The Option Investor Newsletter Sunday 05-27-2001 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/052701_1.asp Entire newsletter best viewed in COURIER 10 font for alignment Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 5-25 WE 5-18 WE 5-11 WE 5-4 DOW 11005.37 -296.37 11301.74 +480.43 10821.31 -129.93 +141.19 Nasdaq 2251.03 + 52.15 2198.88 + 91.45 2107.43 - 84.10 +115.85 S&P-100 658.29 - 10.09 668.38 + 22.95 645.43 - 13.31 + 9.63 S&P-500 1277.89 - 14.07 1291.96 + 46.29 1245.67 - 20.94 + 13.56 W5000 11849.89 - 73.63 11923.52 +432.18 11491.34 -195.93 +178.43 RUT 508.62 + 2.34 506.28 + 18.92 487.36 - 5.53 + 8.92 TRAN 2929.20 - 49.75 2978.95 + 99.39 2879.56 + 10.37 + 6.82 VIX 23.15 - 1.11 24.26 - 3.22 27.48 - .24 - .05 Put/Call .62 .47 .63 .67 ****************************************************************** What is the Definition of Support? by Jim Brown Answer: Friday's close on the Dow and Nasdaq! Each closed within a whisker of being exactly on critical support levels. The Nasdaq closed at 2251, a mere one point above critical support at 2250. The Dow also snugged in close to 11000 at 11005. The S&P remains about 10 points above support. With a blessing from Greenspan on Thursday the light is green for a post holiday rally if the bulls can muster up the courage to attend. Thank you grandpa! You could not tell it from the major indexes on Friday but Greenspan gave the economy and the markets his blessing in the Economic Club of New York speech on Thursday. He warned that the manufacturing correction is not yet over, (old news) but that the Fed was monitoring the problem and they would not be bashful should it require a policy response. (further rate cuts) He said "this period of sub-par economic growth is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated, requiring further policy response" but there was no sign of inflation and productivity was still growing. Count on interest rates going lower and count on the economy recovering in the last half of the year. That was the bottom line of the wordy message. He did suggest that the five previous rate cuts would provide needed support and the Fed may be toning down its aggressive posture. The economic reports out Friday did not project a picture of glowing economic health. The first quarter GDP was revised downward to +1.3% from the previously reported 2.0%. Things are not as rosy as previously projected. Couple that with Greenspan's "not out of the woods" speech and traders were a little cautious. Also existing home sales fell an incredible -4.2% showing that not only new homes are staying on the market longer but all homes. It appears that consumer confidence, which came in Friday at .92 as expected, may be about to take a turn for the worst as evidenced by home sales. If they are not buying houses then they are not buying appliances to go in those houses. Durable Goods came in with a -5.0% drop which was much more than expected. What we have here is light at the end of the tunnel with the Greenspan comments, but the tunnel just got longer, much longer. This was the main culprit for holding back the markets on Friday. It also did not help that a major analyst was talking GE down as well. Saying that short cycle products were still declining in May and there was evidence that Jack Welch's comments, "ugly and getting worse" may still be true. Long cycle products like aircraft engines were still in a growth mode of about 20% for GE but consumer type items were dragging them down. GE and HON both fell on the news as well as UTX and MMM in sympathy. GE also fell on the news that they, along with Goldman Sachs, would provide $7 billion to rescue Finova, FNV. Pocket change, right? The Nasdaq fell despite an upgrade of the semiconductor sector. The culprits Friday were ADCT and DITC whose earnings problems tanked the communications/networking sectors and overpowered the semiconductors. Even JNPR, which was rumored to have won a contract over CSCO, dropped -2.41. Lehman made a very public call saying the second half of the year may be more challenging than previously expected. There were no winners in anything Nasdaq with profit built in over the last two weeks. With so much uncertainty in the U.S. a well as overseas, the urge to go into the long weekend flat was just too strong. Still volume was still VERY light. The Nasdaq just squeaked out a second lightest day of the year award with 1.38 billion while the NYSE posted the lowest volume day of the year at only 818 million. Remember the almost 30,000 volume on the Microsoft leaps on Thursday? There was another 15,000 of the Jan-02-120 calls on Friday. Merrill Lynch analyst, Henry Blodget, came out Friday pounding the table on Microsoft. That was just a coincidence, right? You don't think Merrill Lynch would take a 45,000 leap position just before their golden boy went bullish on the stock? It did not do Blodget any good because MSFT lost -.81 for the day. That was also surprising since MSFT and AOL are now kissing cousins again. The feud between MSFT and AOL, which bought Netscape, appears over and they are reportedly going to announce a deal where MSFT will bundle AOL software with the new Windows XP. Could this be a condition for a pending settlement with the Justice Dept? If MSFT and AOL do get together again it could be trouble for RealNetworks. RNWK has refused to slim down its software for AOL and their agreement is ending. AOL could easily go with Windows Media Player instead and I am sure MSFT would love to grab 28 million more users away from RNWK. (Note: I was talking to one of the other editors late Friday night and I went back to show him the volume on the MSFT leaps and all the daily volume was gone as well as the open interest on the CBOE. I mention this in case it was all a data problem at the CBOE but it was there at 4:PM!) Next week could be a challenge. Since both major averages have dropped back to basically a goal line stand on their previous breakout points, trading could be tricky on Tuesday. After the Friday morning dip and recovery the Nasdaq held 2250 the rest of the day. The Dow only dipped below 11000 once to 10993 and quickly rebounded. However, the Dow does not look as healthy as the Nasdaq and with a -117 close you can see why. It is trending down rather steadily and not far from the low of the day. Just profit taking? Maybe, but the line was drawn in the sand at 11000 by a beaten and battered defender not a bull with just a bloody nose. The VIX was behaving strangely on Friday. With both major indexes falling the VIX was heading DOWN for a 23.15 close. This is a number not seen since September of last year. The saying "when the VIX is low its time to go" has always worked in the past but how low is low? Last August the low was near 18. This was just before the Dow rolled over at 11250 and fell to 9656. What is strange about this is the market was falling triple digits on Friday which normally pushes the VIX up as traders buy puts. Is everyone so bullish they are not even considering puts? Do we have a disaster waiting to happen here? If so, the conditions are setting up so quietly that many may get caught by surprise. This is something traders really need to watch next week. With summer officially upon us and Tuesday likely to be a very low volume day as well, it may be Wednesday before we can confirm direction. The battle may be fought in minor skirmishes Tuesday and as yet unknown news headlines will control our fate. The first economic reports to worry about are the Personal Income and Spending on Tuesday, Chicago PMI on Thursday and the biggie, Nonfarm Payrolls on Friday. The midweek reports are noise but the Payroll report could be trouble. With the economy possibly weaker than expected by the Fed's own admission, falling payrolls could trigger more uneasiness. Put worry about the payrolls together with very low volume and we could see a volatility spike and support levels tested again. On the other hand, investors, not traders, have pretty much accepted the fact that the patient will not die and the antibiotic has already been administered. Next week it will be up to the true believers to hold the line. Would the true believers please stand up! We are behind you all the way, at least until the Nasdaq falls below 2250 and then you are on your own! Away from your computer? Call 900-378-PICK and get this information along with the intraday updates and plays. Enter passively, exit aggressively! Jim Brown Editor ******************************************** New Online Seminar Schedule for June ******************************************** Thirty different seminars from the comfort of home! Imagine being able to learn the tips and tricks of investing without leaving your home. You can do that with our new online seminar product. Taught by the professional traders you read every day and now those traders are available to answer your questions. The seminars average 2 hours and are interactive. You will be able to ask questions and the presenter will answer your questions in real time with charts and diagrams. Click here for the complete list! http://www.premierinvestorseminars.com/seminarcalendar.asp *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.IndexSkybox.com ************************************************************ ************** EDITOR'S PLAYS ************** I am going to keep it short this week. Since market direction is still not known I am cautious about entering plays without a safety net. The easiest way to do this is with bull put spreads. You can maximize your upside as far as you want and at the same time limit your downside. I will use EBAY as an example: After a strong run from $30 EBAY has a lot of profit built in and if the market starts to tank there will be selling. Still EBAY could continue up as one of the only profitable Internet companies. Very profitable and growing. It was announced last week that SunMicro sold $100 million in surplus equipment on EBAY over the last year. Surprise! You and I are not the only customers placing junk on auction. As more and more companies move to EBAY to sell their excess inventory discreetly EBAY profits will soar, or so the analysts say. Still I am concerned about the $30 of profit so I do not want to enter any play without insurance. The way I would play this is to buy the June-$60 put at $3.30 and sell the June-70 for $8.80. I actually like the June-85 better for the short side but there is no open interest so the odds of an assignment are greater. Your risk in the trade is any drop in the stock to $60 plus the premium paid for the long put. Personally I would use the long put just for insurance and put a stop loss on the short side only at about $59.75. Just under $60 to prevent the price magnet syndrome from taking you out. I would not enter the trade until 30 min after the open on Tuesday. If we get an opening dip and rebound, sell the short side on the bounce and buy the long side before the close, hopefully after it has rebounded a couple dollars. If EBAY continued to fall under $60 your short side would be closed and your long $60 put would be increasing in value. The $55 area could be support and I would close the long side under $56. Another play using this same strategy would be the QQQ. The QQQ closed right at $49 on Friday with the Nasdaq at 2251. The QQQs should not break 48 without the Nasdaq breaking 2200. I would buy the June-47 puts for $1.30 to limit your risk in case of a disaster and sell the June-55 for $6.20. If we get a rally before the summer slump we could see 52-53 easy. I would set a buy to close stop on the short side at 53 or above. That would mean about a $4 profit plus any remaining value on the 47 put which would be minimal. If the market is moving strongly I would let the short put run and just follow it up with a trailing stop. Your risk in this play is the difference between 49 and 47 (-2) and the price paid for the long put (-1.30). Your maximum profit is the amount received for the short put (6.20) minus the 1.30 for the long put or 4.90. Enter passively, exit aggressively! Jim *********************************** If you like this type of strategy but would like to learn how to use it on a much more aggressive basis then attend the Capturing Profits using Leap Puts seminar on Wednesday at 9:PM ET. http://www.premierinvestorseminars.com/online/052001_jbrown.asp *********************************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=2217 ************************************************************** **************** MARKET SENTIMENT **************** Predicting Profits By Matt Russ Since the rate cut back on May 15th, all the major market indices have had fantastic gains. It was to be expected that we would see some retracement. But it is predicting the magnitude of the profit taking that is the challenge. While investor sentiment and confidence continues to improve with the recent breakouts, it would be a disservice to say the selling is over and we are back on the bull track. Pullbacks represent opportunity in this type of environment. So let's get right to it and identify some key levels, look at the COT report, and where demand may lie. NASDAQ & QQQ The Nasdaq closed right at 2250 on Friday. Off the open, the COMPX quickly put in its high and low of the day, 2282 and 2242. The 30 point decline was simple consolidation and traders just taking a little off the top before heading away for the holiday weekend. Volume was very light at 1.36 bln. Ideally, on the support side, we'd like to see the 2232 area continue to hold. Below that, expect support at 2200 which corresponds with the 50% retracement level of the recent range. The 2405 anchor is the 61.8% level from January 24th high to the April 4th low, which was shown on Thursday. Resistance overhead will be 2280 and 2328. The QQQs have support at $48.50 and $47.25, with resistance at $50. SPX & OEX We had a breakdown through key support at 1281 on the SPX Friday. After Thursday's close at 1293, that level proved to be a point of supply as the index sold off from there throughout Friday's session. Our goal now is to determine how much profit taking is enough to result in demand returning. On the 30 minute chart, the SPX frighteningly resembles a head-and-shoulder(H&S) pattern. With the head at 1315 and the neckline at 1281, which was just broken today, the bearish objective is 1247. It certainly looks like a test of 1272, from which the index broke out, may be in the cards. Whether the SPX goes for the H&S bearish objective depends on whether