The Option Investor Newsletter Tuesday 03-13-2001 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/031301_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 03-13-2001 High Low Volume Advance/Decline DJIA 10290.80 + 82.50 10293.10 10108.10 1.36 bln 1476/1601 NASDAQ 2014.78 + 91.40 2015.35 1932.63 2.10 bln 2110/1648 S&P 100 613.51 + 12.00 613.73 598.80 totals 3586/3249 S&P 500 1197.66 + 17.50 1197.83 1171.50 52.5%/47.5% RUS 2000 462.26 + 3.86 462.45 453.46 DJ TRANS 2769.74 - 91.45 2863.97 2723.97 VIX 30.73 - 4.38 35.37 30.68 Put/Call Ratio 1.01 ****************************************************************** Market Must Be Down I know this to be true now because Lou Dobbs made his token appearance as the headline guest on the Today show this morning. I usually don't watch morning television other than to catch the jabs Mark Haines lays on Joe Kernen on CNBC but this morning, as I searched for a weather prediction, all the talk shows were headlining the market turbulence. As Matt Lauer drilled Lou with probing questions (most of which have been asked for almost a year now) I couldn't help but think that this was a message to Joe Public not to panic. Of course things have bad before the NASDAQ dropped below 2000, but it seemed that the highly psychological break down through this level on Monday was enough to put the markets in the headlines again. This highlighting of the market's malaise may actually serve to provide us with the final sell off that we need to gain some traction here and go higher for at least a while. The weak holders may use this break through 2000 as an excuse to throw in the towel. On the other side of the coin, many long- term investors have targeted the 2000 level as a place to step up to the plate and buy. No matter what the small investor thinks, in the end it is the institutional buying and selling that moves the market. To that end, it doesn't appear as if the mutual fund managers are positioning themselves for a turnaround anytime soon. In a recent survey of mutual fund managers, only 18% of U.S. managers expect a more healthy earnings picture in 2001 and only 10% expect a "V" type recovery in 2001. For the uninitiated, a "V" recovery is one that rockets straight off a bottom. Instead of a "V" recovery, many analysts are now calling for a more prolonged recovery off the bottom or an "L" recovery. I don't know about you, but whatever letter you believe will typify the bottom, I'd just like to see the "recovery" part of the equation come to fruition, and soon! Today's Markets On Tuesday, investors were successful at plugging the holes in the dam that had caused the major indices to leak red all over Wall Street during Monday's session. Buyers finally stepped in after Monday's sell off to scoop up tech bargains. The NASDAQ (COMPX) rebounded by 91.40, or 4.75% to close back above the important 2000 level at 2014.78. Volume came in at a healthy 2.1 billion shares and advancers beat decliners by 2092 to 1659. Over in the DOW (INDU) things got off to a slow start but the burners kicked on in the afternoon session to take the old economy average higher. The DOW added 82.55, or 0.81%, to 10290.80. It spent much of the morning in negative territory as money flowed into tech stocks; however, it was boosted by late day buying in General Electric (NYSE:GE), J.P. Morgan (NYSE:JPM) and International Business Machines (NYSE:IBM). The stocks closed up $2.73, $1.91 and $2.90 respectively. Treasuries took a rest after recent gains as interest once again turned back to equities. The 10-year benchmark bond closed down 11/32 to yield 4.94% and the 30-year note lost 20/32 to yield 5.34%. We also received some economic news today in the form of the February retail sales figures. Sales for February dipped slightly by 0.2%, but this was more a function of a simultaneously huge upward revision in the January sales figures. Sales in January were revised up to 1.3% from the previously released number of 0.7%. All in all these reports point to a consumer that is still spending and this is good news for an economy that needs the consumer on its side to avoid an extended recession. Stocks and Sectors on the Move Most all technology sectors saw a good bounce off extremely oversold levels today. The PHLX Semiconductor Index clawed its way back by 36.13 to close above 600 at 612.51. Some standouts in the sector included KLA-Tencor (NASDAQ:KLAC) up $2.56 to $43.81, Micron Technology (NYSE:MU) up $3.29 to $44.05 and Advanced Micro Devices (NYSE:AMD) up $1.05 to $23.78. Networking stocks also received a collective group hug from investors today. Stocks in the sector were bid up today on the heels of sizeable losses on Monday. Cisco (NASDAQ:CSCO) recouped $2.56, ending today's session at $21.38. John Chambers spoke today at the Merrill Lynch Global Communications Conference, essentially saying that new orders continue to be soft and that this slowdown would be a two- quarter phenomenon at minimum. But, in a show of confidence in the long-term outlook of the company, Chambers indicated that Cisco would consider reinstating a share buyback program. Bucking the decidedly upbeat tone on the day were shares of Tyco International (NYSE:TYC). The big conglomerate's shares fell $3.87 to $46.83 after the company announced that it is purchasing finance company, CIT Group (NYSE:CIT), for approximately $9.2 billion in stock. The drop in Tyco shares was due in most part to worries over the dilution stemming from the stock-swap acquisition. Tyco plans to use the CIT's services to provide vendor financing within its other areas of business, including telecommunications, electrical equipment and security systems. Also flying into the market's headwind today were airline stocks. Delta Airlines (NYSE:DAL) warned of weaker profits, sending most airline stocks into a landing pattern. Delta warned that, due to a weak economy, it would lose $0.70- $0.90/share instead of the expected profits of $0.46/share. That's like landing at Logan instead of Laguardia! Needless to say the stock took a hit. DAL closed off $1.64, or 3.81%, to $41.46. United Airlines (NYSE:U) followed suit, falling $1.10, or 3.3%, to $32.20 and United Airlines (NYSE:UAL) descended by $1.64, or 4.28%, landing at $36.72. Looking Forward, Always Forward Wednesday brings with it the January Business Inventory report. Although the business inventory report is not usually market moving, as we get closer to the March 20th Fed meeting, all economic reports take on added weight. January business inventories are seen coming in unchanged from December's levels. The real test going forward is to see whether the DOW and NASDAQ can rally together or if one has to suffer at the expense of the other. Recently, the NASDAQ appears to have started to drag down even the old economy stocks. We need to see evidence of this dwindle, since along with the retail investor losing confidence, if we get into an irrational market where even valuations go out the door, then we are in trouble. While the market is still in repair mode and while earnings warnings still are a real threat, traders should still be in "tread lightly" mode. This means going into trades with less than your normal position and closely monitoring sectors for hints as to where the money is flowing. Trade Smart and Keep Stops In Place Craig Seidler Contributing Editor www.OptionInvestor.com ************************************ Spring Options Workshop and Bootcamp April 5th-9th, Denver Colorado ************************************ OptionInvestor is proud to announce our third annual Spring option workshop in Denver Colorado. This power packed five-day event is structured to fully educate you on advanced option strategies and will make you a better and more profitable trader. If you attended the March Denver Expo last year and thought it was the best function you had ever attended...you haven't seen anything yet! Great food, entertainment, education and just plain fun in sunny Denver. The biggest complaint in March was the massive weight gain experienced by the attendees from the gourmet menu. We know how to put on a function. Ask anyone who came last March! Current speakers include: Tom DeMark, author of "Day Trading Options", "Science of Technical Analysis" and "New Market Timing Techniques" and manager of a $4 billion hedge fund. John Najarian, "Doctor J" as he is known on the CBOE Richard Arms, inventor of the TRIN, or Arms Index, Equivolume charting and author of "Trading Without Fear." Mark Skousen, Editor of Forecasts and Strategies for over 20 years. Steve Nison, the worlds foremost expert on Candlestick charting. Author of "Japanese Candlestick Charting Techniques" and "Beyond Candlesticks." Harry Brown, author of seven investment books. Jim Crimmins, President of TradersAccounting.com Austin Passamonte, editor of IndexSkybox.com Jeff Bailey, editor of PremierBriefing.com Jim Brown, President of the Premier Investor Network. The detailed schedule will be posted in about two weeks. There will not be individual breakout sessions during the day. Each topic will be covered in 1-2 hr general sessions taught by one or more OptionInvestor staff and presented on three giant screens. In the evening we will offer five of our popular chalk talk