The Option Investor Newsletter Sunday 04-22-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/042201_2.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=2092 ************************************************************** *********** OPTIONS 101 *********** The Return of the Margin Monster By Robert John Ogilvie An investor may receive a copy of the Characteristics and Risks of Standardized Options by accessing this hyperlink: http://www.cboe.com/resources/odd/ This article is going to cover the concept of writing uncovered calls. As stated in the previous article, an investor wishing to trade this strategy must be a speculative investor able to take on extreme risk. Uncovered call writing is defined as a short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts. This is considered to be very risky because the underlying security can theoretically advance to infinity whereas a short put option can only decline to zero. Generally, the uncovered call is initiated out of the money and at a severe resistance point. This is done because you don’t want to sell a call on a stock that you don’t own. The reason is that if the stock advances above the strike price, the stock may be sold in your account. And unless you own it, you will be short that stock. In some cases, shorting the stock may work out to your advantage. But only if the stock goes down below your adjusted cost basis. Just in case you missed the previous article, I will repeat the calculations for the margin requirement. The calculations are in depth. But as investors, you should be aware of how much these positions cost to hold. The margin requirement changes with the price of the underlying security as well as the option sold. In addition, the margin maintenance is set by the brokerage firm and may be higher than the requirement set by the regulatory agency. To determine the margin requirement if the maintenance is 20% and 10%, take the greater of 20% of the current price multiplied by the number of shares less any out of the money plus the premium or 10% of current price multiplied by the number of shares plus the premium. To illustrate, lets assume we want to write 5 contracts of the May 00 130 Calls on an $100 stock. Let’s also assume the premium is $2.50. First multiply the stock price ($100) by 1000 (5 contracts X 100 shares per contract) and then by 20% to get $10,000 ($100 X 500 X 0.20 = 10,000). Then add the premium received of $1,250 ($2.50 X 5 contracts X 100 shares per contract). The current total is $11,250 (10,000 + 1,250). Then subtract the amount the stock is out of the money which is $15,000 (130 - 100 = 30 points out of the money X 5 contracts X 100 shares per contract) from the previous number ($11,250). The total is -$3,750 ($11,250 - 15,000). Obviously, they won’t let us get away with not providing any collateral. Unfortunately, we have to calculate the 10% method because we can’t have a negative requirement. Multiply the $50,000 by 10% to equal $5,000 and add the premium of $1,250 to total $6,250. We have to use the greater of the two calculations, which is $6,250. This would be a good trade if the stock kept dropping because the margin requirement would decrease and the likelihood of the position expiring worthless increases. However, nothing is set in stone. Lets say for example, the stock drops to $80 and the premium drops to $1.375. The margin requirement reduces to $4,687.50 ($80 X 500 X 0.10 + 500 X $1.375). But what happens if the security bounces up to $135 on the day of expiration? The margin requirement increases and the position is now in the money by 5 points when you only brought in $2.50. Assume the premium is now $7.00 to buy to close. Because the 10% calculation is $10,250 (($135 X 5 X 100 X 0.10) + (5 X 100 X $7)) and the 20% calculation is $17,000 (($135 X 5 X 100 X 0.20) + (5 X 100 X $7)) the margin requirement is the greater or $17,000. That is a large percentage increase in margin liability. If the stock closes at $135, the stock will be sold at $130. That is a $5 loss per share on the stock and a gain of $2.50 per share on the options. The good thing that can happen, assuming you have enough margin available in your account to short the stock, is if the stock drops below $132.50. You would then buy the stock to close out the position at break even or possibly a profit. The bad alternative is if the stock gaps up $5 points on the following Monday. Now you are down a total of $10 less the $2.50 in premium. Most investors close out the uncovered call when it breaks the strike price. Some investors close out the position when the premium to close the position is twice that of the premium received ($2.50 x 2). The point at which an investor decides to close out the position depends upon the investor’s risk tolerance, objectives, goals, speculation level, future outlook on security, etc. An alternative to uncovered call writing is the Bear Call Spread or the Call Credit Spread. This provides some upside protection against the stock. I will embellish on this strategy in my next article. If you have any additional questions regarding this article, please feel free to contact me at the e-mail address below. Robert John Ogilvie Rjogilvie@cutter-co.com 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 PLAYS OF THE DAY ******************** Call Play of the Day: ********************* NTAP - Network Appliance Inc. $23.55 (+7.25 last week) See details in sector list Put Play of the Day: ******************** PDLI - Protein Design Labs Inc. $56.23 (+4.23 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.sungrp.com/tracking.asp?campaignid=2108 ************************************************************** ************************** 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 WCOM $19.04 -0.85 (-0.45) WCOM has offered call players some opportunities for gains over the last several weeks, with almost predictable moves between tight support and resistance levels. However, WCOM has not been able to penetrate the $21 level, which is a prerequisite to reaching the next major resistance level at $25, and seems to have lost momentum. In addition, WCOM is scheduled to report earnings on Tuesday, and all traders should be out before this date. We are dropping WCOM as a play tonight for these reasons. PUTS No dropped puts this weekend *********** 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 ************** NTAP - Network Appliance Inc. $23.55 (+7.25 last week) Network Appliance Inc., a veteran in network file storage and content delivery, has been providing data access solutions since 1992, and is a member of both the S & P 500 and Nasdaq 100 indexes. Major corporations and service providers, including Lycos, Yahoo, Citicorp Securities, Siemens, Lockheed, Cisco, Motorola and Texas Instruments have deployed Network Appliance solutions. Of all the technology sectors which came roaring back this week, none exhibited as much momentum as the data storage sector. Once capital spending improves, as it is expected to later this year, data storage is expected to be among the first sectors to benefit, as an essential part of corporate IT spending. Unlike other technology sectors, customers within the storage sector may temporarily delay their orders, but eventually capacity constraints of existing equipment will force them to upgrade. The key bellwether of this sector, EMC was one of the few US corporations to actually report higher earnings this year, and an impressive revenue growth of 20% on Thursday. Since that point, NTAP, EMC, and their brethren in the data storage sector like BRCD and VRTS have soared on strong volume, and even made substantial gains on Friday, despite the weakness in the major indexes. NTAP is scheduled to report earnings on May 15, and has previously warned of a revenue shortage of 20 to 25%. However, since the Fed's unannounced rate cut, and some hints of a turnaround being whispered by analysts and company managements, investors seem to be finally looking toward the second half of 2001. When individuals and fund managers start to target their favorite beaten down growth stocks, NTAP may very well be on the top of the list. Keep in mind that this is a very aggressive, risky play, and not for the faint of heart. NTAP almost touched its 50-dma of $24.87 on Friday, and a clean break and close above this level could signal the green light for an entry point. As an alternative, traders could take positions at a pullback to $23, if others in the sector are strong, like EMC and BRCD. Set stops at $21 and close the position if NTAP closes below this level. BUY CALL MAY-25*NUL-EE OI=1262 at $3.00 SL=1.50 BUY CALL MAY-30 NUL-EF OI=1084 at $1.60 SL=0.75 BUY CALL JUN-25 NUL-FE OI=1194 at $4.30 SL=2.75 BUY CALL JUN-30 NUL-FF OI= 977 at $2.20 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=NTAP AA - Alcoa, Inc. $40.35 (+1.36 last week) Alcoa is a values-based world leader in aluminum and select nonaluminum businesses. Their global strategy is based on profitable growth, operational excellence and market leadership. Alcoa is active in mining, refining, smelting, fabricating, and recycling. Alcoa's aluminum products and components are used worldwide in aircraft, automobiles, beverage cans, buildings, chemicals, sports and recreation, and a wide variety of industrial and consumer applications including Alcoa's own consumer brands such as Alcoa wheels, Reynolds Wrap aluminum foil and Baco household wraps. Shareholders of aluminum giant Alcoa have had much to be happy about lately, as fundamental factors have helped the company to turn tin into gold in the form of capital gains. With strong fundamentals comes strong technicals, which is no surprise why with today's breakout move, the stock appears poised to challenge its all-time high of $43.62. Reporting earnings earlier this month, the company beat Street estimates by 2 cents. Profits for the first quarter rose by 16 percent, thanks to effective management and cost-control. What's more company recently announced that it would raise $3 billion in financing. The timing couldn't have been better, as the rate cut earlier this week will most likely make terms of the deal even more favorable for the company. Political factors also appear to be in play, as former Chairman and now Treasury Secretary Paul O'Neill is reported to be selling his shares of AA for conflict-of-interest reasons. This relates to his involvement in a proposal to cease production a number of smelters due to the on-going power crisis. Analysts seem to think that the shutdown could benefit the company, as it would raise aluminum prices, leading to higher profit margins. Today's break through formidable resistance at the $39.50 to $40 area on high volume was a bullish move indeed. A surge back above $40.50 may allow more cautious traders to make a play, but confirm with volume. For aggressive traders, look for bounces off support at $40, $39.50, the 5-dma at $39.31, $39 and our closing stop price of $38.50. Correlate entries with movement in sector peers AL and PY BUY CALL MAY-35 AA-EG OI= 652 at $5.80 SL=3.75 BUY CALL MAY-40*AA-EH OI=2634 at $2.15 SL=1.00 BUY CALL JUL-40 AA-GH OI=4315 at $3.80 SL=2.25 BUY CALL JUL-45 AA-GI OI= 731 at $1.85 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=AA DELL - Dell Computer Corp $30.12 (+2.20 last week) Dell Computer is the world's #1 direct-sale computer vendor and one of the world's top PC makers. Therefore it's understandable that the company designs, develops, manufactures, markets, services, and supports a variety of computer systems including desktops, notebooks, workstations, network servers, and storage products. Dell's clients include the government, corporations, the medical and education industries, as well as the individual consumer. Founder Michael Dell is still the CEO and maintains a 14% stake in the company. The inevitable happened. Dell Computer overtook Compaq Computers (CPQ) in worldwide PC sales for the first time ever! After taking the crown from IBM in the early 90's, Compaq retained the exalted title throughout the years. Investors of DELL are also looking forward to a respectable earnings' report on May 17th, after the market closes. Last week, many of the big tech leaders like INTC, IBM, AAPL, and AOL all reported better-than-anticipated results and forecasted positive outlooks. But let's pay attention to Compaq's earnings results too, which are scheduled for Monday evening. This rival's announcement could ultimately effect the sector sentiment, measured by the Goldman Sachs Computer Hardware Index (GHA.X). The index, which tracks the movement of PC makers, should