the index holds the pivot of 1272. While the sentiment feels bullish after the recent run, we should prepare ourselves for the possibility of a pullback toward 1250. As a confirmation of the H&S objective, the Point & Figure chart shows that a healthy pullback may be due and a print of 1250 would be right on support, which will likely attract buyers. On a break of 1272, short opportunities may arise in some of the weaker S&P 500 issues. On the OEX, we see a very similar chart pattern, however, the pivot point of the breakout, 660, was violated Friday. Its close at 658 is right near support at 655-657. Below, look to 650. Resistance lies at 660 and 664. DOW 30 We saw consistent profit taking throughout the week on the Dow. Speculation that the Dow would retrace to test its breakout pivot near 11,000 has come to fruition. Previous highs prior to the break are noted by the blue line in the chart, approximately 10990. While GDP was revised lower as expected, the strong selling off the open was probably traders locking in profits and heading for the beaches early. Like the Nasdaq, volume was very light at 818 mln. The Dow did give up 117 points and a breakdown below 11,000 could attract more shorts, but we aware that a quick move below may just be a fakeout to trigger stops before advancing. It still is a very psychological level. On a breakdown, 10900 would be support and 10800 is very strong. If traders return to buy next week ahead of the Employment Report due out Friday, 11050 and 11100 will be overhead challenges. Friday was a typical light volume profit taking day ahead of a holiday weekend. The major indices retraced recent gains in a normal fashion. Right now, we are trying to identify new levels to trade. The COT Report tells us that both Commercials and Small Specs remained relatively unchanged on the DJIA and SPX futures. Commercials continue to be Net-Long the DJIA and Net-Short the SPX. Small Specs have the opposite position. However, the biggest change was in Small Specs closing 24% of their Net-Long positions on the Nasdaq. The little guys are taking some profits...and were right on the move! How often does that happen? The Commercials were forced to cover some of their shorts on the Nasdaq as a result of the recent move, going from Net-Short -21.87% to -14.87%. It good to see that they're not always right. Enjoy the Memorial Day weekend and watch those levels next week. Trade Smart, Matt Russ ********************** CBOT Commitment Of Traders Report: Friday 05/25 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 +63916 +65713 -70908 -72034 Total Open Interest % (+31.81%) (+32.56%) (-10.01%) (-10.15%) net-long net-long net-short net-short DJIA Futures Open Interest Net Value -7101 -7166 +8925 +8151 Total Open Interest % (-51.65%) (-54.70%) (+23.70%) (+22.89%) net-short net-short net-long net-long NASDAQ 100 Open Interest Net Value +444 +4578 -9946 -12711 Total Open Interest % (+2.24%) (+26.20%) (-14.87%) (-21.87%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: Commercials held their net short positions on the S&P 500 at 10 percent. Small Specs showed a tremendous reduction in net-long positions on the NASDAQ 100 while the Commercials lightened up on their net-short positions on the tech index. Data compiled as of Tuesday 05/22 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/052701_1.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=2224 ************************************************************** *************** ASK THE ANALYST *************** Homage By Eric Utley Not too long ago, I dreaded the weekends. After all, what's life without the market? Two entire days without monitoring price action was just too much, let alone an extended holiday weekend. But recently, I've been attempting to focus my energy towards self-actualization, which I think is a pyramid of needs and self-development, but not sure. At any rate, fly fishing and family are beginning to take a greater precedence in my life. Viewing an advertisement for the most recent war movie earlier this week reminded me that one of my grandfathers fought in the Korean War. In fact, both of my grandfathers served in the U.S. Military. And for reasons unknown to me, I have never thanked either of them. So it's with my new aim towards actualization, on the eve of Memorial Day, that I write the following: Grandpa Utley and Grandpa O'Leary, Thank you both and I love you. Indeed, to all of the veterans that read this column, I would like to send a resounding thank you for protecting something that I cherish: freedom. I don't mean to get mushy on my readers, but just remember to focus on the important things in life this weekend. And for those venturing to Yellowstone National Park over the holiday (Read: Eric's Family), make sure to tell those bears where to go... To all, have a safe and very enjoyable Memorial Day weekend! Send your stock requests to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- Veritas Software - VRTS Please advise your views on VRTS. Although OIN dropped this call play recently but it appears to be heading high. Is OIN waiting for it to cross $80 to be included as a call play once again? - Regards, Sunil Thanks for the question, Sunil! I can't say whether or not Option Investor will add Veritas (NASDAQ:VRTS) to the call list in the coming days if it breaks out over $80. I suppose it will depend upon our play posture at that time. As I've written in the recent past, I'm fairly bullish on the broader data storage sector over the short- and intermediate-terms. And the reason is that information is ubiquitous and the demand for data storage products is insatiable. Data storage products and services were one of the last components cut from information technology (IT) spending budgets last year. As such, I would expect that data storage would be one of the first to benefit from an increase in IT spending on the part of corporate purchasers. I think that we're starting to witness a rebound in corporate spending and, indeed, the data storage sector as evidenced by recent guidance given by Emc (NYSE:EMC), Network Appliance (NASDAQ:NTAP), Brocade (NASDAQ:BRCD) and even Cisco Systems (NASDAQ:CSCO). All of the aforementioned companies have recently hinted towards a rebound in the enterprise market. In short, the above rambling is my bullish argument for companies such as Veritas. So let us address the price action of Veritas. I don't necessarily believe that "chasing" stocks on breakouts is the best strategy in the current market, especially in tech stocks. Of course that is a very subjective statement in terms of time frames and risk tolerances; neither of which I can intelligently qualify for my readers. At the risk of contradicting myself, however, I do think that if the Nasdaq continues to advance and Veritas can convincingly clear the $80 level, we'll see the stock work up to the $100 level in the coming months. So if I don't think that "chasing" stocks is the most prudent strategy in the current market environment, I must be thinking entries on pullbacks. And in Veritas' case, I think a low-risk/potential high-reward entry would be provided on a pullback down around the $72 - 74 range. If that general support area holds, I think Veritas will bounce back up to the $80 level. If it doesn't hold, the risk is mitigated with a tight stop! ---------------------------- Cree - CREE What is your take on the technical picture for CREE? Is its uptrend capable of sustaining? - James Good question, James. Shares of Cree (NASDAQ:CREE) have had an incredible run from their April 4th lows. But over the past two weeks, the stock has ran into a trading range that has historically been filled with supply. The trading range I'm referring to is the $30 and $40 levels. Shares of Cree spent all of last December and January trading between those two levels and I would imagine that there are a large number of longs anxious to get out at current levels in order to breakeven from their purchases last winter. In addition, I would also imagine that there are still some shorts in the stock willing to defend their positions at current levels. On that note, there are still approximately 6 million shares short, or roughly 10 percent of the stock's float. I think it will take quite a catalyst to break Cree above its significant $40 resistance level in light of its current overbought condition. But if Cree did break above $40 I think the remaining shorts would cover, resulting in a violent advance up to possibly the $50 level. In the meantime, like the Veritas technical review above, I think the most prudent approach would be to enter Cree on a pullback, if you're bullish, of course. On the daily chart below, I've laid a retracement bracket over Cree's recent move from its low at roughly $12.20 up to the $36.60 level. Readers will note that the 38% retracements currently sits around the $27 level, while the 50% retracement lies just beneath at $24.40. A pullback to $27 on Cree's daily chart would coincide nicely with a demand level on Cree's point & figure chart. ---------------------------- Krispy Kreme Doughnut - KKD Everyone seems to be shorting KKD (including me) and we're getting burned. I must say, their management knows how to move the market via free doughnuts on the NYSE and lost of PR on CNBC and now a stock split coming up. Help me out oh wise one, why does a company that makes great doughnuts (which is not exactly a break through invention or cure to mankind's ills...I mean it's unhealthy and there is dunkin doughnuts) continue to go thru the roof with their stock prices? Their PE is out of sight for like industries. Is this like the dot coms of 1999 even if KKD does make a profit? They are on the upper ranges of the Bollinger bands, showing a screaming overbought, but are people like me and the institutions that are shorting this company causing this upsurge in price aka contrarian indicators? - Thanks, Skier1 Excellent question, Skier1! And I feel the code name. If you're a snow skier, and haven't already, I highly recommend visiting Alta, Utah, next season for its unsurpassed pow-pow before the 2002 Winter Olympics lets the world in on a little gem. The excellent question was posed in your request that if so many participants are short Krispy Kreme (NYSE:KKD), should it be viewed contrarily? To a certain extent, I think yes. When so many traders are short a stock, the edge in doing so becomes muted as the short side grows "crowded." That is, the fear of being wrong in the bearish bet can morph into mass covering and that buying perpetuates to the upside to the point of excess. And I think that is exactly what has happened since Krispy Kreme debuted on the NYSE at $59.40 per share. Roughly $14 later, I think the shorts are feeling some heavy heat. So readers know, roughly 33 percent of Krispy Kreme's float is currently sold short, which is very "crowded." I don't know about being a wise one, but I tend to agree with your thesis that shares of Krispy Kreme are overvalued at current levels, which is a product of not only the short covering, but the novelty of its brand. On a trailing twelve month basis, shares of Krispy Kreme trade with a multiple of 118, and sport a multiple of roughly 95 on a forward-looking basis. Either way you slice, the stock is overvalued. If Krispy Kreme was expected to grow earnings at a 100 percent clip over the next several years, I could justify its lofty valuation. But it's not. The company is expected to grow its bottom-line by roughly 25 percent, which gives its stock a price-to-earnings-growth (PEG) ratio of 3.8, on a forward-looking basis. Again, very rich! To reiterate, Krispy Kreme's lofty valuation is a product of recent short covering and the novelty of its brand. Having said that, I think there will be a point when a ton of money will be made in shorting this stock. But timing will be EVERYTHING! It may help, Skier1, if you go back and study the likes of the Snapple brand, or even the Amazon.coms (NASDAQ:AMZN) of the market and at what point fundamentals began to be reflected in the stock price. Obviously the fundamentals are NOT being reflected in shares of Krispy Kreme currently. One more quick note: In perusing the point & figure chart of Krispy Kreme, I noticed that the stock's bullish price objective - which was created following its advance past the $45 level in late April - was $74. The stock peaked last week at $75... ---------------------------- Netopia - NTPA ..Can you give me your opinion on NTPA and how it looks on a technically and also how it looks on a point & figure chart? - Thank you, Jay Netopia (NASDAQ:NTPA) is one of those fallen dot coms that we used to love to trade from the long side. These types of stocks are beginning to show life to the upside, and I'm not sure if it's solely a product of short covering or if we'll soon see an improvement in the underlying fundamentals of these businesses. If it's the latter, we're likely to have some good opportunities to make a lot of money from the long side in these stocks, again. For its part, Netopia makes and sells broadband Internet equipment and e-commerce platforms for small and medium-sized businesses. I don't have much insight into the company, per se. But I do know that it competes with the likes of Cisco and Lucent (NYSE:LU) in its router business, and IBM (NYSE:IBM), Computer Associates (NYSE:CA), Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) in other arenas. The reason I bring up its competitors is because Netopia may be an acquisition target if the rumored Lucent/Alcatel (NYSE:ALA) deal is a sign of coming consolidation in the networking business. Turning to the technicals, Netopia presents an interesting case study at current levels. In Friday's trading, the stock clearly traced a bearish reversal, insofar as Japanese candlestick proprietors are concerned. I consulted my good friend, John Seckinger, who confirmed that Netopia traced a shooting star Friday because it did not settle on its low. Had Netopia closed on its low for the day, John pointed out that it would've completed a gravestone doji. In either case, the stock looks poised to pullback and retrace some of its recent gains. What's even more interesting about Netopia's reversal Friday is that it nearly hit its bullish price objective of $8.25, which was generated from its advance from the $3.00 level to $4.50 earlier this month. Moreover, my astute colleague, Jeffrey Canavan, made a comparison of Netopia and Priceline (NASDAQ:PCLN) recently on PremierMarkets.com, which is very