The Option Investor Newsletter Sunday 03-11-2001 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/031101_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** WE 3-10 WE 3-2 WE 2-23 WE 2-16 DOW 10644.62 -213.63 10466.31 + 24.41 10441.90 -357.92 + 18.37 Nasdaq 2052.78 -115.95 2117.63 -144.88 2262.51 -162.87 - 45.59 S&P-100 633.40 - 18.06 633.89 - 8.75 642.64 - 32.88 - 6.93 S&P-500 1233.42 - 31.32 1234.18 - 11.68 1245.86 - 55.67 - 13.23 W5000 11331.73 -282.18 11374.40 -126.30 11500.70 -528.90 - 94.71 RUT 473.65 - 7.84 476.88 - .82 477.45 - 21.83 + 2.23 TRAN 2942.17 - 75.12 2915.19 - 14.88 2930.07 - 64.71 - 18.64 VIX 29.35 + 2.89 30.86 + .52 30.34 + 5.26 - .07 Put/Call .83 .80 .71 .89 ****************************************************************** Confusing At Best What's a trader to think? So many pieces of the economic puzzle were revealed on Friday, some contradicting others, yet we're no closer to clearer visibility. Corporate America is saying one thing while economic data tells us another with Non-Farm Payrolls coming in stronger-than-expected. Even as Cisco (NASDAQ:CSCO) and Intel (NASDAQ:INTC) portend a gloomier outlook for 2001, the 135,000 net new jobs in February puts to rest any ideas that the economy is down for the count. It's enough to drive a trader crazy! Regardless, the markets sold-off strongly fueled by INTC's third warning in a row, leaving a cloud of confusion in its wake. The INTC effect predictably dragged both the NASDAQ and the Dow (INDU) to triple digit losses. While the warning wasn't entirely unexpected, the magnitude of the revenue reduction was what frightened the markets. 25% lower than originally expected! Then early Friday, a report hit the wires that networking giant CSCO would be cutting 5% of its workforce, or 2400 jobs. As the stock traded to new 52-week lows, the company denied that there would be any "major lay-offs," citing a typical reduction in seasonal and temporary employees. It wasn't long until the company came out after the bell to give the full story. Indeed, they would plan to cut temporary workers as well as 3000 to 5000 regular employees, bringing the total reduction near 11% of its workforce over the year. Furthermore, CSCO said it would take a fiscal 4th quarter charge of $300 mln to $400 mln. CSCO CEO John Chambers, who has been quite vocal about the slowing economy and the FOMC's monetary policy decisions, said that he sees "early signs" that the slowdown is spreading globally and that "visibility is very limited." Clearly, with tech bellwethers continuing to warn about a slowing economic environment and former high-fliers withering toward delisting, monetary easing is the relief for which everyone is calling. The confusion comes from today's job report that indicates that the economy is still moving ahead, which some suggest means less of a need for interest rate cuts. It was reported today that Former Fed Governor Lyle Gramley disagrees. Today he stated that he sees a 50 bp rate cut at the FOMC meeting on March 20th. While I believe that we can be confident the Fed will cut rates on the 20th and a short-term relief rally will ensue, we need to prepare ourselves for similar comments that we heard last week from these tech bellwethers. When Chambers has difficulty gauging his business, we must take heed. The NASDAQ traded to two-year lows again today, slipping 115.95 points to finish at 2052. Of course, weakness in the Semiconductor sector(SOX.X) led the decline as I mentioned in Thursday's Wrap. The key support level for that sector was 600, which was violated with a close of 592 on Friday. Renewed fear about where the bottom may lie for the SOX.X created panic selling in many semi names: INTC(-3.81), Applied Materials(NASDAQ:AMAT) (-3.56), Novellus(NASDAQ:NVLS) (-3.56), and KLA-Tencor(NASDAQ:KLAC) (-3.69). The Intel news was quite a blow to the NASDAQ because of the integral role which the SOX.X plays in leading the tech index. Looking at the NASDAQ chart above, you can see that March has been an extremely difficult month to trade thus far. It came in like a lion, only to gap down the following day. These opening gaps can be very dangerous if you are on the wrong side of the market, and this kind of choppy trading carries much overnight risk. After Friday mornings gap lower, the NASDAQ found some short-lived bid support as traders covered their shorts. However, no one wanted to be long going into the weekend and the bids disappeared. It would seem likely that the NASDAQ goes for a test of 2000 next week. It is difficult to say if Monday will be the day, as the above chart suggests erratic trading. My gut feeling is lower, given the troubling economic outlook for both INTC and CSCO. Right now there is no fundamental reason to be buying tech stocks. On the flipside, the shorts must assess the reward of shorting stocks that have been badly battered versus the risk of getting squeezed in a relief rally. We must stick with what works and put trading has been providing profits. Newport (NASDAQ:NEWP) and Broadcom (NASDAQ:BRCM) currently highlight our put list, down $13.38 and $9.25, respectively, since picked. Put players should be extra careful, though, in an oversold market. It was interesting to see an IPO venture into the choppy water of the NASDAQ on Friday. Following Seattle Genetics' (NASDAQ:SGEN) debut earlier in the week, which is partially backed by Bill Gates, Loudcloud (NASDAQ:LDCL) was closely watched by Silicon Valley venture capitalists. LDCL, the Internet infrastructure services IPO is the work of Netscape co-founder Mark Andreessen. It priced 25 mln shares at $6 to raise a cool $150 mln. LDCL finished up a mere three cents in its lackluster debut. Wall Street certainly hopes for the best in the IPO market as investment banking deals and revenues have grinded to a halt in the past year. Much of the current lay-offs occurring at big brokerage houses are coming from the investment banking arms. The INDU's five day winning streak came to an end on Friday as the index retraced some of its recent gains. Even though it lost 213 points on Friday, or 2%, the INDU was up 178 points on the week. It would have been normal to see profit taking in the INDU after its recent performance, especially before the weekend, yet INTC's negative comments exaggerated the decline. Those same comments caused weakness in the PC sector, namely IBM (NYSE:IBM) which lost $7.18. The tech selling caught up with Dow component Microsoft (NASDAQ:MSFT) as well for a $2.56 loss. As mentioned on Thursday, weakness in the Financials continues to make it difficult for the broader market to advance. The Securities Broker/Dealer Index (XBD.X) lost 5% on Friday, breaking through key support at 500. With an anticipated rate cut on the 20th, we would expect to see some nibbling in the Financial names next week, especially as the index approaches longer term support. Looking forward to this Expiration Week, we certainly can expect volatility. Friday is triple-witching, so traders will be rolling positions forward and squaring up before the following Tuesday's FOMC meeting. Furthermore, Friday brings the PPI which both traders and the Fed will be fixated on. It is likely that we will see a test of 2000 on the NASDAQ next week. As I said above, playing the downside has proved to be working and it would seem from Friday's negative tone that the tech index does indeed go lower on Monday. With that said, be on the look out for the bulls and an oversold relief rally. Put trades should be accompanied by stop loss orders. We have all witnessed the power of these types of relief rallies, further perpetuated by short covering. But until the market tells us different, we will continue to short weak tech issues and seek out low volatility call plays. With resistance at 2250 on the NASDAQ, the short-term trend will remain down until that level is broken. I spoke with Jim on Friday and he feels that an oversold rally will set-up some Lottery call plays for March contracts(see Editor's Plays). Knowing how choppy the market has been, heed Jim's words and enter passively, exit aggressively. This type of market requires discipline and stop losses. Trade smart. Editor's Note: The LEAP section is undergoing some exciting changes so that we can be ready to capture entry opportunities once the market recovers. We will be moving to a more actively managed LEAP portfolio, so check out the section for more details. Matt Russ Editor ************************************ Spring Options Workshop and Bootcamp April 5th-9th, Denver Colorado ************************************ OptionInvestor is proud to announce our third annual Spring option workshop in Denver Colorado. This power packed five-day event is structured to fully educate you on advanced option strategies and will make you a better and more profitable trader. If you attended the March Denver Expo last year and thought it was the best function you had ever attended...you haven't seen anything yet! Great food, entertainment, education and just plain fun in sunny Denver. The biggest complaint in March was the massive weight gain experienced by the attendees from the gourmet menu. We know how to put on a function. Ask anyone who came last March! Current speakers include: Tom DeMark, author of "Day Trading Options", "Science of Technical Analysis" and "New Market Timing Techniques" and manager of a $4 billion hedge fund. John Najarian, "Doctor J" as he is known on the CBOE 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=1780 ************************************************************** ************** EDITOR'S PLAYS ************** Expiration Week Lottery Candidates It's that time again, Expiration Week! Cheap premiums and the opportunity for high percentage moves. It's like tip-toeing on a razor's edge, time decay at exponential levels and high gamma March contracts. This high gamma component quickly adds value to options coming into the money, which is exactly what we are trying to take advantage. The NASDAQ is in oversold territory and one would think that a relief rally next week is in the cards. Most of the tech issues have bloodied charts and many of them will find bids when the NASDAQ bounces. I have narrowed it down to two best stocks that have slightly better technicals and received some buying interest going into Friday's close. We'll be looking to purchase slightly out-of-the-money calls to capture quick gains in recovering NASDAQ stocks, if for only a mere moment. While downside risks continue to prevail in the broader market, we all know the power of relief rallies, squeezing the shorts to boost the buying in many beaten down issues. These types of Lottery Plays should be played with a small percentage of total capital, as they carry higher risk and faster time decay with Friday's triple witching. ************************* CIEN - $65.13 (-1.06 last week) Ciena quite possibly is my favorite stock to trade options on, especially during Expiration Week. It can make leaps and bounds to the upside. At the same time, it can fall prey to overall weakness of the market, and fast. CIEN typically leads the NASDAQ. When the overall NASDAQ finds a bid and volume increases, CIEN can give you those massive percentages. Currently, the stock has a long-term downtrend from late-October, the red line on the chart below. The blue support line at $60 represents solid support which was tested in mid-December. But for the past two weeks, CIEN has been trapped between $78 and $65. It very well may bounce from $65 and make its way back to the higher end of the range. If this occurs, watch for sellers near $67 and look at the March 70 calls. However, if CIEN pulls back further to the longer term support at $60, a bounce from that level with a NASDAQ turning positive would give entry into the March 65 calls(which will be cheaper than listed at that time). Failure to hold $60 and continuing weakness in the NASDAQ would be a sign to be cautious. This type of trade requires discipline, stop losses, and constant monitoring. If you are wrong on the entry, cut your losses early and look for your next opportunity. Keep a close eye on a NASDAQ test of 2000. BUY CALL MAR-70 UEE-CN OI= 3171 at $2.31 SL=2.00 BUY CALL MAR-65 UEE-CM OI=10159 at $4.38 SL=3.88 ******** MUSE - $36.87 (-4.13 last week) The buying that went on in MUSE on Friday certainly bucked the NASDAQ trend. After an early downward forecast off the open, volume came in at the $35 level. This $34 - $35 level is KEY support for MUSE that dates back to April 2000. It was retested in May 2000 and then in November 2000, each time a rally ensued. A break below $34 in conjunction with the NASDAQ deterioration and I would stay out of this Lottery call play. But, this support level held on Friday as traders defended positions once again. If the NASDAQ has a positive sentiment on Monday, MUSE will likely continue with its momentum from last week. Playing the March 40 calls at that point would bring increasing volatility and appreciation as the stock rises toward the strike. Watch previous support at $39 as a new resistance level. A move above $39 - $40 and one could consider the March 45 calls, but only if the NASDAQ is in full relief rally mode. This is the week we wait for as traders so initiate positions with the broader market trend and keep tight stops to avoid painful reversals. Once again, cut losses early to preserve capital for a better entry. BUY CALL MAR-40 QVM-CH OI=619 at $2.13 SL=1.88 BUY CALL MAR-45 QVM-CI OI=258 at $0.94 SL=0.63 Trade smart, Matt Russ Editor *************************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=1800 ************************************************************ **************** MARKET SENTIMENT **************** Markets Mauled Again By Austin Passamonte Thursday night at 4:00pm actually had us feeling confident about a sustained relief rally heading into next week. The Dow closed above solid resistance at 10,700 and 10,800. Daily chart signals on all the big indexes were moving into positive territory, especially on the SOX. Nasdaq chart signals were still in oversold range as the index traded within the lows of its recent range. Triple-Witch expiration week was ahead, traditionally a bullish stretch. Investor sentiment had improved; seven chip-sector companies pre-warned just days ago and rallied on this news. Excuses to buy were emerging from the press. Fed governors had publicly stated that they were much more concerned with recession than inflation right now. Fed-Fund futures are pricing in a 100% chance for .50 basis-point cut on the 20th with 35% chance of