The Option Investor Newsletter Tuesday 3-20-2001 Copyright 2001, All rights reserved. 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/032001_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 03-20-2001 High Low Volume Advance/Decline DJIA 9720.80 - 238.30 10019.90 9718.20 1.23 bln 1301/1759 NASDAQ 1857.48 - 93.72 2004.09 1922.78 2.15 bln 1374/2257 S&P 100 581.93 - 15.74 4.06 581.65 totals 2675/4016 S&P 500 1142.62 - 28.20 1180.56 1142.19 40.0%/60.0% RUS 2000 444.48 - 6.79 456.17 444.36 DJ TRANS 2675.86 - 5.80 2717.02 2672.44 VIX 35.04 + 1.69 36.18 32.62 Put/Call Ratio 0.61 ************************************************************* Ugly, really ugly? Let me clarify something. They CUT rates by half a point! C-U-T ! The market reacted like the Fed raised rates instead. Traders sold into the news like they expected a -1.50 cut instead of -.50. Was it something they said? Maybe, "global weakness", "may last for some time." What ever the reason the remaining bulls were shredded into hamburger by the bears as strong volume knocked -300 points off the Dow's high and pushed both major indexes to new lows. What happened to the three cuts and a bump theory? Three big cuts at that! 12 of the last 13 times the Fed has cut rates three times the market has rallied and moved upward. Could we be looking at that rare occasion where the markets continue down? It is too soon to tell but things are not looking good based on today's action. The Dow's high today was 10028, 310 points above the close. This -300 point drop occurred in only an hour and forty minutes after the Fed announcement. The Dow closed at 9718 and at the lowest level since March of 1999. Volume on the NYSE was high at 1.23 million shares. The Nasdaq faired no better dropping -117 points from its high and closing at 1859 or the lowest point since Nov-13th 1998. Volume was strong at 2 billion shares but not excessive. The big news of course was the Fed rate cut and the language they used in the announcement. The big key to me was the global reference. With Japan continuing to tank and Korea showing weakness for the first time in seven years, it appears that the U.S. is not the only weak spot. If our weakness ripples out to the rest of the world through a lack of orders for components and materials then what we get back as these other economies weaken in turn may be worse. The Fed acknowledged that "excess capacity may last for some time" meaning the end is not yet in sight. The stated reason for the cut was a "weak economy risk" but they also said the drop in the stock market was impacting investments into the business community. Now, it does not take a very high IQ to understand the need to conserve cash if your cash cow brokerage account from two years ago is now a cash drain every time you have to cover a losing position. Companies have seen investment income disappear and asset balances drop as much as -75%. The question of "do we upgrade equipment on a the assembly line" turns into "if I layoff those employees how much can I get for that excess equipment?" This dramatic change in the business climate shows that the Fed over reacted in their rate hikes last year and they are behind the curve now in trying to correct the problem. The echo of the announcement had not even died before investors started calling for another intra-meeting rate cut of -.50% This may be wishful thinking but the next meeting is not until May-15th so there is plenty of time for economic reports to impact the Fed thinking. The meetings after that are June-26th and Aug-21st. The Fed may be forced to react early if the global economy continues to weaken. Warnings, downgrades, layoffs and bad news continued to flow today with Oracle announcing a 5% cut in staff. Solectron warned that earnings would drop by more than half and took a charge for cutting 8200 jobs. PWAV warned that it would post a loss when analysts were expecting a +.06 cent gain. There were many more but you have heard the same sad story many times already this month. Ten companies warned after the bell tonight. Is there more ahead? You bet! Some said a Fed rate cut of 75 basis points would have jump started the market and sent buyers into a frenzy. Wrong! At this point there is no reason to buy stocks. With every major company saying that there is "zero visibility" going forward there is nothing that will make investors race into the fog with no idea of what is lurking there. Until we get to a level where all the bad news is priced in, we will fall farther. Former Fed governor, Lyle Gramley, said he would bet "big money" that the Fed was far from done but he could give no reason to buy stocks yet. Earnings are over, the indexes are setting new lows and the worst six months of the year are ahead. Sound like a buying opportunity to you? Actually it is for aggressive investors. The old adage, "buy stocks when nobody wants them" would certainly apply today. NOBODY wants stocks today. Shorts are increasing positions and there is no end in sight. That is a buy signal for long term buy and holders but nobody is taking the bait. CSCO 19, SUNW 17.50, INTC 24.63, ORCL 14.50, JDSU 21.50, there is a limit to how far these companies can drop but still no takers. The shorts are obviously looking for single digits on these stocks and now that the Dow is well under 10,000 and the Nasdaq well under 2000 we could see that soon. Analysts are scratching their heads trying to find new support levels. You know we are grasping at straws when the only hope of a rally is now a short covering rally just prior to income tax day. While I am sure there will be some covering to pay the tax man, I doubt it will be material. Most traders lost money last year and wish they had a tax bill instead of a tax loss. However many institutional investors will wait until after the 15th simply to avoid the possibility of further drops. Capitulation? Not yet! With that label being applied to every major drop for the last week you can see it was not true. If you think this through then there is more red ink in our future. The S&P Tech index is at a 29 month low and still falling. Every stock that has not warned is being shorted aggressively in hopes that they will warn. The put/call ratio is anemic at only .61 and is not showing any signs of serious worry. Only 36% of investors are currently bearish compared to 31% still bullish. Definitely not a bottom indicator. The VIX however is hovering in the 33-36 range which is normally a buy range. Those of us who remember last April remember numbers well over 40. With many investors conditioned to move out of tech stocks over the summer months we could see even higher VIX numbers soon. When I left to speak at the John Dessauer cruise seminar on Mar-8th the Dow closed at 10846. Today it closed at 9718. That is an -1128 point drop in only a week and there are no buyers in sight. Over -1100 points and no buyers, does that worry anybody? It does me. Is the day-trading era over? Are mutual funds withdrawals increasing? Are we going back to historical PE ratios of 7-12? I think these are the more serious questions we need to worry about, not the difference between 50-75 points. As investors we need to play the trend and not try and buy this dip. Rate sensitive stocks are not reacting to the cuts. Fundamentals are now coming back into vogue and until the market sees the fog clearing they are not going to buy stocks. Investors want to see earnings and positive forecasts before committing what little money they have left. I relate this to a gambler who walks up to a table with say $2000 and promptly loses half. His bets then decrease, his aggressiveness declines or he quits to wait for another day. If he loses half again he either quits or goes into serious conservation mode. His $50 bet decreases to $25 and then $10 and then $5 as his bankroll decreases. A trader/gambler with only 10%-20% of their beginning investment can no longer capitalize on positive trends. They are beaten mentally. They are too cautious and even bets with good odds are ignored or only taken in minimum amounts. As traders we need to sit this one out. The risk/reward ratio for puts is no longer in our favor. Stocks that have fallen from $175-$125-$100 to $15-$20 no longer drop in big increments. Calls on these stocks still bleed premium every day. If the trend is still down but stocks are trading in the teens then it is safer to wait. There may be an explosive rally in our future but you would hate to be in puts when it happened. You don't want to be in calls either since it could be weeks or months before it comes. We wait, conserve our cash and look for strong stocks that appear to be putting in bottoms while the market is still tanking. When the market does rebound you are then eager and