The Option Investor Newsletter Tuesday 03-27-2001 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/032701_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 03-27-2001 High Low Volume Advance/Decline DJIA 9947.50 +260.00 9960.900 9649.80 1.31 bln 1941/1111 NASDAQ 1972.24 + 53.75 2004.09 1922.78 1.93 bln 2205/1565 S&P 100 605.58 + 17.13 606.35 587.69 totals 4146/2676 S&P 500 1182.17 + 29.50 1183.35 1150.96 60.8%/39.2% RUS 2000 452.88 + 5.50 452.88 444.39 DJ TRANS 2802.49 + 74.62 2811.20 2724.22 VIX 30.69 - 2.50 33.36 30.09 Put/Call Ratio 0.68 ****************************************************************** Nortel calls in sick, 15000 employees go home! After an excellent day in the markets the warning virus returns to haunt the recovery. You knew it was coming. Everybody has been warning about coming warnings but when they appear the damage is still severe. Nortel, Palm, Disney and Biogen were just several of the big names which warned after the bell. On the Nasdaq, which was positive but still shaky, that takes out three sectors for Wednesday. The Networkers, PC and Biotechs could all see renewed selling. The warnings were expected. Not by name but still expected. Writers for news sources everywhere had already blocked out space for the after the bell news and only needed to pencil in the names of the stocks and begin accumulating the background material. The biggest name to warn was Nortel which said the continuing economic slowdown would require them to cut 15,000 jobs. Worse than the job cuts was the guidance going forward. "No visible guidance is available for the next twelve months." Translation, sales are really bad, getting worse and we don't want to admit how bad it may be or you will really trash our stock. Sorry but NT got trashed anyway. The real damage is not to NT stock but to everyone else that is guilty by association. CSCO, SCMR, JNPR, GLW, JDSU, WCOM, CIEN, etc. Just when the Nasdaq appeared to be gaining speed for a breakout NT may have helped blow out the tires. NT was not the only drag on the Nasdaq in after hours. PALM announced earnings and it was not pretty. The actual earnings beat the street but their guidance going forward was dreary. They expect revenues to only be $300-315 million when analysts were expecting over $500 million. Sales fell by -15% in America and the average selling prices declined by -20%. Let's see, slowing sales and falling prices, not a good recipe for stronger earnings. Needless to say the other stocks in this sector were killed along with PALM which fell from $16 to $10 in after hours. RIMM lost -$5 to $20, HAND fell from $16 to $11. PC stocks like Dell and chip stocks fell in sympathy and the outlook for weaker demand. Problems were not limited to tech stocks but included biotechs as well. BGEN reaffirmed their guidance for the quarter and the year. The stock spiked up several dollars on the good news. Wrong! The news was not good. The guidance they reaffirmed was less than analyst estimates and when reality struck the stock lost those gains and was trading significantly lower in after hours. It is not nice to fool the analysts! The good news, bad news joke for the day was the Consumer Confidence Report. Just when you think everyone has the economy figured out, something always surprises you. The number came in at 117 which was the first gain in the index since Sept-2000 and considerably more than the 104.9 estimate. Investors cheered and began to throw money at stocks. But wait? Yes, the consumer confidence may mean the fear of recession has eased but it also means the Fed just moved from an aggressive rate cut policy to a flat bias again. No more rate cuts? Has the collective consciousness completely spaced this important fact? That would mean investors are ready to look only at earnings as a yardstick for investing. Earnings like PALM, NT, BGEN and company. This proves that nobody can predict market direction routinely. Ask any analyst yesterday what would happen if the consumer confidence blew out the numbers. They would have been falling all over themselves forecasting a serious market drop. Quick to cover their bases today analysts focused on the commitment by the Fed to inject liquidity back into the economy and said consumer confidence was not really that important anyway. Go figure! Investor Warren Buffet made the news today when he said U.S. stocks were still over valued and his companies were seeing increasing impact from the shrinking economy. Still the bond market continued to sell off with both the 10yr and 30yr losing over a full point as investors raised cash to put into equities. The Dow has now bounced +854 points from last Thursday's low of 9106 with almost zero profit taking. Before the NT warning analysts were expecting an assault on 10,000 again on Wednesday. Now the direction is up for grabs. S&P futures are currently down over -7 in after hours and would indicate a possible weak opening tomorrow. With the Nasdaq showing weakness tonight in Biotechs, Networking, Chips and the PC sector every investor will be looking for that magic bounce. This is the bounce that comes after bad news that says, "it was already priced in" and would be the equivalent of a green light for investors still on the sidelines. If these investors believe there is no material risk at these levels then money will start flowing again. Wednesday is shaping up to be a pivotal day in determining if the recent three day rally has any legs. This oversold rally has surprised everyone with the Dow already recovering almost half of the previous drop. Fund managers are now faced with an 800 point gain and wondering if they missed the boat. Any strength from this level could cause them to rush into the market in hopes that the Thursday bottom was really a bottom and not just another new low. Enough about the market let's talk donuts. Krispy Kreme to be exact. I am sorry, I thought all the hype over the last year was just hype and the donut bubble would eventually bust. I must confess, Denver did not have a KREM store. Sure I have eaten them before in Vegas but it is just a donut. A very good donut however. My eyes have seen the light. The first Krispy Krem store opened here in Denver on Tuesday. Opened to rock concert style fanfare. People camped out at the store starting the day before. People parked their cars in the drive through since yesterday morning just to be first when it opened. Really! When it opened at 6:AM this morning there was a contingent of police to handle the hundreds of cars lined up for blocks in every direction. Really! News helicopters were everywhere reporting on the event. My wife saw the news and thought she would run by and pick up some donuts for our Tuesday editors lunch at noon. There were still over a hundred cars in line waiting to get into the parking lot and this was lunch time. I would like to take this opportunity to apologize for the many pointed comments I have made in the past year about KREM. Little did I know it was the equivalent of taking shots at DELL, QCOM or JDSU in their prime. I stand amazed at the market power of KREM. Judging by the volume of donuts sold in Denver today, a breakout over $40 has got to be imminent! Enter passively, exit aggressively! Jim Brown Editor If you have not reserved your seat at the Spring Trading Expo here in Denver on April 5th-9th then you are missing the best seminar we have ever held. This power packed four-day event is structured to fully educate you not only on advanced option strategies but stock analysis as well. This will make you a better and more profitable trader. ************************************ TOPICS and SPEAKERS 3rd Annual Trading Expo April 5th-9th, Denver Colorado ************************************ 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 Sixteen Golden Rules of Failsafe Investing. A powerful session that translates the essence of the book into 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 over 20 professional traders 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********************* 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=1898 ************************************************************ **************** MARKET SENTIMENT **************** Banish The Bear By Austin Passamonte It's official: The bear market is dead! Our bottom is in place and a return to new market highs is only a matter of time & distance from here. Well, first things first. Traders decided that a surprisingly strong consumer confidence report was bad for bonds & good for stocks. The fact that interest rates wouldn't need pruning again real soon suddenly turned bullish for equities. Hmm... we wonder how that concept would have been viewed at this point in time last week or the week prior. Regardless, the markets are never wrong, just traders on the wrong side of markets. Many were all scratching collective heads (their own, not each other's) over the weakness in bonds this