The Option Investor Newsletter Sunday 02-25-2001 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/022501_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 2-23 WE 2-16 WE 2-9 WE 2-2 DOW 10441.90 -357.92 10799.82 + 18.37 10781.45 - 99.10 +204.12 Nasdaq 2262.51 -162.87 2425.38 - 45.59 2470.97 - 91.09 -120.80 S&P-100 642.64 - 32.88 675.42 - 6.93 682.35 - 11.97 - 3.58 S&P-500 1245.86 - 55.67 1301.53 - 13.23 1314.76 - 17.77 - 5.48 W5000 11500.70 -528.90 12029.60 - 94.71 12124.31 -169.65 - 77.20 RUT 477.45 - 21.83 499.28 + 2.23 497.05 - 5.84 + 2.82 TRAN 2930.07 - 64.71 2994.78 - 18.64 3013.42 - 11.82 +136.57 VIX 30.34 + 5.26 25.08 - .07 25.15 + 1.06 - .39 Put/Call .71 .89 .73 .60 ****************************************************************** Finally the shorts covered! By Jim Brown It was not pretty but we will take everything we can get. At 2:PM Bear Stearns chief economist, Wayne Angell, a former Fed governor, told his staff that the Fed would cut rates by -.50% in the first three days of next week. He gave it better than a 60% chance of happening. Immediately buyers came into the market. Not in volume but most stocks started showing immediate improvement. Once the bounce was definitely underway there were several attempts to sell into the rally but they all failed. Once it was apparent that the rally was going to stick the shorts ran for cover. Most charts show huge gains in the last 30 minutes that are characteristic of short covering, not investor buying. There was a rumor that the Fed was going to cut over the weekend to avoid the irrational exuberance and +300 point gains like we got on Jan-3rd. I said on Thursday night, "what other bad news can we get that is not already priced into the market?" Okay, how about Motorola and Qualcomm? I give up! Nyse:MOT warned before the opening bell that they could post a loss for the first time in 15 years. That went over really well! The company said it would fall short of estimates and blamed a significant slowdown in orders across all its business lines. Not only kiss off MOT but Nyse:NOK, Nasdaq:ERICY, and Nasdaq:QCOM as guilty by association. Qualcomm dropped -$17 intraday to $50.13 after it took advantage of the Motorola warning and drop to make an announcement of their own. QCOM said there would be a delay in some third generation deployment in Europe until 2004-2005. European telecommunications operators had forecast that 3G technology would be ready by 2002. The $50.13 low was it's lowest since Oct-1999. Later in the session the company reiterated that demand for the current 2000-CDMA 3G chips was still in line with previous estimates. QCOM regained a substantial portion of the intraday loss and closed the day down only -5.13 at $61.81. Most analysts with a microphone downgraded QCOM but MSDW upgraded the stock to a strong buy from outperform. He said the huge drop in the stock provided an entry point for investors since the new 3G product was not really a factor in current estimates. Good call! I like it when an analyst goes against the trend and draws a line in the sand. $60 had been strong support since last May and many investors made a quick, safe $10 on the drop today. Nyse:IBM was the biggest loser on the Dow with a drop of -4.90. The culprit was the Nasdaq:SUNW earnings warning. With a drop of -50% in earnings estimates for the largest U.S. server producer, analysts immediately realized that IBM with $88 billion in revenues, and the number one server seller worldwide, was not going to come through the recession unscathed. The broad based drop in computer sales will hit IBM as well. IBM may not drop estimates -50% like SUNW but it will warn analysts say. IBM was one of the few stocks that had held the high ground through the recent weakness but over the last three days IBM has lost almost -$15. As I said before the catalyst for today's bounce was a note from Wayne Angell at Bear Stearns. He gave a credible voice to what others were wishing more than believing. The flood of negative sentiment had moved from stocks to a Fed that was behind the curve but did not have the guts to admit it. The almost unanimous call for another rate cut quick has escalated into a 60% chance of an intra-meeting cut next week. Critics claim the Fed can't cut for fear the markets will not react and then have egg on their face. I said several times this is totally flawed. The Fed could come right back and cut again and again if needed. They have just gotten started and could cut another 2.0% if needed to jump start the economy and the markets. We are only three weeks away from the Fed meeting so any intra-meeting cut has to come this week to have any real impact. A further cut at the meeting and we would be on an interest rate roll! A reason given for part of the drop this week was Turkey. The Lira was devalued and there were several rumors that a couple hedge funds were trapped in currency trades. Memories of Long Term Capital and how close we came to a banking system failure were quickly revisited. The Lira was trading at 674,000 to one U.S. dollar. That would make any $40,000 dollar American car about a 26 billion lira investment. Give me a Grand Wagoneer and a two ton truck please. You would need the truck to carry your cash from store to store. A cart with $150 of groceries is worth about a billion lira. Interest rates were running around 6000%. That means it cost 60 lira to borrow 1 lira. So explain to me why a hedge fund would even remotely consider gambling in this currency? I doubt we will see any truth to those rumors. I would however believe it possible that there was some involvement in the South American currencies and possible repercussions from there. Chile and Argentina both suffered fluctuations from the Turkey problems. The short covering rally may have come too late for many investors. Margin calls are up and as of Thursday were running better than twice the normal rate. With the number of stocks still down on Friday that statistic is probably even worse. Liquidations of stock in lieu of adding cash to already strapped accounts will likely run into Monday and maybe Tuesday. The offset to this is investors that have been waiting for an entry point. I have been dying to be bullish for a week. The key word here is "dying." What a depressing week. I am going to take one of my tag lines of "don't buy too soon" and have it etched on my monitor in big block letters. I have been telling investors to wait for the bounce for two weeks and then I bought the dip instead. Have you ever opened a position only to look back the next day and wonder what you were thinking? I am sure that never happened to anyone but me. I mean we were very oversold and everybody just knew the SUNW news was already priced in, right? Fortunately Wayne Angell came to our rescue. Or did he? Does anybody think Alan Greenspan is a stubborn guy? Do you think maybe he took offense at a former Fed governor making a public call like that and stealing the Fed Head's thunder? What do you think will happen to the markets now if there is no rate cut by the close on Wednesday as forecasted by Angell? You got it, retest the lows again. So Greenspan is in a box again. Cut rates the first three days and it looks like somebody else is pulling your strings. Don't cut rates and the market tanks again. Catch 22. I am glad it is his job and not mine. Another analyst was saying today that Alan can't cut rates just to bail out the stocks market. The Fed has said on numerous occasions that equity prices have no impact on Fed policy. Alan however has taken great pains to talk down the last couple of bubbles as we all know. I believe the "stock prices are not important" mantra is bull. Greenspan has said that consumer confidence is very important to the health of the economy. There are 66 million brokerage accounts in the U.S. plus untold millions of fund/retirement accounts. It would probably not be out of line to say more than half of the U.S. population has a direct interest in the stock market. What happens to consumer confidence when they get their statements at the end of each month? I will give you a clue, it is not going up. Investors are not taking their profits out to buy new houses, cars, boats or retirement property. Plans to do those things are on hold and investors are frustrated and scared. I think the stock market is the prime mover for consumer confidence. Now, do you really think Alan does not care about stock prices? How much of the budget surplus last year was funded by windfall profits from the 1999 Internet bubble? The Nasdaq alone rose over $3 trillion. Not everybody sold but many people sold over and over. Do the math using your capital gains rate or even worse your personal tax rate. I will save you the trouble, it was billions. Now how much do you think the last 12 months of the bear market have contributed to the surplus? I would think significantly less. In my humble opinion Alan actually cares a lot about equity prices. Now, if you were Greenspan would you bite the bullet and cut in the next three days anyway and make Angell a hero or would you risk waiting until Thursday or Friday and risk the market falling again? Make no mistake about it. The rally on Friday afternoon was a short covering rally only. I saw no evidence of investors rushing into stocks because they were excited about earnings. This was simply a technical short covering. Traders who had been short all week and seeing a good possibility of a rate cut early next week, took profits and closed positions. The rumor of a weekend rate cut was discounted on the surface but many short traders probably thought twice about closing just in case. Here we are again at a crucial point in the markets. The Nasdaq has now closed three days straight within 20 points of 2250. (2269, 2246, 2262) Resistance is at 2280-2300. Volume on Friday, in spite of the rally, was lighter than the previous down day. No confirmation of the rally came from any internals. Decliners beat advancers and down volume beat up volume 2:1. Sound like a real rally to you? While I may sound bearish I don't want to alarm you. I am just reporting the facts as I see them. My bias is still for the Nasdaq to move up on an oversold rally soon. The 2250 level has been broken but basically is still a price magnet. However there are still quite a few analysts saying we have not seen the wash out yet. They are forecasting 2050 as the next support level with some calling for sub 2000 numbers soon. There will always be bears and if we fell to 1500 they would be saying 1200. The truth will not be known until it happens. How much lower can it go? There is $4 trillion currently invested in stock funds. There is over $2 trillion parked in money market funds. This does not count idle cash in brokerage accounts already. If investors felt the urge to invest in cheap stocks there is more than enough money available to power a monster rally. Luring this cash off the sidelines is the problem. The reality for Monday is a war between the bulls and the bears. Bears will be cautious with a possible rate cut announcement in every news bulletin. This may give the bulls an edge and allow them to take back some ground. Remember, the market hates uncertainty and we will be up to our ears in it. There will be more earnings warnings and more downgrades. The only positive catalyst we have to look forward to is the rate cut. The economic calendar is loaded with problems for the week. Tuesday has Durable Goods, New Home Sales and Consumer Confidence. Wednesday we get the Q4 GDP and Chicago PMI. Thursday is Personal Income and Spending, Construction Spending and NAPM. Friday is the all important Michigan Sentiment again. Even worse than the economic reports is the Greenspan calendar. Wednesday he testifies on Monetary Policy before the House Financial Services Committee at 9:30AM and Friday he testifies on Current Fiscal Issues before the House Budget Committee at 10:AM. Those two appearances could have a block buster impact on the markets. Another Bear Stearns analyst said that if Alan does not cut rates before his testimony then the markets will assume the Fed has backed off their aggressive stance and probably head even lower. A cheerful thought! I would caution investors about rushing into the market next week unless your plan is to trade it. You must also decide before going long if you want to be long during the Greenspan speeches. Those have proven hazardous in the past. Remember we only want to trade in a stable environment and in the direction of the trend and right now the trend is still down. If we can get back over 2300 and hold it then join the party. This goes for conservative traders also. Because we are so oversold there is the possibility of a couple hundred point bounce on good news. To repeat, the plan I am suggesting for long call traders is to go long over 2300 and stay flat under 2300. Let the market make the decision for you. Take the stress out of trading by planning your trades and sticking to the plan. Trade smart, enter passively, exit aggressively! Jim Brown Editor ************************************ Spring Options Workshop and Bootcamp April 5th-9th, Denver Colorado ************************************ OptionInvestor is proud to announce our third annual Spring option workshop in Denver Colorado. This power packed five-day event is structured to fully educate you on advanced option strategies and will make you a better and more profitable trader. If you attended the March Denver Expo last year and thought it was the best function you had ever attended.. You haven't seen anything yet! Great food, entertainment, education and just plain fun in sunny Denver. The biggest complaint in March was the massive weight gain experienced by the attendees from the gourmet menu. We know how to put on a function. Ask anyone who came last March! 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********************* 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=1694 ************************************************************ ************** EDITOR'S PLAYS ************** Play updates! A very painful week! The Nasdaq opened down on Tuesday and never looked back. Traders should have never started any of the plays mentioned in last weeks column. Remember, we never play calls in a down market. Even a helium ballon goes down in a down elevator. With that said, AMCC appears to have put in a strong bottom at $35 and I would suggest selecting a different call strike than the one from last week. I would play the March-$40 call AEX-CH @ $3.50. Remember, wait for a rising market. ******************* CIEN - $85 call The down market drowned CIEN in a sea of red until Thursday. CIEN appears to have put in a bottom at previous support of $70 and is ready to rally if the market cooperates. I picked the ITM $70 call at $7.88 since there is only 3 weeks left. $4.50 is intrinsic value already making the time value only $3.38. After a +$3 move it will be all 100% delta and move dollar for dollar. Only play in a rising market and plan to exit around $90. ************ MUSE - $70 call MUSE died at the open on Tuesday with the markets falling and never recovered. There was a jump on short covering at the close on Friday but no sign of support. I am dropping MUSE as a candidate. **************** QQQ - Calls You should not have entered this play due to the down market. The bounce off $48 on Friday was short covering but if we get a rate cut and positive Greenspan remarks then I could easily see $60 as a target. ******************* NEW PLAYS ******************* JNPR - Mar-$80 Call Is it a bottom or is it short covering? We will not know until next week but after selling off for several weeks we could get a giant jump like the Feb-14th action if the market cooperates on a rate cut. Only play if the market is rising! **************** My market view is very guarded given the minor rally at the close on Friday. There was no confirmation and no volume. Without a rate cut and with Greenspan speaking there are more reasons for the market to go down than up. The fear of a possible rate cut will keep the shorts confused and many out of the market. That is the only positive thing I can see at this time. Only enter these plays if the market is rising on good volume. This could be a dangerous week or an explosive week, we just don't know which yet! Of the recommended plays above I am long CIEN, JNPR and QQQ at this time. Good Luck Jim Brown ************************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=1707 ************************************************************** **************** MARKET SENTIMENT **************** Got A Light, Mr. Angell? By Austin Passamonte These markets have been setting up for a short-squeeze tinderbox over the past several sessions. Every good inferno begins with one tiny spark when all conditions are right. Friday afternoon's market call from a former Fed member may have lit the next market bonfire to flicker, lick or blaze its way up all major index charts... the amount of heat produced remains to be seen. Friday was not at all the session we expected for the first 5.5 hours of action. Thursday's bullish reversal was quickly extinguished long before the bell and further selling was rampant once again. We were part of that furious action as calls were scaled out of early in the session during our own nimble time of capitulation. When the VIX soared to 34.00 and then 35.00 however, every household dime was dug out from beneath sofa cushions to purchase all the index calls we could possibly afford. Our fondest wish is that you did the very same and much more of it! Only a few sessions each year see bullish spikes to that extreme and they are all but lead-pipe locks. We might have over-extended our financial risk a tad (and then some) but experience has shown when it's time to shift