The Option Investor Newsletter Wednesday 04-04-2001 Copyright 2001, All rights reserved. 1 of 1 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/040401_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 04-04-2001 High Low Volume Advance/Decline DJIA 9515.40 + 29.70 9625.90 9375.70 1.43 bln 1522/1520 NASDAQ 1638.80 - 34.20 1698.21 1619.58 2.43 bln 1488/2243 S&P 100 560.99 - 1.39 569.75 554.47 totals 3010/3763 S&P 500 1103.25 - 3.21 1117.50 1091.99 44.4%/55.6% RUS 2000 425.74 - 1.22 429.36 424.64 DJ TRANS 2701.83 + 21.26 2701.83 2667.07 VIX 39.07 - 0.26 40.25 37.54 Put/Call Ratio 0.73 ****************************************************************** Time For A Change It was the same ol' same ol' on the Street today as the NASDAQ attempted a morning rally only to fall to the sellers once again, closing down 34.20 to 1638. Meanwhile, the Dow($INDU) encountered some difficulty at 9600 but mustered up the strength to finish in the green by 29.71 points. The session was packed full of stories, tales, lies, and exaggerations all adding up to a lot of chatter. Through all the noise though, the shorts reasserted themselves in the tech index, driving the NASDAQ to new lows. One thing is for certain: it's time for a change. Taking the number one spot for market noise was the Lucent(NYSE:LU) rumor that the company was going to go belly up. Apparently, it began in Europe overnight and hit the U.S. equity market with a thud when LU traded as low as $5.50. That is an all-time low for LU with today marking the fifth anniversary of its spin-off from AT&T. The company strongly denied the rumors. "Our $6.5 bln lines of credit provide financial resources and the financial flexibility to execute our turnaround plan," Lucent CFO Deborah Hopkins said. While their debt rating could be cut in the future if the company doesn't get its act together, today's rumor goes to show just how nervous our market really is. Earnings warnings have become a daily event after the market close. Being one of the biggest weeks for corporate confessions, we have heard from a handful of companies spanning across most market sectors. The B2B sector continued to warn tonight with Commerce One(NASDAQ:CMRC) presenting its disappointing outlook of 15% less revenues and a wider loss than expected for Q1. Ariba(NASDAQ:ARBA) warned of horrible shortfalls on Monday and the difficulties in this particular sector is evidence of the slowing business spending and cost cutting measures across Corporate America. There's no sugar coating is here: we are seeing the darkest times in the market. It hurts, but the bottomline is that Corporate America, and the U.S. economy for that matter, need to get through these trying times. But, maybe we are getting through those times. I'm not saying its coming to an end, just that there is progress in the process. Economic reports have been turning up with last week's stronger Consumer Confidence number and Monday's NAPM Index. These positive statistics tell us that the economy is healing and just about rule out a intermeeting rate cut. Friday's employment report will be a very important economic indicator especially given the magnitude of lay-offs recently. After hours, for the first time that I can recall, it wasn't all bad news. Nudging forward the idea that it's time for a change were positive comments from Dell Computers(NASDAQ:DELL) and BEA Systems(NASDAQ:BEAS). As many of the hardware stocks have been showing technical signs of bottoming, DELL began an analyst meeting this evening by maintaining their coming quarter estimates. While the entire year is less certain, DELL reported that they have been gaining market share profitability. They reminded though that there is still four weeks remaining in the quarter. BEAS reaffirmed guidance that they gave in early February. All this post-session talk doesn't change the fact that the NASDAQ went for new lows again today. Margin selling talk floated around as a downside catalyst. Tax selling was another "buzz" word heard. Even CNBC did a few spots on "the shorts" in the market and "short" funds, or hedge funds. Now, if CNBC is starting to talk about the short side and how much money the bears have made, isn't it time for a relief rally? I certainly would fade CNBC. The NASDAQ is extremely oversold. I know that analysts, myself included, have been saying this since 2000. But the market without fail overdoes it on both sides. I'd be willing to bet, given positive news from DELL and BEAS and the widespread "short" talk, that the NASDAQ finds relief tomorrow. It's long overdue. The NASDAQ is 70% off its highs. In addition, while not a tech stock, Bed Bath & Beyond(NASDAQ:BBBY) posted better-than-expected earnings of $0.22, beating by a penny. Put activity has been increasing and as a result, the VIX.X has been flirting with the 40 level. As fear increases, investors seek protection of puts, and this drives premiums(volatility) higher. The