prepared to go back into battle. Sometimes the best play is no play at all. It is also entirely possible that the afternoon drop today was simply a "sell the news event" and cooler heads will prevail tomorrow. Don't be fooled by a morning bounce. We have sold off so severely that there is plenty of room above us. We can wait for a trend to appear before committing capital. There have been a dozen or so bear trap rallies in the current down trend. Each were ok for agile traders but costly for the average investor. Nasdaq 2050 is the next level where we would suggest conservative traders should take a long position. After trying for over a week to break out over 2025 we have to recognize that to be significant resistance. Wait for the break out before going long. Aggressive investors will of course be looking for that next bottom and throwing money at anything that resembles a bounce. No amount of caution will change their mind. When was the last time the Fed cut rates three time in a row by 50 points and the market failed to react? This should cause you to rethink any long positions. Investors on the Nasdaq have lost over $4 trillion in the last 12 months. How much more will it take before the carnage is over? Hamburger anyone? There is a world of difference between eating hamburger and being hamburger. You choose. Enter passively, exit aggressively! Jim Brown Editor ************************************ TOPICS and SPEAKERS 3rd Annual Trading Expo 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. ----------------------------------------------------------------- Jeff Bailey, Editor, PremierBriefing.com Learn the basics of Point and Figure Charting while analyzing how supply and demand on an institutional level affects the markets and the stocks you want to trade. Mark Skousen, Ph.D., Editor, FORECASTS & STRATEGIES The Global Economy and its Impact on Us. Learn from a professional economist who turns his understanding of economics into highly valuable investing advice. Harry Browne, Author of Fail-Safe Investing Top Ten Things Every Successful Investor Should Know. A powerful session that translates the essence of the book into ten guiding principles. Jim Brown, Founder, OptionInvestor.com Austin Passamonte, Editor, IndexSkybox.com Jeff Bailey, Editor, PremierBriefing.com Preparing for Battle. This is a very popular session where multiple speakers team together offering insights on: planning your trades and the combination of research, market factors, and choosing your hot list. Tom DeMark, Author of three books on DayTrading Options Day Trading Options. An extremely popular subject taught by one of the world's foremost authorities on chart analysis. Tom wrote the book on day trading options, literally. Steve Nison, Author, Japanese Candlestick Charting Techniques Candlestick Charting. Is that a doji or an evening star formation? How can this benefit your trading success? Candlestick chart analysis is another hot topic that traders are always eager to learn. Nison is internationally recognized as the "Father of Candlesticks" and has written two books on the subject. Austin Passamonte, Editor, IndexSkybox.com Buzz Lynn, Contributing Editor, IndexSkybox.com Beating the Market with Indexes. This is another tag team event where you'll hear from two of our staff from IndexSkybox.com as they discuss topics like: Don't Pick Stocks, Pick Markets; and Market Timing Equals Sector Profits. Rance Masheck, President, SpreadTrader.com Calendar Spreads & Bull Call Spreads. Some of the first strategies a beginner will encounter in spread trading are these two spreads. Both simple and effective they continue to draw experienced traders over and over again. Mark Skousen, Ph.D., Editor, FORECASTS & STRATEGIES Scrooge Investing - The Best Bargains in Beaten Down Stocks for 2001. This is a great topic and Mark's background as an economist really offers some new insight into the challenge of choosing your investments. Jeff Bailey, Editor, PremierBriefing.com Calculating the Bullish Percent. Applying your new knowledge in Point and Figure charting to decipher how many stocks in a sector are showing buy signals. Jim Brown, Founder, OptionInvestor.com Austin Passamonte, Editor, IndexSkybox.com Pre-Market Analysis. A very popular session where multiple speakers team together offering insights on: Pulling the Trigger, Amateur Hour, and Market Hype. Dick Arms, Inventor of the Arms Index, Founder, ArmsInsider.com Increase your profit potential with Equivolume Charting, volume adjusted moving averages and the TRIN Derek Baltimore, Co-Editor, IntradayTrader.com Risk Management in a declining Market Buzz Lynn, Contributing Editor, IndexSkybox.com Sector Trading with IShares. You may know of DIAMONDS for the Dow Jones, SPDRs for the S&P 500, and the QQQs for the NASDAQ but there is a growing list of IShares and HOLDRS that offer great trading potential. Jon Najarian, Founder, Mercury Trading, Floor-Trader CBOE Successful Option Trading. "Doctor J" is the name and options is the game. Jon has twenty years of experience as a professional option trader. His firm makes markets in over 90 high-tech and biotech stocks and trades up to 40,000 options per day. Matt Russ, Editor, OptionInvestor.com How to Profit from Option Pricing, Market Making and Volatility Rance Masheck, President, SpreadTrader.com Straddles. An excellent strategy for today's markets. Traders should be very familiar with the proper execution of a straddle to benefit from expected volatility. Jeff Wright, Preferred Trade Understanding Option Basics and the roll of an options floor trader. Buzz Lynn, Contributing Editor, IndexSkybox.com Slump Busting. Are you on a losing streak? Learn what you need to do to BUST out and break the pattern. Jim Brown, Founder, OptionInvestor.com Big Cap Strategies, Naked Puts, Zero Risk Trading, Making Dollars not Dimes. Jim Crimmins, President, TraderAccounting.com Tax Strategies for the Active Trader. It's that time of year again and Uncle Sam wants a cut of your trading profits. Let Jim offer some advice on how traders should handle such taxing issues. Molly Evans, Writer/Trader, IndexSkybox & OptionInvestor.com The Organized Trader. Rance Masheck, President, SpreadTrader.com Five Point Star Trader System. Learn what you need to know about a stock before making a decision to trade. Austin Passamonte, Editor, IndexSkybox.com Swing Trading & Day Trading Index Options. Many consider Index option trading to be the pinnacle of equity options. Learn more about the do's and don'ts for Index Option trading. Eric Utley, OptionInvestor.com & IntradayTrader.com Psychology of trading and the Importance of the top down approach to trading. Buzz Lynn, Contributing Editor, IndexSkybox.com Trading with Qcharts. Learn how to properly set up, use, and deploy the best features and techniques. Derek Baltimore, Co-Editor, IntradayTrader.com Exit Strategies, knowing when to quit Tim Taylor - Preferred Trade Using Direct Access Trading Platforms 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=1832 ************************************************************** **************** MARKET SENTIMENT **************** Not Impressed By Austin Passamonte That describes today's market action beyond 2:15pm EST. Yes we all "knew" the Fed would only cut by .50-basis points but once again CNBC and to a lesser extent other media outlets did a subtle but certain job of making a case for .75 basis instead. In our opinion this is huge disservice to their audience, but sure makes for easy trading in the process. Real simple today: on the outside chance .75 basis cut was realized, buy calls above recent overhead resistance. The .50 basis that was expected & would surely disappoint investors become known? Buy puts below recent support and hold on! If only this weren't the first week of expiration cycle that has contracts bloated with worthless time premium. Had today been within the last two weeks of expiration cycle it would be very interesting indeed! Easy 100% - 200+% returns on contract cost for major index options the final two hours and perhaps a lot more ahead this time last week, but the Fed still lacks good sense to schedule all their meetings during expiration week! Now back to the future. Markets rallied one session into this meeting and sold that entire effort & then some within one hour before today's close. Gains are lost much easier than logged and we expect Wednesday to continue the decline. With no remaining catalyst to prop markets up and in-vogue, "easy money" made to the short side these days, selling pressure promises to continue in earnest. Remaining market bulls (threatened species) are hoping for one big capitulation event so the markets can resume the customary rally once again. Exactly half of that