The Option Investor Newsletter Sunday 02-11-2001 Copyright 2001, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/021101_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 2-9 WE 2-2 WE 1-26 WE 1-19 DOW 10781.45 - 99.10 10864.10 +204.12 10659.98 + 72.39 + 62.21 Nasdaq 2470.97 - 91.09 2660.50 -120.80 2781.30 + 10.92 +143.88 S&P-100 682.35 - 11.97 705.48 - 3.58 709.06 + 3.83 + 17.35 S&P-500 1314.76 - 17.77 1349.47 - 5.48 1354.95 + 12.40 + 24.00 W5000 12124.31 -169.65 12450.10 - 77.20 12527.30 +143.40 +202.60 RUT 497.05 - 5.84 501.50 + 2.82 498.68 + 10.59 + 2.34 TRAN 3013.42 - 11.82 3092.76 +136.57 2956.19 + 2.90 - 48.69 VIX 25.15 + 1.06 24.75 - .39 25.14 - 1.15 - 1.33 Put/Call .73 .60 .59 .48 ****************************************************************** Surviving The Slowdown Friday was chock full of announcements and speculation on how Corporate America is dealing with the economic slowdown. As lay-offs become more commonplace in 2001, the markets drift lower over concerns about corporate revenues. The intraday trend: decidedly negative. This painful decline begs the question, where will the market look next for that glimmer of hope that we had two weeks ago? The answer is Greenspan. With earnings season winding down and most major tech players confessing their lack of visibility, market watchers once again will shift their focus to Fed Chairman Alan Greenspan and the fate of interest rates. We all know that earnings and revenues going forward, at least for the next two quarters, are going to be less than stellar, according to the standards that we have grown to expect the past few years. With the chief concern being the slowing economy in the U.S., Greenspan is thereby the chief positive catalyst and the closest thing to a panacea for the market's woes. After Friday's dismal market performance for both the NASDAQ and the INDU, Monday will be a day of anticipation. Greenspan is scheduled to speak on Tuesday morning at 10am ET before the Senate Banking Committee. Doc Greenspan will be diagnosing the state of the economy in the Fed's semiannual report to Congress, formerly known as the Humphrey-Hawkins Report. While Greenspan will delicately tip-toe that fine semantic line during the testimony, market watchers will be listening intently for any sign of a possible intermeeting rate cut. It was the stronger Non-Farm Payroll report on Friday the 2nd that sparked market fear of not getting an intermeeting cut, which was widely perceived as certain. The FOMC is not scheduled to meet until March 20th and it seems reasonable that given the current economic condition, a month without Fed action is a month too long. Further evidence of the slowing economy was presented Friday and dragged the markets lower. Motorola(NYSE:MOT) announced that it will cut 4000 jobs from their Semiconductor Products operation. This comes just a few weeks after the company said they were cutting 2500 jobs in their mobile phone unit. The word "lay-offs" has become all too familiar on both Wall Street and Main Street in 2001. Creating downward pressure for the NASDAQ were rumors that Dell Computers(NASDAQ:DELL) would be laying off 10% of its workforce. Reports circulated late Thursday night and set the stage for a test of 2500 on the NASDAQ. DELL denied the reports but the speculation was enough to set the tone for both the stock and the index. Whether rumor or fact, this pattern of lay-offs shows the cost-cutting measures that Corporate America is forced to take to survive in this economic environment. As I mentioned on Wednesday, 2500 was key support for the NASDAQ. This level was overcome by selling on Friday, with the tech-heavy index now sitting in deeply oversold territory. We have reached a very precarious juncture for the NASDAQ. Both Eric and I discussed last week how the tape has been difficult to read as the NASDAQ drifted. Now, lacking a fundamental catalyst along with technical weakness, the NASDAQ is at a point where it really could go either way. Are we heading to retest January 3rd's low of 2251? Or will the NASDAQ put in a new higher low above 2400? Given the oversold condition, Greenspan may provide the necessary boost to attract buyers back this week. Here is a chart of the NASDAQ with the exact same lines that were drawn on Wednesday. We were looking for Wednesday's rally momentum to continue on Thursday and drive the NASDAQ to resistance at 2700. Unfortunately, the momentum was short-lived in the morning and could only lift the index to the downtrend line where sellers whacked it once again. From there, the breakdown accelerated. To the downside, there is really no discernable support level of true strength. January 10th's low was 2376, when the NASDAQ began its run to 2900. More importantly, the market needs a fundamental catalyst to drive it back to its previous trading range. Even if the Fed can provide hope for the market in the form of rate cuts, fundamentals trump both technicals and the Fed. We must trade what the market gives us, and right now Greenspan's Senate hearing will be that next glimmer of hope. In addition to the rumors surrounding DELL, other big cap NASDAQ names have been perpetuating the tech index lower. Both Microsoft (NASDAQ:MSFT) and Oracle(NASDAQ:ORCL) have been subject to the Street's critique. On Thursday morning, Merrill Lynch analyst Henry Blodget downgraded MSFT to an Accumulate from a Buy, expecting slowing software sales. Boy, this guy really knows how to make friends. Hey Henry, you liked Amazon(NASDAQ:AMZN) at $100, you must love it at $13. I'm sorry...don't get me started on that guy. Moving on, ORCL plunged below $25 a share after Morgan Stanley analyst Charles Phillips downwardly revised revenue growth forecasts going forward. These types of downward revisions are going to be as commonplace in the coming months as the word "lay-offs." However, it is a double-edged sword. Obviously, it's perceived as a negative when a company can't sustain current growth levels, yet it also allows for a better chance of an upside surprise. Bring down expectations to realistic levels. Watch those big caps. The market won't be able to advance without them. Lucent(NYSE:LU) may have attempted to be creative in trying to survive the slowdown and now has the SEC looking its way. The SEC has begun a formal investigation of the struggling telecom, calling into question accounting practices. The issue focuses on software licensing agreements and nearly $680 mln in revenues booked in fiscal 2000. Just another financial woe for LU, which has consistently missed earning's numbers during the past year. Looking at the INDU, 11000 has proven to be the victor this time around. Last Wednesday, I mentioned that without a close over 11000, the INDU would slip back to support near 10800-10850. Without even attempting another run at resistance, the INDU sold off more than 150 points. MSFT, IBM(NYSE:IBM), Wal-Mart (NYSE:WMT), SBC(NYSE:SBC), and GE(NYSE:GE) all contributed to the downside action on Friday. Broad selling with little buying epitomizes this market right now. No catalyst, no buying. This is precisely why the INDU was not able to break the 11000 level. There was simply no reason to buy. Tuesday's Greenspan meeting very well may create a tradable move for both indices, if only temporary. Technically, the INDU decent support at the 10600 level, where it consolidated in late-January and from where it launched its recent rally. With Corporate America tightening the belt and trying to survive these uncertain times, the market is seeking something to keep its apparent recovery going. Fundamentally, revenue growth forecasts will continue to be reassessed. Technically, the charts aren't painting a bullish picture. We are in an economic slowdown and in these times, we look to Alan Greenspan. Knowing that he watches the consumers' confidence in the U.S., we can count on him being on our side. So Tuesday morning at his Senate testimony, Greenspan will be conscious of Retail Sales numbers announced earlier at 8:30am ET. These events will provide trading opportunities, and given the oversold conditions on the NASDAQ, it will most likely be to the upside. However, remember two things. First, in a market environment with only short-term catalysts and a lack of long-term visibility, trade quick and be nimble. Second, it's expiration week, so expect opportunity and volatility as institutions roll positions forward. On top of that, PPI is due out on Friday. Be aware that unscheduled events, i.e. analyst calls & company announcements, have been dictating the market. Expect the unexpected and trade smart. Jim Brown will be back on Tuesday to give us insight into Greenspan's comments and the market's reaction. Matt Russ Editor www.OptionInvestor.com *************************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=1574 ************************************************************ ************************************ 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************************* 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=1588 ************************************************************** **************** MARKET SENTIMENT **************** Now They're Getting Nervous By Austin Passamonte For the past few weeks we've been bombarded by bullish sentiment from all media directions, with CNBC starting as the center point for most of us. From pre-FOMC until the last couple days we've seen analysts calling right now the time to buy. Market timers saying the bottom is behind us. Don't fight the Fed. Techs are cheap. Buy now or miss out forever. When the whole world around us insists the sun is now blue and we look up and it still seems yellow, that can be a most unsettling time. What are we to believe? Celebrity media types steering their guests to say bullish things or the lying charts in front of our eyes? Do we really pays $hundreds per month for all our technical analysis and it offers us nothing but sheer falsehood? Not this time. Again and forever, the charts were correct. They plainly called the top for all major indexes weeks ago and will call bottoms eventually as well. We didn't go straight down, haven't reached bottom yet and it won't be a straight ascent back to new highs either. We believe the tech sectors have been pushed beyond near-term limits and are due to bounce quite soon. That will usher in the next wave of eager selling as we look forward to a few more rounds of failed rallies ahead. The Dow in particular is in grave danger to give back a few hundred points or so if near-term support doesn't hold this week. A clean break and close below Friday's session low could easily see 10,400 area next. The wild-card here is our Fed. The only thing keeping Nasdaq markets from sub-2,000 points and the SPX above 1,200 is blind hope that another interim rate cut is in our future and soon. It very well may be and would surely ignite another short squeeze the likes of which we saw one month ago. As we've stated within this section since July 2000, we will consider the next multi-year bottom in place when commercial S&P 500 traders unwind their all-time historical short position over at the Chicago Mercantile Exchange and begin to accumulate instead of distribute. That remains our primary benchmark of long term market reversal. Impatient traders and those with short-term vision may scoff at this notion, pointing out a handful of market rallies since then until now. While they have certainly been tradable events, any who bought & held stocks or LEAPS during each rally have been washed out of their longs every time when trying to hold from these "bottoms". Lower market lows have resulted after every failed rally, and that pattern has not been broken yet. This week's testimony by Greenspan to the House will be picked about for every mumbo-speak utterance in reference to his current stance. One little phrase eluding to anything less than his finger on the rate-cut trigger would not be a time for holding open bullish plays. All ears will tune in and markets orders staged to go at a moment's notice. Markets are in a precarious position right now. Sentiment has suddenly shifted from highly bullish to very nervous. Panic is the next emotion to run this gamut. Peering into our crystal ball, we will be first to go out on the fiscal limb. We expect to test or exceed new market lows on the big indexes within the next two weeks. A few failed rallies along the way are almost certain, with Monday being a good time for the first to begin. Once markets wash out again, everyone turns bearish and calls for doom & gloom all year just like they did last May and July 2000 when market nulls enjoyed two wonderful, long-duration rallies. By then the VIX & VNX would be reaching their highs, technical signals screaming for bullish reversals and CNBC celebs wailing & gnashing their teeth. COT report at that time might show S&P 500 commercials covering their grossly, obscenely profitable shorts and moving over to the accumulation phase. Just about the time Market Sentiment looks to catch the next pre-FOMC rally into further rate cuts. How's that for throwing darts at the future? Trade the upside carefully until then; the trend still remains decidedly down. ** VIX Friday 02/09 close; 25.15 VXN Friday 02/09 close; 65.21 30-yr Bonds Friday 02/09 close; 5.38% 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. Friday (02/10/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 720 - 705 12,067 7,433 1.62 700 - 685 6,169 9,874 .62 OEX close: 682.35 Support: 680 - 665 1,476 8,861 6.00 655 - 645 37 11,778 318.32 Maximum calls: 740/5,057 Maximum puts : 650/4,458 Moving Averages 10 DMA 706 20 DMA 704 50 DMA 700 200 DMA 755 ** NASDAQ 100 Index (NDX/QQQ) Resistance: 66 - 64 68,436 47,127 1.45 63 - 61 82,274 31,585 2.60 60 - 58 27,243 79,282 .34 QQQ(NDX)close: 56.49 Support: 55 - 53 7,355 30,571 4.16 52 - 50 2,704 30,227 11.18 49 - 47 176 5,158 29.31 Maximum calls: 70/61,077 Maximum puts : 60/40,442 Moving Averages 10 DMA 62 20 DMA 63 50 DMA 63 200 DMA 82 ** S&P 500 (SPX) Resistance: 1375 8,655 5,941 1.46 1350 17,317 15,730 1.10 1325 10,877 12,616 .86 SPX close: 1314.76 Support: 1300 2,830 13,496 4.77 1275 587 9,612 16.37 1250 914 8,263 9.04 Maximum calls: 1350/17,317 Maximum puts : 1350/15,730 Moving Averages 10 DMA 1352 20 DMA 1348 50 DMA 1334 200 DMA 1414 ** CBOT Commitment Of Traders Report: Friday 02/09 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 -2903 -467 -4001 -5599 Total Open interest % (-29.87%) (-6.18%) (-16.84%) (-22.99%) net-short net-short net-short net-short NASDAQ 100 Open Interest Net Value +3292 +1810 -6615 -6642 Total Open Interest % (+20.96%) (+11.61%) (-10.93%) (-10.94%) net-long net-long net-short net-short S&P 500 Open Interest Net Value +74142 +73434 -94766 -93215 Total Open Interest % (+41.81%) (+39.86%) (-12.52%) (-12.53%) 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 greatly increased their net-short positions on the DJIA while Commercials have reduced their net-short positions. Interest Rates: Commercials are short 10-year T-Note futures to a five-year extreme. (Bearish) Currencies: Commercials continue to build heavily short Euro dollar futures while small specs build net long. (Bearish) Metals: Commercials are moving to net-long in Gold, Silver and Copper from short positions. Small specs are at five-year net short positions in silver. (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 02/06 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/021101_1.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=1581 ************************************************************ *************** ASK THE ANALYST *************** Indebted By Eric Utley I owe a lot to the readers of this column. The response to my request for feedback last weekend was overwhelming. I was inebriated with replies to my request and very much appreciate the time and effort taken by those who were motivated enough to respond. If you haven't yet received a reply from me yet it's on the way - I'm still working my way through the list. I took a lot away from the many ideas and suggestions sent in by the readers and will begin to implement some new ideas into this column next weekend. I need to run some of the ideas past Jim Brown first and haven't yet had the opportunity to speak with him. One common request I received was for possible trades akin to what Jim lays forward in his Editor's Plays column. The problem I have with setting up trades for the readers of this column is that my trading strategy varies greatly from Jim's and, I'm sure, many of our readers. As I mentioned last weekend, I have been day trading only, and not holding positions overnight. That strategy will evolve with the market landscape. However, because my recent strategy requires such nimbleness, I don't feel it prudent to set up trades during the weekend - there's so much that can change in the market over five short days. Nonetheless, I feel that there's more that I can do in this column to add value. And over the next week or two I will implement some changes. In the meantime, suggestions are always welcome. Send your comments along with stock requests to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- The Top-Down I had many requests for the data points I follow when determining my top-down bias - in essence, the fundamental research I do each day. I like to start with a top-down approach by first gauging the global financial landscape. I don't spend as much time on this aspect of my trading as I'd like, mainly due to the lack of information flow. Nonetheless, I like to be aware of global events that will impact trading in the U.S. markets. For example, I knew at the beginning of last week that the Bank of England was meeting and was expected to cut interest rates and that pressure was on the Bank of Japan to do the same - both banks cut rates last week. I like to follow the price action mainly in two global markets: Asia and Europe. The Qcharts service that I use provides several ways of monitoring price action in Europe and Asia, but the two indexes I mainly follow are the Eurotop 100 Index (TOP.X) and the AMEX Japan Index (JPN.X). There are probably better means of following the Asian and European markets, but these two indexes serve my needs well. To reiterate, I don't follow the foreign markets REAL closely but do know the general direction in which they're trading. The next data point I monitor is the debt market. I like to get a feel of what's going on in the bond market and be aware of any treasury auctions or new corporate debt coming to market. I monitor price action in the debt market by watching the yields of the 5-year Treasury Note (FVX.X), 