The Option Investor Newsletter Thursday 05-17-2001 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/051701_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 05-17-2001 High Low Volume Advance/Decline DJIA 11248.60 + 32.70 11328.60 11181.90 1.34 bln 1901/1203 NASDAQ 2193.69 + 27.25 2216.36 2167.72 2.14 bln 2413/1460 S&P 100 665.58 + 0.98 670.42 663.13 totals 4314/2663 S&P 500 1288.49 + 3.50 1296.48 1282.48 61.8%/38.2% RUS 2000 504.76 + 7.55 504.76 497.48 DJ TRANS 2957.58 + 32.08 2960.55 2915.96 VIX 25.52 + 0.39 26.68 24.92 Put/Call Ratio 0.59 ****************************************************************** Warnings In Triplicate! Another decent day in the markets was followed by a trio of major earnings warnings from tech companies. After trading as high as 11328 and a +115 point gain the Dow pulled back at the close on minor profit taking. The Nasdaq is still struggling to break 2200 with three intraday attempts and a close at 2193. Both indexes posted good days since the obvious reaction to Wednesday's gains would have been serious profit taking. Without the warnings after the close this would have been very positive day. Dell Computer surprised nobody by announcing results that were inline with already lowered estimates. They had said last week that they would meet those estimates. They did surprise with an earnings warning going forward that was not very "Dellish." They said that next quarter would be flat "at best" with estimates of only $.15 compared to current estimates of $.18. They would not provide guidance going forward and said the PC sector was not yet recovering as expected. One comment was particularly disturbing. They said there were not a lot of new projects to bid on which would indicate that the business outlook for future quarters was bleak. Dell fell about $1 in after hours trading. Agilent announced they were going to miss revenue estimates by a few bucks. Say $1 billion or -35%. A billion here, a billion there, who cares? They warned that they could post a loss of -.20 to -.30 per share INSTEAD of earnings of +.25 as expected. Wow, what a difference a year makes! They said orders fell -41% and cancelled orders totaled over $500 million for the current quarter. Better hope that tech rebound is just around the quarter! The company cited an "extremely uncertain business climate" for the downturn in business. CFO, Bob Walker, said he expected $100 million in cancelled orders for the next quarter as well. When asked why the number was not higher, considering the $500 million in the prior quarter, he replied that "frankly, there are not a lot of orders left to cancel." OOPS! Nyse:A fell to $34.30 in after hours from a $38.72 close. PALM wilted after the close when it said that it was dropping its fourth quarter revenue outlook for the second time due to poor sales. They also announced that they had terminated the agreement to buy software company Extended Systems. They are also going to take an inventory write down of about $300 million. CIBC said it was shocking to see another -50% revenue drop and kill the XTND deal at the same time. They expect to double the previous estimates for a loss of $80 million to as high as $190 million instead. With sales and margins dropping drastically analysts now question if they will have enough cash to survive the year. The company itself said conservation of cash was now their top priority. The stock fell -20% to $5.10 in after hours from a close of $7.05. Juniper also got killed after presenting at a CSFB telecom conference. CSCO announced that they had won two large contracts and the rumor was they beat JNPR. Plus, Juniper said that earnings would be flat to down -10% this quarter. Analysts still expect them to hit EPS estimates by managing costs but the bloom is off the Juniper rose. Instead of investors hoping that they will beat estimates like they have in the past, they are now worried that the sleeping CSCO giant has awakened and is on the prowl. It is possible that the easy pickings from the past may not be as easy for JNPR to find in the future. These were only the headliners of earnings problems for the day but there were others. Still AMAT and HWP rose on bad news and comments that techs may have bottomed so our future may not be that bad. Speaking of the future, S&P futures are down but not critical so traders are not racing for the exits in after hours. The sudden burst in the Dow on Wednesday caught many traders and analysts off guard and they are still scratching their heads. Is it real or just a head fake? Calmer heads a hoping for yet another pull back so they can buy a ticket for the train but adding to yesterday's gains today has got them worried. The Dow spike from Wednesday has catapulted the index to highs not seen since September of last year of 11259. That is another level of resistance nobody had even considered when talking about the 11000 ceiling last week. The Nasdaq is the most likely to suffer on Friday. With the 2200 level holding and three giant tech warnings after the close there could be some rethinking of the rally concept. A negative day for handheld PC makers, desktop box makers and networkers could prove to be a heavy load for investors to carry on Friday. Did I mention option expiration? With sizeable profits from the rate cut rally there is a good chance we will see profit taking before the weekend. Add in expiration Friday and volatility could increase. The VIX is currently heading in the opposite direction and at 25.52 nearing lows set in February. Investor sentiment appears to be worry about buying at this level but also worry that they will miss out if they don't. This is the key. The lack of a sell off after the Fed meeting has awakened the investor consciousness again and buyers bought the dip with abandon. They also ran over the wall of shorts at 11000 with only about an hour of indecision. Major Dow resistance overcome with only a blink. This should cause any future dips to be rally points and buying opportunities. Dip buying is back and until investors get their noses bloodied again they will continue to do this. If we have a dip on Friday the odds are good that investors will step up to the plate and take another swing for the fences. A word of caution, volume has still not returned. With only 2.08 billion shares trading on the Nasdaq on Wednesday and 2.14 billion shares today, there are still a lot of traders not convinced it is real. Until volume appears traders will buy the dips but still be ready to turn and run on a moments notice. CIEN fell almost -$6 from the days high even after beating the street by four cents because of sympathy for JNPR. There is still no conviction and we need that conviction if this rally is going to last. Investor sentiment is still "the worst is over" but they are keeping their fingers crossed. Remember my admonition from the last two weeks. My signal to buy long term was the Nasdaq