scenario is likely within the next few sessions. The rally part could be awhile. There are so many upside challenges ahead that we don't know where to begin. Fundamental earnings news (more specifically, lack of earnings) would be one. Pre-warn season is another. Tax season liquidation is a third. Tax season? The markets crashed last year! Not so fast, Sparky... keep in mind that techs rallied huge from January to all-time highs March 2000 and massive gains were made prior to loss. A minority of traders claim full-time, mark-to-market status while the vast majority still sit on painful tax liabilities without money to cover. Sell anything possible to raise Uncle Sam's distorted capital gains share is the solution. Near term? We look for the following index levels to offer "firm" support. A bounce from higher levels is very possible, but downside risk exists to these historical points of support on weekly charts: Dow: 9600 SPX: 1100 NDX: 1460 QQQ: 36.5 OEX: 535 SOX: 400 These are the big indexes that list options. Those who may still follow the COMPX (why?) can assess possible support based on the NDX, its natural leader. We believe most remaining risk lies in the Dow and S&P indexes as the techs have lost far greater percentage values than broader indexes to date. What about the COT report and possible short covering by big professionals there? Keep in mind this tells us we may be near a bottom ZONE, not point. Commercial giants sell on the way up and buy on the way down in a scaling process, not "V bottom" events. Traders who think we can suffer one big capitulation day and break out the bull horns after that may be sadly mistaken indeed. Speaking of COT reports, some have inquired about the dropped listing of Nasdaq 100 data here. The source we formerly gleaned this from is unavailable, and most other reporting wires omit the ND01H because it's very illiquid and dubiously reliable. If we can easily locate the data once again it will be included, but keep in mind all of the important action takes place over in the S&P 500 arena. The rest pales in comparison. With all that's been said, should market bulls at this point slash their hooves and head off to the great glue factory in the sky? Nope: the next powerful rally can emerge at any time without warning. Actually, that's just how one will have to as all odds look bleak from where we lie here tonight. The possibility exists of total market meltdown this week, but the next oversold rally can always emerge without warning. Trade the daily trend with caution and avoid big bets & long term plays. ****** VIX Tuesday 03/20 close: 35.04 VXN Tuesday 03/20 close: 74.34 30-yr Bonds Tuesday 03/20 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. Tuesday (03/20/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 620 - 605 2,558 4,814 .53 600 - 585 4,697 7,749 .61 OEX close: 581.93 Support: 575 - 560 2 4,997 2498.50 555 - 540 21 6,433 306.33 Maximum calls: 660/ 3,262 Maximum puts : 520/ 6,254 Moving Averages 10 DMA 611 20 DMA 627 50 DMA 669 200 DMA 739 NASDAQ 100 Index (NDX/QQQ) Resistance: 49 - 47 132,822 40,868 3.25 46 - 44 119,771 55,702 2.15 43 - 41 50,645 133,252 .38 QQQ(NDX)close: 40.35 Support: 39 - 37 1,756 33,857 19.28 36 - 34 6,863 33,478 4.87 33 - 31 84 6,986 83.17 Maximum calls: 53/116,317 Maximum puts : 43/96,162 Moving Averages 10 DMA 43 20 DMA 46 50 DMA 55 200 DMA 77 S&P 500 (SPX) Resistance: 1200 10,854 15,079 0.72 1175 2,346 6,573 0.36 1150 6,287 22,830 0.28 SPX close: 1142.62 Support: 1125 810 4,258 5.26 1100 80 13,757 171.96 1075 35 15,000 428.57 Maximum calls: 1275/18,229 Maximum puts : 1150/22,830 Moving Averages 10 DMA 1194 20 DMA 1221 50 DMA 1290 200 DMA 1390 ***** 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 their hedged positions. Commercials show a decline of 3 percent on the S&P 500 net-shorts while they reduced their DJIA net-short positions by 6 percent. 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. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/032001_1.asp *********** OPTIONS 101 *********** Is It Over Yet? By Lee Lowell That's the question most investors want to know. Is the selling done or am I going to see my account balance dwindle even further? I think most of us realize that those great few months of non-stop upside movement are over and many of those internet companies that we thought would make us millionaires are all distant memories. The days of wishing the market back up, or the phrases of "it can't go any lower," or "just keep buying the dips" has caused lots of pain to many people. And this bear market has not only caused pain to the investors who got swept up in the speculative craze of dot.mania, but to those investors who are close to retiring and want to start tapping their IRA's. The blue chips that you never want to sell also have been decimated by this monster. I believe it has affected all of us in some way or another. If you trade for a living and the markets are your sole source of income, you know how bad it's been over the last year. So what are we going to do about it? Well, let's just say that we've all been taught a good lesson. I know some option traders who have only been trading since the 90's bull run and have never experienced a downmove such as this. We learned that the markets can't go up forever and that eventually you must take some profits or hedge your gains with downside protection. Even for those people who consider themselves "buy and holders," it doesn't hurt to take a little profit. I too have my "buy and hold" accounts, and they have lost a ton of value also. Nothing has been immune. I'm just glad I still have some years left to try to recoup some lost value. Being a commodity trader at heart, and that still being my main source of income, I've learned there's a world of difference between what influences commodity options versus equity options. In the world of physical commodities, supply and demand is the driving force behind all price movements. Not enough rain in the summer - then soybeans go up. OPEC raises production - crude prices go down, a freeze in South America - coffee prices go up. It's all supply and demand. Equity options are a whole different ballgame. You've got so many outside influences that can affect the prices of stocks. Will the Fed raise or lower interest rates, will the company issue good or bad earnings, will the company issue a warning, what are the analysts saying, takeover rumors, day traders moving the markets, etc, etc. You've got so much to take into consideration. This isn't a recommendation to trade commodity options over stock options, it's just a fact that trading stock options isn't easy. So getting back to the question of what we're going to do. I've decided that for me personally, when I want to trade stock options, I'm only going to trade the indices. SPX, OEX, QQQ, DJX. You can have just as many big movements as individual stocks, but you will never be exposed to the damage (or lucky gain) by those nasty gap moves that individual stocks are prone to these days. Since the indices are made up of many different stocks, they aren't affected nearly as much because an individual stock got downgraded or released bad earnings. I know that every option position I take will be hedged in one way or another. I will only put on spreads at this point. Whether it is an outright call spread or put spread, debit or credit spread, calendar or straddle, etc. No more of these long calls that are held onto until expiration. We've seen profits built up, just to be lost within a few days time. None of that! I will be taking any profit from now on. The greed factor has caused many accounts to be wiped out. If your option position is showing a profit, how long are you planning on letting it run? Is it up 100%? Then take the gain. You don't need to wait until expiration. Are you waiting for that 1000% gain just so you can tell your friends about your amazing trading prowess? Don't get caught up in that. Taking small gains time after time will build up an account very nicely. Of course, the hardest part is taking a loss. Nobody wants to admit that they were wrong and take a loss. The bottom line of trading is whether you made money or lost money. Unfortunately, if you lose money, then most will deem themselves a failure. I believe that is the biggest obstacle to overcome when trading the markets. It's the psychology and emotional aspect of trading that keeps us in the game too long with a loss. You just don't want to admit that your prediction of stock movement was wrong. And then there's the time when you did follow your stop-loss rules and closed out with a loss, only to see the position turn around on you. Yes, that does happen. But how many times has that happened when you decided to stay