The Option Investor Newsletter Tuesday 02-27-2001 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/022701_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 02-27-2001 High Low Volume Advance/Decline DJIA 10636.90 - 5.60 10698.40 10560.10 1.11 bln 1444/1592 NASDAQ 2207.82 -100.68 2300.18 2206.72 1.81 bln 1216/2510 S&P 100 650.97 - 4.83 659.10 647.21 totals 2660/4102 S&P 500 1257.94 - 9.71 1272.76 1252.26 39.3%/60.7% RUS 2000 478.75 - 9.56 488.31 478.75 DJ TRANS 2971.01 - 7.23 2987.36 2960.80 VIX 29.03 + 1.69 29.76 27.65 Put/Call Ratio 0.79 ****************************************************************** Desperately Seeking Hope It was hard to find any hope on the tape today as the NASDAQ closed at a two year low. Leading the slide were former tech heavyweights Cisco (NASDAQ:CSCO) and JDS Uniphase (NASDAQ:JDSU) which both set new 52-week lows. Consumer Confidence comes in at 5-year lows but investors still fret about an intermeeting rate cut that appears so vital at this point. Why? Because, according to Fed Vice Chairman Roger Ferguson, household spending continues to hold up well despite the confidence numbers. His bucket of cold water, in conjunction with numerous earnings warnings, sent the buyers into hiding and left the markets for dead. Seeing that Alan Greenspan speaks tomorrow at 9:30am ET before the House Financial Services Committee, one would have thought that an intermeeting rate cut would have preceded this important inquiry. As I have difficulty in finding a good angle to write about this gloomy market and my hope dwindling, the fact that Mr. Greenspan is going to "update" his State of the Economy testimony given to Senate two weeks ago might be of some hope. But what we really need is a rate cut. Many strategists and market watchers believe that the U.S economy has reached a point where a "wait-and-see" attitude just won't work. At the same time, this intermeeting rate cut hype seems to be just that. Regardless, the market needs a rate cut simply to give the buyers a reason to come back, if only temporarily. While decliners beat advancers on the NASDAQ by a 2-1 margin, volume was relatively light at 1.7 mln shares as buyers were nowhere to be found. There are two reasons that this widely expected rate cut has not yet occurred: first, Greenspan does not like to be bullied into monetary action by the market; and secondly, I think the Fed is waiting for a moment when the market least expects it in order to maximize shock value and effectiveness. He may also be waiting to examine the NAPM numbers expected out on Thursday morning at 10am ET. In addition to economic concerns, analyst comments and downgrades continue to be a thorn in the NASDAQ's side. Today, Goldman Sachs took the opportunity to lower 2001 estimates on Hewlett-Packard (NYSE:HWP), IBM (NYSE:IBM), Network Appliances (NASDAQ:NTAP), EMC (NYSE:EMC), Broadcom (NASDAQ:BRCM), Vitesse (NASDAQ:VTSS), Applied Micro Circuits (NASDAQ:AMCC), and PMC-Sierra (NASDAQ:PMCS), just to name a few. Nike (NYSE:NKE) received a string of downgrades today after the retailer warned that 3rd quarter earnings would be significantly lower-than-expected. They expect 3rd quarter profits of 34 to 38 cents versus previous estimates of 50 to 55 cents. The direct result was lower domestic footwear sales but the company pointed the finger at B-2-B player i2 Technologies (NASDAQ:ITWO) and their supply chain software application. Both stocks tumbled lower: NKE down $9.57 to $39.60, ITWO down $7.94 to $27.56. After Friday's late session short-covering rally, fueled by rate cut speculation, the NASDAQ used that momentum yesterday to climb to 2300. Today, that level proved to be resistance and buyers had no interest in taking positions above there after the Consumer Confidence number came out at 10am ET. The rest of the session was a steady decline toward 2200, which offered nice opportunities to play puts with little to no heat. Technically, the NASDAQ is approaching its intraday low set last Friday before the relief rally, 2156. This level will most likely be challenged as earnings estimates continue to be downwardly revised and companies confess their woes. Obviously, upside action on the NASDAQ will be hinged on a catalyst, namely an intermeeting rate cut. Until then, trading puts seems to be working well, yet be on alert for that unexpected moment when the Fed moves. Recent rallies have been short-lived and proved to be put entry opportunities. Leading the market to the downside was the Networkers(NWX.X), driven by news that JDSU was cutting more than 3000 jobs, or about 10% of its work force. CSCO slipped to $24 a share and Juniper (NASDAQ:JNPR) lost 13%, finishing at $62.75. Biotechs (BTK.X) were weak as well, giving back much of yesterday's gains. The Semiconductor sector(SOX.X) encountered resistance at 600 both yesterday and today, rolling over to lead the NASDAQ lower. After the bell, the outlook continued to deteriorate when fiber optic company Avanex (NASDAQ:AVNX) downwardly revised its 3rd quarter and fiscal year outlook. The stock fell 20% in after- hours to $19. Following suit, both Chartered Semi (NASDAQ:CHRT) and Altera (NASDAQ:ALTR) lowered numbers, citing the weakening economic environment, the usual suspect. Meanwhile, over on the Dow(INDU), the Consumer Confidence release tanked the index by 100 points. After the initial sell-off, the INDU began climbing nicely as traders went into insurance and bank issues. Unfortunately, the INDU encountered resistance at 10700, which will remain a challenge for the index. While it sold off late in the session, buyers reemerged at 10600 to buoy the INDU, even as the NASDAQ slipped to the low of the day. So now the INDU is pinned between 10600 and 10700, and will likely trade off Greenspan's testimony tomorrow. Watch the Financials, JP Morgan Chase (NYSE:JPM) and Citigroup (NYSE:C) in particular. Looking forward, the health of the tech sector is deeply in question as once high flying heavyweights have been humbled. The downside on the NASDAQ is uncertain and the mentality of "it can't go any lower" is dangerous. Expect the unexpected. On the flipside, that may also be an intermeeting rate cut. What we need is hope, and a cut before the March 20th FOMC meeting certainly would provide that temporarily. The damage is done from the previous tightenings of 2000, evident in the constant warnings and revisions. Use rallies into resistance as put entry opportunities and remember that a rate cut will trigger a hefty short covering rally, especially if it comes at an unexpected moment. Even with another easing in the coming month, the market will digest it on a short-term basis, but the economic implications are months and months away. Therefore, be a trader and take it tick by tick, cutting losses early and taking profits quickly. Trade smart. Matt Russ 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." Jim Crimmins, President of TradersAccounting.com 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************************* 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=1712 ************************************************************** **************** MARKET SENTIMENT **************** The World Is Ready To End By Austin Passamonte It's official; we are going to 1,500 in the COMPX and that should drag the Dow down to 9,000 along with it. One big capitulatory downdraft, our V-bottom is in place and we can continue the bull market rally from its brief interruption from prior market highs. Not so fast, Sparky... we shouldn't expect either to occur at the pace & speed traders desire. Nope, this isn't one of those trite action movies where our hero gets shot in