gears, tromp the accelerator and dump the clutch when that light tree all turns green in front of us on the drag strip. We trade very simple by nature with few rigid rules but one of those are to buy calls & sell put-credit spreads on VIX above 30.00, and buy puts & sell call-credit spreads on VIX below 20.00 without question or hesitation. If those extremes continue, keep buying more. This approach only materializes a handful of times per year, is by far amongst the biggest, easiest of wins and has never failed us yet (we had to say that, didn't we?). Likewise, we never trade bearish with a VIX over 30 or bullish when under 20 as learned from two very large monetary losses long ago when we did. For traders who may have missed Friday's bottom spike, rest assured there will be a few more entries like this on either side of VIX bearish 20/bullish 30 again this year and each year for all of us to eagerly take advantage of. Keep an eye on the VIX(VXN as we learn its behavior) for these infrequent but very high-odds setups to occur. What next? You had to ask. Our best guess (what we're paid to do) is for the relief-rally to continue on strength of rate-cut rumor. All we needed was a spark and that's likely the match tossed towards gasoline. Major indexes are oversold to an extreme, the VIX is still high and put/call ratio disparity lost all sense of reason days ago. This also reflects short interest in the equity markets as well. Bears have shorted everything that wasn't tied up or nailed down and massive profits are the result. Harvesting/protecting those gains should be a catalyst to rally. Every powerful rally we can recall emerges from times exactly like this when there is absolutely no reason for it to do so. Likewise, every market slide comes at a time when the world is all looking up. Do you recall talk of a Dow's close above 11,000 being the start for a trek to 12,000+? It may have seemed like forever ago (or 800 index points on Friday) but it was less than two meager weeks past. My, my, how times do change. Where might the Nasdaq markets be two short weeks from now? Considerably higher than where they are tonight would be our guess. The tech index has outwardly been sold into slavery and outwardly treated like the plague. Inwardly, there are millions of tech bulls still in love with their fallen angels eager to rekindle the romance. Sure, there may have been some harsh words recently spoken by loved ones but it will soon be time to kiss & make up. Flirtatious interest shown by other parties will ignite those two age-worn emotions of fear & greed. Lest we think it's different this time and people have changed, we need a refresher course on Human Psychology 101. Human nature is the only predictable constant we can count on in life and upon market action. That being said, we have identified a few key points of overhead resistance for the big four. Should prices reach these lofty highs and struggle, we may consider various entry/plans. Dow: 10,700 - 10,750 is cluttered with various major moving averages and Fibanocci retracements from recent high/low readings. NDX: 2,360 is the 20 DMA and 50% retracement of recent extremes. 2,440 is the 50 DMA and 62% retracement of recent extremes. SPX: 1300 is the 10 DMA and 50% retracement of recent extremes. 1325 is the 20 & 50 DMA and 62% retracement of extremes. OEX: 676 is the 50% retracement of high/low extremes 690 is the 20 & 50 DMA and 62% retracement of extremes. These are key levels to watch in the broad indexes for price action to cluster near. All could be approached prior to week's end and will offer formidable resistance at that time. A relief rally has been brewing since late last week and needs a catalyst to propel it. We may have found exactly that. We do not consider any move from here an ultimate market bottom or even sustainable rally, but it promises to be highly tradable and that is all we ask. After all, we are traders! It's still important to trade the daily trend and for now that appears to be going up. Play scared and take profits when accrued. ****** VIX Friday 02/23 close: 30.34 VXN Friday 02/23 close: 72.04 30-yr Bonds Friday 02/23 close: 5.48% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Friday (02/23/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 680 - 665 7,637 7,838 .97 660 - 645 3,269 5,915 .55 OEX close: 642.46 Support: 640 - 625 225 6,854 30.46 620 - 600 36 12,945 359.58 Maximum calls: 700/6,150 Maximum puts : 600/6,581 Moving Averages 10 DMA 670 20 DMA 689 50 DMA 692 200 DMA 751 NASDAQ 100 Index (NDX/QQQ) Resistance: 60 - 58 86,511 30,864 2.80 57 - 55 77,353 41,835 1.85 54 - 52 32,898 22,757 1.45 QQQ(NDX)close: 51.18 Support: 50 - 48 28,092 38,223 1.36 47 - 45 1,921 14,042 7.31 44 - 42 452 3,072 6.80 Maximum calls: 60/58,280 Maximum puts : 50/26,186 Moving Averages 10 DMA 54 20 DMA 58 50 DMA 60 200 DMA 80 S&P 500 (SPX) Resistance: 1300 12,598 19,395 .65 1275 10,331 20,136 .51 1250 5,507 19,494 3.54 SPX close: 1245.48 Support: 1225 1,222 12,415 10.16 1200 1,343 20,946 15.60 1175 223 4,908 22.01 Maximum calls: 1350/46,708 Maximum puts : 1325/42,538 Moving Averages 10 DMA 1294 20 DMA 1325 50 DMA 1324 200 DMA 1407 ***** CBOT Commitment Of Traders Report: Friday 02/23 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 -2538 -2625 -4571 -4782 Total Open interest % (-26.63%) (-24.98%) (-18.48%) (-18.90%) net-short net-short net-short net-short NASDAQ 100 Open Interest Net Value +2988 +4104 -8493 -8143 Total Open Interest % (+15.44%) (+18.73%) (-13.44%) (-12.85%) net-long net-long net-short net-short S&P 500 Open Interest Net Value +77015 +73789 -96492 -92910 Total Open Interest % (+40.10%) (+40.21%) (-12.70%) (-12.12%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: Once again we have the Small specs and Commercials holding their respective positions with little change. The Commercials continue to indicate that we could be in for further downside activity. 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 02/20 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/022501_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=1700 ************************************************************ *************** ASK THE ANALYST *************** Fed Watch By Eric Utley Last weekend, I speculated that the FOMC will cut interest rates before its meeting near the end of March. That speculation spread last week and induced a bit of fear in the shorts, who feverishly covered late Friday. Additionally, that late-day rally Friday felt as if there were some new and big longs buying stock. It's only a hunch on my part, but the buying felt pretty big. So now that the market is at least discounting the possibility for an intermeeting rate cut, traders might want to consider how to trade around such an event if it does transpire. The best way to profit from a surprise rate cut by the Fed, while taking the least amount of risk, would probably be with the banks, brokers, retailers and cyclicals. The techs are likely to stage a big rally if the Fed does cut rates, but in all reality, it may be best to sell into the tech rally because fundamentals in that group have not even remotely rebounded. Conversely, if the Fed does not move next week, I would think there exists a strong chance of the Nasdaq Composite (COMPX) falling as low as 2000, or even breaking down below that level. The reason is because the market discounted the possibility of an intermeeting move last Friday, so there's that expectation already built into the market. And a disappointment in the form of the Fed not cutting might give us the capitulation day we've been waiting for on the Nasdaq. Moreover, I can almost guarantee we haven't heard the last of earnings warnings from the tech sector. And as long as the fundamentals continue deteriorating in the tech sector, the excessive downside in share prices will continue. Send your opinions of this column along with stock requests to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- JDSU Short I put on several trades last week, gaming both the long and short side. I chose to review the trade I put on in JDS Uniphase (NASDAQ:JDSU) last Tuesday because I think it represents a relatively simple trade. All I did was hypothesized that the tech sector would continue selling off, waited for a good execution and took profits. I expected the Nortel (NYSE:NT) blowup to have a lasting and negative impact over the weekend and result in continued selling in the optical networking sector. In addition, I believe JDSU was downgraded Tuesday morning. If I recall correctly, the Nasdaq futures were somewhat higher Tuesday morning before the open, despite the looming pessimism over the tech sector. However, as soon as the bell rang the pessimism was evident in the cash index as the Nasdaq Composite (COMPX) precipitously fell and JDSU was met with very heavy supply. I normally don't like to trade within the first half-hour of the day because of the whipsaws that tend to take place. However, the selling in JDSU was so rampant that I decided to take on some puts as soon as the stock broke below its intraday low from the previous Friday. I held the puts for a few points in the underlying and when the shorts appeared to be buying the stock back and taking profits, I did the same thing and blasted the puts for a decent profit. JDSU - 5 minute ---------------------------- American Tower - AMT What do you think of AMT? Good way to play the growth in wireless voice/data? Capital expenditures should now begin to bear fruit, and appears to have strong support at current levels. - Thanks, Dave I'll be honest with you, Dave, I don't think the wireless sector is a very friendly place to put money to work right now. The big players in the wireless space, such as Nokia (NYSE:NOK) and Motorola (NYSE:MOT), among others, are facing severe downturns in demand and a softening in their underlying businesses. As such, I would expect that slowdown in consumer demand for wireless products and services would eventually catch up with American Tower (NYSE:AMT) - the company is an operator of network and communications towers. In addition, American Tower, like many highly-leveraged telecom- related companies, is cash flow negative. It continues to lose money from operations and is expected to do so for quite some time. Plus, I did notice the company has some debt on its balance sheet. To be perfectly blunt, I don't think AMT is the kind of stock you want to own in the current market environment. The company is a money losing, leveraged firm operating in an industry with a severe lack of visibility. But let me make it clear that I'm not blasting AMT...as always, I'm just giving my readers an honest take. Finally, I don't like the technical picture of AMT. The daily chart below reveals that AMT has bounced off the $30 level twice in the past, and although it may provide support once again, I don't think it is prudent to try to pick a bottom in a stock like AMT. AMT - daily What's more, this weekly chart below reveals a pattern of long liquidation, consolidation and subsequent liquidation. It appears that AMT may be breaking down from its most recent consolidation and headed to new relative lows. AMT - weekly ---------------------------- Cheap Net Stocks First of all, I find your technical analysis with fundamental backdrop very valuable. I've been searching for some beaten down tech stocks that have been in bases for a couple of months at least. HLTH, DCLK, GX are three such beaten down names. I know for sure that [the] Internet will not disappear. Do you think that Internet stocks will become good speculation candidates going forward? Are these charts investment worthy? Do you typically wait for a stock to cross 200 day moving average before entering trade on long side? Please pinpoint entry points. - Thanks in advance, Sanjay Thank you for the compliments, Sanjay. Internet stocks may become a decent speculative medium over the next few years. But you must realize that these Internet companies, such as DoubleClick (NASDAQ:DCLK) will NEVER realize the hyper-growth rates they enjoyed not to long ago. And before you decide to swoop up some cheap Net stocks hoping they'll rebound, just remember that stock prices can always go lower (see: Priceline (NASDAQ:PCLN) and Etoys (NASDAQ:ETYS)). Shares of DoubleClick do appear as if they've found bottom and are now attempting to form a base. My only concern is that the current trading range is merely a short consolidation range and that DCLK would rollover and trade well below the $10 level. However, as long as the $10 level holds, or thereabout, DCLK might be worth a speculative look. I think the best entry point would be a bounce off the lower end of its range around $10. If you were to buy the stock around $10, I think it's almost a necessity to set a fairly tight stop just below the entry price. Another entry point might be provided on a breakout above the descending trend line which has capped DCLK's recent rally attempts. But, I'd be very cautious buying breakouts in the current tech environment. DCLK - daily ---------------------------- 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. ************* COMING EVENTS ************* For the week of February 26, 2001 Monday ====== Existing Home Sales Jan Forecast: 5.00M Previous: 4.87M Tuesday ======= Durable Orders Jan Forecast: -2.50% Previous: 2.10% Consumer Confidence Feb Forecast: 111 Previous: 114.4 New Home Sales Jan Forecast: 923K Previous: 975K Wednesday ========= GDP-Prel. Q4 Forecast: 1.10% Previous: 1.40% Chain Deflator-Prel. Q4 Forecast: 2.10% Previous: 2.10% Chicago PMI Feb Forecast: 41.30% Previous: 40.20% Agricultural Prices Feb Forecast: NA Previous: -2.0% Oil & Gas Inventory 23-Feb Forecast: NA Previous: 277.1MB Thursday ======== Auto Sales Feb Forecast: 6.5M Previous: 6.7M Truck Sales Feb Forecast: 7.0M Previous: 7.5M Initial Claims 24-Feb Forecast: 350K Previous: 348K Personal Income Jan Forecast: 0.50% Previous: 0.40% PCE Jan Forecast: 0.60% Previous: 0.30% Construction Spending Jan Forecast: 0.50% Previous: 0.60% NAPM Index Feb Forecast: 42.00% Previous: 41.20% Mich Sentiment- Final Feb Forecast: 87.8 Previous: 87.8 Friday ====== ECRI Wkly Leading Indx Feb Forecast: NA Previous: -2.8% Week of March 5th ================= Mar 05 NAPM Services Mar 06 Productivity-Rev. Mar 06 Factory Orders Mar 07 Consumer Credit Mar 08 Initial Claims Mar 09 Nonfarm Payrolls Mar 09 Unemployment Rate Mar 09 Hourly Earnings Mar 09 Average Workweek Mar 09 Wholesale Inventories ************************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=1717 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 02-25-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/022501_2.asp ************** TRADERS CORNER ************** How Bullish Should You Be? How Bullish Do I Feel? By Renee White The opposite of yelling "FIRE" in a dark theatre is yelling "RATE-CUT" when the market is making a historical lower low. The timing of that call just smells funny to me. If you have been playing this market with the wind to your back, another lower low in Nasdaq proved profitable. Like I said last week, if things did not improve early, I would re-enter protective put plays that I had prematurely exited due to travel plans. This is exactly what I did. I felt the market risk was clearly to the downside. Therefore, I bought protective puts to either capture profits from a slide or to buffer my account balance while choosing to hold on to existing long shares. The insurance price of the puts would protect me, and if I was lucky enough to see a big bounce, I could exit those with profits. Sometimes I think I have the worse luck timing meetings, conferences and business, which takes me away from my trading desk. I live in the suburbs so once I leave for a meeting, the traffic and distance forces me to miss most of the trading day. I was able to watch the first 1.5 hours of trading Friday morning. Feeling like the market was going to tank further, I struggled to decide if I should place stops on my profitable put plays if a hard dip occurred, followed by a rally. Or if I should enter higher limit orders for put exits, to profit from the panic of selling due to the continued fall I anticipated. I finally decided to do a little of each. I placed both stops, and limit orders, while leaving other orders open for good measure. I returned 10 minutes before the close and saw the big bounce. Unfortunately, nothing filled. My orders were all 1/4 - 1/2 point out of range and therefore, not triggered. Once again, I had lost an opportunity to take maximum profits being away at another meeting. I've said it before: your bias may be right, you may know the play, but executions make or break you. At the close, I heard about the potential rate-cut next week so many times that it began to seem odd. Something didn't smell right. Even though I decided to take some profits off the table, I held on to others. At market close, I kept asking myself why I held those since there was clear strength going into the close. I'll share my thoughts. It was odd how many times I heard the rate-cut comment in the final minutes of the market. Having learned to question the talking heads with a contrarian view, my immediate reaction was it felt like brainwashing. I mean, what better comment to cause a quick short-covering reversal when the NASDAQ is plummeting to historically lower-lows? Did any one else think the timing of that comment was odd other than me? It just seemed way too perfect. Could some big money have been on the wrong side of the slide? I'll gladly be humbled if I am wrong, but I think betting on a cut next week is risky. Knowing your trading style, risk tolerance and time frame is critical here. Opportunity is opportunity, no matter where the market is. But if you are looking for safe entries for longer term trades, or even intermediate swing