The Option Investor Newsletter Sunday 04-29-2001 Copyright 2001, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/042901_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 4-27 WE 4-20 WE 4-12 WE 4-6 DOW 10810.05 +230.20 10579.85 +452.91 10126.94 +335.85 - 87.69 Nasdaq 2075.68 - 87.73 2163.41 +201.98 1961.43 +241.07 -119.90 S&P-100 649.11 + 5.45 643.66 + 35.89 607.77 + 30.42 - 28.23 S&P-500 1253.05 - 10.07 1242.98 + 60.41 1182.57 + 54.14 - 53.74 W5000 11508.84 + 99.07 11409.77 +557.12 10852.65 +534.25 -327.45 RUT 483.97 + 17.26 466.71 + 11.69 455.02 + 20.36 - 15.87 TRAN 2862.37 + 1.07 2861.30 + 94.71 2766.59 + 79.56 - 84.33 VIX 27.77 - 1.24 29.01 - 1.27 30.28 - 6.48 + 2.94 Put/Call .48 .91 .76 ****************************************************************** Looks Better and Better Every Day! By Jim Brown What a great week! It was not that the major indexes added hundreds of points, it was the fact that they did not LOSE hundreds of points! After soaring for huge gains the previous 10 days the Nasdaq, Dow and the S&P pulled back only slightly, consolidated and for the DOW and S&P closed at the high of the week. For me this was a tremendous achievement. Unfortunately it all came on relatively low volume and without any real conviction. Friday morning opened with a huge upside surprise. The GDP report showed an increase to +2.0% in the first quarter which was double the expected +1.0% rate. While this does not bode well for future Fed rate cuts it does appear the threat of a recession has been overstated. Business spending was stronger than expected rising +1.1% after falling the previous quarter. Consumer spending remained solid with a +3.1% gain. Durable Goods jumped +11.9%. Inventories fell by $7.1 billion indicating the backlog was decreasing rapidly. So much good news you wonder what all the fear was about just weeks ago. Gosh, seems like it was just yesterday that Jobless Claims rose to 408,000 for the first time since October-1992 which was higher than any time during the 1995-96 economic slowdown. Wait, that was yesterday! Labor markets are clearly weakening and conditions are expected to deteriorate further in the coming months. Many companies are announcing layoffs and many more are increasing the number of cuts from those previously announced. Sounds like the GDP report and the Jobless Claims were for different countries! The market cheered the Jobless Claims on Thursday as evidence the Fed would cut rates again on May-15th and cheered again on Friday on news the recession may be overstated. Come on guys, you can't have it both ways. To be fair Greenspan may have influenced the markets slightly on Friday with comments that productivity gains are likely to continue in the work place because of increased technological improvements. If productivity continues to increase then profits will also increase. Thank you Alan for your market moving remarks. Traders will get another chance to find confirmation of their biases next week with Personal Income/Spending and Chicago PMI on Monday, Construction Spending on Tuesday, Factory Orders on Wednesday and NAPM on Thursday. Of course the biggest report for the week will be the Nonfarm Payrolls on Friday which will give us a much better read on the job market. One of the biggest drags on the Nasdaq Friday was Microsoft. Bridge News reported that MSFT was going to delay their new Windows-XP product until October instead of August. Microsoft issued a statement that they were sticking to their "2nd half" release date and claimed they had never suggested an August release. Some analysts said it did not really matter to their earnings if they waited until Oct but MSFT still dropped over -$2 on the news and -$4 off Thursday's high of $71. Who said there was no future for Lucent? The persistent rumor last week was merger talks with Alcatel. Both companies denied the rumors but LU has gained almost +4 (+56%) in the last four days. Alcatel was also gaining ground indicating analysts think it may be a good deal for both companies. The Biotech Index was up strongly again with HGSI posting better than expected earnings. Even AMGN, which warned about results going forward was up +4 on Friday. The BTK.X has now posted three strong day in a row at 545 and looks like it is poised to retest its recent high of 561 next week. The Internet is not dead as evidenced by earnings from Verisign which blew out their quarter by almost doubling estimates with a +.23 profit. They announced a stock buyback as well and the stock rallied +5.68 or +12.28%. VRSN and EBAY have each found a niche where nobody has even come close to competing with them. These niche players may prove bullet proof for buy and hold investors. The adage "Never Short a Dull Market" proved true this week. The Dow was coasting until early afternoon on Wednesday when a computer buy program was triggered and it never looked back. Shorts were again caught off guard with the expectations that profit taking would take us back down again. Once stocks started running again there was persistent buying on Thursday and Friday. Have they given up? I doubt it but they are definitely running scared. The Dow is now less then 200 points from 11,000, a closing level not seen since September. Now well over its 200 DMA of 10615 and gaining speed it looks like it is ready to finally sprint through the 11000 barrier. It has traded within 10 points of 11000 or higher 11 times in the last six months without being able to close over that level. Will the jinx stand one more time? Nobody knows but you can bet there will be an army of shorts lined up at 11001 to bet on at least one more failure. Great! Just what we need, one more short squeeze before we hit a new high. (the power of positive thinking!) With Friday's close the Dow has turned positive for the year by +24 points. The S&P however has not been so lucky. Closing Friday at 1253, it is still -13 points under serious resistance at 1266. It has not been able to make it above this level since late February. The current momentum looks good but almost every analyst questioned is looking for the catalyst that will knock the legs out from under this rally. (the proverbial wall of worry) While the volume was terrible on Friday with only 1.7 bil on the Nasdaq and 1.1 bil on the NYSE, the internals were good. Advances beat decliners by 2:1 across the board and up volume beat down volume 3:1. As I said before, the major drag on the Nasdaq was MSFT, but WCOM and QCOM also turned in negative days. The positive leaders were not very encouraging with Dell +.68, CSCO +.39 and ORCL +.24. The Nasdaq big cap winner was Intel with a +1.54 gain after they said they were seeing a rebound in the PC sector. It appears traders were torn by the drag on MSFT and the gain in the PC sector. Monday will be another chapter when the MSFT story is old news. Do you ever notice that bad news lasts a day and good news a week? Not always but quite often. The Nasdaq, which should be rising on any hope of a tech rebound, simply did not rally while the Dow surged ahead. Granted it only lost -87 points for the week but after a +32% gain the prior ten days it is still remarkable that it held. Which way do we go now? I think it is a pretty sure bet that the Dow will open up on Monday unless we get some more negative news out of South America or Japan or some country not even on the radar screen on Friday. The Fed appears to be on our side since Greenspan had no negative comments on Friday and shorts still appear to be on the run. The order on close orders Friday were 99% weighted to the buy side with some huge orders for GE and AT&T among others. Several stocks had well over one million to buy at the close. This is very bullish since it means they were willing to be long over the weekend and face the Monday open with long positions. This should strike fear into the hearts of traders currently short since it means a serious change of sentiment in the market. Very few institutional investors have wanted to be long anything over a weekend recently. Earnings are now half over for this period and there have been no real disasters. Everyone kept waiting for the nuclear blast from a major company with near bankruptcy results. It never happened and many companies managed to beat estimates. The GDP has given investors new hope and the markets are rising when they are normally falling. Investors normally checking out for the summer doldrums are now trying to go long to avoid missing the boat. It must be driving the bears crazy! I glanced at a couple hundred individual charts and I was amazed at the last week. Stocks that had missed earnings were moving up again. Stocks that met or beat estimates were setting new relative highs. Many have broken through resistance over the last ten days and did not slow. The rampant euphoria is almost too good to be true. The VIX has fallen back to 27.77 and nearing a two month low. Not in a danger zone yet but the collapsing volatility is a sure sign everyone is lining up on the buy side of the boat. The problem here of course is what happens when everybody stands on the same side of a boat. It tends to roll over. (back to the wall of worry) As long as the bears/shorts continue to sell into every big gain we will be okay. Sounds crazy but true. As each dip from a new relative high is met with buying the shorts that created the dip are forced to buy back at higher and higher prices and a real rally is born. Momentum creates volume and volume attracts new buyers. Has anybody considered what would happen if the Fed failed to cut rates just 12 sessions from now due to a stronger than expected GDP? This meeting is shaping up to be a rally killer if we don't get some new negative information to put the Fed at ease. Everything is looking up for next week but remember the roadblock at 11,000. Please, let there be an army of sellers in hiding and an even bigger army of buyers waiting to ambush them on the dip! Trade smart, enter passively, exit aggressively! Jim Brown Editor ************** EDITOR'S PLAYS ************** Stop the Email Please!!! I really hit a nerve with the Editors Plays article last Sunday. I got hundreds of emails either in total amazement and thanking me for the trades they put on this week OR calling me an absolute idiot for suggesting something so ridiculous. You can refuse to believe the strategy for any number of reasons but until you actually try it, DON'T KNOCK IT! I am going to answer some of the emails here because most of the questions were basically the same. I am also planning a two hour live online seminar in early May to teach this strategy and show you how to profit from it. ******** Jim, I like your strategy of using Put Leaps to benefit from stock price appreciation, but I have a question on selecting the strike price. You used $60 on CSCO, but on the other four stocks you used the highest strike price possible. I realize these were just examples, but what is your criteria for selecting a strike price? It would seem to me you would want to use the highest possible strike price available. So if I'm missing something here, I would very much appreciate your thoughts on this subject. Thanks for all the education you've given us. Dick Dick, you are right. In "THEORY" it would be best to use the highest strike price available to achieve the largest amount of cash deposited to your account. However, attempting that strategy can result in your being put the very next day several times before the play finally sticks. The reason for this is the market maker. He is required to be the other side of the trade for up to ten contracts. This provides a liquid market but also makes him an involuntary participant. When you sell the put a large amount of cash comes out of his account and directly into yours. If he is paying attention he can quickly buy the stock at market and exercise the put the same day you sell it to recover that cash. If he is not paying attention or this is just one of thousands of trades he does that day then it may go unnoticed and you become open interest without a buyer taking the other side of the trade. If you sell strikes that are not as far away from reality and have significant open interest and volume then you are likely to be lost in the crowd and the position will stick. If you are the only open contracts in a +$300 strike then you are highly visible and could be put the very same day. There is nothing wrong with selling the puts until they stick. Lets say you are selling BRCM puts. There are five exchanges that trade BRCM options. If you are using a direct access broker like Preferred Trade you can route your order to a specific exchange. Lets say you sent it to the Pacific and got assigned the next day. Immediately do it again and send it to the CBOE or the Philadelphia or the AMEX or the ISE. One of them will let it go through without exercising you. Lets say you want to sell 10 contracts, send 2 to each exchange. If one market maker assigns you, sell two more until they stick. Believe me, it is not as hard as it sounds and it is worth the extra trouble. Of course, it is much simpler to sell into a strike with volume and open interest and get lost in the crowd. You will not receive quite as much cash up front but you may not have to do it but once. ********** Dear Jim, I have a question for you and I'll appreciate your help. This refers to your last Sunday 4/22/01 Editor's Play strategy. I understand what you are trying to explain but it sounds too good to be true. Let me illustrate a transaction: BRCM: $38.10 1- Buy BRCM Jan03 Strike:35 PUT @ $13.50 (ask)Total transaction cost for 10 contracts is $13,500 2- Sell BRCM Jan03 Strike:320 PUT @ $281.30 (bid) Total transaction for 10 contracts paid to my account is $281,300 Net credit to my account: $281,300 - $13,500= $267,800 Now If I get paid interest on the $267,800 at the rate you calculate, I will get $24,551 in interest. If my cost was $13,500 that means that I will have a profit of $11,051 and that would be my worst case scenario. As you see this looks too good to be true. I invest $13,500 and I could either make a maximum profit of $267,800 or $11,051 (82% ROI). Please let me know where's the catch. The catch is simply you may be assigned at any time and you may have to sell the puts several times during the term of the transaction. This is not a bad thing. Consider this, if you sell the $320 puts with BRCM at $40 you will receive $280. (I am using round numbers) If BRCM drops to $35 and you are assigned you give back the $280 plus $40 of your money. You receive stock which you sell for only $35. You have a $5 paper loss at this point. (I am not going to deal with the long put just yet) If you immediately resell the $320 put with BRCM at $35 you will receive $285 and you get your $5 right back. Nothing has changed. You are still short the $320 put and the cash in your account is still the same. You can be put the stock several times over the term of the trade and as long as you immediately sell the stock and resell the put your cash position and your profit/loss remains unchanged. Even if BRCM declined to $5 before expiration and you were put, you could still resell the $320 for $315 and recover the cash. Now the long put protection. If you are exercised and you resell the stock/put again you do not need to use your long put. You only want to use it if you decide to cancel the trade because things are not looking up for BRCM. Lets say BRCM declined to $10 and you maintained a short position all the way down. You can elect to close both positions separately, IE, buy back the $320 short put for the $30 loss and sell the long put for the $25 profit (less the premium paid initially) or wait until you are put the stock and then exercise your long put and assign the stock to someone else for $35. This may sound complicated but it really is not. If you understand each half of the transaction separately then the combination is also simple. ******** I asked my broker about your leaps, however, he said that your play has to much exposure and could get put at any time regarding your example of CSCO. I explained to him the coverage with the July 20 put, but he said that wouldn't help. Can you explain? Thank you. Dave Dave, you broker just does not want to deal with it. The CSCO Jan-03 $60 Put Leaps had an open interest of 701 last Sunday. As of this Sunday there was an open interest of 622. If there is too much exposure and the play will not work, why is there still over 600 open contracts? The Jan-03 $55 put has open interest of 9455. Why are those contracts not closed? That is $38 million in open premium on the $55 strike alone. Why are they not closed? Do the market makers not need $38 million? No, it is because they are required to make a market and if they closed every open trade just because it was "inconvenient" then they would be shut down. Don't take my word for it. Sell the puts. See for yourself. *********** Jim- Very interesting article on leap-puts. What would be a margin requirement to do the 10 contracts on CSCO. what is the downside if stock goes down to $10. How much can one loose. Thanks. Nat Nat, the margin requirement would be 20% of the underlying or using CSCO at $15 = $300 per contract of $3000 for ten contracts. If the stock goes to $10 "WITHOUT A PROTECTIVE LONG PUT" the loss would be $5000. With a protective put as per the example the maximum loss if CSCO went to zero would only be $3400. Would you be willing to risk $3400 on CSCO to make $30,000 assuming CSCO went back to $45? ************ I will announce the date and time of the online seminar I plan to do on this in next Sunday's Editors Plays. If this idea excites you, I suggest you set aside a couple hours and tune in! Jim **************** MARKET SENTIMENT **************** Full Bull Ahead By Austin Passamonte Friday had all the makings of another failed rally. A euphoric pop on the open marked an early high that could not be equaled on numerous attempts to rally throughout the day. Buyers seemed to throw up their hands and walk away near 2:30pm EST and it looked like the big indexes might even dip into the red. But the final hour saw buyers emerge from nowhere eager to hold long over the weekend. When we say indexes rallied, we refer to the Dow and its strong influence on the OEX & SPX. The NASDAQ still can't find any legs and while retail traders fixated with faded four-symbol beauties from yesteryear sit waiting for them to blossom, old economy and Dow tech stocks continue