continue trading above the 350 level. If it breaks down below 340, this should raise your radar significantly; especially if DELL slides back under its 200-DMA ($29.50). On the upside, look for DELL to continue moving through the relative levels of opposition. A powerful charge of the historical resistance, found at the $33 and $34 levels, would be a monumental achievement. Take a look at a six-month chart to visually confirm the significance. Momentum and technical traders alike might consider jumping on this play if DELL overtakes Friday's relative high of $31.32, in an advancing market of course! Remember to be patient for the trend to develop after amateur hour passes. It may also be wise to lock in gains at the first sign of a lull as to avoid the profit mongers lurking in the shadows. We're placing a protective stop at $28 and would drop coverage on DELL if it closed below that level. BUY CALL MAY-25 DLQ-EE OI=16897 at $5.90 SL=4.00 BUY CALL MAY-30*DLQ-EF OI=44048 at $2.40 SL=1.25 BUY CALL MAY-35 DLQ-EG OI=15031 at $0.65 SL=0.00 http://www.premierinvestor.net/oi/profile.asp?ticker=DELL ************************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=2124 ************************************************************** ********** 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 Sunday 04-22-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/042201_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=2093 ************************************************************** ****************** CURRENT CALL PLAYS ****************** GE - General Electric $48.10 (+3.57 last week) General Electric is one of the largest and most diversified industrial corporations in the world. GE's products include major appliances, lighting products, industrial automation products, medical diagnostic imaging products, motors, electrical distribution and control equipment, locomotives, power generation and equipment products, nuclear power support services and fuel assemblies, commercial and military aircraft jet engines, and engineered materials. Through General Electric Capital, GE offers a braod array of financial services. Through NBC Inc. GE provides television, cable and multimedia programming services. GE has been forming a solid series of higher lows since the beginning of April, and demonstrated rock solid support on Friday at $47.50, even when the Dow was at its lowest point. This is impressive, considering the fact that Honeywell reported a decrease in profits, and many new layoffs. At an analyst meeting on Friday, GE CEO elect Jeffrey Immel re stated the company's guidelines for 15% growth over the next year. As the largest company traded on the American exchanges measured in market capitalization, GE moves slowly and steadily, as the stock requires significantly more volume than a small cap stock to gain several points. This can be an advantage to option traders, as the volatility of GE's options tend to be lower than many of the high flying tech stocks. However, this slow but steady behemoth is encountering heavy resistance at the $48.50 level, and it may take strong volume, as well as continued strength in the broad market indexes to penetrate this level. If GE can clear $48.50, it should be able to make a clear run for the 200 dma of $50.76, which would put the stock at a level of technical strength it hasn't seen since last September. Conservative investors might want to wait for a move above $48.50 on heavy volume before taking positions. Alternatively, another bounce off support at $47.50 would be a good entry point. We are moving stops to $47, so close positions if GE closes below this level. BUY CALL MAY-45*GE-EI OI=14144 at $4.30 SL=2.75 BUY CALL MAY-50 GE-EJ OI=11234 at $2.50 SL=1.25 BUY CALL JUN-45 GE-FI OI=24784 at $5.10 SL=3.00 BUY CALL JUN-50 GE-FJ OI=41557 at $2.05 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=GE C - Citigroup Inc. $49.42 (+2.21 last 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. When the Fed cuts rates, it's no secret that the Financial sector is one of the first sectors to benefit. In any business, profits are made by selling goods and services for a higher amount than the cost of procurement. So when interest rates are lowered, the cost of doing business is decreased, allowing for wider profit margins and increased demand. Coupled with a well-received earnings report, shares of financial services firm Citigroup have made some significant progress recently, breaking through a number of major resistance levels. Beating Street estimates by the customary penny, revenue growth came in at 6 percent. Despite a 7 percent drop in profits year-over-year, analysts cited that in light of current conditions in the capital markets, the numbers were better than expected. Increased business in their corporate investment arm also contributed to C's success, and bullish comments from the CEO helped the stock to break through its 50-dma (now at $47.79) with authority. Higher risk players looking for entry targets may find pullbacks to support from the 5-dma at $48.92 and the 50-dma to be attractive opportunities. Just be aware that we have placed a protected stop at $48 so make sure that C continues to close above this level. Looking overhead, the 100 and 200-dma (at $50.10 and $51.56 respectively) may act as formidable resistance going forward. We would suggest to the more risk averse to wait for a strong break above the 200-dma before taking a position. Even with such a move, make sure that sector sentiment is on your side by following AMEX's Banking Index (BIX). BUY CALL MAY-45 C-EI OI= 5668 at $5.30 SL=3.50 BUY CALL MAY-50*C-EJ OI=11019 at $1.95 SL=1.00 BUY CALL JUN-50 C-FJ OI=14830 at $2.85 SL=1.50 BUY CALL JUN-55 C-FK OI=15269 at $1.05 SL=0.00 http://www.premierinvestor.net/oi/profile.asp?ticker=C FDC - First Data Corporation $64.48 (+1.83 last week) First Data is the remarkably efficient, often invisible engine powering today's global shift to a cashless economy. They process and safeguard every type of electronic payment method: credit, debit and stored-value cards, electronic checks and cash. They also provide Electronic Funds Transfers to 75 percent of the world and provide card issuer services for 1,400 financial institutions and 396 million consumers worldwide. And, through their visionary Internet Commerce Group, they are developing advanced services and solutions that help financial institutions, merchants, business and consumers access the power and possibilities of the Internet. At the end of the day, it appears that earnings are still the key to success in the market. Earnings are a measure of the financial health of a company and lends good reason to technical strength. Last week FDC reported its results for the first quarter and by all accounts, it was a stellar one. Beating Street estimates by a penny, revenues increased by 18 percent year-over-year. What makes this even more impressive is the fact that this marked the eight consecutive quarter in which FDC has managed to come out with double-digit growth numbers. Profit margins were also higher than expected, which impressed the analysts. Combined with conference call in which the CEO was highly upbeat, traders were eager to buy. Despite a downgrade by Robinson Humphrey from an Outperform to a Buy rating, Merrill Lynch came in defense of FDC, naming it a top pick for reasons such as attractive valuation and long-term growth prospects. After spending the first half of the week making yet another string of new all-time highs, the stock has pulled back in the past couple of trading sessions. Volume has been declining as well, which suggests that the current pullback is most likely some healthy profit taking. A move back above the $65 level with conviction could allow conservative traders to enter on strength, provided that rivals FISV and PAYX are also moving higher. A bounce of support at our closing stop price of $64 could allow the more aggressive to make a play. BUY CALL MAY-60 FDC-EL OI=2927 at $6.00 SL=4.00 BUY CALL MAY-65*FDC-EM OI=4774 at $3.00 SL=1.50 BUY CALL AUG-60 FDC-HL OI=1034 at $8.90 SL=6.25 BUY CALL AUG-65 FDC-HM OI=1053 at $6.10 SL=4.00 http://www.premierinvestor.net/oi/profile.asp?ticker=FDC ORCL - Oracle Corporation $19.75 (+3.93 last week) Oracle Corporation is the world's leading supplier of software for information management, and the world's second largest independent software company. With annual revenues of more than $10.1 billion, the company offers its database, tools and application products, along with related consulting, education, and support services, in more than 145 countries around the world. Oracle is the first software company to develop and deploy 100 percent internet-enabled enterprise software across its entire product line: database, server, enterprise business applications, and application development and decision support tools. With the NASDAQ in rally mode this week, ORCL has moved in step with the Tech index, gaining almost 25 percent for the week. The unexpected 50 basis point rate cut from the Fed on Wednesday gave traders on the sidelines a reason to enter, and with that, ORCL advanced strongly on heavy buying volume. Morgan Stanley Dean Witter raised their rating on ORCL, upgrading the eBusiness software leader from a Neutral to an Outperform. This upgrade, along with positive sector sentiment following a better than expected earnings report for rival Siebel Systems provided further incentive for the buyers to be bold. Now deep in the heart of earnings season, look for announcements from other industry peers to affect direction in trading. Rival BVSN is expected to report on Tuesday April 24th after the closing bell. While the stock did pull back on Friday, after the recent run-up, a pause to refresh is not only healthy, but may provide higher-risk players with attractive entries. Horizontal support can be found at $19.32, $19 and $18.50. The $18 level is especially strong support, with the 5 and 50-dma both converged at that level. As this is where we are placing our protective stop price, make sure ORCL remains above this level at the end of a trading day, or else we will have no choice but to drop coverage. Look to Merrill Lynch's Software HOLDR (SWH) to gauge sector sentiment. BUY CALL MAY-17.5 ORQ-EW OI=18552 at $3.20 SL=1.50 BUY CALL MAY-20 *ORQ-ED OI=12493 at $1.60 SL=0.75 BUY CALL JUN-20 ORQ-FD OI=40940 at $2.40 SL=1.25 BUY CALL JUN-22.5 ORQ-FX OI= 8798 at $1.40 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=ORCL AGIL - Agile Software $21.08 (+6.00 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. The company's offerings are well suited for participants connected in outsourced supply chains, as well as those managing multi-site engineering, manufacturing, sales and distribution via the Internet. AGIL primarily targets computer, electronics, and medical equipment markets. Major clients include Gateway, Lucent, Texas Instruments, and Solectron. Showing their horns to a greater degree than they have in months, the bulls continued to bid up Technology stocks all week long, launching our AGIL play through the $20 resistance level on Thursday. Then on Friday, rather than taking profits off the table, buyers continued to push the stock higher, solidifying the move over the 50-dma (now down at $18.69). Positive analyst comments have helped to fuel the recent rally, with Needham & Company initiating coverage of the stock with a Buy rating on Tuesday and Morgan Stanley upping their rating to Outperform on Thursday. Of course it doesn't hurt having a wad of positive earnings surprises from the likes of IBM and SEBL, which has helped to propel the Computer Software index (GSO.X) steadily higher all week. With that being said, we are starting to see some weakness on the GSO.X and it is time to snug up those stops to protect our profits. AGIL has had a nice run, gaining more than 130% from its early April lows, and we have captured the lion's share of that move. With the stock now trading above the upper Bollinger band, and the daily Stochastics beginning to roll over in the overbought zone, we are ratcheting our stop up to $20. Profit taking has been occurring in the afternoon the past two days, with a runup the following morning. The prudent entry strategy if you still want to get on board is to buy the dip near the $20 intraday support level and ride the stock up to its next plateau. Buying a breakout over the prior day's high is likely to leave your position underwater by the close on the day of entry due to the pattern of afternoon profit taking. Given the magnitude of the recent run, we need to