The Option Investor Newsletter Thursday 04-12-2001 Copyright 2001, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/041201_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 4-12 WE 4-6 WE 3-30 WE 3-23 DOW 10126.94 +335.85 9791.09 - 87.69 9878.78 +374.00 -318.63 Nasdaq 1961.43 +241.07 1720.36 -119.90 1840.26 - 88.42 + 37.77 S&P-100 607.77 + 30.42 577.35 - 28.23 605.58 + 24.87 - 7.28 S&P-500 1182.57 + 54.14 1128.43 - 53.74 1182.17 + 42.34 - 10.70 W5000 10852.65 +534.25 10318.40 -327.45 10645.85 +170.55 - 84.07 RUT 455.02 + 20.36 434.66 - 15.87 450.53 + 7.26 + 1.47 TRAN 2766.59 + 79.56 2687.03 - 84.33 2771.36 +126.02 + 13.97 VIX 30.28 - 6.48 36.76 + 2.94 33.82 - 1.09 - .38 Put/Call .91 .76 .52 ****************************************************************** Where Did All The Bears Go? By Jim Brown Did I go to sleep last week and forget to wake up? Am I still dreaming? If I am don't wake me up because this is the best dream I have had in a long time. The rest were all crash nightmares! The low last Wednesday on the Nasdaq was 1619 and we have since closed up fours days in a row for the first time since last September and posted a +342 point gain! That is a +21% bounce off the low. The Dow rambled for a nice gain even after WMT warned that earnings would be a challenge. GE helped fuel the gains by posting earnings inline with expectations and dismissing fears that the biggest company in America might be in trouble. What a news day! There were economic reports, missed earnings, earnings beaten and good news breaking out all over. There were so many analysts saying the bottom had passed that I started looking for an oxygen mask for the thin air ahead. GE for instance said they would never miss estimates and the giant was running well despite the economy. Can't get much more bullish than that. Internet companies were still riding the YHOO and AMZN waves. Fiber optic and networking companies were soaring despite warnings about future quarters. Chips were still exploding on news of slowing sales and plant closings. We have officially entered the Twilight Zone. Helping the blowout was news that NT inventory had decreased from 12-18 weeks to only 6 weeks supply. Was that a buying spurt or a write off? We may never know but the fiber/networkers all soared on the news. Maybe the worst is over was the hue and cry from traders and investors alike. The keyword there is of course "maybe." Notable earnings events on Thursday included Juniper Networks. They announced earnings up +12% sequentially but +420% year over year results. They hit estimates of $.25 per share and investors celebrated by buying. More likely shorts again ran for cover since the stock has almost doubled since the low of $28.60 a week ago. JNPR said later that they had little or no visibility going forward. Buyers ignored that comment. Rambus also announced earnings but missed estimates by three cents and warned that profits could be down by -20% going forward do to slowing chip and computer sales. Their RDRAM chips were increasing but volume in the older and more common chips was weak. Legal expenses increased over ten fold with the patent suit from Germany's Infineon Technologies. RMBS lost about -$1.50 in after hours. Handspring announced much stronger revenues than analysts expected and hit proforma estimates of a six cent loss. They affirmed estimates for the next quarter but said earnings would come in at the lower end of the range. Hand lost a little ground in after hours. DCLK also announced earnings that were better than expected but then lowered its guidance going forward. YHOO, who announced yesterday gained +1.10 on the day but traded down in after hours on the DCLK news. AMZN continued to trade up even in after hours after announcing a deal with Borders to take over a co-branded website and provide the back end operations for Borders. Scratch one more competitor. Other results included PWAV which reported a -30% drop in first-quarter revenues based on "unprecedented and broadly based" slowdowns in the telecom sector. The -$.15 loss was much lower than the -$.06 analysts expected. ELNT also met lowered expectations but warned that it would miss next quarter. ADI warned that next quarter they would miss estimates due to cancelled orders and a lack of orders. The good news came from DNA which posted a +21% gain in first quarter earnings. They announced a +$.17 gain which was inline with estimates and were confident going forward. IDPH also jumped on the news because they both are working on some of the same projects. Economic reports were dire today with the jobless claims at 392,000 the highest since 1996 and at the same per household rate as the 1990-1991 recession. The PPI actually dropped slightly more than expected at -0.1% but was almost completely due to energy prices. No inflation is evident in these numbers. Chain store sales posted only a +1.7% increase and Retail Sales dropped by -2% which was more than expected. Consumer Confidence came in at 87.8 which was the lowest since 1973. What does all this mean? It means the pressure is back on the Fed to lower rates at the next meeting on May 15th. Don't expect any cut before then based on Poole's statement that the May meeting would be the right timing. The earnings warnings are about over with 831 companies already pre-announcing. Of those 69% warned that they would miss estimates. To put this in perspective this time last year only 151 companies had pre-announced. Of the companies that have already announced earnings 63% beat estimates and only 6% have missed estimates. Before you start drawing comparisons remember that 573 of the 831 companies pre- announcing warned that earnings would be lower and this is the bar by which the 6% have failed. That means they missed their already lowered numbers for the most part. While I am really glad to see stocks going up on bad news we all need to remember that this was only the tip of the iceberg this week. Next week is the main event and if we can hold the momentum we have a chance. The Nasdaq has moved up on only moderate volume to only -20 points under serious resistance and the Dow is still -170 points under the same. There is a rough week ahead and cautious investors are wondering if they missed the train. There will always be another day and my benchmark for getting back into the Nasdaq is still a close over 2000 on heavy volume. Every major crash occurs when everyone is the most bullish and the bullish sentiment is certainly running rampant. I would be very careful about chasing stocks next week. Do you want to buy CIEN when it is up +80% in four days or JNPR at almost +100%? Let your conscience be your guide and scale into positions if you must play. Tuesday would be my pivot day. If Tuesday is up then maybe the rally has legs. If not then you may get another buying opportunity. Trade smart, enter passively, exit aggressively! Jim Brown Editor www.OptionInvestor.com No change on the seminar stock after a gap up day and a gap down day. Still waiting for a trend before reinstating the 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=2040 ************************************************************** **************** MARKET SENTIMENT **************** Can't Keep A Good Bull Down By Austin Passamonte Bearish news is having little effect on jubilant traders who've decided it's time to buy. Daily session reversals are no longer an exception but the norm. Best way to make money these days? Wait for morning action to stop near 10:30am EST and take the opposite direction. While we do not recommend that as an entry technique, it would have performed admirably well this week. This rally like so many others we've seen is based less on solid fundamentals than pure exhaustion of selling. Of course now we hear all kinds of reason WHY everyone should buy, but these things existed last week as well. A simple shift in sentiment has money flowing upstream instead of down. And that can be expected to prevail unless/until the next market catalyst occurs to thwart current belief. That could be days or weeks away, depending on interpretation. Will a big miss by MSFT, IBM, SUNW or a host of others be shrugged off or strongly reacted to? Only time will tell. Next week ahead has numerous heavy-weights stepping up to the conference call and filling us in on business past and more importantly ahead. Those few who have so far reported have not had any clear guidance going forward. Jonathan Joseph merely said the chip sector is in the basement and the SOX could go down to 400 or up to 700+ from here. Load up the IRAs, everyone! It is not our job nor intent to steer market direction any more than we can figure out emotional extremes. Doing our best to decipher clues on which way is next seems to be challenge enough. If it's safe to play the upside, let's do so. If the bear market is about to see another leg down, let's be cognizant of that. Momentum is clearly to the upside and rightly so. Markets dove far & fast with little relief along the way. They have since rebounded at almost the same speed. Next up are the following heavy points of resistance: Dow: 10,300 Comp: 2,100 SPX: 1225 OEX: 630 SOX: 650 The way things are going we might see these numbers before noon on Monday. The real test of where bulls & bears prevail may be at these levels above. They consist of major moving averages, Fibanocci values and previous points of congestion. Market closes above these levels would clear the paths for sustained moves well above and failure below could solidify range-bound action. Reports this afternoon from Bob Pisani of CNBC's NYSE watch that hedge funds were covering shorts in the CME S&P 500 futures arena may be valid, but daily charts show that volume and open interest were both rising late this week. That indicates activity picked up and more open interest means more shorts were opened with the CME taking the opposite side of these trades, hence rising open interest on higher volume. The next COT report will show what commercials were doing as of Tuesday 4/10 close and it will be interesting to see if they continued to cover shorts during the rally (bullish) or scaled into more shorts on the way up (bearish). Right now, SP01M charts are hinting it was the latter into Thursday's close. We also have some proprietary software and signals unavailable to the public which indicate broad indexes (other than techs) are at bearish reversal extremes. The past four times such signals have aligned (stochastic, ADX and others) in the manner they are in right now were the last four dramatic declines. If that weren't enough, Russ Moore (assistant editor for IS) notes that the VIX, OEX, SPX and INDU are aligned near bearish reversal zones according to Williams %R values. The past few times we've seen these readings were the past few significant declines. Our outlook from here? Cautiously bullish. Price action is now heading straight up while thwarting all efforts to repress. That in itself is evidence enough until proven otherwise. Let us go on record to state that we would PREFER a vigorous bull market to trend years on end with one weekly pullback to let us in. However, signs all around us mandate we keep one eye on the downside in this bear market until overwhelming hooves trample it to death. Next week is the heaviest of all earnings season and expiration week to boot. Near-death options will soar to obscene multiples and turn to instant dust in both directions as wild action is sure to unfold. Do your very best to own many of the former and few of the latter as it occurs! *********** VIX Thursday 04/12 close: 30.28 VXN Thursday 04/12 close: 66.23 30-yr Bonds Thursday 04/12 close: 5.61% 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. Thursday (04/12/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 645 - 630 10,649 5,465 18.94 625 - 610 32,736 1,830 17.89 OEX close: 608.25 Support: 605 - 590 14,466 10,647 .74 585 - 570 6,441 14,290 2.22 Maximum calls: 625/21,271 Maximum puts : 520/10,503 Moving Averages 10 DMA 585 20 DMA 585 50 DMA 630 200 DMA 722 NASDAQ 100 Index (NDX/QQQ) Resistance: 52 - 50 103,521 5,465 18.94 49 - 47 189,392 22,885 8.28 46 - 44 211,182 67,575 3.13 QQQ(NDX)close: 42.80 Support: 41 - 39 277,622 132,442 .48 38 - 36 75,871 112,174 1.48 35 - 33 34,139 108,974 3.19 Maximum calls: 40/161,436 Maximum puts : 43/73,401 Moving Averages 10 DMA 37 20 DMA 39 50 DMA 47 200 DMA 72 S&P 500 (SPX) Resistance: 1250 18,041 16,860 1.07 1225 7,335 8,157 .90 1200 11,042 14,109 .78 SPX close: 1183.50 Support: 1175 9,793 6,832 .70 1150 16,928 20,853 1.23 1125 5,963 13,274 2.23 Maximum calls: 1275/22,728 Maximum puts : 1150/20,853 Moving Averages 10 DMA 1145 20 DMA 1146 50 DMA 1223 200 DMA 1363 ***** CBOT Commitment Of Traders Report: Friday 04/06 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 +55279 +64946 -56907 -65571 Total Open Interest % (+25.70%) (+30.79%) (-8.05%) (-9.15%) net-long net-long net-short net-short DJIA futures Open Interest Net Value -2607 -3269 +4835 +3299 Total Open interest % (-13.39%) (-24.49%) (+19.06%) (+14.22%) net-short net-short net-long net-long NASDAQ 100 Open Interest Net Value +2827 +431 -7344 -4461 Total Open Interest % (+11.07%) (+2.03%) (-9.63%) (-5.89%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: Commercials have reduced their S&P short positions by one percent while increasing their NASDAQ 100 shorts by 4 percent. Commercials have also added to their net-long positions on the DJIA. Data compiled as of Tuesday 04/03 by the CFTC ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/041201_1.