The Option Investor Newsletter Sunday 03-18-2001 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/031801_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** WE 3-16 WE 3-9 WE 3-2 WE 2-23 DOW 9823.41 -207.87 10644.62 -213.63 10466.31 + 24.41 -357.92 Nasdaq 1890.91 - 49.80 2052.78 -115.95 2117.63 -144.88 -162.87 S&P-100 587.99 - 12.72 633.40 - 18.06 633.89 - 8.75 - 32.88 S&P-500 1150.53 - 23.03 1233.42 - 31.32 1234.18 - 11.68 - 55.67 W5000 10559.37 -223.31 11331.73 -282.18 11374.40 -126.30 -528.90 RUT 441.80 - 10.36 473.65 - 7.84 476.88 - .82 - 21.83 TRAN 2631.37 - 71.64 2942.17 - 75.12 2915.19 - 14.88 - 64.71 VIX 35.29 + 2.66 29.35 + 2.89 30.86 + .52 + 5.26 Put/Call 1.08 .83 .80 .71 ****************************************************************** Myopic If Friday's trading didn't scare away every bull, then I don't know what will. That's what we're waiting for: Capitulation. With a capital "C." But I'm not going to try and call a bottom in a market that can't see past the current quarter. The fact is that the market is a leading indicator of the economic future. Without visibility, no one really knows when valuations will come back in line or which companies will have predictable revenue streams. Hence, the buyers strike. While put trading has continued to be successful, Tuesday's Fed meeting and the anticipated rate cut might breath some life back into the market, if only for a brief moment. Consumer Sentiment came in strong-than-expected, indicating the consumer's faith is not dead. So, will we get the 50 or 75 basis point cut? No matter whether we get the 50 or the 75 basis point cut, there will likely be some short covering on Monday and Tuesday ahead of the Fed meeting. Minor relief in tech stocks and financials should be expected. It has been said so many times on the Street lately that the market is in oversold territory. In the same instance, the NASDAQ traces new lows and the Dow(INDU) slips below 10000. Everyday we scan for opportunities on the upside which is a task in itself. One particular sector that appears to have stabilized near support is the Securities Broker/Dealer Index(XBD.X). After the Fitch's downgrade of the credit rating on 19 Japanese bank last Wednesday, this index looks to have settled in at 450. Any short covering in the major B/Ds ahead the Tuesday's Fed meeting would provide an opportunity on the long side. This would be for a quick trade, as the reaction to the Fed is still an unknown. A 50 basis point cut might not satisfy the market, especially with the growing number of pundits expecting a 75 point cut. The bigger cut would give a nice lift for a relief rally going into the end of the week. However, after Friday's stronger-than-expected Consumer Sentiment number, we will probably have to settle for a half point cut. We'll take what we can get. We added Lehman Bros.(NYSE:LEH) as a call play this weekend to give us exposure to this opportunity. Friday's open on the NASDAQ gave the signal for put plays, as it took out Monday's low of 1923. There was very little heat for put traders while the NASDAQ slid 50 points before buyers showed up at 1877 around 10:45am ET. The stronger Sentiment report at 10am only fueled the downside pressure. With another new 52-week low for the NASDAQ, the short covering rally only lasted until the 1925 level, where previous support turned into resistance. There really isn't a lot to say about the NASDAQ anymore. The bottom has been elusive for 1500 points and remains so until we get a better idea of business sentiment for 2001. We would expect a short covering bounce in tech shares ahead of the Fed meeting, especially if the 75 basis point talk continues on the Street and CNBC. The long side trade would be risky but there are a few tech stocks that aren't in a bloody downtrend. I stress few. Worldcom(NASDAQ:WCOM) and Semtech(NASDAQ:SMTC) have been showing relative strength in the NASDAQ. Over on the INDU, the chart indeed did not lie and continued its dominant pattern. Friday was the downward forecast after the consolidation stage, as shown in the Thursday Wrap INDU chart. The INDU traded with a very similar intraday pattern as the NASDAQ; no one wanted to be long going into the weekend. It lost 207 points and also found resistance at previous support at 10000. Of the thirty Dow stocks, only five were in the green: Coca-Cola(NYSE:KO), General Motors(NYSE:GM), International Paper (NYSE:IP), Microsoft(NASDAQ:MSFT), and Phillip Morris(NYSE:MO). If Friday's low of 9814 is taken out by sellers, watch for buying at the 9730 level which is where buyers showed up in March 2000. It may provide a bounce, but this is an entirely different year than last. As option traders, we must look for the immediate opportunity. Seizing the moment. Because of the nature of options, time is of the essence and we must be myopic. Positioning past two days can be disastrous in the current market, unless of course you have been short. Take it one day at a time, and with the Fed changing monetary policy on Tuesday, we can't be sure what a market like this will do. Until we get better visibility with April earnings and the rate cuts begin to take effect, we'll have to take it day to day. No need to catch a falling knife. Any short covering combined with less than a 75 basis point cut will give a very nice put entry. Currently, seven out of 25 bond dealers that trade directly with the Fed expect a 75 basis point rate cut. It seems unlikely, but the Fed has done some strange things in the past, i.e. the 50bp hike last May. Given the bear market, any rally will be short lived. Keep this in mind when setting up trades. Weak tech will continue to be sold after the Fed is out of the way. Trade smart. Matt Russ Editor ************************************ Spring Options Workshop and Bootcamp April 5th-9th, Denver Colorado ************************************ OptionInvestor is proud to announce our third annual Spring option workshop in Denver Colorado. This power packed five-day event is structured to fully educate you on advanced option strategies and will make you a better and more profitable trader. If you attended the March Denver Expo last year and thought it was the best function you had ever attended...you haven't seen anything yet! Great food, entertainment, education and just plain fun in sunny Denver. The biggest complaint in March was the massive weight gain experienced by the attendees from the gourmet menu. We know how to put on a function. Ask anyone who came last March! Current speakers include: Tom DeMark, author of "Day Trading Options", "Science of Technical Analysis" and "New Market Timing Techniques" and manager of a $4 billion hedge fund. John Najarian, "Doctor J" as he is known on the CBOE 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=1834 ************************************************************** **************** MARKET SENTIMENT **************** "I Don't Care, Just Sell It" By Austin Passamonte That's the message countless brokers across the world received this week as traders continue to become much "broker" as well. Margin calls are rampant, which merely serves to feed this extended bearish feast. All bullish hope is almost lost. Every analyst & professional trader is heard to reaffirm we can go nowhere but down and stay there. CNBC itself has turned into a collection of bears and the chronically depressed. Mark Haynes and Joe Kernan might need Prozac judging from the way they've openly acted the past two weeks. Technicians are suggesting 9,400 for the Dow and 1,800 or less on the Nasdaq. Some blustering bears have publicly called for a Dow at 5,000 points, Nasdaq at 1,000 points and SOX at 100 points. Pardon us for saying so, but that's every bit as moronic a statement as Nasdaq 6,000+ turned out to be one year ago this month! Now let's see if we've got this straight: large numbers of traders have just gone broke, everyone on the street is bearish and the selling seems to have no end. Should the Nasdaq & NYSE just hang some "Closed For Business" signs and file Chapter 7? Not so fast. Yes we could go lower and most likely will. Nor will a reversal necessarily be the last test of these recent lows, either. This being said, it is our opinion that the tide may have begun to turn towards a gradual market recovery. We've expected a relief rally for the past -600 Dow points and might wait a few hundred more before one arrives. We are not calling a bottom but do see a possible turn in the big ship that's been awaited since last July. All bear markets end when the last bull gives up, no one wants to buy a single share of anything and stocks talk is considered unfit for social settings. That's when the bottom will arrive. Now, have we seen any noted bulls turn bearish? Has there been rampant selling of everything with a symbol? Do you have any family & friends who cringe at the mere mention of stock markets and quickly change the subject? Don't look now and let's not get overly excited, but this week's COT report shows the big S&P Commercials covered a bit of their all-time historical short position in the CME pits by the close of trading on Tuesday. We wonder if they may have bought back a few more open shorts at fire sale prices Wednesday through Friday? Remember they've shorted this market from SPX 1525 all the way down to 1150, which is a colossal, unimaginable profit zone. Looking at forward-month S&P futures contracts (in our fee-based charting service) we see that volume soared but open interest collapsed the past few trading sessions, including Friday. Open interest in any futures market is predominately commercial holdings and they are usually short. Especially in this case. The fact that net open interest is much lower now hints that there was more short covering in the nearby contract after Tuesday as open interest (all those net shorts) didn't seem to roll forward into forward(back) month contracts. We'll have a much clearer picture this time next week and there's no giant rush to find out: markets will continue to stay flat or decline well beyond that. This transition will be a process not an event and cannot call the exact bottom, nor is it akin to flipping a switch. We miss nothing while waiting for fresh data to post on Friday 3/23 from the CBOT. The key thing to watch for is continued reduction of net short regardless of market direction. At this point we expect them to continue covering shorts if the market stays flat or goes down. If they once again increase shorts on the next rally, we remain bearish. If they cover shorts on a rising market and move close to net neutral or slightly long, Market Sentiment will officially call a bottom then & there. These goliaths will not hold short forever and most of the reason they built this position was to hedge $multi-billion holdings. What do we assume is the opposite of massive net short in the futures arena? Net buying in the cash market. Who do we think sold the public herd INTC all the way down from $75 to $28? Who dumped that overpriced tech junk the masses craved last year all the way down? Now that those very same masses can't throw it away fast enough, who's left to do any buying? Think the mega-pros might want some deflated shares back at what they consider more reasonable prices soon? Market Sentiment thinks so. A move from almost 15% net-short to 11.75% does not signal a market bottom. Far from it. What this does suggest is that they may see limited downside potential compared to much larger upside risk being short. Does that make sense? It might not be the bottom, but better to scale out instead of rolling forward complete with carrying (premium) charges it would take and book some profits just in case. Technical analysis is less predictable these days because it simply measures collective market sentiment at any precise moment in time and trader sentiment changes faster than Denver's weather these days. We cannot draw lines on a weekly chart and know with conviction they will hold in either direction. However, do not be surprised if the former Big Caps (now mini-caps) begin to resist further selling and actually begin creeping up in price over the coming days, weeks and months. If they do, we might just know who's nibbling! ********** VIX Friday 03/16 close: 34.75 VXN Friday 03/16 close: 76.23 30-yr Bonds Friday 03/16 close: 5.27% 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 (03/16/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 625 - 610 1,590 4,492 .35 605 - 590 1,098 5,059 .22 OEX close: 587.94 Support: 585 - 570 276 5,297 19.19 565 - 550 2 3,830 1915.00 Maximum calls: 660/ 3,007 Maximum puts : 520/ 5,891 Moving Averages 10 DMA 621 20 DMA 635 50 DMA 673 200 DMA 741 NASDAQ 100 Index (NDX/QQQ) Resistance: 50 - 48 135,920 57,019 2.38 47 - 45 89,320 55,622 1.61 44 - 42 23,599 128,480 .18 QQQ(NDX)close: 41.10 Support: 40 - 38 14,206 34,787 2.45 37 - 35 1,924 8,598 4.47 34 - 32 91 4,822 52.99 Maximum calls: 53/116,009 Maximum puts : 43/109,575 Moving Averages 10 DMA 45 20 DMA 47 50 DMA 56 200 DMA 77 S&P 500 (SPX) Resistance: 1225 3,520 7,787 .45 1200 6,147 15,005 .41 1175 500 7,127 .07 SPX close: 1150.53 Support: 1125 14 3,802 271.57 1100 57 12,133 218.86 1075 0 12,207 12207.00 Maximum calls: 1275/17,414 Maximum puts : 1150/20,003 Moving Averages 10 DMA 1212 20 DMA 1234 50 DMA 1296 200 DMA 1393 ***** CBOT Commitment Of Traders Report: Friday 03/13 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 -1981 -2012 -1491 -2960 Total Open interest % (-15.88%) (-19.12%) (-4.35%) (-10.32%) net-short net-short net-short net-short S&P 500 Open Interest Net Value +78245 +91122 -94842 -111638 Total Open Interest % (+29.35%) (+37.69%) (-11.74%) (-14.93%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: This week saw the Commercials start to pullback a little on hedged positions. Commercials show a decline of 3 percent on S&P 500 net-shorts while they reduced their DJIA net-short positions by 6 percent. Small specs began getting short the S&P, exactly what we expect to create a bottom in time. Interest Rate/Debt Instruments: Commercials continue to build net-short positions in the Euro and all Treasury note futures markets. Currencies: Commercials are building significant net-long in the Japanese Yen. 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 03/13 by the CFTC. *************************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=1845 ************************************************************ ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/031801_1.