The Option Investor Newsletter Wednesday 04-18-2001 Copyright 2001, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/041801_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 04-18-2001 High Low Volume Advance/Decline DJIA 10615.80 +399.10 10687.10 10226.90 1.91 bln 2053/1060 NASDAQ 2079.40 +156.20 2129.31 1995.91 3.08 bln 2878/1145 S&P 100 639.33 + 27.80 644.87 611.78 totals 4931/2205 S&P 500 1238.16 + 46.63 1248.42 1200.58 69.1%/30.9% RUS 2000 466.51 + 10.93 470.71 455.59 DJ TRANS 2859.02 + 100.95 2863.20 2753.20 VIX 28.45 - 1.79 30.01 26.23 Put/Call Ratio 0.51 ****************************************************************** The Big Squeeze Wow! Who would have thought that today would be the day? The Fed Futures contract did not even have an intermeeting rate cut priced into it. It was an unusually strong day for an unusually strong statement from the Fed. In fact, it was historic as the NASDAQ had the heaviest volume ever (3.08 bln) in comparison to the old method of volume counting, posting a 156 point gain to close at 2078. Thank you! And we don't want to slight the Dow ($INDU) which rallied almost 400 points to finish at 10615. It's like we have been transported back to the good ol' days. Or have we? It is has been a heck of a week! Cisco (NASDAQ:CSCO) warns on Monday, the market shrugs it off on Tuesday, Intel (NASDAQ:INTC) beats the Street and ignites a rally that put the shorts on red alert. Imagine being a big bear and shorting into the morning strength after the gap open. I mean, imagine massive positions. Then, you see that little "Newsflash" on CNBC or on the newswire. Fed cuts Federal Funds Rate by 50 bp to 5.0%. As my colleague Jeff Bailey would say, "a rally of biblical proportions!" Shorts frantically scrambled to cover in what is one of the biggest short squeezes ever. The Dow literally spiked 300 points in seconds! The Fed gave all the longs in the market an early Christmas present, putting a little, and in some cases, a lot of money back in their pockets after the dismal Q1 and Tax Day. The Fed certainly surprised everyone. Instead of bailing the market out three weeks ago, they tactfully waited until the market repaired itself and showed signs of hope before giving it the boost it needed; a shrewd move to avoid criticism of bailing out the market. Money flowed back into tech issues and financials which will most certainly benefit from lower interest rates. So why today? The CPI yesterday was in-line and inflation remains in check. INTC painted an inoffensive picture and didn't cut their capital expenditures going forward. Even in the face of this news, the Fed is looking out for the U.S. economy. Their decision today was aimed at reversing declines in business investment and profits. In the Fed statement, they made it clear that they're on our side, "Dampened capital spending threatens to keep the pace of economic activity unacceptably weak." Today, Greenspan and company proved that they will remain aggressive toward recessionary conditions. Concerns over global weakness, specifically in Japan and Europe, also played a role in the rate cut to insulate the U.S. from global deterioration. The velocity of the moves in both the NASDAQ and the Dow were fantastic. Instant karma. Where you on the right side of the move? I know a few of my colleagues were. These types of moves are characteristic of short covering, however, today's huge volume in the market indicates that there are new longs in the market. When I say this, I'm not speculating on any time horizons for these longs, only that there was clear indications that institutional buyers were out in force. The cash hordes at the mutual funds are spilling over the treasure chests, and today some of that money went to work. It's time for the fund managers to stick it to the shorts a little bit here. We have seen the Fed cut four times this year already, 50 bp each, two of which were intermeeting cuts. That is a fair amount of rate relief to filter through the economy. Can we just fast forward to Q4? Technically, the Dow blasted through resistance at 10300, which was previous support before the recent breakdown. This a very bullish advance. A sustainable move in this index will be lead by Financials and Tech. Overhead, 10750 will likely be a challenge for the bulls; don't count out the bears just yet. They are highly capitalized and love to buck the trend. IBM (NYSE:IBM) came out after the bell with in-line earnings of 98 cents and reiterated that they were on track for full year estimates. Big Blue is weathering the storm well even as CSCO and Hewlett-Packard (NYSE:HWP) resorted to warnings and layoffs. The company stated that while IBM is not immune to the economic conditions, they expect to outperform their rivals in the coming year. Sound a little cocky? You bet they are after widespread speculation that IBM would warn before this release. Advanced Micro Devices (NYSE:AMD) beat the Street by 4 cents and reaffirmed net income for the full year as well. Both stocks traded higher in after-hours: IBM closed at $112.81 and AMD at $29.85. Over on the NASDAQ, the index gapped up on the open over 2000, quickly pulled back to 1995 and climbed higher on the INTC news. The Fed's rate cut lifted the NASDAQ to 2100, where it spent much of the day. However, traders booked profits in the final hour after hitting the day high of 2129. This level should be watched closely as the next resistance. Above that, 2250 is the pivot point from the last decline to recent lows. Shorts will be lurking there to battle. Keep this in mind while maintaining long positions. Helping send the NASDAQ futures higher tonight is Apple (NASDAQ:AAPL). They returned to profitability tonight by beating the estimates by a whopping 10 cents, posting an 11 cent profit. The management presented an upbeat outlook, unlike many other box