in the position until the very end? Not many I bet. I just recently had a position on with some long puts on SUNW. I bought some to protect my long stock and some extra to try to gain a little from the downside moves. I had a gain in the puts until SUNW made a retracement back up. The puts became almost worthless and I was somewhat upset that I hadn't sold out for a profit. But I held on anyway only due to the trend of the market. Well, I got lucky this time because the market once again turned lower and my puts became profitable once again and I immediately sold out for a gain. Yes, it did happen this time for me, but this was once for about the other fifteen that I held for a complete loss. We all think we're different and that it won't happen to me. Well, if you've been in the market over the last year, then chances are some of your portfolio has dwindled. If you've been buying puts for the last year, well congratulations then and I commend you for your fine trading abilities. I'm in it for the long haul with long stocks in my retirement accounts. This has been the way to generate wealth in this country for the last century. I'm not going to go against that trend. But I also make my living trading the markets, so I need to execute the trades that will give me the best return. Always hedge a trade and take a profit or cut a loss short. You'll see. Next time I'll start up with a few sessions of specific trading strategies. Until then...good luck. ************** TRADERS CORNER ************** Review of My March Plays By Scott Martindale I have been buying stocks and going naked the dips to a small extent, just to stay exposed to any rallies. Although I do play the short side, the extreme oversold condition of the major indices, particularly Nasdaq, has indicated to me a greater chance of near-term upside rather than downside. Too bad for me it hasn’t worked out that way. However, I keep thinking back to 1999 through early 2000 when stocks would rally 25% overnight or in the blink of an eye. My fear has been that with so many fast-movers deeply oversold, I would hate to be caught short. Not even a stop order can prevent a big loss following a large opening gap, as many of us learned on the downside over the past year. With the Nasdaq below 2000, the risks appear to be further drifting to the downside vs. huge moves to the upside. Winners in my long-term portfolio continue to be focused in the high-yielding REITs and royalty trusts, natural gas producers/traders, drug makers, and retailers; whereas my remaining tech holdings are moribund. Furthermore, the income portfolio that I have managed for my mother-in-law since last April is flying high because of its heavy weighting toward high- yielding utilities, REITs, petroleum preferred shares and royalty trusts, MIPS, PIES, corporate and GNMA bond funds, munis and zeroes. The only thing that held back her return is the small exposure to technology mutual funds I’ve maintained. [At least it has provided opportunity for some tax loss offsets.] When the markets turn back up with confidence, I’ll consider covered call strategies for further enhancing her portfolio’s cash flow. Trading in my aggressive account has been pretty limited. Last month, I decided to take assignment of both Adobe Systems (NASDAQ: ADBE) and Superconductor Technologies (NASDAQ: SCON) for covered call writing in anticipation of these issues coming back quickly with the next tech rally. They have pretty much languished since, but ADBE in particular is starting to perk up, and is in fact looking strong. I’m still reluctant to buy long-term options in either direction. Even short-term options have been too unpredictable for me these days. Nonetheless, I bought Ciena (NASDAQ: CIEN) March 75 calls in late February in anticipation of an oversold rally in the important optical networking sector. The stock had held up well as a top performer despite its high valuation (see my column from March 6th), so I expected it to outperform in a rally. Last month. I tried deep in-the-money naked puts on CIEN, but bought back at breakeven (with great relief), so this month I tried buying calls to limit my downside. On March 7th, the calls were looking great, well-positioned to continue what seemed like the start to a modest rally, but then two days later the bottom fell out and I sold for a 75% loss. Ouch, burned again. Will I ever learn that when you get a little bit of a run going with an expiring option in this kind of market, it’s best to take your profit and get out rather than continue to push your luck holding over yet another night? I timidly tested these unpredictable waters by writing a few naked puts on only two stocks, continuing with my focus on the deeply oversold optical networking sector. In late February, the technicals (volume, stochastics, money flow, MACD, RSI, Bollinger Bands) were looking like they were poised for a bit of a rally for JDS Uniphase (NASDAQ: JDSU) and Extreme Networks (NASDAQ: EXTR), so I wrote in-the-money March 35’s and March 25’s, respectively. On expiration day, I went ahead and took some shares of JDSU, which is a dominant company with a bottoming formation. But I bought back the EXTR puts at a loss and rolled out to April. Yesterday, that looked like a pretty smart play as the stock gained almost $4 and the put price began to drop. But as it approached the $25 strike, the price of the option slowed its descent as more of the premium simply moved from intrinsic to time value. Today, of course, the stock tanked with the rest of technology. I missed an opportunity to leg in to a credit spread by buying the 20 or 22.50 options, but I’m still optimistic about a near-term bottom in this sector. During the month, I was looking to write covered calls to generate cash on a number of my long-term holdings showing technical strength, but alas few sectors managed to gather much strength. I sold in-the-money calls on energy holdings Texaco (NYSE: TX) and Seitel (NYSE: SEI), looking for a bit of a pullback. SEI did indeed pull back below the $20 sold strike, so I wasn't called out, but TX kept climbing, so I was called out at $60 for a decent gain. I was planning to sell shares or covered calls on some of my tech holdings this week if strength continued, but alas the post-Fed selloff this afternoon may have postponed those plans. We'll see how things progress from here. By the way, today was unusually busy for me as I was not only consulting, writing, and monitoring trades, but I also took in my younger daughter for surgery on her adenoids this morning and attended my older daughter's parent/teacher conference this afternoon -- all with the threat of a rolling blackout at any time as California deals with our self-created energy crisis. Yesterday, I got hit with a one-hour mid-afternoon blackout. It's funny that we generally take our electricity for granted -- much like air and water. When it's not there, it can be a big problem in this information age. When I lived on the Gulf Coast, thunderstorms, hurricanes, and tornadoes frequently threatened power outages -- but somehow that was understandable. This is something else. Let's see, there must be an investment opportunity here somewhere. How about power generation companies like AES Corp. (NYSE: AES), Calpine (NYSE: CPN), and NRG Energy (NYSE: NRG)? How about alternative energy companies that create products for providing on-site energy self-sufficiency, like Capstone Turbine (NASDAQ: CPST), Plug Power (NASDAQ: PLUG), and Astropower (APWR)? Not surprisingly, almost all were up strongly today. The technicals looked weak yesterday on AES and CPN, so I was waiting patiently for more price weakness this week before buying more shares. *************************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=1842 ************************************************************ PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** LEH $65.90 -3.38 (-0.50) Rallying into the close yesterday, LEH gave aggressive traders an opportunity for a quick hit-and-run profit before the bears returned this morning. The stock weakened right from the open and didn't stop falling until the closing bell, as the selling pressure intensified after the Fed cut rates by "only" 50 basis points. Even though LEH didn't violate our $64 stop in today's selloff, the quick violation of the $68 and $66 support levels, combined with the company's pending earnings announcement tomorrow morning should have prompted you to close any open plays. PIXR $32.88 -1.13 (-1.13) The broader market weakness has caused detrimental technical damage to our PIXR play. We actually feel pretty good about the play considering the terrible action of the tape. However, its breakdown below our protective stop at the $33.75 level has