morning, struggling SOX, dismal fundamentals etc. and still the markets soared. Were there any clues we could have heeded? Well, Jeff Bailey in PremiereBriefing.com pointed out last Friday and this Monday how money began flowing out of 10-year notes as their yields crept up to recent resistance. We noticed a clear bull pennant forming on the daily charts and it was convincingly broken this morning just past 10:00am. Soaring bond yields mean money is rushing out, and where could it possibly go? Not in techs as we learned but broad-market indexes proved the landing pad today. We happened to notice a surge in S&P 500 and Nasdaq 100 futures contract volume with corresponding drop in open interest just prior to Monday's closing bell over at the Chicago Mercantile Exchange. What would that mean? Considering most of the open interest is short, a rise in volume and drop in OI equates to short covering on a quick & furious scale. Some players with lots of short contracts suddenly decided they wanted out (or flat). Interesting. Molly Evans pointed that out on the charts in last night's IndexSkybox Market Wrap. So we had an inkling, but still... the markets took off from 10:00am and never looked back. Just like that, the pain is over. It Doesn't Make Sense We know some fundamentalists who are beside themselves over such irrational behavior. The exact-same stocks gutted like fish four sessions ago are snapped up like caviar today. Has the current global outlook changed that fast? Not at all; just human emotion remaining the same. The market is not rational, logical or understandable. How could it be? Market action is nothing more than a collective vote of every dollar invested and the human emotion behind it. Trying to quantify that can drive a rational person insane. Less than sane helps one survive a lengthy career in trading, for sure. Where To Next? So where is this collective vote registering now? Decidedly up, unless... Bonds got shredded, short covering turned to panic buying and all systems go. We see the next points of overhead resistance likely to cause upward action's pause for the moment: Dow: 10,100 SPX: 1192 OEX: 611 NDX: 1786 QQQ: 44.50 Comp: 2017 These 20 day moving averages and points of recent resistance may be reached soon as tomorrow and cause consolidation from there. That may be a challenge, especially for the techs as a few minor warnings ripple through the marketplace. No telling what impact that will have on tomorrow's overall action until we get past 10:00am or later. The Market Is Flat! Actually, Nasdaq indexes have been consolidating for the past two weeks with very little movement on their part. Tech bulls who recall past glory may long for the days of big movement in the Nasdaq markets, but it could be a long wait for such to return. We are gradually seeing an avoidance of techs and most of the action taking place in other broad market sectors. Please understand we do not bash the Nasdaq here, but simply state the obvious: most of their components have fallen and cannot get up in our lifetime. That means a new crop must materialize and emerge to lead techs forward from here. Yahoo or Inktomi at $300? Qualcomm at $800? Never again while we exist to trade. The Dow has gained 840 index points from it's low last Thursday, while the NDX is up a paltry 135 and the COMPX 172. Those used to be gap-open moves back in the day, not 3 1/2 full session's movement. Heck, the SPX itself is up 100+ points to almost surpass the NDX itself! We elaborate here to make a very important point: Nasdaq are NOT the market. For a very brief moment in time that was true and could happen again in the future but it won't be tomorrow. Traders must be prepared to follow the money and right now that flows within other sectors. Bye-Bye Bear? Sure, if no more big caps or blue chips warn. If no banks or funds actually fail, if the energy crisis solves itself and the Fed continues to cut interest rates at every turn the bottom is behind us. It will be awhile before the prevailing downtrend is broken and bull market resumes. A common occurrence in bear market rallies is the fact that no one believes in them while they unfold, and everyone starts to relax & turn bullish just when the move is over. It's the constant change and whipsaw action that makes trading such a challenge during these times. We still expect further tests of recent market lows somewhere in the medium future. Ultimate bottoms do not usually form when everyone stares in anticipation. They usually happen when no one really cares anymore. Meanwhile, we should see tradable action in both directions as volatility reigns. Long-term plays are out of the question right now. Distant-month puts get trashed on spikes like this and distant-month calls against the trend is not a recipe for fiscal success, either. Short-term plays, small amounts of capital, defined profit targets and especially exit points are paramount these days and into the future from here. Trade the daily trend with care and seize modest profits when offered! ***** VIX Tuesday 03/27 close: 30.69 VXN Tuesday 03/27 close: 66.60 30-yr Bonds Tuesday 03/27 close: 5.46% 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. A reading above 10.00 is considered viable resistance or support respectively within that general strike price range. Monday (03/27/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 645 - 630 6,414 2,323 2.76 625 - 610 7,477 2,074 3.61 OEX close: 605.58 Support: 600 - 585 9,648 7,294 .76 580 - 565 2,650 9,344 3.53 Maximum calls: 600/ 3,981 Maximum puts : 520/ 7,994 Moving Averages 10 DMA 587 20 DMA 611 50 DMA 659 200 DMA 734 NASDAQ 100 Index (NDX/QQQ) Resistance: 52 - 50 106,050 14,626 7.25 49 - 47 174,382 41,268 4.23 46 - 44 194,342 63,965 3.04 QQQ(NDX)close: 43.25 Support: 42 - 40 122,183 102,738 .84 39 - 37 11,071 73,345 6.63 36 - 34 7,834 59,201 7.56 Maximum calls: 45/120,826 Maximum puts : 43/75,480 Moving Averages 10 DMA 42 20 DMA 44 50 DMA 53 200 DMA 76 S&P 500 (SPX) Resistance: 1250 15,912 16,959 .94 1225 7,111 6,957 1.02 1200 12,304 14,303 0.86 SPX close: 1182.17 Support: 1175 5,656 6,907 1.22 1150 13,454 15,966 1.19 1125 1,053 7,787 7.40 Maximum calls: 1275/19,775 Maximum puts : 1100/19,443 Moving Averages 10 DMA 1151 20 DMA 1193 50 DMA 1273 200 DMA 1382 ***** CBOT Commitment Of Traders Report: Friday 03/23 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 S&P 500 (Current) (Previous) (Current) (Previous) Open Interest Net Value +70479 +78245 -69490 -94842 Total Open Interest % (+38.13%) (+29.35%) (-9.63%) (-11.74%) net-long net-long net-short net-short DJIA futures Open Interest Net Value -2516 -1981 -2696 -1491 Total Open interest % (-19.73%) (-15.88%) (-11.17%) (-4.35%) net-short net-short net-short net-short NASDAQ 100 Open Interest Net Value +3555 -8928 Total Open Interest % (+21.46%) (-12.57%) net-long net-short What COT Data Tells Us ********************** Indices: For the second week in a row the Commercials have reduced their net-short positions on the S&P 500. In addition, Commercials have added substantially to their net-short positions on the DJIA. Currencies: Commercial traders continue to build net-long positions in the Japanese Yen Metals: Commercials in the silver market are near a five-year net long extreme. 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 03/20 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/032701_1.asp *********** OPTIONS 101 *********** Dollar Cost Averaging By David Popper One of the oldest and most highly recommended methods of investing espoused by investment professionals to the public is the concept of dollar cost averaging. The idea behind dollar cost averaging is that from their view, it is impossible to time the market. Therefore, it makes sense not to become fully invested all at once, but rather to put in a fixed amount monthly. When the market is low, you will buy more shares and when the market is higher, you will buy less shares. In this way, an investor can take advantage of market volatility without having even the faintest understanding of technical analysis. Though long-term "buy and hold" is not my cup of tea, I believe that lessons can be learned from our mutual fund long-term holding friends. When one buys mutual funds through the dollar cost averaging method, two safety features become built into the investment plan. The first is diversity of holdings. Obviously, the mutual fund holder will not be exposed to the risks or rewards of a highly concentrated tech portfolio. The fund holder will be less lucrative in the good times but it will be much safer in the poor times. The second safety feature is diversity of timing. If one bought a slate of mutual funds in March 2000, that investor would be in trouble. Those same funds invested incrementally over the next 12 months would have yielded a substantially better result. What if traders could employ these two safety features and still obtain excellent returns? It only makes sense to employ as many safety features into a trading method as is possible, while still achieving a trader's goal. As a matter of fact, most serious books on trading spend most of the time on discipline and safety. Without trading disciplines that protect a trader during a downturn, an account will surely blow up. So, back to the question, how can a trader employ these two safety features? I will try to outline a plan below: 1. TRADE ONLY BASKETS OF STOCKS WHICH WILL ALLOW COVERED CALLS WRITTEN AGAINST THE POSITION. There is safety in diversity. For example, one could trade the QQQ (NASDAQ:QQQ). The QQQ is a weighted composite of the top 100 NASDAQ stocks, excluding financial stocks. It covers a variety of sectors. Therefore, when one stock falls out of bed, the QQQ doesn't move much. There is the protection of diversity. There are other trading vehicles. Currently, many are products developed by Merrill Lynch and are listed on the American Stock exchange's website. These products allow you to be represented in a sector without being responsible for picking an individual stock. The holders typically include twenty or more positions which represent stocks in the sector. You can write covered calls against the QQQ or Holders. You can also write covered calls against certain index funds representing the S&P 500. 