makers. Siebel Systems (NASDAQ:SEBL) defied the tech downturn and beat the Street by a penny with 15 cent per share earnings. In the Semiconductor space, KLA-Tencor (NASDAQ:KLAC), the leading testing equipment maker, posted better-than-expected earnings as well, 48 cents versus 44 cents. However, they still have six months of inventory backlog as demand has weakened across the Semi sector. Microsoft (NASDAQ:MSFT) closed above its 200-dma today for the first time since March 31st, 2000. This is ahead of its earnings report due out tomorrow after the close. A positive report could very well continue the upside strength going into Expiration Friday. We will likely see volatility tomorrow afternoon as positions are rolled forward and defended, especially with today's move which changed the options landscape. The Fed rally today felt really good. It gives investors hope and incentive for mutual fund managers to put cash to work. However, the bears are not dead and while they took a hit today, we must be on guard for when they pick their next level. The long and short money are going to battle and each has plenty of cash reserves. This will be an interesting fight to watch. But keep in mind the key resistance levels on the indices. We will be opening higher tomorrow so protect your profits and play the long side until resistance proves itself. Expiration adds a whole new twist to the magnitude of today's move. Don't leave those trading screens. Trade smart. Matt Russ Editor ************************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=2090 ************************************************************** ************** NEW CALL PLAYS ************** C - Citigroup Inc. $50.05 +2.13 (+2.75 this week) The creation of Citigroup brings together organizations that are extraordinary in their individual capabilities and in the ways they enhance and complement each other. Together, they offer customers a range of quality products and services unmatched in the financial services industry. Citigroup serves a broader spectrum of customers, in more places and by more means of access and delivery, than any other financial organization. With all of Citigroup's divisions working together to provide their customers with the best service and products, they are forming a model for the industry's future. In the midst of report card season, investors and analysts alike are taking down names and handing out grades. So far, it appears that financial services giant and major DOW component Citigroup is getting top marks. The company reported earnings yesterday and did little to disappoint. Beating Street estimates by a penny, revenue was up 6 percent year-over-year. While profits were down 7 percent, analysts liked what they saw, citing that relative to weakness in the capital markets, this was a good performance indeed. Today's surprise announcement of a 50 basis point rate cut just made C's business environment much more favorable and with that, the stock advanced 4.44 percent on 1.66 times the average daily volume. In doing so, C broke through and closed above its 50-dma (near $48) and right at its 100-dma. With the 5-dma also near $48, this level should provide strong support. As a result, we are placing our protective stop price at $48. Make sure that C continues to close above this point. Aggressive traders may target intra-day pullbacks to moving average support at $48 along with horizontal support at $50 and $49, but confirm bounces with volume. With the last line of moving average resistance from the 200-dma just ahead at $51.53, a break through this level with conviction could give conservative traders an opportunity to take a position. In either case, correlate entries with movement and direction in AMEX's Banking Index (BIX). BUY CALL MAY-45 C-EI OI= 5705 at $5.80 SL=3.75 BUY CALL MAY-50*C-EJ OI= 8264 at $2.25 SL=1.25 BUY CALL MAY-55 C-EK OI= 2100 at $0.65 SL=0.00 BUY CALL JUN-50 C-FJ OI=13438 at $3.10 SL=1.50 BUY CALL JUN-55 C-FK OI=10478 at $1.25 SL=0.50 http://www.premierinvestor.com/oi/profile.asp?ticker=C AOL - AOL Time Warner Inc. $49.00 +5.10 (+6.78 this week) AOL Time Warner is the result of a 2001 gargantuan merger that married the world's largest online company with a media giant. America Online brings its flagship online service, CompuServe, Netscape, and several interactive online services whilst Time Warner's contributions span films and TV, music, cable networks and systems, publishing, and professional sports. AOL Time Warner's brands include Time Warner Cable, Warner Brothers, Warner Music, HBO, Turner, America Online, CNN, New Line Cinema, and Time Inc. The stunning technology rally, incited by the Feds surprise rate cut, combined with the blowout reports from AOL, IBM, and INTC imparts a sense of confidence that better times may lie ahead. The exceptional volume levels and the strong stream of money coming back into the markets further indicated that today's phenomenal rally might just have legs. We're looking for investors to bid shares of AOL up over the short-term amid the excitement that the economic slump just might be tapering off and of course, on the company's own earnings' merits. AOL delighted the Street today with a narrower-than-expected net loss of $1.4 bln, or $0.31 per share, compared with a $1.5 bln loss, or $0.34 per share, same period a year ago. Revenue rose 9% to $9.1 bln and more importantly, the company maintained its financial targets for 2001! In the current wave of earnings woes from the Internet and Media groups, this news gave investors that warm and fuzzy feeling. But before we polish our rose-colored glasses, we need to remind ourselves that disciplined trading is the key to success. Confirm the presence of bullish market internals, in conjunction with high-spirited momentum as indicated by market volume and cash inflow, before going long. If