The Option Investor Newsletter Tuesday 02-20-2001 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/022001_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 02-20-2001 High Low Volume Advance/Decline DJIA 10730.90 - 68.90 10903.20 10727.50 1.11 bln 1321/1755 NASDAQ 2318.35 -107.03 2442.99 2317.77 1.88 bln 1308/2513 S&P 100 661.36 - 14.06 679.08 660.85 totals 2629/4268 S&P 500 1278.94 - 22.57 1307.16 1278.44 38.1%/61.9% RUS 2000 491.14 - 8.14 500.36 490.44 DJ TRANS 2977.46 - 17.32 3015.44 2972.11 VIX 27.50 + 2.42 27.82 25.35 Put/Call Ratio 0.70 ************************************************************* CSCO recession spreads to Intel! The recession CSCO CEO John Chambers spoke about over the weekend has now spread to Intel. Nasdaq:INTC said today that they were instituting cost cuts that would save several hundred million dollars this year. They are cutting some costs by as much as 30% due to an increasingly difficult economic environment. The tech sector finally gave in to the continued bad news and the remaining buyers gave up in disgust. Thank you John Chambers! There was not much to brag about in the markets today. Bulls were constantly bombarded by downgrades on any sector that was showing signs of life. The fiber-optic community led the hit parade as they got hammered again with a round of negative news. Nasdaq:JDSU hit a low of $32 after UBS Warburg cut them to a neutral from a strong buy. A Lehman analyst cut revenue targets for JDSU on the basis of slowing sales and rising inventory. Corning, Nyse:GLW, dropped another -10% to $30 and Nasdaq:CIEN lost -$5 to $77.50. The Lehman analyst also cut all the communication chip stocks and the resulting losses were serious. He said visibility going forward was poor and he expected all three of the majors to warn. He cut estimates by about -18% on all three. Nasdaq:BRCM lost -9.75, Nasdaq:AMCC -5.50, Nasdaq:PMCS -7.88. PMCS was stated to be the least likely to warn. CSFB analyst Charlie Glavin, also downgraded PMCS to a hold and AMCC to a buy due to soft March orders. The selling was not limited to tech stocks. Brokerage stocks took a hit after comments about slowing volume and general economic uncertainty. Keefe Bruyette & Woods issued rating changes and cautions on the major brokers saying account growth was slowing and trade volume was anemic. Nyse:LEH took a huge hit dropping -$7 and Nyse:GS was only slightly better at -$5.50. Schwab was the least impacted with only a -$1.14 loss. Schwab was hit last week after saying they would have trouble meeting estimates. Financial stocks in general were sold on fear of a recession. Banks were dropped on fears of loan losses and weak loan demand. Citigroup, JPM and BAC all fell on a downgrade to Bank One by a Goldman Sachs analyst. Goldman said consumer loan portfolios would be the next area to watch in the banking community. Airline stocks also suffered after Merrill Lynch cut earnings projections for six carriers. UAL, AMR, ALK, CAL, NWAC and DAL, all are victims of deteriorating consumer sentiment and could see lower demands for air travel if the economy continued slowing. Flat corporate profits and continued layoffs would slow demand for air travel. About the only sector making progress today was the retailers. After earnings from Wal-Mart and Home Depot the sector was energized on hopes of strong results from other companies announcing this week. Wal-Mart beat the street by a penny and logged its first $2 billion profit quarter. They called it challenging but still beat the street. Home Depot announced earnings in line with estimates but then warned that next quarter profits may slip. ANF announced after the close and beat estimates by two cents. Historically retailers do well in late February and March and even in this bear market they appear to be holding their own. Agilent, Nyse:A, announced earnings after the close and followed the scripted program perfectly warning that sales would be substantially lower and growth would be only 10%-15% for the full year. Analysts had expected $29 billion in revenues and the company guided them lower to only $12 billion. A serious shortfall! The same reasons were given, over capacity, excess inventory and no sales. They did not actually say "no sales" but read between the lines and that is what you get. The stock was hammered in after hours trading and fell to a low near $41 after closing at $44.26. The Nasdaq closed at its low of the day and only +67 points over the intraday low for the year of 2251. Support at 2400 failed shortly after the open and the index suffered all day. The negative sentiment was so thick it could have been smog. Up volume on the Nasdaq was only 277 million and down volume was 1.5 billion. With today being a continuation of last Friday the 5:1 ratio of down to up volume is getting very close to a capitulation event. The only holdup was the volume. At only 1.8 billion for the Nasdaq it was not a blowout event. Without a blowout there will only be a weak bottom. There was no bargain hunting at the close and it was the lowest close since Jan-2nd at 2291. There were just no buyers to offset the few sellers. If we are going to bounce then Wednesday may be the day. The Agilent earnings tonight sounded just like the others in the past weeks and may not impact the market as much as some new unexpected disclosure. We are very close to important support at 2300 and again at the year low of 2251. This support along with the serious oversold conditions could trigger the bounce. The keyword here is "could." The economic report to watch tomorrow will be the CPI and most analysts are not expecting a blowout like the PPI last week. The expected number is +0.3% with the core rate at +0.2% The problems brought about by the PPI last week include the possibility of stagflation and a calming of Fed aggressiveness. A benign CPI could re-ignite the Fed and increase odds of a larger rate cut at the March-20th meeting. A blowout CPI could cause some serious problems as it would be seen as confirmation of the PPI and a Fed on hold again. I can't imagine the Fed staying on the sidelines with every earnings report chock full of problems but then again I am not Greenspan. As traders we need to be wary of this market. While it is totally rational to expect a bounce any day, what we expect is immaterial. As long as everybody is sitting on the sidelines waiting for the bounce, it will not happen. Until traders decide stocks are too cheap and start spending money again then we should wait. Remember, we are not trying to pick a bottom. We want to buy the bounce not the drop. While I feel that technically we are due a bounce anywhere between here and 2250 there are serious challenges to this thought process. With two of the biggest companies on the Nasdaq, CSCO and INTC, making horribly negative comments, there is no reason for traders to buy stocks. SUNW has an analysts meeting on Thursday and many expect them to warn. The sentiment is very negative and can get worse. Until something changes this sentiment there is not going to be a rally. It could be a benign CPI tomorrow or another surprise rate cut. We do not know what the catalyst will be but we have to have it to stop the current down trend. Either way I do expect a trading rally soon. Now repeat after me, Low CPI, Low CPI, Low CPI..... Enter passively, exit aggressively! Jim Brown Editor ************************************ Spring Options Workshop and Bootcamp April 5th-9th, Denver Colorado ************************************ OptionInvestor is proud to announce our third annual Spring option workshop in Denver Colorado. This power packed five-day event is structured to fully educate you on advanced option strategies and will make you a better and more profitable trader. If you attended the March Denver Expo last year and thought it was the best function you had ever attended... You haven't seen anything yet! Great food, entertainment, education and just plain fun in sunny Denver. The biggest complaint in March was the massive weight gain experienced by the attendees from the gourmet menu. We know how to put on a function. Ask anyone who came last March! Current speakers include: Tom DeMark, author of "Day Trading Options", "Science of Technical Analysis" and "New Market Timing Techniques" and manager of a $4 billion hedge fund. John Najarian, "Doctor J" as he is known on the CBOE Mark Leibovit, Chief Market Strategist of VRTrader.com Richard Arms, inventor of the TRIN, or Arms Index, Equivolume charting and author of "Trading Without Fear." Mark Skousen, Editor of Forecasts and Strategies for over 20 years. Steve Nison, the worlds foremost expert on Candlestick charting. Author of "Japanese Candlestick Charting Techniques" and "Beyond Candlesticks." Harry Brown, author of seven investment books. Jim Crimmins, President of TradersAccounting.com Austin Passamonte, Editor of IndexSkybox.com Jeff Bailey, Editor of PremierMarkets.com Jim Brown, President of the Premier Investor Network. 