10-year Treasury Note (TNX.X) and the 30-year Treasury Bond (TYX.X). Remember that yields move opposite of price. For example, last Friday, the 30-year yield fell 1.59 or .159 percent. Yields were falling and price was rising, thus capital was flowing into bonds and out of stocks judging by the poor performance in the broader market averages last Friday. So, was last Friday's action in the bond market a function of asset allocation or a flight to safety? On the quote sheet below, remember to move the decimal place over once to the left, i.e. 54.17 equals 5.417 percent. I also like to visually monitor the direction in yields by keeping a chart on the 10-year Treasury Note nearby. Whether one uses the 10-year or 30-year is debatable, but either one should serve the purpose of monitoring the ebbs and flows of the bond market. After gauging the debt market, I like to peek into the futures market. Depending upon the current market conditions, the futures market can often serve as a leading indicator for the cash indexes. However, if you're not real familiar with the futures market and how it works, I would suggest to bypass this step in the top-down approach. Nonetheless, the futures market is something to be aware of when trading. After the futures market, I closely examine the broader market averages which includes the Dow Jones Industrial Average (INDU), S&P 500 (SPX.X), Nasdaq Composite (COMPX), Nasdaq-100 Index (NDX.X), Russell 2000 (RUT.X) - for the small caps, Dow Jones Transportation Average (TRAN) and the Dow Jones Utilities Average (UTIL) as well as the CBOE Volatility Index (VIX.X). I like to be aware of the trends, support and resistance levels, and the previous day's open, high, low and close for each of the indexes I follow. Plus, the broad market averages, when combined with the signs from the debt market, can serve as a gauge on which way capital is flowing from a macro perspective. After the major market averages, I break it down to sectors, in an attempt to discern what industry groups are advancing the averages or weighing them down. I don't follow anything real special in the way of sector rotations. All I attempt to do is get a broad grasp on which industry groups are moving and in what direction. Here again with the sectors, I like to get a feel of trends, support and resistance levels, along with the previous day's highs and lows. In addition to the price action monitoring I do with the sectors, I like to research upcoming events and/or news items that may impact trading in certain industry groups. For example, industry conferences, analyst meetings and product launches, among other events. And the only way to research that information, that I know of, is by taking a lot of time after the market closes to read financial publications, read some more and visit a lot of Web sites. My favorite places to look for upcoming analyst meetings and industry conferences are individual company Web sites in the investor relations sections. The following listing of sectors is a snapshot of what I watch and serves the purpose of monitoring sector rotation. Although there are several sectors I left off, such as food and beverage, the list gives me an idea of where capital is flowing. Once I discern where the capital is flowing, I then pull-up charts on a half dozen, or so, individual stocks within the sector. I would suggest for readers to select a handful of liquid stocks within each of the major sectors and become familiar with the way each stock trades. In summary, the top-down approach that I use is simply a means of discerning where capital has flowed, and where it's likely to move to next. By having a macro feel on the market, I can better position my trades and route them in the path of least resistance, no matter the direction of that path or the sector. Additionally, by having a top-down approach I can better employ risk management strategies after entering a trade as risk becomes easier to quantify with a better understanding of the current conditions in the market. ---------------------------- Unitedhealth Group - UNH What are your perspectives on UNH...nice trend...is it just a post-split dip? - Paul Paul, in my opinion, I don't think the stock split had anything to do with the dip in shares of Unitedhealth Group (NYSE:UNH). If you compare a chart of the Health Care Index (HCX.X) to one of UNH you'll notice both began to pullback in early January. The sell-off in each may have been a function of tax-gain selling as traders locked in their profits. Along with the tax-related selling, I think UNH continued to pullback due to the actions of the Federal Reserve on January 3rd. The surprise interest rate cut induced capital to flow back into the tech and finance sectors of the market and out of the defensive groups such as health care. However, as we witnessed last week, capital freely flowed out of the tech sector and into the more defensive groups of stocks along with bonds. But, UNH didn't advance last Friday which is somewhat of a convoluted signal given its defensive nature. I think the ill-reception of Cigna's (NYSE:CI) earnings report - one of UNH's competitors - had everything to do with the underperformance of UNH Friday despite the exodus of capital from the Nasdaq. Here's the conundrum. UNH is in a defensive sector and should advance if the Nasdaq works lower. However, the poor relative performance Friday is a bit disconcerting given that UNH should have risen in light of the terrible Nasdaq. So, was there something in the CI earnings report that shifted the dynamic in the healthcare sector enough so that it no longer benefits from rotation out of tech? I can't say unequivocally if that was the case with the CI report, but it's a good question nonetheless. If the Nasdaq continues to decline, I would think that UNH would find some bids in conjunction with weakness in tech. But the divergence from that thesis last Friday makes UNH all the more harder to game right now. If the Nasdaq rebounds next week, then I would expect UNH to continue to pullback. Moreover, the chart below may reveal a double-top in UNH around $63.50. ---------------------------- Inktomi - INKT What are your thoughts on INKT? Down huge, some rumors of a buyout, in a long-term growth sector. - Thanks, Dan Dan, I don't like shares of Inktomi (NASDAQ:INKT). But before I go on, let me make it perfectly clear that I'm not attempting to talk down INKT nor am I bashing the company. I still have a hard time figuring out what exactly the company does. I know for a fact that the company doesn't make a lot of money from operations. INKT recorded profits of $1 million during its last fiscal quarter - keep in mind the company is still valued at more than $1.6 billion. And those profits INKT reported last quarter are expected to disappear in the coming two quarters as the company guided lower during its conference call with analysts. As the CEO of INKT succinctly put it, "We will incur a modest loss for the next two quarters..." If the words of the CEO aren't cautionary enough, I would encourage to defer to the price action in INKT. The chart looks terrible and I wouldn't dare to attempt to pick the bottom in the stock right here. In all sincerity to any of my readers who own INKT, I wish I had something better to write about the company. But I would rather be honest than to try and paint a rosy picture. In addition, Dan, I choose to never buy a stock on the premise of a takeover, especially when the fundamentals of a company are a cause for concern. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ******************************************** Do you like OptionInvestor? Then vote for us as a favorite site: http://www.investorlinks.com/vote.html Thanks for your support! ******************************************** ************* COMING EVENTS ************* For the week of February 12, 2001 Monday ====== None Scheduled Tuesday ======= Retail Sales Jan Forecast: 0.50% Previous: 0.10% Retail Sales ex-auto Jan Forecast: 0.40% Previous: 0.00% Richmond Fed Survey Jan Forecast: NA Previous: -6.0 Wednesday ========= Business Inventories Dec Forecast: 0.40% Previous: 0.50% Oil & Gas Inventories 9-Feb Forecast: NA Previous: 285.6MB Thursday ======== Jobless Claims 10-Feb Forecast: NA Previous:361,000 Export Prices ex-ag. Jan Forecast: NA Previous: -0.20% Import Prices ex-oil Jan Forecast: NA Previous: 0.90% Philadelphia Fed Feb Forecast: -23 Previous: -36.8 NAHB Housing Indx Feb Forecast: NA Previous: 54 Friday ====== PPI Jan Forecast: 0.20% Previous: 0.00% Core PPI Jan Forecast: 0.10% Previous: 0.30% Housing Starts Jan Forecast: 1.550M Previous: 1.575M Building Permits Jan Forecast: NA Previous: 1.493M Capacity Utilization Jan Forecast: 80.30% Previous: 80.60% Industrial Production Jan Forecast: 0.00% Previous: -0.60% Mich Sentiment-Prel. Feb Forecast: 94 Previous: 94.7 ECRI Wkly Index 9-Feb Forecast: NA Previous: 124.0 Week of February 19th ==================== Feb 21 CPI Feb 21 Core CPI Feb 21 Trade Balance Feb 21 Treasury Budget Feb 22 Initial Claims Feb 22 Leading Indicators Feb 22 Help-Wanted Index ************************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=1596 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Sunday 02-11-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/021101_2.asp ************** TRADERS CORNER ************** New Subscriber Focus: Strategy Allocation By Janar Wasito John Bogle, one of the fathers of index funds, remarked that the single biggest factor in determining how your portfolio performs is how you structure your asset allocation. For option traders, we have certain advantages inherent in using leveraged instruments - and certain risks. But in our world, the same basic insight applies. In this article, I want to walk through some thoughts for new subscribers in particular. When I started reading the newsletter regularly in January, 1999, I had already spent the entire previous year investing most of my assets - about 85% - in long-term stock holdings. I had tried an option trade or two in 1998, and a big loss in DJX options had scared me out of the game until I had set up the majority of my assets in relatively stable positions in blue chip companies. Particularly if you are coming to this newsletter as a new subscriber looking for a way to profit from a new potential bull market some time in 2001, it makes sense to limit your risk by putting only a small fraction of your assets into an account with options authorization. Now, however, I think in terms of strategy allocation. I have both a long-term and a short-term account. But, instead of just buying and holding quality companies in my long-term account, I also have certain options strategies which I will employ in the long-term account. For instance, I still want to hold stock for the long run in this account. I have some CSCO and YHOO which I have had since 1998 in this account, and I regret selling other long-term positions in solid companies. But talk about round trips! The lessons I have learned from watching the CSCO and YHOO is that at certain points it makes sense to put collars on long-term stock holdings. For example, in early 2000, I could have sold a call (even a LEAP) against my CSCO, and bought shorter-term puts, thus creating a collar (for more on the specifics of this kind of strategy, refer to a reference book like Chicago Board Options Exchange, Options: Essential Concepts & Strategies). Now, I am also building positions in REITS, like Spieker Properties(NYSE:SPK). As a San Francisco resident, I note that while the NASDAQ has plummeted in value, the rent on my condo goes up. Call me Peter Lynch, but I see a trend here. Also, in my long-term account, I will use covered calls. I would like to write calls on the QQQ, particularly if I could use technical analysis to get good monthly entry points by buying the stock when it is oversold, and waiting until it is overbought to write an in the money, or at the money call. But, I am not sure whether the QQQ has put in a bottom yet, so I am also looking at stocks like (NYSE:LEH), (NYSE:GS), and (NYSE:MWD) (many recent OIN call picks), and other stocks highlighted in the covered call section of the newsletter. My goal in writing covered calls in my long-term account is to achieve returns in the 5 - 10% range every month in good and bad markets. If I can compound those kinds of returns, over several years, then I will be on my way to financial independence. In my short-term account, my strategies are straight puts and calls on the QQQ (see indexskybox.com for more on my current short-term trading). However, I also select about 3 newsletter call picks each week to track closely. My goal in tracking those plays is to see how leading stocks react to news, and to see whether these plays are working right now. My observation from quantifying and evaluating my own trading records from years past is that I can do very well in short-term call plays, but only during certain parts of the year. In 1999, for instance, I did well in January, June-July, and November-December. So, I want to be aware of whether these single stock plays are working. On the downside, I have found that excessive focus on a single stock can ruin your objectivity, and my goal now is to trade for the long run. That means removing emotion, which will be a major theme in my articles. My approach will not be for everyone. I share it with our readers as a picture of how one trader addresses these problems. The essential learning lesson though is to have a larger plan in place. I will review my asset allocation and yearly game plan on a quarterly, or even a monthly basis. But it is always easier to adjust a plan than to make one up in the middle of the trading day. In my next article, I will address how I read the newsletter for maximum benefit in formulating an action plan for the upcoming week. ***** Who Says, "Real Men Don't Do Laundry?" By Renee White What happened to those tough executives known for playing golf or watching football? Are they getting soft on us? These days, I feel like I'm hearing much more about their laundering and house-cleaning skills. Apparently, many CEO's and CFO's have been hiding their house-cleaning talents from their wives. Funny how quick your memory returns, when your million dollar-a-year salary starts looking shaky due to an overall downturn in the market. That salary doesn't look so bad if your company is growing 30-40% a year. However, if your market cap is shrinking by that much per quarter, then that salary really sticks out like a sore thumb. Leave it to the smart ones not to clean their own houses. No, instead of salary reductions, they take all the candy away that was promised as incentives to those employees they begged to come work for them when the labor-pool was tighter than a rubber-band on a ponytail. First, they cut the good things, and then come the lay-offs. And boy, is that house cleaning party ever starting! Mr. Clean has returned! Evidently, some of our biggest banks in this country have tried cleaning another way. Their specialty is doing the laundry. Some have become so good at it that international relationships with unsavory characters have improved tremendously. In fact, I hear they actually love doing business with some of our big banks. Wire transfers have made their lives feel so heavenly. At home, a lot of these men don't know how to separate whites from colored clothes. But boy oh boy, they sure learned the advantages of clean money. (This really isn't a funny issue because we've recently bought shares in just about every bank that was mentioned in that report this week. So much for spreading risks!) Recently, I read that 662 companies fell below $1 a share in Year 2000. Compare that to 196 in 1998 and 138 in 1999, and you see the impact of our recent market decline and correction. Of course, correction only relates to the NASDAQ market, and this is what scares me. More on this later. Two weeks ago, I shared my overview of business, the economy, and trading near term, while expressing my concerns over the bullish expectations I was hearing due to the expected rate cut at the end of January. It felt odd to me that so many people were "ready to play earnings" and were "loading up the truck" for some big rocket ship that they thought would take off once the second cut was announcement. I saw nothing good about to happen. I shared my negative bias and the fact that my trades were favoring a sell-off going into February expiration. Last weekend, I expressed my concern if Cisco (NASDAQ:CSCO) missed their numbers, a secondary sell-off would certainly occur. Expecting them to continue to outperform, when the overall business climate is sick, just didn't make sense to me at all. If everyone around you has a cold, you're most likely going to get one too. I mentioned I would hold all my put plays going into CSCO'S earnings, yet exiting before the close on earning's day. However, due to the flat activity for two days going into the close before earnings, I decided to hold all put plays in other equities, over the report instead. I had sold my CSCO shares many months ago at $55, worried that our expectations may have outgrown their reality in a bad business environment. So continuing that thought, I was not optimistic that their January earnings would be consistent with their past performance, nor our expectations and certainly not a market mover to the upside. As expected, the news was bad, and the outlook poor for the next two quarters. Glad I held! So, here we are in post earnings and time for a reality check. We have just had one of the worst earnings reporting quarters that most traders have ever experienced since they started paying attention to the markets. We have been given a dose of market medicine, with a 100 basis point rate cut within one month, unprecedented for these times. The reality is: two half point rate cuts have done nothing to get this market out of its funk. All we got was one bigger dead cat bounce. Ugghh! The markets are still sick. So is the economy. Lay-offs are occurring faster than I can burn popcorn. And to make it worse, all the good news is already out for the immediate future. I don't mean to paint a dismal picture. There is money to be made on either side of the market. Nevertheless, we are entering the post-earnings dull zone and I expect little action for a while. In my opinion, (which of course could easily be wrong), I will not play in anticipation for another surprise rate cut to be gifted us this month. The next fed meeting is in March, which coincidentally will fall when we are getting our next phase of pre-earnings warnings. Between then and now