sessions for that personal question and answer interaction. Unlike other seminars with only two or three instructors, you will get in-depth knowledge from many different instructors who are experts in their field. The cost for the four-day workshop, April 6th to 9th is only $2995 (spouse only $1495). This includes breakfast, lunch and supper each day. All course materials, a CD of all the presentations and a professional video package of the entire seminar so you can review the material at home in the comfort of your living room. There is also a $500 discount if you have attended a prior OIN seminar. This is not a prepackaged presentation that gets repeated over and over with stale information. This is a one-time production and everything is fresh, live and as current as we can make it. The videos will have your real time questions and answers and not some from a prior class. Where else can you get intensive yet personalized options education like this? Do not delay as seating is very limited. We guarantee you will not be disappointed! You can pay for your education one bad trade at a time or you can invest less money one time to learn how to do it right. Click here for more info: https://secure.sungrp.com/workshop/april01/index.asp ************************Advertisement************************* What will your strategy be for 2001? The VRTrader.com Annual Forecast Model Your road map to the 2001 market! Forecast is prepared by Mark Leibovit, the #1 market timer in the nation. Mark is Chief Market Strategist for VRTrader.com, a Premier Investor Network website, a technical consultant and former 'Elf' on Louis Rukeyser's Wall Street Week for 7 years. His Annual Forecast Model has been subscribed to by Wall Street's most elite. Mark is presently ranked #1 timer in the nation by TIMER DIGEST and #2 on AmericasBestTimers.com. Order your today! click here: http://www.sungrp.com/tracking.asp?campaignid=1778 ************************************************************** **************** MARKET SENTIMENT **************** Was That The Bottom? By Austin Passamonte The eternal question we've been asked and asking others for nigh on a full year now. Our definitive answer would be, "Quite possibly and maybe, probably for now." How's that for conviction? First the near term. Tons of technical damage was done from Friday and Monday's massive selloff. Once again, layers of resistance lie meshed above us as investors & traders pray for certain levels to get hit so they can just exit at even. Trust us, they are out there in droves. That being said, greed causes the very same holders of hope to resist selling their aforementioned "stranded dogs" even while those issues rally back from despair. Monday had all the signs of temporary capitulation. Massive selling, VIX & VXN values soaring and put/call ratios beyond all measure of sanity. Today's early test of 10,100 in the Dow as pointed out by Jeff Bailey in his "Premier Briefing" hourly reports called it to a "T." Markets gradually moved higher and closed near the respective peaks from there. Yesterday they couldn't sell 'em fast enough; today they buy? What kind of logic, reasoning and common sense does that make? None. Welcome to the world of equity trading where human emotion rules. Plenty of trading accounts went bust over the past three sessions as margin calls forced dumping of the good with bad and traders trapped in a gut wrenching see-saw just wanted out. Others were forced out from being on the wrong side of volatile moves in both directions as well. We officially call that "washed out." Then nightfall came and went, traders wake up to a landscape of bargains and swoon for their discarded angels once again. If we had $1, o.k. $100 for each time we've seen this there would be no need to trade again for awhile. Now what? No company of importance has warned, Japan hasn't yet filed Chapter 7 and post-market futures are up nicely as we speak. Straight up the charts from here? It's never that easy, especially during Triple-Witch expiration events. We expect Thursday to be a wild session as European-style option contracts and numerous CME & NYBOT futures contracts cease trading or expire, including the mighty S&P 500. That coupled with PPI on Friday and general market turmoil almost assures us of large-range days at least two of the next three ahead. Let's not forget the FOMC on Tuesday but we'll focus on that this weekend. Possible overhead resistance: QQQ: 46 NDX: 1800 OEX: 633 SPX: 1235 Dow: 10,400 Possible underlying support: QQQ: 42 NDX: 1680 OEX: 598 SPX: 1180 Dow: 10,100 Market Sentiment's best guess: Major indexes trudge higher on volatile action and close well above current levels if no bombshells erupt. Lurking in the shadows are rally killers too numerous to mention and any could easily derail such fragile upside movement. We'll dissect long-term trends and market lows behind and ahead in Saturday's edition. Let's survive & prosper the next three sessions first. Trade the daily trend, use small amounts of risk capital willing to be lost and consider trading a very few March contract index options. We can almost assure ourselves the action could get wild, and massive multiples can & do amass between Wednesday's open and Friday's close. Chances of broad indexes trading flat over the next three sessions are slightly lower than that first par-5, hole-in-one that patiently awaits us in the distant sun. We never know which little ball teed up in the fairway will be the one! ********* VIX Tuesday 03/13 close: 30.73 VXN Tuesday 03/13 close: 72.67 30-yr Bonds Tuesday 03/13 close: 5.34% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Tuesday (03/13/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 650 - 635 13,740 8,961 1.53 630 - 615 8,275 12,838 .64 OEX close: 613.55 Support: 610 - 595 1,710 13,272 7.76 590 - 575 12 11,698 974.83 Maximum calls: 700/ 6,978 Maximum puts : 560/10,095 Moving Averages 10 DMA 635 20 DMA 649 50 DMA 679 200 DMA 743 NASDAQ 100 Index (NDX/QQQ) Resistance: 54 - 52 77,579 21,875 3.55 51 - 49 143,432 59,324 2.42 48 - 46 72,874 65,642 1.11 QQQ(NDX)close: 44.45 Support: 43 - 41 22,342 24,715 1.11 40 - 38 3,992 25,687 6.43 37 - 35 895 7,810 8.73 Maximum calls: 50/95,963 Maximum puts : 48/42,061 Moving Averages 10 DMA 46 20 DMA 50 50 DMA 57 200 DMA 78 S&P 500 (SPX) Resistance: 1275 24,199 23,491 1.03 1250 25,039 26,072 .96 1225 9,262 12,498 .74 SPX close: 1197.71 Support: 1175 1,631 10,544 6.46 1150 609 19,112 31.38 1125 22 5,393 245.14 Maximum calls: 1350/47,392 Maximum puts : 1325/42,451 Moving Averages 10 DMA 1234 20 DMA 1258 50 DMA 1305 200 DMA 1397 ***** 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 S&P 500 (Current) (Previous) (Current) (Previous) 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 the twelve percent range for several weeks. The Small Specs and Commercials have lightened up in their net-short positions on the DJIA. 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/031301_1.asp *********** OPTIONS 101 *********** A Strategy That Can Work By David Popper Boy this is hard. The market looks like a bottom is forming and a trap door springs. Many friends of mine gain confidence when the market has a rally and despair the very next day when the market resumes its downward trend. There are a lot of technical and fundamental reasons why the market is behaving like this. There are all sorts of books that would teach you how to play a bear market rally such as Stan Weinstein's book, "Secrets for Profiting in Bull and Bear Markets." The bottom line for part time traders is that these fine strategies take too much time and require a lot of practice before a trader begins to be profitable. There are principles and safeguards that can be employed, however, which can help a trader in this environment as long as the trader is realistic about the amount of profit which can be achieved. In case you have not noticed, this market is completely counter- intuitive. Just when it "seems" safe to jump in, the market falls. Just when fear is in the air, the market rises. Simply put, feelings and hunches are completely unreliable and are usually totally out of sync with the market. It may be best to stay out at this point. If you must play, however, there is a strategy which can work in this type of market. Keep in mind that this is not the strategy that you would want to play in a bull market, nor is it a strategy that you would want to play in an overvalued market. Instead, this strategy is designed for busy people, who want to be involved in the market, stay in sync with the market, hedge their position and be profitable. Below I will discuss aspects of this strategy. 1. ONLY TRADE THE TOP STOCKS OR INDEXES: Institutions have certain favorites which are well established companies and are gorillas in their field. Because these companies are quite large, and their stock is quite liquid, institutional money tends to flow toward them when the market trend reverses. Indexes such as the NASDAQ 100 share these same characteristics, but actually provide even more safety because no one warning will make the index fall out of bed. The NASDAQ 100 is my trading vehicle of choice. 