pertinent to our review here today: http://www.premiermarkets.com/archive/commentary/052401_5.asp Jeffrey drew some conclusions which I tend to agree with. And here's the point & figure chart analysis you requested, Jay. ---------------------------- 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 May 28th, 2001 Monday ====== None Scheduled Tuesday ======= Personal Income Apr Forecast: 0.30% Previous: 0.50% PCE Apr Forecast: 0.40% Previous: 0.30% Consumer Confidence May Forecast: 110.3 Previous: 109.2 Wednesday ========= Oil & Gas Inventory 25-May Forecast: NA Previous:324.6MB MBA Mortage Survey 25-May Forecast: NA Previous: 475.4 Thursday ======== Agricultural Prices May Forecast: NA Previous: 3.90% Initial Claims 26-May Forecast: NA Previous: 407K Chicago PMI May Forecast: 40.00% Previous: 38.90% Help-Wanted Index Apr Forecast: NA Previous: 66 Online Help Wanted Idx May Forecast: NA Previous: 105 Chicago Fed Idx Apr Forecast: NA Previous: -0.80% Friday ====== Auto Sales May Forecast: NA Previous: 6.4M Truck Sales May Forecast: NA Previous: 7.0M Nonfarm Payrolls May Forecast: -25K Previous: -223K Unemployment Rate May Forecast: 4.60% Previous: 4.50% Hourly Earnings May Forecast: 0.30% Previous: 0.40% Average Workweek May Forecast: 34.3 Previous: 34.3 Construction Spending Apr Forecast: 0.30% Previous: 1.30% NAPM Index May Forecast: 43.50% Previous: 43.20% Employment Situation May Forecast: 0 Previous: -223K ECRI Future Inflation May Forecast: NA Previous: 107.4 ECRI Wkly leading Idx 25-May Forecast: NA Previous: 122.5 Week of June 4th ================ Jun 05 Productivity-Rev. Jun 05 Factory Orders Jun 05 NAPM Services Jun 07 Initial Claims Jun 07 Wholesale Inventories Jun 07 Consumer Credit *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=2205 ************************************************************ 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 05-27-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/052701_2.asp ************** TRADERS CORNER ************** Mixed Signals Add To The Confusion By Renee White There are times when I have scoured charts, news and research trying to pick just the right candidate for a major market move. Feeling as though I have finally completed this project, I celebrate my decision and plan my entry on the next pullback. Then, the unusual seems to happen, as if the market knew I had picked a play and made up my mind. My research time goes down the drain and I start all over again. The addictive nature of trading the markets is a direct function of never being able to learn every detail that will affect the market for tomorrow's trading: a bottomless pit of information in an ever-changing scenario. Market bottoms are the most difficult to navigate and trade. The vacillations occurring at a bottom gives traders on both sides of the market, plenty of justification for their moves. These cross-signals are rarely read as being as dangerous as they are because once you are on the right side of the trade, it is easy to feel omnipotent. These are times when it is truly important to understand what your trading goal and style really is. Trading market bottoms can be dangerous due to the whipping activity there. Personally, I think two types of traders are best suited for this market: the day-trader who can react intraday and keeps a keen eye out for quick reversals, and the long-term investor who buys and ignores the gyrations of the position for 6-12 months. At that point, he should be able to look back and gloat at his courage to buy when stability was uncertain. Unfortunately, it is the swing trader and option trader who have the hardest time with mid-term market movements and short-term economic projections. When the business cycle is on the bottom, as we are now, it is hard to bank any short-term conviction with confidence. A perfect example of this is the recent political upheaval in the Senate. Something as historical as a shift in the voting margins of Senate immediately starts a sell off. I was hoping to enter some issues, during the seasonal spring weakness, but a change in the political environment has all my potential candidates dropping through support. How quickly things change. I couldn't help but wonder how much of the recent surge in these issues were actually due to politics. To add to the confusion, we've heard that natural gas inventories were beginning to stabilize and that there would probably be ample supply after all. Of course, there is always an unknown and this one is not knowing if next winter will be colder or warmer than usual. If it were warmer, I'd take profits now on plays that have recently run up. Oh, the luxury of a crystal ball. There are other things which just don't make sense to me about certain areas within energy, making play decisions difficult. For instance, California is definitely upset with Reliant Energy (NYSE:REI) these days. It seems as though Reliant saw a desperate situation and used capitalistic theory to capitalize their pockets. Californians have learned to talk with their teeth clenched when discussing the price gouging that has recently affected their sunny Californian lifestyle. I do feel for them. However, closer to home where Reliant cashes its checks, I am left confused. Beginning next month, we will be hit with a 30% increase in our electric bills. If inventory levels have stabilized, and natural gas prices have come down, why then a big permanent jump in rates? Furthermore, if the increase is due to potential defaults from California for not paying the inflated scavenger rates they were billed, then all Reliant customers are paying for a portion of that gouging. What's even more confusing to me is if there is a huge potential default of over $350 million, then why hasn't Reliants stock price been hit hard? I mean, if you overcharge, then your profits should increase, right? If that's the case, why did we get a 30% increase in our rates? Concerned about this very issue, I bypassed an entry point when the stock hit its 200-dma in late March. It violently turned on a dime on the same day, and shot straight up to a new 52-week high, due to an IPO spin-off occurring in April. Since that time though, technicals on the chart are looking sick with relative strength dropping. I would caution anyone considering playing in this minefield until clarity develops. To intertwine this into the markets a bit more, I find myself thinking through what effect rates will have on my trading. It seems to reason, if coast-to-coast energy prices rise that the cost of goods sold must also rise to allow profit margins to increase. We are currently in a business profit margin squeeze, with an adjusted 1st quarter GDP of 1.3%. Virtually, flat growth. However, if we have flat growth now with weakness still coming, no clear signs of a pick up in durable good orders, and on the edge of surging energy costs...won't businesses be forced to increase prices just to stay neutral? Although Consumer Sentiment readings appear to be healthy, I feel the latest number is an aberration. The housing sector is showing its first signs of peaking, with the largest drop in new home sales in 4 years. Add that to continued lay-offs, and an electric bill surprise around the corner, and I would lay money on the Consumer Sentiment numbers softening soon. In my basic economic analysis, I smell inflationary pressures down the road, so I was pleasantly surprised when Mr. Greenspan denied seeing any immediate signs. Still, I expect it within 6-9 months, unless of course, this energy crisis is really no crisis. With shriveling corporate profits now, energy costs will certainly affect their bottom lines. The good news is that this market has shown surprising strength after a fabulous two-phased rally. It feels like it wants to hold, yet it is sitting on support leaning towards a fall. The crosscurrents again make it hard to read, without a clear signal in either direction for the short-term. I have watched the VIX hover in the low 23 area all week and still, there it sits. My bias is still for a pullback although I can't ignore the recent strength in the Nasdaq or the Dow. Personally, I am hoping for a major pullback to gain LEAP entries in my portfolio. I also can’t ignore the S&P 500 chart (INDEX:SPX.X). It opened the year at 1298 and closed Friday at 1277, 3 days after the end of its recent rally high of 1315. Overall, breadth in the market appears to be improving. In fact many more small and mid-cap stocks are crossing up over their 200-dma. That too gives confidence that general market improvement is occurring. Still, we have crosscurrents and the next earnings warning season is approaching while traders sit on their recent profits. That seems high risk to me. So, pick your bias and your strategy. You could justify either side. If you are a very short-term trader, superfluous information means nothing to your trade. Day traders are keen to just jump on board for a fast ride. And long-term holders are relaxed knowing they don't care what gyrations occur the next few months. If you want to trade options during these crosscurrents, it is usually best to buy all the time you can afford. Decisions are harder these days so at least remember the lessons learned last year, and take all profits when you have them. *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.IndexSkybox.com ************************************************************ ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* MSFT - Microsoft Corporation $70.91 (+2.82 last week) See details in sector list Put Play of the Day: ******************** MIR - Mirant Corp $40.95 (-4.49 last week) See details in sector list ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=2218 ************************************************************** ************************** 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 EXTR $34.62 (-1.07) A continuation of Monday's rally wasn't in the cards, as EXTR gradually deteriorated right up to the closing bell on Friday. Despite the fact that volume was light, we didn't get the expected bounce at the $35 support level. Disappointing results from ADC Telecom cast a dark cloud over the Networking sector in the morning, from which it never really recovered. EXTR didn't find any buying support until $34, and that buying was weak. With weakness across the board in the Networking sector, and a violated stop in our play, it is time to cut bait and move on. BAC $58.71 (+1.71) We are closing out our BAC call play on a high note. While the stock is still firmly above our closing stop price of $58, resistance overhead at $60 is proving to be formidable. After a stellar run for shares of the Financial giant this week, BAC could take a breather before making another attempt at challenging the $60 level. It's been said that the best time to exit a play is when you can, and not when you have to. We are choosing now to bank our gains and as a result, dropping coverage. PUTS No dropped puts this weekend *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** FMKT - FreeMarkets Inc. $14.80 (+2.95 last week) FreeMarkets, Inc. creates business-to-business online markets and provides electronic commerce technology and services for the procurement of industrial parts, raw materials, commodities and services. FreeMarkets has created over 9,200 online markets and has enabled its customers to source products from more than 165 suppliers. More than 9,300 suppliers from over 55 countries have participated in online markets created by FreeMarkets. In addition to its FullSource offering, which provides customers with the full range of FreeMarkets' technology, services and information, FreeMarkets offers its DirectSource and QuickSource hosted services, which enable customers to run their own online markets. FreeMarkets also operates the FreeMarkets Asset Exchange for buyers and sellers of surplus assets and inventory. After making a V-shaped bottom from a 52-week low of $6.25 on April 4th, FMKT established an upward trading channel in the beginning of May. This week, the stock demonstrated how a little good news can go a long way with an oversold stock, particularly when significant short covering occurs. A breakaway gap from the 50-dma of $10.86 on May 2nd set the wheels in motion, as investors responded with enthusiasm to the news that FMKT had announced an e-Procurement agreement with Texas Instruments. Following that announcement, news of another outsourcing contract with MiTAC, one of Taiwan's leading manufacturer of computer systems, kept the optimism alive. However, the really big news which pushed FMKT up 4 points on 2.5 times the average daily volume occurred last Monday, and was a critical turning point for the stock. FMKT announced that they had expanded their relationship with Raytheon by which Raytheon will use FMKT's Asset Exchange to sell used equipment and surplus inventory, in addition to using FMKT's B2B Marketplace to conduct strategic sourcing projects around the world. In Friday's lackluster trading environment, support at the 5-dma of $14.70 held up, and aggressive traders could consider this level as a possible entry point. Ideally, we would like to see a strong break above $16 with heavy volume, which could potentially carry FMKT up to $20 with light resistance. There is still a heavy short position in FMKT, and a break above $16 would likely send the shorts running for cover in a big way. Conservative traders should wait for such a scenario to occur before taking positions. Keep an eye on other B2B stocks like ORCL, and set closing stops at $13.50. BUY CALL JUN-15.0*FAQ-FC OI=418 at $1.45 SL=0.75 BUY CALL JUN-17.5 FAQ-FW OI=204 at $0.60 SL=0.00 BUY CALL JUL-15.0 FAQ-GC OI=582 at $2.20 SL=1.00 BUY CALL JUL-17.5 FAQ-GW OI=282 at $1.35 SL=0.75 Average Daily Volume = 866 K http://www.premierinvestor.net/oi/profile.asp?ticker=FMKT OAKT - Oak Technology $11.30 (+1.30 last week) Oak Technology designs, develops and markets high-performance integrated semiconductors, software and platform solutions to original equipment manufacturers (OEMs) that serve the optical storage, I-appliance and digital imaging equipment markets. The company's products consist primarily of integrated circuits and supporting software, all designed to store and distribute digital content, enabling its OEM customers to deliver cost-effective, powerful systems to home and enterprise end users. Aggressive traders, take notice. This play is for you. OAKT is making a convincing case that it wants to work higher, but we need to see it