VIX.X has been in buy territory the past couple of days. However, I do not want to mislead people because the fear level can always increase as it did in October 1998, hitting an all-time high of 60 when Long Term Capital collapsed. The Dow($INDU) found buyers late in the session and managed to post a 29.71 gain. Resistance was met in the morning at 9600 which coincided with resistance at 1700 on the NASDAQ. But, unlike the NASDAQ, the INDU received bid support at 9433. Strength in the Oil and Pharmaceutical Sectors helped secure the daily gain. Financials came under pressure and lay-offs are increasing on the Street. Citigroup(NYSE:C), which implemented a hiring freeze and cost-cutting measures just a month ago, announced that they will be making modest job cuts. Bear Stearns(NYSE:BSC) already has been laying off employees. Even so, Financials are technically weak and may have more downside in the near future. A breakdown in the INDU below today's low of 9375 would result in further downside to 9200. To the upside, resistance will be at 9600. Right now, it's tough to try to position for the long-term. It would be prudent to wait until corporations have visibility for the coming year and there has been some technical repair in the market. Even then, stick with quality names. There seems to be a general consensus that the NASDAQ has support at 1500. This leaves some downside risk. A relief rally would allow entry into select put plays on weak tech issues. Yet, the reason that I am cautioning about a relief rally is that current put positions should be attended to, given the real possibility of relief. Oh yeah, Greenspan spoke today. A non-event which reinforces the focus on corporate earnings. Watch Cisco (NASDAQ:CSCO) and Ciena(NASDAQ:CIEN) tomorrow for the NASDAQ direction. CSCO announced that it is discontinuing its 15900 Wave Length Router, an optical switching product, stating that growth was "not as fast" as expected. This should make the optical arena more competitive and give CIEN an added edge. Both stocks finished higher in after-hours trading. Take what the market gives you tomorrow and be nimble if you are short-term trading. Trade smart. Matt Russ Editor ************************************ 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=1998 ************************************************************ ************* NEW CALL PLAY ************* AGIL - Agile Software $11.44 +1.13 (+0.41 this week) Agile Software develops and markets collaborative manufacturing commerce solutions that speed the build and buy process across the virtual manufacturing network. Agile Anywhere (formerly Agile Workplace) is a Web-based, collaborative software suite that helps global companies and their partners add, update, and manage product content throughout the manufacturing supply chain. AGIL primarily targets computer, electronics, and medical equipment markets. Major clients include Gateway, Lucent, Texas Instruments, and Solectron. Along with the rest of the Software sector, AGIL has taken a beating in the market over the past 2 months, and it is down nearly 80% from its own January highs above $50. But the past couple days have seen some positive developments for the stock. After issuing an earnings warning and announcing that it would take a $5 million charge in the current quarter due to the cancellation of a merger agreement with ARBA, the stock gapped lower yesterday before buyers began to emerge. The recovery began almost immediately, as the stock bounced from the $9 level, and buyers were still snapping up shares at the close of trading today. One possible factor contributing to the rise was a pair of upgrades yesterday; Wit SoundView raised their rating from Hold to Strong Buy, and Robinson Humphrey moved their rating from Neutral to Outperform. Investors seemed to ignore news today that both JP Morgan and CS First Boston lowered their earnings estimates for the software firm. At any rate, while the Computer Software index (GSO.X) continued to deteriorate over the past 2 days, giving up more than 11%, AGIL moved the other direction, gaining more than 22%. This is the kind of divergence that is liable to get even more bulls interested in the stock, and we are more than willing to join in the party, so long as it lasts. Intraday support seemed to appear today at $10, before the rally resumed, pushing AGIL up to close near its high of the day. We are placing our stop at $10, and another bounce near this level could provide aggressive traders with an attractive entry point. In the process of breaking out above the $11.50 resistance level, conservative traders may want to wait for a solid move above this level before taking a position. The next levels to scale will be resistance at $12.50 and then $13.25. But as long as AGIL continues to outperform the broader Software sector, the bulls are likely to keep the price on the rise. BUY CALL APR-10 *AUG-DB OI=2996 at $2.06 SL=1.00 BUY CALL APR-12.5 AUG-DV OI= 452 at $0.88 SL=0.00 BUY CALL MAY-10 AUG-EB OI=1163 at $3.13 SL=1.50 BUY CALL MAY-12.5 AUG-EV OI= 51 at $1.75 SL=1.00 BUY CALL MAY-15 AUG-EC OI= 29 at $1.31 SL=0.50 http://www.premierinvestor.com/oi/profile.asp?ticker=AGIL ************* NEW PUT PLAYS ************* PMCS - PMC Sierra $19.12 -1.12 (-5.62 this week) PMC Sierra is enabling the world's broadband communications revolution. The company derives its success by providing broadband semiconductor technology that has become an essential part of the global networking backbone. PMC Sierra is helping to allow network equipment manufacturers meet the requirement for products to break the bandwidth bottleneck, with their standard semiconductor architectural solutions. With the Chip sector, as measured by the Philadelphia Semiconductor Index (SOX), making new 52-week lows, it's not surprising that PMCS is following suit. A report issued on Monday by the Semiconductor Industry Association indicated that the sector is worse shape than previously thought, as book-to-bill ratios have continued to decline sharply. Add to that the high inventory levels currently on hand, and it's clear to see that the fundamentals give little incentive for Chip stocks to rise. After all, if the customers aren't buying, then why should investors? Analysts echoed the negative sentiment, as Needham & Co. noted that so far this year, the Semiconductor sector hasn't had such a steep decline in at least ten years. Since peaking at over $246, PMCS' star has ceased to shine. This was a company that in its heyday, not only enjoyed extensive analyst coverage, but also a large share of institutional support. This former support has now turned into overhead selling pressure, as the stock has been riding lower on the back of its 5-dma, now at $22.42. With earnings due on the 19th of April and in light of continued sector weakness, it is more likely that investors may be looking to exit ahead of the report rather than enter. Aggressive traders may look for another failed rally above resistance at $20, $22 and the 5-dma as potential entry points. Just make sure that the stock continues to close below our stop price of $23. A break below today's intra-day low of $18.66 on volume would allow more cautious traders to jump into the fray, provided that rival BRCM is also heading lower. BUY PUT APR-22.5 SQL-PX OI= 428 at $4.50 SL=2.75 BUY PUT APR-20 *SQL-PD OI=1077 at $2.95 SL=1.50 BUY PUT APR-17.5 SQL-PW OI= 63 at $1.65 SL=0.75 http://www.premierinvestor.com/oi/profile.asp?ticker=PMCS GS - Goldman Sachs Group $77.53 -3.78 (-7.57 this week) Goldman Sachs Group is a global investment banking and securities firm that provides a wide range of financial services to a substantial and diversified clientele. The company leads the industry in mergers & acquisitions and operates more than 40 offices in over 20 countries. Services fall into two primary business segments: Global Capital Markets and Asset Management and Securities Services; in addition, Goldman Sachs also has a Global Investment Research Department that provides research on economies, debt and equity markets, commodities markets, industries and other companies across the globe. The economic concerns stretching across the globe are effectively crushing US stock prices. As the perils of trading amid the current downtrend weigh heavily on most investors, discriminating put players are reaping great rewards. Putting all sauciness and cheeky attitudes aside, let's focus on the facts. Stock prices are sliding to new lows amid very negative sentiments. On the global front, there's big trouble in little China and possibly new accounting methods in Japan, which is unsettling many in the financial world. And without further ado, let's not forget the barrage of earnings' warnings hitting our Street every day amid the advent of tax selling season. Most certainly that's a perfect recipe for financial stocks to sink lower; especially those with global exposure like Goldman Sachs (GS), Morgan Stanley Dean Whitter (MWD) and Lehman Brothers (LEH). In addition, many of these same financial institutions are over-exposed to the telecommunications companies. For instance, Citibank and LEH are holding approximately $300 in loans to Williams Communications, while JPM, GS, and MWD are retaining about $83 mln each in unsold loans to Level 3 Communications. As the heat of a possible recession burns incessantly across the globe, GS and its counterparts are teetering to dangerously low levels. Our objective is to play the downside for all it's worth. Aggressive types might jump into this high-volume decline from the high-end of the trading channel, off the trailing 5-dma line ($83.24), and exit as GS approaches the bottom support at $77. Although on the flip side, it's quite probable that selling may simply extend into tomorrow's session; especially if you're of the mind that today's close, at