2. BUILD A POSITION: Purchase a position in one or more stocks or indexes with 1/4 of your funds and write either current month deep in-the-money(ITM) calls or alternatively write at-the-money(ATM) calls four to six months out. The advantage of the deep ITM calls is that the extrinsic portion of the call premium depreciates rapidly. The advantage to the longer ATM call is that you secure much more premium due to the high amount of time premium associated with a lengthy expiration date and the fact that ATM calls have the most extrinsic premium built into them. Writing longer term calls does not keep you necessarily in the play for four to six months because if the stock really roars up or down and then settles, the extrinsic portion of the call premium will depreciate rapidly. At that point, you would be able to buy the call back and begin a new play. 3. COVER OR CLOSE YOUR POSITION: If the stock or index, moves up rapidly you would have the option of closing your option position, as discussed above, or simply buying a put for a small amount of money. Once the put is in place, my downside is protected. The profit I make will be the difference between the call and put premium if they are at the same strike price. For example, if I were to sell the $50 call on the QQQ (NASDAQ:QQQ) for $10 and later buy the put for $4, my profit would be $6 and my downside is protected. On top of that, I will be able to profit on a market downturn because my the call that I sold will depreciate in value, while the put that I own will increase in value. On a dip, you would be able to buy back the call cheap and resell it on a rebound. Likewise you could sell the put when the market is severely oversold and repurchase the put on a rally. The beauty of this strategy is that you are in sync with the market. When the market rallies and everyone is buying, you are selling calls for a high premium and establishing downside protection. When the market is dropping and everyone else is panic selling or buying puts for high premiums, you are buying back calls cheap and selling the "cheap" puts for a profit. You are actually buying low and selling high. True, even this strategy will take some practice, but the moves are slower and it is easier for a part time trader to stay on top of the trade. 4. WAIT 30 TO 60 DAYS BEORE YOU DEPLOY AN ADDITIONAL 1/4 OF YOUR TRADING ACCOUNT: Sometimes during the frenzy of an unproven bear market rally, I have found myself jumping the gun and deploying too much capital at once. This can be unproductive. Currently, the market swings are violent. Each thirty to sixty days finds the market trading in a new range. It can be helpful to start an entirely new position, even if with the same security, because the position will be established at an entirely new strike price and with covered calls established on different expiration dates. These modifications are an additional way to diversify your positions. Further, after this system has been employed for a period of 6 months, you will notice that expiration dates will be approaching every month or every other month, so you will have the opportunity to establish new positions often. In essence, by using this strategy, you will be able to collect premium every 30 to 60 days which will provide substantial cash flow. The employment of a portion of your funds on a systematic basis gives you some of the protection of dollar cost averaging, while the use of puts protects your downside and allows you to profit in bull or bear markets. Obviously, skill at reading charts will aid in a trader's ability to establish positions that are potentially safer and more profitable. This strategy, however, affords much more margin for error. ************** TRADERS CORNER ************** Preparing For A Bottom By Scott Martindale What a difference a week makes. Last Tuesday I was waxing nostalgic about the big morning gap up -- the kind that we had enjoyed so often during fall 1999 through spring 2000. However, since last Tuesday we have seen the markets plummet as horribly as anything we saw last year, despite today's encouraging internals. For my part, I'm getting tired of discussing all the reasons the markets should be bottoming while watching them continue to nosedive. Yesterday, the S&P 500 officially joined the Acapulco cliff-diving club. Only the Dow continues to hold out. Now our stock market troubles are threatening to impact Europe, which had been starting the road to recovery. But despite the rants of certain perma-bears (or should we call them vultures) who are excitedly predicting a further 35% drop in Nasdaq, the economy has not died -- it has been temporarily slowed by an FOMC that was too aggressive with rate hikes and is now too reluctant with rate cuts. The Fed should cut rates another full point over the coming weeks, and they continue to pump money into circulation as a stimulus. Admittedly, today's action was enticing. If you are greedy like me, it was hard to resist jumping in on today's bounce. If you believe the bottom is here or not far off, it may be time to start thinking about naked puts gain. However, a huge rally may not be in the cards, so mid- to long-term calls and LEAPS may not be the best play, unless you plan to short-term trade them. However, if you are prepared to exit quickly, or if you don't mind accumulating some shares at "good" prices, naked puts (and put credit spreads) might be a good strategy, especially given the high VIX (i.e., high premiums). Understand the risks and rewards of this strategy -- your reward as a put seller is limited to the initial premium you collect, no matter how much the underlying stock rallies, but your risk in the event of a stock price decline is substantial. I have learned to only write puts on stocks I really believe in and wouldn't mind owning, not just those that have high options premiums and good current technicals. Keep in mind that when you buy an option the underlying stock must move strongly in your direction to make money, but when you sell an out-of-the-money (OTM) option you make money if it goes in your direction, stays at the same level, or even goes slightly in the wrong direction. Also, time decay is fastest for short-term (one to three month) options, which is in your favor as a seller but is a disadvantage as a buyer. Don't get greedy and focus solely on stocks with high options premiums. The premiums are high for a reason -- high volatility, which means it could go down as fast as it goes up. And beware of options that have higher implied volatilities than normal for the underlying stock. When implied volatilities are significantly higher than normal for no apparent reason, a significant move may be coming. You don't want to be on the wrong side of such a move. Pick the stocks first, then choose the put option. Many traders have found success by focusing on relative-strength leaders in a strong uptrend. Compile a watch list of your favorite stocks and find a good support price for each based on technicals and option open interest. It's best to catch a stock bouncing firmly off support, and then sell a front-month strike at or below that support price. Be especially careful selling in-the-money (ITM) puts, which increases your margin requirement and the chance of assignment (watch out for early assignment!). Carefully track your put selling positions to be sure that you can afford to purchase all the underlying stock under your contractual obligations in the event of a market decline. Of course, you can improve your odds by diversifying among various industries. Going all-tech is probably not prudent in this environment. But even if the stock moves up as you hoped, be prepared to buy it back, especially if it moves up quickly. Volatile stocks can drop back down just as quickly as they move up, so I think it's better as a general practice to close out the position when you can lock in a good profit and free up your margin for another play. A variation on the buy-back strategy is to turn the naked put into a put credit spread by legging into the spread as the stock moves up. This provides: a larger credit than if you entered both legs at the same time, a larger target profit than simply buying back the sold put, better downside protection than a naked put position (important in this market!), and it frees up margin. Of course, you can also enter the position initially as a credit spread rather than legging in by placing a limit order on the net credit. What happens if you sell an OTM put below support, but the stock moves against you? OIN has described a strategy whereby if the stock drops to the strike price sold, you cover the position by shorting the stock instead of buying back the put for a loss. This creates a covered put. If the bear is still here, it might be a good way to play. Perhaps the best place to look for bullish stocks right now are the small and mid caps, which have outperformed the big caps this year. Around 66% of stocks on the NYSE are above their 200-day moving average. This provides strong support to the thesis of imminent recovery in both the economy and the broader market. Where else to look? How about power generation companies like AES Corp. (NYSE: AES), Calpine (NYSE: CPN), NRG Energy (NYSE: NRG) and Dynegy (NYSE: DYN). They are well-positioned to capitalize on a key growth