confirm strength on the GSO.X before jumping into the play. BUY CALL MAY-20 *AUG-ED OI=170 at $3.30 SL=1.75 BUY CALL MAY-22.5 AUG-EX OI= 47 at $2.15 SL=1.00 BUY CALL JUL-20 AUG-GD OI= 53 at $5.30 SL=3.25 BUY CALL JUL-22.5 AUG-GX OI= 0 at $4.20 SL=2.50 Wait for OI! BUY CALL JUL-25 AUG-GE OI=155 at $2.95 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=AGIL AOL - AOL Time Warner Inc $48.69 (+6.47 last 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 outlook appears rosy for AOL and its fellow technology stocks. The powerful market rally has lifted many bottom swimmers off their relative lows. In addition, the stream of solid earnings' reports gives a sense that better times are indeed on the horizon. Robust volume levels and the return of institutional buying also bodes for taking technology plays long. This past Wednesday, on April 18th, AOL Time Warner announced it had boosted its 1Q revenue by 98% and trimmed its loss to $1.37 bln, or $0.31, from $1.46 bln, or $0.34 a share same period a year ago. Sales rose 9% to $9.1 bln and importantly, the company maintained its 2001 financial targets. The stock's major breakout through the $45 resistance that day prompted our immediate coverage. While the $48 near-term support is currently sustaining the share price, AOL is getting squeezed as it approaches the $50 level. Let's look for AOL to continue trading with confidence above the 200-DMA ($49.11) and make a convincing break of the $50 shackles in an advancing market. A conservative entry might be found as the momentum takes AOL through the upper resistance and makes a charge for the $55 and $57 levels. However, the ascending support line, now in the vicinity of our revised closing stop at $47, also provides the more adventurous traders with viable alternatives. If you do take positions on upward bounces from the $47 level, or the trailing 5-dma ($46.96), make sure there's enough intraday volatility to substantiate the entry. Put simply, you don't want to get trapped in a narrow consolidation channel. BUY CALL MAY-40 AOE-EH OI=65192 at $9.60 SL=6.50 BUY CALL MAY-45*AOE-EI OI=12366 at $5.20 SL=3.00 BUY CALL MAY-50 AOO-EJ OI=16250 at $2.05 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=AOL RIMM - Research in Motion LTD $36.16 (+7.89 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 Interactive pagers, wireless personal computer card adapters, software connectivity tools, and embedded wireless radios. Telecommunications are a mixed bag when it comes to market performance, but one thing that's for sure is RIMM's stunning accomplishments in recent weeks. On April 11th, the company reported exceptional 4Q revenue of $90.1 mln and earnings of $0.10 versus $0.03 from the same quarter a year ago. In other words, they not only more than tripled quarterly results, but also beat the estimated consensus of $0.07 by 43%. The stellar report initially launched RIMM through the 30-DMA, then around $26; although the big breakout came with the NASDAQ blow out last Wednesday. The stock's technical strength and investor favor positioned it well going into the broad rally. RIMM marched through the $35 resistance right out of the gate. The subsequent bounces off $36 and the triple tests of $39 indicate the coil may be ready to spring again. Of course, we're looking for a nice pop to the upside. A strong move through $40 on heavy volume would give the signal to buy; particularly if you're risk-adverse. Expect some opposition as the bulls try to move RIMM through the $48 and $50 levels. Going forward, the 50-DMA ($35.81) should continue to support the share price amid any market adversity, but take note, we'll drop coverage if there's a close below the $35 level. Stay disciplined and wait for the trend to resume before jumping into RIMM. BUY CALL MAY-30 RUL-EF OI=1677 at $8.70 SL=6.00 BUY CALL MAY-35*RUL-EG OI= 876 at $5.70 SL=3.75 BUY CALL MAY-40 RUL-EH OI= 538 at $3.50 SL=1.75 BUY CALL JUN-35 RUL-FG OI= 333 at $7.20 SL=5.00 BUY CALL JUN-40 RUL-FH OI= 167 at $5.00 SL=3.00 http://www.premierinvestor.net/oi/profile.asp?ticker=RIMM ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=2109 ************************************************************** ********** 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 Sunday 04-22-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/042201_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=2094 ************************************************************** ************* NEW PUT PLAYS ************* PDLI - Protein Design Labs Inc. $56.23 (+4.23 last week) Protein Design Labs Inc. is a leader in the development of humanized monoclonal antibodies for the prevention and treatment of disease. The company has licensed rights to its first humanized antibody product, Zenapax, to Hoffman LaRoche, Inc., and its affiliates, which markets it in the U.S, Europe, and other countries for the prevention of kidney transplant rejection. The company has announced seven other humanized antibodies in clinical development for automimmune and inflammatory conditions, transplantations, and cancer. Amid the hoopla we experienced in the Dow and Nasdaq this week, a few sectors were decidedly left out of the party. The health care sector fared poorly, as it is considered a defensive sector, and money started to move back into technology stocks in the anticipation of a capital spending recovery in the second half of the year. The biotechnology sector also sold off, and has formed a pronounced pattern of lower highs since December at 787, 700, 659, 608, and this week's high at 557. Among the biotechnology stocks, few have a chart pattern as bearish as PDLI. After reaching a high of $140 last November, PDLI has fallen precipitously, forming its own pattern of higher lows at key pivot points along the way. Despite the fall it has already experienced, PDLI could very well have further to go, as it rose to the previous stellar heights from a low of only $6.50 in 1999. Investors frequently have difficulty valuing biotech stocks, as many companies are years from FDA approval of their products, and are not profitable, which makes them susceptible to the availability of financing in the capital markets. Since November, PDLI has rolled over from lower highs at $140, $100, $76, and this week's pivot point of $60. At this point, PDLI appears poised to roll over from $56.20, which would be a good entry point, if the BTK.X is weak. A more conservative play would be to wait for a break below $55 on heavy volume, below which the next support level is $52. Monitor others in the sector like MEDX and ABGX, and set stops at $60. We will close positions if PDLI closes above $60. BUY PUT MAY-60 PQI-QL OI=214 at $10.00 SL=7.00 BUY PUT MAY-55*PQI-QK OI=161 at $ 7.10 SL=5.00 http://www.premierinvestor.net/oi/profile.asp?ticker=PDLI TBH - Telecomunicaoes Brasileir $44.93 (-8.87 last week) Telebras (Telecomunicacoes Brasileira SA), founded in November 1972, is the largest global carrier in the Latin America, and the holding company for 27 regional operators that offer intra-state telecommunications services, and for the long-distance and international operator, Embratel. The company also services more than 3 million cellular customers. Telebras main activities are the provision of domestic and international telecomunications services in the areas of voice, text, sound and image transmission through its 28 concessionaires (Telebras System). Not the type to shy away from risk, we are initiating a highly aggressive put play on Brazilian Telecom giant Telebras. Once owned by the government of Brazil, the company enjoyed monopoly status until August 1995. In 1998, Telebras was privatized and spun-off into 12 separate holding companies. In the US, all the separate components can be bought and sold as an ADR (American Depositary Receipt) on the NYSE as a HOLDR. Due to rumors of weakening economic conditions in Argentina and South America, the stock fell heavily today, losing over 10 percent. Now teetering precariously at an all-time low below the $45 level, it appears that TBH could potentially move much lower at an accelerated rate, with no visible levels of support, giving risk-tolerant traders the possibility of a home run play. Before considering a position however, we should outline the risks involved. The stock is moving based on rumor rather than fact, so material news could lead to wild and unexpected fluctuations. As well, TBH's ADR status adds an element of information risk, as company-specific news (ie. earnings date) is difficult to come by on this ADR. In this case, we are letting the technicals do most of the talking, and what they are suggesting is the possibility for more downside to come. Continued selling pressure leading to a break below Friday's intra-day low of $44.50 may allow traders to enter on weakness. Alternatively, the stock could attempt to fill Friday's gap, in which case, a failed rally above our closing stop price of $49, reinforced by the 5-dma, along with horizontal resistance at $45, $47.50 and $48, may provide for targets of entry. BUY PUT MAY-45*TBH-QI OI= 651 at $3.70 SL=2.50 BUY PUT MAY-40 TBH-QH OI=6405 at $1.85 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=TBH PPDI - Pharmaceutical Product Dev. $53.11 (+3.97 last week) PPDI and its subsidiaries provide a broad range of research, development and consulting services in two segments, development and discovery sciences. In the development segment, the company provides worldwide clinical research and development of pharmaceutical products, medical devices and analytical laboratory services. The discovery sciences division pursues target identification and validation, compound creation, screening and compound selection. PPDI provides services under contract to clients in the pharmaceutical, general chemical, agrochemical, biotechnology and other industries. If double tops chart patterns make for good shorting opportunities, then a triple top ought to be even better. That is exactly what our new play on shares of PPDI is providing us. After rallying with the broad markets over the past 2 weeks, the stock was turned back from the $57 resistance level for the third time since late December. If the past two failures at this level are any indication, this rollover ought to push the stock down into the low $40s. Despite delivering a solid earnings report last Monday, the company was awarded with an ING Barings downgrade from Strong Buy to Buy on Wednesday. Weakness across virtually all sectors of the market on Friday knocked the stock back for a 4% loss, and judging by the daily Stochastics, which are just starting to roll over, this is just the beginning of the move. The only thing missing from Friday's decline was strong volume, as only two-thirds of the ADV traded hands. Conservative investors will want to see volume pick up as IVGN falls through the $52 support level before taking a position. Below that, support is likely to materialize first at $49 and then $46. We are placing our stop at $55, and failed rallies near this level will provide attractive entry points for aggressive investors. Due to the fact it competes directly with LH and DGX in the development side of its business, PPDI tends to move in tandem with these competitors. However, recently PPDI has begun to weaken relative to these stocks, and if they also begin to weaken, look for the downward pressure on shares of PPDI to intensify. BUY PUT MAY-55*PJQ-QK OI=13 at $5.70 SL=3.75 BUY PUT MAY-50 PJQ-QJ OI=10 at $3.20 SL=1.50 BUY PUT MAY-45 PJQ-QI OI=13 at $1.45 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=PPDI ***************** CURRENT PUT PLAYS ***************** IMCL - Imclone Systems Inc. $39.90 (+1.42 last week) Imclone Systems Incorporated is advancing oncology care by developing a portfolio of targeted biologic treatments, designed to address the medical needs of patients with a variety of cancers. The company's three programs include growth factor blockers, cancer vaccines and antiogenesis inhibitors. Imclone Systems' strategy is to become a fully integrated biopharmaceutical company, taking its development programs from the research stage to the market. Imclone Systems is headquartered in New York City with manufacturing facilities in Somerville, New Jersey. Imclone sold off today in a weak sector within an overall weak market. The biotechnology (BTK.X) and drug (DRG.X) sectors both sold off significantly since the surprise rate cut on Wednesday, and Imclone has been one of the victims of this sell-off. DRG.X has now dropped below its 50 dma of 391.01 and appears poised to possibly fall below strong support at the 