another .25 basis on top of that. And the markets were oversold to a degree not seen in decades besides. The above paragraphs are long but could be several times their size if we listed all technical and fundamental reasons why the markets should go up instead of down, at least for a bit. Wasted words. Intel warned, brought a few friends along for the confession and promptly sold off in the process. This time there was no shrugging it off as happened mere days ago. Still, we just traded through the past two weeks when markets tanked on both Thursdays and Fridays only to bounce and recover later in the session. Buying their bottoms and selling a few hours later were four sweet & easy bonanzas for nimble day traders and it looked like we might go five for five. As a matter of fact, pre-market futures rallied to their highest point at 8:29am EST in hopes of a favorable non-farm payroll report. Had that event shown a job decrease, markets may easily have turned positive right from there. That didn't happen. The report was stronger than expected and futures prices promptly fell to session lows. And the markets never looked up from there. As goes the SOX, so follows the Nasdaq. Chips are the proxy leader until another sector emerges from here. Fiber-optics once had such promise but not these days. This picture is mixed to bearish. The index broke below its 20-DMA, fast-bar stochastic is turning down and RSI already did. A break below the 570 level will retest recent lows or make new ones post-haste. Same for the Dow. If it doesn't close above Friday's lows on Monday, a retest of 10,300 is all but guaranteed. Failure of that test will allow free-fall to -10,000 level and serious bullish damage to be kind. The SPX has suffered from the financial sector worst and tech sector secondly. Further damage could send it plunging well below recent support near the 1215 level before a bottom is found. Traders did not hit the panic button on Friday and VIX is far from spiking above 34.00+ to signal extreme fear. It will likely pop above the 35.00 level next time around and major indexes will be trading far lower than they are right now. Summation? We don't know. Depends on what time frame we're talking about. For sure we have not seen ultimate market lows and that's a given. Such being said, this week has all the makings for one of the most extremely volatile stretches we've faced in at least a year. Short-term charts are buried in oversold and Friday's action was excessive. Foreign money will return to the S&P 500 futures market on Monday and roll-outs into back-month contracts prior to expiration could push the markets up this week. Once again, S&P 500 commercials continued to short the latest action as we knew they would. Reports out of the pit were that traders expected a sizable relief rally and are surprised it died so fast if indeed it has. They are still betting the farm that we post lower lows going forward than any that now lay behind us. Rising volume & open interest into Thursday and Friday on the S&P 500 futures market suggests the shorting continued then as well. Commercials make up the bulk of that O/I and it would have fallen if they were covering. Not so according to futures market chart data as of Friday's close. By the time they begin to close these all-time historical shorts no one will likely care. This could continue for some time to come. Predominate sentiment heard around us is bearish. "Short everything in sight" mantra. That may well be how most traders feel these days as investors continue to capitulate as well. It still boggles our mind that the herd all bought INTC one year ago today when analysts upgraded it with a $155 price target, and 364 days later couldn't dump it fast enough at $30. We could all get filthy rich just fading those famous Wall St analysts: buy call LEAPS on multiple downgrades and put LEAPS on multiple upgrades and hang on. Have you seen such a method fail over time so far? We sure haven't! Best guess for what it's worth (crystal ball has been cloudy this month)? We will chop violently this week ahead and close at higher levels next Friday night than last. How we get there could get pretty ugly indeed. The Fed will cut interest rates .50 basis the following Tuesday and markets then slide from there. We seem to be setting up for a major market event to the downside and soon. Only two factors that could prop things up are option expiration and the Fed but neither are guarantees of that. Once again it could be a highly profitable period for full-time day traders but calamitous for the rest. Buy & hold in either direction has been an effort of futility of late except when entries are perfectly hit and exits are reasonably fast. Time is certainly the enemy these days. The wildcard to a washout event is fading belief that the Fed could cut .25-basis early this week, see how the market reacts and then cut another .25 or at most .50 basis again on the 20th. This seems to be what the Fed-Fund futures are hinting at as well. It would be quite like Greenspan to scale into two small cuts instead of one big one with mistaken hope that the first .25 would suffice. Fat chance on that one being enough! Public sentiment is their primary concern and stock markets are the economy. Stock markets are the savings & retirement plan and that won't change overnight. Allow these markets to plummet straight down and inflation/domestic recession will be the least of Fed worries: global recession or far worse lies just beyond Dow 9,000 and Nasdaq 1,500 without question. Traders must take great care in playing the markets going forward from here. Dial up last year's March & April charts to see what our future may hold. The same measures of extreme indecision were rampant then and now. We went from bullish to bearish within days and often within one session. These are nervous markets that go up hard & down easy, so play the daily or hourly trend if at all, protect capital and grab modest profits when offered. They may be fleeting indeed to either direction at any point in time. ******** VIX Friday 03/09 close: 29.35 VXN Friday 03/09 close: 70.70 30-yr Bonds Friday 03/09 close: 5.31% 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 (03/09/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 670 - 655 16,548 5,356 3.09 650 - 635 8,337 11,872 .70 OEX close: 633.40 Support: 630 - 615 1,125 11,102 9.87 610 - 595 236 10,507 44.52 Maximum calls: 700/ 6,857 Maximum puts : 560/10,038 Moving Averages 10 DMA 644 20 DMA 657 50 DMA 682 200 DMA 745 NASDAQ 100 Index (NDX/QQQ) Resistance: 54 - 52 80,305 23,251 3.45 51 - 49 136,936 63,475 2.16 48 - 46 48,379 66,279 .73 QQQ(NDX)close: 45.10 Support: 44 - 42 3,357 13,742 4.09 41 - 39 1,624 21,167 13.03 38 - 36 233 7,186 30.84 Maximum calls: 50/93,524 Maximum puts : 48/42,656 Moving Averages 10 DMA 48 20 DMA 51 50 DMA 58 200 DMA 79 S&P 500 (SPX) Resistance: 1300 14,819 17,030 .87 1275 18,569 24,601 .75 1250 17,645 23,652 .75 SPX close: 1233.42 Support: 1225 5,495 13,673 2.49 1200 3,002 17,297 5.76 1175 242 8,785 36.30 Maximum calls: 1350/47,396 Maximum puts : 1325/42,497 Moving Averages 10 DMA 1249 20 DMA 1271 50 DMA 1311 200 DMA 1399 ***** CBOT Commitment Of Traders Report: Friday 03/09 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 -2012 -1841 -2960 -4538 Total Open interest % (-19.12%) (-20.19%) (-10.32%) (-16.02%) 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 +91122 +84749 -111638 -101746 Total Open Interest % (+37.69%) (+41.67%) (-14.93%) (-13.36%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: For the second week in a row the Commercials have increased their net-short positions on the S&P 500. In the last two weeks the Commercials have added more than two percent to the short side, this is significant considering they had been holding around 12% net-short for several weeks. 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 03/06 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/031101_1.asp *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1807 ************************************************************ ************* COMING EVENTS ************* For the week of March 12-16 Monday ====== None Tuesday ======= Retail Sales Feb Forecast: 0.3% Previous: 0.7% Retail Sales ex-auto Feb Forecast: 0.1% Previous: 0.8% Wednesday ========= Business Inventories Jan Forecast: 0.0% Previous: 0.1% Thursday ======== Initial Claims 10-Mar Forecast: NA Previous: 370K Export Prices ex-ag Feb Forecast: NA Previous: 0.2% Import Prices ex-oil Feb Forecast: NA Previous: 0.3% Current Account Q4 Forecast:-$117.0B Previous: -$113.8B Philadelphia Fed Mar Forecast: -25.0 Previous: -30.5 Friday ====== PPI Feb Forecast: 0.1% Previous: 1.1% Core PPI Feb Forecast: 0.1% Previous: 0.7% Housing Starts Feb Forecast: 1.60M Previous: 1.651M Building Permits Feb Forecast: N/A Previous: 1.697M Industrial Production Feb Forecast: -0.2% Previous: -0.3% Capacity Utilization Feb Forecast: 80.0% Previous: 80.2% Mich Sentiment -Prel Mar Forecast: 87.0 Previous: 90.6 Week of March 19th ================== Mar 20 Trade Balance Mar 20 Treasury Budget Mar 20 FOMC Announcement Mar 21 CPI Mar 21 Core CPI Mar 22 Initial Claims Mar 22 Leading Indicators ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. 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The Option Investor Newsletter Sunday 03-11-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/031101_2.asp ************** TRADERS CORNER ************** New Subscriber Focus: Setting Up Your Workspace, Part II By Janar Wasito This is a continuation of last week's article on how I set up my workspace. In this article, I describe how I set up my charts. Here is the link to last week's article for quick review: http://www.OptionInvestor.com/traderscorner/030401_2.asp In the middle of my Qcharts set up are two candlestick charts. The bottom one is a 60 minute candlestick chart (red down, green up) with Bollinger bands, 10 day EMA (Marty Schwartz' favorite indicator), and MACD (8, 18, 8), and stochastics (10, (3), 5) studies at the bottom. I am using the Bollinger bands to set the direction of the trade, and a stochastics crossing signal as my primary indicator to enter the trade. The top one is a 15 minute chart with Bollinger bands, and red for down and green for up moves. I use it as a primary indicator (along with a stochastics cross on the 60 minute chart) to enter a trade - I am looking for two candlesticks in the direction of the trade I am waiting for. I would recommend Jack Schwager's book "Getting Started in Technical Analysis" for more information on candlestick entries. Both charts in the middle are set so that any symbol that I touch will appear in those charts (the sym button is green). Both charts are also set so that the interval is locked (intv is red). I mention this because it took me a few days to figure this out, and I want to save our readers the trouble. Just another Ivy league brain having trouble changing the oil in my car. On the right side of my workspace, I have a few more quote sheets. On the top is a quote sheet with the newsletter call plays. They are secondary targets, if the indexes line up. I usually focus on the tech stocks, which is a habit I am trying to break (an expensive one at that), but the method to the madness is that such picks at SEBL or BRCM are part of the Nas 100, and 85% of a stock's movement will be dictated by the movement of the sector, so it makes sense to key these plays off of the index movement. I place a comment column with an entry target price next to the last column, and set alerts at the entry points I want. However, I separate the fast mover plays from the low volatility plays by sub totals, and I am looking for entry points on the slow movers too; that is where simultaneously watching the OEX and BKX will probably come in handy. Below this first quote sheet is a quote sheet with the contract symbols for the options on the call picks I am tracking; again a right click gets me set up for a trade instantly. Below the second quote sheet, I have a quote sheet with companies I am generally following, many of which come from local silicon valley option club members who are smarter than I am (working with other traders will be a subject of a future article in this series for new subscribers, too). Finally, on the bottom right hand side of my workspace is a hotlist of U.S. stock point gainers. I scan it intermittently to see what is moving fast. For instance, CIEN seems to be at the top quite often, and usually sets the tone for the market, but, again, when it starts to back off, it usually signals that it is wise to enter an index put play (or to exit call plays in general). That's it. That is my set of maps in the back of my command vehicle when I am rolling down the battlefield through the trading day. I am still getting back into the groove, attempting to build the discipline which I think it will take to be consistently successful in this year 2001, which promises to be something in between 1999 and 2000, probably not as extreme in either direction, but with plenty of opportunities to make money every day and week. The problem with following the example of the platoon commander charging up the hill is that the trader can get tunnel vision. The only thing that matters is the next half hour, or few hours. That's when the trader will make dumb mistakes, increasing risk when he should be limiting risk - I know; I did just that this past Thursday. That's where writing down lesson learned and having detailed risk management procedures comes into play. That's why a platoon commander running down the battlefield with 40 Marines has to answer to a company commander with responsibility for 150 Marines, and the company commander, in turn, is in constant contact with the operations officer in the back of that armored command vehicle, who is helping the battalion commander quarterback 1200 Marines. I am sharing my trading set up with you because, in effect, you need to do both jobs - you need to see the big picture, and you need to be prepared to fight the short-term battle. Every day, this week, I have learned lessons, sat down, and mentally debriefed, then rehearsed how I will play the game the next day and week. Right now, I am refining where to set my stop loss points so that I don't get stopped out too soon, and so that I can let my winners run for optimal profits in the market and time frame that I am trading. That's similar to what we did in the Marines too - have a standard operating procedure for everything. By the time a unit gets good, all a platoon commander will have to say to one of