to soar. Eventually the NASDAQ oyster will hatch a pearl, just keep holding it between warm hooves and wait. Meanwhile IBM, CAT and WMT are streaking up the charts. Fundamentally Speaking We have one question: if the GDP report for Q1 was truly that spectacular, why did so many companies tank on their earnings during this period of time? If Joe Public is still spending like a drunken sailor at port, why are DRAM prices lower than a bushel of feed corn? Heaven help us if the economy slows down the second half of this year by comparison! Can't slow down because the Fed says it won't? We'll revisit that when oil reaches $35 a barrel and it costs more to fill our SUV fuel tanks than to pay our mortgage. Technically Speaking But enough about economics that make sense while equity markets do not. Let's try to figure out where we go from here until May 15th FOMC meeting, our next landmark to reach by navigation. Most indexes are in great shape or at least improving to the bullish side. The Dow's close above 10,800 is significant for two reasons. That was a major point of resistance for a long time before, and it marks a higher high than the April 18th Fed surprise close. (Hourly Chart: Dow) If a picture's worth 1,000 words then lets save ourselves some time here. We see where the Dow made a very nice Bull Flag formation on Wednesday that broke out to confirm and walked its way up the ascending trendline dating back from April 3rd. Note that the old index remains above both 50 and 200 period (hourly) moving averages as well. Next stop: 10,900 area and then the venerable 11,000 close above! (Hourly Chart: Nasdaq Comp) Weak sister. Still trading 100 index points below first overhead resistance but seems about to hatch from its latest bull flag. Is that last hour's candle the "egg tooth" cutting its way out? We'll find out on Monday and if recent history repeats it could confirm with a gap-up breakout in the process. We'd strongly consider buying this market on a short-term basis IF it breaks to the upside and holds above the 50-period moving average (green). That could be the opening tick on Monday as well. Break The Bank At Monday's Bell? Maybe not. Those who tried that on Friday's ebullience ended up sweating out the next six hours praying to get out near even, which they barely did. Those who bought dips in the middle pocketed some lunch money in the process. If this rally sticks it will climb charts in continued staccato fashion. One might consider dip-buying to be in fashion again. With the next FOMC meeting a mere twelve trading sessions away and no signs of market bombs in our path the coast seems clear for heel-kicking bulls. Still, we must remain picky on our entries. Big Dip Ahead? It's almost unanimous on the Street that an ultimate bottom is now safely in place. Market Sentiment will wait awhile on that one, as we've heard the same thing about five times since April 2000 and counting. There is plenty of calendar left to prove otherwise. We can presume the S&P 500 commercial traders got blown out of some shorts by uncle Al on April 18th but they remain just a hair more short as of Tuesday 4:00pm April 24th than they did before the explosion. We would have been really encouraged to see them cover more but doubt still remains in their assessment. Contrary to retail opinion, interest-rate cuts do not solve all market woes. once again, if the economy is this strong and companies are struggling to perform it suggests an over-supply problem, not an economic one. More free money will not cure the ailment but actually exacerbate it and big money may smell this fact. Also, all daily chart stochastic signals and many point & figure charts (courtesy of Jeff Bailey and Jeff Canavan) are now grossly overbought. They can easily remain that way for weeks but when the inevitable release happens to come it will be under that much greater downside pressure. Meanwhile, a run for the roses (or alfalfa) by giddy bulls into May 15th is sure as sunrise. How we love predictable market action! And to think it occurs on expiration Tuesday to boot. That should setup one of our favorite scenarios: rally the "rumor" and tank the news. Can't happen again? The public is not stupid enough to fall for that again? Please. The public has been doing such since first meeting under the buttonwood tree hundreds of years ago. Three week gameplan? Consider buying the dips right into the FOMC meeting, whereupon long puts, bear-call credit spreads or long straddles may be the next lead-pipe lock trade since we enjoyed the last one six weeks before. This marks the final edition of Market Sentiment in current format. Significant changes are in store next week and all of them are considerable upgrades. You will love the newer format, rest assured. With that said, this is my final submission for OI teammates and let me thank you personally for enjoying our time together. It has been great fun and I hope we learned some valuable lessons together. My efforts will now be spent exclusively within IndexSkybox, and I wish each & everyone the very best trading wishes for the rest of your career! ************* VIX Friday 04/27 close: 27.77 VXN Friday 04/27 close: 71.30 30-yr Bonds Friday 04/27 close: 5.80% 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. Friday (04/27/2001) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 685 - 670 14,003 90 155.59 665 - 650 5,175 1,285 4.03 OEX close: 649.10 Support: 645 - 630 6,630 13,311 2.01 625 - 610 12,927 5,269 .41 Maximum calls: 625/10,295 Maximum puts : 640/ 7,391 Moving Averages 10 DMA 633 20 DMA 609 50 DMA 617 200 DMA 714 NASDAQ 100 Index (NDX/QQQ) Resistance: 54 - 52 24,749 917 26.99 51 - 49 74,137 12,489 5.94 48 - 46 108,873 50,477 2.16 QQQ(NDX)close: 45.15 Support: 44 - 42 62,745 44,213 .70 41 - 39 67,164 143,213 2.13 38 - 36 23,448 59,041 2.52 Maximum calls: 46/64,229 Maximum puts : 40/116,118 Moving Averages 10 DMA 44 20 DMA 41 50 DMA 44 200 DMA 70 S&P 500 (SPX) Resistance: 1325 10,774 426 25.29 1300 14,355 3,836 3.74 1275 17,519 4,045 4.33 SPX close: 1253.07 Support: 1225 13,152 5,771 .44 1200 11,070 14,787 1.34 1175 11,274 10,316 .92 Maximum calls: 1275/17,519 Maximum puts : 1200/14,787 Moving Averages 10 DMA 1225 20 DMA 1185 50 DMA 1201 200 DMA 1351 ***** CBOT Commitment Of Traders Report: Friday 04/27 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 +57298 +56586 -61741 -57843 Total Open Interest % (+26.22%) (+26.57%) (-8.52%) (-8.08%) net-long net-long net-short net-short DJIA futures Open Interest Net Value -3478 -3031 +5051 +6200 Total Open interest % (-25.97%) (-20.21%) (+16.58%) (+20.88%) net-short net-short net-long net-long NASDAQ 100 Open Interest Net Value +2520 +3168 -10299 -7462 Total Open Interest % (+11.28%) (+12.12%) (-16.11%) (-10.48%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: Commercials are maintaining their net-short positions on the S&P while increasing shorts on the NASDAQ 100. Data compiled as of Tuesday 04/23 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/042901_1.asp *************** ASK THE ANALYST *************** Constructive By Eric Utley While last week's trading was rather difficult on those with little patience (read: Eric), I have to admit that it was rather impressive in the wake of the ramp following the Fed's surprise rate cut. Does it mean that a new bull market has emerged? I don't think we're quite there yet, but certain sectors of the market are displaying bullish characteristics, which may lead to the rebirth of the beast. In the meantime, my readers might want to monitor trading closely Monday for signs of end-of-the-month window dressing. Many money managers report their monthly performance and holdings to their investors and oftentimes have the tendency to ramp stocks higher near the end of the month in an attempt to artificially boost performance. Just a thought. I hope you all have a great weekend, and for me and my cohort, Matt Russ, it's off to the river. Send your stock requests to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- Brocade Communications - BRCD Short covering in BRCD [two weeks ago] has it with BIG gains. However, could the short covering happen over 4 straight days - look at the ADV of 17m versus the [last two weeks] of trading... Can this rise be primarily short covering or are institutions really buying the stock for the long run? Thoughts? - Barry This is my first question as a subscriber. You folks do a tremendous job of educating people, please keep it up. Please comment on the short and medium term outlook for JNPR and BRCD. - Thanks, Arun Thank you for the request, Barry. I think you've touched upon something important concerning shares of Brocade (NASDAQ:BRCD). And thank you very much for the kind words, Arun. Over a week ago, Brocade warned that its second-quarter earnings would fall well short of already lowered estimates of 11 cents. The company guided earnings down to the 5 to 6 cent range. However, following its substantial warning, shares of Brocade advanced modestly in the wake of a favorable forecast from data storage giant, Emc (NYSE:EMC). I think it would be prudent to point out that Brocade is a major player in the data storage sector as the company provides the foundation - both hardware and software - for storage area network (SAN) solutions. The reason shares of Brocade rallied following the earnings warning was because Emc reported that it was beginning to see an up-tick in demand. That is, increased visibility into future sales. And I think that somewhat answers the question concerning the medium-term outlook for Brocade. If Emc is beginning to see a pick-up in business, Brocade should soon begin seeing the same. As such, I would expect, over the medium-term, for Brocade's business to begin to improve and its share price to stabilize. I think it may be a bit early to begin to accumulate Brocade for investment purposes; however, I do think the company and its stock will out perform over the long-term because of the insatiable demand for data storage products and services. Now let us address the short-term for shares of Brocade. Although the data storage sector may begin to stabilize in the wake of Emc's comments, I still think that the short-term may be a bit dicey as earnings within the group begin to stabilize. To directly answer your question, Barry, I think the recent ramp in shares was a product of short covering, as measured by the volume you mentioned along with the velocity in price. I think there was a tremendous amount of shorts in the stock who grew fearful over the last two weeks following the Fed's surprise rate cut and the comments from Emc. That fear morphed into a buying spree as the shorts scrambled to cover the stock. However, I'm sure there were some institutions accumulating some stock over the past two weeks. Unfortunately, I cannot quantify how much of Brocade's recent price advance was a product of institutional accumulation, as opposed to short covering. But my feeling is that much of Brocade's advance came on the heels of fear-induced short covering. And, short covering-related buying is NOT the type of buying that will carry a stock higher for an extended period of time. So if my idea of short-covering carrying Brocade higher is correct, I would expect the stock to pullback in the short-term to consolidate some of its recent gains. If Brocade does pullback in the near future, traders might watch for an inverse head-and-shoulders (H&S) to form on the daily chart. Watch for the right shoulder of the pattern to form near the $25 level, which may offer bullish traders and even investors a favorable entry into the stock, because risk will be fairly easy to manage at that level. ---------------------------- Corvis - CORV I have been watching Corvis Corporation (CORV) for some time, and wonder what your opinion is. It has come down from a high of over 100 to $7 plus now and seems to move in tandem with the Nasdaq. I am wondering if buying options on this stock (which are cheap) makes more sense, short-term, than buying QQQ calls, or other high priced techs. - Laurie Corvis (NASDAQ:CORV) is a smaller ($2.3 billion market cap) player in the optical networking space. The company's products help carriers convert their long-haul networks to all-optical, as opposed to the older, slower and more expensive legacy technology. Shares of Corvis have fallen far, far off of their highs as you mentioned, Laurie. The reason behind the steep sell-off in the stock is because of the steep fall-off in capital spending by the telecom carriers. It doesn't appear that the cap-ex spending has yet to pick-up, at least according to Salomon Smith Barney analyst, Alex Henderson. The analyst downgraded shares of Corvis and CIENA (NASDAQ:CIEN), along with several other optical companies last Friday. Henderson's concerns were over continued spending cuts by telecom carriers, such as Verizon (NYSE:VX) and Sprint (NYSE:FON). In light of the downgrade and continued weakness in price, I don't think that purchasing short-term calls on Corvis is a prudent strategy. Shares of Corvis are a mere $1.40 off their 52-week low, which tells me the stock is trading relatively poorly. Furthermore, just because a stock is cheap in terms of price doesn't mean it's a bargain. Although the options on Corvis are probably relatively cheap due to a lower carrying cost, the stock is very, very technically weak and the fundamentals of the company have yet to improve. ---------------------------- HomeStore.com - HOMS I have seen HOMS in past steadily moving between 17 - 18 to 34 - 35 and then back to 17 - 18 levels. Can you please study the charts and advise if the stock could be on downward trend now. - Thanks, Sunil I recall that we reviewed HomeStore.com (NASDAQ:HOMS) for you in late December, Sunil. Here are a few items I wrote back in December concerning HomeStore and a link to the full review: I think HomeStore is a good example of why the Internet is such a great medium. Unlike many of the already failed Internet businesses, I sincerely believe that HomeStore is providing a quality and highly valuable service to consumers. They have made it mush easier to locate, finance, and purchase real estate to a consumer's exact specifications. HomeStore has integrated virtually every aspect of purchasing real estate into one concise site. If you're looking to get into HomeStore for the long-term, it may be prudent to wait a quarter or two and see if the company can establish earnings credibility. If it does, I believe it to be a long-term winner on the Web. http://members.OptionInvestor.com/archive/ask/121700_1.asp The point I tried to stress in that last paragraph was to wait and see if HomeStore would continue to deliver in terms of earnings. And deliver they did last week. Last Wednesday, HomeStore recorded earnings of 4 cents per share, while consensus estimates had the company pegged to breakeven. Obviously, the company surprised to the upside in a big way! What's more, HomeStore raised the bar for its second- and third-quarter earnings; the company said it would earn 11 and 16 cents per share while analysts had forecasted 10 and 15 cents per share for the second- and third-quarters, respectively. From a fundamental standpoint, I like the direction in which HomeStore is heading. While some might argue that its shares are still fairly rich in terms of price-to-earnings, I would add that with the expectations for 40 percent earnings growth over the next several years, shares of HomeStore look attractive at current levels for INVESTMENT purposes, especially if the company continues to blow away estimates. Furthermore, its balance sheet remains in very healthy condition with some $300 million in cash and zero debt. From a technical standpoint, however, shares of HomeStore don't reflect my optimism over the company's exceptional earnings and fundamentals. I tend to think that the stock is still stuck in a descending trend, Sunil. Although, shares broke above the intermediate-term descending trend line last week, which came on increasing volume as a product of the company's earnings report. I don't know if last week's break will continue to carry shares of HomeStore higher. It just doesn't quite yet feel like the type of market that is favorable enough to buy breakouts in tech- related stocks. I could be wrong, but I think if you're looking to get long the stock, a pullback down to its ascending support line might offer a favorable entry. If the ascending line I drew on the chart below holds, Sunil, I don't think shares of HomeStore will make it back down to the $17 - 18 range you mentioned. ---------------------------- DST Systems - DST Hi Eric, great column. What do you make of charts and long term growth potential of DST Systems, are they waning or ready to roll on back up? - Thanks, Bruce Thanks for the request, Bruce. I think DST Systems (NYSE:DST) represents a stock unfairly punished by the bear market. And the reason I think that is because the company continues to deliver in terms of earnings and earnings growth. In its last four or five quarters, DST has managed to meet or exceed estimates, which proves to me the company is financially and operationally strong. Furthermore, I noticed that the future estimates, going out a year or two, have not been reduced at all over the last six months, which tells me that the analysts following the company expect it to continue to out perform. I suppose that the bears might set forth the valuation argument as the reason for the steep pullback in shares of DST, but I think the stock is fairly priced at current levels in light of the company's expected future earnings growth rate of 20 percent. Furthermore, I like the business lines of DST, especially the financial services segment. DST, along with several other operations, provides information technology services to financial institutions, such as mutual funds. I think this is a long-term growth area that will continue to produce superior investment returns. As for DST's technicals, I have to admit that the chart does not look very good. Ideally, what I'd like to see is the stock consolidated between roughly the $45 and $50 level for maybe a month or two, and see a subsequent breakout above that range. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* For the week of April 30th, 2001 Monday ====== Personal Income Mar Forecast: 0.50% Previous: 0.40% PCE Mar Forecast: 0.20% Previous: 0.30% Chicago PMI Apr Forecast: 40 Previous: 35 Agricultural Prices Apr Forecast: NA Previous: 4.00% Tuesday ======= Auto Sales Apr Forecast: 6.5M Previous: 6.4M Truck Sales Apr Forecast: 7.5M Previous: 7.7M Construction Spending Mar Forecast: 0.30% Previous: 0.60% NAPM Index Apr Forecast: 43.3 Previous: 43.1 Wednesday ========= Factory Orders Mar Forecast: 0.6% Previous: -0.40% Beige Book Forecast: NA Previous: NA Oil & Gas Inventory 27-Mar Forecast: NA Previous:311.9MB Chicago Fed Idx Mar Forecast: NA Previous: -0.81% Thursday ======== Initial Claims 28-Apr Forecast: NA Previous: NA NAPM Services Apr Forecast: NA Previous: 50.3 Vehicle Sales Apr Forecast: 14.0 Previous: -0.4% Friday ====== Nonfarm Payrolls Apr Forecast: 30K Previous: -86K Unemployment Rate Apr Forecast: 4.40% Previous: 4.30% Hourly Earnings Apr Forecast: 0.30% Previous: 0.40% Average Workweek Apr Forecast: 34.2 Previous: 34.3 ECRI Future Inflation Apr Forecast: NA Previous: 111.0 ECRI Wkly Leading Idx 27-Apr Forecast: NA Previous: -5.1% Week of May 7th ================= May 07 Consumer Credit May 08 Productivity-Prel May 08 Wholesale Inventories May 10 Initial Claims May 10 Export Prices ex-ag. May 10 Import Prices ex-oil May 11 PPI May 11 Core PPI May 11 Retail Sales May 11 Retail Sales ex-auto FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** 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 04-29-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/042901_2.asp ************** TRADERS CORNER ************** Everybody Loves A Good Party! By Renee White We've been given a major adrenaline rush lately. Great party but a party at a Bear's house is not comforting for long. I can't help but wonder if it can continue. Have you ever gone to a party and had so much fun, you didn't want to leave? The jokes and the gaiety of the crowd were infectious and leaving was hard to do. We’re there. If this is the Going-Away-Party for the Bears, it should hold this week. If not, better leave early before the crowd. In some ways, the market definitely looks to be on the mend. Advancers beat decliners and the breadth of sectors performing well has started to broaden out. In other ways, I'm not sure the numbers are telling the full story this early in the game. At the end of the first quarter, we had to look hard to find stocks that ended the quarter up. Yet, three weeks later, many seem to have forgotten that. Since then, we have only seen improvement. On the surface, a sigh of relief allows optimism to penetrate. Traders are like junkies. Give us the wind to our backs, crossovers and up sloping moving averages, high volume on up days, low volume on down days, all sectors benefiting with advancers beating decliners day after day, and we quickly forget how much money we've recently lost. However, experience tells me we should be cautious here and not let our enthusiasm blind us. The question is: Whose party is this? Like many of you, I too hope this is the formal Going-Away-Party for the Bears. That would just make life so much easier. Unfortunately, my life has never been that easy! Perhaps I am jaded. Or perhaps the contrarian in me remembers the damage following the last surprise rate cut in January. Those with faith ended up licking wounds. The reality is: We are still in a bear market until it is known who stays last at the party. As a trader, I try to think through the immediate and obvious. If my more distant evaluations match the immediate game plan, I feel stronger about my decision. That explains my bullishness in 1999, my bearishness in Spring 2000 and my bearish plays during the January 2001 rally. I will admit that things are murkier now than any of those times; this is consistent with transitional periods. After this healthy bounce, I find myself uneasy for several reasons. I've learned to trust my gut, so I will not be jumping into this market until I am either proved wrong, or a healthy pullback occurs bouncing on a higher-low support level. Why am I cautious? Why not? After the longest growth period in history that crashed so rapidly, why would relief in two weeks feel permanent? As if Year 2000 wasn't painful enough, Nasdaq went on to lose 42.68% from Jan 24th, 2001 to April 4th, 2001 with only a handful of advancers during that time...only a few weeks ago. Trading euphoria is different than trading real advancement. In the last few weeks, we have had a surprise Fed rate cut which infused a sense of excitement, not to mention a massive rally. Stock quickly ran up 20%, 25% and even 30%, slowing slightly to gasp air. Then, came a better-than-expected GDP which clearly blew away expectations, stopping any thoughts of profit taking from the week before. The good news is that these events occurred during earnings season and after the major warnings had been announced. The bad news is that these events occurred toward the end of earnings season, with no good news ahead of us to use as a carrot. In fact, one needs to consider that our next rate cut, may only be 25 basis points. Will the markets cry like a baby for not getting its routine 50 basis point candy again? With the markets approaching the summer slowdown season, maintaining this recent advance without a pullback is expecting a lot in my opinion. Unfortunately, this is not what concerns me the most. As much as I would like to say we are economically on the mend, I am actually turning slightly more cautious on the economy than I have been for the last six months. My concern revolves around energy and the affects on companies with an already weakened bottom line. I'll admit, I am out of my knowledge-comfort-zone trying to think this through, but I can't ignore how the dots are starting to connect. In my area of Texas, Reliant Energy will increase their rates by 30% in a few months. To me that is huge, especially since they have been building out capacity for several years. California, the second largest economy, will be hit much harder. If the energy crises progresses to the severity we have been warned, then as traders we must take into consideration what affects they will have on recovery during a slowdown. These expenses could have major effects on all businesses, not just tech. Could energy prices push us into the recession we fear? At a minimum, our economic recovery could certainly be delayed. Has anyone out there ever lived through a Fed cutting by 50 basis points 4 times in a row? Not to mention that the wonderful GDP reading that the markets surged on will most likely be revised downward twice in the next two months. GDP revisions are common and can be as much as 2%. Since the preliminary estimate of GDP growth was 2%, each revision will take us closer to zero growth. If we're at zero growth now, how will energy affect us in the next two quarters? In addition, the next GDP is already a concern. A key ingredient, consumer spending, is already starting out weaker this quarter. Higher electric bills, higher gasoline and weaker spending can't be good for businesses. Second and Third quarter earnings may still be hazardous to our health as companies fight to raise prices during a slowdown. Higher prices anyone? Inflationary pressure? Still, the Fed is on our side and as the theory goes: Don't fight the Fed. Lower interest rates help all businesses. If we are lucky, we may just stay rangebound through the summer. Traders can trade that. Good visibility reports by CEOs warning of an upside surprise by July earnings would also strengthen support. Falling interest rates directly affect businesses that revolve around the lending and borrowing of money. These interest rate sensitive stocks include: commercial lending institutions, banks, savings & loans, homebuilders, mortgage financiers, insurance companies, etc. Some stocks in these sectors have already had huge run-ups since last spring in anticipation of rate cuts. Some have pulled back nicely since January, ripe now for re-entry attempts. Instead of partying with bears and waiting for the hang-over in tech, I will be looking into these sectors which have reason to grow in this economy at this time. renee@OptionInvestor.com *********** OPTIONS 101 *********** Spring Has Sprung By Lynda Schuepp The weather in New England has finally turned. Haven't seen snow in a week or two and the flowers are popping. I think the market is also starting to bloom. A while ago I wrote about calendar spreads. A reader brought up some great questions about the strategy, which needs clarifying. Reader wrote: "I was very interested by your strategy and I did do many simulations on Jan2002 (sell QQQ puts) and Jan 2003 (buy QQQ puts). I simulated the strategies on different volatility levels (20, 30, 40, 50, 60). However, it remains very important to know the margin requirements on the strategy; is it the spread only to be paid or is there a margin on the sale of puts? Moreover, in case we are exercised on Jan 2002 puts (for example in June. 2001) we need the cash to hold or we have to liquidate and lose the opportunity to realize tremendous profits at the maturity of the short leg; i.e. Jan. 2002. I would like to have your reply on these issues." The reader brings up some good questions that I didn't address, namely exercise risk and margin. First as a review, a calendar spread is a very easy, simple, non-stressful trade. Complete details of this strategy can be found in a two part article I wrote back inFebruary titled: "Calendar Spreads are a Nice Way to Sleep at Night. "A calendar spread consists of a long option with a longer expiration date and a short option with a closer expiration date both with the same strike price and both are calls or both are puts. The example I used was the 80 strike on QQQ's, using Jan '02 and Jan '03 puts. I will continue to use this example in this article. The reader’s questions regard exercise risk and margin. Let's first look at exercise/assignment risk. Before I really understood the process of being assigned, this used to be my biggest fear, getting the stock "put" to me. Let's examine the process of exercising an option. First the person who bought the put phones their broker and says that they want to exercise their option. Why would they do this? Several reasons follow: 1. They want to see what it's like (don't laugh) 2. It was part of a hedging strategy that they are unwinding. 3. It is part of an arbitrage scenario. The first reason, believe it or not happens once in a while. First "Jo Investor" calls his broker and says he wants to exercise his put. The broker notifies the OCC (the options clearing house for all stock options). The OCC gathers up all exercise notices from all the other brokers in the country and "randomly" assigns them to the brokerages that are short that particular put. The brokerage then receives their notice from the OCC and then they in turn "randomly" assign one of their customers that are short that same put. Chances are you won't be assigned unless you are the type that is prone to win the lottery. Remember, first your brokerage firm has to be randomly selected by the OCC and then you have to be randomly selected by your brokerage firm. If there is plenty of open interest, then your chances are slim to none. This brings up a good point that I didn't go into before. Make sure there is plenty of open interest in the leg you are going to short. If there is lots of open interest your chances of being assigned are even less. If there are only 100 contracts of open interest and there is no time value left in the option, then your chances of getting assigned are greater. The second reason would be that someone needs to unwind a hedged position. For instance, a mutual fund owns boat loads of the QQQ's that they would like to sell but because they have so many shares to sell it would cause the price to drop, so they would exercise their put and get the full price of the strike they bought. This is typically what happens on expiration day, which is why you don't want to be short an option near expiration. Many "in-the-money" options will be exercised because of this reason. The third reason is a form of arbitrage, done by the "arb" specialists or market makers, and it helps keep the market honest. For instance, the Jan '02 80 put had a bid of $34.60 and an ask of $35.10 at the close. The stock closed at $45.15 so that the put has $34.85 ($80 strike -$45.15 stock price) of intrinsic value and some minimal amount of time value. There were no Jan' 02 80 options traded on Friday so the market maker can be a tough guy and stand firm at the bid, which in this case is $.25 undervalued ($34.85 of intrinsic value less the bid of $34.60). An arbitrager can buy the stock at $45.15 (market on close order) and exercise the put on the stock he just bought and receive the full $34.85 through exercising the put. Because he bought the stock and exercised the option the same day, no additional funds are needed to purchase the stock. It sounds like peanuts, but this is how these guys make a living. Now you know why options are exercised, but let's see what actually happens if you are the lucky one to get assigned. You wake up one morning and look at your positions and find out you now have 1000 shares of QQQ in your account. Based on the close on Friday, that would mean you'd have to buy the stock for 80, but you received cash for the short call initially, so you would be out the difference between the strike of 80 and what you sold the put for originally. After you pick yourself back up off the floor, you might start to panic because you are fully margined and you only have $100 in your savings account. Stay calm, you have two choices and neither of them will bust the bank. Remember, stocks have a 3 day cash settlement so you can wait the entire day before acting. SCENARIO ONE: QQQ's are up in price from the close of previous day. If so, you are in luck! Step one: You would sell the QQQ's at a profit and because the sale occurs the same day, no cash is needed. Step two: Determine if the short put still has any time value. If they do, you could then short the Jan '02 put again and sit back and smile. If no time value is left in the Jan '02 put, then you would sell the January '03 put that you are long. Because the January '03 will always cost more than the January '02, it will make up for the loss incurred in your short leg that was assigned. SCENARIO TWO: QQQ's are down from the close of the previous day. Bite the bullet, you would exercise your Jan '03 long put. The QQQ's you were just "put" are now being "put" to someone else by the exercise of your put. Your loss in this case would be the initial cost of the calendar spread which was $1400, which is the maximum loss you can take. Remember, don't panic, you have all day to watch the stock and see if goes up from the previous day's close. This leads us to the reader's second question regarding margin. Margin on a calendar spread is zero. The amount of the debit (the original cost of the spread) is taken from your cash account initially, and there is no additional margin maintenance because the most you can lose is the cost of the spread as explained above. Remember the worst case is the stock is put to you, AND the stock is down all day from the previous day. You then turn around and exercise your long put and put it right back to the next "lucky" winner and you’re out your original investment. The lesson here is twofold: First, only sell options that have time value and plenty of open interest. I like to sell long-term out of the money options with at least $.75 of time value. Secondly, never hold a short position close to expiration or the "arbs" will get you! ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* C - Citigroup Inc. $50.91 (+1.49 last week) See details in sector list Put Play of the Day: ******************** CIEN - Ciena Corp $50.29 (-16.80 last week) See details in sector list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS: No dropped calls this weekend PUTS: HDI $46.65 (+1.90) Proof that chart patterns don't always pan out, HDI extended Thursday's gains on Friday as the stock pushed through the 7-month descending trendline to close near its high of the day. Our play rode along as the broader market continued its advance, violating our stop early in the day and never looking back. Although the stock is currently sitting near the $47 resistance level and could pull back from here, the bulls seem to be in control. With a violated stop and broken chart pattern, we have no choice but to drop HDI 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 ************** RE - Everest Reinsurance $63.99 (-1.93 last week) Everest Re Group Ltd. is a Bermuda holding company that operates through the following subsidiaries: Everest Reinsurance company provides reinsurance to property and casualty insurers both in Bermuda and the international markets. Everest National Insurance company provides property and casualty insurance to policy holders in the U.S. Everest Indemnity Insurance Company provides excess and surplus lines insurance in the U.S. Southeastern Security Insurance Company provides personal lines insurance in Georgia. Everest Insurance company provides property and casualty insurance to policy holders in Canada. Mt. McKinley Insurance is a run off property and casualty insurer domiciled in Delaware. The insurance sector demonstrated impressive relative strength last week, with a rally of over 5%, and a strong move above IUX.X's 50 dma of 717. IUX.X is now only 3 points below its 200 dma of 748.38, and if the bullish sentiment continues next week, IUX.X should be able to clear this level. Within the casualty and property insurance sector, RE is almost perfectly positioned to move up its symmetrical stair-step pattern to a higher level next week. RE is one of the few stocks which has stayed firmly above its 200 dma for the last twelve months. It is also interesting to note that RE made a spiky dip below its 50 dma three times since the end of January, and rebounded each time. This week, RE made a fourth dip, and closed above the current 50 dma of $63.19 with a bullish candlestick pattern at the close. Financial stocks are likely to rally strongly in anticipation of the upcoming Federal Reserve meeting on May 15, which could add additional momentum to this play. Traders could take positions at current levels, particularly if IUX.X has moved above its 200 dma of 748.38, and others in the sector, like PRG, BRK B and MTG are strong. Another entry point could be a move past $65 with strong volume, which would likely propel RE to the next rung in its upward ladder