The Option Investor Newsletter Sunday 03-04-2001 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/030401_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 3-2 WE 2-23 WE 2-16 WE 2-9 DOW 10466.31 + 24.41 10441.90 -357.92 10799.82 + 18.37 - 99.10 Nasdaq 2117.63 -144.88 2262.51 -162.87 2425.38 - 45.59 - 91.09 S&P-100 633.89 - 8.75 642.64 - 32.88 675.42 - 6.93 - 11.97 S&P-500 1234.18 - 11.68 1245.86 - 55.67 1301.53 - 13.23 - 17.77 W5000 11374.40 -126.30 11500.70 -528.90 12029.60 - 94.71 -169.65 RUT 476.88 - .82 477.45 - 21.83 499.28 + 2.23 - 5.84 TRAN 2915.19 - 14.88 2930.07 - 64.71 2994.78 - 18.64 - 11.82 VIX 30.86 + .52 30.34 + 5.26 25.08 - .07 + 1.06 Put/Call .80 .71 .89 .73 ****************************************************************** Would the last Nasdaq investor please turn off the sign! By Jim Brown The head cheerleader for the Fed went on record again on Friday that the economy could be showing signs of life and investors decided that meant no immediate rate cut and the Nasdaq fell again. Support is still fading and 2050 is widely quoted as the next bounce point. Oracle was the big scapegoat for the day after warning that profits could slip by 10%. Warning season starts next week but who is left? Over 300 companies already warned about the March quarter and every big cap tech I could think of has already confessed. Maybe that is the light at the end of the tunnel. If there is nobody left to warn in the traditional period then is the bad news already priced into the market? The Dow could not decide if it was good news or bad. Down as much as -148 in the morning and up as much as +129 in the afternoon, it finished almost flat as confused investors went flat for the weekend. The Oracle warning depressed a Nasdaq that had rallied into the close on Thursday. Just when you thought it was safe to go back into the market another heavyweight hits you in the wallet. The high profile Oracle warning brought back into the forefront of investors minds the possibility that even a series of Fed cuts may not restore life to tech profits. Earlier this week AMCC warned that revenue would suffer but the real news was the admission on CNBC by the CEO that there was "simply no orders" and visibility was very bad. The severity of the CEO comments echoes the comments of dozens of companies over the last several weeks. Zero visibility, no orders and customers canceling existing orders, how much worse can it get? That could be the key. Greenspan still claims to be ready to cut rates aggressively if the economy shows any signs of getting worse. I don't know how many more companies have to warn before he sees the light but there were some signs today that the "economy is recovering" speech may be cracking. Investors ran up the major averages as the testimony came to a close but after seeing the hit ORCL investors took on their warning there was just no staying power. Chances of a rate cut next week improved slightly today but not enough to make traders want to hold over the weekend. Is there a bottom in our future? We all know there is but not when or where. The stock market pundits, including me, have been expecting an oversold bounce since the middle of February. The Nasdaq is evidently not listening to us since investors are still aggressively selling into every rally. According to several websites that measure investor sentiment the bullish percentage is rising. The farther we drop the more it rises as investors expect a major rebound. Market strategists have always known that market bottoms are formed when investor sentiment is bearish not bullish. This reversal of sentiment has yet to happen. There are many chartists that expect a bounce at 2050 but it is becoming more likely that should we venture that far into the past the real bottom is 2000 instead. It may not be a bottom but even thousands tend to be psychological stopping points. The 2000 level was serious resistance back in July and Oct of 1998 and could provide a tough support level to pierce going back down. Thursday's intraday bottom of 2075 is only an intraday dip from 2000. Support levels have been falling faster than contestants on Survivor with 3000, 2500, 2400, 2300, 2200 all failing in succession. I suggested last Sunday that long call investors only go long over 2300. If you heeded that suggestion you were on the edge of your seat on Monday when the Nasdaq bumped against 2300 several times but could not punch through. Not only have support levels been falling but upper resistance is also falling. 2300 was resistance on Monday but 2200 became resistance after Wednesday. Make no mistake, there is plenty of money available to invest. More than $2 trillion is still parked in money market accounts as well as very high levels of uninvested cash in equity accounts. There is just no burning desire to be in the markets. With the first quarter earnings in April likely to be a disaster investors are simply sitting on the sidelines expecting lower prices ahead. The earnings survivors for the first quarter will be the investor favorites when money goes back to work. We are however rapidly approaching another milestone on the calendar. Historically tech investors have shown a desire to be uninvested between April and October. Summer has typically proven to be listless and uninspiring for tech stocks. The problem with this historical event repeating itself is the severity of the drop already in place. With stocks like CSCO trading in the $20 range and ORCL at $16 how much cheaper are they likely to go? Like one comment I heard today, "buy ORCL and ignore it for five years and you will be very well rewarded." I agree and the difference between $16 today or possibly $12 next week may not be relative in the long term view. I checked, the 2003-$25 leaps are selling for less than $5 with almost a 100% chance of huge returns. Better yet, buy the leaps for $5, sell the 2003-$20 put leap for $7 and you have an incredible combo play and a very minimal risk. Wayne, where are you? Wayne Angell made news last week with a forecast of a Fed intra-meeting rate cut for this week. The cut never materialized and Greenspan had the last laugh. Wayne may have torched his own chances of getting the cut by going public with the forecast. Greenspan has now proved to the detriment of all tech investors that he is in control not the hoard of analysts predicting his actions. Now that the Angell prediction is history there is a little glimmer of light in the rate cut tunnel. Greenspan said on Friday that inflation does not appear to be a problem which appears to give a green light to the next cut. He also repeated his support for a tax cut as an economic stimulant. With the rate cut window open again there is a slim possibility that Alan could come to our rescue as early as next week. Don't hold your breath however. With only 12 trading days before the next FOMC meeting the most likely prospect will be no cut until the meeting. A cut only two weeks before the meeting would be highly unusual. The economic calendar begins with the non-manufacturing NAPM and closes the week with the Jobs Report. If Greenspan holds off on a cut until after the Jobs Report then all hope fades until the March-20th meeting. As traders we need to be very careful the next couple weeks. The tale of the tape is down and regardless of how much we want to hope it up, the market will only move when real money starts to flow. Volume on Friday was strong with the Nasdaq trading over 2.3 billion shares on a down day. The NYSE traded almost 1.3 billion shares and finished flat. Until the Nasdaq rallies on strong volume we should not be entering bullish plays. The exception to this would be trading the bounces. If we do succeed in hitting 2000 next week I would risk trading the bounce. Otherwise I would suggest long call investors wait for a close over 2200 on strong volume which is our current ceiling. If it is any consolation the rate of descent on the Nasdaq has slowed. Stock buybacks are increasing. The Nasdaq lost -65 but advancers were beating decliners 18:17 at the close. The bad news is priced in but the bears are still in control. Be patient! 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 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 PremierBriefing.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************************* What will your strategy be for 2001? The VRTrader.com Annual Forecast Model Your road map to the 2001 market! Forecast is prepared by Mark Leibovit, the #1 market timer in the nation. Mark is Chief Market Strategist for VRTrader.com, a Premier Investor Network website, a technical consultant and former 'Elf' on Louis Rukeyser's Wall Street Week for 7 years. His Annual Forecast Model has been subscribed to by Wall Street's most elite. Mark is presently ranked #1 timer in the nation by TIMER DIGEST and #2 on AmericasBestTimers.com. Order your today! click here: http://www.sungrp.com/tracking.asp?campaignid=1733 ************************************************************** ************** EDITOR'S PLAYS ************** Play updates! Another painful week! The strong bottom we looked at in AMCC blew out with the meltdown in the semiconductor sector and the warning by AMCC on Thursday. JNPR fell through support at $70 and never looked back. CIEN struggled valiantly through the bad Nasdaq week and finally gave in to selling at the close on Friday. Again, we need to wait on the market to find a bottom. QQQ calls - no help here either. The Nasdaq weakness pushed them down to their lowest level ever at $46.70. When the rebound comes this will be a great place to put some money but we need to wait. ******************* NEW PLAYS ******************* Until the Nasdaq finds a bottom most investors should either play puts or sit out. Sitting out is not the answer most investors want to hear so I am going to focus on three low risk (in my opinion) long term plays. We will not worry about intraday swings or new Nasdaq lows. These are long term high profit positions, not trades. ORCL - New 52 week low @ $16.88 Oracle makes around $1 billion in profit per quarter and is currently trading at a PE of 15. Not 115 or 215 or 315 but 15. The long term prospects for ORCL are excellent. The warning last week presented a buying opportunity for long term investors. Can it drop farther, you bet but it can also climb back to the $30-$40 range or higher when the market recovers. I am suggesting a leap combination play. Buy a call, sell a put and add almost $6 per share of cash into your account. You capture any appreciation from the stock with your call, which you got free, and should ORCL finish over $25 by Jan-2003 you keep all the excess put premium as well. Payout examples. Any close at expiration over $19.13 = profit ORCL @ $40 Put expires worthless - $10.50 profit Call worth $15 for $15 profit Cost of call = $4.63 Profit = $10.50 + $15 = $25.50 - $4.63 (cost) = $20.87 ORCL @ $30 Put expires worthless - $10.50 profit Call worth $5 for $5 profit Cost of call = $4.63 Profit = $10.50 + $5 = $15.50 - $4.63 (cost) = $10.87 ORCL @ $20 Stock put to you at $25, you sell @ $20 = $5 loss Call expires worthless = $4.63 loss Put premium received = $10.50 Losses = $4.63 + $5 = $9.63 Profit = $10.50 - $9.63 (loss) = $0.87 ***************** CSCO - 52-week low Using the same concept on CSCO which is now trading at a PE of 54 results in a $4.88 credit to your account. Unless someone invents a new way to route Internet traffic without hardware CSCO will continue to prosper as the world leader in switching equipment. I am suggesting another leap combination play. Buy Jan-2003 $30 Call leap @ $6.25 VYC-AF Sell Jan-2003 $30 Put leap @$11.13 VYC-MF This gives you a net credit of $4.88 into your account. Potential payout examples: CSCO $50 Put expires worthless = $11.13 profit Call worth $20 = $20.00 profit Cost of call = $6.25 Profit = $11.13 + 20.00 = 31.13 - $6.25 cost = $24.88 profit CSCO $40 Put expires worthless = $11.13 profit Call worth $10 = $10 profit Cost of call = $6.25 Profit = $11.13 + $10.00 = $21.12 - $6.25 cost = $14.88 profit CSCO $30 Put expires worthless = $11.13 profit (put could be executed for $30, stock sold for $30) Call worth $.00 Cost of call = $6.25 Profit = $11.13 - $6.25 cost = $4.88 CSCO $20 Put exercised @ $30, stock sold for $20, $10 loss Premium received on Put = $11.13 income Call expires worthless Cost of call = $6.25 Profit = $10 (loss) + $6.25 (cost) = -$16.25 loss Loss of $16.25 is offset by $11.13 premium received Total loss is only $5.12 ************* CIEN - approaching next support at $60 CIEN is nearing support at $60 but could go as low as $40 if the current market weakness continues. However, CIEN just raised guidance for the next quarter and year. Unless a fiber virus suddenly appears Ciena should rocket out of any market bottom. PE is still a strong 158 but the company is growing much faster than its peers. THIS IS MUCH HIGHER RISK Using the same leap combination concept I am suggesting a little different approach. Selling a 2002 put and buying the 2003 call. The call is already in the money and to compensate we are going to sell a deep in the money put as well. BUY 2003 $60 Call Leap @ $33.25 VCB-AL Sell 2002 $90 Put Leap @ $34.50 YCD-MR The net credit is only $1.25 and is not important to this transaction. The key is the fully paid $60 call. If the put expires worthless in 2002 (CIEN over $90) you could then sell another 2003 put to increase your profits. Potential Payout Examples: CIEN $120 - (Jan-2002) $90 put expires worthless = $34.50 profit $60 call now worth $70 = $70 profit ($10 est time value) Cost of call = $33.25 Profit = $34.50 + $70 = $84.50 - $33.25 cost = $71.25 profit (Still a year left on the call) CIEN $100 - (Jan-2002) $90 put expires worthless = $34.50 profit $60 call now worth $50 = $50 profit ($10 est time value) Cost of call = $33.25 Profit = $34.50 + $50 = $84.50 - $33.25 cost = $51.25 profit (Still a year left on the call) CIEN $75 - (Jan-2002) $90 put exercised, stock sold at $75, $15 loss $60 Call worth $35 = $35 profit ($10 time value est) Cost of call = $33.25 Profit = $35 - $33.25 - $15 = $-13.25 loss but call still has a year to go. **************** With the short term market direction still in doubt I would look for more long term opportunities. Stocks are cheap but could get cheaper. Commercial traders are still increasing their short positions which does not bode well for the near future. Greenspan will continue to reduce rates and will eventually get control back again. The Nikkei is now at a 15 year low and is having a negative impact on the US markets. Be patient or be long term. Good Luck Jim Brown *************************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=1749 ************************************************************ **************** MARKET SENTIMENT **************** The Rally That Just Won't By Austin Passamonte It's been a long time since we've watched such fickle markets on a daily basis of rally & sell. Exactly one year ago and counting was much the same thing. While we don't expect intraday swings of three to six hundred Dow or Nasdaq points anytime soon, the pattern remains the same. Skilled traders last year had the chance to make obscene fortunes during days like those depicted above but steam-roll just about everyone else. Since Friday, February 23rd the Dow, SPX and OEX successfully tested recent bottoms three times the past six trading sessions. It might take another trip or two down during the week ahead, but it remains our opinion that a near-term bottom is in place barring unforeseen and catastrophic news. A relief rally is overdue and expected by growing numbers of traders who have begun to see firmness below and a pre-FOMC meeting run may be the catalyst to drive them higher. Should that be the case, are we to expect the final multi-year bottom is there? Not even close. The bear market is far from over and we will almost assuredly trade lower than recent levels sometime down the road. Between then and now lies at least one sustained rally if not more. No markets go straight up or down without correction and that remains true even now. Down is far easier than up but up we will go and soon. Up however, won't be easy. Massive technical damage has been done and solid layers over overhead resistance are meshed above. We consider the following values the next points of solid ceiling based on moving averages, Fibanocci numbers and support/ resistance above: SPX: 1280, 1300, 1320 NDX: 2192, 2300, 2400 Dow: 10,700 = major congestion Comp: 2,380, 2,500 SOX: 610, 642 OEX: 675, 686 The VIX, VXN and put/call ratios remain at bullish reversal zones. Put/Call ratio disparity on index options indicates heavy support and light resistance levels once again. Every market indicator known to man is registered in oversold on daily-chart time lengths. Pick one; they all read the same. The Dow, OEX and SPX each posted bullish "doji" reversal candles on their daily charts. Nasdaq indexes posted bullish "gravestone doji" reversals on their daily charts as well. One key sign of a major bullish price reversal is a market closing on daily lows while bearish reversals usually occur on closes near the session highs. This flies in the face of common assumption in the equity world but is easily proven on a daily chart for any symbol. Dial one up and see for yourself. Most price reversals come in this fashion and that seems to be the setup here right now. There are several bearish points to be made as well. Short-term chart signals are decidedly weak and forecast lower levels at some point during Monday's session at the very least. We approach the next pre-warn season and guilty parties seem all too anxious to line up in droves early & often these days. Markets need to once again shrug off further bearish news before they sustain any kind of upside move. Over at the Chicago Mercantile Exchange, our old friends the commercial traders have increased their historical net-short position to no surprise for anyone. These giant hedge funds and institutions will continue to short this market for weeks and months to come, rallies or otherwise until the final washout occurs. Market Sentiment still expects a final capitulatory period far beyond what we've seen so far to end the big bear. A Dow below 9500, NDX & Comp well below 2000, SPX sub-1200 and OEX sub-600 all at once will break the bear market's back and most remaining stalwart bulls in the process. Our fondest hope is for all to be heavily invested in long puts when that inevitable period arrives. Meanwhile, our bias heading into this week remains to the upside but that is no different than the past two with obvious results. Holding this mantra shall prove us correct eventually, but that's not the idea. All conditions remain highly oversold and countless bullish indications exist & await their day in the sun. Green pastures remain locked under a blanket of snow until sunshine reappears and it promises not to be long. That however, is a relative term. The best we can hope to do is trade the daily (or hourly) trend, book profits when offered and wait on the sidelines for the next extreme market move to arise. Nimble & fleet of mouse is the order for success these days! ********* VIX Friday 03/02 close: 30.86 VXN Friday 03/02 close: 77.43 30-yr Bonds Friday 03/02 close: 5.36% 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 (03/02/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 670 - 655 11,192 5,161 2.17 650 - 635 7,266 9,252 .79 OEX close: 633.89 Support: 630 - 615 976 9,419 9.65 610 - 595 223 9,028 40.48 Maximum calls: 700/6,198 Maximum puts : 560/9,485 Moving Averages 10 DMA 649 20 DMA 672 50 DMA 685 200 DMA 748 NASDAQ 100 Index (NDX/QQQ) Resistance: 56 - 54 119,574 35,068 3.41 53 - 51 57,176 25,989 2.20 50 - 48 121,333 59,859 2.02 QQQ(NDX)close: 46.70 Support: 45 - 43 3,733 23,975 6.42 42 - 40 2,919 14,076 4.82 39 - 37 51 6,004 117.72 Maximum calls: 50/86,601 Maximum puts : 50/39,676 Moving Averages 10 DMA 50 20 DMA 54 50 DMA 59 200 DMA 79 S&P 500 (SPX) Resistance: 1300 12,510 17,023 .73 1275 15,487 21,922 .71 1250 9,235 15,804 .58 SPX close: 1234.18 Support: 1225 3,142 17,422 5.54 1200 2,117 19,063 9.00 1175 246 8,653 35.17 Maximum calls: 1325/49,189 Maximum puts : 1325/42,622 Moving Averages 10 DMA 1257 20 DMA 1295 50 DMA 1315 200 DMA 1403 ***** CBOT Commitment Of Traders Report: Friday 03/02 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 -1831 -2538 -4538 -4571 Total Open interest % (-20.19%) (-26.63%) (-16.02%) (-18.48%) net-short net-short net-short net-short NASDAQ 100 Open Interest Net Value +3985 +2988 -8594 -8493 Total Open Interest % (+18.58%) (+15.44%) (-12.24%) (-13.44%) net-long net-long net-short net-short S&P 500 Open Interest Net Value +84749 +77015 -101746 -96492 Total Open Interest % (+41.67%) (+40.10%) (-13.36%) (-12.70%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: This week saw an increase in divergence on the NASDAQ 100 and S&P 500 with the Commercials adding to their net-short positions and the Small Specs increasing their net-long positions. The DJIA had both sides moving in synch as they lightened their net-short holdings. 