The Option Investor Newsletter Tuesday 03-06-2001 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/030601_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 03-06-2001 High Low Volume Advance/Decline DJIA 10591.20 + 28.90 10690.90 10570.20 1.10 bln 1851/1196 NASDAQ 2204.43 + 61.51 2243.78 2202.70 1.99 bln 2302/1401 S&P 100 645.45 + 7.02 653.21 640.08 totals 4153/2597 S&P 500 1253.80 + 12.39 1267.42 1243.88 61.5%/38.5% RUS 2000 481.13 + 5.34 482.28 475.79 DJ TRANS 2980.43 + 41.03 2980.43 2937.06 VIX 27.44 - 1.78 28.09 27.03 Put/Call Ratio 0.57 ****************************************************************** What if the Nasdaq could close positive three days in a row? Was that a rally in the face of bad news? What happened to the gloom and doom from last week? Did I miss something important over the weekend? Did Abbey Joseph Cohen call a market bottom while I was at lunch? Inquiring minds want to know! For whatever reason the shorts covered once again at the open on Tuesday. The elusive "short covering indicator" must have signaled a possible short squeeze and traders squared accounts in oversold tech stocks. Could it be fears of a surprise rate cut on Wednesday? I doubt it but stranger things have happened. With seven chip stocks either warning or being downgraded in the last 48 hours does it strike anybody else strange that the SOX is up +25% in the last three days? Intel CEO Andy Grove said in a conference call today that he does not see a snap back in chip demand but rather a protracted workout of the inventory problem. Still his stock did not sell off. The selective hearing by investors has analysts scratching their heads. Several of the chip stocks downgraded included PMCS, AMCC, PMCS, VTSS all of which closed positive for today. Maybe we have reached that perfect point in the markets where investors have had enough. Blue chip tech stocks are now back down to PE ranges in the 20s and 30s. Long term analysts are saying stocks are currently valued at 1991 levels which was before the recent eight year run in the market. Al Goldman could not say enough positive things about the current stock values. John Murphy stuck his neck out and called the bottom on CNBC this afternoon. The only people missing are Abbey and Ralph Acampora and we could bag this bear market for good. Well, we could also use an end to earnings warnings! Speaking of warnings, Nasdaq:JDSU, warned on top of a warning after the close today. They warned just a couple weeks ago when the SDLI merger was complete and today they warned that that estimate was too aggressive. Investors in after hours trading did not get very excited and only knocked -$1 off the $28 closing price. This may be a sign of things to come. JDSU has been fallen from $140 to under $25 recently and at that price is considered fairly valued. Easy come, easy go for Nasdaq:AMZN. The rumor from Monday that they were going to link up with Wal-Mart was killed today. The talks had occurred but had concluded without any action. The +25% gain from Monday, +2.75 translated into a -.75 loss today. Jeff, if you can invent a rumor like that every week your stockholders would love you. A +25% gain on the rumor and a -5% loss on the news. To heck with selling books, sell rumors instead! Will he or won't he? Wednesday is widely expected to be the last day for an intra-meeting rate cut. After Wednesday the odds increase dramatically that any rate cut will wait until the Mar-20th FOMC meeting. There are some analysts trying to reach back to our last recession in 1991 and point to a surprise rate cut four days before the meeting as proof that Greenspan can do it at anytime. Sure he can do it but in his speeches he has said there is no urgency and that is the kiss of death for a surprise cut. The next major piece of economic news is the Jobs Report on Friday. There is an outside chance a much weaker than expected number could trigger a cut but almost nobody expects that. Next week however is full of Fed watched numbers including PPI, Sentiment and Industrial Production. Today was Greenspan's 75th birthday. Maybe George W will send him a free rate cut pass in his birthday card. The Nasdaq gapped above resistance at 2200 at the open, spent the day trading much higher and then drifted back to close at 2200 again. Traders waiting for that milestone to be breached to go long were caught off guard and probably were unable to trade the bounce. Whenever the market gaps open substantially it is a very good idea to sit back and watch. The gap open produces a bounce in option prices that is very hard to profit from unless you already own them. Buy on a strong gap open like we had on Tuesday and you will watch those options premiums bleed for the next day or two if there is no follow through in the markets. Remaining on the sidelines is painful but not as expensive as choosing the wrong entry points. For Wednesday traders should look for a pull back to make an entry. However Tuesday's high of 2243 should serve as an entry point if there is no morning drop. Actually I would wait until we trade over 2250 before opening a new long position. 2300 is still resistance as well so the next several days could be a struggle to make any big gains. The futures are actually positive at 7:30 and considering the JDSU warning, among others, this is very positive. Three up days in a row? If I am dreaming, don't wake me up! Enter passively, exit aggressively! Jim Brown Editor www.OptionInvestor.com ************************************ 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=1731 ************************************************************** **************** MARKET SENTIMENT **************** Three Sessions Each Day By Austin Passamonte That's what we have most days lately. A strong move in one direction off the open, mid-day reversal and then who knows what into the close. We've seen this type of action plenty of times before but can't remember so many sessions strung together like this. As we've said for weeks now, accomplished day traders can & do make solid returns each session playing the major indexes and certain volatile stocks, but even that takes great concentration & effort. Almost every other strategy of two sessions or greater duration remains quite an adventure indeed! Part-time and less experienced traders are caught in a wash of sideways action. Perhaps sideways isn't the right term as these markets make wild swings up and down the charts. We'd love to say it'll end soon but cannot yet state that in good conscience. Our expectations are for a steady chop up the charts as we head towards March 20th FOMC meeting. It is a mere 9.5 trading sessions from tonight but there are plenty of stumbling blocks along the way. Government reports interpreted as bearish and/or further warnings by additional bell-weather stocks could easily send markets right back down to test recent lows or beyond. That being said, the herd's sentiment is clearly changing and this is reflected in the charts. Daily-chart signals on the big indexes are grossly oversold and attempting to emerge from these extremes. One of the clearest bull-reversal patterns we see right now is the SOX, which has led tech sectors for the past few years without fail. Short-term signals are rolling down from intra-session overbought zones and portend a further pullback during Wednesday's session at the least. We expect support to hold and higher prices to resume from there with no further market bombs dropped on traders that seem so persistent these days. There are layers of overhead resistance meshed above current price levels and any sustained upside move from here has work cut out for it. Companies continue to warn but prices quickly bounce off knee- jerk, post-market trades. This is bullish fundamental bias that essentially states traders are sick of