around $66.50. RE reported earnings on April 23, so traders don't need to worry about exiting before earnings. We are setting stops at $62, so be prepared to close the play if RE closes below this level. BUY CALL MAY-60*RE-EL OI=182 at $5.10 SL=3.00 BUY CALL MAY-65 RE-EM OI=542 at $1.90 SL=1.00 BUY CALL JUN-60 RE-FL OI= 0 at $6.10 SL=4.00 Wait for OI!! BUY CALL JUN-65 RE-FM OI=100 at $3.30 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=RE AXP - American Express Company $43.74 (+2.24 last week) In addition to being the #1 issuer of charge cards and international banking services, this financial services giant is the world's #1 travel agency. They also publish magazines like "Food & Wine" and "Travel & Leisure". The company's operations include Travel-Related Services, Financial Advisors, and Express Bank. American Express has also taken to the Internet with its Membership Banking; plus, online mortgage and brokerage services. Warren Buffett's Berkshire Hathaway owns about 11% of American Express. The company's respectable earnings report last Monday, on April 23rd, stabilized the share price at the $42 level. The intersected 5, 10 & 50 DMA lines further bolstered the stock while the markets operated precariously amid the economic concerns; particularly after data revealed that Americans seeking first-time unemployment benefits last week rose to its highest level in more than five years. A sharp reversal in sentiment, however, sent AXP and other financials like JP Morgan (JPM) and CitiGroup (C) through their relative resistance levels in Thursday's session. Growing optimism of a fifth rate cut from the Feds at its next policy meeting on May 15th combined with a rare positive outlook from telecom giant WorldCom (WCOM) gave the Blue-chips stocks an infusion of hope. The persistent uncertainty about the technology sectors' earnings prospect further lends to investors seeking shelter in the financial and drug stocks. Now that you've read what sounds like a sales- pitch, let's get down to the nitty-gritty of the play. Stay disciplined. A conservative approach is to stay on the sidelines while the trend firms upward. A clean and decisive move through the relative high at $43.90 would however, give the green light to jump into the momentum. Expect some mild resistance as AXP approaches the $45 and $47 ranges; although the real challenge lies ahead at $50, traced by the 200-DMA ($51.66). The 5 & 10 DMA technicals bolster our $42 CLOSING stop and coverage will be dropped if AXP cannot maintain its position above this mark on a close. If you look on the analyst front, Robertson Stephens recently initiated a Long-Term Attractive rating on AXP. BUY CALL MAY-40 AXP-EH OI=7132 at $4.50 SL=2.75 BUY CALL MAY-45*AXP-EI OI=6508 at $1.25 SL=0.50 BUY CALL JUN-40 AXP-FH OI= 240 at $5.30 SL=3.25 BUY CALL JUN-45 AXP-FI OI= 810 at $2.20 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=AXP ********** 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 04-29-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/042901_3.asp ****************** CURRENT CALL PLAYS ****************** WMT - Walmart $52.83 (+0.78 last week) Walmart Stores Inc. operates more than 2,600 stores and 475 SAM's clubs in the United States. Internationally, the company operates more than 1000 units. Walmart employs more than 962,000 associates in the U.S. and more than 282,000 internationally. In 2000, the company raised and donated more than $190 million for charitable organizations. An enthusiastic market responded to the news which was released this morning that the GDP grew by a higher than expected 2%, and the retail sector was among the best performing of the market sectors. RLX.X burst out of the gate and moved up past resistance at 880 to clear the 900 level by mid morning. WMT gapped open nearly a full point and moved to a high of $53.25 before pulling back. WMT is scheduled to report earnings on May 15 at 5:00 pm, and, if the broad market and retail sector rally in anticipation of the upcoming Federal Reserve meeting, WMT might be able to move above resistance at $54 to the next major level of consolidation between $57 and $60. Today’s volume of 8 million shares was approximately 15% higher than the average daily volume, and indicates that buyers are not hesitating to take positions in this retail giant. News which was released this week regarding Walmart’s Mexican division, Walmex may have helped to bolster investors’ confidence that WMT is in a good position to meet or beat expectations. Walmex posted a 21% increase in operating profits, and a 15% increase in revenues for the first quarter, as strong sales continued to defy a slowdown in consumer spending. Traders could take positions at current levels, or possibly at a pullback to $52.50, particularly if RLX.X stays over 900. Continue to monitor others in the sector like HD and S, and set stops at $52. We will close positions if WMT closes below this level. BUY CALL MAY-50*WMT-EJ OI= 9732 at $3.90 SL=2.50 BUY CALL MAY-55 WMT-EK OI=20395 at $1.15 SL=0.00 BUY CALL JUN-50 WMT-FJ OI= 5285 at $5.00 SL=3.00 BUY CALL JUN-55 WMT-FK OI=15697 at $2.25 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=WMT AEOS - American Eagle Outfitters, Inc. $37.04 (+0.38 last week) American Eagle Outfitters, Inc. is a specialty retailer of casual apparel, accessories and footwear for men and women between the ages of 16 and 34. The company designs, markets, and sells its own brand of versatile, relaxed, timeless classics like jeans, cargo and T-shirts, under the American Eagle Outfitters and Bluenotes brands, providing high quality merchandise at affordable prices. The company currently owns 556 American Eagle Outfitters stores in 47 states and the District of Columbia. As the RLX.X soared Friday, AEOS went along for the ride, and moved to a high of $37.62 before pulling back. Traders who bought the second dip at $36.55 were rewarded, as the stock moved back up to $37 in the afternoon. While AEOS has been progressing nicely upward on a channel of higher lows which began April 3rd, the stock is having difficulty penetrating heavy resistance at $37.50. However, traders need to consider that AEOS has moved up nearly 30% from $27 on April 3rd, and consolidation is almost inevitable. After consolidating between $36.50 and $38.50 last February, AEOS made a 52-week high of $40.04 before pulling back. If the broad market indexes and the retail specialty apparel sector remain strong, it is possible that AEOS may have enough momentum to clear this level of convergence to move to $40. If $40 can be cleared, it is possible that we could be looking at a new all time high for the stock. AEOS has reported nothing but good news in the last several weeks, including better than expected March store sales of $101.7 million reported on April 11th. Traders can take positions on a pullback to $36.50 as an aggressive move, but only if RLX.X is exhibiting technical strength. Alternatively, a strong move above $38 with heavy volume could be the conservative entry level we are waiting for. We are moving stops to $36, so close the position if AEOS closes below this level. BUY CALL MAY-35*AQU-EG OI=253 at $3.70 SL=1.75 BUY CALL MAY-40 HUJ-EH OI=761 at $1.40 SL=0.75 BUY CALL JUN-35 AQU-FG OI= 40 at $5.40 SL=3.50 BUY CALL JUN-40 AQU-FI OI= 33 at $3.00 SL=1.75 www.premierinvestor.net/oi/profile.asp?ticker=AEOS BRCM - Broadcom $37.40 (-1.29 last week) Broadcom Incorporated is the leading provider of highly integrated silicon solutions that enable broadband communication and networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs develops and supplies complete system on a chip solutions and related applications for digital cable set top boxes and cable modems, high speed local, metropolitan, and wide area and optical networks, home networking, carrier access, residential broadband gateways, satellite, dsl, and network processing. Broadcom is located in Irvine California. After making a V-shaped bottom at the beginning of April, BRCM has formed a pattern of lower highs which is similar to the chart pattern of the SOX.X. BRCM’s senior management is scheduled to appear at several upcoming analyst presentations in the next two weeks, and if the SOX.X can muster additional momentum, these conferences could be the catalyst for BRCM to clear its 50 dma of $39.84, which could be a major bullish turning point. On Monday at 1:30 pm, Broadcom’s CEO Dr. Henry Nicholas will be presenting at the JP Morgan H & Q Annual Technology Conference in San Francisco. On Wednesday May 2, Dr. Nicholas is scheduled to present at the Merrill Lynch conference in NY, and on May 9, senior management will present at the Solomon Smith Barney semiconductor conference in Monterey California. Wall Street generally loves bullish comments made by company management at conferences, and analysts frequently issue new ratings during these occasions. However, we don’t know how analysts will react to any news presented, so we must play Broadcom carefully going forward, as the stock is likely to be highly volatile in the next two weeks, particularly with the Federal Reserve meeting approaching. Broadcom demonstrated strong support at $36 on Friday, which could be a possible aggressive entry point. As an alternative, look for a strong move and close above $38.50 with volume of over 13 million shares to take a more conservative position. Monitor SOX.X at all times, and set stops at $35. We will close positions if BRCM closes below this point. BUY CALL MAY-35*RCQ-EG OI=10575 at $6.20 SL=4.00 BUY CALL MAY-40 RCQ-EH OI= 5935 at $3.60 SL=1.75 BUY CALL JUN-35 RCQ-FQ OI= 143 at $7.70 SL=5.25 BUY CALL JUN-40 RCQ-FH OI= 260 at $5.70 SL=3.50 http://www.premierinvestor.net/oi/profile.asp?ticker=BRCM AOL - AOL Time Warner Inc $49.99 (+1.30 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. So close we can almost taste it! We're looking, and patiently waiting, for that visible breakout through the $50 resistance. Currently, the 200-dma ($48.86) is towing the mark as shorter- term support. Volume remains healthy, but AOL needs to explode upward and fast. Time is money. AOL continues to lead the media stocks sideways, and slightly higher, while the technology market dallies in its limbo. Specifically in the case of AOL, the trading pipeline further narrowed itself last week. The previous near-term bottom at $47, which was in-line with the 10- DMA, shifted higher. On Thursday and Friday, the converged 5 & 200 DMAs at $48.77 and $48.86, respectively, bolstered the share price. The fractional cracks through the $50 obstacle lend to the probability of a powerful run, but we'll need the combination of sector and market strength to provide the underlying momentum. The coil is tightening. If your risk portfolio allows for some speculation, you might consider taking positions near the $48 level. Keep a close watch on other related stocks like GMST, COX, UVN, V, and DIS to provide additional insight before beginning plays. Going forward, we're maintaining our protective stop at $47 and will exit if AOL closes below this mark. BUY CALL MAY-45 AOE-EI OI=16045 at $6.00 SL=4.00 BUY CALL MAY-50*AOO-EJ OI=28460 at $2.50 SL=1.25 BUY CALL JUN-45 AOE-FI OI= 205 at $7.00 SL=5.00 BUY CALL JUN-50 AOO-FJ OI= 1723 at $3.80 SL=2.25 BUY CALL JUN-55 AOO-FK OI= 5736 at $1.60 SL=0.75 Aggressive!! http://www.premierinvestor.net/oi/profile.asp?ticker=AOL LLY - Eli Lilly $82.80 (+2.70 last week) LLY discovers, develops, manufactures and sells Pharmaceutical products targeted at the diagnosis, prevention and treatment of human diseases. The company's best known commercial product is the anti-depressant Prozac, although there are numerous other lesser-known drugs that treat conditions such as Parkinson's disease, diabetes, osteoporosis along with a broad range of antibiotics. The company also conducts research to find products to treat diseases in animals and to increase the efficiency of animal food production. It's so refreshing when a play does exactly what it is supposed to. We added LLY on Thursday as a channeling play in the recovering Pharmaceutical sector. While the broader Pharmaceutical index (DRG.X) has been struggling to find its sea legs again, LLY has been in a nice consistent uptrend for the past 5 weeks. Not only that, but when you slap a regression channel on an intraday chart, you'll see the stock bouncing cleanly between the upper and lower channel lines. Friday's action was a textbook example of this, as the stock fell early to bounce several times at the $80 support level (the lower channel line was resting at $79.50) before launching higher right into the closing bell. By the time the dust had settled, LLY was resting at $82.71, a mere $0.25 below the upper channel line. Traders that managed to grab a piece of that action are grinning broadly this weekend. Not impressed with a $2.50 move? Take a look at the option prices, and you will be. The May 85 Call appreciated 75% between the low and high of the day, and that is based on actual trades. Entry points are everything! Now we wait for our next entry point. The DRG index is making a strong case for the bulls as it has clawed its way back above its 5-week ascending trendline, and this may be enough to help LLY break out above its upper channel. If we do get that sort of breakout, consider new positions as the stock clears the upper channel line (now at $83). If our channeling pattern remains intact though, look for new entries to materialize as LLY retraces to the lower channel (currently $79.82) and bounces. Note that we are raising our stop to $80 this weekend, as it looks like that level will hold firm. If you're thinking the lower channel entry point and stop loss are in conflict, remember our stops are based on closing prices. If we extend our channel line out to the end of Monday's trading, we can see it resting just above the $80 level. Now isn't that convenient? Keep an eye on the movement of the DRG.X as any sharp weakness there will likely have a deleterious effect on LLY's share price. BUY CALL MAY-80*LLY-EP OI=3511 at $4.20 SL=2.50 BUY CALL MAY-85 LLY-EQ OI=3619 at $1.75 SL=1.00 BUY CALL JUN-85 LLY-FQ OI= 604 at $3.40 SL=1.75 BUY CALL JUN-90 LLY-FR OI= 333 at $1.70 SL=0.75 BUY CALL JUL-85 LLY-GQ OI=2818 at $5.00 SL=3.00 http://www.premierinvestor.net/oi/profile.asp?ticker=LLY AA - Alcoa, Inc. $41.99 (+1.64 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. A great week for the Old Economy translated into an up week for shares of major aluminum producer Alcoa, as a rallying NYSE helped to lift the stock into 52-week high territory. It's a case of strong fundamentals making themselves apparent technically. The environment of lowered interest rates is with little doubt a favorable one for capital-intensive firms such as AA. In fact, the company recently began taking advantage of such potentially opportune times, raising over $3 billion in cash. Political factors are also playing in AA's favor, as the shutting down of smelters due to the current ongoing power concern could raise aluminum prices, thereby widening profit margins. The company also reported stellar earnings earlier this month, beating Street estimates by two pennies and growing profits by 16 percent year-over-year, a testament to effective management and cost-control. This fundamental strength has not been lost on the market, as AA has been moving in a higher in a beautiful up-trend since late last year. Now within striking distance of its all-time high of $43.62, a break above overhead resistance at $42.50 could allow conservative traders to make a play and put the stock in a position to enter bullish uncharted ground. More aggressive traders looking to enter on a dip may find support at $41.50, the 5 and 10-dma at $40.98 and $40.15, and our closing support price of $40. Confirm sector strength before making a play by keeping an eye on industry peers AL and PY. BUY CALL MAY-35 AA-EG OI= 699 at $7.10 SL=5.00 BUY CALL MAY-40*AA-EH OI=2947 at $2.90 SL=1.50 BUY CALL JUN-40 AA-FH OI= 161 at $3.90 SL=2.50 BUY CALL JUN-45 AA-FI OI= 238 at $1.50 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=AA C - Citigroup Inc. $50.91 (+1.49 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 it comes to Financial issues, a little sector sympathy goes a long way. The recent surprise rate cut of 50 basis point from the Fed has certainly helped, affecting banks stocks positively in the way that news of lowered part costs would for computer manufacturers. It's all about the cost of doing business, and with costs going down, profit margins widen and demand increases. Along with this, C has been bathing in the glow of its recent earnings report, in which the company beat Street estimates by a penny and posted what most analysts agreed were strong numbers given the economic climate of the time. To summarize the action of this past week, the past five trading sessions could be described simply as a period of consolidation between $48 and $50, culminating in a potential breakout move. While we would have liked to see more volume on Friday's advance of 2.83 percent on less than 80% of the average daily volume, the move did take the stock above its 100-dma at $50.14. With this level taken out, the last moving average left to surpass is the 200-dma, now at $51.56. A break above this level with conviction would allow conservative players to take a position, but make sure that AMEX's Banking Index (BIX) confirms upward momentum. To protect our profits, we are moving our closing stop price up from $48 to $49. Pullbacks intra-day to support at the 100-dma, $50, the 5 and 10-dma (at $49.38 and $49.15) along with $49 may could allow higher risk players to him in. BUY CALL MAY-45 C-EI OI= 5799 at $6.50 SL=4.50 BUY CALL MAY-50*C-EJ OI=24024 at $2.40 SL=1.25 BUY CALL JUN-50 C-FJ OI=14946 at $3.40 SL=1.75 BUY CALL JUN-55 C-FK OI=18006 at $1.20 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=C ********** 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 04-29-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/042901_4.asp ************* NEW PUT PLAYS ************* AMD - Advanced Micro Devices $30.00 (+1.00 last week) Best known for their AMD-K6 microprocessors that compete against the industry-leading Intel Pentium microprocessors in the increasingly competitive personal computer (PC) market, AMD is a diversified semiconductor manufacturer. In addition, the company produces a wide variety of industry-standard digital-integrated circuits that