push through the $12.50 level before taking a position. After falling below $5 last month, the stock has been working higher, most recently consolidating near $9.50. Needham & Co. initiated coverage with a Buy rating on Friday, and this may provide an upside bias next week. The volume picture seems to favor the upside as well, as positive days are seeing stronger volume, and we will need to see this pattern continue if OAKT is going to work significantly higher. The risk in the play is that the Semiconductor index (SOX.X) has yet to confirm that it can hold above the 650 support level. If it can continue its recovery next week, OAKT should be able to extend its rally as well. Due to the aggressive nature of this play, we don't want to buy the dips. Instead, wait for a solid move through the $12.50 resistance level on strong volume before taking a position. In order to give the stock some room to move before breaking out to the upside, we are setting a liberal stop at $9.50, where OAKT found solid support on its most recent pullback. The NASDAQ finished the week just above the critical 2250 level on Friday, and we will need to see renewed buying in the broad technology market next week to propel our play higher. BUY CALL JUN-10.0*KAU-FB OI=1011 at $1.55 SL=0.75 BUY CALL JUN-12.5 KAU-FV OI= 297 at $0.30 SL=0.00 BUY CALL JUN-10.0 KAU-GB OI= 457 at $1.85 SL=1.00 BUY CALL JUL-12.5 KAU-GV OI=1309 at $0.65 SL=0.00 BUY CALL OCT-12.5 KAU-JV OI= 45 at $1.40 SL=0.75 Average Daily Volume = 1.21 mln http://www.premierinvestor.net/oi/profile.asp?ticker=OAKT CEFT - Concord EFS, Inc. $47.11 (+3.49 last week) Concord is a vertically-integrated electronic transaction processor. Primary activities include Payment Services, providing credit, debit, check authorization, and EBT processing services to supermarkets, gas stations, and other selected retail segments; and Network Services, providing gateway processing, ATM driving, and debit card processing to the financial services industry, plus coast-to-coast network access under the STARsm, MAC and Cash Station brands. From their early beginnings as a point of sale equipment manufacturer to our position today as the nation's leader in ATM driving, network access, and online debit transactions. It's been a great year so far for CEFT. The company was added to the S&P 500, has basked in the warmth of analyst upgrades and positive coverage (including Robinson Humphrey, Hoak Breedlove Wes, USB Piper Jaffray, Barrington Research), with strong earnings helping the stock to move ever higher. CEFT reported first quarter earnings in late April, growing EPS by 43 percent year-over-year. Since that time, the stock has been in rally mode, benefiting from general market strength as well as company-specific announcements. UBS Warburg analyst upgraded the stock on Friday from a Buy to a Strong Buy rating, upping his price target from $60 to $65, and reassuring investors that the secondary offering the company recently filed is a temporary event and in the long term, the view is bullish. With that, CEFT rallied, gaining $1.56 or 3.18 percent, and while volume was not as high as we would have liked, the break above formidable psychological resistance at $50 to a new all-time high was a good sign indeed. At this point, a run over the intermediate term to the mid-60's level within the next month is quite possible. Continued buying momentum leading to a surge above Friday's intra-day high of $51 would allow conservative players to enter on strength. For aggressive traders, pullbacks to $50, $49, $49.50 and our closing stop price of $48 may provide opportunities for entry. In both cases, keep an eye on industry peers FDC and PAYX. BUY CALL JUN-45*EQF-FI OI=10201 at $6.10 SL=4.00 BUY CALL JUN-50 EQF-FJ OI= 5267 at $2.05 SL=1.00 BUY CALL JUN-55 EQF-FK OI= 2096 at $0.50 SL=0.00 BUY CALL JUL-50 EQF-GJ OI= 84 at $3.50 SL=1.75 BUY CALL JUL-55 EQF-GK OI= 31 at $1.45 SL=0.75 SELL PUT JUN-50 EQF-RJ OI= 534 at $1.15 SL=2.00 (See risks of selling puts in play legend) Average Daily Volume = 3.78 mln http://www.premierinvestor.net/oi/profile.asp?ticker=CEFT *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=2206 ************************************************************ ********** 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 05-27-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/052701_3.asp *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.IndexSkybox.com ************************************************************ ****************** CURRENT CALL PLAYS ****************** QCOM - Qualcomm $67.52 (+1.07 last week) QUALCOMM Incorporated (www.qualcomm.com) is a leader in developing and delivering innovative digital wireless communications products and services based on the Company's CDMA digital technology. The Company's business areas include CDMA integrated circuits and system software; technology licensing; the Binary Runtime Environment for Wireless(TM) (BREW(TM)) applications platform; Eudora. e-mail software; digital cinema systems; and satellite-based systems including portions of the Globalstar(TM) system and wireless fleet management systems, OmniTRACS. and OmniExpress(TM). QUALCOMM owns patents that are essential to all of the CDMA wireless telecommunications standards that have been adopted or proposed for adoption by standards-setting bodies worldwide. QUALCOMM has licensed its essential CDMA patent portfolio to more than 100 telecommunications equipment manufacturers worldwide. During the light trading which occurred on Friday, QCOM held at strong support at a daily higher low at $67.50. The longer QCOM can hold at this support level, the stronger a breakout above $70 is likely to be. In order for this to occur, we may need to have additional bullish news released in the telecommunications equipment sector. While most of the analysts who follow QCOM feel that the near term visibility is somewhat cloudy, investors started to get excited last week with the prospect of the opening of China as a market for QCOM's CDMA technology. China's largest cellular communications company, China Unicom placed a $2 billion order with Nokia, Lucent, Ericsson and others, which will potentially give QCOM a highly lucrative revenue stream in the form of royalties for years to come. QCOM rallied strongly when this news was released on May 15th, and spent most of last week consolidating the gains. Next week, traders will want to pay attention to volume, as the stock will likely need the type of heavy buying of close to 18 million shares in order to propel QCOM above the $70 resistance level, which forms the apex of an ascending triangle. Aggressive traders can continue to take positions at the $67.50 support level, particularly if others in the communications equipment sector like NOK and ERICY are rallying. A bounce up from the 5-dma of $68.50 could be another entry point. Ideally, conservative traders should wait for a break and close above $70 with strong volume. We are keeping closing stops tight at $67. BUY CALL JUN-65*AAO-FM OI=74840 at $5.30 SL=3.50 BUY CALL JUN-70 AAO-FN OI= 5427 at $2.70 SL=1.25 BUY CALL JUL-65 AAO-GM OI= 4562 at $8.30 SL=6.50 BUY CALL JUL-70 AAO-GN OI=10382 at $5.70 SL=3.50 Average Daily Volume = 18.2 mln http://www.premierinvestor.net/oi/profile.asp?ticker=QCOM DELL - Dell Computer Corp $27.00 (+2.21 last week) Dell Computer is the world's #1 direct-sale computer vendor and one of the world's top PC makers. Therefore it's understandable that the company designs, develops, manufactures, markets, services, and supports a variety of computer systems including desktops, notebooks, workstations, network servers, and storage products. Dell's clients include the government, corporations, the medical and education industries, as well as the individual consumer. Founder Michael Dell is still the CEO and maintains a 14% stake in the company. The convergence of the long and short-term DMAS combined with DELL tracing the top spectrum of the Bollinger Bands suggests that there's strong upper resistance at $27 and that mild profit taking may be on the horizon. Last Wednesday, a powerful breakout rocketed DELL through its technical resistance and set the stage for consolidation above the $26.50 near-term support. A bold announcement by the CEO to engage in a full-scale price war and perhaps, even use its huge cash reserves to make acquisitions prompted immediate coverage from two influential brokerage firms. Merrill Lynch and Goldman Sachs put DELL on their Recommend List and Focus List, respectively, and noted the company's healthy business model, going forward. The robust volume throughout the week also indicated there's an active interest for the issue. The sagging Computer Hardware Index (GHA.X) however, isn't helping our position on Dell. Use this broad measurement index as a guide in planning future plays. A solid reversal off 347 and move through 360 dictates a bullish sentiment across the sector. You might consider buying into a visible momentum run as DELL burns through the $27 and $28 levels in an advancing marketplace. Entries from the vicinity of $25, the mark of our protective stop, sanctions heavy risk. We'll drop coverage and move on to more lucrative opportunities if DELL fails to close above this level. BUY CALL JUN-20 DLY-FD OI= 368 at $7.40 SL=5.00 BUY CALL JUN-25*DLQ-FE OI=22050 at $2.60 SL=1.25 BUY CALL JUN-30 DLQ-FF OI=10891 at $0.30 SL=0.00 BUY CALL JUL-25 DLQ-GE OI= 1190 at $3.20 SL=1.50 BUY CALL JUL-30 DLQ-GF OI= 2997 at $0.85 SL=0.00 Average Daily Volume = 36.4 mln http://www.premierinvestor.net/oi/profile.asp?ticker=DELL FFIV - F5 Networks $13.31 (+2.15 last week) F5 Networks provides integrated Internet traffic and content management solutions designed to improve the availability and performance of mission-critical Internet-based servers and applications. Its flagship BIG/IP balancing controller monitors servers in a local-area network for malfunctions, managing user traffic and routing requests to the best available server. The company sells its software-based products to ISP's and corporations with high-traffic Web sites through direct sales and reselling partners such as Exodus Communications and Dell Computer. FFIV sprung forward last Monday, crashing through the $12 top resistance. The technical breakout generated enough momentum to keep it afloat throughout the week's market action. The solid support at $13, currently bolstered by the 5-DMA, confirms the stock's strength going into this week. The continual tests of the $14 level also advocates a potential breakout. On the upside there's plenty of room for profitability - approximately six points before FFIV faces the $20 obstacle. On the downside, we set our closing stop tight at $11.50 to protect our capital. If leading networkers like BRCD and NTAP start to break their support levels at $45 and $24.50, respectively, raise your red flags. A conservative strategy is to wait for the coil to spring before taking positions long. You might consider buying into strength as FFIV climbs off the 5-DMA ($13.23) and penetrates $14 amid heavy volume. BUY CALL JUN-10.0 FLK-FB OI=101 at $3.60 SL=1.75 BUY CALL JUN-12.5*FLK-FV OI=445 at $1.75 SL=1.00 BUY CALL JUN-15.0 FLK-FC OI=127 at $0.65 SL=0.00 BUY CALL JUL-10.0 FLK-GB OI=293 at $4.10 SL=2.50 BUY CALL JUL-12.5 FLK-GV OI=155 at $2.60 SL=1.25 BUY CALL JUL-15.0 FLK-GC OI=377 at $1.55 SL=0.75 Average Daily Volume = 396 K http://www.premierinvestor.net/oi/profile.asp?ticker=FFIV IBM - International Business Machines $117.80 (-0.15 last week) International Business Machines Corporation (IBM) uses advanced information technology to provide customer solutions. The Company operates using several segments that create value by offering a variety of solutions, including, either singularly or in some combination, technologies, systems, products, services, software and financing. Organizationally, the Company's three hardware product segments are comprised of Technology, Personal Systems and Enterprise Systems. IBM's other major operations consist of a Global Services segment, a Software segment, a Global Financing segment and an Enterprise Investments segment. As one of the premier technology stocks traded on the exchanges, IBM is well positioned to attract investors' money, as its stable, consistent growth pattern has offered more dependable results than many of its former high-flying peers. In a market environment which continues to be uncertain, IBM offers reassuring guidance, as well as an increasingly enticing chart pattern. IBM has been range bound for over a year, with consolidation occurring between the nearly converged 200-dma of $106.80 and the 50-dma of $106.10, and resistance at $120. IBM formed a bullish wedge over the last two weeks, with resistance at $117.80, which was cleared on Monday of last week. IBM spent the rest of the week consolidating between support at $117.80, which could be an aggressive entry point, and resistance at $120. Ideally, a break and close above $120 could be a very bullish signal, particularly if accompanied by strength in the hardware sector. Once $120 is cleared, resistance is light until $125. Keep an eye on other hardware bellwethers like HWP and DELL, and keep closing stops at $117. BUY CALL JUN-115 IBM-FC OI=13977 at $5.40 SL=3.50 BUY CALL JUN-120*IBM-FD OI=14396 at $2.60 SL=1.25 BUY CALL JUL-115 IBM-GC OI=15347 at $8.30 SL=6.00 BUY CALL JUL-120 IBM-GD OI= 2384 at $5.60 SL=3.50 Average Daily Volume = 9.96 mln http://www.premierinvestor.net/oi/profile.asp?ticker=IBM ABGX - Abgenix Inc. $42.00 (+1.24 last week) Operating in the biopharmaceutical field, Abgenix develops and intends to commercialize antibody therapeutic products for the treatment of a variety of disease conditions including transplant related diseases, inflammatory and autoimmune disorders, and cancer. Harnessing the power of the mouse, ABGX has developed XenoMouse technology, a proprietary technology which the company believes enables quick generation of fully human antibody product candidates using mice. Current internal product development programs have yielded four antibody product candidates, with ABX-CBL being the current front runner. As expected, profit taking appeared ahead of the holiday weekend, and the Biotechs were not immune from the selling. Fortunately, volume was relatively light, as ABGX fell back to consolidate for most of the day between $41-42. Similarly, the Biotechnology index (BTK.X) dropped early in the day before finding support near $600 and gradually recovering into the close. The