selling and now want any reason to buy. Simple as that. Anyone who ever attempts to trade financial markets using pure logic, reasoning and fundamentals will always get crushed like a squirrel in the road with no exceptions. Market action is totally driven by human emotion and little else. Right now that emotion is turning to hope for the future, blind or otherwise. Our overall expectation? A staggered upward move with possible large dips as we approach March 20th FOMC with our customary "Buy The Rumor" rally. If we think the public has finally wised up and that won't happen this time, we are grossly mistaken. The public has been buying tops & selling bottoms since cave men traded Mastodon bones and their ancestors promise to do so far into the future. Our key to success is identifying what the herd expects to do next and lie in wait for that inevitable migration to begin. Ambush using calls or puts as conditions dictate result in our share of prime beef or bear steak as a reward. Market Sentiment thinks we hear faint hoof beats of the herd approaching now and looks to bullish strategies for the next barbeque bear. Wait patiently for the next successful test of near-term support and consider firing up your grill as well. Just plan on serving the guests and closing up shop sometime before 2:15pm on March 20th in case of rain! ********** VIX Tuesday 03/06 close: 27.44 VXN Tuesday 03/06 close: 69.03 30-yr Bonds Tuesday 03/06 close: 5.38% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Tuesday (03/06/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 685 - 670 11,467 5,733 2.00 665 - 650 12,342 5,571 2.22 OEX close: 645.45 Support: 640 - 625 4,386 9,954 2.27 620 - 605 63 8,181 129.86 Maximum calls: 700/6,584 Maximum puts : 560/9,577 Moving Averages 10 DMA 644 20 DMA 665 50 DMA 684 200 DMA 746 NASDAQ 100 Index (NDX/QQQ) Resistance: 59 - 57 46,907 16,568 2.83 56 - 54 120,869 35,018 3.45 53 - 51 76,437 24,501 3.12 QQQ(NDX)close: 49.40 Support: 48 - 46 52,080 29,466 .56 45 - 43 4,590 33,261 7.25 42 - 40 3,380 15,642 4.63 Maximum calls: 50/99,205 Maximum puts : 50/40,737 Moving Averages 10 DMA 49 20 DMA 53 50 DMA 58 200 DMA 79 S&P 500 (SPX) Resistance: 1325 49,363 42,603 1.16 1300 11,591 16,849 .69 1275 15,194 21,817 .70 SPX close: 1253.80 Support: 1225 5,298 15,689 2.96 1200 3,053 18,614 6.10 1175 244 9,182 37.63 Maximum calls: 1325/49,363 Maximum puts : 1325/42,603 Moving Averages 10 DMA 1249 20 DMA 1285 50 DMA 1314 200 DMA 1401 ***** 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/030601_1.asp *********** OPTIONS 101 *********** Probability Of Profit, Part II By Lee Lowell In the previous article, we talked about how to use a probability calculator to figure out your chances of success of your desired option position. It was mentioned to me that some people had concerns with the "expected return" of the position at the same time. Let's discuss that issue. Expected return, or expected profit/loss, is the amount you can expect to receive or lose from a trade if you do it over and over again. If given the chance to repeat that same trade many times, you should be able to hit that expected profit/loss number pretty closely. Expected return is calculated very easily. All you need to do is take the maximum gain on the trade and multiply it by your probability of success, and then take the maximum loss and multiply it by your probability of loss. Subtract these two numbers and you will have your expected return. Debit and credit spreads are very easy to use when figuring out an expected profit/loss. If a credit spread has a 70% chance of success with the maximum gain of $3, and a probability of loss of 30% with a maximum loss of $7, your expected return on this trade is $0. If you do this same trade 100 times, you would make $3 on 70 attempts and you would lose $7 on 30 attempts, basically making it a wash trade. For long-term success, you want to find trades that have a positive expected return. Usually, with a positive expected return comes a smaller probability of profit, so you need to find the right balance. Does it mean that you shouldn't do a trade if your expected return is negative? Or should you do a trade with a high expected return but a low probability of profit? It depends. If you have a trade with a 99% probability of profit, and your maximum gain is $.50, but that probability of loss is unlimited, will you take the trade? Maybe, maybe not. This is the case with many naked selling option positions. Using spreads will always contain that unlimited loss, so your probabilities and expected returns are all known beforehand. I agree with the theory that you should have a positive expected return for every trade, but that's not always going to happen, especially if your odds of success are getting above 90%. It is my belief that you will never be able to perform the exact same trade twice in the markets. Something is always going to be different about every option trade you make, so it's hard to justify the theory of expected return working out in the long-run (in my opinion). This is why I suggested that any trade with a probability of 80% or higher is worth taking a shot at. Nevertheless, we'll explain some trades with the correct balance. Let's go back to the examples I used last week and I'll show you the numbers and how to get around negative expected return figures. OEX @ 668, Target Price = 706 Calendar days remaining: 24 Percent Annual Volatility: 25 Probability of stock being above Target Price: 19.4% Probability of stock being below Target Price: 80.5% This was our probability estimates for the March OEX 705/710 call credit spread for $1. Our maximum gain is $100 and our maximum loss is $400. What's our expected return? Using the formula I gave above, we get (.805*$100 - .194*$400) = +$2.90. So if we do this same trade many times over, we will make $2.90 over the long run on each trade. I know this seems like such a small number, but that's how expected profit/loss is calculated in the long-run. You have to remember, the OEX can close at any price level on expiration day. In order for us to walk away with the $2.90 profit, the OEX would have to close somewhere around 705.97 on expiration day. On this specific trade though, we are hoping the OEX closes anywhere below 705 for us to receive the full $100. Based on all the parameters we've entered for this trade, in the long-run, we'll be a winner by $2.90. So what we have here is an all-around good trade. We have an 80% chance of success and we also have a positive expected return of $2.90. That's what you want to see in most of your trades. What do we do if our expected profit/loss is negative and we still have a high probability of success? Let's look at an example. CSCO @ $24.75, Target Price = $31.0625 Calendar days remaining: 136 Percent Annual Volatility: 74 Probability of stock being above Target Price: 30.7% Probability of stock being below Target Price: 69.2% Here's a trade using real numbers for a CSCO July '01 $30/$35 call credit spread with an initial credit of $1 1/16. We have a 69.2% chance of CSCO expiring below our breakeven of $31 1/16 and a 30.7% chance of loss. Let's do the math: 0.692*$106.25 - 0.307*$393.75 = -$47.38 We have a negative expected return of -$47.38 on this trade even though the probability of success is close to 70%. What should we do? You have a few options. First, here's a quick test to see what minimum credit you need to bring in on a trade in order to have the profit/loss be positive, or at least a breakeven number. Take the difference between the strike prices (35-30=5) and multiply that by the probability of loss figure (5*.307=1.54). In order for this specific trade to have at least a $0 expected return, you need to take in at least 1.54 points ($154) for the initial credit. Let's see if the $154 floats in our