area. They aren't very volatile, which means they don't offer big options premiums for naked puts, but they are playable with relative safety. How about in the tech sector? Semiconductors will lead any advance in technology by virtue of their position as key components and building blocks in virtually all new technologies. Moreover, they generally sport modest P/E's. In particular, look at the market positions and valuations of companies like Applied Materials (NASDAQ: AMAT), LSI Logic (NYSE: LSI), National Semi Conductor (NYSE: NSM), KLA-Tencor (NASDAQ: KLAC), Texas Instruments (NYSE: TXN), Taiwan Semiconductor (NYSE: TSM), Novellus (NASDAQ: NVLS), and International Rectifier (NYSE: IRF). They may not provide the huge moves of some other tech names in networking, storage, or advanced semiconductors, but they aren't going to have as much downside either. Also, looking at today's movers gives an indication as to who might move the fastest when the markets decide to sustain a rally. I was quite impressed today with BEA Systems (NASDAQ: BEAS), Human Genome Sciences (NASDAQ: HGSI), Juniper Networks (NASDAQ: JNPR), Mercury Interactive (NASDAQ: MERQ), Extreme Networks (NASDAQ: EXTR), and Ballard Power (NASDAQ: BLDP). *************************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=1797 ************************************************************ PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** WAG $42.89 -1.32 (-1.67) Banc of America initiated coverage on WAG with a buy rating this morning, but that effort couldn't trump the negative tone of the retail sales report this morning. The unexpected dip in sales caused widespread selling in retail issues, which spilled over into WAG and dragged it below our stop at $44. WAG did bounce off the $42 level today, and we'd use any extension of that bounce to exit positions early tomorrow. PPG $52.66 -2.04 (-2.84) Cyclical stocks took it on the chin Tuesday on the heels of continued weakness in the sector and an unfriendly retail sales report. PPG was no exception as the stock fell below our protective stop at $54 and continued lower before bouncing off support at $52. If the break below our stop at $54 didn't get traders out this morning, look to exit open positions on a pop back above $53. ELY $24.80 -1.20 (-1.71) The momentum we had been gaming in shares of ELY came to an abrupt halt this morning following a bearish retail sales report. The stock slipped below our stop at $25.50 before bouncing off the $24 level. If the break below our stop didn't get you out, look to exit existing positions on an advance back above $25. MYG $35.92 -1.09 (-0.69) Our new play in MYG that we initiated yesterday came to an end today following the release of retail sales figures. MYG slipped precipitously at the open this morning and offered little in the way of entry points. If by chance readers did get into the play today, look for MYG to breakout above $36 and consider exiting around the $36.50. PUTS: ***** SEBL $29.84 +4.53 (+3.40) All good things must come to an end at some point, including our put play in SEBL. The stock offered several profitable entry points since we picked it at $30.06. After a failed rally from $33 last Tuesday, SEBL slid all the way down to $25.13 on Monday of this week with the intense selling which occurred on the Nasdaq. However, the broad based one day recovery on the Nasdaq today brought SEBL past our stop level of $28. It's a long way to go before SEBL can reach its 50 dma of $56.20, however, at this point, we think it is prudent to drop coverage tonight. BGEN $63.38 +2.63 (+0.44) On Monday, BGEN opened at $62.94, and proceeded to slide from there with the technology selling to reach strong support at $60.31. On Tuesday, Elise Wang of Solomon Smith Barney upgraded BGEN to outperform, giving it a price target of $75. Initially, BGEN did not respond with very much enthusiasm to this upgrade, as it lingered around the $61 level in the morning. However, when the Nasdaq started to rally, BGEN picked up momentum, reaching $63 by 2:00, and then a high of $65 by 3:20. While BGEN pulled back toward the close, it closed right above its 200 dma of $63.19. At this point, BGEN has lost much of its downward momentum, and as such, we are taking our profits and dropping it tonight. MWD $59.00 +3.00 (-1.75) Positive comments from John Mitchell at Putnam Lovell Securities helped the brokerage sector today. According to Putnam Lovell, the sector has excellent long term growth prospects, and many stocks are approaching attractive valuations. Bear Stearns, Lehman Brothers, Goldman Sachs, and Morgan Stanley all regained some lost ground today. While the sector is highly likely to experience weakness in the near term, MWD closed at our stop price of $59, and as such, we are dropping it tonight. NEWP $38.15 +4.75 (+3.03) Newport was one of the 15 stocks chosen by the NASDAQ in a pilot program to test the decimal system. This was of little difference to traders on Monday, as the stock gave up $1.73 or almost 5 percent. Despite the break below support at $35, volume was light for the day, especially considering the volume to the downside for other Tech stocks. This suggested to us some latent strength and with that, we tightened our stop, moving it down from $40 to $37. Today NEWP bounced strongly from its oversold condition, advancing over 14 percent. While volume was light, just under 75% of ADV, the close above the 5-dma at $37.90 along with our stop price of $37, suggests that another move higher could be with more conviction. Already a highly profitable play, we are taking our gains and gladly moving on. VSTR $93.81 +5.44 (+0.31) That was quick! Yesterday's weak opening got our VSTR play off to a good start, and we got an attractive entry as the stock fell below our $92 entry trigger after amateur hour. As the broader markets continued to feel the pain of the bears' mauling, VSTR fell to close at $88.50, very near the low of the day. Alas, that seems to have been the bottom for the time being, as buying emerged right from the open. The rally really seemed to grow legs in the final hour, pushing our play up to close at the high of the day, solidly above our $92 stop. The bulls are hoping for a continuation of today's recovery, and given the strong move this afternoon they may get their wish. At any rate, with a violated stop, it is time to say goodbye to VSTR. ************** BROKERS CORNER ************** A Market Psychology Gauge There are various tools that gauge the market's psychology. The VIX (CBOE's volatility index of the S&P 100), VXN (CBOE's volatility index of the NASDAQ 100), Investor Sentiment Readings, Put/Call ratios, and the CBOT Commitment Of Traders Report are some of the indicators investors use to calculate the market's sentiment. Many of the indicators previously mentioned are considered contrarian indicators. The term contrarian suggests that the data collected may be analyzed as the opposite of the actual readings. For example, an Investor Sentiment Reading, which polls the population of investment newsletter editors, that has an overwhelming majority of bulls over bears is believed by the contrarian investor or "smart money" to be bearish. The actual point at which the Investor Sentiment indicator turns bearish or bullish is up for debate. I have my personal parameters while others have theirs. The basic concept of using contrarian indicators is doing the opposite of the market's sentiment. The term "Smart Money" usually refers to the money not being controlled by the investing public (often referred to as sheep of the herd). My intention is not to offend anyone. I want OIN readers to be educated about ways to possibly gain an edge. When the average person is talking about their latest investment in some arbitrary sector, the smart money would probably sell. This theory is based on an old saying, "the herd gets slaughtered." Another indicator that may give some insight to market sentiment is the Put/Call ratio. You may have heard the Put/Call ratio mentioned on the TV by Tom Costello or Bob Pisani on CNBC. The Put/Call ratio is the volume of puts divided by the volume of calls. There are two ratios to consider; the Index and the Equity. I refer to the CBOE's volume for the Index ratio and the sum of the 5-option exchanges' volume for the Equity ratio. This may be an intra-day as well as an intermediate term indicator. The contrarian believes that a large amount of call volume versus a small amount of put volume is bearish. By assuming that the volume is call and put buying, the larger amount of call volume suggests that the market is net bullish. Because the contrarian believes the opposite, the smart money usually speculates that this is bearish. The presence of a large amount of put volume suggests that the market may be turning bearish. This is usually read as a bullish sign. Unfortunately, the data isn't always dependable because the data changes throughout the day. An investor may wish to look for a general trend. I prefer to use this with other indicators in order to get a consensus on the market's sentiment. As with the Investor Sentiment Reading, the parameters to use on the Equity and the Index Put/Call ratios are debatable. I suggest asking your broker what parameters to use. Or you may contact me via e-mail @ RJOgilvie1@home.com or toll free @ 877-925-0880 if you need further information regarding this topic or any other questions pertaining to investing. Robert J. Ogilvie Neither Cutter & Company, Inc. nor Robert J. Ogilvie makes any representation as to the accuracy, reliability or completeness of any charts, formulas, and /or research opinions presented herein. This article is intended solely for educational purposes. Nothing herein should be construed as an offer or solicitation to buy or sell any securities. Cutter and Company is a Member of the NASD, MSRB, and SIPC. *************************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=1805 ************************************************************ FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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The Option Investor Newsletter Tuesday 03-13-2001 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/031301_2.