though, my concern and question is: will we stay crawling on the bottom here, or will it get worse? Shorting a dull market is risky. Not shorting a continued slide is bad too. I don't see a strong rally in the immediate future at this time; I see more sideways movement possibilities. However, what really concerns me is the Dow(INDU). It has bumped its head up against 11,000 so many times now, that it has knots on its head and a headache to match. The INDU has not been in a bear market and part of me is starting to worry about that. Could these multiple failures to hold over 11,000 be a prelude to a fall in that market also? Is it possible that the ripples of a weak economy is about to tumble that index into a bear market to join NASDAQ, so that once again, they began moving in tandem like the old days? I have to admit, I got a chill when I heard it reported that Gillette(NYSE:G) didn't even want to give any guidance on the near term. In fact, I've heard a lot of concerns about the near-term from companies on the big board. Could laundering skills hurt our financial sector? It all just keeps adding up. I'm beginning to anxiously look forward to some skid marks from the slide. In the last two weeks, we have received mixed economic reports, which in my opinion will not hurry the Fed to another cut before March. Eventually, these rate cuts will filter down the business chain. Even if the INDU does tank, it could create the negative psychology forcing another surprise rate cut without the economic numbers to match. Markets move with psychological passion, so I will play that direction if this week's bleed doesn't change early week. A full fledge recession is an uncertainty. I think the aggressiveness of these rate cuts may save us and come summer, we will all be feeling better. But in all honesty, it is just too close to call. It could go either way. Another month or two of economic numbers should be sufficient for firm opinions. The markets though, move in anticipation, over-reacting typically in either direction. If we do come out of this business slump by summer, we should get sustained movement well before that time. What I hope for is that CEO's will get tired of cleaning houses within a month, laundry returns for true work-clothes instead of money, and the unemployment rate starts slightly inching downward as we get back to our long running booming economy. The first hints of recovery will show up in economic reports and they will not all change at once. It will be confusing since some reports will continued to be revised, months after a preliminary report is published. George W. Bush recently taught us a lesson. If you lower expectations enough, eventually no one expects anything and even mistakes will be laughed off. Once we get all our bullish expectations out of our system, it will be easier for small news to excite us. The best thing about lowered earning's expectations and analyst's downgrades are the opportunities to surprise the market to the upside once again. Once that starts, we are off to the races again. However, market choppiness and confusion will be eminent before we get there. *************************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=1575 ************************************************************ *********** OPTIONS 101 *********** The Hills Are Alive With The Sound Of Music By Lynda Schuepp As Julie Andrews sang in the Sound of Music, "Let's start at the very beginning, a very good place to start." This is my first time writing for Options 101, so I'm going to start at the beginning, but not at the very beginning. I'm assuming, if you are a subscriber, you know what a put and a call are, and the impact of volatility on the price of option. The tricky part is when the market is going sideways. Plan your trade and trade your plan, great advice that I read somewhere. I know I couldn't have made that up, but I don't know who to pay homage to. Let's start at the beginning, namely the entry point. Of course, prior to entry, you should have done research on your stocks, technical analysis, studied which option strategies would be best suited for your outlook, and what your reward to risk scenario looks like. What you say? You don't know what your reward to risk is? Step 1: What is your market outlook and is your stock following the trend? That trite, but tried and true saying, "the trend is your friend" should be followed whenever possible. When I analyzed my losing trades from last year, I found that most of them occurred when I fought the trend. Most salmon die trying to swim upstream, so why fight it? Below are charts of the Nasdaq 100, Dow Jones and the OEX, which I use to gauge the trend of the overall market. Note that you can't get volume from OEX charts. Look at the direction of the 50 day moving averages as they appear on each chart. It's easy to spot the trends. When price and volume averages are moving in the same direction, you can expect more of the same, if they are moving sideways, you can expect a choppy sideways market but look out if they are moving in opposite directions. QQQ, which is representative of the Nasdaq 100, is one of my favorite trading vehicles. I trade the stock and the options. Note that the 50 day moving average of the prices has been steadily moving down with prices, no surprise here. Note also that the 50 day moving average on the volume has been moving up. What that tells us is that the smart money (the institutions) have been selling. However, the last 9 days shows that although prices are still moving down, the average volume is starting to go sideways, saying that the end is near! The problem will be that the QQQ's are likely to trade sideways before reversing direction and that is a much harder market to trade than a directional one. Option trades in this kind of a market would include butterflies and calendar spreads, which are more sophisticated and trickier to adjust. However, this is not a bad time to just buy the underlying and wait for a volatility spike to sell calls against your position. With volatility low, it might also a good time to be buying leap calls. The Dow looks a little more promising. It was trading in a channel between October and the middle of December and then broke the channel. The Dow is establishing higher lows and finding a lot of resistance at 11,000, the magic number. A breakout to the upside may not be far away. The OEX looks similar to the QQQ's. However, without a volume indicator it is difficult to determine if the end is near. From these three charts you can see that 2 out of 3 markets are down and one is sideways with a bias to the upside. Now are you still ready to jump in and load up the truck with short-term calls? Step 2: Determine an appropriate option strategy. Based on my analysis of the market, we are headed sideways. I like butterflies in sideways markets so I am looking at stocks that will provide a nice risk to reward. Sideways markets are uncertain and there is no way to gage how long they will last. I like to go out only a month or two. Next, I would look at the cost of the puts versus the calls to determine which is cheaper. As a review, you pick a strike and buy one option then go up and sell two options at a higher strike price and then finally go up again and buy one option. There is no additional margin required, and your risk is the cost of the butterfly. Step 3: Determine your risk to reward. The risk in a butterfly is the cost of the spread. The reward is the difference between the middle strike and outer strike less the cost of the spread. Looking at option prices above on the QQQ's from Friday's close and using the natural spread (buying at the ask and selling at the bid), I would look at the 55-60-65 call and put butterflies and the 60-65-70 call and put butterflies. Remember the maximum reward is if the stock closes at the middle strike at expiration. In order to determine which set of strike prices to use, you must determine where you think the stock will be on March 16th, option expiration day. The QQQ's are currently at $56.40 but I think they will be higher so I'd choose a middle strike price higher than Friday's close. Let's just look at one set of strikes for the calls and the puts, but you can use these prices to experiment on your own and find a trade that you would feel comfortable with. Looking at the March 55-60-65 calls 55 call-- debit is 4.90, 10 contracts cost $4990 60 call-- credit is 2.50, 20 contracts you'd get $5000 65 call-- debit is 1.20, 10 contracts cost $1200 Total cost of the butterfly would be $1100 (4990 less 5000 plus 1200) Maximum reward is $3900 (middle strike less cost of butterfly) Maximum risk is $1100 (cost of butterfly) Reward to risk is approximately 3.5 to 1 ($3900/1100) Looking at the March 55-60-65 puts 55 put debit is 3.10, 10 contracts cost $3100 60 put credit is 5.70, 20 contracts you'd get $11400 65 put debit is 9.60, 10 contracts cost $9600 Total cost of the butterfly would be $1300 (3100 less 11400 plus 9600) Maximum reward is $3700 (middle strike less cost of butterfly) Maximum risk is $1300 (cost of butterfly) Reward to risk is approximately 2.8 to 1($3700/1300) Odds are better using the call scenario in this case. If the QQQ's drop further, you could buy back your 60 calls and let your long calls ride for an almost free trade. Using calls, you would make money if the QQQ's close between $56.10 and $63.90 by March 16th, which is a pretty nice range. If you were VERY bullish you would move the butterfly up and use the 60-65-70 strikes, but that would mean your expectations would be for the QQQ's to close up 15% to $65 by expiration. There is not a magic bullet here, just a scenario you can work at to get better. If you've never traded butterflies, paper trade these two scenarios, or one that you like better and see where the QQQ's and the butterfly close daily, weekly and at expiration. It's a great strategy, with low risk, high reward and let's you sleep comfortably at night. Once you understand how this trade moves relative to the underlying, you just might find this to be your favorite strategy. ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* FDC - First Data Corporation $60.03 (-0.27 last week) See details in sector list Put Play of the Day: ******************** ISSX - Internet Security Systems $66.44 (-5.01 last week) See details in sector list ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1589 ************************************************************** ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS DELL $23.50 (-1.69) Rumors of layoffs at DELL shot a big fat hole in our nascent earnings run play, and like the company management, we could do little but watch as fear ruled the day. After the rumors surfaced, the stock was down sharply at the open, right through our $25 stop, and despite the company's assertion that the rumors were false, the stock sold off into the close, ending the day on Friday with a nearly 10% loss. Needless to say, with a busted stop, rumors of layoffs, and posting its lowest close in over 3 weeks, DELL has no business on our call list anymore. Hopefully the company can smooth some of the ruffled feathers on Thursday when they report their quarterly earnings, but in the meantime we will step away from the stock. PUTS GS $107.75 (-6.21) We mentioned on Thursday that GS appeared poised to test its 50-dma support (now at $102.50), and that is exactly what it did. On Friday, the stock approached the moving average in early morning trading but upon doing so, found willing buyers on strong volume. With that, GS bounced to end the day up $1.80 or 1.7 percent on higher than average volume and in doing so, closed above our stop price of $107. In light of the resiliency GS displayed on a weak day for the markets and the stop loss violation, we are taking profits on this play. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** AES - AES Corporation $59.58 (+1.33 last week) AES is an independent power producer headquartered in Arlington Virginia. The company's generating assets include interests in one hundred and thirty four facilities totaling over 53 gigawatts of capacity. AES's electrical distribution network has over 920,000 km of conductor and associated rights of way and sells over 126,000 gigawatt hours per year to over 17 million end-use customers. In addition, through its various retail electricity supply businesses, the company sells electricity to over 154,000 end-use customers. As the third largest power company in the world, AES has demonstrated phenomenal growth, and has recently attracted new attention among the investment community as a combination of a stable, defensive company with an enviable annual earnings growth rate. On January 29, AES reported a 97% increase in fourth quarter earnings, and a 106% increase in revenues to $6.7 billion. Company management stated that they expect earnings to grow in the range of 25 to 35% over the next three to five years. After a slight post earnings dip, AES shares have resumed the strong upward channel which commenced early in December. Banc of America Securities and CSFB both upgraded AES to a strong buy during January. CSFB has stated that AES has the strongest backlog of new business in its history, and that the shares were penalized due to investors failing to understand that AES' California credit and pricing exposure is immaterial. In fact, in the last couple of weeks, the investment community has started to recognize that AES stands to benefit enormously from the power shortage in California. On Thursday, Governor Davis ordered a new 21 day streamlined process for new power plants which he hopes will bring an additional 500 megawatts to California by this summer. AES has recently submitted a proposal to the California Energy Commission to restart two previously retired gas plants which could provide an additional 450 megawatts of energy by June 1. With all of this good news, and strength in the energy sector AES is now solidly above the 200 dma at $52.26 and the 50 dma at $55.07, and shrugged off the sell off in the overall market this week, by bursting through the converged 5 and 10 dma at $57. Traders could take positions on a possible pullback to support at $59 or $58.50. Resistance is heavy at $60, but once cleared, there is little additional resistance to $65. Watch the other independent power producers like CPN for sector strength, and set stops at $56. ***February contracts expire next week*** BUY CALL FEB-55 AES-BK OI= 950 at $5.00 SL=3.00 High Risk! BUY CALL FEB-60 AES-BL OI=5440 at $1.50 SL=0.75 High Risk! BUY CALL MAR-55 AES-CK OI= 91 at $6.80 SL=5.00 BUY CALL MAR-60*AES-CL OI=1057 at $3.70 SL=2.50 http://www.premierinvestor.com/oi/profile.asp?ticker=AES IFIN - Investors Financial Services Corp $85.81 (+4.31 last week) Investors Financial Services Corp. provides asset administration services for the financial services industry through its wholly- owned subsidiary, Investors Bank and Trust Company. The company provides global custody, multicurrency accounting, institutional transfer agency, performance measurement, foreign exchange, securities lending, mutual fund administration and investment advisory services to financial asset managers, including mutual fund complexes, investment advisors, banks, and insurance companies. Offices are located in the United States, Canada, Cayman Islands, and Ireland. Shares of IFIN have demonstrated uncharacteristic strength in a bear market, and have stayed firmly above their 200 dma for the last twelve months, dipping briefly below the 50 dma in January. For the fiscal year 2000, IFIN's net income rose 58%, as their net interest income rose 64%, driven by increased client deposits. As a small cap value stock, IFIN is benefiting from a sector rotation out of large cap growth stocks, which suffered serious losses last year. IFIN's earnings are driven by assets under management, which shields the company somewhat from the earnings fluctuations found in the other financial sectors. After reaching a 52-week high of $96 in December, IFIN dipped to $60.75 on January 21, but has since then re established the upward channel which commenced last summer. Investors responded very enthusiastically to the news that IFIN had completed the purchase of the Advisor Custody Unit of Chase Manhattan Bank's National Customer Services Division on February 2, and this week, IFIN burst through its converged 5 and 10 dma of $81.53, which had been a sticking point for the stock for nearly two weeks. IFIN now appears determined to make a run for the next resistance level at $90, and possibly its 52-week high at $96. Traders could take positions on a pullback to $85, or at current levels. Watch the investment management sector for an indication of sector strength, and others like AC and STT, and set stops at $80. ***February contracts expire next week*** BUY CALL MAR-80 FLQ-CP OI= 0 at $10.50 SL=7.75 Wait for OI! BUY CALL MAR-85*FLQ-CQ OI=87 at $ 7.50 SL=5.25 BUY CALL APR-80 FLQ-DP OI= 0 at $13.38 SL=9.75 Wait for OI! BUY CALL APR-85 FLQ-DQ OI= 0 at $10.50 SL=7.75 Wait for OI! http://www.premierinvestor.com/oi/profile.asp?ticker=IFIN SDS - SunGard Data Systems Inc. $54.99 (+6.48 last week) SunGard is a global leader in integrated IT solutions and eProcessing for financial services. SunGard is also the pioneer and a leading provider of high-availability infrastructure for business continuity. With annual revenues in excess of $1 billion, SunGard serves more than 10,000 clients in over 50 countries, including 47 of the world's 50 largest financial services institutions. Wherever financial assets are managed, traded, processed or accounted for, SunGard offers an integrated solution. SunGard provides a wide range of modular, best-of-breed financial software solutions that are integrated using standard message protocols and SunGard integration technologies to form highly scalable, web-enabled enterprise solutions. It appears that not all Tech stocks are out of favor. The recent bear market has put ideas like value along with quality and consistency of earnings back into the spotlight. Add to that strong fundamentals and it's no wonder why shares of SDS have rallied over the past 8 months in the face of declining markets. With the company's core customer base consisting of old economy firms in the Financial sector, SDS has been able to not only post consistently profitable quarters, but also provide clear guidance going forward. The company reported earnings this past week, posting record revenues and beating Street estimates by a penny. This along with an upbeat conference call led Robertson Stephens to re-iterate their Strong