just a mere fraction from the intraday low, may indicate subsequent bearish activity. If that scenario unfolds, you might jump into the momentum and ride the trend. But please, lock in gains aggressively. A major pitfall is the potential of an inter-meeting rate cut to ignite a broad market rally. Keep intraday stops in place according to your risk portfolio. We've initiated a CLOSING stop at the $82 level to safeguard capital. BUY PUT APR-85 GS-PQ OI=5334 at $9.40 SL=6.50 BUY PUT APR-80*GS-PP OI=4783 at $6.20 SL=4.00 BUY PUT APR-75 GS-PO OI=1654 at $3.60 SL=1.75 BUY PUT APR-70 GS-PN OI=7983 at $1.95 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=GS ***************** STOP-LOSS UPDATES ***************** WR - call play Adjust from $23 up to $24 EQT - call play Adjust from $67 up to $70 SONS - put play Adjust from $17 down to $16 DPMI - put play Adjust from $43 down to $40 ISSX - put play Adjust from $26 down to $24 CMVT - put play Adjust from $57 down to $52 ************* DROPPED CALLS ************* COF $52.35 -1.50 (-3.15) A down day for the Financial sector was enough to take shares of consumer credit lender COF lower today. With peers such as AXP and C continuing to show weakness, the stock ended the day down 2.79 percent. While trading volume was very light, less than 80% of the average daily volume, COF encountered resistance from the 5-dma at $54.17. What's more, the stock closed below the 10-dma near our protective stop price of $53. In keeping with our sell rules, we are dropping coverage of this call play. With its up-trend now broken, look for rallies approaching overhead resistance as an opportunity to sell into strength. WFC $45.99 -2.96 (-3.02) WFC held up comparatively well on Tuesday despite the sell off in the broad indexes. However, on Wednesday, the BIX.X made a steep drop below a critical support level of 620, WFC was no longer able to buck the trend. In addition, shareholders did not respond well to the news released on Wednesday that the CFO of WFC is resigning. While WFC did make a valiant attempt to rally with BIX.X at the close, it has closed below our stop level, and as such, we are dropping it tonight. ************ DROPPED PUTS ************ No dropped puts tonight. ************** TRADERS CORNER ************** Trading Amgen By Mary Redmond As traders we are constantly forced to adapt to changing rules and changing market circumstances. This is one of the reasons trading is such a stressful occupation. We want to use the VIX.X, the VXN.X, and other indicators to guide us through the market, but a level which was considered very high on the VIX.X a year ago might only be a medium level for the VIX.X in 2001. There are some analysts who state that the VXN.X, which measures the volatility level of two at-the-money NDX calls and puts, may decrease in range in the coming months, as investors' expectations of the Nasdaq decrease. However, at this point we are seeing levels of volatility in the markets which may have been considered unsustainable in the past. For example, the VIX dropped to 18 last August, which was a warning signal of an impending massive crash. However, the VIX hovered between 24 and 26 during the first two weeks of February. It turns out that this would have been a good level at which to sell, however, some traders might have been waiting for the VIX to dip below 20 again. We might not see the VIX at the 20 level for a very long time. Instead of looking for a number which is a buy or sell signal, it might be better to look at the movements the VIX and the VXN have made in the few days prior to initiating a trade. For instance, the VIX has been above 30 since March 12th, and has been moving from the 30 level to the 40 level. The VXN has been moving from the 66 level to the 76 level during the same period of time. During this time, there were profitable bullish and bearish trades which could have been executed using the VIX.X as indicators. We can use a trade in one of our most recent successful put plays, Amgen, as an example. We decided that Amgen was a short play this week for a number of reasons. The biotech index had been in a heavy downward channel and had broken several key support levels. A roll over from the 500 level confirmed a pattern of severe weakness in the sector, and corresponded with a failure of AGMN to rally above the $60 level, which is a very important support level for the stock. You can see the downward trend on the long-term and the short-term AMGN chart. The longer term trend confirms a head and shoulders pattern dating back to last January. The short term pattern shows a rounded bowl-like pattern which almost always portends a significant drop. So, we have determined that we think AMGN is going to roll over, and possibly make a significant drop. Now, we want to try to correlate the movement in the stock with the trend of the overall market. Here is where the VIX.X comes in. On March 22nd, the VIX