noticeable selling came in networking issues but computer hardware, software and Internet shares also moved lower in the aftermath. The Dow industrials were only slightly affected by news and the rotation between Old Economy and New Age companies continued to hold the blue-chip average in a relatively small trading range. By early afternoon, investors became more optimistic and market analysts commented that the selling in technology stocks may simply be a consolidation in response to January's stellar performance. The end of the session saw mixed results with hi-tech bellwethers Microsoft (NASDAQ:MSFT) and International Business Machines (NYSE:IBM) enjoying bullish activity while Intel (NASDAQ:INTC) and Hewlett Packard (NYSE:HWP) succumbed to profit-taking. Most stocks in the communications-technology group experienced broad selling pressure but there were some positive moves in software shares. Among S&P 500 sectors, new buying interest surfaced in biotechnology, utility, natural gas and retail stocks while oil service, major drug, paper and gold issues generally retreated. Summary of Previous Picks: Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return CTLM FEB 35 34.06 37.13 $0.94 5.2% Exit? EMLX FEB 70 66.94 81.75 $3.06 4.6% ADI FEB 55 53.70 49.40 -$4.30 0.0% Closed FTE FEB 85 83.05 77.20 -$5.85 0.0% Closed Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return CTLM FEB 35 33.94 37.13 $1.06 18.7% EMLX FEB 60 57.94 81.75 $2.06 9.7% CMVT FEB 90 88.81 105.25 $1.19 9.5% VSTR FEB 105 102.75 118.81 $2.25 7.7% EMLX FEB 65 63.94 81.75 $1.06 6.5% IDTI FEB 35 34.44 38.50 $0.56 5.1% ADI FEB 55 53.80 49.40 -$4.40 0.0% Closed FTE FEB 85 83.70 77.20 -$6.50 0.0% Closed Sell Strangles: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return AFFX FEB 53 51.81 67.38 $0.69 9.4% AFFX FEB 85 85.69 67.38 $0.69 9.4% VECO FEB 35 34.50 54.19 $0.50 8.0% VECO FEB 80 80.63 54.19 $0.63 10.0% AFFX FEB 50 49.19 67.38 $0.81 7.4% AFFX FEB 98 98.31 67.38 $0.81 7.4% VECO FEB 30 29.06 54.19 $0.94 7.3% VECO FEB 95 96.13 54.19 $1.13 8.7% Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return OSIP FEB 85 86.13 58.94 $1.13 8.6% BRCD FEB 135 136.25 80.06 $1.25 7.4% CIEN FEB 145 146.00 81.88 $1.00 6.2% MYGN FEB 100 100.69 68.50 $0.69 6.1% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status A $61.88 $50.14 FEB45p/50p $0.56 $49.44 $0.56 Exit? CMVT $121.63 $105.25 FEB95p/100p $0.75 $99.25 $0.75 Alert ITG $45.81 $50.42 FEB35p/40p $0.69 $39.31 $0.69 Open NUFO $60.19 $45.00 FEB40p/45p $0.62 $44.38 $0.62 Exit? CEPH $58.50 $57.25 FEB75c/70c $0.38 $70.38 $0.38 Open Debit Straddles: AC (NYSE:Alliance Capital) Profit target met - closed on 1/30 for $0.75 (30%) gain. In hindsight, holding onto the puts a bit longer would have been quite profitable...ahh, the life of a speculator! New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Naked Puts, & Combinations *************** AEOS - American Eagle Outfitters $58.25 *** Hot Sector! *** American Eagle Outfitters (NASDAQ:AEOS) is a specialty retailer of all-American casual apparel, accessories and footwear for men and women between the ages of 16 and 34. The company sources, designs and markets a versatile line of timeless and relaxed clothing classics like jeans, khakis, and T-shirts under the American Eagle Outfitters and AE brand names for exclusive sale in American Eagle Outfitters stores. The stores sell fashionable items that reflect a lifestyle-based retail branding strategy. Their many designers interpret fashion trends and develop merchandise that has fresh, collegiate appeal. Merchandise is regularly updated with unique styles, colors and fabrics. The company also offers fashionable interpretations of fundamental wardrobe items such as jeans, sweaters, khakis, T-shirts, woven shirts, and fleece. The retail sector is HOT and AEOS shares moved to a new, all-time high today after announcing that total sales for the first five weeks of the year increased 73% to a record $72 million. That's a bold statement of the company's success, considering the recent slump in the economy and traders who want to own a great stock in the apparel industry can speculate on the future movement of the issue with these conservative positions. AEOS - American Eagle Outfitters $58.25 PLAY (sell naked put): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put MAR 45 AQU OI 239 1.06 43.94 6.9% *** Sell Put MAR 50 AQU OJ 449 2.31 47.69 10.9% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=AEOS ****** DIGL - Digital Lightwave $49.25 *** Own This One! *** Digital Lightwave (NASDAQ:DIGL) designs, develops, markets and supports diagnostic products for monitoring, maintaining and managing fiber optic networks. Telecom service providers utilize fiber optics to provide increased network bandwidth to transmit Internet, voice, data and multimedia video traffic. Digital's products provide telecommunications service providers and other equipment manufacturers with capabilities to cost-effectively deploy and manage fiber optic networks to address the rapidly increasing