The Option Investor Newsletter Tuesday 04-24-2001 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/042401_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 04-24-2001 High Low Volume Advance/Decline DJIA 10454.30 - 77.90 10636.90 10448.00 1.21 bln 1534/1493 NASDAQ 2016.60 - 42.70 2095.89 2012.37 1.98 bln 1846/2012 S&P 100 625.74 - 8.15 639.00 625.57 totals 3380/3505 S&P 500 1209.47 - 14.89 1233.54 1208.89 49.1%/50.9% RUS 2000 462.35 + 1.28 465.07 460.47 DJ TRANS 2764.64 - 29.49 2795.06 2755.54 VIX 32.46 + 0.96 32.46 30.47 Put/Call Ratio 0.70 ****************************************************************** Too Good To Be True? The rate cut rally from last week was simply too strong and rallied too high to be sustainable without some profit taking. Everybody knew it but everyone hoped it would not happen this time. Unfortunately, once weakness appeared the brave bulls from last week turned into timid calves and they ran for the sidelines with tail tucked firmly between their legs. The bears are not yet back in control but their growling can be heard from the sidelines as warning after warning continues to weigh on the markets. With every earnings miss and negative projection they become a little braver and a little louder. Their memory of being severely burned by the explosion last week has tempered their aggressiveness but they are nibbling away on the weaker stocks. One of the biggest companies to warn on Tuesday was Compaq with a pledge to cut another 5,000 jobs so they can rebound strongly when the economy recovers. They missed estimates by a penny and said next quarter earnings would only be in the nickel range. CPQ lost over -$3 to $17.56. Following them for a position on the loss leader board was JDSU with an announcement they were cutting -5,000 jobs as well and sales were going to be -20% less than expected. JDSU has lost almost 30% of its value since Friday. The negative news impacted the fiber and networking sectors which had been flying high last week. The list of losers was long and broad based with consumer stocks like Kimberly Clark missing estimates by a penny and warning and biotechs like GDT and retailers like COST also warning. There did not appear to be any real pockets of sector safety but there was a few specific stocks bucking the trend. IBM recovered slightly from Monday's drubbing but was trending down at the close. LH and DGX were standouts for the bulls with LH announcing a stock split and DGX being written up favorably in Barrons. Gains in other stocks were slim and scarce. Amazon announced earnings after the close and there was not any real change since they pre-announced a couple weeks ago. They did give themselves some room to the downside for future revenue by widening the range of guidance. The increased range was mostly increased to the downside. Lucent also announced earnings that missed expectations again but mostly due to a bankruptcy of one of their major customers. They posted a loss of -.37 when the street was expecting -.23 but without the special items they would have hit that number. They are taking bids for their fiber business which is estimated at over $5 billion and the CEO said they had many big bidders and a closing was expected to happen very soon after the bids finalized. They squashed rumors that they did not have enough cash to get out of trouble and said things were looking much better going forward. Have they said this before? IBM announced they were buying Informix to better compete with Oracle. Investors cheered the news with a boost for IBM but IFMX dropped almost -30% as analysts felt IBM paid too little for the company. The earnings news was flying hot and heavy all day and I could write several pages if I listed them all. Relax, I am done. The key points here in my mind are sentiment related and something I mentioned on Sunday. The markets have simply gone too far, too fast. Now the bulls and bears must battle each other for directional control. The top 25 stocks by volume on the Nasdaq were all down but volume was very light at less than two billion. This means there was no conviction. The Nasdaq was up +32% since the April-4th low and we were due for a pullback! The biggest sentiment problem I see is today's closing level. We closed -3 points below where we were when Greenspan cut rates last week. We gave back all of those gains. But before you rush for the phone remember there was almost a +75 point gap open that day on good earnings news. We are still above that gap. Traders were widely reporting that short sellers were coming back into the market with the most widely shorted stocks taking heat again. The good earnings news is widely assumed to be over. MSFT, IBM, INTC and the other really big caps have already announced and everybody else in our future cannot cause the very big ripples to the upside. They can only add weight on the downside as they continue to warn. With the upside to investor sentiment capped, we need to watch carefully for risk to the downside. The markets need to work through this period and build a base from which to rally later. Almost nobody expects a retest of the 1619 low from April-4th but there is a good possibility we have more weakness ahead. Consolidation could stop with support in the 1900 range where we spent a week just recently. With each day that passes there will be fewer earnings announcements and fewer chances for that really bad news that could cause us to tank again. We need to be patient and realize that most bad news is already priced in and this dip could be the last buying opportunity at this level. Stocks are still cheap and everyone expects an economic rebound in the second half of the year. Markets discount this expectation and investors will start buying this future once they feel the bottom has passed. Remember the week after the major earnings in April is historically down and so far we are following the script exactly. The only challenge is waiting and more importantly, recognizing when the bottom has passed. That will be our entry point. Until then, be patient! Enter passively, exit aggressively! Jim Brown Editor ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=2088 ************************************************************** **************** MARKET SENTIMENT **************** Pulling Back To Support? Where Might That Be? By Austin Passamonte The past three session's weakness has been labeled a normal, expected market pause. There may well be little cause for alarm on light volume declines after such rapid & massive gains, but let's explore both sides of the equation so we can forge a gameplan to see us through any scenario ahead. Market action went up on huge, even historical volume and has declined on considerably less. No need to panic there. Also, subsequent earning reports have not been nearly dreadful as many were steeling themselves for, but neither are they stellar. No one could expect price action to keep going straight up from whence it came, especially after the weekend lull served to temper euphoric buying, panic buying and panicked short covering as well. The Fed's surprise cut and shocking effect it had on pure short covering of historical proportions created unstable markets with huge gaps that offer no support. No actual trades, no supply accumulated to defend those levels = lead-pipe lock the gaps will be filled. Not if but when remained the question from there and our answer seems to be sooner than later. The Fed is in aggressive if not near-panic mode to slash interest rates and prop up the economy at all costs. Don't fight the Fed is an apt battle cry over that cannot be thwarted over the medium to long term. Our individual time frames might make a difference going forward from here. As one would expect in the midst of a bear market, there is more case to be made for going with the trend instead of against. The NASDAQ indexes closed lower tonight than the price levels they traded at Wednesday morning prior to our infamous rate cut. This