the run up is true blue, we should see AOL continue to trade with confidence above the 200-dma technical and make significant headway tomorrow. Conservatively, buy into an upswing and take profits as AOL challenges the $55 and $57 levels. If there's enough intraday volatility and your style is more geared to target shooting, then consider bottom fishing near our CLOSING stop of $46. However it may unfold, make sure the bulls are in control before initiating positions at any level. BUY CALL MAY-40 AOE-EH OI=65198 at $9.90 SL=7.00 BUY CALL MAY-45*AOE-EI OI= 5459 at $5.60 SL=3.50 BUY CALL MAY-50 AOE-EJ OI= 7855 at $2.35 SL=1.25 BUY CALL MAY-55 AOE-EK OI= 1321 at $0.75 SL=0.00 http://www.premierinvestor.com/oi/profile.asp?ticker=AOL ************ NEW PUT PLAY ************ ABT - Abbott Laboratories $46.89 -0.21 (+1.22 this week) Abbott Laboratories is engaged in the discovery, development, manufacture and sale of healthcare products and services. ABT's pharmaceuticals and hospital products (accounting for more than 40% of sales) include antibiotics, synthetic hormones, and drugs such as Norvir, which is used to treat HIV. Its products are sold directly to retailers, wholesalers, healthcare facilities, laboratories, and government agencies throughout the world. The Pharmaceutical index (DRG.X) is still locked in its prevailing downtrend, and this bearish effect has been keeping a lid on the price of ABT, despite reporting earnings inline with analyst estimates last week. The FTC (Federal Trade Commission), which has taken aim on the big drug makers as well, today received approval to launch a probe aimed at ferreting out any anti-competitive practices. The FTC suspects the big drug makers are cutting illegal deals with smaller drug makers to keep cheaper generic drugs off the market. Adding even more downside pressure to the sector was the Federal Reserve, cutting interest rates during the day today. This ignited a strong rally in the broader market, with money finding its way into neglected issues like Technology, Financial, and Retail. The cash coming into these sectors had to come from somewhere, and it appears that it was flowing out of defensive sectors like Drugs, Food and Energy. If the broad market rally continues in the days ahead, additional losses in the DRG.X are entirely possible, which should propel ABT further south. For its own part, ABT has been struggling with the 200-dma, now sitting near $47. Throw in the intraday resistance at $47.50, and we have a nicely defined put play that looks just about ready to roll over again. Aggressive entries near our $47.50 stop look attractive as ABT rolls over, while the more conservative approach will be to get onboard as the stock falls through the $45.50 support level. BUY PUT MAY-50 ABT-QJ OI=1564 at $3.80 SL=2.25 BUY PUT MAY-47.5*ABT-QW OI=1248 at $2.30 SL=1.25 BUY PUT MAY-45 ABT-QI OI=7669 at $1.15 SL=0.50 BUY PUT MAY-42.5 ABT-QV OI=2485 at $0.60 SL=0.00 http://www.premierinvestor.com/oi/profile.asp?ticker=ABT ***************** STOP-LOSS UPDATES ***************** AGIL - call play Adjust from $14.75 up to $17 RIMM - call play Adjust from $27 up to $32 MYGN - call play Adjust from $43 up to $49 AEP - call play Adjust from $48 up to $49 GE - call play Adjust from $43 up to $45 FDC - call play Adjust from $60 up to $64 ************* DROPPED CALLS ************* ADVP $53.24 -4.30 (-1.44) This short lived play actually reached a high of $60.73 on Wednesday morning before the announcement of a rate cut by the Federal Reserve hit the market. From that point on, a dramatic change in sector preference took place. The technology and financials which were being purchased tentatively for the last few days experienced heavy buying, and the health care sector, which is considered a defensive sector, fell in profit taking. As such, we are dropping ADVP tonight as it closed below our stop level. MRK $79.30 -1.55 (-0.20) There's nothing like a rate cut to get investors into a less defensive mood. A belated post-Easter gift of 50 basis points was a positive force for most sectors today. Seeing value in beaten up stocks, traders rotated out of their safe havens and into more aggressive issues. As a result, the Drug sector as a whole dropped in the face of an up market, with MRK closing down almost 2 percent on 145% of ADV. While the stock is still above our stop price of $79, in light of today's price/volume action and fundamental shift, coupled by the first signs of a potential rollover, we are taking this opportunity to close out a profitable play. ************ DROPPED PUTS ************ BBY $54.70 +7.20 (+5.60) The Fed ambushed the bears today with another midday interest rate cut, and interest rate sensitive issues like the retailers rallied sharply on the news. Already up modestly after the positive earnings reports last night, BBY surged sharply higher, Leading the retailers higher with more than a 15% gain on the day. Obviously the rally pushed our play through the $50 stop level, so we have no choice but to drop it before we even got a chance to play. VRSN $47.43 +3.30 (+2.48) A strong open this morning was the result from the string of positive earnings announcements after the close yesterday. VRSN gapped open above our $45 stop and after holding its ground through amateur hour, shot through the $50 level when the Fed stepped forward with a surprise intra-meeting rate cut. Virtually every sector or stock that had been under pressure lately saw sharp buying interest and VRSN was no exception. Despite losing momentum and seeing heavy selling into the close, VRSN held above $47 at the close. Despite the likelihood that the stock could head further south tomorrow, we have no choice but to drop the play tonight due to our violated stop. BEAS $36.71 +4.26 (+3.44) A surprise rate cut from the Fed helped to give the bulls a second chance