trades, think things through a little bit deeper, and further away from the hype. Being late for a reversal entry is much less painful than another potential train wreck. Let's review a little. During corrections, the market reacts anticipatory. However, if a true recession materializes, those who anticipated a quick bounce and recovery get creamed for early entry. Nothing but cash is safe in a real recession. Remember, the definition of a recession is an economic contraction, not just a market correction. By the book, a recession is at least two consecutive quarters of negative GDP growth. It does not turn into a depression until it is 6 consecutive quarters...18 months. Therefore, a recession lasting 1 year or more is always likely once it begins. Our last GDP report showed major slowing, but it was not a negative number. Still, the damage occurs to the businesses well before the compilation of data for reports. That's why money has not been eager to jump into the markets this year; the second half of the year is starting to smell. Will our next GDP be our first negative report? Don't step in front of this freight train loaded with too many long positions until economic numbers prove prudent. I'll only be playing the short side because even if I am wrong, the huge overhead resistance and poor April earnings will help protect me. In a true recession, people become afraid to spend and borrow. They hold off on everything other than necessities until everything "feels" safer. Cash is king. Recessions hit all industries. The safest are anything you eat, drink or smoke. That doesn't mean those areas will fly, just that they are necessities and their profits will be more stable. Lately, lay-offs are occurring faster than rate cuts. The Fed obviously was late to the game. The damage is there. I hope that quick large cuts can save the depth and length of damage. Still, businesses don't bounce back that quickly. They do not lay off 10,000 employees one month, just to hire them back 4 weeks later. Of course in the meantime, normal people also scale back on spending. Media will bombard every household with the bad news; lay-offs will speak for themselves, while advertised price cuts appear in red everywhere. Even lower rates have a hard time promoting business activity, as in 1929. Banks hate to loan money to shaky businesses and people without jobs. This is why the crash of 1929 didn't bottom for several years. A stalemate occurred when it became hard to encourage people to spend, encourage banks to loan, or people to borrow. Regardless of what the Fed wants, if they get behind the curve and fail to cut rates soon enough, things can quickly spin out of control until all systems catch-up with each other. Right now it looks like catch-up isn't likely until a period that is typically weak for the markets; post April & into summer at best. That alone could depress things until fall. Rate cuts do not guarantee an immediate rising market. We are in a critical period here. I'm sticking to a downside bias. The way I see it, a potential rally is just potential, until it materializes and holds! Until then, I'm playing conservatively. This chapter is clearly not over yet. ***** The Fed, Reg FD, Silicon Valley By Janar Wasito I went out to lunch with a friend from graduate school recently. He had co-founded one of the two start-ups I worked for while at Stanford. How times have changed. While ordering our meal at a restaurant in downtown Palo Alto, I was struck by how empty the place was -- basically just us and one of Rich's classmates. But it also struck me as a time to put some of the changes in the Internet economy into perspective. First, the Fed. Now that the Nasdaq is back at 1998 levels, the financial press seems to be clamoring for a rebound based on the Fed easing cycle. But liquidity is not the problem. Money is available. It is available for good ideas and profitable initiatives. The problem is ROE, or return on equity. Take the build out of 3G or third generation cellular phone networks. Billions have been spent on the licenses alone, but how is that investment going to result in a return for the company? That is the issue. The Fed grabs headlines. An inter-meeting cut will grab attention and pump up the market for a day or two, but the real problem has nothing to do with interest rates, it has to do with the operational strength and profitability of individual companies. Which brings me to a related topic, Regulation FD. What do CSCO, EMLX, and PMCS have in common? Recent, large price drops. Prominent positions in the networking sector. Most importantly, perhaps, from the standpoint of how drastically their stock prices move, though, is regulation FD, or Full Disclosure, which has been promulgated by the Securities and Exchange Commission in the last 6 - 9 months. All of these companies announced significant earnings shortfalls in the last few months, and they all got hammered. But the analyst community heard about it when you and I, the retail investors, did. They were just as blindsided by the news as we were. That is a significant change from the situation prior to 2000, when analysts often received information in advance of the public. This was also in an era of expanding earnings and, I think, was one of the related factors in pushing the earnings multiples of leading technology companies to exaggerated levels. The reason that this is important to retail investors is that we now hear about the news when the big players do. This makes communicating with other investors more important. It also makes a web site like OptionInvestor.com more valuable, since it aggregates a lot of information in a timely manner. But, on the downside (or upside, if you are put player), it will tend to compress company valuations. It is a background factor to be aware of. Finally, a report from the frontlines. Although the economy is apparently going through a tough period, Silicon Valley is in better shape than ever. Now is a great time to be an entrepreneur here. Sure, a lot of the froth has been blown off the top. But, the companies that are going to survive the dot com melt down are moving ahead. I was working out at my yuppie boxing gym with someone from hotjobs.com the other day, and he said that no one has been laid off, and that the company is doing some important strategic alliances with other companies in the field. Rich, the former co-founder of a dot com, was in town touching base with some folks about new ventures in incubation mode. Tom, who I met on a scuba dive expedition off the coast of Australia (one part of a one year honeymoon), is back in town, doing lunch, and advising companies; he sold his dot com to INKT at the end of 1999. Venture capitalists have money, and though they had a rough year in 2000, many of the experienced players saw it coming, and their investors could not be too disappointed after the run in the late 1990s. In short, now is the time to invest human capital into new ventures...now, when magazine covers are proclaiming the death of the new economy, yada-yada-yada. In the next few months, it will also be a decent time to dollar cost average some long range funds into dot.coms with the cash and a plan to become sustainable businesses. How does this all impact option traders? First, the Fed is not going to be the factor that saves the day. Look at the fundamentals of the companies for clues that the firms are making a return on their money. Second, in the current environment, the SEC is making sure that we retail investors are getting information as quickly as institutional players. This affects volatility, makes gathering your own information and sharing it effectively even more important. Finally, some of the most interesting opportunities in technology investing are going to come into focus in the near future. The Internet Bubble has burst, but it will probably be replaced by a biotech - Information Technology bubble in a year or two. Stay tuned. *************************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=1695 ************************************************************ *********** OPTIONS 101 *********** Calendar Spreads: A Nice Way To Sleep At Night, Part 1 By Lynda Schuepp Because traders have a limited attention span and we writers have a constraint on the length of our articles, this article will be spread over two weeks. Calendar spreads are really an easy yet at the same time a more sophisticated option strategy. I've written about calendar spreads before but I thought I'd write about it again because it's a good way to explain some "option basics" for the beginner trader while at the same time offer a more sophisticated trade for those of you who have been burned by straight directional trades (buy a call or put). I'm assuming there aren't too many of you brave soldiers that still have enough capital to be going naked. I will try to give a fair amount of explanation to each of my points below but if you still don't understand a point, go dig out some books. I have found over the years that sometimes one writer can explain things in such a way that it seems simple while other writers make it sound so complicated. Unfortunately, different readers respond to different writers in very different ways. Now on to the topic at hand - the calendar spread using January '02 and January '03 puts with a strike price of $80 using prices generated February 23rd. Definition: The calendar spread is sometimes called a time spread. Components: 1. A short position 2. A long position with a longer timeframe, 3. Using all calls or all puts 4. The same strike price is used for both legs. 5. Cost is minimal 6. Maximum Risk is the cost of the trade 7. Reward can be very high, usually 2 to 8 times your investment, depending on your time frame. Maximum reward is obtained when the stock closes at the strike price you chose at expiration of the shorter month. In this case, the January '02. The example I will use would be to buy a January '03 put with an 80 strike on QQQ and sell a January '02 put with an 80 strike on QQQ. I personally like to deal with puts, because the prices are usually cheaper than calls. In this example, if the QQQ's close at 80 on expiration day of January '02 (the shorter leg), then the short leg (the January '02 put) will expire worthless and you will have an "at-the money" put with one year left to expiration that you can sell. This is the part that a lot of people have trouble with and it is what prevents them from doing this trade. IMPORTANT CONCEPT: It is very important to understand that the current price of the January '02 "at-the-money" option (strike of approximately 50) is a good approximation for what the January "03 80 put will be worth in January '02 if the QQQ are at 80. The current price of the January "02 50 put has almost a year left and is currently worth about $7.40. If the QQQ's are at 80 at expiration in '02 then the 80 strike price would be "at-the-money" and worth at least $7.40, probably more. Some reasons for doing a calendar spread: 1. Don't have time to watch the market, minute by minute 2. Don't have a lot of trading capital (left). 3. Not as confident in trading ability anymore 4. Like to sleep well at night 5. Like a limited risk strategy with potential high returns 6. Like to make money, even when you are wrong Criteria for doing a calendar spread: 1. Find a stock that has been slammed and was at a MUCH HIGHER point in the past. That's not too hard to do these days. Try any stock in the Nasdaq 100, or maybe just try the Nasdaq 100 by looking at the QQQ's. I'll use QQQ in my example. 2. Find a stock where the shorter-term option has higher volatility than the longer-term option. Understanding how to play volatility will greatly increase your odds for success in any option trade. Volatility is a main component in option pricing and if you don't understand it, you need to. Volatility is the measure which the stock is expected to move up or down in a given period of time. There are two types of volatility: historical and implied. Historical volatility is calculated based on the actual change of prices in the past. Implied volatility is what the market maker believes the stock will move and is calculated using a complicated model which then becomes a factor in the option's price. The higher the implied volatility relative to historical volatility, the more expensive the option. For this reason, you want to be a buyer of low volatility and a seller of high volatility. Looking at the QQQ's we see that the months farther out have lower implied volatility than the closer months. Most trading platforms give you implied volatility of the option. Therefore, the QQQ's remain a candidate for this trade because the implied volatility of the January '02 options which we would be short is more than the January '03 options which we would be long. 3. Find a stock where the current implied volatility (20-day) is lower than the average yearly historical volatility. Don't confuse this with #2 which discusses differences in volatility between the months. If the volatility as a whole is relatively low in relation to where the volatility has been in the last year, your position will benefit from a rise in volatility. Historical volatility over the last year has ranged from .42 to .69, and currently is at .43 at the low end of the range. Therefore, the price of our options will increase in value if volatility increases. Our long January '03 80 put will rise in value if the volatility is higher than the current volatility because implied volatility is a main component of option pricing as discussed above. If volatility at expiration is the same as it is currently, then our "guesstimate" of $7.40 is a good one. I like to be conservative, so I would base my risk/reward calculation using this number, knowing that my odds are greatly increased if there is a rise in volatility. If you don't have the ability to get this information, don't worry, it is not as important, it just gives you a little bit better edge. The Last four criteria will be covered in detail next week: 4. Determine the most appropriate time frame to trade. 5. Determine the most appropriate strike to use. 6. Select the number of contracts that are optimal for your trading plan. 7. Learn how to calculate your risk to reward using different strikes and timeframes. 8. Find the approximate value of your spread at expiration if you are wrong. Pay particular attention to "IMPORTANT CONCEPT" above and go back and try it with other stocks that you trade. Don't try this out without the benefit of the criteria 4 thru 8. So stay tuned and come next week armed with your best candidates and learn how to further improve your odds of being successful by using criteria 4 through 8. Just master 1 through 3 this week and pick a book on options and read everything you can about volatility--your bank account will thank you. ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* EMC - EMC Corporation $45.00 (-9.05 last week) See details in sector list Put Play of the Day: ******************** WEBM - Web Methods Inc. $48.75 (-14.55 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=1708 ************************************************************** ************************** 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 UTEK $33.94 (-4.06) Providing proof that stop losses are mandatory in this uncertain market, UTEK fell off a cliff Friday morning, violating several perceived support levels in the process. The selling frenzy didn't abate until the stock reached the $31 level, and although the afternoon recovery came on solid volume, the bullish trend is now dead. After our stop at $37 fell victim to the bears in the first hour of trading, there was no looking back and we have no choice but to remove UTEK from the playlist this weekend. PUTS ABGX $30.31 (-4.00) Abgenix has offered excellent opportunities for put players in the last week. However, the stock responded well today to news released regarding their payment for ImmGenics with $77 million in cash. In addition, the biotech index exhibited very bullish behavior on Friday, as the index rallied in the morning, and closed significantly higher. Considering these factors, and the fact that Abgenix closed above our stop level, we are dropping it this weekend. TIBX $19.44 (+3.63) The late afternoon rally attempt took TIBX Upward 19.6%, or $3.19 on 1.6 times the ADV. If you had open positions, stops at the $18 level should have protected your capital. The sharp reversal coupled with the violation of our protective stop compels us to drop TIBX from our put list this weekend. Tibco Software recently confirmed it's reporting 2Q earnings on March 22nd, after the market. *********** 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 ************** EMC - EMC Corporation $45.00 (-9.05 last week) EMC wants to be your storage solution. The company designs, manufactures and markets a wide range of enterprise storage systems, software, networks, and services. The company’s products store, retrieve, manage, protect and share information from all major computing environments including mainframe, UNIX, and Windows NT. With offices around the world and a 35% growth rate for the first 9 months of the year, EMC is effectively filling its role as the worldwide storage leader. In the wake of negative news and earnings warnings from the Storage sector, EMC fell through the $50 support level last week. Compounding the stock's problems, the company joined the crowd and issued its own warning, cautioning investors of slowing growth. Still expecting to meet its $12 billion revenue target for the year, EMC revised sales growth estimates downward to the 25-35% range. Following this admission, the stock traced a new 52-week low of $34 on Thursday before the buyers returned. After helping the stock to recover