the shoulder, stabbed in the leg and kicked in the face only to rise up & win his fight and leading lady's heart. That only happens in theaters. Real-life bear markets aren't nearly so concise and compliant. They are known to drag on and on until every last market bull is slain and strung from a meat hook. Capitulation will not be an event but more likely a process few want to endure but all shall before the inevitable end. Meanwhile, we will continue to experience rallies up to resistance and sell-offs down to support or below. Wild rallies failing to sustain and subsequent lower lows are another hallmark. Seen any of those over the past few months? Traders are always euphoric towards resistance and despondent near support, causing them to buy tops and sell bottoms. Isn't that what public traders have always done since the caveman age? Flash back less than one month ago. Everyone was euphoric as the Dow flirted with 11,000 and tech stocks pre-warned left & right only to rally the next session. There was no fundamental difference in the economy then as now. Oh yes... everything is different this time. The media says we have no reason to buy until 2003 after the recession winds its way through our world economy. While that may very well be true, rest assured that some catalyst will arise to excuse pent-up buyers to snap up their precious tech-loves for the pittance they now fetch. CSCO at $24? JDSU below $28? GLW below $29? There are millions of "investors" just dying to dollar-cost average down and the first hint of buying that ensues will open the floodgates. Not this time? Public has finally learned their lesson once & for all? Please! This is the public we're speaking about. Basic human nature and herd mentality shall never change. Lower price levels could easily be in our future and the next several sessions as well. Any interim rate-cut will merely serve as a temporary lift to otherwise pretty dismal fundamentals. That being said, trading rallies will emerge in the near future and for quite a while as sideways action grinds on. These are trader's markets and no one sees an end to that anytime soon. All major indexes could slip another 5% to 10% from here, but they could gain 10% - 30% just as well. It's up to us for choosing just when market action has reached extremes and the VIX is a fine measure of that. Market Sentiment will continue to buy every dip of our near-term chart signals and sell when they cycle up days, hours or minutes later. Put-plays can wait until the Fed rumor becomes news. We are on the cusp of major market moves once again and it could go either or both directions on any given session. Take modest positions, sell on the slightest profits captured, honor disciplined stops and stay in the game until the big ones are hit. There will be plenty of big moves headed our way in both directions going forth and staying alive while cautiously probing for them is the key. Defense wins championships! ***** VIX Tuesday 02/27 close; 29.03 VXN Tuesday 02/27 close; 73.45 30-yr Bonds Tuesday 02/27 close; 5.35% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Tuesday (02/27/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 690 - 675 9,224 5,544 1.66 670 - 655 7,110 5,484 1.30 OEX close: 650.97 Support: 645 - 630 2,774 9,402 3.39 625 - 610 36 6,364 176.78 Maximum calls: 700/7,374 Maximum puts : 600/6,983 Moving Averages 10 DMA 663 20 DMA 684 50 DMA 689 200 DMA 750 NASDAQ 100 Index (NDX/QQQ) Resistance: 58 - 56 65,243 26,407 2.47 55 - 53 51,149 36,993 1.38 52 - 50 42,763 37,773 1.13 QQQ(NDX)close: 49.00 Support: 48 - 46 1,517 9,243 6.09 45 - 43 1,313 10,661 8.12 42 - 40 707 6,361 9.00 Maximum calls: 60/58,280 Maximum puts : 50/26,186 Moving Averages 10 DMA 53 20 DMA 57 50 DMA 60 200 DMA 80 S&P 500 (SPX) Resistance: 1325 46,026 42,478 1.08 1300 12,876 17,257 .75 1275 12,309 18,556 .66 SPX close: 1257.94 Support: 1250 8,017 20,199 2.52 1225 3,040 12,170 4.00 1200 1,663 16,811 10.11 Maximum calls: 1350/47,943 Maximum puts : 1325/42,478 Moving Averages 10 DMA 1282 20 DMA 1315 50 DMA 1320 200 DMA 1406 ***** 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 Commercialc 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 02/13 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/022701_1.asp *********** OPTIONS 101 *********** Fiduciary Duty By David Popper Last December, I received a call from a retired executive of a well known tech company. He wanted to sue his broker for placing him in risky and damaging trades. He lost 1.5 million dollars. He explained that he left an "old economy" company and joined well established tech company because options were available and because the company's stock split and doubled every 18 months to two years. He had made a fortune on his options. In December 1998, he had actually accumulated $1.5 mln and decided to slow down, move to Idaho and do very little. His company referred him to a well known broker. The broker asked him if he liked the prospects of his company. He responded positively. The broker then recommended that he invest his entire fortune in buying calls on this company. The calls were January 2001 calls with a strike price of $100. The stock's price at the time was $80. Surely this company, which doubled every year, was a lock to race well past $100 a share. My client could just see profits galore. Why, if history were any guide, he would make more money retired than he ever made working. From time to time during these three years, thirteen times to be exact, the broker, with the consent of my client, would trade in and out of these options and made an average of $20,000 profit per trade. This was pure gravy. Over the course of time, my client began studying trading and even subscribed to a few web sites. Imagine being retired and being responsible for monitoring only one position of a company that you know intimately, which has a track record of doubling and splitting 18 months to two years. Then came March 2000. The stock plummeted. My client hung in there. He was used to dips and the company's prospects were bright. The year 2001 was pressure packed. My client's emotions rose and fell with the market. He fought with his wife often. He spoke to his broker everyday. They decided to hang in there. If he sold now, he couldn't retire so he might as well ride it out. He also played the "what if" game way too often. On expiration day, the stock closed at $68 a share and with that went the hopes and dreams of this man. The place in Idaho was sold and his marriage was in ruins. There, however, was one last, desperate gambit. Maybe he could sue the broker. He called me and wanted to know if there was a claim against the broker. After reviewing the situation, I decided that there was no claim. The man was well aware of the risks involved and was only thrilled to make $20,000 thirteen times while the broker timed the market. The man was a subscriber to many stock web sites and was familiar with the risks of holding one position and of the risks in owning straight calls. He went into the trades with his eyes wide open. I agreed with him that there was a breach of fiduciary duty. It wasn't between him and his broker, however, it was between he and his family. I began managing my own retirement account in 1998 because my broker, who was also a friend, passed away. Before I made the decision to trade myself, I had interviewed many brokers who were only interested in placing me in mutual funds that had mediocre results. Others wanted trading authority but did not want to educate me. I felt that no one would watch out for this account like I would, so I began to read, learn and trade. When I walked away from the mutual