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1860 ************************************************************** *************** ASK THE ANALYST *************** Priorities By Eric Utley The looming tax deadline, Japan's debacle, 52-week lows and the sea of red formerly known as the U.S. stock market were all far out of mind last weekend. I took a brief sabbatical from my duties here at OI to spend some much-needed quality time with my family. My beloved mother and much-adored younger sister made the journey across the Rockies in an attempt to drag me away from my trading terminal which has become a permanent fixture in my life. Fortunately, they succeeded in diverting my attention and I'm grateful. I forgot that there are things other than the market that are far more important in my life. My only intent in sharing this personal detail with my readers is to reinforce what, and more importantly who, we are venturing into the stock market for. Instead of reviewing a trade from last week with my readers, I'd like to give a forward-looking thought concerning the FOMC meeting on Tuesday. I'm of the belief that the Fed will cut by 50 basis points and not 75 basis points. But, I've got a take on both scenarios. If the Fed cuts by 50 basis points, I think the market sells off out of disappointment and traders might look to hit some bids on tech stocks. We may even get the much-hyped capitulation event following a 50 basis point cut. On the other hand, if the Fed does in fact cut by 75 basis points I think the broader market lifts, especially finance and tech stocks. I think that the finance stocks, especially banks, will rally into the close following a 75 basis point cut. Among tech stocks, I think the most battered groups will advance substantially because of the short infestation. Watch shares of CIENA (NASDAQ:CIEN) if the Fed does cut by 75 basis points - that was one stock that REALLY moved on the surprise rate cut on January 3rd. This rate cut, however large or small, by the Fed Tuesday will mark its third in this benign cycle of monetary policy. And as history has shown, three rate cuts are supposed to be of some significance. But, I'm of the belief that the tech sector will remain under pressure over the next several months even if the Fed does cut by 75 basis points Tuesday. That belief could change as early as next weekend, and I'll let you know if it does. But my opinion right now is that tech is, and will be, a tough place for quite some time. Having said that, traders might get some good entries on put plays in the tech sector following a 75 basis point cut. Even though I said to keep an eye on CIENA for a long trade following a 75 basis point, I would emphasize that any long trade should be exited quickly if profits are made. Be very nimble! This is just my opinion, and my beliefs don't mean anything to the market. I would urge my readers to develop their own trading ideas and develop a thesis ahead of the FOMC meeting Tuesday if the event is going to be traded around. Send your stock requests to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- Concord EFS - CEFT Hi there. I've been watching CEFT for a while now and it seems to be strong in the midst of all the negative news this last year or so. It seems to have broken new highs and I'm wondering if you could highlight this company and give us your take on it. - Thanks, Bert Thanks for writing in, Bert! I also have watched shares of Concord EFS (NASDAQ:CEFT) for quite some time now. I actually owned the stock for part of last year. The company has a solid history of earnings growth and impressive expectations going forward. If the company continues to hit its numbers this year, one might argue a very bullish case for owning shares of Concord at current levels. The company is a leading provider of merchant services. In short, Concord provides electronic transaction services for credit and debit cards, including authorization and settlement. Two other companies in this space are Total Systems (NYSE:TSS) and First Data Corp. (NYSE:FDC). The charts of the two aforementioned competitors of Concord look pretty good considering the broader market meltdown. You'll note that shares of First Data, Total Systems and Concord are trading near their respective 52-week highs. This does present a bit of a conundrum in light of the current market environment. Concord is hitting on all cylinders and its sector counterparts are performing equally well in terms of both price and fundamentals. However, I'm a bit cautious in buying stocks near their highs in this market because virtually every sector is getting whacked, which was especially evident last week. Having said that, I would be cautious in pursuing shares of Concord at current levels for no other reason than the broader market weakness. But, I would definitely keep Concord on the radar screen especially when the broader market stops falling. I would think shares of Concord, along with those of its competitors, would do quite well when the broader market stabilizes and ultimately advances. The relative strength in Concord in both price and underlying fundamentals should lend to outperformance once the economy and market up-tick. ---------------------------- Global Crossing - GX Your insightful analyses are much appreciated. How does GX look for a medium term play? Capital expenditures almost completed, revenues rising (finally), and appears to have good support around $15. - Thanks, Dan Dan, I have to thank you for the kind words, they are VERY much appreciated. I'll be honest, I think a medium-term play on shares of Global Crossing (NYSE:GX) is a bit dicey. The tech and telecom sectors remain a place of peril and I think trying to game the bottom right here in Global Crossing is a risky proposition for a medium- term "trade." But, if you must play Global Crossing right here, from the long side, I would suggest using a tight stop in order to manage risk. However, while my short- medium-term outlook on Global Crossing is not as friendly, I do the think the company will be a long- term winner in the build out of the global Internet. The company already has the build out of its global fiber network financed. And that network, when completed, will carry voice, video and a variety of financial transactions. Most of all, Global Crossing's network will increase information flow. I don't have an edge or any particular insight into the price action of shares of Global Crossing in the medium-term. The fact remains that the near future of tech and telecom remains cloudy and difficult to gauge. As such, I wouldn't suggest a trade from the long side in Global Crossing right here and and now. But, for those INVESTORS looking to add some aggressive exposure, and who already have a diversified portfolio, I think they could nibble on a little Global Crossing at current levels. But to make it perfectly clear, the stock should only be pursued at current levels for those with a higher risk tolerance and AT LEAST two or three years of patience. ---------------------------- Krispy Kreme - KREM KREM has earnings coming and a split. I think they are riding a wave that should be crashing, and have thought of shorting this stock...any observations? - Thanks much, Bruce Thanks for the question, Bruce. I have to tell you, Krispy Kreme (NASDAQ:KREM) is opening a shop about two minutes away from my house here in Denver and I fear my caloric intake may go parabolic. In all seriousness, Bruce, I do have a few good observations for you concerning Krispy Kreme. The company is set to release 7.4 million shares on April 5th from their IPO lockup. This could potentially and drastically increase the supply of stock if insiders and franchisees choose to sell their stock. To give you an idea of the potential impact of the lockup, when Krispy Kreme announced a secondary offering on January 5th its stock lost more than $8 that day. In short, I don't think Krispy Kreme's investors like the idea of more supply coming to market, especially with the cult-like following its shares have. Now, my second observation of Krispy Kreme may sound a bit out of whack but I do believe it holds some credence. Krispy Kreme is set to move to the NYSE on May 17th and trade under the symbol KK. What's interesting is that I watched two Nasdaq stocks (Global Crossing and E*Trade (NYSE:ET)) move to the NYSE and their stocks subsequently weakened more than usual. I would suggest pulling up charts on Global Crossing and E*Trade and noting the precipitous decline in their share prices after their respective moves to the Big Board. This whole idea of shorting a stock just because it moves from the Nasdaq to the NYSE is obviously speculative, and IS NOT predicated on the underlying fundamentals of the company. However, we're putting the idea to test with our new put play this weekend in BMC Software (NYSE:BMC) which recently moved from the Nasdaq to the NYSE. If our BMC Software put play works, Krispy Kreme may represent a good short at current levels with the supply of stock set to increase and its move to the NYSE. ---------------------------- Abbot Laboratories - ABT Please let me know your thoughts on ABT. When I look at this on a weekly basis it looks like it is trying to do one of two things...form a head and shoulders...Or, going for a triple top at around 53...either way it looks like it may have more downside than upside. - Thank you, Christine Thank you for taking the time to write in, Christine. Drug stocks enjoyed a monster rally, which began in early 2000 at the dawn of the great bear market. As investors began to sell tech and finance stocks, their capital made its way into more defensive issues such as tobacco and drug stocks. My readers can pull up a chart on the AMEX Pharmaceutical Index (DRG.X) in order to view the massive sector rotation into the drug stocks, which lasted up until early 2001. However, for reasons unknown to me, the same market participants who were rotating into drug stocks last year are now selling in a big way. This sector rotation out of drug stocks is a bit confusing to me, because they represent a defensive play. And, as we all know, the broader tech and finance sectors are still getting whacked. One reason that I can think of why investors are selling drug stocks is to raise capital...maybe to meet redemption requirements or to stay liquid? Or, maybe investors are selling drug stocks as a function of their high historical valuations and are merely taking profits from last year? We do know that there is a massive long liquidation in the drug stocks currently, Christine, which brings us back to your Abbott Labs (NYSE:ABT) request. I have nothing to write about Abbott that is particularly negative concerning the company or its fundamentals. Furthermore, I'm not smart enough to pick the bottom in the DRG.X, but it does appear that the path of least resistance is to the downside. However, because Abbott made a large move to the downside over the last month, especially last week, it's rather difficult to measure the amount of risk in putting out stock (read: short selling) at current levels. If a trader was looking to short shares of Abbott, I think the most prudent strategy, in terms of risk-to-reward, would be to wait for the stock to rebound to a significant resistance level. You mentioned a possible top at the $53 level, or head-and-shoulders formation, Christine, but I would point out that it would take quite some time for Abbott to rally roughly 10 points to complete the formation you're looking for. And I don't know if Abbott will make it that high during this cycle of rotation out of drug stocks. Two resistance levels to watch for a rollover might be $46.50 and $48.00. ---------------------------- Qwest Communications - Q If you have room what are your thoughts on Qwest (Q)? - Thanks, Marvin Similar to my ideas concerning Global Crossing, Marvin, I think the short-term for Qwest (NYSE:Q) is a bit difficult to gauge in terms of the macro fundamentals in the telecom sector. However, the stock did act particularly well last week, which stemmed from the company reaffirming its growth outlook last Tuesday. The bullish comments from Qwest were a beacon of hope last week. But the question right here and now is if the momentum from Qwest's comments can sustain its stock price and push it higher in the short-term. The reason I pose this question is because shares of Qwest traced a bullish forecast up through Thursday, followed by an inside day Friday. The stock could be set to breakout of this pattern and trade up to $40, which could present opportunity to traders from the long side. But, I don't know what the catalyst could be to allow Qwest to work higher. My only suggestion is to refer to price next week, and watch for a breakout. Finally, for what it's worth, I think Qwest will be a long- term winner of the new economy and will capitalize on the broadband business. When the market and economy turn, I think Qwest is a stock to own for investment purposes. The operative word, however, is WHEN the market turns. Be patient! ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* For the week of March 19th, 2001 Monday ====== None Scheduled Tuesday ======= Trade Balance Jan Forecast:-$33.0B Previous: -$33.0B Treasury Budget Feb Forecast:-$44.0B Previous: -$41.7B FOMC Announcement Forecast: NA Previous: NA Wednesday ========= CPI Feb Forecast: 0.20% Previous: 0.60% Core CPI Feb Forecast: 0.20% Previous: 0.30% Oil & Gas Inventories 16-Mar Forecast: NA Previous: 285.3MB Thursday ======== Initial Claims 17-Mar Forecast: 368K Previous: 375K Leading Indicators Feb Forecast: -0.20% Previous: 0.80% FOMC Minutes Forecast: NA Previous: NA Semi Book to Bill Ratio Feb Forecast: NA Previous: 0.81 Friday ====== ECRI Wkly Leading Idx 16-Mar Forecast: NA Previous: -4.1% Week of March 26th ================= Mar 26 Existing Home Sales Mar 26 New Home Sales Mar 27 Durable Orders Mar 27 Consumer Confidence Mar 29 Initial Claims Mar 29 GDP-Final Mar 29 Chain Deflator-Final Mar 29 Help-Wanted Index Mar 30 Personal Income Mar 30 PCE Mar 30 Chicago PMI Mar 30 Mich Sentiment-Rev. ************************Advertisement************************* Tired of waiting on trades to execute? 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The Option Investor Newsletter Sunday 03-18-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/031801_2.asp ************** TRADERS CORNER ************** Be Calm, Think Clearly, It's Not Time To Panic By Renee White Okay, I give up. I'll admit it. It WAS a bubble. Like most of my contemporaries, I'd give anything for a second chance to apply all that I've learned in the last two years. If you are like me, you are probably sick now. Sick of hearing how oversold this market is. Sick of hearing "Was that the bottom?" Are you also sick of the word capitulation, and Jay Leno's Nasdaq jokes? How about being sick of looking at a dwindling account balance, and hearing, "Buy this. It's fairly valued." I will not belabour that point in this article. In addition, I will not make light of the week we have had. This is painful and very stressful for anyone who watches the markets, regardless if they make their living by it or not. It affects aggressive traders, employees and conservative retirees on fixed income. My heart just bleeds for the elderly who felt safe in some "widow and orphan" stocks of yesteryear; equities that were previously described as "safe." So now we know what both bubbles and crashes feel like. The good news is: we have accelerated our learning curve by experiencing both dimensions. Sure, it was an expensive lesson and for many of us the bleeding continues. However, let's get beyond that. This is finance and things change. The market is fluid; it doesn't only go up. If you are to survive in order to win again, you must be able to live through the storms AND learn from them. To play in this game for years to come, each of us must learn how to play the slides and the nasty muddy bottom aftermath, as well as the ascent. The storms are our best teachers of our own individual weaknesses. Those who study it will become much stronger traders once the sun starts shining again. Last year I spent more time reading economics and how it affects the markets. Although the markets feel gut wrenching these days, those studies have really improved my market projections and interpretations. Recently I heard: "The stock market has predicted 9 out of the last 5 recessions." The first time I heard that I laughed. This week, instead of laughing, I thought about it. In order to avoid being caught up in the panic perpetuated by the media, I decided to avoid CNBC Wednesday, Thursday and Friday. I do not need hysterics when I am trying to clearly understand the market. In 1987, the stock market clearly announced an economic crisis, but other than a shakeout in the financial industry, no recession occurred. Though I have a knot in my stomach, I think this past week was an over-reaction. It is clear to me now that everyone feels sick and traders are looking at the stock market as a predictor of our economic demise. I would like to caution readers from falling into this trap. You have heard it mentioned before, when the CEO gets Man Of The Year and his face smiles gleefully on the cover of Time Magazine, it's probably a good time to short the stock. Well friends, I can't help but wonder with the Nasdaq crash jokes becoming a nightly routine for Jay Leno, if we are near a buy signal. Four out of the four nights I watched last week, he lead with Nasdaq crash jokes. I think everyone knows at this point that picking the exact bottom is just guessing. No one knows and everyone has an opinion. Understanding a little economics can help calm the nerves. The Federal Reserve influences the economy by adjusting money flow. The Chairman can stimulate the economy by his favorite tool, lowering the Federal Funds Rate. To kick-start the economy during the recession in the early 1990's, the Fed shaved the Federal Funds Rate 16 times over a 2-year period, starting in late 1990. If you look at your charts, you will see an ascent starting about the same time. By making money cheaper, everyone benefits; banks, businesses and the everyday person. The Fed Funds Rate is the rate federal banks charge each other for overnight loans of $1 mln or more. It is considered a barometer of the direction of short-term interest rates, which fluctuate constantly. When banks borrow cheaper dollars, they pass it down in terms of cheaper mortgages, credit cards, and business loans. Money flows easily but there are also risks associated with declining interest rates. If rates fall too low with an expanding economy, it tends to spark inflation. Naturally, with inflation comes the scare of increasing interest rates to cool things off. The cycle occurs, then repeats again. The markets are so volatile at this