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 02/27 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/030401_1.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=1763 ************************************************************** *************** ASK THE ANALYST *************** Nadir By Eric Utley These are trying times, indeed! And this game we call the market is not getting any easier. I've become increasingly reluctant to trade anything tech-related from the long side because of events such as the Oracle blowup last Thursday evening and the steep sell-off in the market Friday afternoon. Just when I think I've developed an edge, and discerned a favorable probability in tech, something goes awry. As such, I avoided tech from the long side last week in my endeavors. I've been employing several hedging techniques in my day trades in order to preserve capital, minimize risk and still make money. Although, I didn't use any particular hedge in the trade I've detailed below. Some of these tactics may be useful for my readers and are widely known by industry professionals, such as hedge fund managers - a group which I plan to join in the future. These hedging techniques can be as simple as buying a calculated ratio of protection. For example, I might speculate that CIENA (NASDAQ:CIEN) is going to trade higher during the day, so I buy 1,000 shares in conjunction with the purchase of 5 puts. So I can capture a large upside move, while minimizing the risk with the puts. Another strategy might be to buy the leading stock within a particular group while simultaneously selling the lagging stock within the group. For example, buying shares of CIENA and shorting shares of Nortel (NYSE:NT). This type of hedge can allow traders to capture a large upside move, while again hedging downside risk. Of course, any hedging strategy is limited to the amount of capital with which a trader operates. But even if a trader is only operating with $5,000 or $10,000, they can still employ risk management strategies by way of hedging practices, and still make money. I think the topic of hedging is of particular interest given the continued slide in the Nasdaq. At some point, the Nasdaq HAS to reach its lowest point. When that point is reached, I really don't know. But it might be prudent to use some sort of hedge when gaming the long side of tech in the meantime. As always, if my readers have any specific questions hedging techniques, let me know through the e-mail address below. Send your stock requests to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- Fed Speculation I bought some speculative calls last Tuesday on Citigroup (NYSE:C) in an attempt to game a possible intermeeting rate cut by the Fed. While I normally don't like to trade in a purely speculative manner, I felt the risk to the downside was fairly limited, while there existed the potential for great upside if the Fed did, in fact, cut rates on Tuesday. Citigroup was trading relatively well Tuesday morning, following the release of Consumer Confidence numbers. In fact, the broader banking sector, as measured by the KBW Bank Sector Index (KBW.X), was displaying strength in spite of the heavy trading in the broader market. Citigroup was bouncing off the $50 level, so I went in and bought a relatively large number of calls. As I had speculated, the relative strength in shares of Citigroup attracted buyers and the stock began to lift off the $50 level. Because Citigroup was trading at a strike price ($50), the options were very sensitive to the movement in the underlying. Furthermore, the implied volatility in Citi's options is relatively low. So a few ticks in the underlying can move its options - especially options with a 50 delta. As Citi traded higher, off the $50 level, I began to sell into the strength. The reason I scaled out of my position as the stock traded higher was because I wanted to keep some exposure in the event of a surprise rate cut. In short, by taking some profits off the table from the initial position, I was able to let the rest of my position ride, minus some emotion. Citi peaked at $51.50 and began to rollover. As the day wore on, it became evident that the Fed would not cut rates to appease the market. As such, Citi began to slip and as soon as the stock fell back below my entry level at $50, I blasted my remaining position for a small loss due to commissions and slippage. However, the gains from my earlier sales offset the small losses due to the stock's pullback so the trade was a net gain. I could have made a lot more money if I would have blasted my entire position when Citi crossed the $51 level. But, I was gaming a bigger move to the upside in the event of a rate cut. And as I mentioned previously, I felt the reward-to-risk profile for this particular trade was favorable. If I was presented with the same situation again, I would make the exact same trade. ---------------------------- Veritas Software - VRTS Would you please look at VRTS and give us your opinion? - Thanks, Molly The two sectors that had remained relatively intact during the latter-half of 2000 were data storage and optical. However, those two sectors have been systematically taken lower so far in 2001, and I suspect they'll continue to trade lower in the foreseeable future. This is just my opinion, of course. As you probably know, Molly, Veritas (NASDAQ:VRTS) is a supplier of data storage software. It competes with the likes of Oracle (NASDAQ:ORCL), who publicly warned last Thursday. In addition, the hardware makers in the storage sector, such as Emc (NYSE:EMC) and Brocade (NASDAQ:BRCD) have admitted to the lack of visibility in their respective businesses. On an ancillary note, Emc is one of the best managed companies in the world and their lack visibility is a testament to how tough the storage business really is. However, that's not to say you can't TRADE Veritas from the long side in an attempt to game the oversold condition in the Nasdaq Composite. That's the reason you'll find Veritas on the OptionInvestor call list currently. But owning Veritas at current levels for INVESTMENT purposes is a game I'd rather not play. ---------------------------- Applied Micro Circuits - AMCC Looking at the weekly chart for AMCC, it strikes me that there is an almost perfect head and shoulders pattern. Also it appears that the drooping right side is now striking a double bottom near 32. How would you interpret these patterns as to the near-term movement of AMCC? - Thanks, Alec Alec, much has taken place since you sent in your request for Applied Micro Circuits (NASDAQ:AMCC). The stock subsequently took out the relative low at $32 you mentioned and the company issued a profit warning last Thursday. Following the profit warning Thursday afternoon, a powerful short covering rally ensued in shares of Applied. It was a classic case of sell the rumor and buyback on the news. However, that profit taking (short covering) rally Thursday may be short lived until the visibility in the networking business improves. And judging by the recent warning from 3Com (NASDAQ:COMS) and the poor price action in Cisco (NASDAQ:CSCO), the networking business is far from reaching a trough. And as you probably know, Alec, Applied Micro sells its integrated circuits to manufacturers such as Cisco. Let us now address the massive head-and-shoulders on the weekly chart you alluded to, Alec. I consulted our nationally recognized technician, John Seckinger, for a little help with AMCC's head-and-shoulders on the weekly chart. And what John and I concluded was a bit unnerving. John and I used the $105 level for the head - in some instances it may be more prudent to use AMCC's peak near $110 as the head of the formation. But in this case we felt $105 represented a a "better" level for the head. According to our placement, the level of the neckline at the time of AMCC's trading near $105 sat at roughly the $50 level. So, we came up with a difference of $55 (or $105 - $50). To derive the bearish, downside objective from the head-and-shoulders, John and I placed the right shoulder at $60. Taking the difference from the head to neckline of $55, and subtracting that from the right shoulder at $60, we came up with a bearish objective of $5. Coincidentally, the $5 level is the next major support level that lies below shares of Applied Micro, which is a bit disconcerting, to say the least. ---------------------------- Solectron - SLR I really enjoy writings as they have been very educational & enlightening for myself as well as others I'm sure. I would like your take on SLR if you have time please. - Thank you, Marvin I greatly appreciate your kind compliments, Marvin. Thank you. By now, we all know that the stocks within the tech sector are in a deep bear market. There's an intensifying debate brewing about whether the current bear market is nothing more than an inventory correction and tech stocks will rebound in the latter- half of calendar 2001. Others suggest the bear market is, in fact, a secular decline in technology which may last years upon years. Having said that, shares of Solectron (NYSE:SLR) may still be a dicey proposition at their current levels. However, there is a growing trend among technology companies to outsource their manufacturing operations to firms such as Solectron. Recent examples of this trend have been provided by Ericcson (NASDAQ:ERICY) and Motorola (NYSE:MOT) - two troubled telecom companies. Although the two aforementioned telecoms didn't outsource the services of Solectron, their actions reinforce the trend nonetheless. If the trend of tech and telecom companies outsourcing their beleagured manufacturing operations to firms such as Solectron, Flextronics (NASDAQ:FLEX) and Celestica (NYSE:CLS) continues, then it might help to buoy the shares of these contract manufacturers and mitigate the impact from the deteriorating tech sector. And for that reason, there may exist an underlying bid in this group of stocks, such as Solectron, because the fundamentals may be in place to sustain the group. But I would suggest proceeding with caution in any tech group. If you're going to try to pick the bottom in Solectron in an attempt to anticipate improving fundamentals within the contract manufacturing group, I would suggest using a tight stop to manage risk. ---------------------------- Mercury Interactive - MERQ What do you think about MERQ? I like the fairly predictable trading ranges and am also looking at it as a long term hold. - Thanks, Pat Pat, I'm going to be rather blunt and bearish in my review of Mercury Interactive (NASDAQ:MERQ). It's not because I have anything against the company or its products. But I think owning the stock for the "long term" may be a dangerous proposition right here and now. Mercury Interactive sells its products and services over a broad spectrum of technology companies. Its list of customers include dot coms, B-2-B companies, tech heavyweights such as Cisco and Oracle, as well as old economy names. I don't have to go into detail concerning the current conditions in the dot com business, B-2-B and broader technology. However, what is a bit disconcerting with Mercury Interactive, specifically its stock price, is that it trades with a large premium. That premium which has been built into the stock was predicated on the company's superior outperformance in earnings growth and expectations for subsequent profits. But I fear that Mercury Interactive won't live up to its expectations - that much is currently being discounted into the stock price. To take a quick tangent from my review of Mercury, I'd like to reinforce that the sole purpose for venturing into the stock market is to make money. And I don't think you're going to make money in Mercury Interactive over the next twelve to eighteen months by owning the stock. Of course, that may not matter depending upon your time horizons. But, the point I'm trying to make is that rationalizing a decline in a stock by saying you're a long-term investor is a dangerous practice - it won't make you money. While Mercury may struggle for the next year, or so, you might be able to make more money in other groups of the market such as finance, retail or cyclical. I'm by no means making an example of you, Pat. I'm simply giving you my honest take in an attempt to help you make more money, or save it in this case. ---------------------------- 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 March 5, 2001 Monday ====== NAPM Services Feb Forecast: 52.00% Previous: 50.10% Online shopping Index Feb Forecast: NA Previous: 162.7 Tuesday ======= Productivity-Rev. Q4 Forecast: 2.00% Previous: 2.40% Factory Orders Jan Forecast: -2.20% Previous: 1.10% Wednesday ========= Consumer Credit Jan Forecast: $5.3B Previous: $3.0B Beige Book NA Forecast: NA Previous: NA Oil and Gas inventory 2-Mar Forecast: NA Previous: 280.0MB Semiconductor Billing Jan Forecast: NA Previous: -2.1% Thursday ======== Initial Claims 3-Mar Forecast: NA Previous: 372K Chain Store sales Feb Forecast: NA Previous: 4.8% Friday ====== Nonfarm Payrolls Feb Forecast: 88K Previous: 268K Unemployment Rate Feb Forecast: 4.20% Previous: 4.20% Hourly Earnings Feb Forecast: 0.30% Previous: 0.00% Average Workweek Feb Forecast: 34.2 Previous: 34.3 Wholesale Inventories Jan Forecast: NA Previous: 0.00% ECRI Future Inflation Feb Forecast: NA Previous: -7.8% ECRI Wkly Leading Indx 2-Mar Forecast: NA Previous: -3.3% Week of March 12th ================= Mar 13 Retail Sales Mar 13 Retail Sales ex-auto Mar 14 Business Inventories Mar 15 Initial Claims Mar 15 Export Prices ex-ag. Mar 15 Import Prices ex-oil Mar 15 Current Account Mar 15 Philadelphia Fed Mar 16 PPI Mar 16 Core PPI Mar 16 Housing Starts Mar 16 Building Permits Mar 16 Industrial Production Mar 16 Capacity Utilization Mar 16 Mich Sentiment-Prel. ************************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=1771 ************************************************************** 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 03-04-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/030401_2.asp ************** TRADERS CORNER ************** Hey! What Happened To Our Market-Moving Rate Cut This Week? By Renee White Thank You, Mr. Angell. I'm sure more than a few traders who trusted your insight lost money from your rate cut comment last week. My neck was on the line last weekend when I dismissed the optimism and played against his call. I hope he realizes that next time he may be thought of as The Angel of Death. I'm glad I played the contrarian and held puts! Although the week gave us lower lows, I found it interesting. It is clear than many people are stepping aside at this time, watching from the sidelines. More margin calls flushed out more traders on a weak week. In addition, just when traders were beginning to believe every company had already warned, more showed up. The latest twist in the game that I see developing is the warning after the warning. I'm beginning to wonder if we shouldn't be prepared for a second phase of earning’s revisions from all major companies. Gosh, wouldn't that be sick? Get ready. Trying to find optimism, I realized we have fallen so far that we can't possibly fall that much again. I mean, NASDAQ can't go to zero. Can it? We have dropped 3,061 points from the intraday highs in March 2000, a 59.65% drop, one of the worst in history. NASDAQ has lost 22% in valuations this February alone. That was after we thought the majority of the damage had already been done and the rate cuts had begun. Still, we can't drop another 3,000 points when we are sitting at 2117. The good news is: if we continue to slide at our current pace, we should have the pain over and done with by the end of the quarter once NASDAQ hits zero. If you think that won't happen, then perhaps the bottom is near. I don't mean to be glib, but if you’ve managed to hang in there, learning to trade this slide, you probably feel you have