funds, I was in effect telling my family that I would watch our account carefully and would use it to maximize returns. I would not use it as my personal escape from reality into a world of risk and excitement. I would not make trades which were high risk until I had the time and knowledge necessary to do so. In short, I had a fiduciary duty to trade prudently, with an eye toward achieving financial security. Having said the above, I had to determine which plays made sense for someone who had only limited time to trade. I began using many methods and enjoyed mixed results. Then, one event happened which clarified my thinking. In January 2000, I purchase 300 shares of Ariba (NASDAQ: ARBA) for $265 a share based primarily on technical analysis and the fact that the earning were on the next Monday. On Friday, it quickly rose to $300 a share and on that Monday it announced a split. On Tuesday morning, I had a short non-jury trial out of town. On my way to the trial, I called my broker and heard that a split was announced and that the stock was indicated at $365 a share in the pre-market. I won my trial, went outside, called the broker and found out that the stock dropped to $290. Man, I was expecting it to be $400 a share. I realized that it could have caved more and too much money could have been lost while I did my job. I decide that the ultra go-go stocks were not for me yet. I began trading the Q's (AMEX:QQQ). These never fall out of bed. When Emulex(NASDAQ: EMLX) fell out of bed two weeks ago, QQQ was down 3 points. You do not get great pops, but you don't get nasty surprises either. When they come, you have plenty of notice. They also give you a 5-8% premium, if you are a covered call writer. I am not advocating using QQQs as trading vehicle per se, what I am suggesting is only using trading vehicles that move no quicker than you have the ability to monitor. After all, I am out for reasonable gains, not the best gains, because with best gains come the greatest risk and I may not have time to monitor that risk. Taking unmonitored risk would be a breach of my fiduciary duty. ************** TRADERS CORNER ************** To Buy, To Sell, or To Stay Out of the Game By Scott Martindale It sure has been frustrating watching the VIX spike over 35 on Friday followed by a precipitous fall to around 27 without any follow-through rally in the Nasdaq. Today it closed back up at 29. [The VXN, which is barely a month old, now appears to be the index to watch for Nasdaq trading.] The past couple of years indicate that it might take a VIX move to 40 or 50 before we rally strongly across the board. Some of you may recall that in October 1987 during that extreme market panic, the VIX reached 170! Let's all pray that we aren't destined for that level of fear. Based on the past, many market watchers insist that the level of fear and pessimism must become much greater before markets can bottom out and then go higher. But I believe that investor/trader mentality is different today than in 1987. I think the reason bullishness often increases following disappointing news on the economy and a big sell-off is it causes many of us to reinforce our belief in the future of technology and biotechnology, and the promise they hold for productivity improvement and disease eradication. Especially given the tremendous medical, scientific, and technological breakthroughs of the 1990's, few today believe that our economy is destined for depression or that the role of tech will diminish. Although we will always have cyclicality in our growth and prosperity as well as the risks associated with a global economy, the only current stumbling blocks are overly-aggressive Fed policies and stock prices getting ahead of themselves in the form of high valuations due to eager investors not wanting to miss out. Greedy optimists by nature, we modern Americans invest in our stock markets as a way to express confidence in ourselves, our country, and humanity in general. The frightful bursting of the over-inflated tech bubble has only temporarily instilled investors with a cautious approach. Many are now following the advice of implementing stop losses, which perpetuates the selling and dissuades buyers. It's become a game in which everyone is looking for the best entry price for the next bull. Although it's suddenly fashionable to be near-term bearish, in fact, most everyone expects a renewed rally eventually such that those who are waiting for the extreme pessimism of past market bottoms may never see it. Most of us have become terminally optimistic, and for good reason. I also wanted to briefly mention my President's Day holiday weekend. I drove my family up to the San Francisco Bay Area to visit my wife's sister in Sonoma County and let the kids ride her horses. I hadn't been up there since Christmas of 1998, and I haven't lived in the Bay Area since 1994, and I couldn't help but notice the changes -- mostly the traffic and the endless dot-com and software billboards. I mention this because it really hammered home for me the incredible growth in high tech. For those of you in Peoria, Teaneck, or Lookout Mountain who think of this dizzying array of high-tech dynamos only as ticker symbols for options plays, I (and I'm sure fellow OIN contributor Janar, as well) can assure you that they actually exist with real bricks- and-mortar facilities in and around the Silicon Valley. As I drove along Highway 101 and Interstate 280, I took note of numerous office buildings displaying the names of Nasdaq stocks that we often consider for options plays. Off the top of my head, I recall seeing company names like Western Digital (NASDAQ: WDC), Cisco Systems (NASDAQ: CSCO), Liberate Technologies (NASDAQ: LBRT), and Ciena (NADAQ: CIEN), not to mention the Main Street of venture capital -- Sand Hill Road. It made it all seem a little more real to me, this technology revolution. So were you buying or selling today? Based on today's volume, chances are you weren't playing at all. With the disappointing weakness we have seen since the first week after February expiration, I have mostly avoided the market and allowed some stock positions to stop out. Nevertheless, my short- term bullish outlook was starting to come back. With the extremely oversold condition of Nasdaq and the seemingly imminent inter-session rate cut, I've been looking for a little rally. I have entered March naked put positions in JDS Uniphase (NASDAQ: JDSU) at the 35 strike and Extreme Networks (NASDAQ: EXTR) at the 25 strike, as well as a March 75 call position in CIEN. All three appeared to have promising technicals that should allow them to benefit strongly from any minor tech rally. I also bought shares of JDSU around $29 in my long-term account today. [You'll recall from last week's column that I protected a hefty gain in JDSU by stopping out on Jan 26 at $56.] When I entered each of these plays, it seemed like I was buying a bounce, but at today's close it looked more like a falling knife. We'll see. I might have to stop out of everything tomorrow. I also closed out my long put position in Time Warner Telecom (NASDAQ: TWTC) last Thursday for a decent 50% gain, which was good timing. It's strong rally late Friday and Monday demonstrated to me the importance of taking profits. The part I'm still struggling with the most is cutting my losses early. It seems the only method that works for me is to enter a stop order early in the play. Otherwise, I tend to wait too long giving the position a chance to comeback. Patience isn't always a virtue. Perhaps the best place to look for bullish plays right now are the small caps, which have easily outperformed the big caps this