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=2072 ************************************************************** *************** ASK THE ANALYST *************** Seas of Green By Eric Utley The market traded rather well going into the holiday weekend. Witnessing the rampant green on my screen throughout the week, I'm left asking the question: Is it over now? The tax-related selling I mentioned last weekend has come to an end, and I believe that could lead to further upside in the coming week. Furthermore, I'll be looking for bullish, or at least, moderately positive guidance from corporate America to provide the additional catalyst this tape needs to lift. We'll be entering the heart of first-quarter earnings season in the coming weeks, which should prove very, very telling for the remainder of the year in terms of price action in the broader market. In the meantime, last week's green has me feeling fairly good about the current state of the market. I believe that the rally we witnessed could surprise many participants with its duration and magnitude. In short, I believe it has legs. Call me an optimist, but it's my belief. To all my readers, have a great extended weekend and try to focus on the things that are more important in life than the market (read: fly fishing). Send your stock requests to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- Coca-Cola - KO In looking at KO - I regret that I didn't short KO a while back but currently looking at it as a short if it closes below $44. Is next support around 20? Or is this one of those strong stocks that is likely to hold at 44? PE still 50. - Thanks, PK Thank you for the request, PK. Coca-Cola (NYSE:KO) has had problems for quite some time, which is clearly evident on its chart. The company has implemented several restructuring plans in an attempt to boost its bottom-line and justify its relatively lofty multiple of 50 times trailing earnings, as you alluded to, PK. Most recently, the company formed a joint effort with Proctor & Gamble (NYSE:PG). The two companies announced on February 21st that they had formed a stand-alone company to market and distribute drinks, juices and snack foods. However, that very same day, Coke had its estimates lowered by both Goldman Sachs (NYSE:GS) and Sanford Bernstein. The lowered estimates back in February proved to be leading indicator, as Coca-Cola Enterprises (NYSE:CCE) - the bottler - warned of lower growth in late March due to the global economic slowdown. Coca-Cola Enterprises accounts for roughly 75 percent of can and bottle soft drink sales of Coca-Cola. Shares of Coca-Cola dipped below your action point at $44 last week, PK, but have since rebounded along with the Dow Jones Industrial Average (INDU). Judging by the weekly chart below, there appears to be a point of support at $42.25, but below that level, it's a clear shot down to $40. On the monthly chart below, which dates back over a decade, reveals that shares of Coca-Cola had a significant pivot point around the $40 level in 1996. Below that level, however, exists little support until the $20 level. In my very humble opinion, I don't think Coke trades down to $20 in the near future. I think there exist better opportunities in the market, both on the long and short side than selling Coke with a downside target of $20. ---------------------------- KLA-Tencor - KLAC Please advise your views on KLAC. [Specifically] the support and the resistance values. When should one understand that the stock has commenced the upward trend? - Thanks, Sunil Thanks for the regular request, Sunil! KLA-Tencor (NASDAQ:KLAC) was one of the chip companies that received an upgrade from Salomon Smith Barney analyst, Jonathan Joseph on Wednesday. Investors obviously received the upgrade well as measured by the price action in KLAC, in conjunction with strong volume. Last Friday, KLAC advanced above its 200 day moving average (dma), which is a technical level that many institutions follow, and often begin buying stocks once they move back above that key level. Having said that, Sunil, the immediate support level I would look to is the 200-dma, which currently resides at $42.28. The daily chart below also reveals near-term support levels at $40, and again around the $35 area. As for resistance, I'd place the most significant hurdle between the $46 and $48 range. The longer-term chart (weekly) for KLAC reveals a cup-with- handle basing pattern. And so you know, I'd place the value area of the handle around the $40 area. Judging by the weekly chart below, I think the best way to look for the beginning of an ascending trend is to watch for a breakout above the $48 level on daily volume of 15 million shares, or more. Thereafter, hello $60! From where I sit, it's a matter of time before KLAC breaks out. Be patient! ---------------------------- Texas Instruments - TXN I like to accumulate TXN for the long-term. Where do you see solid support for [this] stock? - Thanks, Anne Thanks for the question, Anne. Texas Instruments (NYSE:TXN) was another recipient of the Jonathan Joseph upgrade last week. Prior to the upgrade last Wednesday, I was actually looking at a short position in TI as the stock continued to work lower. Fortunately, I never got short the stock. In all honesty, Anne, I think it would be more prudent to focus on a chip stock with a better chart. Although TI rebounded late last week, it remains close to its 52-week low, which suggests to me that the stock is a laggard in the group for the time being. And I know you suggested accumulating shares of TI for the long-term, but the whole point of entering into the market is to make money. It's my belief that money can be made a little easier in other stocks in the chip group away from TI. But, that's just my opinion. Now, let me address your question concerning TI's support and resistance levels. The stock gapped higher from the $30 level following the Solly upgrade Wednesday morning. I think the gap gets filled, which will put the stock back down to the $30 level. That area might be a good level to start looking for entries. You might consider a protective stop below the stock's relative lows. As for resistance, I see trouble near the $37 level, and again at $40. However, because of TI's technical weakness, I think it would be more prudent to accumulate the stock on pullbacks as opposed to chasing the stock near resistance. But, that's just another one of my opinions. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* For the week of April 16th, 2001 Monday ====== SEMI Book-to-Bill Ratio Mar Forecast: NA Previous: 0.77 Tuesday ======= CPI Mar Forecast: 0.20% Previous: 0.30% Core CPI Mar Forecast: 0.20% Previous: 0.30% Housing Starts Mar Forecast: 1.630M Previous: 1.647M Building Permits Mar Forecast: NA Previous: 1.670M Industrial Production Mar Forecast: 0.00% Previous: -0.60% Capacity Utilization Mar Forecast: 79.20% Previous: 79.40% Consumer Confidence Apr Forecast: NA Previous: 117.0 Wednesday ========= Trade Balance Feb Forecast:-$32.9B Previous:-$33.3B Leading Indicators Mar Forecast: -0.30% Previous: -0.20% Durable Goods Mar Forecast: NA Previous: -0.2% Oil & Gas Inventories 20-Mar Forecast: NA Previous: NA Existing Home Sales Mar Forecast: NA Previous: 5.18M New Home Sales Mar Forecast: NA Previous:911,000 Thursday ======== Initial Claims 14-Apr Forecast: NA Previous: 392K Philadelphia Fed Apr Forecast: -20 Previous: -23.5 Treasury Budget Mar Forecast: -38.3B Previous:-$35.4B Employment Cost Index Q1 Forecast: NA Previous: 0.8% Help Wanted Index Mar Forecast: NA Previous: 71 Online Help Wanted Index Apr Forecast: NA Previous: 112.5 Friday ====== GDP Q1 Forecast: NA Previous: 1.0% ECRI Wkly Leading Idx. 20-Apr Forecast: NA Previous: NA Week of April 23th ================= Apr 24 Consumer Confidence Apr 25 Durable Orders Apr 25 Existing Home Sales Apr 25 New Home Sales Apr 26 Initial Claims Apr 26 Employment Cost Index Apr 26 Help-Wanted Index Apr 27 GDP-Adv. Apr 27 Chain Deflator-Adv. Apr 27 Mich Sentiment-Rev. ************************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=2079 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Thursday 04-12-2001 Thursday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/041201_2.asp ************** TRADERS CORNER ************** It Sure Feels Good To Breathe Again By Renee White Finally, we can exhale. In my 20 plus years in the market, I have never held my breathe so long as I have since September. Earlier this month, for the first time ever, I was wishing I was older in order to evaluate the fear in the markets during the early 1970's, with now. I began to question if the recent gasp during the last two weeks, was deserved or merely another over-reaction. I found myself re-evaluating daily. During times of utmost fear, one hopes for national stability, so business cycle visibility can be evaluated with clarity. Obviously, the China crises turned that cloudy visibility into mud. The markets hate uncertainty. It was natural for them to remain soft not knowing how well our new administration would handle their first national crises. A few weeks back, I wrote that I was starting to fell better about the visibility in the distance, yet it was still too early to call. Then the China event came. Like a puppy lying right on top of your newspaper while you're trying to read, visibility completely disappeared. The last 10 days have been the most interesting. The level of fear, panic and feeling of uncertainty seemed to perpetuate disproportionately with reason. Sure, consumer confidence has weakened along with a few other economic numbers, but this is to be expected. In fact many of these numbers have not bottomed-out yet, and will continue to worsen for the next several months. The public's level of concern will increase as our comfort level as a trader increases. These two masses do not move at the same rate during transition and periods of economic contraction. During bullish times, both masses move together with upward sentiment. During bearish times, the public tends to stay bullish far longer than they should. I've read that it can take the public 1-year to feel the effects of a bear market. Unfortunately, some think like the public but trade like a trader. They buy the dips all the way down, expecting a continuation of bullish times, while slowly wiping-out their account as the bear market eats their new purchases like lunch. When the upturn does start, they finally have stopped buying, and stay out when they should be in. I think we have just turned an important corner. The markets took comfort with the release of our servicemen, giving us (the trader), an ability to breathe with comfort. The general public though, will become more hesitant to spend money in the near term as lagging economic indicators continue to hit the economy with bad news. Traders though, should follow the leading economic indicators, and begin hunting for bargains while these indicators push the markets higher. It will be many months before both leading and lagging economic indicators move in tandem. In fact, it may not be until first quarter 2002. Most traders have heard many times that the market moves ahead of the economy. My point is this: follow the trend with the trading world and don't let the confusion of conflicting non-trading information confuse the big picture. A tradable rally appears to be underway. That does not mean we are clear for the next bull-run. I have been studying many tech mutual funds this week and noticed an interesting pattern, repeated in different funds. Many daily and weekly charts were showing entry points in the last few days. The last time both time periods gave the same signal, was back in September when they both screamed, "Sell". As a disclosure, I will admit that my experience in mutual funds is minimal, preferring instead my own management of particular stocks. Regardless, these charts look ripe for improvement and the only way that can happen is if stocks start moving higher. If the economy does continue to show signs of improvement with the leading indicators, those fund managers will be buying their favorite stocks at much improved prices. It is very possible that major selling by the mutual funds is over. Few fund managers were prepared for the damage that occurred in the first quarter of 2001, especially since Yr2000 was the worst year most managers had ever seen. With the 1st quarter damage behind them, I suspect all panic and tax-loss selling is over. At least the charts give me that impression. If this is true, we may once again start to see buy programs kick in, on pullbacks in the market. One can rationalize that the securities they decided to hold, are underwater. Instead of waiting for them to recover to their previous 52 week highs, in order to improve fund performance going forward their options are: buying more of their current holdings to lower their basis, adding new positions which may grow faster, and selling those equities expected to be dead money, which has probably already occurred. If allowed by the fund, some can use options to bolster returns. However, tech funds are still tech funds. They cannot diversify into healthcare, gold, energy or retail, if it's against the fund's objectives. If I am right, these tech funds will now move with the value of the market, instead of downward selling pressure from funds unloading large positions. Researching the intricacies of mutual funds has proven far more time consuming than expected. It is clear that timing equity trading is different than timing entry for mutual funds. Fund managers do not have the luxury of popping in and out of the biggest mover on a technical whim, like equity traders. In fact, I would still trade equities with caution. A healthy rally may truly be underway, but it is important to keep stops tight, and put greed aside. It feels like a recovery rally, but it could still be just another fake-out. In my opinion, this rally will stop the bleeding and start wound healing. I think we have bottomed-out in tech, at least for a while. Never before have I felt the negativism and fear that I have recently witnessed in the markets. I've received more "end of the world" emails and newsletter solicitation offers in the mail in the last 3 weeks, than at any period in my life. It was so negative that my contrarian alerts were sounded. I couldn't even read them without them making me mad. I re-evaluated our economy and continued to belief that these were opportunist trying to milk the average person for money due to panic & fear. Don't buy in to the snake-oil salesmen. Levelheaded market watchers rarely send notices with big letters, bold print, and dripping in fear. In lieu of the recent pressure of the Nasdaq, I am changing my opinion from six weeks ago, and will not be playing the bearish plays I expected for earnings. I am not necessarily bullish, but I think a tradable exhaustive relief rally is where the profit is. Based on my mutual fund thoughts above, I don't expect to see a new low in Nasdaq in the near-term. I think this period will give us a nice window to see who surges out of the gate the fastest. These will be the players to keep your eyes on. Buy a weekly paper and circle those with huge weekly volume and advancements. Those who have follow-thru for more than one week will be your keepers, and they should repeat that pattern after this rally fades, sells off, and bounces. In addition, take note of any companies with upward earning's revisions going forward. It's homework time. The recent panic is now officially over. renee@OptionInvestor.com ************************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=2041 ************************************************************** ***************** Traders Corner #2 ***************** Notes From The Field By Austin Passamonte Without question I've learned more from my peers in the trenches while contributing to OI and IS than they've ever learned from me. Let me share the following with you that I received as four detailed emails from a fellow trader who has researched some methods long & hard that merit my attention and possibly yours. Reprinted with permission from the author with editing for brevity of length only: Dear Austin, I would first like to thank OptionInvestor and IndexSkybox to teach us "newbies" methodical, logical approaches to trading options. I have learned an immense amount from you and the other writers. Hardest part really is the emotional...I seem to have a knack for finding the right plays but so often "push" entries because I am itching to be in a play. A classic article of Jim Brown's said, "Entry Point, Entry Point, Entry Point" makes all the difference between a successful and losing trade. Knowing that even veteran traders fight the same emotional battles and make costly mistakes keeps me from abandoning hope. I know I can do it and do it well. I just need to make rules second nature and know that when (not if!) I occasionally break one, the fact that I played by the rules on the majority of my trades allows me to get myself back on track and notch one more learning experience on my belt. I've always been a person who wants to completely understand what I'm doing. As a business owner for more than twenty years I've had bottom-line responsibility for figuring out "how and why" of everything. So I took your article back in July about "Let's Perfect a Trading Model": http://members.OptionInvestor.com/archive/traderscorner/071000_1.asp