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. 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********************* Mark Leibovit, the #1 market timer in the nation, will be on the Nightly Business Report discussing his Annual Forecast Model on Friday evening February 23 (between 5:30 and 7:00 p.m. ET). Mark is Chief Market Strategist for VRTrader.com, a Premier Investor Network website, a technical consultant and former 'Elf' on Louis Rukeyser's Wall Street Week for 7 years. His Annual Forecast Model has been subscribed to by Wall Street's most elite. Mark is presently ranked #1 timer in the nation by TIMER DIGEST and #2 on AmericasBestTimers.com. For information on his extremely accurate Annual Forecast Model for your own viewing, click here: http://www.vrtrader.com/vr_forecaster/index.asp ************************************************************ **************** MARKET SENTIMENT **************** Dead Mountain-Lion Bounce? By Austin Passamonte It's official: We're heading to new market lows according to every celebrity spokesperson and market analyst speaking on CNBC today, from the time we tuned in until we turned their noise off. That's all the near-term bullish confirmation Market Sentiment needed to hear. Make no mistake, we still feel the ultimate multi-year bottom lies ahead and it may likely not be anything resembling a "V". That being said, we expect to go higher before then if even just for a little while. Where to begin? Well, fundamental news couldn't get much worse. Big-cap techs have been pounded to recent lows not dreamed of in the wildest bear fantasies. CSCO (NASDAQ:CSCO) at $26, INTC (NASDAQ:INTC) at $31 and JDSU (NASDAQ:JDSU) downgraded from a "buy" to worse were absolutely unthinkable mere weeks ago. INTC's report about slashing costs and dismal 2001 outlook whacked any semblance of a rally broad markets may have attempted to post this session. Better then than after the bell, however. From a purely fundamental basis investors & traders should sell every equity they own, sit in cash and wait for the bull-run to resume many months or even years from now down the road. For those of us who care more about technical analysis, such is not the case. Where do we begin? Let's just hit the high notes here. First of all, chart signals spanning all mid to near-term time frames for major indexes except the Dow are buried in oversold zones and screaming for relief. They can remain there awhile longer but not forever. Daily chart candlestick patterns pushed well outside the OEX and SPX lower Bollinger band today while the VIX pushed outside its upper Bollinger band... both cases of near-term bullish reversal indication, likely tomorrow. The VIX has spiked towards its bullish reversal values and newer studies tracking the NDX (VNX.X on CBOE and QQV.X on AMEX exchanges) each spiked higher of course, but we don't have a feel for where they trade at extremes. All could go higher as the selloff continues but not forever. Put/Call ratios have lost all touch with sanity. We realize it's the first front-month day for March contracts but get a load of those open put/call ratios listed below versus overhead ratios in relation. The whole world loaded up on OTM put contracts today and the majority simply cannot win. We are sitting on huge disparities of support with scant resistance directly overhead. We like that risk/reward factor as well. Ten of the last fourteen trading sessions in the S&P 500 have been negative closes and that cannot go on forever. Without question we should see lower closes than today's and probably many of them going forward, but a relief rally is builds pressure in the interim. Market sentiment expects another relief rally soon and we think it's closer now than anytime since the post-FOMC decline. Tech darlings are cheap and momentum players & dip buyers cannot stand to stay away. Lest we think it will be different this time, that's what everyone always thinks during times like these. The public will always exist and an excuse will emerge to begin testing the "bottom" soon. We consider the next rally to follow (whenever it emerges) to be another excellent bearish-play entry, but it should be tradable to the upside first. There seems to be more upside reward than downside risk in the overall indexes but not necessarily single companies. Plenty of time-bombs still remain out in techland that will take their stock's price from current value to zero. Make sure you don't play any of those! Expect market relief soon and it could be fleeting but furious. One session's action does not a trend make as we've witnessed countless times this year. Trade the daily trend with caution! ****** VIX Tuesday 02/20 close: 27.50 VXN Tuesday 02/20 close: 67.60 30-yr Bonds Tuesday 02/20 close: 5.45% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Tuesday (02/20/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 700 - 685 8,019 4,017 2.00 680 - 665 2,180 5,636 .39 OEX close: 661.36 Support: 660 - 645 48 3,418 75.96 640 - 620 3 12,260 4086.67 Maximum calls: 700/4,891 Maximum puts : 640/5,681 Moving Averages 10 DMA 687 20 DMA 699 50 DMA 696 200 DMA 752 NASDAQ 100 Index (NDX/QQQ) Resistance: 62 - 60 57,218 23,778 2.41 59 - 57 27,759 21,868 1.28 56 - 54 21,582 35,000 .62 QQQ(NDX)close: 52.99 Support: 52 - 50 5,086 22,072 4.34 49 - 47 221 8,546 38.67 46 - 44 222 5,561 25.05 Maximum calls: 60/41,149 Maximum puts : 60/19,206 Moving Averages 10 DMA 57 20 DMA 61 50 DMA 61 200 DMA 81 S&P 500 (SPX) Resistance: 1350 44,809 40,929 1.09 1325 38,467 43,732 .88 1300 9,907 23,176 .43 SPX close: 1278.95 Support: 1250 3,273 12,096 3.70 1225 114 12,218 107.09 1200 1,197 22,240 18.58 Maximum calls: 1350/44,809 Maximum puts : 1325/43,732 Moving Averages 10 DMA 1321 20 DMA 1341 50 DMA 1331 200 DMA 1410 ***** CBOT Commitment Of Traders Report: Friday 02/16 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 -2625 -2903 -4782 -4001 Total Open interest % (-24.98%) (-29.87%) (-18.90%) (-16.84%) net-short net-short net-short net-short NASDAQ 100 Open Interest Net Value +4104 +3292 -8143 -6615 Total Open Interest % (+18.73%) (+20.96%) (-12.85%) (-10.93%) net-long net-long net-short net-short S&P 500 Open Interest Net Value +73789 +74142 -92910 -94766 Total Open Interest % (+40.21%) (+41.81%) (-12.12%) (-12.52%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: Overall, positions of both the Small specs and Commercials have not varied significantly from last week, as Commercials continue to hold large net-short positions on the S&P 500, DJIA, and NASDAQ 100 while the Small specs are on the long side in the S&P 500 and NASDAQ 100. 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 02/13 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/022001_1.asp *********** OPTIONS 101 *********** Probability Of Profit By Lee Lowell Going into most option trades, the trader feels pretty good about his/her chances of walking away a winner. They've done the research. They've checked the fundamentals, the technical picture, and maybe even done some volatility analysis (my favorite part). But have you checked your actual chances of success of your desired position? This would be achieved by checking the "probability of profit." It's very easy to do. All you need is to have access to a probability calculator. If you've ever done studies on this subject, you'll find that most option buying strategies lie somewhere in the range of having a 2%-35% chance of success, while option selling strategies fall somewhere in the range of 70%-95% chance of success. The reason that most option buyers have such a small chance is due to the fact that most will buy overvalued, out-of-the-money options. Be that the case, I'm still going to show you how to check your chances of success for whatever strategy you choose. Since I like to sell options to take advantage of daily time decay, I'm going to walk you through the steps I take to find the probability of the strategy yielding a winner. I never sell naked options so most of my trades are selling credit spreads on either the indices or some individual stocks. One of the keys to any selling-type strategy is to find an underlying security with above- average implied volatility. One of the easiest securities to do this with is the OEX. You can find its implied volatility by looking at it own volatility index called the VIX. The graph above is a one year chart for the VIX. As of Friday, 2/16/01, the VIX was trading just around 25 which is a little under the average for the last year. The VIX tells us how expensive or cheap the options on the OEX