means that all effect on price action has been erased, a mere 4.5 trading sessions later. The Dow remains some 90 index points higher with OEX and SPX right near par of that artificial ramp. Are we the only ones to note how each subsequent rate cut is having less effect on price action each time? The fourth .50-basis slash in four months cannot hold up one solid trading week beyond. What catalyst will it take to blast the Dow above 11,000 and NASDAQ above 2,500 on a strong close? We must ask ourselves these honest questions. Technically, major indexes broke below ascending trend lines of support dating back from April 4th lows that price action has steadily rode higher since then. Coupled with daily-chart stochastic action rolling down from overbought zones makes us question if the retrenchment is anywhere near complete. Analyst calls on SOX index that began the powerful rally have been eschewed & widely debated since then. Regardless who is correct, the SOX added such rapid gain that anything short of continual glowing news to support such ascertained a significant pullback. Post-earnings blues. Once earnings season is over, what actual catalyst remains to push prices higher from here? Can we expect a post-earnings run into the next fundamental event, which would be... ..further rate cuts. Now that the Fed whacked rates last week, can we reasonably expect them to do so again before the May meeting? Will there be a euphoric rally into the rumor of the FOMC 5/15 event? Can another .50-basis slash (or less) move the markets whereas a pair of surprise events could not? Visual Peek We made these charts by mistake, confusing our turn for Market Wraps at IndexSkybox. Rather than discard the work, may we share them here with you? (Daily/Hourly Chart: SPX) The big index broke down through a neutral wedge this afternoon (hourly chart on right) and more importantly the ascending trendline marking its launch from recent lows on April 4th. Daily-chart patterns show price action stopped dead on a given retracement value today and look to open lower Wednesday. First stop: 1200 and then 1180 area before any measure of firm support is found. Stochastic values in the daily chart are just starting to make a bearish reversal and show no signs of strength to say the least. (Daily/Hourly Chart: NDX) Again, NASDAQ indexes broke their own ascending trendlines and neutral wedges in the final hour of trading to close below. Very bearish. Daily chart (left template) show clear signs of more weakness beginning right now. (Daily/Hourly Charts: INDU) The Dow will fall from Tuesday's close barring an unforeseen morning miracle. Look for 10,380 and then 10,200 to be the next stops for bulls to mount a counter-move from. Do not rule out the 10,000 level by this time next week or sooner as well. Yes, these values could all change on an explosive rally tomorrow but is that how we want to place our bets? Would you rather go long with bullish plays while daily stochastic action is bottomed out in oversold zones and heading up, or curling down from overbought as they are now? We respect your right to do either, but our choice leans very heavily to the former scenario every time. Bottom Line Plainly we are seeing markets challenged to develop a strong & lasting uptrend save for occasional, violent and fleeting bear market rallies. If the current surge off recent lows has an upward future from here it must plant its feet in the sand very soon and begin the assault anew. For now we would look to play the downside once again unless / until a new bullish catalyst emerges that can shore up solid rally legs to scale Mount Greenish Pasture instead of Heartbreak Ridge! ********* VIX Tuesday 04/24 close: 32.46 VXN Tuesday 04/24 close: 79.95 30-yr Bonds Tuesday 04/24 close: 5.76% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. A reading above 10.00 is considered viable resistance or support respectively within that general strike price range. Tuesday (04/24/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 665 - 650 4,391 961 4.57 645 - 630 5,918 5,581 1.06 OEX close: 625.74 Support: 620 - 605 2,649 3,674 1.39 600 - 585 5,619 5,419 .96 Maximum calls: 625/10,173 Maximum puts : 580/5,406 Moving Averages 10 DMA 621 20 DMA 601 50 DMA 619 200 DMA 716 NASDAQ 100 Index (NDX/QQQ) Resistance: 53 - 51 19,538 1,879 10.40 50 - 48 75,194 18,832 3.99 47 - 45 115,458 53,295 2.17 QQQ(NDX)close: 44.30 Support: 43 - 41 55,473 32,820 .59 40 - 38 63,801 76,565 1.20 37 - 35 16,131 56,173 3.48 Maximum calls: 46/57,734 Maximum puts : 40/49,903 Moving Averages 10 DMA 43 20 DMA 40 50 DMA 45 200 DMA 70 S&P 500 (SPX) Resistance: 1275 18,469 4,035 4.58 1250 15,360 4,186 3.67 1225 11,297 6,614 1.71 SPX close: 1209.47 Support: 1200 11,664 14,237 1.22 1175 11,474 8,845 .77 1150 5,355 11,998 2.24 Maximum calls: 1275/18,469 Maximum puts : 1200/14,237 Moving Averages 10 DMA 1205 20 DMA 1173 50 DMA 1206 200 DMA 1355 ***** CBOT Commitment Of Traders Report: Friday 04/20 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader's direction. Small Specs Commercials S&P 500 (Current) (Previous) (Current) (Previous) Open Interest Net Value +56586 +61808 -57843 -61473 Total Open Interest % (+26.57%) (+28.76%) (-8.08%) (-8.46%) net-long net-long net-short net-short DJIA futures Open Interest Net Value -3031 -2326 +6200 +3973 Total Open interest % (-20.21%) (-13.24%) (+20.88%) (+14.07%) net-short net-short net-long net-long NASDAQ 100 Open Interest Net Value +3168 +3794 -7462 -7890 Total Open Interest % (+12.12%) (+15.00%) (-10.48%) (-10.57%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: Commercials are holding steady around the eight percent net-short level on the S&P 500. We are seeing growing divergence between the Commercials and Small Specs on the DJIA with the Commercials adding to their net-longs and the Small Specs increasing their net-shorts. Data compiled as of Tuesday 04/17 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/042401_1.asp *********** OPTIONS 101 *********** Are Options A Safe Choice? By David Popper On Friday mornings, I have breakfast with two dear friends who also share my passion for the market. Last Friday, one of my friends was beating himself up for missing the upward move. He played Monday morning quarterback over and over, particularly because some of the stocks that he held just last week shot up over 50% in just three trading days and he was not a part of the move. My friend was looking at the chart and finding all of the "reasons" that he should have known that the market was going up. He discounted the fact that there were many false rallies over the past several months. In most of the rallies, there was very little buying, rather there was more short covering than buying. By the time most of the moves were discerned, the move was over and the short positions reestablished. Most people who bought the move bought in too late and were burned once again. Yes, we were due for a relief rally, but these often come too late. The only factor that made this move different was that the Fed surprised the market. No one could have predicted this event with any certainty. None of this made my friend feel any better. Such emotional turmoil is not uncommon these days. The simple fact though is that no one can predict the unpredictable. This is why buy and sell rules are so important. Today there are mixed signals in the market. On the one hand, many stocks have blasted through their 50 day moving average. Some stock charts even indicate the 50 day moving average crossing over an upwardly moving 200 day moving average. This is very positive. On the other hand, many stocks have invaded the upper bollinger band and most oscillators indicate that the market is overbought. Additionally, many stocks have run into severe resistance. One could guess that we are due for a short-term pullback before the new uptrend continues. It would be only a guess. We could also reestablish the downtrend. Damned if you do and damned if you don't. Of