to the $39-40 level by Thursday's close, we saw buyers increase their enthusiasm late on Friday. Major support between $32-34 got the bulls started on Thursday, and then former Fed governor, Wayne Angell got the party going again Friday afternoon with his prediction of a Fed rate cut early next week. Speculation aside, the bottom line is that buying was strong going into the close on Friday, and this could be the beginning of a significant recovery. After declining more than 50% in the past 3 weeks, EMC seems to be significantly oversold, and with daily Stochastics turning up out of the oversold region, we are more than happy to step up and take a piece of the developing recovery. Conservative entries can be considered on a continuation of the Technology rally that pushes EMC through the $46 level. Aggressive traders that are looking for a better entry point can consider new positions on a bounce from either the $42 or $40 level. Keep a short leash on the play, as a drop through our $39 stop will be a clear sign that the bears are back in charge. BUY CALL MAR-40 EMC-CH OI=7459 at $7.20 SL=5.00 BUY CALL MAR-45*EMC-CI OI=3742 at $4.50 SL=2.75 BUY CALL MAR-50 EMC-CJ OI=7257 at $2.60 SL=1.25 BUY CALL APR-45 EMC-DI OI= 766 at $6.60 SL=4.50 BUY CALL APR-50 EMC-DJ OI=2360 at $4.50 SL=2.75 BUY CALL APR-55 EMC-DK OI=1607 at $3.10 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=EMC *************************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=1701 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 02-25-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/022501_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=1696 ************************************************************ ****************** CURRENT CALL PLAYS ****************** MSFT - Microsoft Corp $56.75 (-0.56 last week) Microsoft is the #1 software company in the world. They develop, manufacture, license, and support a broad range of software products including Windows operating systems, server applications, the popular MS Office suite, and a Web Browser. As most of you know, the company is presently involved in anti-trust issues with the government. CEO and co-founder, Bill Gates still owns 15% of Microsoft. The technology stocks as well as many of the blue chips are feeling the torrents of negativism and fear that is currently influencing investors' opinions. As a result, OI call plays are light in consideration of the massive selling rocking the markets. Yet, we consider MSFT a viable option. Take a look at the stock's chart and you can visually confirm its strength at the $55 support level. Our play is for the $55 level to not only continue to keep MSFT afloat during the storm, but also to serve as a launching pad on the rebound. A solid bounce off the 5 & 10 DMAs at $56 and $57 followed by a move through the 30-dma and the $60 resistance signal the beginnings of a run. You might, however, consider selling into strength as MSFT approaches the governing 200-dma, currently at $64.65. This formidable line of opposition recently stopped other rally attempts dead in their tracks. If you chose to enter prior to a convincing breakout, keep stop in place near the above-mentioned $55 support. Microsoft is having its day in court this week. On Monday, a seven-judge panel is scheduled to hear two days of oral arguments from company and government lawyers in regard to contentions brought forth by Microsoft that its practices were lawful and the trial judge was biased. BUY CALL MAR-50 MSQ-CJ OI= 1601 at $7.88 SL=5.50 BUY CALL MAR-55*MSQ-CK OI= 8307 at $4.00 SL=2.50 BUY CALL MAR-60 MSQ-CL OI=32948 at $1.50 SL=0.75 BUY CALL APR-55 MSQ-DK OI=25343 at $5.63 SL=3.50 BUY CALL APR-60 MSQ-DL OI=22464 at $3.13 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=MSFT LH - Laboratory Corp. of America $147.00 (+1.75 last week) Laboratory Corporation of America Holdings (LabCorp) is the #2 clinical laboratory service in the world, behind Quest Diagnostics. LH performs 2000 types of tests for more than 100,000 clients, including health care providers, pharmaceutical firms, physicians, government agencies and employers. With 25 major laboratories and some 1200 service sites nationwide, the company emphasizes specialty and niche testing such as allergy tests, HIV tests, blood analyses, and substance abuse screenings. Seemingly impervious to the bears' persistent assault, LH managed to recover nearly all its intraday losses as the shorts covered their positions ahead of the weekend. What started out as another down day for the broader markets did an abrupt about-face after former Fed Governor Wayne Angell predicted that the Fed will cut rates early next week. The news broke just before 3pm ET, and provided the fuel for LH to extend its fledgling recovery right up to the closing bell. After the initial drop to $142, the recovery was already well underway before Mr. Angell's encouraging comments, as LH bounced from the 6-week ascending trendline. The strength of the recovery brought the stock back above the $144 stop level, allowing LH to end the volatile day with only a fractional loss. Aggressive traders that stepped in after the bounce were rewarded with a surge of buying volume in the final 30 minutes - now we need to see if there will be any follow through next week. Buyers have been struggling to push LH through the $148 resistance level, and now that the upper Bollinger band is above $150, they just may be able to pull it off next week. Conservative investors will want to step into the play as LH rallies through $148 on the back of continued strong volume. While intraday dips to the $144 level are buyable for aggressive investors, take care not to catch a falling knife. With daily Stochastics flattening out in the overbought region, it is conceivable that profit taking could emerge at any time. BUY CALL MAR-145 LH-CI OI= 61 at $10.00 SL= 7.00 BUY CALL MAR-150*LH-CJ OI= 54 at $ 7.50 SL= 5.25 BUY CALL APR-150 LH-DJ OI= 0 at $13.20 SL=10.00 Wait for OI! BUY CALL APR-155 LH-DK OI= 1 at $11.20 SL= 8.25 BUY CALL MAY-150 LH-EJ OI= 23 at $17.10 SL=12.25 BUY CALL MAY-155 LH-EK OI=102 at $14.60 SL=10.75 SELL PUT MAR-140 LH-OH OI=532 at $ 4.90 SL= 7.00 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=LH ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1673 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 02-25-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/022501_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=1697 ************************************************************ ************* NEW PUT PLAYS ************* PWAV - Powerwave Technologies Inc. $17.44 (-5.81 last week) Powerwave Technologies Inc., an ISO 9001 quality certified company is a leading supplier of high performance RF power amplifiers for use in wireless communications networks. Powerwave designs, manufactures and markets both single carrier and multi carrier RF power amplifiers for use in cellular, PCS, and 3G base stations throughout the world. Corporate headquarters are located in Irvine California. PWAV started to make a pattern of lower highs in early December, as PWAV's inability to cross resistance at $73.50 and $68.50 led to an accelerating downward spiral in January and February. PWAV responded to the weakness in the cellular sector which started with disappointing earnings and multiple downgrades of Nokia, the key bellwether cellular communications stock. Then, after reporting earnings of its own on January 23, PWAV was deluged by downgrades from multiple brokerage firms. A downgrade from buy to hold by UBS Warburg stated that they believed power amplifier blenders would be forced to lower prices due to increased competition, and pressure from OEM vendors as a result of aggressive equipment pricing. This report sliced 12% of PWAV's price. Then, on February 14, both Morgan Stanley Dean Witter and CIBC World Markets cut their ratings on PWAV, which resulted in another round of heavy selling to take the stock below its 10 dma of $25.94. PWAV is now in a downward stair step pattern, with each support level typically lasting one to two days, and typically broken by a sharp decline of two points. On Friday, the ripple effect which started with weakness in the cellular sector, and culminated with warnings from Qualcomm and Motorola turned into a tidal wave of selling in wireless communications stocks. While some technology sectors rebounded toward the end of the day as the Nasdaq erased Friday's loss, PWAV showed no response, and actually dropped half a point in the last few minutes of trading. At this point, additional selling seems almost inevitable, unless we have a dramatic turnaround in the wireless communications sector. PWAV is now at a new 52-week low and poised to drop from $17.5 which would most likely lead to support at the $15 level. Traders could take positions at current levels, or at a possible roll over from the $18.00 level. Watch NOK, ERICY and QCOM for sector weakness, and set stops at $20. BUY PUT MAR-20 *VFQ-OD OI=139 at $4.00 SL=2.50 BUY PUT MAR-17.5 VFQ-OE OI= 5 at $2.38 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=PWAV ITWO - I2 Technologies Inc $29.56 (-8.63 last week) ITWO is a global provider of intelligent eBusiness solutions for supply chain management and enhanced business applications. On June 12, 2000 ITWO merged with Aspect Development (ASDV) to create one of the largest software providers for eBusiness and eMarketplace solutions. TradeMatrix, its Internet marketplace, provides an open digital community powered by i2's advanced optimization and execution capabilities that help manufacturers plan production and other related operations. The Chairman and founding CEO, Sanjiv Sidhu retains a 40% stake in the company. The lot of competitors in the eCommerce and supply chain sectors, such as I2 Technologies (ITWO), Ariba (ARBA), Commerce One (CMRC) and SAP (SAP), continue to be scrutinized by investors. Of course, the negative bias across the markets is an obvious catalyst for the general downtrend, but news of a joint software venture between Commerce One and Sap to rival the alliances of Ariba, I2 Technologies, and IBM also added some fuel to the B2B fire. Furthermore, the investors' concerns about the sector's valuations were effectively revealed as share prices continued to rapidly decline. Specifically, the propulsion driving ITWO further into the dark abyss last week was bolstered by its increased trading activity. Volume levels, at 1.2 to 1.6 times the ADV, invariably accelerated the stock's downtrend. Another dissenting element that came into play, in regard to ITWO, was the revised price targets put out by CIBC World Markets and CE Unterberg Towbins. Each firm cut their targets by 20% and 29%, respectively. From a technical perspective, the beginning of ITWO's ultimate demise began when the $38 support level failed to keep ITWO afloat amid the market chaos. However the decisive factor, which prompted us to add ITWO to our put list, came into play during Friday's session. ITWO not only returned to pre-rally price levels - $30 marks the historical resistance from way back in November 1999 - but it also couldn't resurface above that proximity during the late day rally on the NASDAQ. The overall weakness implies that traders could take ITWO lower next week. It'd be wise, however, to confirm the downtrend before beginning plays. In its entirety, the current price level may on one hand this may present an attractive buying opportunity to some, but on the other, it indicates that this tech stock's valuation was highly overrated to begin with and needs to be taken down even a few more notches. We don't have a crystal ball to warn of fleeting buying sprees. However, we can minimize our trading risks by staying tuned to market direction, sector sentiment, and the stock's particular trading nuances as well as keeping stops in place. Consider setting a stop loss at $32 for protection of capital. BUY PUT MAR-35 QYJ-OG OI=1029 at $7.13 SL=5.00 BUY PUT MAR-30*QYJ-OF OI=3615 at $3.75 SL=2.00 BUY PUT MAR-25 QYJ-OE OI= 69 at $1.75 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=ITWO ***************** CURRENT PUT PLAYS ***************** QLGC - QLogic Corporation $41.88 (-9.80 last 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 continues to suffer in sympathy as its cousins in the data storage and chip sectors continue to warn of further weakness to come. The severe sell off in shares of Brocade this week lead to heavy selling in QLGC on more than double the average daily volume. Since QLGC supplies chips to the data storage supply companies, this stock may not fully recuperate until we have more upbeat comments from companies like Emulex, and EMC. In addition, the warnings from Qualcomm and Motorola plagued the entire semiconductor sector on Thursday and Friday, as Motorola specifically cited weakness in chip demand as one of their primary problems. On Thursday, the semiconductor book to bill ratio was released at .8, which is the weakest seen in years. This is partly responsible for the poor response of the semiconductor sector to the recuperation in the Nasdaq which occurred on Friday. Semiconductor stocks are suffering from an inventory problem, and several analysts this week stated that the problem may not be corrected as soon as was previously expected. The SOX.X needs to clear several resistance levels before a true rally can ensue. While QLGC recovered from its low level of the day on Friday, it is still in a strong downward trend. A rollover from $43.75 would be a possible entry point, if accompanied by weakness in the SOX.X. A more conservative put entry could be a drop below $37 on heavy volume which could conceivably bring QLGC to its 52-week low at $33.81. We are moving stops to $44. BUY PUT MAR-45*QLC-OI OI=750 at $7.25 SL=5.00 BUY PUT MAR-40 QLC-OH OI=386 at $4.38 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=QLGC NOK - Nokia $21.34 (-5.81 last week) Nokia is the world leader in mobile communications. Backed by its experience, innovation, user-friendliness and secure solutions, the company has become the leading supplier of mobile phones, and a leading supplier of mobile, fixed and IP networks. By adding mobility to the Internet, Nokia creates new opportunities for companies, and further enriches the daily lives of people. Nokia got hammered again on Friday, as the stock has hit a new 52-week low every day for the last five days. This week the primary catalysts for the heavy selling were warnings from Motorola and Qualcomm, which threw the wireless sector into a tailspin. In an interview with the London Times on Thursday, Qualcomm’s CEO Irwin Jacobs stated that they were expecting a two year delay in the roll out of their third generation W-CDMA technologies. Qualcomm dropped from a high of over $83 to a low of $63 this week, and the selling intensified on Friday, as nearly five times the average daily volume changed hands. Motorola seemed to catch the flu when Qualcomm sneezed, as, Motorola issued a warning on Friday stating that a big drop off in orders and sales could result in the company’s first quarterly loss in 16 years. Motorola sold off on double its average daily volume. Friday was Nokia’s worst day this week, as a whopping 45 million shares traded, three times the average daily volume. The near term outlook for Nokia seems particularly grim considering the fact that Nokia did not rally toward the end of the day when the Nasdaq erased the day’s loss. Since Nokia did not respond to the previous two Federal Reserve rate cuts, it might not respond to a third, which increases the odds for success of our put play. Nokia appears poised to roll over from the current level, which could be a possible entry point. Otherwise, a break below $20 on heavy volume is a real possibility, and another potential entry point. We are moving stops to $23. BUY PUT MAR-25*NAY-OE OI=7498 at $4.30 SL=2.50 BUY PUT MAR-20 NAY-OD OI= 638 at $1.15 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=NOK ARBA - Ariba Inc $17.69 (-3.81 last 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. You've heard it over and over again. Fear of the uncertainty is driving the markets lower; and more specifically, effectively shifting investors out of the technology sectors. The B2B and related stocks are no exception. The likes of ARBA, BEAS, and CMRC have been hit hard. ARBA experienced a 17.7% cut last week amid robust trading. Our objective is to play the downward momentum as investors continue to examine their tech-related issues. Granted ARBA is already a cheap stock, but nonetheless, the share is edging lower and importantly, option contracts are active. The opportunity for lucrative profits cannot be ignored. We however, recommend not throwing caution to the wind. ARBA is an attractive stock at a bargain price and the potential for a market recovery is imminent. Keep stops in place at $19 and begin new positions only after confirming further weakness in a declining market. There's light support at the $17 level and the new 52-week low, at $16.38, is the ultimate opposition. The more adventurous types might consider taking an entry on a high-volume rollover from the 10-dma line, near $21. This strategy is very risky, so be prepared to lock in gains quickly. BUY PUT MAR-25 IRU-OE OI=1500 at $8.38 SL=6.00 BUY PUT MAR-20*IRU-OD OI=2916 at $4.38 SL=2.75 BUY PUT MAR-15 IRU-OC OI= 918 at $1.44 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=ARBA BBOX - Black Box Corp $48.75 (-3.13 last week) Black Box Corporation provides technical network services and related products to businesses across the globe via its catalog and Web site. The company's technical support services include a 24-hour phone support line and on-site design, installation, and maintenance. Customers outside of North America account for about a third of sales. We're glad