demand for bandwidth. Their current customers include telecommunications service providers such as GTE, MCI WorldCom, Qwest Communications, Level 3 Communications, Ameritech, and telecom equipment manufacturers such as Alcatel Network Systems, Tellabs, Nortel Networks and Cisco Systems. Digital Lightwave surprised a number of analysts last week, easily exceeding consensus earnings estimates for the fourth quarter. The maker of products for fiber-optic networks said it earned $13 million, or $0.40 per share, up from $3.9 million, or $0.13 per share, in the same period last year. Revenue nearly doubled to $33.9 million from the fourth quarter a year ago and the company has now completed seven consecutive quarters of increased revenue and earnings growth. Analysts quickly upgraded the issue and the new buying support has helped the stock weather the effects of the "Cisco Syndrome." We favor the bullish technical outlook for the issue and traders who agree with that opinion can speculate on the future movement of the stock with these conservative positions. DIGL - Digital Lightwave $49.25 PLAY (sell naked put): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put FEB 40 DGW NH 325 0.50 39.50 15.4% Sell Put MAR 35 DGW OG 46 1.44 33.56 10.5% *** Sell Put MAR 40 DGW OH 14 2.56 37.44 16.2% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=DIGL ****** IMPH - Impath $55.94 *** On The Move! *** Impath (NASDAQ:IMPH) specializes in providing patient-specific cancer diagnostic and prognostic information, with a particular expertise in difficult to diagnose tumors, prognostic profiles in breast and other cancers, and lymphoma/leukemia analysis. The company currently works with more than 7,400 physicians specializing in the treatment of cancer patients, in 1,785 hospitals and 409 oncology practices. The company's database currently contains more than 550,000 patient profiles. In addition, Impath can link its information with that of its tumor registry business to provide data on the full continuum of care, from diagnosis through treatment and outcomes on many patients. Impath is working on more than 50 projects with over 20 different pharmaceutical/biotechnology companies including 21 U.S. based and four international clinical trials. Impath shares have been "on the move" in the past few sessions after some bullish comments and an upgrade were issued by First Union Securities. Now the stock has moved out of a recent trading range on heavy volume and the potential for future upside movement is excellent. Traders who agree with a bullish outlook for the issue can speculate on a continued rally with this conservative credit spread. IMPH - Impath $55.94 PLAY (conservative - bullish/credit spread): BUY PUT FEB-45 QPH-NI OI=34 A=0.38 SELL PUT FEB-50 QPH-NJ OI=34 B=0.93 INITIAL NET CREDIT TARGET=$0.62-$0.75 ROI(max)=14% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=IMPH ****** NBR - Nabors Industries $62.30 *** Oil Sector Hedge! *** Nabors Industries (AMEX:NBR) is a land drilling contractor with over 500 actively marketed land drilling rigs. Nabors conducts oil, gas and geothermal land drilling operations in the US Lower 48 states, Alaska and Canada, and internationally, primarily in South and Central America and the Middle East. Nabors also is one of the largest land well-servicing and work-over contractors in the United States. Nabors also is a major provider of offshore platform work-over and drilling rigs. Nabors markets a number of platform, jack-up and barge rigs in the Gulf of Mexico and other international markets. These rigs provide well, work-over and drilling services. To further supplement its primary business, the company offers a number of ancillary well-site services, including oilfield management, engineering, transportation, construction, maintenance, well logging other support services, in selected domestic and international markets. The Oil Service sector has performed very well over the past few sessions and based on the improving technical outlook for the group, we decided to look for a conservative position to hedge our bullish outlook for the broader market. The search uncovered some excellent candidates but most of the option premiums in the Oil Service group have very little premium. However, this play offers reasonable reward with limited downside risk and today's activity in NBR shares suggest the bullish trend will continue. NBR - Nabors Industries $62.30 PLAY (aggressive - bullish/credit spread): BUY PUT MAR-50 NBR-OJ OI=2071 A=0.40 SELL PUT MAR-55 NBR-OK OI=219 B=0.85 INITIAL NET CREDIT TARGET=$0.55-$0.60 ROI(max)=12% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=NBR ****** UHS - Universal Health Services $89.70 *** On The Rebound! *** Universal Health Services (NYSE:UHS) owns and operates acute care hospitals, behavioral health centers, ambulatory surgery centers, radiation oncology centers and women's centers. The company has a number of hospitals, acute care hospitals, behavioral health centers, and two women's centers in the US and