upward trends for both the BTK and ABGX are still intact, and barring any unpleasant surprises over the long weekend, look for buyers to return on Tuesday. After the recent rally, a little bit of consolidation was expected, and it has been encouraging to see it take place on relatively light volume. One bearish factor that we are concerned about is the daily Stochastics oscillator, which has now dropped out of overbought territory. We need to see the $40 support level (also the site of our stop) hold up against the bears next week. Aggressive traders can still target shoot new entries on dips near $40-41, but will want to see the bounce confirmed by solid buying volume before taking a position. More conservative entries will materialize on a rally through the $44 intraday resistance level, or on a move through the recent high of $46.50. Regardless of your entry strategy, keep an eye on the BTK index. We'll need it to continue its uptrend if our play is going to have a realistic chance of moving up to challenge the $50 level. BUY CALL JUN-40*AZG-FH OI=3371 at $4.50 SL=2.75 BUY CALL JUN-45 AZG-FI OI= 200 at $2.10 SL=1.00 BUY CALL JUL-45 AZG-GI OI= 484 at $4.40 SL=2.75 BUY CALL JUL-50 AXY-GJ OI= 82 at $2.85 SL=1.50 BUY CALL JUL-55 AXY-GK OI= 163 at $1.80 SL=1.00 SELL PUT JUN-40 AZG-RH OI=1213 at $2.00 SL=3.75 (See risks of selling puts in play legend) Average Daily Volume = 1.75 mln http://www.premierinvestor.net/oi/profile.asp?ticker=ABGX IMCL - Imclone Systems $50.06 (+5.13 last week) Engaged in the research and development of novel cancer treatments, IMCL focuses on growth factor inhibitors, therapeutic cancer vaccines and angiogenesis inhibitors. The company's lead product candidate, IMC-C225, is a therapeutic monoclonal antibody that inhibits stimulation of a receptor for growth factors upon which certain tumors depend. Phase I/II clinical trials have been promising. The lead candidate for angiogenesis inhibition, IMC-1C11 is an antibody that binds selectively and with high affinity to KDR, a principal Vascular Endothelial Growth Factor (VEGF) receptor, thus inhibiting angiogenesis. Continuing to outperform the broader Biotechnology index (BTK.X), IMCL clawed its way above the $50 level again on Friday, setting the stage for a continued rally next week. For its own part, the BTK gave back a little ground heading into the weekend, but managed to hold above the 200-dma (currently 619.26). IMCL dipped early in the day to the $48 level, but buyers were waiting in the wings. As expected, volume was anemic ahead of the long weekend, but the buying volume that did appear helped to keep the uptrend intact. Bulls are focused on the $50 resistance level, and a return of volume next week could be just what they need to accomplish the next breakout. Conservative traders will want to wait for a move above $51 on solid volume before adding new positions. Dip buying seems to be back in vogue, and aggressive entries can still be taken on intraday dips to support at $48. Volume will be the critical parameter to monitor next week, and if the buyers come back in numbers, IMCL could very quickly push through resistance at $55 on the way to a test of the $60 level. IMCL is solidly in overbought territory, so we have ratcheted our stop up to $47, just in case the profit taking resumes next week. If you are going to buy the dips, make sure to wait for the bounce. We don't want to get caught trying to catch a falling knife. Weakness in the BTK index will likely drag IMCL lower as well, so make sure the index is moving up as well before initiating new positions. BUY CALL JUN-50*QCI-FJ OI=3792 at $3.60 SL=1.75 BUY CALL JUN-55 QCI-FK OI=1194 at $1.65 SL=0.75 BUY CALL JUL-50 QCI-GJ OI= 281 at $6.00 SL=4.00 BUY CALL JUL-55 QCI-GK OI= 395 at $3.80 SL=2.25 BUY CALL JUL-60 QCI-GL OI= 0 at $2.50 SL=1.25 Wait for OI!! SELL PUT JUN-45 QCI-RI OI= 408 at $1.15 SL=2.25 (See risks of selling puts in play legend) Average Daily Volume = 1.39 mln http://www.premierinvestor.net/oi/profile.asp?ticker=IMCL OPWV - Openwave Systems $45.38 (+8.33 last week) Openwave Systems is a provider of Internet-based communication infrastructure software and applications, serving over 150 communications service providers with over 500 million subscribers. Among OPWV's customers are wireless network operators, wireline carriers, Internet Service Providers (ISPs), portals, and broadband network providers. OPWV has a broad portfolio of products, including wireless Internet infrastructure and browsers, unified messaging, mobile email, directory services, voice processing and instant messaging Our OPWV play is off to a decent start, despite the broad market weakness on Friday. As expected, trading volume was anemic ahead of the long weekend, and the market-wide profit taking continued right up to the closing bell, bringing the NASDAQ Composite right back to the critical 2250 level. Continuing its upwards stair-step pattern, OPWV dipped to the $43 support level (also the site of the 5-dma) at the open before attracting buyers for the remainder of the morning. After reaching the $47 resistance level, buying interest dried up, and we watched a slow deterioration into the close. Volume dropped off sharply in the afternoon, indicating that there aren't many traders that are willing to sell at these levels either. Even after the afternoon profit taking, OPWV eked out a fractional gain, bringing the stock to its highest close since late February. Once the $47 resistance level has been cleared, the bulls will have their work cut out for them near $50, the site of the 6-month descending trendline. Aggressive traders will want to use intraday dips to the $43 support level or our $41 stop as entry points for new positions, but make sure to wait for buying volume to appear before playing. The market is at a critical juncture here, and we don't want to catch a falling knife. More cautious investors will want to wait for a volume backed move through the $47 level before taking the plunge. BUY CALL JUN-45*UGE-FI OI=2454 at $3.80 SL=2.25 BUY CALL JUN-50 UGE-FJ OI=1804 at $1.75 SL=1.00 BUY CALL JUL-45 UGE-GI OI=1374 at $6.90 SL=5.00 BUY CALL JUL-50 UGE-GJ OI=3009 at $4.70 SL=2.75 BUY CALL JUL-55 UGE-GK OI=2529 at $3.10 SL=1.50 SELL PUT JUN-40 UGE-RH OI=1371 at $1.25 SL=2.50 (See risks of selling puts in play legend) Average Daily Volume = 6.08 mln http://www.premierinvestor.net/oi/profile.asp?ticker=OPWV CSCO - Cisco Systems, Inc. $22.05 (+1.85 last week) Cisco Systems is the worldwide leader in networking for the Internet. Cisco's networking solutions connect people, computing devices and computer networks, allowing people to access or transfer information without regard to differences in time, place or type of computer system. Cisco provides end-to-end networking solutions that customers use to build a unified information infrastructure of their own, or to connect to someone else's network. An end-to-end networking solution is one that provides a common architecture that delivers consistent network services to all users. It appears that aggressive rate cuts from the Fed are helping to improve shareholder confidence and with that, large cap tech stocks have become direct beneficiaries. Last year, the slowing economy lead to reduced capital expenditures, affecting even the high growth Networking industry. With that, earnings estimates were reduced, billions of dollars of inventory was written off as losses and visibility became limited at best. Since early April however, it seems that the sentiment has turned from one where traders were still waiting for a bottom to the feeling that the bottom may have already been reached. Cisco reported earnings in early May, beating lowered Street estimates by a penny. While the conference call continued to mention limited visibility going forward, shareholders have been much more optimistic, with the thinking that the worst is now behind the stock. Since early April, CSCO has been trading in an ascending channel. Hitting the top of this channel on Tuesday, following a breakout day on Monday, the stock has since been in consolidation mode, trading narrowly on decreasing volume. With traders now more willing to buy the dips, aggressive players may target bounces off support at $22, $21.75, the 10-dma at $21.10, $21 and our closing stop price of $20. Bullish activity in the AMEX Networking Index (NWX), corresponding with a break above $23 by CSCO could be the signal for conservative traders to make a play. BUY CALL JUN-20.0 CYQ-FD OI=90311 at $2.75 SL=1.50 BUY CALL JUN-22.5*CYQ-FX OI=60630 at $1.10 SL=0.50 BUY CALL JUN-25.0 CYQ-FE OI=32313 at $0.40 SL=0.00 BUY CALL JUL-22.5 CYQ-GX OI=40651 at $1.95 SL=1.00 BUY CALL JUL-25.0 CYQ-GE OI=59679 at $1.05 SL=0.00 SELL PUT JUN-20.0 CYQ-RD OI=33635 at $0.45 SL=1.00 (See risks of selling puts in play legend) Average Daily Volume = 62.7 mln http://www.premierinvestor.net/oi/profile.asp?ticker=CSCO MCDT - McDATA Corporation $39.60 (+2.91 last week) McDATA specializes in providing highly available, scalable and centrally managed SAN solutions. McDATA's goal is to deliver storage networking solutions that truly address the storage problems of the enterprise. McDATA's OpenReady Solutions improve the reliability and availability of data, greatly simplify SAN management, and reduce the total cost of ownership. As companies migrate from server-centric to storage-centric environments, they require the flexibility to grow their enterprise. Companies demand the ability to grow their current environment to meet future requirements, fully leveraging their investments. It just goes to show that the apple does not fall far from the tree. MCDT is storage giant EMC's response to the growth opportunities in the Storage Area Networking (SAN) space. Spun off late last year, the company is a direct competitor of Brocade Systems (BRCD). The storage sector last year was not immune to the slowdowns in capital equipment spending. Coupled with the detonation of many dotbomb companies, it's no wonder that the growth rate has pulled back. While the stock has had a volatile ride so far in its short life, it appears now that the direction is up. The company reported earnings in April, growing sales by 83 percent year-over-year, with gross margins of over 45 percent. So despite the slowdown, it appears that MCDT's growth rate continues to be brisk. Connecting the highs and lows since March, we can see that upward trending regression channel which MCDT has been trading in. This past week, the stock spent most of its time in a trading range between support at $36 and resistance at $40. While MCDT has pierced the $40 level intra-day, what we are looking for is a close above this critical level as a bullish signal. Another surge over $40 on strong volume could do it, giving conservative traders an opportunity to enter this play. If the stock decides to make a brief pullback, then aggressive traders may target support at $39, $37.50 and $37, but make sure that MCDT continues to close above our new closing stop price of $38. In both cases, track sector sentiment be keeping a close watch on sector peers such as NTAP and VRTS. BUY CALL JUN-35 DMU-FY OI=1040 at $6.10 SL=4.00 BUY CALL JUN-40*DMU-FZ OI=1346 at $3.00 SL=1.50 BUY CALL JUN-45 DMU-FI OI= 619 at $1.35 SL=0.75 BUY CALL JUL-40 DMU-GZ OI=3865 at $5.30 SL=3.50 BUY CALL JUL-45 DMU-GI OI= 228 at $3.60 SL=1.75 SELL PUT JUN-35 DMU-RY OI=1130 at $1.40 SL=3.00 (See risks of selling puts in play legend) Average Daily Volume = 2.20 mln http://www.premierinvestor.net/oi/profile.asp?ticker=MCDT MSFT - Microsoft Corporation $70.91 (+2.82 last week) Microsoft Corporation develops, manufactures, licenses and supports a wide range of software products for a multitude of computing devices. Microsoft software includes scalable operating systems for servers, personal computers and intelligent devices, server applications for client/server environments, knowledge worker productivity applications, and software development tools. The Company's online efforts include the MSN network of Internet products and services and alliances with companies involved with broadband access and various forms of digital interactivity. As a key component in the NASDAQ as well as the DOW, the health of the market can in part be measured by activity in this bellwether stock. After hitting a bottom at the psychological support level of $50 in March, Microsoft has since bounced strongly. Aggressive rate cuts on the part of the Fed no doubt played an important role in renewing investor confidence and sentiment in macro economic conditions. On a more company-specific level, excitement over new product introductions later this year from Bill Gates & Co. are on the forefront of the minds of shareholders. A new iteration of MSFT's core operating system, Windows XP, along with the introduction of an interactive net-enabled gaming console, the X-Box, has generated investor interest. The prospect of a new licensing scheme, along with business generated from upgrade costs, have filled shareholders with visions of higher revenue numbers going forward. What's more, the anti-trust case, which weighed heavily on MSFT's stock price last year seems all but forgotten for now. At this point, the stock is at a technically important point. A break above formidable resistance at $72 would not only be a signal for conservative traders to make a play, but also suggest that the stock could move quickly to $80. This would be bullish not only for MSFT shareholders, but most likely the market as a whole. For higher risk players looking to buy on dips, look for horizontal support at $70.50, $70, our closing stop price of $69.50, with moving average support from the 5 and 10-dma at $70.28 and $69.38. We would advise entering only if Merrill Lynch's Software HOLDR (SWH) confirms the bounce. BUY CALL JUN-65 MSQ-FM OI=10682 at $6.90 SL=5.00 BUY CALL JUN-70*MSQ-FN OI=77190 at $3.10 SL=1.50 BUY CALL JUN-75 MSQ-FO OI=73265 at $1.00 SL=0.00 BUY CALL JUL-70 MSQ-GN OI=40564 at $5.30 SL=3.50 BUY CALL JUL-75 MSQ-GO OI= 3513 at $2.85 SL=1.50 SELL PUT JUN-65 MSQ-RM OI=59898 at $0.55 SL=1.00 (See risks of selling puts in play legend) Average Daily Volume = 44.2 mln http://www.premierinvestor.net/oi/profile.asp?ticker=MSFT QLGC - QLogic Corporation $58.53 (+4.41 last week) QLogic Corporation is the leading manufacturer of fibre channel bus adaptors. The company is also a designer and supplier of semiconductor and board level input/output (I/O) components They've been designing and marketing SCSI-based (small