As a challenge to understand what you were teaching and see what I could add to further fine-tune my abilities. I made changes to MACD and Stochastic settings that seem to help identify intraday changes. MACD I set to 4,10,6 (exponential) and stochastics to 8,3,2 (exponential). I also use three Moving Averages: 2 day, 5 day (both exponential) and 50 day (simple). I found most sustained and strongest moves occur when: A) 2 day MA crosses 5 day MA, more divergence and more vertical cross-over is better. B) A move is more likely to have staying power if cross-over happens at the same time the MACD is turning positive. C) The final caveat is that most upward moves are the strongest when 15 minute chart has the cross-over at the same time, also with positive MACD. Some stocks "must have" both happen simultaneously, others do well as the 15 minute crossovers follow immediately. If 30 minute charts have crossovers with 5 and 15 minute a really strong move is afoot! Another thing I observe (although more a "sometimes" indicator) is the 50 period MA on a 5 minute chart. Ideally it will be turning up at the same time, again giving more strength to the move. This appears to be a lagging indicator more as a bonus with these. And no just touching - you must wait for the actual crossover (I've been burned when jumping the gun!). I use IQ Charts that do not give a 10 minute option, therefore the reason for 5 and 15 minutes. This method seems to allow for "taking a chunk of the middle"; we often have to see the move happening before the signals. More often than not it identifies strong moves versus short-lived pops. Nothing is perfect and I have seen it fail, but rarely and usually when the market overall takes a quick dive). Interestingly my IQ Charts only allow one to designate the %K and %D so to clarify, my settings are 8 for %K and 3 for %D. When I can specify a period it is 4. If you look at the OEX starting with 3/22 you'll see where it crossed over at the beginning of a very nice run. And thanks again to you and your peers, I am beginning to get more comfortable with playing Puts as well. I'm just reversing my indicators...as a matter of fact I was just thinking this afternoon as I drove home that since prices fall so much faster that I really should be watching more for downside indicators, but old habits are difficult sometimes. (Follow-up email) I wanted to follow-up on the 2/5 Day MA method I wrote to you about a few days ago. I've had more time to observe another indicator in live action and am more comfortable sharing my observations about it. Using these indicators I was able to buy Puts just as the market started to fall the other day and made 100%. Then near another close, interpretation of my indicators made me think the market would turn positive and bought Calls, making another 100% the next day. I'm becoming very comfortable with how well these indicators signal change. I've "paper traded" them for quite a while and looked backward at big moves up and down to see if they held up, and have made some good money using them in live action as well. I'm documenting the indicators using upward trends, just reverse everything for downward action using 15-minute charts for confirming downward signals. Downward moves happen so much faster than upward moves we only need to see crossover on the 15 minute. My experience is one can ride out fluctuations until crossover on the 15 minute chart, preventing whipsaws out on short down moves. In crazy markets like these we *must* have simultaneous crossover on at least the 5 minute and 15 minute charts, and MACD must always agree at the time of the crossover. More vertical a crossover and divergence is better. Horizontal crossovers with little divergence are suspect. If 30 minute chart crosses over at the same time it signifies a stronger move and even stronger move if 60 minute joins in. Look out if the daily happens to crossover, too! It appears to work with your chosen settings for MACD but mine (4,10,6 exponential) seem to fine-tune a little. The other indicator I really like for additional confirmation when crossovers happen is Wilder's RSI (8 period, average 2, exponential) on top of my MACD chart (I am using TC2000 but assume Q-Charts can do this also). This one I pay strict attention to on the 60 minute chart (well, occasionally the 30-minute, but it's riskier). When Wilder's RSI crosses over into positive MACD territory it's another sign of definite strength building in the move. It must actually cross over and stronger MACD is better. I've seen what appear to be imminent crossovers get turned away just as it touches the line so it MUST be an actual crossover. Lastly, if you look at my indicators on weekly charts they still aren't ready to make any of the crossovers, and looking back at past up and down moves they seem to track well with my indicators on a weekly chart too. Hopefully I'm not coming across as a "know-it-all!" I just feel I have found some helpful indicators that so far seem to hold up well in identifying moves early. Thanks again for all of your efforts...I love the new IndexSkybox instant messaging addition! And I must tell you I am so much more comfortable now that I have moved to trading the indexes. Now I feel like I can more consistently ride the trends and yet spend a lot less time searching for that one "right stock." Best regards, Mary Sanders Mary, On a personal note I am EXTREMELY proud of the work you have done on your own to optimize this trading approach. We know very well the massive time, effort and money this takes. On behalf of all readers at OptionInvestor and IndexSkybox I want thank you for taking the time to share these valued methods with us. You are a perfect example of the shared teamwork between real traders that makes these newsletters special and unique within our industry! Happiest of Passover & Easter holidays and Best Trading Wishes, austinp@OptionInvestor.com ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* WCOM - Worldcom Inc. $19.06 (+0.50 this week) See details in sector list Put Play of the Day: ******************** BEAS - BEA Systems, Inc. $33.27 (+4.90 last week) See details in sector list ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS No dropped calls tonight. PUTS TLAB $34.50 (+0.75) After violating our $34 stop, we are dropping coverage on our put play in TLAB. While the stock continues to display weakness relative to its sector, as measured by AMEX's Networking Index (NWX), and TLAB made a new 52-week intraday low, it could only be a matter of time before it heads up like a lead balloon in an up elevator if the NWX continues to move higher. With resistance looming overhead at $35 and from the 10-dma near $36, look to exit remaining positions on any weakness. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** RIMM - Research in Motion Ltd. $28.27 (+7.45 last week) Research In Motion is a designer, manufacturer and marketer of innovative wireless solutions for the mobile communications market. The Company's products include two-way Inter@ctive pagers, wireless personal computer card adapters, software connectivity tools, and embedded wireless radios. The maker of the BlackBerry pager, which lets people send and receive e-mails, stunned the Street with an exceptional earnings' report, beating consensus estimates by a whopping 43% on April 11th! RIMM reported $0.10 versus the estimated consensus of $0.07; and in addition, the company more than tripled its earnings of $0.03 from the same quarter a year ago. Some analysts are however, raising concerns about the company's large gains being derived more from investment income in comparison to actual profit margins. RIMM noted that fiscal 4Q profit from operations more than doubled to $8.3 mln from $3.2 mln in the year-earlier period with $11.2 mln in investment income up from $3 mln. Analysts may be spinning the numbers, but the bottom-line was simple, investors were ecstatic. The stock opened strong this morning, fortifying $24 and the corresponding 5-dma as a prevailing support level. On the day, RIMM bolted through $26 and made its second venturesome charge at the 30-dma resistance, currently trailing $29. A high-volume break of this overhead obstacle gives traders the green light to jump into the momentum. Keep in mind, the telecom sector as a whole is a mixed bag. RIMM is rolling forward on its own impressive earnings' results; therefore, it's especially important to confirm stock direction and market sentiment. The successful test of $26 intraday prompts us to use this level as a definitive barometer, going forward. If the share price CLOSES below this level next week, we'll drop coverage on RIMM citing impending weakness. In this particular case, we're choosing to err more on the side of caution! BUY CALL MAY-25*RUL-EE OI=21974 at $6.20 SL=4.00 BUY CALL MAY-30 RUL-EF OI= 1295 at $3.70 SL=2.00 BUY CALL MAY-35 RUL-EG OI= 807 at $2.05 SL=1.00 BUY CALL JUN-30 RUL-FF OI= 1094 at $4.70 SL=2.75 BUY CALL JUN-35 RUL-FG OI= 268 at $3.10 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=RIMM MYGN - Myriad Genetics Inc. $45.50 (+12.38 last week) Myriad Genetics is engaged in the discovery and sequencing of genes related to major common diseases, including cancer, cardiovascular disease, and central nervous systems disorders. MYGN operates a genetic predisposition testing lab and develops products to prevent or treat the diseases associated with these genes. The Company licenses non-exclusive access to its ProNet technology to pharmaceutical companies for use in identifying novel proteins and their bio-chemical pathways which may lead to the development of new therapeutic procedures. The synergies of a recovering marketplace, a stunning biotech breakout, and the recent announcement of a $185 joint venture between Myriad Genetics, Oracle, and Hitachi to map human proteins all acted as dynamic catalysts, which launched MYGN out of its depressed state. Coming off $30 lows following the April 4th announcement, MYGN made a steadfast climb through its respective resistance levels. Today's clean break through $43 and $45 was however, the most significant. It indicated that MYGN has the potential to challenge the 50-dma upper resistance line, at the critical $49 and $50 level. If MYGN can close the gap, it's very likely a snowballing effect would occur in an advancing NASDAQ; and thus, create grand opportunities to lock in big gains. We're looking for the Biotech Index (BTK.X) to target the 525 level and for MYGN to bounce upward from its current level - the optimum-trading scenario. On the day, MYGN saw a $6.25, or 16% gain; and as such, the large ramp upwards could portend some profit taking next week. Some traders might be willing to begin positions amid the deep pullbacks to $40, which is bolstered by the 5-dma, but that's much riskier. With that said, consider the value of patience. It may be wiser to wait for the big breakout. We're initiating a protective stop at $42, the previous resistance, and will exit if the share price CLOSES above that mark. BUY CALL MAY-40 ESQ-EH OI=2011 at $9.50 SL=6.50 BUY CALL MAY-45*ESQ-EI OI= 26 at $6.80 SL=5.00 BUY CALL MAY-50 ESQ-EJ OI= 32 at $4.60 SL=2.75 BUY CALL MAY-55 ESQ-EK OI= 36 at $3.20 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=MYGN ************************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=2073 ************************************************************** ********** 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
The Option Investor Newsletter Thursday 04-12-2001 Thursda 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/041201_3.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=2042 ************************************************************** ****************** CURRENT CALL PLAYS ****************** CPN - Calpine Corporation $51.25 (+5.00 last week) Based in San Jose, Calif., Calpine Corporation is dedicated to providing customers with reliable and competitively priced electricity. Calpine is focused on clean, efficient, natural gas fired generation and is the world's largest producer of renewable geothermal energy. Calpine has launched the largest power development program in North America. To date, the company has approximately 31,200 megawatts of base load capacity and 6,500 megawatts of peaking capacity in operation, under construction, and in announced development in 28 states and Canada. After exhibiting extreme volatility over the last two weeks, primarily attributed to the bankruptcy filing by Pacific Gas and Electric's utility subsidiary, CPN basically traded flat on Thursday, just under the 10-dma of $51.16. This is a good sign, as the stock needed to consolidate its 12% gains since dropping to $45 on April 6th, and support is very strong at the $50 level. CPN has now formed a very tight neutral wedge from the 52-week high of $58.02 on March 30th, and last week's low of $45, which will most likely break out to the upside in anticipation of the company's scheduled earnings report on April 26th. However, after a week of rallies, the overall indexes may very well give back some of the gains next week. CPN has dipped below its 50 and 200-dmas only once in the last six months, and the management's upwardly revised guidance for the first quarter and year may whet traders' appetites in anticipation of a better-than-expected earnings report. Consider taking positions at the current level, as long as the broad indexes and utility sector (UTY.X) are strong. Alternatively, a more conservative strategy would be to wait for a breakout above $52 with heavy volume, above which resistance is light until $55. CPN and AES are both scheduled to report earnings on April 26th. However, next week, DUK and DYN are scheduled to report on April 17th, and the market's reaction to these earnings should rub off on CPN. We will close positions if CPN closes below $49, so set this as your stop level. BUY CALL APR-45 CPN-DI OI=3375 at $7.20 SL=5.00 BUY CALL MAY-45 CPN-EI OI= 186 at $8.60 SL=6.00 BUY CALL MAY-50*CPN-EJ OI= 889 at $5.50 SL=3.50 BUY CALL MAY-55 CPN-EK OI=1214 at $3.10 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=CPN VRTX - Vertex Pharmaceuticals Inc. $43.61 (+7.80 last week) Vertex Pharmaceuticals discovers, develops and markets small molecule drugs that address unmet medical needs. Vertex has nine drug candidates in clinical development to treat viral diseases, inflammation, cancer, autoimmune diseases and neurological disorders. Vertex has created its pipeline using a proprietary, information-intensive approach to drug design that integrates multiple technologies - biology, chemistry, biophysics, and computer-based modeling - aimed at increasing the speed and success rate of drug discovery. A dynamic breakout through the 500 level in the Biotech Index (BTK.X) led VRTX through its own $41 resistance. Volume was light as we headed into the holiday weekend, but nevertheless the buyers bid VRTX up $4.09, or 10.4% on the close. Going into next week, the 50-dma ($45.01) ceiling, which correlates to our $45 target, is the next line of opposition to overcome. Another powerful run would certainly be welcome for those traders who like to buy into strength, but if there's some profit taking, look for other turning points to begin new plays. Pullbacks to the 5-dma at the $40 support level provide enterprising entry points if the market internals, combined with sector and stock direction, herald that the bulls are in charge. If you're a bit more cautious, but still tempted to