are used in applications such as telecommunications equipment, data and network communications equipment, consumer electronics, and servers. AMD also produces Flash memory devices, embedded processors and networking products. A solid earnings report on April 18th galvanized a series of analysts to change their ratings on AMD, launching the stock into its most recent uptrend. Beginning with Salomon Smith Barney (Outperform to Buy) and Prudential (Hold to Strong Buy) on April 19th, and followed up last Wednesday with a new Buy rating from Thomas Weisel, AMD is benefiting from the belief that they are continuing to take market share from Intel. Combine that with a sharp rise in the Semiconductor sector, and you can see why the stock is up more than 50% in the past 3 weeks. So what is AMD doing on the put list this weekend? File it under the category of "Too Far, Too Fast", and you can see the stock is about to run into trouble. First off, there is some formidable resistance near $30, and the bulls will really need to charge hard to break through this level. With the Semiconductor index (SOX.X) struggling with the 650 resistance level, we think AMD is due for a retracement of its recent gains. The big earnings announcements are now over, leaving few catalysts to boost stocks from here until the Fed pronounces their next interest rate decision in mid-May. With that in mind, this is an aggressive play with a very tight stop, intended to capture profits from any near-term weakness as AMD retraces back into the $24-25 range. Aggressive traders can consider new positions near current levels, but need to observe their stops. We are placing ours at $30.50. More conservative players will want to see weakness develop before playing. Use a drop through the $28.50 intraday support level as your entry trigger. Use the performance of the SOX.X as a way to gauge the strength or weakness of the overall sector. If the broad sector resumes its upward trend, that will be a strong hint to stand aside, as AMD will likely not be far behind. BUY PUT MAY-30*AMD-QF OI= 911 at $2.30 SL=1.25 BUY PUT MAY-25 AMD-QE OI=20704 at $0.70 SL=0.00 Aggressive!! http://www.premierinvestor.net/oi/profile.asp?ticker=AMD PDLI - Protein Design Labs Inc. $59.13 (+2.90 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. For shareholders of PDLI, it's been a roller-coaster ride this week, as declines in the early going led to a bounce mid-week, ending the past five sessions near where it began the previous week. The company is known for producing anti-kidney rejection drug Zenapax, the first humanized antibody product. As part of the Genomics sector, traders are attracted to PDLI's price movement. The potentially wild swings in this stock makes this an attractive play for seasoned options players. A number of factors could add to increased volatility in the coming days, as the company reports earnings this coming week on May 2nd. As per our sell rules we will drop coverage of this play ahead of that date but until then, there is enough time to potentially profit from this situation. Friday's gain of 7.51 percent seemed to be without conviction, as the stock advanced on less than 57 percent of the average daily volume. There could be good reason for this however, as the 100-dma (currently sitting at $61.27) looms just overhead. This is a moving average that PDLI has been unable to surpass since late last year. Nonetheless, this is an aggressive put play, since we are selling into the strength of PDLI. We are placing a protective stop at the $61 level. A close above this point could indicate to us that PDLI may move higher, leaving us with little choice but to step aside. A failed rally as the stock approaches resistance at $60, $61 and the 100-dma may allow aggressive traders to take a position. For an entry on weakness, wait for the stock to break below $57 on volume before jumping in. Even then, make sure that sector sentiment is on your side by tracking AMEX's Biotech Index (BTK). BUY PUT MAY-60*PQI-QL OI=324 at $7.20 SL=5.00 BUY PUT MAY-55 PQI-QK OI=156 at $4.60 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=PDLI SGR - Shaw Group Inc. $57.50 (-2.46 last week) The Shaw Group Inc. is the largest supplier of fabricated piping systems and services in the world, with unparalleled experience and expertise in the global power generation market. Shaw distinguishes itself by offering comprehensive solutions consisting of integrated engineering and design, pipe fabrication, construction and maintenance services and the manufacture of specialty pipe fittings and supports to the power generation, crude oil refining, chemical and petrochemical processing and oil & gas exploration and production industries. Having had a nice earnings run in the month of April, it appears now that SGR is ready to take a breather. Despite a strong rally in three-letter Old Economy stocks this past week, shares of the leading pipe supplier pulled back, displaying weakness relative to market conditions. It appears that the stellar earnings report, in which the company grew sales by 95 percent year-over-year and earnings by 68 percent, had already been priced in by the time of the announcement. Even with a backlog of over $3 billion due to strong demand in the consumer power market, traders were much more eager to sell than to buy. From trough to peak, SGR went from $45 in the beginning of April to a high of $63, so profit taking on the part of nervous bulls is a factor working in our favor. Having failed to take out resistance overhead at $63, the stochastics have already crossed over bearishly and have started to move lower. With the 5 and 10-dma converged around the $59.60 area, look for this level to potentially act as formidable resistance, allowing higher-risk players to take a position as the stock price approaches this level. Additional resistance can be found horizontally at $58.50 and our stop price of $59. In making an aggressive play, make sure that SGR continues to close below our stop, as a close above this level would leave us with little choice but to drop the play. For the more risk averse, a bearish plunge below $57 with conviction could be the signal to jump in, but only if sector sisters MLI and KMT are also moving lower. BUY CALL MAY-60*SGR-QL OI=742 at $5.30 SL=3.50 BUY CALL MAY-55 SGR-QK OI=271 at $2.70 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=SGR ***************** CURRENT PUT PLAYS ***************** VRTS - Veritas Software Corp. $58.10 (-6.20 last 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. While VRTS rallied on Friday with the Nasdaq, the stock still formed a pattern of lower highs this week at $65, $62.70 and $59, and the bearish head and shoulders pattern formed in April could result in a precipitous drop with another failed rally. JP Morgan released news that they had started coverage of VRTS on Friday as a long term buy with a price target of $67, and this may have helped to bolster the stock price. Nonetheless, VRTS has rallied nearly 100% from its 52-week low of $38.60 on April 4th, and additional profit taking is highly likely. VRSN is currently resting right on its 50-dma of $58, and a failed rally from this point could present a possible entry level. Additionally, a break below $57 with heavy volume could be a more conservative entry point, particularly if the Nasdaq and GSO.X are falling. Ideally, we would like to see a strong break below $55, which could conceivably lead VRSN to the next major support level at $50. Monitor other software stocks such as SEBL and MSFT, in addition to data storage cohorts such as EMC and BRCD, and keep stops at $61. Be prepared to end the play if VRTS closes above $61. BUY PUT MAY-60* VIV-QL OI=15258 at $7.30 SL=5.00 BUY PUT MAY-55 VIV-QK OI= 6074 at $4.80 SL=3.00 http://www.premierinvestor.net/oi/profile.asp?ticker=VRTS CIEN - Ciena Corp $50.29 (-16.80 last week) CIENA Corporation's market-leading optical networking systems form the core for the new era of networks and services worldwide. Ciena's LightWork architecture enables next- generation optical services to transmit signals simultaneously over the same circuit. This multiplexing system changes the fundamental economics of service-provider networks by simplifying the network and reducing the cost to operate it. About 45% of sales come from outside the US markets. What a difference a week can make when it comes to the price of a tech stock. On April 20th, CIEN peaked at $70.89 and the outlook was very positive. Investors had recently taken the share price off its 52-week low ($33.50), giving it a shot of adrenaline as the NASDAQ was resurrecting itself. But as it's been lately, the rallies are short-lived; the traders' worrisome reactions to the economic data, analyst comments, and rumors continue to send stocks into a flurry of volatile activity. On news of numerous downgrades throughout the communications- equipment sector, CIEN started its downward spiral. On the week, CIEN lost $16.80, or a whopping 25% and shattered the first level of support at the $55 level. The strong sell-off, amid the NASDAQ's attempts to break to the upside of its channel, indicates CIEN may not have seen its bottom yet. Other leaders in the industry like Corning (GLW), Nortel (NT), Cisco (CSCO), and even Sycamore Networks (SCMR) are also falling to the wayside of investors' interest. GLW's woeful earnings' tale and lowered expectations combined with NT's almost single-digit status and CSCO's news that it will discontinue selling its most expensive product due to weak sales certainly doesn’t offer the incentive to go long. If you're interested in jumping into the negative momentum next week, look for heavy downside volume to take CIEN through the 30-dma ($50.20). An aggressive rollover from the upper resistance at the 5 & 10 DMAs ($55.30, $57.36) could also provide enterprising opportunities, but please consider locking in gains as CIEN approaches the current support instead of trying to get that home run. We believe a breakdown of the $50 level is critical to the play's overall success; and therefore, have lowered our protective stop to $52. We will drop coverage if the share price violates this mark on a CLOSE. Ciena is schedule to report earnings on May 17th, before the opening bell. BUY PUT MAY-55 EUQ-QK OI=5191 at $9.50 SL=6.50 BUY PUT MAY-50*EUQ-QJ OI=3409 at $6.70 SL=4.75 BUY PUT MAY-45 EUQ-QI OI=3937 at $4.60 SL=2.75 BUY PUT MAY-40 EUQ-QH OI=3911 at $3.00 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=CIEN PMCS - PMC-Sierra, Inc. $37.95 (-6.86 last 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. Still suffering from the sector weakness and no visibility for the rest of the year, PMCS just can't seem to do anything but go down. While the short-lived April rally gave new hope to bulls, there is just no good news to keep the stock afloat. Earnings are dismal, inventories are still high, and the company doesn't know when things are going to improve. Of course, Joe Osha didn't help by downgrading the stock last week along with AMCC who followed up with a dismal conference call. With that being said, it is interesting that the stock seemed to find support last week near the $35 level, as its daily highs continued to creep lower. That sounds like a bearish wedge, now doesn't it? It looks like one too, with the descending trendline now sitting near $38.50. The broader Networking and Semiconductor sectors haven't been helping matters either, as they continue to give back their artificial interest rate reduction induced gains. Both the Networking index (NWX.X) and the Semiconductor index (SOX.X) are showing similar bearish wedges, and odds favor a break to the downside in the next few sessions. Aggressive traders will want to keep an eye on the $39 level. This is still the location of our stop, and an intraday rollover near this level would provide an attractive entry point. Broad market strength on Monday should provide those aggressive entries, while conservative traders will get their chance to play as PMCS falls through the $35 support level. BUY PUT MAY-40*SQL-QH OI=1133 at $5.90 SL=4.00 BUY PUT MAY-35 SQL-QG OI=2822 at $3.30 SL=1.75 BUY PUT MAY-30 SQL-QF OI=4470 at $1.65 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=PMCS VTSS - Vitesse Semiconductor $30.95 (-5.75 last week) Vitesse Semiconductor is a supplier of high-performance integrated circuits targeted at systems manufacturers in the communication and automatic test equipment (ATE) markets. A leading manufacturer of gallium arsenide (GaAs) integrated circuits, a type of IC that performs at higher speeds than silicon chips. The company offers several products that address the needs of high-performance communications systems at data rates for the SONET, ATM, IP, Fibre Channel and Gigabit Ethernet markets. VTSS also provides gate arrays and custom products that offer a combination of high complexity, low power dissipation and high speed for the ATE market. Bouncing strongly off the lows of early this month, Chip stocks appear now to be taking a pause. The Fed's surprise rate cut of 50 basis points helped to give Semiconductor issues a pop, as such companies are usually capital-intensive, thereby benefiting from lower interest rates. Whether this move will sustain itself at this point is the question. While companies such as Intel have provided bullish comments going forward, earnings reports for the most part have been mixed in relation to analyst estimates, due to a continued lack of visibility. As well, most companies reported that sales numbers were weak due to decreased demand. Which is why Merrill Lynch downgraded the Chip sector this week, dropping VTSS from NT Accumulate to a NT Neutral rating. The problems leading to the decline of the Chip sector, namely historically weak demand, have not changed, so it has been argued that the recent rally could be optimism on the part of hopeful bulls in looking for a bottom. With that in mind, VTSS has been the under-performer in its sector, especially technically. While many Semiconductor issues were able to make it above their 50-dma, VTSS struggled with this moving average ($35.70). A weak earnings report is one reason for this, as the company managed to only meet Street estimates of 10 cents and like most Chip stocks, cited weak revenue numbers as the main culprit. Now below its 5-dma ($31.56), failed rallies at this level along with resistance at $32 and our closing stop price of $33 may allow aggressive traders to take a position. For the risk averse, if VTSS is unable to hold its 10-dma at $30.88, this could be a potential entry point, provided that the Philadelphia Semiconductor Index (SOX) confirms sector weakness. BUY PUT MAY-30*VQT-QF OI=1496 at $3.30 SL=1.75 BUY PUT MAY-25 VQT-QE OI= 580 at $1.40 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=VTSS ***** LEAPS ***** Buy Now!! The Recession Is Over! By Mark Phillips Contact Support Strange as it seems, that was the message being broadcast by CNBC on Friday. While they didn't quite state it that way, it seemed every "expert" they spoke with was pointing at the stronger than expected economic numbers and proclaiming that we wouldn't have an official recession. Excuse me?? What happened to the string of "experts" that were claiming just a few short weeks ago that there would NOT be a second half recovery for the economy? For the record, the official definition of a recession is 2 consecutive quarters of negative GDP growth. The preliminary first quarter GDP numbers came in at 2% on Friday, an increase over the 1% figure posted for the fourth quarter of 2000, leading some to claim that the economy has turned the corner and the Fed has actually managed to engineer a soft landing. While that may in fact be true, color me unconvinced. Needless to say, I'll be carefully watching the string of economic reports over the next 2 weeks for confirmation. The anchor leg to the economy is still the almighty consumer, who continues to buy big ticket items like cars and houses, as demonstrated by the jump in both auto sales and housing starts. With unemployment on the rise (due to the seemingly endless string of layoff announcements), we could see renewed weakness in the months ahead as the consumer becomes less willing to spend. All right. Enough about the economy, as we have plenty of other developments to cover. First up, the broader markets. Largely driven by the surprisingly upbeat economic reports covered above, the broad markets recovered midweek and closed out the week with a strong finish. Old economy stocks led the charge with the DJIA moving up to close above the 10,800 level. Although it didn't manage to close positive for the week, the NASDAQ did manage to hold above the 2000 level. Buyers continued to jockey for position, on expectations that the Fed will continue to aggressively cut interest rates, further fueling the market's advance. The bears have been pretty quiet lately...could it be they are busy preparing to spring another trap on the bulls like they did in late January? As I've been alluding to for a few weeks now, I think we've seen the lows in the market, but I have this sneaking suspicion that the bears are going to have one last hurrah before going back into hibernation. The VIX has been grabbing my attention lately as well. Notice that it has now dropped below 28 (27.77 as of Friday's close) and is approaching the lower end of the range (24-36) it has occupied for the past 6 months. It's lower Bollinger band has dropped off to 25.50, but I wouldn't rule out one more excursion into the 35-40 range before settling back into its historically normal range between 20-30. On the news front we got a rare gift from Genzyme General (NASDAQ:GENZ) last Wednesday, as the company announced a 2-for-1 stock split. Investors cheered as the stock rallied all the way to $110 on Friday before pulling back slightly to close out the week at a new all time closing high of $107.51. The stock has been a stellar performer, consistently trending higher for the past year, while the broader Biotech sector continues decline. Amazing what can happen when you actually grow revenues with real products and show a profit. While on the topic of GENZ, I uncovered a mistake in the portfolio this week. When we opened the position, the 2002 strike we selected was $85 (symbol YGZ-AQ). I guess my feeble eyes aren't what they used to be, as I entered the symbol YGZ-AO into the portfolio list. The prices entered were already correct, and