365 level, which could be the short term kiss of death for weaker stocks in the health care sector. In addition, BTK.X is only a few points above its own 50 dma of 521, and has little support beneath this level. On April 3, Imclone reported Q1 results with a much wider loss than expected of 52 cents per share, due to much lower revenues of $153 thousand, vs. $1.1 million the prior year. While IMCL rallied subsequently, tagging along with the biotech index, and the anticipation of a new patent to be granted, the tide seems to have turned this week. Without a strong catalyst, IMCL is likely to fall in the near term, as investors have found new interest in the financial and computer technology sectors. In addition, the biotech sector suffered today on the news that DNA's experimental drug Veletri, failed to meet Phase 3 trial objectives. After falling below the 200 dma of $42.86, IMCL has formed a series of lower highs and roll overs from $42.50 and $41.50. The most likely scenario from this point seems to be a roll over from $39 with strong volume, which could be a good entry point, and take IMCL to the next support at $38.50. A drop below this level could bring IMCL to $35, and could be another potential entry point. We are setting stops at $41,so close positions if IMCL closes below this point. BUY PUT MAY-45 QCI-QI OI=514 at $7.70 SL=5.25 BUY PUT MAY-40*QCI-QH OI=351 at $4.50 SL=3.00 http://www.premierinvestor.net/oi/profile.asp?ticker=IMCL ABT - Abbott Laboratories $45.09 (-0.58 last 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. Although Drug stocks continued to lose ground on Friday, it was not a good day for new entries on our ABT play. The day began with a gap down, and was followed by a slow and tenuous recovery back to the $45 level at the close. Those that entered the play on the most recent rollover from $47 resistance are now sitting pretty, but there wasn't a decent entry to be had today. As long as the NASDAQ remains in rally mode, defensive stocks like the large Pharmaceutical companies are likely to remain under pressure. And of course, it doesn't help ABT's case that the FTC is breathing down the neck of the big drug makers, probing into allegations that they have been cutting illegal deals with the smaller drug firms to keep cheaper generic drugs off the market. So where do we go from here? First off, we are moving our stop down to $46, and aggressive entries can be taken as ABT rallies to this level and then rolls over. We need to see continued weakness in the Pharmaceutical index (DRG.X) before taking a new position, as the broader sector is apt to continue to have a dominant influence on the movement of ABT. More conservative investors will want to wait for the stock to fall through the $44 support level before adding new positions. BUY PUT MAY-47.5*ABT-QW OI=1264 at $3.30 SL=1.75 BUY PUT MAY-45 ABT-QI OI=7662 at $1.85 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=ABT IVGN - Invitrogen Corporation $63.34 (+7.34 last week) IVGN develops, manufactures and markets more than 10,000 products for the life sciences markets. The company's products are principally research tools in reagent and kit form, biochemicals and media, which the company sells to corporate academic and government entities. IVGN focuses its business on two principal segments, Molecular Biology and Cell Culture Products. The company markets a broad portfolio of products that are designed to enable rapid, efficient cloning of DNA fragments and eliminate certain time-consuming steps in genetic research. Diverging from the broader Technology sector, Biotechnology stocks resumed their downtrend in the past couple days, and our IVGN play got off to a good start on Friday. After opening just below $66, the bears ruled the day, pushing the stock down until the final 90 minutes when the bulls charged forward to reclaim some of their early losses. CS First Boston issued a Strong Buy rating on Wednesday, but judging from the recent price action, investors weren't motivated to continue buying the stock at current levels. The daily chart is now looking even more appetizing to the bears as the stock continued its rollover from the 200-dma ($66.92) and fell below the 50-dma ($65.09). The daily Stochastics are just about to drop out of the overbought zone, and continued weakness in the Biotech index (BTK.X) will likely make this play a big winner over the next week. Keep in mind that IVGN will issue their quarterly earnings report on Thursday, April 26th after the close, so we want to have all positions closed before then. Aggressive players can consider new positions on failed rallies to resistance near $66 (also the site of our stop), but will want to see weakness in the BTK index before initiating the play. More conservative entries will materialize as the stock falls through the Friday lows near $61. BUY PUT MAY-65*IUV-QM OI= 471 at $6.60 SL=4.50 BUY PUT MAY-60 IUV-QL OI=1084 at $4.20 SL=2.50 BUY PUT MAY-55 IUV-QK OI= 538 at $2.50 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=IVGN ************************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=2110 ************************************************************** ***** LEAPS ***** Let the Buying Frenzy Begin! By Mark Phillips Contact Support Now that I've got your attention, let's all just cool our heels for a few minutes. After spending the past 6 months enduring "most unfavored status", all of the sudden many of the past darlings of the Technology market rocketed forward by 40, 60, and even 80% over the past week. Now I know that some of these stocks were oversold, but PLEASE, how about a little bit of rationality. Sure, I love what it has done to the gains in our LEAPS portfolio, but the action over the past week is not the stuff of which sustainable rallies are made. There are still a lot of Commercial shorts out there, the VIX is lurking in the high 20's (29.01 as of Friday's close), which isn't far above that lower Bollinger band, and I'm expecting a reversal, possibly as early as next week. What's the trigger event going to be? I wish I knew. It could be a string of poor earnings or warnings, an ugly economic report, or a bizarre conjunction of the planets. With the oscillators on all the major indices, along with countless individual equities buried in overbought, conditions seem ripe for a bearish reversal. Before you think I'm still firmly locked away in my bear cave, let me reassure you nothing could be further from the truth. I'll even be first (well, maybe the 1001st) to say we have seen the bottom in the NASDAQ. We finally got the kind of buying volume on Wednesday (thanks Uncle Alan) and Thursday that is necessary to build a solid bottom. But we've come up a long ways and on virtually every chart I look at, I find multiple gaps. What do we all know about gaps? That's right, they almost always get filled. While this may be the one exception to the rule, I don't think that is a high-odds bet. In the past 2 weeks, we have seen the DJIA launch from below 9400 to just below 10,700 at Thursday's close. The S&P 500 gained a whopping 150 points in the same period of time, while the NASDAQ Composite is up 33%. A big part of these gains are artificial due to sneaky Al Greenspan and his midday interest rate cut. Don't even get me started on the irresponsibility of that little stunt, or the fact that he has now done it to us twice this year. And we're still supposed to believe that he doesn't target the equity markets with interest rate policy? Give me a break! There's no denying that investor sentiment has taken a definite turn for the better, as bad news is being consumed like it were caviar. Witness the earnings warnings this week from Cisco Systems (NASDAQ:CSCO) and Brocade Communications (NASDAQ:BRCD). CSCO delivered a stunning warning on Monday complete with a $2.5 Billion inventory writedown (Yes, that's billion with a 'B'), but you sure wouldn't know it from the price chart. Since Tuesday's open, the Networking giant is up 20%. Then Friday night, BRCD warned of lower sales and profits for the current quarter. How did investors respond in the after hours market? After gaining a whopping 78% in the past 3 days, the stock actually traded up fractionally in extended hours trading. This market has definitely changed its mood in the past couple weeks, because those kinds of warnings a month ago would have resulted in absolute carnage. Ok, that's enough about the market. Let's spend some time on the LEAPS Portfolio. Despite all my grousing about Sneaky Al's interest rate shenanigans, I love what it has done for our Portfolio. Clorox (NYSE:CLX) is the only play posting a loss at this time and many of our plays are up 50% or more. Nokia Corp. (NYSE:NOK) is the current leader, with a 112% gain on the 2002 LEAP. Due to the vertical nature of the NASDAQ over the past week, it should come as no surprise that none of our current Watchlist plays were filled this week, but we don't want to chase any of these plays higher for reasons detailed above. But I'm not completely unreasonable. I don't expect to retest the lows on any of the major indices or on any of our Watchlist Plays, but I do think they will come back to test support (old resistance) before re-entering a more sustained upward trend. Remember, we don't have to be in all the listed plays - only the ones that are kind enough to give us the entry points we are asking for. So Dell Computer(NASDAQ:DELL), General Electric (NYSE:GE), NASDAQ-100 Tracking Stock (AMEX:QQQ) and Texas Instruments (NYSE:TXN) have had their entry targets moved up to logical levels of support, now that we have more confidence in the health of the market. The other important issue is money management, and with several of our plays up so sharply, we absolutely need to ratchet those stops up. Genzyme General (NASDAQ:GENZ) is up over 50% and NOK over 100%. Don't you think it would be foolish to allow either of those positions to deteriorate to the point they EVER showed a loss? So do I, and we're going to work very hard here to make sure that never happens. At the same time, we don't want to be too aggressive in managing our stop losses, causing our plays to be stopped out on a minor retracement, just before launching up for another 50% gain. So our stops on GENZ, Southwest Securities (NYSE:SWS), Nordstrom Inc. (NYSE:JWN), Micron Technology (NYSE:MU), National Semiconductor (NYSE:NSM) and NOK have all been moved upwards to either lock in profits, or at the very least prevent the position from ever becoming a loss. These stops are all at significant support levels, but far enough from current price action that minor pullbacks should not threaten to stop us out of the plays. After seeing some positive earnings news and the market's positive reception of same, I finally feel comfortable adding two of my favorite Technology companies onto the Watch List, EMC Corp. (NYSE:EMC) and Siebel Systems (NASDAQ:SEBL). Like the other plays on the Watch List, the entry targets are significantly below current prices, reflecting my anticipation that there will be some significant profit taking before this rally really gets going. Take some time to review the plays in both the Portfolio and on the Watch List. Pick the plays you really want and then monitor the target levels over the weeks ahead. For plays that are already in the Portfolio, look for a bounce at a major support level, but above the listed stops. Odds are that you will be rewarded with some attractive entry points that will have you smiling broadly by this time next year. Plan your trades and then trade the plan. 