forced PIXR's exclusion from our call list. PUTS: ***** No dropped puts tonight ************************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=1857 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Tuesday 03-20-2001 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/032001_2.asp *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1843 ************************************************************ ******************** PLAY UPDATES - CALLS ******************** WM $51.28 -0.74 (-0.21) This week's earlier climb saw WM tackling $53.35, hinting that a strong burst of momentum could power the share price through the 52-week high ($55.93). Unfortunately, disappointed investors took profits in late afternoon trading today and shares of WM reversed their current uptrend. But alas, the good news is two-fold. The 10-dma ($51.31), bolstered by the 5-dma ($50.57), provided firm support amidst the triple digit market decline. And furthermore, the pullback offers the opportunity to take positions IF WM makes another charge. Be patient for strength to return to the financials and a more cooperative market environment before opting to go long. WCOM $17.19 -1.19 (-0.25) The converged 5, 10 & 30 DMA lines in the vicinity of the $17 level kept WCOM afloat while the markets reacted to the Fed's 50-basis point cut. Volume was rather light on the decline, which also bodes well for the future success of this call play. However, let's trade prudently. We've tightened our closing stop mark to $17 from $15 to safeguard existing profits. And please take note, while it's characteristic for aggressive players to look for entries on dips below a stop loss, the current environment doesn't portend favorable results for traders employing that strategy; particularly in the case of WCOM. While it's true that WCOM has flirted with the upper resistance, WCOM's lower volatility makes it a candidate for narrow trading. Conservatively, wait for better confirmation to present itself in an advancing market. A good sign of continued strength is for WCOM to crack the 50-dma ($18.93) resistance and trade convincingly above that level. And remember to keep in mind, WCOM's strength is based on its own company-specific merits. Many of the other big telecoms like VZ and SBC are not faring well these days. SMTC $27.38 -0.38 (+0.02) Semtech hovered between $27 and $28 on Monday, as the company released news regarding the sale of its foundry service business. SMTC is in negotiations to sell its Santa Clara wafer fabrication facility, as part of a strategy to source a majority of its silicon wafers from outside foundries. Apparently, the market liked the news, as SMTC rallied all the way up to $30.13 on Tuesday morning before the Fed meeting. While the rest of the market collapsed after the announcement, SMTC hit a low of $27.25 and rebounded from there to its closing level. At this point, SMTC remains in the upward channel which was established a week ago, and is poised to make another attempt to clear the $30 level. A move past the $28 level on strong volume could present a possible entry point. A break above $30 on heavy volume would be an entry point for more conservative traders. Continue to monitor the SOX.X for strength, and set stops at $27. We will exit positions if SMTC closes below $27. ******************* PLAY UPDATES - PUTS ******************* RATL $22.25 -0.44 (-1.94) The pre-Fed rally led RATL through our $23 closing stop; however, the robust volume couldn't generate enough momentum to hold the course following the rate-cut letdown. A strong rollover, just below the 10-dma ($25.94) resistance, offered put players nice entries as the NASDAQ gave back its earlier gains. Going forward, heed some caution before buying into future weakness. In the past two sessions, the 5- dma ($22.43) showed signs of serving as an intraday support. A clean break through this level in a declining market environment would however, be a signal to jump on this put play. OPWV $23.49 -4.01 (-2.25) OPWV sold off to a new 52-week low of $22.45 on Monday, and then rebounded with the market to close at the high point of the day. On Tuesday OPWV demonstrated an even higher level of volatility, as it rallied with the markets in the morning to hit a high of $29.60 before the Federal Reserve's decision on interest rates was announced. Subsequently, the stock made a sharp, steep drop of over 6 points in less than two hours. The sharp moves can yield big profits to traders on the right side of positions, but the volatility levels also increase option premiums, so use caution going forward. A failed rally from the $25 level could be a possible entry point for aggressive traders, if accompanied by weakness in the market and communications software sector. In addition, further selling could take the stock below $22.45, which could be an additional entry level. Continue to monitor others in the communications software sector, like CMVT, and move stops to $27. We will exit positions if OPWV closes above the $27 level. ABGX $16.75 -2.69 (-2.44) Abgenix rolled over from $19.75 this morning, and dropped to $18.75 even before the Federal Reserve announced the decision. Following the decision, we saw continued heavy selling which brought the stock all the way to a new 52-week low at $16.50. The $13 level represents the next major support level, and ABGX could easily reach this level in the current market environment. However, remember that we are near or approaching oversold levels in the major indexes, and that an oversold bounce is likely to occur. If ABGX rolls over from $18.50, aggressive traders could take positions. More conservative traders could take positions at current levels, if accompanied by weakness in BTK.X. Watch others in the sector, like MEDX, and move stops at $20. We have moved our stop on ABGX down to the $20 level. AETH $16.19 -2.75 (-0.38) Optimism amongst traders going into the Fed meeting was apparent on Monday, with a rising NASDAQ ahead of today's news. As such, shares of AETH got off to an auspicious start this week, gaining $2.38 or over 14 percent on Monday. However, the move was on only half the ADV, suggesting that it was the lack of selling pressure rather than buying interest that lifted AETH. Yesterday's optimism became today's disappointment however, and for aggressive traders who took a position in this put play when the stock was at higher levels, they benefited greatly, as AETH gave back all of yesterday's gains, and then some. While volume was still light, it was heavier than on yesterday's rally. Continued selling tomorrow, taking AETH below $16 could allow for an entry on weakness but confirm with volume. Aggressive traders may target the 5 and 10-dma near $17.50 and $19.50 for potential entries, but confirm weakness with peers CMVT and OPWV before jumping in, and keep in mind our closing stop price of $19. BMC $20.35 -0.60 (+1.18) Already deep in oversold territory, BMC got a much-needed bounce yesterday in sympathy with the rising markets. Opening at the low of the day and closing at the high, the stock gained $1.78 or over 9 percent. While on surface this appeared to be a bullish sign, BMC's rise was on less than half its ADV, and resistance from the 5-dma continued to hold. Today, the stock opened higher but finished lower on a volatile day, giving back 2.86 percent of yesterday's gains on increased selling volume. With resistance overhead from the 5 and 10-dma (at $20.69 and $22.55 respectively), weakness as BMC approaches these levels may offer an attractive entry for higher risk players, but confirm with volume. A break below the psychological $20 support level with conviction could allow for a less risky play, but make sure Goldman Sachs' Software Index (GSO) confirms negative sector sentiment before taking a position. Please note that our stop price is currently at $22. A close above this point would be our signal to exit. BRCM $30.50 -3.81 (-2.88) A string of new product announcements combined with a rally in the NASDAQ yesterday was enough for traders to overlook the continuing stream of lawsuits, if only for just one day, allowing BRCM to move up 2.81 percent on half the ADV. Like the rest of the market, traders were tentative ahead of the Fed meeting, allowing stocks to bounce, as speculators bid most shares up on low volume. Today, the sellers returned in force, as a failed attempt to break through the 10-dma along with a downdraft in the markets post-Fed announcement resulted in BRCM dropping over 11 percent on about average volume, making a new 52-week low in the process. If the stock breaks below today's intra-day low of $30.44, this may allow conservative traders to jump in, but for an even safer play, wait for BRCM to take out $30 support on volume. Aggressive