currently are compared to its past. We need to know these numbers because it will come into play when using our probability calculator. The OEX closed on Friday 02/16/01 around 675. Since I believe that the OEX will not make a substantial rebound in the very near term, I want to sell some call spreads on the OEX for the nearest expiration month. I will concentrate on selling out-of-the-money(OTM) options since these are usually overpriced, and because they have a smaller chance of becoming profitable. If I am wrong on my prediction and the OEX starts to rebound, the OTM calls give me more room for error since they have no intrinsic value to begin with. I'm looking at selling the March OEX 705 calls and buying the March 710 calls for a credit of 1 point. My reward is limited to $100 per spread and my risk is limited to $400 per spread. Does that seem like a good deal? Risking $400 to make $100? We won't know until we check our odds. Let's take a look at the probability calculator. On the top of the calculator you will see the inputs area. Here you enter the current price of the underlying security along with the days to expiration, volatility estimate, and your target price level. I have loaded the current price of the OEX of 668, 24 DTE, a volatility estimate of 25% and my target price of 706 which is my breakeven level. If you look at the results, you will see the chances of the OEX going above the breakeven point of 706 that I set in the inputs section. It's only giving me a 19.40% chance of the OEX going above 706. So I have approximately an 80% chance of this trade working out in my favor. Going back to our question above: does this seem like a good deal to risk $400 to make $100? I think if you have any chance over 80%, then it's a pretty good deal. You can look at it on the flipside too as the option buyer. Would you rather risk $100 to make $400. On the surface this seems like the better bet. But if you only have a 20% chance of winning that $400, would you do it? It's a personal preference, but as the option seller, I like taking the odds of an 80% chance of winning over a 20% chance. We need to discuss the inputs for a minute. Since the price of the underlying, DTE, and breakeven points are known numbers, the only one we need to be careful about is the volatility component. Since the volatility input is usually a guesstimate, we can achieve different probability numbers. I like to stick with the market's implied volatility forecast because that usually represents a wide consensus of most market participants. The OEX is easy to use because the VIX is a readily available number. When pricing individual stocks, you need to have a good handle on the volatility estimate. Look at historical volatility charts along with the implied volatility charts and come to some sort of average. If you're looking to sell options, choose the higher volatility number. This will give you more room for error because you'll be more cautious of the strikes you choose. For those of you who like riskier trades and have the capability in your brokerage account to sell naked options, you can get some pretty good chances of success for the options to expire worthless. Take a look at selling the MARCH OEX 560 put/720 call strangle for 2 points. This makes our breakeven points 558 on the downside and 722 on the upside. (THIS IS BY NO MEANS A RECOMMENDATION OF ANY KIND TO SELL STRANGLES ON THE OEX!) This gives us a greater than 99% chance of the OEX not reaching our downside parameter and an 88% chance of the OEX not reaching our upside parameter. Granted, there is unlimited risk in this trade, but the chances of that happening within 24 days are slim. If the OEX stays within our wide trading range, we get to keep our $200 premium. Think a stock like Brocade (BRCD) is due for a quick and large recovery? Why not buy some cheap OTM calls. How about the March $70 calls for 1 point? C'mon, it's only $100. Taking into consideration that BRCD's implied volatility levels are at yearly high's, you'll only have about a 6% chance of making any money on that option. Good luck. Now, these probability calculations are not the end-all be-all of options trading. Since the outputs are based on guesses of your volatility input, the outcomes can always surprise you. Your volatility estimate at the time of trade may be different a week later, or some earnings warning may come out and drastically move the price of the stock. Check your chances with the calculator during the course of the trade to see how the odds change. This is why I like to make my sell-side trades on the indices instead of individual stocks because they are prone to less dramatic moves. The probability calculator is just another tool to add to your arsenal when trading options. Use it before you buy that next OTM option. Your chances of success might surprise you. Until next time... ************** TRADERS CORNER ************** Review Of My February Plays By Scott Martindale What was that I heard from John Bollinger on CNBC today? While I was working out at the gym, I was reading the closed caption on the TV, and he seemed to indicate that the Nasdaq might stay around 2300 for the next couple of years! Not much lower, but not much higher either until earnings catch up with valuations. Did he really say that the action for the foreseeable future might be in tractors rather than chips? Say it ain't so. Indeed, a scan of my long-term stock holdings at today's close showed winners like high-yielding REITs and royalty trusts, natural gas producers/traders, drug makers, and retailers; whereas my remaining tech holdings were almost all down. Although I've lightened up considerably in tech primarily through stop orders, I'm still holding several of my favorites without stops. Just as January was a terrific month to be a bullish options trader, February was just the opposite. With the Nasdaq peaking on the first trading day after January expiration, buying puts or selling calls was the better approach. Nonetheless, I ventured into a few naked put plays. On Jim's suggestion in the newsletter on Sunday, Jan 21st, regarding strength in Ciena (NASDAQ:CIEN), I sold deep-ITM Feb 120 naked puts on Jan 22nd for $24 when the stock dipped to about $101. Much to my distress, the stock continued to pull back into the low-80's before rallying into the Fed meeting. On the Wednesday morning of the Fed announcement, I decided to relieve myself of some portfolio risk and buy back the puts for $23.25. This turned out to be a wise decision as the stock sold off post-Fed to around $70. I also continued to use these fearsome selloffs to provide entry points for writing high-premium naked puts; whereas buying calls (with their equally high premiums) only pays off if the stock recovers strongly. [Of course, the downside risk of naked puts is still much greater.] I wrote naked puts on only three stocks showing extreme weakness: Network Appliance (NASDAQ:NTAP), Adobe Systems (NASDAQ:ADBE), and Superconductor Technologies (NASDAQ:SCON). Unfortunately, all three continued to stay weak. After selling off from the mid- 70's to the mid-50's in two days, NTAP appeared to be stabilizing, so I wrote the slightly-OTM Feb 55 puts on Jan 26th for $5.25. Rather than close them out on the next leg down, I decided to hold on in anticipation of a strengthening in the important data storage sector, but I ended up closing out the position during expiration week at around $14. This was bad position management on my part. As for ADBE, I used the post-Fed announcement selloff on Jan 31st as an entry point, writing the Feb 45 puts for $3.50 with the stock right around $45. The stock held tough for four days before succumbing to selling pressure. SCON held tough technically right through the Fed announcement, so when it showed some pre-weekend weakness on Feb 2nd, I took the opportunity to sell ITM Feb 10 puts. Unfortunately, the weakness has persisted. Nevertheless, I decided to take assignment of both ADBE and SCON for covered call writing in anticipation of these issues coming back quickly with the next tech rally. I realized today that I haven't bought a long-term option (over three months out) or a LEAP since last June! I just haven't been confident enough in the market direction to fork out much money for time premium, and the bid/ask spreads can really hurt you if you decide to stop out. Until I can tell a bull rally from a bear trap, I'm going to remain reluctant to buy long-term options in either direction, although I have been trading equities a bit. However, I'm still willing to play short-term options, although I didn't buy any new call options during the Feb expiration month. Swing trading the Nasdaq 100 Unit Trust (AMEX:QQQ) and S&P 100 Index (CBOE:OEX) proved to be too time-intensive and