closing over 2250 on strong volume. Neither has happened yet. Let your conscience be your guide. Away from your computer? Call 900-378-PICK and get this information along with the intraday updates including plays. Enter passively, exit aggressively! Jim Brown Editor ******************************************** Capturing Stock Appreciation With Leap Puts ******************************************** If you are interested in attending an online seminar on my strategy of capturing stock appreciation by selling Leap Puts it will be this Sunday, May 20th at 8:PM ET and I will repeat it at 8:PM PT as well. It will last 90 minutes and will be interactive. You will be able to ask questions and I will answer your questions in real time with charts and diagrams. You do not need any special software to view the seminar but you must have a 56K Internet connection or faster for best results and a separate phone for the audio portion. If you are interested in this seminar please click here for more information. http://www.premierinvestorseminars.com/ **************** MARKET SENTIMENT **************** Follow-Through By Matt Russ Adding to Wednesday's gains, all major indices were in the green. It's feeling good again, at least in listed stocks. Like Austin used to ask, "Can we start buying calls on Monday and selling them on Thursday?" Maybe, if you stick to those old, boring two and three lettered stocks. NASDAQ & QQQ Ciena's (NASDAQ:CIEN) earnings report this morning beat estimates by 4 cents, coming in with $0.20 profit per share. This boosted the Nasdaq on the open to 2200, yet it only gyrated in a narrow range along this line throughout the session. The Nasdaq peaked today at 2216 within its 50 point range. Although the index put on an additional 27 points after Wednesday's rally, there wasn't enough strength to push higher toward the real challenge of 2232. CIEN traded higher on the initial euphoria but then faded almost immediately and finished off $2.15. Juniper Networks (NASDAQ:JNPR) also brokedown, evident of weakness in the Networkers. We would be looking for support at 2167, which is the 61.8% retracement level from recent highs to Monday's low, and also today's open. Below that is the 50% retracement at 2145 and the 38% level of 2125. This translates over to the QQQs as support at $47.36, $46.75, and $46.13, with resistance at $48.79 and $49.40. SPX & OEX The breakout on Wednesday was a forceful one, fueled by short covering at 1272 resistance. We talked about this crucial level for two weeks and the breakout squeezed the shorts real bad. You can see this in the velocity of the rally, marked by long green candlesticks with very little selling. Now Bill had mentioned that an argument could be made for an inverse head-and-shoulders(H&S) on the SPX. The upside target was projected at 1440. Whether this target can be met depends on the Cyclicals, Financials, and if the they can drag Tech higher with them. The interest rate environment is favorable and should drive both Cyclicals and Financials. Next resistance will be in the 1296 - 1300 area. Support will lie at retracement levels of 1284 and 1281. A further pullback may result in a test of previous resistance at 1272. On the OEX.X, 660 resistance was broken, now it should act as support. Resistance at 670. DOW 30 On Tuesday, I said that we were still waiting on the Cyclical Index (CYC.X) to breakout. Well, on Wednesday it did just that in extraordinary fashion with an almost 4.5% gain. This pushed the Dow well above psychological resistance level of 11,000 and is a very good sign for the markets. While people might say that this move might not have the conviction needed to sustain a longer run, for reasons such as investors selling out once their positions get even, I would disagree. The losing positions are concentrated in tech and the new leaders for the Dow are stocks that didn't really participate during the tech bubble, i.e. the Caterpillars (NYSE:CAT), the Alcoas (NYSE:AA), and the Duponts (NYSE:DD), etc. There is real momentum in this index and given our current interest rate environment, they will continue to lead. We even got follow through today on the $INDU, another 32 points. I'm not saying we don't get a pullback after this fantastic run, but there was a lot of new money in the market establishing long positions. We are looking for support at 11117, the 61.8% level and certainly the 38.2% level, which coincides with 11,000. The latter level would be a large pullback. Buyers would likely be back before that point, possibly the 11050 area at 50% retracement. Resistance will be at Thursday's high of 11328, and then 11401 which was last September's high. Volatility still is laying low. The VIX.X bounced off of 25 today and settled at 25.52. Where's the fear? The Nasdaq? We are entering earnings warning season, so who will be the first to step up? The more guidance, the better for visibility. Until then, we are sticking with what works and the "old economy" stocks seem to be doing the job. Looks like those Commercials were right on those DJIA Futures. Trade Smart, Matt Russ ********************** CBOT Commitment Of Traders Report: Friday 05/11 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade(CBOT). 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 (Current) (Previous) (Current) (Previous) S&P 500 Open Interest Net Value +47090 +36513 -49689 -41144 Total Open Interest % (+21.09%) (+14.90%) (-7.33%) (-6.05%) net-long net-long net-short net-short DJIA Futures Open Interest Net Value -7572 -6592 +7468 +7488 Total Open Interest % (-62.11%) (-57.98%) (+21.83%) (+25.09%) net-short net-short net-long net-long NASDAQ 100 Open Interest Net Value +2657 +4288 -9986 -10972 Total Open Interest % (+13.59%) (+22.06%) (-17.20%) (-17.02%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: Divergence increased on the S&P 500 with the Commercials adding to their net-short positions by 1.28 percent while the Small Specs enhanced their net-longs by 6.19 percent. From here were are in limbo until %values actually switch to flat or net-long sometime in the future. We could see fluctuation of positions oscillate up and down for weeks or even months to follow. A major market hurdle will be the S&P 500 commercial traders moving to net-long in accumulation stage and that is still undetermined from here. Data compiled as of Tuesday 05/08 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/051701_1.asp PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** No dropped calls tonight PUTS: ***** No dropped puts tonight 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. 