Puerto Rico. The company, as part of its Ambulatory Treatment Centers Division, owns outright, or in partnership with physicians, and operates or manages surgery and radiation oncology centers located across the U.S. and in the District of Columbia. Services provided by the company's many hospitals include general surgery, internal medicine, obstetrics, emergency room care, radiology, oncology, diagnostic care, coronary care, pediatric services and behavioral health services. Universal Health Services has recovered from a recent sell-off in the Healthcare sector with flying colors and speculation on the company's upcoming earnings have propelled the issue into an unexpected rally. With the quarterly announcement due on Friday, February 16, the upward movement should easily carry the share value beyond our sold options and as long as there are no major surprises, these positions will expire profitable. UHS - Universal Health Services $89.70 PLAY (sell naked put): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put FEB 75 UHS NO 23 0.30 74.70 4.7% Sell Put FEB 80 UHS NP 14 1.05 78.95 12.9% *** Sell Put FEB 85 UHS NQ 0 2.30 82.70 23.0% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=UHS *************** Neutral Plays - Straddles & Strangles *************** ASFC - Astoria Financial $55.91 *** Probability Play! *** Astoria Financial (NASDAQ:ASFC) is a unitary savings and loan association holding company for Astoria Federal Savings and Loan Association (Astoria Federal). In addition to directing, planning and coordinating the business activities of Astoria Federal, the company invests primarily in U.S. Government and federal agency securities, mortgage-backed securities and other securities. Astoria Federal's principal business is attracting retail deposits from the general public and investing those deposits, together with other funds generated from operations, principal repayments on loans and securities and borrowed funds, primarily in one-to-four family residential mortgage loans and mortgage-backed securities and, to a lesser extent, multi-family residential mortgage loans, commercial real estate loans and consumer and other loans. This position meets our criteria for a favorable straddle; cheap option premiums, a history of adequate price movement and future events or activities that may generate volatility in the issue or its industry. This selection process provides the foremost combination of low risk and potentially high reward. As with any strategy, it should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ASFC - Astoria Financial $55.91 PLAY (conservative - neutral/debit straddle): BUY CALL MAR-55 AQR-CK OI=14 A=$2.75 BUY PUT MAR-55 AQR-OK OI=20 A=$1.81 INITIAL NET DEBIT TARGET=$4.25-$4.38 TARGET ROI=20% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ASFC ****** CHKP - Check Point Software $146.56 *** Premium Selling! *** Check Point Software Technologies (NASDAQ:CHKP) develops, markets and supports Internet security solutions for enterprise networks and other service providers including Virtual Private Networks, firewalls, intranet and extranet security and Managed Service Providers. The company delivers solutions that enable secure, reliable and manageable business-to-business communications over any Internet Protocol network-including the Internet, intranets and extranets. Check Point product offerings also include traffic control/quality of service and IP address management. Check Point products are fully integrated as a part of the company's Secure Virtual Network architecture and provide centralized management, distributed deployment, and comprehensive policy administration. The capabilities of Check Point products can be extended with the Open Platform for Security, enabling integration with many best of breed hardware, security applications and enterprise software applications. Check Point Software Technologies is an excellent candidate in the premium-selling category of options trading. The issue has great option premiums, a relatively well-defined trading range and a high probability of remaining between the sold (short) strike prices. Based on historical analysis of option pricing and the underlying stock's technical history, the issue meets our basic criteria for a favorable credit strangle, and in the event of a brief slump, we wouldn't mind having the issue in our portfolio at a cost basis near $120. The company will split its stock 3-for-2 on 2/12/2001. CHKP - Check Point Software $146.56 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put FEB 170 KGE BN 1562 1.00 171.00 9.3% *** Sell Call FEB 120 KGE ND 706 1.13 118.87 11.5% *** Sell Put FEB 165 KGE BM 467 1.69 166.69 13.6% Sell Call FEB 125 KGE NE 607 1.56 123.44 13.7% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=CHKP ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1550 ************************************************************** ******************* 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. 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