aggravating for my taste, so I stopped that trial back in December. However, I continued to hold February calls on Applied Micro Circuits (NASDAQ:AMCC) and Portal Software (NASDAQ:PRSF) from late- December. I sold the AMCC Feb 80's at a 50% loss just when I thought it was starting to come back in late January. But the PRSF Feb 10's worked great as I sold them on Jan 30th ahead of the Fed meeting for a 375% profit, even though the technicals seemed to indicate it had further to run. The post-announcement selloff made this an excellent decision as I sold at the peak. Note that merely placing a tight stop loss in an effort to "let profits run" doesn't always guarantee that you preserve your gains since a volatile stock can gap down very quickly, giving you far less gain than you expected. In cases like this, it's better to sell on strength rather than depend on stops to protect your gains. I've been cautiously bullish for awhile now, waiting for the right time to buy calls and equities or write puts, but not playing the downside at all (despite Austin's encouragement in the newsletter). But last Wednesday morning, I finally decided to buy March puts on a stock with a particularly ominous chart, Time Warner Telecom (NASDAQ:TWTC). Of course, the market jumped on that opportunity to rally big when ol' Scott finally bought puts! Although I had been hiding out, the market was laying low just waiting to trap me! [I know everyone's felt that way from time to time.] But alas, the stock has continued its slide along with the rest of the market, making that play profitable so far. Last month I described a covered call play on JDS Uniphase (NASDAQ:JDSU) in which I was called out at $60 and bought back in at $58. However, I was stopped out of those shares on Jan 26th at about $56. I was also stopped out of Nortel Networks (NYSE:NT) around $36, QQQ at $61, and a few others. I don't carry sell stops on all my long-term holdings, just the sectors that seem particularly vulnerable or are in longer-term downtrends. In retrospect, I also should have stopped out of EMC (NYSE:EMC) when the once-invincible data storage sector succumbed to the tech bear like everything else. Nevertheless, during the month I wrote covered calls to generate cash on a number of my long-term holdings showing technical strength, including Stillwater Mining (AMEX:SWC), International Rectifier (NYSE:IRF), Qualcomm (NASDAQ:QCOM), and Biogen (NASDAQ:BGEN). I wrote at-the-money Feb 40's on SWC, Feb 55's on IRF, and Feb 85's on QCOM, as well as in-the-money Feb 65's on BGEN. I held off selling calls on BGEN until Feb 9th because of its extreme strength, and I wrote ITM because it looked overbought and due for a pullback as it bumped up against $70. However, it pulled back only briefly, and in fact BGEN was the only stock that was called out for the month. Despite the current market weakness, it still looks like an opportunity in the making as valuations fall to more palatable levels. No doubt, Nortel's severe earnings warning and John Chambers' comments hurt, but I'm continuing to watch the fallen angels for possible plays, such as NT, CSCO, JDSU, AMCC, and Extreme Networks (NASDAQ:EXTR). *************************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=1625 ************************************************************ PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** MUSE $55.06 -9.00 (-9.00) Unfortunately, even MUSE could not hold up amidst the heavy selling which occurred on the Nasdaq and in the software sector. MUSE dropped in the morning to the $58 level, where it spent most of the afternoon consolidating. However, when the Nasdaq dropped 100 points at the end of the day, MUSE could not muster up the strength to fight the trend. While the stock may recuperate if the Nasdaq rallies, MUSE has closed below our stop level of $58, and we are thus dropping it tonight. IFIN $76.88 -5.13 (-5.13) Unfortunately, broad based heavy selling in the brokerage and investment banking stocks put an end to our call play in IFIN. IFIN sold off in sympathy with other stocks like GS, MWD and STT, which were mercilessly slaughtered on stagflation concerns. While these concerns may dissipate if the CPI is benign tomorrow, IFIN closed below our stop and we are thus dropping it tonight. IBM $111.50 -3.50 (-3.50) Simply put, IBM not only failed to rise to the occasion. And to a larger extent, the share price failed to stay afloat amid the market adversity. The uncertainty saw Big Blue get cut down over 3% on robust volume. The substantial losses unequivocally took IBM through our $113 stop. It's disappointing to have to knock IBM off our call list, but its overall weakness today leaves us no choice. USB $28.98 -0.45 (-0.45) Broad-based bearish comments in conjunction with company specific downgrades in the finance sector Tuesday caused detrimental damage to our USB call play. The stock has appeared to lost all of its momentum and is now sliding lower. Although USB hung around its 50-dma near the close of trading, it did settle below our protective stop at $29. If the close below the stop didn't get you out today, use any pop back above the 50-dma now at $29.03 to exit open positions. LAB $47.12 -3.91 (-3.91) Brokerage stocks took it on the chin during Tuesday's session as a round of downgrades and bearish comments concerning light trading volume swept through the sector. For its part, LAB was downgraded by Keefe Bruyette, which subsequently caused detrimental damage to our play. LAB fell on relatively heavy volume, and finished well below our protective stop at $49. If the slip below the stop didn't get you out of positions, use any relief rally or bounce Wednesday morning to exit open positions. Monitor the direction in the Broker Index (XBD.X) in order to gauge an exit point! PUTS: ***** STT $100.10 -4.80 (-4.80) Patient investors were finally rewarded today, as STT gave them a sharp drop to pad the profits in their accounts. After gradually declining every day for the past couple weeks, the stock finally vindicated the bears by gapping lower and then sliding throughout the day, fractionally breaching the century mark towards the end of the day. Driving the drop today was widespread weakness in Financial stocks, and the net result was to bring our play down to major support in the $98-100 level. Given that the $100 support level held into the close today, we'll take this opportunity to lock in our profits and move on to new plays. *************************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=1633 ************************************************************ 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 Tuesday 02-20-2001 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/022001_2.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1640 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** AES $58.59 +0.61 (+0.61) Amidst the overall market weakness, AES emerged victorious, seemingly undaunted by investors' fears of possible stagflation and a continued slowdown in technology earnings growth. Public awareness is growing regarding the increasing demand for power in the U.S., particularly in California. In addition, consolidation is occurring in the power sector, as Energy East announced today that they plan to buy RGS Energy Group for $1.4 billion. With the momentum AES is generating, it should be able to break out from the wedge it has been forming to clear heavy resistance at $60 in the near future, which could mean clear sailing to the $65 level. Conservative traders might want to wait for this break on heavy volume. Monitor the independent power sector for strength, and set stops at $56. CIEN $77.31 -5.31 (-5.31) It was an outright nasty post-holiday session! The monstrous sell-off reached all corners of the market and left no stock unscathed. In fact, CIEN closed below our $78 stop, but we're maintaining our coverage on the expectation of a rebound following the short covering rally this afternoon. The analysts are also booting for CIEN's strong recovery, with many citing the company's ability to take market share from its faltering rival, Nortel (NT). Recently Thomas Weisal and Wit SoundView reiterated Strong Buy recommendations and issued price targets of $150 and $155, respectively. Today, Gruntal & Co also reiterated a Short-Term Outperform and $120 price target on CIEN. Today's pullback places CIEN below the 5 & 10 DMAs. Therefore, please consider waiting for CIEN to resume a strong position above the $78 and $79 marks before strategizing an aggressive entry. In a rebounding market, look for buyers to take CIEN into the $82-$84 range and drive it towards $90 on strong volume. AEOS $58.19 -0.50 (-0.50) Earnings' reports from Walmart (WMT) and HomeDepot (HD) initially gave the DOW and