computer system interface) products for over 12 years and sells its products to server, workstation, and date peripheral makers. Blue-chip clients include Compaq, Dell, Hitachi, IBM, and Quantum Corporation. Analyst upgrades and highly bullish comments have combined with technical strength to help shares of QLGC to rise strongly. In a report by IDC, QLGC was singled out as the only company to offer end-to-end Storage Area Network (SAN) infrastructure products, a market expected to reach $1 billion in revenues by the end of this year. Having initiated coverage on QLGC last week, the past five trading sessions have been productive indeed. On Monday, the stock was upgraded by Robertson Stephens from a Long Term Attractive to a Buy rating. This combined with a buying spree on the NASDAQ resulted in a bullish surge of over 14 percent on almost twice the average daily volume. Since then, the stock has retreated slightly and appears to be consolidating, trading in a narrow range with support just above $58 and formidable resistance overhead at $62. At this point, it appears that QLGC is setting itself up for a charge to the $70 level. If the buyers take control, lifting the stock past $60 with conviction, this could allow conservative traders to enter on strength, provided that the Philadelphia Semiconductor Index (SOX) confirms upward momentum. To protect what has become a nicely profitable play, we are moving up our closing stop price, from $56 to $57. Aggressive traders may look for pullbacks intra-day to support at $58 and $57 as potential entry points, but confirm with volume. BUY CALL JUN-55 QLC-FK OI=1123 at $6.70 SL=4.50 BUY CALL JUN-60*QLC-FL OI=1669 at $3.90 SL=2.50 BUY CALL JUN-65 QLC-FM OI= 454 at $2.10 SL=1.00 BUY CALL JUL-60 QLC-GL OI=1226 at $7.50 SL=5.25 BUY CALL JUL-60 QLC-GM OI= 593 at $5.50 SL=3.50 SELL PUT JUN-55 QLC-RK OI= 865 at $2.60 SL=4.00 (See risks of selling puts in play legend) Average Daily Volume = 5.78 mln http://www.premierinvestor.net/oi/profile.asp?ticker=QLGC *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=2207 ************************************************************ ********** 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 05-27-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/052701_4.asp *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.IndexSkybox.com ************************************************************ ************* NEW PUT PLAYS ************* MIR - Mirant Corp $40.95 (-4.49 last week) Mirant, incorporated in 1993, is a very competitive global energy company. They have an integrated business model with energy marketing and risk management experience associated with market price fluctuations. Mirant has extensive operations in North and South America, Europe, Asia, and the Caribbean developing, constructing and running power plants. They also sell wholesale electricity, natural gas, and other energy- related commodities. Shares of Mirant, which was once known as Southern Energy, began trading on the Big Board last September. The stock set a closing high of $47.20 early Monday on its earnings release. The stardom was short-lived however, and MIR succumbed to a typical post-earnings decline. A $6.25, or 13.2% cut on the week returned MIR to a precarious position on the charts. The technical deviation, or breach of the light support found at the $42 level, brought MIR to our put list this weekend. The new coverage comes despite a new Buy rating and $60 price target from JP Morgan. Friday's selling was dynamic at 1.7 times the norm as investors sliced and diced MIR and other integrated energy companies like Duke Energy (DUK) and Calpine (CPN). The sector weakness instigated by the returning confidence in the technology stocks provides a great atmosphere to play MIR on the downside. Ideally, we'd like to see the stock break below $39 and the correlating 30-dma before jumping on MIR; although we think it'd easily work down to $35 after that. Look for a declining market to boost the odds. In the news, the Atlanta- based power producer announced on Wednesday that it sold privately $750 mln of 20-year convertible bonds. The bonds carry a coupon of 25% and are convertible into Mirant common shares at $67.95, a big 51% premium over Wednesday's closing price of $45. And in an effort to help the energy crisis in California, Mirant announced a 19-month agreement with the California Department of Water Resources (DWR) to provide the state with 500 megawatts of electricity -- enough power for approximately 500,000 homes. Initially, we're setting stops at the $43 level, and would close positions if MIR settled above that level. BUY PUT JUN-45 MIR-RI OI=1602 at $4.50 SL=2.75 BUY PUT JUN-40*MIR-RH OI= 209 at $1.45 SL=0.75 BUY PUT JUN-35 MIR-RG OI= 387 at $0.45 SL=0.00 Average Daily Volume = 2.33 mln http://www.premierinvestor.net/oi/profile.asp?ticker=MIR ***************** CURRENT PUT PLAYS ***************** BMY - Bristol-Myers Squibb $54.20 (-1.80 last week) Bristol-Myers is best known as a leader in the personal care industry as a producer and distributor of familiar items such as Clairol and Excedrin. However the company focuses its primary efforts on pharmaceuticals, which comprise about 70% of its total sales. Cardiovascular treatments, anticancer, and anti-infective drugs top their research-development list. Through divisions and subsidiaries they also make baby formula, nutritional products, and medical devices. BMY is a stock that never recovered from the March slide. After plummeting from the mid-sixties, the $56 and $56 levels had, up until last week, supported the share price. However, the synergy of news that it was selling its Clairol business to consumer goods giant Proctor & Gamble (NYSE:PG) for $4.95 bln and a party change in the Senate served as supplementary catalysts to shake BMY off its support. BMY and other major pharmaceuticals like Merck (MRK), Unitedhealth Group (UNH), and Pfizer (PFE) were already feeling the effects of market rotation. A mixed bag of recommendations from Prudential Securities on seven of the major pharmaceuticals on Wednesday didn’t raise much of a fuss either. It was Thursday's dramatic trading at 2.7 times the ADV and violation of the 5-dma line that prompted our coverage. The objective is to target an entry on a definitive rollover from the current vicinity and ride the decline as BMY approaches the $52 level. A break through this mark might accelerate the downtrend; although it may be better to lock in gains first. If the bulls take the market after the holiday weekend and BMY closes above $55, OI will exit the play. Across the globe, Dutch food group Numico named Bristol Myers Squibb, Novartis, and American Home Products (AHP) as possible bidders to takeover its company. BUY PUT JUN-60 BMY-RL OI= 2547 at $6.20 SL=4.50 BUY PUT JUN-55*BMY-RK OI=10506 at $2.00 SL=1.00 Average Daily Volume = 5.10 mln http://www.premierinvestor.net/oi/profile.asp?ticker=BMY JNPR - Juniper Networks $52.16 (-2.65 last 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. An abysmal earnings report from ADC Telecom started the Networking sector off on the wrong foot Friday morning, and it never really recovered. Similarly, JNPR fell to the critical $52 support level early in the day and never really attracted any buyers. It was no real surprise to see weakness ahead of the holiday weekend, and anemic volume was the order of the day for most stocks. Sure enough, JNPR only saw 12 million shares trade hands on Friday, less than 40% of the ADV. The weak volume makes it hard to place too much credence in the price action, and trading next week will be pivotal for our play. If the $52 support level fails, the bears will be encouraged to take a run at support at $50. Should $50 fail to support the stock, the bears will likely become more aggressive in the selling, targeting support at $47 and then $42. A volume-backed move below $52 will provide one possible entry strategy, although aggressive traders can still target new positions on a failed rally near the level of our stop, now at $55. We should see a breakout of the 6-week bearish wedge in the next several sessions, and the odds favor a move to the downside. Watch the Networking index (NWX.X) for continued signs of weakness, as JNPR will likely follow the broader sector. BUY PUT JUN-55 JUX-RK OI= 8468 at $5.90 SL=4.00 BUY PUT JUN-50*JUX-RJ OI=14343 at $3.30 SL=1.75 BUY PUT JUN-45 JUX-RI OI= 4786 at $1.65 SL=0.75 Average Daily Volume = 29.1 mln http://www.premierinvestor.net/oi/profile.asp?ticker=JNPR ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=2219 ************************************************************** ***** LEAPS ***** Political Change Delivers The Expected Consolidation By Mark Phillips Contact Support Just when the bulls were getting comfortable, along comes a little political turmoil to rattle their complacency. In case you missed the news earlier in the week, Vermont Senator James Jeffords announced his defection from the Republican party. Normally this wouldn't be a big deal, but in this case it shifts the balance of power in the Senate. Investors weren't sure how to interpret the news, but in the end, decided the prudent course of action would be to take some profits off the table ahead of the 3-day weekend. Although the major indices ended the week at or near major support levels, the selling was orderly and came on very light volume, indicating that there wasn't a mad rush for the exits. With the changes to the political structure in Washington, gridlock is the most likely outcome, as it will be harder to get anything done in the nation's capital. This is normally good news for the markets, as it means less government intervention to influence the orderly conducting of business. To be fair, by Friday most of the damage from the political scene had already been done. The culprit on Friday was the Durable Goods Orders report, which came in much weaker than expected at -5.0% vs. expectations of -2.0%. This raised the spectre of a delay in the much-hoped-for economic recovery, and predictably, investors decided to take their profits ahead of the weekend. For the record, the DJIA finished the week at 11005, just above the critical 11,000 support level, while the NASDAQ Composite closed at 2251, just above its own pivotal 2250 level. Volume on both the NYSE and the NASDAQ on Friday was anemic; just what we would expect in front of the holiday weekend. If we can hold these levels next week, it could provide a nice springboard for a rare summer rally. Of course, I would be remiss in my duties if I didn't point out that earnings warnings should start to flow freely again next week. Didn't we just go through this? Yep! I for one am hoping that it isn't as bad as the dismal process we went through last quarter. Another record quarter for warnings will not be good for our fledgling recovery, and would likely send the indices below critical support faster than you can say Fear is still dissipating in the market, and we need look no further than the VIX for confirmation of that fact. Despite broad-based selling over the past few days, our trusty fear index continued to walk lower this week, coming to rest at 23.15. A quick look at the daily chart confirms we haven't seen it this low since early October. We are now approaching levels where initiating new long-term positions becomes more risky, as investors are becoming less fearful and more bullish. You can see this lack of fear in several of our Watch List plays such as Brocade Communications (NASDAQ:BRCD), Siebel Systems (NASDAQ:SEBL) and Verisign (NASDAQ:VRSN). These plays are way above our entry targets, but you'll notice that I have not moved any of the targets this week. I expect some weakness before the next leg of the rally, and one of the key components to my ideal entry strategy will be an increase in the level of fear in the marketplace. The current rally has been fueled by interest rate cuts (none of which have shown up in the economy yet) and the HOPE of a second-half economic recovery. The upcoming earnings warning season has the potential to cause a lot of damage if investors begin to lose faith in the highly advertised recovery. Buying the dips seems to be back in vogue, which allows us to initiate positions on our own terms without getting sucked into chasing our favorite stocks higher. The current recovery is tenuous enough that we should continue to be rewarded for our patience. This week marks a milestone for the LEAPS column, as we are finally closing out the old Playlist. The last resident of that list found its way onto the Drop list this weekend, due in large part to the political uncertainty mentioned above. Calpine (NYSE:CPN) has been deteriorating for several weeks, and the decline this week sealed its fate. The risk/reward on the play no longer looks favorable and we have also removed it from the Watch List. There were a couple other interesting developments this week that are worth mentioning. General Electric (NYSE:GE) drew the wrath of sellers late in the week after making an offer to provide financial assistance to troubled load provider Finova Group (NYSE:FNV). GE fell right through our entry target, ending the week just below the critical $50 level. We now need to wait for a recovery through the $51 level before taking a position. Then there was poor old EMC Corp. (NYSE:EMC), which drifted lower all week, ending well below our entry target. While the play still looks good, we need to see it regain the upper side of $40 before we nibble on new positions. One other development to keep your eye on next week is the developing weakness in shares of Wal-Mart (NYSE:WMT). Last week's fledgling rally was clipped right at the descending trendline, and Friday's loss placed the stock just fractionally above our $51 stop (also the site of the 50-dma). A close below this level will be cause for ejection of the play from our portfolio. So where do we go next week? Although it sounds like a broken record, I think the best approach is patience. The major indices are at critical levels of support and the VIX indicates an absence of fear. If support holds, it should pave the way for the next leg higher. But if support fails, our patience is likely to be rewarded, as the ensuing weakness could provide entry points on several of our most coveted plays. Our action plan (entry targets) is in place and now we need to wait for the market to give us that for which we have asked. One final thought before I wind this up. We all enjoy these three-day