year simply by staying flat. And value has outperformed growth. In a slower growth environment, a reasonably priced small cap that can successfully take precious market share from a highly valued large cap should show good price appreciation. Perhaps the OIN call favorites of prior years will have to make way for small caps and value stocks. Let's try to identify some good low-P/E, low-PEG, low-cap optionable stocks with promising fundamentals and upturning technicals. *************************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=1691 ************************************************************ PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** EMC $41.66 -3.34 (-3.34) Although revealing nothing new, the Goldman Sachs earnings revisions in the Hardware sector sank our EMC play this afternoon. Citing weakness in IT spending, Goldman trimmed its numbers on EMC, HWP, IBM and NTAP. EMC sold off shortly after the open, dragged lower by a weakening Technology market and closed below our $42 stop, very near the low of the day. The fledgling rally ran out of gas before being refueled by a Fed rate cut, and suffered the additional indignity of having its tires deflated by another drop in Consumer Confidence this morning. While the stock may find buyers waiting just below current levels, technicals are deteriorating, and it is clearly time for us to move on. MCLD $14.00 -1.69 (+0.44) MCLD pulled back during Tuesday's session on market-related weakness. For the most part, the competitive local exchange carrier (or CLEC) sector held up relatively well in Tuesday's session, led by telecom giant AT&T. However, MCLD exhibited weakness early in the day and continued lower throughout the session. Although MCLD pulled back on light volume and settled right on our stop at $14, we're dropping coverage this evening and would exit any open positions on a bounce off $14 early Wednesday. QQQ $49.00 -3.15 (-2.18) Greenspan's failure to deliver a rate cut Tuesday, before his testimony Wednesday, caused widespread weakness across the tech sector. The Nasdaq Composite fell to yet another new 52-week low, while the QQQs fell below our protective stop at $50. Because of the failure at the $50 level, we are dropping coverage on the QQQs as a long term play and would use any pop back above $50 to exit current positions. PUTS: ***** No dropped puts today ************************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=1705 ************************************************************** 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 Tuesday 02-27-2001 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/022701_2.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1706 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** MSFT $59.38 -0.19 (+2.63) MSFT saw a fantastic break through the 30-dma, at the $59 level, as its appeals case got underway on Monday. The rise in the NASDAQ certainly bolstered the stock's gains too; but as they say, it was easy come easy go. In this morning's session, MSFT extended upward to $61.19, but soon retraced as a dark mood overtook the Street. The consumer's confidence report ultimately undermined two days of positive sentiment and in sympathy with the broad markets, MSFT fell slightly today. The stock landed firmly at its near-term support and should bounce from here if the software sector regains its composure and the markets return to rally mode. To protect against future doom and gloom, keep stops in place at $58. In consideration of the fickle and susceptible market directions, it may be wise to be patient for a big breakout through the $64 resistance before adding new positions. If you have existing plays or choose to buy into intraday strength, expect opposition as MSFT approaches that line of opposition, at the 200-dma. There was favorable news for Microsoft in the second day of the appeals hearings. Chief Judge Harry Edwards questioned whether US District Judge Thomas Penfield Jackson’s findings of fact sufficiently defined what he called "the browser and platform market" and further commented, that it was "absolutely unclear" on whether the software giant had tried to monopolize the market for Internet browsers. BRCD $43.50 -5.13 (-2.19) When we started our aggressive call play on BRCD yesterday, we mentioned that a break above the 10-dma (now at $48.63) on volume could make for an ideal entry on strength. It is at this moving average however, that the stock found resistance today, as a weak NASDAQ session dragged BRCD lower, to close down 10.54 percent on 118% of ADV. In doing so, the Storage Area Networking (SAN) leader closed back below the 5-dma at $44.88. The good news is, support at $43 held, as did our stop price of $42. A bounce off these two levels tomorrow as well as support at $40 could allow higher risk players to make a play, but only if the buying volume returns. A move back above the 5-dma could set BRCD up to once again challenge the 10-dma, providing two potential entry points for the more risk averse. Just make sure peers EMC, MCDT and QLGC confirm the surge. VRTS $62.31 -6.63 (-0.06) Giving back yesterday's gains, shares of VRTS ended the day down 9.61 percent on 1.37 times the ADV in sympathy with the Storage sector, and most Tech stocks for that matter. However, the movement in the past couple of days on declining volume suggests that the stock may be in the initial stages of some sideways movement. With a range as wide as 7 points intra-day, nimble traders could find this an attractive play. Support at $62, $61 and our stop price of $60 continue to hold up, with bounces off these two levels providing potential targets for aggressive entries. Looking overhead, the $68-70 area may act as formidable resistance. A break above the 5-dma at $66.30 could allow more cautious traders to enter on strength, provided that sector sisters EMC, LGTO and NTAP confirm upward momentum. From there it VRTS would be poised to challenge $70. MER $62.70 -0.80 (+1.47) Merrill Lynch rallied to poke its head above the converged 200 and 10 dmas at the $64.50 level this morning. However, the volume was not strong enough to buck the trend of the overall market, and, as a result, Merrill sold off to strong support at the $62 level. Traders and investors may have started to realize that the rumored 50 bp. rate cut this week may not materialize, and this hurt the broad financial sector, as well as brokerage stocks. Merrill rallied slightly from the day's low levels toward the close, which is a positive sign. Tomorrow’s trading might be highly volatile, as Chairman Greenspan is testifying in the morning. Traders might want to consider taking positions at the current level, or at a move above $63.46, but only if the brokerage sector is rallying. Continue to set stops at $60. CIEN $69.75 -7.50 (-4.75) Proof that the broader market/sector is the dominant factor in the success of any given play, CIEN dropped back within spitting distance of our $69 stop today. Despite all the positive factors mentioned in our initial writeup last night, the stock succumbed to broad market weakness today. Prompting Technology stocks to sell off again today was the bearish impact of Consumer Confidence that has now dropped to its lowest level in more than 4 years. As though that wasn't enough, Goldman Sachs cratered the Hardware sector today, trimming estimates on the likes of EMC, HWP, and NTAP. Though not directly related to CIEN, the downward pressure created in the broader NASDAQ market dragged our play down for a nearly 10% loss on the day. All eyes are now on the Fed, hoping for an interim rate cut this week. If Greenspan and Company fail to