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1813 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** No call updates tonight ******************* PLAY UPDATES - PUTS ******************* QLGC $30.69 +3.56 (+1.75) A gut-wrenching sell-off across the broad markets yesterday saw QLGC slide to a new 52-week low at $27.13 amid active trading. A rolling pattern between the $27 level and the $30 resistance ceiling provided entry/exit opportunities throughout the session. While the intraday gyrations provided aggressive types with a variety of possibilities, the troubled sector itself saw little relief, until late afternoon today. As buyers put money to work, QLGC and other related stocks such as EMLX, JNI, NTAP rebounded off their bottom supports. But in despite of the oversold conditions, QLGC's roller coaster ride may not be over just yet. The bulls couldn't successfully take QLGC through the overhead resistance; although it is currently at a precarious level. Therefore, don't throw caution to the wind. While the market sorts itself out, keep protective stops tight at $32 to avoid extensive losses. AFFX $38.00 -0.75 (-8.00) Shares of AFFX lost more ground on Monday - or perhaps it'd be better said that they fell off a cliff! On 2.6 times the ADV, the bears cut AFFX down 19%, or $8.75 within the first couple hours of trading. A feeble rebound barely cracked the $40 mark before AFFX found intraday support near $38. The stock continued to trade to the down side today, setting a new 52-week low at $36.13. Importantly too, the pattern of lower highs and lows persisted to illustrate AFFX's overall weakness; although we can't ignore the fact that the NBI.X and BTK.X rose significantly today after suffering four days of strong declines. In an effort to protect existing profits and to avoid getting nailed pending a sharp rebound, we've lowered our closing stop to $40. It may also be wise to wait for a dissenting broad market to push AFFX below the $36 level before adding new positions. BRCM $35.94 +2.69 (-2.69) Yesterday's weakness in the NASDAQ, along with more lawsuits from disgruntled shareholders, combined for a one-two punch, knocking down shares of BRCM by $5.38 or almost 14 percent on 1.2 times the ADV. Today, in sympathy with a rebounding market, the stock cut Monday's losses in half, regaining 8.08 percent on 1.1 times ADV. In doing so however, BRCM made a new 52-week intra-day low of $32.50, as bulls and bears struggled to value the optical chip company. While the bulls got their way today, BRCM's downtrend remains firmly intact. Failed rallies above resistance at $37 and the 5-dma at $37.80 could lead to a resumption of its decline, providing aggressive traders with targets for entry. However, a close above our stop price of $38 would lead to a drop of this put play. A break below $35 with volume, confirmed by a falling Philadelphia Semiconductor Index (SOX), could allow more cautious traders to take a position. *************************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=1798 ************************************************************ ************** NEW CALL PLAYS ************** AGGRESSIVE: BAC - Bank of America Inc. $54.25 +2.63 (+2.25 this week) One of the world's leading financial service companies, Bank of America is committed to making banking work for customers like it never has before. The company enables customers to do their banking and investing whenever, wherever, and however they choose through the nation's largest financial services network, including more than 4,400 domestic offices, and 13,000 ATMs, as well as 38 international offices, a telephone banking network that handles over a half billion calls a year and an internet web site that provides on line access to over 3 million customers, more than any other bank. Bank of America's stock has demonstrated exceptional resilience since the beginning of the year, as BAC stayed above its major moving averages during most of the correction we experienced in the last several weeks. Fundamental strength and excellent news which has been released recently has added to the momentum. According to CSFB analysts, BAC has been able to buck the sector trend by increasing their stock underwriting and M & A activity this quarter and year to date. In addition, BAC's fixed income underwriting activity is up 78% year to date. Considering these trends, BAC could be better positioned than most to meet their first quarter estimates. Last week, a maverick bank analyst at Prudential, Michael Mayo began coverage on 19 bank stocks, and issued a rare sell rating on 9 of them. BAC was one of the few he recommended. During Monday's intense selling on both major indexes, BAC held at strong support at the $51 level, above the 200 dma of $49.21 and the 50 dma of $50.47. This reinforces a pattern of lower highs from February 21, at $46, and March 1 at $48. BAC is poised to possibly break above strong resistance at $55 in anticipation of the Fed meeting next week. Traders could take positions at current levels, or at a possible pull back to support at $53.50. A rally above $55 on strong volume could be another entry point. Watch others in the banking sector like JPM and FTU for strength. We are setting stops at $52, so close plays if the stock closes below this point. BUY CALL APR-50 BAC-DJ OI= 1360 at $6.00 SL=4.00 BUY CALL APR-55*BAC-DK OI= 5795 at $2.95 SL=1.50 BUY CALL MAY-50 BAC-EJ OI= 5893 at $6.90 SL=5.00 BUY CALL MAY-55 BAC-EK OI=11060 at $4.00 SL=2.50 http://www.premierinvestor.com/oi/profile.asp?ticker=BAC ELNT - Elantec Semiconductor $24.56 +3.06 (+3.06 this week) Elantec is engaged in the design, manufacturing and marketing of high performance analog integrated circuits, primarily for the video, optical storage, and DSL markets. The company offers approximately 150 products such as amplifiers, drivers, faders, transceivers and multiplexers, most of which are available in multiple packaging configurations. ELNT targets high growth commercial markets in which advances in digital technology are driving increasing demand for high speed, high precision and low power consumption analog circuits. It has been a long painful slide for ELNT bulls since the stock fell out of its long ascending channel back in early November. Crashing down from the $120 level, the Semiconductor stock found itself trading at a mere shadow (19%) of its former self a short 6 weeks later. Fortunately the Semiconductor stocks began to recover the PHLX Semiconductor index (SOX.X) enjoyed a sustained rally right through the end of January. After resting up for round two, the bears came out swinging in early February and again pushed the SOX.X down to test its lows for the year, while dragging ELNT down in the process to touch new lows below $20. Even in the face of continued bearish commentary in the Semiconductor sector, Chip stocks have begun to show signs of life, as seen on the ELNT chart. Even with the drastic selloff Friday and Monday on the NASDAQ, ELNT refused to move to new lows, and with the daily Stochastics coming out of oversold, it is looking like it could be setting up for a decent recovery. The first solid resistance appears at $26 and then $30, the bottom and top of the gap from February 28th. Then we have solid resistance near $33 where the stock repeatedly found support throughout February. Consider new positions on a bounce from intraday support near $22 (also the location of our stop), or on a continuation of the rally that manages to clear the $26 resistance level. Watch the SOX.X for confirmation of sector strength before playing, and stand aside from the play if it violates our stop on a closing basis. BUY CALL APR-25*UET-DE OI=177 at $4.25 SL=2.75 BUY CALL APR-30 UET-DF OI= 31 at $3.00 SL=1.50 BUY CALL MAY-25 UET-EE OI= 32 at $6.00 SL=4.00 BUY CALL MAY-30 UET-EF OI= 29 at $4.38 SL=2.75 BUY CALL MAY-35 UET-EG OI=100 at $2.88 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=ELNT LOW VOLATILITY: DD - DuPont $45.36 -0.12 (-1.74 this week) Engaged in a diverse collection of science and technology related businesses, DD operates within 20 strategic business units. Some of the more prominent of these units are Agriculture and Nutrition, Nylon Enterprise, Performance Coatings & Polymers, Pharmaceuticals, Polyester Enterprise, Specialty Fibers and Specialty Polymers. Within these units, the company's 80 businesses manufacture and sell a wide range of products to many different markets, including the transportation, textile, construction, automotive, agricultural, pharmaceutical, packaging and electronics industries. Until the DJIA began to melt down a few days ago, DD was looking like it was solidly on a quest to take out the $50 resistance level. Then with the Industrials falling precipitously through the 10,300 support level, we watched DD begin to fall out of its promising uptrend. With daily Stochastics rolling over sharply from the overbought region, you may be wondering why we are adding the stock as a call play. The answer lies on the intraday charts. Although the stock fell sharply again this morning, it caught a strong afternoon bounce just above the $44 support level, recovering to close above both the 50-dma ($44.31) and the 200-dma ($44.53). This gives us a concrete level to place our stop - $44. Any close below this level will spell doom for our play, but it appears that a near term floor is in place, from which DD can regain its footing and take a shot at the elusive $50 level. Any selling that produces a drop near $44 looks attractive for aggressive entries, so long as this support level is not violated on a closing basis. More conservative players will want to wait for the stock to demonstrate its affinity for higher altitude by clearing the next level of resistance at $46 before playing. Use the DJIA as a benchmark of investor sentiment for our play. If this index breaks down below Monday's low, DD will likely continue its descent as well. BUY CALL APR-45*DD-DI OI=6242 at $2.50 SL=1.25 BUY CALL APR-50 DD-DJ OI=9392 at $0.65 SL=0.00 BUY CALL JUL-45 DD-GI OI=4088 at $4.30 SL=2.75 BUY CALL JUL-50 DD-GJ OI=5105 at $2.20 SL=1.00 BUY CALL OCT-45 DD-JI OI=1911 at $5.60 SL=3.50 BUY CALL OCT-50 DD-JJ OI= 441 at $3.30 SL=1.75 http://www.premierinvestor.com/oi/profile.asp?ticker=DD PIXR - Pixar Animation Studios $35.06 +1.00 (+0.69 this week) Pixar is an Academy Award-winning computer animation studio with the technical, creative and production capabilities to create a new generation of animated feature films, merchandise and other related products. Pixar's objective is to combine proprietary technology and world-class creative talent to develop computer-animated feature films. In partnership with Walt Disney Pictures, Pixar created and produced Toy Story (1995), A Bug's Life (1998) and Toy Story 2 (1999). Since its incorporation, Pixar has been responsible for many important breakthroughs in the application of computer graphics for filmmaking. A Tech stock that is up so far this year is worth of some attention. It is with this in mind that we are initiating coverage on Pixar. Since its low of $25.63 late last year, the stock has advanced, thanks to a stellar earnings report in which the company tripled revenues over the previous quarter and beat Street estimates by 8 cents. What's more, the company guided earnings higher for the next quarter. In an uncertain market that values strong earnings, this was more than enough good news to move the stock up. Having broken through resistance at $34.50 today, look for this point to provide support, along with the 5-dma at $34.31 and the 50-dma at $34.09. A bounce off these levels along with the 10-dma at $33.23 may provide an entry for aggressive traders, as long as PIXR is above our stop price of $33.75 by the closing bell. While PIXR has been recently been outperforming industry peers DIS, FOX and MGM, positive sentiment in these stocks could give our play an easier path in which to move higher. BUY CALL APR-30 PQJ-DF OI= 80 at $5.63 SL=3.50 BUY CALL APR-35*PQJ-DG OI=292 at $1.94 SL=1.00 BUY CALL APR-40 PQJ-DH OI=253 at $0.50 SL=0.00 BUY CALL JUL-35 PQJ-GG OI= 88 at $3.75 SL=2.50 BUY CALL JUL-40 PQJ-GH OI= 99 at $1.69 SL=0.75 http://www.premierinvestor.com/oi/profile.asp?ticker=PIXR ************* NEW PUT PLAYS ************* AGGRESSIVE: RATL - Rational Software Corp $25.75 -1.75 (-2.19 this week) Rational Software develops, markets and supports a comprehensive suite of solutions that automate the software development process. The Company's global products and services help organizations develop and deploy Web, e-business, enterprise- wide, technical, and mission-critical software. It serves customers in three principal categories: e-business, e- infrastructure, and e-devices. Blue chip clients include Merrill Lynch, Microsoft, and Nokia. Rational Software fared relatively well while investors concerns about the economy shook the markets earlier in the year. But recently, it's been a hard road for those who went long on RATL. Since reaching a relative peak at $55.25 on January 29th, the share price has literally been cut in half. The worries about a slowdown in IT (information technology) spending eventually trickled down to the software infrastructure sector. TIBCO Software's 1Q earning's warning last Thursday further accelerated RATL's losses, bringing damages to $30, or 55% to date. Other companies that help companies to do business over the Web, such as Mercury Interactive (MERQ), BEA Software (BEAS), and Check Point Software Technologies (CHKP), were effectively pounded too. Today more bad news hit RATL. Prudential Securities announced they lowered their forecasts on the company to reflect economic weakness. It certainly looks like it won't be a bed of roses for RATL. at least over the short-term. Four consecutive days of losses have seen RATL setting new 52-week records and we're anticipating more downside action in a declining market. Nonetheless, we're setting stops to safeguard our capital. We'll exit the play on a close above the $29 mark, which is currently bolstered by the 5-dma ($29.55). Going forward, look for RATL to shatter the record books and fall through $24.31 on robust volume. But keep in mind that from a historical perspective, the stock hasn't seen the underside of $25 since January 2000, which denotes an attractive price level. Plus, the current oversold conditions increase the risks of a turnaround. Now that your nerves are wore down to their nubs, you might consider an entry on rollovers at the $30 level and then exiting with potential profits as RATL approaches the $25 support. Otherwise, wait for strong downward momentum to take RATL below the $25 support and buy into the weakness. Be prepared to lock in gains quickly. BUY PUT APR-30 RAQ-PF OI= 937 at $6.75 SL=4.75 BUY PUT APR-25*RAQ-PE OI=1292 at $3.75 SL=2.00 http://www.premierinvestor.com/oi/profile.asp?ticker=RATL AETH - Aether Systems Inc. $19.75 -0.19 (-1.88 this week) Aether Systems Inc. is a leading provider of wireless and mobile data products and services allowing real time communications and transactions across a full range of devices and networks. Using its engineering expertise, the ScoutWare family of products including the Aether Intelligent Messaging (AIM) software platform, and its network operations and customer care center, Aether seeks to provide comprehensive, technology independent wireless and mobile computing solutions. Aether develops and delivers wireless and data mobile services across a variety of industries and market segments both in the United States and internationally. Once valued at over $12 billion in market cap, shares of wireless software maker AETH have fallen sharply over the past year. Like many other high-flying technology stocks, concerns over valuation have played a key role in the share price decline. As well, the unexpected slowdown in wireless handset sales has acted as a drag to the stock. The company's business model has also contributed to AETH's demise, as traders lost their appetite for money-losing operations. The recent delays in the deployment of next-generation wireless systems have affected the entire wireless sector, taking AETH along for the ride. Having failed to move above its 50-dma (now at $36) early this year, the stock has since drifted downward, most recently accelerating its descent. This is in spite of positive comments from JP Morgan H & Q, who re-iterated their Buy rating and set a 12-month price target of $66, citing strong revenue growth leading to eventual earnings growth next year. Shareholders have been much less patient, as AETH has moved lower on the back of the 5-dma, now at $21.60. Look for this moving average to provide resistance going forward, along with $20 and $21.50. Selling pressure as the stock price approaches these overhead resistance levels may allow high-risk players to jump in, making sure that AETH does not close above our stop price of $22. Strong selling pressure taking the stock below $19.00 with conviction could lead to another test of today's low of $18.31, allowing for an entry on weakness. Ideally, wait for sector rivals CMVT and OPWV to confirm downward momentum. BUY PUT APR-17.5 HIZ-DW OI= 63 at $4.50 SL=2.75 BUY PUT APR-20 *HIZ-DD OI= 50 at $3.38 SL=1.75 BUY PUT APR-22.5 HIZ-DX OI=281 at $2.19 SL=1.00 BUY PUT MAY-20 HIZ-ED OI= 51 at $4.13 SL=2.50 BUY PUT MAY-22.5 HIZ-EX OI= 30 at $3.00 SL=1.50 http://www.premierinvestor.com/oi/profile.asp?ticker=AETH ********************* PLAY