original formula (.692*$154 - .307*$346 =$0). Yes, it works! So what you need to do now if you want to trade this CSCO spread, is to set a limit price of at least 1.54 points for your initial credit. This will ensure a balanced trade between risk/reward and expected return. The other trick for getting this to a balanced trade is to take the negative expected return figure of -$47, turn it to a positive +$47 and add it to the first initial credit. So we take $47.38 an add that to our initial credit of $106.25 and we get $154. Again, we need to take in at least 1.54 points initial credit for the credit spread to be properly balanced. You can figure these numbers for any kind of option trade you like. I used the credit spreads because the breakeven points are easy to see. In the case of a long call where your profits are unlimited and the downside is limited, you just need to pick a specific point on the upside to use in your equations. Most people would pick a point that the underlying must reach in order to double your premium. "Percent to double" as it's called. I hope the math hasn't confused too many people, but it's really not that hard once you get the hang of it. Try it and you'll see. Good luck. ************** TRADERS CORNER ************** Valuations: Realistic or Optimistic? By Scott Martindale I was a bit nostalgic this morning. Ah, yes, it was reminiscent of the good ol’ days of 1999. Remember those days? It seems like forever ago. You could buy a call on a promising-looking chart, hold it overnight, and bamm! -- get that pop in the morning. Except in 1999 you might get some follow-through during the day instead of the flat line we saw for the rest of today. Today, you really weren’t able to do much after the opening pop. I’ve been holding Ciena (NASDAQ: CIEN) March 75 calls for about a week through some ups and downs, not stopping out because of its history of big moves in an up market coupled with the extremely oversold condition of the market. Today, I got that burst through $75 that I’ve been looking for (followed by some after-hours selling), but I’m still holding in anticipation of little more rally ahead. But is it to be? Well, almost everyone -- bull and bear alike -- has felt the market is short-term oversold and due for some kind of rally. Bulls go further in saying the Nasdaq has successfully tested its lows and is putting together a bottom as evidenced by its rise in the face of continuing bad news. Bears say a recession is coming and valuations are still too high, but bulls say that the markets will rise steadily due to falling interest rates, tax cuts, and $3 trillion in cash on the sidelines waiting for the "right time." Is there an imminent recession? Let’s look beyond the bad numbers that the press likes to trumpet and find some bright spots. We got new housing numbers recently, i.e., 921,000 starts in January -- better than January 1999, which was the record year for the housing industry. Orders for business equipment (much of which is new technology) were up 5.7% in January -- the fastest sequential growth since June 2000. And, of course, employment is still strong. It’s interesting to note that the Value Line Index (VLE) has maintained a solid uptrend since the fourth quarter of 1998. In contrast to the widely followed Russell and S&P Indices that are market cap weighted, the VLE is unweighted, similar to an individual investor’s portfolio. Thus, it is better at telling you your chances of picking a winner in that an unweighted average gives an indication of market breadth. Steven Leuthold was on CNBC on Friday talking about some of his analysis of historical market performance after various earnings changes in the S&P 500. Interestingly, by far the best performance in stock appreciation -- something like 20% gains on average -- follow periods in which the S&P shows negative earnings growth in excess of -5%. He thinks it’s time to start accumulating. Three-quarters of stocks are above their 10-week moving average, and almost as many are above their 30-week moving average. Market forecasters like Ralph Acampora, Ed Yardeni, and Harry Dent are still forecasting huge increases in the major indices by the end of the decade, like 20,000+ in the Dow and 10,000+ in the Nasdaq. Wow! Could we be so lucky? A better question is, can earnings truly grow enough to justify such valuations? Let me talk a little about valuations, particularly in one of the most promising sectors of all - optical networking. Let’s compare some of the players with respect to the P/E (TTM -- trailing 12 months), P/E (estimated fiscal year 2001), and PEG (ratio of P/E to consensus estimate of 5-year earnings growth rate). P/E (TTM) P/E (2001) PEG JDS Uniphase (NASDAQ: JDSU) 0.0 37 0.82 Corning (NYSE: GLW) 66 22 0.78 Ciena (NASDAQ: CIEN) 178 103 2.60 Cisco Systems (NASDAQ: CSCO) 58 36 1.10 Juniper Networks (NASDAQ: JNPR) 152 63 1.20 Extreme Networks (NASDAQ: EXTR) 113 46 0.98 Sycamore Networks (NASDAQ: SCMR) 320 70 1.40 Foundry Networks (NASDAQ: FDRY) 19 19 0.47 From this list, FDRY looks like a bargain. But in a market that has punished high-valuation stocks, including the fallen angel optical networkers, CIEN has managed to hold up well. It has firm support around $70, even though it is the most richly valued on the list. Furthermore, CIEN recently raised $1.5 billion in fresh capital with a combined stock and bond offering. They sold 11 million shares of stock at $83.50 and issued $600 million in bonds, plus they already had about $240 million in cash on its balance sheet prior to the offering. Although they will need some of these funds to absorb the recently acquired Cyras Systems, it’s possible CIEN is planning more acquisitions with this money. As the industry stabilizes, consolidation is the natural progression. The stronger companies like CIEN, GLW, and JDSU should see more rapid strengthening in their share prices that will give them the ability to take over the weaker players, further strengthening their market position. [The one caveat is that speculators may drive up the price of the weaker players in anticipation of a takeover. Obviously, this would make a good options play.] Does this mean certain companies truly deserve the high valuations as investors get a foothold in what many consider to be the dominant sector for the "new economy?" Or does it mean that many investors are still chasing tulip bulbs? Time will tell. But as options traders, we can play the momentum without betting the farm. *************************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=1746 ************************************************************ PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** FPL $64.95 -0.28 (+0.41) A daily chart visually confirms that FPL is currently experiencing a period of consolidation, tightly coiling around the supportive 5 & 10 DMAs intersection. The vicinity of $65, therefore, would've provided a favorable range of operation to take entries if FPL made the big break through the immediate resistance at $66. However, that wasn't the case. FPL basically laid down and ignored the rallying conditions. This laxadaisal behavior compelled us to drop coverage on FPL tonight despite the fact that it didn't violate our protective stop. JNPR $64.06 +5.44 (+10.47) In Monday's session, traders shunned UBS Warburg's sharp 12-month price target cut from $250 to $100 per share and bid JNPR up $6.04%, or 9.4% on average volume. JNPR's rebound exhibited astonishing strength in defiance of concerns about the overall sector, but fortunately was capped by the 5-dma and our corresponding $60 protective stop. Then the axe fell today. The networking leaders extended their respective rallies for a second round of strong gains. JNPR saw another fantastic advance, clearly violating the 10-dma ($65.58) and knocking us out