his squad leaders is: Take this rocket team and set an anti armor ambush oriented north at that cross road. And it will happen, and the rest of the platoon will understand how to support it, and the platoon commander will think about what fire support is necessary to optimize the ambush. That's where I want to get: the candlesticks go to the Bollinger bands, and I am set to take a contrary trade. The stochastics cross, and that is my primary indicator to take the trade, along with two candlesticks in the 15 minute charts. The MACD should confirm, but might lag the stochastics. Once I am in the trade, I set a stop loss based on price of the underlying. Then I wait for the move to occur, take profits, and prepare my account to set an ambush in the opposite direction the next day or two. As retail traders, we have some big advantages over our institutional brethren. One of them is that we can be in cash (and the Caribbean) at any time we choose. Mutual funds can't. To them, cash is 5 or 10%. We can trade in both directions. Mutual funds can't, though hedge funds can. Because our accounts are so comparatively small, we can make a good percentage return by focusing on just a few stocks or indexes. All of this reminds me of the approach to fighting that we developed in the Marines. Let the thundering herds run by, and pick shots that are decisive. My trading set up is how I shape these battles to my advantage. ***** Trading Using The QQV.X By Mary Redmond The VIX.X and the newer VXN.X have proven to be very useful technical indicators for short-term traders. While they are not infallible, these volatility indicators can be used in combination with other market technical indicators in order to gauge a possible oversold or overbought market. In addition, the AMEX also has a new indicator of its own, called the QQV.X. Under certain circumstances, this QQV.X may give a more precise estimate of volatility on the QQQ, the tracking stock for the Nasdaq 100. While the VXN.X is derived from the volatility of NDX options, the QQV.X is derived specifically from the bid/ask quotes of QQQ options. The QQV.X measures the implied volatility of two at-the-money QQQ call and put options with 30 days to expiration. A QQV.X of 50 implies that that, according to current investor sentiment, the QQQ could be as much as 50% higher or 50% lower during the coming year. Since September of 2000, QQV's tabulated levels have ranged from a low of 42.86 to an intraday high of 75.40. A chart of the QQV compared to the QQQ looks like this. Generally speaking, we have found that a very low VIX, or VXN can indicate that the market is overbought and likely to correct. Similarly, when these two indexes are high it can indicate that investor sentiment is overly bearish and that the market is possibly poised to rally in the short-term. This is also true with the QQV. An examination of 60, 30 and 15 minute charts of the QQV.X shows that an extreme deviation from the QQV.X's normal trading range can be a strong indication of short-term market swings. This can be even more accurate when used in conjunction with the VIX.X and VXN.X, as well as bond yields, the TRIN, and other indicators. Since there are many little spikes in and out of the indicator's trading range when viewed on 30 and 15 minute charts, it can be best to use a 60 minute chart. In addition, one technical indicator is usually not sufficient information to use when making buy or sell decisions. For example, the chart below shows that the QQV.X spiked out of its trading range a few times which were not good buying opportunities. Generally, it is best to wait until the VIX and VXN are also spiking higher, and bond yields are moving higher, which indicates selling in the bonds. For example, the charts below show some opportunities when the QQV.X spiked way out of its normal daily trading range when viewed on a 60 minute chart. The second chart shows the VIX.X. When these two are viewed together, you can see that they presented some indicators of oversold and overbought markets. There were also some false buy signals shown by the QQV.X, but if you had checked the VIX.X, the VXN.X, and the movement of the bond markets, you might have been prevented from making a wrong move. On February 12th, during morning trading, the QQV.X spiked up out of its Bollinger bands, at the same time the VIX.X spiked up. The QQQ was $56.25 in the morning. The next day, when both indicators moved down, the QQQ was $59.15. On the 16th, it looks like the QQV.X gave a buy signal. However, at that point the VIX.X was spiking to the low side, and bond yields were falling. This would not necessarily have been a good time to buy. It is possible that there could have been a large demand for QQQ call and put options at that point, which could have skewed the QQV.X to move out of its normal range. The 22nd and the 26th show occasions when both the QQV.X spiked higher, and the VIX.X spiked up over 30. These were both good buying levels for the QQQ. Also, you can see the big spike in the QQV.X which occurred toward the end of trading on March 2nd, and the beginning of the day on March 5th. At this point, the QQQ was trading at $47.75. This was also accompanied by a spike in the VIX.X to over 34, and rising bond yields. This was a good buying level for QQQ. At the current levels, the QQV, VXN and VIX are trading in the middle of their normal trading ranges. This does not give a clear indication of near-term direction. There are many other factors involved. However, the QQV can be a very useful tool for short-term traders to add to their arsenal. ************************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=1814 ************************************************************** *********** OPTIONS 101 *********** Let's Do The Limbo Rock! By Lynda Schuepp Trading in this market reminds me of the lyrics of an old limbo song, "How low can you go?" Friday saw the Nasdaq slip or should I say fall another 5% to lows not seen since December of 1998. How much bleeding before we say uncle? The famous contrarian indicator, the put/call volume ratio closed at .81, not near the extreme levels needed for capitulation. Now that should be the word of the year. I'm sick of hearing it on CNBC. The dictionary defines capitulation as the act of surrendering or giving up. Guess what guys, it doesn't look like we're there yet. The charts are ugly in any time frame. As an option player, it's risky to play it directionally. There are no signals to go long, but it's scary going short or playing to the downside, because it's hard to believe we could go any lower. There are three options (excuse the pun) in my book: take a winter vacation, trade intraday or play it safe using spreads or long-term plays. Let's look at the pros and cons of each. The first option would be to take a winter vacation. Bull markets are much longer than bear markets, so even if you go away and the market turns, you won't miss the majority of the action. What you might miss is a bear rally. Remember the market took a lot of prisoners on the way down who are looking to "break-even" at this point, so there is tons of overhead resistance to get through on the way back up. Based on the weather we've been having in Boston this winter, vacation to a warmer climate is sounding better each day. The second option is to micro trade, taking small bites intraday. No homeruns in this market, just singles. The secret to day trading options is to find those stocks that have lots of volume with options that have small bid/ask spreads. It's hard to trade the once "high-flyers" because you can lose too much just getting in and out, which is called slippage. You might think an option selling at a bid of $2 and an ask of $2.50 is pretty reasonable until you realize that a 1/2 point on $2 is 25%. Multiply that by 2 to account for buying and selling same day and the option has to rise 50% just for you to break even. This is where a lot of option traders make their mistakes. The easiest options to day trade are the QQQ's and the OEX, using the current month "at-the- money" strikes. There are two reasons that make these a good choice. First, you can't get entirely nailed on bad news because they are both made up of 100 stocks, and secondly there is plenty of open interest and volume trading, so the spreads stay fairly tight and somebody is always willing to buy or sell to you, unlike some stocks that only trade 40 or 50 contracts a day. Looking at the QQQ's, Friday's action saw them run from $47 down to a low of $42 and back up to close at $45. The 45 strike on the QQQ's showed volume of 6390 contracts on the calls and 11,350 contracts on puts. Now that gives me some hope. The number of puts to calls was 2 to 1 which is very pessimistic. That's good news. The more bearish, the more likely we are near the end of the limbo rock, after all, we can't go any lower than the ground. The OEX isn't as pessimistic. It traded about 1400 call contracts versus 1900 put contracts. Therein lies some of the problem with the put/call indicator which uses all equities plus index options. Fund managers use OEX options to hedge their portfolios, so I personally don't think the old ratio is quite as useful as it used to be. This disparity suggests to me that the Nasdaq may be really close to a bottom, but the OEX isn't quite there yet. The third option would be to do some longer-term plays, the "Rip Van Winkle" approach. I think everyone should get into some of this action. Because the QQQ's closed at $45, I would first look at the strikes of 40, 45 and 50 because they are "at-the-money." At-the-money strikes have the most liquidity and the smallest spreads. Next, I'd look at bull calls spreads (buying a lower price strike and selling a higher price strike). And lastly, I'd look at the prices looking at near months (April, June) and long-term (January). It is interesting when you look at the same strikes with various months, you will see that the farther months are more fairly priced, because implied volatility is lower. The cost for a 40-45 call spread (long QQQ'S 40 strike and short QQQ'S 45 strike) would cost $3.10 per contract using April and cost $2.90 per June contract and only $2.30 per January contract. The most money you can make on a debit call spread like this is the difference in the strikes less the cost of the spread. The January spread could yield $2.70 (45 short strike less the 40 long strike less $2.30 cost of the spread). The same spread using April's prices would yield a maximum of $1.90 per contract. Looking at these two scenarios, which do you think is less risky? Risk $3.10 to make a maximum of $1.90 and only have until April to be right or risk $2.30 to make a maximum of $2.70 and have until January to be right. These are the steps you must go through when trading options. Take the time and do the work and get the whole picture. Look before you leap (no pun intended). ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* UNH - United Healthcare Group $60.99 (+0.20 last week) See details in sector list Put Play of the Day: ******************** VSTR - VoiceStream Wireless $93.81 (-3.00 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=1801 ************************************************************ ************************** 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 RIMM $40.38 (-2.93) RIMM held up fairly well on Thursday of this week, but unfortunately, the pervasive bearishness on the Nasdaq simply overwhelmed the stock on Friday. RIMM opened down with a gap of over a point to reach a low of $38.75, during the market lows of the day. Considering the condition of many technology stocks on Friday, RIMM's pattern of higher lows is admirable, and RIMM made a bullish spike upward toward the close. However, the stock fell below our stop level of $42.50, and as such, we have no choice but to drop it this weekend. IDTI $34.50 (+1.13) The bears mauled virtually everything on Friday, as the NASDAQ-leading Semiconductor index (SOX.X) led the selling frenzy with more than a 7% loss on the day. Combined with the 5.7% loss in the Networking index (NWX.X), it is no wonder that IDTI fell through its $35 stop as the week drew to a close. Mirroring the losses in the SOX and NWX, our play gave up 6.5% as it fell through the $35 support level. The upward momentum has obviously dissipated and with the NASDAQ hitting new lows again, we must part with this call play tonight. UBS $161.92 (+7.12) We mentioned on Thursday that overhead resistance could be heavy going forward. Friday's action confirmed this theory, as UBS made an attempt to surpass the $165 barrier in early morning trading. But with a declining Dow, the stock succumbed to the downward pressure, retreating for the rest of the day to close down $2.88 or 1.75 percent. Volume was light and support at the 5-dma (at $161.53) held firmly. However, with movement in peers BSC, LEH and MWD suggesting further weakness in the Financials, and the close below our stop price of $162, we are no longer recommending this play. EDS $62.70 (-3.75) After spending the week trading in a narrow range, EDS finally chose a direction. The stock was not immune to weakness in the broader markets on Friday. That along with news that Compaq had won a major deal with Blue Cross Blue Shield which EDS was vying for led to a drop of $2.83 or 4.32 percent on over 1.4 times the ADV. In doing so, the stock closed below its 5 and 10-dma (at $64.63 and $64.22) as well as our stop price of $64. With that, we are dropping coverage on EDS and would look to exit on any strength. PLAB $35.50 (+2.81) Notwithstanding three days of opportunist trading chaperoning strong finishes and combined with new Buy coverage from Banc of America, PLAB sold off with a vengeance in Friday's marketplace. The robust selling quickly took PLAB through the support at the 5-dma line. There was a valiant effort for recovery in the last hour of trading, but the bounce off the 10-dma line didn't have quite enough propulsion to boost PLAB back above our $36 exit mark. Therefore, while it's possible PLAB could regain its composure next week and challenge the $40 level, we're honoring our closing stop and exiting the play this weekend. PUTS No dropped puts tonight. *********** 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 ************** No new calls tonight. *************************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=1808 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 03-11-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/031101_3.