hold out an olive branch for the markets, it seems likely that the NASDAQ will continue to set new lows, so play carefully. If you are looking to buy the current dip, wait for confirmation that buyers are coming back, supporting the stock above our current stop level. If support fails before Uncle Alan rides in on his white horse, then stand aside from the play. More conservative players can consider new entries if CIEN can rally back through resistance at $74 or $76, but make sure the move is confirmed by strong volume, and positive movement in the Networking index (NWX.X). LH $159.70 +5.05 (+12.70) Investors have been scrambling this week, looking for any safe place to park their cash, and LH seems to have gotten the nod. Shooting sharply higher yesterday, LH tested resistance at the $160 level before pulling back at the close. As a defensive play, broad market weakness today propelled the stock right through, although it was unable to hold onto its newfound high ground as the closing bell approached. In the past 2 days, LH has advanced nearly 9%, bringing it solidly above the upper Bollinger band. Even volume has been confirming the strength of our play as it has been running 50% above the ADV this week. In the near term though, our play is due for a bit of profit taking with the close well above the upper Bollinger band, daily Stochastics flattening out in overbought, and the possibility of a Fed-induced broad market rally looming on the horizon. Consider tightening your stops if you have accumulated significant profits this week, and wait for a pullback before initiating new plays. We have raised our stop to $154, and would consider any solid bounce at or above (maybe intraday support at $157) this level to be attractive for initiating new positions. ******************* PLAY UPDATES - PUTS ******************* NOK $21.90 -0.85 (-0.73) Nokia made a feeble attempt to rally on Tuesday morning, and hit a high of $23.40 before succumbing to overall market weakness. Nokia rolled over from $23 at noon, and took a dive to support at $22. Further weakness in the Nasdaq might precipitate Nokia to fall below the next support Level of $21.50 on heavy volume, which could be a good entry point for more conservative put players. Alternatively, another roll over from $23 is a possibility if it is accompanied by weakness in the wireless communications sector. Continue to set stops at $23, and close positions if Nokia closes above this level. PWAV $16.13 -1.94 (-1.87 ) PWAV staged a bull trap rally on Monday and Tuesday, and actually spiked to a high of $19.34 this morning before the sellers took over. Around noon, the stock rolled over from $18 as if on cue when the Nasdaq started to fall. Momentum picked up later in the day as PWAV actually hit $15.50, before rebounding slightly near the close. At this point it would take a major rebound in the Nasdaq, as well as in the wireless sector to revive this stock. Traders could take positions at current levels, or at a roll over from $17.50 if the wireless communications and telecom sectors remain weak. Due to market conditions, we are setting stops at $18. ADBE $30.50 -1.19 (-2.13) Aggressive traders that were quick on the trigger, got a great entry into our ADBE play at the open yesterday. The stock gapped up to $33.50 and then promptly rolled over and began its slow descent again. Market weakness again today just confirmed that the bears are still in control, and ADBE went along for the ride, closing very near its lows from last week. The battle lines have been drawn near the $30 level and this is likely where we will see if there is enough selling volume to drag the stock to new lows. Last week's intraday low was $28.44, and if the Fed fails to prop up the equity markets, this looks like a strong possibility given today's market weakness. We have moved our stop down to $32, and aggressive traders can consider new positions on any failed rally near this level. Otherwise, look for the conservative approach to get you safely into the play, initiating new positions on a volume-backed move below $28.50. *************************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=1692 ************************************************************ ************** NEW CALL PLAYS ************** AGGRESSIVE: FPL - FPL Group $66.10 +1.89 (+1.97 this week) The FPL Group is a public utility holding company. The group owns energy operations from coast to coast, but the majority of its revenues are derived from Florida Power & Light Company (FPL). This rate-regulated public utility supplies service to approximately 3.8 mln customers in eastern and southern Florida. FPL also wholesales natural gas, oil, and electric power. FPL Group is merging with Entergy in a deal that will create one of the largest power companies in the US! A merger of equals was announced in July 2000 and a 15-month timetable was set to secure regulatory approval and close the deal. Early in January, a judge's procedural schedule put a glitch in the plans and it looked like the merger would be shelved for almost a year. Fortunately, a motion of reconsideration of the schedule was approved and the merger is back on track. The February 16th announcement was welcome news. Investors bid FPL up 2.1%, or $2.30 on moderate volume. The momentum snowballed in succeeding sessions and FPL experienced a nice run despite the market downturn. Trading activity reached 1.7 times the norm, but the $66 mark capped the uptrend; that is until today's bullish action took FPL through the resistance. FPL not only gets a gold star for cracking the $66 level, but it also gets brownie points for closing on the daily high! The 52-week record is just over the horizon at $73. We're confident FPL can attain this objective; especially in a cooperating market environment. ABN Amro also reiterated a Buy for FPL and issued a $79 price target. At this point however, understand it's sheer momentum driving FPL upward. Others in the energy sector like DYN, CPN, and DUK are simply holding their own; although, EIX is making a nice recovery off its lows. Therefore, keep stops in place at $64 to safeguard against a respite. FPL Group is expected to report earnings around April 23rd. BUY CALL MAR-60 FPL-CL OI= 150 at $6.70 SL=4.75 BUY CALL MAR-65*FPL-CM OI= 161 at $2.35 SL=1.25 BUY CALL APR-65 FPL-DM OI=1000 at $4.20 SL=2.50 BUY CALL ARP-70 FPL-DN OI= 2 at $2.10 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=FPL BOL - Bausch & Lomb Inc. $52.67 +2.15 (+1.87 this week) Baush & Lomb is involved in the development, manufacture and marketing of healthcare products for the eye through three business segments: vision care, pharmaceuticals and surgical. The vision care segment includes contact lenses and lens care products. The pharmaceutical segment manufactures and sells generic and proprietary prescription pharmaceuticals with a strategic emphasis in the ophthalmic field. The surgical segment manufactures and sells products for cataract, refractive, and retinal surgery. Investors have had no trouble seeing the merit of BOL over the past 6 weeks, as they have continued to bid the stock higher. Knowing that consumers will continue to see to their vision needs whether the economy is in a recession or not, buyers have continued to park their investment dollars in the stock, due to its perceived defensive nature. Even the Lehman downgrade from Buy to Market Perform at the end of January couldn't dampen the bulls enthusiasm, and they continued to bid the price higher. Since finding support near $37 in early January, the stock has gained more than 42%, finally clearing the 200-dma ($50.50) last week and confirming it as support