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 $12.50 138.10% JAN-2003 $ 25 VDL-AE $ 5.63 $12.10 114.92% CPN 01/21/01 JAN-2002 $ 40 YLN-AH $10.50 $18.50 76.19% JAN-2003 $ 40 OLB-AH $15.38 $23.50 52.85% LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP CLX 03/13/01 '02 $ 35 WUT-AG $ 3.50 $ 3.30 - 5.71% $ 28 '03 $ 35 VUT-AG $ 6.10 $ 5.80 - 4.92% $ 28 GENZ 03/23/01 '02 $ 85 YGZ-AO $24.50 $37.00 51.02% $ 90 '03 $ 90 OZG-AR $27.75 $39.00 40.54% $ 90 SWS 03/22/01 '02 $ 18 YWF-AT $ 4.10 $ 6.50 58.54% $ 19 '03 $ 20 VWZ-AD $ 5.00 $ 7.40 48.00% $ 19 WM 03/22/01 '02 $ 50 WWI-AJ $ 6.00 $ 7.30 21.67% $ 48 '03 $ 50 VWI-AJ $ 9.20 $10.90 18.48% $ 48 WMT 03/23/01 '02 $ 50 WWT-AJ $ 7.00 $ 9.00 28.57% $ 45 '03 $ 50 VWT-AJ $11.00 $13.70 24.55% $ 45 JWN 03/30/01 '02 $ 20 WNZ-AD $ 1.65 $ 2.20 33.33% $ 15.50 '03 $ 20 VNZ-AD $ 3.30 $ 3.70 12.12% $ 15.50 GS 04/05/01 '02 $ 90 WSD-AR $14.00 $20.90 49.29% $ 82 '03 $ 90 VSD-AR $20.50 $29.60 44.39% $ 82 MU 04/05/01 '02 $ 40 WGY-AH $10.60 $15.70 48.11% $ 38 '03 $ 40 VGY-AH $14.80 $21.10 42.57% $ 38 NSM 04/05/01 '02 $ 25 WUN-AE $ 5.50 $ 9.60 74.55% $ 24 '03 $ 30 VSN-AF $ 7.20 $11.70 62.50% $ 24 NOK 04/06/01 '02 $ 25 WIK-AE $ 4.70 $10.00 112.77% $ 24 '03 $ 25 VOK-AE $ 7.00 $12.70 81.43% $ 24 FON 04/09/01 '02 $ 25 WO -AE $ 2.80 $ 3.00 7.14% $ 19 '03 $ 25 VN -AE $ 4.40 $ 4.90 11.36% $ 19 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL DELL 03/18/01 $25 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 $42-43 JAN-2002 $ 40 WGE-AH JAN-2003 $ 40 VGE-AH QQQ 03/25/01 $43-44 JAN-2002 $ 40 WD -AN JAN-2003 $ 45 VZQ-AS TXN 03/25/01 $31-32 JAN-2002 $ 35 WTN-AG JAN-2003 $ 35 VXT-AG EMC 04/22/01 $35 JAN-2002 $ 40 WUE-AH JAN-2003 $ 40 VUE-AH SEBL 04/22/01 $32-33 JAN-2002 $ 35 YDS-AG JAN-2003 $ 40 OIE-AH New Portfolio Plays None New Watchlist Plays EMC - EMC Corporation $45.10 As one of the best-managed technology companies and the leading provider of computer data storage systems, it was only a matter of time before EMC found its way back onto our Watch List. We've been breathlessly waiting for the company to release its April earnings report, and thankfully they didn't disappoint, matching lowered expectations Thursday. Strong revenue growth (29% for the first quarter) and a bullish forecast was like waving a red cape in front of angry bulls who charged forward running shares of the company up by 23% in the past 2 days. Closing above $45 for the first time in almost 2 months is the first step to breaking EMC out of the downtrend which began in late September. Notice that the strikes we have selected are currently in the money. This is due to the fact that we expect EMC (and most other technology stocks) to pull back in the days and weeks ahead. In just the past 4 days the stock is up nearly 50%, and there should be some significant profit taking before the stock continues its recovery. We are targeting new entries on a bounce from the $35 level and will then place a stop just below the lows from early April. BUY LEAP JAN-2002 $40.00 WUE-AH BUY LEAP JAN-2003 $40.00 VUE-AH SEBL - Siebel Systems $45.54 I've been wanting to add SEBL to the LEAPS portfolio for some time now, but the stock has always been a little too pricey for my taste. Simply put, SEBL is a provider of eBusiness software applications. Their eBusiness Applications enable organization to sell to, market to, and service their customers across multiple channels, including the Web, call centers, resellers, retail and dealer networks. So what did it take to get the stock on our Watch List? Start with a nasty bear market to drag the valuation down to more reasonable levels, and throw in a stellar earnings report, and you have all the makings of an explosive rally. For the record, SEBL was one of only a handful of technology companies that didn't warn ahead of its earnings announcement. Not only that, but the company beat Wall Street expectations by a penny, posting revenue growth of 84%. As a testament to the company's strength, they were able to sign 3 new customers (DirectTV, Gateway, and AT&T Wireless) for over $20 million apiece during the March quarter. The company even claims to be taking business away from ORCL, one of their primary competitors. Cautious comments about the next quarter, along with profit taking from the recent rally (the stock jumped nearly 37% the day after earnings) should pull the stock back to earth and allow us a relatively low risk entry. Target a pullback to the $32-33 level for new positions, and then hold on for the next leg up. BUY LEAP JAN-2002 $35.00 YDS-AG BUY LEAP JAN-2003 $40.00 OIE-AH 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=2125 ************************************************************** ********** 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 Sunday 04-22-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/042001_5.asp ************* COVERED CALLS ************* Trading Basics: Q&A with the Covered-calls Editor By Mark Wnetrzak This week's questions concern strategy and stock selection, portfolio diversity and position management. Dear OIN, I realize that you are unable to address any specific trading questions in my portfolio, nor would I ask, but would like to inquire concerning some trading advice in general. I, like many, am looking for a more conservative and stable manner of trading after the recent deterioration in the market. I feel that your covered call section would fill this need, but would like your advice before beginning. Based on portfolio size, do you recommend a certain percentage amount going towards any single position? When trying to decide which stocks to choose from your many suggestions, are there certain criteria you would recommend in deciding upon which ones to actually trade? Once a stock is bought and the call sold, what do you recommend as far as stops to prevent losses. Do you set them on both the stock and call? Are they based on a certain dollar amount loss or a percentage drop? I would very much appreciate any help that you could provide, as I want to enter into this form of trading as prepared as can be. Thanks again, KT Regarding your questions about Covered-calls: First, have you looked through OptionInvestor.com's archive: both in the Covered-call section and Options 101? There is a lot of information on the web-site and each narrative is listed by title. Those strategy articles will answer many of your questions. Generally, most professional traders suggest limiting a single position to a percentage that will not severely impact your overall portfolio if there is a catastrophic loss. This could be anywhere from 3% to 20%, depending on one's risk/reward tolerance and portfolio size. You will have to decide what level you are comfortable risking in one position. Obviously, no one knows how a particular stock is going to perform in the future and you do not want to have "one ship that sinks the whole fleet." The fact that we really can't predict share values reinforces our reasoning for choosing to hedge with ITM covered-writes. In my research, I use a two-pronged approach to produce a list of Covered-Call candidates to supplement your search for profitable trading positions: technical searches and option scans. I search through hundreds of charts each week looking for technically strong stocks with robust option premiums. Then I sort through several lists of "overpriced" options and identify stocks with favorable technicals. We consider the covered write as a single entity and are not interested so much in stock ownership or bullish movement, but in obtaining a consistent (monthly) return on investment. Yet, it is sage advice to only purchase issues you really would not mind owning and so you must not neglect thoroughly researching potential candidates. Again, you must satisfy your reasons for entering a position; whether it is based on technical signals (above a moving average, stochastics or MACD, a heavy-volume rally) or fundamental strength (positive earnings, cash flow, revenue) or another type of short-term momentum such as a merger, buyout or stock split. Of course, any situation where the covered-write strategy is applied, short-term or longer term, requires a neutral to slightly bullish outlook on the underlying equity and the overall market. Anytime you enter into a transaction, you should know exactly what your break-even (cost basis) point is, and as the stock starts to move down to that break-even point, get ready for "action." Some traders may allow the stock to move to a specific point below their "break-even" before they repurchase the calls and sell out, or they initiate the closing trade when they can buy the calls back for 1/4 or less, whichever comes first. Others will use technical signals to identify an unemotional exit point such as a decline below a long-term moving average (150- or 200-day) and will hold onto the stock, selling new calls each month as long as the technical trend isn't violated. Each particular situation is obviously different, but in general, most traders don't like to lose more than about 5% overall. Unfortunately, there are times that we lose 30% or more, but since we are diversified with other stocks, this doesn't bring down our whole portfolio. In addition, there are some covered-call repair strategies (rolling forward/down) one can implement and they are described in detail in Lawrence McMillan's book, "Options: As a Strategic Investment." Our basic strategy on covered-calls is designed to lock in profits whenever possible, and keep inevitable losses to a minimum. There are many unexpected things that can occur, such as profit warnings, lawsuits, negative industry sentiment, etc., that can crash a stock suddenly in a single day. These situations cannot be avoided and there are no easy solutions as to what investors should do. Once again, it all depends on the individual situation, and one of your best defenses against a portfolio loss is diversity. Remember, the stocks you buy must represent companies of different types and in different industries. While this sounds obvious, many investors ignore this simple principle, and consequently get hurt when their industry falls "out of favor." Best regards, Mark W. OIN 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 14.01 APR 10.00 2.31 *$ 0.68 10.6% ELNK 10.38 10.75 APR 10.00 1.38 *$ 1.00 9.7% IGEN 13.31 19.15 APR 10.00 4.25 *$ 0.94 9.0% ACPW 20.31 21.50 APR 17.50 3.75 *$ 0.94 8.2% HPOW 8.00 7.24 APR 7.50 1.13 $ 0.37 7.8% LTBG 11.44 10.01 APR 10.00 1.94 *$ 0.50 7.6% CTLM 24.44 32.99 APR 20.00 5.38 *$ 0.94 7.1% MTSN 14.00 17.18 APR 12.50 2.44 *$ 0.94 7.1% LTXX 18.06 26.30 APR 17.50 1.31 *$ 0.75 6.5% VPHM 32.50 39.03 APR 30.00 3.75 *$ 1.25 6.3% BRKS 43.47 56.23 APR 40.00 5.63 *$ 2.16 6.2% EBAY 36.19 50.65 APR 30.00 7.38 *$ 1.19 6.0% TIBX 8.97 12.85 APR 7.50 1.75 *$ 0.28 5.6% ADBE 28.63 45.96 APR 25.00 5.13 *$ 1.50 5.5% SHFL 21.25 24.95 APR 20.00 2.44 *$ 1.19 5.5% NRG 30.84 33.49 APR 30.00 2.60 *$ 1.76 5.4% LTXX 19.00 26.30 APR 17.50 2.31 *$ 0.81 5.3% IGEN 15.19 19.15 APR 12.50 3.25 *$ 0.56 5.1% TVLY 17.81 25.74 APR 15.00 3.25 *$ 0.44 4.4% AAPL 20.59 25.04 APR 17.50 3.60 *$ 0.51 4.3% SHFL 20.94 24.95 APR 17.50 4.38 *$ 0.94 4.1% PCS 21.60 26.65 APR 17.50 4.50 *$ 0.40 3.4% ATVI 24.63 25.97 APR 22.50 3.13 *$ 1.00 3.4% CPRT 21.81 22.56 APR 20.00 2.63 *$ 0.82 3.1% CLPA 6.22 3.91 APR 5.00 2.06 $ -0.25 0.0% UTHR 16.94 11.45 APR 15.00 3.25 $ -2.24 0.0% JBL 26.00 32.44 MAY 22.50 5.00 *$ 1.50 6.2% EXFO 31.95 35.04 MAY 25.00 8.60 *$ 1.65 6.1% SBYN 13.75 15.95 MAY 10.00 4.40 *$ 0.65 6.0% AHAA 21.21 27.35 MAY 17.50 4.80 *$ 1.09 5.8% EMIS 18.20 16.30 MAY 15.00 4.10 *$ 0.90 5.5% ZIGO 24.74 33.53 MAY 17.50 8.20 *$ 0.96 5.0% *$ = Stock price is above the sold striking price. Comments: I told you this week would be interesting. Maybe that is an understatement: this week was fantastic! Yes, I have some call-buying regret but what if Intel (NASDAQ:INTC) missed estimates or the FED didn't come to the rescue! Ok, time to take a critical look at the issues that did not "exhibit" strength during the recent bullish Market move. Cell Pathways (NASDAQ:CLPA) has moved down to its December low (key moment) and is offering very little premium in May. Time to exit? United Therapeutics (NASDAQ:UTHR) dropped on a drug approval delay: time to decide on rolling down to a May $12.50 call (locking in a small loss), an August $12.50 call (for a small profit), or just exiting the position. As for H Power Corp. (NASDAQ:HPOW), if you still retain a bullish outlook, the May $7.50 call should lower your cost basis to $6. Positions Closed: Do not under estimate the power of the FED or Murphy's Law! All the positions below ended the month positive with five closing above the sold strike. Well, it happens... 