earned a Ph.D. in market lessons. Suffice it to say, you will definitely be titled "seasoned" once a new bull leg appears and the next batch of green traders come cheerfully, learning to trade in order to grow rich. The odds are in our favor of not seeing another slide of this magnitude again for many, many years. When it eventually returns, we should all smell it coming. For now, we have almost survived. We aren't there yet though. The damage is not finished, but it is feeling closer and closer. This week reminded me of a slab of beef on the grill, being poked for doneness. On one side, it is char-grilled, on the other, still slightly bloody. It's been poked with a fork and the blood still looks just a little too red. It's not quiet done yet, but close. They say a crash isn't over until the last generals fall. We thought that meant stocks or sectors. However, on Friday I heard them whooping Mr. Greenspan in the congressional shed. It wasn't pretty. It's obvious that falling from a deity level is tough and everybody watches. During his testimony this week, we learned that he is indeed paying attention to those mixed economic reports that I have mentioned in previous articles. He specifically mentioned the strength in the auto and housing industries, while other parts of the economy showed weakness. We should keep our eyes on these reports as we try to discern if we can salvage our economy from a true recession. Unemployment claims were up, but so was consumer spending. The mixed reports showed consumer spending did not match current consumer sentiment. With 4th quarter GDP 1.1%, a 6 year low, the concern in our economic slowdown is real. Again, this number tells us we are in a sharp economic pullback, but it is important to acknowledge that it has not turned negative yet. Trading on Friday was interesting. I was left with mixed feelings. With Oracle (NASDAQ:ORCL) warning after Thursday's close, the market had all the reasons it needed to fall right back through the new Nasdaq low set on Thursday. Although the market was skittish, it appeared to struggle with an urge to go up, not down. Advancers beat decliners, but you would hardly know this by looking at the chart. I definitely felt more gloom in the market at the beginning of the week than towards the end. In fact, I found myself holding both call and puts going into the weekend. I couldn't exit my puts, yet I couldn't buy more either. I did buy a few calls Thursday and Friday. This indecision is new. A feeling I haven’t felt for many months. It's too early for me to know if there is any depth to this change in sentiment, but straddles may be the best plays here. Since we held Thursday's low after Oracle's news, I tend to think the bounce from this oversold condition may start next week. Things just felt a little different Friday. I don't trust long term trades yet, but I should be able to scalp some profits from an oversold bounce if I'm right. We are getting to very low levels. Low enough that I think the risk of shorting before a bounce is risky. Sometime soon, Nasdaq will find a bottom and it will come before we have signs of economic recovery. Probably, about the time the general public starts to really feel the effects of an economic slowdown, the market will have already started to turn. We probably won't believe it, know it, or trust it, when we get there. Perhaps these mixed economic reports are the beginning. Or perhaps they too will roll over first. One last note, I want to share the red flag that went up in my subconscious mind this week. CNBC's Tom Costello reported that visitors from foreign nations were starting to come by to interview him on the falling NASDAQ. That was not comforting to me. Japan came at the end of the week after a host of others. Japan. A country who once showed major economic strength, who had also had a wild and high-flying stock market, and now has one of the biggest debts of all large countries and a continued recession lasting greater than 8 years. Was this gloating on their part, or concern? ***** New Subscriber Focus: Setting Up Your Workspace, Part I By Janar Wasito One of the main challenges for new subscribers is taking the large amount of information presented in the newsletter and putting it into a form which is useful and actionable during the trading day. This is part one of a two part article on how I approach this problem. First, I want to throw out two analogies for trading. The first is that of a Marine platoon commander leading his platoon up the hill on some attack. Maybe I send a team with light machine guns up the left side, and go down the middle with most of the unit and some attached rockets, radio in for some fire support, and kick off a coordinated attack on a bunker complex. Adrenaline is pumping, emotions are high, this is the stuff of John Wayne movies. The second is of that of the same Marine lieutenant sitting in the back of some armored command vehicle in a back up Battalion command post. There are 4 radios, some to aircraft, some to forward units, some to adjacent units. There are 4 maps of various scales taped to the insides of the vehicle, and reports are coming in from everyone at the same time. The maps have high-speed avenues of approaches drawn in between mountain ridges, and the rate of movement of enemy vehicles have been calculated in advance, as have the ranges and capabilities of supporting weapons. It’s a more cerebral game of allocating resources and identifying points of main effort. If the main command post gets taken out, you are quarterbacking hundreds of Marines over a large operational area, moving aircrafts into the zone of operations. So, which image best represents how the trader makes money? I would suggest that the first image is a little like the trader after the bell has rung and the trading session has started. But the second image is where I try to make my money. The second image is more like what I do at night or on the weekends to try to understand my own trading better and to improve it. The second image is how any good trader - such as Marty Schwartz - will really make money. I read the newsletter with a hard copy in a binder, a pencil, and my laptop computer with an Internet connection. I have Qcharts open, and I have my trading set up at my fingertips, which I will explain in a second. From Qcharts, I can right click on an option contract and have it set up in Preferred Trade’s software. From observation to orientation to decision to action (an OODA loop) in literally minutes, if not faster. As George Fontanills says at times, this is adult Nintendo, but the stakes are real. At the heart of this set up is my charting software. On the left hand side, I have two quote screens, and a time and sales at the bottom. The top quote screen has my primary trading index, the QQQ, at the top, along with the NDX.X. Below those two tickers, separated by a subtotal, are a series of market tickers, including the COMPX, SOX.X, OEX, VXN.X, VIX, and BKX.X. (I won’t try to explain each one, as this is done in other parts of the newsletter frequently). Below those tickers, also separated by a subtotal, are the 100 components of the Nasdaq 100. As for the vertical columns, I have symbol, net, last, and net%, so that I can instantly rank the 100 components by net % change. This helps me throughout the trading day to see which stocks are leading the index higher or lower. For example, on Thursday, I could see CIEN at the top of the net% all day, and when it weakened, it signaled a downward shift in the QQQ index. Below this first quote sheet is a second quote sheet in which I load 1 or 2 option contract symbols - QQQ puts or calls, depending on the situation. Below this second quote sheet is a time and sales box, which I can expand to fill the entire screen. When I am getting into or out of a option contract, I will look at the bid/ask, and usually I split the market, and use Preferred Trade’s direct access to the option exchanges to select the best exchange. I will often watch as I put in a limit order between the bid and ask, only to see the market maker move the bid up to match my limit. Fine, buddy, so I will cancel the order, wait for the bid to drop back down and put it back in. Getting familiar with the order entry capabilities will add % points to a trader’s returns, and those incremental gains will add up, over a long period. Slippage is where market makers will gain a lot of their profits, but retail traders can guard against some of this by playing heads up ball. Next week, I will discuss further my workspace functions and trading techniques in Part II. *************************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=1755 ************************************************************ *********** OPTIONS 101 *********** Calendar Spreads: A Nice Way to Sleep at Night, Part 2 By Lynda Schuepp As Paul Harvey says, "And now for the rest of the story." Here is the link for Part 1 that was printed last week to help you review: Calendar Spreads: Part 1 http://members.OptionInvestor.com/options101/022501_1.asp Part 2: Criteria for doing a calendar spread: 4. Pick a time frame you are comfortable with. This is a subjective one, but there is no mystery here. The longer the time frame the less sensitive the spread is to fluctuations in the stock. If you would like to just buy an investment and tuck it away, then you should use a long time frame like the January '02 and January '03 as previous discussed. If you want action now, then use a shorter time frame. The shorter the time frame, the more the potential reward as an annual percentage, but with that comes more risk. As they say, "there ain't no free lunch." 5. Pick a strike you are comfortable with.No mystery here either, remember, you are betting that the stock will close at or near your strike price at the expiration of the shorter leg. If you were to use March and April instead of the January '02 and January '03, it is common sense that you wouldn't use 80 as your strike price, unless you think the QQQ's could close at 80 in the next 4 weeks! The strike you choose will be dependent on your market outlook for the next month if using the March and April options. If you think the QQQ's will stay flat, you might choose a 50 strike, if you were moderately bullish you might choose 55, really bullish and you might select 60! The cost of the spread decreases as you move the strike farther above the current price of the stock. The cost of the March-April 50 put calendar spread would cost $1.60 or $1600 for 10 contracts versus $1.20 for the spread using a 60 strike. However, which strike has the greater probability? I'll leave that for you to decide. I prefer to go out longer term and use my capital to put on various positions with greater odds and somewhat less of a reward, therefore, increasing my changes to be right. 6. Select the number of contracts you are comfortable with. I recommend at least 10 contracts when doing this strategy. The reason is that most brokers charge you a minimum ticket, and with the cost of the spread so cheap, it's not worth doing less than 10, or commissions will play a real factor. It also gives you some room to make some adjustments, a topic we can cover in another article. 7. Study different strike and timeframes and calculate your risk to reward. In the case of the January '02/ January '03 puts with a strike of 80, we determined our maximum reward was $7.40, lets say $7 to make it easier to calculate. The cost of the spread would be $1.60 using the "natural spread". The natural spread is buying at the ask and selling at the bid, which the market maker is obligated to fill at. However, you can always squeeze a little out of each leg, and I would conservatively assume we could get this spread down to $1.40 or $1400 for 10 contracts. Now divide $1.40 into the guesstimated actual reward of $7 and you get 5 to 1 odds! That means you make a 500% return in about a year if QQQ go to 80 buy January 02. Maybe you would be more comfortable with a projection of 70, if so then use the prices for 70 strike, which would be a cost of $2.30 for the natural spread or about a 3 to 1 odds. Notice how your reward drops as the strike price drops closer to the actual price of the stock. 8. Find approximate values on your spread at expiration in case you are wrong about the stock. You can do this by looking at current option prices and using those prices as approximations for what options will be worth in the future by changing the time frames and strike prices. If you decide on the QQQ January '02/January '03 80 strike, then how much would your spread be worth if the QQQ's only get to 60 or 70? To figure this, look at the current prices of the January 02 options to approximate the value of your '03 leg at expiration in January '02. If the QQQ's only get to 60 instead of 80, your short January '02 80 put is worth 20 points, ouch! You would have to buy them back and you would be down $20,000 plus your initial investment of $1400. Don't panic, your January '03 80 put would be worth at least 20 points too, plus 1 year of time value, so all is not lost. You probably could get $1 of time value on the "03 put so your total loss would be about $400 ($1400 cost of spread less $1000 which would be the sale of spread in January '02). Worst-case scenario-- if the stock is "put" to you, in other words you are assigned the stock, simply exercise your long put and move on. You have no extra money at stake and that is truly the worst case. You would lose $1400, the cost of the spread. If the QQQ's only got to 70 - then the short January '02 80 puts would be worth $10 or $10,000, but your long 80 puts would be worth approximately $12.80 or $12,800, which is the current price of the January '02 60 put. This is the approximation you must master, by using current prices to project the value of your long leg at expiration of the shorter-term option. If the QQQ's get to 70 then your 80 puts would be 10 points in the money. Today, the current strike that is 10 points "in the money" would be the 60 strike because the QQQ's are currently trading for about 50. Looking at the current prices of the January '02 60 puts which are now 10 points "in the money" you would determine that your long 80 put would be worth about $12.80. Subtracting the $10 to buy back the short leg, your profit would be $1400 ($12.80 for the price of the long less $10 price of the short leg less $1.40 cost of the spread originally, times 1000 for 10 contracts). You made 100% in a year and you were 10 points off your projection, not bad. Really study and understand how to determine the value of your spread at expiration and you will see that this is a worthwhile, low risk, high reward kind of trading. Pay particular attention to #8 and go back and try it with other stocks that your trade. ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* FPL - FPL Group $65.36 (+1.23 last week) See details in sector list Put Play of the Day: ******************** MERQ - Mercury Interactive Corp $48.50 (-21.56 last week) See details in sector list *************************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=1750 ************************************************************ ************************** 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 SEBL $36.09 (-11.97) The ORCL bomb did extensive damage to the Software sector even before the opening bell on Friday, and our SEBL play never even had a ghost of a chance to make it off the sidelines, gapping down to $35.50. Buyers tried to resurrect the stock throughout the morning, and actually almost succeeded in lifting the stock back above our $40 stop. Unfortunately, fear of darkness began to set it, and the burden of relentless selling in the Software sector was too much for the bulls. After lunch, the bears came back, mauling the bulls in the afternoon session. SEBL fell back to close very near the low of the day for a 19% loss, leaving us no choice but to remove it from the playlist this weekend. MSFT $56.69 (-0.06) Notwithstanding the stock's relative strength and resiliency of late, the world's software leader fell under par in Friday's session. Whilst the Oracle (ORCL) news didn't, in effect, rock the NASDAQ, the software sector continued to vanquish under the scrutiny and slew of analyst downgrades. Besides the obvious violation of its $58 support, MSFT closed just a fraction from its intraday low amid robust trading. The whole kit and caboodle doesn't bode well going into next week; therefore, we're dropping coverage on MSFT this weekend. PUTS No dropped puts this weekend *********** 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 ************** EDS - Electronic Data Systems $66.45 (+4.75 last week) EDS is a professional services firm that applies consulting, information and technology in innovative and productive ways to enable clients to improve their overall performance, extend their enterprise ahead of the competition and better serve their customers. The company's end-to-end services portfolio covers these areas: Management Consulting, E-Solutions, Business Process Management and Information Solutions. EDS is highly innovative in using technology to solve business problems and help clients in such areas as improving customer service, enhancing the quality of their products and even getting to market ahead of the competition. It's all about the earnings. The slowing economy has without a doubt been unkind to many equities, no matter what the sector. Business models that can’t survive the harshest of scrutiny are being tossed aside, and companies that can't maintain their earnings growth projections are finding it difficult to keep their stock prices up. On the other side of the coin, the market has been richly rewarding those few firms which have exhibited sound fundamental strength. In such uncertain times, consistency and quality of earnings are what command premiums, which has helped shares of EDS to rally strongly so far this year. After forming a wedge pattern spanning two months in December and January, the stock broke to the upside in early February, thanks to an impressive earnings report in which the company beat Street estimates by two cents and provided bullish guidance going forward. This led to a rash of upgrades and positive comments from the likes of CS First Boston, JP Morgan, Lehman Brothers, and most recently Deutsche Banc Alex Brown. Intra-day bounces off the 5 and 10-dma at $63.80 and $63.35 along with support at $65 and our stop price of $64 could allow aggressive