hit a high level of 42, then made a significant drop of over 10 points to a low of 30 on the 28th. While 32 is still a relatively high level for the VIX.X, the issue here is the movement it had made. Over the period of a week, the VIX.X dropped nearly 30%, which is a significant decline in volatility. At the same time, the VXN dropped from 78 on March 19th, to a low of 66 on March 28th. So, at this point, we had a significant drop in the volatility levels from the levels we experienced the week prior. While this might not have been a definite signal to buy puts, it might have been a signal that long traders might have wanted to be cautious. The QQQs rallied last Friday to the $39.90 level, but failed to clear $40. On Monday, again, the QQQ rallied to $39.90, but couldn't clear $40. this correlated with a failed rally in the Nasdaq past 1850. Perhaps more significant was the drop in the BTK.X. The BTK.X failed at the 480 level, and couldn't even attempt to rally on Monday morning. It opened down and dropped below the next support level at 455. After AMGN had dropped below $60, the next major support level was $58.50 At this point, the VIX.X was at the 32 level. While this is normally considered a high level, at this point it would have been appropriate to buy a put in Amgen. You can see how the drop below $58 which occurred on Monday and Tuesday morning occurred with heavy volume. At this point, the VIX had risen significantly, however, the trend in the markets was clearly down, particularly when the Nasdaq dropped below 1700. At this point, AMGN could have been shorted again. However, on Tuesday afternoon, the VIX.X and the VXN.X both spiked way out of their Bollinger bands, at very high levels. The VIX had spiked up over 40 again, a move up of over 30% in a few days, and the VXN.X had moved up to over 78, another significant percentage move. This could have been a level at which short players should have taken profits. In summary, it is important to use the volatility indicators for guidance, while keeping in mind that the levels at which we may have previously bought and sold may change in the coming months. ************************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=1983 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** EQT - Equitable Resources, Inc. $71.71 +1.12 (+2.71 this week) Equitable Resources is an integrated energy company with emphasis on Appalachian area natural-gas supply, natural-gas transmission and distribution, and leading-edge energy-management services. Equitable Resources, its divisions and its subsidiaries, offer natural gas products and energy services to wholesale and retail customers through three business segments: Equitable Utilities, Equitable Production and NORESCO. NORESCO provides energy-management services for projects across the United States and in selected international markets. The division focuses on energy infrastructure, performance contracting, and power quality related projects. Most Recent Write-Up In a market that seems bent on making new 52-week lows, EQT stands out as an exception, bullishly charging up to new all-time highs. One of the main reasons for this is the company's consistent stream of stellar earnings reports. EQT last reported in early February, with a 71 percent rise in EPS due to increases in production, energy prices and efficiencies in operation. During the conference call, the CEO offered optimistic comments going forward. At a time where lack of visibility seems to be the mantra on Wall Street, this news was warmly welcomed. Despite a downgrade last Thursday from JP Morgan from a Buy to a Long Term Buy rating, shares of the energy provider continue to move up on increasing volume. After struggling twice with formidable resistance at $67, it appears that the third time was a charm. With this level now breached, the stock will now likely find support at this point. It is here that we are drawing our lines in the sand, placing a protective stop. Make sure that EQT continues to close above this level. When considering an entry, track movement and direction in industry peers DYN and SRE to ascertain sector sentiment. Aggressive traders may target pullbacks intra-day to support at $70, the 5-dma near $69, $68 and the 10-dma just above $67. The more cautious may want to wait for buying volume to continue, taking EQT above $71 with conviction before taking a position. Comments With a beatiful chart, EQT is the call Play of the Day. After yesterday's break above $70, EQT managed to hold over that level. Look to entry this play on a pullback to $70.50 along with a bounce. Sellers showed up today at $72.25. Therefore, a high volume break over this resistance level would allow entry. BUY CALL APR-65 EQT-DM OI=260 at $7.20 SL=5.25 BUY CALL APR-70*EQT-DN OI=121 at $3.00 SL=1.50 BUY CALL MAY-70 EQT-EN OI= 15 at $4.90 SL=3.25 BUY CALL MAY-75 EQT-EO OI=100 at $2.60 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=EQT ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Option Trading Basics: Writing Covered LEAPS By Mark Wnetrzak With the recent downturn in the market, we have received a number E-mails about selling LEAPS as covered-calls to increase downside protection in new positions or recover lost value in long-term portfolio stocks. Indeed, this technique can be a great way to offset potential losses in slumping equities because the time value premium in LEAPS is less affected by market downturns and sharp declines in the underlying issue can increase the Implied Volatility (providing additional premium) of the sold options. As most of you know, LEAPS, or Long-term Equity AnticiPation Securities are options with expiration dates far in the future. Currently, LEAPS are available for the year 2003 and as with standard equity and index derivatives, these unique instruments allow investors to establish long or short positions using the most popular trading techniques and combinations. In most cases, positions involving LEAPS do not differ much from those utilizing shorter-term options. LEAPS can be sold against the underlying stock in the same manner as near-term call options. The covered write position with LEAPS will have limited profit potential when compared to outright stock ownership, but will outperform that strategy if the stock price declines or remains relatively unchanged. A trader who sells LEAPS will take in a substantial credit when compared to a near-term covered write and since he is selling a more expensive option, the initial cash investment in new positions will be smaller. The LEAPS writer also has a higher net return if assigned early, because the cost basis in the underlying issue was reduced through the sale of additional premium. For long-term investors, writing covered LEAPS can provide additional insurance against bearish market activity while retaining the potential for stock splits and spin-offs, dividends and other benefits of stock ownership. The most significant difference in LEAPS is their slow rate of time-value decay. While this effect is initially beneficial to option writers, it can be a major obstacle in future position adjustments. The premiums (due to future potential) inherent in LEAPS prices can be very large even when they are substantially in- or out-of-the-money. This characteristic will significantly affect a trader's ability to roll-out of a position because the sold (short) call option is relatively expensive to repurchase. At the same time, a short-term covered call writer who is faced with rolling down - buying back the current short position and selling another with a lower strike price - may transition to LEAPS as a simple means of reducing the overall basis in the underlying issue, even though he may be moving to a potentially less profitable position. The large absolute premiums available in LEAPS make them an attractive tool in hedging against future downside activity, but selling long-term options to salvage lost share value is not always the most efficient technique. The key to a correct assessment of this popular strategy, whether used for new positions or in an attempt to recover from falling stock prices, lies in comparing the difference in annualized returns from the sale of LEAPS versus those that can be achieved from repeatedly writing shorter-term options. Good Luck! Summary of Previous Candidates: Covered Calls: (Margin not used in calculations) Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield NVDA APR 45 42.81 57.63 $2.19 4.2% Looking Weak ERTS APR 45 43.00 48.38 $2.00 3.2% XBox Scare NVLS APR 40 37.56 33.88 -$3.68 0.0% Exit/Rolldown? Positions closed: SNPS Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield ERTS APR 45 42.81 48.38 $2.19 10.5% XBox Scare NVDA APR 40 38.75 57.63 $1.25 8.1% NVDA APR 40 38.94 57.63 $1.06 8.1% MU APR 30 29.38 34.60 $0.62 5.5% Key Moment NVLS APR 35 33.81 33.88 $0.07 0.5% Time to go? Positions closed: SNPS Sell Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield GMST short APR $30 put covered by shorting stock. GMST APR 60 60.69 23.38 $0.69 6.2% JNPR APR 30 29.06 29.19 $0.13 1.1% Cover/Exit? JNPR APR 80 80.88 29.19 $0.88 7.8% VECO APR 30 28.75 34.06 $1.25 13.3% Ready to Cover? VECO APR 55 56.00 34.06 $1.00 11.0% Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield WWCA APR 50 50.62 38.38 $0.62 6.0% GENZ APR 95 95.94 86.47 $0.94 5.9% CHKP APR 110 111.25 42.58 $1.25 5.7% PDII APR 85 85.62 57.75 $0.62 5.6% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status EMR $66.31 $60.10 APR80c/75c $0.75 $80.75 $0.75 Open SII $74.80 $68.10 APR90c/85c $0.80 $90.80 $0.80 Open LEN $39.04 $38.47 APR30p/35p $0.80 $34.20 $0.80 Alert MMM $103.63 $98.62 APR120c/115c $0.80 $115.80 $0.80 Open Positions closed: HAL, NBL New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations *************** NOC - Northrop Grumman $89.50 *** Consolidation Complete! *** Northrop