traders may target failed rallies above resistance from the 5 and 10-dma (at $33.37 and $35.58) respectively. To further protect our gains, we are moving our closing stop down from $37 to $36. Track sector sentiment using the Philadelphia Semiconductor Index (SOX) when monitoring plays. VTSS $33.50 -7.81 (-5.56) Caution on the part of the sellers yesterday in light of the impending Fed announcement allowed Tech stocks to float higher and with that, VTSS moved ahead $2.25 or 5.76 percent on light trading, about 70% of ADV. Today, with traders disappointed from a 50 basis point rate cut, the bears once again took control. VTSS for its part lost almost 19 percent on over 1.35 times the ADV and in doing so, made a new 52-week low. Now a highly profitable play, we are reducing our risk exposure and as such, we are lowering our protective stop price from $42 to $36. A close above this level will result in profit taking on our part and dropping coverage. Weakness as VTSS approaches resistance at $34.75, $35 and $36 may allow for an aggressive play while the more risk averse may find an entry if the selling continues, taking the stock below today's closing price. Correlate entries with movement in industry peers QCOM and TQNT. RIMM $24.71 -4.79 (-1.48) After the sharp drop at the end of last week, RIMM was due for an oversold bounce ahead of the FOMC meeting today. That's exactly what happened, as investors gingerly bought ahead of the interest rate decision, pushing the stock as high as $29.50 yesterday. Although closing near the high of the day, the stock's inability to even clear Friday's high provided an early sign of the inherent weakness. This provided aggressive traders with an attractive entry near the close. An even better entry materialized this morning as RIMM gapped open near the $31.50 level, and then quickly headed south. More conservative traders got their entry point this afternoon as the stock continued its descent below $28 on heavy volume, enroute to testing the lows from last week. Weak reception of the Fed's interest rate move today should continue to pressure Technology stocks to the downside, and conservative entry points will materialize as RIMM falls through last week's lows near $23. Aggressive traders will want to wait for a bounce before opening new positions - consider a rollover near the $28-29 level to be an attractive entry point. Our stop has now moved to $29, so any close above that level will indicate the bears' assault is losing its strength, and will bring our play to an end. ************************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=1858 ************************************************************** ************** NEW CALL PLAYS ************** AGGRESSIVE: ADBE - Adobe Systems $32.81 +1.06 (+4.19 this week) A long-time leader in desktop publishing software, ADBE provides graphic design, publishing, and imaging software for Web and print production. Offering a line of application software products for creating, distributing, and managing information of all types, the company generates nearly 75% of sales through publishing software products such as Photoshop, Illustrator, and PageMaker. Its Acrobat Reader, which uses portable document format (PDF) is popping up all over the Internet, as businesses shift from print to digital communications. In addition, ADBE licenses its industry standard technologies. Software stocks have borne the brunt of the damage in the NASDAQ downturn so far this year, as tracked by Goldman Sachs' Software Index (GSO). With concerns of decreasing capital expenditures ravaging the Software sector all but confirmed by Oracle's recent warning, fear was rampant to say the least. However, a better than expected earnings report has helped desktop publishing leader Adobe to move strongly higher. Last Thursday the company reported earnings, beating Street estimates by 5 cents. While ADBE did lower its revenue outlook going forward, it appears that things were not as bad as previously thought. What's more, the company authorized a 5 million share repurchase program. With that, analysts for the most part were a little more optimistic, as a number of brokerage firms re-iterated their Buy or Strong Buy ratings. WR Hambrecht called ADBE's report a "relative blowout" considering the economic climate. CS First Boston upgraded the stock last Friday while today, Thomas Weisel initiated coverage with a Market Perform rating. But actions appear to be speaking louder than words, as there has been heavy buying volume lately. Today, the stock managed to buck negative market sentiment, gaining 3.35 percent on over 1.4 times the ADV. Pullbacks intra-day to support at $31.50 and $30 may provide ideal targets for aggressive traders, but confirm bounces with buying volume, and make sure that ADBE remains above our protective stop price of $31 by the closing bell. A solid break above resistance at $34 may allow more cautious traders to enter on strength. Correlate entries with industry peers CORL and MACR BUY CALL APR-30*AEQ-DF OI=3476 at $5.13 SL=3.00 BUY CALL APR-35 AEQ-DG OI=1689 at $2.63 SL=1.25 BUY CALL MAY-35 AEQ-EG OI= 40 at $3.75 SL=2.50 BUY CALL MAY-40 AEQ-EH OI= 77 at $2.13 SL=1.00 ************* NEW PUT PLAYS ************* AGGRESSIVE: FLEX - Flextronics International $19.00 -4.38 (-1.81 this week) One of several "contract manufacturers" serving the telecommunications, networking, consumer electronics, and computer industries, FLEX provides its customers with the opportunity to outsource a complete product. The company takes responsibility for engineering, supply chain management, assembly, integration, test and logistics management. FLEX provides complete product design services, including electrical and mechanical, circuit and layout, radio frequency, and test development engineering services. Among FLEX's long list of customers are Cisco, Hewlett-Packard, Lucent, Microsoft, Nokia, Motorolla, and Palm Computing. After the January rally, shares of virtually everything Technology-related went back into a nose dive and FLEX joined the bearish party along with all the other contract manufacturers like JBL and SLR. Now down more than 50% from the late-January high of $40, one has to ask the question, "How low can it go?". Based on today's heavy selling pressure (losing 19% on volume more than double the ADV), FLEX has more room to fall. Sure there will be oversold bounces, but it doesn't look likely tomorrow morning after the bearish guidance from competitor JBL. JBL announced earnings after the close, and although the company beat estimates by a penny, they guided revenue estimates lower for the next 2 quarters. The Fed's 50 bp rate cut this afternoon had the effect of driving shares of FLEX sharply lower, as selling volume picked up and continued right up to the final 20 minutes. A minor bounce took the price $1 above its lows, but we don't expect that to last. Adding to the bearish pressure, Bear Stearns, ING Barings and SG Cowen all piled on to downgrade the stock this afternoon after the close. There is little evidence that any bullish developments are hiding around the corner, so our job is to ride the existing trend as long as it lasts. To that end, aggressive investors will want to target new entries on any bounce that fails to take out the $21 intraday resistance level (also the location of our stop). More cautious entries will materialize as the selling intensifies again, driving FLEX below today's low near $18. Keep an eye on the action in shares of other contract manufacturers and the overall NASDAQ. As long as that remains negative, FLEX doesn't have much chance of mounting a sustained recovery BUY PUT APR-20 *QFL-PD OI=3166 at $3.50 SL=1.75 BUY PUT APR-17.5 QFL-PS OI= 326 at $2.06 SL=1.00 ********************* PLAY OF THE DAY - PUT ********************* RIMM - Research in Motion $24.71 -4.79 (-1.48 this 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. Most Recent Write-Up After the sharp drop at the end of last week, RIMM was due for an oversold bounce ahead of the FOMC meeting today. That's exactly what happened, as investors gingerly bought ahead of the interest rate decision, pushing the stock as high as $29.50 yesterday. Although closing near the high of the day, the stock's inability to even clear Friday's high provided an early sign of the inherent weakness. This provided aggressive traders with an attractive entry near the close. An even better entry materialized this morning as RIMM gapped open near the $31.50 level, and then quickly headed south. More conservative traders got their entry point this afternoon as the stock continued its descent below $28 on heavy volume, enroute to testing the lows from last week. Weak reception of the Fed's interest rate move today should