during today's trading session. Although the uptrend has been impressive, we need to be cautious about initiating new positions with the stock very near the upper Bollinger band ($53.36), and daily Stochastics beginning to weaken over the past 2 weeks. In fact, with the weakening of the Stochastics, we have the early stages of bearish divergence developing, as successive price highs are being accompanied by lower Stochastics highs. Overhead resistance is also formidable, beginning at $54, and then again at $56, which is the top of the gap down, which occurred last August. Aggressive traders can consider new entries on an intraday bounce from the $50 or $51 intraday support levels, but don't try to catch a falling knife. If BOL falls through our $50 stop, it will be a clear sign that the bears are finally gaining the upper hand, and our trigger to stand aside. More conservative entries can be considered on a continuation of the rally as the stock clears the $53 level, but beware of the looming upper Bollinger band. BUY CALL MAR-50*BOL-CJ OI= 88 at $3.90 SL=2.50 BUY CALL MAR-55 BOL-CK OI=401 at $1.35 SL=0.75 BUY CALL APR-55 BOL-DK OI=110 at $3.20 SL=1.50 BUY CALL APR-60 BOL-DL OI= 91 at $1.50 SL=0.75 BUY CALL JUL-60 BOL-GK OI= 79 at $5.40 SL=3.00 http://www.premierinvestor.com/oi/profile.asp?ticker=BOL ************* NEW PUT PLAYS ************* AGGRESSIVE: ADI - Analog Devices Inc. $40.25 -2.96 (-4.25 this week) With revenues of $2.58 billion for fiscal 2000, Analog Devices is a leading manufacturer of precision high performance integrated circuits used in analog and digital signal processing applications. Headquartered in Northern Massachusetts, the company employs approximately 9,100 people worldwide and has manufacturing facilities in Massachusetts, California, North Carolina, Ireland, the U.K., the Philippines, and Taiwan. Analog Devices is listed on the New York Stock Exchange and included in the S & P 500 index. Shares of ADI have been in an unmistakable down trend since last September, as the semiconductor index has been in a free fall. ADI originally responded to the first Fed rate cut on January 3 with a rally above its 50 dma of $51.84 to a high of $62.60 on January 31. However, the SOX.X fell below its 50 dma of 643.23 on February 5, and tried to rally above it once more before making a serious drop on the second week of February. This coincided with the release of ADI's earnings on February 15. While the company met expectations of 50 cents per share, the management stated that ADI would fall short of expectations in the coming quarter, and expected to earn in the range of 43 cents per share vs. the previously expected 49 cents per share. One last attempt to meet the 50 dma of $51.76 on February 15 failed, and confirmed the heavy downward pattern. However, the last straw may have been the warning from TXN on Monday. ADI is in a class of semiconductors which specialize in analog and digital signal processing chips, along with TXN, LLTC, and MXIM. This particular category of semiconductors was hit hard this week when TXN gave a grim forecast of lowered expected revenues on Monday. TXN stated that they expect first quarter revenue to fall 20% from the year ago quarter, and started a cost cutting program which included leaving plants idle and offering employees early retirement. With the SOX.X in serious need of a jumpstart, and no near term catalyst in sight except the hope of a rate cut, the prospects for ADI looks bad. Heavy support at $45 failed this week, and ADI looks poised to drop from the $40 level, which has served as support since January of 2000. A drop below this level on heavy volume would be a good entry point if the SOX.X stays weak. Alternatively, aggressive traders could possibly enter on a roll over from $41. Watch others like TXN for weakness, and set stops at $43. BUY PUT MAR-40*ADI-OH OI=1774 at $3.30 SL=1.75 BUY PUT MAR-35 ADI-OG OI= 381 at $1.40 SL=0.75 http://www.premierinvestor.com/oi/profile.asp?ticker=ADI NEWP - Newport Corporation $48.50 -4.50 (-8.75 this week) The Newport Corporation is a global supplier of precision components and automated assembly, measurement, and test equipment for use in the fiber-optic communications, semiconductor equipment, computer peripherals, and scientific research markets. The Company's high precision products enhance productivity and capabilities of the Fortune 500 corporations, government agencies, and the other technology clients it serves. Optical components and devices for vibration and motion control account for about two-thirds of the company's sales. As a maker of equipment used in the manufacturing of Semiconductors as well as Fiber Optic components, weakness in the Chip sector along with the Networking space have turned into a devastating one-two punch, putting Newport's stock price on the ropes. With declining book-to-bill ratios and plant shutdowns in Semiconductor companies across the board and lower guidance put forth by Networking giants such as Cisco and Nortel, it's no wonder that shares of NEWP have suffered. The stock was downgraded this month by ABN AMRO from an Add to a Hold rating, and by Wit SoundView from a Strong Buy to a Buy rating. The company attempted to boost its stock price mid last week, targeting a 66 percent growth rate for the year 2001. This fell upon deaf ears however, as the stock has continued to head deeper into negative territory, with help from resistance from the 5 and 10-dma (now at $52.85 and $57.61 respectively). Today's fall of 8.49 percent put NEWP below the key psychological $50 level, suggesting the possibility of more downside to come. A plunge below today's low of $48 on volume would allow for an entry on weakness while failed rallies above resistance at the 5 and 10-dma along with $50 and our stop price of $55 are potential entry points for higher risk players. In both cases, track Tech sentiment using AMEX's Networking Index (NWX) and Semiconductor Index (SOX). BUY PUT MAR-50*NZZ-OJ OI=134 at $7.63 SL=5.25 BUY PUT MAR-45 NZZ-OI OI= 67 at $5.00 SL=3.00 http://www.premierinvestor.com/oi/profile.asp?ticker=NEWP ********************* PLAY OF THE DAY - PUT ********************* PWAV - Powerwave Technologies $16.13 -1.94 (-1.31 this 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. Most Recent Write-Up PWAV staged a bull trap rally on Monday and Tuesday, and actually spiked to a high of $19.34 this morning before the sellers took over. Around noon, the stock rolled over from $18 as if on cue when the Nasdaq started to fall. Momentum picked up later in the day as PWAV actually hit $15.50, before rebounding slightly near the close. At this point it would take a major rebound in the Nasdaq, as well as in the wireless sector to revive this stock. Traders could take positions at current levels, or at a roll over from $17.50 if the wireless communications and telecom sectors remain weak. We are lowering our protective stop to $18 and would exit positions if PWAV closed below that level. Comments PWAV traced yet another new relative low during Tuesday's session. The stock appears poised to trade lower as long as the Nasdaq continues to slide. Look for new entries on a break below current levels or wait for PWAV to fall below $15.50 on heavy volume. Additional entries might be provided upon a short-covering rally and subsequent rollover near the $17 level. In either case, make sure to confirm direction in the Nasdaq before planning a trade. BUY PUT MAR-20 VFQ-OD OI=161 at $5.00 SL=3.00 BUY PUT MAR-17.5*VFQ-OE OI=124 at $3.00 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=PWAV ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1671 