course, if you play it safe on the sidelines, you get to beat yourself up if the market goes higher. What can an individual trader do in these times of uncertainty besides staying on the sidelines? One thing a trader can consider using LEAPS. I have learned to appreciate the value of LEAPS in uncertain times. Too often in the recent past, I have purchased 1000 shares of QQQ (AMEX:QQQ) at a technically appropriate time, only to be stopped out of the trade. Even though the losses are "minimal," a two or three thousand dollar loss does not feel minimal to me. Too many failures like these can get costly and can make you gun shy. When you finally let an opportunity pass and it is a real rally, it can inflict damage to your confidence. On the other hand, if after being stopped out, you see the stock soar thereafter, you could be tempted to stay long in violation of your sell rules. Sometimes the stock continues its downward spiral. Suddenly you can be sitting on a huge loss. LEAPS allow you to purchase control of a stock for up to three years at a fraction of the cost. Recently, I purchased ten QQQ 40 calls for January 2003 at a cost of $8.80 each. The LEAPS give me the potential for significant gain over the next 19 months and my downside risk is only $8.80. This sure beats the risk of holding the stock while it melts. It also beats being stopped out several times. When I bought these LEAPS, I no longer felt the self-induced pressure of trying to catch the next move because I already placed my bet. I can wait for a real trend to develop without risking more capital and without being afraid of missing a move. In a sense, the LEAPS give me a new sense of freedom in uncertain times. Holding these 10 LEAPS allows me to trade less emotionally. The pressure of attempting to discern mixed signals is over. Further, in downturns, you can write calls against these LEAPS thereby reducing the cost of the LEAP and reducing the exposure. Damned if you do, damned if you don't is an awful way to live. It can lead to desperate and potentially dangerous decisions. Let LEAPS help you avoid this trap. ************** TRADERS CORNER ************** Review of My April Plays By Scott Martindale Despite market weakness this week, things are looking brighter, no doubt. My portfolios certainly are much healthier. I'm sure I'm not alone in that I wish now that I had bought aggressively at the height of gloom and doom on April 4th. AMCC around $11, JNPR below $30, and so on. Double or triple your money in two weeks, baby, just like the good old days. April was quite similar to January in that it was an exciting and eventful expiration month -- a fearful sell off followed by a Katie-bar-the-door rally, including the requisite intermeeting Fed rate cut. Although I wasn't positioned with a lot of call positions in my short-term account, I was still heavily invested in my long-term portfolio, and I decided to take profits in many positions by week's end. Over the previous two expiration months, I've taken assignment from naked put plays in shares of Adobe Systems (NASDAQ:ADBE) at $45, Superconductor Technologies (NASDAQ:SCON) at $10, and JDS Uniphase (NASDAQ:JDSU) at $35. ADBE has come back to provide a nice covered call play at $45. However, SCON is still consolidating, and JDSU was starting to recover nicely before warning today -- and before I wrote the covered calls. I had planned to write the calls on a pre-earnings rally this week, but JDSU reported early. If I had written the calls on Friday, I would be buying them back today. Back on March's expiration Friday, I had bought back March 25th naked puts on Extreme Networks (NASDAQ:EXTR) at a loss and rolled out to April 25's for $7.50 with the stock closing under $19. Last Thursday, the stock rallied big time, and I closed out the position for under $1. As it turned out, I could have held to expiration as the stock closed the week well above $25, but I've been burned too many times by expiration Friday sell offs, so I chose to close out on Thursday. On April 6th, Calpine (NYSE:CPN) dropped over $6 intraday to below $46 after Pacific Gas & Electric (NYSE:PCG) filed for bankruptcy protection. With that short-term weakness in CPN within the longer-term uptrend going into its promising earnings report in late April, I wrote April 45 naked puts for $2.10 and allowed them to expire worthless. I also tried the approach of buying cheap calls during expiration week, looking for a big hit. On Wednesday April 18th, a rumor came out of Europe in advance of the next day's earnings report about SAP (NYSE:SAP) beating estimates. So both PeopleSoft (NASDAQ:PSFT) and Oracle (NASDAQ:ORCL) also seemed poised for a morning pop. Because the reporting company sometimes sells off on the news, I chose PSFT and bought April 32.5 calls near the close for $0.65. I entered a day limit order for Thursday to sell at $2.40. True to the rumor, SAP beat estimates and everyone opened higher. My PSFT calls were bid over $1.1 early, but fell back quickly. Because I was expecting a larger early pop as well as an eventual market pullback by week's end, I went ahead and closed out at $0.75. Then, it started its steady climb for the day, with the stock hitting around $35, and with the option bid well over my initial limit order of $2.40. So much for my aggressive exit to an aggressive entry! Considering the relatively small investment, I think the better approach for this type of aggressive expiration week trade is to just set a target and then let it ride throughout the day, if not clear through until expiration. In late March, I wrote covered calls against several of my long- term holdings, including April 60's on Juniper Networks (NASDAQ: JNPR), April 60's on Qualcomm (NASDAQ:QCOM), April 27.5's on Nokia (NYSE:NOK), and April 120's on Biotech Holders Trust (AMEX: BBH). I bought them all back at opportune times during the big dip in early April, and then placed GTC orders to write the same April calls again, which didn't execute until the big rally on April 18th. Although I didn't receive much time premium for them, I wanted to cash in some profits in anticipation of a pullback or consolidation period. In retrospect, when it got so close to expiration, it probably would have been more advantageous to cancel the covered call orders and either sell the shares at opportune times, or place a trailing sell stop under the rising share prices, or write the May calls. Also in my long-term portfolio I added to my non-tech holdings by buying shares on technical weakness in energy plays Nabors Drilling (AMEX:NBR), AES Corp. (NYSE:AES), and Williams Companies (NYSE:WMB), as well as conglomerate Tyco (NYSE:TYC), and adding shares of high-yielding Knightsbridge Tankers (NASDAQ: VLCCF). One thing I'm thinking about right now is the concept of letting profits run vs. taking profits early in different types of markets. In 1999, I made excellent profits, but I would have made 50-100% more on average if I simply had let all my bullish options plays run until expiration. It was that kind of market. Then, after getting burned in 2000, I decided that the best approach is to take profits at the slightest show of weakness and close losing positions quickly. But I think a trading strategy should change depending on the market at hand. In a firmly uptrending market, take profits early when shorting overbought issues (or buying puts), and let profits run on bullish positions. In a downtrending market, do the opposite, i.e. take profits early when going long oversold issues, and let profits run on bearish positions. [So, can anyone tell me what kind of market we are in now?] That said, however, I always would be more careful letting profits run on the short side primarily because the vast majority of investors and traders want to see the market go up. The whole purpose of both business and investing is stock appreciation. The shorts have a lot of adversaries out there. Not to mention that shorting by definition is an attempt to profit