2. DOLLAR COST AVERAGE YOUR PURCHASES AND WRITE CALLS OUT 3 MONTHS. No matter what you may have purchased over the past year, unless you are an excellent daytrader with the time to watch the market on a tick by tick basis, chances are your positions are underwater. If you were to divide your assets into four equal parts and begin to buy the QQQ and write a covered call out 3 months, your premium would be between 12 to 15%. You would only have 25% of your portfolio at risk. If the market dropped, you would have serious protection. If the market ran up, so be it. The next month, you would employ another 25% of your assets. This would be an entirely different play, even if still using the QQQ because the entry point into the stock and the strike price of the option would be very different. Now you have 50% of your assets employed. On the third month, you would again repeat the process and would have 75% of your assets in the market. At the end of the third month, the original options on the first 25% position would expire and so that same 25% would be redeployed and so forth. After three months, there would be an option cycle expiring every month and thus a monthly premium would be captured. You would be able to stay in sync with the market because you are never fully invested and so you always have some flexibility. You may have noticed that the final 25% was never discussed. In my opinion, there should always be some cash in a portfolio for flexibility and for emergencies. That 25% would stay in cash in my portfolio. In real life, how would this work? For simplicity's sake, let's use $100,000. On month one, if $25,000 of QQQ was purchased, and calls were written for the July expiration, I could expect to recover a premium of $3000 to $3750. At May expiration, I would employ the next $25,000 and write August calls and receive a similar premium. At the June expiration, I would write the September calls. At the July expiration, the first calls would have expired and I can deploy that 25%. After the initial startup, I would be receiving between $3000 and $3750 monthly, while keeping $25,000 in reserve. True if the market implodes, even this method will not save you. Even mutual funds are down now. You will be hurt less, however, while still drawing a nice monthly premium. ************** TRADERS CORNER ************** A Further Look at Valuations: Semiconductors By Scott Martindale According to Lawrence Kudlow on CNBC last week, a signal of good growth and liquidity would be a normal yield curve and a $30 bounce in gold prices, and these should be the objectives of the FOMC. Do you think they are? The Fed has certainly been slow to correct their previous overly aggressive rate hikes. The good news is that rates are gradually rolling back, the Fed is creating money faster than ever, and they are encouraging banks to lend aggressively. Since 1921, there have been 13 cases when the Fed has eased rates three times. The market has gained an average 28.7% to its high in the 12 months thereafter. In 1998, the Nasdaq gained 77% in 10 months after the Fed cut a third time. Similar relief rallies occurred in 1975, 1982, 1985, 1991 and 1996. When the Fed gets serious about "saving" the economy, you can generally count on them to succeed. Furthermore, keep in mind that the Nasdaq's outsized weighted- average P/E you often hear about is a bit misleading since it is skewed by a few unprofitable big names. But the median P/E (equal number of stocks above and below) is only around 30, which implies a PEG ratio in the range of 1.5 - 2.0 -- certainly not outrageous for an index that tracks a lot of young, high-growth companies. The only problem has been finding enough players (i.e., buyers) to participate. Some of them are starting to gather, including some friends of mine who have stayed in cash for months. John Bollinger was on CNBC today telling us that the NYSE advance/decline line is rising in a way that is not indicative of bear market behavior. So although the Nasdaq has experienced a nasty bear, NYSE stocks have not. These companies are the primary buyers of new technology, so if monetary and fiscal policy succeed in preventing a recession, we may have seen the bottom in the Nasdaq. Two weeks ago, after one of the recent short-lived rally attempts, I mentioned that I was quite impressed with the day's performance of BEA Systems (NASDAQ:BEAS), Human Genome Sciences (NASDAQ:HGSI), Juniper Networks (NASDAQ:JNPR), Mercury Interactive (NASDAQ:MERQ), and Ballard Power (NASDAQ:BLDP). Despite relatively high valuations, I observed that they are fast growers and may be some of the bigger gainers in the next sustained rally. How are they doing in this current rally? They are all either holding steady or rallying strongly. I'm beginning to think that this might be a nice little basket of high-potential stocks to hold. Nevertheless, I'm staying cautious until any tax selling (raising cash to pay 2000 taxes) over the next two weeks is over. In fact, I'll be looking to sell covered calls this week into strength on some of my long-term positions. Finally, I'd like to talk again today about valuations, particularly in the sector that is the engine of all new technologies and the leading indicator of a recovery - semiconductors. Let's compare a random sampling of some players in this sector with respect to their historical volatility, P/E (TTM -- trailing 12 months), P/E (estimated fiscal year 2001), and PEG (ratio of P/E to consensus estimate of 5-year earnings growth rate). [Listed in descending order of market cap.] Volat. P/E(TTM) P/E(2001) PEG Texas Instruments (NYSE: TXN) 78% 21 36 1.63 Applied Materials (NASDAQ: AMAT) 81 19 26 1.05 STMicroelectronics (NYSE: STM) 73 21 21 0.94 Xilinx (NASDAQ: XLNX) 83 53 29 1.07 Broadcom (NASDAQ: BRCM) 136 0 67 1.37 Applied Micro (NASDAQ: AMCC) 153 0 38 0.89 PMC-Sierra (NASDAQ: PMCS) 160 62 40 0.95 QLogic (NASDAQ: QLGC) 151 42 26 0.73 Int'l Rectifier (NYSE: IRF) 123 21 17 0.64 TriQuint Semi (NASDAQ: TQNT) 114 21 28 0.88 Elantec Semi (NASDAQ: ELNT) 180 28 26 0.74 Ibis Tech (NASDAQ: IBIS) 145 0 241 48.0 Many consider AMAT to be the sector leader because of its dominant position in wafer fabrication equipment and spare parts. The SOX index has consolidated a bit this week after last week's run-up, but if it's true that technology cannot recover without the chip sector leading, and if it's true that AMAT is the flagship for the chip sector, then it should lead any resurgence in the Nasdaq. However, AMAT, TXN, STM, and XLNX, probably won't be the biggest percentage movers due to their lower historical volatilities. For higher volatility, and thus greater potential moves, you can look to the mid and lower cap stocks, whose volatilities reach well above 100. The call options are more expensive, but the potential is greater, and of course the premiums for put writing are more lucrative. Almost all on the list have reasonable valuations. My favorites: AMAT for its low business risk and general market dominance, IRF because of its market position in power chips, and AMCC because of its strength in communications chips. *************************ADVERTISEMENT********************* 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. For information on his extremely accurate Annual Forecast Model for your own viewing, click here: http://www.sungrp.com/tracking.asp?campaignid=1891 ************************************************************ 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: ***** NEWP $35.31 -4.90 (-4.79) Up until this afternoon, NEWP's stock had been acting fairly well, making a series of higher