point that I will most likely sit out until after the market picks a direction after the rate cut. April earnings will still be bad so if we get a rally soon, I will probably play earnings with another downside bias. If I am lucky, I will enter April earnings plays after a rally has surged to a resistance level using May/June expiration periods. This is the typical post-tax season slump which can help my bearish bias. May is known for being a very weak month for the markets. Before following the total fear and panic, look around and you will still see signs of a vibrant, healthy economy in most areas. It's possible that we have all become far too myopic in our perspectives, caused by the memories of our enjoyably comfortable bubble from the past. It's time we think clearly, looking further out in time. Although things are shaky, they do not warrant panic. Plot and follow economic reports for hints on where we are going. Buy a basic book on economics to learn the difference in leading and lagging indicators and how they affect the stock market. Build confidence through learning. Be calm. Think clearly. And don't panic. *************************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=1846 ************************************************************ *********** OPTIONS 101 *********** Option Tactics In A Bear Market By Lynda Schuepp It ain't over until the fat lady sings. We all are sick of the bleeding and each week we think, "this is the bottom, I'll buy the dip, it's always worked before." It is human nature to want to be long the market not short, but continuing to use strategies that worked two years ago are quite unprofitable. But surely the bottom is near, you say. We've been wishing and hoping that were true since the first major correction in April of last year. One year later, we are down 40% from that low and down 60% from the high set. Let's compare this bear market to other bear markets. We thought the crash in 1987 was horrendous and the worst most of us have seen in our trading careers. That correction saw the S&P 500 tumble 56%, the Nasdaq declined 58% and the Dow Jones fared the worst at a loss of 70% and only lasted four months, and the worst was over in a month. We have to go back to December of 1974 to see more significant declines. That bear market lasted 2 years and saw the S&P 500 drop 94%, the Dow Jones drop 87% and the Nasdaq fared worst at a decline of 149%! Does history repeat itself? What's different this time? One only needs to look at the gains in these three indexes up to their highs in March of 2000 to see the problem. I'm afraid Alan's bubble is a reality. If you go back to the lows in December of 1974 to the highs in March of 2000, the Dow rose 1900%, the S&P 2400% and the Nasdaq 9200%! Now I'll admit the Nasdaq is a better reflection of growth companies than the Dow. The times they are a-changing, so it's probably more realistic to compare the growth in the three indexes since the lows back in October of 1987. The Dow rose 600%, the S&P 600% but the Nasdaq rose 1700%, almost triple the other indexes. Therein, lies the problem-what goes up (too far, too fast), comes down to a more reasonable level. The question remains - are we at reasonable levels yet? As of Friday, the Dow is up 508%, the S&P up 432% and the Nasdaq is up 556% since the October 1987 lows. If we are not in a recession, then these levels are pretty realistic but if we are in a recession, we should see ALL indexes go lower from here. Last week, I wrote about a longer-term strategy to use in a bear market. Well, it's one week later, the market is lower still and it's time to review our position. To recap from last week, we looked at a bull call spread, being the bottom fishers and optimists that we naturally are. We chose the January calls for reasons explained in the article, going long the 40 strike and short the 45 strike. Last week at the close, we could have put the trade on for $2.30. One week later it would cost $2.30 based on the closing prices on Friday! But the market is down, how can that be? Imagine, the QQQ's dropped from $45 to $41 this week, but our spread actually held. This is why you should hedge your bets in this kind of market! Had you simply gone directional and bought the January 40 calls without selling the 45 strike, you'd be down 25% of your investment. And speaking of investment, on 10 contracts you would have invested over $11,000 if you only bought the 40 calls, but the spread only cost $2300 for 10 contracts. Let's review, invest $2300 in the spread and your loss is zero after the QQQ's went down 8% or invest $11,000 and be down $3000. That's why you need to add this strategy to your arsenal. The good news is that the perception based on the option prices this week indicate we may finally be near a bottom, but don't expect a rapid turn around. Nasdaq since October 1987: Notice how the Nasdaq dropped to its 100-period moving average. Remember this is the 100-MONTH moving average, because this is a monthly chart. Sometimes, you need to step back and look at the big picture. We are very near that average now, the actual number is 1678 and that's only another 10%. We could do that in a week! This average has provide MAJOR support in the past bear markets and will need to be watched. The moral of the story is keep your losses small and minimize risk in your trades by implementing more conservative strategies in this kind of market. ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* WCOM - WorldCom Inc $17.44 (+0.50 last week) See details in sector list Put Play of the Day: ******************** RIMM - Research in Motion $26.19 (-14.19 last week) See details in sector list ************************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=1861 ************************************************************** ************************** 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 ELNT $23.88 (+2.38) Caught in a descending elevator, it didn't seem to matter that ELNT wanted to head up. The Semiconductor index (SOX.X) was in a full speed descent over the past 2 days, and the negative effect bled into our play. Even though volume dropped off to less than one-third of the ADV, there was still too much selling pressure for the stock to remain above our $24 stop. Rather than fight a losing battle in a crippled sector, we'll step aside before things really get ugly. PUTS No dropped puts this weekend *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** WM - Washington Mutual Inc $51.49 (+1.86 last week) Washington Mutual is the US's largest savings and loan financial services company. They provide a diversified line of products and services to individuals and small to mid-sized businesses. WM offers consumer banking, mortgage lending, commercial banking, financial services, and consumer finance. They operate principally in California, Washington, Oregon, Florida, Texas and Utah; although they some 2,000 facilities across 40 states. While the market may continue to punish shares of the larger banks with exposure to Japan, the smaller banks with concerns principally in the US such as Washington Mutual (NYSE:WM) become very attractive to financial investors. If the Fed cuts rates drastically on Tuesday, WM is likely to burst at the seams and make a charge for $55.93, the 52-week high set in December. Hence, we're beginning coverage this weekend purely on the speculative probability that WM could rally into the Fed meeting Tuesday. Again, this is distinctively probable because WM is a domestic bank with little, if any, exposure to Japanese-related concerns. If such a rebound comes into play there's two elements you'll want to pay particular attention to in regard to exit strategies. First, there's the stock's own resistance levels, which could cap the uptrend and thus, result in a rollover. In other words, traders might want to lock in gains as WM approaches the $56 level to avoid getting caught in a downdraft and seeing profits quickly dissipate. The other pertinent element is, of course, the direction of the old economy index and its resistance levels. Anticipate the threatening opposition; first through 10,000, then 10,100 and so on. Exit accordingly. Now, notwithstanding the stock's steadfast strength at the current trading levels, pick your entries according to your risk portfolio and keep closing stops in place at $50. A more aggressive trader might be willing to take a riskier entry below $50, say near the $48 support or 5- dma ($49.92) and venture that WM will react positively in the coming days. Others may instead consider a more conservative trade and simply buy into strength on the big breakout through the immediate resistance at $52 and $54. And on the analyst front, there's some confidence regarding the stock's potential, going forward. Goldman Sach's reiterated a Market Outperform on Friday and Sandler O'Neill upgraded WM to a Buy as well as issued a $58 price target. Nonetheless, keep the rose-colored glasses in your pocket and trade with discipline. BUY CALL APR-45 WM-DI OI=1682 at $7.50 SL=5.25 BUY CALL APR-50*WM-DJ OI=3685 at $3.60 SL=1.75 BUY CALL APR-55 WM-DK OI=6123 at $1.20 SL=0.50 http://www.premierinvestor.com/oi/profile.asp?ticker=WM LEH - Lehman Brothers Holdings $66.40 (-1.71 last week) Through its subsidiaries, LEH constitutes one of the leading global investment banks, serving institutional, corporate, government and high-net-worth individuals clients. The company is engaged primarily in providing financial services, including securities writing and direct placements, corporate finance and strategic advisory services, private equity investments and securities sales and trading. Completing its array of banking, research and trading capabilities, LEH also engages in the trading of foreign exchange, derivative products and certain commodities. After the drubbing the broader markets took last week, it is tough to find any stocks that posted a gain. While it wasn't a stellar move, it was encouraging to see LEH successfully test the 200-dma (currently $63.75) and close above it on Friday. To underscore the stock's strength, the DJIA posted a 52-week closing low, with the NASDAQ and S&P500 setting new 2-year lows. So, for starters, our new play is looking pretty solid relative to the alternatives out there. Add in the possibly buoyant effect of the Fed meeting on Tuesday and an earnings report set for the following morning (March 21st), and we have the makings of a good, albeit speculative, call play. Aiding the stock in its reassuring bounce last week was solid support at the $60 level, and barring a disappointment from the Fed on Tuesday, we don't expect to revisit that level any time soon. We want to watch this one closely, and so were are starting with a tight stop at $64. Consider intraday dips near the $65 support level to be attractive entry points, but keep in mind that a close below $64 will be cause for ejection from the playlist. With daily Stochastics just coming out of oversold, more conservative players may want to enter on strength, initiating new positions as the stock surges through $67 on solid buying volume. Watch the Broker/Dealer index (XBD.X) carefully, as it has been teetering on the edge of support at $450. If this support fails, it will be very difficult for our play to keep its head above water. On the other hand, a solid bounce from this level could be just what LEH needs to really get moving. Just keep your eye on the clock. The Fed meeting is likely to juice the share price one way or the other, and we will want to be out of any open positions no later than the close of business Tuesday, with earnings set to be released the following morning. BUY CALL APR-65*LEH-DM OI=1097 at $ 7.00 SL=5.00 BUY CALL APR-70 LEH-DN OI=1722 at $ 4.40 SL=2.75 BUY CALL JUL-70 LEH-GN OI= 936 at $ 8.50 SL=6.00 BUY CALL JUL-75 LES-GO OI=1494 at $ 6.70 SL=4.75 http://www.premierinvestor.com/oi/profile.asp?ticker=LEH ************************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=1869 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 03-18-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/031801_3.asp *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1847 ************************************************************ ****************** CURRENT CALL PLAYS ****************** WCOM - WorldCom Inc $17.44 (+0.50 last week) WorldCom is a global communications company that provides a broad range of communications, outsourcing, and managed network services. The core business is communications services, which includes long distance, local, and wireless communications; including voice, data, Internet, and international services. WorldCom also provides one of the broadest range of Internet and private networking services available. It was volatile week of trading for many of the telecommunications companies. The massive sell-off on Wednesday saw many of WCOM's competitors like Level3 Communications (LVLT), SBC Communications (SBC), and Verizon (VZ) take big hits. In contrast, WCOM gained an astonishing 12% intraday after CEO Bernard Ebbers maintained his guidance for 1Q earnings and would not cut its growth outlook. The strong move off the $15 support caught our attention and initiated immediate coverage of WCOM. Salomon Smith Barney's Jack Grubman, also praised WorldCom. He upped his 1Q and yearly revenue growth expectations for the company's data unit as well as reiterated a Buy rating on the stock. On Thursday, we got a big break. Merger scuttlebutt involving SBC Communications (SBC) and Sprint (PCS) interspersed with whispers of WorldCom's potential involvement in a separate deal lifted the whole telecommunications sector. The strong upward momentum launched the share price through the $18 resistance on volume of 1.4 times the ADV. A clean break through $18 opened the door for a challenge of the next line of opposition at the 50-dma, near $19. While this may not seem like much of an obstacle, this technical measurement has, in previous months, snuffed out upward trend lines. Look for buyers to step in amid an advancing marketplace and generate enough momentum to clear this resistance before taking additional positions; unless you're interested in buying a deep dip and playing the current trading channel. The latter approach tends to involve more risk. We're maintaining a protective stop at the $15 mark. For new readers, this essentially means that we'll exit the play if WCOM fails to hold this level on a close. BUY CALL APR-15 JQD-DC OI= 8963 at $3.25 SL=1.50 BUY CALL APR-17.50*JQD-DW OI=19381 at $1.69 SL=0.75 BUY CALL APR-20 LDQ-DD OI=26616 at $0.75 SL=0.00 http://www.premierinvestor.net/oi/profile.asp?ticker=WCOM SMTC - Semtech Corp. $27.69 (+2.63 last week) Semtech is a leading supplier of power management, transient protection, system management, high performance, and advanced communications semiconductor products for portable and high speed communications applications. Semtech designs, manufactures, and markets a range of products, the majority of which are sold to the communications, industrial and computer markets. Within the semiconductor sector, the analog device chip stocks, such as LLTC, MXIM, and SMTC have been holding up better than some of the high flying chips stocks such as PMCS and BRCM. SMTC demonstrated a pattern of consistently weaving within approximately 10 points above and below its 200 and 50 dmas for the last twelve months. Some analysts feel that, at this point, the analog chip stocks have discounted weakness in the first and second quarter of this year, and are possibly looking forward to the third quarter. According to SMTC's management, the December and January gross bookings have shown improvement from the weakness exhibited in November. Since the beginning of this year, SMTC has held at strong support at $22, and has been unable to penetrate heavy resistance at $29.75. Eventually, the stock should break out of this tight range, and the technical indicators favor an upside breakout. In Friday's choppy action, SMTC reached a low right on top of the 50 dma of $27.23, which could be a possible entry point for aggressive positions. Conservative call players might want to wait for a break above $29.75 on strong volume, which might lead SMTC to test the next resistance level at the 200 dma of $34.49. We are setting stops tight at the $27 level, so close positions if SMTC closes below $27. Continue to monitor others in the analog chip sector, such as ADI and NSM, as well as the SOX.X. BUY CALL APR-25*QTU-DE OI= 43 at $5.00 SL=3.00 BUY CALL APR-30 QTU-DF OI=121 at $2.56 SL=1.25 BUY CALL JUN-25 QTU-FE OI=360 at $7.00 SL=5.00 BUY CALL JUN-30 QTU-FF OI=183 at $4.50 