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=1815 ************************************************************** ****************** CURRENT CALL PLAYS ****************** UNH - United Healthcare Group $60.99 (+0.20 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. There's no question of UNH's strength and stamina at these higher trading levels; especially in light of the pandemonium endlessly effecting the broader market. It was also encouraging to see Thursday's convincing run through the immediate resistance at $61 and challenge of $62. However, the stock's lengthy consolidation period, tightly capped by the $62 level, is rather frustrating for option players. Next week, conservative types should look for UNH to make a charge for its 52-week high ($64.36) in an advancing market before taking positions. Across the sector, other publicly traded managed- care companies and health insurers such as Wellpoint Health Networks (WLP), Cigna (CI), and Aetna (AET) are also channeling at their respective levels. One dent in this defensive group's shining armor was PacifiCare Health Systems (PHSY), who recently announced that the State of California had issued a censure against it for late payment of claims to hospitals and doctors. Then on Friday, PHSY got whacked again following early news that its largest shareholder, UniHealth Foundation, was planning to sell up to 1 mln shares of the managed-care company in the next several weeks to diversify its assets. The silver lining was the obvious absence of a rippling effect through the sector. Going forward, if we find that the overall sentiment remains bullish and we're anticipating a break to the upside, enterprising traders might consider taking positions off the $60 level. Keep in mind though, a close below this mark and we'll exit the play. In other words, consolidation is healthy, but definite weakness below the low end of the trading spectrum is not. Again if you're conservative, then be patient for the big breakout through the upper resistance before buying into strength. BUY CALL APR-55 UNH-DK OI= 19 at $8.10 SL=5.75 BUY CALL APR-60*UNH-DL OI= 356 at $4.70 SL=2.75 BUY CALL APR-65 UNH-DM OI=2247 at $2.40 SL=1.50 BUY CALL JUN-60 UNH-FL OI=1294 at $7.20 SL=5.00 BUY CALL JUN-65 UNH-FM OI= 393 at $4.80 SL=3.00 http://www.premierinvestor.net/oi/profile.asp?ticker=UNH ************* NEW PUT PLAYS ************* VSTR - VoiceStream Wireless $93.81 (-3.00 last week) Having expanded with the acquisitions of Omnipoint and Aerial Communications, VoiceStream provides digital PCS to more than 2.5 million customers on its GSM (global system for mobile communications) networks. It will expand into the southeastern US with the acquisition of fellow GSM operator Powertel. In the rapidly changing Telecom world, VSTR itself agreed to be acquired by Deutsche Telekom in July, 2000. Through its subsidiaries, VSTR provides personal communications services (PCS) under the VoiceStream brand name in 11 urban markets, including Denver, Seattle/Tacoma, Phoenix/Tucson, Portland, Salt Lake City, and is currently constructing systems in San Antonio and Austin. It seems that even the slightest hint of an earnings miss is enough to crater a company's stock price, especially in the out-of-favor Telecom sector. So with VSTR missing estimates by a wide margin for the past 6 quarters, why has the stock not been knocked back to the $20 level along with the likes of WCOM, PCS and AWE? Simply put, VSTR has been continuing to increase its revenue growth rate to the 300%/year range, while its competitors have struggled to maintain their own double-digit revenue growth rates. The net result is that until just last month when VSTR missed earnings estimates by a whopping 21% (posting a loss of -$3.49, vs. estimates of -$2.87), the stock had managed to hang onto the $100 level as support. VSTR's weakness is likely tied to weakness in shares of Deutsche Telekom (DT), the company's merger partner. At the same time that VSTR was falling below its solid $100 support level, DT was probing new yearly lows below $29. Since then VSTR has found support near $85 and returned to the $100 level, confirming that it will now act as resistance. The stock rolled over in the middle of last week, and with the bearish stochastics crossover, it looks like VSTR is headed down to test its late-February lows. Conservative traders will wait for further selling pressure to drive the stock below $92 before taking a position, while aggressive traders will look for a failed rally to give them a better entry point. The first area of serious resistance is at $96, and then $97, with a formidable barrier at the century mark. We are placing our stop at $97.50. Consider any rally that fails to close above our stop as a good opportunity to initiate aggressive put entries for the next leg down. Use the Merrill Lynch Telecom HOLDR (AMEX:TTH) as a way to gauge investor sentiment in the sector before playing. BUY PUT APR-95*UVT-PS OI=257 at $9.50 SL=6.75 BUY PUT APR-90 UVT-PR OI= 38 at $7.50 SL=5.25 BUY PUT APR-85 UVT-PQ OI=523 at $5.75 SL=3.75 http://www.premierinvestor.net/oi/profile.asp?ticker=VSTR QLGC - QLogic Corp $28.94 (-6.50 last week) QLogic Corporation is the leading manufacturer of fibre channel bus adaptors. The company is also a designer and supplier of semiconductor and board level input/output (I/O) components They've been designing and marketing SCSI-based (small computer system interface) products for over 12 years and sells its products to server, workstation, and date peripheral makers. Blue-chip clients include Compaq, Dell, Hitachi, IBM, and Quantum Corporation. A faltering NASDAQ, a troubled sector, and a stock sliding through its bottom support make a great recipe for a successful put play. Couple those elements with a downgrade to Outperform from Buy as well as a 42% price target cut to $45 from $77 per share by the influential Salomon Smith Barney and the probability for QLGC to experience further declines increased. The tough economic environment and the exposure to several troubled customers like to SUNW, DELL and NTAP prompted SSB to cut its ratings and estimates on QLGC. In addition, other storage network product makers such as EMLX and JNIC were also effectively cut down on Thursday. The predilection for softness in the June quarter is effectively wrecking havoc on the whole sector. Initially, the NASDAQ's resurgence on Tuesday carried QLGC off its lows at the $35 level and the share price once again saw the topside of $40. However, the revival was short-lived. In subsequent sessions, QLGC was sold-off with a vengeance and by Thursday morning, the share price lost its footing. Not only did the $35 level fail to keep QLGC afloat, but the downtrend generated enough momentum to push the share price below the $30 mark. Look for robust volume to continue fueling the downtrend next week. We're setting a closing stop at $32, which represents Friday's intraday resistance level. If QLGC closed above this level for any reason, we'd exit the play and move our capital to other more lucrative opportunities. This is not to say that intraday entries at or above the $32 mark should be restricted. For example, a reasonable, yet more aggressive entry, might be found in that precarious vicinity during a high-volume rollover. However, it's generally a good idea to consider locking in gains as the stock approaches its bottom support levels to avoid losing existing profits. Keep in mind, put players should be extra careful in an oversold market. BUY PUT APR-40 QLC-PH OI=271 at $13.38 SL=10.00 BUY PUT APR-35 QLC-PG OI=151 at $ 9.38 SL= 6.50 BUY PUT APR-30*QLC-PF OI=191 at $ 6.13 SL= 4.00 BUY PUT APR-25 QLC-PE OI= 0 at $ 3.38 SL= 1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=QLGC *************************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=1802 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 03-11-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/031101_4.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=1816 ************************************************************** ***************** CURRENT PUT PLAYS ***************** SEBL - Siebel Systems Inc. $27.31 (-9.25 last 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. The warning delivered by Oracle last week seems to have knocked the life out of SEBL, at least on a temporary basis. While SEBL reported earnings above expectations in January, at this point sharks are descending on companies when there is blood in the sector. SEBL has a long way to go before the stock can begin to re-establish an upward trend. With a P/E of 130, SEBL is still overvalued to many investors, and a roster of big name firms on Wall Street rushed to downgrade the stock last week, as no one wanted to be left holding the bag. As if on cue, SEBL rolled over from $28.50 on Thursday, and continued to sell off on Friday, with the Intel warning. SEBL has now made a new 52-week low of $27.31, which is strong support dating back to October 1999. If the selling continues, the next support levels are $25 and $20. Put players should be extra careful in an oversold market. An aggressive entry point could be a failed rally from $28.50, if others in the business applications software sector are experiencing weakness. Alternatively, a break below $27 on strong volume in a weak market would very likely bring SEBL to $25. Continue to monitor GSO.X, as well as others like ORCL and BEAS for weakness. We are moving stops to $30, so close positions if SEBL closes above this level. BUY PUT APR-30*SGQ-PF OI=1754 at $5.75 SL=4.00 BUY PUT APR-25 SGQ-PE OI=1459 at $3.00 SL=1.50 http://www.premierinvestor.net/oi/profile.asp/ticker=SEBL BGEN - Biogen Inc. $63.56 (-5.00 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. Biotechnology was one of the last high flying sectors to correct, and BGEN is one of the few biotechnology stock which is still above its 200-dma of $61.23. However, if this week’s trend continues, BGEN could be in for a major fall. In fact, when BTK.X fell below its 200-dma of 633 on January 26th, many of the key bellwether biotech stocks had fallen significantly, including HGSI and DNA. As a profitable company, BGEN managed to keep its strong valuation intact until recently. However, considering the fact that BGEN was $47 last October, investors now seem to be finding it difficult to justify such a rapid gain during a period of accelerating economic weakness. After failing to rally past $75 on February 26th, BGEN has formed a downward channel and a pattern of recurring lower highs during March. On Friday, BGEN made a valiant attempt to reach its 10-dma of $68.50 in the morning, but only got as far as $66 before spiking down. BGEN is currently resting at an important support level of $63.56. If this level fails, the next stop is the 200-dma of $61.23. If the stock can’t hold above the $60 level, support is light until $55. At this point, conservative put players might want to wait for BGEN to fall below $60 on heavy volume before entering. A more aggressive strategy could be to enter on another failed rally from $64.38. Traders should monitor BTK.X for weakness, as it is poised to fall from current levels to $515, and possibly $500. One key bellwether biotech stock, AMGN, fell below its 200-dma on Friday, for the first time in weeks, which is a bad sign for the biotech sector. We are keeping stops set at $65, and traders should exit if BGEN closes above $65. BUY PUT APR-65*BGQ-PM OI= 2848 at $6.13 SL=4.00 BUY PUT APR-60 BGQ-PL OI=10930 at $3.75 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=BGEN ADBE - Adobe Systems $26.94 (-0.75 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. 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. The bears seem to be getting tired of pushing ADBE ever lower, as we can see by the fractional loss for all of last week. While the NASDAQ got massacred on Friday to the tune of -5.3%, our play once again managed to hold above the $26-27 support level at the close. Although the bears managed to push ADBE as low as $24.63 intraday, strong buying volume came in after the early morning dip, aiding in the stock's recovery. While we are not seeing any dramatic signs of strength, the stock's resilience seen over the past week is giving us early signs that any additional ground to the downside will require a pitched battle. Of course, at the rate at which bad news is hitting this market, it could be as early as Monday that the bulls give up their defensive positions and let the bears take another run at new 52-week lows. Recall from Thursday's update that we are watching for ADBE to show strength relative to the broader market. This is what we saw on Friday, and it could be an early sign that ADBE has found a bottom. Of course, any rumblings of more earnings warnings in the software sector, or from ADBE itself (we should be so lucky...) would provide a sharp downside catalyst for our play, helping to break the back of the current support level. Aggressive traders will want to buy puts on a rollover from resistance near the $29 level. So long as our play doesn't manage a close over our stop, also at $29, ADBE looks like it will be confined to the current trading range ($26-29) until the next rash of bad news hits the market. When it does, conservative traders will get their much-awaited entry point when the stock plunges below the $26 level. Just watch out for strong buying interest as the stock approaches $24; another strong bounce at that level will indicate there are traders willing to defend their positions near that level. Given its weakened state, ADBE is likely to deteriorate faster than the broader NASDAQ, and recover more slowly. If this pattern starts to change, it will be a sign that ADBE is regaining some of its strength. BUY PUT APR-30*AEQ-PF OI= 908 at $5.63 SL=3.50 BUY PUT APR-25 AEQ-PE OI=2361 at $2.94 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=ADBE BRCM - Broadcom Corporation $38.56 (-7.75 last 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. Once the high-flyer of the Semiconductor sector, optical chipmaker Broadcom has struggled recently, under-performing its peer group. Despite a strong bounce in the Philadelphia Semiconductor Index (SOX) early this past week, BRCM did not participate in the rally, most likely because of a number of company-specific concerns that weighed on the stock price. An article from the Wall Street Journal dated February 27th that questioned the legitimacy of recent insider stock sales resulted in a flood of class-action lawsuits on behalf of unhappy shareholders. The company also warned that first quarter earnings