players to take a position. If the buyers continue to bid up the stock on Monday, then a break above Friday's high of $67.40 would allow for an entry on strength, but be sure to confirm upward momentum with industry peers CEFT and SDS. ***March contracts expire in two weeks*** BUY CALL MAR-60 EDS-CL OI=1439 at $7.10 SL=5.00 BUY CALL MAR-65*EDS-CM OI=3452 at $3.30 SL=1.75 BUY CALL APR-65 EDS-DM OI= 459 at $5.40 SL=3.50 BUY CALL APR-70 EDS-DN OI= 723 at $3.00 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=EDS IDTI - Integrated Device Tech. $33.38 (-4.88 last week) Integrated Device Technology designs, develops, manufactures and markets a broad range of high-performance semiconductor products. The company serves up products for data networking and telecommunications equipment such as routers, hubs, switches, cellular base stations, storage area networks, networked peripherals, servers, and personal computers. About 70% of sales are from communications and high-performance logic components such as embedded RISC microprocessors, specialty memory, logic and clock management circuits, and networking devices. "Sell the rumor, but the news" seemed to be the flavor of the week for Semiconductor stocks. Following the lead of AMCC investors who bid the price of the stock up in the wake of the CEO's revenue reduction Thursday afternoon, IDTI investors went on a buying spree after the company revised its revenue and earnings guidance downwards Thursday evening. Calling for revenues to come in 20% shy of prior estimates of $279 million, the company's president, Jerry Taylor cautioned that "IDTI continues to see the impact of the industry-wide inventory correction which began in the fourth quarter of calendar 2000". Nothing new there, except for investors' reaction to it. Rather than punish the stock, buyers queued up to go on a buying spree Friday morning, tacking on a little over a dollar as volume surged to 70% above the ADV. Helping the bulls in their quest to stage a Friday rally was the Semiconductor index (SOX.X), which continued to recover from Thursday's new yearly lows. While IDTI weakened a bit near the close, this was more likely fear of darkness, rather than any significant weakness in the stock. Since the NASDAQ and SOX.X direction will be pivotal in the success of our play next week, we need to watch these indices carefully. If we have seen a near-term bottom and they make a concerted effort to rally, then IDTI will be off to the races, providing conservative investors with an attractive entry point as the stock moves above $34.50. On the other hand, early weakness could give the ball to aggressive investors with another dip near the $30 intraday support level. As long as the buyers come back in volume and give us a strong bounce, entries near this level would seem to present a compelling risk/reward ratio. Set stops at $30. ***March contracts expire in two weeks*** BUY CALL MAR-30 ITQ-CF OI=255 at $4.88 SL=3.00 BUY CALL MAR-35*ITQ-CG OI=550 at $2.13 SL=1.00 BUY CALL APR-30 ITQ-DF OI=154 at $7.00 SL=5.00 BUY CALL APR-35 ITQ-DG OI=154 at $4.63 SL=2.75 BUY CALL APR-40 ITQ-DH OI=155 at $2.94 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=IDTI UNH - United Healthcare Group $60.79 (+6.46 last week) United Healthcare owns and manages a broad spectrum of health care plans and services across in the United States and internationally. This global enterprise provides employers products and resources to plan and administer employee benefit programs. They operate distinct business segments: United Healthcare manages HMO, point-of-service, and preferred provider plans; Ovations is Medicare and Medicaid options provider; Uniprise handles health plans for large companies; and Specialized Care offers the specialized plans. On Friday, news of a partial victory in Federal Court boosted shares of publicly traded managed-care companies. US District Judge Fredrico Moreno dismissed claims that the HMOs conspired against doctors to systematically delay and deny payment even when care was medically necessary. These practices violate federal racketeering laws and fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA), a 1974 federal law that regulates pension and health benefits. Last year, the managed-care industry came under great scrutiny and was the target of a slew of lawsuits by health-care providers and patients alike. Most of the nation's leading health insurers, including UnitedHealth Group (UNH), Wellpoint Health Networks (WLP), Cigna (CI), PacifiCare Health Systems (PHSY), and Aetna (AET) were named in the lawsuits. The long-awaited, but peremptory judgment lifted shares across the sector. UNH was launched out of its primary trading range ($55 to $60) on brisk volume. On the day, UNH gained $1.80, or 3.1%, finishing strong at just a few cents off the intraday high. The bullish move through the immediate opposition at the $60 level follows a week of relatively positive action for UNH and its cohorts. Consider starting new call plays if UNH maintains its upward trend and challenges $65 with vengeance. A more aggressive and risky strategy is to buy into a bounce off the 50-DMA at $57 & $58, then sell your positions as UNH approaches the corresponding resistance levels. Take note, we'll drop coverage on UNH if it demonstrates weakness and closes below the $59 mark. ***March contracts expire in two weeks*** BUY CALL MAR-55 UNH-CK OI=3046 at $6.60 SL=4.50 BUY CALL MAR-60*UNH-CL OI=3339 at $2.95 SL=1.50 BUY CALL APR-60 UNH-DL OI= 109 at $4.70 SL=2.75 BUY CALL APR-65 UNH-DM OI= 820 at $2.80 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=UNH **************************** NEW LOW VOLATILITY CALL PLAY **************************** PPG - PPG Industries Inc $52.38 (+2.88 last week) PPG Industries manufactures decorative and protective coatings, glass products, and also specialty chemicals. You may be familiar with their Lucite brand house paint or Olympic stains. Coatings for architectural, automotive, and industrial uses account for 50% of the company's revenue while the glass products represent nearly 30% of sales. PPG has over 110 manufacturing facilities in 22 countries and about 250 retail paint stores in the US. PPG's undeviating trendline and unfailing sector in conjunction with last week's strong breakout through the $51.50 resistance demands concise and timely attention. Moving right to the point, PPG is a slow, but steady mover that historically exhibits low volatility. We're beginning coverage on the basis of implied gains, notwithstanding the topsy-turvy marketplace. While the technology traders continue to assail their flight instincts and rotate in-and-out of different sectors, PPG offers somewhat of a safe haven. Furthermore, our anticipation is that PPG will build momentum and make a charge for its 52-week record high at $58.12 over the near-term. Consider taking entries on bounces off the previous resistance ($50), if there's buyers demonstrating interest amid an advancing marketplace. Otherwise, gauge the stock's strength going forward and look for opportunities on the climb. In other words, pursue entries at the stock's corresponding levels of intraday support as it advances towards it's upper resistance. PPG Industries is expected to report earnings around April 19th. ***March contracts expire in two weeks*** BUY CALL MAR-45 PPG-CI OI=125 at $7.60 SL=5.25 BUY CALL MAR-50*PPG-CJ OI=165 at $2.90 SL=1.50 BUY CALL APR-50 PPG-DJ OI= 2 at $3.90 SL=2.50 BUY CALL APR-55 PPG-DK OI= 5 at $1.10 SL=0.00 http://www.premierinvestor.net/oi/profile.asp?ticker=PPG ************************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=1764 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 03-04-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/030401_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=1756 ************************************************************ ****************** CURRENT CALL PLAYS ****************** VRTS - Veritas Software $63.63 (+1.25 last week) Veritas Software is the industry's leading enterprise-class application storage management software provider. They furnish storage management software for protection against data loss and file corruption, efficient file processing and networks back-up. Veritas (Latin for "truth") has made its name by partnering with such technological heavyweights as Hewlett-Packard, Microsoft, and Sun Microsystems, all of which have licensed and embedded Veritas products in their operating systems. Its purchase of the network and storage management software group of disk drives maker, Seagate Technology, doubled Veritas' size and gave Seagate approximately a 33% stake in the company. Relative strength has been the name of the game for shares of storage software maker Veritas this past week. While the rest of the Storage sector, and the NASDAQ for that matter, spent the week looking for a bottom, VRTS has been in a well-defined trading range. Fans of candlestick charting may note the two hammer formations at the end of the previous week. Since then, the stock has managed to maintain support just above the $60 level, while encountering resistance overhead at $72. With intra-day swings of over 7 points, this has already been a great play for nimble traders. A downgrade of VRTS by Morgan Stanley from Outperform to Neutral along with ORCL's earnings warning dragged the stock down on Friday, closing almost 10 percent lower on 1.8 times the ADV. However, VRTS did manage to close above our stop price of $63. With support also at $62 and $60, a bounce off these levels could allow higher risk players to jump in, but make sure the stock ends the day back above our stop. Be aware though that the company will be hosting a mid-quarter conference call on Monday after the market close, so traders may want to wait for this event to pass over before making a play. Strong buying interest that lifts VRTS above $65 could give conservative traders a signal to enter. While VRTS has outperformed other companies in the Storage sector this past week, we recommend confirming upward momentum with industry peers LGTO and EMC before taking a position. ***March contracts expire in two weeks*** BUY CALL MAR-60 VIV-CL OI=1253 at $ 8.25 SL=5.75 BUY CALL MAR-65*VIV-CM OI=1497 at $ 5.75 SL=3.75 BUY CALL MAR-70 VUQ-CN OI=2257 at $ 3.75 SL=2.50 BUY CALL APR-65 VIV-DM OI= 412 at $10.63 SL=7.50 BUY CALL APR-70 VUQ-DN OI=1473 at $ 8.63 SL=6.00 SELL PUT MAR-55 VIV-OK OI=1488 at $ 2.38 SL=4.00 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=VRTS BOL - Bausch & Lomb Inc. $52.29 (+1.49 last 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. Proving once again that Newton was right, the law of gravity came into play on Friday. While not exactly welcome, the profit taking on BOL was expected, and actually a bit overdue. The stock had been pushing awfully hard on the upper Bollinger band in recent days, and needed to pull back a bit to allow the next wave of buyers to get on board. Let's face it - this isn't a Tech stock, and it is up 40% in the past 7 weeks in the midst of a down market. Between the upper Bollinger band ($54.85), the top of the August gap ($55.75) and historical resistance at $55-56, our play needed to retrace to gather its strength for an all-out assault. BOL should continue to enjoy the benefits of a defensive stock as the overall market continues to deteriorate amid concerns of the decelerating economy. So how do we play it in the week ahead? Given the fact that the bulls arrested the stocks decline at the ascending trendline ($52), we are raising our stop to this level and would consider a bounce from current levels to be a good aggressive entry point. A continuation of the uptrend will provide conservative traders more entry points as the stock moves back up through $53 and then $54, but beware of the looming resistance. We'll need the bulls to work together to lift BOL through the $56-57 resistance level, but a continuation of the current uptrend could see that level by week's end. ***March contracts expire in two weeks*** BUY CALL MAR-50*BOL-CJ OI= 93 at $3.70 SL=2.25 BUY CALL MAR-55 BOL-CK OI=811 at $1.10 SL=0.50 BUY CALL APR-55 BOL-DK OI=112 at $3.00 SL=1.50 BUY CALL APR-60 BOL-DL OI=113 at $1.60 SL=0.75 BUY CALL JUL-55 BOL-GK OI= 80 at $5.30 SL=3.25 http://www.premierinvestor.net/oi/profile.asp?ticker=BOL VRSN - VeriSign Inc. $50.56 (+0.06 last week) VeriSign Inc. is the leading provider of trusted infrastructure services to web sites, enterprises, electronic commerce service providers and individuals. The company's domain name, digital certificate and payment services provide the critical web identity, authentication and transaction infrastructure that online businesses require to conduct secure e-commerce and communications. VeriSign's services are available through its web sites or through its direct sales force and reseller partners throughout the world. On Friday, VRSN moved between the trading range it established this week, with sharp spikes between its new higher low of $48, and resistance at $52. Friday’s close was particularly encouraging, as VRSN formed a very bullish candlestick pattern with a surge of momentum which defied the weak trend of the Nasdaq. Several Wall Street analysts upgraded VRSN yesterday, as the firms applauded the company’s deal with The Internet Corporation for Assigned and Numbers (ICANN). According to CSFB, the VRSN gains a lot and loses a little, as the new deal proposed (which is expected to be approved by the Commerce Dept) removes the uncertainty regarding VRSN’s previously expected spin off of part of their business. At this point, VRSN will retain control of the lucrative DNS registrar in exchange for the surrender of rights to .org and .net web domains. Since .com web domains comprise 80% of the internet addresses, this was perceived as a winning situation for VRSN. Upselling customers through the DNS registrar is expected to be a critical part of VRSN’s long term growth strategy. At this point, VRSN is poised to break out above $52, and possibly above strong resistance at $55, with some help from the overall market. Traders could take positions at current levels, or at a surge above $52, if accompanied by strength in the Nasdaq and the software index. Alternatively, a strong break above $55 with heavy volume could position VRSN to make a clean break above the next major resistance level at $60. Set stops at $50, and exit positions if VRSN closes below this level. ***March contracts expire in two weeks*** BUY CALL MAR-50*QVR-CJ OI= 729 at $5.88 SL=4.00 BUY CALL MAR-55 QVR-CK OI=1530 at $3.63 SL=1.75 BUY CALL APR-50 QVR-DJ OI= 174 at $9.38 SL=6.25 BUY CALL APR-55 QVR-DK OI= 163 at $7.25 SL=5.25 http://www.premierinvestor.net/oi/profile.asp?ticker=VRSN FPL - FPL Group $65.36 (+1.23 last 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. A merger of equals that will create the one of the largest power companies in the US is back on track! Early in January, a judge's procedural schedule put a glitch in the merger plans of FPL Group and Entergy. It looked like the deal would be shelved for almost a year. Fortunately, a motion of reconsideration of the schedule was recently approved. The February 16th announcement was welcome news to investors. In defiance of the befuddled marketplace, FPL flourished amid robust trading. And of consequence, this week's bullish stock action took FPL through the overhead resistance at $65.50 and $66. We're now looking for FPL to resume its strong upward momentum and make a charge for $73, which marks the 52-week record. In an advancing market, this objective is certainly attainable. However, a conservative approach demands patience for the big breakout before taking entries. While it's true that others in the energy sector like DYN, CPN, EIX, and DUK are managing quite well, this play is based on stock-specific momentum. Keep stops in place at $64 to safeguard capital. Amongst the analysts, ABN Amro declared its confidence in FPL. Last week the brokerage firm reiterated a Buy recommendation and issued a $79 price target. ***March contracts expire in two weeks*** BUY CALL MAR-60 FPL-CL OI= 146 at $6.00 SL=4.00 BUY CALL MAR-65*FPL-CM OI= 171 at $2.15 SL=1.00 BUY CALL APR-65 FPL-DM OI=1000 at $3.60 SL=1.75 BUY CALL ARP-70 FPL-DN OI= 12 at $1.60 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=FPL *************************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=1751 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 03-04-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/030401_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=1757 ************************************************************ ************* NEW PUT PLAYS ************* BGEN - Biogen Inc. $68.31 (-3.72 last week) Biogen, Inc. is a biopharmaceutical company principally engaged in discovering and developing drugs for human healthcare through genetic engineering. Headquartered in Cambridge, MA, the company's revenues are generated from international sales of Avonex for treatment of relapsing forms of multiple sclerosis, and from the worldwide sales by licenses of a number of products, including alpha-interpheron, Hepatitis B vaccines, and diagnostic products. Biogen's research and development activities are focused on novel products to treat inflammatory and autoimmune diseases, neurological diseases, cancer, fibrosis and congestive heart failure. After a drop from over $120 a year ago, BGEN has sustained a consistent trading range between heavy resistance at $75 and support at $50 for the last twelve months. While the biotech index made a substantial rise of over 14% in January, and a subsequent fall of over 19% in February, BGEN shot up to $75 in January, and remained above $70 for most of February, while many of the other biotech stocks lost strength. At this point, BGEN's chart indicates that it may be time for this stock to fall from its lofty heights. BGEN formed a bearish wedge pattern this week, with a series of lower highs at $75, $72, and $70, and strong support at $68. On Thursday, BGEN opened at $72, dropped to support at $68 during the sell off, and rebounded only to close at $70. On Friday, BGEN made two attempts to clear $70, and failed both times to close below its 10 dma of $69.13. On Friday, the biotech index reached its 50 dma of 695, but was unable to close above it, which reinforces the pattern of lower highs in BTK.X which has been forming since November. A strong break below $68 would likely lead BGEN to $67, and then its next major support level at $65. This could be a good entry