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The Option Investor Newsletter Thursday 05-17-2001 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/051701_2.asp ******************** PLAY UPDATES - CALLS ******************** GE $52.11 -0.10 (+3.10) After Wednesday's stellar rally in GE, we could hardly ask for better second day action. GE opened at $52, and hit intra day resistance at $52.62 twice before retreating to its new strong support level at $52. While the U.S. Justice Dept has given approval to GE's acquisition of Honeywell, the deal is still being scrutinized by European regulators, which may be dampening investor enthusiasm to a certain degree. However, today, GE Chairman Jack Welch stated that he expects the European commission to ultimately accept the deal, and that the teams are working together constructively. He also stated that he expected the deal to be completed within the timeframe already laid out. Going forward, conservative traders might want to wait for the Dow to pullback a little more before entering at the current level. Monitor CYC.X, as further strength in the cyclical index could give a boost to GE going forward. A breakout and close above resistance at $52.50 could also give a signal to possibly enter positions. We are moving closing stops to $50. GDW $62.79 -0.31 (+1.54) After regaining momentum with the overall indexes during Wednesday's phenomenal rally, GDW hit a high of $64.75 on Thursday morning before pulling back. Strong volume still accompanies rallies in a signal of strength, as GDW has now formed an inverted head and shoulders pattern with the left shoulder at $60, the head at $57.50 and the right shoulder just below the 10-dma of $60.70. The bullish spike at the close bodes well for Friday's opening, and traders can consider taking positions here, or possibly at a pullback to $62, if others in the S & L sector are strong. More conservative traders might want to wait for a breakout above strong resistance at $65 with heavy volume. Keep an eye on others like WM and ASFC, and set closing stops at $61.75. XOM $88.73 -0.77 (+1.09) While many pay more at the pump, energy companies like XOM, TX, RD and CHV pad their revenue streams and watch their stocks hit respective highs. Our play objective is for ENE to make a convincing move through $90 and ride the momentum as it approaches the next level of resistance near $95. Thursday's pullback to the converged 5 & 10 DMAs provides a nice launching point to take entry; although some may want to wait for the bullish confirmation before going long. Keep closing stops at $87, but please don't discount an intraday pullback as an opportunity to jump into the play. BA $68.79 +2.04 (+2.79) What more could we ask for? A surge of buying near the open Thursday pushed BA up to $68 by mid morning, and the momentum just kept going, until BA reached an intra day high of $69.85 before retreating to support to the current level. BA's strength is particularly impressive considering the slight pullback from the high levels we experienced in the overall indexes. While the Dow seems to be in a rally mode, BA continues to release excellent news of its own. On Thursday, BA announced that they had received a new $400 million contract from the Royal Australian Air Force. A pullback seems likely, and traders could try to enter positions if BA retreats to $68. A very aggressive trader could shoot for a pullback to the 5-dma of $66.97, however, we may not see that level again in the short term if the buying continues. We are moving closing stops to $66 to protect gains. Continue to monitor others in the defense sector, like LMT and GD, as well as the overall indexes. CAT $55.25 -0.66 (+2.05) A rallying DOW on Wednesday helped CAT to gain 5.21 percent on almost 1.8 times the average daily volume, as the deep cyclical stocks pushed the Old Economy index strongly higher following Tuesday's 50 basis point rate cut by the Fed. Thursday, Lehman Brothers came out to say that they were cautious on shares of the leading earth-moving equipment maker, and speculated that the company may make a negative pre-announcement at some point in the future. With that, the stock pulled back fractionally, ending today down 1.18 percent. While volume today was above average, its up-trend is still firmly intact, with the 5 and 10-dmas, at $54.06 and $52.96, respectively, reinforcing support at $54 and $53. Bounces off these two levels along with $55 may give aggressive traders potential entry points. However, make sure that the stock closes above our stop price of $53.75. If the bulls return in force, then a break through today's intra day high of $56.05 could allow for an entry on strength, but only if peers DE and DOV are also moving higher. EBAY $62.55 +4.69 (+9.30) Wednesday, we initiated bullish coverage on electronic auctioneer EBAY, citing a number of favorable fundamental factors, including the company's unique and viable business model, strong management and share price out-performance relative to its peers. Nimble traders who followed our suggestion of entering on a bullish surge above $58 were amply rewarded Thursday, as EBAY managed to rally over 8 percent on over twice the average daily volume. Positive analyst coverage helped ignite investor interest, as Robertson Stephens reiterated their Strong Buy rating, calling the stock a core holding. Already a highly profitable play after just one day, we are moving our stop price up from $55 to $58. Higher risk players looking for entries on pullbacks may find support at $61, $60 and $58. For the more cautious, wait for EBAY to surpass the $63 mark with conviction before considering an entry. While the stock continues to vastly outperform its sector, we recommend keeping an eye on movements in Merrill Lynch's Internet HOLDR (HHH). MO $51.94 -0.41 (+0.64) MO appears to be in a consolidation mode, after rallying from $46 at the end of April. Short term traders could take trades from moves between support at $50.50 and resistance at $52.50. Traders who want to get in before the Kraft IPO can use this time as an opportunity to pick good entry points. A pullback to the converged 5-dma and 10-dma at $51.70 could be a good entry point, particularly if others in the tobacco sector are strong. On Wednesday, MO and RJR were found NOT guilty in a wrongful death trial brought by the widow of a deceased smoker. In addition, MO offered a $1 billion 4% bond rated A2 by Moody's on Thursday. The longer MO can consolidate at these levels, the stronger the potential pre-IPO rally is likely to be. MO's 52-week high at $53.80 is turning out to be stubborn resistance, so a break above this level with heavy volume might be a green light for conservative traders to enter. We are moving closing stops tight to $51. JNY $46.00 -0.50 (+1.05) After breaking above resistance at $40 in the beginning of May, and surging to a new all time high at $46.65, JNY has been consolidating at the current levels. A little more strength in the retail sector, RLX.X, could propel JNY to higher heights in the days ahead. Ideally, we would like to see RLX.X break above resistance at 911, and move to February's high of 930. GPS reported earnings after the close, so monitor the market's reaction to these