at taking out the 50-dma (now at $37.26). While the stock managed to pierce that level intra-day, profit taking late in the day caused BEAS to finish below the major moving average. The stock managed to find support today just below at the 5-dma (at $33.27). Ending the day up over 13 percent on almost 1.3 times the average daily volume, BEAS closed above our stop price of $33, leaving us little choice but to drop this play. Look for possible weakness to carry over from today's close as an opportunity to scale out. ************** TRADERS CORNER ************** Utilizing The Tick By Mary Redmond Traders nowadays have many technical tools at their disposal. Some of them work well on particular stocks and indexes and not on others. The more specialized the tool is, the higher the level of accuracy is likely to be. For example, the QQV, the VXN.X and the tick.nq can usually be very effective when trading the Nasdaq or Nasdaq stocks like Ciena and Juniper, as they move in close tandem to the QQQs, or Nasdaq 100. The Dow often responds better to indicators like the VIX and the its own tick, as well as the movement of bond yields. For example, we can take a look at how the QQQ responds to the movement of the QQV and tick. Extreme movements in the tick often correspond to extreme movements in the QQV or VXN, and they often signal a turning point for the Nasdaq, QQQ, and many Nasdaq stocks. The tick and the volatility indicators can be even more effective when used with the stochastics and MACD indicators. In particular, we can find several key points over the last several weeks when the tick reached an extreme level of over or under 700, which was a deviation out of its Bollinger Bands. When this occurred at the same time as a wide deviation of the QQV and VIX out of their Bollinger bands, or a high level of regression from the QQV's trading waves, it gave a strong buy/sell signal for the Nasdaq. For example, on March 28th, the QQV gave a warning signal when it dropped to 55, which was a retracement of over 84% from its previous high level. On the 27th, the tick had reached a high point of +500. While these signals may not have been enough when viewed individually, together they were a warning. On the 28th, the QQQ was trading at $42.93, and subsequently dropped precipitously to the $34 level by April 4th. On April 4th, the tick reached -1200 which was an extreme level, and after a failed rally, it was at -1000. The QQV at this point had hit a key retracement level from its last wave at a high of 70. See how it spikes way up out of its trading bands? This was a signal of a highly oversold Nasdaq. Did that mean it would definitely rally? Not necessarily, but it meant that a relief rally of some level was likely. The QQQ was at the $34 level, and over the next two days, it popped up to $38. Another important signal occurred from April 6th to April 9th. You see how the QQV spiked up way out of its Bollinger bands to the 75 level? Also, the tick moved as low as -600 on April 6th. The QQQ was $36 and moved to $40. Then, over the last seven days, the QQQ has basically been range bound between $40 and $42.50, until the Federal Reserve cut rates by 50 bp on Wednesday. While the cut may stimulate the market to rally in the near future, there will still be intraday swings in the tick and QQV which traders can use to their advantage. Let's take a close up look at how the QQQ traded on an intraday basis compared to the tick.nq, and the QQV. Usually, the volatility indicators are not as precise when used for one or two point intraday trades, but in cases of rare deviation, they can be effective. On the 11th in the afternoon the tick dropped to -750 a very low level. The QQV was stuck around 60, which was a retracement level. The QQQs were $40.75, and moved to $42.69 the next day. On the 12th in the afternoon, the QQV dropped to a very low level of 55, which was a retracement of over 100% from its previous wave. At the same time, the tick reached a +500. The QQQ dropped from $42.80 to $40 following this. In addition, the tick tends to move in waves, or cycles, and they frequently follow the same type of retracement pattern as the QQV. Traders who master the use of these tools will be at an advantage in trading. ************************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=2106 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** CPN - Calpine Corporation $54.50 -0.06 (+3.19 this 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. Most Recent Write-Up As if on cue, Calpine surged out of the $51 pivot point of its neutral wedge on Monday with a strong move above $52 near the open. From that point, it was smooth sailing until the stock reached resistance at $54.50 on Tuesday. Traders responded optimistically to the news that CPN and Encal Energy of Alberta Canada had determined a ratio at which the shares of the two companies were to be exchanged upon completion of the previously announced merger. The deal is scheduled to close on April 19th, and will result in CPN gaining control of approximately 1 trillion cubic feet of natural gas reserves, as well as access to gas transportation facilities in Canada. In addition, the energy sector soared in response to excellent earnings released from Enron and Dynegy. CPN is scheduled to report earnings on April 26th before the market opens, so traders have over a week left to play a potentially strong earnings run. Depending on market conditions, it might be possible to enter CPN on a pullback to support at $54. Alternatively, traders can wait for a break above $56 with strong volume, which could propel CPN to $58. We are moving stops to $53 so end the play if CPN closes below this level. Comments With the sector rotation back into Tech stocks today following the positive INTC effect and surprise rate cut, CPN held up relatively well. Because