Buy rating and set a target price in the mid-70's. Technically the chart is solid, sporting a beautiful uptrend. Connecting lows since July, the stock has been on a steady climb, with occasional tests of the 50 and 100-dma providing traders with a rare opportunity for entry. In fact, SDS recently bounced off its 50-dma (at $49), with its break above the 5 and 10-dma (at $51.52 and $50.64 respectively) confirming upward momentum. Horizontal support can be found at $54, $52.75, our stop price of $51 and the psychological $50. For an entry on strength, look for a break above $55 on increased volume coupled with rallying in rivals EDS and KEA. ***February contracts expire next week*** BUY CALL FEB-50 SDS-BJ OI=1393 at $5.20 SL=3.25 High Risk! BUY CALL FEB-55*SDS-BK OI= 126 at $1.10 SL=0.00 BUY CALL MAR-50 SDS-CJ OI= 89 at $6.00 SL=4.00 BUY CALL MAR-55 SDS-CK OI= 445 at $2.65 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=SDS ***************************** NEW LOW VOLATILITY CALL PLAYS ***************************** DYN - Dynegy Inc $53.15 (+2.80 last week) Through its subsidiaries, Dynegy markets and trades electricity, natural gas, coal, liquid petroleum, and other related products in North America, the UK, and continental Europe. Dynegy controls more than 14,000 MW of generating capacity through its investments and alliances with utility companies to sell energy in deregulated retail markets. Dynegy's asset base was further broadened by the 2000 acquisition of Illinova Corporation, which included Illinois Power, a distributor of electricity and natural gas to over 650,000 customers in southern Illinois. Chevron owns 29% of Dynegy. Dynegy, a major supplier of electrical and gas energy to the California market, saw huge gains in its 4Q. On January 24th, Dynegy reported more than double earnings and predicted it would easily blow away most analysts' profit forecasts in 2001. Net income rose 235% to $105.9 mln, or $0.32 a diluted share, from $45.1 mln, or $0.19, same quarter a year ago. Revenue also more than doubled to $10 bln from $4.64 bln. In addition, a few days later the company announced the completion of its previously announced acquisition of 1,700 MW of power generation facilities in the Northeast, the 500-MW Danskammer Power Plant and 1,200-MW Roseton Power Plant, both just outside New York City. According to Steve Bergstrom, president and COO of Dynegy, "this acquisition significantly strengthens our competitive position in the Northeast.these facilities are well positioned to create value for our customers and our company due to their location, fuel diversity and ability to serve both heating and cooling loads". In other words, big bucks. We're initiating coverage on this lower volatility stock because of its convincing strength above the 10-dma ($50.90) and 5-dma ($52.45). Another important element is specifically, the stock's sector. Take a look at charts of Chevron (CHV), Texaco (TX), Barrett's Resources (BRR) and Mitchell Energy & Dev (MND) for visual confirmation of the energy sector's relative strength. Investors' interest was first evident last week as volume levels elevated and the share price broke to the upside of the $50 resistance. Near-term support has since developed higher at $52 and $52.50. These levels offer reasonable entries into the play, but beware of the upper opposition at $54 - some conservative traders might consider taking profits as DYN flirts with that price level. Otherwise, you can always jump into the momentum as DYN rallies above $54 and makes a charge for $59.87, the 52-week high. Despite the low volatility of the stock, we have a stop loss set at the $50 mark for protection. BUY CALL MAR-45 DYN-CI OI=1427 at $10.00 SL=7.00 BUY CALL MAR-50 DYN-CJ OI= 301 at $ 6.50 SL=4.50 BUY CALL MAR-55*DYN-CK OI=1492 at $ 3.90 SL=2.50 BUY CALL MAR-60 DYN-CL OI=1193 at $ 2.10 SL=1.00 BUY CALL MAR-65 DYN-CM OI= 439 at $ 1.15 SL=0.50 http://www.premierinvestor.com/oi/profile.asp?ticker=DYN M0 - Philip Morris Cos $48.00 (+2.59 last week) Philip Morris Companies is the world's largest tobacco firm, controlling about half of the US tobacco market. The Marlboro name is their most valuable brand; although Benson & Hedges, Parliament, and Virginia Slims brands have made their mark across the globe, too. The company also derives a large proportion of its profits from its Kraft food and Miller beer subsidiaries. Its Kraft Foods unit is the #1 food company in the US and #2 throughout the world. Some household brands that you're likely familiar with include Jell-O, Oreo, Ritz, Kool- Aid, Maxwell House, and Post cereal. Philip Morris Companies might have missed estimates by a penny on January 1st, but their strong Food and Tobacco Units boosted its overall profits. The solid earnings' report and its attractive price level lured many value and fundamental investors to increase their holdings in the company. The second interest rate cut also likely played into the bullish developments of late. In just 7 trading sessions, MO has gained 9.1%, or $4.00 on strong volume. The robust trading activity indicates the buying may not be over; especially when you consider the not-so-favorable market environment. The significant break through the $47 resistance and subsequent new 52-week record of $48.43 on Friday were key factors in adding MO to our call list this weekend. Look for $47 and $48 to develop as strong levels of support over the near-term and for MO to challenge the $50 level. If on the downside, the stock fails to hold its recent gains and returns to sub-$45 trading, we'll exit the play in the bat of a lash. This is not to say that taking entries on pullbacks to the 5 & 10 DMAs, currently at $46.71 and $45.81, is out of the question in an advancing market - although it is risky! BUY CALL MAR-40 MO-CH OI= 8052 at $8.40 SL=6.00 BUY CALL MAR-45 MO-CI OI= 8606 at $4.30 SL=2.50 BUY CALL MAR-50*MO-CJ OI=11078 at $1.45 SL=0.75 BUY CALL MAR-55 MO-CK OI= 1428 at $0.35 SL=0.00 High Risk! http://www.premierinvestor.com/oi/profile.asp?ticker=MO *************************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=1582 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 02-11-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/021101_3.asp *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1576 ************************************************************ ****************** CURRENT CALL PLAYS ****************** CIEN - CIENA Corporation $79.88 (-3.88 last 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. Seemingly immune to the poison that seems to have been ingested by many of the big boys on the NASDAQ, CIEN has been holding firm over the past few days. An amazing feat in and of itself, CIEN has also been bucking the trend in its own sector with the Networking index (NWX.X) heading sharply lower again this week, this time thanks to an earnings miss from tech bellwether CSCO. It looks as though the stock has found solid support near the $80 support level, and it's a good thing too, as our stop is just below there at $78. So what do we owe the incredible resilience to? First, the company hasn't made any rumblings about having a weak quarter, and with the strong performance last quarter, investors seem to be hoping for a ray of light from this Optical Networking company when they report earnings on Thursday morning. Then we have Chapman company initiating coverage of the company with a Buy rating, and bullish comments from other Optical companies is helping to paint a rosy picture for CIEN. ONI Systems (ONIS) reported a smaller than expected loss, raised its forecasts for the next 2 quarters and said there is no sign of a slowdown in its telecommunications customer base. Another player, Corvis (CORV) said on Wednesday that it has $581 million in unfilled orders for its long-distance optical networking equipment products, and has no plans to change its financial outlook for the year. Hmmmm, that doesn't sound like the whining we have heard lately from the likes of LU, CSCO, et.al. Could it be that CIEN and its Optical brethren are doing something right, that many of the more elderly Networking companies have yet to grasp? Whatever the cause, we only have a few days left to play, as all positions should be closed ahead of the company's earnings release. Although the stock gave up some ground on Friday, the weak volume (about two-thirds of the ADV) indicates there is not a rush for the exits, and investors may have just been reducing their exposure ahead of the weekend. Current levels look attractive for aggressive players, but they need to wait for buying to appear indicating that the stock is serious about moving higher into its earnings report. More cautious players will want to wait for an increase in buying volume to push the price above $85 resistance before playing. ***February contracts expire next week*** BUY CALL FEB-80 UEE-BP OI=2795 at $ 5.13 SL= 3.00 High Risk! BUY CALL MAR-80*UEE-CP OI=1668 at $ 9.88 SL= 7.00 BUY CALL MAR-85 UEE-CQ OI=3786 at $ 7.63 SL= 5.25 BUY CALL APR-80 UEE-DP OI=1844 at $13.50 SL=10.25 BUY CALL APR-85 UEE-DQ OI= 668 at $11.25 SL= 8.50 SELL PUT FEB-75 UEE-NO OI=4740 at $ 2.69 SL=4.25 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=CIEN RE - Everest Re Group $62.73 (+3.23 last 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. Nervous investors moved to the sidelines ahead of the weekend, but they sure weren't in a hurry to shed their shares of RE. Trading less than a third of the ADV, the fractional loss was insignificant compared to the drubbing that many stocks took amid widespread weakness on all the major indices. Insurance stocks were one of the few sectors that moved up on Friday, and the continuing strength on the Insurance index (IUX.X) surely helped RE to stay above the $62 support level (also the location of our stop). With earnings set for February 21st after the close, the timing looks ideal for a bullish play, especially with the support of the Insurance sector, which appears to be solidifying its attempt to move higher. The stock is attempting to establish a new uptrend after the selloff that commenced right after the first of the year, but is running into resistance right now at the upper Bollinger band ($64.69). Combined with daily stochastics which are just entering the overbought zone, RE could be vulnerable to profit taking in the days ahead. If the bulls can maintain the upper hand (likely so long as the IUX.X continues its ascent) then our play ought to be able to move back up near the upper Bollinger band and confirm the emerging uptrend by posting a higher relative high. Although conservative investors may want to wait for a move through the $64 resistance level before initiating new positions, they need to be aware of the inherent risk of an imminent pullback from the Bollinger band right after they enter the play. At this point, aggressive players may have the best approach - opening new positions on a convincing bounce from the $62 support level, as we see a return of buying volume next week. ***February contracts expire next week*** BUY CALL FEB-60 RE-BL OI=147 at $3.20 SL=1.50 BUY CALL FEB-65 RE-BM OI=615 at $0.90 SL=0.00 High Risk! BUY CALL MAR-60*RE-CL OI= 46 at $5.60 SL=3.50 BUY CALL MAR-65 RE-CM OI= 31 at $2.70 SL=1.25 BUY CALL APR-65 RE-DM OI=200 at $4.20 SL=2.50 BUY CALL APR-70 RE-DN OI=592 at $2.65 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=RE FDC - First Data Corporation $60.03 (-0.27 last week) First Data is the remarkably efficient, often invisible engine powering today's global shift to a cashless economy. They process and safeguard every type of electronic payment method: credit, debit and stored-value cards, electronic checks and cash. They also provide Electronic Funds Transfers to 75 percent of the world and provide card issuer services for 1,400 financial institutions and 396 million consumers worldwide. And, through their visionary Internet Commerce Group, they are developing advanced services and solutions that help financial institutions, merchants, business and consumers access the power and possibilities of the Internet. Strength in spite of a weak market, major analyst support and blowout earnings are just a few of the many factors that led us to add FDC as a call play. It appears that value has become the buzzword on the market lately and with that, the stock has rallied on comments by First Union Securities and US Bancorp Piper Jaffray that shares of FDC are attractively valued in relation to the consistency in their earnings and growth rate. Both institutions have Strong Buy ratings on the stock and have been continually upping the target price, much to the delight of shareholders. Merrill Lynch also upgraded the stock earlier in the year, anticipating a good earnings report, and FDC did not disappoint. In the conference call, the CEO was bullish, raising EPS guidance for fiscal 2001. Now well above all its major moving averages, the stock has rallied on support from the 5 and 10-dma, currently converged near the $60 level. Look for a bounce off this point as well as horizontal support at our stop price of $58 as ideal opportunities for aggressive plays. For the more conservative, who prefer to buy on the breakout, wait for FDC to take out overhead resistance at $61.50 on volume. Once over this level, the stock will be in blue-sky territory, making new all-time highs. When planning an entry, keep an eye on competitors FISV and PAYX in order to ascertain sector sentiment. ***February contracts expire next week*** BUY CALL FEB-55 FDC-BK OI=2026 at $5.30 SL=3.25 High Risk! BUY CALL FEB-60 FDC-BL OI=6279 at $1.30 SL=0.00 High Risk! BUY CALL MAR-55 FDC-CK OI= 10 at $6.50 SL=4.50 BUY CALL MAR-60*FDC-CL OI= 275 at $2.95 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=FDC ************************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=1590 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 02-11-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/021101_4.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=1577 ************************************************************ ************* NEW PUT PLAYS ************* BOBJ - Business Objects S.A. $73.50 (-6.06 last week) BOBJ develops, markets and supports e-business intelligence software for client/server environments, Intranets, Extranets and the Internet. Business intelligence software tools are designed to help companies turn data into useful business information, thereby leading to increased competitive advantage, new business opportunities, improved customer service and ultimately, increased revenues and profit. In addition, the company's products can improve the performance of an e-business enterprise by providing reporting and analysis against the ever-expanding amount of transaction and profile data that is collected each day throughout the World Wide Web. Starting off the new year with a brief dip below $40 was not an auspicious beginning for this e-business software company, but after the surprise interest rate cut on January 3rd, BOBJ has been on a tear. Leading up to its recent earnings report, the stock managed to rally as high as $75 before the numbers were released. Surprising the street by a nickel on February 1st, BOBJ got one final pop, which was enough to help it graze the 200-dma (then at $83.50). That was all the bears could take, as they awoke from hibernation in a selling mood. The stock reversed course right at the 200-dma, and began rolling over. Friday's nearly $3 drop finished the job of filling the post-earnings gap up, but now the Stochastics have dropped out of overbought territory, and the next likely level of support is $70, followed by $65. We do have the possibility that this is only profit taking, as volume has been declining steadily over the past week, only reaching about 60% of the ADV on Friday. Taking the cautious approach will yield new entries as BOBJ declines below the $72 level on increasing volume. Barring a drastic change in sentiment, the $80 level looks like it will provide solid resistance in the event the bulls try to rally the stock, so that is where we have placed our stop. More aggressive players can target shoot new entries on any bounce that begins to fall back at the intraday resistance levels of $75, or $78. With no positive catalysts on the horizon, as long as the NASDAQ remains weak, BOBJ will have a hard time reversing course and heading back into bullish pastures. ***February contracts expire next week*** BUY PUT FEB-75 BBJ-NO OI=105 at $ 5.00 SL=3.00 High Risk! BUY PUT MAR-75 BBJ-OO OI= 0 at $10.00 SL=7.00 Wait for OI! BUY PUT MAR-70*BBJ-ON OI= 10 at $ 7.50 SL=5.25 BUY PUT MAR-65 BBJ-OM OI= 5 at $ 5.25 SL=3.25 http://www.premierinvestor.net/oi/profile.asp?ticker=BOBJ MERQ - Mercury Interactive Corp $71.94 (-11.06 last week) Mercury Interactive is the exterminator of the software industry. The company offers a comprehensive line of automated testing tools that address the full range of quality needs for testing complex applications throughout the business enterprise. Essentially the tools help companies build better applications, from Internet/e-business transaction systems to informational Web sites. All of its research and development is conducted in Israel, however the company is based in California. The software and programming stocks are again the target of indignation in the NASDAQ. Many of the once star-studded tech stocks like MERQ, NTAP, AGIL, AETH, and INTU are getting the old heave-ho as trader's try to find some balance in their portfolios during these turbulent times. Even Big Softie (MSFT) broke its $60 support in last Friday's session as the declining NASDAQ sunk below 2500. MERQ has fared much worse in recent times. Last week, it became evident that the converged 10, 30, & 50 DMAs, in the vicinity of the $85 level, couldn't keep MERQ afloat amid the continuing adversity of the marketplace. When the bears accelerated their attack late afternoon on Thursday, the already struggling MERQ quickly fell victim to the broad selling pressure. It did however find some light support just above the $70 mark on Friday. With that in mind, it may be wise to take put positions only after MERQ exhibits definitive weakness below that level. Stronger support is at $60, where buyers stepped in both in November and January's declines. Another strategy, if your more adventurous and your portfolio can handle the risk, is to play a spread between our protective stop at $79 and the bottom support near $70. For example, if MERQ rebounds and then fails to break through the overhead resistance near the 5-dma ($79.54), you might consider playing the downward momentum and locking in gains as