lows and higher highs over the past few trading sessions. The stock started out today trading higher but just after lunchtime, NEWP fell sharply on accelerating selling volume. Rumors that large customer Corning (GLW) had cancelled orders may explain the drop, but the CEO came out to say that there were no order cancellations and reaffirmed guidance going forward. While NEWP attempted to bounce near the end of the day, the damage was already done. Closing below our stop price of $37, we are taking our money off the table. PUTS: ***** BMC $22.13 +1.88 (+1.54) Throughout this past month, the 5 and 10-dma have acted as formidable resistance for the stock during its recent decline. Yesterday, the company announced a multi-year customer win in Computer Sciences Corporation, and while the stock did close down for the day, it's short-term moving average provided support along with the psychological $20 mark. Today, BMC gained over 9 percent in sympathy with a rallying market. While volume was low, less than 30% of ADV, the move suggests that momentum from the downside may now be in the process of reversing. With that, and the close above our stop price of $21, we are dropping coverage of this play. ************************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=1911 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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The Option Investor Newsletter Tuesday 03-27-2001 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/032701_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=1899 ************************************************************ ******************** PLAY UPDATES - CALLS ******************** ELNT $29.94 -0.81 (-1.75) Today, the leader in high-performance analog ICs and Central Office DSL line drivers introduced a new family of CPE line drivers to their comprehensive suite of solutions. Although the news didn't give ELNT a much-needed boost of adrenaline, the share price nonetheless towed the line at the $29 and $30 support. A high-volume move off the 5-dma ($29.54), in conjunction with a flurry of activity above the $32 level, implies future strength and signals that additional entries may be the cards. If you prefer more conservative strategies, wait for the big breakout through $33. Bullish action to the upside of overhead resistance at the 50-dma ($35.50) would be the icing on the cake; particularly if you have open positions. In light of the current consolidation following last week's run-up, we've revised our closing stop to $29 to safeguard against weakness. And coming up after the close of trading on Friday, ELNT will replace Morrison Management Specialists (MHI) in the Standard & Poor's SmallCap 600 Index. VRSN $37.63 +2.38 (+4.25) One of the reasons we initiated coverage on this highly aggressive call play yesterday was due to the favorable risk/reward ratio. We recommended high-risk entries on bounces off the 5 and 10-dma. Coupled with a closing stop at $32, and the strong possibility of a bounce with a clear path to $37, the potential gains appeared to outweigh the inherent risks. Nimble traders who executed this play on a bounce off short term moving average support (with the 5 and 10-dma converged just above $34.50) this morning were amply rewarded, as the stock used this level as a launching pad to end the day up 6.74 percent on above average volume. At this point, it appears that the bears have drawn their line in the sand at $39. A bullish surge above this point should give conservative traders a potential entry while the more aggressive may target pullbacks to support at $37, $36, $35 and $34.50. Correlate entries with strength in sector sisters CHKP and RSAS. Please note that we have adjusted our closing stop price up, from $32 to $34. PMI $61.19 -1.02 (+1.31) On Monday, PMI broke out above heavy resistance at $61, with a burst of momemtum which carried the stock all the way up to $63.95, before profit taking ensued. Traders who took positions last week at proper entry points could have been richly rewarded by this move. On Tuesday, PMI consolidated just below the 10 dma of $61.49, establishing support at a new higher low. A nice smooth line connects the higher lows and higher highs since March 14, and PMI has moved back into this channel on Tuesday, after breaking out to the upside. At this point the most likely scenario would seem to be a move up to the next resistance level at $62. Traders could take positions at the current level in anticipation of such a move. More conservative traders might want to wait for another hyperactive breakout like the type PMI experienced on Monday. It looks like the insurance sector, IUX.X, is ready and able to lead the way, as the sector surged up toward the close with a bullish candlestick pattern. Remember that PMI has an average daily volume of only 360,000 shares, so a little volume goes a long way. We are moving stops to $60, so close positions if PMI closes below the $60 level. ******************* PLAY UPDATES - PUTS ******************* AETH $15.00 -0.56 (-1.44) Things continue to be quiet on the news front for AETH and with that, the stock has resumed it slow and steady descent. Opening near resistance yesterday from the 10-dma, the stock drifted lower to also close below its 5-dma. While volume was light, the action was most certainly bearish. Today, in the face of a rising NASDAQ, shares of the wireless software maker gave up another 3.61 percent on over 1.3 times the ADV. This move came despite positive comments from US Bancorp Piper Jaffray, who re-iterated their Strong Buy rating and $100 price target. Closing right at key support at $15, continued selling pressure tomorrow could allow for an entry on weakness, provided that peers CMVT and OPWV confirm downside movement. Aggressive entries may be gained on failed rallies at the 5 and 10-dma (now at $15.82 and $16.68 respectively), along with our closing stop price of $17. When considering such an entry, wait for selling volume to confirm the rollover before making a play. MDT $45.44 +1.43 (-0.44) MDT traded in a very narrow range on Monday, from $44.30 to $45.09, after reiterating its previously forecast guidance for earnings growth in the mid teens. On Tuesday, MDT rallied to $46.50 in the morning, probably due to the excitement in the health care sector due to Johnson & Johnson's takeover of Alza. By mid afternoon the excitement wore off, and MDT rolled over from $46 to $45.44, confirming the series of lower highs established early in March at major resistance levels of $50, $48, and $45.44. Volume increased on the downside, indicating that sellers took control of the situation. The medical products and services sector performed well today, but it is too early to confirm a true trend, as this may have been a reaction to the J & J Alza deal. Traders can take positions on a roll over from current levels, which would most likely lead to support at $44. Conservative traders might want to wait for a break below $44 on heavy volume, which could lead to the next support level at $42. Watch others in the sector like BAX and BDX, and move stops to $46. We will close the position if MDT closes above $46. OPWV $23.00 -1.84 (-1.56) OPWV bucked the trend on one of the strongest market rallies we have had in weeks. While OPWV moved in a vary narrow range between $24.56 and $25.49 on Monday, OPWV experienced a sharp drop to $21.15 on Tuesday morning, and a subsequent rally to a lower high consistent with the two week pattern. Tuesday's selling occurred on heavy volume of over 7 million shares, nearly 15% higher than the average daily volume, which sets OPWV in a precarious position going forward. If the markets experience a pullback or any profit taking in the next couple of days, OPWV is likely to roll over from the $23 level to the next support level at $21. The near term outlook for OPWV seems particularly bleak, considering the fact that Robertson Stephens downgraded the stock from a strong buy to a buy on Monday. While analyst Marianne Wolk states that OPWV has a $300 million backlog of business, the company is experiencing some near term weakness in messaging due to the difficult macro environment. Aggressive traders could take positions at current levels, particularly if others in the sector such as CMVT are weak. Conservative traders could wait for a break below $22.62 on strong volume, particularly if accompanied by weakness in the broad indexes. We are keeping stops at $26, so close the position if OPWV closes below this level. ENE $60.46 -1.02 (+1.06) Waiting for conviction in the middle of another powerful broad market advance, ENE did manage a slight drop today. The premise behind our play is the descending wedge that has been developing over the past 6 weeks. With the descending trendline now resting at $61.75, we have a clearly defined level at which to initiate new plays should the broad market run out of gas in the days ahead. The