of this, and the support at $54, CPN is the call Play of the Day. We feel that an entry point will present itself on Thursday. Look for buyers to support the stock at $54. A bounce from there again, like late in Wednesday's session, would allow entry. If money does flow back into this hot energy issues, a break through resistance at $55 would also warrant entry. Resistance lies overhead at $56. BUY CALL MAY-50 CPN-EJ OI= 939 at $7.10 SL=5.25 BUY CALL MAY-55*CPN-EK OI=1993 at $4.20 SL=2.50 BUY CALL MAY-60 CPN-EL OI=5520 at $2.10 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=CPN ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Here Comes the Fed to Save the Day! And the Bears Run to Cover! Stocks rallied today with record gains in the major indices after the Federal Reserve announced a surprise interest rate cut to boost the sluggish economy. The FOMC, noting that risks for the economy remain tilted to further weakness, lowered the bellwether federal funds rate by 50 basis points to 4.5%. The Fed also cut the more symbolic discount rate, charged for emergency loans to banks, by 50 basis points to 4%. The FOMC, which meets next in May, said the rate cut was based in part on softening capital investment, erosion of current and future profits and rising uncertainty in the business outlook. It also cited a "reduction in equity wealth on consumption" and risk of slower growth abroad. Traders were caught unaware by the decision, a move that brings the total interest rate reduction this year to 200 basis points, and widespread short-covering combined with renewed interest in technology stocks drove the market to levels not seen in weeks. Investors who were afraid they would be left behind jumped back into stocks searching for bargain-priced shares and almost every NASDAQ sector registered significant gains. Among broader market groups, the biggest moves were seen in the biotechnology, retail and cyclical segments. Shares of banks, brokers and credit firms also rallied on hopes of increased trading in a reviving equity market and higher demand for loans at lower rates. Banks and financial companies are usually the biggest benefactors of a rate cut, as it promotes stock buying and makes it more profitable to lend money. Automobile and home-building companies also rallied as lower interest rates make it easier for consumers to purchase "big ticket" items. Only the defensive areas of the market such as tobacco, major drug and utility issues fell during the upbeat session. Summary of Previous Candidates: Covered Calls: (Margin not used in calculations) Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield NVLS APR 40 37.56 53.31 $2.44 5.3% Relief! PDII APR 50 48.75 71.50 $1.25 4.9% NVDA APR 45 42.81 77.26 $2.19 4.2% ERTS APR 45 43.00 59.01 $2.00 3.2% Positions closed: SNPS (recovering! - Murphy's law) Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield JNPR APR 30 29.05 57.41 $0.95 33.8% VRSN APR 35 34.35 47.43 $0.65 23.3% COHR APR 35 34.40 42.30 $0.60 17.6% VSTR APR 70 68.56 103.71 $1.44 13.7% PDII APR 45 44.19 71.50 $0.81 12.5% ERTS APR 45 42.81 59.01 $2.19 10.5% VSTR APR 80 79.40 103.71 $0.60 9.8% NVLS APR 35 33.81 53.31 $1.19 9.3% What a rally! NVDA APR 40 38.75 77.26 $1.25 8.1% NVDA APR 40 38.94 77.26 $1.06 8.1% MU APR 30 29.38 47.30 $0.62 5.5% Positions closed: SNPS (Big rally - Murphy's law) Sell Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield GMST APR $30 put position closed. GMST APR 60 60.69 37.85 $0.69 6.2% JNPR APR 30 29.06 57.41 $0.94 8.3% JNPR APR 80 80.88 57.41 $0.88 7.8% VECO APR 30 28.75 50.00 $1.25 13.3% VECO APR 55 56.00 50.00 $1.00 11.0% Alert GENZ APR 70 69.35 104.89 $0.65 6.6% GENZ APR 100 call position covered/closed IBM APR 80 79.40 106.50 $0.60 9.2% IBM APR 110 110.65 106.50 $0.65 8.1% Covered/Closed! Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield BGEN APR 70 70.50 63.43 $0.50 7.8% WWCA APR 50 50.62 42.56 $0.62 6.0% CHKP APR 110 111.25 71.00 $1.25 5.7% PDII APR 85 85.62 71.50 $0.62 5.6% Positions closed: GENZ Credit Spreads: Stock Pick Last Position Credit C/B G/L Status EMR $66.31 $66.90 APR80c/75c $0.75 $80.75 $0.75 Open SII $74.80 $75.20 APR90c/85c $0.80 $90.80 $0.80 Open LEN $39.04 $41.50 APR30p/35p $0.80 $34.20 $0.80 Open MMM $103.63 $116.00 APR120c/115c $0.80 $115.80 $-0.20 Closed NOC $89.50 $95.37 APR80p/85p $0.50 $84.50 $0.50 Open UTX $72.85 $78.10 MAY85c/80c $1.00 $81.00 $1.00 Alert April Positions closed: HAL, NBL Debit Straddles: Stock Pick Last Position Debit Value G/L Status AC $45.85 $47.90 MAY 45c/45p $4.30 $4.00 $-0.30 Open New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations *************** CCMP - Cabot Microelectronics $65.95 *** Earnings Play! *** Cabot Microelectronics (NASDAQ:CCMP) is a supplier of performance polishing slurries used in the manufacture of the most advanced integrated circuit (IC) devices, within a process called chemical mechanical planarization. The company supplies slurries to IC device manufacturers worldwide. Most of Cabot's CMP slurries are used to polish insulating layers and the tungsten plugs that go through the insulating layers and connect the multiple wiring layers of IC devices. The company is developing and selling new slurries used to polish copper, a new metal used in wiring layers of IC device fabrication. Also, Cabot has developed and has begun sales of new CMP slurries designed for polishing several components in hard disk drives, specifically rigid disks and magnetic heads. In addition, the company has recently begun producing and selling polishing pads used in the CMP process. Earnings continue to determine share values in the current market and now that investors have "priced-in" the slowing trends in the technology sector, almost any favorable comments can spark a rally. That's exactly what traders are expecting when Cabot Micro posts its financial