would be below estimates. This led to batch of downgrades from brokerages such as Goldman Sachs, Robertson Stephens, Salomon Smith Barney and WR Hambrecht. A rollover in the Chip sector on Friday translated into a decline of 5.65 percent. While volume was below average, the stock fell to a new 52-week low, closing below the $40 support level. Further weakness in the Semiconductors on Monday could push BRCM lower. Failure to hold Friday's intra-day low of $37.75 could allow conservative traders to enter on weakness, but make sure volume confirms the drop. We are moving our stop price down from $45 to $43. A close above this level would lead to our dropping this play. Resistance overhead at $40 and the 5-dma at $43 could provide more aggressive traders with potential entry points. BUY PUT APR-40*RCQ-PH OI=2746 at $6.63 SL=4.50 BUY PUT APR-35 RCQ-PG OI=1061 at $4.13 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=BRCM NEWP - Newport Corporation $35.13 (-7.25 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. Shares of fiber optic and semiconductor subsystem manufacturer Newport failed to make much progress earlier in the week despite a rising NASDAQ. After being added to the S&P MidCap 400, the stock has since fallen under the swoon of post-index addition syndrome. Even news from the company that they were revising their earnings projections to the upside, thanks to their merger with robotics firm Kensington Laboratories, did little to ignite investor interest. Analysts have not been as optimistic about the company’s prospects going forward. First Union Securities trimmed their earnings estimates, as did Robertson Stephens, citing lack of visibility in the second half of the year along with continued weakness of capital spending in the Semiconductor and Networking industries. UBS Warburg cut their target price for the stock from $120 down to $60, along with the fiscal outlook for 2001. Friday's loss of $4.63 or over 11 percent resulted in a close just above support at $35. Further selling leading to a plunge below this level would allow cautious players to take a position. Aggressive traders may find intra-day spikes to resistance at $36, $37.50, $39 and $40 could provide targets for entry, but confirm the rollover with volume before making a play. To protect our gains, we are moving our stop price down from $43 to $40. A close above this level would trigger our stop, taking NEWP off our put play list. Make sure that market sentiment is on your side before initiating a play by tracking AMEX's Networking Index (NWX) and the Philadelphia Semiconductor Index (SOX). BUY PUT APR-45 NZZ-PI OI= 60 at $13.63 SL=10.00 BUY PUT APR-40*NZZ-PH OI=204 at $ 9.88 SL= 7.00 http://www.premierinvestor.net/oi/profile.asp?ticker=NEWP AFFX - Affymetrix Inc $46.00 (-11.06 last week) Affymetrix develops and manufactures DNA chip technology. Its GeneChip system and related products identify, analyze, and manage complex genetic information in an effort to improve the diagnosis, monitoring, and treatment of disease. Their product is essentially DNA probe arrays that contain gene sequences on a chip, a scanner to process the probe arrays, and software to analyze the information. They market their technology to academic research centers, pharmaceutical and biotech firms, and clinical laboratories around the world. "Glitch" or no glitch, AFFX led the biotech decliners into the trenches during the last three trading sessions. Already having lost two-thirds of its value in the past 12 months, AFFX fell another 18%, or $10.00 after acknowledging on Wednesday that it found flaws in one line of its gene-research products and would be offering replacements at a potential cost of $4 mln. While it appears that this $4 mln "glitch" is not likely to effect future earnings and it doesn't involve gene chips used to analyze human tissues, which make up about 80% of the company's sales, it certainly didn't offer investors encouragement going forward. The announcement simply added salt to an already existing wound. Long-term investors are currently faced with a stock that is exceeding the 39% decline in the Nasdaq's Biotechnology Index (NBI.X) and now, is extending its losses at an accelerated pace. In respect to the play on AFFX, we're maintaining our closing stop mark at $50. While we consider entry points viable at this level and the corresponding 5-dma line (assuming a high-volume rollover scenario), we will exit the play if AFFX closes above this level. An aggressive rollover strategy indicates buying into a downward momentum cycle and potentially selling as the stock approaches its previous support levels. Additional confirmation of AFFX's overall weakness would be the stock's slide under last October $45 support level. Furthermore, the NASDAQ Biotechnology Index (NBI.X, currently at 861) and the Amex Biotechnology Index (BTK.X, currently at 530) both track the broad sector. These indexes can be very useful measurement tools as you plan your entries and exits. BUY PUT APR-55 FIQ-PK OI= 917 at $11.38 SL=8.50 BUY PUT APR-50*FIQ-PJ OI=1292 at $ 7.75 SL=5.50 BUY PUT APR-45 FIQ-PI OI= 31 at $ 4.88 SL=2.75 BUY PUT APR-40 FIQ-FH OI= 62 at $ 3.00 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=AFFX *************************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=1803 ************************************************************ ***** LEAPS ***** Hang On To Your Hat - We're Going For A Joyride! By Mark Phillips Contact Support No, your eyes do not deceive you. Welcome to another week with no new plays and no Spotlight play. Combine that with 4 drops, and you might think we are set to throw in the towel and buy bonds. Nothing could be further from the truth, but it seems it is time that we step back and re-evaluate our approach. After another devastating week in the markets, I'm going to take the week off from the usual market commentary, and refocus on what we are trying to accomplish here in the LEAPS section. Suffice to say, I don't see any earth-shattering entry points developing in the week ahead, and I think by the time you finish reading, you'll agree, this is a better way to spend our time together this week. While I have tried to point out that the list of plays is only a list of possible plays, there have been enough reader emails asking questions about the strategy and guidelines of our LEAPS plays, that I think it merits a fresh approach. In order to give you a clear idea of where we are going, we first need to review where we have been and where we are now. In the past, we would write up a new play that would cover the logic behind the play, along with detailed entry/exit criteria. Additionally, at the bottom of the play would be the listed strikes and their current prices as of the date the play was initiated. These are the prices that went into the playlist, from which we tracked the performance of the play. That's all well and good, but it doesn't really provide an accurate measure of how well our plays are doing. Frequently we would watch the option premium increase or decrease significantly before our entry criteria is satisfied. So there we sit on the sidelines (not yet having entered the play), but the playlist shows a profit (or loss) of 30%, 40%, and sometimes 50%! There's something wrong with that picture, don't you think? Let's use the recent CLX play as an example. Initiated on February 11th, the entry criteria called for either a bounce from support at $33-34 or $30 before opening new positions. Looking at the daily chart, you can see that Friday's session closed at the low of the day ($33.33), but has not yet bounced (although it looks like it may be getting close). So we are not yet "in" that play, but look at the current values of the selected strikes in the playlist. The 2002 strike is off by a whopping 43% while the 2003 strike has lost more than 30%. On paper that looks horrid!! A 43% loss, and it is still on the playlist? Why? But looked at another way, we can almost taste the pending entry point and are looking forward to finally getting into the play. The problem is that once we do, the playlist will show that we have already lost 40-50% on the position. That doesn't seem very accurate, now does it? But more importantly, it makes it difficult for you to determine when (or if) we should be entering or exiting the play, and which strikes to target. Coming back to the CLX play, note that the original write-up targeted the $40 strikes for new entries. But the entry strategy had us targeting new positions as the stock is testing support in the low $30s. The correct strike to be purchasing in that case would be the $35 strike, as it will give us a better Delta once we are in the play. So, now that you can see the problems, are you interested in the solution? Too bad - I'm going to tell you anyways. First off, we are going to have two playlists in the LEAPS section. The first will be a watch list. It will contain each of the stocks that we are currently monitoring for new entries, along with the recommended strikes to purchase, and our recommended entry strategy. But there will be no option prices listed until it becomes a "Live" play. During the week, we will determine which plays provided valid entry points and summarize that in the LEAPS section on Sunday. When a play provides a valid entry point, it will be moved from the "Watch List" to the "Active Play List." The Active Play List will look the same as the current playlist, only the numbers will certainly be more accurate. The prices for the listed options will show the high option price on the day we received our entry point, and the "CHANGE" column will provide an accurate profit/loss value since entry. Each active play will also have clearly defined stop levels, which will be moved upwards as our active plays become profitable. In effect, the LEAPS playlist will become an actively managed portfolio, with new plays finding their way from the Watch List to the Active Play List. Needless to say, the Watch List will also be dynamic, as new plays are added, entry criteria are satisfied or modified, or plays are dropped due to a failure to perform acceptably. All of this evaluation will take place BEFORE the play ever makes it onto the Active Play List, hopefully providing you with a much more usable tool for your long-term investing. It will be a work in progress over the next 2-3 weeks, so please be patient with us as we get things laid out in the most useful manner we can. Of course, if you have comments or suggestions as the new LEAPS section begins to take shape, please drop me an email. All suggestions are welcome, and I will implement as many as practical in the weeks ahead. Stay tuned...the next month promises to be very exciting in the Land O' LEAPS. Current Plays SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT CHANGE EMC 11/07/99 JAN-2002 $ 45 WUL-AI $ 9.50 $ 6.10 -35.79% 09/17/00 JAN-2003 $100 VUP-AT $32.75 $ 2.25 -93.13% CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $ 0.94 -91.48% 11/26/00 JAN-2003 $ 60 VYC-AL $16.63 $ 1.50 -90.98% 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 $ 8.50 -51.43% WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $24.70 359.11% 10/22/00 JAN-2003 $ 45 VWI-AI $ 7.88 $15.90 101.90% C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $ 8.50 -17.56% 10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $ 7.70 -37.14% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $32.00 86.81% JAN-2003 $ 70 OZG-AN $23.13 $41.13 77.80% BGEN 11/05/00 JAN-2002 $ 70 WGN-AN $17.25 $13.13 -23.91% JAN-2003 $ 70 VNG-AN $25.00 $21.00 -16.00% MU 11/26/00 JAN-2002 $ 45 WGY-AI $13.13 $10.60 -19.24% JAN-2003 $ 45 VGY-AI $17.25 $15.90 - 7.83% QQQ 12/10/00 JAN-2002 $ 70 WNQ-AR $15.13 $ 2.05 -86.45% JAN-2003 $ 75 VZQ-AW $19.25 $ 4.20 -78.18% WMT 12/24/00 JAN-2002 $ 55 WWT-AK $ 9.63 $ 7.20 -25.19% JAN-2003 $ 55 VWT-AK $14.00 $11.60 -17.14% DELL 01/07/01 JAN-2002 $ 20 WDQ-AD $ 5.25 $ 7.25 38.10% JAN-2003 $ 25 VDL-AE $ 5.63 $ 7.38 30.99% WCOM 01/14/01 JAN-2002 $ 25 WQM-AE $ 5.00 $ 1.88 -62.50% JAN-2003 $ 25 VQM-AE $ 7.38 $ 3.50 -52.54% CPN 01/21/01 JAN-2002 $ 40 YLN-AH $10.50 $16.30 55.24% JAN-2003 $ 40 OLB-AH $15.38 $21.10 37.24% CLX 02/11/01 JAN-2002 $ 40 WUT-AH $ 5.20 $ 2.95 -43.27% JAN-2003 $ 40 VUT-AH $ 8.10 $ 5.60 -30.86% JWN 02/18/01 JAN-2002 $22.5 WNZ-AX $ 3.30 $ 2.25 -31.82% JAN-2003 $ 25 VNZ-AE $ 4.10 $ 3.20 -21.95% Spotlight Play None New Plays None Drops CSCO $20.63 In all honesty, this play should have dropped months ago when CSCO plunged below the $50 support level. While any positions should have been stopped out long ago, we took one last shot at new positions 2 weeks ago, targeting a bounce from $22 in our Spotlight play. Sure enough, we got just enough of a bounce early last week to make us think the long-overdue recovery had begun. Surprise!! Things aren't as rosy as once hoped for in the Tech sector, as witnessed by the second Q1 warning from INTC, and CSCO's announcement on Friday that they would be eliminating 5000 jobs. Second half recovery? I think not! In response, investors sold the stock down to the $20 level on Friday, and it doesn't find any support until at least $18, and possibly even $14. There is nothing wrong at CSCO other than the severe weakness that has infected any stock remotely connected with technology, but that still doesn't make it a good LEAP play right now. Rest assured that CSCO will be back on the playlist, but not until we can see solid signs of recovery in both the technology sector, and more importantly, CSCO's price chart. EMC $34.35 One of our biggest winners on the playlist, EMC ran up to give us in excess of a 600% return by Labor Day of last year. Alas, the great Technology crash finally came home to roost for this exceptionally well-run business as well. The combination of new lows on the NASDAQ and the company's own earnings warning last month have driven the stock below the long-term $50 support level, and it doesn't look like the pain is over yet. After a valiant attempt to rally after the earnings warning, the bears are back in control, driving the stock to new yearly lows on Friday. The current downtrend has been in place since early October, and while there have been brief trading rallies, each one has petered out at a lower level, pushing EMC deeper and deeper into bear country. Currently sitting on tenuous support in the $34-35 range, the stock looks like it could easily drop into the mid-$20s before finding a solid bottom. It is one of the best managed companies in the Technology sector, so when economic conditions do improve and businesses ramp up their