DJIA has now recovered approximately half of its staggering loss from last week, and is only about 60 points from major resistance at 10,000. Should the bears return, ENE is likely to head further south, pressured by the descending trendline and the 10-dma ($60.65). A rollover from either of these levels looks attractive for aggressive traders to initiate new positions, while the more conservative approach will be to wait for shares to fall through the $59 intraday support level before taking a position. Given the lack of an upside bias today, we are adjusting our stop down to $62. LLL $77.48 +2.48 (+2.48) Observant bears got an attractive entry point into our LLL play midday today, as the stock rolled just below $79, right at the 10-dma ($78.81). Propelled higher with the broader market in the morning, bulls had to have been disappointed by their stock's inability to hold onto all its early gains. In defense of the bulls' positions, LLL did still manage to close positive for the day, just above the $77 support level, helped by a buying surge near the close. The volume picture was actually pretty bullish today, as the daily volume came in nearly 70% above the ADV, with most of it on the buy side. So where do we go from here? Aggressive entries can still be considered on a failed rally below our $80 stop. More conservative traders will want to see the $77 intraday support level violated on strong volume before taking a position. Keep an eye on the $73 level, as it has managed to provide support over the past week. This is a good point to take profits or at least tighten up your stops. VRTS $54.92 +4.86 (+1.04) Avoiding the drop list by a whisker tonight, VRTS had quite a bullish day indeed. Gaining nearly $5 on the session, our play continued yesterday's recovery on solid volume, ending the day just a fraction below our $55 stop. Either the stock is poised to break higher, or we are setting up for an attractive entry point as the bulls are turned back near the $55 resistance level. Yesterday's dip below $50 put the first chink in that level as support, and renewed Technology selling tomorrow could be just what we need to drive VRTS to new lows. Earnings warning season is upon us, and as companies step forward with their confessions, (we've already heard from NT, PMCS), Technology stocks are likely to remain under pressure. This continued bearish sentiment is just what conservative investors will be looking for in order to initiate new positions on a drop below support. Target a drop below $52.50, and then $49 for new entries. Watch the Computer Software index (GSO.X) for confirmation of weakness in the sector before playing. ************************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=1912 ************************************************************** ************** NEW CALL PLAYS ************** AGGRESSIVE: ERTS - Electronic Arts Inc. $54.75 +3.00 (+2.75 this week) Electronic Arts is the leading independent interactive entertainment software company that develops, publishes and distributes products for personal computers and advanced entertainment systems such as the PlayStation and Nintendo 64. Since its inception, EA has garnered more than 700 awards for outstanding software in the U.S. and Europe. Combining such diverse media as video, photographic images, computer graphics, and stereo sound with the work of professional story writers and Hollywood film directors, EA is breaking traditional boundaries and evolving into a 21st century high-technology entertainment company. It's been said in real estate that the secret to making money is location, location and location. As the leader in the gaming software space, ERTS has found itself in the right place, at the right time and owning some of the hottest properties. In the New Economy, the world of video games is undergoing a fundamental change. Where once, users contented themselves with blasting computer-controlled sprites, the Internet has taken gaming to a whole new level, connecting users all over the world in interactive competition. What's more, the demographic for computer-based entertainment has expanded. No longer the sole domain of children and teenagers, video games have captured (or some would suggest, retained) a wider and more mature audience, with penetration especially evident in the sweet spot in the ages of 20-30. With well-known brands such as Origin Systems (known for their Ultima series, which has been in existence for over a decade) and bestseller EA Sports under their control, the company appears poised to take advantage of newer and higher-powered gaming consoles (including the upcoming X-Box from Microsoft) coming later this year. A breakout above formidable resistance at $55 on strong buying volume could provide conservative traders with an entry on strength. From there ERTS could challenge its 52-week high, just below resistance at $58. Entries on pullbacks may be found below, with support from the 5 and 10-dma, at $51.95 and $51.01 respectively. Just be aware that we are placing our closing stop right below the 10-dma, at $51. When making an entry, keep an eye on rivals ATVI and THQI to confirm upward movement. BUY CALL APR-50 EZQ-DJ OI=2810 at $7.50 SL=5.25 BUY CALL APR-55*EZQ-DK OI=2011 at $4.50 SL=2.75 BUY CALL APR-60 EZQ-DL OI=1316 at $2.50 SL=1.25 BUY CALL MAY-55 EZQ-EK OI= 67 at $6.75 SL=5.00 BUY CALL MAY-60 EZQ-EL OI= 135 at $4.63 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=ERTS QCOM - Qualcomm Inc. $59.88 +3.25 (+1.00 this week) Qualcomm Incorporated is a leader in developing, delivering, and enabling innovative digital wireless communications products and services based on the Company's digital technologies. As the pioneer of Code Division Multiple Access (CDMA), the technology of choice for next-generation wireless communications, Qualcomm continues to lead the industry in the development of voice, data, and wireless Internet products and solutions. Qualcomm is also transforming industries through its various satellite businesses and technology partnerships. Since finding support at the $57 level in the middle of March, shares of CDMA wireless networking giant Qualcomm have been drifting up, as can be seen in a series of higher lows and higher highs. A large capital expenditure on the part Verizon Wireless (VZ) to the tune of $5 billion helped to boost QCOM's share price recently, as expectations that VZ would adopt CDMA2000 ignited investor interest. The company has also been announcing and showcasing a host of new products aimed at promoting its 3G wireless architecture. News today that Korea is favoring QCOM's solution for their next generation wireless deployment program combined with a good day for the NASDAQ resulted in a gain of 5.75 percent on over 1.3 times the ADV. If QCOM can clear strong resistance at $60 with conviction, this could provide more cautious traders with an opportunity for entry. Pullbacks intra-day to support from the 5 and 10-dma (near horizontal support at $58 and $55.63 respectively) may allow higher risk players to take a position. Just make sure that the stock closes above our protective stop price, placed at $57. With QCOM being one of the larger stocks in the NASDAQ by virtue of its market capitalization, keep track of changes in the NASDAQ 100 (NDX, QQQ), as movement in the large cap Tech stocks could provide a clue as to where QCOM could move next. BUY CALL APR-55 AAO-DK OI=5357 at $ 8.38 SL=6.00 BUY CALL APR-60*AAO-DL OI=9458 at $ 5.25 SL=3.00 BUY CALL APR-65 AAO-DM OI=8744 at $ 3.13 SL=1.50 BUY CALL MAY-60 AAO-EL OI= 448 at $ 7.75 SL=5.75 BUY CALL MAY-65 AAO-EM OI= 837 at $ 5.75 SL=4.00 http://www.premierinvestor.net/oi/profile.asp?ticker=QCOM M0 - Philip Morris Cos $47.23 +1.98 (+3.83 this week) Philip Morris Companies is the world's largest tobacco firm, controlling about half of the US tobacco market. The Marlboro name is their most valuable brand; although Benson & Hedges, Parliament, and Virginia Slims brands have made their mark across the globe, too. The company also derives a large proportion of its profits from its Kraft food and Miller beer subsidiaries. Its Kraft Foods unit is the #1 food company in the US and #2 throughout the world. Some household brands that you're likely familiar with include Jell-O, Oreo, Ritz, Kool- Aid, Maxwell House, and Post cereal. If there ever was a market to pick and choose with care, it's this one. Investors are treading softly as key economic data effectively plays havoc with market sentiment and their pocket books! And despite the dirt-bottom prices of the tech stocks, it now appears more fashionable (and safe!) to invest in the slower growing, or so-called value stocks, rather than the high- flying growth stocks. As it is, MO has been making a strong charge off last Thursday's $41.47 low. The building intensity, especially if accompanied by a sustaining rally on the DOW, is likely to carry the share price back above the $50 