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 Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield LMNE 5.22 MAY 5.00 ULN EA 1.30 209 3.92 28 29.9% MFNX 5.25 MAY 5.00 QFN EA 0.95 4270 4.30 28 17.7% MRVC 8.80 MAY 7.50 VQX EU 2.15 522 6.65 28 13.9% BORL 7.99 MAY 7.50 BLQ EU 1.05 492 6.94 28 8.8% ASTE 16.05 MAY 15.00 QYA EC 2.10 0 13.95 28 8.2% EXAR 30.15 MAY 25.00 EQC EE 6.50 38 23.65 28 6.2% NXCD 11.35 MAY 10.00 DQX EB 1.85 61 9.50 28 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). ***** ASTE - Astec Industries $16.05 *** Earnings Rally! *** Astec Industries (NASDAQ:ASTE) is a manufacturer of asphalt mixing plants; asphalt paving equipment; asphalt analyzing and recycling equipment; heat transfer equipment; aggregate processing equipment; excavating and trenching equipment; and underground directional drilling equipment. Astec reported earnings Thursday and beat estimates on revenues of $143.3 million and net income of $5.3 million, or $0.27 per fully diluted share. The company continues to focus on developing innovative products for its customers and controlling their costs during the current adverse economic conditions. We simply favor the breakout above the recent consolidation phase and a cost basis near support. MAY 15.00 QYA EC LB=2.10 OI=0 CB=13.95 DE=28 TY=8.2% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=ASTE ***** BORL - Borland Software $7.99 *** Stage I Base *** Borland Software (NASDAQ:BORL) is a leading provider of high- performance e-business implementation platforms designed to increase developer productivity and reduce time to market for enterprise software projects. E-business implementation platforms consist of software products that allow businesses to develop, deploy, and manage e-business applications. Borland recently announced a new suite of interactive training classes, the Borland. e-Learning Series, offered in multi-media CD-ROM format. The company continues to expand into new markets recently opening a sales and operations office in Stockholm, Sweden. Investors appear to be anticipating favorable earnings, which will be reported on Wednesday, April 25. We like the historical support near our cost basis as Borland forges a Stage I base. MAY 7.50 BLQ EU LB=1.05 OI=492 CB=6.94 DE=28 TY=8.8% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=BORL ***** EXAR - Exar Corporation $30.15 *** Change of Character? *** Exar Corporation (NASDAQ:EXAR) designs, develops and markets high-performance, high-bandwidth analog and mixed-signal silicon solutions for the worldwide communications infrastructure. Leveraging its industry-proven analog design expertise, system- level knowledge and standard CMOS process technologies, Exar provides OEMs innovative ICs addressing wide area network (WAN) transmission standards such as T/E carrier, ATM and SONET. In early March, Exar warned that it expected its fourth quarter performance to be lower than anticipated. Now it appears that investors believe the bad news has already been discounted. The move above the March high signals a possible change of character and suggests the downtrend has ended and a more lateral consolidation has begun. A reasonable cost basis from which to speculate on Exar's future. MAY 25.00 EQC EE LB=6.50 OI=38 CB=23.65 DE=28 TY=6.2% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=EXAR ***** LMNE - Luminent $5.22 *** Speculators Only! *** Luminent (NASDAQ:LMNE) designs, manufactures and sells a full line of single-mode active and passive fiber optic components for high-capacity data transmission in the metropolitan and access markets. Network equipment manufacturers rely on Luminent to provide technical depth, responsive customer service and volume manufacturing to meet the increasing requirements for transmission capacity and speed between nationwide telecommunications networks and end-users. With earnings due after the close Monday, April 23, this position offers a reasonable entry point for investors who wish to speculate on this new provider of innovative fiber- optic products. Remember: high reward = high risk! MAY 5.00 ULN EA LB=1.30 OI=209 CB=3.92 DE=28 TY=29.9% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=LMNE ***** MFNX - Metromedia Fiber Network $5.25 *** Bottom Fishing! *** Metromedia Fiber Network (NASDAQ:MFNX), a leader in deployment of optical and IP infrastructure within key metropolitan areas domestically and internationally, is revolutionizing the fiber- optic industry. Through its subsidiaries AboveNet Communications, the architect of the Internet Service Exchange (ISX), PAIX.net, the first and leading neutral Internet exchange, and SiteSmith, a leader in delivering comprehensive Internet infrastructure managed services, Metromedia Fiber Network is a leading provider of Internet connectivity, co-location and managed services solutions for high-bandwidth and business-critical applications. The company beat estimates in March and though it is scaling back its capital spending, it didn't lower its guidance for next year. A reasonable cost basis for those who like to fish the bottom. MAY 5.00 QFN EA LB=0.95 OI=4270 CB=4.30 DE=28 TY=17.7% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=MFNX ***** MRVC - Mrv Communications $8.80 *** More Bottom Fishing! *** Mrv Communications (NASDAQ:MRVC) creates, acquires, finances and operates companies, and through them, designs, develops, builds, and markets products, which enable high-speed broadband communi- cations. The company concentrates on companies and products devoted to optical components and network infrastructure systems. In February, Mrv reported revenue of $97.7 million for the quarter ended December 31, 2000, an increase of 18%, and net income of $4.5 million, or $0.06 per diluted share. Though the company reported strong results, worries about the future economic environment have taken their toll. With the current notion that bad news has been "priced" in, this position offers bottom fishing traders a favorable cost basis from which to speculate on Mrv's future share value. MAY 7.50 VQX EU LB=2.15 OI=522 CB=6.65 DE=28 TY=13.9% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=MRVC ***** NXCD - NextCard $11.35 *** Technicals Only! *** NextCard (NASDAQ:NXCD) is considered the leading issuer of consumer credit on the Internet. Launched in 1997, the Company was the first to offer instant online credit card approval, a choice of customized credit card offers, and exceptional online customer service. With earnings due next week on Wednesday, April 25, and now the surprise FED rate cut, investors have boosted NextCard above a short-term "head-n-shoulders bottom." The near-term resistance is the January high with a move above completing a Stage I breakout. Reasonable speculation on improving technicals with a favorable cost basis. MAY 10.00 DQX EB LB=1.85 OI=61 CB=9.50 DE=28 TY=5.7% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=NXCD ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional 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 and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. 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 SNWL 16.60 MAY 15.00 UWL EC 2.90 199 13.70 28 10.3% BRCM 40.62 MAY 35.00 RCQ EG 8.10 11233 32.52 28 8.3% PMCS 44.81 MAY 35.00 SQL EG 11.80 2943 33.01 28 6.5% PRGN 27.54 MAY 22.50 GQP EX 6.30 174 21.24 28 6.4% INGR 10.66 MAY 10.00 IGQ EB 1.20 120 9.46 28 6.2% SMDI 15.94 MAY 12.50 HTU EV 4.10 414 11.84 28 6.1% ************************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=2095 ************************************************************** *********************** CONSERVATIVE NAKED PUTS *********************** Stock Buying Basics: Common Chart Patterns By Ray Cummins A number of readers have requested more information on how we pick our plays. Obviously, the most important factor in play selection is the technical health of the underlying issue. To determine the future trend (or character) for any stock, you must be able to identify the most common historical patterns and understand the implications of basic technical indicators. A large majority of chart formations fall into the category of area patterns. Each of these trends or indications can have predictive value under certain conditions. First we will discuss the most common bullish patterns. Ascending Triangle: Right-angle triangles are the most popular group of area patterns. These patterns are easily identified; one of the two trend lines is generally flat while the other points toward it. When the top trend line is horizontal and the lower trend line slants up and to the right, meeting the upper line at an intersection beyond the price, the triangle is ascending. The outlook for this type of formation is very favorable and the continuation rally (after a break-out has occurred), is generally of the same magnitude as the height of the original triangle. Here is an example: Pennants and Flags: In a flag pattern, the upper and lower boundary lines pattern are generally parallel though both may slant up, down or sideways in the trend. In a bullish trend, the formation resembles a flag flying from a mast. This pattern tends to form during the middle of a rally. A pennant is similar to a flag. The major difference is a pennant has converging rather than parallel trend lines (much like an ascending triangle). It generally occurs in a period of congestion. The pattern is short-term and forms after a sharp upward movement in price. Here is an example: Rounded Bottom: The rounded bottom is a reversal pattern that reflects a gradual and symmetrical change in trend from bearish to bullish. The price pattern (and often the volume pattern) will resemble a concave shape similar to a bowl or saucer. It can be either long-term or short-term. A series of rounding bottom formations can occur where the rising end moves higher than the preceding top of the previous pattern. Individual formations are generally 1 to 2 months long and the change in price can be up to 25% of the share value. Here is an example of a long-term saucer: Head-And-Shoulders Bottom: This formation is one of the most common reversal patterns. The first element is a pronounced sell-off in which volume increases during the decline. A brief recovery follows but the rally fails near the support area of the previous range (prior to the initial break-down). Now the left shoulder and neckline are established. A second sell-off drives the stock price to new lows but volume quickly fades and a decisive reversal begins. The lowest price is the (inverted) head of the pattern. The recovery again fails at the neckline and with traders unwilling to commit fully to the new trend, the stock fades to a short-term low; approximately equal to the left shoulder. The slump is brief and the change in direction is once again decisive (often a hammer-bottom). The new rally is supported by a surge in volume and the momentum carries the issue up and through the neckline (previous resistance) of the pattern. At this point, a successful test of the neckline (now support) is the final confirmation of a new trend. Here is an example: Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield ACPW 20.41 21.50 APR 17.50 0.40 *$ 0.40 30.8% PSFT 29.10 33.15 APR 25.00 0.50 *$ 0.50 27.0% UTCI 9.25 9.80 APR 7.50 0.25 *$ 0.25 24.7% SBYN 12.75 15.95 APR 10.00 0.50 *$ 0.50 23.7% APHT 20.50 16.25 APR 15.00 0.56 *$ 0.56 17.4% ACPW 19.13 21.50 APR 15.00 0.31 *$ 0.31 16.3% PRGN 21.53 27.54 APR 15.00 0.31 *$ 0.31 14.6% OATS 9.25 8.20 APR 7.50 0.44 *$ 0.44 13.3% NVDA 62.69 86.96 APR 45.00 0.81 *$ 0.81 13.2% CA 28.20 37.19 APR 22.50 0.35 *$ 0.35 12.7% MCDTA 24.31 22.25 APR 17.50 0.56 *$ 0.56 11.2% EBAY 35.50 50.65 APR 25.00 0.38 *$ 0.38 11.0% AAPL 19.63 25.04 APR 15.00 0.50 *$ 0.50 9.8% ASMI 17.69 21.76 APR 15.00 0.31 *$ 0.31 9.6% AAPL 23.00 25.04 APR 17.50 0.44 *$ 0.44 9.5% HOTT 28.00 31.18 APR 22.50 0.38 *$ 0.38 9.1% BBY 47.49 54.33 APR 40.00 0.50 *$ 0.50 9.0% THQI 33.88 38.70 APR 30.00 1.38 *$ 1.38 9.0% IGEN 18.94 19.15 APR 15.00 0.25 *$ 0.25 9.0% SCIO 19.38 22.49 APR 15.00 0.44 *$ 0.44 8.9% SCIO 23.00 22.49 APR 17.50 0.25 *$ 0.25 7.5% GLC 23.44 22.80 APR 20.00 0.55 *$ 0.55 7.4% MTON 27.25 37.93 APR 20.00 0.50 *$ 0.50 7.3% ESCM 21.75 27.94 APR 17.50 0.38 *$ 0.38 6.8% AMD 29.44 29.00 APR 22.50 0.35 *$ 0.35 6.1% OLOG 25.00 23.30 APR 22.50 0.56 *$ 0.56 6.0% ANF 32.30 32.55 APR 25.00 0.55 *$ 0.55 5.7% VTS 36.98 30.75 APR 30.00 0.62 *$ 0.62 5.3% MTON 31.69 37.93 APR 22.50 0.31 *$ 0.31 5.1% ADVP 49.94 54.21 APR 40.00 0.75 *$ 0.75 5.0% DDS 20.30 16.68 APR 17.50 0.40 $ -0.42 0.0% EBAY 41.63 50.65 MAY 30.00 1.10 *$ 1.10 10.1% RFMD 17.85 27.50 MAY 12.50 0.45 *$ 0.45 9.7% SCI 22.99 25.50 MAY 17.50 0.45 *$ 0.45 7.7% VSEA 39.35 47.50 MAY 30.00 0.70 *$ 0.70 7.1% EXFO 31.95 35.04 MAY 17.50 0.45 *$ 0.45 5.7% *$ = Stock price is above the sold striking price. Comments: An expiration week rally! What a novel concept and a put-sellers dream come true. Ok, but is was a nice change of pace. As for Dillard's (NYSE:DDS), the action last Friday was horrid after a weak sales report but the FED induced spike did offer a break-even exit on Wednesday. Remember, taking a quick exit by buying back the puts for $0.10 or $0.15 can save headaches (or margin calls). Positions Closed: Lam Research (NASDAQ:LRCX) wins a Murphy's Law award on a stellar rally, Cirrus Logic (NASDAQ:CRUS), Trico Marine (NASDAQ:TMAR), and Boston Scientific (NYSE:BSX). NEW CANDIDATES ********* 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 PPD 17.25 MAY 10.00 PPD QB 0.50 1013 9.50 28 13.8% FNSR 16.00 MAY 10.00 FQY QB 0.40 97 9.60 28 12.1% SNWL 