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=SMTC ***************** CURRENT PUT PLAYS ***************** OPWV - Openwave Systems Inc. $25.54 (-5.36 last week) Openwave Systems Inc., the combination of Phone.com and Software.com, is the worldwide leader of open Internet-based communication infrastructure software and applications. Openwave's customers are communication service providers worldwide, including wireless network operators, wireline carriers, internet service providers, portals, and broadband network providers. Openwave was formed in November of 2000 following the merger of Phone.com Inc. and Software.com Inc. A classic rollover from the $28.70 level occurred in the morning, as the Nasdaq collapsed at the open. This rollover brought OPWV to support at the $26 level, which held briefly until the afternoon. It is important to note that OPWV did not participate in the brief Nasdaq rally which occurred during the mid morning on Friday, which almost brought the Nasdaq, and the software index, GSO.X, into positive territory for a few minutes. OPWV continued to experience selling throughout the day, which brought it to a low of $24.72, almost a point above the 52-week low of $23.87. While the software index has exhibited weakness recently, the communications software sector has been hit particularly hard. This week, Comverse Technologies, another communications software company, reported excellent earnings, but fell flat on its face after being downgraded by Goldman Sachs, US Bancorp Piper Jaffray and Banc of America Securities. OPWV could potentially be hurt by slowing wireless demand, or the slowing demand for additional software applications by carrier customers, either of which is possible in the coming quarter. At this point, investors are not taking any chances, and are bailing at the slightest sign of weakness in a stock's sector. Considering the market's lukewarm reaction to Oracle's earnings, the software index may experience further selling ahead. Trading next week will be tricky, as the Federal Reserve will announce their decision on interest rates on Tuesday. Traders might want to assess the market's reaction to the Fed's decision before taking positions. OPWV is currently poised to roll over from $26, which could be an entry point for aggressive put players. Otherwise, a break below $23.87 on heavy volume would be very bearish, and could establish a new 52-week low. Watch other communications software stocks, like CMVT, DOX, and CSGS, to assess sector weakness. We will set stops at $29, and close positions if OPWV closes below this point. BUY PUT APR-30 UGE-PF OI=533 at $7.40 SL=5.25 BUY PUT APR-25*UGE-PE OI=906 at $4.20 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=OPWV QLGC - QLogic Corp $27.00 (-1.94 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. You might want to get another ticket to ride the QLGC roller coaster. Earlier in the week, QLGC offered day traders opportunities to profit as a result of the intraday gyrations. Take a look at a chart for visual confirmation. But on Friday, the rolling share price made a definitive move to the downside, breaking out of its consolidation channel. Now notice that Friday's activity not only resulted in the stock hitting its third 52-week low ($26) for the week, but also that the $28 level, which is bolstered by trailing 5-dma ($28.36), served as staunch resistance amid rally attempts. The budding pattern of lower-highs and lower-lows certainly forecasts the potential for more downside activity going into the Fed Meeting. However, beware of a broad market rally in the event Greenspan opts for a dramatic rate cut. This is where the use of stop losses come in very handy. We have revised our protective stop to the $30, but understand, ours is a closing stop. Entries above this level are viable under the right conditions: a dissenting market and/or rollover play off the 10-dma ($31.97), for instance. To jump on this put play in a more conservative manner, look for sector weakness and a break below the $26 bottom. BUY PUT APR-30*QLC-PF OI=262 at $6.50 SL=4.50 BUY PUT APR-25 QLC-PE OI= 84 at $3.75 SL=2.00 BUY PUT APR-20 QLC-PD OI=800 at $1.50 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=QLGC AFFX - Affymetrix Inc $37.00 (-9.00 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. The rolling downward momentum afflicting the broad markets and the Biotechs (BTK.X) is effectively generating lots of downside action for AFFX! In despite of major short covering on Tuesday that boosted the markets, AFFX simply experienced two days of consolidation between $36 and $39. A failed rally at $41 on Thursday provided a prime opportunity to jump into this put play. Rewards were fruitful for the risk-takers. AFFX freefell to the $36 level amid robust volume in the first couple hours of trading on Friday. Once again, the 5-dma ($38.13) has resumed its role as the upper resistance, keeping a tight lid on advances. Conservative types may find this measurement device a way to gauge entries and/or exits. In light of the narrowing trading range and the upcoming Fed Meeting, we've revised our closing stop from $40 to $39. If AFFX demonstrates unexpected strength and finishes the day above $39, we'll move on to other lucrative opportunities. While our closing stop is at $39, please don't discount aggressive entries above this level. If the environment dictates further weakness; albeit, a declining market combined with a faltering sector (BTK.X below the critical 500 mark), there may very well be profits to capture. Conservatively, be patient for a break to the underside of $36 for better confirmation. BUY PUT APR-40 FIQ-PH OI=489 at $7.13 SL=5.00 BUY PUT APR-35*FIQ-PG OI=122 at $4.13 SL=2.50 BUY PUT APR-30 FIQ-PF OI= 21 at $2.19 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=AFFX RATL - Rational Software Corp $20.31 (-7.63 last 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. Exceptional volume levels topping twice the normal trading activity have generated a strong downtrend line for RATL in recent weeks. The rippling effect of a slowdown in IT (information technology) spending across the board is currently having a negative impact on the software infrastructure sector. Companies who help businesses operate over the Web such as Mercury Interactive (MERQ), BEA Software (BEAS), and Check Point Software Technologies (CHKP) are getting diced and sliced as investors continue to ponder their trading strategies amid a bloodied marketplace. And to add insult to an already injured RATL, Prudential Securities lowered their forecasts on the company last week to reflect economic weakness. In despite of the oversold conditions - RATL has lost almost 65% of its value since hitting $55.25 on January 29th - the share price continues to decline. Monumental declines occurred in Thursday and Friday's sessions. While not monumental percentage-wise, historically it's very significant. Prior to October 1999, the $20 served as the upper resistance - literally for almost a year until the company's big breakout into the technology wave. Therefore, use this information in planning your plays. On one hand, more declines may be in the cards with the $14 level providing the next relative bottom. Or on the other hand, discriminating buyers may find the attractive price level too hard to resist, even if it's amid a short-term rally on Fed news. On Thursday, First Albany and Dain Rauscher Wessels tooted Strong Buy recommendations, with the latter also issuing a $70 price target. Therefore, it's of the utmost importance at this point in the play to use stops for protection, despite the lack of traders' response to the upgrades last week. Your personal level of risk will dictate intraday stop marks, but take note, we'll exit the play on bullish close above $23. If you're considering an aggressive entry near the 5-dma ($23.94), be prepared to lock in gains as RATL approaches the $20 level, supported by the 52-week low ($19.94). BUY PUT APR-25 RAQ-PE OI=1430 at $6.38 SL=4.25 BUY PUT APR-20*RAQ-PD OI= 577 at $3.12 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=RATL RIMM - Research in Motion $26.19 (-14.19 last week) Research in Motion designs, builds and markets wireless solutions for the mobile communications market. Through development and integration of hardware, software and services, RIMM provides solutions for seamless access to time-sensitive information including e-mail, messaging, Internet and Intranet-based applications. RIMM's portfolio of products includes the RIM Wireless Handheld product line, the BlackBerry wireless email solution, wireless personal computer card adapters, embedded radio modems and software development tools. The company's technology also enables a broad array of third party developers and manufacturers in North America and around the world to enhance their products and services with wireless connectivity. Tossed about in the stormy NASDAQ seas for the first half of last week, RIMM really started to sink towards the end of the week. Giving up $11.18 (30%) over the past two days would normally be bad enough, but it came on volume that more than doubled the ADV, pushing the price solidly below the surface of the lower Bollinger band to close out the week at its lowest point since last May. So what caused the meltdown in the share price, you ask? Let's call it fortuitous guilt by association, as the Wireless sector had a rough week. First NXTL warned of a revenue and earnings shortfall due to the economic slowdown. Shares of the company got hammered on the news, and then Wireless Handheld device makers PALM and HAND got slapped with an NCR patent infringement suit Thursday morning and the punishment was swift. Both PALM and HAND gave up better than 12% in the past 2 days, and combined with the NXTL news and overall bearish sentiment in the market, it is no great surprise that our play gave us such a large move. The late-May low of $23.25 is the stock's last chance of support that is less than a year old. If the bulls can't hold the line near this level, the stock will quickly be trading at levels not seen since August of 1999. In that case look for support to appear at $21, and then $18. Given the rapid decline this week, we are ratcheting our stop down to $33 to prevent giving our profits back to Mr. Market. Consider new positions on any rally that fails to hold above our stop, as the selling volume begins to reappear. Entering new positions on further weakness seems a bit dicey at this point, given the fact that Friday's closing price was more than $4 below the lower Bollinger band. It seems likely that there will be some short covering before the stock heads further south. Although not likely to have much of an effect in the current market conditions, don't forget that RIMM will release earnings on March 28th. BUY PUT APR-30 RUL-PF OI=1090 at $6.70 SL=4.75 BUY PUT APR-25*RUL-PE OI= 198 at $3.80 SL=2.25 http://www.premierinvestor.net/oi/profile.asp?ticker=RIMM AETH - Aether Systems Inc. $16.56 (-5.06 last 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. Market sentiment has played a key role in the decline in the shares of Aether over the past year. With the stock down almost 95 percent from its all-time high, AETH has not only moved lower in sympathy with the NASDAQ, but has vastly under-performed the Tech index. The overabundance of optimism over its earnings prospects and business model that allowed AETH to peak last year has now turned into a formidable wave of overhead resistance amidst the tides of pessimism. The slower than expected deployment of next generation wireless networks has also been a drag on the Wireless sector, weighing heavily on AETH. Even bullish comments from analysts are not helping the stock. Late last month, JP Morgan H & Q reiterated their Buy rating and 12-month price target of $66, citing strong revenue growth leading to earnings growth going forward. This did little to incite buyer interest however, as the stock has lost almost 50 percent since the time of the announcement. A failure to hold a 3-week base culminated in a break below support at $23 in early March, and has since resulted in a steady decline, with the 5-dma (now at $18.45) acting as a lodestone on the stock. Failed attempts to challenge resistance at this level along with $17.50 and $19.50 may offer attractive opportunities to enter aggressively. Just be aware that in order to protect our profits, we are lowering our closing stop price from $20 to $19. Strong selling volume leading to a break below Friday's intra-day low of $16.38 may allow the more cautious to take a position, provided that peers CMVT and OPWV confirm downward movement. BUY PUT APR-20 HIZ-PD OI= 48 at $5.13 SL=3.00 BUY PUT APR-17.5*HIZ-PW OI=377 at $3.25 SL=1.75 http://www.premierinvestor.net/oi/profile.asp?ticker=AETH BRCM - Broadcom Corporation $33.38 (-5.25 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. A struggling Chip sector and a seemingly endless flurry of lawsuits aimed at the company has turned this former Wall Street darling into a much-beleaguered stock. An article from the Wall Street journal in late February cast a harsh eye on recent insider stock sales, questioning not only the legitimacy, but also the legality of the transactions. With the stock price already in a downtrend, this only served to draw the ire of shareholders, resulting in an almost daily stream of class action lawsuits. This legal burden kept shares of the optical chipmaker from participating in the recent short-lived bounce in Chip stock prices and now, with Semiconductor sector, as tracked by the Philadelphia Semiconductor Index (SOX), threatening to make new lows, it appears that BRCM's stock price may follow suit. Connecting the highs and lows since the middle of February reveals that BRCM has been trading a steep downward-trending regression channel. Since the drop of almost 14 percent on Monday, the stock spent most of the week trading sideways, and in doing so, has marked enough time for the top of this channel to catch up. Failure to hold the $32 level may provide cautious traders with an entry on weakness while aggressive players may target resistance from the 5-dma (at $34.25), $35 and our stop price at $37. Make sure BRCM stays below our protective stop, as a close above this price could suggest a break in its downtrend and give us the signal to close our positions. 