the symbol has now been corrected. I neglected to mention it last week, but we have another play that blessed investors with a 2-for-1 split. On April 17th, Washington Mutual (NYSE:WM) announced the dividend which will be payable on May 15th. Keep an eye on the stock as the split date approaches. A rally prior to the event might provide a good opportunity to lock in your profits and then look for another opportunity to enter the play. With the markets strong performance last week, our portfolio was once again rewarded, prompting me to raise stops on GENZ, Wal-Mart (NYSE:WMT), Nordstrom Inc. (NYSE:JWN), Goldman Sachs (NYSE:GS) and Nokia (NYSE:NOK). There is no sense letting those profits melt away if the bears should happen to reappear. See the portfolio below for details. Along a similar vein, while we got entry points on a couple of our Watchlist plays, it looks like we need to ratchet entry targets upwards on a General Electric (NYSE:GE) and Siebel Systems (NASDAQ:SEBL), due to their strong earnings reports. Check the Watchlist and make note of the changes to targeted strikes as well. With Dell Computer (NASDAQ:DELL) finally giving us an entry point this week, the old playlist has now been reduced to only Calpine (NYSE:CPN). That means our transition is now almost complete. I have a couple more enhancements to implement, but no time to cover them this week. Full details in next week's issue, I promise. So where do we go from here? The markets made a convincing case that they want to go higher, but my gut tells me we are due for another pullback. I wouldn't be in a hurry to jump into new plays at this juncture unless they come back to our predefined entry levels. The broad market as well as many of our plays have advanced considerably since the beginning of April, and I don't think the bears are quite ready to go back into hibernation. We could continue up into the May FOMC meeting in anticipation of more interest rate cuts, but that isn't where I'd be putting my money. Don't forget the market's tendency to trade flat to down as the April earnings season winds down. Chasing stocks higher at this point could give you the dubious distinction of buying near the highs. Remember to stick to your 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 $ 8.90 69.52% JAN-2003 $ 25 VDL-AE $ 5.63 $ 9.00 59.86% CPN 01/21/01 JAN-2002 $ 40 YLN-AH $10.50 $20.30 93.33% JAN-2003 $ 40 OLB-AH $15.38 $24.90 61.95% 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-AQ $24.50 $35.80 46.12% $ 99 '03 $ 90 OZG-AR $27.75 $43.60 57.12% $ 99 SWS 03/22/01 '02 $ 18 YWF-AT $ 4.10 $ 6.40 56.10% $ 19 '03 $ 20 VWZ-AD $ 5.00 $ 7.20 44.00% $ 19 WM 03/22/01 '02 $ 50 WWI-AJ $ 6.00 $ 6.90 15.00% $ 48 '03 $ 50 VWI-AJ $ 9.20 $10.40 13.04% $ 48 WMT 03/23/01 '02 $ 50 WWT-AJ $ 7.00 $ 9.30 32.86% $ 49 '03 $ 50 VWT-AJ $11.00 $14.00 27.27% $ 49 JWN 03/30/01 '02 $ 20 WNZ-AD $ 1.65 $ 2.45 48.48% $ 16 '03 $ 20 VNZ-AD $ 3.30 $ 3.80 15.15% $ 16 GS 04/05/01 '02 $ 90 WSD-AR $14.00 $18.60 32.86% $ 87 '03 $ 90 VSD-AR $20.50 $27.70 35.12% $ 87 MU 04/05/01 '02 $ 40 WGY-AH $10.60 $13.70 29.25% $ 38 '03 $ 40 VGY-AH $14.80 $19.40 31.08% $ 38 NSM 04/05/01 '02 $ 25 WUN-AE $ 5.50 $ 8.50 54.55% $ 24 '03 $ 30 VSN-AF $ 7.20 $10.50 45.83% $ 24 NOK 04/06/01 '02 $ 25 WIK-AE $ 4.70 $10.40 121.28% $ 27 '03 $ 25 VOK-AE $ 7.00 $12.60 80.00% $ 27 FON 04/09/01 '02 $ 25 WO -AE $ 2.80 $ 2.90 3.57% $ 19 '03 $ 25 VN -AE $ 4.40 $ 4.80 9.09% $ 19 QQQ 04/25/01 '02 $ 40 WD -AN $11.10 $11.10 0.00% $ 39 '03 $ 45 VZQ-AS $12.30 $12.30 0.00% $ 39 DELL 04/27/01 '02 $ 25 WDQ-AE $ 6.20 $ 6.20 0.00% $ 23 '03 $ 25 VDL-AE $ 9.00 $ 9.00 0.00% $ 23 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CPN 03/18/01 $46-47 JAN-2002 $ 45 YLN-AI JAN-2003 $ 50 OLB-AJ GE 03/25/01 $45-46 JAN-2002 $ 50 WGE-AJ JAN-2003 $ 50 VGE-AJ 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 $38 JAN-2002 $ 40 YDS-AH JAN-2003 $ 40 OIE-AH VRSN 04/29/01 $42-44 JAN-2002 $ 50 YXO-AJ JAN-2003 $ 50 OVX-AJ LRCX 04/29/01 $25 JAN-2002 $ 30 WMJ-AF JAN-2003 $ 30 VPC-AF New Portfolio Plays QQQ - Nasdaq-100 Trust $44.75 Defying the bears last week, the NASDAQ Composite managed to hold above the critical 2000 support level and gradually creep higher on Thursday and Friday. While not a stellar performance, it was good enough to give us our entry point on the QQQ on Wednesday. The midday bounce at $44 came on increasing volume, as investors decided that the economy wasn't as bad off as they originally thought. The gap left from the Fed's surprise interest rate cut is still sitting unfilled, and we would be surprised if it isn't filled over the next couple weeks, providing one more chance to get into the play at an attractive level. However, the market showed impressive resilience and who are we to argue. Unfortunately when I moved the entry target up last week, I neglected to change the targeted 2002 strike from $40 to $45. Either one will work, but the $45 strike (symbol WD-AS) is more consistent with our philosophy of buying LEAPS slightly out of the money. If you are still looking to enter the play in the next couple weeks on any weakness, I would target the $45 strike for both 2002 and 2003. Our stop for the play is initially set at $39. BUY LEAP JAN-2002 $40.00 WD -AN $11.10 BUY LEAP JAN-2003 $45.00 VZQ-AS $12.30 DELL - Dell Computer $26.00 After soaring as high as $31 the day after Uncle Alan's surprise rate cut, DELL was looking like it wasn't going to let us onboard before trading even higher. Proving the wisdom of our entry strategy -- waiting to buy on the pullback -- DELL kindly did just that on Friday morning, just kissing the $25 level (also the site of the 50-dma) at the open before tenuously recovering throughout the day. Mirroring the NASDAQ, the stock stutter-stepped its way higher throughout the day, and we diligently took our entry. Due to its dominant position in the PC industry, DELL is well positioned to profit from the economic recovery when it truly appears, and we will get a much better idea of the health of the company when they report their earnings on May 17th. I made a strike selection error on this play as well, neglecting to move the targeted strikes from $25 to $30. We took our position in the $25 strikes for both 2002 and 2003, but would recommend the $30 strikes (symbols WDQ-AF and VDL-AF respectively) for new positions. We could see some more weakness in the technology sector over the next week or two, possibly providing a couple more entry opportunities near the $25 level. Given the still tenuous nature of the stock's recovery, we are placing a tight stop at $23 BUY LEAP JAN-2002 $25.00 WDQ-AE $6.20 BUY LEAP JAN-2003 $25.00 VN -AE $9.00 New Watchlist Plays VRSN - Verisign, Inc. $51.91 Continuing along its impressive growth path, VRSN stunned the markets Thursday night with a stellar earnings report, beating estimates by a dime. That's a 76% upside surprise -- not too shabby in light of the poor results from so many other Internet-related companies. The interesting thing is that the estimates had been revised sharply downward not too long ago. Did the company guide estimates downwards so that they could be certain of an upside surprise? Regardless of the answer to that, the provider of Internet authentication and payment security services had a glowing report in store for analysts, complete with revenue growth north of 600% year-over year. Thomas Weisel jumped in with an upgrade from Buy to Strong Buy on Friday, helping the stock to tack on a 12% gain to round out a turbulent week. Needless to say, we don't want to jump in while adrenaline is still pumping through the bulls' veins. Rather, we will wait for weakness on the NASDAQ to drag the stock back down to support in the $42-44 area before putting our money at risk. Clearly the company's business has remained robust through the recent technology slowdown, and the stock should be a stellar performer in the months ahead. BUY LEAP JAN-2002 $50.00 YXO-AJ BUY LEAP JAN-2003 $50.00 OVX-AJ LRCX - Lam Research Corp.$29.03 As is the normal pattern towards the end of an economic downturn, Chip stocks have been enjoying a bit of buying interest over the past couple weeks. While that is encouraging, I'm not entirely convinced by the economic reports that came out last week. By Friday, the talking heads on CNBC were claiming that with stronger than expected Durable Goods Orders, record high Housing Starts and GDP growth back up at 2%, we are no longer going to have a real recession. Despite my skepticism, the fact remains that Semiconductor Equipment Manufacturers like LRCX will lead the way as the economy turns the corner. In fact, LRCX appears to have bottomed last December and since then the stock has doubled in price. Earnings came in a few pennies shy of estimates 2 weeks ago, but investor have still been gobbling up the stock. It looks like there will be some consolidation in the near term before the stock resumes its upward trend, and we want to be lying in wait when the time is right. There is a fair amount of congestion between $23-27, so we will place our entry target right in the middle. Look for a dip to the $25 level followed by bounce to get you into the play. BUY LEAP JAN-2002 $30.00 YMJ-AF BUY LEAP JAN-2003 $30.00 VPC-AF Drops None ********** 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 04-29-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/042901_5.asp ************* COVERED CALLS ************* Writing Covered-Calls: A Popular Technique By Mark Wnetrzak One of our readers inquired about the use of the covered-call strategy by professional traders and fund managers. Indeed, buying stock and writing covered-calls is a well-known hedge strategy among institutions and mutual fund managers suggest that the risk/reward characteristics of this approach can often be much better than owning the stock or speculating in options. There are a number or reasons why professional option writers use the covered-call strategy to achieve above-average returns. The motivation to sell call options comes from the fact that they are generally overpriced. Whether due to supply and demand factors or simple speculation, it's common for traders to pay more for call options than they are worth. When options are expensive, option writers benefit by receiving larger time values. Even a relatively small difference in premium can result in a 3% to 5% increase in the annual returns from this strategy. The basic techniques that fund managers use when implementing this strategy can be beneficial to retail investors as well. One of the most common traits is selling short-term options to obtain higher relative time values. In most cases, longer-term series have much less premium (proportionally) in the option price due to a smaller demand from traders. Fund and pension plan buyers generally select high quality stocks and sell in-the-money options for increased probability of assignment. When compared to outright ownership, this method is almost equal to "pre-selling" the issue at a profit. In covered-write positions, the owner retains any dividends issued on the stock before the option is exercised. Profits from regular dividends can increase the annual return of the position as much as 5%. For this reason, hedge-fund managers sell options on stocks with moderate to large dividends. In some instances, the early exercise of options (dividend capturing) will prevent an investor from receiving this added premium but the effect can be offset by reinvesting the funds in another profitable position. Professionals also use the popular "buy-write" method when placing orders. Designating the net cost of the combined position when the order is placed eliminates price risk and affords the fund manager with an opportunity to negotiate a favorable basis. A block trader will often agree to these terms in order to unload large amounts of the stock with only a small premium concession from the current market price. Institutional traders generally utilize only the most successful long-term strategies to guarantee a consistent rate of return. Any method that produces less than profitable results will inevitably lower their supply of funds. The covered-call strategy is commonly used to generate moderate compound returns over a complete market cycle while avoiding the potential of large portfolio losses. It appears this may be the safest way to outperform all but the most aggressive techniques in the majority of market conditions. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield LMNE 5.22 4.51 MAY 5.00 1.30 $ 0.59 16.4% MRVC 8.80 8.00 MAY 7.50 2.15 *$ 0.85 13.9% MFNX 5.25 4.75 MAY 5.00 0.95 $ 0.45 11.4% BORL 7.99 9.12 MAY 7.50 1.05 *$ 0.56 8.8% ASTE 16.05 19.00 MAY 15.00 2.10 *$ 1.05 8.2% JBL 26.00 28.06 MAY 22.50 5.00 *$ 1.50 6.2% EXAR 30.15 28.41 MAY 25.00 6.50 *$ 1.35 6.2% EXFO 31.95 33.05 MAY 25.00 8.60 *$ 1.65 6.1% SBYN 13.75 15.00 MAY 10.00 4.40 *$ 0.65 6.0% AHAA 21.21 24.36 MAY 17.50 4.80 *$ 1.09 5.8% EMIS 18.20 16.25 MAY 15.00 4.10 *$ 0.90 5.5% ZIGO 24.74 37.10 MAY 17.50 8.20 *$ 0.96 5.0% NXCD 11.35 9.40 MAY 10.00 1.85 $ -0.10 0.0% *$ = Stock price is above the sold striking price. Comments: Amazing, the Markets didn't collapse! Is that signaling a change of character? Are we really putting in a bottom? Time will tell. Nextcard (NASDAQ:NXCD) suffered a post-earnings drop and is now at a key moment. A move towards the March low may be forthcoming. Jabil Circuit (NYSE:JBL) appears to be headed for a test of support near $26. Astec Industries (NASDAQ:ASTE) is causing a bit of call- buying regret - I don't even want to talk about Zygo Corp. (NASDAQ: ZIGO). Make sure you really want to own Luminent (NASDAQ:LMNE), which just reported earnings, and Metromedia Fiber Network (NASDAQ: MFNX), which delayed their earnings report until next week. NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ENMD 20.26 MAY 17.50 QMA EW 3.70 730 16.56 21 8.2% FDRY 13.35 MAY 10.00 OUJ EB 3.70 1080 9.65 21 5.3% ILUM 29.13 MAY 25.00 ILU EE 5.00 71 24.13 21 5.2% ISIL 31.74 MAY 25.00 UFH EE 7.60 478 24.14 21 5.2% MU 44.07 MAY 37.50 MU ET 8.00 4134 36.07 21 5.7% PVTL 24.13 MAY 20.00 QFK ED 4.80 3 19.33 21 5.0% SRNA 18.81 MAY 15.00 NHU EC 4.50 203 14.31 21 7.0% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ENMD 20.26 MAY 17.50 QMA EW 3.70 730 16.56 21 8.2% SRNA 18.81 MAY 15.00 NHU EC 4.50 203 14.31 21 7.0% MU 44.07 MAY 37.50 MU ET 8.00 4134 36.07 21 5.7% FDRY 13.35 MAY 10.00 OUJ EB 3.70 1080 9.65 21 5.3% ILUM 29.13 MAY 25.00 ILU EE 5.00 71 24.13 21 5.2% ISIL 31.74 MAY 25.00 UFH EE 7.60 478 24.14 21 5.2% PVTL 24.13 MAY 20.00 QFK ED 4.80 3 19.33 21 5.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ENMD - EntreMed $20.26 *** New Drug Speculation! *** EntreMed (NASDAQ:ENMD), The Angiogenesis Company, is a clinical- stage biopharmaceutical company emphasizing antiangiogenesis therapeutics that inhibit abnormal blood vessel growth associated with a broad range of diseases such as cancer, blindness and atherosclerosis. The company's strategy is to accelerate development of its core technologies through collaborations and sponsored research programs with university medical departments, research companies and government laboratories. ENMD's leading drug candidate, Panzem(TM), is currently in Phase II clinical trials for prostate cancer and multiple myeloma. Thursday, ENMD announced the results of a joint effort by its scientists and scientists at the American Red Cross. The study represents the first scientific journal publication by EntreMed scientists on Tissue Factor Pathway Inhibitor (TFPI), a naturally occurring anticoagulant molecule. Apparently, Investors were pleased as the stock rallied strongly on Friday, supported by heavy volume. A reasonable short-term entry point from which to speculate on EntreMed's future. Due diligence, as always, is mandatory! MAY 17.50 QMA EW LB=3.70 OI=730 CB=16.56 DE=21 TY=8.2% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=ENMD ***** FDRY - Foundry Networks $13.35 *** Bottom Fishing! *** Foundry Networks (NASDAQ:FDRY) is a leader in high-performance, end-to-end switching and routing solutions, including Internet routers, Layer 3 switches and Layer 4-7 Internet traffic and content management switches. Foundry products are installed in the world's largest ISPs, including AOL (NYSE:AOL), EarthLink (NASDAQ:ELNK), AT&T WorldNet, MSN and Cable & Wireless (NYSE:CWP). Foundry Networks met reduced estimates this week, reporting net revenue of $82.6 million and pro forma net income of $5.3 million, or $0.04 per diluted share. Company executives were cautiously optimistic about the future and said they expected sales to rise, which produced an upgrade from Merrill Lynch. Investors were also pleased as the stock surged $3 from the Wednesday open. This position offers a favorable cost basis for those investors who believe in Foundry Networks' future. MAY 10.00 OUJ EB LB=3.70 OI=1080 CB=9.65 DE=21 TY=5.3% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=FDRY ***** ILUM - Illuminet $29.13 *** Bracing for a Rally? *** Illuminet (NASDAQ:ILUM) is a leading provider of advanced nation- wide signaling and intelligent network services to the communi- cations industry. Illuminet specializes in SS7 network services and intelligent network solutions for services. The company also provides prepaid wireless services, including real-time account management, through its subsidiary National Telemanagement Corp., based in Dallas, TX. Illuminet beat expectations this week, reporting revenues of $44.5 million and net income of $9.0 million or $0.27 per diluted share. Growth in the quarter was driven by increased demand for the company's core business of network services from a diverse base of established customers. It appears those investors who sold in early April were a bit premature. A conservative entry point on a stock that is moving above its consolidation-area resistance. MAY 25.00 ILU EE LB=5.00 OI=71 CB=24.13 DE=21 TY=5.2% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=ILUM ***** ISIL - Intersil $31.74 *** Earnings Rally! *** Intersil (NASDAQ:ISIL) is a leading supplier of semiconductors, reference designs and software for wireless access and communi- cations analog markets. Intersil applies analog, mixed-signal and radio frequency (RF) expertise to the development of products tailored for high-growth communications markets. On Wednesday, April 25, ISIL reported 1st-quarter net income of $8.1 million, or $0.07 a share, beating the consensus estimate by 2 cents. The company reported 1st-quarter revenues