point, particularly if accompanied a drop in BTK.X below its 10 dma of 573.67. A more aggressive entry point could be a failed rally past $69, if the market and sector are weak. BGEN remains above its 50 dma of $63.61 and its 200 dma of $60.91, and a drop below either of these levels would be a very bearish indicator, and another possible entry point. Keep an eye on others in the sector, like MEDI and IDPH for an indication of weakness, and set stops at $72. ***March contracts expire in two weeks*** BUY PUT MAR-70*BGQ-ON OI= 984 at $4.38 SL=2.50 BUY PUT MAR-65 BGQ-OM OI=1893 at $2.13 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=BGEN JNPR - Juniper Networks Inc $53.59 (-21.16 last week) Juniper Networks develops and provides next-generation Internet infrastructure systems that are designed to meet the scalability, performance, density, and compatibility requirements of IP networking systems. The company's M40 and M20 Internet backbone router use JUNOS network traffic management software, ASICs. Its clients include some of the world's leading service providers such as Ericsson and MCIWorldcom. Over the course of time, loyal OI readers have been privy to a variety of JNPR plays. This weekend we're initiating downside coverage on this volatile and, quite often, profitable Internet stock. When the last trace of gold glitter failed to dazzle investors, they were quick to bring this tarnished maker of high-capacity computer-networking equipment to its knees. On February 7th, JNPR violated the ever-so psychological century mark and has since lost almost half of its value. Hovering just above the $50 level, JNPR is near death - or is it a grand buying opportunity? Here lies the danger. Although, previous attempts to recover its high-flying stature were rapidly extinguished as investors continued to ponder the economic state of affairs. Over the long run, Juniper Networks and its rival, Ciena (CIEN) are likely to be sheltered from the telecom spending slowdown as they are focused on 3rd generation data networks, but in the meantime, the technology slayers are taking no prisoners. A sharp price target cut on Friday to $75 from $200 a share by MSDW also didn't help build investor's short- term confidence in the stock. JNPR fell $8.22, or 13% on the day. Volume has been unwavering on the decline and at times, exceptional, with trading activity at double the ADV. If you’re a bit leery of taking positions, you should be. This is a HIGH- RISK put play, plain and simple. You might find entries on high-volume rollovers from the $65 level, but make sure the sellers are out in control. Although the pattern of lower-lows is encouraging, better confirmation would come if JNPR breaks $50 and convincingly demonstrates an acceleration of its downside momentum. We're keeping a tight rein on JNPR in consideration of its volatile trading nature. Any strength above the $60 mark into the close and we'll exit the play. ***March contracts expire in two weeks*** BUY PUT MAR-60 JUX-OL OI=3818 at $10.50 SL= 7.50 BUY PUT MAR-55*JUX-OK OI=1321 at $ 7.75 SL= 5.50 BUY PUT MAR-50 JUX-OJ OI=2753 at $ 4.88 SL= 3.00 http://www.premierinvestor.net/oi/profile.asp?ticker=JNPR ***************** CURRENT PUT PLAYS ***************** PWAV - Powerwave Technologies Inc $15.75 (-2.00 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 continued to form its downward channel on a week when Many other stocks in the wireless communications equipment sector started to show a few signs of bullish behavior. On Thursday, when the Nasdaq made a dramatic pivot point from the lows of the day to close slightly higher, PWAV made only a feeble attempt to rally to $15.94, which confirms the weekly pattern of lower highs. Friday’s move was particularly significant, since the stock rolled over from its daily high at $17 to close at $15.75, an important support level. PWAV has been receiving little positive attention from Wall Street, and was the victim of a significant number of downgrades in the last several weeks, from Morgan Stanley Dean Witter, CIBC World Markets and DB Alex Brown. In order to re establish a true upward trend line, PWAV would need to clear its 10 dma of $18.36, and this seems like a long shot. However, the markets may be poised for a rebound next week, so traders should be careful with this play. Viewed on a longer term chart pattern, PWAV is forming a bearish wedge pattern with strong support at the $15 level, which was briefly violated this week. A possible entry level could be taken on a roll over from $16, particularly if it occurs in a down market. Conservative traders might want to wait for PWAV to close below $15 on heavy volume, which would be a very bearish signal. Considering the risk involved, we are keeping stops tight at $17. ***March contracts expire in two weeks*** BUY PUT MAR- 20 VFQ-OD OI=158 at $4.88 SL=3.00 BUY PUT MAR-17.5*VFQ-OE OI=118 at $2.94 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=PWAV EBAY - eBay Inc $37.69 (-6.75 last week) eBay is the world's largest online trading community. Founded in September 1995, eBay is a powerful marketplace for the sale of goods and services by a passionate community of individuals and small businesses. The sellers pay a fee to have their items placed on the company's Web site and the buyers get to browse and make bids on the merchandise. If an item sells, eBay charges the seller a percentage of the closing price. The company's rivals in the auctioning arena are Yahoo! and Amazon.com. Formidable overhead resistance from major moving averages and continued weakness in the Internet sector have conspired in the recent decline in shares of online auctioneer EBAY. Having failed to rally above its 200-dma ($52) earlier this year, the stock has since fallen below both its 100 and 50-dma (at $45 and $42.58 respectively) on accelerating volume. While the bulls would argue that EBAY has a profitable business model, as evidenced by its positive earnings figures, the bears would point out that having earnings only means that the company cannot hide behind its losses, with its triple-digit price/earnings ratio of 220.59 serving as a poster child of over-valuation. Speculation from Salomon Smith Barney that the company could merge with Yahoo, along with the settlement of a lawsuit against Bidder's Edge in EBAY’s favor helped the stock to buck Friday's NASDAQ downturn. Nonetheless, the technicals remain weak, as the stock has been riding down the 5 and 10-dma ($40.20 and $42.90) these past couple of weeks. Provided that the downtrend remains intact, look for EBAY's moving averages to act as a strong barrier, with failed rallies providing aggressive traders with opportunities for entry. Just make sure that the stock continues to close below our stop price of $40. A drop below support at $35 on renewed downside volume could allow the more conservative to enter on weakness. In making a play, Merrill Lynch's Internet HOLDR (HHH) should provide an adequate measure of sentiment in the dotcom space. ***March contracts expire in two weeks*** BUY PUT MAR-40*QXB-OH OI=2369 at $4.75 SL=3.00 BUY PUT MAR-35 QXB-OG OI=1054 at $2.38 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=EBAY MERQ - Mercury Interactive Corp $48.50 (-21.56 last week) Mercury Interactive is the exterminator of the software industry. The company offers a comprehensive line of automated testing tools that address the full range of quality needs for testing complex applications throughout the business enterprise. Essentially the tools help companies build better applications, from Internet/e-business transaction systems to informational Web sites. All of its research and development is conducted in Israel, however the company is based in California. The potential inability to meet high expectations put forth by Street analysts combined with weakness in the NASDAQ has resulted in a mass exodus of shareholders in MERQ. Despite coverage initiated by WR Hambrecht this past week with a Buy rating and a 12-month price target of $80, the stock has declined sharply on accelerating volume. Fears that the company can not maintain its wide profit margins, along with concerns that earnings going forward could suffer because of greatly reduced capital expenditures on the part of its customers, punctuated by bad news from B2B software giant Oracle, only added fuel to the fire sale. The lack of positive announcements from the company in the form of new customer wins and key strategic partnerships has also helped to deal a blow in the stock's share price. Friday's drop of $10.50 or almost 18 percent on over 2.8 times the ADV not only made our put play highly profitable, but also resulted in a dip near its 52-week low of $45. To protect our profits, we are moving our protective stop down, from $63 to $56. Oversold bounces that fail at $50, $53, $55 and $56 could serve as aggressive targets for higher risk players, but be sure to confirm a rollover with selling volume. The more risk averse may want to wait for MERQ to fall below key support at $45 with conviction before making a play. In both cases, correlate entries with direction in sector sisters CPWR and RATL. ***March contracts expire in two weeks*** BUY PUT MAR-50*RQB-OJ OI=380 at $7.88 SL=5.75 BUY PUT MAR-45 RQB-OI OI=392 at $5.13 SL=3.00 http://www.premierinvestor.net/oi/profile.asp?ticker=MERQ NEWP - Newport Corporation $42.38 (-14.88 last 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 manufacturer of machines used to produce Semiconductors and Fiber Optic components, the fortunes of NEWP are intimately connected to the goings on in the Chip and Networking sectors. With book-to-bill ratios falling rapidly and news of plant closings from many Semiconductor companies, along with earnings warnings and lowered projected revenues by networking giants such as Cisco and Nortel, it's no wonder that shareholders are worried. What's more, analysts have picked up on the bearish sentiment. ABD AMRO downgraded the stock from an Add to a Hold rating. Wit SoundView followed suit, dropping NEWP from a Strong Buy to a Buy rating. The company attempted to do some damage control, by stating their intentions to grow sales 66 percent in 2001. This news was met by a skeptical market, as the stock has continued its downward path. High volume activity this week was not surprising, as on Thursday NEWP was added to the S&P MidCap 400 Index (MID). On Friday the stock experienced a bout of post index addition blues. This along with a weak NASDAQ resulted in a drop of over 16 percent on over 1.6 times the ADV. The break below support at $45 is ominous indeed. Look for this level to act as an obstacle, with additional resistance from the 5-dma at $48.64, providing aggressive entry points. We are moving down our stop from $55 to $49. A break below Friday's low of $41.38 may be a signal for conservative players to play, using AMEX's Networking Index (NWX) and Semiconductor Index (SOX) to gauge Sentiment before doing so. ***March contracts expire in two weeks*** BUY PUT MAR-45*NZZ-OI OI=147 at $7.24 SL=5.00 BUY PUT MAR-40 NZZ-OH OI=155 at $4.63 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=NEWP ADBE - Adobe Systems $27.69 (-4.94 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. ADBE's battle lines have been redrawn in the past 2 sessions as the bulls and the bears slug it out at intraday support and resistance. On the heels of the ORCL earnings warning Thursday night, software stocks came under renewed selling pressure, dropping our play as low as $26.25 before buyers reappeared. Volume swelled and the stock quickly ran up to the $29 level before the downward trend re-emerged. ADBE is likely to break out of this range in the near future, with overall direction in the NASDAQ and the Software sector (GSO.X) likely to be the dominant factors. This gives us a nice tight range to focus on as we target new positions. Aggressive traders will want to open new plays on failed rallies to the $29 level (also the location of the month-long descending trendline), while those with a more conservative approach will wait for selling pressure to push our play below the stubborn $26 support level. While still deep in oversold territory on the daily chart, ADBE is rolling over on the intraday charts from overbought territory, and showing further signs of weakness. Even the lower Bollinger band is now south of $25, giving our play more room to move to the downside as Technology bulls continue to pull in their horns. While we still favor the downside on ADBE, keep your positions on a short leash with stops set at $29. As we can see from the volatility of the past 2 sessions, the bulls are just itching to get a rally started and are likely to grasp at any excuse. ***March contracts expire in two weeks*** BUY PUT MAR-30*AEQ-OF OI=1947 at $4.00 SL=2.50 BUY PUT MAR-25 AEQ-OE OI= 895 at $1.63 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=ADBE AMCC - Applied Micro Circuits Corp. $28.81 (-8.25 last week) Fulfilling the need for speed, AMCC is a global provider of high-performance, high-bandwidth integrated circuits used to control the high-speed flow of transmissions through fiber-optic telephone networks. Communications products, used in LANs and WANs, account for 55% of the company’s sales. The company's chips are also used in automated test equipment, high-speed computing, HDTV, and military applications. The company which is growing through acquisitions, has a top-flite client list, including Nortel, Raytheon, Alcatel, Cisco, 3Com and Lucent. Joining the ever-growing confessional processional Thursday afternoon, AMCC's CEO, David Rickey, lowered the company's revenue guidance for the fourth quarter. Revising estimates down from $175 million to $125-135 million would have seemed to be the death-knell for the stock and a boon to our play, but schizophrenic traders apparently had other things in mind. In a rare show of optimism, traders apparently sold the rumor and bought the news. Investors that had sold AMCC in prior sessions on rumors that the communications chip provider would warn in the near future, did an about face and bought the stock when trading resumed after the warning. This rampant enthusiasm was unexpected and nearly took out our stop before fear of darkness took over, allowing the stock to settle back below $30. Despite trepidation and uncertainty about Greenspan's testimony on Friday, the bulls were back at it by the time the Fed head was through speaking, rallying the stock north of $32 before the late-day selling took hold once again. Again, AMCC settled below the $30 level, and it looks like this is a good point to focus on in the week ahead. If the bulls are unable to crest this level on a closing basis, AMCC is likely to head down with the ever-weakening NASDAQ. Keep an eye on the Semiconductor index (SOX.X) as a way to gauge investor sentiment in the sector. The recovery that began Thursday afternoon seemed to lose momentum Friday afternoon, and a further deterioration will be just what we need to drag AMCC to new lows. Conservative traders will want to target new positions as the stock drops below the $28 intraday support level, while more aggressive players can target a rollover below our stop, which we have now lowered to $30. ***March contracts expire in two weeks*** BUY PUT MAR-30*AEX-OF OI=1061 at $4.13 SL=2.50 BUY PUT MAR-25 AEX-OE OI=1131 at $1.75 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=AMCC ******************************** WEEKLY UPDATES FOR VARIETY PLAYS ******************************** LONG-TERM: WAG $44.33 +0.96 (+1.53 last week) As we stated last week, WAG appeared poised for another test of resistance at $45. That is exactly what happened early on Wednesday. WAG traded at a high of $45 and the sellers stepped in, taking the stock down for two days. We have upped our stop to $43, which happened to be the near where the stock settle on Thursday's close. Yet, with Friday's report that WAG's same-store sales rose 9.5% in February, the stock powered higher for the first half of the day to $44.50. Take a look at an intraday chart from Friday. The stock gave almost no heat until the end of the day and exemplifies an almost perfect day trade. Supply held the stock from advancing beyond $44.50. This should be kept in mind as profit takers may be locking in their gains. Once again, resistance at $45 is solid and a break above there would attract a lot of buying. Look for bounces from intraday support at $44 for entries if WAG pulls back. Below that, $43 will be a key level of support as well as our stop loss. The 10-dma currents lies at $43.64. ***March contracts expire in two weeks*** BUY CALL MAR-40* WAG-CH OI= 354 at $4.59 SL=2.75 BUY CALL MAR-42.5 WAG-CV OI= 565 at $2.50 SL=1.25 BUY CALL APR-45 WAG-DH OI=2084 at $2.05 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=WAG DORL $28.81 +0.25 (+1.75 last week) Slowly but surely, that's just the nature of Low Volatility plays. Nevertheless, money can be made and at a lower risk level. After adding this play on Wednesday, the stock pulled back in Thursday's session and offered a prime entry point off of $28. DORL climbed higher on Friday, running into resistance at the $29 level. Entries can be attained on a break above this resistance level along with strong volume. Pullbacks to support at $28, or the 10-dma at $27.75, accompanied by a bounce would also be buyable. Our stop loss is currently set at $27. ***March contracts expire in two weeks*** BUY CALL MAR-25 QDL-CE OI=166 at $3.88 SL=2.75 BUY CALL MAR-30 QDL-CF OI= 43 at $0.56 SL=1.25 High Risk! BUY CALL APR-25*QDL-DE OI= 1 at $4.50 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=DORL DJ $63.90 +1.01 (+4.40 last week) Friday's continuation of DJ's recent tear brought the stock above its 200-dma of $62.86 for the first time since last August. With the newspaper industry facing lower ad revenues going forward, DJ's announcement on Thursday that it would raise the price of the Wall Street Journal for the first time in more than 10 years should help insulate it from the slowdown. To gain entry, look for pullbacks toward the 200-dma or $62.50 where buy support has been showing up. The overhead challenge will be $64, with $65 thereafter. It would be better to be patient will this play and gauge pullbacks for entry. Our stop remains at $62. ***March contracts expire in two weeks*** BUY CALL MAR-60 DJ-CL OI=445 at $4.10 SL=2.50 BUY CALL MAR-65 DJ-CM OI=500 at $0.95 SL=0.00 High Risk! BUY CALL APR-60*DJ-DL OI= 0 at $5.50 SL=3.75 http://www.premierinvestor.net/oi/profile.asp?ticker=DJ WM $51.10 +0.56 (+0.58 last week) WM staged a nice comeback throughout the week and avoided further distribution of its stock. As it treads along the $50 level, which also happens to be our stop, WM has been making strides higher. It cleared resistance at $51 and $51.50 on Friday, running for $52.50, just as we stated last week. Friday's high was $52.43 and sellers were right there to take profits. A break above that level very well may bring sellers out, yet strong buying volume would attract more buyers and would warrant entry. A further pullback to support at $50 accompanied by a bounce would be the best entry opportunity. ***March contracts expire in two weeks*** BUY CALL MAR-50 WM-CJ OI=1798 at $2.15 SL=1.25 BUY CALL APR-50*WM-DJ OI=2532 at $3.40 SL=1.75 http://www.premierinvestor.net/oi/profile.asp?ticker=WM DROPS: GE $44.57 -1.34 (-1.61) Resistance at $48 proved to be too strong for GE, which has been climbing since January. The turbulence of the market this week not only knocked down GE from the $48 level, it also sunk the bellwether below the trendline from which it was ascending. Friday's downside action broke that trendline which roughly coincided with our stop level of $45. Being a Long Term play, current call holders with far out expirations may chose to ride it out. Otherwise, considering stop losses if GE does not make a decent recovery. PSS $75.35 +0.28 (+1.05) On Tuesday, we saw PSS pull back to its 10-dma after Monday's breakout to new highs. We viewed this as an entry opportunity into an uptrending stock in a sector which is performing well. Yet, since then, PSS has been rolling over ever so slightly. While buyers supported the stock on Friday at $74, sellers where hiding out at $76. The past three sessions have seen supply come into PSS at lower levels. Profit taking obviously is occurring and we feel that PSS may be in for some consolidation after failing to following through on Monday's breakout. This Low Volatility call did not violate our stop at $74.50, so use that as a guide for current positions. The 50-dma is at $71.06 and the stock may be in for a pullback to that level. *************************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=1752 ************************************************************ ***** LEAPS ***** Seems Like Deja Vu To Me 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. Sound familiar? It should, as it was the first few lines of last week's commentary. Aside from some minor details, it applies directly to the market with which we are faced right now. This past week, the new low of 2071 came on Thursday, rather than Friday, but the pattern remains the same. Buyers are as scarce as hens' teeth and the result is that the NASDAQ has been left to suffer the effects of gravity without a parachute. Thursday's low was the Technology index's lowest point since December of 1998, and if buyers don't come off the sidelines soon, it looks like we will be visiting the sub-2000 area before the Federal Reserve cuts interest rates in a little over 2 weeks. Even the DJIA is having a hard time, with three tests of the critical 10,300 support level in the past 6 sessions. The VIX surged through its upper Bollinger band again this week, briefly cresting the 34 level on Thursday, but the lack of capitulation selling or high-volume buying would seem to indicate it will head higher still. Recall the market declines of 1997 and 1998, where the VIX crested 50 before buyers returned in sufficient numbers to buoy equity prices off their lows? Ending the week at 30.86, the VIX is in historical 'Buy' territory, but we need a lot more convincing before we will look at this as a great entry point for long-term positions. While there is a record amount of cash sitting on the sidelines, there just isn't any reason for it to find its way into equities. The economic slowdown is really starting to hit home with individual investors, and anyone not wearing rose-colored glasses (and dark ones at that!) can see that we are in a recession. Greenspan's lack of action this past week, although not surprising, is disconcerting. I can see one of two possible scenarios relating to our illustrious Fed head. The first is that he is already seeing signs of a bottoming process in the economic indicators (although I don't see how), and is loathe to over-stimulate (yeah, right!) the economy and perhaps usher in inflation. If that is in fact the case, then bulls can take heart. Since the equity markets move in advance of the actual economy, then signs of economic recovery in the months ahead will be met with buyers coming off the sidelines in droves. Oh, wouldn't that be lovely! Before you get too excited, lets talk about the other possibility. Could it be that Greenspan is losing his Midas touch, or worse yet, that it is becoming the reverse Midas touch, where everything he touches turns to lead? It seems as though every economist or analyst (Wayne Angell included) is seeing an economy that is in dire straights and desperately in need of stimulation. But Uncle Alan doesn't see it? Come on! Something just doesn't seem right here. Watching one of the late-night cable news shows last week, I heard a comment that casts a different light on the Fed's current monetary policy. "Alan Greenspan preached for years about the 'irrational exuberance' and the fact that the equity markets were overextended. He's determined to be right". Could it be that he got tired of market bulls thumbing their nose at him, and is keeping the purse strings tight until he feels they (we) have learned their lesson? Whatever the case may be, we are due to suffer more pain in the equity markets before things improve enough to warrant new long-term positions. Greenspan will likely cut rates at the March 20th FOMC meeting, but that and the two 50 basis point cuts in January will not be felt by the broad economy until the end of summer. Why would you want to tie up your capital for the next 6 months on the hopes that things might get better all by themselves? If you are a techaholic (join the club), then your best course of action for the near term is two-fold. First-off, keep your hands in your pockets, as that will keep you from clicking on the 'Buy' button when you see your favorite Technology stock trading at an 'unbelievable bargain'. Odds are that it will get even cheaper in the weeks and months ahead and it is much safer to enter new positions on the way back up than trying to catch the proverbial falling knife. Your second task is to take advantage of your hiatus from active trading and add something to your arsenal of tools. It doesn't matter what it is, so long as you learn. Write a trading plan, read a new book on technical or fundamental analysis, analyze your trading decisions over the past year, or paper trade for awhile. All of these activities will serve to make you a better trader, improving your trading results in the future. Even defensive plays like WMT, CLX, CPN, and the like are having a hard time making any headway. Financial stocks normally do well in a declining interest rate environment, but as you can see by our drop of AXP this weekend, even that safe haven is suspect. C isn't doing much better, and WM is looking downright stellar just by its ability to not lose ground. Not only is there a dearth of good candidates for new LEAPS plays, we were hard pressed to find a single play on our list that looks like an attractive candidate for new entries in the week ahead. Remember our Spotlight of CSCO last week where we were targeting a bounce near the $22 level? The stock fell to $22.19 at the close on Friday, but still doesn't look like a good entry. With heavy selling volume driving the stock to new yearly lows on a daily basis, (actually Friday's close was a 2-year low), it looks like CSCO could see the sub-$20 area before the week is out. This isn't an isolated case either, underscoring the necessity of using stops to both preserve profits, and more importantly, limit losses. Until we can see signs that the economy is coming out of its stupor, trading the long side is a risky venture at best. The time to be bullish will return, and hopefully soon. We'll keep a sharp eye out for signs of improvement, but in the meantime, hold your fire. Cash is your ammunition, and you don't want to shoot until you can see the whites of their eyes. Have a good week! Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN EMC 11/07/99 JAN-2002 $ 45 WUL-AI $ 9.50 $ 8.40 -11.58% 09/17/00 JAN-2003 $100 VUP-AT $32.75 $ 3.40 -89.62% CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $ 1.19 -89.20% 11/26/00 JAN-2003 $ 60 VYC-AL $16.63 $ 1.88 -88.72% AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $ 2.10 -88.73% 08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $ 8.10 -53.71% AXP 03/12/00 JAN-2002 $46.6 WXP-AQ $ 9.33 $ 6.70 -28.19% WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $22.70 321.93% 10/22/00 JAN-2003 $ 45 VWI-AI $ 7.88 $14.30 81.59% C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $ 7.80 -24.35% 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 $30.88 80.24% JAN-2003 $ 70 OZG-AN $23.13 $39.38 70.23% BGEN 11/05/00 JAN-2002 $ 70 WGN-AN $17.25 $16.38 - 5.07% JAN-2003 $ 70 VNG-AN $25.00 $24.75 - 1.00% MU 11/26/00 JAN-2002 $ 45 WGY-AI $13.13 $ 8.10 -38.29% JAN-2003 $ 45 VGY-AI $17.25 $12.80 -25.80% QQQ 12/10/00 JAN-2002 $ 70 WNQ-AR $15.13 $ 2.80 -81.49% JAN-2003 $ 75 VZQ-AW $19.25 $ 4.90 -74.55% WMT 12/24/00 JAN-2002 $ 55 WWT-AK $ 9.63 $ 6.40 -33.51% JAN-2003 $ 55 VWT-AK $14.00 $10.50 -25.00% DELL 01/07/01 JAN-2002 $ 20 WDQ-AD $ 5.25 $ 6.38 21.43% JAN-2003 $ 25 VDL-AE $ 5.63 $ 6.63 17.67% WCOM 01/14/01 JAN-2002 $ 25 WQM-AE $ 5.00 $ 1.69 -66.25% JAN-2003 $ 25 VQM-AE $ 7.38 $ 3.38 -54.24% CPN 01/21/01 JAN-2002 $ 40 YLN-AH $10.50 $13.20 25.71% JAN-2003 $ 40 OLB-AH $15.38 $18.00 17.07% CLX 02/11/01 JAN-2002 $ 40 WUT-AH $ 5.20 $ 3.80 -26.92% JAN-2003 $ 40 VUT-AH $ 8.10 $ 6.60 -18.52% JWN 02/18/01 JAN-2002 $22.5 WNZ-AX $ 3.30 $ 2.05 -37.88% JAN-2003 $ 25 VNZ-AE $ 4.10 $ 2.65 -35.37% Spotlight Play None New Plays None Drops AXP $43.75 Continuing lower over the past 2 weeks, AXP can't seem to find any respite from the relentless selling. The stock has now turned the $45 support level into resistance and looks poised to challenge the next support level at $40 in the near future. Despite falling interest rates, the negative impact of a slowing economy is having an even more pronounced effect on Financial stocks, and AXP is no exception. As a matter of fact, if signs of economic recovery fail to materialize soon (and why would they with the Fed standing on the sidelines), AXP could very easily be headed much lower. Since adding it to the list the stock rallied strongly from just above $40 to north of $60, and has now returned to where it started a year ago. Handsome profits were made in the process, but the persistent downtrend over the past 5 months makes further bullish plays ill-advised at this time. We think the most prudent course of action is to remove it from our playlist, and wait for economic conditions to improve. ************************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=1765 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 03-04-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/030401_5.asp ************* COVERED CALLS ************* Charting Basics: The Stochastic Oscillator By Mark Wnetrzak Our recent discussion of overbought/oversold indicators prompted one of our subscribers to ask about the use of "Stochastics" to identify potential entry and exit points. Oscillators can be valuable tools for analyzing stocks, but they are also among the most misunderstood indicators. In the study of financial issues, oscillators offer a mathematically derived measure of a specific market's momentum; its rate of acceleration or deceleration. In any trend, prices are gaining, maintaining, or losing momentum. A loss of momentum can be a hidden reversal signal or a warning sign that the trend may be coming to an end. The stochastic oscillator compares the current stock price to its price range over a specifically identified period of time. This technique is based on the idea that in an upward trending market, stocks tend to close near their highs and in a downward trending market, stocks tend to close near their lows. That would indicate that as an upward trend erodes, stocks close further away from the highs and vice versa. The stochastic indicator attempts to show when prices start to group around their lows in an bullish market, and just the opposite in a down-trending market. The theory is that these are the conditions which indicate a trend reversal is about to occur. The stochastic indicator is plotted as two lines (%D and % K) on a chart with values ranging from 0 to 100. The %D line is considered more significant of the two. Stochastic readings above 80 indicate that price is closing near its highs and likewise, readings below 20 indicate that price is closing near its low. Ordinarily, the %K line will reverse direction before the %D line but, when the %D line changes direction prior to the %K line, moving back down through the 80 range (or up through the 20 range), a reversal in the price is usually indicated. A very powerful move is indicated when the plot approaches 100 ( or 0) and then reverses back down through 80 (or up through 20). Many times, when the %K or %D lines begin to flatten out, this is an indication that the momentum is changing and may be the first sign that the current price trend may soon reverse. One of the simplest applications of the oscillator is to identify the divergence between price and momentum. That situation occurs when the stock price is making higher highs but the stochastic oscillator is making lower lows (or the opposite). Remember, the purpose of an oscillator is to alert traders to a potential failed rally or the possible conclusion of a sell-off. If the stochastic indicator fails to confirm a stock's new high, traders should wait for %K to cross below %D and to drop below 80 before considering an exit. When the stochastic indicator fails to achieve a new low along with the share value, investors should wait for %K to cross above %D and to climb above 20 before entering a new position. In any case, a bullish or bearish stochastic divergence should always be validated by the market's price action. When used correctly, the stochastic oscillator can often demonstrate a change in price before the reversal actually occurs, and that can be very helpful in determining the appropriate time to enter or exit a position. 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 ACPW 20.38 18.00 MAR 17.50 4.38 *$ 1.50 10.2% PHSY 36.88 32.38 MAR 30.00 8.75 *$ 1.87 9.6% ACLS 11.13 10.38 MAR 10.00 1.88 *$ 0.75 8.8% ORG 10.96 11.50 MAR 10.00 1.50 *$ 0.54 8.3% GLFD 20.38 22.00 MAR 20.00 1.44 *$ 1.06 8.1% ESCM 16.84 21.81 MAR 15.00 2.88 *$ 1.04 8.1% MNMD 38.25 35.13 MAR 35.00 4.88 *$ 1.63 7.1% NVLS 45.38 40.94 MAR 40.00 7.00 *$ 1.62 6.1% URBN 10.44 11.13 MAR 10.00 1.06 *$ 0.62 5.7% GLGC 23.94 20.13 MAR 20.00 4.88 *$ 0.94 5.4% PLMD 39.44 38.75 MAR 30.00 10.50 *$ 1.06 5.3% LTBG 14.19 12.50 MAR 12.50 2.13 $ 0.44 5.3% GMST 49.50 41.94 MAR 40.00 10.88 *$ 1.38 5.2% ROAD 25.06 25.13 MAR 25.00 1.25 *$ 1.19 4.3% AMSY 22.88 22.63 MAR 20.00 3.63 *$ 0.75 4.2% CSTR 16.75 17.63 MAR 15.00 2.44 *$ 0.69 4.2% WGR 28.00 25.75 MAR 25.00 4.00 *$ 1.00 3.6% CSTR 17.06 17.63 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 23.31 MAR 22.50 1.88 *$ 0.82 3.3% NXCD 11.38 9.38 MAR 10.00 2.31 $ 0.31 2.5% SGI 5.00 4.65 MAR 5.00 0.40 $ 0.05 0.9% ATRX 23.00 18.94 MAR 20.00 4.00 $ -0.06 0.0% ANSR 8.09 6.38 MAR 7.50 1.44 $ -0.27 0.0% LGTO 17.88 12.41 MAR 15.00 3.88 $ -1.59 0.0% PRGN 28.63 20.94 MAR 25.00 5.00 $ -2.69 0.0% *$ = Stock price is above the sold striking price. Comments: Many of the above issues are testing support near their sold strikes and should be monitored closely over the next two weeks. Pacificare Health (NASDAQ:PHSY) (after Thursday's court ruling) and Atrix Labs (NASDAQ:ATRX) are testing their 150 dma's - a key moment for both issues. Legato Systems (NASDAQ:LGTO) failed to hold at its 150 dma and will be shown closed next week. Peregrine Systems (NASDAQ:PRGN) has also broken down - exiting the position may be prudent. Positions Closed: Ultratech Stepper (NASDAQ:UTEK) 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 CLPA 6.22 APR 5.00 QJC DA 2.06 173 4.16 49 12.5% MCCC 20.50 MAR 20.00 MUD CD 1.44 18 19.06 14 10.7% ITN 13.56 MAR 12.50 ITN CV 1.55 650 12.01 14 8.9% DCEL 19.50 MAR 17.50 DDU CW 2.63 20 16.87 14 8.1% VPHM 26.69 MAR 22.50 HPU CX 5.00 108 21.69 14 8.1% MKC 40.00 MAR 40.00 MKC CH 1.00 286 39.00 14 5.6% ERTS 51.81 MAR 45.00 EZQ CI 7.88 83 43.93 14 5.3% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** CLPA - Cell Pathways $6.22 *** Cheap Speculation! *** Cell Pathways (NASDAQ:CPLA) is a pharmaceutical company focused on the research, development and commercialization of products to prevent cancer and to treat cancer. Their technology is based upon CLPA's discovery of a novel mechanism that it believes can be targeted to induce selective apoptosis, or programmed cell death, in certain pre-cancerous and cancerous cells without affecting normal cells. CLPA has created a class of selective apoptotic anti-neoplastic drugs (SAANDs) and has synthesized over 500 new chemical compounds in this unique group. In screening assays, over 200 of these drugs display significantly greater apoptotic potency than CLPA's lead drug product, Aptosyn. CLPA was hammered last September as the FDA decided it would need further information before approving the company's NDA on Aptosyn. Now the issue is recovering from the selling pressure and forming a Stage I base. With the company focusing its resources on registration-directed trials in multiple cancer indications, a cost basis near $4 seems like a reasonable price to speculate on the future. APR 5.00 QJC DA LB=2.06 OI=173 CB=4.16 DE=49 MR=12.5% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=CLPA ***** DCEL - Dobson Communications $19.50 *** Buyout Candidate? *** Dobson Communications (NASDAQ:DCEL) is a leading provider of cellular phone services to rural markets in the United States. Headquartered in Oklahoma City, the Company owns or manages wireless operations in 19 states. In early February, AT&T Wireless purchased 200,000 shares of Dobson Communications' Series AA preferred stock for $200 million. AT&T has said that it is in further negotiations with Dobson Communications regarding increasing its ownership