storage demands again, look for the stock to find its way back onto our play list. QQQ $45.10 Since we went "bottom fishing" and picked up coverage of the QQQ as a NASDAQ recovery play in early December, we have watched a persistent NASDAQ decline slash fully one-third of the Q's value. As the NASDAQ has moved to fresh 2-year lows, Technology bulls have been locked in the barn and left to wonder if the sun will ever come out again. Rest assured that it will, but not likely for several months to come. January gave us one brief trading rally, but then the bulls were back on the defensive giving up ground in huge chunks. Although the rapid gains in the NASDAQ that ended a year ago have jaded us to large point moves, keep in mind that Friday's -115 point decline was more than a 5% decline, equivalent to a -285 point decline a year ago. Rather than attempt to catch the bear-market rallies that will inevitably appear in the months ahead, we will remove the Q's from our list until we can see signs of a sustained technology recovery ahead. WCOM $16.94 After one brief rally in January, WCOM has headed back towards its lows for the year, near $14. Bearish sentiment in the Technology sector continues to sap the strength of any attempted rally, and the stock is now finding resistance near $18. While it hasn't violated any major support levels since we began coverage, we also are not seeing significant upside potential for the stock in the bearish Telecom environment. Even speculation last week that CEO and President, Bernie Ebbers might be willing to put the company up for sale, didn't have the power to juice the stock price. While the downside looks limited from here, there doesn't seem to be a strong catalyst to move the shares higher. We'll drop WCOM this weekend and look for sentiment to improve in the broader Telecom sector before dipping our toes into this pool again. www.OptionInvestor.com *************************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=1809 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 03-11-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/031101_5.asp ************* COVERED CALLS ************* Technical Indicators Explained: Bollinger Bands By Mark Wnetrzak Bollinger Bands are one of the most effective tools available to traders who utilize technical analysis, but they do not, as is commonly believed, provide absolute buy and sell signals. The originator of this unique gauge, John Bollinger, designed the indicator to reflect whether prices are high or low on a relative basis and with this information, adept traders can identify entry and exit points by using other technical indicators to confirm an issue's price action. Bollinger Bands are similar to upper and lower envelopes that surround the stock price on a chart. They are generally plotted two standard deviations away from a simple moving average. This is the primary difference between Bollinger Bands and envelopes. Envelopes are plotted a fixed percentage above and below a moving average but Bollinger Bands adjust themselves to current market conditions because standard deviation is a measure of volatility. They widen during volatile market moves and contract during less active periods. Occasionally, Bollinger Bands are displayed with a simple moving average line. The time period for the moving average can vary, but a 10-dma is commonly used by short-term traders. The standard deviation value can also be increased or decreased to suit your personal preference and many technicians lower the value to 1-1/2 standard deviations when using a 10-day moving average. Despite the unique signals produced by Bollinger Bands, they do not provide the complete picture and in most cases, a separate indicator should be used to confirm the trend. The reason is, when the price touches one of the bands, it could indicate a continuation of the trend or a reversal in the other direction. Many technicians use the Relative Strength Index in conjunction with Bollinger Bands as it is an excellent gauge for identifying overbought and oversold conditions. Generally, when the price of the instrument touches the upper band, and the RSI is below 70, the trend will continue. The opposite is true for the lower band, and RSI indications above 30. Conversely, when the issue's price touches the upper band and the RSI is near 75-80, the trend may reverse itself and move downward. The same condition exists when the price touches the lower band and RSI is below 25-20. It is possible to generate signals from price action within the bands alone. A technical "top" formed outside the bands followed by a second top inside the bands constitutes a sell signal. The second top's position relative to the initial top is not important, but it must occur with the boundaries of the bands. This technique is often used to identify potential reversals, where the continuation rally achieves a nominal new high. Another unique characteristic of Bollinger Bands is that a move that originates at one boundary will generally continue all the way to the other boundary. This observation is particularly useful in projecting price targets. Next week, we will review the key components and formations used in Candlestick Charting. 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 MCCC 20.50 21.00 MAR 20.00 1.44 *$ 0.94 10.7% ACPW 20.38 18.75 MAR 17.50 4.38 *$ 1.50 10.2% ACLS 11.13 11.13 MAR 10.00 1.88 *$ 0.75 8.8% ORG 10.96 10.80 MAR 10.00 1.50 *$ 0.54 8.3% DCEL 19.50 20.06 MAR 17.50 2.63 *$ 0.63 8.1% VPHM 26.69 25.88 MAR 22.50 5.00 *$ 0.81 8.1% GLFD 20.38 20.25 MAR 20.00 1.44 *$ 1.06 8.1% ESCM 16.84 20.56 MAR 15.00 2.88 *$ 1.04 8.1% ITN 13.56 12.35 MAR 12.50 1.55 $ 0.34 6.2% NVLS 45.38 42.69 MAR 40.00 7.00 *$ 1.62 6.1% URBN 10.44 11.63 MAR 10.00 1.06 *$ 0.62 5.7% MKC 40.00 41.36 MAR 40.00 1.00 *$ 1.00 5.6% PLMD 39.44 39.22 MAR 30.00 10.50 *$ 1.06 5.3% ERTS 51.81 50.13 MAR 45.00 7.88 *$ 1.07 5.3% GMST 49.50 42.81 MAR 40.00 10.88 *$ 1.38 5.2% AMSY 22.88 21.31 MAR 20.00 3.63 *$ 0.75 4.2% CSTR 16.75 17.63 MAR 15.00 2.44 *$ 0.69 4.2% MNMD 38.25 34.31 MAR 35.00 4.88 $ 0.94 4.1% ATRX 23.00 20.44 MAR 20.00 4.00 *$ 1.00 3.8% WGR 28.00 33.70 MAR 25.00 4.00 *$ 1.00 3.6% CSTR 17.06 17.63 MAR 15.00 2.75 *$ 0.69 3.5% MNTR 23.56 23.25 MAR 22.50 1.88 *$ 0.82 3.3% SGI 5.00 4.77 MAR 5.00 0.40 $ 0.17 3.2% GLGC 23.94 19.38 MAR 20.00 4.88 $ 0.32 1.8% ROAD 25.06 23.88 MAR 25.00 1.25 $ 0.07 0.3% NERX 10.06 6.31 MAR 7.50 3.62 $ -0.13 0.0% NXCD 11.38 8.94 MAR 10.00 2.31 $ -0.13 0.0% PHSY 36.88 27.81 MAR 30.00 8.75 $ -0.32 0.0% LTBG 14.19 11.63 MAR 12.50 2.13 $ -0.43 0.0% ANSR 8.09 5.38 MAR 7.50 1.44 $ -1.27 0.0% CLPA 6.22 5.81 APR 5.00 2.06 *$ 0.84 12.5% *$ = Stock price is above the sold striking price. Comments: Well, this was another banner week for the Market...NOT! While many of the above stocks are consolidating and testing their support areas, the majority appear to be holding up rather well. Roadway Express (NASDAQ:ROAD) looks like it will test its 150 dma near $22.50 - a roll-down candidate? NeoRX (NASDAQ:NERX) is continuing to languish and may test the December low, not a pretty prospect. Nextcard (NASDAQ:NXCD) failed to breakout of its Stage I base and may now test the bottom of its range. Time to evaluate your long-term outlook on the issue. Pacificare Health Systems (NASDAQ:PHSY) continues to disappoint and the technicals have turned horrid - time to get out for minimal impact? Lightbridge (NASDAQ:LTBG) has failed to stay above its 150 dma and has now moved below the January to February lows - definitely at a key moment. Answerthink (NASDAQ:ANSR) has broken below its recent trading range from $6 to $8 and will be shown closed as you would need to roll-down to an "October" $5 call just to break even! Positions Closed: Ultratech Stepper (NASDAQ:UTEK), Legato Systems (NASDAQ:LGTO), Peregrine Systems (NASDAQ:PRGN) NEW PICKS ********* This week we have a very conservative outlook, considering the technical condition of the equity markets. Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return PLMD 39.22 MAR 35.00 PM CG 5.38 819 33.84 7 14.9% BBBY 28.44 APR 27.50 BHQ DY 2.94 140 25.50 42 5.7% SHFL 20.94 APR 17.50 SFQ DW 4.38 12 16.56 42 4.1% SEI 22.05 APR 20.00 SEI DD 3.10 197 18.95 42 4.0% GLC 23.73 APR 22.50 GLC DX 2.35 753 21.38 42 3.8% ATVI 24.63 APR 22.50 AQV DX 3.13 10 21.50 42 3.4% CPRT 21.81 APR 20.00 KQJ DD 2.63 5 19.18 42 3.1% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ATVI - Activision $24.63 *** Stage II Rally *** Activision (NASDAQ:ATVI) is a leading worldwide developer, publisher and distributor of interactive entertainment and leisure products. Activision is taking advantage of the current move in the gaming business as new hardware platforms enter the market. Sony's PlayStation II was in short supply during its debut and Nintendo's Game Boy Advance already has 2.7 million pre-orders. Don't forget that Microsoft's Xbox will enter the market later this fall. Activision pleased investors in February when it reported earnings of $20.5 million, or $0.70 per share beating estimates by a dime. The company also raised its EPS and revenue estimates for next year which resulted in several upgrades. We simply favor a conservative entry point in a bullish chart. APR 22.50 AQV DX LB=3.13 OI=10 CB=21.50 DE=42 MR=3.4% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=ATVI ***** BBBY - Bed Bath & Beyond $28.44 *** Next Leg Up? *** Bed Bath & Beyond Inc. (NASDAQ:BBBY) is a nationwide chain of superstores selling high quality domestics merchandise and home furnishings. The Company's domestics merchandise line includes items such as bed linens, bath accessories and kitchen textiles, and its home furnishings line includes items such as cookware, dinnerware, glassware and basic housewares. BBBY has been a consistent grower for several years even in the face last year's rising interest rates. The stock has traded above its 150 dma since early last year and is showing no signs of changing that trend. Investors looking for one of the few stocks not in a free-fall helped push BBBY to an all-time high on Friday. The issue appears to be continuing its upward trend but we prefer a cost basis closer to technical support. APR 27.50 BHQ DY LB=2.94 OI=140 CB=25.50 DE=42 MR=5.7% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=BBBY ***** CPRT - Copart $21.81 *** Earnings Rally *** Copart (NASDAQ:CPRT) provides vehicle suppliers, primarily insurance companies, with a full range of services to process and sell salvage vehicles through auctions, principally to licensed dismantlers, rebuilders and used vehicle dealers. Copart earned net income of $9.3 million in the 2nd-quarter of 2001, generating a 42% increase in EPS to $0.17 per diluted share on revenues of $56.6 million. The company's Internet sales climbed to 21% of gross proceeds, up from 18% just three months ago due to their new Future Bidding product. Copart continues to expand, opening its third full service vehicle auction facility in the Chicago area, as they try to broaden their national presence. It appears the one-day post-earnings drop offered an excellent entry point in this bullish issue. A conservative entry point with a reasonable return. APR 20.00 KQJ DD LB=2.63 OI=5 CB=19.18 DE=42 MR=3.1% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=CPRT ***** GLC - Galileo International $23.73 *** Technicals Only *** Galileo International (NYSE:GLC) is a provider of electronic global distribution services for the travel industry utilizing a computerized reservation system. The Company provides travel agencies and individuals with the ability to access schedule and fare information, book reservations and issue tickets for more than 500 airlines. Galileo gained some attention this month when it made a $220 million bid for TWA's 26% stake in Worldspan. Galileo and Worldspan have battled for second place in recent years behind Sabre, the leader in the computerized travel reservation business. On Friday, all bids were rejected except the $742 million offer from AMR, that still requires the approval of federal regulators. GLC has been forming a Stage I base and recently moved above its 150 dma in January. We favor a cost basis near technical support as investors speculate on Galileo's future. APR 22.50 GLC DX LB=2.35 OI=753 CB=21.38 DE=42 MR=3.8% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=GLC ***** PLMD - PolyMedica $39.22 *** One-Week Speculation! *** 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 35.00 PM CG LB=5.38 OI=819 CB=33.84 DE=7 MR=14.9% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=PLMD ***** SEI - Seitel $22.05 *** Upside Earnings Surprise! *** Seitel (NYSE:SEI) is a provider of seismic data and related geophysical services and expertise to the petroleum industry. The Company's seismic data library, consisting of both 2-dimensional and 3-dimensional data, is marketed to major and independent oil and gas companies under license agreements. Seitel announced better than expected earnings for 4th-quarter this week, driven by a third consecutive quarter of record library sales and higher operating margins. Net income totaled $8.8 million or $0.35 per share compared to Wall Street consensus estimate of $0.34, as the resurgence of oil and gas exploration has increased the demand for Seitel's seismic data library . The oil and gas service sector remains bullish and SEI is optimistic about 2001. For those investors who agree with the positive outlook on the company, this play offers a reasonable cost basis in the issue. APR 20.00 SEI DD LB=3.10 OI=197 CB=18.95 DE=42 MR=4.0% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=SEI ***** SHFL - Shuffle Master $20.94 *** Rally Mode! *** Shuffle Master (NASDAQ:SHFL) is a gaming supply co. specializing in providing innovative, high quality products and services to the casino industry, including card shufflers and other table gaming equipment, table and slot games, and gaming machine software and related hardware. SHFL rallied in late February after announcing that it had signed an agreement with Recreativos Franco, Madrid, one of the gaming industry's leading manufacturers. This will allow Shuffle Master to tap into Franco's wealth of knowledge and significantly expand their product offering to casinos. Shuffle Master has been in "rally mode" since early last year and continues to move higher. The stock again has climbed into "blue sky" territory and this play offers bullish investors a conservative entry point. APR 17.50 SFQ DW LB=4.38 OI=12 CB=16.56 DE=42 MR=4.1% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=SHFL ***************** 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 