the retail sector a lift in early trading, but it soon became evident that the rally couldn't swing the broader market. In despite of the overall downside action, AEOS managed quite well and once again demonstrated its strength ahead of its own earnings' date. The company is confirmed to report on March 15th, BEFORE the opening bell. Currently, near-term support is established at the $58 level; although $60 remains a staunch adversary on the upside. During these turbulent times, it may be wise to wait for the big breakout through the 52-week high, at $60.06, before adding new positions. A close under the $54 mark and we'll exit AEOS. SDS $58.25 +0.99 (+0.99) SDS continued to display relative strength in a market that is not necessarily friendly to anything tech-related. However, SDS' strength is not isolated; several of its competitors traded higher during Tuesday's tough session for the tech sector. SDS' relative strength should bode well going forward if the Nasdaq and broader tech sector rebounds. Having said that, the most prudent strategy would be to wait for an advancing Nasdaq in conjunction with strength in competitors such as FISV before entering new SDS positions. If you get confirmation early Wednesday morning, new positions can be added at current levels, thereafter traders might look to take some profits as SDS approaches $60. Low volume pullbacks can be pursued conservatively, but be aware that we've raised our protective stop to $57 and would drop coverage on SDS if the stock closed below that level. LH $146.49 +1.24 (+1.24) On a day where sharp declines emerged on all the major indices, defensive stocks attracted fresh money, and LH fit the bill. Granted, it wasn't a huge gain, but the fact that our play posted a gain at all is encouraging, as it continued to forge ahead in its fledgling recovery. Capping the stock's upside move today was the upper Bollinger band ($147.15), but with daily Stochastics still heading upwards, LH looks like it could continue to push towards resistance, first at $148, and then $150-152. We are moving our stop up to $141, and aggressive traders can target shoot new entries on a bounce from this level or the ascending trendline near $143. In case you missed it last week, the company reported earnings that beat estimates by a handy 8 cents (13.5%), and that is likely the principle catalyst behind the solid performance in the past week. LH is even outperforming its primary competitor, DGX, which is looking a little bit weak. If DGX rolls over, selling pressure could bleed over into trading of LH, so monitor this stock to keep from getting on the wrong side of the trade. MLTX $20.00 +0.13 (+0.13) While not a stellar day for Technology stocks, or our play on MLTX, it was encouraging to see the stock stop on a dime at the $20 support level. After puncturing the upper Bollinger band last Thursday, the stock needed to pull back a bit for its next leg higher, and we are hoping this is where things will turn up again. With our stop still sitting at $19, there isn't a lot of wiggle room for aggressive investors looking to buy the dip. If MLTX bounces above our stop (and it looks like we may be seeing the beginning of that in today's session), feel free to initiate new positions for the next move up. More conservative investors will want to hang onto their cash until the bulls can propel the price up through the $21 level (the bottom of the gap up from last Thursday). The NASDAQ is in a tenuous condition right now, so we need to watch it to keep us apprised of the likely near term direction on our play. If it bounces from current levels it will likely buoy shares of MLTX, but setting new 52-week lows is likely to have a deleterious effect on our play. FDC $63.15 -0.80 (-0.80) FDC traded in a tight range today between $63 and $64, amid more tech selling. This defensive play continues to maintain a solid uptrend and today's action was nothing more than consolidation of last week's gains. Buyers held the $63 support level throughout the day and any bounces from that level or below at $62 support would offer nice entries. Overhead, $64 is the level to break through so watch for volume to propel it higher. JP Morgan H&Q spotlighted FDC this morning calling the stock "a safe harbor in turbulent seas." They "continue to recommend FDC and view it as a highly attractive defensive holding in a turbulent tech market." We concur. The stop remains at $62. ******************* PLAY UPDATES - PUTS ******************* ABGX $30.88 -2.81 (-2.81) Continuing weakness in the Nasdaq, particularly the biotech sector worked out favorably for our put play. ABGX rolled over from $34.81 and then $32.56 today, to reach strong support at the $30.88 level. This is consistent with the long term downward channel which was established in November. The pattern of lower highs in February kept ABGX rolling over from strong resistance at $38, $36, and $34. Should this trend continue, ABGX may break the heavy support level at $30, which dates back to last January. If $30 is broken on heavy volume, ABGX may fall to the $20 level. Conservative put players might want to wait for a drop below $30 on heavy volume before taking positions. Aggressive traders can take positions on another roll over from $32.58, if it is accompanied by weakness in BTK.X and the Nasdaq. We are moving stops to $34 tonight. NOK $25.50 -1.00 (-1.00) Nokia sold off with its peers in the cellular communications industry to reach a new 52-week low at $25.27. A disappointing earnings report from Nextel on Friday prompted a Solomon Smith Barney downgrade today, which served to weaken the entire cellular sector. In addition, continued worries of excess inventory plague the semiconductor sector, which experienced heavy selling today. Weakness in semiconductors is unhealthy for the cellular sector, as many chip components are sold to cellular phone companies. Nokia's near term outlook is very grim, as the stock showed little response to the Nasdaq rally we saw in January. Traders can take positions at current levels, or at a roll over from $26.50. Continue to monitor others like MOT and ERICY, and move stops to $27. BBOX $51.88 +0.00 (+0.00) Today's lack of downside action amid the dissenting broader markets indicates BBOX could have found a bottom; or it's simply consolidating at $51 and $52 after experiencing such a devastating decline, particularly last week. We're keeping BBOX on our put list to give it some room and time to produce results; however, that doesn't mean to go out and buy puts, not just yet. We're looking for a breakdown below the $50 level or a high-volume rollover to occur. Our protective stop remains in place at the $55 mark, but a downward bounce from the 5-dma ($52.50) could also offer a reasonable entry if the share price begins to deteriorate. Be patient and don't take unwarranted risks. BRCD $44.88 -8.38 (-8.38) February sure hasn't been the month to bet against the bears in Technology stocks. Even solid stocks in solid sectors have been hit by severe selling whenever investors fear there is more bad news hiding around the corner. BRCD is a good case in point, as it has given up nearly 60% in less than a month, first on general Technology weakness and then last week on the drastic EMLX earnings warning. Even the approach of BRCD's earnings (tomorrow after the close) has been unable to lift shares of the fibre-channel leader, despite the fact that there has been nothing but good news from the company. Today saw BRCD give up a whopping 15% on more than double the ADV as it reached major support in the $43-45 level, not seen since May of last year. With the severe oversold condition of both BRCD and the broader NASDAQ, we would recommend tightening up your stops, and we have lowered our stop to $49. Unless you have the ability to daytrade tomorrow, now would be the time to look at locking in profits on BRCD. If you want to play the last day of our play ahead of earnings, consider a failed intraday rally near the $47 or $49 level as your trigger for new entries. Whatever your preference, make sure to close any open positions before the closing bell tomorrow. NETE $52.94 -4.06 (-4.06) Sure enough, Friday's late-day rally in NETE turned out to be a fluke (likely related to options expiration), and after starting out today on the downside, the stock found resistance at $56 before continuing to decline, ending the day very near the low of the day with a 7% loss. The closing price puts NETE below the 200-dma ($53.60), and this technical violation could open the door to further losses. Largely driven by solid selling across the board on the NASDAQ, NETE just couldn't buck the bearish trend today. We are pulling in our stop, placing it at $56, near the day's high and the descending trendline. Aggressive