continue to pressure Technology stocks to the downside, and conservative entry points will materialize as RIMM falls through last week's lows near $23. Aggressive traders will want to wait for a bounce before opening new positions - consider a rollover near the $28-29 level to be an attractive entry point. Our stop has now moved to $29, so any close above that level will indicate the bears' assault is losing its strength, and will bring our play to an end. Comments Sticking to our thesis of selling weak tech stocks, we are making RIMM our put Play of the Day. After the expected 50 basis point rate cut, the NASDAQ and INDU sold off to new lows. If the weakness continues tomorrow, we will look to jump on RIMM puts on a drop below $24. If RIMM finds bids early, watch for a rollover near intraday resistance at $27, $28 or $29 to obtain an aggressive entry. BUY PUT APR-30 RUL-PF OI=1071 at $7.40 SL=4.75 BUY PUT APR-25*RUL-PE OI= 884 at $4.10 SL=2.25 http://www.premierinvestor.com/oi/profile.asp?ticker=RIMM ************************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=1867 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ Almost As If It Was Scripted! Equity markets ended sharply lower today after the FOMC's widely expected decision to lower interest rates by 50-basis points. Monday, March 19 The stock market edged higher today amid bargain hunting and a flurry of speculation ahead of Tuesday's meeting of the Federal Reserve. The Dow Jones industrial average rallied 135 points to 9,959 and the NASDAQ closed 60 points higher at 1,951. The S&P 500 index rose 20 points to 1,170. Trading volume on the NYSE totaled 1.1 billion shares, with winners beating losers 1,963 to 1,103. Activity on the NASDAQ was average at 1.7 billion shares traded, with advances outpacing declines 2,198 to 1,527. In the U.S. bond market, the 30-year Treasury fell 9/32 to 101 9/32, with its yield up to 5.28% as stocks enjoyed new buying interest. Sunday's new plays (positions/opening prices/strategy): Guidant (NYSE:GDT) APR60C/55C $0.25 credit bear-call PolyMedica (NASDAQ:PLMD) APR50C/45C $0.55 credit bear-call Varian (NYSE:VAR) APR75C/70C $0.80 credit bear-call Costco (NASDAQ:COST) APR45C/32P $1.25 credit strangle SPX Corp. (NYSE:SPW) APR95C/95P $11.00 debit straddle Today's volatile market activity provided some good opportunities to participate in our new combination positions. PLMD, VAR and COST provided entries near the target prices and the SPW straddle offered an excellent opening debit. The GDT spread was the only position that did not offer a favorable credit however, we will monitor the play for future entry opportunities. Portfolio Activity: The major indices closed near the session highs Monday, after a midday dip to recent lows as the market rebounded from extremely oversold levels. Bargain hunting and short-covering accounted for much of the bullish movement in anticipation of a reduction in interest rates at the Tuesday meeting of the Federal Reserve. Among the Dow industrial issues, Hewlett-Packard (NYSE:HWP) led the gainers with a $2 rally to $30.50 even as Goldman Sachs cut its estimate for HWP's 2001 earnings. Boeing (NYSE:BA) was also a big gainer, rallying to $56 after a week of consecutive losses. The aerospace giant won a $69 million contract from the Navy for production of the Advanced Targeting Forward Looking Infrared system. DuPont (NYSE:DD) added to the blue-chip average's gains, bouncing back to $43 after a six-session decline. An unexpected profit warning from the technology sector and negative comments from US Bancorp Piper Jaffray about the personal computer market weighed heavily on the NASDAQ. Intel (NASDAQ:INTC) finished at $27 after hitting a new 52-week low of $25.38 and analyst notes suggested a recession in the commercial and consumer segments is expected to result in a negative growth rate for the PC market in 2001. Intel is suffering from this bearish outlook and our LEAPS with Covered-calls position in the issue will likely fall as well. Ciena (NASDAQ:CIEN) initially was another blue-chip loser on the technology composite, reaching a low near $47 after the New York Times reported that some analysts think Ciena will be forced to lower its earnings projections because its customers, primarily telecommunications carriers, are in worse financial condition than previously expected. Other optical-networking stocks were pressured by a profit warning from Corning (NYSE:GLW), which said it will miss analysts' estimates for 2001 earnings because of the economic slowdown in the telecom segment. In the broader market, interest-rate sensitive financial stocks wavered for much of the day before finishing mildly higher. Some cyclical and consumer product shares also rallied along with issues in the utility and oil service sectors. The Spreads portfolio saw little significant activity during the choppy session but there was some interesting movement in one of our bullish plays. The Shaw Group (NYSE:SGR) dropped over $7 after FPL Group and Entergy raised the possibility that their pending merger might be in jeopardy, suggesting they have run into difficulties over the value of their deal and how to combine the two utility companies. In a joint statement, the companies said certain issues have arisen in connection with their pending merger, including governance structure/value-related issues and integration of the two companies going forward. Analysts say the FPL-Entergy merger issues raise questions for the Shaw Group, a power plant developer that counts both companies as customers, because SGR has a joint venture with Entergy to build all of its new power plants. Apparently, the addition of FPL's construction program to the joint venture would double the work available to Shaw and make it more front-end loaded. However, the effect on SGR's profits may be less significant as the company is projected to make only 10% of its revenue this year from the joint venture. Based on that fact, the reaction may have been somewhat overdone and we will monitor the issue for signs of a continued downtrend before making any adjustment. There was also some new volatility in the Straddles section. Telecom Brazil (NYSE:TBH) dropped over $2 to the $54 range and the movement increased the profit in the APR-$65 straddle to $10, a return of $2.40 on $7.60 in less than one month. Imperial Chemicals (NYSE:ICI) traded at a recent low near $27 and that position is approaching the downside break-even point. We will monitor the straddle for a favorable "early-exit" opportunity. Tuesday, March 20 Equity markets ended sharply lower today after the FOMC's widely expected decision to lower interest rates by 50-basis points. A slew of profit warnings also helped push the major averages lower with precipitous losses occurring in blue-chip technology issues. The Dow Jones industrial average dropped 238 points to 9,720 and the NASDAQ composite slid 93 points to 1,857. The S&P 500 index fell 28 points to 1,142.62. Trading volume on the NYSE totaled 1.23 billion shares, with losers ousting winners 1,756 to 1,308. Activity on the NASDAQ was heavy at 2.02 billion shares exchanged, with declines beating advances 2,261 to 1,375. In the U.S. bond market, the 30-year Treasury rose 11/32 to 101 20/32, pushing its yield down to 5.26%. Portfolio Activity: Stocks tumbled again today after the Federal Open Market Committee cut its target for the federal funds rate by an expected 50-basis points, to 5%. The Fed said it decided to cut rates today for a third time this year because pressure on profit margins have hurt investment and consumption in the United States. The Fed also cut the discount rate by 50-basis points to 4.5% but the move was seen as too little, too late by market watchers. Comments from the Fed that "the economic slowdown could continue for some time" and that the potential for weakness in global economic conditions suggest substantial risks that demand and production could remain soft" were perhaps overly pessimistic in light of the current market conditions. Investors were unhappy with the despairing outlook and the selling pressure quickly surfaced in computer hardware and networking issues. Among other technology groups, chip stocks and electronics manufacturing issues also ended significantly lower in the wake of recent profit warnings from KLA Tencor (NASDAQ:KLAC) and Solectron (NYSE:SLR). On the Dow, Intel (NASDAQ:INTC) led the average lower, falling to a 52-week low after analysts at Morgan Stanley Dean Witter said a slowdown in demand would likely drive a 20% sequential decline in chip industry revenues during the first quarter. International Business Machines (NYSE:IBM), Microsoft (NASDAQ:MSFT) and Hewlett-Packard (NYSE:HWP) also finished lower. The Dow's financial