VPHM 25.88 MAR 22.50 HPU CX 3.88 110 22.00 7 9.9% UTHR 14.75 APR 12.50 FUH DV 3.63 92 11.12 42 9.0% NOVN 33.69 APR 30.00 NPQ DF 6.00 49 27.69 42 6.0% MCCC 21.00 APR 20.00 MUD DD 2.50 15 18.50 42 5.9% UCOMA 18.00 APR 15.00 QUW DC 4.12 51 13.88 42 5.8% CSTR 17.63 APR 15.00 QLR DC 3.38 282 14.25 42 3.8% ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1817 ************************************************************** *********************** CONSERVATIVE NAKED PUTS *********************** Trading Basics: Managing Common Emotions By Ray Cummins One of our new readers asked why it is so important to adopt a systematic approach to trading. The answer is very simple: Most traders lose money because they do not have a plan identifying how and when to exit their positions. Maximizing profits from winning trades, while preserving capital in losing plays, is critical to long-term success and that task can be incredibly difficult without a comprehensive trading system. Human nature is one the many obstacles that new investors must overcome to be successful in the stock market. Every trade we make is affected by hope, greed, and fear and the influence of these feelings is the biggest single factor an investor must understand if he expects to profit on a consistent basis. Of course, trying to separate emotions from trading decisions is a very difficult task. As humans, we tend to act on a given set of circumstances in a very predictable manner and those natural instincts cause many traders to make emotional judgments, rather than mechanical decisions, when the situation becomes complex. To make matters worse, a trader will commit the same mistake in the future if there is not a properly pre-planned reaction to a particular sequence of events. In fact, most investors believe their response is proper in the consequence of what the market has done when in reality, the correct action should be a result of a predetermined resolution to a given set of criteria. Some of us are better at controlling their emotions than others, but everyone can benefit from the use of a systematic approach to managing portfolio positions. Unfortunately, many investors spend all their time looking for the perfect system; the "Holy Grail" of trading that produces a profit every time. Obviously, the "perfect" method does not exist. If it did, there would be no market because those with access to the system would quickly acquire all of the average trader's money. It is the element of randomness in share price movement that insures a predictable or "scripted" pattern of trading can not exist and that is the most important component of our market system. Since every strategy has specific advantages and drawbacks, successful traders follow simple guidelines that help ensure profitable results. First, they use a disciplined approach, adhering to strict principles of money management. Although losses are an unavoidable part of the game, successful traders remove ego and emotions from the outcome by executing the system as it was designed. They use discipline in applying the technique, ensuring it is initiated in a timely manner and during the appropriate market conditions. They have confidence in a methodical process and the patience to allow it time to work as intended. These sophisticated participants have have no margin for faulty judgment or excessive capital exposure but they know that a trader with a well-devised plan can be wrong about the market more often than not and still be successful. 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 BSTE 37.25 33.00 MAR 30.00 0.63 *$ 0.63 16.5% PLMD 38.75 39.22 MAR 30.00 0.63 *$ 0.63 16.3% NOVT 36.94 34.00 MAR 30.00 0.56 *$ 0.56 14.5% VSEA 31.03 30.44 MAR 25.00 0.44 *$ 0.44 14.0% ADVP 45.13 49.94 MAR 40.00 0.81 *$ 0.81 12.8% MDR 15.80 15.34 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 15.34 MAR 12.50 0.60 *$ 0.60 11.1% EFII 24.88 24.19 MAR 22.50 0.38 *$ 0.38 10.4% NEM 15.96 17.99 MAR 15.00 0.40 *$ 0.40 10.0% SGR 52.04 52.30 MAR 45.00 1.30 *$ 1.30 9.4% OLOG 23.38 24.63 MAR 22.50 0.56 *$ 0.56 9.0% TMK 36.28 36.20 MAR 35.00 0.55 *$ 0.55 8.7% PHTN 25.25 23.56 MAR 20.00 0.31 *$ 0.31 8.4% APWR 42.50 35.38 MAR 30.00 0.69 *$ 0.69 8.2% ATVI 22.50 24.63 MAR 20.00 0.38 *$ 0.38 8.0% AMAT 47.94 46.75 MAR 37.50 0.56 *$ 0.56 8.0% HGSI 48.81 49.56 MAR 35.00 0.56 *$ 0.56 7.9% LPNT 41.31 37.50 MAR 35.00 0.56 *$ 0.56 7.5% TSO 13.32 13.01 MAR 12.50 0.40 *$ 0.40 7.1% ABMD 25.44 19.38 MAR 15.00 0.50 *$ 0.50 6.5% OII 22.50 23.12 MAR 20.00 0.40 *$ 0.40 6.3% NAUT 19.19 18.75 MAR 17.50 0.56 *$ 0.56 6.2% BPOP 27.38 28.44 MAR 25.00 0.50 *$ 0.50 6.0% RBK 31.20 27.59 MAR 25.00 0.45 *$ 0.45 5.8% OII 22.00 23.12 MAR 20.00 0.45 *$ 0.45 5.4% AL 38.25 38.44 MAR 35.00 0.60 *$ 0.60 4.1% KSWS 31.50 28.81 MAR 30.00 1.38 $ 0.19 1.7% TPTH 12.75 8.69 MAR 10.00 0.44 $ -0.87 0.0% UIS 18.91 15.55 MAR 17.50 0.65 $ -1.30 0.0% *$ = Stock price is above the sold striking price. Comments: One week to go and you know what that means - time to evaluate your short- and long-term outlook on any issue you may own. The Market's horrid action continues to lend a negative influence as investors have been continually disappointed in trying to find a bottom. Regardless, many of the above issues continue to show strength as they consolidate and test support areas. McDermott International (NYSE:MDR) appears to have worried us for naught as the issue made a successful test of support - but we will still monitor the position closely. K-Swiss (NASDAQ:KSWS) has violated its 30 dma as it continues to weaken and a move below its 50 dma should signal an exit! Tripath Imaging (NASDAQ:TPTH) is at a key moment and the deteriorating technicals suggest an exit may be prudent. We will show Unisys (NYSE:UIS) closed as it is acting excessively weak and has now broken its recent up-trend. Positions Closed: Spectrian (NASDAQ:SPCT), Homestore.Com (NASDAQ:HOMS), Brio Tech (NASDAQ:BRIO). 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 VPHM 25.88 MAR 20.00 HPU OD 0.25 46 19.75 7 20.0% OATS 9.25 APR 7.50 QOQ PU 0.44 106 7.06 42 13.3% THQI 33.88 APR 30.00 QHI PF 1.38 10 28.62 42 9.0% TMAR 17.31 APR 15.00 MUQ PC 0.56 69 14.44 42 7.8% ANF 32.30 APR 25.00 ANF PE 0.55 87 24.45 42 5.7% VTS 36.98 APR 30.00 VTS PF 0.62 10 29.38 42 5.3% ADVP 49.94 APR 40.00 QVD PH 0.75 15 39.25 42 5.0% 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 $49.94 *** Health Services Sector *** 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. This position offers a conservative cost basis in the issue. APR 40.00 QVD PH LB=0.75 OI=15 CB=39.25 DE=42 MR=5.0% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=ADVP ***** ANF - Abercrombie & Fitch $32.30 *** Back On Track? *** Abercrombie & Fitch (NYSE:ANF) is engaged in the distribution and sale of men's, women's and kids' casual apparel. The company's retail activities are conducted under the Abercrombie & Fitch and Abercrombie trade names through retail stores, a catalogue, a magazine, catalogue and a web-site, all bearing some form of the company name. Merchandise is targeted to appeal to customers in specialty markets who have distinctive consumer characteristics. ANF recently reported that February same-store rose 6% from the year-ago period, provoking an upgrade from Goldman Sachs and also sending the retailer's stock to a 52-week high. In a research note, analysts said ANF shares should sell at a premium to the market given its above-average growth rate and improvements in its core merchandise business. Our position provides reasonable speculation at a cost basis well below the current trading range. APR 25.00 ANF PE LB=0.55 OI=87 CB=24.45 DE=42 MR=5.7% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=ANF ***** OATS - Wild Oats Markets $9.25 *** Rally Mode! *** Wild Oats Markets (NASDAQ:OATS) is a natural foods supermarket chain in North America. The company operates over 100 stores in the U.S. and British Columbia under several names, including Wild Oats Community Market, Alfalfa's Market, Henry's Marketplace, Nature's Fresh and Nature's Northwest, Sun Harvest Market and Capers Community Market. The company's stores are one-stop, full service supermarkets for customers seeking high-quality natural and gourmet foods and related products. Shares in OATS rallied on news that Perry Odak, former CEO of ice cream maker Ben and Jerry's, will replace the company's co-founder Mike Gilliland as chief executive of the natural foods retailer. Odak was also a top executive at cosmetics company Jovan, electronic game-maker Atari, consumer products company Armour-Dial and Color Tile. Investors obviously believe the move will improve the management of the company and they have driven the shares up 30% in the last week. Traders can speculate on the future performance of OATS share value with this conservative position. APR 7.50 QOQ PU LB=0.44 OI=106 CB=7.06 DE=42 MR=13.3% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=OATS ***** THQI - THQ Incorporated $33.88 *** Hot Sector! *** THQ Incorporated (NASDAQ:THQI) is a developer, publisher and distributor of interactive entertainment software for the leading hardware platforms in the home video game market. The company currently publishes titles for Sony's PlayStation, Sega Dreamcast, Nintendo 64, Nintendo Game Boy and Game Boy Color, and personal computers in most interactive software genres, including action, adventure, driving, fighting, puzzle, role playing, simulation, sports and strategy. The Company's customers include Wal-Mart, Toys "R" Us, Target, Kmart Stores, Kay Bee Toys, Electronics Boutique, Blockbuster, Best Buy, other national retailers, discount chains and specialty retailers. THQ Incorporated has become one of the global leaders of the video game industry by building a highly successful portfolio of properties, expanding its international distribution and acquiring next-generation console and online development studios. Fundamentally, THQI has excellent revenue and earnings growth and if you want to own a stock in the gaming software group, this position offers a conservative entry point. APR 30.00 QHI PF LB=1.38 OI=10 CB=28.62 DE=42 MR=9.0% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=THQI ***** TMAR - Trico Marine Services $17.31 *** On The Rebound! *** Trico Marine (NASDAQ:TMAR) is a provider of marine support vessels to the oil and gas industry in the United States Gulf of Mexico, the North Sea and Latin America. The services provided by TMAR's diversified fleet include the transportation of drilling materials, supplies and crews to drilling rigs and other offshore facilities; towing drilling rigs and equipment from one location to another, and support for the construction, installation, maintenance and removal of offshore facilities. Trico Marine recently announced excellent quarterly revenues, driven by increased demand during the past several months, both in the Gulf and internationally. The trend is expected to continue as strength in energy prices will likely lead to increased capital spending among industry customers and strong demand for marine services. Traders who favor the bullish outlook for the offshore oil-service segment speculate on its performance with this conservative position. APR 15.00 MUQ PC LB=0.56 OI=69 CB=14.44 DE=42 MR=7.8% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=TMAR ***** VPHM - ViroPharma $25.88 *** One-Week Play! *** 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 recent rally in ViroPharma was due to a revised agreement with Sanofi-Synthelabo for pleconaril, VPHM's most advanced product candidate. The agreement expands ViroPharma's intellectual property rights and should dramatically enhance the commercial potential of pleconaril. The upward move was overdone and the pullback offers an excellent opportunity to target shoot an entry in the issue. Plan to open the position at $0.31 (or higher), depending on Monday's trading activity. MAR 22.00 HPU OD LB=0.25 OI=46 CB=19.75 DE=7 MR=20.0% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=VPHM ***** VTS - Veritas $36.98 *** Oil Service Sector *** Veritas DGC (NYSE:VTS) is a provider of integrated geophysical technologies to the petroleum industry worldwide. The company's customers include major, national and independent oil and gas companies that utilize geophysical technologies to identify new areas where subsurface conditions are favorable for the production of hydrocarbons; determine the size and structure of previously identified oil and gas fields; and optimize development and production of hydrocarbon reserves. Oil service stocks are "on the move" and Deutsche Banc Alex Brown just raised its earnings estimates and stock price target on VTS, saying the global energy market continues to accelerate. A research note suggested that Veritas has experienced a strong recovery in its land seismic markets, benefiting from higher Canadian demand and improving prices in the United States. In addition, increasing activity in Brazil, Eastern Canada and in the North Sea should result in a pick-up in the marine segment during the next year. Target a premium of $0.62 (or higher) initially, to allow for a pull-back after the recent rally. APR 30.00 VTS PF LB=0.62 OI=10 CB=29.38 DE=42 MR=5.3% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=VTS ***************** 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 PLMD 39.22 MAR 35.00 PM OG 1.25 763 33.75 7 42.7% ESCM 20.56 APR 17.50 QFC PW 0.69 100 16.81 42 8.5% LE 28.09 APR 25.00 LE PE 1.05 31 23.95 42 8.3% UCOMA 18.00 APR 12.50 QUW PV 0.38 10 12.12 42 6.9% BBBY 28.44 APR 25.00 BHQ PE 0.94 150 24.06 42 7.7% MCCC 21.00 APR 17.50 MUD PW 0.50 0 17.00 42 6.7% RCII 45.50 APR 40.00 RQG PH 0.94 0 39.06 42 5.0% *************************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=1804 ************************************************************ ************************ SPREADS/STRADDLES/COMBOS ************************ Another Day In Paradise! The NASDAQ slid to a new two-year low today as investors reeled from another significant revenue warning in the technology group. Friday, March 9 The NASDAQ slid to a new two-year low today as investors reeled from another significant revenue warning in the technology group. The world's largest chip-maker, Intel (NASDAQ:INTC) said that it expects first-quarter revenue to fall 25% from the fourth quarter of 2000, far below the 15% decline it forecast in January. The NASDAQ closed dropped 115 points after the news, ending at 2,052. The broader market was also pummeled by a stronger-than-expected employment report and the S&P 500 index closed down 31 points at 1,233. The