results for the second quarter on Thursday, April 26. Those who believe the earnings report will be viewed as "positive" can speculate on that outcome with these conservative positions. CCMP - Cabot Microelectronics $65.95 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put MAY 35 UKR QG 300 1.00 34.00 7.1% *** Sell Put MAY 40 UKR QH 263 1.40 38.60 9.7% Sell Put MAY 45 UKR QI 44 2.10 42.90 13.9% Sell Put MAY 50 UKR QJ 56 3.30 46.70 20.3% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=CCMP *************** FCEL - FuelCell Energy $57.09 *** On The Rebound! *** FuelCell Energy (NASDAQ:FCEL) is a developer of carbonate fuel cell technology for stationary power generation. The company has developed a proprietary patented carbonate fuel cell, which the company believes has significant advantages in terms of fuel efficiency and cost over competing fuel cells for stationary power generation. The company manufactures carbonate fuel cells, usually on a contract basis. Its revenue is primarily generated from agencies of the United States government and customers located throughout the United States, Europe and Asia. Shares of FCEL received a boost in late March as news spread that a state project would use the company's fuel cells in what some analysts described as the "largest fuel cell commercialization effort anywhere in the U.S. to date." The Connecticut Resources Recovery Authority (CRRA) has proposed spending $124 million over five years for FCEL's products through a new contract with their distributor, Enron North America (NYSE:ENE). Enron will serve as project developer and twelve fuel cell units will be installed at multiple sites in Connecticut to relieve transmission congestion in the Southwestern part of the state and add needed capacity. A Lehman Brothers utility analyst said he believes the request for purchase is a significant step towards technology validation and commercialization of the company's products and an order of this magnitude would absorb half of FuelCell's anticipated year-end production of 50 megawatts and provide a significant step towards reaching the $1200/kilowatt cost target the company has outlined. The news started a recovery in FCEL shares and today the issue moved above a recent resistance area on heavy volume. Traders who believe the rally will continue can speculate on that outcome with these conservative positions. FCEL - FuelCell Energy $57.09 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put MAY 40 FQG QH 179 0.80 39.20 6.6% *** Sell Put MAY 45 FQG QI 45 1.50 43.50 11.8% Sell Put MAY 50 FQG QJ 54 2.90 47.10 15.8% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=FCEL *************** GS - Goldman Sachs Group $99.65 *** On The Move! *** The Goldman Sachs Group (NYSE:GS) is a global investment banking and securities firm that provides a range of services worldwide to a substantial and diversified client base. The company operates offices in over 20 countries and their activities are divided into two segments, Global Capital Markets, and Asset Management and Securities Services. Goldman Sachs also has a Global Investment Research Department that provides research on economies, debt and equity markets, commodities markets, industries and companies on a worldwide basis. Shares of investment companies, banks, stock brokers and credit firms rallied today after the U.S. Federal Reserve unexpectedly cut interest rates, raising hopes for increased trading in the stock market and higher demand for loans at lower rates. The decline in interest rates is expected to help relieve the gloomy outlook for the market and may bolster slim profit estimates for many financial firms. It may also further stimulate the mortgage and loan market, one of the few bright spots for the bank sector in the first quarter. Statistically, investment banks are some of the best-performing issues after a rate cut and traders who agree that investment banking stocks will continue to perform well in the coming months should consider one of these positions. We will "target shoot" a slightly higher premium in the recommended position, to allow for some consolidation in the underlying issue. GS - Goldman Sachs Group $99.65 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put MAY 80 GS QP 541 1.00 79.00 4.8% *** Sell Put MAY 85 GS QQ 6341 1.65 83.35 6.2% Sell Put MAY 90 GS QR 1700 2.70 87.30 8.3% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=GS *************** MUSE - Micromuse $50.23 *** Excellent Earnings! *** Micromuse (NASDAQ:MUSE) and its subsidiaries develop and support a family of scalable, highly configurable, rapidly deployable software solutions for the effective monitoring and management of multiple elements underlying an enterprise's information technology infrastructure including network devices, computing systems and other managed environments. The company's Netcool product suite is designed to monitor large-scale networks in real-time, allowing network operators to quickly identify and address problems before they lead to trouble. It also helps telecom firms, Internet service providers and business-oriented enterprises maintain the uptime of network-based customer services and applications. The Company markets and distributes to customers through its own sales force, value-added resellers and systems integrators. Micromuse reported record financial results for its second fiscal quarter today with revenues of $59 million, representing a 119% increase over the comparable quarter of fiscal 2000. Earnings for the quarter were $9.2 million, or $0.12 per share compared to earnings of $3.1 million, or $0.04 per share in the second quarter of fiscal 2000. The company's profitable operations enabled cash, cash equivalents and investments to increase by a record $29.7 million to $166.4 million and sequential quarterly license revenue growth was 19%. Operating