OF THE DAY - PUT ********************* AFFX - Affymetrix Inc $38.00 -0.75 (-8.00 this 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. Most Recent Write-Up Shares of AFFX lost more ground on Monday - or perhaps it'd be better said that they fell off a cliff! On 2.6 times the ADV, the bears cut AFFX down 19%, or $8.75 within the first couple hours of trading. A feeble rebound barely cracked the $40 mark before AFFX found intraday support near $38. The stock continued to trade to the down side today, setting a new 52-week low at $36.13. Importantly too, the pattern of lower highs and lows persisted to illustrate AFFX's overall weakness; although we can't ignore the fact that the NBI.X and BTK.X rose significantly today after suffering four days of strong declines. In an effort to protect existing profits and to avoid getting nailed pending a sharp rebound, we've lowered our closing stop to $40. It may also be wise to wait for a dissenting broad market to push AFFX below the $36 level before adding new positions. Comments The Biotechs(BTK.X) bounced back today with the major market rebound, yet we feel that this is simply short covering from the recent downward forecast. Look for a rollover from resistance at $40 for entries, or a break below $36 with sector weakness to jump on this put play. While our closing stop is $40, a failed rally at $43 may give aggressive traders an entry as well. However, note that we will lock in our profits in this play if AFFX closes over $40. BUY PUT APR-45 FIQ-PI OI=31 at $9.38 SL=2.75 BUY PUT APR-40*FIQ-FH OI=68 at $6.50 SL=1.50 BUY PUT APR-35 FIQ-FG OI=12 at $3.75 SL=1.50 http://www.premierinvestor.com/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=1806 ************************************************************ ************************ COMBOS/SPREADS/STRADDLES ************************ A Technical Bounce Was Inevitable... The stock market rebounded today in the aftermath of a widespread sell-off that sent the major indices to recent lows. Monday, March 12 Stocks plummeted Monday as investors fled from the equity markets amid new fears of economic recession. The Dow fell 436 points to 10,208 and the NASDAQ finished down 129 points at 1,923. The S&P 500 was down 53 points at 1,180. Despite the widespread selling pressure, volume on the Big Board was a light 1.22 billion shares with losers trouncing winners 4 to 1. Activity on the NASDAQ was also light with 1.22 billion shares traded. Technology declines outpaced advances greater than 3 to 1. In the U.S. bond market, the 30-year treasury rose 11/32, pushing its yield down to 5.30%. Sunday's new plays (positions/opening prices/strategy): Amgen (NASDAQ:AMGN) APR80C/75C $0.69 credit bear-call Kerr McGee (NYSE:KMG) APR60P/65P $0.90 credit bull-put CheckPoint (NYSE:CKP) MAY10C/10P $0.25 debit synthetic Impath (NASDAQ:IMPH) APR70C/35P $2.25 credit strangle Telebras (NYSE:TBH) APR65C/65P $7.60 debit straddle Today's volatile market activity provided some good opportunities to initiate our new combination positions. The bullish synthetic position in CKP was the only play that did not offer a price near the target as it moved higher at the open and never retreated. Portfolio Activity: The stock market approached capitulation status today as concerns about the lack of corporate earnings growth weighed on investors. Industrial stocks were hit hard with all 30 Dow components ending in the red. Boeing (NYSE:BA), Disney (NYSE:DIS), General Electric (NYSE:GE), J.P. Morgan (NYSE:JPM) and Honeywell (NYSE:HON) were among the biggest losers. In technology trading, 99 of the 100 stocks on the NASDAQ 100 declined, driving the "new economy" index down almost 62% from its high of 5048 set on March 10, 2000. The weakness stemmed from losses in the networking sector after Cisco (NASDAQ:CSCO) tumbled in the wake of Friday's announcement that it will lay off thousands of workers, resulting in a charge of $300 million to $400 million in the fourth quarter. Sweden's Ericsson added to the gloomy outlook, warning that it now expects its total sales for the first quarter of 2001 to be flat or somewhat lower compared to the first quarter last year. Over the past few weeks, expectations for technology industry earnings have dropped from a 14% decline to a 25%-30% decline for the first half of 2000. In the broader market, almost every group posted losses with telecom, Internet and computer software shares leading the hi-tech losers while biotechnology, pharmaceutical, transportation, oil service, and brokerage stocks added to the downward movement in industrial sectors. The Spreads portfolio was a "sea of red" as investors ran for the exits in today's unexpected sell-off. Stocks plummeted across the board with both growth and defensive shares enduring precipitous declines. The big losers in our blue-chip technology section were Microsoft (NASDAQ) and Intel (NASDAQ:INTC). Time Warner Telecom (NASDAQ:TWTC) also moved significantly lower and the decline has jeopardized our short Put option at $60. Among industrial stocks, Alexander & Baldwin (NASDAQ:ALEX), Continental Airlines (NYSE:CAL), Chiron (NASDAQ:CHIR), Minnesota Mining & Manufacturing (NYSE:MMM) and Stryker (NYSE:SYK) fell on broader market weakness and these positions, as well as other combination plays with sold Puts, must be reviewed and adjusted (or closed) if the situation dictates an early exit. Luckily, many of our bearish spreads profited from the downward movement including International Business Machines (NYSE:IBM), Honeywell (NYSE:HON), Johnson & Johnson (NYSE:JNJ), American Home Products (NYSE:AHP), PerkinElmer (NYSE:PKI), Pfizer (NYSE:PFE) and Shire Pharmaceuticals (NASDAQ:SHPGY). The Avery Dennison (NYSE:AVY) "bear-call" credit position benefited from the sell-off but it remains on the current watch-list for a potential adjustment. A number of our time-selling plays were affected by the new downward pressure and the position that profited most was Advanta (NASDAQ:ADVNB), as it fell closer to the sold call option at $12.50. Surprisingly, another of our recent calendar spread candidates, Ocular Sciences (NASDAQ:OCLR) actually moved higher, toward the maximum area of profit, during the session. The bearish market activity produced a number of favorable moves in the debit straddle section. Stocks such as Omnicom (NYSE:OMC) and Icos (NASDAQ:ICOS) saw large losses and the new volatility helped the positions break out of range-bound trading patterns. Alliance Capital (NYSE:AC) also slumped and the $3 drop pushed the neutral debit-strangle into a profitable range. Older plays in Tri-Continental (NYSE:TY) and British Telecom (NYSE:BTY) were significantly affected by today's downside movement with both stocks falling to recent lows. Hopefully, the large moves will continue and possibly produce future profits in some of these recently docile issues. Tuesday, March 13 The stock market rebounded today in the aftermath of a widespread sell-off that sent the major indices to recent lows. A number of groups moved higher during the session, but the overall outlook was cautious as analysts suggested the gains would not hold due to worries over the U.S. economy and falling corporate profits. The NASDAQ closed up 91 points at 2,014 and the Dow was 82 points higher at 10,290. The S&P 500 was up 17 points at 1,197. Volume on the NYSE hit 1.35 billion shares, with losers beating winners 1,567 to 1,522. Activity on the NASDAQ was heavy at 2.1 billion shares exchanged. Technology advances outpaced declines 2,111 to 1,646. In the bond market, the U.S. 30-year Treasury fell 17/32, pushing its yield up to 5.33%. Portfolio Activity: Stocks rebounded today with bargain-hunting buyers resurfacing after the market's recent sell-off. Technology issues led the way with advances seen in semiconductor, computer hardware and software, and telecom shares. Among the Dow industrial stocks, General Electric (NYSE:GE) was a big winner, rising over $2 after company officials told investors that GE is prepared to deliver double-digit earnings growth in 2001, and they are confident in the ability to deliver first-quarter earnings per-share of $0.30, up 15% from the same period last year. Analysts at Merrill Lynch backed the bullish forecasts, saying the stock offers a buying opportunity at current prices. A number of blue-chip issues were higher today, including Honeywell (NYSE:HON), the merger target of GE, Intel (NASDAQ:INTC), J.P. Morgan Chase (NYSE:JPM), AT&T (NYSE:T), Hewlett-Packard (NYSE:HWP) and Microsoft (NASDAQ:MSFT). In the broader market, airline shares slumped in the aftermath of a profit warning from Delta Air Lines (NYSE:DAL). Delta said it now expects a first-quarter loss of $0.70 per share, compared to the $0.46 profit expected by analysts. Oil service, cyclical, pharmaceutical, utility and gold shares retreated while financial and biotechnology issues generally advanced. Today's winners in the Spreads portfolio were in the technology group with Intel (NASDAQ:INTC), Hewlett-Packard (NYSE:HWP), AT&T (NYSE:T) and Microsoft (NASDAQ:MSFT) among the best performing issues. Motorola (NYSE:MOT) also moved higher, even though the company announced it's slashing 7,000 more jobs in its wireless handset group and will also accrue special-item charges in both the first and second quarters of 2000. Cardinal Health (NYSE:CAH) was among the leaders in the health services segment while Chiron (NASDAQ:CHIR) moved higher on strength in the biotechnology group and PolyMedica (NASDAQ:PLMD) topped the major drug segment. The recent volatile market activity has yet to affect our positions in Investment Technology (NYSE:ITG), which remains comfortably between the sold strikes ($50 and $55) of our two opposing plays. Among small-cap shares, Advanta (NASDAQ:ADVNB), Ocular Sciences (NASDAQ:OCLR) and Insignia Financial NYSE:IFS) all moved higher and it's time to plan the upcoming transition to April in those time-selling plays. On the downside, the recent bearish move in Minnesota Mining and Manufacturing (NYSE:MMM) continued through a technical support area at $110 on heavy volume and the bullish play in that issue must now be monitored for a potential exit or adjustment. The premium-selling positions in Alexander & Baldwin (NASDAQ:ALEX), Time Warner Telecom (NASDAQ:TWTC) and Continental Airlines (NYSE:CAL) also exhibited new exit signals as the issues failed to recover in today's rally. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** RARE - Rare Hospitality $29.44 *** A Rare Opportunity! *** Rare Hospitality International (NASDAQ:RARE) was incorporated in December 1982 and formerly known as LongHorn Steaks. The company operates and franchises over 150 restaurants, including over 100 LongHorn Steakhouse restaurants; a number of restaurants operated under the names Bugaboo Creek Steak House and Bugaboo Creek Lodge & Bar, and also some Capital Grille restaurants. In addition, the company operates two additional specialty restaurants, Hemenway's Seafood Grille & Oyster Bar and The Old Grist Mill Tavern. The LongHorn Steakhouse restaurants are Texas roadhouse-themed casual dining, full-service restaurants that serve lunch and dinner. The Bugaboo Creek restaurants are casual dining restaurants designed to resemble a Canadian Rocky Mountain lodge. The Capital Grille restaurants are fine dining establishments with a more upscale menu and atmosphere. With the recent decline in corporate earnings, it's surprising to find a company that announced fourth quarter revenues that rose 19% from the equivalent period in 1999. At the same time, total revenues for 2000, a 53-week period, were $464,028,000, an increase of 21% from the 52-week period in 1999. The company's diluted earnings per share increased 48% to $1.23 for 2000 from $0.83 for 1999. The CEO complimented the RARE team for its help in delivering exceptional operating and financial results during the past year and also for extending the company's track record of consistent, profitable growth. He said the company seeks to optimize shareholder value with a strategy of superior execution in their existing restaurants, moderate and controlled expansion of their restaurant base, and profit margin expansion through increased operating efficiencies and economies of scale. Looking forward, the company's primary financial goal is to sustain a 20% annual growth rate in earnings per diluted share; an optimistic target for all but the most productive corporations in today's economy. Investors appear to share the company's bullish outlook and those of you who wouldn't mind owning the issue at a discounted price can speculate on the near-term movement of the stock with this synthetic position. Target a higher premium initially, to allow for a brief consolidation in the issue. PLAY (speculative - bullish/synthetic position): BUY CALL APR-35 QRH-DG OI=3 A=$0.93 SELL PUT APR-25 QRH-PE OI=0 B=$0.69 INITIAL NET DEBIT TARGET=$0.00-$0.12 TARGET PROFIT=$0.75-$0.80 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $800 per contract. http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=RARE ****************************************************************** CUM - Cummins Engine $41.05 *** For Namesake! *** Cummins Engine Company (NYSE:CUM) is a worldwide designer and manufacturer of diesel engines up to 2,700 horsepower. Cummins also produces natural gas engines, engine components and other subsystems. Cummins provides power and components for a wide variety of equipment in its primary businesses: engine, power generation and filtration. The company sells its products to original equipment manufacturers, distributors and automotive customers worldwide, and conducts manufacturing, distribution and service activities in many areas of the world. The company has three operating segments: Engine, Power Generation, and Filtration. The demand for vehicle engines and diversified power generation components has fallen significantly over the past year as the effect of a slowing economy worked its way through the supply chain from the consumer to the manufacturer. The worldwide glut of large trucks and heavy equipment is taking a severe toll on the companies that supply the industry and Cummins officials recently said the challenges in the market would pull revenue down about 10% in the first quarter. Cummins blamed the losses on a significant drop in demand as new shipments of heavy-duty truck engines were down more than half from last year's levels. While the outlook for the sector is somewhat bleak, the company has made some streamlining moves and expects to slash about $55 million this year from ongoing costs. In addition, the company expects to announce a more complete restructuring plan in the coming months. On the bright side, Cummins recently announced it has entered into a long-term supply agreement with PACCAR (NASDAQ:PCAR) and the company's European subsidiary, DAF Trucks. Earlier this month, Westport Innovations and Cummins announced the formation of a joint venture to market low-emission, high performance engines powered by natural gas. The joint venture combines their technologies in a business model that can profit from a significant market share, based on the increasing demand for natural gas-powered products. Despite the fundamental challenges facing the company and the industry, it appears that investors have priced the pessimistic outlook into the current value of CUM shares. With technical support at $37, this position offers a reasonable risk/reward ratio for traders who are bullish on the issue. PLAY (conservative - bullish/credit spread): BUY PUT APR-35.00 CUM-PG OI=2 A=$0.55 SELL PUT APR-37.50 CUM-PU OI=250 B=$0.85 INITIAL NET CREDIT TARGET=$0.40-$0.50 ROI(max)=19% B/E=$37.10 http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=CUM ****************************************************************** - STRADDLES - ****************************************************************** FLR - Fluor $45.00 *** Cheap Speculation! *** Fluor (NYSE:FLR) is a holding company that provides services on a worldwide basis in the fields of engineering, procurement, construction, maintenance, operations, project management and business services. These services are grouped into three primary operating segments. Fluor Daniel provides a full range of design, engineering, procurement, construction and other services to many clients in a broad range of industrial and geographic markets on a worldwide basis. Fluor Global Services include equipment sales, temporary technical and non-technical staffing, services to the United States government and productivity consulting services and maintenance management, among others. Fluor Signature Services provides integrated business services and business infrastructure support in the areas of human resources, finance, accounting, safety, information technology, knowledge management and office support services. Fluor has been an active issue recently and the volatile movement may continue if there are any unexpected announcements at the company's annual meeting Wednesday. Held exclusively for owners of Fluor stock, the annual meeting has the purpose of reviewing the company's operations, electing directors to the board, and conducting other corporate business matters. In addition, senior executives will be available for media interviews and corporate questions following the formal meeting. Technically, the history of the issue is too short to make a meaningful calculation on its option pricing and potential movement but one of these options is going to be "in-the-money" at expiration. The question is, which one and by how much? Traders who want to speculate on the future volatility of the issue can use this position to profit from any large movement. The Open Interest on the bearish portion of the play is not as high as we would prefer but since the position will likely be held until expiration, the final option value will be determined almost entirely by the price of the underlying issue. Note: Traders who are looking for another position of this nature should consider the March ATM options on Metasolv (NASDAQ:MSLV). PLAY (very speculative - neutral/debit straddle): BUY CALL MAR-45 FLR-CI OI=110 A=$0.85 BUY PUT MAR-45 FLR-OI OI=3 A=$0.80 INITIAL NET DEBIT TARGET=1.50-$1.55 TARGET ROI=20% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=FLR ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1782 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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