level. A challenge of March 9th's 52-week high ($52.04) would be optimum. For now, we're looking for the strong uptrend to remain intact; and importantly, for MO to make a clean break of the immediate resistance at the 30-dma line, currently tracing the $47 level. A convincing bounce off the $45 support on a pullback or a direct move off $47 invites the more risk-oriented traders to jump into the developing momentum - wait until after amateur hour! Consider taking profits as MO approaches the $50 resistance. Locking in gains early protects against getting caught in a sharp rollover. Remember, there's still money to be made if MO moves 3 to 5 points over the short-term and then cycles back again for another round. The company is confirmed to report earnings on April 17th, so there's also the possibility of this momentum play developing into an earnings run. It's not likely there'll be any earnings surprises from the company. And today, CEO Geoffrey Bible reiterated that Phillip Morris Cos still isn't interested in separating its tobacco business from its food and beverage units; notwithstanding investor pressure. Instead earlier in the month, Kraft filed with the SEC to raise as much as $5 bln in an IPO, the third-biggest such filing in U.S. history - Phillip Morris would maintain over 80% of the new company. BUY CALL APR-40 MO-DH OI= 852 at $7.60 SL=5.25 BUY CALL APR-45*MO-DI OI= 8050 at $3.40 SL=1.75 BUY CALL MAY-40 MO-EH OI= 277 at $8.20 SL=5.75 BUY CALL MAY-45 MO-EI OI= 443 at $4.50 SL=2.75 BUY CALL MAY-50 MO-EJ OI= 1346 at $2.00 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=MO ************* NEW PUT PLAYS ************* AGGRESSIVE: DPMI - DuPont Photomasks Inc. $47.01 -3.24 (-2.97 this week) DuPont Photomasks leads the photomasks industry with one of the most technically advanced manufacturing networks. The company supplies photomasks to the global semiconductor industry from 13 strategically located facilities in North America, Europe, and Asia, and derives 25 percent of its current revenues from leading edge photomasks with .18 micron or smaller design rules. DuPont photomasks also produces and supplies photoblanks and pellicles. Headquartered in Round Rock, Texas, DuPont Photomasks posted worldwide sales of approximately $328 million in fiscal 2000. DPMI shareholders were subjected to a wild roller coaster-type ride with their shares over the last several months, as DPMI surged from $38.82 on November 30, to a high of $88.80 on February 15. Subsequently, the stock failed to rally past $84.68 on March 7, and made an extraordinarily steep and sharp plunge to $40 on March 22, losing over half of its market capitalization in two weeks. While DPMI reported record second fiscal quarter earnings on January 23 of 64 cents per share, compared with 27 cents the year ago quarter, DPMI's CEO Peter Kirlin stated that photomask unit demand is principally driven by new product designs, and tends to lag the semiconductor industry by six to eight quarters. This news was not received well by investors, as DPMI may not yet have seen the impact of slowing demand and inventory buildups in the semiconductor sector. On March 19, DPMI cut their guidance for the third fiscal quarter by over 16%, stating that their earnings should be in the range of 53 to 66 cents, compared to the analysts' expectations of 79 cents per share, due to slowing demand in the semiconductor industry. While some analysts think that the inventory correction in the SOX.X could be over in the next two quarters, DPMI might not have seen the worst of it, as their demand lags the action in the chip sector. DPMI is now deeply below the 200 dma of $63.45, and the 50 dma of $70.86. Over the last few days, DPMI has rolled over from its 10 dma of $50.15 to find temporary support at the $47 level. Aggressive traders could take positions at current levels if accompanied by weakness in the SOX.X A break below $45 on heavy volume would be very bearish, and another good entry point. We are setting stops at $51, so close positions if DPMI closes above this level. BUY PUT APR-45*DUD-PI OI= 77 at $3.00 SL=1.50 BUY PUT APR-40 DUD-PH OI-154 at $1.45 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=DPMI GENZ - Genzyme General $89.51 +2.56 (+5.26 this week) Genzyme General, a division of Genzyme Corporation, is focused on developing innovative products and services to solve major unmet medical needs. GENZ has nearly 600 products and services on the market and a strong pipeline of therapeutic products for the treatment of rare genetic diseases. The Diagnostics business unit develops, markets and distributes in vitro diagnostic products and genetic testing services. With a solid, profitable revenue base, this research is intended to maintain the company’s high rate of earnings growth. We may be a bit early to this party, but we are looking for a rollover in shares of GENZ to provide us with an aggressive put play over the next several days. After bottoming with the broader Biotechnology index (BTK.X) last Thursday, the stock has bounced from a low of $72 to a just north of $90 in today's session, a 25% move in less than 4 days. In the current market environment, it seems the stock has come too far too fast, and with the looming resistance at $90-91, the bears are bound to come calling soon. Getting the current recovery underway last Thursday was Goldman Sachs, upgrading the stock from Market Perform to Market Outperform. Whether the upgrade had anything to do with the recent gains, it seems safe to say that the stock has exhausted that fuel by now. Volume has dropped back to the ADV, and aggressive traders can consider new positions as the stock heads south from current levels. We are playing this one with tight stops, set at $91, as a move above that level will indicate the rally still has legs. Keep an eye on the BTK.X, as weakness in the broader sector is likely to lead GENZ lower. More conservative players will want to wait for weakness to develop before playing and a drop through the $86 support level (just above today's gap open) will be the trigger to watch for. BUY PUT APR-90*GZQ-PR OI=675 at $6.00 SL=4.00 BUY PUT APR-85 GZQ-PQ OI=182 at $3.90 SL=2.50 BUY PUT APR-80 GZQ-PP OI=471 at $2.45 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=GENZ ********************* PLAY OF THE DAY - PUT ********************* VRTS - Veritas Software $54.92 +4.86 (+1.04 this week) As an independent supplier of storage management software, VRTS develops and sells products that protect against data loss and file corruption, allowing rapid recovery after disk or computer system failure. The company's products provide continuous data availability in clustered computer systems with shared resources. This enables IT managers to work efficiently with large file systems, making it possible to manage data distributed on large computer network systems without harming productivity or interrupting users. VRTS provides products for most popular operating systems, including UNIX and Windows NT, as well as a full range of services to assist its customers in planning and implementing their storage management solutions. Most Recent Write-Up Avoiding the drop list by a whisker tonight, VRTS had quite a bullish day indeed. Gaining nearly $5 on the session, our play continued yesterday's recovery on solid volume, ending the day just a fraction below our $55 stop. Either the stock is poised to break higher, or we are setting up for an attractive entry point as the bulls are turned back near the $55 resistance level. Yesterday's dip below $50 put the first chink in that level as support, and renewed Technology selling tomorrow could be just what we need to drive VRTS to new lows. Earnings warning season is upon us, and as companies step forward with their confessions, (we've already heard from NT, PMCS), Technology stocks are likely to remain under pressure. This continued bearish sentiment is just what conservative investors will be looking for in order to initiate new positions on a drop below support. Target a drop below $52.50, and then $49 for new entries. Watch the Computer Software index (GSO.X) for confirmation of weakness in the sector before playing. Comments VRTS had difficulty with the $55 level toward the end of the session, which also happens to be our stop loss. This was the level that VRTS could not conquer on Monday and from where the shorts took control. Given the negative NASDAQ sentiment after the NT and PALM warnings, we would look to enter puts on a break of $53 or $52. Downside target will be $50. If VRTS finds a bid tomorrow for some reason, watch for rollovers from $55 for entry. BUY PUT APR-55*VIV-PK OI=6495 at $6.20 SL=4.50 BUY PUT APR-50 VIV-PJ OI=6627 at $3.80 SL=2.25 BUY PUT APR-45 VIV-PI OI=3810 at $2.25 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=VRTS ************************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=1921 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ The Recovery Continues... Stocks rallied today in the wake of favorable consumer confidence data and optimism about the future of the economy. Monday, March 26 Industrial stocks rallied today helping the broader market post favorable gains as the recent recovery in stocks continued. The Dow was up 182 points at 9,687. The NASDAQ finished 10 points lower at 1,918 amid a new group of profit warnings in the chip sector. The S&P 500 closed up 12 points at 1,152. Volume on the NYSE was relatively light at 1.11 billion shares, with winners beating losers 2,007 to 1,071. Activity on the NASDAQ was also limited at 1.7 billion shares exchanged. Technology advances led declines 2,004 to 1,635. In the U.S. bond market, the 30-year Treasury fell 29/32, pushing its yield up to 5.36%. Sunday's new plays (positions/opening prices/strategy): Worldcom (NASDAQ:WCOM) J0220/J20C $2.69 debit calendar Biochem (NASDAQ:BCHE) APR40C/35C $0.43 credit bear-call Intl Rectifier (NYSE:IRF) APR30P/35P $0.55 credit bull-put Hnc Software (NASDAQ:HNCS) APR20C/20P $3.75 debit straddle Capstone (NASDAQ:CPST) APR35C/22P $0.50 debit synthetic The upside activity in the market made it difficult to enter the bullish combination positions at the suggested prices. WCOM moved higher near the open and there was little opportunity to enter the calendar spread (with a simultaneous order) at the target debit. A similar dilemma occurred with CPST, but traders who participated in the synthetic play earned a $1.50 profit by the end of the day. BCHE and IRF offered favorable opening credits and the HNCS debit straddle also traded at (and below) the target entry price in the afternoon session. Portfolio Activity: Today's broad recovery in industrial stocks was a welcome event for the market and investors are hopeful that the recent selling pressure has come to an end. On the Dow Jones average, United Technologies (NYSE:UTX) led the gainers with AT&T (NYSE:T), Home Depot (NYSE:HD), Boeing (NYSE:BA), Wal-Mart (NYSE:WMT), Philip Morris (NYSE:MO) and International Paper (IP) among the leading blue-chip issues. The big loser was Johnson & Johnson (NYSE:JNJ), one of our bearish positions, which slumped to $85 on unconfirmed rumors that the company plans to acquire Alza (NYSE:AZA) for $12 billion in stock. On the NASDAQ, semiconductor stocks declined after PMC Sierra (NASDAQ:PMCS) warned that earnings and revenues for the first quarter will miss consensus estimates because of weak demand and cancellation of backlog orders. The company also announced it was cutting 230 jobs, resulting in a one-time charge in the quarter. Communications-related chip companies weighed on the technology group after investment bank Goldman Sachs slashed their earnings estimates for the sector. Networking stocks also slumped after Cisco (NASDAQ:CSCO) CEO John Chambers suggested in an interview that the U.S. economic downturn would last for "at least three more quarters" and perhaps longer. He said Cisco's earnings outlook has deteriorated significantly since the company warned in January that it expected the slump to continue for two quarters or more. Inside the broader market, transportation and biotechnology stocks rallied and utility issues also rose after California utility regulators announced plans to approve another electric rate increase. The Spreads portfolio experienced a number of favorable moves in today's session as investors searched the market for bargains. Widespread advances were seen in industrial shares including oil service, diversified machinery, and materials and construction. Our bullish position in Lennar (NYSE:LEN) was a beneficiary as the issue rallied to a recent high near $40. The move provided a small credit in the calendar spread and boosted the margin of safety in the short Put at $35. Traders who intend to remain in the time-selling position should plan to cover the short Call at $40 (or roll out and up to a future series) if the issue breaks above $40 on heavy volume. A new candidate in this category, LSI Logic (NYSE:LSI) was in the news today after agreeing to purchase C-Cube Microsystems (NASDAQ:CUBE) for $900 million in stock. The company will exchange 0.79 of its shares for each C-Cube share, and plans to complete the transaction by the end of June. The unexpected announcement had a negative affect on LSI, ending the recent rally as the share value fell to $18. Traders who avoided the new position on Friday, due to the inflated prices, should be grateful that the buyout was made public before the opening bell. Rumors of another merger were rampant today after the Wall Street Journal online edition reported that Johnson & Johnson (NYSE:JNJ) is in advanced discussions to acquire Alza (NYSE:AZA) for more than $12 billion. Analysts say the move will bolster JNJ's drug pipeline and capture some important pharmaceutical technology. Both companies' boards were scheduled to discuss the transaction Monday, and although exact terms weren't divulged, some traders say the deal would value Alza at $42 to $48 a share. While the speculation had a favorable affect on our bearish position in JNJ (an unnecessary roll-out from last month), the bullish activity among other issues in the drug delivery group was not as welcome. The most significant movement was seen in Elan (NYSE:ELN) and with renewed optimism that it could also be a take-over target, the potential for a continued recovery is excellent. We will monitor the issue for further signs of technical reversal in the coming sessions. Tuesday, March 27 Stocks rallied today in the wake of favorable consumer confidence data and optimism about the future of the economy. The Dow rose 260 points to 9947 and the NASDAQ closed up 53 points at 1,972. The S&P 500 finished up 29 points at 1,182. Trading volume on the NYSE reached 1.31 billion shares, with winners beating losers 1,944 to 1,114. Activity on the NASDAQ was above average at 1.93 billion shares exchanged. Technology advances outpaced declines 2,208 to 1,568. In the bond market, the U.S. 30-year Treasury fell 1 11/32, pushing its yield up to 5.46%. Portfolio Activity: A rise in consumer confidence helped boost the major averages today in a broad-based advance that spread to almost every sector of the market. The Dow Industrial average climbed for a third consecutive session on strength in SBC Communications (NYSE:SBC), Walt Disney (NYSE:DIS), American Express (NYSE:AXP), Alcoa (NYSE:AA), Home Depot (NYSE:HD), Honeywell (NYSE:HON) and General Electric (NYSE:GE). Blue-chip technology stocks also supported the rally with Microsoft (NASDAQ:MSFT), International Business Machines (NSYE:IBM), Hewlett-Packard (NYSE:HWP) and Intel (NASDAQ:INTC) enjoying upside activity. On the NASDAQ, software, telecom, Internet and select networking issues were popular with Dell Computer (NASDAQ:DELL), Oracle (NASDSAQ:ORCL), JDS Uniphase (NASDAQ:JDSU) and Qualcomm (NASDAQ:QCOM) posting the biggest gains. In the broader market, transportation, bank, utility, retail, paper, drug and biotechnology issues rallied while oil service, natural gas and gold shares declined. The big news in today's session was the published confirmation that Johnson & Johnson (NYSE:JNJ) will acquire Alza (NYSE:AZA) for $10 billion in stock to strengthen its drug pipeline and allow it to deliver medicines in better ways. The acquisition will give JNJ several promising new drugs, including Ditropan for treating overactive bladder and Concerta, a treatment for attention deficit disorder. The products and technologies of Alza will also boost the company's strengths in the areas of oncology, women's health, urology, pain management and central nervous system problems. Johnson & Johnson's CEO stated that the purchase will lead to long-term earnings growth but many analysts frowned on the deal, saying that JNJ overpaid for the drug delivery company. Our recent bearish position in JNJ is not in danger but the effects of the merger announcement has been felt in other positions. Today's upward activity in Elan (NYSE:ELN), a drug-delivery industry competitor, was directly related to the JNJ-AZA pact and it appears that the trend may continue. With the most recent resistance area near $55, the position is a candidate for exit (or adjustment) on any rally beyond that price range, supported by heavy volume. There were a number of other bullish issues in the portfolio today and the activity in the telecom group deserves mention. Sprint (NYSE:FON), Worldcom (NASDAQ:WCOM) and AT&T (NYSE:T) all enjoyed favorable rallies even as analysts reported that competition and price pressures will continue to plague the group. WorldCom eased investor's fears about their outlook, saying the company has seen solid growth in data and Internet operations and also in its European business, despite weakness in the euro. A Salomon Smith Barney analyst recently raised his first-quarter revenue growth expectations for WCOM's data unit and increased