investors can still consider new positions on failed rallies near this level, although given the NASDAQ weakness today, we may not get so lucky. Taking the conservative approach may be the strategy that yields a new entry point in the days ahead. If that fits your risk profile, look for a drop below today's low of $52.50 to trigger new entries. *************************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=1626 ************************************************************ ************** NEW CALL PLAYS ************** AGGRESSIVE: UTEK - Ultratech Stepper $39.06 +1.06 (+1.06 this week) UTEK develops, manufactures and markets photolithography equipment designed to reduce the cost of ownership for manufacturers of integrated circuits, including advanced packaging processes, photomasks, thin film magnetic recording devices and micro-machined components, The company supplies step-and-repeat systems based on one-to-one (1X) and reduction optical technology to customers involved in the semiconductor fabrication process throughout North America, Europe and Asia. When was the last time you saw a chart that looked this good? UTEK has been on a tear for the last 2 months and is showing no signs of letting up anytime soon. Confirming support near $19 in late December, the stock has more than doubled since then as buyers have been driving it higher on heavy volume. With an ADV of 473K shares, and recent trading frequently topping 1 million shares, it is clear that this stock is on fire. As a matter of fact, if you only looked at the UTEK chart, you sure wouldn't know that the NASDAQ was flirting with new 52-week lows. The stock hasn't been this high since late 1995, and if the current trend continues, it seems entirely reasonable that the bulls will soon scale the all time high of $47.50. Announcing very strong earnings (a nickel ahead of estimates) on January 25th got the stock moving again, and it got another shot of adrenaline from the Adam Harkness upgrade to Strong Buy on January 31st. Ever since beginning its recent uptrend, the stock has been moving in a nice tight ascending channel, and with today's move it is now above the upper channel line ($39) and the upper Bollinger band ($38). Stochastics have been buried in overbought for over a month, and it seems likely that we will see some profit taking in the near future. That will be our opportunity to target new positions for the next leg of the rally. The rapidity of the rise has left us with little to point at as solid support so we will use the intraday support that has formed at $38, and then $37 as our entry levels. A pullback to either of these plateaus looks attractive, so long as the uptrend remains intact. Just in case the trend runs out of steam, place stops at $37. BUY CALL MAR-35*UQT-CG OI=643 at $5.13 SL=3.00 BUY CALL MAR-40 UQT-CH OI= 4 at $2.06 SL=1.00 BUY CALL MAR-45 UQT-CI OI= 0 at $0.69 SL=0.00 Wait for OI! BUY CALL APR-40 UQT-DH OI= 0 at $3.50 SL=1.75 Wait for OI! BUY CALL MAY-40 UQT-EH OI= 0 at $5.38 SL=3.25 Wait for OI! http://www.premierinvestor.com/oi/profile.asp?ticker=UTEK LONG TERM: QQQ - Nasdaq-100 Trust $52.99 -2.14 (-2.14 this week) QQQ is a long-term unit investment trust that issues tracking stocks of the Nasdaq-100 Index (Cubes), which represent the largest and most-actively traded companies on the Nasdaq exchange. The price of the tracking stock corresponds to the performance of its component equities and is approximately one- fortieth of the Index's value. NASDAQ evaluates the Index's composition quarterly. There's no doubt of the uncertainty and storm clouds rumbling through the NASDAQ. But the adage, "once bitten, twice shy" doesn't necessarily apply to the adrenaline-driven technology traders who keep charging back in for another round. The thinking, or feeling, goes that there could very well a pot of gold to be had at the end of that illusory rainbow. Anyway, enough armchair psychology for one write-up. We're beginning coverage on QQQ with the objective of riding up a recovery from the bottom. And yes, we all want to know where is that market bottom in EXACT terms. Well, let's face it. All the market gurus put together can't say for sure. But one thing is certain, we've put a protective stop in place at QQQ's $50 level. Keep in mind, there's a difference between calculated risk and outright gambling; plus the tech-laden NASDAQ is very volatile! So instead of trying to catch the falling knife and getting bludgeoned, you might want to strategize an entry by buying into a rally and locking in gains as QQQ approaches different levels of its upper resistance. An example would be to enter a play as QQQ moves through $55 and the 5-dma and then sell as it approaches $60 and the 10-dma. In other words, play the current trading spreads versus trying to get that one home run over the long-term. BUY CALL MAR-45 QQQ-CS OI= 121 at $9.00 SL=6.25 BUY CALL MAR-50*QQQ-CX OI= 4334 at $5.20 SL=3.25 BUY CALL MAR-55 QQQ-CC OI= 6239 at $2.55 SL=1.25 BUY CALL MAR-60 QQQ-CH OI=41149 at $1.00 SL=0.00 http://www.premierinvestor.com/oi/profile.asp?ticker=QQQ ************* NEW PUT PLAYS ************* AGGRESSIVE: GS - Goldman Sachs $96.00 -5.50 (-5.50 this week) The Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments, and high net worth individuals. The company provides investment banking, which includes financial advisory and underwriting, and trading and principal investments. The company's activities are divided into two business segments, comprised of Global Capital Markets and Asset Management and Securities Services. Goldman Sachs rallied strongly from December to mid January, in anticipation of the rate cuts by the Federal Reserve, and hit a high of $118.62 on January 30. However, since that point, a head and shoulders formation developed, as GS was unable to rally past $120, and profit taking ensued. Viewed on a daily chart, you can see a left shoulder at $110.50, a head at $118.62, and a right shoulder at $109.50. In the last week, the selling intensified, and GS dropped first below its 50 dma of $105.92 on Feb 15, and below its 200 dma of $99.99 today. This may have occurred in response to Friday's much higher than expected PPI, which started some investors worrying about the possibility of stagflation developing, in which the Fed's abilities to control the economy are limited. However, most analysts feel this is not a serious threat yet, as one PPI report does not indicate a trend. GS and others in the investment banking sector may be suffering from the realization that the rate cuts are not a panacea to overall weakness in the investment banking and brokerage industry. The IPO market has been exceptionally weak for months, and shows few signs of recuperating. Today, analyst reports from CIBC and Keefe, Bruyette and Woods reiterated that the weak retail environment may take its toll even further on brokerage and investment banking stocks. If the CPI is benign, the investment banking stocks may rally at the open tomorrow, in which case aggressive traders could consider taking positions upon a roll over from the $96 or the $98 levels, if the sector is weak. Otherwise, a break below $96 on strong volume would be very bearish, and could easily lead GS to the $90 level. Watch others like MWD and LEH, and SPBROK for sector weakness, and set stops at $102. BUY PUT MAR-100*GS-OT OI=249 at $8.70 SL=6.25 BUY PUT MAR- 95 GS-OS OI=663 at $5.80 SL=4.00 http://www.premierinvestor.com/oi/profile.asp?ticker=GS ARBA - Ariba Inc $18.00 -3.50 (-3.50 this week) Ariba is a provider of Internet-based B2B e-commerce network solutions for operating resources. Their Web-based procurement software helps manufacturers, retailers, and distributors to track and manage supply purchases over the Internet. Blue chip clients include Dupont, Federal Express, and Hewlett-Packard. Once this star-studded tech stock slipped below the psychologically governing century mark last November, it's been downhill ever since - and that's no joke! We're initiating coverage on ARBA tonight as it appears to be going for broke - again no pun intended! Today's massive sell-off hit ARBA hard. On the day, it experienced a 16.3% cut on 1.2 times the ADV. We're looking for ARBA to see single digits as the NASDAQ struggles and investors examine their tech-related issues. Yes, it's true that ARBA is already a cheap stock, which isn't typical for an OI call play, but the options are active; and thus, present a lucrative opportunity for enterprising traders. The obvious risk to taking put positions on ARBA is a market reversal, a profitable B2B sector (despite Nortel's dismal outlook), and an attractive stock at a bargain price. But before ARBA can resume an uptrend, there needs to be enough buyers to create a substantial momentum