earnings tomorrow, as they may impact the retail sector. Traders can consider taking positions on a pullback to the 5-dma of $45.86, if RLX.X is exhibiting strength. We are setting closing stops tight to the $45 level, so be prepared to exit positions if JNY closes below this level. TGT $38.37 +0.37 (-1.33) TGT has been basing this week, and it is likely that the stock could make a spurt into its earnings report which is scheduled for next Tuesday, May 22nd before the opening. This week, Walmart reported a 4% increase in first quarter profits, and CSFB lowered its ratings on TGT to hold from a buy, which knocked the stock to $37 on Wednesday before a strong rebound on heavy volume ensued. TGT's ability to snap back after the downgrade is testimony to its technical strength. On Friday, traders should monitor the market's reaction to GPS's earnings, as this could impact the retail sector. If RLX.X moves above its current level at 911, this could signal traders to enter TGT, particularly if TGT could clear its converged 10-dma and 5-dma of $38.8 with strong volume. We are keping closing stops at $38, so end the play if TGT closes below $38. ADBE $43.60 +2.51 (+3.74) Not content to sit on its gains from Wednesday, ADBE shot higher right from the open, refusing to give aggressive traders a chance to climb aboard near the $41 level. It didn't take long before buying interest had pushed the stock through the next level of resistance at $43. While there was some late-day weakness as traders harvested profits, it came on relatively light volume, and the $43 level converted itself nicely to support. In light of the continued advance, we have moved our stop up to the $41 level, and a close below that level would be strong evidence of inherent weakness that has yet to show itself. For the time being, it looks like the bulls are still in control, and aggressive traders can target new entries on a bounce at either $43 or $41. $45 resistance will be the next hurdle for the bulls to clear, and a solid move through this level will signal more conservative players to step into new positions. ADBE tends to move in tandem with the GSTI Software index (GSO.X), and a continued advance in this index will help to propel ADBE higher in the days ahead. MER $68.86 -1.12 (+3.87) After breaking through resistance Wednesday, the MER bulls decided to rest. Despite a slight advance in the Securities Broker/Dealer index (XBD.X), MER gave up a little ground after twice failing to break above $70 today. On a positive note, the bears didn't have much success in attacking the stock's recent gains, as intraday support materialized near $68.75. That was until news broke after the close that the company plans to issue about $750 million of 30-year zero-coupon convertible senior bonds. Fear of dilution hit the stock in after-hours, dropping it to just above our $66 stop. While this could be providing an attractive entry point into the play, exercise caution, as a continued deterioration tomorrow could spell a premature end to our play. Financial stocks will need to participate if the DJIA is going to continue its advance, and strength tomorrow will provide confirmation that the bulls are still in control. Look for a move back through the $68 level to provide this confirmation. Following the herd as MER breaks above the $70 level will be the more conservative approach, especially if volume increases closer to the ADV. Q $37.82 +0.82 (+0.40) After meandering lower during most of yesterday's market-wide rally, Q found some interest from bullish traders near the $36.40 level before rallying into the close. The early action this morning was almost a mirror image, as the stock fell to the same level and bounced solidly throughout the afternoon, coming to rest just below $38. Both of the last two days, the 50-dma (currently $36.34) has provided support and with daily Stochastics now poking out of oversold territory, and the broader markets continuing to advance, Q seems to be setting up for an extended advance. Our stop is still resting at $36, and aggressive traders will want to use intraday dips above this level as an opportunity to initiate new positions. Resistance near $38 is keeping a lid on the recent advance, but once the price pushes above $38.25, conservative traders will have their opportunity to enter the play. The North American Telecommunications index (XTC.X) is still struggling to get going to the upside, but once it clears the $988 resistance level, it will provide more support for Q to advance in the days ahead. ******************* PLAY UPDATES - PUTS ******************* ENE $52.20 -2.81 (-6.00) A lack of resolution to the problems that are brewing in India led shares of ENE lower today, as it breached both the $53 and $55 support levels on its way to a 5% loss for the day. Lenders to the company's Dabhol Power Company (DBC) had postponed until Thursday a crucial vote on canceling the contract to sell power to India's Maharashtra state. The company has been sparring for six months now over payment defaults by the Maharashtra State Electricity board and the matter is expected to be resolved by a cancellation of the contract. India stepped in, urging ENE to renegotiate the contract, and the crucial vote was postponed until Friday. Failing to reach a decision today kept uncertainty alive and the bears grabbed the opportunity and ran with it, pushing selling volume to more than triple the ADV. This marks the lowest close for the stock since January of 2000, and while mild support exists near $47, it isn't out of the realm of possibility that the stock could test the $44-45 level before the bulls return. While aggressive traders may still be able to gain entry into the play on a bounce up to resistance at either $53 or $55, the ferocity of the bears over the past 2 days could mean that the next high-odds entry opportunity will come as ENE falls through the $52 level, today's low. Move stops down to $56, as a rally through that level will indicate the bears are loosening their grip on the stock. ************** NEW CALL PLAYS ************** AGGRESSIVE: HAL - Halliburton Hldg Co $47.31 +1.90 (+5.52 last week) Halliburton is the world's #1 provider of oil field services; essentially providing services and equipment to customers for the exploration, development and production of oil and gas. They operate in 120 countries and serve independent, integrated and national oil companies. The company's second business segment, Halliburton Engineering and Construction Group, builds energy-related and civil facilities for industrial customers and government entities worldwide. Revved up volume levels and a 13.2% move this week generated some excitement around the office. Today's technical breakout coupled with the underlying strength in the energy services sector presents traders with a positive predilection going into tomorrow. We're certainly bullish on the sector. Halliburton's