from the woes of others, such as shrinking IRA's and frustrated employees enduring layoffs, reorgs, and reduced compensation to enhance profitability. I have little sympathy for the "big shorts" when they complain about the Fed announcing a surprise rate cut in the middle of the trading day (which creates a gap up in prices that murders their short positions). Make no mistake, I have no problem at all with traders buying puts or shorting stock in an effort to ride short-term price movements up and down. My problem is with the big players who intentionally manipulate prices through shorting in an attempt to induce sell offs. On a large scale, they can actually exacerbate weakness in the overall economy by eroding investor and consumer confidence. What about current market conditions? The biggest one-day advances generally happen in bear markets, and in fact it happened often over the past year as the Nasdaq made its ten biggest one- day percentage advances in history. However, the difference is that in previous bear market rallies (like in January), investors were panicky about bad news coming out, whereas now they're hopeful of a recovery toward the end of this year and into next. Despite the current pullback, which has wiped out the post-Fed surprise rally on the Nasdaq, the overall market sure seems to be gaining strength. The Fed has shown that they will cut as necessary. I'm optimistic that there's money to be made on the upside. ************************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=2104 ************************************************************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** NTAP $19.93 -2.20 (-3.57) Unfortunately, weakness in the broad market indexes overwhelmed our NTAP play before it had a chance. After failing to rally from its 50-dma of $23.80 on Monday, NTAP struggled on Tuesday morning, but hit resistance at $22.68, and retreated. Since NTAP has closed below our stop level, we have no choice but to drop it tonight. GE $45.99 -1.21 (-1.76) GE offered call players profits last week as the stock soared following the Fed's surprise rate cut, and kept the momentum alive by reaching a high of $48.55 last Thursday. Unfortunately, a nearly 11% gain in one week was too much for this behemoth to digest, and GE experienced profit taking during today's sell off. The stock closed with a very bearish candlestick pattern, and may drop a little further before buyers step in again. Since GE closed below our stop price, we are dropping the play tonight. DELL $25.86 -3.49 (-4.26) Compaq Computer's (CPQ) announcement of a 74% loss in 1Q net income Monday evening certainly stung the other PC stocks, but it was the broad market downturn that ultimately killed our play on DELL. Another round of dismal earnings forecasts combined with a notable slip in consumer confidence sent many technology-related stocks, DELL not being an exception, to give back last week's fantastic gains. DELL finished the session on its lows and clearly violated our $28 closing stop. The recession gives us no choice, but to move on to other opportunities despite the possibility of a run up ahead of its own earnings. The company is scheduled to report on May 17th, after the market. FDC $63.40 -1.20 (-1.08) Since the nice run-up early last week, culminating in a new all-time high, the stock has drifted lower on decreasing volume. In doing so, FDC has fallen below its 5-dma (now at $64.58) and today, fell below horizontal support and our closing stop price of $64. While the 10-dma sitting just below at $63.26 may provide support for FDC, the break below support and our stop along with the waning price/volume action suggests that the stock may take a breather before making another major move. As such, we would rather take our money and put it to work in more promising prospects. PUTS: ***** PPDI $58.34 +5.47 (+5.23) The PPDI bears got ambushed this morning in the wake of competitor DGX's earnings report. The report, which came out last night blew away estimates, and PPDI went along for the bullish party this morning. Shooting rapidly through our $55 stop, the stock settled in around $57 for most of the day until resuming its upward move at the close, posting a new yearly high. Action throughout yesterday was muted, failing to provide an attractive entry point, so we fortunately didn't get caught in the stampede. This is why we establish trigger points for entries. If the play refused to give us the entry we want, we are happy to let the play go. QCOM $59.50 +1.30 (-4.33) Ahead of the company's earnings report scheduled tomorrow after the closing bell, we are closing out our put play on QCOM. While the stock closed below both its 5 and 50-dma yesterday (now at $61.32 and $58.66 respectively), shares of the CDMA patent holder managed to gap up at the open today and in doing so, put itself back above the 50-dma. While the stock attempted to rally today, stochastics are suggesting that a rollover in the near-term is quite likely, but the risk in holding through earnings adds an element of uncertainty that we would rather not be subject to. With that, we are dropping coverage on QCOM. ************************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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The Option Investor Newsletter Tuesday 04-24-2001 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/042401_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=2089 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** AOL $47.25 -0.35 (-1.44) Most media stocks like DIS, V, and GMST all started the week on the downside, but AOL towed the line despite the varied sentiment within the sector. Near-term support, which correlates with our $47 closing stop, importantly sustained the share price amid the sector and market volatility. However, make no mistake. AOL is at a crucial level. The bulls need to take AOL off $47 and move it through the 5-dma ($48.49) and 200-dma ($48.95) before the risk-adverse should take additional positions. To put it briefly, we're looking for AOL to lead the group out of the slump and shatter the formidable $50 resistance. A breakout of this breadth would endorse further coverage. AEOS $35.00 -1.66 (-0.07) AEOS moved higher on Tuesday morning, which is impressive considering the fact that the retail index, RLX.X, fell below its 50 dma of 852 on Tuesday morning. While AEOS closed down on Tuesday, the pattern of higher lows which was established on March 14th is still intact. If the retail sector can recuperate later in the week, AEOS may be able to rally to resistance at the $37.50 level, and possibly clear it. Traders can consider taking positions on a rebound from current levels if RLX.X is exhibiting strength. Alternatively, more conservative traders might want to wait for a move back above $36 with heavy volume, which could set the stage for AEOS to possibly make an assault on heavier resistance at $37.50. We are keeping stops tight at $34, so close positions if AEOS closes below this level. AA $39.96 -0.46 (-0.39) Positive news and analyst comments yesterday helped shares of aluminum giant Alcoa make a new 52-week closing high yesterday, as the company completed the sale of its Thiokol Propulsion division to Alliant Techsystems. As well, Salomon Smith Barney recommended to clients yesterday to sell their positions in Canadian Pacific Railways and moving the proceeds into AA. Today, the company made bullish comments on the aerospace industry, suggesting that growth in the sector could increase demand for raw materials from AA. Despite the good news, the stock pulled back in sympathy with the NYSE. However, with the 5 and 10-dma (at $39.95 and $39.42) still below the stock price, the up-trend is still intact. Aggressive traders may target bounces off moving average support along with $39.50, $39 and our closing stop price of $38.50. For the more cautious, wait for AA to move back above $40 on volume before taking a position, confirming upward