the 2001 target to 14%. Sprint (NYSE:FON), the #3 U.S. long-distance company, reported it has witnessed a small slowdown in some of its businesses, but also said it has not been materially hurt by the lagging economy. That may be part of the reason the issue rallied today, long after the Bellsouth (NYSE:BLS) takeover rumors have faded. The bullish activity in AT&T was likely due to positive comments from a Morgan Stanley Dean Witter analyst, who boosted his rating on AT&T shares to a "strong buy" from "neutral" and called AT&T one of the most interesting stocks in the telecom sector. The analyst said the company does not need improved visibility, takeovers or other dramatic economic or pricing improvements to drive performance. In addition, he commented that AT&T's wireless stock distribution is an important catalyst for the stock, as are the initial public offering of its broadband unit and spin-off of its cable tracker that will soon follow. That's great news for the company and traders who participated in the Covered-calls with LEAPS position should continue to profit from that play in the coming months. Questions & comments on spreads/combos to Contact Support ****************************************************************** - STRATEGIES - This week, I will be travelling abroad on a visit to one of the most popular European trading venues; The London International Financial Futures and Options Exchange (LIFFE). There will be no new plays or portfolio summaries but if time permits, I will share some of my experiences at that unique facility. In the interim, readers who participate in combination techniques may benefit from a review of these common option-trading strategies. ****************************************************************** Delta Neutral Trading: Advanced Techniques There are many ways to take advantage of theoretically mispriced options in the retail market. Most traders will buy or sell a concurrent (and possibly opposing position) in the underlying issue or open a spread with options on the same instrument in a similar series. Those who wish to participate in delta-neutral strategies may choose to trade options which are theoretically equivalent. Spreads with this type of "hedged" outlook generally fall into the category of "volatility plays". Two of the more advanced volatility spreads are the "Back-spread" and the "Ratio Vertical Spread". The first concept one notices about these two techniques is they have many common characteristics: Both spreads are initially "delta neutral". Both spreads are affected by changes in the underlying issue. Both spreads are affected by the passage of time. Both spreads are affected by changes in implied volatility. The Back-spread: A back-spread exists when more long positions are purchased than those which are sold (2x1,3x1 etc..) and all the contracts expire at the same time. In order for a call back-spread to be delta neutral, the purchased calls must have a higher exercise price than those which are sold. A put back-spread requires just the opposite; the purchase of puts with a lower exercise price than those which are sold. The primary characteristic of a profitable call or put back-spread is an increase in volatility; a move away from the long (purchased) option's exercise price will increase the value of the spread. Depending on the type of back-spread, movement in one direction will be preferable to movement in the other direction. In a call back-spread, upside potential is unlimited and a put back-spread has unlimited downside potential. Traders should choose the type of back-spread that reflects their opinion about future market direction and avoid this strategy during stable cycles. In most cases, regardless of direction the strategy requires movement. If the underlying issue remains in a small range, a back-spread will rarely profit. One way to ensure profit from a volatile market (regardless of direction) is to open the position for a credit. That means the amount of money received from the sold options is greater than the cost of those which are purchased. If the market collapses in the case of a call back-spread, or explodes in the case of a put back-spread, all options will expire worthless and the play will profit from the credit of the initial transaction. Ratio Vertical Spread Some traders refer to the opposite of a back-spread as a ratio vertical spread or front-spread. This position consists of more short (sold) contracts than long (purchased) contracts, with all contracts expiring in the same month. A ratio vertical spread will realize the maximum profit at expiration if the underlying issue finishes at the short (sold) option's exercise price. The value of the position will decrease if the underlying contract moves away from this exercise price. While the ratio vertical spread will generally profit in a stable market, the type of position (bullish/bearish) should still be based on the future outlook for the underlying issue. Since the ratio vertical spreader assumes the opposite risks of the back-spreader, the amount of loss is unlimited on the upside in a call ratio vertical spread, and just the opposite in a put ratio vertical spread. With the recent market outlook in mind, we will focus on the bearish form of this strategy; the ratio call spread. The ratio call spread is a neutral strategy in which one buys a number of calls at a lower strike price and sells more calls at a higher strike. This type of play offers a large probability of making a limited profit with low downside risk and a relatively small investment. It is one of the more attractive delta-neutral spreading techniques since the trader is buying mostly intrinsic value and selling a relatively large amount of time value. The ratio call spread has a defined range within which a profit can be made at expiration. If the spread is initially established for a credit, there is no downside risk. The profit or loss at expiration is constant below the lower strike price because both options are worthless in that area. Maximum profit occurs when the issue finishes exactly at the strike price of the sold option. The greatest risk in a ratio call spread lies to the upside, where the loss is theoretically (although not realistically) unlimited. Many delta-neutral traders prefer ratio call spreads because the downside risk or gain is predetermined in the opening ratio and therefore the position requires little monitoring in a bearish market. The margin investment required for a ratio call spread is fairly nominal since (on the long side) one is buying a call rather than buying the stock. The actual position is really the combination of a bull-call spread and a naked call, thus the net investment is equal to the collateral required for the naked call plus (or minus) the net debit (or credit) of the spread. As in many spreads, there is more than one way to implement the strategy. The most common philosophy is that ratio call spreads should be established for credits so that there is no chance of losing money on the downside. Traders that use this method want the underlying stock to be below the sold strike price when the spread is established. The further the stock is below the strike, the more attractive the spread will be. Once again, this type of position has no downside risk; even if the stock collapses, the profit will be equal to the initial credit received. The trader that plays both debit and credit (ratio call) spreads will generally have a better selection of candidates to choose from and will also be able to assume a more neutral posture on the underlying issue. Those who trade only credit spreads will generally return smaller profits (when the price of the security remains relatively unchanged) but will not have to worry about risk with a declining market. If the stock price falls significantly after the play is opened, a downside follow-up is not required when the initial spread was for a credit. If the initial spread was a debit, the trader may want to roll-down the written calls. The follow-up action for an upside move usually consists of buying additional long calls to reduce the ratio in the spread. Eventually, the goal would be to adjust the spread ratio to 1:1 (a bull-call spread). In addition to these defensive actions, ratio call spreads can also be closed early to take profits or limit losses. The most common situation occurs when the stock price is close to the higher strike price and the time value on the sold position has eroded significantly. Another alternative is to re-adjust the ratio to reflect any new opinion on the underlying security or to re-establish a neutral profit range. Good Luck! ************************Advertisement************************* Get 10 FREE Issues of Investor's Business Daily. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1880 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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