of the play. PUTS: ***** PWAV $17.19 +0.88 (+1.13) PWAV offered a few excellent opportunities for put players since we picked it at $17.44. The stock's progressive roll over pattern took it to a low of $14.06 on March 1. However, today's Nasdaq rebound invigorated some of the wireless communications stocks, including PWAV. While PWAV will need more momentum in order to re establish a true upward trend, it closed above our stop level of $17, and as such, we are dropping it tonight. ISSX $47.44 +4.69 (-3.87) The long overdue Nasdaq rally prompted a surge of buying on the software index today, which put a halt to our short lived put play. While ISSX still remains in a long term downward trend, the stock closed above our stop level of $47, and as such, we are dropping it tonight. AMCC $30.69 +1.50 (+1.88) Strength in the Semiconductors continued today, contributing significantly to the NASDAQ rally. The bullish sentiment finally rubbed off on our AMCC play, helping the stock to move above our $30 stop at the open. Although there was no follow through to the upside, the stock didn't really sell off as the afternoon progressed, adding strength to the theory that AMCC may have found a bottom. While the fledgling rally could roll over in the days ahead, we need to follow our discipline and drop AMCC now that it has closed above our stop. EBAY $40.31 +2.31 (+2.63) Good news from Amazon.com helped to lift the Internet sector on Monday and with that, shares of leading online auction site EBAY managed to end the day up fractionally on less than 60 percent of ADV. That strength managed to carry over to today, when a bouncing NASDAQ from deeply oversold conditions lifted the stock up over 6 percent. While volume was average and resistance was encountered from the 50-dma near $43, the close above our stop price of $40 means that we will be dropping coverage of this play. Look for weakness in EBAY near today's close to potentially carry over into tomorrow's session, providing an opportunity to exit short positions. ************************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. 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The Option Investor Newsletter Tuesday 03-06-2001 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/030601_2.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=1754 ************************************************************ ******************** PLAY UPDATES - CALLS ******************** UNH $60.51 +0.51 (-0.28) UNH demonstrated its durability and stamina amid the current rotation out of defensive stocks and the adversity effecting its sidekick, PacifiCare Health Systems (PHSY). The $59 support level convincingly sustained the share price during Monday morning's early decline. And since, short- term support rose to $60, bolstered by the 5-dma line. Volume continued to remain healthy as UNH toggles with the $61 resistance. Today's marginal close in the positive offers bullish encouragement, but a charge for the 52-week high at $64.36 would provide better confirmation going forward. Keep stops in place at $59 to safeguard capital. IDTI $37.13 +2.13 (+3.75) Even after Prudential Securities downgraded shares of IDTI on Friday, the bulls came out swinging on Monday, attempting to keep the recovery alive. With a downgrade from Strong Buy to Hold, you would have expected the stock to be under pressure this week, but that clearly wasn't the case. Whether it was the weather, or contrarian sentiment, we don't know, but our play has been moving nicely higher this week. After consolidating between $33-34 yesterday, the bulls went on a buying spree this morning, quickly pushing shares as high as $39 before watching a steady deterioration into the close. Buoyed by gains in both the Semiconductor index (SOX.X) and the Networking index (NWX.X), IDTI will likewise be susceptible to weakness in these sectors should the NASDAQ recovery fail to follow through during the remainder of the week. Yesterday's anemic volume was likely due to the weather, but we saw volume top the ADV by 25% today. This would be a good sign if it weren't for the fact that the volume was still increasing as the price dropped into the close. Given the solid moves the past 2 days, we are moving our stop up to $35 to protect our gains. Aggressive players can consider new positions on a bounce from either $36 or $35 (the bottom of today's gap). More conservative traders will want to wait for another strong move to the upside that takes IDTI through the $39 resistance level before opening new plays. Before initiating new positions, make sure the SOX and NWX indices are still heading up - IDTI will have a hard time continuing its climb without the support of the broader sectors in which it operates. EDS $65.32 +0.19 (-1.13) With resistance overhead at $67.50 and then at $68, shares of the e-business solutions giant have moved sideways so far this week on declining volume. Yesterday, EDS pulled back $1.32 or about 2 percent on lighter than average volume. Today, an attempt to break through $67.50 was denied, as there was just not enough buying pressure to back the move. The good news is, the stock continues to make higher lows, so its uptrend is still firmly intact. Support is also building, with the 5 and 10-dma (at $65.06 and $63.74) both edging ever higher. Bounces off these two moving averages along with horizontal support at $65 and our stop price of $64 may provide aggressive traders with potential entry points. Conservative traders will want to wait for the buyers to return in force, powering EDS above $68 with conviction before taking a position. Keep an eye on rivals CEFT and SDS to gauge sector sentiment when making a play. UBS $161.00 +3.05 (+6.20) We started our aggressive call play on Swiss banking leader UBS yesterday based on its recent strategic moves as well as its successful test of an important support level (the 100-dma, now at $153.27). So far, this has already paid off, as our calls, just one day old, now sit in profitable territory. Today's gain of almost 2 percent is actually quite significant, because of the low options premiums translating into low option prices and a high degree of leverage. Today's move also signals the break of its downward trending regression channel. At this point, continued strength in UBS allowing it to advance above $163 on volume would allow for an entry on strength. Dip buyers may look for pullbacks to support at $160, the 5 and 10-dma converged at $158, $155 and our stop price of $153 for higher risk entries. Tracking the movements of competitors BSC, LEH, MWD could help in discerning overall sector health. ******************* PLAY UPDATES - PUTS ******************* BGEN $68.06 -0.63 (-0.38) BGEN continues to roll over from lower highs, which resulted from several failed attempts to clear the 10 dma of $70.35. On Monday, the selling took BGEN as low as $66.75, before the stock recuperated with the market. On Tuesday, BGEN opened at $69.25, but immediately dropped to strong support at the $68 level, even as the Nasdaq rallied. The biotech index fell below an important support level of 576, and without further strength in BTK.X, BGEN may have further to fall. If support at $68 fails for BGEN, the next major support level is $65, and then the $62.75 level. Conservative traders might want to wait for such a drop as a potential entry point. Aggressive traders could consider taking positions on another failed rally attempt from $68.50, if BTK.X is also falling. In light of recent market action, we are moving stops to $70. ADBE $28.50 +1.44 (+0.81) Even a broad-based Technology rally couldn't help ADBE get back on its feet, as the stock only managed a paltry $1.44 gain today. Even with volume coming in 60% above the ADV, the bulls couldn't even challenge the $29 resistance level, and should