take an early entry into potential momentum waves, you might target shoot near the $42 level during an upbeat trading session. Keep in mind, this is purely a technical play spurred on by overall sector strength; although we mustn't discount the possibility of stock-specific momentum in the coming weeks. Vertex Pharmaceuticals is expected to deliver a solid earnings report on April 24th, BEFORE the market opens. In response to Thursday's pre-holiday breakout, we've upped our CLOSING stop to $40 to safeguard profits. BUY CALL MAY-35 VQR-EG OI=404 at $10.80 SL=8.25 BUY CALL MAY-40*VQR-EH OI= 43 at $ 7.50 SL=5.25 BUY CALL MAY-45 VQR-EI OI= 69 at $ 4.90 SL=3.00 BUY CALL MAY-50 VQR-EJ OI= 70 at $ 3.00 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=VRTX EQT - Equitable Resources, Inc. $74.91 (+2.46 last 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. It appears that no news is good news for EQT. Even with the lack of announcements from the company this week, the stock has ventured deeper into blue-sky territory. What's more, it's stock has outperformed those of its sector, and for good reason. In a economy which has seen businesses cautious about their earnings outlook going forward, traders have found EQT's optimistic stance, backed by a long line of stellar earnings reports to be an attractive alternative to questionable business models and inventory-plagued firms. Not to say that EQT is old slow and steady, as it posted an increase in EPS of over 70 percent in its last earnings report. Strength in management has played a key role in the company's success, with increases in production and efficiencies in operation helping EQT to capitalize on an environment of rising energy prices. Fundamental strength is corroborated by technical strength, as the chart is a classic lower left to upper right ascending pattern. Connecting the highs and lows since March reveals an upward slowing regression channel. The sideways movement of the past few trading sessions has created more upside room for EQT. A break above its all-time high of $75.63 with conviction would allow conservative traders to take a position, provided that industry peers DVN and SRE confirm upward movement. For entries on intra-day pullbacks, higher risk players may look for support from the 5-dma near $74, $73.50 and our closing stop price of $73. ***April contracts expire next week*** BUY CALL APR-70 EQT-DN OI=159 at $ 5.40 SL=3.50 Higher Risk! BUY CALL APR-75 EQT-DO OI=100 at $ 1.30 SL=0.75 Higher Risk! BUY CALL MAY-70*EQT-EN OI= 4 at $ 6.90 SL=5.00 BUY CALL MAY-75 EQT-EO OI=103 at $ 3.80 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=EQT MRK - Merck & Co. $79.50 (+3.08 last week) Merck is a global pharmaceutical company, which specializes in the development of human and animal health products. They are the #1 industry leader in the US and #2 worldwide. Some of its more prominent drugs include Zocor and Meycaor (cholesterol drugs), Pepcid (an anti-ulcerant), top-selling hypertension drugs, Vasotec and Prinivil, and more recently the AIDS medication, Crixivan. The drug maker also provides pharmaceutical benefit services through Merck-Medco Managed Care which it sells to corporations, labor unions, and insurance companies. The Drug sector has certainly been doing its part in helping the NYSE to rally. So it's no surprise that shares of pharmaceutical giant Merck have performed well. Since hitting a low of $66 in middle-to-late March, the stock has bounced strongly in a v-bottom fashion. The settlement of a major lawsuit with the government of Brazil was a catalyst for the rebound, as was news that in Phase III clinical trials, it was demonstrated that MRK's drug for osteoarthritis and acute pain, Vioxx, was superior to Celecoxib in relieving osteoarthritis pain. This was followed by an announcement that MRK had received a letter of approval from the FDA that would allow the company to revise its labeling for Vioxx, in light of recent studies. While Merck is not expected to report earnings until April 24th, keep in mind that rival LLY is reporting on Monday, April 16th, followed by PFE on April 17th. Depending on how its sector rivals perform, this could affect trading in MRK as it heads into its own reporting period. The stock broke above its 200-dma (at $78.87) today and with that moving average support can be found at that point along with the 5-dma at $77.89, the 50-dma at $76.26 and the 10-dma at $76.93. Aggressive traders may target these levels, but make sure that MRK closes above our stop price, now at $78. For more conservative traders, a bullish surge above $80 on volume could provide for an entry on strength. In both cases, keep an eye on Merrill Lynch's Pharmaceutical HOLDR (PPH) to gauge sector sentiment. ***April contracts expire next week*** BUY CALL APR-75 MRK-DO OI= 9060 at $5.20 SL=3.00 Higher Risk! BUY CALL APR-80 MRK-DP OI=11909 at $1.60 SL=0.75 Higher Risk! BUY CALL MAY-75*MRK-EO OI= 2293 at $6.70 SL=3.00 BUY CALL MAY-80 MRK-EP OI= 4047 at $3.40 SL=1.75 http://www.premierinvestor.net/oi/profile.asp?ticker=MRK WCOM - Worldcom Inc. $19.06 (+0.50 this week) Worldcom is a preeminent telecommunications company for the digital generation, operating in more than 65 countries with 2000 revenues of approximately $40 billion. Worldcom provides the innovative technology and services which are the foundation for the twenty first century. Since WCOM's CEO Bernie Ebbers reaffirmed the company's guidance for the quarter, WCOM has developed a strong upward trading channel, which it should be able to glide through easily on the way to its earnings scheduled for April 24th. The telecom sector outpaced the broad market indexes this week, propelled by the anticipation of a recuperation in earnings growth for the second half of 2001, and predictions of a possibility of a reopening of the capital markets and credit markets later in the year. After making a series of higher lows last week at $17.50, $18, and $19, WCOM should be able to make a break above $20 next week, which would be a good entry point. The next resistance levels are $20.50, and $21.50, which might be obstacles on the way to the 200-dma of $24.92. However, if strength in the telecom sector continues next week, we may very well see WCOM make a run for $25. Next week BLS will report earnings on April 19th, and the following week the majority of telecoms will be reporting. On April 23rd, SBC will report, and on April 24th, WCOM will be joined by Q, T, and VZ. You will want to be out of the play before WCOM reports earnings. Pay attention to the market's reaction to BLS's earnings as you scale into positions this week, and remember to assess the reactions of others in the sector for weakness or strength. We are keeping stops at $19, so close positions if WCOM closes below this level. ***April options expire next week*** BUY CALL APR-15 JQD-DC OI= 9542 at $4.80 SL=3.00 Higher Risk! BUY CALL APR-20 LDQ-DD OI=47298 at $0.60 SL=0.00 Higher Risk! BUY CALL MAY-15*LDQ-EE OI= 7430 at $5.20 SL=3.00 BUY CALL MAY-20 LDQ-EE OI= 2455 at $1.65 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=WCOM AEP - American Electric Power $47.99 (+0.54 this week) American Electric Power is a multinational energy company based in Columbus Ohio. AEP owns and operates more than 38,000 megawatts of energy, making it one of America's largest generators of electricity. The company is also a leading wholesale energy marketer and trader, ranking second in the U.S in electricity volume. AEP provides retail electricity to more than 9 million customers worldwide, and has more than $55 billion in assets, primarily in the U.S, with holdings in select international markets. AEP has now formed a very tight bullish wedge, with a series of higher lows at $41, $46, and the 10-dma of $47.63. While AEP moved above strong resistance at $48.75 this week to reach a 52-week high at $49.50, the momentum was not sufficient to carry AEP past the $50 level. During trading this week, AEP refused to drop below strong support at $47.50, which bodes well for the stock going forward. It is possible that AEP may be able to break out above $49.50, with some help from strength in the power producer sector. According to Thomson First Call, the estimates for the S&P 500 earnings call for a drop by 8%, but the estimates for the utility sector should rise by 11%. Several analysts upgraded first quarter earnings expectations for the sector, due to a widespread energy shortage, as well as unusually cold weather. Two other energy companies, DUK and DYN, are scheduled to report earnings on April 17th, and AEP may be affected by the market's reaction to these earnings. AEP will report on April 24th, so traders have all of next week to continue this play. Consider taking positions on a move above $48 with strong volume, if others in the sector are rallying. Conservative traders might want to wait for a break above $49.50 with strong volume. We are keeping stops at $47, so close the position if AEP closes below this level. ***April options expire next week*** BUY CALL APR-45 AEP-DI OI=203 at $3.20 SL=1.75 Higher Risk! BUY CALL MAY-45*AEP-EI OI=836 at $3.70 SL=2.50 BUY CALL MAY-50 AEP-EJ OI=475 at $0.85 SL=0.50 http://www.premierinvestor.net/oi/profile.asp?ticker=AEP AGIL - Agile Software $15.08 (+1.95 last 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. Technology stocks had their best week since Labor Day, gaining ground every day and propelling the NASDAQ to its highest close since late March. While the lion's share of the gains seems to have gone to Semiconductor stocks, the Software index (GSO.X) was no slouch either, as it gained more than 16% this week. If you're impressed with that, you'll be downright stunned with the performance of our AGIL play, as it tacked on more gains this week, bringing it up to close above $15 for the first time in nearly a month. On a percentage basis, the recent move is huge, as the stock is up more than 65% from its intraday low on April 3rd. The technical indicators are pointing to more upside as well, but the bears could be lurking just around the corner. Resistance is looming at $16 and then $17.50, reinforced by the upper Bollinger band at $16.21. With daily Stochastics entering the overbought zone, we need to be alert for profit taking that could materialize at any time. Earnings on AGIL don't come around until the end of May, so we won't have that catalyst/obstacle to deal with in the near term. Conservative traders will want to see the bulls prove their stamina by driving the price through $16 before taking a position. More aggressive traders can consider target shooting the intraday dips as AGIL continues to trace higher highs and higher lows. We have upped our closing stop to $14.25, which was intraday support on Thursday. A bounce near this level looks attractive for new entries. ***April contracts expire next week*** BUY CALL APR-15 AUG-DC OI= 269 at $1.35 SL=0.50 Higher Risk! BUY CALL MAY-15 *AUG-EC OI=2180 at $2.10 SL=1.00 BUY CALL MAY-17.5 AUG-EW OI= 306 at $1.40 SL=0.75 BUY CALL JUL-15 AUG-GC OI= 243 at $3.70 SL=2.25 http://www.premierinvestor.net/oi/profile.asp?ticker=AGIL ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** 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
The Option Investor Newsletter Thursday 04-12-2001 Thursday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/041201_4.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=2043 ************************************************************** ************* NEW PUT PLAYS ************* BEAS - BEA Systems, Inc. $33.27 (+4.90 last week) As a provider of e-commerce infrastructure software, BEAS helps companies of all sizes extend investments in existing computer systems and provide the foundation for running a successful integrated e-business. The company's products have been adopted in a wide variety of industries, including commercial and investment banking, securities trading, telecommunications, airlines, retail, manufacturing and government. BEAS' products serve as a platform or integration tool for applications such as billing, customer service, electronic funds transfers, ATM networks, Internet sales, supply chain management, and hotel, airline and rental car reservations. A rallying NASDAQ has helped Tech stocks to move higher recently. With that, the B2B space has also advanced, though not to the extent of other sectors. Despite the low prices of B2B stocks relative to earlier and much steeper levels, valuation remains a concern on the minds of investors and analysts alike. BEAS was downgraded today by Salomon Smith Barney an Outperform to a Buy rating, on the heels of a cut yesterday by Prudential Securities, from a Strong Buy to a Hold rating. With a limited upside price target of $41, Prudential cited BEAS' high P/E ratio, the slowing economy, aggressive pricing on the part of competitors and potential acquisitions leading to integration risks as reasons to for the downgrade. While there is some time before BEAS' earnings, please note that the stock may be affected by upcoming reports from industry peers. Of note, PPRO is set to report on April 16th, ITWO and SEBL provide a one-two punch on April 18th, ARBA on April 20th and BVSN on April 24th. Having failed to rally above the 50-dma, now near $39, aggressive traders may target further unsuccessful attempts, leading to a rollover, with resistance at $33.50, $35 and our closing stop price of $36. For the more risk averse, wait for the stock to drop below the 5-dma (at $31.75) on strong selling volume, before making a play. Wait for confirmation by following Merrill Lynch's B2B HOLDR (BBH) before taking a position. ***April contracts expire next week*** BUY PUT APR-35 BUC-PG OI=4878 at $3.70 SL=2.00 Higher Risk! BUY PUT MAY-35*BUC-QG OI=1536 at $6.50 SL=0.75 BUY PUT MAY-30 BUC-QF OI=2469 at $3.90 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=BEAS NVLS - Novellus Systems, Inc. $48.23 (+10.98 last week) Novellus Systems, Inc. is a manufacturer of chemical vapor deposition (CVD), physical vapor deposition (PVD) and copper electrofill systems. As circuit geometries shrink in size, the deposition equipment manufactured by Novellus becomes an increasingly important technology for manufacturing advanced semiconductor devices. Novellus products provide solutions to both the productivity and quality problems facing the worldwide semiconductor manufacturing industry today. They have developed concepts that have improved the quality of deposited films while increasing system throughput and continuously reducing costs of ownership. It has been said that where the Chip stocks go, the NASDAQ follows. So it is with good reason that the Tech sector has rallied, thanks to strength in the Semiconductors, as measured by the Philadelphia Semiconductor Index (SOX). Chip equipment-maker NVLS has moved higher on sector sympathy this week, but despite the prevailing optimism, there are reasons both fundamental and technical to think that it may head lower. Fundamentally, little has changed this week in the Chip sector. Book-to-bill ratios are still falling and inventory is still building up. If anything, the fundamentals have deteriorated, as MOT recently warned, and LRCX missed estimates in their earnings report, citing an "unprecedented contraction" in new orders. In spite of this, famed Salomon Smith Barney Semiconductor analyst Jonathan Joseph upgraded the sector yesterday from a Neutral to Outperform rating. His reasoning was based on anecdotal reports that order and shipment