16.60 MAY 12.50 UWL QP 0.40 120 12.10 28 11.7% MANU 34.40 MAY 22.50 ZUQ QR 0.75 60 21.75 28 10.7% NTAP 23.55 MAY 15.00 NUL QC 0.50 839 14.50 28 10.4% BRCD 36.78 MAY 22.50 BQB QX 0.50 1830 22.00 28 6.9% MUSE 48.83 MAY 25.00 QVM QE 0.65 367 24.35 28 6.8% 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). ***** BRCD - Brocade $36.78 *** Earnings Warning = Rally! *** Brocade Communications (NASDAQ:BRCD) is a provider of storage area networking infrastructure solutions. Brocade's family of hardware and software products provides a networking foundation for storage area networks, which bring a networking model to storage environments. Using Fibre Channel fabric switches and software, customers can connect servers with external storage devices through a SAN, creating a highly reliable and scalable environment for data-intensive storage applications. Brocade issued a warning last week that its earnings would fall short of expectations due to the weakening economy. But, the company also offered an optimistic outlook and was promptly upgraded by a number of analysts. Salomon Smith Barney raised its rating on BRCD, saying the storage networking sector has huge growth potential. Banc of America Securities also upgraded the issue based in part on a belief that most of the bad news has been fully priced into its share value. Traders who agree with that outlook may choose to speculate on BRCD's future movement with a cost basis near $22. MAY 22.50 BQB QX LB=0.50 OI=1830 CB=22.00 DE=28 TY=6.9% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=BRCD ***** FNSR - Finisar $16.00 *** Bottom Fishing! *** Finisar (NASDAQ:FNSR) provides fiber optic subsystems and network performance test systems to enable high-speed data communications over local area networks and storage area networks. Additionally, the company has developed products for digitizing the return path of a cable television network and for aggregating data traffic in extended networks. The company also offers value-added optical subsystems, which convert electrical signals into optical signals, for networking and storage equipment manufacturers that develop and market systems based on Gigabit Ethernet and Fibre Channel. Last week, FNSR reported it will post lower-than-expected revenue and earnings for its fiscal fourth quarter, citing the economy's slowdown and order rescheduling. Apparently, investors are not expecting much in the way of earnings as the issue has rallied since the announcement and now appears to be moving back to an old range near $25. Traders who think the bad news has already been factored into FNSR's share value can speculate on that view with this conservative position. MAY 10.00 FQY QB LB=0.40 OI=97 CB=9.60 DE=28 TY=12.1% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=FNSR ***** MANU - Manugistics $34.40 *** On The Rebound! *** Manugistics Group (NASDAQ:MANU) is a global provider of unique supply chain optimization solutions for enterprises and evolving eBusiness trading networks. Its solutions, which include client assessment, software, consulting services for implementation and solution support, can be optimized to the supply chain of any company. MANU's solutions provide its clients with the business intelligence to participate in various trading relationships, from traditional linear supply chains to eBusiness networks. The company's newest generation of proven solutions enable businesses to work in concert with their trading partners via the Internet, expanding their supply chains to eBusiness networks. MANU is one of our old favorites and technically, the issue appears to have successfully reversed direction with the recent rally in computer software shares. MAY 22.50 ZUQ QR LB=0.75 OI=60 CB=21.75 DE=28 TY=10.7% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=MANU ***** MUSE - Micromuse $48.83 *** 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. MUSE reported record financial results for its second fiscal quarter last week 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 2000. Operating margins were also a surprise, growing from 17% last year to a record 19.2% in the second quarter of 2001. Good earnings are hard to come by in the current market and MUSE's bullish technical outlook suggests the company's share value is poised for further upside activity. MAY 25.00 QVM QE LB=0.65 OI=367 CB=24.35 DE=28 TY=6.8% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=MUSE ***** NTAP - Network Appliance $23.55 *** Own This One! *** Network Appliance (NASDAQ:NTAP) designs, manufactures, markets and supports high performance network attached data storage and access devices which provide fast, reliable and effective file service and content delivery solutions for data-intensive network environments. The company pioneered the concept of the network appliance, an extension of the industry trend toward specialized devices that perform a specific function in the network, similar to the development of the router for network communications. The technology storage group rallied last week after industry leaders reported earnings that met lowered expectations and hinted at an increase in demand for their products. Traders who agree that a bottom may have been reached in the sector can establish a cost basis near NTAP's recent lows with this conservative position. MAY 15.00 NUL QC LB=0.50 OI=839 CB=14.50 DE=28 TY=10.4% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=NTAP ***** PPD - Pre-Paid Legal Services $17.25 *** Speculation Only! *** Pre-Paid Legal Services (NASDAQ:PPD) was one of the first major companies organized solely to design, underwrite and market legal expense plans (Memberships). The company's legal expense plans currently provide for or reimburse a portion of the legal fees associated with a variety of legal services in a manner similar to medical reimbursement plans. The company has offered legal services under two Membership types: closed panel, which allows members to access legal services through a network of independent provider law firms under contract with the company and open panel, which allows members to locate their own lawyer to provide legal services available under the Membership. PPD has moved higher in recent sessions after announcing revised annual earnings that reflect accounting changes prompted by an SEC inquiry. Investors appear to be happy with the outcome of the investigation and if short-sellers continue to cover their positions, the issue will likely move higher in the coming weeks. MAY 10.00 PPD QB LB=0.50 OI=1013 CB=9.50 DE=28 TY=13.8% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=PPD ***** SNWL - SonicWALL $16.60 *** Solid Earnings! *** SonicWALL (NASDAQ:SNWL) designs, develops, manufactures and sells Internet security infrastructure products designed to provide secure Internet access to the company's broadband customers, and processes secure transactions for enterprises and other service providers. The company also sells security services, including content-filtering services and anti-virus protection, on an annual subscription basis. The company's transaction security products offer high-performance SSL acceleration and offloading to enable providers and enterprises to deploy unique e-commerce applications without degrading Website performance. SNWL reported revenues of $24.6 million for the first quarter of 2001, an increase of 83% compared to the same period of 2000. In addition to strong growth in their worldwide installed base, they experienced a 240% growth over last year in upgrades and services revenues, which grew to 19% of total revenues for the first quarter. The fundamental outlook is positive and technically, SNWL has excellent upside potential in the near-term. MAY 12.50 UWL QP LB=0.40 OI=120 CB=12.10 DE=28 TY=11.7% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=SNWL ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional 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 and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. 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 KLIC 16.96 MAY 15.00 KQS QC 0.50 134 14.50 28 10.2% EMLX 32.49 MAY 20.00 UML QD 0.50 382 19.50 28 7.8% SEBL 45.54 MAY 30.00 SGQ QF 0.70 2436 29.30 28 7.8% MU 46.54 MAY 32.50 MU QS 0.60 3627 31.90 28 6.6% CCMP 70.01 MAY 40.00 UKR QH 0.85 304 39.15 28 6.2% ************************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=2111 ************************************************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Time For A Breather! Stocks consolidated today amid light trading as investors took profits after a string of bullish sessions. Friday, April 20 Stocks consolidated today amid light trading as investors took profits after a string of bullish sessions. The Dow industrial average fell 113 points to 10,579 and the NASDAQ Composite slid 18 points to 2,163. The S&P 500 index ended 10 points lower at 1,242. Volume on the Big Board totaled 1.3 billion shares with declines pacing advances 1,861 to 1,194. Trading activity on the NASDAQ was average at 2.5 billion shares exchanged. Losers beat winners 2,035 to 1,840 in the technology group. In the bond market, the 30-year Treasury fell 1/32, pushing its yield up to 5.79%. Thursday's new plays (positions/opening prices/strategy): Human Gen. (NASDAQ:HGSI) MAY40P/45P $0.80 credit bull-put Lehman Bros. (NYSE:LEH) MAY55P/60P $0.55 credit bull-put Total Fina (NYSE:TOT) MAY80C/75C $0.80 credit bear-call Friday's market activity provided some excellent opportunities to achieve the target prices in our new combination positions. Market Activity: Industrial stocks retreated today, ending a week of gains on the blue-chip average. Losses in drug and cyclical shares drove the DOW to a triple-digit decline, even as upbeat earnings reports were issued by some bellwether companies. Aviation giant Boeing (NYSE:BA) registered a first-quarter profit of $0.89 per share, smashing the consensus estimates by $0.09. Revenues rose 34% in the quarter and Boeing reaffirmed its previous earnings outlook for 2001. Software maker Microsoft (NASDAQ:MSFT) posted a profit of $0.44 in its third quarter, beating the First Call estimate by $0.02 and exceeding the $0.43 reported in the year-ago period. Revenues were up 14% from last year and better than analysts had expected. At the same time, mediocre profit reports from Merck (NYSE:MRK) and Honeywell (NYSE:HON) weighed heavily on investors and also leading the blue-chip group lower were shares of Dupont (NYSE:DD), Minnesota Mining (NYSE:MMM), Walt Disney (NYSE:DIS), Eastman Kodak (NYSE:EK) and SBC Communications (NYSE:SBC). The recent rally in technology shares also produced the inevitable round of profit-taking, leaving the NASDAQ in the minus column. Chip and Internet issues led on the downside, but there were a number of bullish surprises and among the best performers were Brocade (NASDAQ:BRCD), Network Appliance (NTAP:NTAP) and QLogic (NASDAQ:QLGC). Emulex (NASDAQ:EMLX) also enjoyed a solid rally after reporting a third-quarter profit of $0.13 a share, in line with estimates as revenue jumped 65% from the year-ago quarter. In the broader market, biotechnology, consumer products, banking, airline, retail and drug stocks retreated. Oil and oil service issues were among the few upside movers in the S&P 500 sectors. Monthly Portfolio Summary: April was a great month for the Spreads/Combos Portfolio and the recent recovery rally helped the section finish with a majority of profitable positions. Our most popular strategy; the Credit Spread, was again the most successful and positions that expired at maximum profit included Amgen (NASDAQ:AMGN), Biochem Pharma (NASDAQ:BCHE), Amerada Hess (NYSE:AHC), Elan (NYSE:ELN), Genzyme (NASDAQ:GENZ), Cummins Engine (NYSE:CUM), International Rectifier (NYSE:IRF), Kerr McGee (NYSE:KMG), Lennar (NYSE:LEN), P.F. Changs (NASDAQ:PFCB), PolyMedica (NASDAQ:PLMD), Shaw Group (NYSE:SGR), International Business Machines (NYSE:IBM); two separate spreads, and Varian (NYSE:VAR). Our carryover (adjustment) from March, Johnson & Johnson (NYSE:JNJ) also expired profitable. Positions in Minnesota Mining (NYSE:MMM) and Patterson Energy (NYSE:PTEN) required adjustments to maintain profits or limit losses. Liz Claiborne (NYSE:LIZ) was rolled to May at the $40 strike and our most difficult play in the section, Avery Dennison (NYSE:AVY), finished at the sold strike - Murphy's Law! Positions in Harley Davidson (NYSE:HDI), Guidant (NYSE:GDT) and Wellpoint Health Networks (NYSE:WLP), although unavailable at the target prices, were also successful. The Straddles Portfolio enjoyed a banner month with a number of positions offering