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 VTSS - Vitesse Semiconductor $39.06 (-2.38 this week) Vitesse Semiconductor is a supplier of high-performance integrated circuits targeted at systems manufacturers in the communication and automatic test equipment (ATE) markets. A leading manufacturer of gallium arsenide (GaAs) integrated circuits, a type of IC that performs at higher speeds than silicon chips. The company offers several products that address the needs of high-performance communications systems at data rates for the SONET, ATM, IP, Fibre Channel and Gigabit Ethernet markets. VTSS also provides gate arrays and custom products that offer a combination of high complexity, low power dissipation and high speed for the ATE market. Analyst downgrades and negative sentiment in the Wireless sector kept a lid on VTSS' stock price recently and now, with the failure of what could have been a bullish triangle pattern along with a faltering Chip sector, our put play could find itself deeper into profitable territory. After a steep decline in the month of February, the stock settled into a trading range, with support below at $39.50 and resistance overhead at $45.25. Connecting the lows since the beginning of March also revealed that the stock was in the process of forming an ascending triangle formation. While such patterns usually resolve to the upside, VTSS' weakness relative to its peers suggested that a resolution to the downside was more likely. This came to pass on Thursday, as an optimistic open near resistance on the heels of a positive NASDAQ gave way to a day of selling, closing below $39.50 support and resulting in a breakdown of its triangle pattern. This uptrend line on Friday, along with the 5 and 10-dma (at $40.95 and $41.46 respectively) acted as resistance. Further failed attempts to take out these levels could provide higher risk players with entry points, but wait for the sellers to return before jumping in. In order to preserve our gains, we are moving our stop price down, from $43 to $42. A close above this level will result in our dropping coverage. If the bears get the upper hand in Monday trading, a break below Friday's intra-day low of $37.75, confirmed by weakness in sector sisters QCOM and TQNT, could allow the more risk averse to take a position, keeping in mind that support levels for the stock can be found just below at $37 and $35. BUY PUT APR-40*VQT-PH OI= 682 at $6.63 SL=4.50 BUY PUT APR-35 VQT-PG OI=1229 at $4.13 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=VTSS ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1827 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Sunday 03-18-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/031801_4.asp *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1848 ************************************************************ ************* NEW PUT PLAYS ************* ABGX - Abgenix $18.81 (-8.63 last week) Abgenix is a biopharmaceutical company focused on the development and commercialization of fully human monoclonal antibody therapies for a variety of diseases. The company's antibody technology platform, which includes XenoMouse (TM) technology enables the rapid generation of high affinity, fully human antibody product candidates to essentially any disease target appropriate for antibody therapy. Abgenix leverages its leadership position in human antibody technology by building a large and diversified product portfolio through the establishment of licensing arrangements with multiple pharmaceutical, biotechnology and genomics companies and through the development of its own proprietary products. Last year, investors were willing to bid to the moon for biotechs which offered the potential to cure deadly diseases like cancer decades from now. This year, investors only care about the cancer which has eaten away at their savings, and are running scared from non profitable companies which could have to wait years for FDA approval of their products. ABGX fell below its 200 dma of $58.90 the first week in January, which coincided with a drop in the biotechnology index below its major moving averages. While BTK.X rallied following the initial Fed rate cut in January, ABGX rallied simultaneously, but failed to move above the 50 dma of $54 the last week in January, and has been on a serious slide since that point. On January 30, ABGX reported fourth quarter revenues of $13.5 million, with a net loss of $4.5 million, or 5 cents per share, which is down from 16 cents per share in the year ago quarter. Management stated that they expect 2001 revenues to increase to $30 to $35 million, from $26 million in 2000, but they expect to increase their expenditures dramatically, to over $100 million. This translates into a 15% increase in revenues and a 100% increase in company expenditures on research and development, and the market did not like this news. A failed rally past $38 during the last week in February coincided with a failed rally in BTK.X past the $600 level. This week, ABGX held at the $22 level until Friday, when ABGX broke an important support level of $20, which dates back to December of 1999. At this point, support is light until the $13 level, and, without a dramatic change in investor sentiment, we could see that level next week. Traders could consider taking positions at current levels, or possibly at a failed rally past $20. Monitor the BTK.X for continuing weakness, as it broke an important support level of $470 on Friday. We are setting stops at $22, so close positions if ABGX closes above this level. BUY PUT APR-25 AZG-PE OI= 9 at $7.63 SL=5.25 BUY PUT APR-22.5*AZG-PY OI=132 at $5.50 SL=3.50 http://www.premierinvestor.net/oi/profile.asp?ticker=ABGX BMC - BMC Software, Inc. $19.17 (-4.33 last week) Founded in September 1980, BMC Software is one of the world's largest independent software vendors. They deliver the most comprehensive Service Assurance strategy for e-business systems management with the fastest guaranteed implementation. This strategy enhances availability, performance and recoverability of companies' business-critical applications. The BMC typical customer is an enterprise confronted with the task of managing billions of data entries essential to the daily activity of hundred, thousands and even millions of individuals. The company is headquartered in Houston, Texas, with offices worldwide. Throughout the NASDAQ's slide so far this year, the Software sector has been one of the weaker components in the Technology space. Given these circumstances, shares of BMC Software have managed to defy gravity for much of this time. A positive earnings pre-announcement in the beginning of the year in which the company raised guidance going forward coupled with an upgrade by Prudential Securities to a Strong Buy rating helped the stock to gap up massively, from $15.62 to a price level of over $20. From there, the stock spent most of its time attempting to break through resistance at $33. Unable to do so, BMC has since fallen under the weight of its sector, as warnings of an earnings shortfall from ORCL led software stocks lower in the aftermath. The company recently moved trading of its stock from the NASDAQ to the NYSE, but this change in venue has done little to ease its downtrend. Earlier this month, the stock was downgraded by Dain Rauscher Wessels from a Buy to a Neutral rating, resulting in further selling. On Friday, with pressure overhead from the 5-dma, along with a falling NADSAQ, BMC failed to hold critical psychological support at $20. It appears now that the stock may attempt to fill its January gap and in doing so, could provide an opportunity for conservative traders to make a play on a break below $18.75 with conviction. Higher risk players may look for failed rally attempts resulting in a rollover at $20, the 5-dma (now at $21.14) and our closing stop price of $22. Track sector sentiment using Goldman Sachs Software Index (GSO) when monitoring positions. BUY PUT APR-22.5 BMC-PX OI=159 at $4.40 SL=2.75 BUY PUT APR-20 *BMC-PD OI= 10 at $2.70 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=BMC ******************************** WEEKLY UPDATES FOR VARIETY PLAYS ******************************** LOW VOLATILITY: PIXR $34.00 -0.25 (-0.38 this week) On Tuesday, when we picked this Low Volatility call play, PIXR surged and closed above $35 on high volume. We were anticipating a confirmation of that strong break. Normal profit taking has occurred since then and PIXR bounced off its 252-dma at $33.75. This moving average is typically used by traders as it represents the number of trading days in a year. That level also is our stop loss. We would expect to see PIXR confirm its Tuesday breakout early next week. Much of the selling on Friday was market related. Bounces from the 252-dma at $33.75 can be bought as well as a break above $35 again on strong volume. Premiums are reasonable, especially in July contracts. BUY CALL APR-30*PQJ-DF OI= 80 at $4.50 SL=2.75 BUY CALL APR-35 PQJ-DG OI=304 at $1.44 SL=0.75 BUY CALL APR-40 PQJ-DH OI=283 at $0.25 SL=0.00 High Risk! BUY CALL JUL-35 PQJ-GG OI= 97 at $2.88 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=PIXR ************************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=1862 ************************************************************** ***** LEAPS ***** Construction Zone -- Proceed With Caution By Mark Phillips Contact Support Welcome back to the work in progress we call LEAPS. If you take a quick glance down below, you'll see that the section has changed quite a bit since our last visit. First, let me say thank you to all of you that wrote to me last week regarding the upcoming changes. I really appreciate the kind words and the constructive suggestions on how we can make this column more useful as a trading resource. I haven't had time to respond to you all on an individual basis yet, but will attempt to do so in the week ahead. Ok, so what have we done here? First off, the layout you see here is only a transitionary phase, but it should carry us through the weeks and months ahead until we have completed the first wave of changes. You'll notice that there are now three lists of plays shown below. The first list is the old playlist, that we've all become familiar with over the past year. In fairness to those that rely on it for tracking our plays, we will maintain this list until each of the plays listed there have either transitioned to the active LEAPS Portfolio or have been dropped due to poor performance. Listed next is the LEAPS Portfolio, and you can see we have one lone resident on this new list. CLX gave us what we deemed to be an acceptable entry point early last week, and so it moved here from the old playlist. Each play that is added to the LEAPS portfolio will be given a play write-up detailing our entry point, and why we think it deserved to be added at that time. We will err on the conservative side by listing the high price of the day as our entry price. Although the CLX play write-up is rather long, expect future play write-ups to be more concise, allowing us to spend more time talking about the Portfolio, Watchlist, the overall market and what to expect in the week ahead. Finally, the LEAPS Watchlist is likely to be the most dynamic portion of the new LEAPS column. Here we will list plays that we feel are appropriate for the consideration of new positions, and we will detail the level at which we will take an entry, the strike price we will target, as well as what we would consider a technical violation in terms of a stop level. Due to the current market conditions, you can see that all of the listed target prices are below current market values. The bearish market environment is not appropriate to buying breakouts, whereas bounces from support levels will provide better entry points. Combined with our listed stop levels, it should provide entries into profitable plays, while eliminating poorly performing stocks from consideration. We will review our listed entry levels on a weekly basis, and update them as needed. As market conditions permit, we will also consider entry points above current prices as well. Each of the possibles on the old playlist have been moved to the Watchlist, and we have listed what we believe are attractive entry points as well as a value for the stop. Although the term 'stop' isn't really appropriate, due to the fact that we have not entered any of these plays, I think it conveys the point that a move below this level will indicate a broken play, and therefore, no entry. If the stop listed on the Watchlist is violated on a closing basis, we will drop that play and remove it from the Watchlist. Additionally, you can see we have two new plays on the Watchlist, CRUS and SWS. See the individual plays below for the motivation and entry strategy for these plays. When a play on the Watchlist provides us with an entry as detailed in the play write-up, it will move from the Watchlist to the Portfolio, accompanied by a new play write-up, detailing our entry into the play, and the location of our stop. Stops will move up, but will never move down, and the Portfolio will keep these levels up to date on a weekly basis. You can use these levels for managing your open plays, or apply a fixed stop-loss percentage to the actual LEAPS contract price. I can't wrap this up until doing a brief recap of what I think are the pertinent factors facing us in the markets next week. All of the major indices, as you well know, declined to set new 52-week lows on Friday, and the VIX again closed above 35. In days gone by, we would have looked at this as a screaming Buy signal for LEAPS, but there hasn't been any capitulation and despite the extreme oversold conditions, there just isn't any catalyst for these markets to go up. Greenspan will be speaking on Tuesday, hopefully giving us our much-anticipated (and much-needed) interest rate cut. Don't pin your hopes on that event to propel the major indices out of their doldrums though. As has been covered much more eloquently in the newsletter in recent weeks, the problems engulfing the equity markets at this time go much deeper than interest rates and will take more healing than can be provided with a quick 50, 75, or even 100 basis point decrease. That's all the time we have for this week, but now that we've covered the basics, it should allow us to spend more time in the weeks ahead addressing specific details of the various plays and the always changing market conditions. Stay tuned and keep those emails coming! Current Playlist (Old Format) SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT CHANGE AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $ 1.50 -91.95% 08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $ 6.60 -62.29% WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $22.50 318.22% 10/22/00 JAN-2003 $ 45 VWI-AI $ 7.88 $14.40 82.86% C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $ 6.40 -37.92% 10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $ 6.10 -50.20% GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $28.00 63.46% JAN-2003 $ 70 OZG-AN $23.13 $36.63 58.34% BGEN 11/05/00 JAN-2002 $ 70 WGN-AN $17.25 $11.88 -31.16% JAN-2003 $ 70 VNG-AN $25.00 $19.25 -23.00% MU 11/26/00 JAN-2002 $ 45 WGY-AI $13.13 $10.00 -23.81% JAN-2003 $ 45 VGY-AI $17.25 $15.10 -12.46% WMT 12/24/00 JAN-2002 $ 55 WWT-AK $ 9.63 $ 5.20 -45.97% JAN-2003 $ 55 VWT-AK $14.00 $ 9.30 -33.57% DELL 01/07/01 JAN-2002 $ 20 WDQ-AD $ 5.25 $ 7.00 40.48% JAN-2003 $ 25 VDL-AE $ 5.63 $ 7.13 35.44% CPN 01/21/01 JAN-2002 $ 40 YLN-AH $10.50 $14.20 35.24% JAN-2003 $ 40 OLB-AH $15.38 $18.90 22.93% JWN 02/18/01 JAN-2002 $22.5 WNZ-AX $ 3.30 $ 1.70 -48.48% JAN-2003 $ 25 VNZ-AE $ 4.10 $ 2.60 -36.59% LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP CLX 03/13/01 '02 $ 35 WUT-AG $ 3.50 $ 4.00 14.28% $ 28 '03 $ 35 VUT-AG $ 6.10 $ 6.70 9.84% $ 28 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL STOP CRUS 03/18/01 $17-18 JAN-2002 $ 20 WUR-AD $15 JAN-2003 $ 20 VUR-AD $15 SWS 03/18/01 $18 JAN-2002 $ 18 YWF-AT $15 JAN-2003 $ 20 VWZ-AD $15 AOL 03/18/01 $38 JAN-2002 $ 40 WIU-AH $35 JAN-2003 $ 40 VAN-AH $35 WM 03/18/01 $46-47 JAN-2002 $ 50 WWI-AJ $43 JAN-2003 $ 50 VWI-AJ $43 C 03/18/01 $44-45 JAN-2002 $ 50 WRV-AJ $42 JAN-2003 $ 50 VRN-AJ $42 GENZ 03/18/01 $83 JAN-2002 $ 85 YGZ-AQ $74 JAN-2003 $ 90 OZG-AR $74 BGEN 03/18/01 $60-61 JAN-2002 $ 65 WGN-AM $58 JAN-2003 $ 70 VNG-AN $58 MU 03/18/01 $38 or $35 JAN-2002 $ 40 WGY-AH $30 JAN-2003 $ 40 VGY-AH $30 WMT 03/18/01 $44-45 JAN-2002 $ 50 WWT-AJ $41 JAN-2003 $ 50 VWT-AJ $41 DELL 03/18/01 $20-22 JAN-2002 $ 25 WDQ-AE $16 JAN-2003 $ 25 VDL-AE $16 CPN 03/18/01 $43-44 JAN-2002 $ 45 YLN-AI $38 JAN-2003 $ 50 OLB-AJ $38 JWN 03/18/01 $16 JAN-2002 $ 20 WNZ-AD $14 JAN-2003 $ 20 VNZ-AD $14 New Portfolio Plays CLX - The Clorox Company $32.31 It is an interesting comment on the state of our equity markets that a pedestrian stock like CLX is the first play to make it into our live portfolio. Recall from the initial play write-up 5 weeks ago that we were looking for a bounce near either the $33-34 support level or near $30. On Wednesday, the company warned of falling earnings for the third quarter and full year due to, yep you guessed it, weaker volume in certain product areas and increased energy and raw materials costs. We had already decided to take the entry provided earlier in the week, when the stock was bouncing from $31. Fortunately the bears didn't seem to be able to push the share price any lower following the warning, even though Sanford Bernstein cut their rating on the stock from Outperform to Market Perform. My reaction to that is, "Big Deal"! I checked the past 3 years of earnings upgrade/downgrade history, and there wasn't a single mention of this firm over that span of time. More importantly, investors as a whole seemed to disregard the downgrade, as well as reduced earnings estimates from Lehman Brothers and Goldman Sachs on Thursday. The brief dip was met by buying on Friday, and our play finished out the week with a small gain. Recall that our catalyst for the play is the fact that we are now entering a declining interest rate environment, which is always helpful to cyclical stocks. Although the economy is weak, CLX is fairly insensitive to the travails of the broader economy. Afterall, how bad would things have to get before you'd quit buying bleach for your laundry? On Wednesday, the company warned of falling earnings for the third quarter and full year due to, yep you guessed it, weaker volume in certain product areas and increased energy and raw materials costs. Repeated bounces near $31 in the weeks ahead still look attractive for new entries, just in case you missed your chance last week. BUY LEAP JAN-2002 $35.00 WUT-AG at $3.50 BUY LEAP JAN-2003 $35.00 VUT-AG at $6.10 New Watchlist Plays CRUS - Cirrus Logic $18.81 Operating in the recently decimated Semiconductor sector, CRUS designs and manufactures integrated circuits that employ high-performance analog and digital