weekends, but take some time over the next few days to reflect on the significance of Memorial Day. If not for the sacrifices of those that gave their lives to defend our country, I doubt we would have this incredible opportunity to pursue our own financial freedom as we do. I, for one, am very grateful! Stick to your plan and have a safe a profitable week! Mark Phillips Contact Support Current Playlist (Old Format) SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT CHANGE CPN 01/21/01 JAN-2002 $ 40 YLN-AH $10.50 $14.10 34.29% JAN-2003 $ 40 OLB-AH $15.38 $18.60 20.98% LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP CLX 03/13/01 '02 $ 35 CLX-AG $ 3.50 $ 3.50 0.00% $ 30 '03 $ 35 VUT-AG $ 6.10 $ 6.10 0.00% $ 30 GENZ 03/23/01 '02 $ 85 GZQ-AQ $24.50 $31.50 28.57% $ 99 '03 $ 90 OZG-AR $27.75 $40.10 44.50% $ 99 SWS 03/22/01 '02 $ 18 YWF-AT $ 4.10 $ 6.50 58.54% $ 20 '03 $ 20 VWZ-AD $ 5.00 $ 7.40 48.00% $ 20 WM 03/22/01 '02 $33.8 BWT-AY $ 4.00 $ 5.10 27.50% $ 32 '03 $33.8 OBN-AY $ 6.13 $ 7.60 23.98% $ 32 WMT 03/23/01 '02 $ 50 WWT-AJ $ 7.00 $ 7.30 4.29% $ 51 '03 $ 50 VWT-AJ $11.00 $11.30 2.73% $ 51 JWN 03/30/01 '02 $ 20 JWN-AD $ 1.65 $ 2.05 24.24% $17.50 '03 $ 20 VNZ-AD $ 3.30 $ 3.80 15.15% $17.50 GS 04/05/01 '02 $ 90 GS -AR $14.00 $18.90 35.00% $ 91 '03 $ 90 VSD-AR $20.50 $28.10 37.07% $ 91 MU 04/05/01 '02 $ 40 MU -AH $10.60 $ 9.40 -11.32% $ 38 '03 $ 40 VGY-AH $14.80 $14.70 - 0.68% $ 38 NOK 04/06/01 '02 $ 25 WIK-AE $ 4.70 $ 9.40 100.00% $ 29 '03 $ 25 VOK-AE $ 7.00 $12.00 71.43% $ 29 FON 04/09/01 '02 $ 25 WO -AE $ 2.80 $ 1.60 -42.86% $ 19 '03 $ 25 VN -AE $ 4.40 $ 3.60 -18.18% $ 19 QQQ 04/25/01 '02 $ 40 WD -AN $11.10 $12.80 15.32% $ 45 '03 $ 45 VZQ-AS $12.30 $13.90 13.01% $ 45 DELL 04/27/01 '02 $ 25 WDQ-AE $ 6.20 $ 5.80 - 6.45% $ 23 '03 $ 25 VDL-AE $ 9.00 $ 8.90 - 1.11% $ 23 ADBE 05/16/01 '02 $ 40 AEQ-AH $11.00 $12.20 10.91% $ 37 '03 $ 40 VAE-AH $14.60 $17.70 21.23% $ 37 AOL 05/16/01 '02 $ 55 AOO-AJ $ 9.60 $ 9.40 - 2.08% $ 48 '03 $ 55 VAN-AJ $14.60 $14.50 - 0.68% $ 48 NXTL 05/25/01 '02 $ 20 WFU-AD $ 3.40 $ 3.40 0.00% $ 15 '03 $ 20 VFU-AD $ 5.80 $ 5.80 0.00% $ 15 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL GE 03/25/01 $50-51 JAN-2002 $ 53 WGE-AX JAN-2003 $ 55 VGE-AK TXN 03/25/01 $36-37 JAN-2002 $ 40 TXN-AH JAN-2003 $ 40 VXT-AH EMC 04/22/01 $39-40 JAN-2002 $ 45 EMC-AI JAN-2003 $ 45 VUE-AI SEBL 04/22/01 $41-42 JAN-2002 $ 45 YDS-AI JAN-2003 $ 45 OIE-AI VRSN 04/29/01 $50-51 JAN-2002 $ 50 YXO-AJ JAN-2003 $ 55 OVX-AL LRCX 04/29/01 $27-28 JAN-2002 $ 30 WMJ-AF JAN-2003 $ 30 VPC-AF BRCD 05/13/01 $40-41 JAN-2002 $ 45 UBF-AI JAN-2003 $ 45 OMW-AI QCOM 05/20/01 $60-61 JAN-2002 $ 65 AAO-AH JAN-2003 $ 70 VLM-AN BRCM 05/27/01 $35-36 JAN-2002 $ 40 WGJ-AH JAN-2003 $ 40 OGJ-AH New Portfolio Plays NXTL - Nextel Communications $17.30 Pre-holiday weakness gave us just the entry point we were looking for as NXTL bounced from the $17 level several times over the past 2 days. Although none of the bounces were particularly strong, the fact that the broad market weakness couldn't drag the stock lower speaks to relative strength, which should help attract buyers next week. It has been encouraging to see the stock hold above the $17 level while the daily stochastics has cycled down into the oversold region on light volume. Provided there aren't any unpleasant developments in the Wireless sector over the next several days, we should see a resurgence of buyers propel our play up towards the $20 resistance level, especially if the NASDAQ bulls return from the long weekend in a buying mood. Support looks firm near $15.25, so we are starting out with a fairly tight stop at $15. A close below this level would cause us to question the premise of our play and exit the position prematurely. A renewed bounce from the $17 level still looks attractive for new entries, but only if confirmed by solid buying volume and strength in the broad technology sector. BUY LEAP JAN-2002 $20.00 WFU-AD $3.40 BUY LEAP JAN-2003 $20.00 VFU-AD $5.80 New Watchlist Plays BRCM - Broadcom Corp. $39.35 A lack of selling and hints of improving conditions within the Semiconductor sector, has us eyeing BRCM as a long-term recovery candidate. As a leading provider of integrated silicon solutions for the broadband voice, video and data transmission markets, BRCM is positioned to benefit as the capital spending freeze begins to thaw in the second half of the year. Despite weakness ahead of the Memorial Day weekend, the Semiconductor index (SOX.X) held above the important $650 support level, and the NASDAQ Composite managed to hold onto support at 2250. BRCM has improved significantly since early April, due in large part to the Fed's aggressive policy of cutting interest rates. After BRCM failed to hold above the $48 resistance level last week, investors began harvesting profits ahead of the long weekend. It looks like an attractive entry point is in the making, and we are targeting the $35-36 support level for new positions. In addition to historical support, we have the 50-dma, (resting at $35.84), and it looks like we could get a bounce near this level about the time the daily Stochastics oscillator finishes its current decline into oversold territory. Watch the SOX for confirmation of sector strength, and look to initiate new positions when BRCM bounces from support with the assistance of solid buying volume. BUY LEAP JAN-2002 $40.00 WGJ-AH BUY LEAP JAN-2003 $40.00 OGJ-AH Drops CPN $49.00 Political changes in Washington have cast a cloud of uncertainty over energy stocks in recent days and CPN was hit with heavy selling all week. Although it looked like it might be setting us up for an entry point on Thursday, the continued selloff on Friday really changed the character of the play. Sellers cut through the $50 support level as though it weren't even there, and we now have a rollover on the Stochastics oscillators in both the daily and weekly timeframes. With the technical violation coming on heavy volume, the risks of the play now outweigh the potential rewards. We are removing CPN from the old playlist and the Watch List this weekend. *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. 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The Option Investor Newsletter Sunday 05-27-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/052701_5.asp ************* COVERED CALLS ************* Trading Basics: Position Adjustments and Averaging By Mark Wnetrzak One of our readers requested some guidelines for "averaging" a position. By definition, averaging is the practice of purchasing the same security at various price levels, thereby arriving at a higher or lower average cost. Averaging down is the more common tactic among novice investors, as it seems like an excellent way to lower the cost basis in an issue. Likewise, the technique is also used by professional fund managers to reduce the cost-per- share in a bearish market but they also add-to portfolio holdings on a regular basis to increase profits in a bullish market. Surprisingly, it is better to "average up" than to "average down." This activity is contrary to the one ordinarily recommended in investing manuals; that being the practice to "buy and hold," and then buy more on a decline. From an emotional standpoint, it is natural to rationalize this strategy as it offers a more favorable entry opportunity than that of the original position. But, it is far more productive to consider that any increase in exposure to a specific market is similar to entering the initial position; thus it must be assessed based on its current merits. The question to ask before adding to a losing position is whether the recent price action warrants additional portfolio capital. That question can only be answered after careful study of the prevailing conditions, both technical and fundamental. Of course, the notion that buying additional stock at a lower price in a long position improves the overall cost basis often overshadows the fact that this benefit is at the expense of the new shares. In simple terms, the existing position cannot be averaged without producing a similar effect on the more recent purchase and the end result has a relative benefit only when viewed with regard to the original position. For most investors, the strategy of "averaging down" can be very successful in the long-term but the purchase of additional shares should never considered if the added exposure is not justified by the current outlook for the issue. Indeed, to "buy down" requires strong will and deep pockets, and financial self-destruction is a common outcome for those who possess both attributes. At the same time, there are savvy market players that "buy and hold," then "add-to" and finally sell for a profit. This class of traders is schooled in the science of systematic investing and the art of accumulation of wealth over time. They have acquired the virtue of patience, entering the market prudently with a long-term outlook that is untroubled by its cycles and fluctuations. Investors of this nature buy in depressed times with the idea of profiting through a widespread recovery in the economy, which leads to higher equity values. These astute participants are contrarians who view the infrequent lulls as an opportunity to increase their holdings at attractive prices. They purchase issues that have the potential to grow exponentially when the market turns upward and they add to their positions at regular intervals to even out the troughs and peaks, accruing wealth over time in a methodical, organized manner. Regardless of the manner in which you approach the stock market, it is important to devote only the amount of capital that is within the proper limits of your investing portfolio. When in doubt, limit the size of the initial position until a favorable trend is well established. After the position is in place, have the courage to accept a loss and act promptly at the first sign of danger. The most important lesson to learn is that each issue should be constantly evaluated both fundamentally and technically to determine if it merits your investment capital. You have to ask, "If I were considering this stock for the first time today, would I buy it?" If not, sell it and move your assets to a more favorable investment. Learning to manage the situation (keeping the losses to a minimum) is one of the most important aspects of successful investing and that's a subject we'll discuss further in next week's edition. 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 NPIX 10.00 13.50 JUN 10.00 1.15 *$ 1.15 11.3% OSUR 10.24 11.97 JUN 10.00 1.00 *$ 0.76 8.9% VOXX 10.09 10.16 JUN 10.00 0.95 *$ 0.86 8.2% STOR 19.27 19.40 JUN 15.00 5.40 *$ 1.13 7.1% APHT 20.00 22.63 JUN 17.50 3.50 *$ 1.00 6.6% SPWX 15.70 14.97 JUN 12.50 3.90 *$ 0.70 6.4% FNSR 20.98 20.69 JUN 15.00 7.00 *$ 1.02 6.3% CELG 22.99 28.03 JUN 20.00 4.00 *$ 1.01 5.8% STLW 13.01 13.25 JUN 10.00 3.50 *$ 0.49 5.6% WEBX 16.20 20.00 JUN 12.50 4.30 *$ 0.60 5.5% MEDX 26.30 28.11 JUN 22.50 4.80 *$ 1.00 5.1% NEM 20.98 21.97 JUN 20.00 2.00 *$ 1.02 4.7% AFCI 17.70 21.04 JUN 15.00 3.40 *$ 0.70 4.3% *$ = Stock price is above the sold striking price. Comments: Aremissoft (NASDAQ:AREM) recovered above our cost basis this week, offering a less painful exit for anyone remaining in the issue. I would rather wait on the sidelines until the contract dispute is resolved, not to mention the lawsuits. Also, keep an eye on Audiovox (NASDAQ:VOXX) as it consolidates towards its 50-dma at $9.50. Gold dropped this week and analysts believe the current rally will not hold. It's time to keep a close watch on Newmont Mining (NYSE:NEM) as it moves towards support. Positions Closed: Aremissoft (NASDAQ:AREM) 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 ABMD 25.60 JUN 22.50 IBU FX 4.00 96 21.60 20 6.3% ALXN 26.02 JUN 22.50 XQN FX 4.40 31 21.62 20 6.2% CYGN 7.79 JUN 7.50 YNQ FU 0.75 1046 7.04 20 9.9% MCDTA 31.95 JUN 25.00 MQG FE 7.90 84 24.05 20 6.0% MRVC 12.35 JUL 10.00 VQX GB 3.20 1192 9.15 56 5.0% PGNX 20.16 JUN 17.50 GUB FW 3.20 64 16.96 20 4.8% SBYN 15.28 JUN 12.50 QYS FV 3.20 30 12.08 20 5.3% 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 CYGN 7.79 JUN 7.50 YNQ FU 0.75 1046 7.04 20 9.9% ABMD 25.60 JUN 22.50 IBU FX 4.00 96 21.60 20 6.3% ALXN 26.02 JUN 22.50 XQN FX 4.40 31 21.62 20 6.2% MCDTA 31.95 JUN 25.00 MQG FE 7.90 84 24.05 20 6.0% SBYN 15.28 JUN 12.50 QYS FV 3.20 30 12.08 20 5.3% MRVC 12.35 JUL 10.00 VQX GB 3.20 1192 9.15 56 5.0% PGNX 20.16 JUN 17.50 GUB FW 3.20 64 16.96 20 4.8% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ABMD - Abiomed $25.60 *** Starting The Next Leg Up? *** Abiomed (NASDAQ:ABMD) is a leading developer, manufacturer and marketer of medical products designed to assist or replace the pumping function of the failing heart. The company's first generation AbioCor Implantable Replacement Heart is in an advanced stage of development and preparation for initial human trials. Abiomed currently manufactures and sells the BVS, a heart assist advice for the temporary support of all patients with failing but potentially recoverable hearts. Last week, Abiomed reported earnings that revealed product revenues increased 20% to $22.0 million in fiscal 2001. The BVS is demonstrating that it is the most successful device in the treatment of patients for reversible heart failure. Investors are looking to the future since Abiomed received permission from the FDA to commence initial clinical trials with the AbioCor Implantable Replacement Heart. A reasonable cost basis from which to speculate on the company's future. JUN 22.50 IBU FX LB=4.00 OI=96 CB=21.60 DE=20 TY=6.3% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=ABMD ***** ALXN - Alexion Pharmaceuticals $26.02 *** Stage I Entry *** Alexion Pharmaceuticals (NASDAQ:ALXN) develops products for the treatment of heart disease, and inflammation, diseases of the immune system and cancer in humans. The company's lead product candidates are genetically altered antibodies that target specific diseases that arise when the human immune system induces undesired inflammation in the human body. Alexion suffered over the last year on concerns over mixed trial results and their resistance to partnering with a major pharmaceutical developer. There is some speculation that Alexion is now undervalued as it is trading above its cash value. Investors may simple be interested in the potentially promising products under development, including some treatments for rheumatoid arthritis, multiple sclerosis, and also xenotransplantation rejection. We simply favor the formation of a Stage I base on improving