significant profits. Granite Construction (NYSE:GVA), Telebras (NYSE:TBH), Imperial Chemical (NYSE:ICI) and Grupo Televisa (NYSE:TV) provided gains of 100% or more. Other profitable plays included Omnicom (NYSE:OMC), Icos (NASDAQ:ICOS), British Telecom (NYSE:BTY) and HNC Software (NYSE:HNCS). SPX (NYSE:SPW) reached the downside break-even point in early April and then rallied to the same point on the upside at expiration, providing a $20 move for those who traded the cycle. In the other delta-neutral category; Credit Strangles, the only two positions, Costco (NASDAQ:COST) and Impath (NASDAQ:IMPH) expired at maximum profit. The selection of Calendar Spreads were an active group in April and the extreme volatility produced some excellent time-selling opportunities. Bullish positions in Sprint (NYSE:FON), Lennar (NYSE:LEN) and Earthlink (NASDAQ:ELNK) offered favorable profits for aggressive traders while disparity plays in Ocular Sciences (NASDAQ:OCLR), International Financial Group (NYSE:IFS) and Data Broadcasting (NASDAQ:DBCC) provided small gains for conservative participants. Advanta (NASDAQ:ADVNB), our carryover from last month, offered a profitable exit just after the March expiration and LSI Logic (NYSE:LSI) has been rolled into May at cost basis of $0.80 for the JUL-$25 Call. Cirrus (NASDAQ:CRUS) has yet to provide a profit but there is ample time for a recovery before our SEP-$30 call expires. In the Covered-calls on LEAPS section, Microsoft (NASDAQ:MSFT) has been the most successful play as the JAN03-$35 Call is now trading at a 25% profit. The AT&T (NYSE:T) position has also enjoyed excellent gains and our new Worldcom (NASDAQ:WCOM) spread is profitable as well. The Hewlett-Packard (NYSE:HWP) JAN02-$40 Call is at break-even with almost 9 months remaining until expiration and Intel (NASDAQ:INTC) appears to be in the process of recovering from a recent slump. This month's group of Synthetic Positions was a mixed bag with some candidates exceeding our expectations while others made little of no profit. Capstone (NASDAQ:CPST), Dupont (NYSE:DD) and Olin (NYSE:OLN) offered profitable opportunities. Zoltek (NASDAQ:ZOLT), Wal-Mart (NYSE:WMT) and Cypress Semi (NYSE:CY) expired with the original credit. Weatherford (NYSE:WFT) ended above the sold strike but the position did not provide a profit. The lone position in the diagonal spread category, International Business Machines (NYSE:IBM) expired at maximum profit. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** INSP - Infospace $4.04 *** Cheap Speculation! *** InfoSpace (NASDAQ:INSP) is a global provider of cross-platform merchant and consumer infrastructure services on wireless, broadband, and narrowband platforms. The company provides commerce, information, and communication infrastructure services to wireless devices, merchants and Web sites. The company's many partners encompass a global network of wireless, PC, and non-PC devices, including cellular phones, pagers, screen telephones, television set-top boxes, online kiosks and personal digital assistants. InfoSpace is also engaged in the growing market for broadband wired (DSL and cable) and broadband wireless (2.5G and 3G) services. InfoSpace has relationships with AT&T Wireless, Cingular Wireless, Intel, Virgin Mobile, Verizon, National Discount Brokers, Hasbro, and Bloomberg LLC, among others. The company's affiliate network also consists of more than 3,200 Web sites that include AOL, Microsoft, Disney's GO Network, NBC's Snap, Lycos, and ABC LocalNet. We found this position while searching through candidates for the Covered-call section and with the large disparity in option premiums, the position presents an excellent speculation play for traders who favor time-selling strategies. Since INSP's earnings are due next week, there will certainly be volatile activity, but that can also benefit the position. As with most bullish calendar spreads, the play is speculative with low cost and large potential profits. Two favorable outcomes can occur: the stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the stock consolidates, allowing the sold option to expire and then eventually rallies above the long option's strike price. PLAY (speculative - bullish/calendar spread): BUY CALL JUL-5.00 IOU-GA OI=6131 A=$0.90 SELL CALL MAY-5.00 IOU-EA OI=1716 B=$0.50 INITIAL NET DEBIT TARGET=$0.30-$0.35 TARGET ROI=25% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=INSP ****************************************************************** TLGD - Tollgrade Communications $30.40 *** Telecom Leader! *** Tollgrade Communications (NASDAQ:TLGD) is a provider of service assurance solutions to the telecommunications industry. The company's focus is helping local exchange carriers deliver the high quality of service through enhanced testability. Tollgrade develops, manufactures and markets Test System and Test Access technology that enables local carriers to achieve maximum Digital Loop Carrier testability, along with the effective provisioning and deployment of next generation services that include Digital Subscriber Line service. Tollgrade's next generation DigiTest centralized network test platform serves as the company's system solution. DigiTest includes its Digital Wideband Unit for loop qualification and in-service DSL testing; the Digital Measurement Unit, which contains the test head for load coil detection and the complete range of Plain Old Telephone Service measurements, and Digital Measurement Node, which serves as the mounting shelf for the system. Tollgrade surprised investors last week, announcing a 24.9% rise in first quarter revenue and a 10.3% increase in earnings per share for the period, as compared to the similar quarter in the prior year. Gross profit increased 11.9% to $15.7 million from $14 million in the first quarter of 2000 and income from daily operations rose 8.9% to $8.3 million from the first quarter of 2000. At the same time, the company announced a cost realignment initiative that will yield about $4,300,000 in annual pre-tax savings as they streamline operations and maintain a healthy margin level. The company's goal is to become more focused and better positioned to achieve sustainable growth in the future and investors appear to support that outlook. Technically, the issue has recently moved above its 50-dma and it continues to build a Stage I base, establishing near-term support around $25. The rally above the March high bodes well for further upside potential with a future test of the top of the price channel near $37 likely. Traders should target a lower debit (or even a credit) in the position, to allow for a brief consolidation in the issue. PLAY (speculative - bullish/synthetic position): BUY CALL MAY-40.00 THF-EH OI=126 A=$1.00 SELL PUT MAY-22.50 THF-QX OI=35 B=$0.70 INITIAL NET DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=$1.00 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $700 per contract. http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=TLGD ****************************************************************** PMCS - PMC-Sierra $44.81 *** Multiple Upgrades! *** PMC-Sierra (NASDAQ:PMCS) designs, develops, markets and supports high-performance semiconductor networking solutions. Their many products are used in the high-speed transmission and networking systems, which are being used to restructure the global telecom and data communications infrastructure. The company provides components for equipment based on Asynchronous Transfer Mode, Synchronized Optical Network, Synchronized Digital Hierarchy, T1/E1/J1 and T3/E3/J2 access transmission, High speed Data Link Control and Ethernet. The company's networking products adhere to international standards and are sold on the merchant market to over 100 customers either directly or through its worldwide distribution channels. PMCS was a popular issue on Friday, enjoying no less than five brokerage upgrades as analysts competed to publish the most optimistic outlook for the company. Salomon Smith Barney, J.P. Morgan, Robertson Stephens, Goldman Sachs and Frost Securities all expressed optimistic views regarding the company, based on on a variety of data points including the belief that earnings will bottom within the next three to six months and orders will likely bottom within the next three months. Analysts also said they were upbeat about the company's potential for completing inventory corrections in the near future. I never thought I would be offering a put-credit spread on PMCS with a $30 strike price but here it is! Traders who believe the recent rally in technology stocks will continue can speculate on that outcome with a conservative combination play. PLAY (conservative - bullish/credit spread): BUY PUT MAY-25 SQL-QE OI=2365 A=$0.50 SELL PUT MAY-30 SQL-QF OI=3523 B=$0.95 INITIAL NET CREDIT TARGET=$0.55-$0.60 ROI(max)=12% B/E=$29.45 http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=PMCS ****************************************************************** MMM - Minnesota Mining $112.50 *** Revenge Play! *** Minnesota Mining & Manufacturing (NYSE:MMM) is engaged in the research, manufacturing and marketing of products related to its technology in coating and bonding for coated abrasives. Characterized by substantial inter-company cooperation, 3M's business has developed upon the research and technology of its original product, coating and bonding. This process consists of applying one material to another, such as abrasive granules to paper or cloth (coated abrasives), adhesives to a backing (pressure-sensitive tapes), ceramic coating to granular mineral (roofing granules), glass beads to plastic backing (reflective sheeting) and low-tack adhesives to paper. Minnesota Mining enjoyed a surprise rally last week after the Fed unexpectedly cut interest rates and our bearish position in the issue was one of our few losing plays in April. Now the urge for revenge has become overwhelming and with the company due to report earnings on Monday, there is a great opportunity to speculate on the performance of MMM shares in the near-term. PLAY (very conservative - bearish/credit spread): BUY CALL MAY-130 MMM-EF OI=164 A=$0.50 SELL CALL MAY-125 MMM-EE OI=367 B=$1.00 INITIAL NET CREDIT TARGET=$0.55-$0.60 ROI(max)=12% B/E=$125.55 http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=MMM ****************************************************************** - INDEX OPTION SPREADS - ****************************************************************** As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific market industry or the market as a whole. Spread strategies can be made with index options similar to those made with individual stock options. Many professional traders employ index spreads as a hedge strategy. We favor debit spreads on the SPX for momentum and hedge or longer-term plays and OTM credit spreads on the OEX when the risk/reward is favorable. Low ROI disparity spreads will also be listed (when available) for the conservative index trader. ******************************************************************* OEX - S&P 100 Index $643.66 *** OTM Credit-Spreads *** The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. OBSERVATIONS: For OTM credit spread trades, we like to use the actively-traded S&P 100 Index options because they contain much more premium than options on individual stocks and provide an underlying instrument less prone to huge, gapping moves. Remember however, that you can always be exercised early so monitor your positions daily. TECHNICALS: Analysts say a classic "buy" signal was issued in the broader market last week based on the recent "W" formations completed in the OEX, SPX, and the RUT along with indicators that use moving averages, and also the sentiment gauges such as the VIX. This activity will probably result in the market becoming short-term overbought, but no serious selling pressures are evident and the technicals remain bullish as we move into the second major week of earnings. Of course, caution is warranted as a lot of profit is on the table and be sure to review the "Market Sentiment" section on the homepage of the OIN for more specific technical information on the S&P 100 Index. PLAY (conservative - bullish/credit spread): BUY PUT MAY-595 OEB-QS OI=98 A=$4.60 SELL PUT MAY-600 OEY-QT OI=1771 B=$5.20 INITIAL NET CREDIT TARGET=$0.60-$0.65 ROI(max)=14% B/E=$499.40 http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=OEX ****************************************************************** ************************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. 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