we gave BBOX some room to operate last week. The stock ultimately broke out of the $51 and $52 consolidation channel and saw $45.75 by Friday. The definitive moves to the downside provided attentive traders with a multitude of profitable opportunities. But take note, the pre-weekend rally took BBOX upward on accelerating volume, which may indicate succeeding gains if there's any market strength next week. The good technical news is that the bulls failed to bring BBOX through the developing resistance at $50 and the 5-dma line. Questions of the stock's valuation and the company's future outlook continue to rattle about in investors' minds, so there's still the potential of further weakness. We have, however, tightened our stop to $49 to guard existing positions. If you're strategy is to play the spreads and take entries on rollovers near the resistance levels, expect the share price to find light support at $45, stronger as it approaches $41.50, which marks the stock's 52-week low. BUY PUT MAR-50*QBX-OJ OI=68 at $6.00 SL=4.00 BUY PUT MAR-45 QBX-OI OI=24 at $3.00 SL=1.50 BUY PUT MAR-40 QBX-OH OI=13 at $1.63 SL=0.75 http://premierinvestor.net/oi/profile.asp?ticker=BBOX ADBE - Adobe Systems $32.63 (-3.69 last week) A long-time leader in desktop publishing software, ADBE provides graphic design, publishing, and imaging software for Web and print production. Offering a line of application software products for creating, distributing, and managing information of all types, the company generates nearly 75% of sales through publishing software products such as Photoshop, Illustrator, and PageMaker. Its Acrobat Reader, which uses portable document format (PDF) is popping up all over the Internet, as businesses shift from print to digital communications. In addition, ADBE licenses its industry standard technologies to major hardware manufacturers, software developers, and service providers, as well as offering integrated software solutions to businesses of all sizes. Refusing to break down on Friday, ADBE actually moved slowly upwards until the final hour of trading. Then, following speculation that the Fed would be cutting interest rates early next week, the stock followed the NASDAQ sharply higher for the remainder of the session. Volume backed the late-day recovery too, with more than 2 million shares (more than a third of the ADV) trading hands in the final 90 minutes. The possibility of an inter-meeting interest rate cut from the Fed drove the shorts to cover ahead of the weekend. Stepping back a moment and looking at the daily chart, we can see that the prevailing downtrend is still in place. Should the rate cut fail to appear next week, look for the sellers to come back with a vengeance and take another shot at driving ADBE to new lows. The descending trendline is now sitting at $34, also the site of our stop, and should the rally run out of steam near this level, it will provide aggressive traders with an attractive entry point as the selling resumes. Without help from the Fed, there is little to motivate buyers, and given the recent earnings warning which was followed by a rash of downgrades, ADBE looks like it has more downside before finding a bottom. Conservative traders will look for a drop through the $30 level as their signal to open new positions. BUY PUT MAR-35*AEQ-OG OI=1931 at $4.88 SL=3.00 BUY PUT MAR-30 AEQ-OF OI=1574 at $2.31 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=ADBE NETE - Netegrity, Inc. $48.25 (-8.75 last week) Netegrity is a provider of software and services that manage and control user access to Web-based e-commerce applications. The company's SiteMinder product is part of the software infrastructure that is used to build and manage an e-commerce Web site, commonly known as a portal. SiteMinder manages the complex process of identifying users and assigning entitlements to each, which determines what information that user can see and what transactions the user can perform on that Web site. Continuing its rapid descent Friday morning, NETE gave us a great opportunity to lock in profits as it probed the $40 support level. Aggressive traders had to be quick on the trigger though, as the stock did an about face at the low and rallied nearly 20% in the final hour of trading. So what prompted the sharp reversal ahead of the weekend? Just before 3pm ET, Bear Stearns chief economist and former Fed Governor Wayne Angell told his sales force that there is a 60% chance of a Fed rate cut next week. As if somebody threw a switch, sellers were replaced with buyers, and the broad markets rallied right into the close with the NASDAQ actually managing to post a gain for the day. Although the rally was impressive, it looks like the move was largely short-covering by bears that didn't want to go into the weekend exposed to the risk that the Fed might actually move over the weekend. What it is giving us is another attractive entry point on our play, as the stock moved up very near the $50 resistance level. One other factor that could give the stock an upward bias next week is the positive rating from Adam Harkness. The firm initiated coverage of NETE with a Buy rating Friday afternoon, but should the rate cut fail to materialize, tech bulls are likely to be sorely disappointed. We are looking for that disappointment to produce a resumption of the downtrend as another week commences. Consider new positions as the stock rolls over, so long as it remains below our $50 stop. More conservative traders will want to wait for the stock to fall below the $45 support level on strong volume before jumping back into the play. BUY PUT MAR-50*UPN-OJ OI=346 at $6.00 SL=4.00 BUY PUT MAR-45 UPN-OI OI=114 at $3.50 SL=1.75 http://www.premierinvestor.net/oi/profile.asp?ticker=NETE WEBM - Web Methods Inc. $48.75 (-14.55 last week) Web Methods is a leading provider of infrastructure software and services for achieving business to business integration, or B2Bi. Their software, Web Methods B2B, enables companies to work more closely with their customers, suppliers, and other business partners through the real time exchange of information and transactions over the internet. WEBM sold off to a new 52-week low at $42.25 on Friday morning, then rallied on Friday afternoon with the Nasdaq toward the close. However, it is unlikely that this rally will be sufficient to establish a new upward trend in WEBM, considering the heavy selling which has occurred over the last several weeks. WEBM is suffering from the heavy selling of newly unlocked shares from its IPO last year, as millions of dollars worth of newly unlocked stock was dumped on the market during the last three months. Further selling may possibly occur, which would almost certainly weaken the share price even further. WEBM fell below its 50 dma of $85.31 after reporting earnings on January 31, and since then, the downward momentum has been intense. WEBM is now in the middle of the downward channel established on February 15, and is poised to roll over from the current level, which could be a possible entry point. A more conservative entry point could be taken on a break below the new 52-week low of $42.25 on strong volume. Monitor the software index for sector weakness, and continue to set stops at $50. BUY PUT MAR-50*UUW-OJ OI=584 at $6.38 SL=4.50 BUY PUT MAR-45 UUW-OI OI= 19 at $4.00 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=WEBM ******************************** WEEKLY UPDATES FOR VARIETY PLAYS ******************************** LONG-TERM: GE $46.18 -0.92 (-0.82 last week) Market fears continued to heighten this week, dragging down most sectors and issues. As the selling increased into the end of the week, GE slipped from its recent attempts at $48. On Friday, as the NASDAQ fell to new two year lows and the INDU grew weaker, GE dipped to the $45 level and bounced strongly. This level is critical support as well as our stop loss level. The bounce occurred in conjunction with what appeared to be a short covering rally before the weekend. As long as GE puts in higher lows, as it has since January, this long-term play will survive. However, a weakening broader market and a break of $45 and GE will be dropped. BUY CALL APR-45 GE-DI OI= 535 at $4.00 SL=2.50 BUY CALL JUN-50*GE-FJ OI=17030 at $2.84 SL=1.50 BUY CALL SEP-50 GE-IJ OI= 6828 at $4.39 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=GE QQQ $51.18 +0.18 (-3.95 last week) Using $50 as our stop loss, we believe that QQQ offers a long-term trading opportunity. However, the QQQs also offer quick trading opportunities and we would suggest taking profits in any long-term QQQ positions as they present themselves, especially considering the downside turbulence. Friday's sell-off brought the QQQs to $48 before the short-cover/ relief rally began, lifting them to $51. The NASDAQ very well may have more downside in the near future, so use caution, stop loss orders and bounces as entry points. Current resistance is overhead at $52 and break above could lead to challenge of $54. Support appears at $48, but below that support is unclear. The closing stop will remain at $50. BUY CALL APR-50*QQQ-DX OI=1397 at $5.69 SL=4.00 BUY CALL APR-52 QQQ-DZ OI= 300 at $4.80 SL=3.00 BUY CALL JUN-54 QQQ-FB OI=1070 at $5.30 SL=3.50 http://www.premierinvestor.net/oi/profile.asp?ticker=QQQ LOW VOLATILITY: WAG $42.80 -0.05 (-0.89 last week) The week started off well after the WSJ.com published an article on what sectors are strong after interest rate cuts. Drug retailers was one of those sectors. Yet, with resistance near $45, the stock pulled back a bit along with the broader market and is now resting near its 10-dma at $42.60. We feel that this is a critical level and therefore maintain a stop loss at $42.50. If last week was simply consolidation, WAG will be poised to re-challenge $45, which has a double-top resistance from last November. A bounce from current levels and buying interest in retailers would give a nice entry. However, a breakdown below our stop and further liquidation down to $40 may be in the cards. Remember, resistance at $45 will be strong, but a breakout on heavy volume from there would also warrant an entry. BUY CALL MAR-40* WAG-CH OI= 371 at $3.40 SL=1.75 BUY CALL MAR-42.5 WAG-CV OI= 557 at $1.70 SL=1.00 BUY CALL MAR-45 WAG-CI OI=2549 at $0.60 SL=0.00 High Risk! http://www.premierinvestor.net/oi/profile.asp?ticker=WAG MO $47.02 -0.99 (+0.51 last week) Fear in the broader market on Friday led to profit-taking in some of the safer havens, like MO. This general fear resulted in MO falling almost a dollar after the stock failed to break $48.50. Our stop is currently at $47, so MO is right on the edge. Its 10-dma lies slightly above at $47.31. This may present a problem and an invitation to sellers to book profits. In that case, we will stop out of the play, however, there is support at $45.50. A bounce from current levels will lead to a challenge of $48.50 once again. Traders can buy a break of that level but remember that $50 will be staunch resistance, especially considering the amount of open interest on the March 50s. BUY CALL MAR-45*MO-CI OI= 9750 at $3.10 SL=1.50 BUY CALL MAR-50 MO-CJ OI=20116 at $0.65 SL=0.00 High Risk! http://www.premierinvestor.net/oi/profile.asp?ticker=MO WM $50.52 -0.31 (-0.02 last week) Moving with the general market trend, WM's fluctuations have been far less volatile. Sellers have been active in the stock on Thursday and Friday, taking WM as low as $49. We issue a word of caution as WM lies at critical level of $50, also the site of our stop loss. At this point, the 10-dma is overhead at $51.21, but the 50-dma lies beneath at $49.86 to help further buoy support at $50. If further distribution of shares continues next week, utilize your stops to minimize downside risk. Buyers held the stock flat at $49.50 on Friday. On the upside, resistance will be encountered at $51 and $51.50. If WM clears these levels, a run at $52.50 would allow entry. BUY CALL MAR-45 WM-CI OI= 2 at $6.10 SL=4.50 BUY CALL MAR-50*WM-CJ OI=1459 at $2.05 SL=1.25 BUY CALL MAR-55 WM-CK OI=1717 at $0.40 SL=0.00 High Risk! http://www.premierinvestor.net/oi/profile.asp?ticker=WM ************************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=1709 ************************************************************** ***** LEAPS ***** Not So Fast! Short Covering Does Not Make A Bottom By Mark Phillips Contact Support Another week, and another yearly low for the NASDAQ. So what else is new? The continuous stream of poor economic news coupled with earnings warnings everywhere you look, combined to drive the NASDAQ to a new intraday low of 2156 on Friday before so much as a hint of buying appeared. Joining the bearish party last week was the DJIA; giving up on breaking through resistance at 11000, the index rolled over, heading south for the majority of the week. Just as it was testing the bottom of its recent range at 10300, former Fed Governor, Wayne Angell swooped in with a carrot for the bulls. Telling his sales force at Bear Stearns that there is a 60% chance of a Fed rate cut in the early part of net week was like waving a red cape in front of a bull, and buyers swooped in to scoop up the perceived bargains. But wait a minute. Was it truly a resurgence of buying, or simply the shorts covering ahead of the weekend, protecting against the possibility that Mr. Angell was right? Based on the charts, my vote goes for short covering. Although the major indices posted an impressive recovery from their lows, they all closed sharply negative on the week. Even the NASDAQ, the only index to close in the black on Friday is deep in oversold territory, as borne out by the still-buried daily stochastics oscillator. Our favorite sentiment indicator, the VIX, certainly gave us a short-term buy signal midday on Friday when it briefly crested the 35 level, but the speed with which it declined back to 30 has us a bit concerned. The VIX has tested this level several times since Labor Day, with each occurrence followed by a brief trading rally. The catch is that each time, the bears reasserted control and pushed the major indices, particularly the NASDAQ back into their prevailing downtrends. When the prevailing trend is down, we occasionally need to relieve some of the pent-up buying pressure so that the sellers can pile on for the next leg down. While it may sound overly pessimistic, we expect to see the VIX shoot back over the 35 level, possibly much higher, before we see the much-needed capitulation that we can connect with a long-term market bottom. When top-flite managers like John Chambers, Michael Dell, and Jack Welsh are having a hard time providing guidance for the remainder of 2001, equities are having a hard time attracting enough buying interest to effectively combat the bears. Hope for the second-half recovery is disappearing fast and investors are as nervous as a cat in a room full of rocking chairs. This is not the environment in which to be initiating new long-term positions on stocks that will continue to be affected by a deteriorating economic picture. Underscoring the point, this week two more of our Technology plays bit the dust due to negative comments from the companies. Both QCOM and A gave us opportunities to profit nicely since we picked them, but the economic downturn has taken its toll driving both to new yearly lows. So what's a LEAPS investor to do? The first approach would be to simply stand aside until we see evidence that improvements in the economic picture (more rate cuts will help, but won't be an instant panacea). If you simply must play, then disciplined trading will be the key. Use all the tools at your disposal to locate the high odds entry points - a bounce from major support on strong volume with both the daily and weekly Stochastics oscillators turning up would be a good start. To improve your odds, focus on stocks that will not be as severely affected by the current poor economic conditions. Financial stocks like AXP and C seem to be excessively oversold (although that doesn't mean that can't become more so), and should benefit from a declining interest rate environment over the coming months. While still under pressure at this time, WMT is deriving more of their income stream from staples like groceries. No matter how bad the economy is, people still need to buy food. And if you want to profit from the escalating energy crisis in California, our CPN play is likely to perform well over the next year, due to our insatiable demand to keep those electrons flowing. Select Technology plays with solid fundamentals are starting to look attractive as well, but it is entirely possible that they will become even cheaper in the months ahead. If you decide to play in this arena with the likes of CSCO, EMC, or even the QQQ, take a shorter term approach. After entering the play, manage your positions with an iron hand, adhering to strict stop-loss rules, and consider yourself successful if you can pocket consistent gains of 25-30%. Preserve capital at all costs. LEAPS give us the luxury of time to be right, but not the ability to stand idly by while the bears maul our portfolio. If you can't see a high-odds entry, then perhaps you are better served by remaining on the sidelines. The bulls will run again, and we want to make sure we are healthy enough to join them when they do. Have a profitable week. Editor's Note: Take notice of the change in EMC strikes in the playlist this weekend. Due to the recent McDATA spinoff, new strikes have been assigned for EMC. The old strikes (WUE-AI and VUE-AT) represent control of only EMC shares, while the new strikes (WUL-AI and VUP-AT) represent control of both EMC and MCDT shares. The majority of trading has now moved to the new strikes, and the VUE-AT LEAP is no longer trading. Since it makes more sense to control shares of both companies at this juncture, we are changing the listed strikes accordingly. We have listed both sets of strikes this week for reference, and next week will list only the new strikes. As you can see by the difference in the 2002 strike prices, there will be a discrepancy in the RETURN column, but it appears to be fairly small. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2002 $ 45 WUE-AI $ 9.50 $12.30 29.47% JAN-2002 $ 45 WUL-AI $ 9.50 $12.80 34.74% 09/17/00 JAN-2003 $100 VUE-AT $32.75 $13.10 -60.00% JAN-2003 $100 VUP-AT $32.75 $ 5.40 -83.51% CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $ 2.19 -80.11% 11/26/00 JAN-2003 $ 60 VYC-AL $16.63 $ 2.75 -83.46% AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $ 2.55 -86.31% 08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $ 8.80 -49.71% AXP 03/12/00 JAN-2002 $46.6 WXP-AQ $ 9.33 $ 7.50 -19.61% WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $22.20 312.64% 10/22/00 JAN-2003 $ 45 VWI-AI $ 7.88 $14.00 77.78% C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $ 8.10 -21.44% 10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $ 7.10 -42.04% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $26.88 56.89% JAN-2003 $ 70 OZG-AN $23.13 $35.50 53.48% QCOM 09/17/00 JAN-2002 $ 70 WBI-AN $22.50 $15.75 -30.00% JAN-2003 $ 70 VLM-AN $29.63 $23.13 -21.95% BGEN 11/05/00 JAN-2002 $ 70 WGN-AN $17.25 $19.25 11.59% JAN-2003 $ 70 VNG-AN $25.00 $27.50 10.00% MU 11/26/00 JAN-2002 $ 45 WGY-AI $13.13 $ 8.60 -34.48% JAN-2003 $ 45 VGY-AI $17.25 $13.40 -22.32% A 12/03/00 JAN-2002 $ 55 YA -AK $16.88 $ 6.40 -62.07% JAN-2003 $ 60 OAE-AL $19.88 $ 9.20 -53.71% QQQ 12/10/00 JAN-2002 $ 70 WNQ-AR $15.13 $ 3.90 -74.22% JAN-2003 $ 75 VZQ-AW $19.25 $ 6.50 -66.23% WMT 12/24/00 JAN-2002 $ 55 WWT-AK $ 9.63 $ 7.10 -26.23% JAN-2003 $ 55 VWT-AK $14.00 $11.30 -19.29% DELL 01/07/01 JAN-2002 $ 20 WDQ-AD $ 5.25 $ 7.13 35.71% JAN-2003 $ 25 VDL-AE $ 5.63 $ 7.25 28.77% WCOM 01/14/01 JAN-2002 $ 25 WQM-AE $ 5.00 $ 1.94 -61.25% JAN-2003 $ 25 VQM-AE $ 7.38 $ 3.63 -50.85% CPN 01/21/01 JAN-2002 $ 40 YLN-AH $10.50 $12.50 19.05% JAN-2003 $ 40 OLB-AH $15.38 $17.10 11.22% CLX 02/11/01 JAN-2002 $ 40 WUT-AH $ 5.20 $ 4.40 -15.38% JAN-2003 $ 40 VUT-AH $ 8.10 $ 7.20 -11.11% JWN 02/18/01 JAN-2002 $22.5 WNZ-AX $ 3.30 $ 2.70 -18.18% JAN-2003 $ 25 VNZ-AE $ 4.10 $ 3.20 -21.95% Spotlight Play CSCO - Cisco Systems $27.00 A year ago, you would have thought us insane if we had said you would get another chance to buy CSCO below $30, but that is precisely the scenario we have right now. Persistent market weakness, thanks to the rapid Fed-induced economic slowdown has dragged even this Tech bellwether down near 2-year lows. Of course, it didn't help that CSCO itself missed earnings earlier this month for the first time in several years. Throw in CEO John Chambers' strong statement last weekend that the US manufacturing sector is solidly in a recession, and it is no wonder buyers have continued to be swamped by sellers since the $45 support level was broken in early December. Even after the nearly 70% drop in price, CSCO has a lofty PE of 66, based on Friday's closing price of $27. So why is the stock featured as the spotlight play this weekend, instead of being moved to the ever-growing Drop list? CSCO is arguably the best-managed technology company in existence, and despite the near-term weakness, we expect it to outperform the overall Technology market once rosier economic times return. Not only that, but it appears that most of the damage that can be done, has been. With that being said, we wouldn't be in a hurry to gobble up new positions at current levels. The late-day rally on Friday appears to be mainly short-covering as the bears didn't want to carry their positions into the weekend with the looming possibility of a surprise interest rate cut. That's right, as mentioned above, the primary catalyst for the rally seems to have been the optimistic (at least from where we sit) comments from Wayne Angell that we are about to receive another gift from Greenspan and Company. We don't expect the current rally to continue for long, and are looking for another pullback as our opportunity to add new positions. Although the $25 level provided support last week, it seems entirely possible that we could see a dip into the low $20's before the stock finds its ultimate bottom for the long (and likely slow) recovery. Consider this an early advisory, that when we do get the dip into the low $20s it looks like a good time to open new long-term positions, provided that support near $22 isn't violated. Initiate new plays above $23 on a bounce from $22. If the tech-wreck continues to pressure CSCO below this support level, stand aside for the time being, as the next solid support doesn't appear until $17-18. BUY LEAP JAN-2002 $30.00 WCY-AF at $5.75 BUY LEAP JAN-2003 $30.00 VYC-AF at $8.75 New Plays None Drops A $38.30 Despite beating analyst estimates by 4 cents last week, A investors didn't like what they heard in the company's conference call. Stating that sales growth would be weaker in coming quarters was all the incentive analysts needed, and several stepped forward to downgrade the stock. The bears had a field day, dropping the stock for a 12% loss on Wednesday, but the pain didn't stop there. A continued to decline throughout the remainder of the week, closing on Friday at a new all-time low. The late-day rally on Friday wasn't enough even to undo the damage done early in the day, leaving the stock locked in a persistent downtrend. Until economic conditions improve, allowing management to provide better future visibility, we don't want to keep A on our playlist, tying up capital that could be put to better use elsewhere. QCOM $61.81 Just as QCOM was looking like it was going to give us an attractive entry point for the next leg up, CEO Irwin Jacobs cratered his own stock by stating that the 3G CDMA buildout in Europe would likely be delayed until late 2004. Investors responded by selling the stock all the way down to $50 Friday morning, its lowest point since October of 1999. This is yet another case showing the necessity of stop losses, the use of which would have had you out of any open positions well in advance of today's dramatic decline. Despite the sharp afternoon recovery, the bearish nature of Mr. Jacob's comments significantly changes our outlook for the stock. There is a lot of collateral damage that needs to be repaired, and we don’t want to leave our money in the balance while the repair crews go to work. *************************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=1702 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 02-25-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/022501_5.asp ************* COVERED CALLS ************* Trading Techniques: Covered-Call Repair Strategy By Mark Wnetrzak A recent E-mail from a subscriber suggested that we review the basic ratio-call strategy used to recover losses in a stock's value. The technique involves long-term portfolio stocks that have declined during the recent market slump. When the share value of a portfolio issue falls, the investor can react in a number of ways. The easiest approach is to simply take no action and hope the stock eventually recovers. Another popular method is to "average down" which involves adding new shares to your current position at a lower price. While this a great way to lower the overall cost basis in the issue, it also significantly increases the amount of money at risk in the position. One of the most common method that option traders use in this situation utilizes a bull-call spread to lower the break-even basis of the position while increasing the overall profit potential. In the book "Options For The Stock Investor", the author refers to this strategy as a covered call plus a call-debit spread, where the premium from the sold position is used to offset the cost of the long call. The term "ratio-call spread" is a slightly different definition than most position traders would use, but regardless of how it's labeled, it is a favorable technique. An example: An investor purchases 500 shares of ABC stock at $20 and writes (5) JAN-$20 calls for a premium of $1.00. The overall cost basis is $19.00. At the end of the strike period, the stock has fallen to $18.00, a realized loss of $1.00. Now the trader still likes the long-term outlook for the issue but is concerned about further downside risk and the need to recover lost profit potential. The investor could try to improve his overall position by purchasing (5) FEB-$17.50 calls and selling (10) FEB-$20 calls. The new position is a combination of the covered-call and the bull-call spread. The components are; LONG 500 shares ABC stock and LONG (5) FEB-$17.50 calls but also SHORT (10) FEB-$20 calls. Notice there are no "naked" or uncovered calls and with simple analysis of each individual component, you will find that the technique offers an excellent remedy for restoring lost profit potential at a reasonable level of risk. A basic explanation of the advantages of the strategy: Assume that buying the (5) $17.50 calls and selling the (10) $20 calls requires a small additional debit. On some occasions, the sold calls (twice as many) will roughly equal the price of the bought calls and thus no extra costs (other than commissions) are required for the play. However, any additional money invested towards the new position will lower the new break-even (below the current one) by approximately that amount. Now, if ABC should continue to decline and eventually finish the expiration period below $17.50, all of the calls will expire. The investor will be only slightly worse off, because his cost basis is increased by the additional amount spent for the bull-call spread. The amount should be a very small percentage (2-5%) of the stock price, or in this example, about $0.50. If ABC finishes at or above $20 at expiration, the play will return maximum profit, easily 2-3 times more than the simple covered call. This profit outlook can be determined by calculating the various prices based on the stock finishing exactly at $20. The real advantage is apparent as you compare the final outcome when the stock price finishes within the strike prices. Recall that the downside break-even is now lower by approximately $0.50, the same amount as additionally invested for the bull-spread, and upside profit for the new play occurs (and increases exponentially) at a significantly lower stock price. All of the possible results for any particular position can be analyzed by simply comparing both plays at the various prices. Obviously, no one likes to be in a losing position, but the key to success is how we react to this type of situation and in many cases, the ratio-call repair technique offers an excellent method to recover lost share value. 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 ANSR 8.09 7.50 MAR 7.50 1.44 $ 0.85 13.9% ACPW 20.38 20.63 MAR 17.50 4.38 *$ 1.50 10.2% ACLS 11.13 10.44 MAR 10.00 1.88 *$ 0.75 8.8% ESCM 16.84 16.50 MAR 15.00 2.88 *$ 1.04 8.1% URBN 10.44 11.19 MAR 10.00 1.06 *$ 0.62 5.7% GLGC 23.94 20.34 MAR 20.00 4.88 *$ 0.94 5.4% PRGN 28.63 28.50 MAR 25.00 5.00 *$ 1.37 5.0% ROAD 25.06 28.00 MAR 25.00 1.25 *$ 1.19 4.3% AMSY 22.88 22.75 MAR 20.00 3.63 *$ 0.75 4.2% CSTR 16.75 16.50 MAR 15.00 2.44 *$ 0.69 4.2% ATRX 23.00 20.25 MAR 20.00 4.00 *$ 1.00 3.8% WGR 28.00 25.59 MAR 25.00 4.00 *$ 1.00 3.6% CSTR 17.06 16.50 MAR 15.00 2.75 *$ 0.69 3.5% NERX 10.06 6.75 MAR 7.50 3.62 $ 0.31 3.5% MNTR 23.56 23.06 MAR 22.50 1.88 *$ 0.82 3.3% LGTO 17.88 14.50 MAR 15.00 3.88 $ 0.50 2.6% UTEK 38.00 33.94 MAR 35.00 4.25 $ 0.19 0.6% SGI 5.00 4.60 MAR 5.00 0.40 $ 0.00 0.0% NXCD 11.38 8.56 MAR 10.00 2.31 $ -0.51 0.0% *$ = Stock price is above the sold striking price. Comments: Not too bad a week, at least as far as the Covered-Call Section is concerned. Still, even deep-in-the-money covered writes are not a panacea for a protracted bear move. If you have altered your outlook on the future, consider using any rally to reduce exposure. Technically, Ultratech Stepper's (NASDAQ:UTEK) drop on Friday is worrisome as a test towards $30 (50 dma) appears likely - one to watch next week. Nextcard (NASDAQ:NXCD) may yet make a successful test of support around $8. Legato Systems (NASDAQ:LGTO) remains at a key moment. Neorx (NASDAQ:NERX) is moving lower on increasing volume - not a good sign. Roadway Express (NASDAQ:ROAD) continues to show impressive strength in the face of the bear! 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 PHSY 36.88 MAR 30.00 HYQ CF 8.75 542 28.13 21 9.6% ORG 10.96 MAR 10.00 ORG CB 1.50 619 9.46 21 8.3% GLFD 20.38 MAR 20.00 GQF CD 1.44 64 18.94 21 8.1% MNMD 38.25 MAR 35.00 MAQ CG 4.88 143 33.37 21 7.1% NVLS 45.38 MAR 40.00 NLQ CH 7.00 1375 38.38 21 6.1% LTBG 14.19 MAR 12.50 LKQ CV 2.13 50 12.06 21 5.3% PLMD 39.44 MAR 30.00 PM CF 10.50 75 28.94 21 5.3% GMST 49.50 MAR 40.00 QLF CH 10.88 418 38.62 21 5.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** GLFD - Guilford Pharmaceuticals $20.38 *** Drug Sector *** Guilford Pharmaceuticals (NASDAQ:GLFD) is a biopharmaceutical company engaged in the development and commercialization of products in two principal areas: targeted and controlled drug delivery systems and therapeutic and diagnostic products. The company reported earnings last week, showing a net loss of $47.1 million, or $2.00 per share on revenues of $18.1 million. According to the Guilford’s CEO, 2000 was a pivotal year as the company achieved important milestones, while transitioning into a fully-integrated biopharmaceutical company. The company has six product candidates advancing through various stages of clinical development and is working on bringing these products into the marketplace. A reasonable cost basis from which to speculate on Guilford's future. MAR 20.00 GQF CD LB=1.44 OI=64 CB=18.94 DE=21 MR=8.1% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=GLFD ***** GMST - Gemstar $49.50 *** An Old Favorite! *** Gemstar-TV Guide International Group (NASDAQ:GMST) develops, markets and licenses proprietary technologies and systems that simplify and enhance consumers' interaction with electronics products and other platforms that deliver video, programming information and other data. Their first proprietary system, VCR Plus+, is currently incorporated into virtually every major brand of VCR sold worldwide. The company has also developed and acquired a large portfolio of technologies and intellectual property to implement interactive program guides (Gemstar Guide Technology), which enable consumers to navigate through, sort, select and record television programming. Gemstar is an OIN favorite as the options premiums are generally robust and the issue has a unique niche in the consumer electronics market. The recently announced a 10-year pact to provide its interactive program guide to U.S. cable operator Charter Communications’ (NASDAQ:CHTR) digital cable customers, will provide Gemstar 85% of national advertising revenue. We simply favor the improving technicals and the support above our cost basis. MAR 40.00 QLF CH LB=10.88 OI=418 CB=38.62 DE=21 MR=5.2% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=GMST ***** LTBG - Lightbridge $14.19 *** Bottom Fishing *** Lightbridge (NASDAQ:LTBG) provides customer relationship management solutions that enable communications service providers to initiate and maintain relationships with their subscribers. Clients rely on Lightbridge's Telesto. network of integrated customer acquisition and risk management solutions to forge customer relationships. The company's traditional and Web-based offerings are designed to facilitate rapid application approval, minimize fraud and expand the opportunity to retain high-value customers. Lightbridge, which recently completed its merger with Corsair Communications, expects to see 20% total revenue growth over last year with total gross margins in the mid fifty percent range. The stock has rebounded strongly off the December low and is showing continued buying pressure as it forges a Stage I base. MAR 12.50 LKQ CV LB=2.13 OI=50 CB=12.06 DE=21 MR=5.3% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=LTBG ***** MNMD - MiniMed $38.25 *** Change of Character? *** MiniMed (NASDAQ:MNMD) designs, develops, manufactures and markets advanced infusion systems with a primary emphasis on the intensive management of diabetes. The company's products include external pumps and related disposables, a first generation continuous glucose monitoring system as well as exclusive marketing rights to an implantable insulin pump, which is currently only approved for distribution in the European Community. MiniMed's 4th-quarter sales grew 30% to $92.5 million and net income increased 153% to $18.8 million. The company continues to make progress on the design, testing and pilot manufacturing of their next generation insulin pump, which is currently scheduled for introduction later this year. Prudential has recently upgraded MiniMed to a "strong buy" rating and Adams, Harkness & Hill has reiterated a "buy" rating. Several positive technical signals and MiniMed's recent move above its 30 dma suggest further upside potential. MAR 35.00 MAQ CG LB=4.88 OI=143 CB=33.37 DE=21 MR=7.1% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=MNMD ***** NVLS - Novellus Systems $45.38 *** Speculators Only? *** Novellus Systems (NASDAQ:NVLS) manufactures, markets and services advanced automated wafer fabrication systems for the deposition of thin films within the semiconductor equipment market. Novellus had favorable earnings in January, reporting record net sales for the 4th-quarter of $389.9 million and net income of $94.2 million, or $0.69 per fully diluted share. 