margins were also a surprise, growing from 17.6% last year to a record 19.2% in the second quarter of 2001. Favorable earnings are hard to come by in the current market and today's bullish announcement suggests that the company's share value is poised for further upside activity. MUSE - Micromuse $50.23 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put MAY 25 QVM QE 329 0.65 24.35 6.2% *** Sell Put MAY 30 QVM QF 684 0.95 29.05 8.8% Sell Put MAY 35 QVM QG 561 1.80 33.20 15.4% Sell Put MAY 40 QVM QH 126 2.95 37.05 23.0% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=MUSE *************** NVDA - Nvidia $77.26 *** The Rally Continues! *** Nvidia (NAADAQ:NVDA) designs, develops and markets 3D graphics processors, graphics processing units and related software that set the standard for performance, quality and features for every type of personal computer user, from professional workstations to low-cost PCs. The company's 3D graphics processors are used in a wide variety of applications including games, the Internet and industrial design. Its graphics processors were the first to incorporate a 128-bit multi-texturing graphics architecture designed to deliver to users of its products a highly immersive, interactive 3D experience with compelling visual quality, with realistic imagery and motion, stunning effects, and complex object and scene interaction at real-time frame rates. The company sells its products to major OEMs such as Compaq, Dell, Gateway, Hewlett Packard, IBM, micronpc.com, NEC, Packard Bell and Sony and add-in board manufacturers such as ASUStek, Creative Labs, Elsa, Guillemot and Leadtek. This week, Nvidia announced that their new GeForce2 Go graphic processing unit (GPU) was chosen by Dell Computer (NASDAQ:DELL) for Dell's Inspiron notebook PCs. Regarded as the industry's first mobile GPU, the GeForce2 Go sets a new standard for 2D, 3D and multimedia performance for the notebook. The company also said it plans to begin production in May of the graphics chips and media communications chips used in Microsoft's (NASDAQ:MSFT) forthcoming Xbox video-game machine. Microsoft has stated that they are on time and will begin shipping the much anticipated Xbox starting in fall. Nvidia's senior VP of marketing recently declined to tell the Wall Street Journal how many chips Nvidia will make for the Xbox, but he acknowledged that "it's in the millions." Technically, Nvidia has rallied sharply off last December's low and is nearing a new, all-time high. The stock continues to outperform the semiconductor sector and the technicals suggest further upside movement. The first level of support is the March high followed by stronger support at $60 (50-dma and the February high). Investors willing to "target shoot" an entry point with deep-ITM naked puts will have a hard time gaining anything but the sold premium as compensation for trying. NVDA - Nvidia $77.26 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put MAY 45 UVA QI 538 1.05 43.95 6.5% *** Sell Put MAY 50 UVA QJ 1256 1.55 48.45 9.2% Sell Put MAY 55 UVA QK 3219 2.15 52.85 12.4% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=NVDA *************** Neutral Plays - Straddles & Strangles *************** AMAT - Applied Materials $53.03 *** Premium Selling! *** Applied Materials (NASDAQ:AMAT) develops, manufactures, markets and services semiconductor wafer fabrication equipment and other related spare parts for the worldwide semiconductor industry. Many of AMAT's products are single-wafer systems designed with two or more process chambers attached to a base platform. The platform feeds a wafer to each chamber, allowing the simultaneous processing of several wafers to enable higher productivity and precise control of the process. AMAT has five major single-wafer, multi-chamber platforms: the Precision 5000, the Centura, the Endura, the Endura SL and the Producer. These platforms support chemical vapor deposition, physical vapor deposition, etch and rapid thermal processing technologies. The customers for the company's products include semiconductor wafer manufacturers and semiconductor integrated circuit (or chip) manufacturers. AMAT is one of our favorite issues in the semiconductor group and today's bullish activity appears to have propelled the stock out of a recent trading range near $45. At the same time, the current upside potential may be limited in the near-term as semiconductor companies continue to report mediocre earnings and investors come to terms with the unfavorable outlook for the industry. AMAT is expected to post its earnings well after most of the other issues in the group (in mid-May) and that fact has produced some robust speculation in the stock's options. Based on historical analysis of the option premiums and the stock's technical background, this position meets our basic criteria for a favorable "premium-selling" candidate. As with any recommendation, each position should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. AMAT - Applied Materials $53.03 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put MAY 37.5 ANQ QU 3345 0.90 36.60 7.9% *** Sell Call MAY 70 ANC EN 339 0.70 70.70 6.3% *** - or - Sell Put MAY 40 ANQ QH 26367 1.20 38.80 10.3% Sell Call MAY 65 ANQ EM 1341 1.35 66.35 11.4% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=AMAT *************** BEARISH PLAYS - Naked Calls & Combinations *************** SII - Smith International $75.70 *** Earnings Are In! *** Smith International (NYSE:SII) is a worldwide supplier of premium products and services to the oil/gas exploration and production industry, the petrochemical industry and other industrial markets. Smith provides an extensive line of advanced products and unique engineering services including drilling and completion fluid systems, solids-control equipment, waste-management services, three-cone and diamond