signal processing (DSP) technologies. The company's products enable system-level applications in the Analog (audio, communications and data acquisition), Internet (embedded processors and optical storage) and Magnetic Storage (disk drive electronics integration) markets. The selling pressure that has engulfed chip companies over the past several months has depressed shares of CRUS, but the stock is starting to show signs of life. Since early December, the stock has tested support near $17 three times, and this level looks attractive for initiating new positions, so long as our $15 stop isn't violated. Earnings came in 2 cents ahead of estimates in January, but the CRUS cautioned that revenues will be sequentially flat for the fourth quarter, leading to the most recent decline in the share price. The company reiterated its earnings guidance for fiscal year 2001 and should show strong performance, especially when the economy begins to recover. With a PE ratio below 7, there is plenty of upside for our new play. When Technology starts to show signs of life the Semiconductors should lead the charge, so keep an eye on the Semiconductor index (SOX.X) for signs that the bulls are flexing their muscles again. BUY LEAP JAN-2002 $20.00 WUR-AD BUY LEAP JAN-2003 $20.00 VUR-AD SWS - Southwest Securities $19.35 As a full-service securities and banking firm, SWS uses technology to deliver a broad range of investment and related financial services to its clients. These clients include individual and institutional investors, broker/dealer, corporations, governmental entities and financial intermediaries. The company provides clearing services to 200 correspondent broker/dealers and over 500 independent contract brokers, as well as full-service and online discount brokerage services to individual investors. Broker stocks have been under heavy selling pressure since late January, reflecting reduced revenues due to decreased trading activities. In the past week, these stocks have begun to show some resistance to the downside pressure, as demonstrated by the Securities Broker/Dealer index (XBD.X), which has been finding support near $450. The company's earnings miss in January dragged the stock back from the $30 resistance level, and we are a bit concerned that it fell through the $20 support level last week. However, now that estimates have been ratcheted downwards for upcoming quarters, and with a PE ratio less than 3.0, the risk/reward ratio is definitely attractive. Consider new entries on a bounce from the $18 support level, with rigid stops set at $15. Look for a resurgence in buying in the XBD index to provide an early cue that SWS is ready to begin its recovery. BUY LEAP JAN-2002 $18.13 YWF-AT BUY LEAP JAN-2003 $20.00 VWZ-AD Drops None ************************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. 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The Option Investor Newsletter Sunday 03-18-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/031801_5.asp ************* COVERED CALLS ************* Option Trading Basics: Q&A with the Covered-calls Editor By Mark Wnetrzak This week, we decided to review one of the most common subjects discussed in subscriber E-mail. A frequently received question concerns the techniques used by specialists and market-makers. The majority of methods employed by floor specialists to profit from trading in options and their associated stocks are based on pricing theory and statistical probability. There are also a number of scalping techniques; the most common of which occurs when heavily traded options are bought at the bid and sold at the ask, generating a spread credit for the market maker. Specialists who participate in risk-free transactions utilize simple arbitrage techniques. The concept of put-call parity identifies mis-priced relationships between the call, put, and the stock. If the call is overpriced relative to the put, then the put is purchased and a synthetic put, made up of a short call and long stock, is sold. This technique is called a conversion. If the call option is under-priced relative to the put, then the call is bought and a short synthetic call, made up of a short put and short stock, is sold. The opposite of a conversion and is often called a reversal, or reverse conversion. Specialists also favor box spreads; two call options with different strike prices and two put options with strike prices equivalent to the calls. Once again, box spreads are only initiated when the options are mis-priced on a relative basis. The most profitable transactions for specialists are generally deep-in-the-money calls and puts, since these options usually have large bid/ask spreads (due to the lack of liquidity). An example of this type of trade: If an individual places an order to sell a deep-in-the-money call, then the floor broker uses a reversal, or reverse conversion with a short synthetic call (short stock and short put) to offset the purchased call. If the bid-ask spread is $1 and the specialist pays the retail trader bid price only, the position should yield a profit. Recall that the basis for this transaction is the market-maker can buy the call at a discount and at the same time, sell the synthetic call at fair value to generate a risk-free position. Obviously, this assumes the put option is fairly priced and the stock can be shorted (sold) for the current bid. Any delay in the execution of the remaining components will put the trade at risk. If the share price changes or the up-tick rule (in most cases, stocks can be shorted only on an upward move) prevents the specialist from shorting the stock in a timely manner, the profit will quickly disappear. There are no up-front funds needed for this method, but because of the difficulty in shorting stock, specialists generally do not receive all of the profit from the initial transaction. However, specialists do have a method of offsetting any potential losses. In the case of a reversal, the funds received from the sale of the stock are placed in a risk-free, short-term investment. Thus interest rates, the difference between the market prices and the fair value of the options, and the amount of funds received in the short sale all have some effect on the eventual profitability of the position. Fortunately, all option trades do not result in a conversion or reversal. Since the majority of retail traders buy options, and since a large portion of purchased derivatives are redeemed at a lower value (or expire worthless), market-makers will often take a short position in these options. Then they simply wait until the option falls in value, to purchase an offsetting position. In the case of a short call option, they may eventually construct a long synthetic call (a much easier transaction - no shorting of stock) to offset the sold position. Regardless of the situation or type of arbitrage, their fundamental goal is to profit from disparities in option pricing and by trading inside the bid/ask spread. Good Luck! SUMMARY OF PREVIOUS PICKS ***** NOTE: Using Margin doubles the listed Monthly Return! Stock Price Last Call Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return ACPW 20.38 17.75 MAR 17.50 4.38 *$ 1.50 10.2% VPHM 26.69 24.44 MAR 22.50 5.00 *$ 0.81 8.1% ESCM 16.84 21.75 MAR 15.00 2.88 *$ 1.04 8.1% NVLS 45.38 40.88 MAR 40.00 7.00 *$ 1.62 6.1% URBN 10.44 11.31 MAR 10.00 1.06 *$ 0.62 5.7% MKC 40.00 40.00 MAR 40.00 1.00 $ 1.00 5.6% PLMD 39.44 33.44 MAR 30.00 10.50 *$ 1.06 5.3% ERTS 51.81 47.38 MAR 45.00 7.88 *$ 1.07 5.3% MCCC 20.50 19.50 MAR 20.00 1.44 $ 0.44 5.0% AMSY 22.88 20.00 MAR 20.00 3.63 $ 0.75 4.2% CSTR 16.75 16.25 MAR 15.00 2.44 *$ 0.69 4.2% WGR 28.00 31.36 MAR 25.00 4.00 *$ 1.00 3.6% CSTR 17.06 16.25 MAR 15.00 2.75 *$ 0.69 3.5% MNTR 23.56 22.94 MAR 22.50 1.88 *$ 0.82 3.3% ACLS 11.13 9.50 MAR 10.00 1.88 $ 0.25 2.9% ITN 13.56 12.06 MAR 12.50 1.55 $ 0.05 0.9% DCEL 19.50 16.94 MAR 17.50 2.63 $ 0.07 0.9% PLMD 39.22 33.44 MAR 35.00 5.38 $ -0.40 0.0% ORG 10.96 9.05 MAR 10.00 1.50 $ -0.41 0.0% SGI 5.00 3.94 MAR 5.00 0.40 $ -0.66 0.0% NERX 10.06 4.88 MAR 7.50 3.62 $ -1.56 0.0% ATRX 23.00 16.50 MAR 20.00 4.00 $ -2.50 0.0% MNMD 38.25 30.69 MAR 35.00 4.88 $ -2.68 0.0% GLFD 20.38 16.06 MAR 20.00 1.44 $ -2.88 0.0% GLGC 23.94 15.88 MAR 20.00 4.88 $ -3.18 0.0% GMST 49.50 34.50 MAR 40.00 10.88 $ -4.12 0.0% CLPA 6.22 5.41 APR 5.00 2.06 *$ 0.84 12.5% SHFL 20.94 21.25 APR 17.50 4.38 *$ 0.94 4.1% GLC 23.73 23.44 APR 22.50 2.35 *$ 1.12 3.8% ATVI 24.63 23.25 APR 22.50 3.13 *$ 1.00 3.4% BBBY 28.44 26.25 APR 27.50 2.94 $ 0.75 2.1% SEI 22.05 19.50 APR 20.00 3.10 $ 0.55 2.1% CPRT 21.81 18.88 APR 20.00 2.63 $ -0.30 0.0% *$ = Stock price is above the sold striking price. Comments: The only good thing that can be said for this month is that expiration Friday is over, as more issues have taken a turn for the worse during these horrid times. Evaluate the "cost" of holding on to your positions and writing more calls versus selling the stock and eliminating the potential for further capital erosion. A neutral-to-bullish strategy is difficult, if not impossible, to employ in a bearish environment. The ability to roll down and/or forward is adversely affected and in many cases, can only "lock-in" a loss at best. Purchasing long-term puts (or index puts) can help hedge against further downside but the cost of this insurance raises your cost basis. The "Bear" is a fearsome creature and his path of destruction rarely leaves anyone untouched - the key is to survive. Positions Closed: Ultratech Stepper (NASDAQ:UTEK), Legato Systems (NASDAQ:LGTO), Peregrine Systems (NASDAQ:PRGN), Roadway Express (NASDAQ:ROAD), Nextcard (NASDAQ:NXCD), Health Systems (NASDAQ:PHSY), Lightbridge (NASDAQ:LTBG), Answerthink (NASDAQ:ANSR). NEW PICKS ********* Sequenced by Return ***** Stock Last Call Strike Option Last Open Cost Days to Monthly Symbol Price Month Price Symbol Bid Intr Basis Expiry Return ELNK 10.38 APR 10.00 MQD DB 1.38 4912 9.00 35 9.7% IGEN 13.31 APR 10.00 GQ DB 4.25 130 9.06 35 9.0% UTHR 16.94 APR 15.00 FUH DC 3.25 149 13.69 35 8.3% MTSN 14.00 APR 12.50 QQM DV 2.44 118 11.56 35 7.1% ADBE 28.63 APR 25.00 AEQ DE 5.13 1145 23.50 35 5.5% SHFL 21.25 APR 20.00 SFQ DD 2.44 80 18.81 35 5.5% NRG 30.84 APR 30.00 NRG DF 2.60 568 28.24 35 5.4% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** ADBE - Adobe Systems $28.63 *** Post-Earnings Rally? *** Adobe (NASDAQ:ADBE) builds award-winning software solutions for Network Publishing, including Web, print, video, wireless and broadband applications. Its graphic design, imaging, dynamic media and authoring tools enable customers to create, manage and deliver visually-rich, reliable content. On Thursday, Adobe posted pro forma earnings, excluding non-operating gains and losses, of 33 cents per diluted share which was 5 cents higher than analysts' lowered forecasts and 3 cents better than their original expectations. Though the company warned that 2nd- quarter revenue growth was expected to come in at 15%, rather than their forecast of 25%, investors and analysts were pleased with the report, considering the current economic environment. This position offers a favorable entry point for traders who believe Adobe will weather the storm. APR 25.00 AEQ DE LB=5.13 OI=1145 CB=23.50 DE=35 MR=5.5% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=ADBE ***** ELNK - EarthLink $10.38 *** Merger/Buy-out Target! *** EarthLink (NASDAQ:ELNK) is an Internet service provider that offers reliable nationwide Internet access and related value- added services to individual and business members. ELNK was formed as a result of the merger of EarthLink and MindSpring Enterprises. The companies' combined member base grew as a result of the merger and also from strategic acquisitions as well as traditional marketing channels and alliances. There is some speculation that EarthLink may be a take-over target now that the company has amended a 3-year pact with Sprint. The company is also aggressively positioning itself to be the number one wireless ISP. We simply favor ELNK's bullish change of character as the stock has rallied back above its 150-dma on strong volume. APR 10.00 MQD DB LB=1.38 OI=4912 CB=9.00 DE=35 MR=9.7% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=ELNK ***** IGEN - IGEN International $13.31 *** Bottom Fishing! *** IGEN (NASDAQ:IGEN) develops and markets biological detection systems based on its proprietary ORIGEN technology, which provides a unique combination of sensitivity, reliability, speed, and flexibility. ORIGEN-based systems are used in a wide variety of applications, including clinical diagnostics, pharmaceutical R & D, life science research, and industrial testing for food safety and quality control. This week, IGEN sold 789,075 shares of common stock for $9.5 million to Acqua Wellington North American Equities Fund, Ltd. The company recently announced a joint venture to develop a test for the "mad cow disease" that would allow screening of infected cows in slaughterhouses. Technically, the recent bullish signals and positive divergences suggest that IGEN may be putting in a bottom. This position offers a reasonable cost basis for investors who agree with a positive outlook for the issue. APR 10.00 GQ DB LB=4.25 OI=130 CB=9.06 DE=35 MR=9.0% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=IGEN ***** MTSN - Mattson Technology $14.00 *** Stage I *** Mattson (NASDAQ:MTSN) is a leading supplier of thermal, plasma and wet semiconductor processing equipment. MTSN's products combine advanced process technology on high-productivity platforms backed by industry-leading support. In February, Mattson announced that the company plans to divest its single- wafer RT-CVD business unit, previously known as STEAG CVD Systems. Though the company reported favorable earnings in January, the current economic slowdown is forcing the MTSN to focus on its core technologies and providing its customers with high-productivity tools based upon the best-performing platforms and processes available. The stock has formed a Stage I base over the last six months and this play offers a favorable cost basis below technical support. APR 12.50 QQM DV LB=2.44 OI=118 CB=11.56 DE=35 MR=7.1% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=MTSN ***** NRG - NRG Energy $30.84 *** Power Sector Turned On! *** NRG Energy (NYSE:NRG) is a participant in the independent power generation industry. The Company is principally engaged in the acquisition, development, operations and maintenance of and ownership of power generation facilities. NRG recently closed its sale of 18.4 million shares of common stock at a price of $27 per share. The independent power producers are gaining attention and this week analysts raised their 2001 and 2002 earnings outlooks on the sector. NRG appears to have completed a rounded-bottom formation which suggests a test of the September high is forthcoming. Traders who agree with this outlook can use this position to establish a reasonable entry point in the issue. APR 30.00 NRG DF LB=2.60 OI=568 CB=28.24 DE=35 MR=5.4% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=NRG ***** SHFL - Shuffle Master $21.25 *** Rally Mode Continues! *** 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 has again climbed into "blue sky" territory and this play offers bullish investors a second-chance entry point. APR 20.00 SFQ DD LB=2.44 OI=80 CB=18.81 DE=35 MR=5.5% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=SHFL ***** UTHR - United Therapeutics $16.94 *** What's Up Doc? *** United Therapeutics (NASDAQ:UTHR) develops pharmaceuticals to treat vascular diseases, including pulmonary hypertension and peripheral vascular disease, as well as selected other chronic conditions. The company has focused primarily on developing Uniprost as its lead product for treating advanced pulmonary hypertension, and also is developing Uniprost for late-stage peripheral vascular disease. Not much news since the company announced that it had completed enrollment in its Phase III study of oral beraprost in patients with pulmonary hypertension. Insider trade data released at the end of February may have spiked the recent rally as it shows insiders are acquiring the stock. We simply favor the bullish short-term technicals and the volume supported rally in March, at a time when just about everything else was hammered. The tape is telling us something and the key is whether or not we decide to listen. APR 15.00 FUH DC LB=3.25 OI=149 CB=13.69 DE=35 MR=8.3% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=UTHR ***** ***************** 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 NVLS 40.88 APR 35.00 NLQ DG 8.25 100 32.63 35 6.3% AAPL 19.63 APR 17.50 AAQ DS 3.25 1852 16.38 35 5.9% CSTR 16.25 APR 