and may even acquire the company. A favorable cost basis from which to speculate on the outcome of the negotiations. MAR 17.50 DDU CW LB=2.63 OI=20 CB=16.87 DE=14 MR=8.1% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=DCEL ***** ERTS - Electronic Arts $51.81 *** If it's in the Game... *** Electronic Arts (NASDAQ:ERTS) operates in two principal business segments: EA Core and EA.com. Through EA Core, the company makes, markets and distributes interactive entertainment software for a variety of hardware platforms. EA.com represents Electronic Arts' online and e-Commerce business. EA.com's online business includes subscription revenues collected for Internet game play on their web-sites, sales of Internet-based games and sales of Electronic Arts products sold through EA.com websites. In late January, Electronic Arts reported quarterly earnings that were less than outstanding, but investors chose instead to focus on the company's future outlook. The company says it will be profitable next year and this week's purchase of gaming Web site Pogo.com, should draw more new paying subscribers to help meet that financial target. Analysts believe EA.com needs about 600k-700k more subscribers to meet its financial goals, equivalent to nearly 5% of pogo.com's registered users. A reasonable short-term return with a cost basis at support. MAR 45.00 EZQ CI LB=7.88 OI=83 CB=43.93 DE=14 MR=5.3% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=ERTS ***** ITN - InterTAN $13.56 *** Buyout/Merger Speculation? *** InterTAN (NYSE:ITN) is engaged principally in the sale of consumer electronics products and services through Company-operated retail stores and dealer outlets in Canada and Australia. In Canada, the Company also operates cellular telecommunications stores (the Rogers AT&T Stores) on behalf of Rogers Cantel Inc. InterTAN's ongoing retail operations are conducted through two wholly owned subsidiaries, InterTAN Australia, which operates in Australia under the trade name Tandy, and InterTAN Canada, which operates in Canada under the trade name RadioShack. InterTAN recently reported that its same store sales increased 11% as it once again delivered double-digit growth in its audio/video categories. Even so, the latest surge in price may be more related to InterTAN retaining Salmon Smith Barney to "investigate and evaluate multiple strategic options" to enhance shareholder value. We simply favor the bullish breakout above the October to February consolidation area. MAR 12.50 ITN CV LB=1.55 OI=650 CB=12.01 DE=14 MR=8.9% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=ITN ***** MCCC - Mediacom $20.50 *** Next Leg Up? *** Mediacom Communications (NASDAQ:MCCC) is the 9th largest cable television company in the U.S. offering an array of broadband services, including cable television, advanced digital video programming and high-speed Internet access. The Company's cable systems pass approximately 1.2 million homes and serve approximately 780,000 basic subscribers in 22 states. This week, Mediacom reported its 4th-quarter revenues were $87.5 million, an increase of 39.3%, and EBITDA was $41.0 million, an increase of 44.2%. The Company estimates that in 2001 it will achieve pro forma revenue growth of 12.0% to 14.0% and pro forma EBITDA growth of 11.5% to 13.5%. Mediacom also announced that it is buying AT&T Broadband's systems in Iowa, Georgia, Illinois and Missouri in a $2.2 billion cash deal, doubling its current size. SG Cowen has upgraded their rating on Mediacom to "strong buy." A reasonable entry point on a technically bullish chart. MAR 20.00 MUD CD LB=1.44 OI=18 CB=19.06 DE=14 MR=10.7% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=MCCC ***** MKC - McCormick $40.00 *** Blue Sky Territory! *** McCormick & Company (NYSE:MKC) is the global leader in the manufacture, marketing and distribution of spices, seasonings and flavors to the entire food industry - to foodservice and food processing businesses as well as to retail outlets. In addition, the packaging group manufactures and markets specialty plastic bottles and tubes for personal care and other industries. In January, McCormick reported record sales and earnings per share for the fourth quarter and fiscal 2000. The company expects that most of their earnings per share growth for 2001 will occur in the second half of the year, due to the dilution effects of its acquisition of Ducros, the leading spice business in Europe. Even a downgrade by Merrill Lynch to "NT accumulate" did little to stop investors from pushing McCormick to a new all-time high and this position offers favorable short-term speculation on its future movement. MAR 40.00 MKC CH LB=1.00 OI=286 CB=39.00 DE=14 MR=5.6% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=MKC ***** VPHM - ViroPharma $26.69 *** New Agreement! *** ViroPharma (NASDAQ:VPHM) is a pharmaceutical company engaged in the discovery and development of new antiviral medicines for the treatment of diseases caused by RNA viruses including: viral respiratory infection (VRI); viral meningitis; hepatitis C; and respiratory syncytial virus (RSV) diseases. The company has recently completed enrollment in their ongoing VRI Phase III studies, and expects to announce results in April. Pending favorable results, the company expects to file for a NDA later this year. The rally in ViroPharma this week is due to a revised agreement with Sanofi-Synthelabo for pleconaril, VPHM’s most advanced product candidate. The new agreement expands ViroPharma's intellectual property rights and should dramatically enhance the commercial potential of pleconaril. We simply favor the bullish implications of the recently completed short-term head-n-shoulders bottom. MAR 22.50 HPU CX LB=5.00 OI=108 CB=21.69 DE=14 MR=8.1% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=VPHM ***** ***************** 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 PGNX 16.75 MAR 15.00 GUB CC 2.50 3 14.25 14 11.4% CVNS 11.44 APR 10.00 CQQ DB 2.50 20 8.94 49 7.4% WCNX 31.63 MAR 30.00 NBU CF 2.38 118 29.25 14 5.6% AMAT 45.25 MAR 40.00 ANQ CH 6.25 911 39.00 14 5.6% CLCI 10.13 APR 10.00 QAZ DB 0.94 275 9.19 49 5.5% *************************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=1758 ************************************************************ *********************** CONSERVATIVE NAKED PUTS *********************** Position Management: Exit Strategies By Ray Cummins Learning to correctly manage portfolio positions; maximizing gains while limiting losses, is one of the most important aspects of successful trading. The first thing a trader should realize is that they should never enter a position without a pre-planned exit strategy. The reason for this approach is simple: the most common reason for losing money in the options market is failing to close a position in a timely manner, regardless of whether the action is to limit losses or lock-in gains. A surprising number of traders achieve excellent profits, but end up giving most (or all) of it back simply because they don't develop a sensible plan to manage each position. The majority of market professionals utilize limit orders in conjunction with profit targets and protective stops to curb losses, but the retail trader is far less proficient in this practice. Using sell-stops eliminates the risk of emotional or reaction-based judgments in difficult situations and removes human nature from the equation. A mechanical and disciplined method for achieving profit is the key to consistent success and allowing the market to make the exit decision is much more precise than relying on our complex human intuition. Unfortunately, there are a number of difficulties associated with using trading stops in the options market. The first problem is how to determine the point at which to exit. As we noted in last week's narrative, most methods of position management fit into one of two categories: a target profit or loss limit; or a technical exit based on the chart indications of the issue. The most common technique for preserving capital; using a closing stop, is simple as long as one adheres to the initially established limits. It is each trader's responsibility to determine the appropriate level of portfolio funds that are invested in any one play and also the percentage loss of a position that would trigger its exit. This percentage then becomes a constant to judge whether a prospective position's stop, relative to its entry price, is consistent with a trader's pre-determined risk exposure. The alternative method; a technicals-based exit, is more difficult. As you might expect, the proper placement of sell-stops requires a thorough knowledge of chart analysis and basic market trends or cycles. The primary price support areas and short-term (18 - 40 dma) moving averages are the main indicators that determine the initial target limits, but there are many different indicators available to establish an acceptable exit point. With this type of position management, the play is closed after the issue violates a pre-determined level or when conditions no longer favor a trend's continuation. Ideally, the best method is to identify a specific and dynamic target for each position, based on the underlying issue's technical history (including character and volatility) and the overall market trend. Another obstacle that option traders must overcome is the tendency to place stop-loss orders at common levels, where they are less effective and more likely to receive unwanted fills. The problem with most retail players is they use similar logic to place stops in concentrated areas based on trend lines, moving averages, price gaps and other popular chart formations. Novice participants are known for using obvious stop-loss prices such as whole numbers or familiar fractions, rather than more precise amounts, and yet they are the first ones to complain to their broker about "bad" trades. The truth is, when the underlying issue has a volatile character or moves in a relatively large range, it's easy for floor traders to migrate the market to those areas for short periods, so that waiting orders (whether unwanted or not) can be filled. At times, it appears there is almost a magnetic pull to certain levels but in reality, it is just the specialists' desire to make trades and maintain liquidity in the market. Some traders try to avoid this problem by not using specific exit targets while others position their stops at distinctive prices. One factor new traders often overlook is that a stop is an order to sell "at the market" while prices are dropping, or to buy "at the market" while prices are rising, and it is quite common to receive fills that are beyond the specified stop level. The difference between the stop price and the actual execution price is referred to as "slippage" and with the extreme volatility inherent in many issues, sometimes it does not make sense for traders to use GTC or stop-loss orders, since the whipsawing in prices can easily cause what in hindsight may be unwanted fills. Next week, we will continue this discussion of position management and the methods that successful traders use to maximize portfolio profits. 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 MDR 15.80 13.35 MAR 12.50 0.40 *$ 0.40 12.2% TSN 13.55 12.60 MAR 12.50 0.65 *$ 0.65 11.3% MDR 15.29 13.35 MAR 12.50 0.60 *$ 0.60 11.1% NEM 15.96 16.60 MAR 15.00 0.40 *$ 0.40 10.0% KSWS 31.50 29.75 MAR 30.00 1.38 $ 1.13 9.8% SGR 52.04 52.70 MAR 45.00 1.30 *$ 1.30 9.4% OLOG 23.38 24.13 MAR 22.50 0.56 *$ 0.56 9.0% PHTN 25.25 25.50 MAR 20.00 0.31 *$ 0.31 8.4% APWR 42.50 36.00 MAR 30.00 0.69 *$ 0.69 8.2% ATVI 22.50 23.25 MAR 20.00 0.38 *$ 0.38 8.0% AMAT 47.94 45.25 MAR 37.50 0.56 *$ 0.56 8.0% HGSI 48.81 56.44 MAR 35.00 0.56 *$ 0.56 7.9% LPNT 41.31 38.50 MAR 35.00 0.56 *$ 0.56 7.5% TSO 13.32 12.98 MAR 12.50 0.40 *$ 0.40 7.1% ABMD 25.44 20.50 MAR 15.00 0.50 *$ 0.50 6.5% OII 22.50 21.75 MAR 20.00 0.40 *$ 0.40 6.3% NAUT 19.19 17.94 MAR 17.50 0.56 *$ 0.56 6.2% BPOP 27.38 27.63 MAR 25.00 0.50 *$ 0.50 6.0% RBK 31.20 26.94 MAR 25.00 0.45 *$ 0.45 5.8% OII 22.00 21.75 MAR 20.00 0.45 *$ 0.45 5.4% AL 38.25 37.75 MAR 35.00 0.60 *$ 0.60 4.1% UIS 18.91 16.89 MAR 17.50 0.65 $ 0.04 0.6% TPTH 12.75 9.50 MAR 10.00 0.44 $ -0.06 0.0% BRIO 13.38 7.63 MAR 10.00 0.63 $ -1.74 0.0% *$ = Stock price is above the sold striking price. Comments: McDermott International (NYSE:MDR) continues to hold above its 50 dma. Both positions above could be exited now for a small loss ($0.10 - $0.30), based on Friday's closing price. Brio Tech (NASDAQ:BRIO) joined the crowd by warning this week. We will show the position closed. Tripath Imaging (NASDAQ:TPTH) is suffering after posting earnings this week though it appears to be holding at support. Using any oversold rally to exit the position may be prudent. Monitor issues that are now showing excessive weakness; K-Swiss (NASDAQ:KSWS) and Reebok (NYSE:RBK) and re-evaluate your long-term outlook for each position. Positions Closed: Spectrian (NASDAQ:SPCT), Homestore.Com (NASDAQ:HOMS) 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 BSTE 37.25 MAR 30.00 BQS OF 0.63 40 29.37 14 16.5% PLMD 38.75 MAR 30.00 PM OF 0.63 5233 29.37 14 16.3% NOVT 36.94 MAR 30.00 QOH OF 0.56 172 29.44 14 14.5% VSEA 31.03 MAR 25.00 UES OE 0.44 102 24.56 14 14.0% ADVP 45.13 MAR 40.00 QVD OH 0.81 357 39.19 14 12.8% EFII 24.88 MAR 22.50 EFQ OX 0.38 90 22.12 14 10.4% TMK 36.28 MAR 35.00 TMK OG 0.55 0 34.45 14 8.7% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ADVP - AdvancePCS $45.13 *** Health Services *** AdvancePCS (NASDAQ:ADVP), formerly known as Advance Paradigm, is a provider of health improvement services, offering its clients a comprehensive array of pharmacy benefit management, disease management, clinical trials and research, web-based marketing support and other health-related programs. AdvancePCS generates revenues from providing services to two primary customer groups; health benefit plan sponsors and pharmaceutical manufacturers. The company markets to includes Blue Cross Blue Shield plans and other managed care organizations, insurance companies, government agencies, employer groups and labor union-based trusts. ADVP also provides clinical research services primarily to pharmaceutical manufacturers. AdvancePCS is the nation's largest independent provider of health improvement services and a great addition to any balanced portfolio. Our position offers a conservative cost basis in the issue. MAR 40.00 QVD OH LB=0.81 OI=357 CB=39.19 DE=14 MR=12.8% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=ADVP ***** BSTE - Biosite Diagnostics $37.25 *** Trading Range? *** Biosite Diagnostics (NASDAQ:BSTE) develops and markets accurate and cost-effective diagnostic products designed to improve the quality of patient care and simplify the practice of laboratory medicine. The company's two product platforms, the Triage Panel and the Triage Meter System, are designed to provide rapid results through either qualitative visual readings or quantitative meter readings. Both of the company's product platforms utilize its expertise in antibody engineering, analyte cloning, signaling chemistry, micro capillary fluidics and sampling technologies. The principal markets for the company's products are hospital laboratories, emergency departments and point-of-care locations. After a recent technical consolidation, the issue has established a relatively stable trading range and our position provides an excellent opportunity for conservative "drug sector" speculation. MAR 30.00 BQS OF LB=0.63 OI=40 CB=29.37 DE=14 MR=16.5% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=BSTE ***** EFII - Electronics For Imaging $24.88 *** On The Rebound? *** Electronics For Imaging (NASDAQ:EFII) designs and markets products that support color and black-and-white printing on a variety of peripheral devices. The company's products incorporate hardware and software technologies that transform copiers and printers from many leading copier manufacturers into fast, high quality networked printers. The company's Fiery products include stand-alone servers, which are connected to digital copiers and other peripheral devices, and Fiery controllers, which are embedded in digital copiers and desktop color laser printers. EFII sells its products primarily to original equipment manufacturers in North America, Europe and Japan. Electronics For Imaging is noted for solid fundamentals and experts say it has excellent growth potential. Traders who agree with that outlook should consider this position for a potential entry point in the issue. MAR 22.50 EFQ OX LB=0.38 OI=90 CB=22.12 DE=14 MR=10.4% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=EFII ***** NOVT - Novoste $36.94 *** What's Up? *** Novoste (NASDAQ:NOVT) is a leader in the unique field of vascular brachytherapy (radiation therapy) to reduce the incidence of restenosis. The company has developed the Beta-Cath System, which is a hand-held device designed to deliver beta or low penetration radiation to the site of a treated blockage in a coronary artery to decrease the likelihood of the re-narrowing of a previously treated artery. Restenosis is the major limitation of angioplasty treatments, which are used by interventional cardiologists to open blocked coronary arteries. NOVT shares rallied Friday, without any public news to explain the move. Traders who expect the trend to continue can speculate on that outcome with this conservative position. MAR 30.00 QOH OF LB=0.56 OI=172 CB=29.44 DE=14 MR=14.5% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=NOVT ***** PLMD - PolyMedica $38.75 *** Entry Point? *** 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 it is under investigation. For those who favor PLMD's fundamentals; growing earnings, free cash flow and a balance sheet with no debt, this position offers a reasonable cost basis in the issue. MAR 30.00 PM OF LB=0.63 OI=5233 CB=29.37 DE=14 MR=16.3% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=PLMD ***** TMK - Torchmark $36.28 *** Own This One! *** Torchmark (NYSE:TMK) is an insurance and diversified financial services holding company. Torchmark, through its subsidiaries, provides a variety of life and health insurance products and annuities to a broad base of customers. Torchmark insurance subsidiaries are licensed to sell insurance in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, New Zealand and Canada. The company is the parent for businesses operated by Liberty National Life Insurance, Globe Life and Accident Insurance, United American Insurance, United Investors Life Insurance, and