MERQ approaches previous support. ***February contracts expire next week*** BUY PUT FEB-75 RQB-NO OI= 459 at $ 6.50 SL=4.50 High Risk! BUY PUT FEB-70 RQB-NN OI= 308 at $ 3.63 SL=1.75 High Risk! BUY PUT MAR-75*RQB-OO OI= 433 at $11.38 SL=8.50 BUY PUT MAR-70 RQB-ON OI= 35 at $ 8.50 SL=6.00 http://www.premierinvestor.net/oi/profile.asp?ticker=MERQ ISSX - Internet Security Systems $66.44 (-5.01 last week) Internet Security Systems (ISS) is the leading provider of total information security management for networks, servers, applications and desktops. Not only does ISS offer market-leading, best of breed security management systems for security assessment, policy enforcement and intrusion detection - all built on the company's SAFEsuite security management platform - it also provides superior customer service, consulting and education offerings that significantly reduce the complexity and expense inherent in protecting online assets. ISS approaches Internet security through a complete lifecycle approach, offering a managed solution that covers the full continuum of Internet security needs. In the case of ISSX, it's not the company's business model that is in question but rather, the business model of its customers. For any corporation that relies heavily on Information Technology, network security is an area where spending cannot be cut. This has helped shares of ISSX as well as its competitors to fare relatively better than other Internet firms which generate revenue from less mission-critical goods and services, making it more immune to cuts in capital expenditures. However, analyst Brian Foote of Ryan, Beck & Co. recently downgraded the stock from a Strong Buy to a Buy rating based on three simple words: accounts receivables volatility. What this means is that when ISSX sells its products to its customers, it does so on credit, making the company a loaner of money. In doing so, this exposes ISSX to longer payback periods, reduced cash flow and working capital, and the much-dreaded default risk (if the customer goes under and cannot pay its debt). With dotcoms becoming dotbombs at an alarming rate, the certainty of payback is difficult to discern and can swing wildly. As we all know, investors do not like uncertainty. Failing to break through its 100 and 200-dma (at $77 and $79), the stock has since pulled back below $72, where the 5, 10 and 50-dma are all converged. We are placing a protective stop at this level. A failed rally above this point could allow aggressive traders an ideal opportunity to jump in. There is also horizontal resistance at $69, $68 and $67. A break below $64.50 on volume would allow the more conservative to enter on weakness, provided that peers CHKP and VRSN are also moving lower. ***February contracts expire next week*** BUY PUT FEB-65*ISU-NM OI=132 at $2.94 SL=1.50 High Risk! BUY PUT FEB-60 ISU-NL OI=244 at $1.19 SL=0.00 High Risk! http://www.premierinvestor.net/oi/profile.asp?ticker=ISSX ***************** CURRENT PUT PLAYS ***************** AETH - Aether Systems Inc. $28.63 (-16.93 last 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. Put players benefited from the continued heavy selling in shares of Aether amid a weak market environment on Friday. Since Aether's earnings report this week, investors have shown no mercy for the stock, and have sold on more than double the average daily volume, taking the stock to a new 52-week low at $26.13. On their earnings conference call, Aether 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. Since then, Wall Street analysts have lined up to downgrade the stock. Robertson Stephens, Piper Jaffray, Lehman Brothers, C.E. Unterberg Towbin and JP Morgan Hambrecht & Quist all cut their price targets on the stock this week. On Thursday, Aether gapped down and continued to sell off throughout the day. On Friday, Aether fell from $29 to $26.50 in the morning, and rallied slightly with probable short covering in the afternoon. The most likely scenario is a roll over from $28.50, which could be a possible entry point for aggressive put players. Conservative put players might want to wait for a break under $26.50 on strong volume, which could lead Aether to a new 52-week low. Watch the Nasdaq and the wireless sector for continued selling before initiating positions, and set stops at $31. ***February contracts expire next week*** BUY PUT FEB-30 HIZ-NF OI=326 at $3.38 SL=1.50 High Risk! BUY PUT FEB-25 HIZ-NE OI= 90 at $1.00 SL=0.00 High Risk! BUY PUT MAR-30*HIZ-OF OI=181 at $5.63 SL=3.50 BUY PUT MAR-25 HIZ-OE OI=348 at $3.13 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=AETH HGSI - Human Genome Sciences $51.06 (-4.38 last week) Possessing one of the largest human and microbial genetic databases, HGSI licenses its database of knowledge to pharmaceutical heavyweights like GlaxoSmithKline and Merck. Management has chosen to forgo the race to decode the entire human genome, and has instead focused on finding and patenting genes involved in developing gene-based therapeutics. Its four compounds currently in clinical trials are intended to limit the toxic effects of chemotherapy, promote the repair of damaged cells, stimulate antibody production, and spur regrowth of blood vessels. As the Biotechs have continued to meander lower, HGSI has had no positive catalyst to support it, and has consistently moved down over the past 2 weeks. Now testing major support near $47-48, it is with some regret that we look to the imminent end of our play. It has been a consistent (if slow) performer, but we have the looming spectre of the company's earnings report to contend with now. The company would not confirm the earnings release date, but we have an unconfirmed date of February 13th. That is Tuesday, so it doesn't take a rocket scientist to figure out that timid investors will want to lock in their profits and close out any open positions ahead of time, just to be safe. For those adrenaline junkies out there, if you are going to continue to hold positions up until we get the numbers from the company, make sure you are playing with stop losses, and tight ones at that. We have moved our stop down to $54 this weekend, and aggressive investors can still consider a day-trade on a bounce and rollover below this level. Watch the Biotech index (BTK.X) for confirmation of sector weakness, and consider new entries only if the signals from the market, sector, and stock are all pointing to more downside. Given the limited timeframe, and major support not far below ($47-48), we would discourage new positions on a drop below $51, and would instead use any weakness as an opportunity to exit open positions at an even more profitable level. ***February contracts expire next week*** BUY PUT FEB-55 HHA-NK OI= 475 at $5.88 SL=4.00 High Risk! BUY PUT FEB-50 HHA-NJ OI= 835 at $2.94 SL=1.50 High Risk! BUY PUT MAR-50*HHA-OJ OI=2158 at $6.50 SL=4.50 http://www.premierinvestor.net/oi/profile.asp?ticker=HGSI IDTI - Integrated Device Tech. $38.06 (-4.50 last week) Integrated Device Technology designs, develops, manufactures and markets a broad range of high-performance semiconductor products. The company serves up products for data networking and telecommunications equipment such as routers, hubs, switches, cellular base stations, storage area networks, networked peripherals, servers, and personal computers. About 70% of sales are from communications and high-performance logic components such as embedded RISC microprocessors, specialty memory, logic and clock management circuits, and networking devices. With weakness continuing to pervade both the Networking (NWX.X) and Semiconductor (SOX.X) sectors, IDTI has been unable to break out of its persistent downtrend over the past 3 weeks. As profitable as the play has been, it is possible the ride may be coming to an end, at least temporarily. Stochastics are now deep within oversold territory, and the $38 level has provided consistent support as the daily close has inched ever lower. Volume has been dropping, with Friday's fractional loss coming on a mere 45% of the ADV. With the lower Bollinger band sitting near $36, also the site of considerable historical support, prudent traders will tighten up their stops to preserve their gains. For our part, we have inched our stop down a bit more, bringing it to $40, very near the highs for the past 3 days. The loss this week solidified the 50-dma (currently $39.84) as resistance, and aggressive investors can still consider new entries on an intraday bounce and rollover near this level. The stock is beginning to establish a pattern of attempting to rally and then falling back to close very near the low of the day, making for a very tradable pattern. More conservative traders will want to wait for an increase in selling volume to push IDTI below the $38 support level before jumping into new positions. As long as the SOX.X and NWX.X are still weak, IDTI will likely have a hard time doing anything but head further south. ***February contracts expire next week*** BUY PUT FEB-40 ITQ-NH OI=2896 at $3.25 SL=1.75 High Risk! BUY PUT MAR-40*ITQ-OH OI= 171 at $5.63 SL=3.50 BUY PUT MAR-35 ITQ-OG OI= 15 at $3.00 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=IDTI STT - State Street Corp. $108.00 (-2.74 last 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. Where have all the sellers gone? After giving us a picture perfect rollover at the 200-dma (then at $114.38) a little less than 2 weeks ago, STT has inexplicably found support near $108. The daily swings are barely tradable with the last 2 days action confined to a range of just over $2. That's pretty slim on a $100+ stock. With the intraday rallies being capped near the $110 level, it seems logical to ratchet our stop down to that point, to minimize the effect of an adverse move to the upside. It looks like the bears are about to get help from the 30-dma as well. Currently sitting at $112.67, the average is dropping more that $0.45 per day and interestingly, the descending trendline that is created by the highs over the past 2 weeks is exactly parallel to this moving average. And sure enough, the trendline is currently at $111, adding one more obstacle that STT has to overcome if it is going to reverse its bearish trend. We do have a cautionary note on the broader sector though. The Brokerage index (XBD.X) is looking like it is trying to reverse its recent slide, with support materializing near 595 and stochastics threatening to reverse and head back up from oversold territory. We lamented the lack of sellers above, but there is obviously a lack of buyers as well, due to the stock's inability to even get close to the descending trendline over the last 2 days. As our play continues to drift lower, consider new entries either on a drop below $107.50, accompanied by further weakness in the Brokerage sector. More aggressive players can consider new positions from a rollover near $110, but make sure the stock isn't beginning a grand recovery on the back of the broader sector. ***February contracts expire next week*** BUY PUT FEB-110 STT-NB OI=715 at $4.20 SL=2.75 High Risk! BUY PUT MAR-110*STT-OB OI= 24 at $7.70 SL=5.75 BUY PUT MAR-105 STT-OA OI= 22 at $5.20 SL=3.50 http://www.premierinvestor.net/oi/profile.asp?ticker=STT GLW - Corning Inc $40.96 (-10.12 last week) Corning is a global communications technology company that operates in three primary business segments: Telecommunications, Advanced Materials, and Information Display. They are the world's top producer and pioneer of fiber-optic cable, which it invented over 20 years ago. Corning also owns the well known crystal maker, Steuben Glass. The company operates 40 manufacturing plants in 10 countries. Corning's been busy making plans to ensure it can effectively keep up with the worldwide demand for optical fiber. Recent news of a $150 mln Italian facility expansion comes on the heels of Corning approving a plan a couple weeks ago to build a $400 mln optical fiber-optic plant in Oklahoma City. And earlier in December, Corning also announced it would put $450 mln into expanding an optical-fiber plant in North Carolina. But as it may be, the announcements aren't having a positive impact on the share price, at least not of late. The fiber optic stocks continued to buckle under the pressure of lingering uncertainty within the industry. Many related stocks like JDSU, SDLI, NT, ALA and NEWP are near their respective lows. Corning's tempered guidance for 2001 as the result of expected softening from several existing customers, Lucent (LU) and Nortel (NT) in particular, combined with JDS Uniphase (JDSU) dismal forecast incited strong sell-offs across the board. On Wednesday, GLW fell victim to more selling and violated the $50 support on accelerating volume levels. The bearish activity extended throughout the week as subsequent technical breakdowns below the 5 and 10 DMAs ($46.40, $51.01) effectively fueled the downward momentum. However, keep in mind that GLW is considered a HIGH- RISK put play simply because the fiber optic stocks tend to exhibit volatile direction changes and wide price variances. Going forward, we're keeping a tight rein on GLW. The current price level poses an attractive buying opportunity and if the NASDAQ reverses, we don't want to be caught holding the bag. Although we have our protective stop firmly set at the $44 mark, the more aggressive types might enter at a higher level if there's evidence of a high-volume rollover in a declining market. A more cautious approach is to buy into further weakness as GLW breakdowns below $40.08, the new 52-week low set in Friday's session. ***February contracts expire next week*** BUY PUT FEB-45 GLW-NI OI=4239 at $4.80 SL=3.00 High Risk! BUY PUT FEB-40 GLW-NH OI= 483 at $1.60 SL=0.75 High Risk! BUY PUT MAR-45 GLW-OI OI= 989 at $6.60 SL=4.50 BUY PUT MAR-40*GLW-OH OI=1106 at $3.60 SL=1.75 http://www.premierinvestor.net/oi/profile.asp?ticker=GLW GSPN - GlobeSpan, Inc. $27.38 (-7.50 last week) GlobeSpan is a company focused on DSL technology. They are a leading worldwide provider of integrated circuits (chip sets), software, and system designs for Digital Subscriber Line (DSL) solutions that enable the high-speed transmission of data, voice and video over the World Wide Web at rates over 100 times faster than today's 56 Kilobit modems. Using existing copper telephone lines that run to nearly every home and business, GlobeSpan's products create the functionality and speed that makes DSL a reality. A growing call for high-speed, low cost Internet access has produced an enormous demand for GlobeSpan's products. Weakness in Chip stocks (especially of the communication variety) along with the DSL sector as a whole has so far made our put play in GSPN a successful one. Bad news from companies such as Broadcom, Ericsson, Lucent and PMC Sierra have all have weighed on shares of GSPN, as the stock has fallen in sympathy with related Tech issues. This is in spite of a stellar earnings report, with 519 percent year-over-year revenue growth. The company maintained its guidance going forward but it appears that the Street was expecting more. With the highest of expectations already priced in from its January run-up, the stock sold off post-earnings despite Prudential Securities re-iterating their Strong Buy rating. These factors combined, have resulted in technical weakness in GSPN's chart. Recently falling below its last major moving average, the 50-dma at $33.74, the stock has been heading deeper into negative territory, with a declining 5-dma (now at $ 31.36) exerting downward pressure on GSPN. A failed rally above this moving average could allow aggressive traders to make a play, but confirm with selling volume. In order to protect our profits, we are moving our stop price down from $32 to $30. These two levels should also provide horizontal resistance along with $29 and $28. A break below support at $26 would allow the more risk averse to enter on weakness. From there the stock could drop quickly to the low 20's. Correlate entries with weakness in the Philadelphia Semiconductor Index and RBAK (DSL). ***February contracts expire next week*** BUY PUT FEB-30*GLQ-NF OI=480 at $3.88 SL=2.50 High Risk! BUY PUT FEB-25 GLQ-NE OI=439 at $1.25 SL=0.00 High Risk! http://www.premierinvestor.net/oi/profile.asp?ticker=GSPN ******************************** WEEKLY UPDATES FOR VARIETY PLAYS ******************************** LONG-TERM: GE $45.66 -1.48 (-0.62 last week) After Monday's bounce from the 10-dma at $46, GE was beginning to show some life. The stock, however, has encountered resistance at $48 throughout the week. There is a seller at that price that's keeping the stock down. A strong move through $48 would set up GE for a move toward $50, a level not seen since December 19th. On the downside, watch $45 for support. A close below this level, which is also our stop loss, and we would part ways with GE. BUY CALL MAR-45 GE-CI OI=14094 at $2.70 SL=1.25 BUY CALL JUN-50*GE-FJ OI=14218 at $2.65 SL=1.25 BUY CALL SEP-50 GE-IJ OI= 4978 at $4.00 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=GE LOW VOLATILITY: USB $30.02 +0.08 (+0.34 last week) Building a nice ascending wedge at the $30, USB is readying itself for a breakout. It has been holding up well in the face of the broad market sell-off. As a major regional bank, USB likely will continue to perform well in anticipation of further rate cuts. The 10-dma is at $29.72 and pressuring the stock to break resistance at $30.25. An entry can be attained on a break through this level or on a bounce from support at $29.80. We have a tight stop set at $29. BUY CALL FEB-30 USB-BF OI=2231 at $0.75 SL=0.00 High Risk! BUY CALL MAR-30*USB-CF OI= 868 at $1.60 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=USB CTX $42.19 -1.23 (+0.31 last week) After picking up coverage on CTX last weekend, the stock subsequently traded higher, nearly reaching the $45 level. The latter half of last week saw CTX pullback on what appeared to be normal profit taking judging by the relatively light volume. In fact, the stock bounced right off our protective stop at $42 during Friday's session. As long as CTX continues to trade above $42 we'll maintain coverage on the stock. However, should CTX close below $42 we'd drop the play. Having said that, another bounce off $42 could provide a more aggressive entry. Conversely, if the stock rebounds early next week look for new entries on an advance past the $42.50 level. BUY CALL MAR-40*CTX-CH OI= 6 at $4.30 SL=2.75 BUY CALL MAR-45 CTX-CI OI= 9 at $1.90 SL=0.75 BUY CALL APR-45 CTX-DI OI=209 at $3.30 SL=1.75 http://www.premierinvestor.net/oi/profile.asp?ticker=CTX DROP: LGTO $16.50 -0.88 (-1.38) LGTO has been getting heavy