of $127.8 million. ISIL did "warn" that revenue would be about 5% to 8% lower next quarter with flat margins. Investors pushed the stock over $6 higher and the near-term negatives appear to be already "price-in." We favor the bullish breakout above the 150-dma on heavy volume, though we prefer a cost basis closer to technical support. MAY 25.00 UFH EE LB=7.60 OI=478 CB=24.14 DE=21 TY=5.2% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=ISIL ***** MU - Micron Technology $44.07 *** Trading Range *** Micron Technology (NYSE:MU) and its subsidiaries manufacture and market DRAMs, very fast SRAMs, Flash Memory, other semiconductor components, and memory modules. In March, MU reported earnings showing a net loss from continuing operations of $4.1 million, or $0.01 per share, slightly exceeding estimates. The company is selling its PC unit, Micron Electronics (NASDAQ:MUEI) and is buying a Web-hosting company. Recently, Salomon Smith Barney upgraded several chip stocks, including Micron, and said that the chip sector can't get much worse. Micron rallied strongly on the news (and the surprise FED rate cut) and has moved into a new trading range on improving technicals. With the current bullish momentum in the semiconductor sector, this position offers a reasonable entry point as Micron continues to forge a Stage I base. MAY 37.50 MU ET LB=8.00 OI=4134 CB=36.07 DE=21 TY=5.7% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=MU ***** PVTL - Pivotal $24.13 *** Rally Mode *** Pivotal (NASDAQ:PVTL) enables large and medium-sized businesses worldwide to make, serve, and manage customers with superior speed and efficiency by providing XML-based demand chain networks that deliver personalized customer experiences across every touch point in real-time. Pivotal reported solid earnings on April 19, with net revenues increasing 82% to $26.4 million in the 3rd-quarter. Net income excluding amortization of goodwill was $405,000 or 2 cents per share. The company shipped several new products as well as developed several alliances with additional systems integrators, according to Pivotal's CEO. The stock has rallied strongly as investors appear to be looking to the future. A new customer relationship management distribution and services agree- ment with China Hewlett-Packard could bode well for the future, barring any more P3 - fighter entanglements. MAY 20.00 QFK ED LB=4.80 OI=3 CB=19.33 DE=21 TY=5.0% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=PVTL ***** SRNA - Serena Software $18.81 *** Technicals Only! *** Serena Software (NASDAQ:SRNA) is an industry leading provider of software infrastructure products and consulting best practices that automate enterprise software and Web content changes. SRNA's eBusiness Infrastructure Change Management strategy manages the change process throughout the entire eBusiness lifecycle, across multiple platforms -- from the mainframe to the Web. Serena recently announced an alliance with Compaq Computer (NYSE:CPQ), to initiate joint marketing programs. We simply favor the current bullish trend as the stock has rallied above its 50 dma on heavy volume. Excellent short-term speculation for those investors who retain a bullish outlook on the company. MAY 15.00 NHU EC LB=4.50 OI=203 CB=14.31 DE=21 TY=7.0% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=SRNA ***** ***************** 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 MCDT 25.99 MAY 22.50 DXZ EX 4.80 451 21.19 21 9.0% UCOMA 15.39 MAY 12.50 QUW EV 3.60 907 11.79 21 8.7% EMLX 34.96 MAY 25.00 UMQ EE 11.00 574 23.96 21 6.3% CBST 30.62 MAY 25.00 UTU EE 6.60 187 24.02 21 5.9% QLGC 41.44 MAY 30.00 QLC EF 12.40 1242 29.04 21 4.8% PFCB 38.09 MAY 35.00 HUO EG 4.10 533 33.99 21 4.3% *********************** CONSERVATIVE NAKED PUTS *********************** Success Basics: Trading Systems and Position Management By Ray Cummins The majority of professional market players use a trading system to initiate their plays and exploit each individual position for maximum return. Actually, there are many common traits shared by top traders but one concept that is prevalent among almost every expert is discipline and that characteristic comes from utilizing a sound methodology in each transaction. In addition, a reliable system will improve a trader's psychology and confidence and this in turn will help him (or her) adhere to the original strategy, virtually ensuring better results. Regardless of the type of approach (mechanical or subjective) used to participate in the market, the basic system should include a method for determining an entry point and identifying target exit points and those are the topics we will review in this article. Entry Point: A successful system must be able to recognize good opportunities and help a trader initiate new positions in a timely manner. The entry point is generally determined by a set of precise rules or calculations appropriate to the market and the strategy. It is a crucial part of any trading scheme and the most popular methods for identifying profitable entry points are derived from chart patterns and mechanical systems. For example, a "buy" signal can be based on a momentum indicator or a market condition, but it can also be initiated at a specific price in a chart formation or by a computer program designed specifically for identifying favorable trading circumstances. Today's sophisticated software can analyze technical as well as market sentiment indicators and calculate the conditions in the market which offer the best environment for a particular strategy or technique. Some traders use a combination of more than one method such as a signal from a mechanical system and confirmation from a current market condition or specific chart formation. Profit Target: The first rule of profitable trading: Before entering any trade, be sure to identify the initial exit points (based on loss limits and profit targets) or implement an exit strategy that will close the position if a predetermined set of criteria is achieved. Most traders identify the upside exit through the use of a profit target. This target is generally determined with regard to risk and reward; the amount of money a trader is willing to risk in the position versus the expected profit. This ratio will be based on personal risk tolerance and psychological attitudes, as well as portfolio requirements. To correctly assess the profit potential in an option position, you must understand pricing principles and study the underlying issue's historical volatility, then set the target appropriately. Profit targets can also be based on price patterns such as a trading range or with regard to a trend-line or moving average. Obviously, there will be exceptions to the rule and unique situations that require special treatment but each of these instances must be dealt with on an individual basis using good judgment. Loss Limit: The unfortunate fact is, losses are an inherent part of trading in any market or commodity. Some positions will profit while others will fail miserably and the key to success is managing the losers for minimum effect. That is why it is so important to diversify (spreading the risk) and to use a stop-loss on every position. There are two common types of stop-loss placement. The first is based on a monetary amount or a percentage of the overall position. With this loss-limiting method, the total risk is a fixed amount based on the initial cost of the trade. The second type of stop uses a technical exit point, derived from proven indicators (price, momentum, sentiment) or specific chart patterns. This method of establishing a loss-limit can also be based on the volatility or trading range of the underlying market. Next week, we will continue this discussion of position management and review some of the techniques that professional traders use to maximize profits and limit losses. 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 PPD 17.25 20.86 MAY 10.00 0.50 *$ 0.50 13.8% FNSR 16.00 13.74 MAY 10.00 0.40 *$ 0.40 12.1% SNWL 16.60 15.93 MAY 12.50 0.40 *$ 0.40 11.7% MANU 34.40 31.71 MAY 22.50 0.75 *$ 0.75 10.7% NTAP 23.55 21.86 MAY 15.00 0.50 *$ 0.50 10.4% EBAY 41.63 46.87 MAY 30.00 1.10 *$ 1.10 10.1% RFMD 17.85 25.99 MAY 12.50 0.45 *$ 0.45 9.7% SCI 22.99 24.65 MAY 17.50 0.45 *$ 0.45 7.7% VSEA 39.35 42.39 MAY 30.00 0.70 *$ 0.70 7.1% BRCD 36.78 35.62 MAY 22.50 0.50 *$ 0.50 6.9% MUSE 48.83 43.90 MAY 25.00 0.65 *$ 0.65 6.8% EXFO 31.95 33.05 MAY 17.50 0.45 *$ 0.45 5.7% *$ = Stock price is above the sold striking price. Comments: It's nice to see a rally continue after some profit-taking, at least in the DOW, SP500, and Russell 2000. Any weakness in the markets should allow an investor to judge the strength of the issues he or she may be interested in. Does it violate the current trend or moving average as it consolidates? Does it hold at proven support and is the overall outlook still intact? Anyway, keep an eye on Sonicwall (NASDAQ:SNWL) as a few negative technical signals are now evident. NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield AMD 30.00 MAY 22.50 AMD QX 0.35 3906 22.15 21 8.0% EMLX 34.96 MAY 22.50 UML QX 0.50 574 22.00 21 9.7% MCDT 25.99 MAY 17.50 DXZ QW 0.45 343 17.05 21 11.5% PPD 20.86 MAY 15.00 PPD QC 0.45 5234 14.55 21 14.1% PSFT 35.87 MAY 27.50 PQO QY 0.55 1406 26.95 21 10.3% SEBL 45.70 MAY 32.50 SGQ QZ 0.65 550 31.85 21 9.6% UCOMA 15.39 MAY 10.00 QUW QB 0.30 9028 9.70 21 12.9% 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 20.86 MAY 15.00 PPD QC 0.45 5234 14.55 21 14.1% UCOMA 15.39 MAY 10.00 QUW QB 0.30 9028 9.70 21 12.9% MCDT 25.99 MAY 17.50 DXZ QW 0.45 343 17.05 21 11.5% PSFT 35.87 MAY 27.50 PQO QY 0.55 1406 26.95 21 10.3% EMLX 34.96 MAY 22.50 UML QX 0.50 574 22.00 21 9.7% SEBL 45.70 MAY 32.50 SGQ QZ 0.65 550 31.85 21 9.6% AMD 30.00 MAY 22.50 AMD QX 0.35 3906 22.15 21 8.0% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** AMD - Advanced Micro Devices $30.00 *** Intel Hedge? *** Advanced Micro Devices (NYSE:AMD) is a semiconductor manufacturer with manufacturing facilities in the United States, Europe and Asia, and sales offices throughout the world. AMD's products include a wide variety of industry-standard digital-integrated circuits used in many diverse product applications, such as telecommunications equipment, data and network communications equipment, consumer electronics, personal computers, workstations and servers. AMD is now seen as a viable competitor for Intel's dominant market position in the semiconductor industry and the company's recent earnings report suggests they are poised for growth in the future. Their quarterly numbers were solid, given today's economic climate, and the company said it is comfortable with current full-year earnings estimates. MAY 22.50 AMD QX LB=0.35 OI=3906 CB=22.15 DE=21 TY=8.0% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=AMD ***** EMLX - Emulex $34.96 *** Data Storage Rally! *** Emulex (NASDAQ:EMLX) is a designer, developer and supplier of a broad line of Fibre Channel host adapters, hubs, application specific computer chips, and software products that provide connectivity solutions for Fibre Channel storage area networks, network attached storage, and redundant array of independent disks storage. The company's products offer customers a unique combination of critical reliability, scalability and performance, and can be customized for mission-critical server and storage system applications. Shares of technology storage companies were bullish this week, after industry leaders reported earnings that met lowered expectations and hinted at a pick-up in demand for their products. Emulex's third-quarter results were in line with revised forecasts as revenues surged 65% and order patterns have now stabilized. Salomon Smith Barney recently raised its rating on the company and offered a price target of $40. MAY 22.50 UML QX LB=0.50 OI=574 CB=22.00 DE=21 TY=9.7% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=EMLX ***** MCDT - McDATA $25.99 *** Bracing For A Rally? *** McDATA (NASDAQ:MCDT) is a provider of high availability storage area network director switching devices that enable enterprises to connect and centrally manage large numbers of storage and networking devices. McDATA designs, develops, manufactures and sells switching devices that enable enterprise-wide storage area networks. The company's products enable business enterprises to cost-effectively manage growth in storage capacity requirements, improve the networking performance of their servers and storage systems and scale the size and scope of their SAN or information infrastructure while operating data-intensive applications on the SAN. MCDT has established an excellent short-term base and the recent buying pressure near the top of the trading range is an indication of upside potential. MAY 17.50 DXZ QW LB=0.45 OI=343 CB=17.05 DE=21 TY=11.5% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=MCDT ***** PPD - Pre-Paid Legal Services $20.86 *** 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 shares started to rebound in early April after the company announced revised annual earnings estimates that reflect accounting changes prompted by an SEC inquiry. Investors were happy with outcome of the quarterly report and if the SEC investigation is resolved favorably, the issue has little chance of retreating to our cost basis. MAY 15.00 PPD QC LB=0.45 OI=5234 CB=14.55 DE=21 TY=14.1% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=PPD ***** PSFT - Peoplesoft $35.87 *** Solid Earnings! *** Peoplesoft (NASDAQ:PSFT) designs, develops, markets and supports a family of enterprise application software products for use throughout large and medium sized organizations, including corporations, higher education institutions, and government agencies. Shares of PSFT have moved higher in recent sessions following strong quarterly results and numerous upgrades from financial analysts. PSFT posted earnings that beat Wall Street estimates and management reiterated its second-quarter and 2001 forecasts, despite the slowing economy. Goldman Sachs said that enterprise application companies are performing the best in the sector and Peoplesoft is performing the best within that group. Technically, the stock has near-term support at $29 and a cost basis below $27 appears to be favorable price for the issue. MAY 27.50 PQO QY LB=0.55 OI=1406 CB=26.95 DE=21 TY=10.3% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=PSFT ***** SEBL - Siebel Systems $45.70 *** Strong Sector! *** Siebel Systems (NASDAQ:SEBL) is a provider of unique eBusiness applications. Their eBusiness applications enable organizations to sell to, market to, and service customers across multiple channels, including the Web, call centers, resellers, retail, and dealer networks. They are available in industry-specific versions which enable organizations to create a single source of customer information that sales, service, and marketing professionals can use to tailor product and service offerings to meet each of their customer's unique needs. The Application Software sector is performing well and companies in the group have benefited from some recent bullish earnings announcements. Now the question is whether the trend will continue and traders who agree with a bullish outlook for SEBL can speculate on its future movement with this conservative position. MAY 32.50 SGQ QZ LB=0.65 OI=550 CB=31.85 DE=21 TY=9.6% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=SEBL ***** UCOMA - UnitedGlobalCom $15.39 *** Merger Approval! *** UnitedGlobalCom (NASDAQ:UCOMA) is a broadband communications provider outside the United States. UCOMA offers multi-channel television services in 23 countries worldwide and telephone and Internet/data services in a growing number of its international markets. The company's European operations are held through its 53%-owned subsidiary, United Pan-Europe Communications N.V. The company's Asia/Pacific operations are primarily held through its 75%-owned subsidiary, Austar United Communications, Limited. The company's Latin America operation is VTR Global Com S.A., Chile's largest multi-channel television provider and a growing provider of telephone services. The European Commission recently approved a plan for cable firm Liberty Media (NYSE:LMGa) to acquire joint control of UnitedGlobalCom, parent of Dutch cable operator UPC, and investors are apparently in favor of the merger. Traders can "target shoot" a higher premium in the play ($0.35-$0.40) to establish a lower cost basis in the issue. MAY 10.00 QUW QB LB=0.30 OI=9028 CB=9.70 DE=21 TY=12.9% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=UCOMA ***** ***************** 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 FLEX 27.56 MAY 20.00 QFL QD 0.50 2328 19.50 21 12.0% CBST 30.62 MAY 22.50 UTU QX 0.50 45 22.00 21 10.9% ZIGO 37.10 MAY 25.00 UZY QE 0.55 10 24.45 21 10.0% DG 23.88 MAY 20.00 DG QD 0.30 403 19.70 21 7.3% QLGC 41.44 MAY 25.00 QLC QE 0.40 637 24.60 21 6.7% GILD 45.58 MAY 37.50 GDQ QU 0.40 203 37.10 21 5.5% ************** BROKERS CORNER ************** Naked Put Exit Strategies Selling naked (uncovered) puts is a complex strategy that has many variables to consider. This article is a continuation to my previous three articles (Margin monster, Return of the Margin Monster and Selling In the Money Puts). The previous articles outlined the margin requirements and the basic strategy of naked puts. This article will cover a few strategies to exit. Out of the Money Selling out of money naked puts is a strategy that one might use to collect premium while setting a buy point on the underlying security. I recommend my clients sell the put at a specific strike price that provides a preferable cost basis at a support level. There should be a reason for selling a put at the strike you choose. For instance, XYZ is trading at $15.21. The next support level is at 11.95. If I sell the 20 contracts of the 12.5 PUT for $0.60 per contract that will give me an approximate cost basis of $11.90 if the put is assigned (I buy 2000 shares at $12.50). I can either sell the stock or sell calls. If the stock stays above $12.50 and the put expires worthless, I keep the premium. The margin requirement changes as the stock price and option premium changes. At a minimum, you will want to calculate the margin requirement when the security is at the strike price. In the above example, the initial margin requirement is $4,242: (10% X 15.21 stock price X 2000 shares) + $1,200 PUT Value = $4,242 If the stock drops to $12.50, the