momentum with strength in industry peers AL and PY. C $48.70 +0.21 (-0.72) After breaking out above its 50-dma last week, shares of consumer financial services firm and major DOW component Citibank have been trading in a narrow range. With support below at $48 and resistance overhead at just above $50, the stock has been range-bound in the midst of decreasing trading volume. The company announced yesterday that it was launching its new electronic retail-trading platform. C is also currently in talks with SunTrust Banks, as SunTrust is interested in purchasing capital-markets division Robinson-Humphrey. The company also launched its Internet-based 401(k) benefits plan site today, and ended the day up fractionally on low volume. Sitting right above its 10 and 50-dma at $48.08 and $47.57 respectively, bounces off these moving averages along with support at our closing stop price of $48 may prove potential aggressive entry points. For an entry on strength, wait for C to move back above its 5-dma at $49.39 with conviction before making a play. Track sector sentiment by watching AMEX's Banking Index (BIX). ******************* PLAY UPDATES - PUTS ******************* IMCL $36.69 -1.34 (-2.78) After rolling over from $38 on Monday, Imclone held at $37 on Tuesday morning until the Nasdaq started to exhibit weakness. Meanwhile, the BTK.X had dropped below its 50 dma of 514 on Monday, and continued to sag on Tuesday, keeping company with the pharmaceutical index, DRG.X. BTK.X is stuck in a serious downward channel, and continues to take most of the stocks in the sector down with it. Viewed on a weekly chart, IMCL is forming a very bearish wedge pattern, with strong support near the $30 level dating back to January of 2000. Unless we see a dramatic change in sentiment in the biotech sector, we can most likely expect further weakness in IMCL. Traders can take positions at current levels, or at a rollover from $36.52, which could drop IMCL to support at $35. Below $35 the next major support level is the 50 dma of $33, and a break below this would be very bearish. Continue to monitor others like HGSI and AMGN as well as BTK.X, and move stops to $38. We will close positions if IMCL closes above this level. PDLI $50.84 -3.15 (-4.06) PDLI is suffering along with most of its biotech brethren under the weight of low visibility in an increasingly risk averse market environment. After rolling over from a lower high at $60 last week, PDLI held at the $55 level on Monday. However, on Tuesday, weakness in BTK.X as well as a failed rally in the major indexes acted as catalysts for a precipitous drop in shares of PDLI. The stock is now perched only two points above the 50 dma of $49, and below this level, the next support levels are $47.50 and $45. Continue to monitor BTK.X as well as others such as IDPH and DNA, and move stops to $54. We will close positions if PDLI closes above this level. ABT $44.43 -0.11 (-0.66) Rangebound trading was the order of the day again for ABT traders. The bulls have been unable to penetrate resistance between $45-46, and now that Friday's gap has been filled, the bears are free to resume their selling spree. All we need is for volume to pick up again. Notice that is has fallen off to only about two-thirds the ADV as traders try to digest last week's broad market gains and decide where we go from here. A big factor in the bears' favor is the fact that ABT is now beefing up its litigation reserves as it braces for a costly settlement in a federal investigation involving the prostate-cancer drug Lupron. At the same time they made this announcement, the company restated its quarterly results for the first three months of the year, reporting a more than $300 million dollar loss, rather than a profit. The initial reaction came on Friday following this announcement, but recent price action seems to indicate there is more pain in store for the stock. Due to the recent rangebound trading, our entry targets are easy to define. Aggressive entries will appear as the stock rolls over from the $46 resistance level, while conservative traders will get their opportunity as selling pressure pushes ABT below the $44 support level. Keep stops set at $46. IVGN $61.04 -1.03 (-2.30) The Biotech index (BTK.X) can't get out of its own way and has commenced the next leg of its 6-month downtrend. Rolling over from the descending trendline at the $550 level late last week, the BTK is picking up speed to the downside, pulling our IVGN play down with it. There aren't any company specific developments to report, but the technical picture is getting worse by the day. After failing to penetrate the 200-dma last week, the stock fell through the 50-dma (then at $65) on Friday, and has been finding resistance this week near $63. Adding more misery to the bulls is the fact that Stochastics are rolling down out of overbought territory, after forming solid bearish divergence with respect to the early March highs. The only point that keeps us from backing up the truck is the fact that volume has been downright anemic this week, not even reaching 40% of the ADV in today's session. Aggressive traders will want to target shoot new entries on a failed rally near the level or our stop, now at $63. More conservative players will wait for a drop through the $60 level before jumping into the play. As the stock continues to fall, we would look for buyers to show up near the $56 support level, and that is when the tug of war between the bulls and the bears will get interesting. PMCS $36.69 -2.07 (-8.12) It may not be very sporting, but you've got to love these put plays where we get to pick on the sector weakling. After having fallen sharply in recent months, PMCS rallied over the past 2 weeks on the back of the NASDAQ's sharp recovery. Strength in both the Semiconductors (SOX.X) and Networkers (NWX.X) helped to lift shares of PMCS, but now investors are seeing that this sector association cuts both ways. As last week's Fed-induced euphoria has dissipated, the bears have waded back into the fray, prompted by Merrill Lynch's broad downgrade in the Semiconductor sector. Sure enough the SOX failed to hold above support and looks destined to trade lower in upcoming sessions. For its own part, PMCS is at a critical juncture, resting just above the 50-dma ($35.41). Conservative players will want to initiate new positions as the stock falls through this level, while aggressive players can use any failed intraday rallies to target shoot new entries near the $40 level. There are several gaps to fill from last week's runup, first between $34-35, and then between $27-29. Use these levels as possible profit targets as the stock searches for support. Move stops down to $41. TBH $46.52 +1.43 (+1.59) Connecting the highs and lows of the past couple of weeks, a downward-trending regression channel can be discerned. Fears of economic and political troubles in Latin America were a large factor in TBH's recent decline. Also in the rumor mill, suggestions of high-level corruption in the Brazilian government along with a potential debt default by Argentina sent shareholders running for the exits. While TBH is currently attempting to bounce from its lows, the stock encountered resistance today at the top of its downtrend line. Failed rallies as TBH approaches resistance from the 5-dma at $47.75, $48 and our closing stop price of $49 could allow higher risk players to take a position. A break below today's intra-day low of $45.75 on volume could allow for an entry on weakness. ************************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=2105 ************************************************************** ************** NEW CALL PLAYS ************** No new calls tonight ************* NEW PUT PLAYS ************* AGGRESSIVE: DIGL - Digital Lightwave $34.93 -0.98 (-4.99 this week) Digital Lightwave serves the growing fiber-optic networking industry. It provides products and technology monitor, maintain and facilitate the management of