15.00 QLR DC 2.13 282 14.12 35 5.4% UCOMA 15.56 APR 12.50 QUW DV 3.75 0 11.81 35 5.1% SMTC 27.69 APR 22.50 QTU DR 6.38 24 21.31 35 4.9% BSX 18.45 APR 17.50 BSX DW 1.80 4476 16.65 35 4.4% *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1849 ************************************************************ *********************** CONSERVATIVE NAKED PUTS *********************** Trading Strategies: When It's In-The-Money... By Ray Cummins One of the most common questions we receive from new subscribers concerns the potential for early assignment of "in-the-money" options. In most cases, the probability of being "exercised" is relatively low and only when you are short in a position with no extrinsic value does the likelihood of an unwanted assignment become a concern. However, one of the more popular strategies used by aggressive traders; selling "deep-in-the-money" Puts, involves a higher risk of assignment and there are some facts you should know before participating in this technique. When you sell an option, as an opening transaction, you are the Seller or Writer. Writers are obligated to buy the underlying interest at the strike price (with a Put) or sell the underlying interest at the strike price (with a Call) if the contract is exercised. With American Style options, the instrument can be exercised on any trading day prior to the expiry date. The last day to exercise an American-style option is usually the third Friday of the month in which the contract expires (expiration Friday). The option exchanges have a cut-off time of 5:30 P.M., Eastern Standard Time, for receiving an exercise notice. However, most brokerage firms have an earlier cut-off time that may affect when you receive a notice of assignment. When an option writer receives an exercise notice that obligates him to buy the underlying security at the specified strike price, he can simply buy the stock or initiate an offsetting transaction such as buying another ITM Put (and eventually exercising it) or shorting the underlying. Due to pricing disparities, there may be an advantage to one of these (or other) alternate "covering" strategies. As expiration approaches and the sold (short) Puts become further in-the-money, you run a higher risk of having the stock put to you. It can, and sometimes does, happen prior to expiration, but the actual percentage of early assignments is statistically very low. If there is a strong move in the stock in the right direction, you might consider repurchasing the Puts, especially with deep-ITM positions, because they have relatively low Delta (great for sold Puts) and perform almost as well as a position in the stock. Of course, that also frees your portfolio collateral for additional plays with greater (relative) profit potential and eliminates the risk of early assignment. Also, as expiration approaches, you may consider rolling the position out to a future date, where there is a lower risk of assignment due to the additional time premium (extrinsic value) in the option. The term "rolling" means that an existing option position is liquidated and a similar position is established to replace it. If the replacement position differs from the original position with respect to only the exercise price, the position is said to have been "rolled up" or "rolled down". If the only difference between the positions was the expiration month, you've "rolled out" to a future position. The Options Industry Council, a non-profit association created to educate the investing public and brokers about the benefits and risks of exchange-traded options, has recently distributed some interesting facts concerning the topic of early assignment. First, regarding the Options Clearing Corporation, the largest clearing organization in the world for financial derivatives instruments. Operating under the jurisdiction of the Securities and Exchange Commission, the OCC is the issuer and registered clearing facility for all U.S. exchange-listed securities options. To ensure fairness in the distribution of equity and index option assignments, The Options Clearing Corporation utilizes a random procedure to assign exercise notices to the accounts maintained with OCC by each Clearing Member. The assigned firm must then use an exchange approved method (usually a random process or the "first-in, first-out" method) to allocate those exercise notices to accounts which are short the options. With that in mind, here are some general guidelines concerning the early assignment of short option positions: Surprisingly, only 10% (on average) of options end up being exercised and the percentage hasn't varied much over the years. That means option exercises are not that common. The majority of option exercises (and the corresponding assignments) take place when the option approaches expiration. It usually doesn't make sense to exercise an option which has any time premium over intrinsic value and for most options, that doesn't occur until close to expiration. In general terms, a Put which goes in-the-money is more likely to be exercised than a Call (in similar circumstances) because the trader who exercises a Put uses it to sell his shares and receive cash. A person exercising a Call option uses it to buy shares and must pay cash. Traders are more likely to exercise options when they can receive cash sooner, as opposed to situation with Calls, where exercise means you have to pay cash sooner. However, the simple fact is, there is no absolute method to predict when you will be assigned on a short option position; it can happen any day the market is open for trading. Good Luck! SUMMARY OF PREVIOUS PICKS ***** Stock Price Last Put Strike Price Profit Monthly Symbol Picked Price Month Sold Picked /Loss Return VPHM 25.88 24.44 MAR 20.00 0.25 *$ 0.25 20.0% PLMD 38.75 33.44 MAR 30.00 0.63 *$ 0.63 16.3% VSEA 31.03 27.63 MAR 25.00 0.44 *$ 0.44 14.0% ADVP 45.13 45.75 MAR 40.00 0.81 *$ 0.81 12.8% MDR 15.80 12.95 MAR 12.50 0.40 *$ 0.40 12.2% TSN 13.55 13.06 MAR 12.50 0.65 *$ 0.65 11.3% MDR 15.29 12.95 MAR 12.50 0.60 *$ 0.60 11.1% NEM 15.96 16.05 MAR 15.00 0.40 *$ 0.40 10.0% SGR 52.04 51.51 MAR 45.00 1.30 *$ 1.30 9.4% OLOG 23.38 25.00 MAR 22.50 0.56 *$ 0.56 9.0% TMK 36.28 35.60 MAR 35.00 0.55 *$ 0.55 8.7% APWR 42.50 30.06 MAR 30.00 0.69 *$ 0.69 8.2% ATVI 22.50 23.25 MAR 20.00 0.38 *$ 0.38 8.0% AMAT 47.94 44.25 MAR 37.50 0.56 *$ 0.56 8.0% HGSI 48.81 44.94 MAR 35.00 0.56 *$ 0.56 7.9% ABMD 25.44 17.81 MAR 15.00 0.50 *$ 0.50 6.5% OII 22.50 20.70 MAR 20.00 0.40 *$ 0.40 6.3% BPOP 27.38 27.69 MAR 25.00 0.50 *$ 0.50 6.0% OII 22.00 20.70 MAR 20.00 0.45 *$ 0.45 5.4% BSTE 37.25 29.56 MAR 30.00 0.63 $ 0.19 5.0% AL 38.25 35.60 MAR 35.00 0.60 *$ 0.60 4.1% TSO 13.32 12.07 MAR 12.50 0.40 $ -0.03 0.0% EFII 24.88 21.94 MAR 22.50 0.38 $ -0.18 0.0% NOVT 36.94 29.13 MAR 30.00 0.56 $ -0.31 0.0% PHTN 25.25 19.13 MAR 20.00 0.31 $ -0.56 0.0% NAUT 19.19 16.31 MAR 17.50 0.56 $ -0.63 0.0% LPNT 41.31 33.38 MAR 35.00 0.56 $ -1.06 0.0% RBK 31.20 23.10 MAR 25.00 0.45 $ -1.45 0.0% OATS 9.25 8.88 APR 7.50 0.44 *$ 0.44 13.3% THQI 33.88 32.56 APR 30.00 1.38 *$ 1.38 9.0% TMAR 17.31 15.38 APR 15.00 0.56 *$ 0.56 7.8% ANF 32.30 31.99 APR 25.00 0.55 *$ 0.55 5.7% VTS 36.98 31.15 APR 30.00 0.62 *$ 0.62 5.3% ADVP 49.94 45.75 APR 40.00 0.75 *$ 0.75 5.0% *$ = Stock price is above the sold striking price. Comments: Whew! As the little girl in the movie Aliens says: "They're dead, ok! Can I go now?" She didn't want to stick around and wait for the creatures to return. Many investors may feel the same way after witnessing the destructive force of a Bear Market. Preserving capital becomes paramount in the effort to survive this cycle. This can be accomplished by rolling down or shorting the underlying stock as the price falls through the sold strike. Of course, just exiting the position may be the best course of action. If you decide to own the stock, writing calls on the new position may help reduce your cost basis, but will not protect against an extended downturn in the market. Remember, the key is to be around for the next "Bull" cycle. Positions Closed: Spectrian (NASDAQ:SPCT), Homestore.Com (NASDAQ:HOMS), Brio Tech (NASDAQ:BRIO), K-Swiss (NASDAQ:KSWS), Tripath Imaging (NASDAQ:TPTH), Unisys (NYSE:UIS). 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 AAPL 19.63 APR 15.00 AAQ PC 0.50 16389 14.50 35 9.8% BSX 18.45 APR 17.50 BSX PW 0.80 400 16.70 35 9.6% SCIO 19.38 APR 15.00 UIO PC 0.44 10 14.56 35 8.9% GLC 23.44 APR 20.00 GLC PD 0.55 725 19.45 35 7.4% MTON 27.25 APR 20.00 KQM PD 0.50 23 19.50 35 7.3% ESCM 21.75 APR 17.50 QFC PW 0.38 120 17.12 35 6.8% OLOG 25.00 APR 22.50 OOQ PX 0.56 0 21.94 35 6.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, MR-Monthly Return. ***** AAPL - Apple Computer $19.63 *** Bottom Fishing! *** Apple Computer (NASDAQ:AAPL) designs, manufactures and markets personal computers and other personal computing and communicating solutions for sale primarily to education, creative, consumer, and business customers. Most of the company's net sales to date have been derived from the sale of its Apple Macintosh line of personal computers and related software and peripherals. Apple Macintosh personal computers are characterized by their intuitive ease of use, innovative industrial designs and applications base, and built-in networking, graphics, and multimedia capabilities. The company offers a range of PCs and products, including related peripherals, software, and networking and connectivity solutions. This position offers a reasonable cost basis for traders who are interested in "bottom fishing" the Personal Computer sector. APR 15.00 AAQ PC LB=0.50 OI=16389 CB=14.50 DE=35 MR=9.8% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=AAPL ***** Boston Scientific $18.45 *** Entry Point! *** Boston Scientific (NYSE:BSX) is a worldwide developer and marketer of minimally invasive medical devices. The company's products are used in a range of interventional medical specialties, such as cardiology, electrophysiology, gastroenterology, neuro-endovascular therapy, pulmonary medicine, radiology, urology and also vascular surgery. BSX's products are generally inserted into the human body through natural openings or small incisions in the skin and can be guided to most areas of the anatomy to diagnose and treat a range of medical problems. These products provide effective alternatives to traditional surgery by reducing procedural trauma, complexity, risk to the patient, cost, and recovery time. BSX has returned to favor after almost a year of selling pressure and traders who want to own stock in this company can establish a discounted basis in the issue with this position. APR 17.50 BSX PW LB=0.80 OI=400 CB=16.70 DE=35 MR=9.6% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=BSX ***** ESCM - ESC Medical Systems $21.75 *** Up On A Down Day! *** ESC Medical Systems (NASDAQ:ESCM) develops, manufactures and markets medical devices utilizing state-of-the-art proprietary intense pulsed light source and laser technology. Its systems are used in a variety of aesthetic, surgical and unique medical applications, including the non-invasive treatment of veins and other benign vascular lesions, pigmented lesions, hair removal and skin rejuvenation, as well as ENT, OB/GYN and neurosurgery. In February, ESC Medical posted excellent quarterly results and said it expects revenues to nearly double to $300 million in 2001, due to its purchase of Coherent Medical Group. The recent acquisition makes ESCM one of the world's largest medical laser companies and combined with their proprietary technology, used for both medical and cosmetic purposes, the potential for future earnings growth is excellent. This position offers a great risk/reward ratio for traders who wish to speculate on the potential of this unique company. APR 17.50 QFC PW LB=0.38 OI=120 CB=17.12 DE=35 MR=6.8% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=ESCM ***** GLC - Galileo International $23.44 *** Own This One! *** 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 attention last month when it made a $220 million bid for TWA's 26% stake in Worldspan. GLC and Worldspan have battled for second place for many years behind Sabre, the leader in the computerized travel reservation business. Unfortunately, the court accepted American Airlines' bid for most of TWA's assets, including the Worldspan stake, and the company must now look for other possible strategic transactions in the industry. Apparently, investors still favor the outlook for the issue as it is trading comfortably above a 30-dma and the bullish trend is expected to continue. APR 20.00 GLC PD LB=0.55 OI=725 CB=19.45 DE=35 MR=7.4% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=GLC ***** MTON - Metro One Telecom $27.25 *** A Big Day! *** Metro One Telecom (NASDAQ:MTON) develops and provides enhanced directory assistance and information services for the telecom industry. Metro One contracts with wireless carriers to provide services to their subscribers. The company's customers include many of the leading wireless telecommunications carriers and the company has expanded into the landline telecommunications market. Shares of Metro One rallied Friday after company officials said MTON's first-quarter earnings would surpass analysts' estimates of $0.21 a share by up to 50%, due to improved efficiencies and lower data content costs. The company said it expected revenues of between $48 million and $49 million, as it continues to enjoy improved operational performance and gross margins. Traders who want to speculate on the recovery in MTON shares can do so in a conservative manner with this position. Target a higher premium initially, to allow for a brief consolidation in the issue. APR 20.00 KQM PD LB=0.50 OI=23 CB=19.50 DE=35 MR=7.3% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=MTON ***** OLOG - Offshore Logistics $25.00 *** Serving Oil Services! *** Offshore Logistics (NASDAQ:OLOG) is a supplier of helicopter transportation services to the worldwide offshore oil and gas industry. Through its Air Logistics subsidiaries and with its investment in Bristow Aviation Holdings Limited, operates almost 400, including 78 aircraft operated through other entities. The company's operations also include production management services through Grasso Production Management. GPM's services include furnishing personnel, engineering, production operating services, paramedic services and the provision of boat and helicopter transportation of personnel and supplies between onshore bases and offshore facilities. The offshore gas and oil industry is active again and transportation to the rigs is a necessary part of any oil company's operations. OLOG is one of the leaders in the business and with the stock trading at a new two-year high, it appears that investors favor the outlook for the company. A a premium of $0.62-$0.75 would provide a reasonable cost basis in the issue. APR 22.50 OOQ PX LB=0.56 OI=0 CB=21.94 DE=35 MR=6.0% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=OLOG ***** SCIO - Scios $19.38 *** Drug Sector Speculation! *** Scios (NASDAQ:SCIO) is a biopharmaceutical company engaged in the discovery, development, and commercialization of novel human therapeutics based upon its capabilities in both protein-based and small-molecule drug discovery and development. The company focuses its proprietary research and development efforts in the areas of cardiorenal and inflammatory disorders, and Alzheimer's disease. The company has research and development collaborations with a umber of major drug producers and also has a Psychiatric Sales and Marketing Division, which provides operating cash that funds the other activities of the company, principally research and development efforts. Scios is hoping that Natrecor, a drug used in conjunction with acute congestive heart failure patients will become a usable therapeutic for that condition. Natrecor is a recombinant form of B-type natriuretic peptide, a naturally occurring hormone in the body that aids healthy functioning of the heart and it may be able to help the body's natural responses to heart failure. Traders who want to speculate on a drug-sector issue should consider this position. APR 15.00 UIO PC LB=0.44 OI=10 CB=14.56 DE=35 MR=8.9% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=SCIO ***** ***************** 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 WCOM 17.44 APR 15.00 JQD PC 0.63 5692 14.37 35 10.6% WSM 27.87 APR 22.50 WSM PX 0.55 311 21.95 35 7.6% SHFL 21.25 APR 17.50 SFQ PW 0.44 12 17.06 35 7.4% EBAY 32.50 APR 20.00 XBH PD 0.56 409 19.44 35 6.9% SMTC 27.69 APR 17.50 QTU PZ 0.44 130 17.06 35 6.4% SGR 51.51 APR 42.50 SGR PV 0.80 32 41.70 35 5.6% ************************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=1863 ************************************************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Title: When Will It End? The triple-witching expiration of equity-index options, futures and options on individual stocks did little to help the market's performance today. ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, March 16 The triple-witching expiration of equity-index options, futures and options on individual stocks did little to help the market's performance today. The active session was plagued by worries of economic slowdown and the broad-based selling pressure drove the Dow 217 points lower to 9,823. The NASDAQ slipped 49 points to 1,891 while the S&P 500 index finished 23 points lower at 1,150. Trading volume on the Big Board reached 1.5 billion shares, with losers doubling winners 2,049 to 1,000. Activity on the NASDAQ was heavy at 2.1 billion shares exchanged, with declines leading advances 2,595 to 1,062. In the U.S. bond market, the 30-year Treasury rose 3/32 to 101 18/32, pushing its yield down to 5.26%. Thursday's new plays (positions/opening prices/strategy): Earthlink (NASDAQ:ELNK) OCT12C/APR12C $1.62 debit calendar Sprint (NYSE:FON) AUG25C/APR25C $1.50 debit calendar Harley (NYSE:HDI) APR50C/APR45C $0.30 credit bear-call The new time-selling positions in ELNK and FON were available at the target entry prices. However, the downward market movement prevented a favorable opening premium in the HDI position. Market Activity: Stocks retreated today amid uncertainties over corporate earnings and the upcoming Federal Reserve meeting. Investors showed their disappointment in the market's recent performance by moving to the sidelines and the lack of buying simply helped the bears gain momentum late in the session. By the end of the day, the Dow had fallen to its lowest level in a year while the NASDAQ and the S&P 500 index hit lows not seen since 1998. There were few blue-chip issues in the plus column and the biggest losses occurred in the technology components. Hewlett-Packard (HWP), Intel (NASDAQ:INTC) and International Business Machines (NYSE:IBM) led the industrial average lower and the selling pressure migrated to other hardware shares. Dell Computer (NASDAQ:DELL), Compaq (NYSE:CPQ), Gateway (NYSE:GTW) and Apple Computer (NASDAQ:AAPL) all moved lower. The surprise of the session was Computer Sciences (NYSE:CSC), which plunged almost 40% to $32 after saying it expects fourth-quarter earnings to miss consensus estimates by a wide margin, due mainly to declining global demand for information technology consulting and systems integration services. The bearish news simply added to the pessimism in Oracle's (NASDAQ:ORCL) outlook Thursday, which suggested the current economic uncertainty will limit visibility for many technology companies for the next few quarters. Monthly Summary: In March, the most popular category of option trading strategies was also the most successful. The credit spreads section offered successful positions in American Home Products (NYSE:AHP), Avery Dennison (NYSE:AVY), Honeywell (NYSE:HON), Investment Technology (NYSE:ITG), Johnson & Johnson (NYSE:JNJ), PerkinElmer (NYSE:PKI), Pfizer (NYSE:PFE), Minnesota Mining (NYSE:MMM), Stryker (NYSE:SYK) and Shire Pharmaceuticals (NYSE:SHPGY). The losing position in the group, Cardinal Health (NYSE:CAH) was profitable until Friday morning and readers who exited the play during the first hour of trading limited the loss to less than $0.50. The calendar spread was another popular trading technique and we enjoyed a number of profitable positions in that category. Alza (NYSE:AZA), Atrix Labs (NYSE:ATRX), Clorox (NYSE:CLX) and Navistar (NYSE:NAV) were among the issues that provided satisfactory returns over the past month. Insignia Financial (NYSE:IFS), Advanta (NASDAQ:ADVNB) and Ocular Sciences (NASDAQ:OCLR) were also outstanding positions in this strategy. IFS closed at $12.43 and ADVNB finished the day at $12.69, both within pennies of the target strike price. In the case of ADVNB, the long option will be sold on a future rally to lock-in a small gain in the position. The time-selling play in OCLR also performed well, providing a roll-out credit of $0.69, thus reducing the overall debit to $0.56 in the long-term spread. Among the LEAPS with Covered-Calls positions, AT&T (NYSE:T) was the standout and the trading range near $23 has proven to be very helpful in reducing the cost of the JAN-02 $25 Call. The overall cost of the spread JAN-$25/APR-$25 is now only $0.90 and we plan to own the option "free and clear" by early summer. Positions in Hewlett-Packard (NYSE:HWP) and Intel (NASDAQ:INTC) have performed reasonably well, considering the protracted selling pressure in technology issues. In the delta-neutral sections, finding profitable plays was much more difficult than in recent periods. The range-bound activity in many of the broader market issues proved to be a significant obstacle in debit strategies while unexpected (and precipitous) losses made premium-selling positions hard to manage. However, there were some excellent candidates in both categories and the popularity of these techniques guarantees that we will continue to offer more non-directional plays in the future. The winners in the debit straddle portfolio were Alliance Capital (NYSE:AC), Flour (NYSE:FLR), Grupo Teliviso (NYSE:TV) and Tri-Continental (NYSE:TY). TD Waterhouse (NYSE:TWE) expired at break-even, but offered a profitable exit earlier in the year and today, British Telecom (NYSE:BTY) reached a new maximum credit of $27.50. In the credit strangles group, Aphton (NYSE:APHT), Chiron (NASDAQ:CHIR), Cima Labs (NASDAQ:CIMA), Polymedica (NASDAQ:PLMD) and Time Warner Telecom (NASDAQ:TWTC) all expired at maximum profit. Positions in Alexander & Baldwin (NASDAQ:ALEX) and Continental Airlines (NYSE:CAL) were not successful, but both issues offered viable exit opportunities for technically adept traders. Our group of synthetic positions were less productive than normal, due to the bearish activity in the market and the few entry opportunities that were available. Of the candidates offered, Dupont (NYSE:DD), Davox (NASDAQ:DAVX), Luminent (NASDAQ:LMNE), Sicor (NASDAQ:SCRI) and Olin Chemicals (NYSE:OLN) initially enjoyed bullish activity however, many of the plays were not available at the target entry prices. Eli Lilly (NYSE:LLY), Metro One Telecom (NASDAQ:MTON) and Investment Technology (NYSE:ITG) offered reasonable opening credits, but they failed to perform as expected, thus tying up large collateral amounts for relatively small returns. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - One of our subscribers asked for some bearish credit-spreads on industrial stocks and with the recent decline in broader-market issues, that appears to be the correct directional outlook for short-term traders. All of these positions are based on recent technical indications and the current price or trading range of the underlying issue. Since current news and market sentiment will have an effect on these companies, please review each play individually and make your own decision about the future outcome of the position. ****************************************************************** GDT - Guidant $48.44 *** The Sell-off Continues! *** Guidant (NYSE:GDT) is a global company that designs, develops, manufactures, and markets a broad range of therapeutic medical devices used in the treatment of cardiovascular and vascular diseases. The company offers coronary stents, coronary balloon dilatation catheters, and related products and accessories used to treat blockages in the vascular system; automatic implantable cardioverter defibrillator systems, which are used to detect and treat abnormally fast heart rhythms, known as tachycardia; a full line of implantable pacemaker systems used to manage slow or irregular heart rhythms, known as bradycardia; products for use in minimally invasive vascular surgeries, including the treatment of abdominal aortic aneurysms; and products for use in minimally invasive cardiac surgeries, including products to perform cardiac artery bypass grafting on a beating heart. On Friday, Guidant had a number of news announcements, the first of which was positive for the company. Guidant officials said the company won U.S. regulatory approval for two new coronary dilatation catheters used to treat blocked coronary arteries. The company already has received regulatory approvals for the Powersail and Highsailin catheters in Europe and Japan, its two other key markets, and the FDA approval will strengthen their position in the United States. Later in the day, the company announced it had voluntarily halted production and sales of its Ancure System, a less invasive approach than surgery for people with abdominal aortic aneurysms. The product accounts for about 3% of the company's earnings and may result in a first-quarter charge of $12 - $15 million. Technically, GDT remains in a Stage IV downtrend, bouncing-off its descending 150-dma several times over the last five months. A test towards strong support at $45 appears likely while a move above the confirmed resistance at $53 is highly improbable. In addition, the company's earnings are due next week and without a major upside surprise, there is very little chance the issue will eclipse $55 in the coming month. PLAY (conservative - bearish/credit spread): BUY CALL APR-60 GDT-DL OI=2282 A=$0.30 SELL CALL APR-55 GDT-DK OI=2589 B=$0.80 INITIAL NET CREDIT TARGET=$0.55-$0.60 ROI(max)=12% B/E=$55.55 http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=GDT ****************************************************************** PLMD - PolyMedica $33.44 *** New Downtrend? *** PolyMedica (NASDAQ:PLMD) is a national supplier of unique medical products and services. The company is best known through its Liberty brand name, which serves the chronic disease marketplace for senior customers and focuses on Compliance Management using its Technology Platform to help seniors manage their disease more effectively. Liberty pioneered the concept of National Direct to Consumer Advertising to seniors with chronic diseases. Polymedica has been one of our favored issues in past weeks for premium-selling strategies. The relatively stable trading range and inflated option premiums were a perfect combination in many option trading techniques. However, the character of the issue has changed significantly and there is little news to explain the activity. Now it appears the stock is starting a new leg down as it has failed to stay above its 150-dma and the selling pressure came on heavy volume. A continued move through the February low would confirm a bearish future and traders can speculate on that outcome with this conservative position. PLAY (conservative - bearish/credit spread): BUY CALL APR-50 PM-DJ OI=125 A=$1.00 SELL CALL APR-45 PM-DI OI=86 B=$1.50 INITIAL NET CREDIT TARGET=$0.55-$0.60 ROI(max)=12% B/E=$45.55 http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=PLMD ****************************************************************** VAR - Varian $63.20 *** Failed Rally? *** Varian Medical Systems' (NYSE:VAR) products can be grouped into three principal categories: oncology systems, x-ray tubes and imaging subsystems, and other technologies developed by their Ginzton Technology Center, primarily brachytherapy. Varian's VMS oncology systems line encompasses a fully integrated system of products embracing not only linear accelerators but also unique ancillary products and services. Their linear accelerators and simulators are in service around the world, treating many cancer patients daily. The company's x-ray tubes are sold to most major diagnostic equipment manufacturers and cover a wide range of applications including advanced mammography and CT scanning. Varian is another issue will little public news to drive its share movement but from a technical viewpoint, the upside potential is small. In fact, VAR appears to be forming an early Stage III top and the recent move below its 50-dma is bearish. The issue has failed three times in the $70 range, creating significant overhead supply and it has now broken technical support by moving below the February lows. The premiums for the OTM call options are slightly inflated and with recent resistance at the sold strike price, VAR is an excellent candidate for a bearish credit spread. PLAY (less conservative - bearish/credit spread): BUY CALL APR-75 VAR-DO OI=4 A=$0.65 SELL CALL APR-70 VAR-DN OI=2 B=$1.35 INITIAL NET CREDIT TARGET=$0.75-$0.80 ROI(max)=17% B/E=$70.75 http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=VAR ****************************************************************** - STRADDLES & STRANGLES - ****************************************************************** SPW - SPX Corporation $95.96 *** Probability Play! *** SPX Corporation (NYSE:SPW) is a global provider of technical products and systems, industrial products and services, service solutions and vehicle components. SPX designs, manufactures and markets a wide range of fire detection systems, data networking equipment, broadcast antennas and automated fare/toll collection systems. SPX also designs, manufactures and sells transformers, industrial valves, mixers, electric motors, laboratory freezers and ovens, high-pressure hydraulics, industrial furnaces and coal feeders, as well as specialty service tools, equipment and other services primarily to the motor vehicle industry in North America and Europe. In addition, the company also engages in the design, manufacture and marketing of transmission and steering components for light and heavy-duty vehicle markets, principally in North America and Europe. SPX has been a very active issue recently and the decision to buy United Dominion (NYSE:UDI) simply complicates the task of valuing the company. Shareholders of United Dominion, a manufacturer of industrial and builders' products, expect to receive SPX shares worth $25 for each of their shares, but with the price of SPX in a recent decline, the ratio (0.2353 of an SPX share for each share of UDI) may need to be adjusted to keep the deal intact. SPX is planning to use cash on hand along with a new $780 million credit line to refinance United Dominion's existing debt and if all goes well, the merger will close in the second quarter. Another event that may affect SPX's share value is the company's earnings report, due in mid-April. Based on analysis of the historical option pricing and technical background, this position meets the fundamental criteria for a favorable debit straddle. Since the options have large bid/ask spreads, use a limit order to open the position. Our target for the overall price of the straddle will be $11.25 - $11.50. Those of you with a longer-term outlook can use the June options at a target price of $18. PLAY (conservative - neutral/debit straddle): BUY CALL APR-95 SPW-DS OI=1245 A=$6.20 BUY PUT APR-95 SPW-PS OI=5 A=$5.50 INITIAL NET DEBIT TARGET=$11.25 TARGET ROI=20% http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=SPW ****************************************************************** COST - Costco $37.13 *** Home Again! *** Costco Wholesale (NASDAQ:COST) operates membership warehouses that offer very low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories in no-frills, self-service warehouse facilities. The company operates over 300 warehouse clubs, comprised of some 237 stores in the United States, 59 in Canada, 10 in the UK, three in Korea, three in Taiwan, and one in Japan. The company also has a number of warehouses in Mexico operated through a 50%-owned joint venture. COST appears to be a good candidate for a premium-selling play as it is moving back towards a trading range in which it has been comfortable for almost a year. The fundamental outlook for the company is excellent and the option premiums remain robust due to the recent volatility in the issue. Traders who wouldn't mind owning COST at a basis near $31 can sell the OTM option premium for a credit and use the earned income to offset potential losses on the downside, in the event of assignment of the issue. PLAY (conservative - neutral/credit strangle): SELL CALL APR-45.00 PRQ-DI OI=1383 B=$0.50 SELL PUT APR-32.50 PRQ-PZ OI=159 B=$0.75 INITIAL NET CREDIT TARGET=$1.38-$1.50 ROI(max)=12% UPSIDE B/E=$46.38 DOWNSIDE B/E=$31.12 http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=COST ****************************************************************** ************************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=1871 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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