as the week progressed. There has been some minor selling pressure in the $17-$18 level, with buy support at $16. With the stock drifting in this range, consolidation of recent gains looks to be in the future. We are dropping this play tonight because of its technical stagnation. If you are in current positions, watch the $16 level for continued support and use it as a stop loss level. $18 will be overhead resistance. ************************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=1591 ************************************************************** ***** LEAPS ***** And The Answer Is...BAD! By Mark Phillips Contact Support Remember my lead-in question from last week, where I asked how bad the selling would be on the NASDAQ in the week ahead. Fortunately I had enough foresight (or luck) to advocate standing on the sidelines the past couple weeks, but I must say that the damage was worse than I expected. Remember that we are looking for the NASDAQ (and many of our LEAPS plays) to arrest their declines in time to post higher lows. This would give us at least a ray of hope that the much-needed recovery could get under way. How bad can it get? Well, the QQQ is only about $4 above its January reaction low of $52.06, and it (along with stocks like EMC and NT) are at risk of trading at new yearly lows if bulls don't come out of the barn soon. But what will the catalyst be? We know that the Fed is now in an easing mode, as they attempt to stave off a full-fledged recession, but after the initial euphoria, investors have seemed far more interested in the string of earnings warnings and misses that have inundated the news wires of late. After all, they know that today's interest rate reduction will take 6-9 months before it really has an effect on the economy, and therefore the business cycle. Even the DJIA has been unable to follow through its recent rally and crest the 11,000 level, making it tough to game long plays in any of the major markets without carefully selecting the right sector. CPN is one of the rare winners recently as the play has shot right up the chart since we picked it, reflecting investors' interest in anything that might allow them to profit from the continuing energy fiasco out here in California. Recent market action has reminded me of the Peanuts cartoon I used to watch as a kid. I'm sure you remember it too. Every year, Lucy would hold the football for Charlie Brown. He'd come tearing across the field, and kick for all he was worth. But just at the last minute, Lucy would pull the ball aside, and Chuck's foot would connect with nothing but air. You can see it now, can't you? The follow through from the attempted kick carried poor old Charlie up into the air, prior to an unceremonious and unpleasant landing, flat on his back. I submit to you that the bulls are starting to feel like Charlie Brown, after several repetitions of this scenario. The bears let the charts look just good enough to sucker the buyers in, and then yank the ball away, revealing that the supposed support level that motivated their recent purchases is really nothing more than thin air. You don't have to go through that experience (can you say ARBA?) too many times before you become too timid to take advantage of the true opportunities when they do present themselves. When all of us die-hard bulls are looking at the markets through bearish glasses, that is when sentiment will have shifted sufficiently to allow the markets to begin the long recovery we are craving. Maybe we are actually getting close. Here's my logic. I'm a bull at heart, and I freely admit it. But analyzing my trading of late, 90% of my trades are Puts, not Calls. And I'm doing much better on the bearish plays too! Okay, so those are short term trades, but it provides an indication of the near term market direction. When those put plays start refusing to perform, and strong stocks are putting in solid upward moves from major support levels, that will be the time to initiate new LEAPS positions for the next leg up. The best possibility for this type of play that I could find this week is our old favorite, EMC. See the Spotlight play below for the details. For another week, we are stuck watching with anticipation for favorable chart formations before initiating new positions, and we aren't really getting any help from our buddy the VIX. While it did provide a mild caution flag early last week as it grazed the 23 level (its lowest point since early October), it wasn't enough to tell us that we were about to see the kind of weakness that materialized at the end of the week. Currently resting at 25.15, our favorite volatility indicator is still right in the middle of its historical range, failing to give us an indication of which way the markets are likely to move. And our new volatility metric for the NASDAQ, the VXN, really doesn't have enough trading history for us to use it as a reliable indicator. Waiting and watching is still the name of the game. Aggressive players can consider buying solid bounces from support, but need to be very cautious that they wait for the bounce before pulling the trigger. Otherwise we could find ourselves laying flat on our backs asking, "What happened?". Exercise patience and wait for your entry points to come to you. Finally, use stops and take profits when they are offered. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2002 $ 45 WUE-AI $ 9.50 $28.40 198.95% 09/17/00 JAN-2003 $100 VUE-AT $32.75 $13.10 -60.00% CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $ 2.31 -78.98% 11/26/00 JAN-2003 $ 60 VYC-AL $16.63 $ 2.94 -82.33% NT 11/28/99 JAN-2002 $37.5 WNT-AU $15.13 $ 5.70 -62.33% 09/10/00 JAN-2003 $ 75 ODT-AO $27.50 $ 2.85 -89.64% AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $ 3.80 -79.60% 08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $11.10 -36.57% AXP 03/12/00 JAN-2002 $46.6 WXP-AQ $ 9.33 $ 9.10 - 2.47% WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $22.80 323.79% 10/22/00 JAN-2003 $ 45 VWI-AI $ 7.88 $14.60 85.40% C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $11.80 14.45% 10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $10.20 -16.73% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $31.88 86.08% JAN-2003 $ 70 OZG-AN $23.13 $40.50 75.10% QCOM 09/17/00 JAN-2002 $ 70 WBI-AN $22.50 $26.38 17.22% JAN-2003 $ 70 VLM-AN $29.63 $34.63 16.86% TXN 10/22/00 JAN-2002 $ 50 WTN-AJ $13.75 $ 5.00 -63.64% JAN-2003 $ 50 VXT-AJ $18.38 $ 9.40 -48.84% BGEN 11/05/00 JAN-2002 $ 70 WGN-AN $17.25 $19.13 10.87% JAN-2003 $ 70 VNG-AN $25.00 $27.13 8.50% MU 11/26/00 JAN-2002 $ 45 WGY-AI $13.13 $ 9.60 -26.86% JAN-2003 $ 45 VGY-AI $17.25 $14.60 -15.36% A 12/03/00 JAN-2002 $ 55 YA -AK $16.88 $14.50 -14.07% JAN-2003 $ 60 OAE-AL $19.88 $17.90 - 9.94% ORCL 12/10/00 JAN-2002 $ 35 WOK-AG $ 7.75 $ 3.00 -61.29% JAN-2003 $ 35 VOR-AG $11.13 $ 6.13 -44.97% QQQ 12/10/00 JAN-2002 $ 70 WNQ-AR $15.13 $ 6.10 -59.68% JAN-2003 $ 75 VZQ-AW $19.25 $ 9.40 -51.17% WMT 12/24/00 JAN-2002 $ 55 WWT-AK $ 9.63 $ 7.00 -27.27% JAN-2003 $ 55 VWT-AK $14.00 $11.30 -19.29% DELL 01/07/01 JAN-2002 $ 20 WDQ-AD $ 5.25 $ 7.50 42.86% JAN-2003 $ 25 VDL-AE $ 5.63 $ 7.50 33.21% WCOM 01/14/01 JAN-2002 $ 25 WQM-AE $ 5.00 $ 2.75 -45.00% JAN-2003 $ 25 VQM-AE $ 7.38 $ 4.88 -33.90% CPN 01/21/01 JAN-2002 $ 40 YLN-AH $10.50 $16.10 53.33% JAN-2003 $ 40 OLB-AH $15.38 $21.10 37.24% ARBA 01/28/01 JAN-2002 $ 45 YYR-AI $14.25 $ 4.63 -67.54% JAN-2003 $ 45 OLR-AI $19.00 $ 8.00 -57.89% CLX 02/11/01 JAN-2002 $ 40 WUT-AH $ 5.20 $ 5.20 0.00% JAN-2003 $ 40 VUT-AH $ 8.10 $ 8.10 0.00% Spotlight Play EMC - EMC Corporation $56.40 Recent trading in shares of one of our favorite LEAPS plays has left us a bit puzzled here at the home office. The company was one of the few technology companies to beat analyst earnings estimates AND revenue growth targets. On top of that, in the conference call, Chairman Michael Ruettgers said the company "gained share in every major segment of our addressable market. Our competitive lead has never been stronger." So the fundamental picture looks intact - why did the stock get taken apart in the past 2 weeks? Blame it on NASDAQ weakness, Fed dread, energy costs, or just plain old investor nervousness, but the stock seems to have been excessively punished recently. A quick look at the chart bears this out, with the closing price the past two days deep into the lower Bollinger band (currently at $59.69), daily stochastics deep into oversold and due for a bounce, and the closing price approaching major support between $50-53. Given the strong fundamental picture, with a strong case for a bounce on technical reasons, we think EMC makes a compelling case for new positions, provided it doesn't plunge below major support. We'll actually give the stock until the $50 level to find bottom and would advocate aggressive traders begin to take positions on any bounce above that level. More conservative traders can still take advantage of the near term weakness by opening new positions as the stock moves back above the $62-63 resistance level on solid volume. BUY LEAP JAN-2002 $60.00 WUL-AL at $14.40 BUY LEAP JAN-2003 $60.00 VUP-AL at $20.10 New Plays CLX - Clorox $36.20 As technology stocks continue to languish and the bears become ever more entrenched in their dominant positions, we are forced further off the beaten path to find decent LEAPS candidates. With the Fed now solidly (we hope) in an easing mood for the foreseeable future, cyclical stocks like CLX should be in the beginning stages of a long-term recovery. The company is engaged in the production and marketing of non-durable consumer products sold primarily through grocery and other retail stores. The stock is sensitive to interest rates and the strength of the economy, but how bad would things have to be before people stop buying laundry supplies or kitty litter? Looking at the chart, we can see that the stock has thrice found major support near $30 over the past year, and is once again recovering on anticipation that the worst is behind for the stock. Intermediate resistance near $35, has now been crested by the bulls, but with Stochastics back in overbought, now isn't the time to initiate new positions. Look for a bit of profit taking to drop CLX down to the $33-34 support level, providing us with a more attractive entry point. If we get an unexpected (and unlikely) drop to the vicinity of $30, aggressive traders can consider new positions so long as the stock doesn't break its 52-week low of $28.38 before reversing back to the upside. With cheap options available, a $5-10 move in shares of CLX could provide a very nice profit. Based on the recent trading history, our new play looks to have upside to the $45-50 area, plenty of room for those high returns we like to see from our LEAPS plays. BUY LEAP JAN-2002 $100.00 WUT at $5.20 BUY LEAP JAN-2003 $100.00 VUTH t $8.10 Drops ARBA $24.69 Well, that didn't last long! We were promptly chastised for our attempt to bottom fish in the risky B2B sector. Recall that we picked up ARBA as it had made a fairly convincing case for solid support near $32-34. No sooner did we add it to the play list than the stock began a determined kamikaze dive, plunging through our $32 stop as though it didn't exist. As the first full week of February comes to a close, we have watched the stock give up fully 38%, and it is showing no signs of bottoming yet. ARBA failed to perform as expected, so it justifiably gets the boot this weekend. ORCL $23.56 Anyone else asking themselves what happened? ORCL gave up a whopping 13% on Friday, and that was without any embarrassing confessions or earnings warnings from the company. Say thanks to Morgan Stanley Dean Witter analyst Charles Phillips (no relation), who issued a report saying that ORCL's database license revenue growth may fall victim to the dot-com meltdown. In a nervous technology market, investors sold first and asked questions later, driving the stock down to its lowest level in over 2 months. Whether the analyst's concerns are founded or not, the basis of our play (technical strength) has been shattered, and so has our confidence in the stock over the near term. TXN $37.33 Our play on TXN was having enough problems fighting off the bears after posting weak earnings on January 22nd, and then NOK came to the confessional a little more than a week later, warning that first quarter growth in mobile phone sales will fall short of expectations. Shares of NOK have gotten clocked on the news, hence its drop from the play list last weekend. But the Wireless sector bears have turned their attention on TXN, given the semiconductor firm's strong business relationship with the Finnish wireless phone giant. The results are clearly seen on the TXN chart, as the price has now declined through multiple levels of support and is resting just above new yearly lows. With the flood of bad news continuing to come out of the Semiconductor sector, it seems prudent to move aside and focus on plays that don't have such a steep uphill battle in front of them. *************************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=1583 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 02-11-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/021101_5.asp ************* COVERED CALLS ************* Market Sentiment: Opposing the Crowd By Mark Wnetrzak The recent introduction of volatility indices on the NASDAQ 100; the VXN and the QQV, prompted one of our new readers to ask why analysts are so concerned with tracking fear and anxiety in the stock market. The basis for these unique sentiment gauges is a concept known as the "contrarian viewpoint," or one that opposes the general majority. The most common methods of technical analysis use quantitative measures that characterize price movement to determine the future outlook for a particular instrument. Even the popular charting indices (advance/decline lines, overbought/oversold etc.) are based on historical statistics. There is however, another class of indicators that does not rely on the mathematical analysis of specific trends or changes in volume and accumulation patterns to produce a trading signal. The theory behind these measures is that investors and analysts are particularly prone to simple psychological biases such as "running with the crowd" and the opposing belief is widely referred to as a "Contrary Opinion." The rational for contrarian investing is simple: When the crowd is bullish, they invest their money in stocks, some to the point of borrowing against portfolio collateral (margin). When most of the public's cash is already in the market, what money is left to push stock prices higher? On the other hand, when the majority of investors become bearish, they have already sold most of their stocks. If the average investor has more cash than stock, there is a lot of money waiting to be reinvested. Contrarian indicators are subjective and they don't rely on any specific signals, as opposed to most chart reading methods that measure quantity and quality. The underlying idea is that human nature and the "herd" mentality affects all of us because people feel comfortable when they share common beliefs and opinions. In fact, humans tend to coalesce around popular ideas even when there is no substantial evidence to support the base theory. We ignore evidence that would lead to other conclusions in hopes that it will eventually go away. This type of behavior in the market is exhibited in the excessive optimism that investors display just before a significant correction occurs. It is also seen in the negative outlook that becomes widespread as the bottom of a bear market approaches. Many of these biases occur because of the way we process information. Investors tend to base decisions on data that is insufficient and drawn from a sample that is far too small. We also tend to focus on issues that are outperforming the market and assume that the trend will continue far beyond the point that probability suggests is practical. These beliefs are reinforced when others interpret information in the same manner, thus market confirmations and agreement often create a vicious, self-fulfilling cycle. Traders who understand these biases and successfully identify the opinions of the majority can use this knowledge to position their portfolio with the opposite outlook. The most common contrarian indicators are the equity put/call ratios and the bullish/bearish sentiment indices compiled by market research services such as Investors Intelligence. The (equity-only) put-call ratio is computed daily by dividing the put volume of all stock options by the call volume of all stock options. When option traders are bullish on the stock market, call volume increases relative to put volume. When traders are bearish, put volume increases relative to call volume. The P/C ratio is an excellent contrary sentiment indicator and when the relationship between put volume and call volume becomes extreme, a market reversal is likely. Investors Intelligence was one of the first services to exploit the fact that when too many people are bullish on the market, a correction may be looming on the horizon. The company produces the well-known Market Sentiment Index, which reflects the number of investment newsletters that are bullish or bearish on stocks. In August 1987, bulls rose to 60.7% while bears were just 19.2% and that psychological climate prevailed even though a technical market top was forming. Those feelings continued until the "Black Monday" sell-off in October; strong evidence that optimism doesn't accompany the start of a new bull market. Contrary opinion indicators are valuable tools when used properly but one thing to be aware of is that any technique you subscribe to should always be used to confirm other signals from different types of analysis. When these indicators provide well defined signals that agree with your other gauges, be sure to listen to the message. Here's one that may interest you: On Thursday, the American Association of Individual Investors revealed in their survey that the bulls are up to 56% and the bears are down to 14%. What does that say about the future of the stock market? Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return SFAM 8.63 7.69 FEB 7.50 1.88 *$ 0.75 16.1% ONNN 8.00 7.13 FEB 7.50 1.56 $ 0.69 15.5% XLA 8.38 6.61 FEB 5.00 3.88 *$ 0.50 9.9% ANTC 11.25 9.94 FEB 10.00 2.25 $ 0.94 9.3% CLRS 7.88 8.09 FEB 5.00 3.25 *$ 0.37 8.7% RDRT 7.56 8.97 FEB 5.00 2.88 *$ 0.32 7.4% HOTT 22.13 26.81 FEB 17.50 5.88 *$ 1.25 6.9% VPHM 22.13 22.44 FEB 17.50 5.38 *$ 0.75 6.5% ELON 24.44 21.56 FEB 20.00 5.00 *$ 0.56 6.3% SCON 7.13 7.69 FEB 5.00 2.44 *$ 0.31 5.9% PGNX 27.38 21.88 FEB 20.00 8.13 *$ 0.75 5.6% ASTSF 16.31 14.06 FEB 12.50 4.38 *$ 0.57 5.2% FNSR 36.38 29.88 FEB 30.00 7.50 $ 1.00 5.0% CPST 34.19 31.88 FEB 25.00 10.50 *$ 1.31 4.9% MCCC 20.00 17.94 FEB 17.50 3.25 *$ 0.75 4.9% ESCM 16.00 14.75 FEB 15.00 1.44 $ 0.19 2.8% ENTU 20.31 14.44 FEB 15.00 6.00 $ 0.13 1.0% ISLD 6.13 4.63 FEB 5.00 1.50 $ 0.00 0.0% GEN 10.50 7.96 FEB 10.00 1.50 $ -1.04 0.0% GEN 11.00 7.96 FEB 10.00 1.31 $ -1.73 0.0% NERX 10.06 8.72 MAR 7.50 3.62 *$ 1.06 11.9% NXCD 11.38 10.81 MAR 10.00 2.31 *$ 0.93 7.4% LGTO 17.88 16.50 MAR 15.00 3.88 *$ 1.00 5.2% ATRX 23.00 22.25 MAR 20.00 4.00 *$ 1.00 3.8% CSTR 17.06 16.75 MAR 15.00 2.75 *$ 0.69 3.5% *$ = Stock price is above the sold striking price. Comments: Many of the above issues are consolidating under the stress of a general market malaise. GenRad (NYSE:GEN) however, reacted quite negatively after reporting a weak 4th-quarter and also warning of a 1st-quarter loss. The extremely heavy volume on Thursday's move to the bottom of GenRad's support area should have triggered an exit signal. As taking a small-loss exit on Thursday would have been prudent, we will show the position closed. Some other issues to consider exiting or rolling down, especially on further weakness: On Semiconductor (NASDAQ:ONNN), SpeedFam-IPEC (NASDAQ:SFAM), ANTEC (NASDAQ:ANTC), Progenics Pharmaceuticals (NASDAQ:PGNX), Capstone Turbine (NASDAQ:CPST), and Digital Island (NASDAQ:ISLD). The action in ViroPharma (NASDAQ:VPHM) still remains suspect after last Friday's high volume reversal. Positions Closed: Bookham Tech (NASDAQ:BKHM), At Home Corp. (NASDAQ:ATHM) NEW PICKS ********* Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return SGI 5.00 MAR 5.00 SGI CA 0.40 537 4.60 35 7.6% URBN 10.44 MAR 10.00 URQ CB 1.06 3 9.38 35 5.7% PRGN 28.63 MAR 25.00 GQP CE 5.00 58 23.63 35 5.0% ROAD 25.06 MAR 25.00 EJQ CE 1.25 36 23.81 35 4.3% CSTR 16.75 MAR 15.00 QLR CC 2.44 19 14.31 35 4.2% WGR 28.00 MAR 25.00 WGR CE 4.00 30 24.00 35 3.6% MNTR 23.56 MAR 22.50 MNQ CX 1.88 579 21.68 35 3.3% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** CSTR - Coinstar $16.75 *** Rally Mode Continues! *** Coinstar Inc. (NASDAQ:CSTR) and its subsidiaries, Meals.com and Coinstar International, use technology to deliver time and money saving services to consumers in their local supermarkets. The company's 8,500 strong network of machines is currently available to 130 million consumers in 45 states and the District of Columbia, as well as in Canada and the United Kingdom. Meals.com Inc. connects consumers, grocery stores and manufacturers through online and in-store technologies that provide shoppers with relevant information and special offers based on their personal preferences. Coinstar recently announced it has served its 100 millionth customer, proving the more and more Americans are using Coinstar. This week, Coinstar reported that its 4th-quarter loss narrowed versus a year ago, and said it hired J.P. Morgan to help explore strategic alternatives. Buy-out? Merger? Nothing like speculation to continue the bullish momentum. We simply favor the support around $15. MAR 15.00 QLR CC LB=2.44 OI=19 CB=14.31 DE=35 MR=4.2% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=CSTR ***** MNTR - Mentor $23.56 *** New 7-month High! *** Mentor (NASDAQ:MNTR) develops, manufactures and markets a broad range of products for the medical specialties of aesthetic and general surgery (plastic and reconstructive surgery) and urology. In January, Mentor reported its 3rd-quarter showing net income from continuing operations was $7.2 million and $0.30 per share compared to $7.3 million and $0.29 a share last year. The results included a restructuring charge of $1.4 million, from which the company expects to reap improved profitability. Mentor continues to expand, recently completing the acquisition of Porges S.A., a subsidiary of Sanofi-Synthelabo, which provides an ideal platform for the European launch of new Mentor products. The stock has rallied sharply off its lows and has now moved above the July high, a bullish indication. MAR 22.50 MNQ CX LB=1.88 OI=579 CB=21.68 DE=35 MR=3.3% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=MNTR ***** PRGN - Peregrine $28.63 *** Stage I Base *** Peregrine Systems (NASDAQ:PRGN) offers business organizations an integrated suite of packaged infrastructure resource management application software. Peregrine's Infrastructure Management Group is the world leader in providing software solutions to manage the entire life cycle of an organization's assets and Peregrine's E-Markets Group delivers best-of-breed e-Commerce connectivity, real-time data transformation, catalog creation and management, and portal creation and management. In January, the company reported a 3rd-quarter profit that was slightly higher than analyst forecasts and said results outside of the U.S. were very strong. Peregrine's CEO remains comfortable with forecasts for continued growth for the rest of the year. The chart continues to improve as Peregrine forges a Stage I base. We favor the bullish move above the 150 dma and a cost basis within support. MAR 25.00 GQP CE LB=5.00 OI=58 CB=23.63 DE=35 MR=5.0% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=PRGN ***** ROAD - Roadway Express $25.06 *** Transportation Sector *** Roadway (NASDAQ:ROAD) is a leading transporter of industrial and commercial goods with a variety of innovative services designed to meet customer needs. Roadway, an ISO 9000 certified carrier, provides seamless service between all 50 states, Canada, Mexico and Puerto Rico with export services to 66 countries. Roadway reported favorable earnings in January as the company experienced stronger than normal business levels in 2000. Though ROAD's CEO is cautious about the beginning of 2001, he stated that the company has cost control measures in place and believes that pricing levels will continue to remain stable. He didn't expect any significant adverse impact on margins as the company continues to focus on its core LTL service, growth through specialized products and cost containment. Upgrades and new coverage have followed in recent weeks and the bullish move to a new 52-week high on heavy volume bodes well for the future. MAR 25.00 EJQ CE LB=1.25 OI=36 CB=23.81 DE=35 MR=4.3% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ROAD ***** SGI - Silicon Graphics $5.00 *** On the Mend... *** Silicon Graphics (NYSE:SGI) provides a broad range of high- performance computing and advanced graphics solutions that enable customers to understand and conquer their toughest computing problems. After unloading Cray Supercomputer and restructuring SGI finally appears to be showing signs of life. The company reported earnings in January, posting revenue of $487 million, compared with $426 million last quarter, which represents a 14% increase. Order growth for the company's high-end graphics products, particularly its unique line of SGI (TM) Reality Center(TM) facilities, has been particularly strong. Though the company reported a loss this quarter ($0.38 per share), it expects to be profitable in the fourth quarter. The stock remains in a Stage I base but the technicals are beginning to improve. MAR 5.00 SGI CA LB=0.40 OI=537 CB=4.60 DE=35 MR=7.6% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=SGI ***** URBN - Urban Outfitters $10.44 *** Entry Point? *** Urban Outfitters (NASDAQ:URBN) is an innovative specialty retailer and wholesaler which offers a variety of lifestyle merchandise to highly defined customer niches through 40 Urban Retail stores in the United States, Canada and the United Kingdom; an Urban web site, www.urbn.com; 24 Anthropologie stores in the United States; an Anthropologie catalog and web site, www.anthropologie.com; and a wholesale subsidiary which sells to the URBN's retail operations, and to more than 1,300 specialty stores, catalogs and department stores. Urban Outfitters rallied sharply in January after reporting sales for the month of December were up 12% to $38.1 million from $34.1 million in December of last year. With earnings due on March 15, investors have been pushing the stock higher in anticipation of the news. We favor a conservative entry point closer to support until the results are known. MAR 10.00 URQ CB LB=1.06 OI=3 CB=9.38 DE=35 MR=5.7% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=URBN ***** WGR - Western Gas Resources $28.00 *** Oil Sector Hedge *** Western Gas Resources (NYSE:WGR) is an independent gas gatherer and processor, transporter, producer and energy marketer providing a broad range of services to its customers from the wellhead to the sales delivery point. The Company designs, constructs, owns and operates 17 natural gas gathering, processing and treating facilities located in major gas-producing basins in the Rocky Mountain, Mid-Continent, Gulf Coast and Southwest regions of the United States. Western Gas suffered a correction as the electric problem in California affected it sales to Pacific Gas & Electric Co. (NYSE:PCG). With earnings due next Wednesday, February 14, investors appear to have priced-in the uncertainty related to PCG. Western Gas appears ready to resume its up-trend and should make an excellent addition to any diversified portfolio. MAR 25.00 WGR CE LB=4.00 OI=30 CB=24.00 DE=35 MR=3.6% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=WGR ***** ***************** SUPPLEMENTAL COVERED CALLS ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return UCOMA 18.31 MAR 15.00 QUW CC 4.38 6 13.93 35 6.7% SPCT 21.25 MAR 20.00 QCS CD 2.69 8 18.56 35 6.7% MXWL 21.00 MAR 20.00 QMW CD 2.38 198 18.62 35 6.4% BGC 10.93 MAR 10.00 BGC CB 1.55 122 9.38 35 5.7% CHIR 45.06 MAR 42.50 CIQ CV 4.88 53 40.18 35 5.0% *************************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=1578 ************************************************************ *********************** CONSERVATIVE NAKED PUTS *********************** Margin and Maintenance with Naked Puts By Ray Cummins One of our readers suggested that we discuss the difference between initial margin and account maintenance requirements with regard to uncovered options. First, we will review the general guidelines for common stock-option strategies. MARGIN ACCOUNTS To establish and maintain a margin account, a broker requires a minimum of $2,000-$5,000 in any combination of cash or marginable securities to be on deposit with the brokerage. For an account to carry uncovered options and/or spreads there is a generally a minimum balance requirement of $10,000-$50,000. Margin account holders are required to maintain certain minimum equity levels in their accounts. If the market value of the account declines, the broker may request a deposit of additional collateral. Of course, a margin call should be answered promptly to avoid the liquidation of any portfolio holdings. BUYING STOCKS ON MARGIN Generally, the initial investment requirement on long positions involving marginable stocks is 50% of the current share value. Stocks priced above $4.00, but less than $10.00, usually require a margin minimum of $4.00 per share, while shares valued above $10.00 generally require a maintenance of 30% of the current share value. Most of the issues in our Covered-Call Section require 50% initial margin for the purchase of the stock and a maintenance requirement of 30% of the value of the issue after it is in your portfolio. MARGIN REQUIREMENTS - UNCOVERED OPTIONS The margin requirement for writing options is vastly different than that which is used with stocks. The margin requirement is simply a deposit that an investor must provide to guarantee that he or she will cover any written options in the event they are exercised. This collateral is a legal requirement and it is a very important component in your strategy selection because it determines the overall "return on investment" or ROI. There are two different categories of margin requirements with options: Initial Margin and Maintenance Margin. INITIAL MARGIN The Initial Margin is the amount of collateral you must have in your account to initiate the position. Recall that with options, margin means the cash or securities required to be deposited by an option writer with his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest, or in the case of cash-settled options, to pay the cash settlement amount, if assigned an exercise. The minimum margin requirements are imposed by the Board of Governors of the Federal Reserve System, the options markets and other self-regulatory organizations, and increased margin requirements may be imposed either generally or in individual cases by various brokerage firms. The most widely used margin requirements are based on the regulations at the Chicago Board Options Exchange: Writers of uncovered puts or calls must deposit and maintain 100% of the option proceeds* plus 20% of the aggregate contract value (current equity price x $100) minus the amount by which the option is out-of-the-money, if any, subject to a minimum for calls of option proceeds* plus 10% of the aggregate contract value and a minimum for puts of option proceeds* plus 10% of the aggregate exercise price amount. (*For calculating maintenance margin, use the option's current market value instead of the option's proceeds.) With most brokers, uncovered equity puts generally require the greater of the following per contract (for collateral): The initial premium received plus 40% of the underlying issue's price, minus the out-of-the-money amount. - or - The initial premium received plus 20% of the underlying issue's price. This is also the formula we use when calculating the initial return on investment for candidates in the Naked-Puts Section. MAINTENANCE MARGIN The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option (and the underlying stock) changes, so does the maintenance margin. With (short) Put options, the margin requirements can increase when the underlying stock price falls and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the exchange formula) and traders should always consider not only the initial margin requirement, but also the maximum margin needed through the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Consider these facts carefully before you initiate any "naked" option positions. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return MLI 26.88 25.05 FEB 25.00 0.65 *$ 0.65 14.8% ARTG 34.50 37.94 FEB 25.00 0.69 *$ 0.69 13.2% EXPE 16.25 16.25 FEB 12.50 0.31 *$ 0.31 12.6% FIBR 26.38 18.00 FEB 17.50 0.69 *$ 0.69 12.6% SPCT 21.94 21.25 FEB 17.50 0.38 *$ 0.38 11.5% CBT 33.18 35.61 FEB 30.00 0.55 *$ 0.55 11.2% RATL 47.88 44.13 FEB 35.00 1.25 *$ 1.25 10.3% TVLY 20.69 25.69 FEB 15.00 0.38 *$ 0.38 9.1% SMTC 27.75 28.75 FEB 17.50 0.63 *$ 0.63 9.1% GMST 52.69 50.56 FEB 35.00 1.19 *$ 1.19 9.1% PLUG 19.94 20.19 FEB 12.50 0.44 *$ 0.44 8.9% GLGC 23.88 22.38 FEB 17.50 0.31 *$ 0.31 8.8% TER 39.56 35.10 FEB 32.50 0.56 *$ 0.56 8.7% ISSI 17.75 17.44 FEB 12.50 0.38 *$ 0.38 8.7% PRIA 30.19 25.50 FEB 22.50 0.38 *$ 0.38 8.6% PPRO 22.31 14.50 FEB 12.50 0.38 *$ 0.38 8.5% AVCI 37.13 25.06 FEB 20.00 0.69 *$ 0.69 7.6% BMCS 32.13 30.63 FEB 22.50 0.44 *$ 0.44 7.0% EXFO 50.44 40.00 FEB 30.00 0.69 *$ 0.69 7.0% VECO 57.50 46.50 FEB 30.00 0.56 *$ 0.56 6.7% MU 46.44 38.76 FEB 35.00 0.56 *$ 0.56 6.2% JNIC 29.00 16.94 FEB 17.50 0.75 $ 0.19 3.2% MDR 15.29 16.00 MAR 12.50 0.60 *$ 0.60 11.1% TPTH 12.75 11.00 MAR 10.00 0.44 *$ 0.44 10.7% ABMD 25.44 25.94 MAR 15.00 0.50 *$ 0.50 6.5% SPCT 24.75 21.25 MAR 17.50 0.44 *$ 0.44 5.9% NAUT 19.19 16.63 MAR 17.50 0.56 $ -0.31 0.0% *$ = Stock price is above the sold striking price. Comments: It is that time again to evaluate your long-term outlook on any issues you may end up owning. The following issues have broken down technically and could be considered candidates for an early exit on further weakness (or ensuing rally): Mueller Industries (NYSE:MLI), Teradyne (NYSE:TER), and PurchasePro.Com (NASDAQ:PPRO). Nautica Enterprises (NASDAQ:NAUT) fell rather drastically Friday on heavy volume - not a good sign. A move below $16 (50 dma) on a closing basis would be a bearish change of character. Positions Closed: Metromedia Fiber (NASDAQ:MFNX) NEW PICKS ********* Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return CHIR 45.06 FEB 42.50 CIQ NV 0.44 624 42.06 7 12.0% BRIO 13.38 MAR 10.00 UBR OB 0.63 190 9.37 35 16.6% TSN 13.55 MAR 12.50 TSN OV 0.65 298 11.85 35 11.3% TSO 13.32 MAR 12.50 TSO OV 0.40 45 12.10 35 7.1% RBK 31.20 MAR 25.00 RBK OE 0.45 1112 24.55 35 5.8% OII 22.00 MAR 20.00 OII OD 0.45 0 19.55 35 5.4% AL 38.25 MAR 35.00 AL OG 0.60 32 34.40 35 4.1% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** AL - Alcan Aluminum $38.25 *** Metals Sector *** Alcan Aluminium (NYSE:AL) is the parent company of a group of companies involved in most aspects of the aluminum industry. Through subsidiaries and joint ventures worldwide, the company participates in bauxite mining, aluminum oxide refining, power generation, aluminum smelting, manufacturing and recycling, as well as research and technology. The company recently acquired Algroup, and the integration progressing well. The new entity has a very clear strategic focus, aimed at profitable growth, and Alcan will continue to be a leader in the industry. Those who favor a hedge in the metals industry should consider this position. Will we "target shoot" a credit near $0.75 initially, to increase the overall return on investment. MAR 35.00 AL OG LB=0.60 OI=32 CB=34.40 DE=35 MR=4.1% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=AL ***** BRIO - Brio Technology $13.38 *** On The Move! *** Brio Technology (NASDAQ:BRIO) delivers complete business analytic software solutions enabling companies to use information to be more competitive, customer-centric and responsive to increasing demands of e-business. With Brio ONE, organizations have one integrated, scalable and easy-to-use solution delivering business intelligence, enterprise reporting, information portals, and packaged analytic applications across all B2X environments. Brio ONE helps companies derive higher business value from all of their information sources, including ERP, SFA and CRM applications, data marts, data warehouses and the Internet. Oracle's Senior VP Craig Brennan is the new CEO of BRIO and he has an aggressive "comeback" plan for the company. Investors appear confident in the strategy and the new buying pressure has helped BRIO's stock return to a bullish trend. MAR 10.00 UBR OB LB=0.63 OI=190 CB=9.37 DE=35 MR=16.6% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=BRIO ***** CHIR - Chiron $45.06 *** Technicals Only! *** Chiron Corporation (NASDAQ:CHIR) is a biotechnology company that participates in three healthcare businesses: biopharmaceuticals, vaccines and