theoretical value of the PUT increases to $1.55 and the margin requirement increases to $8,100: (20% X 12.50 stock price X 2000 shares) + $3,100 PUT Value = $8,100 In this example, the requirement increases to almost twice the initial margin. If you have no intention of owning the stock, you may choose to close out the position here. Another place to exit is if the security price violates the previous support level. Another exit strategy is to buy the put to close at a specific percentage above the sale price. Some use 25%. However, that is sometimes the price spread. There are some investors that have their buy points at 25, 30, 50 or 100% of the initial sale price. The exit point you choose should be based upon your individual risk tolerance and investment objectives. In the above example, if XYZ were assigned to me, would require a minimum of $12,500 initial margin to buy the stock and have a total cost of $25,000. Therefore, a balance of anything less than $12,500 would require more cash to be deposited. If assigned the security, exit strategies include selling the security (may be at a profit or loss) or selling calls against the newly acquired security. One could also hold the security and buy a protective put to hedge the downside. If the stock goes up, you may always choose to close out the naked put and lock in the profit. This frees up the cash for another trade opportunities. In the Money The reason I sell in the money puts is to capture the premium depreciation over time and/or profit on buying to close the naked put if the security’s price advances. But what do we do if the stock moves the wrong way? Do we wait and hope it comes back up? Unfortunately, the answer isn’t set in stone. It depends. Assuming the Naked Put’s strike price is at a support level (because we don’t pick some arbitrary number), a violation of that support would be a reason to buy the put to close and exit the position. If you don’t, a breakdown could occur and eat up a lot of capital. If you enter the trade because of technical reasons, you should exit it as well. If the stock drops and bounces, there might be a reason to hang in there. As with the out of money scenario, exit points based on a percentage of the sale price are a common method in determining an exit point. For instance, ABC is at 50, you sell the ABC July 70 Put for $25 per contract. If ABC declines, the Put will increase in price. If you placed an exit point at 25% greater than the initial sale, you would buy the option at around $31.25 per contract. One could also argue that the cost basis price is a good decision point. In this example, that price is $45. If ABC is assigned, you buy the stock at $70 and keep the $25 per contract. If the stock is assigned early, there are a few possibilities depending on the price of the security. You may be able to still profit from the trade. However, it is rare to be assigned early. Even if you are, you might only be assigned on part of your position. As stated above, if you are able to buy the put to close at a profit, you should look for the best opportunity. There isn’t one simple strategy that is best for all circumstances. Because every investor has a specific risk tolerance level and investment objective, each position requires a specific entry and exit strategy. Those of you that really want to do some form of naked puts, but are frustrated that they may be too complex or you can’t access your computer, should find a good full service options broker. As I stated, there are many facets to this strategy. I am sure I forgot something. If you have any questions or comments or subject suggestions, please contact me toll free at 877-925-0880. I am a full service financial consultant and ROP with Cutter & Company. Robert John Ogilvie email@example.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. ************************ SPREADS/STRADDLES/COMBOS ************************ Another Good Week! Friday, April 27 Stocks rallied again today on the heels of favorable economic data. The Dow finished 117 points higher at 10,810 and the NASDAQ closed up 40 points at 2,075. The S&P 500 index was up 18 points at 1,253. Trading volume on the NYSE hit 1.09 billion shares with advances beating declines 2 to 1. Activity on the NASDAQ was light at 1.79 billion shares exchanged. Technology winners outpaced losers 23 to 14. In the U.S. bond market, the 30-year Treasury fell 1 12/32, pushing its yield up to 5.80%. Thursday's new plays (positions/opening prices/strategy): Providian (NYSE:PVN) MAY40P/45P $0.45 credit bull-put Shire Pharma (NASDAQ:SHPGY) MAY60C/40P $1.50 credit strangle Unitedhealth (NYSE:UNH) MAY60C/50P $0.05 credit synthetic Our new positions in SHPGY and PVN were available at acceptable prices, although neither play traded at the target credit. UNH posted earnings of $0.64 per share in the first quarter, beating analysts' estimates of $0.60 per share. The company also raised its full-year earnings guidance to $2.66 to $2.68 per share, well above consensus estimates. The issue rallied early in the day before pulling back to its opening price, however the suggested credit was not available (on a simultaneous order basis). Portfolio Plays: Today's robust gross domestic product (GDP) data gave investors new hope for the future of the U.S. economy and that translated to additional buying in the equity markets. America's GDP was up 2% in the first quarter, well above analysts' expectations of a 1.1% rise, due in part to a 3.1% increase in consumer spending. A moderate 1.1% gain in capital spending along with an improving trade balance added to the optimism that growth will improve in the second half of the year. The major averages rallied on the news with industrial stocks propelling the Dow to a triple-digit advance. The blue-chip leaders were American Express (NYSE:AXP), International Business Machines (NYSE:IBM), Intel (NASDAQ:INTC), Wal-Mart (NYSE:WMT) and J.P. Morgan (NYSE:JPM). Alcoa (NYSE:AA) and Caterpillar (NYSE:CAT) reached new 52-week highs during the session. Microsoft (NASDAQ:MSFT) was one of the few losers on rumors the company might delay the release of its new operating system, Windows XP, to October because it needs to work out some compatibility issues. Among other technology issues, computer hardware, networking and semiconductor shares were popular and biotech stocks also rallied amid positive announcements from the gene-mapping group. Human Genome Sciences (NASDAQ:HGSI) posted a lower-than-expected quarterly loss and Celera Genomics (NYSE:CRA) said it has completed the mapping of the mouse genome. In the broader market, retail, financial, gold and transportation stocks moved higher while utility, natural gas and oil service companies generally retreated. It was another great day for positions in the "Combos" Section as the market continued to recover from recent selling pressure. In the technology segment, PMC Sierra (NASDAQ:PMCS), AT&T (NYSE:T), LSI Logic (NYSE:LSI), Intel (NASDAQ:INTC), Tollgrade (NASDAQ:TLGD), Hewlett-Packard (NYSE:HWP) and Human Genome Sciences (NASDAQ:HGSI). achieved favorable gains. Among the broader market issues, Lehman Brothers (NYSE:LEH), Active Power (NASDAQ:ACPW) and Progressive (NYSE:PGR) moved higher and of course, and our bullish spread on the OEX is performing very well. One issue that failed to rally during today's session was Total Fina Elf (NYSE:TOT) and we were grateful for the brief reprieve. One of the surprise announcements of the session affected our new speculation play in Visx (NYSE:EYE). J.P. Morgan analyst Chris Shibutani said he was downgrading the company's stock, apparently due to a recommendation from Institutional Shareholder Services, which suggested that Visx shareholders "vote against Icahn." In this case, it seems Institutional Shareholder Services may have been recommending that shareholders vote for Visx's new group of officers rather than those proposed by Mr. Icahn. Investors may have thought they recommended a vote against the takeover, but it seems strange that anyone would oppose a $32 bid for the company. The Visx board has said it will allow a shareholder decision on Icahn's recent bid, so the confusion will likely be resolved in the coming weeks. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** BCHE - Biochem Pharma $30.16 *** Merger Woes? *** BioChem Pharma (NASDAQ:BCHE) is a worldwide biopharmaceutical company involved in the research, development, manufacturing and marketing of products for the prevention, detection and treatment of human diseases. Biochems' most advanced therapeutic product candidates are being developed for use in treatment of cancers and infectious diseases. BioChem is also engaged in the research, development, production and marketing of vaccines for human use. BioChem's anticancer and anti-infective research and development activities are either done internally, through agreements with CliniChem Development, or through strategic alliances. Biochem shares commercialization rights for 3TC and Zeffix with Glaxo Wellcome in Canada and has also granted to the latter exclusive commercialization rights in the rest of the world. Options in BCHE were active this week as the company reported earnings and rumors circulated that a pending merger with Shire Pharmaceuticals (NASDAQ:SHPGY) might be in jeopardy. In March, Biochem agreed to merge with Shire for $36 per-share, valuing the combined company at $8.5 billion. The Canadian government said last month that it did not see the merits of the marriage but on Shire's request, an additional 30-day review was granted. The review period ended on Friday, however Shire requested another extension on April 25, and since no news has been posted, there is rampant speculation on both sides of the outcome. Regardless of the result, it is unlikely that BCHE will trade much above our sold strike price with the buyout expected at $36 and that's the basis for this speculative position. PLAY (aggressive - bearish/credit spread): BUY CALL MAY-37.50 BQX-EU OI=348 A=$0.45 SELL CALL MAY-35.00 BQX-EG OI=3916 B=$0.95 INITIAL NET CREDIT TARGET=$0.55-$0.60 ROI(max)=28% B/E=$35.55 This position is based on recent increased activity in the stock and underlying options. Although the play offers a favorable risk versus reward potential, it must be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=BCHE ****************************************************************** LOW - Lowe's $62.10 *** Recovering Economy? *** Lowe's Companies (NYSE:LOW) is the second largest retailer of home improvement products in the world, with a specific emphasis on retail do-it-yourself (DIY) and commercial business customers. Lowe's specializes in offering products and services for home improvement, home decor, home maintenance, home repair and also remodeling and maintenance of commercial buildings. The company's principal customer groups are DIY retail customers and commercial business customers. Retails stocks rallied on Friday after new data showing the U.S. economy expanded more than expected in the first quarter fueled hopes that consumer spending may rebound later this year. Gross Domestic Product, the broadest measure of economic activity, grew in the first quarter at a stronger-than-forecast 2% annual rate due to an increase in consumer demand. Home improvement shares also received a boost last week after a report showed that sales of new homes rose to a record rate in March and sales of existing homes rose to their second-highest rate on record. Of course, the implication is that construction demand will remain high in the coming months and that will bolster share values in this group. Traders who agree with that outlook can speculate on the future direction of LOW with this conservative position. We will target a higher premium initially, to allow for a brief consolidation in the issue. PLAY (conservative - bullish/credit spread): BUY PUT MAY-50 LOW-QJ OI=1797 A=$0.25 SELL PUT MAY-55 LOW-QK OI=2807 B=$0.60 INITIAL NET CREDIT TARGET=$0.45-$0.50 ROI(max)=9% B/E=$54.55 http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=LOW ****************************************************************** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is also higher than other plays in the same strategy based on disparities in option pricing. Current news and market sentiment will have an effect on these issues. Review each play individually and make your own decision about the future outcome of the position. ****************************************************************** ARBA - Ariba $7.39 *** Cheap Speculation! *** Ariba (NASDAQ:ARBA) is a business-to-business electronic commerce software and network services platform provider. Ariba provides software, network access and commerce services that help enable corporations to electronically automate and optimize business with their buyers and suppliers. Customers can do this by both automating their existing relationships with their buyers and suppliers and by building a marketplace that brings buyers and suppliers together to buy and sell electronically. In addition, the company offers commerce services such as content management, electronic payment, electronic sourcing and electronic logistics, among others. The Ariba B2B Commerce Platform consists of four primary components, including Ariba Buyer, their Internet-based procurement application, Ariba Marketplace and Dynamic Trade, its Internet-based market-maker applications, and Commerce Services Network, its Internet-based commerce services application. Ariba has fallen on hard times recently, plummeting from a share value near $160 to an incredible all-time low of $4.38 in less than nine months. Surprisingly, the company's performance was not that bad as revenues more than doubled this past quarter to $90.7 million, up from $40 million a year earlier. At the same time, the future revenue outlook is somewhat limited due to the unpredictable nature of the Internet marketplace business. But, the selling has abated for now and there appears to be excellent upside potential from a technical viewpoint. Traders who share that optimistic outlook should consider this speculative play. PLAY (speculative - bullish/synthetic position): BUY CALL AUG-12.50 IRU-HV OI=3555 A=$1.00 SELL PUT AUG-5.00 IRU-TA OI=5641 B=$0.80 INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$1.50-$2.50 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $250 per contract. http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=ARBA ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** BAB - British Airways $49.30 *** Probability Play *** British Airways plc (NYSE:BAB) is the holder of British Airways, the world's largest international passenger airline. Its primary scheduled route network is one of the world's most extensive. In 1998-1999 the airline operated an average of over one thousand flights a day on an unduplicated route network of about 686,000 kilometers. The British Airways fleet numbers in hundreds and the airline's main bases are London Heathrow Airport, the largest international airport in the world and London Gatwick, which is now the sixth largest airport. The British Airways Group, along with Deutsche BA, and Air Liberté, carries millions of passengers each year to destinations around the world. This week we received a number of requests for conservative debit straddles. Unfortunately, with the recent market volatility, the number of theoretically favorable candidates is small. However, this position meets our criteria for a favorable straddle; cheap option premiums, a history of adequate price movement and future events or activities (quarterly earnings in May and the ongoing problems with the Concorde) that may generate volatility in the issue or its options. This selection process provides the best combination of low risk and potentially high reward. As with any strategy, it should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - neutral/debit straddle): BUY CALL JUL-50 BAB-GJ OI=10 A=$2.80 BUY PUT JUL-50 BAB-SJ OI=14 A=$4.80 INITIAL NET DEBIT TARGET=$7.30-$7.40 TARGET PROFIT=25% - or- PLAY (very speculative - neutral/debit strangle): BUY CALL JUL-60 BAB-GL OI=100 A=$0.45 BUY PUT JUL-40 BAB-SH OI=100 A=$0.85 INITIAL NET DEBIT TARGET=$1.10-$1.20 TARGET PROFIT=50% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=BAB ****************************************************************** VECO - Veeco Instruments $49.70 *** More Premium-Selling! *** Veeco Instruments (NASDAQ:VECO) designs, manufactures, markets and services a broad line of equipment primarily used by manufacturers in the optical telecommunications, data storage and semiconductor industries. These industries produce computer integrated circuits, personal computers, hard disk drives, network servers, fiber optic networks, digital cameras, television set-top boxes and personal digital assistants. Veeco's Process Equipment products precisely deposit or remove (etch) various materials in the manufacturing of advanced thin film magnetic heads for the data storage industry and optical telecommunications components. Veeco's Metrology equipment is used to provide critical surface measurements on semiconductor devices, thin film magnetic heads and disks used in hard drives and in optical telecommunications and many research applications. Here is another issue with a relatively well-defined trading range and no apparent news or events that will substantially change its character prior to the May options expiration. Veeco's quarterly earnings announcement occurred earlier in April and the report was favorable with a positive outlook for the future. In addition, the profit envelope coincides with VECO's recent trading range and there should be ample time to make an adjustment if the issue moves beyond the sold (short) strikes. As with any stock, news and market sentiment will have an effect on the issue so review the play individually and make your own decision about the future outcome of the position. PLAY (aggressive - neutral/credit strangle): SELL CALL MAY-60 QVC-EL OI=12 B=$0.95 SELL PUT MAY-40 QVC-QH OI=186 B=$1.00 INITIAL NET CREDIT TARGET=$2.00-$2.10 ROI(max)=13% UPSIDE B/E=$62.00 DOWNSIDE B/E=$38.00 http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=VECO ****************************************************************** ********** 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
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "firstname.lastname@example.org"
Option Investor Inc