2000 was the best year in the company's history, with record backlog and with revenue more than double the prior year. As for 2001, the company plans to offer a mid-quarter update in their conference call on March 1. Novellus has weathered economic downturns in the past, concentrating on expenses and their internal numbers. A reasonable entry point for those who wish to speculate on one of the stronger semiconductor issues. MAR 40.00 NLQ CH LB=7.00 OI=1375 CB=38.38 DE=21 MR=6.1% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=NVLS ***** ORG - Organogenesis $10.96 *** Bracing for a Rally *** Organogenesis (AMEX:ORG) is the only tissue-engineering company to have developed and gained FDA approval for a mass-produced product containing living human cells. The Company's product development focus includes living tissue replacements, cell-based organ assist devices and other tissue-engineered products. Lead product Apligraf - a cellular, bi-layered skin substitute - is approved and marketed for the treatment of venous leg ulcers and diabetic foot ulcers. The Organogenesis research pipeline includes the Vitrix(TM) living dermal replacement product, a coronary vascular Graft, and a liver assist device. The stock recently completed a double-bottom formation and is showing increasing strength. Organogenesis continues to report record sales of Apligraf which should bode well for their future earnings. MAR 10.00 ORG CB LB=1.50 OI=619 CB=9.46 DE=21 MR=8.3% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ORG ***** PHSY - PacifiCare $36.88 *** Earnings Surprise *** PacifiCare Health Systems (NASDAQ:PHSY) is one of the nation's largest health care services companies with $11 billion in revenues. Primary operations include health insurance products for employer groups and Medicare beneficiaries in eight states and Guam, serving approximately 4 million members. Other specialty products and operations include behavioral health services, life and health insurance, dental and vision services and pharmacy benefit management. PacifiCare's stock has rallied on better-than-expected 4th-quarter earnings, a strong outlook for 2001 and a series of brokerage upgrades. A conservative entry point closer to support for those investors who are bullish on PacifiCare. MAR 30.00 HYQ CF LB=8.75 OI=542 CB=28.13 DE=21 MR=9.6% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=PHSY ***** PLMD - PolyMedica $39.44 *** Range Bound? *** PolyMedica (NASDAQ:PLMD) is a nationwide provider of consumer specialty medical products and services. The company is best known through its Liberty brand name and it serves primarily the senior chronic disease marketplace. PolyMedica also focuses on Compliance Management using its unique Technology Platform to help seniors manage their disease more effectively. Liberty pioneered National Direct to Consumer Advertising to seniors with chronic diseases. The company announced favorable earnings in January but has suffered since November when Barron's made unsubstantiated claims that it was part of an FBI investigation. So far, the company has denied that is under investigation. For those who consider PolyMedica undervalued, the current overpriced options provide a reasonable entry point. MAR 30.00 PM CF LB=10.50 OI=75 CB=28.94 DE=21 MR=5.3% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=PLMD ***** ***************** 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 RMDY 25.50 MAR 22.50 LRQ CX 5.50 44 20.00 21 18.1% ACLS 10.44 MAR 10.00 ULS CB 1.13 2070 9.31 21 10.7% LPNT 41.31 MAR 40.00 PUN CH 3.13 194 38.18 21 6.9% CRA 39.70 MAR 35.00 CRA CG 6.00 122 33.70 21 5.6% AMKR 19.75 MAR 17.50 QEL CW 2.88 51 16.87 21 5.4% ABX 15.32 MAR 15.00 ABX CC 0.80 4095 14.52 21 4.8% *************************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=1698 ************************************************************ *********************** CONSERVATIVE NAKED PUTS *********************** Stock Buying Basics: Market Extremes By Ray Cummins Today we continue our discussion of common technical analysis terms and the basic indicators that can help a trader determine market direction. One of the expressions that has become very popular in recent weeks is "oversold." With regard to the basic market definition, the underlying concept is based on the number of stocks advancing or declining. When an excessive number of issues have advanced, the market is said to be "overbought." If an excessive number of issues have declined, it is said to be "oversold." If the broader market is in an overbought condition, that's usually a sign that euphoria has overwhelmed investors and it's time to stop buying, or at least start taking profits. When the major indices appear to have declined to a relatively low point in the cycle and the market is oversold, you may want to start buying again, as the risk will generally be lower in bullish positions. Indicators that identify market extremes are universally popular as technical trading tools. The most important concept investors should understand is that overbought and oversold indicators can only provide a method of determining when a market is approaching historical excesses. They do not suggest that the market is at a turning point merely because it has moved beyond a specific level. In addition, simply establishing these arbitrary ranges can often create a major problem for traders. The key to success with this type of analysis is that the condition of overbought or oversold must only be indicated when the instrument reaches an excessive state; one which occurs rarely over time. After all, any trader who applies relatively lax boundaries when searching for such an extreme condition will seldom be able to correctly identify the few occasions when the gauges are truly extended beyond the norm. The first step is to use a reliable indicator that works well with this type of technical analysis. One of the most common tools for viewing overbought and oversold is the Relative Strength Indicator or RSI. This measure of price momentum was developed by J. Welles Wilder in 1978 and is commonly included in the "oscillators" group because it varies between fixed upper and lower boundaries. The RSI is based on the fact that a stock, when advancing, will tend to close nearer to the high of the day than the low, and of course the reverse is true for declining issues. The indicator compares the price performance of a stock to that of itself, rather than to a stock market index or another stock, and it must not be confused with other relative strength gauges. In this case, the oscillator is indexed from 0 to 100 and it is most useful in a well-defined trading channel as trending prices tend to distort overbought and oversold signals. Using the basic values, a "buy" signal occurs when the oscillator is at 20 or less (the stock is oversold) and "sell" signals are issued when the RSI value is 80 or greater (the stock is overbought). Technical analysis can play a vital role in identifying stocks that are in the process of becoming winners and those that may quickly turn into losers. Establishing the correct parameters in which the terms "overbought" and "oversold" apply only to truly exceptional conditions is an important requirement in the study of historical pricing. Many otherwise intelligent traders regard this type of indication as a clear-cut signal when the market is beyond the relatively arbitrary boundaries of the oscillator. In reality, this measure of momentum is simply showing whether the price line is speeding up or slowing down and when an extreme is achieved, the condition cannot be expected to exist for extended periods. The result is generally a consolidation, followed by a renewed trend or a reversal and because it's almost impossible to determine which will occur, additional indicators are used to help predict the likely outcome. 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 BRIO 13.38 11.31 MAR 10.00 0.63 *$ 0.63 16.5% MDR 15.80 12.66 MAR 12.50 0.40 *$ 0.40 12.2% KSWS 31.50 32.38 MAR 30.00 1.38 *$ 1.38 12.0% TSN 13.55 12.75 MAR 12.50 0.65 *$ 0.65 11.3% MDR 15.29 12.66 MAR 12.50 0.60 *$ 0.60 11.1% TPTH 12.75 10.00 MAR 10.00 0.44 $ 0.44 10.7% SGR 52.04 50.31 MAR 45.00 1.30 *$ 1.30 9.4% APWR 42.50 37.44 MAR 30.00 0.69 *$ 0.69 8.2% TSO 13.32 13.45 MAR 12.50 0.40 *$ 0.40 7.1% ABMD 25.44 25.56 MAR 15.00 0.50 *$ 0.50 6.5% OII 22.50 20.15 MAR 20.00 0.40 *$ 0.40 6.3% NAUT 19.19 18.25 MAR 17.50 0.56 *$ 0.56 6.2% BPOP 27.38 27.00 MAR 25.00 0.50 *$ 0.50 6.0% RBK 31.20 26.18 MAR 25.00 0.45 *$ 0.45 5.8% OII 22.00 20.15 MAR 20.00 0.45 *$ 0.45 5.4% UIS 18.91 17.12 MAR 17.50 0.65 $ 0.27 4.3% AL 38.25 36.00 MAR 35.00 0.60 *$ 0.60 4.1% HOMS 36.63 29.13 MAR 30.00 1.13 $ 0.26 3.1% SPCT 24.75 16.13 MAR 17.50 0.44 $ -0.93 0.0% *$ = Stock price is above the sold striking price. Comments: McDermott International (NYSE:MDR) joined the crowd and posted unfavorable earnings, primarily due to the de-consolidation of a bankrupt subsidiary and lower income from its construction business. The stock has taken an unexpected turn for the worse and may move back into its old trading range ($8 - $10), so we will attempt to exit the position on any rally. Several other issues continue to weaken (and act horrid) and should be watched closely or exited: Reebok (NYSE:RBK) - at support, Homestore.Com (NASDAQ:HOMS) - rally failing, and Spectrian (NASDAQ:SPCT) - in the shadow of the Nortel (NYSE:NT) effect. Your actions, which may include acquiring the stock, exiting the position, or rolling down, should be determined by your personal risk-reward tolerance and overall outlook for each issue, its industry, and the market. If your anxiety is high, use a future rally to reduce portfolio exposure or lower your cost basis by rolling down and out to a safer strike price. 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 NEM 15.96 MAR 15.00 NEM OC 0.40 1950 14.60 21 9.9% OLOG 23.38 MAR 22.50 OOQ OX 0.56 0 21.94 21 9.0% PHTN 25.25 MAR 20.00 PDU OD 0.31 32 19.69 21 8.4% AMAT 47.94 MAR 37.50 ANQ OU 0.56 962 36.94 21 8.0% ATVI 22.50 MAR 20.00 AQV OD 0.38 65 19.62 21 8.0% HGSI 48.81 MAR 35.00 HHA OG 0.56 4 34.44 21 7.9% LPNT 41.31 MAR 35.00 PUN OG 0.56 9 34.44 21 7.5% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** AMAT - Applied Materials $47.94 *** Chip Sector! *** Applied Materials (NASDAQ:AMAT) develops, manufactures, markets and services semiconductor wafer fabrication equipment and related spare parts for the worldwide semiconductor industry. Customers for these products include semiconductor manufacturers and semiconductor integrated circuit (IC or chip) manufacturers that either use the ICs they manufacture in their own products or sell them to other companies. These ICs are key components in most advanced electronic products; computers, telecom devices, automotive engine management systems and electronic games. The company also owns Etec Systems, a manufacturer of mask pattern generation solutions for the electronics industry and has a flat panel display division, AKT, and provides manufacturing execution system software (MES) for the semiconductor industry through its company, Consilium. AMAT is our #1 choice in the chip sector, and traders who want to speculate on the group should consider this conservative position. MAR 37.50 ANQ OU LB=0.56 OI=962 CB=36.94 DE=21 MR=8.0% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=AMAT ***** ATVI - Activision $22.50 *** Video Gaming Giant! *** Activision is an international developer and distributor of interactive entertainment and leisure products. The company's products span a wide range of genres including action, adventure, extreme sports, strategy and simulation and target markets such as game enthusiasts, general consumers, value buyers and children. The company also publishes, develops and distributes products for a variety of game platforms and operating systems, including PCs, the Sony Playstation, Sega Dreamcast and Nintendo N64 console systems and the Nintendo Gameboy handheld device. ATVI is one of the leaders in producing entertainment and leisure software and the company has recently signed on to provide products for the new Microsoft Xbox, ensuring that the world's most powerful video game console will offer consumers a range of games when it hits the market. The stock recently climbed to a new, all-time high, and our cost basis near $20 appears to be a relatively safe entry point in the issue. MAR 20.00 AQV OD LB=0.38 OI=65 CB=19.62 DE=21 MR=8.0% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ATVI ***** HGSI - Human Genome Sciences $48.81 *** New Discovery! *** Human Genome Sciences (NASDAQ:HGSI) researches and develops novel compounds for treating and diagnosing human diseases based on the discovery and understanding of the medical usefulness of genes. The company has used automated, high-speed technology to discover the sequences of chemicals in genes and generate a collection of partial human gene sequences. The company possesses one of the largest databases of the genes of humans and microbes, and it has created a broad base of products based on its genomic database. GlaxoSmithKline has begun human trials of a new compound that may reduce risk in atherosclerotic plaque and cardiovascular disease using a target derived from its collaboration with HGSI. Human Genome will benefit from milestone payments related to clinical progress and if the product is commercialized, the company will receive substantial royalties. Investors cheered the news and HGSI shares are due for a bounce after a prolonged period of selling pressure. MAR 35.00 HHA OG LB=0.56 OI=4 CB=34.44 DE=21 MR=7.9% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=HGSI ***** LPNT - Lifepoint Hospitals $41.31 *** A New Trend? *** Lifepoint Hospitals (NASDAQ:LPNT) owns and operates general, acute care hospitals located in non-urban areas. Lifepoint operates a number of hospitals located in: Alabama, Florida, Georgia, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming. Lifepoint's general, acute care hospitals usually provide the range of medical and surgical services commonly available in hospitals in non-urban markets. These hospitals also provide diagnostic and emergency services, as well as outpatient and ancillary services such as outpatient surgery, laboratory, radiology, respiratory therapy and physical therapy. Lifepoint is planning a public offering of 3.3 million shares of its stock, which will dilute the 32.2 million shares outstanding. Investors were briefly disappointed, but now the issue appears to bracing for a rally, and our cost basis is well below the current trading range. MAR 35.00 PUN OG LB=0.56 OI=9 CB=34.44 DE=21 MR=7.5% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=LPNT ***** NEM - Newmont Mining $15.96 *** Precious Metals Hedge! *** Newmont Mining (NYSE:NEM) is engaged in the production of gold, the exploration for gold and the acquisition and development of gold properties worldwide. The company currently produces gold from mines in Nevada and California, and, outside of the United States, from operations in Peru, Indonesia, Mexico and Uzbekistan. The company also began production of copper concentrates from a copper/gold deposit at a second location in Indonesia. Battle Mountain Gold, which has operations in northern Ontario, Canada and Bolivia, as well as interests in Australia and Papua New Guinea, is a wholly-owned subsidiary of NEM. This position is simply a portfolio hedge for traders who are concerned about the recent performance of the broad market. Consider this play only if you have a relatively bearish outlook for stocks. MAR 15.00 NEM OC LB=0.40 OI=1950 CB=14.60 DE=21 MR=9.9% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=NEM ***** OLOG - Offshore Logistics $23.38 *** Serving Oil Services! *** Offshore Logistics (NASDAQ:OLOG) is a supplier of helicopter transportation services to the worldwide offshore oil and gas industry. Through its Air Logistics subsidiaries and with its investment in Bristow Aviation Holdings Limited, operates almost 400, including 78 aircraft operated through other entities. The company's operations also include production management services through Grasso Production Management. GPM's services include furnishing personnel, engineering, production operating services, paramedic services and the provision of boat and helicopter transportation of personnel and supplies between onshore bases and offshore facilities. The offshore gas and oil industry is active again and transportation to the rigs is a necessary part of any oil company's operations. OLOG is one of the leaders in the business and with the stock trading at a new two-year high, it appears that investors favor the outlook for the company. We will "target shoot" a premium near $0.75 initially, to allow for some consolidation in the issue. MAR 22.50 OOQ OX LB=0.56 OI=0 CB=21.94 DE=21 MR=9.0% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=OLOG ***** PHTN - Photon Dynamics $25.25 *** Bottom Fishing! *** Photon Dynamics (NASDAQ:PHTN) is a provider of yield management solutions to the flat panel display industry. The acquisition of CR Technology complemented its capabilities of data acquisition, image analysis and systems engineering. As a result, Photon now offers yield management solutions for the printed circuit board assembly and advanced semiconductor packaging industries. Their test, repair and inspection systems are used by manufacturers to collect data, analyze product quality and identify and repair product defects at critical steps in the manufacturing process. Photon achieved record revenue during the most recent quarter and received its largest order to date from a major LCD manufacturer. The company is also setting its sights on international expansion and is targeting gross margins of 50% in the next two years. Our conservative position is low risk with a reasonable expectation of profit. MAR 20.00 PDU OD LB=0.31 OI=32 CB=19.69 DE=21 MR=8.4% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=PHTN ***** ***************** 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 