voice, data and multimedia communications networks. The cost-effectiveness of the company's products are used to effectively verify and qualify service during network installation and to ensure optimal performance. The company is headquartered in Clearwater, FL. The company's earnings report delighted investors and analysts on the eve of April 17th, but the elation may be coming to an abrupt end. After soaring almost 19% in a mere three sessions, the past two days of trading indicate the high-volume upswing is tapering off. DIGL gave back 12.5% amid robust trading and is poised to fall back to the wayside. The cautious market sentiment fueled by more earnings woes and softening economic news could easily send DIGL to the underside of the critical 10- dma line ($28.42) in a declining market. But before you jump in head first, take a look at a daily chart. Today's closing bell stunted the sell-off, which is certainly bearish, but it'll be important to confirm the downtrend through $35 - this level is the bottom spectrum of the recent trading channel. A convincing break of this support followed by a decline through the $30 level would signal even the more conservative types to jump into this put play. To perpetuate better odds for success, follow other major players in the communications equipment sector like GLW, CIEN, NT and NXTL to give a sense of overall direction. If all goes according to plan, consider taking profits as DIGL approaches the hypercritical 50-dma, near $25, and keep a CLOSING stop in place at the $38 mark. BUY PUT MAY-40 DGW-QH OI= 74 at $7.80 SL=5.75 BUY PUT MAY-35*DGW-QG OI=300 at $4.70 SL=2.75 BUY PUT MAY-30 DGW-QF OI=371 at $2.50 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=DIGL VRTS - Veritas Software Corp. $56.90 -2.23 (-7.40 this week) Veritas is an independent supplier of storage management software. The company's products help to improve the level of centralization, control, automation, and manageability in computing environments. More specifically, the company's products offer protection against data loss and file corruption, allow rapid recovery after disk or computer failure, enable IT managers to work efficiently with large numbers of files, and make it possible to manage data distributed on large networks of computer systems without harming productivity or interrupting users. After falling from a 52-week high of $166.87 on October 20 to a 52-week low of $38.60 on April 4, VRTS appeared to have made a dramatic rebound by rallying over 29 points, or nearly 100% in a few short weeks. As is the case with many overextended tech stocks which rallied with euphoria last week, investors are quick to take profits before being caught in another down draft. Last Tuesday, VRTS reported earnings of 21 cents per share, which was on the high end of analysts expectations, and widened their guidance going forward. Veritas management stated that they expect revenue for 2001 to be in the range of 35 to 50 percent, compared to their previously stated guidance of 45 to 50 percent. Since transactions with Original Equipment Manufacturers like SUNW comprise 15% of VRTS's net sales, VRTS was further impacted when SUNW gave lowered guidance last week. SUNW's management stated that they expected to see only a slight growth in revenue for their fiscal fourth quarter. In addition, the entire software sector took a beating this week when Lehman Brothers downgraded Oracle from a strong buy to a buy, stating that they expect the current quarter to be particularly weak. After pulling back from a high of $67.78 last week, VRTS faltered on Monday, and dropped below the 50 dma of $59 on Tuesday. The software index, GSO.X is poised right above its own 50 dma of 211, and a break below this level could be a catalyst for further weakness in VRTS. Traders could take positions on a drop below $55 on heavy volume, if others in the sector like SEBL and CHKP are weak. Alternatively, a failed rally from $57.50 would be a more aggressive play. We are setting stops at $61, so close positions if VRTS closes above this level. BUY PUT MAY-55 VIV-QK OI= 3819 at $5.70 SL=3.50 BUY PUT MAY-60 VIV-QL OI=15322 at $8.30 SL=6.00 http://www.premierinvestor.com/oi/profile.asp?ticker=VRTS HDI - Harley Davidson, Inc. $43.23 -0.57 (-1.52 this week) Harley Davidson is best known for its popular line of touring, custom and performance motorcycles. The Motorcycle and Related Products division designs, and sells the popular line of motorcycles, as well as a complete line of motorcycle parts, accessories and general merchandise. HDI's other segment, Financial Services, engages in the business of financing and servicing wholesale inventory receivables and consumer retail installment sales contracts (primarily motorcycles). Additionally, this division acts as an agency for certain unaffiliated insurance carriers to provide property/casualty insurance and extended service contracts to motorcycle owners. After trading to a new yearly high north of $50 in mid-September, shares of HDI have been posting lower lows for several months now. After posting earnings a penny ahead of estimates 2 weeks ago, the stock rallied right up to the descending trendline late last week and promptly rolled over. Following what has become an all too familiar pattern, the stock began its current downward move 2 days after Bear Stearns initiated coverage with a Buy rating. The weakness in the broad markets this week is having its effect on HDI as it has now fallen back through the critical 200-dma (currently at $$43.91). The nagging question in the back of investors' minds has to be whether consumers will continue to pay the premium price that HDI's products traditionally command in the marketplace. If the Consumer Confidence numbers this morning are any indications, the verdict is likely to be no, and this will affect the company's sales going forward. Daily Stochastics have now fallen out of overbought territory and are pointing to a retest of support in the $40 area. Note the gap between $39-40 that was left after the company announced earnings on April 10th. Aggressive entries can be taken on any intraday bounce that fails to penetrate the $45 resistance level, and this is where we are placing our stop. A drop through the $42.50 level will be the trigger for conservative traders to take a position, and an increase in selling volume will give us the confirmation that we are on the right side of the trend. BUY PUT MAY-45*HDI-QI OI=2597 at $3.50 SL=1.75 BUY PUT MAY-40 HDI-QH OI=6374 at $1.15 SL=0.50 BUY PUT JUN-40 HDI-RH OI= 101 at $2.05 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=HDI ********************* PLAY OF THE DAY - PUT ********************* PMCS - PMC-Sierra, Inc. $38.76 -2.07 (-8.12 this week) PMCS designs, develops, markets and supports high-performance semiconductor networking solutions. The company's products are used in the high-speed transmission and networking systems, which are being used to restructure the global telecommunications and data communications infrastructure. Providing components for equipment based on Asynchronous Transfer Mode, Synchronized Optical Network, Synchronized Digital Hierarchy, High Speed Data Link Control, and Ethernet, the company sells its products to over 100 customers either directly or through its worldwide distribution channels. Most Recent Write-Up It may not be very sporting, but you've got to love these put plays where we get to pick on the sector weakling. After having fallen sharply in recent months, PMCS rallied over the past 2 weeks on the back of the NASDAQ's sharp recovery. Strength in both the Semiconductors (SOX.X) and Networkers (NWX.X) helped to lift shares of PMCS, but now investors are seeing that this sector association cuts both ways. As last week's Fed-induced euphoria has dissipated, the bears have waded back into the fray, prompted by Merrill Lynch's broad downgrade in the Semiconductor sector. Sure enough the SOX failed to hold above support and looks destined to