competitors like Schlumberger (SLB), Baker Hughes (BHI), and Cooper Cameron (CAM) all making explosive charges to the higher realms. To top it off for HAL, the solid pullback to $45 today - before it sped through the $46 resistance - further established a strong level of short-term support. In regard to the trailing 5 & 10 DMAs at $44.76 and $43.30, they indeed bolster our $45 CLOSING stop; but honestly, these technical measurements may be a bit too deep to consider using as an entry gauge. A slight pullback in an advancing marketplace followed by a high-volume jump through $47.50 does however, offer a more reasonable opportunity to lock in gains. BUY CALL JUN-40 HAL-FH OI=2470 at $7.70 SL=5.50 BUY CALL JUN-45*HAL-FI OI=3324 at $3.60 SL=1.75 BUY CALL JUN-50 HAL-FJ OI=1168 at $1.15 SL=0.00 Aggressive! BUY CALL JUL-45 HAL-GI OI=6393 at $4.70 SL=2.75 BUY CALL JUL-50 HAL-GJ OI=3313 at $2.15 SL=1.00 Average Daily Volume = 2.89 mln http://www.premierinvestor.com/oi/profile.asp?ticker=HAL BAC - Bank of America Corp. $56.60 +0.05 (+3.08 this week) Providing a diversified range of banking and certain non-banking financial products and services, BAC's operations consist of Consumer Banking, Commercial Banking, Global Corporate and Investment Banking, and Principal Investing and Asset Management. Consumer Banking targets individuals and small businesses, while Commercial Banking targets businesses with annual revenues up to $500 million. Global Corporate and Investment Banking provides investment banking, trade finance, treasury management, leasing and financial advisory services. Principal Investing includes direct equity investments in businesses and general partnership funds. It goes without saying that the Financial sector benefits directly from lower interest rates. A decrease in rates lightens the burden that is called the cost of doing business, leading to higher margins and better than expected earnings. Since discounted future earnings in part make up the perceived value of a stock, improved prospects for future earnings gives share prices incentive to rise. The 50 basis point rate cut on Tuesday resulted in an even more favorable economic environment for Financial stocks. With the Fed Funds rate below the two-year note, banks can buy at the short end of the yield curve and sell at the long-end, thereby capturing the spread. On a more company-specific level, shares of BAC have performed better than those of industry rivals such as C and JPM. The stock successfully tested its 50-dma (now at $53.76) recently, resulting in a strong bounce of almost 6 percent so far this week. Now in striking range of its 52-week high of $61, BAC will first have to surpass formidable resistance at $57.50. Conservative traders may look for continued buying pressure to take the stock above this level before taking a position. In doing so, make sure that the S&P Bank Index (BIX) confirms sector strength. For aggressive traders, pullbacks intra-day to support at $56.50, $56, the 5 and 10-dma at $55.22 and $55.55 respectively, and our closing stop price of $55 may allow for potential entry points. BUY CALL JUN-50 BAC-FJ OI= 4355 at $7.10 SL=5.00 BUY CALL JUN-55*BAC-FK OI= 2018 at $2.85 SL=1.50 BUY CALL JUN-60 BAC-FL OI= 3246 at $0.75 SL=0.00 BUY CALL AUG-55 BAC-HK OI=10893 at $4.90 SL=3.00 BUY CALL AUG-60 BAC-HL OI=14919 at $2.45 SL=1.25 Average Daily Volume = 5.93 mln http://www.premierinvestor.com/oi/profile.asp?ticker=BAC ************* NEW PUT PLAYS ************* AGGRESSIVE: CIEN - Ciena Corporation $57.75 -2.15 (-1.98 this week) Helping to satisfy the insatiable demand for bandwidth, Ciena makes dense-wavelength division multiplexing (DWDM) systems for use with long-distance fiber-optic communications networks. CIEN offers optical transport, intelligent switching and multi- service delivery systems that enable service providers to deliver and manage high-bandwidth services to their customers. The company's MultiWave DWDM systems allow optical fiber to carry up to 40 times more data and voice information without requiring more lines. CIEN's customers include long-distance carrier, competitive local exchange carriers (CLECs), Internet service providers and wholesale carriers. Ciena reported results for its second quarter before the market open today, beating Street estimates by a penny and more than doubling revenues year-over-year. Despite the better-than-expected performance, traders sold the stock in light of comments made during the conference call. While the company did not lower their guidance going forward, the CEO stated about the current environment was one of uncertainty. The company also conceded that it was not completely immune to the slowdown in capital expenditures on the part of the Telecoms. What's more, smaller, hungrier companies are nipping at CIEN's heels, with upstarts such as Corvis using a competitive price strategy to capture market share. Faced with the prospects of an uncertain future, continued slowdowns in spending from major customers and the possibility of a price war, it's no wonder the sellers won out today, as CIEN fell 3.65 percent today on over 1.56 times the average daily volume. For this put play, we are placing our stop at $60 resistance. Aggressive traders may target failed rallies as the stock approaches this level, along with $58, but confirm with volume. Continued bearish sentiment could take this stock down to the $52 level in the near term. If CIEN meets this price objective, this could be an opportunity to take some profits. A break below support at $56 with conviction may be a signal for conservative players to jump in. In both cases, correlate entries with direction and movement in the AMEX Networking Index (NWX). BUY PUT JUN-60*EUQ-RL OI=3552 at $7.90 SL=5.75 BUY PUT JUN-55 EUQ-RK OI=2173 at $5.00 SL=3.00 Average Daily Volume = 42.28 mln http://www.premierinvestor.com/oi/profile.asp?ticker=CIEN JNPR - Juniper Networks $53.44 -4.45 (-0.82 this week) As a provider of Internet infrastructure solutions, JNPR serves Internet service providers and other telecommunications service providers, helping them to meet the demands resulting from the rapid growth of the Internet. The company delivers next generation Internet backbone routers that are specifically designed for service provider networks. JNPR's flagship product is the M40 Internet backbone router, which complements the recently-introduced M20, which is a router built specifically for emerging service providers. The routers provided by the company combine the features of the JUNOS Internet Software, high performance ASIC-based packet forwarding technology and Internet-optimized architecture into a purpose-built solution for service providers. No, your eyes are not deceiving you; JNPR is back. Only one day after we were stopped out of the play, the company was in the news again and investors didn't like what they heard, whacking the stock for a 7.5% loss