the NASDAQ rally fail to continue tomorrow, ADBE looks like a ripe target for the bears. Watch the GSTI Software index (GSO.X) for signs of weakness, as this will more than likely be a catalyst to kick our play back into its persistent downtrend. We still have solid support at the $26-27 range, with resistance near $29, also where our stop is resting. Aggressive traders will want to target shoot new positions as the stock rolls over near current levels, so long as our stop remains intact. The move conservative approach will be to wait for sellers to regain the upper hand and push ADBE down through the $26 support level. Use caution with any open plays, as the NASDAQ is trying to break out of its bearish trend, and if the current rally turns out to have legs, it will be difficult to push ADBE to new lows. MERQ $48.38 +4.75 (-0.13) Our put play in MERQ started the week on the right foot, heading deeper into profitable territory in spite of a rising NASDAQ on Monday, as the stock lost $4.88 or over 10 percent on over twice the ADV. However, MERQ managed to bounce strongly today, reclaiming almost 11 percent of its market value with volume at twice the ADV. Considering the steep declines recently, a technical bounce was not surprising. Closing just below our stop price of $49 today, today's move allows some time for MERQ's moving averages to catch up with the stock price. A failed rally above $49, $50 and $52 may provide entry points for higher risk players while conservative traders will want to wait for MERQ to drop below $48 on volume. From there it could be a quick trip to test $45 support. Before jumping in, make sure that sector sympathy confirms an entry by monitoring competitors CPWR and RATL. NEWP $39.38 -4.63 (-3.00) Moving in step with the NASDAQ yesterday, NEWP managed to end Monday's trading session higher by $1.63 or 3.83 percent on a light day of trading, with less than 80 percent of the ADV trading hands. This tentative buying carried over into today's session in the early going, as a gap up in the morning led to an attempt to rally later in the day. But upon encountering resistance at the 10-dma near $49, the sellers returned on mass. This proved to be an opportunity to take on new short positions, as the stock sold off on high volume in the last hour of trading to close below support at $40. We are moving our stop down from $46 to $44 to protect our profits. Aggressive players may look for sellers returning as NEWP approaches resistance at $40, $41.50, $44 and the 5-dma at $45 to enter this play while conservative traders will be watching for a break below $38.50 on volume, confirming direction using AMEX's Networking Index (NWX) and Semiconductor Index (SOX). *************************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=1747 ************************************************************ ************** NEW CALL PLAYS ************** AGGRESSIVE: A - Agilent Technologies $40.59 +2.55 (+2.57 this week) Agilent Technologies is a global diversified technology company that provides enabling solutions to high growth markets within the communications, electronics, healthcare and life sciences industries. The company provides test instruments, standard and customized test, measurement and monitoring instruments and systems for the design, manufacture and support of electronics and communications devices. Additionally, A provides fiber optic communications devices and assemblies, integrated circuits for wireless applications, application-specific integrated circuits, optoelectronics and image sensors. Agilent also supplies patient monitoring, ultrasound imaging, and cardiology products and systems for the healthcare industry. Persistent market weakness drove A down to a new yearly low of $34.40 last week, making the diversified technology company ripe for a recovery. Apparently the bulls recognized an attractive opportunity and began accumulating shares near the low. Yesterday, the EU approved Philips Electronics' plans to buy the healthcare unit of Agilent, and then Frost Securities initiated coverage of the company with a Buy rating. That positive news, combined with an oversold bounce and a positive NASDAQ today, drove the share price up by more than 5%. The big question now is whether the current recovery in Technology stocks is sustainable or if it is another head-fake designed to fleece some more eager bulls. The technicals favor a continued rally for A, as the daily Stochastics oscillator poked out of oversold today, allowing the stock to clear the critical $40 resistance level. But it won't be an easy road for the bulls, as A has formidable resistance staggered overhead at $42, $45 and then $47. Last week's consolidation pattern confirmed the stock has decent support near $38, and if the rally is for real, then the stock should be able to hold above this level on any pullback. Not only is it a good location for initiating aggressive positions, but it is also where we are placing our stop. More conservative investors will want to wait for a continuation of the upward move to push A through the $42 resistance level before jumping aboard. Although not a member, A tends to move in tandem with the Networking index (NWX.X), so watch the performance of this index for confirmation of strength before playing. ***March contracts expire in two weeks*** BUY CALL MAR-35 A-CG OI= 172 at $6.19 SL=4.00 BUY CALL*MAR-40 A-CH OI= 865 at $2.30 SL=1.25 BUY CALL APR-35 A-DG OI= 44 at $7.59 SL=5.25 BUY CALL APR-40 A-DH OI= 250 at $4.59 SL=2.75 BUY CALL APR-45 A-GI OI=1706 at $2.64 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=A PLAB - Photronics Inc $37.63 +3.13 (+4.94 this week) Photronics manufactures photomasks, which are high precision quartz plates that contain microscopic images of electronic circuits. Photomasks are a key element in the construction of semiconductors. The Company's products are used to transfer circuit patterns onto semiconductor wafers during the fabrication of integrated circuits. US chip makers account for nearly 85% of sales; although Photronics operates manufacturing facilities in Asia, Europe, and North America. They recently acquired rival Align-Rite in a move to become the world's largest independent maker of photomasks. Some market analysts are shouting "Buyers Beware!", but many others are taking advantage of the fantastic bargains within the tech sector. For the fourth straight session, the Philadelphia Semiconductor Index (SOX.X) made gains, after hitting a two- month low last Wednesday. Semiconductor stocks across the board are evidently looking too good to pass up! As a result, PLAB's been rolling along. Coming off lows near $30, PLAB edged back up to its support at $35-$36. Today, this tech stock made its move through $37 and closed up 9.1%! Volume was exceptional at 2.7 times the ADV. We're looking for near-term support to solidify at $36 and offer traders a firm launching pad from which to take entries, assuming the uptrend extends into subsequent sessions. Now for those who prefer buying the dip, the $34 level, which marks a firmer support, can serve as a measurement for both aggressive entries and diehard exits. PLAB's coverage is certainly based on its own technical merits, but the sector strength and rallying marketplace are also key elements to this momentum play's success. Therefore, it'll be important to keep your attention on the SOX.X for ultimate direction. Currently this index is sitting at 646, but so far has failed to overcome the critical 650 level. A major break through 650 would signal a very bullish disposition for all semiconductor-related stocks and provide the confirmation we're looking to attain. ***March contracts expire in two weeks*** BUY CALL MAR-30 PQF-CF OI=284 at $8.00 SL=5.75 BUY CALL MAR-35 PQF-CG OI=971 at $3.63 SL=2.00 BUY CALL APR-30 