data is so bad that it couldn't possibly be worse. As NVLS heads into earnings on April 23rd, please note that the stock may be affected by reports from Intel on April 17th and AMD on April 18th. Having failed numerous times to break through formidable resistance at $50, we are placing our closing stop at this point. Failed rallies above this level, along with $49, may allow aggressive traders to jump in, but confirm with volume. For an entry on weakness, wait for selling volume to take NVLS below $46.50 before making a play, but confirm direction with movement in rival AMAT. ***April contracts expire next week*** BUY PUT APR-50 NLQ-PJ OI=529 at $3.50 SL=1.75 Higher Risk! BUY PUT MAY-50*NLQ-QJ OI= 69 at $6.20 SL=0.75 BUY PUT MAY-45 NLQ-QI OI= 99 at $3.90 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=NVLS ***************** CURRENT PUT PLAYS ***************** AMGN - Amgen $54.14 (-0.66 last week) Amgen is a global biotechnology company that discovers, develops manufactures, and markets human therapeutics based on advances in cellular and molecular biology. The company manufactures and markets four human therapeutic products, Epogen, Neupogen, Infergen, and Stemgen. Amgen uses wholesale distributors of pharmaceutical products as the principal means of distributing the company's products to hospitals, pharmacies and clinics. Considering the broad based rally in the major indexes, AMGN should have been able to stage a more impressive gain. BTK.X surged 34% on Thursday, almost reaching the 50-dma of 526, propelled by good earnings and a buy recommendation on BGEN. However, AMGN was unable to stay above the 10-dma of $55, which is not a bullish signal for next week. However, considering the bullish sentiment which is starting to develop in the biotech sector, traders should be careful with AMGN. An aggressive put player could take a position on a roll over from $54.50, preferably if the BTK.X and the Nasdaq are experiencing profit taking. Alternatively, a move below support at $52 with heavy volume would be a more conservative entry point, and could lead to a break below strong support at $50. AMGN is scheduled to report earnings on April 26th after the close. However, this week, two key bellwether biotech stocks report earnings on Thursday, DNA after the close, and GENZ before the open. If one or both of these companies has disappointing results, this could be the catalyst needed for AMGN to drop below critical support at $50, which would be a lower risk put entry. We are keeping stops at $55, so close positions if AMGN closes below this price. ***April contracts expire next week*** BUY PUT APR-60 YAA-PL OI=6789 at $6.40 SL=4.50 Higher Risk! BUY PUT APR-55 YAA-PK OI=5684 at $2.75 SL=1.50 Higher Risk! BUY PUT MAY-60 YAA-QL OI=1631 at $8.40 SL=6.00 BUY PUT MAY-55*YAA-QK OI=1751 at $5.50 SL=3.50 http://www.premierinvestor.net/oi/profile.asp?ticker=AMGN MBI - MBIA, Inc. $74.99 (-0.11 last week) Not necessarily a household name, MBI is engaged in providing financial guarantee insurance, investment management and financial services to public finance clients and financial institutions on a global basis. The company's subsidiary, MBIA Insurance, provides financial guarantees for municipal bonds, asset-backed and mortgage-backed securities and investor-owned utility bonds. The company also provides investment management products and financial services through a group of subsidiary companies. These services include cash management, municipal investment agreements and discretionary asset management. Well, what's it going to be? More selling, or is MBI actually putting in a bottom? Recall that we initiated our put play earlier this week, as the company is likely to be one of several casualties of the PG&E (PCG) bankruptcy due to the unresolved power crisis in California. With direct exposure to the PG&E (PCG) bankruptcy of approximately $590 million, it's no wonder that Morgan Stanley decided to downgrade the stock to Neutral Monday afternoon. After plunging sharply in the wake of the PCG bankruptcy announcement, MBI shares have been in a tight consolidation pattern over the past 2 days, making entry points a snap. Enter the play on weakness as the bears push the price below $74, or wait for a rollover near the $76 intraday resistance level before initiating new positions. Volume has dropped back to the daily average, and it is hard to gauge how much more the stock could fall based strictly on the oscillators. This play is likely to be predicated on perception of how the legal wrangling in California is going to play out. Keep an eye on news related to the PCG bankruptcy, as it is likely to be the dominant factor in the coming week. Earnings will certainly be a factor, but MBI doesn't report its results until the first week of May, making it unimportant for now. ***April contracts expire next week*** BUY PUT APR-75 MBI-PO OI= 92 at $2.35 SL=1.25 Higher Risk! BUY PUT MAY-75*MBI-QO OI=461 at $5.00 SL=3.00 BUY PUT MAY-70 MBI-QN OI=376 at $3.00 SL=1.50 BUY PUT MAY-65 MBI-QM OI=924 at $1.70 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=MBI UNH - UnitedHealth Group $58.43 (-0.51 last week) Providing a broad range of resources to help people improve their health through all stages of life, UNH forms and operates markets for the exchange of health and well being services. The company's Health Care Services segment consists of the UnitedHealthcare and Ovations businesses. UnitedHealthcare coordinates network-based health services on behalf of local employers and consumers in six broad regional U.S. markets. Ovations is a business dedicated to advancing the health and well-being goals of Americans over the age of 50. Additionally, the company's Ingenix business operates in the field of health care data and information, analysis and application. While it certainly isn't tearing down the charts, UNH continues to walk its way gradually lower, in accordance with the historical pattern that has been put in place over the past 3 months. After running into resistance near $61, the bears once again took control and are trying to squeeze the enthusiasm out of the bulls. But the bulls have been holding their ground since the Aetna (AET) earnings warning on Tuesday. The investor indecision is clearly visible in the daily charts, with resistance now sitting at $59 (also the site of our stop), and the lows getting higher. Something has to give soon, and if we use the historical pattern as our guide, it looks like it will break to the downside. Both the S&P Health Care index (HCX.X) and the Healthcare Payor index are struggling to stay in their weak upward trends, but are looking like they may be in danger of breaking down. Weakness in the broader sector will spell problems for UNH, and gains for put buyers. Aggressive traders can still target intraday rallies near the $59 level, as the buyers run out of steam and the stock heads lower again. More conservative entries will materialize as the stock falls through support, now sitting near $56.50, near the lows from the large AET-related drop on Tuesday. The only other item to note is earnings. Although we are now entering the heart of earnings season, UNH doesn't report until April 27th, making it a negligible factor in the near term. ***April contracts expire next week*** BUY PUT APR-60 UNH-PL OI=2104 at $2.75 SL=1.50 Higher Risk! BUY PUT MAY-60*UNH-QL OI= 898 at $4.20 SL=2.50 BUY PUT MAY-55 UNH-QK OI=1445 at $2.00 SL=1.00 BUY PUT MAY-50 UNH-QJ OI=1562 at $0.80 SL=0.00 http://www.premierinvestor.net/oi/profile.asp?ticker=UNH ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***** LEAPS ***** Tax Season Buying or Vacationing Bears? By Mark Phillips Contact Support The first week of the April earnings season drew to a close without any serious damage, and the bulls emerged with the upper hand as we head into the holiday weekend. While things look positive on the surface, I just can't shake the feeling that there are some serious monsters lurking under the bed. Maybe the bears just left early for the holiday weekend? The DJIA is keeping its head above the 10,000 level but has some serious resistance to contend with now at 10,300. The S&P500 is likewise reaching some formidable resistance near 1185 and the NASDAQ has yet to demonstrate the buying conviction needed to crest resistance in the 1975-2000 area. With daily Stochastics entering the overbought zone on all of the above-mentioned indices, I would be very cautious about chasing any of our current plays (Portfolio or Watch List) higher at this point. Don't get me wrong, I found the bullish action this past week to be very encouraging and I like the way our current portfolio is shaping up, with every play showing solid gains since their respective entry prices. The problem as I see it is that nothing fundamental has changed to allow the markets to continue their recent advance. Look at the Semiconductor index (SOX.X). In just the past 3 sessions, this index has rallied 25%, right to the 10-week descending trendline. There are still some serious problems in this sector, and the economy has yet to show that it has found a bottom. While I want to believe the bulls are back in town, technically the SOX (and the rest of the market) looks primed for a reversal and I think the bears are salivating at the prime rib feast they are about to enjoy. The VIX relaxed significantly this past week, ending at 30.28, just above the upper Bollinger band and primed for another run upwards, similar to what we saw in late 1998. As I mentioned last week, this looks eerily similar to the late 1998 pattern, just prior to when the VIX soared above 60, in the final smash-down market bottom. One theory that surfaced this past week about the market's rally is that the shorts were covering their positions to pay their tax bills, which are due on April 15th. It is a 180-degree reversal from the bulls selling long positions a year ago to cover their own tax bills, but one that could have some merit. Let's face it. The big profits over the past year came on the short side, and those with the foresight to play the trend the market gave them will be writing some fat checks to Uncle Sam. Only time will tell, but with the sharp recovery over the past several sessions, and the Commercials still holding large net-short positions, I think the prudent approach is to wait for the next pullback before initiating new long-term positions. So while the market action of the past 2 weeks is very encouraging to me (giving the appearance of the bottom being put in place), we are unlikely to rocket straight back to the highs seen a little over a year ago, and still expected by famous market bulls like Abbey Joseph Cohen. There will be more selling (profit-taking at a bare minimum), and the severity of this selling will go a long ways towards telling us whether or not we have seen the bottom in this bear market. We aren't going to miss the next bull market by exercising some patience and discipline and waiting for the entry points we want to materialize. Until we can get a little better visibility (which is likely to appear in the next couple weeks as we slog through earnings season), I am going to err on the side of caution, and refrain from even adding any new plays to the Watch List. We've been running pretty hard getting the new format laid out, and it appears to be working out nicely. Let's step back, take a breath and allow things to stabilize a bit before plunging ahead with a new list of plays. A refreshing change this week is the fact that there are no casualties from either our Portfolio or Watch List, reflecting the relative strength in the markets this week as compared to recent history. Our old playlist is now down to a paltry two plays, Dell Computer (NASDAQ:DELL) and Calpine (NYSE:CPN), and they are both actually looking pretty healthy. Due to the wild and wooly trading in the Technology sector over the past couple weeks, we missed out on possible entry points on several of our Watch List plays, namely DELL, Texas Instruments (NYSE:TXN) and NASDAQ-100 (AMEX:QQQ). Rather than chasing the plays higher, we have taken advantage of the new information (in the form of another week's trading history) to reset several of our entry triggers. They are still all sitting near major support levels, reflecting our anticipation that we will see more selling on the NASDAQ before the recovery gets moving in earnest. A major component of the new LEAPS Portfolio is actively managed positions along with Stop levels, and after the strong moves on several of our plays, we have ratcheted up several of our Stops. Genzyme General (NASDAQ:GENZ) has moved up to $80, Washington Mutual (NYSE:WM) to $48, Wal-Mart Stores (NYSE:WMT) to $45, and Goldman Sachs (NYSE:GS) to $82. All of these are now placed at support levels that managed to withstand the bears' most recent assault, and we expect them to hold over the long term. Relative to short-term trades, these are very loose stops, but we can afford a bit more generosity given the timeframe we work under here in the LEAPS Portfolio. A violation of one of our stops will be an indication of a serious technical violation and should signal our exit before things really get ugly. Take advantage of the long weekend to spend time reflecting on why we spend so much time on our investments - family and free time. The markets will be there on Monday, ready and waiting. These holidays are there for a reason, to give us a chance to step back and reflect on what is truly important. Have a happy and safe Easter Holiday. Mark Phillips Contact Support Current Playlist (Old Format) SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT CHANGE DELL 01/07/01 JAN-2002 $ 20 WDQ-AD $ 5.25 $10.50 100.00% JAN-2003 $ 25 VDL-AE $ 5.63 $10.40 84.72% CPN 01/21/01 JAN-2002 $ 40 YLN-AH $10.50 $18.30 74.29% JAN-2003 $ 40 OLB-AH $15.38 $22.90 48.94% LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP CLX 03/13/01 '02 $ 35 WUT-AG $ 3.50 $ 3.60 2.86% $ 28 '03 $ 35 VUT-AG $ 6.10 $ 6.40 4.92% $ 28 GENZ 03/23/01 '02 $ 85 YGZ-AO $24.50 $36.70 49.80% $ 80 '03 $ 90 OZG-AR $27.75 $38.70 39.46% $ 80 SWS 03/22/01 '02 $ 18 YWF-AT $ 4.10 $ 4.10 0.00% $ 15 '03 $ 20 VWZ-AD $ 5.00 $ 5.10 2.00% $ 15 WM 03/22/01 '02 $ 50 WWI-AJ $ 6.00 $ 9.80 63.33% $ 48 '03 $ 50 VWI-AJ $ 9.20 $12.90 40.22% $ 48 WMT 03/23/01 '02 $ 50 WWT-AJ $ 7.00 $ 8.40 20.00% $ 45 '03 $ 50 VWT-AJ $11.00 $12.60 14.55% $ 45 JWN 03/30/01 '02 $ 20 WNZ-AD $ 1.65 $ 1.80 9.09% $ 14 '03 $ 20 VNZ-AD $ 3.30 $ 3.40 3.03% $ 14 GS 04/05/01 '02 $ 90 WSD-AR $14.00 $20.80 48.57% $ 82 '03 $ 90 VSD-AR $20.50 $28.90 40.98% $ 82 MU 04/05/01 '02 $ 40 WGY-AH $10.60 $15.80 49.06% $ 33 '03 $ 40 VGY-AH $14.80 $21.00 41.89% $ 33 NSM 04/05/01 '02 $ 25 WUN-AE $ 5.50 $ 8.20 49.09% $ 20 '03 $ 30 VSN-AF $ 7.20 $ 9.80 36.11% $ 20 NOK 04/06/01 '02 $ 25 WIK-AE $ 4.70 $ 7.30 55.32% $ 20 '03 $ 25 VOK-AE $ 7.00 $ 9.80 40.00% $ 20 FON 04/09/01 '02 $ 25 WO -AE $ 2.80 $ 3.80 35.71% $ 19 '03 $ 25 VN -AE $ 4.40 $ 5.80 31.82% $ 19 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL DELL 03/18/01 $23-24 JAN-2002 $ 25 WDQ-AE JAN-2003 $ 25 VDL-AE CPN 03/18/01 $46-47 JAN-2002 $ 45 YLN-AI JAN-2003 $ 50 OLB-AJ GE 03/25/01 $41-42 JAN-2002 $ 40 WGE-AH JAN-2003 $ 40 VGE-AH QQQ 03/25/01 $36-37 JAN-2002 $ 40 WD -AN JAN-2003 $ 45 VZQ-AS TXN 03/25/01 $29-30 JAN-2002 $ 35 WTN-AG JAN-2003 $ 35 VXT-AG New Portfolio Plays FON - Sprint Corp. $21.43 Well, it looks like we got into this one just in time. Given the quiet, but positive trading range on Monday, we went ahead and added FON to the portfolio, and by Tuesday, we were sitting on a nicely profitable play. The strength in the Technology sector lifted all the players in the Telecom sector, even good old AT&T. Optimistic bulls bid stocks in the sector cautiously higher, and like we mentioned last week, the Telecom service providers inched higher from their apparent bottom. We don't expect it to be a high-speed recovery, but there is plenty of time for our 2003 LEAPS to appreciate over the next 18 months, and it won't take a huge move to generate those triple-digit gains we like so much. Don't let those gains get away from you though. Use stops to protect your capital; ours are originally set at $19. BUY LEAP JAN-2002 $25.00 WO -AE $2.80 BUY LEAP JAN-2003 $25.00 VN -AE $4.40 New Watchlist Plays None Drops None ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=2074 ************************************************************** ********** 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