drill bits, drilling tools, under-reamers, casing exit and multilateral systems, packers and liner hangers. The company also offers supply-chain management solutions through an extensive branch network providing pipe, valves, fittings, mill, safety and other maintenance products. Smith's operations are classified into two segments: Oilfield Products and Services Group; and Distribution Group. Today SII announced first quarter earnings of $0.68 per share on revenues of $865 million with net income more than three times the amount reported in the prior year period. Revenues grew 38% over the first quarter of 2000 and 14% sequentially, due to the impact of increased activity levels, acquisitions and improved pricing in the company's oilfield segment operations. Despite the favorable earnings report and bullish market sentiment, SII shares were hit by new selling pressure and the negative finish ended the recent upward trend. If the rally fails at this range, SII will have little reason to move above the strong, long-term resistance at $85, which clearly forms a triple-top formation on a 1-year chart. The current technicals are "neutral-to-bearish" and a move below the 150-dma would confirm a new downward trend. SII - Smith International $75.70 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Call MAY 80 SII EP 313 2.75 82.75 9.7% Sell Call MAY 85 SII EQ 107 1.40 86.40 6.3% *** http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=SII **************************************************************** ************************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=2122 ************************************************************** ************* Readers Write ************* Concerning A Unique "Hedge" Position... Hello OIN, It has been along time since I have written you. I just noticed (as of 12:30 on 4/12) that all 10 of the most active options are CIEN Jan 2002 puts and calls. I was working out different scenarios, and don't see the downside to this one, maybe you can point if there is a downside. CIEN $47 Jan '02 70 call 6.90 - 7.10 Jan '02 70 put 31.00 - 31.70 Sell the put for $31.00 Buy the call for $7.00 (rounded-down for simplicity) net taken in $24.00 short the stock $47.00 total taken in $71.00 Granted we can close out either position at any time, but the bottom line is this: In January, we cover our short by either getting put the stock at 70 (if CIEN is below 70), or we exercise our call and buy the stock at 70. Net result is a profit of $1, plus we have the money for 8 months to "collect the interest on," and we have no margin requirement because of the option positions. I there a downside that I am missing? Thank you OM ****************************************************************** Regarding the CIEN combination position: Although there isn't a margin requirement on the short put, the short stock requires an initial margin of $2,350 per one hundred shares shorted plus the credit received. This credit is held in a margin account and doesn't pay interest because it is collateral. However, the $2400 per contract you receive pays for your initial requirement to short the stock. Let's assume you have no cash in your account. First, you short 1000 shares of CIEN. The initial requirement is 70,500 (23,500 cash required + 47,000 credit from sale). Your margin call is 23,500. So you sell the Jan '02 put for $31. This covered put brings in about $31,000. Your margin call is satisfied and you have $7,500 that can be swept to the money market account. But you decide you are bullish on the stock and want to buy the Jan '02 call for $7. You now have a $70500 credit in the margin account, $500 in money market and a call that has no loan value. If the stock moves up, YOU ARE SHORT CIEN! You lose a dollar every dollar the stock moves up. The delta on the call and put may not combine enough to offset the dollar for dollar loss on the short stock. Plus, you might get a margin call at about $62. That is when the minimum 30% requirement comes into effect. You would either have to deposit more money in or buy to close the short stock at about $62. That is a $15000 loss on the stock. It is hard to say what the options would be worth at that time. I can tell you that at the present time, 1:30 P.M on Thursday, the stock is at 53.30. A loss of $6,300 on the stock. But the call is bidding 11.5 and the put is offered at 26.7; a gain of about 8,800 (net of $1500). However, I noted that when the stock was at about 50. The call was bidding 10 and the put was offered at 28. A $6000 gain and $3000 net. If the stock goes down either a dollar or to $5, you will be short the stock and have to buy it at $70. Your net credit is your profit unless you find an opportunity to buy the stock to close, buy the put to close and sell the call for a greater than one dollar profit. Your profit ends up occurring because you end up spending $70000 to close out the position when you actually have $70500 as a credit balance in the margin account. That is a net of $500 plus the $500 in the money market. To answer your question, it is a good and somewhat free trade with margin call risk. You may not need to buy the call. You may only need to buy the stock if it breaks above $70. But like I stated before, you would be closing it out at $62 anyway because of the maintenance call. Perhaps, save the seven dollars per contract. The only reason I see to buy the call is to take advantage of the combined delta effect to help hedge the short if the stock goes up. Try looking at opportunities in nearer term months in order to offset the risk of time. I hope I was able to help you. I am an ROP with Cutter & Company. If I can aid you any further or in any other matter, contact me toll free 877-925-0880 or email firstname.lastname@example.org Robert J. 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