PQF-DF OI= 10 at $9.00 SL=6.25 BUY CALL APR-35 PQF-DG OI=148 at $5.25 SL=3.25 BUY CALL APR-40*PQF-DH OI= 5 at $2.75 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=PLAB LOW VOLATILITY: ELY - Callaway Golf Company $26.09 +0.82 (+1.09 last week) Ely Callaway founded Callaway Golf Company in 1982. First called Callaway Hickory Stick USA, Inc., the Company specialized in hickory-shafted putters and wedges that were "Demonstrably Superior and Pleasingly Different." The Company designs, develops, manufactures and markets high quality, innovative golf clubs and golf balls. Callaway Golf Company employs about 2,600 people worldwide, most of whom are housed in nine buildings on the Carlsbad, Calif. campus with a combined area of nearly 800,000 square feet. The Company's principal products include metals, woods, irons, putters and golf balls. It appears that even a slowing economy cannot abate the popularity of golf, helping shares of Callaway to stay in 52-week high territory. The success of high margin products such as its Rule 35 golf ball, which the company started making last year, along with new endorsement contracts with high profile golfers, has ignited investor interest in the stock. Since hitting a low of $11.88 last August, ELY has been advancing steadily higher in a beautiful lower-left to upper-right ascending pattern, with volume to the upside these past few weeks more than doubling to support the move. An entry on strength may be gained if the buyers step in tomorrow, taking the stock to new 52-week highs. For higher risk players looking to enter on a dip, support can be found at the 5 and 10-dma at $25.14 and $24.59. These two levels are reinforced by horizontal support at $25 and $24. We are placing a protective stop just below at $23.75. Make sure that ELY continues to close above this point. ***March contracts expire in less than two weeks*** BUY CALL MAR-25 ELY-CE OI= 47 at $1.45 SL=0.75 BUY CALL APR-25 *ELY-DE OI=132 at $2.25 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=ELY ************* NEW PUT PLAYS ************* AGGRESSIVE: SEBL - Siebel Systems Inc. $29.00 -4.63 (-8.00 this week) Siebel Systems Inc. is the world's leading provider of ebusiness applications software. Siebel Systems provides an integrated family of ebusiness applications software enabling multichannel sales, marketing and customer service systems to be deployed over the Web, call centers, field, reseller channels, retail and dealer networks. Siebel Systems' sales and service facilities are located in more than 37 countries. While most technology stocks enjoyed long awaited gains in today's rally, SEBL experienced heavy selling on 39 million shares, which is three times the average daily volume. The heavy selling began last Friday, when Oracle's lowered sales and earnings estimates spilled over into other ebusiness software applications companies. SEBL opened last Friday with a gap down of over 6 points, and the bad news continued this week. SEBL suffered the indignity of downgrades from a list of influential Wall Street firms over the last few days, including CSFB, Merrill Lynch, Morgan Stanley Dean Witter, Goldman Sachs, and Robertson Stephens. Robertson Stephens analyst Alex Baluta stated that SEBL is likely to face a challenging environment at the end of the quarter, as companies delay purchases in the uncertain economic environment. Adding to the problem, SEBL often closes 50% or more of its business in the last month of the quarter. As if this weren't bad enough, The Wall Street Journal reported in an article on Tuesday that SEBL's sales chief had left the firm and taken a position with Vignette. This only served to increase investors nervousness with an already weakened stock. While SEBL has been in a long term down trend since November, today's fall may have suffocated any hopes of a recuperation with the Nasdaq. SEBL is making a pattern of failed rallies from lower highs, and is now at a new 52-week low. Following this pattern, the most likely near term move is a roll over from $29, which could lead to the next support level at $27 dating back to October of 1999. The next strong support level is at the $20 level. Traders could consider taking positions at current levels, or at a drop below $28.50 on heavy volume. Monitor the software index for weakness, and set stops at $32. **March contracts expire in two weeks** BUY PUT MAR-35 SGW OG OI=841 at $7.13 SL=5.00 BUY PUT MAR-30*SGW-OF OI=716 at $3.63 SL=1.75 http://www.premierinvestor.com/oi/profile.asp?ticker=SEBL BRCM - Broadcom Corporation $48.88 +0.75 (+1.56 this week) Broadcom Corporation is a provider of highly integrated silicon solutions that enable broadband digital transmission of voice, video and data to and throughout the home and within the business enterprise. These integrated circuits permit the cost-effective delivery of high-speed, high-bandwidth networking using existing communications infrastructures that were not originally designed for the transmission of broadband digital content. Strength in the Chip sector recently has helped to lift the NASDAQ higher. A rash of earnings warnings yesterday from Semiconductor companies across the board did not cause the customary sell-offs and in fact, stocks such as XLNX, CY, LSI, VTSS, and TQNT advanced in the face of their warnings. This rallying on bad news was enough for bring out the bulls, who were more than happy to assume that the worst has been priced into the Semiconductor stocks. Earnings shortfalls, falling sales and inventory build-ups all add up to a negative picture. While it can be argued that the market looks ahead, these problems added to an uncertain economy mean the lack of visibility ahead. That being said, BRCM has been weak relative to its peers, even in the recent bounce. Every time the stock has reached a level of support, it has fallen below on increased selling volume. Negative comments and ratings by Banc of America Securities, Merrill Lynch, Solomon Smith Barney, WR Hambrecht and most recently SG Cowen have also provided a drag on the stock price. What's more, the company has been under legal pressure, as a Wall Street Journal article published last week questioned the legitimacy of recent insider stock sales. Failed rallies above resistance at $50 and our stop price of $52 could allow aggressive traders to take a position while a break below the 5-dma at $47.71 would allow the more risk averse to make a play. As always, correlate entries with movement in the Philadelphia Semiconductor Index (SOX) as well as the NASDSAQ 100 (QQQ). ***March contracts expire in two weeks*** BUY PUT MAR-50*RCQ-OJ OI=1484 at $5.38 SL=3.50 BUY PUT MAR-45 RCQ-OI OI=1549 at $3.00 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=BRCM ********************** PLAY OF THE DAY - CALL ********************** EDS - Electronic Data Systems $65.32 +0.19 (-1.13 this 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. Most Recent Write-Up With resistance overhead at $67.50 and then at $68, shares of the e-business solutions giant have moved sideways so far this week on declining volume. Yesterday, EDS pulled back $1.32 or about 2 percent on lighter than average volume. Today, an attempt to break through $67.50 was denied, as there was just not enough buying pressure to back the move. The good news is, the stock continues to make higher lows, so its uptrend is still firmly intact. Support is also building, with the 5 and 10-dma (at $65.06 and $63.74) both edging ever higher. Bounces off these two moving averages along with horizontal support at $65 and our stop price of $64 may provide aggressive traders with potential entry points. Conservative traders will want to wait for the buyers to return in force, powering EDS above $68 with conviction before taking a position. Keep an eye on rivals CEFT and SDS to gauge sector