The Option Investor Newsletter Thursday 04-12-2001 Thursday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/041201_5.asp ************* COVERED CALLS ************* Option Pricing: No Substitute For Knowledge! By Mark Wnetrzak Option pricing is a complex and often misunderstood subject that usually requires a great deal of study to understand completely. The trader who perseveres will find there is a simple logic to most of the concepts. These knowledgeable traders earn the right to have less money at risk and greater potential for profits. As one becomes familiar with the components of pricing theory, he can he begin to formulate potentially profitable strategies. One of the primary considerations for most traders is risk versus reward. In the derivatives market, buyers of options have limited risk and unlimited reward while sellers of options have limited reward and unlimited risk. With this single perspective in mind, it's obvious why most retail traders simply 'buy' options. Most investors would never consider a position with unlimited risk and yet few understand that almost any trade that isn't fully hedged entails enormous speculation. A violent adverse move, which does not allow time for adjustments, can quickly reduce any position to a fraction of its initial value. With this in mind, it's hard to understand why traders would take outright long or short positions under any circumstances. The only possible explanation is they believe the probability of catastrophic loss is very small and the potential for profit is worth the risk. The most important issue successful option traders understand is that risk/reward characteristics of a position are not the only considerations. Equally important is the probability of profit or loss. When one evaluates a prospective position, the likelihood of each possible outcome must be factored into the assessment. Is the reward, even a limited one, sufficient to offset the risk? A successful trader will always seek to improve the risk/reward characteristics of his position by looking for the trade with the greatest possible margin for error. In order to achieve this goal, a trader must be able to accurately assess an option's value. One of the most important components of option pricing is the concept of time decay. Time value and time decay are actually two of the easiest aspects of option pricing to understand. The time value of any option can be simply understood as everything but the intrinsic value. Time costs money and more time equals more money. The amount of time value in an option's price decays each day it is in existence. The closer the option gets to expiration, the faster it decays. In a strictly mathematical sense, time value decays at its square root and this rate of decay is known as Theta. Time is a commodity and there is one very important concept that merchants of time (option writers) must understand; the laws of option pricing dictate time value is highest in the at-the-money (ATM) option. Time value decreases as the strike prices move in and/or out of the money (ITM or OTM). Strike prices that are deep in and/or out of the money have the lowest time value of all options. Option buyers (as well as sellers) need to have a firm grasp of pricing theory. Remember, the main attraction of options to most traders is they provide the buyer with leverage; one can realize a large percentage gain with only a modest change in the stock price. The concept of delta proves that OTM calls offer greater reward potential if the stock moves substantially while ITM calls will perform better if the stock only moves moderately. Choosing the correct time frame of a position requires another difficult decision because the time closest to expiration costs the most and yet the less time remaining in the option, the greater the movement. With options, more time does cost more money, but the cheapest way to avoid time decay is to buy the most available. The successful option trader must be able to identify potentially profitable strategies given the current market conditions and before a position's value can be correctly assessed, the basic components of theoretical option pricing must be fully understood. Next week, we will continue our review of this complex subject. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield IMNY 11.63 11.45 APR 10.00 2.31 *$ 0.68 10.6% ELNK 10.38 11.77 APR 10.00 1.38 *$ 1.00 9.7% IGEN 13.31 19.60 APR 10.00 4.25 *$ 0.94 9.0% ACPW 20.31 20.41 APR 17.50 3.75 *$ 0.94 8.2% UTHR 16.94 14.90 APR 15.00 3.25 $ 1.21 7.7% LTBG 11.44 10.05 APR 10.00 1.94 *$ 0.50 7.6% CTLM 24.44 37.15 APR 20.00 5.38 *$ 0.94 7.1% MTSN 14.00 16.26 APR 12.50 2.44 *$ 0.94 7.1% LTXX 18.06 24.09 APR 17.50 1.31 *$ 0.75 6.5% VPHM 32.50 37.50 APR 30.00 3.75 *$ 1.25 6.3% BRKS 43.47 50.00 APR 40.00 5.63 *$ 2.16 6.2% EBAY 36.19 41.63 APR 30.00 7.38 *$ 1.19 6.0% TIBX 8.97 11.14 APR 7.50 1.75 *$ 0.28 5.6% ADBE 28.63 41.06 APR 25.00 5.13 *$ 1.50 5.5% SHFL 21.25 24.31 APR 20.00 2.44 *$ 1.19 5.5% NRG 30.84 32.25 APR 30.00 2.60 *$ 1.76 5.4% LTXX 19.00 24.09 APR 17.50 2.31 *$ 0.81 5.3% IGEN 15.19 19.60 APR 12.50 3.25 *$ 0.56 5.1% TVLY 17.81 21.63 APR 15.00 3.25 *$ 0.44 4.4% AAPL 20.59 22.42 APR 17.50 3.60 *$ 0.51 4.3% SHFL 20.94 24.31 APR 17.50 4.38 *$ 0.94 4.1% PCS 21.60 23.56 APR 17.50 4.50 *$ 0.40 3.4% ATVI 24.63 22.90 APR 22.50 3.13 *$ 1.00 3.4% CPRT 21.81 22.40 APR 20.00 2.63 *$ 0.82 3.1% CLPA 6.22 4.10 APR 5.00 2.06 $ -0.06 0.0% HPOW 8.00 6.80 APR 7.50 1.13 $ -0.07 0.0% *$ = Stock price is above the sold striking price. Comments: Time to evaluate your long-term outlook on any issues that may not get called away and act appropriately. Many of the issues below have rebounded with the current Market strength (Murphy's Law) and may offer a second chance to exit. Next week should be interesting, to say the least; mind your discipline! Positions Closed: Seitel (NYSE:SEI), Semtech (NASDAQ:SMTC), Veeco Instruments (NASDAQ:VECO), Integrated Circuit System (NASDAQ:ICST), Bed Bath & Beyond (NASDAQ:BBBY), Methode Electronics (NASDAQ:METHA), Signalsoft (NASDAQ:SGSF), and Galileo International (NYSE:GLC). NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield AHAA 21.21 MAY 17.50 GAK EW 4.80 83 16.41 35 5.8% EMIS 18.20 MAY 15.00 MTQ EC 4.10 78 14.10 35 5.5% EXFO 31.95 MAY 25.00 FQO EE 8.60 33 23.35 35 6.1% JBL 26.00 MAY 22.50 JBL EX 5.00 1355 21.00 35 6.2% SBYN 13.75 MAY 10.00 QYS EB 4.40 55 9.35 35 6.0% ZIGO 24.74 MAY 17.50 UZY EW 8.20 5 16.54 35 5.0% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield JBL 26.00 MAY 22.50 JBL EX 5.00 1355 21.00 35 6.2% EXFO 31.95 MAY 25.00 FQO EE 8.60 33 23.35 35 6.1% SBYN 13.75 MAY 10.00 QYS EB 4.40 55 9.35 35 6.0% AHAA 21.21 MAY 17.50 GAK EW 4.80 83 16.41 35 5.8% EMIS 18.20 MAY 15.00 MTQ EC 4.10 78 14.10 35 5.5% ZIGO 24.74 MAY 17.50 UZY EW 8.20 5 16.54 35 5.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** AHAA - Alpha Industries $21.21 *** Earnings Priced-In? *** Alpha Industries (NASDAQ:AHAA) designs and manufactures RFICs for wireless handsets, wireless base stations, and several broadband end markets (cable, fiber optic, fixed wireless). The company's technologies enable RF functions, such as tuning, switching, and amplification and its primary product offerings include switches, power amplifiers, discrete semiconductors, and ceramic products. In early March, Alpha cut its 4th-quarter projections, citing the downturn in the economy and continued softness in the wireless handset and infrastructure markets. Technically, it appears the "bad" news is already "priced-in" and investors are starting to return to the semiconductor sector. Friedman, Billings, Ramsey & Co. recently strengthened its research coverage on this sector and started coverage on AHAA. We favor a conservative entry point from which to speculate on the bullish momentum as investors focus on the future. MAY 17.50 GAK EW LB=4.80 OI=83 CB=16.41 DE=35 TY=5.8% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=AHAA ***** EMIS - Emisphere Technologies $18.20 *** New Discoveries! *** Emisphere (NASDAQ:EMIS) is a biopharmaceutical company pioneering the oral delivery of otherwise injectable drugs. By applying its unique carrier technology, Emisphere has taken a unique leadership position in solving the oral delivery of proteins, peptides and other macromolecules produced by pharmaceutical and biotechnology companies. Three Emisphere formulations are currently in human clinical trials being conducted by Emisphere and its partners and the company has recently commenced human clinical testing in the United States of oral heparin tablets utilizing a new delivery agent. The heparin solution remains an important portion of the company's overall product strategy for their family of heparins since it will be an alternative for the elderly population, who may be unable to swallow a tablet. Technically, EMIS is moving resolutely out of a short-term base and there will be little or no resistance to its upward movement until the $20-$25 range. Thorough due-diligence is a prerequisite is this position! MAY 15.00 MTQ EC LB=4.10 OI=78 CB=14.10 DE=35 TY=5.5% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=EMIS ***** EXFO - Electro Optical Engineering $31.95 *** A Big Day! *** Electro Optical Eng. (NASDAQ:EXFO) is a designer, manufacturer and marketer of fiber-optic test, measurement and monitoring instruments for the telecommunications industry. Last quarter's earnings were excellent with sales of $64 million, up from $29 million the previous period. Net income totaled $7.5 million, compared to $3.7 million and the increase in revenues reflected new demand for the company's industrial and scientific products. EXFO has enjoyed an increase in forecast earnings with analysts raising their future profit estimates for the coming year. At the same time, the issue has been the target of "short-sellers" and the current rally may be due to the effect of "covered" positions. Traders who believe the rally has upside potential can speculate on that outcome with this conservative position. MAY 25.00 FQO EE LB=8.60 OI=33 CB=23.35 DE=35 TY=6.1% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=EXFO ***** JBL - Jabil Circuit $26.00 *** Own This One! *** Jabil Circuit (NASDAQ:JBL) is an electronic manufacturing services provider for global electronics companies in the communications, personal computer, peripheral, consumer and automotive markets. JBL offers circuit design, board design from schematic, prototype assembly, volume board assembly, system assembly, repair and also warranty services from facilities in the North America, Europe, Asia and Latin America. In March, JBL reported record results for the second quarter of its fiscal 2001 with net income increasing 22% to $41 million and earnings per share increasing 17% to $0.21, when compared to the second quarter of fiscal 2000. Analysts at Prudential Securities continue to be positive in the long-term on Jabil, saying the company is among the best-positioned issues in the electronic manufacturing services segment. Traders who agree with that outlook can establish a conservative cost basis in the stock with this "in-the-money" position. MAY 22.50 JBL EX LB=5.00 OI=1355 CB=21.00 DE=35 TY=6.2% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=JBL ***** SBYN - SeeBeyond $13.75 *** Cheap Speculation! *** SeeBeyond (NASDAQ:SBYN) enables the seamless flow of information within and among enterprises in real time. The SeeBeyond eBI Suite offers a rapidly deployable and infinitely scalable infrastructure for application integration, B2B connectivity and business processes optimization. SeeBeyond continues to expand its operations with several new partnerships and is growing its customer base in the Asia Pacific region. Several recent new alliances and contracts, including a 4-year deal with GM should bode well for future earnings and has sparked trader interest. A short-term, as well as a longer-term double bottom formation is evident and this position offers a favorable entry point for those investors who are bullish on SeeBeyond's future. Earnings are due Monday, April 23. MAY 10.00 QYS EB LB=4.40 OI=55 CB=9.35 DE=35 TY=6.0% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=SBYN ***** ZIGO - Zygo $24.74 *** On The Rebound! *** Zygo Corporation (NASDAQ:ZIGO) is an emerging supplier of optical components and modules for the telecommunications market and a leading designer, developer, and manufacturer of optics and other on-line yield enhancement solutions for the semiconductor and industrial manufacturing markets. Last week, analysts at Lehman Brothers upgraded Zygo to a "strong buy" rating with a 12-month target of $30. The brokerage said Zygo's focus on next generation optical components has enabled it to do well even in the weak climate for current generation devices. Bears Stearns also has an optimistic outlook for the company and based on the bullish chart indications, investors apparently agree. MAY 17.50 UZY EW LB=8.20 OI=5 CB=16.54 DE=35 TY=5.0% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=ZIGO ******************************************************************* ************************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=2044 ************************************************************** *********************** CONSERVATIVE NAKED PUTS *********************** Trading Strategies: In-the-Money Naked Puts By Robert John Ogilvie Today's strategy discussion ties into two of my previous articles, "Margin Monster and Return of the Margin Monster." I know what you are thinking, pretty corny titles. If you haven't already read them, read them so you have a better understanding of the cost to do these trades. I believe that investors should have a complete knowledge of the requirements to initiate a trade before embellishing on the juicy profit potential. That would be misleading. It would be like telling your kids that you are going to Disney World and ending up at the dentist (sorry dentists reading). In-the-Money Naked Puts Before pursuing any strategy in options trading, investors should review the Characteristics and Risks of Standardized Options. A short put position is uncovered if the writer is not short stock or long another put at the same or higher strike price. Why do we want to sell naked (uncovered) puts? Some traders do this in order to bring in premium in order to lower the cost basis on a stock they don't mind buying at the strike price. Some do it to bring in the premium expecting it to expire out of the money worthless. So more aggressive bullish traders sell in the