wave. Therefore, pay attention to volume levels and stock direction before you jump into the play. Also, the negative bias across the software sector should increase the chances of ARBA moving lower over the near-term. You might buy into further weakness or enter on rollovers at the $20 and $21 levels, which is capped by the 5- dma ($22.09) line. If you play a rollover, be prepared to lock in gains as ARBA approaches $18, the new 52-week low set at today's closing bell. BUY PUT MAR-25 IRU-OE OI=1365 at $7.75 SL=5.50 BUY PUT MAR-20*IRU-OD OI=2518 at $5.25 SL=3.25 http://www.premierinvestor.com/oi/profile.asp?ticker=ARBA QLGC - QLogic Corporation $42.19 -9.25 (-9.25 this week) Q Logic Corporation is changing the way the world views Storage Area Networks, serving OEMs, VARs, and systems integrators within the broadest line of SAN and NAS infrastructure components in the industry. With over 15 years of enterprise storage experience, the company develops a full range of Fibre Channel switches, PCI host bus adapters, controller silicon and management chips for systems and peripherals, as well as the QLCG management suite of SAN management software solutions. QLGC is suffering from a serious weakness in the semiconductor sector. As one of the last high flyers in this sector to fall, QLGC has a chart which could frighten even the most die-hard bulls. QLGC was as high as $120 in December, and rallied to $97.69 in January following the rate cuts. However, the subsequent drop has been sharp and steep. On February 1, QLGC fell below the converged 200 and 50 dmas of $85.94, after reporting earnings on January 23. Following this significant drop, a huge gap formed on February 12, as the stock fell from $70.39 on February 9, to $55.31 on February 12, on the day that EMLX warned of a major slowdown. Since QLGC provides components for data storage systems, a slowdown in the data storage sector could be a short term kiss of death for shares of QLGC. In addition, numerous analysts have warned that the semiconductor inventory problem may not correct until later this year. Traders can take positions at current levels if the SOX.X continues to exhibit weakness, and stays below its 50 dma of $644.26. Conservative traders might want to wait for a break below the 52-week low of $39 on heavy volume. Set stops at $50. BUY PUT MAR-50 QLC-OJ OI=289 at $11.13 SL=8.25 BUY PUT MAR-45*QLC-OI OI=443 at $ 7.50 SL=5.25 http://www.premierinvestor.com/oi/profile.asp?ticker=QLGC ********************* PLAY OF THE DAY - PUT ********************* ABGX - Abgenix $30.88 -2.81 (-2.81 this week) Abgenix is a biopharmaceutical company focused on the development and commercialization of fully human monoclonal antibody therapies for a variety of diseases. Abgenix leverages its leadership position in human antibody technology by building a large and diversified product portfolio through the establishment of licensing arrangements with multiple pharmaceutical, biotechnology and genomics companies and through the development of its own internal proprietary products. Most Recent Write-Up Continuing weakness in the Nasdaq, particularly the biotech sector worked out favorably for our put play. ABGX rolled over from $34.81 and then $32.56 today, to reach strong support at the $30.88 level. This is consistent with the long term downward channel which was established in November. The pattern of lower highs in February kept ABGX rolling over from strong resistance at $38, $36, and $34. Should this trend continue, ABGX may break the heavy support level at $30, which dates back to last January. If $30 is broken on heavy volume, ABGX may fall to the $20 level. Conservative put players might want to wait for a drop below $30 on heavy volume before taking positions. Aggressive traders can take positions on another roll over from $32.58, if it is accompanied by weakness in BTK.X and the Nasdaq. We are moving stops to $34 tonight. Comments Watch the BTK.X tomorrow to determine its direction, as well as ABGX's. A break of 550 on the BTK.X would result in an increase in sellers. If ABGX takes out the $30 level, shorts will most likely jump on board. Rollovers from $32 would also provide an entry point into this put play. BUY PUT MAR-35*AZG-OG OI=68 at $5.75 SL=4.00 BUY PUT MAR-30 AZG-OF OI=33 at $3.38 SL=1.75 http://www.premierinvestor.com/oi/profile.asp?ticker=ABGX ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1606 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ The Sell-off Continues... New concerns about future corporate profits sent the technology composite to its lowest close since early January and the outlook for a recovery is grim. Tuesday, February 20 New concerns about future corporate profits sent the technology composite to its lowest close since early January and the outlook for a recovery is grim. The NASDAQ ended down over 100 points at 2,318. The Dow industrials also declined on weakness in finance stocks, ending 68 points lower at 10,730. The S&P 500 index was down 22 points to 1,278. Trading volume on the NYSE reached 1.10 billion shares, with losers outdistancing winners 1,754 to 1,326. Activity on the NASDAQ was moderate at 1.85 billion shares traded, with declines doubling advances 2,515 to 1,312. In the U.S. bond market, the 30-year Treasury rose 2/32, pushing its yield down to 5.44%. Sunday's new plays (positions/opening prices/strategy): Manugistics (NASDAQ:MANU) MAR60C/35P credit $2.50 strangle PolyMedica (NASDAQ:PLMD) MAR50C/22P credit $0.93 strangle QualComm (NASDAQ:QCOM) MAR100C/60P credit $1.38 strangle Intel (NASDAQ:INTC) JA02-40/A40C debit $3.75 calendar PerkinElmer (NYSE:PKI) MAR105C/100C credit $0.70 bear-call The Presidents Day Holiday was not kind to our premium-selling positions as the quoted option prices receded substantially from Friday's closing numbers. None of our new Short-Strangles traded at the suggested credits and only the PolyMedica play was offered near the target entry price. The PerkinElmer position opened at a lower premium, but the spread offered a favorable risk/reward ratio for bearish-outlook traders. Technology stocks started the day with a brief rally but Intel did not participate. The chip giant simply added to the negative sentiment, announcing it would reduce discretionary spending by at least 30% while avoid layoffs. Investors were not pleased and the stock tumbled. The target (short) call option premiums were trading for just a few cents but rather than avoid opening the LEAPS play, we decided to sell April options for a slightly higher credit and a lower cost basis overall. Portfolio Activity: Investors punished the market today, pushing the major indices lower amid worries that the U.S. economy's slowing pace will negatively affect corporate earnings growth for the next three quarters. Technology shares closed near the day's lows, with big-cap networking issues leading the sell-off. JDS Uniphase (NASDAQ:JDSU) and Cisco Systems (NASDAQ:CSCO) were among the worst performers as both stocks fell almost 10%. The computer hardware segment also fell precipitously with Hewlett Packard (NYSE:HWP) and Dell (NASDAQ:DELL) leading the downward movement. On the Dow, financial stocks were among the worst performers with losses in Citigroup (NYSE:C) weighing on the industrial average. The slide in blue-chip issues was checked by retail giants Home Depot (NYSE:HD) and Wal-Mart (NYSE:WMT), as both companies were able to hold on to small gains in the wake of favorable earnings news. In the broader market, defensive issues benefited from the selling, which was concentrated in growth stocks. Tobacco, utility and pharmaceutical shares edged higher and select Old Economy issues also enjoyed small advances. Some analysts say they are unconvinced that hi-tech companies can make a comeback in the near-term and investors are looking for clues about what action the Federal Reserve might take to stimulate economic growth. The best outcome is for the FOMC to fulfill market expectations and cut rates by a half percentage point at its March 20 policy meeting. Then we will begin to see bargain hunting in the technology group and hopefully, an end to the recent downward trend in the NASDAQ. There was little bullish activity in the Spreads section but Omnicom Group (NYSE:OMC), the second largest advertising firm in the world was a big mover after reporting quarterly earnings that beat consensus expectations. A new business unit, BBDO Worldwide recently became the exclusive worldwide agency for auto-maker Chrysler, and that segment was credited with boosting the company's overall revenues. Chief Financial Officer Randell Weisenburger announced in a conference call that the Chrysler account had contributed about $650 million out of total of $1.4 billion in new business for Omnicom in the quarter, an increase of 115% on the year. Shares in OMC rallied to a high near $95 and the value of our debit straddle (at $90) moved back to the original cost basis. For traders who have watched their option premiums erode in this range-bound market, a break-even exit may not be so bad. Another issue in that section, Grupo Televiso (NYXE:TV) dropped $2 to a recent low near $45 and now the stock appears to be in the midst of a large downward move. The first target will be the January lows near $42.50. A successful test of that area would suggest the beginning of a new rolling cycle and a move back to the $50 range. The small-cap group was one of the few areas of the market that performed well during the session. Our new positions in Zoltek (NASDAQ:ZOLT) and Answerthink (NASDAQ:ANSR) edged higher even as the technology segment came under renewed selling pressure. In the industrial group, Clorox (NYSE:CLX) moved as high as $37.15 and traders in the bullish calendar spread at $40 may have used the upside activity to sell March options in the long-term play. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** PCTL - PictureTel $3.97 *** Cheap Speculation! *** PictureTel (NASDAQ:PCTL) is engaged in developing, manufacturing and marketing visual and audio collaboration solutions. Visual collaboration employs videoconferencing, video streaming and data collaboration technologies to facilitate productive meeting environments that may incorporate video, audio and real-time and archived multimedia data. The company's products and services enable businesses, schools, medical facilities, government and other organizations to eliminate the barrier of distance so they can work together more effectively. PictureTel is organized into three distinct business segments, videoconferencing products, videoconferencing services and audioconferencing products, which consists of its MultiLink subsidiary. Earnings continue to drive the market and the activity is obvious in this case as shares of PictureTel have rallied over the past two days amid expectation of a favorable announcement. The price of PCTL, the world leader in integrated collaboration, rocketed another 20% during Tuesday's session on extreme volume and the potential for additional upside movement is excellent. At the same time, resistance at the previous trading-range bottom (near the sold strike at $5), and the inflated March option premium offer a position with a great time-selling opportunity. Traders who want to speculate on the future value of PCTL's stock should consider this conservative spread with a bullish outlook. PLAY (conservative - bullish/calendar spread): BUY CALL JUL-5.00 PTQ-GA OI=332 A=$1.25 SELL CALL MAR-5.00 PTQ-CA OI=118 B=$0.38 INITIAL NET DEBIT TARGET=$0.75 TARGET ROI=50% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=PCTL ****************************************************************** ABMD - Abiomed $28.31 *** Have A Heart! *** Abiomed (NASDAQ:ABMD) is a developer, manufacturer and marketer of medical products designed to safely and effectively assist or replace the pumping function of the failing heart. The company has been developing and is preparing to enter human clinical trials for the AbioCor Implantable Replacement Heart, a unique, battery-powered totally implantable replacement heart system, which may eventually become the first such device for end-stage heart failure patients. Abiomed currently manufactures and sells a temporary heart assist device, which is approved by FDA as the only device for the temporary treatment of patients with failing but potentially recoverable hearts. Abiomed shares rallied in late January after the company said it received permission from the U.S. FDA to begin initial trials of its replacement heart. The Food and Drug Administration granted Abiomed approval to implant AbioCor, its prosthetic replacement heart, in five patients as part of an initial clinical trial of the device. The device will be used in an attempt to keep alive patients with "end-stage" heart failure who cannot be helped by other available therapies, including heart transplantation. The FDA testing permission brings Abiomed a step closer to receiving approval to sell its unique artificial heart and Banc of America Securities offered a new "buy" rating on the company after the announcement. In addition to the FDA news, ABMD also recently withdrew its offer to buy Thermo Cardiosystems (AMEX:TCA), which suggests they are confident of the success of their new procedure. Traders who want to speculate on the recent bullish activity in ABMD and the potential for further positive developments can do so in a conservative manner with this synthetic position. PLAY (conservative - bullish/synthetic position): BUY CALL MAR-35.00 IBU-CG OI=344 A=$1.38 SELL PUT MAR-22.50 IBU-OX OI=275 B=$1.12 INITIAL NET CREDIT TARGET-$0.00-$0.12 TARGET PROFIT=$1.00 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $700 per contract. http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ABMD ****************************************************************** - CREDIT STRANGLES - ****************************************************************** APHT - Aphton $20.06 *** Premium-Selling! *** Aphton (NASDAQ:APHT) is a biopharmaceutical company developing products using its vaccine-like technology for neutralizing hormones that participate in many gastrointestinal system and reproductive system cancer and non-cancer diseases, and the prevention of pregnancy. Aphton's approach to the treatment of major diseases is to employ anti-hormone therapy. This hormone therapy involves neutralizing, or blocking, targeted hormones that play a critical role in diseases of the gastrointestinal and reproduction systems. Aphton has strategic alliances with Aventis Pasteur, SmithKline Beecham, Schering-Plough, and the World Health Organization. Since the plays that we offered on Sunday provided few favorable opportunities, we decided to look for some new candidates in this popular strategy. While we wouldn't normally use a biotechnology company for this technique, the option pricing in Aphton appears to offer a generous margin for movement and the company has few (expected) catalysts for volatile activity in the near term. In addition, we favor Aphton's diverse portfolio of hormone products and owning the issue at a cost basis near $14 isn't a terribly unpleasant alternative. PLAY (moderately aggressive - neutral/credit strangle): SELL CALL MAR-30 HQY-CF OI=0 B=$0.38 SELL PUT MAR-15 HQY-OC OI=0 B=$0.43 INITIAL NET CREDIT TARGET=$0.88-$1.00 ROI(max)=18% UPSIDE B/E=$30.88 DOWNSIDE B/E=$14.12 http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=APHT ****************************************************************** ALEX - Alexander & Baldwin $27.50 *** Probability Play! *** Alexander & Baldwin (NASDAQ:ALEX) is a diversified company with most of its operations centered in Hawaii. Its Transportation segment carries freight between various United States and Canada, Hawaii and other Pacific ports, and provides terminal and cargo logistics services. The Property Development/Management segment develops and manages a wide range of residential, commercial and industrial properties. The Food Products segment grows and also processes raw sugar and molasses, invests in a sugar refining business, produces and markets coffee, and generates and sells electricity. Ocean transportation operations of the company are conducted by a wholly owned subsidiary, Matson Navigation, and several Matson subsidiaries. Real property and food operations are conducted by the company and other wholly-owned subsidiaries. ALEX is a good candidate for a premium-selling position because it has a small trading range with support near our downside cost basis and overhead supply below the upside break-even point. In addition, there are no apparent news items or events that will substantially change its character prior to the March options expiration. The issue is exactly in the middle of our profit envelope and we will use the recent volatility and the inflated option prices to open a neutral play with a favorable premium. The probability of the share value reaching our sold strikes is rather low, but there is always the possibility of a significant change in the technical outlook, so monitor the position on a regular basis. PLAY (conservative - neutral/credit strangle): SELL CALL MAR-30 XQD-CF OI=103 B=$0.38 SELL PUT MAR-25 XQD-OE OI=0 B=$0.31 INITIAL NET CREDIT TARGET=$0.75-$0.81 ROI(max)=10% UPSIDE B/E=$30.75 DOWNSIDE B/E=$24.25 http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ALEX *************************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=1634 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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