sentiment when making a play. Comments EDS gapped up and drifted lower today on light volume. We are expecting that the volume that has pushed EDS higher will be returning after two days of minor profit taking. Today, the stock encountered resistance at $67.50, a level which was established on Friday. To play EDS, look for bounces from intraday support at $64.50 accompanied by strong buying volume. The 10-dma at $63.75 should also provide added support. A break above $67.50 could attract buying that drives the stock toward $70. ***March contracts expire next week*** BUY CALL MAR-60 EDS-CL OI=1242 at $5.80 SL=4.00 BUY CALL MAR-65*EDS-CM OI=3354 at $2.25 SL=1.00 BUY CALL APR-65 EDS-DM OI= 500 at $4.59 SL=2.75 BUY CALL APR-70 EDS-DN OI=1019 at $2.59 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=EDS ************************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=1761 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ No Conviction in the Rally! Stocks moved higher for the second consecutive session but the major averages ended well below their peak levels as investors worried about declining corporate profits. Monday, March 4 Stocks moved higher today as investors ignored a slew of profit warnings in their search for discounted issues. The NASDAQ was 25 points higher at 2,142 at the close while the Dow finished up 95 points at 10,562. The S&P 500 index rose 7 points to 1,241. Trading volume on the NYSE was a light 926 million shares, with advances beating declines 1651 to 1407. Activity on the NASDAQ was also meager with 1.49 billion shares exchanged. Technology declines edged advances 1,846 to 1,810. In the bond market, the 30-year Treasury fell 6/32, pushing its yield up to 5.37%. Sunday's new plays (positions/opening prices/strategy): Honeywell (NYSE:HON) MAR50C/MAR47C $0.50 credit bear-call Invest Tech. (NYSE:ITG) MAR45P/MAR50P $0.45 credit bull-put Min. Mining (NYSE:MMM) MAR100P/M105P $0.40 credit bull-put Dupont (NYSE:DD) APR50C/APR40P $0.20 debit synthetic Cima Labs (NASDAQ:CIMA) MAR75C/MAR45P $0.88 credit strangle Most of our new positions offered favorable entry opportunities during the session. The bullish plays in Investment Technology and Minnesota Mining provided acceptable opening prices that were easily improved through separate orders. Dupont moved higher at the open and never retreated, providing only a brief window for adept traders in early trading. The option premiums in Cima Labs were slightly lower than Friday's quotes, due to declining time value and the overall credit was not as high as we anticipated. Portfolio Activity: The market rebounded today after a series of recent declines amid optimism from two of Wall Street's biggest brokerages. Positive remarks from Merrill Lynch and Morgan Stanley Dean Witter, both of which advised clients to consider adding to their portfolios at these depressed levels, were largely responsible for the day's bullish activity. Citing the exaggerated declines of the past few weeks and the Fed's campaign to lower interest rates, Merrill Lynch moved its U.S. equity exposure to "overweight," based on a belief that most of the negative profit outlook is already priced into stocks. In spite of the bullish comments, trading volumes were thin in one of least active days of 2001 as New York City and the rest of the northeastern United States braced for a major storm with extreme winter weather forecast for the region. On the Dow, Caterpillar (NYSE:CAT), Boeing (NYSE:BA) and United Technologies (NYSE:UTX) led the blue-chip gainers while Coca-Cola (NYSE:KO), SBC Communications (NYSE:SBC) and Merck (NYSE:MRK) all declined. Among technology issues, chip stocks rose even as new profit warnings were announced by Cypress Semiconductor (NYSE:CY), Vitesse Semiconductor (NASDAQ:VTSS) and LSI Logic (NYSE:LSI). In the Internet sector, Amazon.com (NASDAQ:AMZN) surged 25% after a British newspaper reported that Amazon.com and Wal-Mart (NYSE:WMT) are in talks to form a "strategic alliance." Networking shares also rallied, with Cisco (NASDAQ:CSCO), Juniper Networks (JNPR) and Nortel (NYSE:NT) moving higher during the session. In the broader market, most sectors enjoyed favorable gains but retail, financial and biotechnology were among the weakest segments. The Spreads Portfolio experienced bullish activity in a number of technology groups but blue-chip shares were the most popular issues during the session. Bellwether companies including AT&T (NYSE:T), Intel (NASDAQ:INTC), Hewlett-Packard (NYSE:HWP), and Microsoft (NASDAQ:MSFT) led the upside movement and strength in these issues helped propel the broader markets to an oversold rally. Among industrial stocks, transportation companies were upbeat and the momentum helped Continental Airlines (NYSE:CAL) move back to the $45 range, near our sold strike in the neutral credit strangle. At the same time, issues in defensive sectors also edged higher and that means we will have to keep an eye on bearish positions in American Home Products (NYSE:AHP), Chiron (NASDAQ:CHIR) and Avery Dennison (NYSE:AVY). In the small-cap category, Solutia (NYSE:SOI) and Olin (NYSE:OLN), both chemical companies, continued to rally and recent synthetic positions in those issues have performed well. Our new time-selling issues, Advanta (NASDAQ:ADVNB), Insignia Financial Group (NYSE:IFS) and Ocular Sciences (NASDAQ:OCLR) ended the day with little change and that bodes well for the success of those positions. Among premium-selling candidates Aphton (NASDAQ:APHT) and Alexander & Baldwin (NASDAQ:ALEX) edged lower and any further downward movement will provide unavoidable exit signals, based on recent technical indications. The only bright spot in that category was Time Warner Telecom (NASDAQ:TWTC), which rallied over $3 on strength in the telecom industry, and remains comfortably in the middle of our profit envelope. Tuesday, March 6 Stocks moved higher for the second consecutive session but the major averages ended well below their peak levels as investors worried about declining corporate profits. The NASDAQ finished 61 points higher at 2,204 and the Dow ended 28 points higher at 10,591. The S&P 500 index was up 12 points to 1,253. Trading volume on the NYSE reached 1.09 billion shares, with advances outpacing declines 1,861 to 1,191. Activity on the NASDAQ was average at 1.98 billion shares exchanged, with advances beating declines 2,305 to 1,401. In the bond market, the U.S. 30-year Treasury fell 4/32, pushing its yield up to 5.37%. Portfolio Activity: Investors pushed the market higher for a second straight session, ignoring earnings worries while continuing to hunt for bargains in the technology industry. Among NASDAQ issues, hardware and semiconductor shares led the charge while industrial stocks were supported by interest in the financial, retail, oil service and airline segments. Defensive stocks, including utility, consumer products, paper and precious metals generally retreated. Whether the recent rally proves to be sustainable over the long haul is yet to be seen, but the bullish activity has helped a number of positions in the Spreads Portfolio return to profitability. In addition, today's upside momentum provided excellent "roll-out" opportunities in many of our long-term plays including Hewlett Packard (NYSE:HWP), Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT) and AT&T (NYSE:T). Motorola (NYSE:MOT) also displayed potential, climbing to a high near $18.50 near midday. As we mentioned in last Sunday's edition, some of the Covered-calls with LEAPS plays will benefit from cost-averaging (with additional long options) to recover lost profit potential. Time-selling positions in the industrial group have also enjoyed the recent recovery rally and Navistar (NYSE:NAV) and Atrix Laboratories (NASDAQ:ATRX) offered profitable exits during the