blood testing. The company is developing products for preventing and treating cancer, infectious diseases and also cardiovascular disease. The company's products include Proleukin, a recombinant form of interleukin-2, which the company markets as a treatment for metastatic renal cell carcinoma and metastatic melanoma. Chiron manufactures recombinant human platelet-derived growth factor, the active ingredient in Regranex Gel and they also manufacture Betaseron for Berlex Laboratories, which is marketed as a treatment for multiple sclerosis. In addition, the company sells a line of traditional pediatric and adult vaccines. This position is simply based on the well defined trading range in CHIR and the risk of owning the issue at $42 is relatively low. FEB 42.50 CIQ NV LB=0.44 OI=624 CB=42.06 DE=7 MR=12.0% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=CHIR ***** OII - Oceaneering International $22.00 *** Earnings Rally! *** Oceaneering International (NYSE:OII) is an applied technology company that provides a range of integrated technical services and hardware to customers operating in marine, space and other harsh environments. The company concentrates on the development and marketing of underwater services and products requiring the use of advanced deepwater technology and most of its services are provided to the oil and gas industry. These products and services include drilling support, sub-sea construction, design, lease and operation of production systems, facilities maintenance and repair, specialty sub-sea hardware and specialized onshore and offshore engineering and inspection. Oil service shares are performing well and this issue has vaulted to new highs in anticipation of its upcoming earnings report. Barring a disaster, the stock should easily remain above our cost basis and a recent support area near $19. Traders should wait for a brief pullback in the issue before initiating a position. MAR 20.00 OII OD LB=0.45 OI=0 CB=19.55 DE=35 MR=5.4% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=OII ***** RBK - Reebok $31.20 *** Retail Leader! *** Reebok International (NASDAQ:RBK) is engaged primarily in the design and marketing of sports and fitness products, including footwear and apparel, as well as the design and marketing of footwear and apparel for non-athletic, casual use. The company has four major brand groups: the Reebok Division, the Rockport Company, Ralph Lauren/Polo Sport and the Greg Norman Division. Reebok shares have been on the move after the company's report that it posted a profit in the fourth quarter, compared to last year's loss. The company says its products continue to outsell competitor's brands and profits this year could surge 25% this year. Reebok was also the best performing stock in the S&P 500 for 2000 and it appears the trend will continue. MAR 25.00 RBK OE LB=0.45 OI=1112 CB=24.55 DE=35 MR=5.8% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=RBK ***** TSN - Tyson Foods $13.55 *** Food Sector Consolidation *** Tyson Foods (NYSE:TSN) and its various subsidiaries produce, distribute and market chicken, Mexican foods, prepared foods, animal and pet food ingredients and live swine. Tyson is a totally integrated poultry company and its operations consist of breeding and rearing chickens, as well as the processing and marketing of these food products. Tyson Foods is buying IBP Inc. (NYSE:IBP) for $3.2 billion in cash and both companies seem to see the deal as beneficial for both. If the deal goes through, IBP will be able to expand its new line of shelf-ready, brand name beef and pork products, and Tyson Foods will benefit from IBP's expertise in fresh meats and luncheon and deli meats. Traders who wouldn't mind owning stock in the Food Industry can speculate on the success of the potential merger partners with this conservative position. MAR 12.50 TSN OV LB=0.65 OI=298 CB=11.85 DE=35 MR=11.3% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=TSN ***** TSO - Tesoro Petroleum $13.32 *** Hot Sector! *** Tesoro Petroleum (NYSE:TSO) is an independent refiner and seller petroleum products and a provider of marine logistics services. The company operates three refineries on the United States West Coast, in Alaska, Hawaii and Washington, and also has a network of terminals along the Texas and Louisiana Gulf Coast providing fuel and logistical support services to the marine and offshore exploration and production industries. Tesoro operates in two business segments: Refining and Marketing and Marine Services. Its principal petroleum products include gasoline, diesel fuel, jet fuel and heavy oils and lubricants. TSO is simply another popular small-cap stock in the oil service sector and if their upcoming earnings report is favorable, the issue should continue to rally in the coming months. MAR 12.50 TSO OV LB=0.40 OI=45 CB=12.10 DE=35 MR=7.1% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=TSO ***** ***************** SUPPLEMENTAL NAKED PUTS ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Return ****** Stock Last Put Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return FILE 25.13 MAR 20.00 ILQ OD 0.63 0 19.37 35 9.7% BBBY 25.31 MAR 22.50 BHQ OX 0.81 27 21.69 35 8.7% LGND 13.75 MAR 12.50 LQP OV 0.38 30 12.12 35 7.1% DORL 26.25 MAR 25.00 QDL OE 0.75 50 24.25 35 6.5% USAI 22.00 MAR 20.00 QTH OD 0.50 43 19.50 35 6.0% JEC 52.20 MAR 50.00 JEC OJ 1.30 0 48.70 35 5.7% HB 49.60 MAR 45.00 HB OI 0.80 850 44.20 35 4.3% ************************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=1592 ************************************************************** ************************ SPREADS/STRADDLES/COMBOS ************************ The Downtrend Continues... Friday, February 9 Stocks plunged today as fears of an economic recession weighed heavily on investors. Weakness in large-cap technology stocks drove the NASDAQ down 91 points to 2,470. The selling pressure spread to industrial issues, pulling the Dow 99 points lower to 10,781. The broader market S&P 500 index ended down 17 points at 1,314. Trading volume on the NYSE was meager with only 1.05 billion shares traded. Big Board losers beat winners 1,658 to 1,400. Activity on the NASDAQ was also light with 1.8 billion shares exchanged. Technology declines trounced advances 2,376 to 1,356. In the bond market, the 30-year Treasury rose 20/32, pushing its yield down to 5.381%. Thursday's new plays (positions/opening prices/strategy): There were no positions opened in today's session. The credit spread in Apollo Group (NASDAQ:APOL) was not offered at our target price and it appears that there was a limit order in place before the market open. Here's a hint: If you are trying to fill a thinly traded position with a noticeable disparity, do not place the order before the options begin trading. Both Davox (NASDAQ:DAVX) and Solutia (NYSE:SOI) remained in a small range, preventing any favorable entries in the bullish synthetic positions. We will continue to monitor these plays for entry opportunities in the coming sessions. Portfolio Plays: Today was not a good example of how to the end the week! Almost every technology sector endured substantial declines and big-cap companies were particularly weak as investors gave up hope of an economic recovery in the near-term. The belief that profits will not improve until late in the year has become widespread and the bearish sentiment is beginning to affect all of the major averages. Analysts say that revenues should improve over the course of the next few months because of a weaker dollar and the reduction in excess equipment inventories. Earnings will also receive a boost from an upcoming accounting change, which will eliminate goodwill amortization. The immediate future is less favorable because the profit environment needs to stabilize before the market can stage a sustainable recovery, and the disappointing results will likely continue through the next quarter. On the bright side, all of the major averages are now deeply oversold and stocks are due for a technical bounce. Next week, traders will look for clues about the Federal Reserve's next move in FOMC Chairman Alan Greenspan's address to the Senate Banking Committee. Lets hope the outlook is an optimistic one! Despite the dismal performance of the market today, the Spreads Portfolio experienced little significant activity. The downward pressure on stocks was limited in most of our positions and only a few big-cap technology issues suffered large losses. Qualcomm (NASDAQ:QCOM) was the big loser, down almost $6 to $79.12 amid a sell-off in the wireless telecom group. Motorola (NYSE:MOT) was another poor performer, moving below $19 for the first time in a month. Hewlett Packard (NYSE:HWP), AT&T (NYSE:T) and Microsoft (NASDAQ;MSFT) led the blue-chips lower and Navistar (NYSE:NAV) dropped to the bottom of a recent trading range. Our calendar spread in Navistar will need to be closed, or adjusted forward to March options before the company's earnings next week. On the bright side, a number of industrial issues moved higher during the session. Bullish plays in Advanced Energy (NASDAQ:AEIS), HBSC Corporation (NYSE:HBC) and Atrix Laboratories (NASDAQ:ATRX) benefited from upside activity. AES Corporation (NYSE:AES) and Household International (NYSE:HI) were portfolio standouts with both issues climbing to recent highs. In the Straddles Section, the decline in option volatility continued to erode the value of many of the positions. In addition, the range bound activity in the broader market limited the movement of most of those issues and unfortunately, the trend is expected to continue. The only hope we have in the coming weeks is for an unexpected catalyst to reverse the current course of the market. I, for one, would welcome any surprise. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** AZA - Alza $44.55 *** Extreme Options Activity! *** ALZA (NYSE:AZA) is a research-based pharmaceutical company with leading drug delivery technologies. ALZA applies its unique technologies to develop pharmaceutical products with enhanced therapeutic value for its own portfolio and for many of the world's leading pharmaceutical companies. ALZA commercializes products it develops as well as products it acquires from third parties. ALZA is currently focusing its sales and marketing efforts in urology and oncology, and in the year 2000 expects to add central nervous system (CNS)/pediatric marketing and sales activities. Trading in Alza options surged last week as the share value of the stock moved higher, and the increased activity pushed the Implied Volatility in the option premiums to extreme levels. There was little news to explain the movement and traders could only speculate about the reason for the rally, but based on the the volume of shares exchanged, somebody is expecting an upward bias in the coming sessions. There a number of ways to attempt to profit from the recent interest and we have listed two of our favorites. Both of these plays are based on the activity in the stock and underlying options. While each position offers good risk/reward potential, they must also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (speculative - neutral/calendar spread): BUY CALL APR-45.00 AZA-DI OI=2270 A=$4.40 SELL CALL FEB-45.00 AZA-BI OI=1756 B=$1.60 INITIAL NET DEBIT TARGET=$2.60-$2.70 TARGET ROI=25% - or - PLAY (conservative - bullish/credit spread): BUY PUT MAR-37.50 AZA-OU OI=472 A=$0.80 SELL PUT MAR-40.00 AZA-OH OI=1749 B=$1.25 INITIAL NET CREDIT TARGET=$0.55-$0.65 ROI(max)=28% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=AZA ****************************************************************** PFE - Pfizer $45.04 *** An Old Favorite! *** Pfizer (NYSE:PFE) is one of the world's largest pharmaceutical and consumer healthcare companies. The company was formed with the combined interests of Pfizer and Warner-Lambert company and the new entity now represents a significant consumer business encompassing many of the world's best-known brands including Halls, Tetra, Benadryl, Sudafed, Listerine, Desitin, Schick, Visine, Ben Gay, Lubriderm, Zantac 75 and Cortizone. Pfizer operates through four main operating units: Pharmaceuticals, Warner-Lambert Consumer Division, Pfizer Animal Health Group and Pfizer Global Research and Development. Pfizer was the focus of a number of news items last week after the company said Tuesday that it has received approval to market its schizophrenia drug Ziprasidone. Analysts say doctors are looking for alternatives to existing anti-psychotic treatments and if the drug's safety record holds up over time, it could generate sales that rival those of competing products. On the downside, Ziprasidone is associated with an altered heartbeat, a side affect that has ended the promise of other popular drugs. The announcement helped the stock rally to recent highs but the optimism quickly faded as concerns about the labeling of other potentially harmful products consumed investor's attention. Now it appears that PFE is destined to remain in its recent trading range until another "blockbuster" news item attempts to change the character of its stock. We will speculate on that outcome with this conservative combination position. PLAY (conservative - bearish/credit spread): BUY CALL MAR-50.00 PFE-CJ OI=11354 A=$0.40 SELL CALL MAR-47.50 PFE-CM OI=12436 B=$0.80 INITIAL NET CREDIT TARGET=$0.50-$0.60 ROI(max)=25% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=PFE ****************************************************************** MTON - Metro One Telecom $34.50 *** Reader's Request! *** Metro One Telecommunications (NASDAQ:MTON) develops and provides enhanced directory assistance and information services for the telecommunications industry. It contracts mostly with wireless carriers to provide services to their subscribers. The company opened its first call center and began testing and offering its enhanced directory assistance and information services in 1989 and has since entered into hundreds of contracts to provide its services to carrier's subscribers on a charge per call basis. In addition, the company has expanded into the landline telecom market and provides services to GST Communications, a regional competitive local exchange carrier. The company currently has contracts with 13 carriers and their customers include many of the leading wireless telecom providers such as Sprint PCS, AT&T Wireless Services, Nextel Communications, Pacific Bell Wireless, Vodafone AirTouch PLC and ALLTEL Communications. One of our readers commented on the recent bullish chart history of Metro One and asked us to identify some potential positions in the issue. One of the more favorable speculative strategies is the "synthetic" position and in this case, the option premiums favor that approach. Traders who see a bullish future for the issue may attempt to profit from this low risk technique. We will target a slightly higher premium initially, to improve the potential for profit in the position. PLAY (conservative - bullish/synthetic position): BUY CALL MAR-40 KQM-CH OI=40 A=$1.00 SELL PUT MAR-25 KQM-OE OI=40 B=$0.62 INITIAL NET CREDIT TARGET=$0.00-$0.12 TARGET ROI=25% Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $775 per contract. http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=MTON ****************************************************************** - STRADDLES - I received some new requests for debit straddles this week and although the relative premiums in options is very low, there were very few candidates that met the fundamental criteria for the strategy. As you know, I simply look for options that are undervalued, on stocks that have the potential to move (high or low) enough to make the straddle profitable. In addition, I try to find issues that have a history of multiple movements through a sufficient range (in the requisite time period) to justify the overall risk/reward of the position. Based on historical option pricing analysis and the technical background of the underlying issues, these positions are good candidates for debit straddles. Current news and market sentiment will have an effect on these stocks, so review each position individually and make your own decision about its potential for profitability. ****************************************************************** TV - Grupo Televisa $50.31 *** Probability Play! *** Grupo Televisa SA (NYSE:TV) is a media company in the Spanish speaking world and a well known participant in the international entertainment business. The company has interests in television production and broadcasting, programming for pay television, international distribution of television programming, popular direct-to-home satellite services, publishing and publishing distribution, music recording, cable television, radio production and broadcasting, professional sports and business entertainment promotions, paging services, feature film production and sales, dubbing and an Internet portal. The company also owns an equity interest in Univision Communications, a Spanish television broadcaster in the United States. PLAY (conservative - neutral/debit straddle): BUY CALL APR-50 TV-DJ OI=141 A=$4.50 BUY PUT APR-50 TV-PJ OI=1080 A=$4.00 INITIAL NET DEBIT TARGET=$8.25 TARGET ROI=50% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=TV ****************************************************************** ICOS - ICOS Corporation $50.06 *** Probability Play! *** ICOS Corporation (NASDAQ:ICOS) is discovering and developing new pharmaceuticals by seeking points of intervention in disease processes that may lead to more specific and efficacious drugs. The company's research and drug development programs involve both acute and chronic conditions. Presently, the company and its affiliates have four product candidates in clinical trials: IC351 and sitaxsentan, each a small molecule product candidate; Pafase, a recombinant form of a naturally occurring human serum enzyme; and IC14, a monoclonal antibody. In addition, the company has several product candidates in the research and pre-clinical phases of development. Over the past few years, ICOS has established corporate collaborations to enhance and optimize the company's development while maintaining substantial downstream product rights to potential products, thereby offsetting a substantial portion of the financial risk of developing these candidates. PLAY (conservative - neutral/debit straddle): BUY CALL APR-50 IIQ-DJ OI=156 A=$5.50 BUY PUT APR-50 IIQ-PJ OI=18 A=$5.00 INITIAL NET DEBIT TARGET=10.25 TARGET ROI=50% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ICOS ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. 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