Grumman (NYSE:NOC) is an advanced technology company operating in the Integrated Systems and Aerostructures (ISA), Electronic Sensors and Systems (ESS), and Information Technology (IT) segments of the aerospace and defense industry. The ISA segment includes the design, development and manufacturing of aircraft and aircraft subassemblies. The ESS segment includes the design, development, manufacturing and integration of electronic systems and components for military and commercial use. Logicon, the Company's IT segment, includes the design, development, operation and support of computer systems for scientific and management information. Northrop Grumman shares finished higher today after the company announced it has completed a $51 billion acquisition of Litton (NYSE:LIT), creating a $15 billion defense-industry giant with global positions in military electronics, ships and information technology services. Northrop officials say they will move to integrate the combined assets of the companies and expect to achieve double-digit earnings growth and a 20% revenue increase over the next two years. The acquisition of the shipbuilder is considered a good strategic fit, strengthening the company's defense electronics and information technologies while boosting its market share in a number of areas. The combined entity is responsible for the B-2 bomber, the Global Hawk unmanned aerial vehicle, small cruise ships, Navy ships, night-vision goggles and binoculars, air-traffic-control radar, and the electronic warfare system on many fighter jets. Technically, NOC appears ready to resume its recent Stage II climb and a close above the January highs (near $90) would confirm the potential for additional upside activity. NOC - Northrop Grumman $89.50 PLAY (conservative - bullish/credit spread): BUY PUT APR-80 NOC-PP OI=70 A=0.30 SELL PUT APR-85 NOC-PQ OI=238 B=0.70 INITIAL NET CREDIT TARGET=$0.50 ROI(max)=11% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=NOC ******************************************************************* PDII - Professional Detailing $57.75 *** Stage I Base? *** Professional Detailing (NASDAQ:PDII) is a unique contract sales organization providing customized product detailing programs and other marketing and promotional services to the United States pharmaceutical industry. The company has designed programs that promote more than 90 different products, including prescription medications Imitrex, Flonase, Prilosec, Wellbutrin and Cardura, as well as a number of OTC (over-the-counter) products such as Bayer Aspirin, Pepcid AC and Monistat 5, to hospitals, pharmacies and physicians in more than 20 different specialties. The company is engaged by its clients on a contractual basis to design and implements product detailing programs for both prescription and OTC pharmaceutical products. PDII is a unique issue, having fallen precipitously from highs near $100 earlier in the year to a comfortable range near $55 and more recently, the stock appears to be forging a Stage I base. The issue is near a 66% retracement of last year's rally with oversold indications and the technicals suggest the current trend; a lateral consolidation, will continue. Analysts at WR Hambrecht & Company say the stock will outperform its peer group (Healthcare Technology & Pharmaceutical Services) over the next 12 months and they have recently issued a new "buy" rating with a target of $70. Traders who favor the outlook for the company can speculate on the continued sideways activity in PDII shares with these conservative positions. PDII - Professional Detailing $53.25 PLAY (sell covered call or naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Call APR 50 PKU DJ 6 9.00 48.75 4.9% *** Sell Call APR 55 PKU DK 1127 6.00 51.75 11.9% Sell Put APR 45 PKU PI 145 0.81 44.19 12.5% *** Sell Put APR 50 PKU PJ 49 1.81 48.19 20.1% Sell Put APR 55 PKU PK 36 3.62 51.38 28.7% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=PDII ******************************************************************* VSTR - Voicestream $92.56 *** Deutsche Telekom Merger *** VoiceStream Wireless (NASDAQ:VSTR) is a nationwide provider of personal communications service using GSM wireless technology. VoiceStream, together with joint ventures in which it holds interests, has licenses to provide service to over 220 million people and operating systems from New York to Hawaii, serving approximately 3 million subscribers. VoiceStream has licenses in 23 of the 25 largest markets in the United States and it also holds 49.9% minority interests in two joint ventures controlled by Cook Inlet Region and Cook Inlet Holdings. Subsidiaries of these joint ventures are qualified to obtain service licenses that VoiceStream cannot obtain directly. Shares of VSTR rallied today on speculation that regulators were approaching the end of their review of Deutsche Telekom AG's bid to purchase the wireless operator. The FCC is trying