KLAC 43.38 MAR 35.00 KCQ OG 1.13 2506 33.87 21 16.2% ILUM 26.50 MAR 22.50 ILU OX 0.63 0 21.87 21 12.6% QQQ 51.18 MAR 45.00 QQQ OS 0.95 8911 44.05 21 9.0% SRCL 39.38 MAR 35.00 URL OG 0.62 35 34.38 21 7.5% BFT 31.30 MAR 30.00 BFT OF 0.55 25 29.45 21 6.8% LOW 54.58 MAR 50.00 LOW OJ 0.85 1336 49.15 21 6.8% ************************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=1710 ************************************************************** ************************ SPREADS/STRADDLES/COMBOS ************************ An Incredible Comeback! Technology stocks staged a dramatic recovery Friday amid hopes of an impending rate cut by the Federal Reserve. Friday, February 23 Technology stocks staged a dramatic recovery Friday amid hopes of an impending rate cut by the Federal Reserve. The NASDAQ closed up 17 points at 2,262. Industrial stocks did not perform as well with the Dow falling 84 points to 10,441. The broader market S&P 500 index ended 7 points lower at 1,245 after hitting a two-year low earlier in the session. Volume on the NYSE hit 1.23 billion shares, with losers beating winners 1,729 to 1,328. Activity on the NASDAQ was heavy at 2.24 billion shares traded. Technology declines beat advances 2,077 to 1,703. In the bond market, the 30-year Treasury rose 21/32, pushing its yield down to 5.48%. Thursday's new plays (positions/opening prices/strategy): Chiron (NASDAQ:CHIR) MAR50C/40P $1.50 credit strangle Avery Denn. (NYSE:AVY) MAR60C/55C $0.50 credit bear-call Invest Tech. (NYSE:ITG) MAR55C/40P $0.35 credit synthetic All of our new positions were available at acceptable prices. The bear-call spread in Avery Dennison did not meet our target credit but the entry price was favorable for traders who agree with a neutral outlook for the issue. Portfolio Activity: The market ended mixed today with technology stocks recovering in late trading while industrial issues continued to decline on weakness in defensive stocks. The Dow extended its recent slide, testing the lower boundary of this winter's trading range after an unexpected sell-off in computer giant International Business Machines (NYSE:IBM). The drop in IBM shares came on a downgrade by Salomon Smith Barney, which cut its 2001 earnings and revenue estimates on the bellwether stock. Among other blue-chip issues, DuPont (NYSE:DD) and J.P. Morgan (NYSE:JPM) led the losers while Microsoft (NASDAQ:MSFT), Eastman Kodak (NYSE:EK), and General Motors (NYSE:GM) edged higher. On the NASDAQ, Sun Microsystems (NASDAQ:SUNW) ended flat after an earlier move below $20, in the wake of an unexpected profit warning. Sun cut its third quarter earnings expectations just weeks after affirming revised numbers and the magnitude of the reduction surprised many investors. In the telecom sector, Motorola (NYSE:MOT) slumped after saying it expects to miss first-quarter earnings estimates and may post an operating loss because of weak order flow. The stock moved to a two-year low on the news. Networking, chip and Internet shares were among the best technology groups and in the broader market, biotechnology stocks rallied while gold shares ended higher for a third straight session. On the downside, bearish activity was seen in brokerage, natural gas, major drug, chemical, utility, consumer products and oil service issues. The Spreads Portfolio endured another day of widespread selling and although the late recovery in the technology segment was a welcome activity, a number of popular issues ended the session at recent lows. One of the big surprises was Qualcomm (NASDAQ:QCOM), which whipsawed to $50 after a report warned of a two-year delay in the rollout of its third generation mobile phone technology by European operators. Qualcom officials were quick to refute the rumor, saying that one of its new CDMA technologies was already available in South Korea. The company went on to say that CDMA demand during the second quarter was consistent with previously stated expectations and that royalty reports from the company's licensees for the first quarter were exceptionally strong. The damage had already been done, however, and QCOM shares did well to recover to the day's highest levels, which were significantly below the recent trading-range bottom near $69. Another issue that has moved unexpectedly out of its recent comfort area is Continental Airlines (NYSE:CAL). The fall from grace began on Tuesday when Continental appealed a court order approving the auction of Trans World Airlines, saying the process is slanted to favor a bid by American Airlines. Northwest Airlines and investor Carl Icahn have also objected to the auction process, alleging that AMR's current offer is "illusory," because it does not commit AMR to buying any particular assets at any particular price. On Wednesday, a bankruptcy judge denied Continental's motion to halt the process until an appeal can be reviewed by a higher court. The decision leaves Continental in an unfortunate situation and without leverage to oppose the transaction. From an investor's viewpoint, there is little positive news in the company's future and with AMR and United Airlines acquiring the lion's share of the industry, the outlook for CAL becomes less certain. However, there's definitely no ambiguity in the chart, as the stock has dropped over 10% since the appeal was announced and the selling volume has increased during the decline. Those of you who sold premium in the issue (and did not close the play on Wednesday's move below technical support) should be prepared to own the stock unless a significant change in character occurs. There are, of course, some other positions that are performing very well, along with a few plays that have not achieved the expected goals. The problem is how to identify an appropriate exit point and with the technology group at extremely oversold levels, now is not the time to be making adjustments or cutting your losses. That move should have been made on the way down, before the market dropped to new yearly lows. The key to success in this game is to limit losses and maximize profits, thus the question is, "How far do you let the position run before closing the play?" Most methods for taking profits and preventing losses fit into one of two categories: a pre-arranged target profit or loss limit; or a technical exit based on the chart indications of the underlying issue. The first technique is simple, as long as you adhere to the initially established limits. The alternative method is more difficult, but there are many different indicators available to establish an acceptable exit point; moving averages, trend-lines, previous lows, etc. and with this type of stop-loss system, you exit the play after a violation of a pre-determined level. Establishing these loss-limiting rules before you enter a position will help to control emotions and improve consistency with exit decisions. When you trade without a plan, it's amazing how confusing the situation can become and for most of us, a system of structured and pre-planned moves is the only solution. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** OLN - Olin $20.47 *** Chemicals Sector! *** Olin Corporation (NYSE:OLN) is a manufacturer concentrated in three major business segments: Chlor Alkali Products, Metals and Winchester. Chlor Alkali Products include chlorine and caustic soda, sodium hydrosulfite and high strength bleach products. Metals products include copper and copper alloy sheet, strip, welded tube and fabricated parts, and stainless steel strip. The Metals segment also includes a network of metals service centers in the continental U.S. and Puerto Rico. Winchester products include sporting ammunition, canister powder, reloading components, small caliber military ammunition and industrial cartridges. Here's an interesting issue that we discovered while searching for "Naked Put" candidates. The company reported solid earnings in fiscal 2000 with record profits in the Olin Brass segment and a noteworthy turnaround in Chlor Alkali Products. The Winchester subsidiary posted solid earnings, but the final revenue results were skewed by the impact of a recently-ended strike at Olin's manufacturing facility in East Alton. The company announced that the costs of the wage dispute will be in the range of $0.40 per share for 2001, with a substantial portion of the loss coming in the first quarter. Strangely enough, investors have chosen to overlook the past problems and focus on the future, and the new buying pressure is evident in the stock's recent rally. With the current bearish outlook for growth issues, a defensive play may be a favorable addition to your portfolio. Traders who believe OLIN has future upside potential may speculate on that outcome with this conservative position. Because the stock has moved up significantly in the past few sessions, we will target a lower cost basis initially, to enter the play. PLAY (conservative - bullish/synthetic position): BUY CALL MAY-22.50 OLN-EX OI=40 A=$0.90 SELL PUT MAY-17.50 OLN-QW OI=36 B=$0.40 INITIAL NET DEBIT TARGET=$0.12-$0.25 TARGET PROFIT=$0.75-$1.00 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $575 per contract. http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=OLIN ****************************************************************** SYK - Stryker $53.94 *** On The Move! *** Stryker (NYSE:SYK) and its subsidiaries develop, manufacture and market specialty surgical and medical products, including a range of orthopaedic implants, bone cement, trauma systems used in bone reconstruction, powered surgical instruments, endoscopic systems, raniomaxillofacial fixation devices, specialty surgical equipment used in neurosurgery and patient care and handling equipment for the global market. The company also provides outpatient physical and occupational rehabilitation services in the United States. In late January, Stryker reported a 27% increase in its fourth quarter profit, boosted by a demand in surgical equipment and its fast-growing physical therapy services unit. The company said operating earnings came in at $65 million, or $0.33 per share in the latest quarter, up from $51 million, or $0.26 per share a year ago. The company's net sales increased 10% to $612 million, with domestic sales jumping 18% to $380 million for the fourth quarter on growing shipments of orthopedic implants, powered surgical instruments, endoscopic equipment, hospital beds and stretchers and higher revenue from physical therapy services. The surprise performance was posted by Stryker's Physical Therapy business, where revenues soared 50% to $40 million. Worldwide sales of their MedSurg Equipment was also strong, with an 18% increase from the year-ago quarter. Based on the outstanding financial results, investors have shown a new interest in the company and the bullish technical indications suggest there is additional upside potential in the issue. PLAY (conservative - bullish/credit spread): BUY PUT MAR-45 SYK-OI OI=2607 A=$0.40 SELL PUT MAR-50 SYK-OJ OI=3545 B=$0.90 INITIAL NET CREDIT TARGET=$0.55-$0.60 ROI(max)=12% B/E=$49.45 http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=SYK ****************************************************************** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. Current news and market sentiment will have an effect on these issues so please review each play individually and make your own decision about the future outcome of the position. ****************************************************************** SHPGY - Shire Pharmaceuticals $55.50 *** Top Forming? *** Shire Pharmaceuticals Group (NASDAQ:SHPGY) is an international specialty pharmaceutical company with a strategic focus on four therapeutic areas: central nervous system disorders, metabolic diseases, cancer and gastrointestinal disorders. Shire has operations in the United States, Europe and the rest of the world. Revenues are derived from sales of products through the company's sales and marketing group, licensing and development fees, and royalties. Shire is a fundamentally sound company with a number of great products but recently, the defensive drug manufacturing sector has not been performing as well as one might expect, considering the bearish trend in the technology industry. On an individual basis, a number of issues in the segment have traded lower over the past few weeks and SHPGY is encountering difficulty at a well-defined resistance level near $58. Looking back, that's approximately the same price range as its failed rally during the middle of 2000. With the all-time high in November forming a peak, the resultant pattern is similar to a common technical formation known as a "head-n-shoulders." Traders who agree that the potential for a move through $60 is unlikely in the next few weeks may speculate on that outcome with this conservative play. PLAY (conservative - bearish/credit spread): BUY CALL MAR-65 UGH-CM OI=0 A=$0.31 SELL CALL MAR-60 UGH-CL OI=284 B=$0.88 INITIAL NET CREDIT TARGET=$0.62-$0.69 ROI(max)=14% B/E=$60.62 http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=SHPGY ****************************************************************** CAH - Cardinal Health $100.84 *** Bracing For A Rally? *** Cardinal Health (NYSE:CAH) is structured as a holding company that, through a number of separate operating subsidiaries, provides products and services to healthcare providers and manufacturers to help them improve the efficiency and quality of healthcare. These services and products include Pharmaceutical Distribution and Provider Services, Medical-Surgical Products and Services, Pharmaceutical Technologies and Services and other Automation and Information Services. A subscriber offered this stock for our review and based on the recent technical indications in the issue, we think it warrants further consideration. In addition, a number of analysts have upgraded their outlook on the company, based on the addition of Bindley Western, a wholesale distributor of pharmaceuticals and provider of nuclear pharmacy services. Cardinal is now a very diversified health care stock in a popular sector and with the company's history of outstanding earnings, the future is bright. Those of you who have an optimistic view of the issue should study this position further and make your own decision about its possible outcome. BUY PUT MAR-90 CAH-OR OI=914 A=$0.70 SELL PUT MAR-95 CAH-OS OI=307 B=$1.25 INITIAL NET CREDIT TARGET=$0.60-$0.70 ROI(max)=14% B/E=$94.40 http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=CAH ****************************************************************** - STRADDLES AND STRANGLES - One our readers commented that we rarely offer Debit Strangles, which are a speculative type of Straddle position that utilizes "out-of-the-money" options. The technique offers low risk and potentially high reward, but the problem is that you are paying a premium for time with no intrinsic value in the options. There are conditions however, where this speculative technique can be favorable, as long as you understand that "probability of profit" is relatively low. The following two positions meet our basic criteria for favorable debit strangles; options that are cheap (undervalued) with an underlying security that has the potential to move (high or low) enough to make the play profitable and a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk/reward of the position. As with any recommendation, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** ICI - Imperial Chemical $29.45 *** Probability Play! *** Imperial Chemical Industries (NYSE:ICI) is an industrial chemical organization. Its core business now comprises National Starch, Quest, Industrial Specialties and Paints. Imperial also has a chemicals business that comprises Halochemicals, Methanol and a number of regional businesses. ICI is actively pursuing the divestment of most of its Industrial Chemicals segment consistent with its strategic shift to specialty chemicals. ICI is engaged in industrial adhesives, specialty starch, fragrances, flavors, food ingredients, specialty process intermediates, paints and chlorofluorocarbon replacements. It also has positions in a wide range of synthetic resins and polymers, chemicals based on silica and alumina, surfactants and catalysts. In addition, ICI has a regional position in the United Kingdom in chlor-alkali products. PLAY (speculative - neutral/debit strangle): BUY CALL JUL-35 ICI-GG OI=92 A=$0.75 BUY PUT JUL-25 ICI-SE OI=20 A=$1.10 INITIAL NET DEBIT TARGET=$1.60-$1.70 TARGET ROI=50% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ICI ****************************************************************** TMX - Telefonos de Mexico $31.60 *** Recent Activity! *** Telefonos de Mexico, S.A. de C.V. (NYSE:Telmex) owns and operates a telecommunications system in Mexico. It is a provider of local, long-distance and cellular telephone services as well as Internet access throughout Mexico. Telmex also provides other telecom and telecommunications-related services such as directory services, data transmission, Internet access, paging service and connection services to other carriers. Outside Mexico, Telmex has made a series of acquisitions primarily focused in Latin America and the Spanish-speaking market in the United States, and it now operates in the United States (including Puerto Rico), Brazil, Ecuador and Guatemala. The T1msn Internet portal, a joint venture between Telmex and Microsoft, is aimed at all of the Spanish-speaking areas of the Americas. PLAY (very speculative - neutral/debit strangle): BUY CALL APR-35 TMX-DG OI=1794 A=$0.90 BUY PUT APR-30 TMX-PF OI=1563 A=$1.35 INITIAL NET DEBIT TARGET=$2.05-$2.15 TARGET ROI=25% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=TMX *************************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. 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