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ Still Searching For A Bottom... Stocks retreated today as optimism that the Federal Reserve would cut interest rates before the next scheduled meeting faded despite a decline in consumer confidence. Monday, February 26 The stock market rallied today amid optimism that the FOMC will lower interest rates in the near future. The NASDAQ closed 45 points higher at 2,308 and the Dow was up 200 points at 10,642. The S&P 500 index finished 21 points higher at 1,267.65. Volume on the NYSE hit 1.11 billion shares, with winners beating losers 2,207 to 852. Activity on the NASDAQ was average at 1.83 billion shares traded, with advances beating declines 2,424 to 1,343. In the U.S. bond market, the 30-year Treasury rose 19/32, pushing its yield down to 5.44%. Sunday's new plays (positions/opening prices/strategy): Cardinal (NYSE:CAH) MAR90P/95P $0.75 credit bull-put Shire (NASDAQ:SHPGY) MAR65C/60C $0.56 credit bear-call Stryker (NYSE:SYK) MAR45P/50P $0.40 credit bull-put Olin (NYSE:OLN) MAY22C/17P $0.45 debit synthetic Imperial (NYSE:ICI) JUL35C/25P $1.70 debit strangle Telefonos (NYSE:TMX) APR35C/30P $2.10 debit strangle There were a number of excellent opportunities to participate in the new combination positions today. The bullish credit spread in Cardinal Health was available at (and above) the target price, but Stryker and Shire Pharmaceuticals offered lower than expected entry premiums. We were unable to achieve the suggested debit in Olin Chemicals, but Imperial Chemicals and Telefonos De Mexico provided acceptable opening prices. Portfolio Activity: Industrial stocks were rejuvenated today on hopes that the Fed would bolster the sagging economy with an aggressive interest rate cut. The optimism for an FOMC announcement prior to the regularly scheduled meeting in March gained momentum after Bear Stearns' chief economist and former Fed governor Wayne Angell said there was an 80% chance that Greenspan would cut interest rates by half a percentage point in the next few days. Other analysts said that even without a near-term reduction, the Fed might do something very aggressive at the March meeting. The news spurred institutional traders into a short-covering frenzy and the market responded favorably. Among the Dow stocks, Home Depot (NYSE:HD) rebounded to $44 after Lowes (NYSE:LOW) said it now expects to exceed the consensus earnings estimates for the first quarter. Analysts also raised their revenue outlook for the second quarter, citing the benign interest rate environment and rising commodity prices. The blue-chip average also got a boost from software maker Microsoft (NASDAQ:MSFT), which moved up almost $3 as a court began hearing the company's appeal of the federal antitrust ruling, which stipulated that Microsoft be broken into two parts. On the downside, unexpected profit warnings from chip-producer Texas Instruments (NYSE:TXN) and consumer products giant Procter & Gamble (NYSE:PG) helped limit the Dow's gains. In technology trading, telecom stocks rallied after Merrill Lynch said share prices have fallen dramatically and that the sector may be approaching the bottom in terms of valuation. In the networking group, Cisco Systems (NASDAQ:CSCO) led a downward move after First Boston cut its price target and earnings estimates on the stock. Weakness was also seen in the chip-equipment segment after Salomon Smith Barney said investors have realized that the second half of 2001 will not provide the expected recovery in the industry. In the broader market, a number of biotechnology stocks enjoyed significant gains. Among those issues, Human Genome Sciences (NASDAQ:HGSI) was a standout, rising almost 15% to $55 after reporting encouraging results in its heart disease treatment. Genzyme (NASDAP:GENZ) also moved higher after boosting 2001 sales estimates for its drug Renagel. Despite the recovery in S&P 500 shares, defensive issues in the Precious Metals sector also rallied. There were some excellent moves in the Spreads portfolio today. Microsoft (NASDAQ:MSFT) was a big gainer, rallying to a recent resistance area near $60 as the software giant told an appeals court that it acted legally to promote its products and did not stifle competition. Merrill Lynch analyst Henry Blodget said that many legal experts expect the Appeals Court to reverse the order to break up the company, and possibly impose other, less severe conduct-based remedies. The news provided hope for the beleaguered issue and our long-term position (JAN-$50C/MAR-$70C) in the company is once again profitable. Strength in drug and biotech shares helped push some of our issues in this group to recent highs. Alza (NYSE:AZA) and PolyMedica (PLMD) were among the best performers and the move in Alza provided a great exit opportunity for those investors in the bullish credit spread at $40. The rally also offered another chance to close the recent calendar spread for a favorable profit. On the downside, the selling pressure in Abiomed (NASDAQ:ABMD) continued and it now appears that the issue is headed for a test of the recent lows near $20. Many of the stocks in the pharmaceutical segment are also candidates in bearish positions and we must monitor plays in American Home Products (NYSE:AHP), Pfizer (NYSE:PFE), and Johnson & Johnson (NYSE:JNJ) for significant character changes. One issue in the finance group that appears to have experienced a complete technical recovery is Investment Technology (NYSE:ITG) and with our short (call) position at $55, we will watch for a close above the recent highs near $53 to confirm a renewed upward trend. On the bright side, Continental Airlines (NYSE:CAL) also enjoyed a significant rebound and the position in that issue may eventually finish profitable. In the Straddles portfolio, Icos (NASDAQ:ICOS) was a big mover, up almost $5 to a recent high near $55 on no (apparent) public news. Now we will monitor the play for a favorable early-exit profit. Tuesday, February 27 Stocks retreated today as optimism that the Federal Reserve would cut interest rates before the next scheduled meeting faded despite a decline in consumer confidence. The NASDAQ finished 100 points lower at 2,207 and the Dow ended down 5 points at 10,636. The S&P 500 was down 9 points to 1,257. Trading volume on the Big Board reached 1.10 billion shares, with winners beating losers 1,590 to 1,449. Activity on the NASDAQ was average at 1.79 billion traded, with declines beating advances 2,507 to 1,220. In the bond market, the 30-year Treasury rose 1 8/32, pushing its yield down to 5.35% as bond investors reacted positively to the consumer confidence data. Portfolio Activity: Technology stocks resumed their downward trend today as investors worried that the Fed would opt not to cut rates between meetings. In addition, bullish traders had to oppose additional economic data revealing that the economy is slowing faster than expected. News that consumer confidence fell to its lowest level since June 1996 also concerned investors, as did a slew of negative analyst comments. Across the broad market, buying interest surfaced only in defensive sectors such as utility, gold and consumer products. Renewed selling pressure was seen in financial and biotechnology shares and on the NASDAQ, Internet, computer software, chip and networking stocks led the index lower. There was little bullish activity in the Spreads portfolio during the session but one of the issues that moved higher, AT&T (NYSE:T) was among the Dow's best performers. The stock added another 5% to finish near $23 after Mediacom Communications announced it will purchase AT&T's cable systems in four states for $2.2 billion. Vodafone Group (NYSE:VOD) also said it will buy AT&T's stake in Japan Telecom for $1.3 billion as it expands its global presence in the world's second-largest mobile phone market. The transactions will help reduce AT&T's debt to about $42 billion and the move brought the stock into a favorable trading range near the strike price of the sold (short) call in our current Covered-calls with LEAPS play. Continental Airlines (NYSE:CAL) and Clorox (NYSE:CLX) also edged higher during the bearish session and it appears that both of these issues have additional upside potential in the short-term, after recent consolidations. Industrial stocks in the Straddles section have experienced very little favorable activity over the past few weeks but some issues have enjoyed volatile activity. Omnicom Group (NYSE:OMC) and Calpine (NYSE:CPN) recently traded at near-term extremes and Icos (NASDAQ:ICOS) reached a 3-month high near $57 in today's session. The still unexplained rally in ICOS drove our new debit straddle to profitability at one point during the day, but now the question is whether any news will be announced to help sustain the bullish momentum. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - An article in Sunday's newsletter concerning Calendar Spreads prompted a request for some candidates in this strategy. Here are two low-cost positions that may fit your criteria for this approach to spread trading. Both of these plays offer favorable risk/reward potential but they should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** IFS - Insignia Financial Group $12.65 *** Technicals Only! *** Insignia Financial Group (NYSE:IFS) is the parent company of an international real estate organization. Insignia's businesses specialize in commercial real estate services, single-family home brokerage, mortgage origination, titles, apartment brokerage and leasing, escrow agency services, condominium and cooperative apartment management, real estate oriented financial services, equity co-investment and other services. Additionally, Insignia has developed substantial Internet-based business applications associated with real estate. Insignia's principal businesses are Insignia/ESG, (United States commercial real estate services), Insignia Richard Ellis (United Kingdom commercial real estate services), Realty One (single-family home brokerage and mortgage origination), Douglas Elliman (apartment brokerage and leasing) and Insignia Residential Group (condominium and cooperative apartment management). The company's earnings are due in early March. My approach to Calendar Spreads differs slightly from the method described in the Sunday (2/18/01) OIN as I prefer to use call options on relatively stable bullish issues and initiate new positions after spikes in near-term Implied Volatility. For those of you who are not familiar with this technique, the basic premise in a calendar spread is simple; time erodes the value of the near-term option at a faster rate than it will the far-term option. For conservative investors, it is generally better to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in my technique; selling time value in the options when they are overpriced (high implied volatility) and buying it back (only if necessary) when they return to intrinsic value. In this case, we would like to have the stock finish just below the sold strike when the near-term option expires. If the short options remain in-the-money at expiration, we will have to buy them back to preserve the long-term position. PLAY (aggressive - neutral/calendar spread): BUY CALL JUN-12.50 IFS-FV OI=174 A=$2.10 SELL CALL MAR-12.50 IFS-CV OI=576 B=$0.85 INITIAL NET DEBIT TARGET=$1.20 TARGET ROI=50% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=IFS ****************************************************************** ADVNB - Advanta $12.50 *** Disparity Play! *** Advanta (NASDAQ:ADVNB) is a financial services company with over 2,600 employees, servicing approximately $20 billion of assets, including $12 billion in managed assets and $8 billion in assets serviced for third parties. Advanta has been providing financial services to consumers and small businesses since 1951, including a broad range of self-service financial solutions and services on the Internet. Advanta leverages its first-class direct marketing and information based expertise to develop state-of-the-art data warehousing and statistical modeling tools that identify potential customers and new target markets. Over the past few years, it has used these distinctive capabilities to become one of the nation's largest issuers of MasterCard credit cards to small businesses. Advanta also created one of the first automated underwriting and sales engines used in the non-conforming mortgage industry. ADVNB shares rallied today on extreme volume and there was little news to explain the movement. The recent trading range near $12 has been very stable during the past few weeks as the share value continues to consolidate from a significant upward trend in early January. That activity was attributed to the company's earnings announcement and news that Chase Manhattan Mortgage Corporation, a subsidiary of J.P. Morgan Chase & Co. (NYSE:JPM) had signed an agreement to acquire Advanta's mortgage business. Now the only speculation is if and when that deal will eventually occur and how well the company will deliver on its promise to earn $1.41 a share for fiscal 2001. With an excellent premium disparity in the target options, this position offers an excellent speculation play for traders who believe they can effectively manage ADVNB's potential for future upside activity. PLAY (aggressive - neutral/calendar spread): BUY CALL APR-12.50 ABQ-DV OI=139 A=$0.88 SELL CALL MAR-12.50 ABQ-CV OI=160 B=$0.50 INITIAL NET DEBIT TARGET=$0.25-$0.31 TARGET ROI=20% http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ADVNB ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** TWTC - Time Warner Telecom $66.13 *** Probability Play! *** Time Warner Telecom (NASDAQ:TWTC) is a fiber facilities-based integrated communications provider offering local business "last mile" broadband connections for data, high-speed Internet access, local voice and long distance services. TWTC serves customers in 21 metropolitan markets in the United States and their customers principally are telecommunications-intensive business end-users, long distance carriers, Internet service providers wireless communications companies and governmental entities. The company offers switched services in 20 of its 21 service areas and its fiber optic networks span 8,872 route miles, contain 332,263 fiber miles, and provide service to 5,566 buildings. Even with the recent sell-off in technology issues, traders are still asking for more premium-selling positions. Here is another popular issue with inflated option prices and a reasonably stable trading pattern. In this case, we will use the recent volatility and the robust premiums to initiate a neutral-outlook play with a favorable credit. The probability of the stock reaching our sold strikes is rather low, but there is always the possibility of a significant change in the technical outlook, so monitor the play on a regular basis. PLAY (conservative - neutral/credit strangle): SELL CALL MAR-80 TTU-CP OI=870 B=$0.93 SELL PUT MAR-40 TTU-OH OI=351 B=$0.88 INITIAL NET CREDIT TARGET=$1.88-$2.00 ROI(max)=13% UPSIDE B/E=$81.88 DOWNSIDE B/E=$38.12 http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=TWTC *************************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=1699 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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