money puts (price of stock currently lower than the put's strike price) to get a higher delta and thus more movement in option premium relative to the underlying security. The other reason is to collect the excess time premium that evaporates as the option approaches expiration. The mechanics of selling a put in the money include being suitable financially as well as having a speculative investment objective. Securities that have a high amount of implied volatility are preferable in order to receive sufficient time premium. This is generally a bullish strategy. But it may also be utilized on a security that is consolidating. This is a strategy that may be used on stocks, indexes and index holder trusts (i.e. QQQ). Our search has found us a candidate that is pretty volatile and is currently consolidating. XYZ is currently trading at 32.50. The May 40 Puts are bidding $9.50. There is about $7.50 in intrinsic value and $2 of time premium. In a perfect world, XYZ would go up above 40 by the May expiration cycle and the put would expire unassigned. Although this might happen, another way to profit from this trade is to let XYZ trade sideways or advance slightly, thus taking advantage of the higher delta, and close out the position for a slight profit. Theoretically, assuming the option has a delta of 60 (option moves $0.60 to the XYZ's $1), and XYZ moves up $2, the option contract would cost approximately $1.20 less, or $8.30. As time passes so does the premium. Assuming XYZ stays at about $32.50, the $2 time premium will erode. However, if this is truly a volatile stock, it is unlikely that it will stay relatively stable. Hopefully, the stock will move up as well as the time premium erodes making it cheaper to buy the put to close the position. If you are assigned before expiration, the cost basis for the stock will be about $30.50. So if the stock is above the cost basis, you are profitable. For the above example, let's assume we are writing 10 contracts of the May '01 40 puts on an $32.5 stock. The premium is $9.50. First multiply the stock price ($32.50) by 1000 (10 contracts X 100 shares per contract) and then by 20% to get $6,500 ($32.50 X 1000 X 0.20 = 6,500). Then add the premium received of $9,500 ($9.50 X 10 contracts X 100 shares per contract). The current total is $16,000 (6,500 + 9,500). Then subtract the amount the stock is out of the money, which is $0. The initial cost to do this trade is $16,000. The cash required is $6,500 because the premium will full fill the rest of the obligation. I figure the return on the trade on the cash required at the time the trade is closed. For instance, if XYZ advances to $36 and the 40 put may be bought to close at $7.50, the trade makes about $2.00. The margin requirement at 36 is $14,700. The cash required increases to $7,200 (20% of $36,000). Therefore, $2,000 divided by $7,200 = 27.8%. Not bad! Let me give you all a few hints to look for when initiating a trade like this. Learn the calculations for margin requirements and know the cost to start the trade as well as the costs to maintain it. Various brokerages have different requirements (especially for those stocks on the high-risk list). If the cost to initiate or maintain the trade is greater than buying the underlying security on margin, then you may want to rethink the strike price and the trade altogether. Have a stop loss plan. Use a broker that understands what you are doing and can help guide you and double check your reasoning. If the stock price is above your cost basis but still in the money, and you are approaching expiration, referring to the bid/ask spread calculate whether you are more profitable if assigned than buying the put to close. The higher the delta value is the better option/stock movement relation. However, the higher the delta is, the lower the time premium. Finally, refer to OptionInvestor.com's list of plays (both Calls and Naked Puts) for candidates. This is a risky strategy. As previously addressed, you have the risk of early assignment. Other risks include the security's price declining and risk of losing all of your investment. Some additional risks are increased margin requirements and opportunity costs. I am a full service broker and Registered Options Principle and available for questions regarding this and many other strategies. Robert John Ogilvie Rjogilvie@cutter-co.com Toll Free 877-925-0880 Neither Cutter & Company, Inc. nor Robert J. Ogilvie makes any representation as to the accuracy, reliability or completeness of any charts, formulas, and/or research opinions presented herein. This article is intended solely for educational purposes. Nothing herein should be construed as an offer or solicitation to buy or sell any securities. Cutter and Company is a Member of the NASD, MSRB, and SIPC. Please read the OptionInvestor.com's Disclaimer. The following group of issues is a list of candidates for this strategy. Only you can know what techniques and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook and as with any investment, you must decide if the selections meet your criteria for potential plays. They will not be included in the weekly portfolio summary. Stock Last Call Strike Option Last Open Cost Margin Req. Symbol Price Mon. Price Symbol Bid Int. Basis per contract DELL 27.92 MAY 30 DLQ QF 3.40 11461 26.60 898.40 BRCM 35.38 MAY 45 RCQ QI 10.90 959 34.10 1797.60 MU 46.41 MAY 55 MU QK 10.30 96 44.70 1958.20 IBM 96.20 MAY 110 IBM QB 15.10 213 94.90 3434.00 ORCL 15.82 MAY 20 ORQ QD 4.40 363 15.60 756.40 ORCL 15.82 MAY 17.5 ORQ QW 2.40 2314 15.10 556.40 EMC 31.26 MAY 40 EMC QH 9.10 497 30.90 1535.20 SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield UTCI 9.25 9.40 APR 7.50 0.25 *$ 0.25 24.7% SBYN 12.75 13.75 APR 10.00 0.50 *$ 0.50 23.7% APHT 20.50 16.30 APR 15.00 0.56 *$ 0.56 17.4% ACPW 19.13 20.41 APR 15.00 0.31 *$ 0.31 16.3% PRGN 21.53 22.32 APR 15.00 0.31 *$ 0.31 14.6% NVDA 62.69 70.25 APR 45.00 0.81 *$ 0.81 13.2% CA 28.20 29.82 APR 22.50 0.35 *$ 0.35 12.7% MCDTA 24.31 21.01 APR 17.50 0.56 *$ 0.56 11.2% EBAY 35.50 41.63 APR 25.00 0.38 *$ 0.38 11.0% AAPL 19.63 22.42 APR 15.00 0.50 *$ 0.50 9.8% ASMI 17.69 19.33 APR 15.00 0.31 *$ 0.31 9.6% AAPL 23.00 22.42 APR 17.50 0.44 *$ 0.44 9.5% HOTT 28.00 27.73 APR 22.50 0.38 *$ 0.38 9.1% BBY 47.49 49.10 APR 40.00 0.50 *$ 0.50 9.0% THQI 33.88 38.29 APR 30.00 1.38 *$ 1.38 9.0% IGEN 18.94 19.60 APR 15.00 0.25 *$ 0.25 9.0% SCIO 19.38 22.40 APR 15.00 0.44 *$ 0.44 8.9% SCIO 23.00 22.40 APR 17.50 0.25 *$ 0.25 7.5% GLC 23.44 21.55 APR 20.00 0.55 *$ 0.55 7.4% MTON 27.25 33.06 APR 20.00 0.50 *$ 0.50 7.3% ESCM 21.75 27.05 APR 17.50 0.38 *$ 0.38 6.8% AMD 29.44 24.85 APR 22.50 0.35 *$ 0.35 6.1% OLOG 25.00 24.82 APR 22.50 0.56 *$ 0.56 6.0% ANF 32.30 31.93 APR 25.00 0.55 *$ 0.55 5.7% VTS 36.98 33.56 APR 30.00 0.62 *$ 0.62 5.3% MTON 31.69 33.06 APR 22.50 0.31 *$ 0.31 5.1% ADVP 49.94 54.68 APR 40.00 0.75 *$ 0.75 5.0% OATS 9.25 7.06 APR 7.50 0.44 $ 0.00 0.0% DDS 20.30 16.98 APR 17.50 0.40 $ -0.12 0.0% *$ = Stock price is above the sold striking price. Comments: Next week the April series expires and earnings reports start to really roll in. Definitely time to evaluate your outlook on any issues that may get "put" to you and use the current broad-market strength to exit those you don't want to own. Positions Closed: Cirrus Logic (NASDAQ:CRUS), Trico Marine (NASDAQ:TMAR), Lam Research (NASDAQ:LRCX), and Boston Scientific (NYSE:BSX). NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ACPW 20.41 APR 17.50 ACQ PW 0.40 474 17.10 7 30.7% EBAY 41.63 MAY 30.00 QXB QF 1.10 1815 28.90 35 10.1% EXFO 31.95 MAY 17.50 FQO QW 0.45 75 17.05 35 5.7% PSFT 29.10 APR 25.00 PQO PE 0.50 992 24.50 7 27.0% RFMD 17.85 MAY 12.50 RFZ QR 0.45 871 12.05 35 9.7% SCI 22.99 MAY 17.50 SCI QW 0.45 81 17.05 35 7.7% VSEA 39.35 MAY 30.00 UES QF 0.70 42 29.30 35 7.1% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ACPW 20.41 APR 17.50 ACQ PW 0.40 474 17.10 7 30.7% PSFT 29.10 APR 25.00 PQO PE 0.50 992 24.50 7 27.0% EBAY 41.63 MAY 30.00 QXB QF 1.10 1815 28.90 35 10.1% RFMD 17.85 MAY 12.50 RFZ QR 0.45 871 12.05 35 9.7% SCI 22.99 MAY 17.50 SCI QW 0.45 81 17.05 35 7.7% VSEA 39.35 MAY 30.00 UES QF 0.70 42 29.30 35 7.1% EXFO 31.95 MAY 17.50 FQO QW 0.45 75 17.05 35 5.7% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ACPW - Active Power $20.41 *** Earnings Play! *** Active Power (NASDAQ:ACPW) designs, manufactures and sells power quality products that provide the consistent, reliable electric power required by today's digital economy. They are the first company to commercialize a flywheel energy storage system that provides a highly reliable, low-cost and non-toxic replacement for lead-acid batteries used in conventional power quality installations. In January, Active Power reported revenues for the 4th-quarter that totaled $2.7 million, up 468% from the same period last year and 99% sequentially. Active Power's CEO stated that market demand for their battery-free power quality solutions remains strong and is very optimistic about their near and long term growth prospects. In March, Lehman Brothers started coverage on Active Power with a "strong buy" rating and a price target of $31. The company is due to announce earnings next week and traders who want to speculate on the outcome of the report can use this conservative position. APR 17.50 ACQ PW LB=0.40 OI=474 CB=17.10 DE=7 TY=30.7% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=ACPW ***** EBAY - eBay $41.63 *** On The Move! *** eBay (NASDAQ:EBAY) has developed a Web-based community in which buyers and sellers are brought together in an auction format to buy and sell items such as antiques, coins, collectibles, stamps, computers, memorabilia, and toys. eBay enables trade on a local, national and international basis with local sites in 60 markets in the U.S. and country-specific sites in the United Kingdom, Canada, Germany, Austria, France, Italy, Japan, Australia, and Korea. The company recently announced it will open trading Web sites for Ireland, New Zealand and Switzerland. eBay's revenue nearly doubled last year and analysts expect above a 50% annual growth rate for the next 4 years. In early April, eBay shares moved higher after a Deutsche Bank Alex. Brown analyst said he expects the online auction service to beat his first-quarter estimates and bullish outlooks from Yahoo! and Amazon.com have bolstered that optimistic attitude. Technically, eBay appears to have made a successful test of its December low and the cost basis in this position is near the bottom of the recent trading range. MAY 30.00 QXB QF LB=1.10 OI=1815 CB=28.90 DE=35 TY=10.1% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=EBAY ***** EXFO - Electro Optical Engineering $31.95 *** A Big Day! *** Electro Optical Eng. (NASDAQ:EXFO) is a designer, manufacturer and marketer of fiber-optic test, measurement and monitoring instruments for the telecommunications industry. Last quarter's earnings were excellent with sales of $64 million, up from $29 million the previous period. Net income totaled $7.5 million, compared to $3.7 million and the increase in revenues reflected new demand for the company's industrial and scientific products. EXFO has enjoyed an increase in forecast earnings with analysts raising their future profit estimates for the coming year. At the same time, the issue has been the target of "short-sellers" and the current rally may be due to the effect of "covered" positions. Traders who believe the rally has upside potential can speculate on that outcome with this conservative position. MAY 17.50 FQO QW LB=0.45 OI=75 CB=17.05 DE=35 TY=5.7% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=EXFO ***** PSFT - Peoplesoft $29.10 *** Earning Rally? *** Peoplesoft (NASDAQ:PSFT) designs, develops, markets and supports a family of enterprise application software products for use throughout large and medium sized organizations, including corporations, higher education institutions, and government agencies. Shares of PSFT have moved higher in recent sessions and traders are speculating that the company's upcoming earnings announcement is the reason for the renewed interest in the issue. Technically, in the short term (1 week speculation), the stock has excellent upside potential, having rebounded above its 30-dma amid reduced selling pressure, and a cost basis below $25 appears to be favorable price at which to own the issue. APR 25.00 PQO PE LB=0.50 OI=992 CB=24.50 DE=7 TY=27.0% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=PSFT ***** RFMD - RF Micro Devices $17.85 *** Can't Catch This One! *** RF Micro Devices (NASDAQ:RFMD) designs, develops, and markets proprietary radio frequency integrated circuits 'RFICs' for wireless communications applications. The company's products are used in cellular and PCs, cordless telephony, wireless LANs, local loop, industrial radios, security and remote reading. Shares of RFMD surged today, thanks to stronger-than-expected new business with its largest customer. Officials also reiterated guidance they previously gave analysts, saying the company would see 20% sequential growth in its fiscal 2002 first-quarter from an expected $55 million in fourth-quarter revenues. The company will report fourth-quarter results on 4/17 and traders who believe the announcement will be favorable can profit from that outcome with this conservative position. MAY 12.50 RFZ QR LB=0.45 OI=871 CB=12.05 DE=35 TY=9.7% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=RFMD ***** SCI - SCI Systems $22.99 *** On The Rebound! *** SCI Systems (NYSE:SCI) designs, manufactures, markets, sells, and services electronic products for the telecommunication, computer, aerospace, defense, medical, and entertainment industries, as well as the U.S. Government. SCI is the world's second-largest maker of electronic computers with nearly a third of sales going to Hewlett-Packard and as long as HWP continues to purchase its products, SCI will be successful in the hardware sector. The company's earnings are due near the end of April and since most of the bad news appears to be "priced-in," there is little downside risk in owning the stock at a cost basis near $17. MAY 17.50 SCI QW LB=0.45 OI=81 CB=17.05 DE=35 TY=7.7% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=SCI ***** VSEA - Varian Semiconductor $39.35 *** Break-out! *** Varian Semiconductor (NASDAQ:VSEA) is a leading producer of ion implantation equipment used in the fabrication of integrated circuits. The company operates globally, designing, manufacturing, marketing and servicing semiconductor processing equipment and it is also a leading supplier of ion implantation systems. Varian recently announced that the company was awarded a new patent for ion implant architecture incorporating unique and powerful ion acceleration and analysis technology. The invention and patent allows Varian to improve the yield of semiconductor devices by delivering an ion beam of exceptional species and energy purity. That is probably not the reason that the stock broke above its recent trading range today, but it does lend additional credence to the company's leading position in the industry. Traders who want to own this unique issue can target a discounted cost basis with this conservative position. MAY 30.00 UES QF LB=0.70 OI=42 CB=29.30 DE=35 TY=7.1% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=VSEA ******************************************************************* ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Indeed, It Will Be A "Good" Friday! Thursday, April 12 Technology stocks rallied