trade lower in upcoming sessions. For its own part, PMCS is at a critical juncture, resting just above the 50-dma ($35.41). Conservative players will want to initiate new positions as the stock falls through this level, while aggressive players can use any failed intraday rallies to target shoot new entries near the $40 level. There are several gaps to fill from last week's runup, first between $34-35, and then between $27-29. Use these levels as possible profit targets as the stock searches for support. Move stops down to $41. Comments PMCS traced an obvious reversal on its daily chart early this week and appears poised to work lower. We'd like to see the stock break from its current levels early Tuesday morning, which could send PMCS down to support at $34. Traders looking for confirmation might wait for PMCS to break below the $35 level before entering new positions, in which case it might be more appropriate to target the $30 level on the downside. BUY PUT MAY-40*SQL-QH OI=1539 at $7.10 SL=5.00 BUY PUT MAY-35 SQL-QG OI=2667 at $4.20 SL=2.50 http://www.premierinvestor.com/oi/profile.asp?ticker=PMCS ************************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=2121 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ Consolidation or Continued Decline? Stocks extended their recent losses today following another round of profit warnings. Monday, April 23 Technology stocks retreated today after analysts downgraded some key issues in the semiconductor group. The NASDAQ finished down 104 points at 2,059 while the Dow ended 47 points lower at 10,532. The S&P 500 index was down 18 points to 1,224. Volume on the Big Board was relatively light at 1.01 billion shares exchanged with declines beating advances 18 to 12. On the NASDAQ, activity was also light with 1.83 billion shares changing hands. Technology losers beat winners almost 2-to-1. In the U.S. bond market, the 30-year Treasury fell rose 29/32, pushing its yield down to 5.73%. Sunday's new plays (positions/opening prices/strategy): Minn. Mining (NYSE:MMM) MAY130C/125C $0.60 credit bear-call S&P 100 Index (CBOE:OEX) MAY595P/600P $0.65 credit bull-put PMC Sierra (NASDAQ:PMCS) MAY25P/M30P $0.75 credit bull-put Infospace (NASDAQ:INSP) JUL5C/MAY5C $0.35 debit calendar Tollgrade (NASDAQ:TLGD) APR45C/A22P $0.40 credit synthetic Today's downside activity provided some excellent opportunities to participate in our bullish positions. The sell-off in technology issues caused traders to rotate into defensive shares and the move helped boost Minnesota Mining to a recent high. The company also posted earnings that fell short of some expectations as net income declined to $453 million or $1.13 per share. Most analysts were looking for earnings to come in at $1.16 per share but the issue still enjoyed buying pressure following the announcement and that activity provided a favorable entry in the bearish credit spread. Tollgrade opened the day lower and the downward movement provided a better-than-expected credit in the position. Portfolio Activity: Stocks closed lower Monday after a new round of profit-taking as as investors reevaluated the outlook for technology issues. The sell-off was triggered by negative comments on the semiconductor sector and analyst downgrades of both Oracle (NASDAQ:ORCL) and Intel (NASDAQ:INTC). Chip stocks were among the biggest losers after Merrill Lynch analyst Joseph Osha lowered his ratings on a number of bellwethers in the sector. Osha said the recent rally in the group substantially increases the downside that investors face before a fundamental bottom occurs. Networking and Internet stocks also retreated while computer hardware and software issues consolidated from last week's gains. On the Dow, International Business Machines (NYSE:IBM), Boeing (NYSE:BA) and Walt Disney (NYSE:DIS) led the losers while Exxon Mobil (NYSE:XOM) and Philip Morris (NYSE:MO) moved higher. Optimism that the coming quarters will bring a recovery in earnings and the economy contributed to the market's gains over the past two weeks but analysts say it is questionable whether that improvement will materialize. At the same time, they believe the economic data coming out this week will have a significant affect on the current market trends. The April consumer-confidence index will be released on Tuesday; the March report on durable-goods orders is due on Wednesday; and the Commerce Department offers its advance estimate of first quarter gross domestic product Friday. Hopefully, today's activity is simply a case of "too far, too fast" and the market will rebound after absorbing the recent steep advances. Technology stocks led the decline today and the renewed selling pressure had a negative effect on some of the positions in our portfolio. The losses followed a stellar week in the market, as NASDAQ issues rebounded amid the latest round of earnings reports. However, investors are questioning whether the recent gains have been excessive and they are reevaluating the current valuations in "new economy" stocks. Most experts are confident the market has experienced its "worst" and will continue to recover after a period of consolidation but the declines in Human Genome Sciences (NASDAQ:HGSI) and PMC Sierra (NASDAQ:PMCS) suggests that traders are still wary of the sudden recovery in technology shares. At the same time, many of the broader market issues rallied amid the rotation to "old economy" companies and our adjusted position in Liz Claiborne (NYSE:LIZ) benefited from that activity. Most of the other positions, including the blue-chip technology stocks in the Covered-calls with LEAPS section, reacted to today's activity as well as could be expected. Tuesday, April 24 Stocks extended their recent losses today following another round of profit warnings. The NASDAQ finished down 42 points at 2,016 while the Dow was down 77 points at 10,454. The S&P 500 index was 14 points lower at 1,209. Trading volume on the Big Board reached 1.21 billion shares with advances beating declines 15 to 14. On the NASDAQ, trading activity was slightly lower than average with 1.97 billion shares exchanged. Technology losers beat winners 10 to 9. In the bond market, the 30-year Treasury fell 9/32, pushing its yield up to 5.75%. Portfolio Activity: Technology stocks made a valiant attempt to rally in the wake of profit warnings early in the session, however the group retreated later in the day as investors remained cautious about the outlook for corporate profits in the near-term. Software, semiconductor and networking stocks provided support during the first few hours of trading but almost every NASDAQ sector was in the red at the close. Computer hardware stocks endured some of the worst losses after Compaq Computer (NYSE:CPQ) missed consensus expectations in its quarterly results. Compaq also announced it plans to release another 2,000 employees, bringing the number of jobs cut to 7,000. Among other technology bellwethers, JDS Uniphase (NASDAQ:JDSU) was a big loser after warning on its fourth quarter. The fiber-optic giant now expects fourth-quarter earnings of $0.05 per share, well short of the $0.12 per share that had been expected by analysts. JDS also announced a major restructuring that will include cutting 20% of its work force. Lucent (NYSE:LU) was one of the few bright spots, posting a second-quarter loss that was slightly better than expected. The announcement prompted an upgrade from Salomon Smith Barney, who said that Lucent's results weren't bad considering the difficult economic backdrop. On the Dow, Dupont (NYSE:DD) was a surprise winner after reporting first-quarter profits of $0.54 per share, ahead of the consensus estimate by three cents. The global chemical manufacturer said it expects the worldwide economic slump to impact the manufacturing sector through the second quarter and perhaps into the second half of the year. Among other blue-chip issues, AT&T (NYSE:T), Caterpillar (NYSE:CAT), SBC Communications (NYSE:SBC), International Business