Dow was also a big loser, falling over 200 points to a recent low at 10,644. Trading volume on the NYSE reached 1.08 billion shares, with declines doubling advances 1,987 to 1,081. On the NASDAQ, volume was moderate at 1.9 billion shares traded, with declines tripling advances 2,681 to 993. In the bond market, the 30-year Treasury fell 8/32, pushing its yield up to 5.32%. Thursday's new plays (positions/opening prices/strategy): Intl. Bus. (NYSE:IBM) APR125C/A120C $0.60 credit bear-call Liz Claib. (NYSE:LIZ) APR40P/APR45P $0.60 credit bull-put Shaw Group (NYSE:SGR) APR42P/APR45P $0.45 credit bull-put The sharp decline in shares of International Business Machines did not help our efforts to enter the bearish position (on a simultaneous order basis) but there was plenty of opportunity to achieve an acceptable credit. LIZ and SGR both slumped during the session, providing the target entries in the bullish spreads. Portfolio Activity: Stocks tumbled today following the release of robust employment data and Intel's unexpected profit warning. Increases in service employment were surprisingly strong and although unemployment was steady at 4.2% in February, average hourly earnings jumped 0.5%. Analysts say the report confirms that U.S. economic growth remains sluggish amid weakness in the manufacturing sector and that bodes well for 50-basis point rate-cut by the Fed at its March policy meeting. Unfortunately, that component has already been factored into stock prices and Intel's dim revenue outlook simply added to the recent fears of a slowing economy. Several analysts slashed their profit estimates for other companies in the sector and the concerns of slowing demand put pressure on a number of technology groups. Computer hardware and software issues were hit hard with Microsoft (NASDAQ:MSFT), Sun Microsystems (NASDAQ:SUNW) and Oracle (NASDAQ:ORCL) among the big name losers. Internet and networking companies were also hammered with Yahoo! (NASDAQ:YHOO) and Cisco (NASDAQ:CSCO) experiencing heavy selling activity. The industrial group offered little safety as blue-chips tumbled on new weakness in manufacturing issues. Honeywell (NYSE:HON), General Electric (NYSE:GE) and International Business Machines (NYSE:IBM) led the average lower. In the broader market, only defensive drug shares moved higher while brokerage, retail, cyclical, airline, utility, oil service and natural gas issues generally retreated. The Spreads Portfolio saw mixed activity in a number of sectors today as investors searched for safety in the midst of widespread selling pressure. Most of the bearish positions benefited from the renewed downward trend but there was too little pleasure in the negative movement to offset the grievous losses endured in the blue-chip technology positions. Hewlett-Packard (NYSE:HWP) and Microsoft (NASDAQ:MSFT) were both victims of Intel's profit warning and the news also affected other chip-related companies such as Motorola (NYSE:MOT). Fortunately, there were some solid performances in defensive groups including drug and healthcare issues, and the suffering was relatively modest considering the precipitous declines in the major indices. The bearish activity did improve one of our recent time-selling positions as Advanta (NASDAQ:ADVNB) slid to $13.25, just $0.75 above our sold option in the neutral calendar spread. The downward movement brought additional time-value premium back into the $12.50 calls and we now have the opportunity to roll-forward at that strike price to reduce our overall debit in the spread. Other recent candidates in that category, Insignia Financial Group (NYSE:IFS) and Ocular Sciences (NASDQ:OCLR) have also performed well with both issues remaining near the sold (short) strike. The most difficult play in the portfolio continues to be Avery Dennison (NYSE:AVY) and today the issue did not disappoint, closing at $55.50, our cost basis in the bearish (call-credit) spread. From a short-term perspective, the issue appears to be establishing a new bullish trend above its recent trading-range top near $55. However, the move has come on meager volume and since the issue is defensive in nature, any future rally in technology shares or the broader market may bring the upside activity to an abrupt end. Another potential resistance area exists near $57, where the rallies in November and December (2000) failed and that further complicates the decision to go long or wait for a consolidation. Since the possibility of predicting the outcome is almost nil, the easiest way to (attempt to) avoid a loss may be an adjustment. Looking at the current option prices, a transition to the APR-$60 call can be made for a small debit, raising the position "break-even" above $60, and allowing for a small profit if the issue remains below that strike price for 5 weeks. Of course, that is simply one alternative, and it is not necessarily the appropriate move for everyone. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** KMG - Kerr-McGee $69.79 *** Oil Sector *** Kerr-McGee (NYSE:KMG) is an energy and chemical company engaged in oil and gas exploration and production, titanium dioxide pigment manufacturing and marketing and minerals, mining and marketing. KMG acquires leases and concessions and explores for, develops, produces and markets crude oil and natural gas through its many subsidiaries, Kerr-McGee Oil & Gas Corporation, Kerr-McGee Oil and Gas Onshore, Kerr-McGee Oil UK PLC, Kerr-McGee North Sea Limited, Kerr-McGee Resources UK. Kerr-McGee's chemical operations consist of two segments that produce and market inorganic industrial and specialty chemicals, heavy minerals and forest products through its subsidiaries, Kerr-McGee Chemical, KMCC Western Australia, Kerr-McGee Pigments KG, Kerr-McGee Pigments N.V. and Kerr-McGee Pigments Limited. The requests and suggestions for issues in the major oil and oil service sectors have been higher than usual during the past few weeks. The interest is based on the renewed bullish activity in the group and KMG is an excellent candidate for traders who favor the outlook for the industry. Analysts rank the company high in its specific segment and the strong technical support near the cost basis of the position renders a relatively conservative outlook for the play. PLAY (conservative - bullish/credit spread): BUY PUT APR-60 KMG-PL OI=46 A=$0.40 SELL PUT APR-65 KMG-PM OI=37 B=$1.10 INITIAL NET CREDIT TARGET=$0.75-$0.85 ROI(max)=17% B/E=$64.25 http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=KMG ****************************************************************** AMGN - Amgen $66.63 *** Rolling Over? *** Amgen (NASDAQ:AMGN) is a biotechnology company that discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology. Amgen manufactures and markets four human therapeutic products, Epogen, Neupogen, Infergen and Stemgen. Epogen stimulates the production of red blood cells and is marketed by Amgen in the United States for the treatment of anemia associated with chronic renal failure in patients on dialysis. Neupogen selectively stimulates the production of neutrophils, a type of white blood cell. Infergen is a non-naturally occurring type-1 interferon which stimulates the immune system to fight viral infections and is indicated for the treatment of chronic hepatitis C viral infection. Stemgen stimulates the production, mobilization and maturation of the rogenitor cells and is indicated for use in support of stem cell transplantation. This position was discovered with one of our primary scan/sort techniques; identifying potentially failed rallies on issues with bullish options activity. The pharmaceutical segment is losing its attraction as a defensive area for investors and it appears that AMGN is out of favor as well. In addition, the premiums for the (OTM) call options are slightly inflated and the potential for a technical recovery is significantly affected by the resistance at the sold strike price; a perfect condition for a bearish credit spread. As with any candidate, the position should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (moderately aggressive - bearish/credit spread): BUY CALL APR-80 YAA-DP OI=12587 A=$1.00 SELL CALL APR-75 YAA-DO OI=8414 B=$1.75 INITIAL NET CREDIT TARGET=$0.88-$1.00 ROI(max)=21% B/E=$75.88 http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=AMGN ****************************************************************** CKP - Check Point Systems $10.01 *** Reader's Request! *** Checkpoint Systems (NYSE:CKP) is a multinational manufacturer and marketer of retail asset tracking and protection products, including integrated security, automatic identification, and retail merchandising solutions. The company offers a radio frequency identification technology, bar code labeling systems, tags and supplies, and a global network of e-Commerce-enabled service bureaus. Retail merchandising systems include hand-held label applicators, promotional displays, and queuing systems. The company also markets closed circuit television systems and point-of-sale monitoring systems primarily to help retailers prevent losses caused by theft of merchandise, as well as electronic access control systems for commercial and industrial applications. The company holds or licenses over 1000 patents and proprietary technologies, including those acquired in the 1999 acquisition of Meto AG, relating to its products and their manufacture. One of our readers provided this issue and asked if it would be a good candidate for a covered-call. Fundamentally, the company is doing well, having reported earnings of $9.5 million, or $0.28 a share in mid-February. In the year-ago period, Checkpoint earned $3.2 million, or $0.11 a share. Revenue for the quarter rose to $188 million from $111 million last year and the company expects revenue to rise 3% to 4% in 2001. Technically, the issue appears to be working its way out of a year-long trading range from $7-$9. However, the option premiums are relatively small, so rather than limit the upside potential with a covered-call, a good alternative would be the synthetic position. Target a higher credit in the play initially, to allow for a pullback in the issue. PLAY (conservative - bullish/synthetic position): BUY CALL MAY-10 CKP-EB OI=415 A=$1.10 SELL PUT MAY-10 CKP-QB OI=170 B=$0.90 INITIAL NET CREDIT TARGET=0.05-$0.10 TARGET PROFIT=$0.75-$1.00 Note: Using options, the position is equivalent to being long the stock. The collateral requirement for the sold (short) put is approximately $500 per contract. http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=CKP ****************************************************************** - STRADDLES & STRANGLES - ****************************************************************** TBH - Telecom Brazil ADR $64.00 *** Probability Play! *** The Telecomunicacoes Brasileiras ADR represents the common shares of the various holding companies of Telebras. In 1998, Telebras spun off twelve holding companies representing separate Brazilian long-distance, regional wire-line and wireless entities. These common shares were listed and started trading in September of that year. One ADR equals 1,000 Telebras portfolio certificates. An ADS, or American Depositary Share, is a U.S. dollar-denominated form of equity ownership in a non-U.S. company. It represents a specified number of foreign shares on deposit at a custodian bank in the issuer's country and carries the corporate and economic rights of the underlying foreign shares. An American depositary receipt (ADR), is a certificate evidencing ownership of a certain number of ADSs. The term ADR is sometimes used to refer to ADS. We are almost afraid to run a straddle these days, as the recent range-bound market has made it very difficult to profit from this strategy using statistically favorable positions. However, we have had good luck with the South American ADRs and Telebras is another unique candidate in this group. The past volatility in the issue is more than adequate to produce a profitable outcome and the probability of TBH moving to one of the break-even points in the allotted period is above 80%, based on its recent trading pattern and the current option prices. Traders who participate in delta-neutral strategies should consider this conservative position and review it with regard to their strategic approach and trading style. PLAY (conservative - neutral/debit straddle): BUY CALL APR-65 TBH-DM OI=804 A=$3.50 BUY PUT APR-65 TBH-PM OI=238 A=$4.40 INITIAL NET DEBIT TARGET=$7.70-$7.75 TARGET ROI=20% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=TBH ****************************************************************** IMPH - Impath $49.44 *** Technicals Only! *** Impath (NASDAQ:IMPH) specializes in providing patient-specific cancer diagnostic and prognostic information, with a particular expertise in difficult to diagnose tumors, prognostic profiles in breast and other cancers, and lymphoma/leukemia analysis. The company works with more than 7,400 physicians specializing in the treatment of cancer patients, in 1,785 hospitals and 409 oncology practices. IMPH's database currently contains more than 550,000 patient profiles. In addition, Impath can link its information with that of its tumor registry business to provide data on the full continuum of care, from diagnosis through treatment and outcomes on many patients. Impath is working on more than 50 projects with over 20 different pharmaceutical/biotechnology companies. Here's another candidate for traders who like to sell premium on volatile issues. The issue has a relatively well-defined trading range that has slowly consolidated since late last year, and no apparent events that will substantially change its character prior to the April options expiration. Our profit envelope is outside the most recent pattern boundaries from $40-$60 and the technical indications suggest the sideways trend will continue. Traders who favor this style of speculation will note that the position has a statistically high probability of a successful outcome. As always, review the current news and sector outlook before making your own decision about the future outcome of the play. PLAY (speculative - neutral/credit strangle): SELL CALL APR-70 QPH-DN OI=124 B=$1.00 SELL PUT APR-35 QPH-PG OI=7 B=$1.00 INITIAL NET CREDIT TARGET=$2.12-$2.25 ROI(max)=17% UPSIDE B/E=$72.12 DOWNSIDE B/E=$32.88 http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=IMPH *************************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=1810 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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