today. Underscoring the strength of the decline, volume came in north of 43 million shares, more than 50% above the ADV. So what was this terrible news, you ask? Earning the "creative language" award for the day, the company stated at a CSFB conference that it isn't changing guidance, but that there is a risk of a 10% decline in revenues. Investors didn't take kindly to the clever wording, interpreting it as a pre-warning warning. It didn't take long for the stock to sell off to recent lows with more than 24 million shares being sold in the final two hours of the session. So we're back to where we started a couple days ago. The $52 level (also the site of the 50-dma) will be the next support level for the bears to attack, but with the spectre of declining revenues, they could very well be more successful than earlier in the week. Conservative investors will want to wait for continued strong volume to push JNPR below this level, while more aggressive players will want to wait for an intraday bounce before playing. Despite an early move above $60 this morning, resistance should hold firm at $58, and this is where we are initially placing our stop. Now that the company's outlook has deteriorated, look for resistance to turn weak rallies back at the $54 or $56 level, providing easy pickings for aggressive traders. As JNPR moves lower, support levels to watch for a possible bounce will be at $50, and then $47. BUY PUT JUN-55*JUX-RK OI=5911 at $6.90 SL=5.00 BUY PUT JUN-50 JUX-RJ OI=9125 at $4.50 SL=2.75 BUY PUT JUN-45 JUX-RI OI=1903 at $2.95 SL=1.50 Average Daily Volume = 28.6 mln http://www.premierinvestor.com/oi/profile.asp?ticker=JNPR ********************* PLAY OF THE DAY - PUT ********************* ENE - Enron $52.20 -2.81 (-6.00 this week) Originally only an energy company, in recent years ENE has moved into the communications market as well. Through its subsidiaries, the company is primarily engaged in the transportation of natural gas through pipelines throughout the United States, and the generation, transmission and distribution of electricity to markets I the northwestern United States. ENE also markets natural gas, electricity and other commodities and finance services worldwide. Most recently, the company has moved into the Communication business, developing an intelligent network platform to provide bandwidth management services and deliver high bandwidth applications. Most Recent Write-Up A lack of resolution to the problems that are brewing in India led shares of ENE lower today, as it breached both the $53 and $55 support levels on its way to a 5% loss for the day. Lenders to the company's Dabhol Power Company (DBC) had postponed until Thursday a crucial vote on canceling the contract to sell power to India's Maharashtra state. The company has been sparring for six months now over payment defaults by the Maharashtra State Eectricity board and the matter is expected to be resolved by a cancellation of the contract. India stepped in, urging ENE to renegotiate the contract, and the crucial vote was postponed until Friday. Failing to reach a decision today kept uncertainty alive and the bears grabbed the opportunity and ran with it, pushing selling volume to more than triple the ADV. This marks the lowest close for the stock since January of 2000, and while mild support exists near $47, it isn't out of the realm of possibility that the stock could test the $44-45 level before the bulls return. While aggressive traders may still be able to gain entry into the play on a bounce up to resistance at either $53 or $55, the ferocity of the bears over the past 2 days could mean that the next high-odds entry opportunity will come as ENE falls through the $52 level, today's low. Move stops down to $56, as a rally through that level will indicate the bears are loosening their grip on the stock. Comments After Wednesday's sell signal on ENE's Point & Figure chart, we added this energy concern as a put. Weakness continued today as supply continue to hit ENE, and volume was huge, coming in at four times ADV! We see further downside in this play. Look for rollovers from $53 to enter or on a further breakdown through $52. BUY PUT JUN-60 ENE-RL OI=2935 at $8.30 SL=6.50 BUY PUT JUN-55*ENE-RK OI=2307 at $4.30 SL=2.75 BUY PUT JUN-50 ENE-RJ OI=2163 at $1.80 SL=1.00 Average Daily Volume = 3.62 mln http://www.premierinvestor.com/oi/profile.asp?ticker=ENE ************************ COMBOS/SPREADS/STRADDLES ************************ The Rally Continues... The stock market extended its recent gains today on continued strength in blue-chip issues and renewed speculation in hi-tech shares. Wednesday, May 16 Industrial stocks led the market higher today with the Dow Jones average closing at its highest level in 9 months. Technology issues also rallied as investors applauded the most recent rate by the Federal Reserve. The Dow was up 342 points at 11,215 and the NASDAQ closed up 80 points at 2,166. The S&P 500 index ended 35 points higher at 1,284. Trading volume on the NYSE hit 1.35 billion shares with winners beating losers 2-to-1. Activity on the NASDAQ was heavy with 2.06 billion shares exchanged. Hi-tech advances beat declines 23 to 15. In the bond market, the 30-year Treasury rose 20/32, pushing its yield down to 5.86%. Tuesday's new plays (positions/opening prices/strategy): National (NYSE:NCC) OCT30C/JUN30C $1.05 debit calendar Mellon (NYSE:MEL) SEP50C/SEP40P $0.10 credit synthetic Mellon (NYSE:MEL) JUN40P/JUN42P $0.50 credit bull-put State St. (NYSE:STT) JUN90P/JUN95P $0.50 credit bull-put The brief retreat during the morning session provided some good opportunities to open the new combination positions at favorable prices. Since I was not able to monitor today's activity, these (conservative) quotes are based on "time and sales" data. Portfolio Plays: The stock market experienced a strange "delayed-reaction" rally today in the wake of the Fed's decision to reduce interest rates. On Tuesday, the FOMC announced they had cut interest rates by 50 basis points for a fifth time this year and looking forward, the Fed also said the "risks are weighted toward conditions that may cause economic weakness." Analysts viewed the cautious statement as an indication that more rate cuts may occur in the future and the optimistic outlook combined with favorable inflation data to cause a buying spree. Blue-chip stocks rallied to recent highs with all but one Dow stock ending the day "in the black." Alcoa (NYSE:AA), Minnesota Mining (NYSE:MMM) and United Technologies (NYSE:UTX) closed at all-time highs while Caterpillar (NYSE:CAT) posted a new 52-week high. Technology components also recovered with Hewlett-Packard (NYSE:HWP), International Business Machines (NYSE:IBM), Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) among the bullish issues. On the NASDAQ, chip stocks rallied even as a number of negative analysts' comments and earnings warnings were