American Income Life Insurance. Torchmark is a solid company in the insurance industry and this position offers excellent portfolio diversification for traders who need a broad market hedge. MAR 35.00 TMK OG LB=0.55 OI=0 CB=34.45 DE=14 MR=8.7% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=TMK ***** VSEA - Varian Semiconductor $31.03 *** Semiconductor Sector! *** Varian Semiconductor (NASDAQ:VSEA) designs, manufactures, markets and services semiconductor equipment used in the fabrication of integrated circuits. As a leading supplier of ion implantation systems, the company has shipped more systems worldwide than all other competitors combined and to virtually every major chipmaker in the world. The company has introduced leading-edge technology that leverages single-wafer processing to the entire spectrum of energies and implant applications. This approach led to a product that is highly differentiated by its unique capabilities, greater throughput and improved process yields. This week's pick in the semiconductor sector is VSEA, and traders who want to speculate on a recovery in the group can do so in a conservative manner with this OTM Put position. MAR 25.00 UES OE LB=0.44 OI=102 CB=24.56 DE=14 MR=14.0% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=VSEA ***************** 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 XLNX 42.50 MAR 35.00 XLQ OG 1.25 5227 33.75 14 25.3% FWC 15.31 MAR 15.00 FWC OC 0.60 34 14.40 14 20.3% NVLS 40.94 MAR 35.00 NLQ OG 0.94 3707 34.06 14 18.0% FLR 40.41 MAR 40.00 FLR OH 0.95 0 39.05 14 12.4% RCII 42.06 MAR 40.00 RQG OH 0.75 356 39.25 14 10.5% UCL 36.48 MAR 35.00 UCL OG 0.40 1120 34.60 14 6.4% *************************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=1753 ************************************************************ ************************ SPREADS/STRADDLES/COMBOS ************************ The Gloomy Outlook Continues! Technology stocks were routed again today in a volatile session that saw the NASDAQ stage an oversold rally only to retreat amid renewed selling pressure. Friday, March 2 Technology stocks were routed again today in a volatile session that saw the NASDAQ stage an oversold rally only to retreat amid renewed selling pressure. The technology composite closed down 65 points at 2,117. Industrial stocks managed small gains with the Dow finishing 16 points higher at 10,466. The S&P 500 index was down 7 points at 1,234. Trading volume on the NYSE reached 1.28 billion shares, with winners beating losers 1,919 to 1,124. Activity on the NASDAQ was moderate at 2.3 billion shares traded, with advances beating declines 1,894 to 1,716. In the treasury market, the long bond fell 1 2/32, pushing its yield up to 5.36%. Thursday's new plays (positions/opening prices/strategy): Sicor (NASDAQ:SCRI) MAY15C/MAY10P $0.43 debit synthetic Ocular (NASDAQ:OCLR) JUL17C/MAR17C $1.25 debit calendar Alliance (NYSE:AC) APR50C/APR45P $2.85 debit strangle Sicor slumped in early trading, falling to $12.06, but the target debit was unavailable. There may be another entry opportunity in the coming sessions. In the Alliance Capital debit strangle, a 3-contract trade at $2.85 was observed late in the afternoon. Portfolio Activity: The NASDAQ crumbled in late-session trading today as investors fought unsuccessfully to support a courageous recovery in the technology group. The news of an earnings warning from Oracle (NASDAQ:ORCL), a computer software maker that helps companies grow their businesses, joined a slew of downbeat forecasts from other hi-tech firms and aroused concerns that even corporations with new Internet-oriented products aren't immune to a slowdown. A number of analysts contributed to the negative outlook, with Goldman Sachs offering discouraging forecasts for Siebel Systems (NASDAQ:SEBL), Ariba (NASDAQ:ARBA), Commerce One (NASDAQ:CMRC), Brocade (NASDAQ:BRCD), Applied Micro (NASDAQ:AMCC), Microsoft (NASDAQ:MSFT) and Sanmina (NASDAQ:SANM). The bearish comments did not end there however, as CS First Boston and Morgan Stanley also downgraded a string of technology issues. SG Cowen added their thoughts on the semiconductor group, saying the weakness will likely extend into the second half of the year. Telecom shares also slumped after SBC Communications (SBC:NYSE) said its first-quarter profits will fall short of expectations because of high costs of entering new businesses such as long-distance and high-speed Internet. On the Dow, defensive shares Exxon-Mobil (NYSE:XOM), Minnesota Mining (NYSE:MMM), and International Paper (NYSE:IP) led the gainers as investors continued to seek shelter in classic safety sectors. Retail stocks were also among the stronger groups and in the broader market, oil service, airline and biotechnology issues generally moved higher. Our portfolio ended with mixed results after a volatile session and although industrial stocks were more bullish as a group, a number of technology issues finished the day higher. Motorola (NYSE:MOT), AT&T (NYSE:T), Hewlett Packard (NYSE:HWP) and Intel (NASDAQ:INTC) all enjoyed favorable gains and for those of you in these long-term positions, a time will come when you should consider adding to your current (long) options to improve the overall cost basis. In the transportation segment, Continental Airlines (NYSE:CAL) continued its recent unpredictable activity, climbing $2 to a recent trading range near $44 and once again, it appears that the issue could sustain a small rally from the current levels. Navistar (NYSE:NAV) has rebounded significantly over the past few sessions and the issue should test a near-term resistance area at $29. Our calendar spread in NAV is short at $30 and any upward movement in the stock will improve the profit in the position. In the biotech segment, Chiron (NASDAQ:CHIR) has moved back to the top of its trading channel and the issue should be monitored for a rally to new yearly highs. Our short (call) option at $50 is not currently in danger but a technical change in character could certainly affect the outlook for the play. One of the safe-haven sectors, consumer non-durables has performed well during the broad market slump and Avery Dennison (NYSE:AVY) continues to challenge the top of its recent trading channel. A rally in the group would likely propel the stock to the upper $50 range and with our sold (short) calls at $55, we must be prepared to respond to that outcome. With additional overhead supply at $61, the easiest spread adjustment would be a transition (roll-out and up) to the APR-$60 call. In the small-cap category, Advanta (NASDAQ:ADVNB) was one of the surprise movers, climbing $1 to $13.63 after announcing that it completed the sale of its mortgage business to Chase Manhattan Mortgage for a cash price of in excess of $1 billion. With the conclusion of the strategic alternatives process, Advanta expects to have a book value of $16-$17 per share and the company is now set to focus on its credit card business. Company officials said the completion of the transaction converted a substantial portion of their book value to cash and the proceeds from the sale will be used to reduce debt and enhance their profitable operations. Investors applauded the news, which was not expected until later in the quarter and the issue responded with a midday rally to yearly highs near $14. Traders in our calendar spread position were caught off guard and now they will have to make a decision about the future outlook for the issue. Those who feel the move will continue can roll-up and out to a higher strike price in the short position, or simply buy shares (or ITM calls) to offset the current obligation at $12.50. Of course, a consolidation may be in order after the recent run-up and any pullback could also be used to adjust the spread to reflect a bullish perspective. As we noted in the original narrative, a position of this nature (aggressive, time-selling) requires adept management and the key to success is keeping the sold option relatively near the price of the underlying issue, where the extrinsic value and premium erosion is greatest. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** HON - Honeywell $44.79 *** Reader's Request! *** Honeywell International (NYSE:HON) is a diversified technology and manufacturing company serving customers worldwide with unique aerospace products, control technologies for buildings, homes and industry, automotive products, power generation systems, fibers, specialty chemicals, plastics, electronic and advanced materials. Honeywell's operations are conducted by strategic business units in four reportable segments: Aerospace Solutions, Automation and Asset Management, Performance Materials and Transportation. The company is a product of the merger of Honeywell and Allied Signal and the Honeywell has recently accepted an offer to become part of General Electric (NYSE:GE). One of our readers submitted this issue for a bearish position, based on concerns that the European Commission's review of the General Electric/Honeywell merger might take months and could result in a number of significant concessions before the deal is approved. In a potentially serious setback to its largest-ever acquisition, General Electric was notified last week that the EU regulators will extend by as much as four months their review of its proposed $45 billion acquisition of Honeywell. Authorities at the EU are entitled to review certain mergers involving large companies and it has the power to prevent such transactions when it finds that it would threaten competition in its markets. While it is unlikely the merger would be blocked, the announcement all but ends GE's hopes of completing closing the acquisition by the end of March and investors are not happy with the news. Traders who think the recent bearish trend will continue can speculate on that outcome with this combination position. PLAY (speculative - bearish/credit spread): BUY CALL MAR-50.00 HON-CJ OI=8379 A=$0.30 SELL CALL MAR-47.50 HON-CW OI=3093 B=$0.70 INITIAL NET CREDIT TARGET=$0.45-$0.50 ROI(max)=23% B/E=$47.95 http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=HON ****************************************************************** MMM - Minnesota Mining $111.33 *** Safety in Diversity! *** Minnesota Mining and Manufacturing Company (NYSE:3M) is a fully integrated enterprise whose business has developed from research and technology in coating and bonding for coated abrasives. The company offers products in six categories: industrial products, transportation, graphics & safety products, health care products, consumer and office products, electro and communications products, and specialty material products. 3M's products are sold directly to users and through numerous wholesalers, retailers, jobbers, distributors and dealers in a wide variety of trades in many countries around the world. With the recent broad market downturn, investors have flocked to safety issues in the cyclical and consumer product groups. Most of these companies have diversified interests in various economic areas operating through different divisions and units, thus they are less susceptible to the slowing economy. Minnesota Mining is is often referred to as the maker of industrial adhesive products (3M markets Scotch brand tape) but they also provide manufacturing services in a number of other industries. Each specific segment is affected by a combination of many different elements, as well as the overall economy, the health of the industry they transact business in, and the unit's individual performance. All of these subsidiaries behave in different ways from one another, performing uniquely in separate cycles and with varying degrees of success. At any given time, one or more of these segments will outperform the broader market and by owning shares of a conglomerate, traders can benefit from its ability to compensate for common economic fluctuations. Technically, MMM has established a relatively stable trading range near $110 and those of you who favor the company's outlook in the current market environment may speculate on its performance with this conservative position. PLAY (conservative - bullish/credit spread): BUY PUT MAR-100 MMM-OT OI=1357 A=$0.65 SELL PUT MAR-105 MMM-OA OI=4040 B=$1.10 INITIAL NET CREDIT TARGET=$0.50-$0.55 ROI(max)=11% B/E=$104.50 http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=MMM ****************************************************************** ITG - Investment Technology $56.35 *** Revenge Play! *** Investment Technology Group (NYSE:ITG) provides equity trading services and transaction research to institutional investors and brokers, using technology to increase the effectiveness and lower the cost of trading. Its principal service offerings are POSIT, an electronic stock crossing system; QuantEx, a decision-support, trade management and order routing system; SmartServers, which offers server-based implementation of basic trading strategies; Electronic Trading Desk, an agency-only trading desk offering clients the ability to efficiently process multiple sources of liquidity; ITG Platform, a PC-based order routing and transaction management system; ACE and TCA, a set of unique trading tools for systematically analyzing and lowering transaction costs; ITG/Opt, a computer-based equity portfolio selection system; and Research, which provides research, development, sales and also consulting services to its clients. ITG's revenues are generated on a per transaction basis for all orders executed. ITG was one our picks for a potential failed rally last month, and the issue showed its contempt for our bearish opinion with a complete technical reversal and a move to new all-time highs. With heavy volume backing the renewed up-trend, it appears that ITG is poised for additional bullish movement and this position offers a great way to participate in that activity with limited risk. Target a higher premium initially, to allow for a brief consolidation in the issue. PLAY (conservative - bullish/credit spread): BUY PUT MAR-45 ITG-OI OI=15 A=$0.35 SELL PUT MAR-50 ITG-OJ OI=0 B=$0.75 INITIAL NET CREDIT TARGET=$0.50-$0.60 ROI(max)=11% B/E=$49.50 http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=ITG ****************************************************************** DD - Dupont $44.72 *** Bottom Fishing! *** DuPont (NYSE:DD) is engaged in science and technology in a range of disciplines including high-performance materials, specialty chemicals, pharmaceuticals and biotechnology. Dupont operates through a number of strategic businesses and within the strategic business units, approximately 80 businesses manufacture and sell a wide range of products to many different markets, including the transportation, textile, construction, automotive, agricultural, health, pharmaceuticals, packaging and electronics markets. The company's strategic business units have been aggregated into nine reportable segments: Agriculture & Nutrition, Nylon Enterprise, Performance Coatings & Polymers, Pharmaceuticals, Pigments and Chemicals, Pioneer, Polyester Enterprise, Specialty Fibers and Specialty Polymers. The final segment consists of the company's photomasks, safety resources, and global services businesses, and divested businesses including certain printing and publishing products and coal. It's obvious that businesses in different industries are affected in unique ways by the same economic variables and this reasoning applies just as well to a company with a diverse line of products. Investors buy stocks in this category to protect their portfolio against unexpected changes in the market and for that reason, a number of conglomerates are exhibiting new strength in the wake of recent widespread selling pressure. DD is one of these issues and with the current Stage I base identifying a possible bottom to the year-long downtrend, we are going to speculate on a future rally with this conservative synthetic position. PLAY (speculative - bullish/synthetic position): BUY CALL APR-50 DD-DJ OI=5490 A=$0.75 SELL PUT APR-40 DD-PH OI=6014 B=$0.50 INITIAL NET CREDIT TARGET=$0.00-$0.12 TARGET PROFIT=$1.25 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,400 per contract. http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=DD ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** CIMA - Cima Labs $57.00 *** Probability Play! *** Cima Labs (NASDAQ:CIMA) develops and manufactures fast-dissolve and enhanced-absorption oral drug delivery systems. OraSolv and DuraSolv, their principal proprietary fast-dissolve technologies, are oral dosage forms incorporating taste-masked active drug ingredients into tablets that dissolve quickly without chewing or water. Cima currently manufactures and packages five commercial products incorporating its proprietary fast-dissolve technologies. Cima Labs also develops applications for its technologies that it licenses to pharmaceutical company partners, and they generate revenue from licensing fees, product development fees, selling products that employ its fast-dissolve technologies and royalties. The company currently has agreements with American Home Products, AstraZeneca, Bristol-Myers Squibb, N.V. Organon, Novartis and Schering-Plough. This issue is an excellent candidate in the "premium-selling" category of options trading. Based on analysis of statistical option pricing and the underlying stock's technical history, this position meets our fundamental criteria for a profitable credit-strangle. The issue has robust option premiums and a relatively well-defined trading range along with a mathematically high probability of remaining between the target strike prices. However, current news and market sentiment will have an effect on the stock's movement so the position should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. Some traders may favor a more aggressive approach, selling options that are closer to the current price of the issue, to produce a higher initial return. While that technique may be more attractive, it also increases the theoretical risk of loss. Only you can know what plays are suitable for your risk-reward tolerance and portfolio outlook. PLAY (conservative - neutral/credit strangle): SELL CALL MAR-75 UVK-CO OI=298 B=$0.56 SELL PUT MAR-45 UVK-OI OI=37 B=$0.62 INITIAL NET CREDIT TARGET=$1.25 ROI(max)=10% UPSIDE B/E=$76.25 DOWNSIDE B/E=$43.75 http://www.OptionInvestor.com/charts/feb01/charts.asp?symbol=CIMA ************************Advertisement************************* Tired of waiting on trades to execute? 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