Machines (NYSE:IBM) and General Motors (NYSE:GM) were the best performers. In the broader market, only utility, natural gas, chemical and gold shares climbed while retail, drug, biotechnology and insurance issues generally moved lower. The Spreads Portfolio has a relatively small number of positions after last Friday's option expiration and most of those plays were negatively affected by today's downside activity. However, some upside bias was seen in a few stocks including AT&T, which edged higher after reporting first-quarter earnings of $0.06 per share, topping the consensus estimate by a penny. AT&T, which plans to split into four separately traded companies this summer, reported a net loss of $366 million in the first quarter, however revenues were not that unfavorable and cash flow was slightly better than expected, providing investors with some hope for future earnings. Other telecom stocks traded mixed in the aftermath of the report, with Sprint (NYSE:FON) and Worldcom (NASDAQ:WCOM) ending almost unchanged. Surprisingly, Earthlink (NASDAQ:ELNK) climbed during the session after reporting revenue of $295 million for the first quarter of 2001, a 34% increase over the company's earnings at this time last year. The company also narrowed its net loss for the first quarter of 2001 to $35.1 million, or $0.27 per share, and investors applauded the news. Traders who missed the chance to adjust the calendar spread last week were offered $0.60 today for the MAY-$12.50 Call. The new position (OCT12C/MAY12C) has a new cost basis near $1.00. Another previous time-selling issue, Data Broadcasting (NASDAQ:DBCC) edged upwards during the bearish session and traders who are long in the MAY-$7.50 Call should have an opportunity to profit from that option if the bounce off the 30-dma is any indication of DBCC's future movement. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** SCIO - Scios $24.16 *** Earnings Rally? *** Scios (NASDAQ:SCIO) is a biopharmaceutical company engaged in the discovery, development, and commercialization of novel human therapeutics based upon its capabilities in both protein-based and small-molecule drug discovery and development. The company focuses its proprietary research and development efforts mostly in the areas of cardiorenal and inflammatory disorders, and also Alzheimer's disease. The company has research and development collaborations with Chiron, DuPont Pharmaceuticals, Eli Lilly, GenVec, Kaken Pharmaceutical and Novo Nordisk. Scios also has a Psychiatric Sales and Marketing Division, which provides the cash that funds the other activities of the company such as research and development efforts. Scios will report quarterly earnings on Thursday, April 26. Shares of SCIO climbed to a new all-time high today as investors continued to speculate on the company's upcoming earnings report and the potential for success in their "new product" pipeline. Very little is known about the current profit outlook but Scios says its experimental drug Natrecor may soon become the first new treatment in more than a decade for acute congestive heart failure. The U.S. Food and Drug Administration's Cardiovascular and Renal Drugs Advisory Committee will review the company's New Drug Application (NDA) amendment for Natrecor® (nesitritide) for the treatment of acute congestive heart failure (CHF) on Friday, May 25, 2001. Scios submitted an amendment to its existing NDA for Natrecor at the beginning of this year, based largely on the findings of the 498-patient VMAC (Vasodilation in the Management of Acute Congestive heart failure) trial. Regardless of the reason, SCIO is definitely exhibiting bullish signals and traders who want to speculate on continued upward activity should consider one of these positions. PLAY (speculative - bullish/debit spread): BUY CALL MAY-20.00 UIO-ED OI=324 A=$5.00 SELL CALL MAY-22.50 UIO-EX OI=482 B=$3.20 INITIAL NET DEBIT TARGET=$1.65-1.75 PROFIT(max)=42% - or - PLAY (speculative - bullish/synthetic position): BUY CALL JUN-30 UIO-FF OI=42 A=$1.60 SELL PUT JUN-20 UIO-RD OI=0 B=$1.45 INITIAL NET CREDIT 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=SCIO ****************************************************************** EYE - Visx $23.01 *** Cheap Speculation! *** VISX (NASDAQ:VISX) develops products and procedures to improve eyesight. The company's principal product, the VISX STAR S2 Laser System is designed to correct the shape of a person's eyes to reduce or eliminate their need for glasses or contact lenses. The VISX System ablates, or removes, submicron layers of tissue from the surface of the cornea to reshape the eye and improve vision. The Food and Drug Administration has approved the VISX System for use in the treatment of most types of vision problems including nearsightedness, farsightedness, and astigmatism. The company uses VisionKey cards to control the use of their unique system and to collect license fees for the use of its patents. I received some positive comments on the Calendar Spread plays offered last month and one of my favorites in this category is VISX. The issue has enjoyed a stable up-trend since January and the front-month option premiums have excellent volatility due to continued speculation about a merger or buyout. Carl Icahn recently offered to purchase VISX in a cash deal valued at $1.9 billion and he also suggested that other suitors present their offers so the situation can be resolved. Icahn already owns a 9.9% stake in VISX and he is currently involved in a proxy fight for control of five seats on the company's board of directors. Traders who favor time-selling positions might consider a very speculative spread in this unique issue. PLAY (speculative - bullish/calendar spread): BUY CALL SEP-30 EYE-IF OI=133 A=$1.30 SELL CALL MAY-30 EYE-EF OI=497 B=$0.25 INITIAL NET DEBIT TARGET=$0.95-$1.00 TARGET ROI=50% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=EYE ****************************************************************** PGR - Progressive Corporation $111.36 *** Reader's Request! *** The Progressive Corporation (NYSE:PGR), through its subsidiaries and affiliates, provides personal automobile insurance and other specialty property-casualty insurance and related services in the United States. The company's property-casualty insurance products protect its customers against collision and physical damage to their vehicles and liability to others for personal injury or property damage. The Progressive Corporation has 82 subsidiaries and one mutual insurance company affiliate and the company offers a number of personal and commercial property insurance products related to motor vehicles. Progressive shares rallied last week after the company posted a better than expected first quarter profit, reversing a year-ago loss. Progressive said its operating profits climbed to $88.3 million, or $1.18 per share, due to higher premiums, limited claims costs and increased returns on its investments. Most analysts expected the firm to earn $0.69 but the company easily surpassed that estimate with stellar underwriting results and a significant reduction in its cost of claims. After the news, Credit Suisse First Boston, Goldman Sachs, Bear Stearns and Friedman Billings raised their price targets and future earnings estimates for the company. One of our readers asked how he might profit from the upward momentum in this issue. Obviously, there are a number of ways to benefit from future bullish activity but with the issue up significantly in the past few sessions, the safest strategy may be a limited risk play with a cost basis well below the current price of the issue. PLAY (conservative - bullish/credit spread): BUY PUT MAY-95 PGR-QS OI=16 A=$0.75 SELL PUT MAY-100 PGR-QT OI=115 B=$1.25 INITIAL NET CREDIT TARGET=$0.60-$0.70 ROI(max)=14% B/E=$99.40 http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=PGR ****************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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