announced. Goldman Sachs lowered its earnings forecasts on some popular semiconductor issues and CS First Boston cut its 2001 PC industry unit growth target to 0%, but the news had no effect on the renewed optimism for the group. Stocks in the networking and Internet sectors were also strong as traders looked for bargains in high growth shares and computer hardware and software issues enjoyed excellent gains. In broader market trading, almost every group moved higher with retail, biotechnology and cyclical issues among the best performers. The Spreads Portfolio was awash in a "sea of green" today as the Dow experienced its second-biggest point gain this year. Stocks in all the major groups rallied and there was very little bearish activity during the session. Some of the big winners were Human Genome Sciences (NASDAQ:HGSI), PMC Sierra (NASDAQ:PMCS), Network Appliance (NASDAQ:NTAP), Nextel (NASDAQ:NXTL) and Cisco Systems (NASDAQ:CSCO). Blue-chip technology shares were also strong with Intel (NASDAQ:INTC), Hewlett Packard (NYSE:HWP) and AT&T (NYSE:T) moving higher. Among the industrial issues, Providian (NYSE:PVN), Lehman Brothers (NYSE:LEH), Merrill Lynch (NYSE:MER), Progressive (NYSE:PGR) and Liz Claiborne (NYSE:LIZ) continued to rally and a recently slumping issue, Unitedhealth (NYSE:UNH) rebounded above $60 after last week's precipitous sell-off. The move provided a great opportunity to close the sold (short) put in the synthetic position for a very small loss and prevent potential ownership of the underlying issue. In the lower-priced category, ADC Telecom (NASDAQ:ADCT) jumped almost $1 to $9.27 and our bullish play is a approaching a favorable early-exit profit. Today's closing credit offered an $0.80 gain and we will target a $1.00 overall profit to close the position. One of our long-term issues, Hewlett-Packard (NYSE:HWP) reported reported favorable second-quarter earnings of $0.18 a share. The company's actual earnings, which do not include one-time charges, were $0.15 per share. The company also widened its third quarter revenue growth estimate to flat-to-down 5% but said current third quarter earnings estimates are reasonable. Investors cheered the news and shares of HWP rallied $2 in after-hours trading. If the upward trend continues, we should be able to write some new calls against our current LEAPS. Sprint (NYSE:FON) also announced new earnings guidance, saying it expects second-quarter and full-year revenues to miss estimates because of lower-than-expected profits from its global markets segment. Bankruptcies among its wholesale customers and weak demand for long-distance service will cause the company's profits to fall short of previous expectations. Sprint, which is the United States' third largest long-distance company, said that second-quarter earnings at its FON Group would be $0.28 to $0.30 per share against analysts' forecasts of $0.32 per share. On the good side, Sprint said earnings from the FON Group's local phone and directory publishing businesses would be "in line" with expectations and although they lowered their price target to $29, Morgan Stanley Dean Witter analysts reaffirmed their "outperform" rating on the issue. Our bullish calendar spread (AUG25C/APR25C) has already offered a favorable early-exit profit but traders who plan to remain in the position should consider selling additional time premium to offset any near-term losses. Thursday, May 17 The stock market extended its recent gains today on continued strength in blue-chip issues and renewed speculation in hi-tech shares. A rally in Hewlett-Packard (NYSE:HWP) boosted the Dow 32 points to 11,248 while broad buying support in the technology group propelled the NASDAQ to a recent high of 2,193. The S&P 500 index finished up 3 points at 1,288.49. Volume on the NYSE was fairly heavy at 1.34 billion shares traded with advancing issues outpacing declining issues by 19-to-12. Activity on the NASDAQ was also higher than normal with over 2.1 billion shares exchanged. Technology advances beat declines by 12 to 7. The strongest issues in the industrial segment were Disney (NYSE:DIS), McDonald's (NYSE:MCD), Boeing (NYSE:BA), General Motors (NYSE:GM) and United Technologies (NYSE:UTX). Among technology companies, Internet and computer hardware shares supported the rally and semiconductor issues were also popular. In the broader market, biotechnology, retail, cyclical, brokerage and airline issues moved higher while natural gas, oil and oil service and some financial stocks consolidated after recent gains. Portfolio Plays: The Spreads section enjoyed another day of bullish activity and with only one session remaining before May's options expiration, it appears this is going to be the most profitable month of 2001. The recovery in financial issues has helped our portfolio excel and one of the new positions, Mellon Bank (NYSE:MEL) has reached the short-term profit target. After just two days, the bullish synthetic position (SEP50C/40P) has achieved a $1 closing credit. In the technology group, Hewlett Packard (NYSE:HWP) was one of the big winners, up over $4 after saying on Wednesday that its second-quarter profits fell 66% year-over-year. HWP's revenues also dropped 4% over the year-ago period to $11 million but the company assuaged investors, commenting that it sees "signs of progress" and was comfortable with the consensus third-quarter earnings estimate of $0.23 per share. Our bullish Covered-calls with LEAPS play at $40 benefited from the upward movement and there were opportunities to sell June options to reduce the cost basis in the position. Among other categories in the portfolio, the biotechnology section was led by Chiron (NASDAQ:CHIR) and Human Genome Sciences (NASDAQ:HGSI). PMC Sierra (NASDAQ:PMCS) topped the semiconductor segment and Nextel (NASDAQ:NXTL) was a leader in wireless telecom. Lowe's (NYSE:LOW) was the biggest mover in retail stocks and Active Power (NASDAQ:ACPW) led the utility group. In the small-cap group, ADC Telecom (NASDAQ:ADCT) continued to rally, closing at $9.60 and the upside move offered a great early-exit opportunity in the bullish synthetic position. Another issue in that section, Stratos Lightwave (NASDAQ:STLW) jumped over $2 and the recent bullish collar was available near the target cost basis. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** PVN - Providian Financial $56.85 *** Rally In Progress! *** Providian Financial (NYSE:PVN), through its subsidiaries, is a leading provider of lending and deposit products to customers throughout the United States and they also offer credit cards in the United Kingdom and Argentina. The company serves a broad, diversified market with its loan products, which include credit cards and membership services products. The company also offers various deposit products and has more than $31 billion in assets under management and over 14 million customers. I received some positive comments on the recent positions in the Financial Services segment and since issues in this category are performing very well, I decided to look for another candidate in the industry. Companies that offer credit services are usually popular in an improving interest-rate environment and Providian is one of the leaders in the group. In April, the company posted 30% earnings per share growth for the first quarter 2001 on total profits of $230 million, well above the $174 million in the first quarter of 2000. During the quarter, customer accounts grew to 17.1 million, a 31% increase over the end of the first quarter of 2000, driven by new accounts and strong customer retention. The total number of managed loans also increased by $1.3 billion to $28.4 billion in what is typically a seasonally slow quarter for that segment. The CEO said the company continues to build a very strong consumer franchise, as evidenced by a continued high level of customer retention during the quarter, and he is very pleased with the positive business momentum in the midst of an uncertain economy. In other news, the company recently merged its e-commerce products and services under GetSmart, a unique, online financial services marketplace that gives consumers single-point access to a variety of products and tools from numerous independent financial service providers. The site offers an account aggregation feature called Daily View, online bill paying, mortgages, second and home equity loans, auto loans, credit cards, money market accounts, long-term certificates of deposits and other common financial products. In addition to providing clients with competitive financial products and services from its network of partners, GetSmart also offers a number of branded products, such as the GetSmart Visa card, that enhances its service offerings to consumers. In short, GetSmart offers consumers a convenient place where they can find products and services that meets their needs and helps them effectively manage their finances. Investors apparently agree with the approach the company is using to increase their business and this position offers a low risk method to potentially profit from future bullish activity in the company's share value. Target a higher credit in the position initially, to allow for a brief consolidation from the recent rally. PLAY (very speculative - bullish/synthetic position): BUY CALL JUN-65 PVN-FM OI=490 A=$0.60 SELL PUT JUN-45 PVN-RI OI=1375 B=$0.40 INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.50 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,200 per contract. http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=PVN ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** UNP - Union Pacific $59.75 *** Delta-Neutral Speculation *** Union Pacific (NYSE:UNP) primarily provides rail transportation. The company's rail segment includes the operations of its wholly owned subsidiary, Union Pacific Railroad Company and UPRR's many subsidiaries and rail affiliates (collectively, the Railroad). The company has other operations including a trucking product line, Overnite Transportation Company, as well as other product lines that include the corporate holding company (which largely supports the Railroad), Fenix LLC and its affiliated technology companies, and self-insurance activities. The company's rail customers include Eastman Chemical, Midwest Generation, Thrall Car Manufacturing, DaimlerChrysler, and Toyota. Almost every week I receive new requests for conservative debit straddles. Unfortunately, with the recent market volatility the number of theoretically favorable candidates has declined. That is not to suggest that you can't make money in the strategy, it just means you can not focus entirely on the classic volatility theories in your research. In today's scan, we have identified a number of interesting candidates and based on analysis of its historical option pricing and technical background, this issue meets the fundamental criteria for a favorable straddle. As you have come to expect, the probability of profit in this position is higher than other plays in the same strategy, due to favorable option pricing but current news and market sentiment will have an effect on the stock's movement. Review the play thoroughly and make your own decision about the future outcome of the position. PLAY (speculative - neutral/debit straddle): BUY CALL JUN-60 UNP-FL OI=656 A=$1.80 BUY PUT JUN-60 UNP-RL OI=69 A=$2.60 INITIAL NET DEBIT TARGET=$4.25 TARGET PROFIT=25% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=UNP ****************************************************************** SNE - Sony Corporation *** Probability Play! *** Sony (NYSE:SNE) develops, designs, makes and markets electronic equipment, instruments and devices for consumer and professional markets. Sony develops, produces, manufactures and sell home-use entertainment hardware and software, principally through Sony Computer Entertainment. Sony also develops, produces, makes and distributes recorded music through Sony Music Entertainment and Sony Music Entertainment. Sony develops, produces, manufactures, markets, distributes and broadcasts a wide range of image-based software, including film, video, television and new entertainment technologies through Sony Pictures Entertainment. Sony conducts insurance operations through its Sony Life Insurance and its Sony Assurance subsidiaries. In addition, Sony is engaged in leasing and credit financing, satellite distribution services including program supplying businesses in Japan, and also Internet-related businesses and location-based entertainment complexes. Profitable debit straddles are relatively simple to uncover and there are three rules to identifying favorable conditions for a straddle purchase. First, the trader should select options that are undervalued (cheap). Next, the underlying security must have the potential to move (high or low) enough to make the straddle profitable. Finally, the underlying stock should have a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk/reward of the position. SNE has acceptable values in all three categories and because it is based overseas, the issue is also affected by developments in the international marketplace. Traders who think Sony is a good candidate for future volatility can profit from that outcome with this conservative position. Our initial target debit in the play will be slightly lower than the current quoted price, to allow for some shrinkage in the premiums as the issue has been volatile during the last few sessions. PLAY (conservative - neutral/debit straddle): BUY CALL JUL-80 SNE-GP OI=388 A=$6.40 BUY PUT JUL-80 SNE-SP OI=34 A=$4.00 INITIAL NET DEBIT TARGET=$10.15-$10.20 TARGET PROFIT=25% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=SNE ****************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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