components lost ground with J.P. Morgan Chase (NYSE:JPM), Citigroup (NYSE:C) and American Express (NYSE:AXP) in the red. AT&T (NYSE:T) pushed the telecom group lower after CIBC World Markets cut its price target and 2001 earnings estimates for the company, due to higher expenses in long-distance spending. In the broader markets, major drug, biotechnology and brokerage stocks generally moved lower while select oil service, retail, utility, natural gas, paper and airline shares saw limited buying pressure. The bullish activity prior to the Federal Reserve's announcement regarding interest rates helped a number of issues in the Spreads portfolio. One of our recent calendar-spread positions, Advanta (NASDAQ:ADVNB) traded near $13.25, providing a minimum of $1.06 closing credit for the APR-$12.50 call. The time-selling spread provided a 0.43 credit on $0.62 invested in less than one month, a 70% return before commissions. A new position in that group, Earthlink (NASDAQ:ELNK) rallied early in the session and the play is off to good start, even with the closing sell-off in technology issues. The Shaw Group (NYSE:SGR) bounced back from yesterday's losses after Merrill Lynch upgraded the issue with a near-term target price of $55. Our short Put option at $45 is safe for now but conservative traders may consider rolling down and forward to the MAY-$40 Put if the downtrend resumes. A number of stocks in the oil service segment moved higher including Patterson Energy (NASDAQ:PTEN), Kerr McGee (NYSE:KMG), Amerada Hess (NYSE:AHC) and Weatherford (NYSE:WFT). Among bearish positions, drug stocks and pharmaceutical shares fell during the session and the sell-off in these sectors also helped a number of portfolio plays. On the downside, many of our technology issues continue to suffer from institutional selling pressure and the negative effects of mutual fund "window dressing" will probably continue for the next few weeks. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** LEN - Lennar $37.75 *** Reader's Request! *** Lennar (NYSE:LEN) is a homebuilder and a provider of residential financial services. Headquartered in Miami, Florida, the company has homebuilding operations in a number of Eastern states and is one of the nation's leading builders of quality homes for all generations, building affordable first-time family, move-up and retirement homes. The company's homebuilding operations also include the purchase, development and sale of residential land. The purchase, development and sale of residential land is mainly conducted through its own efforts and its partnership interests. The financial services operations provide mortgage financing, title insurance and closing services for Lennar homebuyers and others, package and resell residential mortgage loans and also mortgage-backed securities, perform mortgage loan servicing activities, and provide cable television and alarm monitoring services to residents of Lennar communities and others. One of our readers commented that today's interest rate reduction is going to benefit the home building industry in the long-term and he suggested that we look for some potential candidates in that segment. Lennar is one of our favorite companies in the group and the recent announcement concerning its new home orders suggests that their quarterly profits will be favorable. Lennar reported earlier in the month that preliminary new home orders in the three months ended February 28, 2001 totaled 6,092 homes, compared to 2,758 homes in the same period in 2000. The growth should be apparent in the company's earnings report, due to be released tomorrow during the morning session. Traders who agree with a bullish outlook for the issue should consider one of these positions, depending on their strategic approach and trading style. PLAY (conservative - bullish/calendar spread): BUY CALL AUG-40 LEN-HH OI=82 A=$3.90 SELL CALL APR-40 LEN-DH OI=40 B=$1.20 INITIAL NET DEBIT TARGET=$2.50-$2.60 TARGET ROI=50% - or - PLAY (aggressive - bullish/credit spread): BUY PUT APR-30 LEN-PF OI=40 A=$0.35 SELL PUT APR-35 LEN-PG OI=13 B=$1.35 INITIAL NET CREDIT TARGET=$1.10-$1.20 ROI(max)=28% B/E=$33.90 http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=LEN ****************************************************************** - TECHNICALS ONLY - Here are some additional candidates for traders who believe the recent downtrend in broader market stocks will continue. These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about the future outcome of the position. ****************************************************************** ELN - Elan Corporation PLC $49.94 *** Trading Range? *** Elan (NYSE:ELN) is a worldwide pharmaceutical and biotechnology company focused on the development and commercialization of products. Elan focuses on drug delivery systems and has expanded its therapeutic lines with the development and commercialization of new pharmaceutical products for the selected target markets of neurology, pain management and oncology. Elan currently conducts its operations through two primary business units: Pharmaceuticals and Pharmaceutical Technologies. EP is engaged in the discovery, development and marketing of therapeutic products for neurological disorders and pain management, as well as diagnostic services for neurological disorders. EP's principal research and development activities focus on Alzheimer's disease, pain management, epilepsy, multiple sclerosis, Parkinson's disease, dystonias and a number of other neurological disorders. EPT is engaged in the development, licensing and marketing of drug delivery products and technologies. There is nothing fundamentally wrong with Elan. The company has an excellent growth profile within the pharmaceutical industry and is outpacing most of its peers from a revenue and earnings-growth standpoint. In addition, the company has a solid product pipeline consisting of two recently FDA-approved drugs and two more poised for approval. The company is also in the process of successfully transforming from a drug delivery company into a fully integrated pharmaceutical company and this change in product mix will serve to enhance margins. At the same time, most of the profit growth potential appears to be in the distant future and with quarterly earnings due after the April options expiration, there is little reason for the issue to rally in the near-term. In addition, the past history of resistance near $56 (DEC00-FEB01 highs) provides a reasonable cushion for any necessary spread adjustments. Plan to cover or exit the short option on any heavy-volume move through the recent supply area at $55. PLAY (conservative - bearish/credit spread): BUY CALL APR-60 ELN-DL OI=4587 A=$0.35 SELL CALL APR-55 ELN-DK OI=5068 B=$1.05 INITIAL NET CREDIT TARGET=$0.75-0.80 ROI(max)=17% B/E=$55.75 http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=ELN ****************************************************************** PFCB - P.F. Chang's $32.69 *** Low Risk - Low Reward! *** P.F. Chang's China Bistro (NYSE:PFCB) consists of full-service restaurants throughout the United States. P.F. Chang's owns and operates approximately 50 full-service restaurants that feature a blend of traditional Chinese cuisine and American hospitality in a sophisticated, contemporary bistro setting. Its restaurants offer culinary creations, prepared from fresh ingredients with herbs and spices imported directly from China. Chang's menu is focused on select dishes created to capture the distinct flavors and styles of the five major culinary regions of China (Canton, Hunan, Mongolia, Shanghai and Szechwan). The Company's unique restaurants operate under the name of P.F. Chang's China Bistro and Pei Wei Asian Diner. Pei Wei is a limited-service restaurant that caters to a quicker, more casual dining experience than P.F. Chang's China Bistro. This position emerged in a scan of bearish spread candidates with premium disparities and although there is a relatively small credit in the position, the risk is very low as well. Novice traders might consider this play as a way to participate in their first combination position and the well-defined resistance area near the sold strike ($40) will make any potential adjustments relatively easy for those who are new to spread-exit strategies. PLAY (conservative - bearish/credit spread): BUY CALL APR-45 HUO-DI OI=1072 A=$0.25 SELL CALL APR-40 HUO-DH OI=207 B=$0.56 INITIAL NET CREDIT TARGET=$0.43-0.50 ROI(max)=9% B/E=$45.43 http://www.OptionInvestor.com/charts/mar01/charts.asp?symbol=PFCB ****************************************************************** ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1826 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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