to decide whether to approve the acquisition amid continued worries about the German government's 44% direct stake in Deutsche Telekom. Traders say the FCC will likely make overtures to allay concerns about the German government's stake in U.S. markets and any potential risks to our national security. Today's high-volume buying suggests the acquisition is likely to be approved and traders who agree with that outlook can establish a conservative cost basis in the issue with these OTM positions. VSTR - Voicestream $92.56 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put APR 70 UVH PN 2831 1.44 68.56 13.7% *** Sell Put APR 75 UVH PO 341 1.69 73.31 15.2% Sell Put APR 80 UVH PP 630 2.38 77.62 16.9% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=VSTR *************** Neutral Plays - Straddles & Strangles *************** GENZ - Genzyme $86.47 *** Premium Selling! *** Genzyme (NASDAQ:GENZ) makes and markets therapeutic products and diagnostic products and services, with an emphasis on therapies for genetic diseases. Genzyme General primarily consists of two business units, Therapeutics and Diagnostics. The Therapeutics business unit focuses on developing and marketing products for genetic diseases, including a unique family of diseases known as lysosomal storage diseases, and specialty therapeutics. Their Therapeutics business unit currently has three products on the market and several others in varying stages of development. The Diagnostics business unit develops, markets and distributes in vitro diagnostic products and genetic testing services. Genzyme General is a division of Genzyme Corporation and has its own common stock to reflect its value and track its financial performance. The company's earnings are due April 19. Genzyme continues to be an excellent candidate for traders who participate in premium-selling strategies. The stock has great option premiums, a relatively well-defined trading range and a high probability of remaining between the sold (short) strike prices. Based on historical analysis of option pricing and the underlying stock's technical history, the issue meets our basic criteria for a favorable Credit Strangle. However, current news and market sentiment will have an effect on the issue and the position should also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. GENZ - Genzyme $86.47 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put APR 70 GZQ PN 567 0.65 69.35 6.6% *** Sell Call APR 100 GZQ DT 3076 0.95 100.95 8.2% *** - or - Sell Put APR 75 GZQ PO 1611 1.40 73.60 10.9% Sell Call APR 95 GZQ DS 4112 2.05 97.05 13.9% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=GENZ *************** BEARISH PLAYS - Naked Calls *************** BGEN - Biogen $58.06 ** Breaking Down! *** Biogen (NASDAQ:BGEN) is a biopharmaceutical company principally in the business of developing, manufacturing and marketing drugs for human health care. Biogen currently derives revenues from sales of AVONEX (Interferon beta-1a), a product for the treatment of relapsing forms of multiple sclerosis, and from royalties on worldwide sales by the company's licensees of several products covered under patents controlled by the company. Such products include certain forms of alpha interferon, hepatitis B vaccines and hepatitis B diagnostic test kits, among others. In addition, through various collaborations, the company is involved in the clinical developments of the other products, including AMEVIVE (LFA3TIP), adenosine A(1) antagonists, ANTOVA (Humanized 5C8), LT-Beta Receptor, VLA-4 Inhibitors, Hedgehog Proteins, gene therapy products, and other programs. AVONEX is on the market in over 50 countries, including countries in continental Europe, North and South America and the Middle East. Stocks in the biotechnology segment have dropped amid increasing selling pressure in recent sessions and Biogen is just one of the many companies affected by the downward trend. Traders say the the decline in share values can be attributed to new pessimism among investors and a Lehman Brothers analyst warned that many of the group's bellwether stocks are at risk of further bearish activity. Analyst Rachel Leheny believes the downward momentum could intensify with a decline of up to 30% possible in the share values of some biotechnology companies and that doesn't bode well for issues in the group. BGEN's recent recovery rally failed near a short-term resistance area at $65 and based on the current technical indications, it is unlikely the stock will recover to our target strike prices in the next two weeks. BGEN - Biogen $58.06 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Call APR 60 BGQ DL 3592 2.75 62.75 21.8% Sell Call APR 65 BGQ DM 3112 1.25 66.25 13.6% Sell Call APR 70 BGQ DN 8077 0.50 70.50 7.8% *** http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=BGEN ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. 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