session. Among the neutral "premium" plays, Aphton (NASDAQ:APHT) and Alexander & Baldwin (NASDAQ:ALEX) rebounded from recent lows, but they are far from a full recovery and we will continue to monitor those positions closely. Stocks in the small-cap category performed well and Sicor (NASDAQ:SCRI) has been a pleasant surprise, up almost $1 since we selected the issue for a bullish play last week. Other stocks in that group have been excellent candidates for calendar spreads and today's movement in Insignia Financial Group (NYSE:IFS) was beneficial as it brought the issue back to the sold (short) strike at $12.50. Unfortunately, the downward trend may just be starting and with the favorable premiums for April options, an adjustment may soon follow. Ocular Sciences (NASDAQ:OCLR) was another issue that slumped during the session, but the stock appears to have good short-term support near $16 and that's the area we will use to identify future signs of a failed rally. Questions & comments on spreads/combos to ray@OptionInvestor.com ****************************************************************** - NEW PLAYS - One of our readers asked for some candidates in the Oil Services industry, based on the recent bullish momentum in the sector and its hedge potential against future declines in the broader market. All of these plays offer a favorable risk/reward outlook, however they should be evaluated for portfolio suitability and reviewed with regard to your attitude toward the technical character of each issue along with your strategic approach and trading style. ****************************************************************** AHC - Amerada Hess $76.69 *** Reader's Request! *** Amerada Hess (NYSE:AHC) explores for, produces, transports and sells crude oil and natural gas. The company's exploration and production activities take place in the United States, United Kingdom, Norway, Denmark, Gabon, Indonesia, Azerbaijan, Thailand, and in certain other countries. The company also manufactures, purchases, transports and markets refined petroleum and other energy products. The company owns one-half of a refinery joint venture in the U.S. Virgin Islands and another refining facility, terminals and retail outlets located on the East Coast of the United States. Shares of oil and natural gas companies rallied again today as optimism over OPEC's next production move helped a number of companies in the sector achieve record levels. Amerada Hess was one of these issues, climbing to an all-time high near $77 amid renewed strength in the industry. Despite the increasing share prices, analysts continue to be bullish on the group suggesting that the refiners will easily beat consensus estimates for the first quarter and will remain upbeat regarding prospects for the rest of the year. Merrill Lynch is one of the more optimistic backers of the refining segment, based on the recent recovery in profits from the majors' refining-and-marketing operations that produced a number of positive revenue surprises. The technical indications in AHC are also favorable and this position offers a reasonable risk/reward ratio for traders who are bullish on the issue. PLAY (conservative - bullish/credit spread): BUY PUT APR-65 AHC-PM OI=1 A=$0.55 SELL PUT APR-70 AHC-PN OI=25 B=$1.10 INITIAL NET CREDIT TARGET=$0.60-$0.70 ROI(max)=14% B/E=$69.40 http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=AHC ****************************************************************** WFT - Weatherford International $56.85 *** Reader's Request! *** Weatherford International (NYSE:WFT) is one of the world's top providers of equipment and services for the drilling, completion and production of oil and natural gas wells. Its operations are conducted in over 50 countries, and the company has more than 300 service and sales locations in substantially all of the oil and natural gas producing regions in the world. Their products and services are divided into separate operating businesses: Drilling and Intervention Services, Completion Systems, Artificial Lift Systems and Compression Services. Stocks in the Oil Service sector are performing very well and Weatherford is one of the top companies in the industry. The company's earnings report, posted in late January, reflects that fact as revenues for the fourth quarter of 2000 increased 44% over the $372.6 million reported in the fourth quarter of 1999. Fourth quarter 2000 earnings, excluding special charges, reflect an improvement of 372% over the prior year's earnings of $7.5 million. Sequentially, the company's fourth quarter results, excluding special charges, improved significantly over the third quarter with operating income up 53% on higher worldwide activity levels in drilling and production for oil and natural gas. WFT's performance reflected these trends and was further aided by the positive impact that industry demand is having on pricing for its products and services. Weatherford is also benefiting from the ongoing introduction of new products and services as well as the addition of new capacity and the company is well-positioned to meet the rising equipment needs in the industry. Traders who favor the fundamental outlook for the company and the bullish technical indications for its share value can speculate on the future movement of the issue with this synthetic position. PLAY (speculative - bullish/synthetic position): BUY CALL APR-65 WFT-DM OI=3 A=$1.30 SELL PUT APR-50 WFT-PJ OI=48 B=$1.05 INITIAL NET DEBIT TARGET=$0.00-$0.12 TARGET PROFIT=$1.00 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,700 per contract. http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=WFT ****************************************************************** PTEN - Patterson Energy $39.75 *** Reader's Request! *** Patterson Energy (NASDAQ:PTEN) provides domestic land drilling services to major and independent oil and natural gas companies. The company focuses its operations in Texas, New Mexico, Oklahoma, Louisiana and Utah. The company currently has a drilling fleet of 119 drilling rigs, 114 of which are currently operable. The company is also engaged in the development, exploration, purchase and production of oil and natural gas, and provides a number of contract drilling fluid services to oil and natural gas operators. Among domestic drilling companies, Patterson is one of the best fundamental candidates with fourth quarter earnings revealing a profit of $0.32 a share, far beyond the consensus estimate of $0.22 and well above last year's penny a share. The company's revenues were up 90% year-over-year on new demand for land-based drilling, which was fueled by the rising costs of natural gas. The company is growing and to meet the increasing need for drill rigs, Patterson Energy and UTI Energy (AMEX:UTI) recently agreed to a stock-swap merger, creating the nation's second-largest oil driller and 18th-largest oil-field company. UTI Energy is also enjoying financial success, recently posting earnings of $0.23 a share, seven cents above the Street's consensus, on an 80% surge in revenue. The company's future earnings estimates, along with those of PTEN, have been revised higher by up to 25% in the past month and that provides a great example of the strength in the industry. This combination position simply offers a way to speculate on the future performance of one of the top companies in the Oil Service sector. PLAY (moderately aggressive - bullish/credit spread): BUY PUT APR-30 NZQ-PF OI=0 A=$0.50 SELL PUT APR-35 NZQ-PG OI=0 B=$1.19 INITIAL NET CREDIT TARGET=$0.75-$0.81 ROI(max)=17% B/E=$34.25 http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=PTEN ************************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=1770 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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