again today, pushing the NASDAQ higher for the fourth consecutive session. The Dow Industrials also rebounded, rising on new strength in financial and biotechnology issues. The NASDAQ closed up 62 points at 1,961 while the Dow finished 113 points higher at 10,126. The S&P 500 index was 17 points higher at 1,183. Volume on the Big Board was a light 1.08 billion shares with advances beating declines by about 2-to-1. NASDAQ volume hit just 1.87 billion shares with winners beating losers 2-to-1. In the bond market, the yield on the U.S. 30-year Treasury fell to 5.59%. Tuesday's new plays (positions/opening prices/strategy): Granite (NYSE:GVA) APR35C/APR35P $1.75 debit straddle Intl. Bus. (NYSE:IBM) APR85P/APR90P $0.75 credit bull-put Intl. Bus. (NYSE:IBM) M100C/APR105C $4.25 debit diagonal Wellpoint (NYSE:WLP) APR105C/A100C $0.00 credit bear-call The volatile market activity provided some great opportunities to participate in our new combination positions. Unfortunately, the slump in Wellpoint shares prevented a favorable entry in the bearish spread. Questions & comments on spreads/combos to Contact Support ****************************************************************** - STRATEGIES & PLAY SELECTION - Readers often ask for more information on spreads and combination positions and since today's publishing deadline limits the time available for new candidates, this is an excellent opportunity to publish one of the recent E-mail replies regarding this unique section of the Option Investor Newsletter. ****************************************************************** Hello Ray, I have been considering Spread trading for the past few months, since I do not have the time to monitor the market throughout the day and my preference is to participate in strategies with good reward potential and limited risk. I am relatively inexperienced with options, but have learned a number of skills and techniques from the various writers of the OIN, including your articles. Before I begin trading the "plays" offered in the Spreads/Combos portfolio, could you provide some additional information about the way you select candidates and manage the positions in this section. Any additional help and suggestions would be greatly appreciated! Thank You RP Regarding Spreads and Combinations: Strategy and Play Selection The Spreads/Combos section is produced for a target audience: novice traders that need simple strategies. To generate the majority of plays, I search through lists of candidates and evaluate the positions and their potential returns based on the technical outlook of the underlying issue, its sector and the overall market. If I feel the chart fits the strategy and there is an acceptable risk/reward ratio, the position is placed on a list of final candidates. After I have all of the possible plays for a specific day, I simply choose those which, in my opinion, appear most favorable. On some days, I also list positions on candidates (or sectors/groups) that readers have requested or submitted, so they can see what type of play a more experienced trader might utilize, based on their outlook for the underlying issue, industry or market segment. These plays are always listed with the heading "Reader's Request" to differentiate between my picks and those generated by subscribers. To be successful with this section, remember that it is written for relatively new traders (about 80% of our readership), many of which place their combination orders as a "spread." That's why I always list a suggested "net-credit" or "net-debit" target to help them open the play. This is a recommended entry point; simply my opinion of what a trader might use as an initial "limit" for the spread order, and it should be a reasonable price to initiate the play even with small changes in the stock and option quotes. The target is always less than the straight BID/ASK numbers (we don't pay "market" for spread orders) and generally, you can expect to shave a minimum of $0.10-$0.20 off the BID/ASK price when opening or closing even the smallest spread order. The margin can be more or less, depending on the price of the options, whether they are ITM or OTM, the time value remaining, the volatility of the stock etc. I simply try to give the novice trader an idea of the value of the position because the option prices are always different the next morning. Of course, you may need to adjust this target based on the activity of the underlying issue, the trading volume of its options or the Implied Volatility of the series being traded. In closing the plays, I generally suggest a target return of 10-20% per month on most of the basic spread strategies and that is how the "target profit" or "return on investment" numbers are derived. I try to construct positions to reflect that goal, but not every play is a winner so the main objective is to limit losses and close failed positions before they become very costly, preserving capital for the next success. I follow the portfolio "real-time" with Interquote and paste all the quotes into an archive for each position at regular intervals throughout the day. I trade the "paper" portfolio just as one would trade their regular portfolio and record the target entry prices for each position (the suggested NET CREDIT or NET DEBIT numbers) whenever they are achieved or fall within a small margin. That margin is generally $0.10-$0.20 for spreads under $3-$4 and slightly more for higher priced positions. Occasionally, I will allow additional latitude on unique plays if it's realistic that the target could have been attained and I have a good knowledge of the market-maker that handles that issue or can document other trades in that series at that price. I usually don't "leg" into combination plays as far as the newsletter portfolio is concerned (unless specifically stated) but I try to utilize the volatility at the open and close of the session to improve our entry prices. Some of our plays are priced better than the initial "target" and others are worse. I don't just take the best price of day; I try to trade as someone would in their own portfolio. In addition, I have the benefit of real-time and historical option quotes and one of the leading market-makers in the industry (to help price the positions without actually trading them). In most cases, the published prices are a fairly accurate record of the potential entry opportunities and keep in mind, I rarely show positions as "not-traded" even though I personally would have avoided them, based on new information that became available after the play was initially offered. New traders occasionally comment that they were unable to achieve the entry targets, even when trades were posted at those prices. As with most experienced traders, I have the benefit of a floor specialist working on my behalf to get the best entries. You will rarely get filled in these spreads at the target with deep discount brokerages unless the options actually trade at those prices. The potential for success with an online broker such as Preferred Trade (which has direct access to the exchange but does not allow simultaneous orders for multiple positions) is based strictly on your own skills and the market's volatility. Many of our advanced readers use the section as a candidate list and they trade their own positions at different entry and exit prices. I correspond with some of them daily (lots of candidates that way!) and they are quick to report when a price has been posted in error or could not have been achieved. Some of them open and close new positions using the method I previously referred to: "legging" in or out-of a spread. Basically, you just try to utilize the daily movement of the underlying stock to your advantage, buying a long position when it is cheaper and selling a short position when it is more expensive. This tactic becomes easier when you are more familiar with the daily stock, sector, and market trends and use the appropriate trading tools. Daily Summary (Portfolio Activity): I try to monitor the plays in the Spreads/Combos portfolio on a regular basis and as time permits, I will make suggestions as to when they might be closed or adjusted. However, my primary job is to provide candidates for your careful scrutiny and to identify positions that have a favorable risk/reward outlook. In the end, the determination to trade is solely yours. I will also try to identify those occasions when a play offers a favorable early-exit profit, or when I notice an issue has reversed direction and may require closure or adjustment of the associated position. Keep in mind that I generally have over 100 positions in four sections to track on a daily basis and I may not always observe the crucial turning point or change in character of a specific issue. The portfolio narrative is a service I provide to help novice traders understand how various spreads might be opened and closed but in most cases, actions taken based on the commentary would be far too late to be effective. In no way is it offered as a substitute for personal trade management nor does it replace your duty to monitor the positions in your portfolio. In years past, we published a monthly summary of combination positions, and it was a reasonable representation of the plays provided during the month. However, because there are so many ways in which each play can be opened, closed and adjusted, the summary eventually became a journal of my personal management of the positions and it was obvious that it might not be completely representative of the manner in which the average trader would react. So, now I keep an ongoing Excel-based summary for daily play tracking and a monthly summary in narrative form, which is included at the end of the expiration period. Position Management: One of the questions I receive frequently concerns the correct timing of early exits and adjustments for spread positions. While there is no perfect answer (or solution) to this dilemma, one of the most practical closing strategies is based on the target ROI (return on investment) for the position. For example, if a play originates with a 15% monthly return target and a slightly smaller but reasonable profit becomes available at an earlier date (based on a lower yield and shorter time period), the position is indeed a candidate for early closure. Of course, most positions that meet that criteria will appear to be so successful they can't possibly lose at expiration. This aspect, along with commission considerations and the effects of human nature, which urges you to simply hold the play and hope for maximum profit, will prevent most traders from closing the play early. As you know, even when the issue moves in the predicted direction, the position is always at risk from a variety of changes in the market. These effects are reduced with hedged positions but the end result can still be unfavorable. There are a number of examples in past portfolio plays including some of which might have been our most profitable positions, except that they were closed in the interest of sound money management. As far how to place STOPS and closing orders; some traders suggest closing a position when it meets a specific price while others use technical analysis to determine the correct placement of potential exit orders. The limited-risk techniques discussed in the Spreads/Combos section are not without their disadvantages and obviously, the more advanced strategies are not immune to the market's corrections. Spreads and combinations, as well as all option trading techniques, need to have some type of exit point in case the market/stock/sector turns in the opposite direction from that which is expected and position management is an important part of being a successful trader. In addition, the success of a limited risk strategy such as OTM credit spreads is keeping losses to a minimum. There are never any big winners to offset the big losers, so there simply can't be any big losers. Obviously, a gapping issue will occasionally wipe out a portion of previous gains and there is nothing you can do about it. But, at the same time, you must manage the remaining positions effectively or there will be no profits to offset the rare catastrophic losers. Additional Information: As far as spread strategies, I have written a number of narratives for the techniques used in the section and those are still listed in the web-site archives (Options 101 etc). Of course, there are also a plethora of great articles by other OIN writers, covering just about every imaginable option trading strategy commonly used by retail investors. Unfortunately, there is no way to produce a list of specific guidelines or step-by-step techniques on entering and exiting combination plays. The methods I use are much the same as those that Jim and other writers discuss in the daily strategy narratives and each is based on simple, proven money-management techniques; the most important of which is "keep the losses small!" The older articles in Options 101 (by broker Robert Ogilvie) cover the basic spread strategies and their possible outcomes (good and bad) and many of Jim's recent trading lessons describe the use of position trading adjustments (rolling into spreads for example) to minimize losses in straight option positions such as buying calls. The most important entry/exit information for spreads comes from the knowledge of option pricing, time-value erosion, volatility and probability. Those subjects have been covered at length in various educational series on the web-site. Contrary to what you might believe, there are no simple and easy answers. Option trading is not free money in any way; lots of hard work and research, and success comes only after failure and experience. The key is to find something you do well and stick to it. Don't use complex strategies just because they are unique or intriguing. Often the best course of action is the simplest. The key to remember is most sections of the newsletter are really just a list of candidates to significantly limit your search for profitable trading positions. You still have to decide what you are looking for, and if the positions meet your personal criteria for potential plays. Only you can know what type of strategies are suitable for your portfolio outlook, skill level, and risk tolerance. Books and Online Material: Here are my suggestions for the best books on the subject of spreads and combination strategies that profit from option pricing disparities. The rules haven't changed in years and the bibles remain the same: "Options as a Strategic Investment" by Larry McMillan and "Option Pricing and Volatility" by Sheldon Natenburg, both available in the OIN bookstore. The CBOE also has some great articles on basic combination strategies in their educational section (www.cboe.com) and the basic descriptions and profit graphs are available from Optionmax (www.optionmax.com). In addition, the options page at e-analytics (www.e-analytics.com) has some excellent summaries of popular combination strategies. I hope this has helped you understand the difficulties associated with producing the "Spreads/Combos" and maybe you will eventually benefit from some of the plays offered in that section. Remember, they are really just candidates and should only be considered with respect to your personal risk/reward attitude and trading style. Good Luck! ************************Advertisement************************* Tired of waiting on trades to execute? 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