technicals with support near our cost basis. Don't forget to do your homework! JUN 22.50 XQN FX LB=4.40 OI=31 CB=21.62 DE=20 TY=6.2% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=ALXN ***** CYGN - Cygnus $7.79 *** New Product Receives FDA Approval *** Cygnus (NASDAQ:CYGN), headquartered in Redwood City, California, develops and manufactures non-invasive diagnostic medical devices, utilizing proprietary biosensor technologies to satisfy unmet medical needs cost-effectively. Cygnus' current efforts are focused on the GlucoWatch Biographer and enhancements thereto. In March, Cygnus doubled its value after the FDA granted the company approval to market its GlucoWatch. Biographer as a prescription device for adults with diabetes. The GlucoWatch Biographer is the first and only monitoring system that provides glucose readings automatically and non-invasively, up to three times an hour, day or night. This could represent a major step forward in the management of diabetes. Investors are looking towards a profitable future as Cygnus prepares to commercialize this revolutionary product in the U.S. and other countries. JUN 7.50 YNQ FU LB=0.75 OI=1046 CB=7.04 DE=20 TY=9.9% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=CYGN ***** MCDTA - McDATA (Class A) $31.95 *** Own This One! *** McDATA (NASDAQ:MCDTA) 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. MCDTA has established an excellent upward trend with solid buying pressure and good volume. The cost basis in this position is near a recent support area and offers a low-risk entry point in the issue. JUN 25.00 MQG FE LB=7.90 OI=84 CB=24.05 DE=20 TY=6.0% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=MCDTA ***** MRVC - MRV Communications $12.35 *** Networking Sector *** MRV Communications (NASDAQ:MRVC) is in the business of creating and managing growth companies in optical technology and Internet infrastructure. MRV has created several start-up companies and formed independent business units in the optical technology and Internet infrastructure area. The company's primary operations include the design, manufacture and sale of two major groups of products: optical networking and internet infrastructure systems, primarily subscribers' management, Network Element Management, and physical layer, switching and routing management systems in fiber optic metropolitan networks; and fiber optic components for the transmission of voice, video and other data across enterprise, telecommunications and cable TV networks. Networking stocks have found new buying support in recent weeks and MRVC is one of the more popular issues among speculative investors. Those of you who want to own a solid company in the group can use this (July) position to establish a favorable cost basis in the issue. JUL 10.00 VQX GB LB=3.20 OI=1192 CB=9.15 DE=56 TY=5.0% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=MRVC ***** PGNX - Progenics $20.16 *** Rally Mode! *** Progenics Pharmaceuticals (NASDAQ:PGNX) is a biopharmaceutical company focusing on the development and commercialization of innovative products for the treatment and prevention of cancer and viral and other life-threatening diseases. The company applies its immunology expertise to develop biopharmaceuticals that induce an immune response or that mimic natural immunity in order to fight cancers, such as malignant melanoma, and viral diseases, such as HIV infection. The company's recent product candidates include GMK, a therapeutic vaccine for the treatment of melanoma; MGV, a vaccine for the treatment of various cancers; and PRO-542 and PRO-367, which are therapeutic products designed to block HIV. Progenics recently announced that in pre-clinical studies, their experimental prostate cancer vaccine generated a favorable response and they have also initiated an international Phase III trial with its GMK vaccine to prevent the relapse of malignant melanoma, the deadliest form of skin cancer. Traders are supporting the latest rally with excellent volume and this position offers a low-risk cost basis from which to speculate on PGNX's new drug products. JUN 17.50 GUB FW LB=3.20 OI=64 CB=16.96 DE=20 TY=4.8% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=PGNX ***** SBYN - SeeBeyond $15.28 *** Entry Point! *** SeeBeyond (NASDAQ:SBYN) enables the seamless flow of information within and among enterprises in real time. The SeeBeyond eBI Suite offers a rapidly deployable and infinitely scalable infrastructure for application integration, B2B connectivity and business processes optimization. SeeBeyond continues to expand its operations with several new partnerships and is growing its customer base in the Asia Pacific region. Several recent alliances and contracts, including a major deal with GM have garnered additional investor interest in the company. From a technical viewpoint, a short-term, as well as a longer-term "double-bottom" formation is evident and this position offers a favorable entry point for those investors who are bullish on SeeBeyond's future. JUN 12.50 QYS FV LB=3.20 OI=30 CB=12.08 DE=20 TY=5.3% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=SBYN ***** ***************** 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 WEBM 31.68 JUN 30.00 UUW FF 4.10 1491 27.58 20 13.3% PRCS 27.10 JUN 22.50 FGU FX 5.70 25 21.40 20 7.8% DTHK 8.74 JUL 7.50 DTU GU 2.00 0 6.74 56 6.1% LMNE 6.16 JUL 5.00 ULN GA 1.65 793 4.51 56 5.9% MCAF 12.02 JUL 10.00 CFU GB 2.90 70 9.12 56 5.2% AVGN 20.60 JUN 17.50 GKU FW 3.60 30 17.00 20 4.5% *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.IndexSkybox.com ************************************************************ ************************* NAKED PUT PERCENTAGE LIST ************************* Naked Put Percentage List By Matt Russ Stock Stock Strike Option Option Margin Percent Support Symbol Price Price Symbol Price At 25% Return Level BRCD 46.48 50 UBF-RJ 5.10 1162 44% 40 CHKP 61.31 65 KEQ-RM 5.60 1533 37% 54 CIEN 60.34 60 EUQ-RL 3.70 1509 25% 55 CMVT 63.05 65 CQV-RM 5.10 1576 32% 60 CRA 45.15 50 CRA-RJ 5.50 1129 49% 42 EBAY 62.20 65 QXB-RM 5.40 1555 35% 58 FCEL 86.53 90 FQG-RR 8.30 2163 38% 80 IDPH 60.53 65 IHD-RM 5.50 1513 36% 56 IMCL 50.06 55 QCI-RK 6.40 1252 51% 45 ISSX 54.72 60 ISU-RL 6.80 1368 50% 50 KKD 73.55 75 KKD-RO 6.70 1839 36% 66 KLAC 56.61 55 KCQ-RK 2.65 1415 19% 50 MERQ 67.55 70 RQB-RN 5.90 1689 35% 58 NVDA 91.70 95 RVU-RS 7.80 2293 34% 85 OPWV 45.38 50 UGE-RJ 5.90 1135 52% 40 PDLI 78.75 75 RPV-SO 7.70 1969 39% 71 QLGC 58.53 60 QLC-RL 4.90 1463 33% 52 SEBL 51.92 55 SGW-RK 4.90 1298 38% 48 VRSN 62.47 65 QVR-RM 5.50 1562 35% 60 VRTS 75.00 80 VUQ-RZ 7.80 1875 42% 72 VRTX 45.45 50 VQR-RJ 5.50 1136 48% 38 *********************** CONSERVATIVE NAKED PUTS *********************** Option Trading Basics: Margin and Monthly Yield Explained! By Ray Cummins One of our readers submitted some excellent questions concerning collateral and return-on-investment calculations for naked-puts and covered-calls. Dear Ray: I enjoy your column very much. I would appreciate it if you let me know how the monthly yield on the naked puts is calculated along with an example. Also, the average monthly yield for May for covered calls was 7.06% and 10.47% for selling naked puts. This is an almost 50% better return for naked puts. I have trouble comparing the risk of covered call writing and naked puts. However, my gut reaction is that the risk of the two strategies is comparable. I would appreciate your comments on this. I realize this is only one month but 10.7% compounded monthly would be 330% for 12 months. Is the profit from writing "naked" puts likely to be in that range? Regards JS Concerning the margin requirements and monthly yield calculations for naked puts and covered-calls: Here is an explanation of the margin and collateral requirements for common equity-option strategies including "naked" puts. MARGIN REQUIREMENTS - UNCOVERED OPTIONS The margin requirement for writing options is vastly different than that which is used with stocks. The margin requirement is simply a deposit that an investor must provide to guarantee that he or she will cover any written options in the event they are exercised. This collateral is a legal requirement and it is a very important component in your strategy selection because it determines the overall "return on investment" or ROI. There are two different categories of margin requirements with options: Initial Margin and Maintenance Margin. INITIAL MARGIN The Initial Margin is the amount of collateral you must have in your account to initiate the position. Recall that with options, margin means the cash or securities required to be deposited by an option writer with his brokerage firm as collateral for the writer's obligation to buy or sell the underlying interest, or in the case of cash-settled options, to pay the cash settlement amount, if assigned an exercise. The minimum margin requirements are imposed by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations, and increased margin requirements may be imposed either generally or in individual cases by various brokerage firms. The most widely used margin requirements are based on the regulations at the Chicago Board Options Exchange: Writers of uncovered puts or calls must deposit and maintain 100% of the option proceeds* plus 20% of the aggregate contract value (current equity price x $100) minus the amount by which the option is out-of-the-money, if any, subject to a minimum for calls of option proceeds* plus 10% of the aggregate contract value and a minimum for puts of option proceeds* plus 10% of the aggregate exercise price amount. (*For calculating maintenance margin, use the option's market value instead of the option's proceeds.) MAINTENANCE MARGIN The Maintenance Margin is the amount of cash (or securities) required to offset the changing collateral requirements of the written options in your portfolio. As the price of the option (and the underlying stock) changes, so does the maintenance margin. With (short) put options, the margin requirements can increase when the underlying stock price falls and also when it rises significantly. The reason is the manner in which the collateral amount is determined (with the exchange formula) and traders should always consider not only the initial margin requirement, but also the maximum margin needed through the life of the position. Option writers occasionally have to meet calls for additional margin during adverse market movements and even when there is enough equity in the account to avoid a margin call, the need for increased collateral will make that equity unavailable for other purposes. Consider these facts carefully before you initiate any "naked" option positions. MONTHLY YIELD As far as the calculations we use to determine collateral and net return for our Naked-Put positions. The following explanation will demonstrate the small mathematical advantage of this technique when compared to covered-call writing. Return On Investment (ROI) = Profit / Collateral Requirement. In this strategy, profit is the initial premium received for the sold option. The collateral requirement is simply the amount of cash or equity that must be in your account to open the position. Most discount/online brokers use the following formula to determine the collateral requirement for "naked" puts. The margin maintenance per contract is the greater of: The premium received plus 40% of the underlying issue price, minus the out-of-the-money amount; (0.40 * Stock Price + Premium - ( Price Picked - Strike)) - or - The premium received plus 20% of the underlying issue price; (0.20 * Stock Price + Premium) The second formula generally applies when the strike price sold is significantly below the underlying stock price. An example: Stock Price = $29.25 Strike Price Sold = $25 Premium Received = $0.50 Cost Basis = $24.50 The 20% formula requirement = $6.35 The 40% formula requirement = $7.95 Using the greater value of the two formulas, the collateral for this play is $7.95 per contract. The Return On Investment (ROI) = $0.50 / $7.95 = 6.29% To correlate the ROI to a monthly basis, annualize the ROI and divide by 12. Using the above example of a 6.29% ROI with an expiration of 3 weeks (21 days), calculate the Target Yield as follows: 6.29 / 21 * 365 / 12 = 9.11%. The original collateral requirement is always utilized in the monthly summary, regardless of the eventual change in stock price. The final price of the stock determines the actual profit when that price is below the sold strike but above the cost-basis. In any case, the total profit can never be greater than the initial premium for the sold option. As you can see, there is a slight mathematical edge with this strategy when compared to covered-calls because of the lower margin maintenance or collateral requirement. However, the risk is the same in both techniques; the underlying stock can always fall to $0. Regarding your last question: Is the profit from naked put writing likely to be in that range? No, unfortunately there will always be draw-downs and even one or two catastrophic (unavoidable) losers. In fact, the need to limit large losses and prevent failed plays from significantly eroding capital should be a dominant theme in any trader's approach to the market. In addition, all positions must be reviewed regularly to ensure that the total portfolio risk is kept to a practical minimum. Since this is a limited profit strategy, you simply can't afford to have many losers. That's why it is so important to monitor each position on a daily basis and exit those issues that experience a significant change in character. Every loss factors into the overall return, which on average is 4-5% monthly, annualized. That's slightly better than the covered-call average, due to the differences in collateral requirements. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield EXEL 15.97 16.00 JUN 12.50 0.70 *$ 0.70 15.6% VIGN 10.02 9.93 JUN 7.50 0.30 *$ 0.30 14.2% SBSE 23.79 21.54 JUN 20.00 0.65 *$ 0.65 11.1% STOR 21.93 19.40 JUN 15.00 0.45 *$ 0.45 10.1% ILUM 32.01 31.90 JUN 25.00 0.65 *$ 0.65 10.0% NMTC 22.22 23.00 JUN 17.50 0.45 *$ 0.45 10.0% SMTC 31.70 28.36 JUN 25.00 0.60 *$ 0.60 9.4% NFLD 13.50 16.90 JUN 10.00 0.30 *$ 0.30 8.7% AVCI 13.59 13.27 JUN 7.50 0.30 *$ 0.30 8.6% TSAI 12.03 13.08 JUN 10.00 0.30 *$ 0.30 8.5% GLGC 21.05 23.81 JUN 17.50 0.50 *$ 0.50 7.8% APCC 16.83 18.25 JUN 15.00 0.45 *$ 0.45 7.3% PDG 11.05 11.62 JUN 10.00 0.30 *$ 0.30 7.1% GNSS 20.45 27.12 JUN 15.00 0.35 *$ 0.35 6.9% OO 26.00 25.49 JUN 22.50 0.35 *$ 0.35 5.2% SAWS 30.60 24.03 JUN 25.00 0.80 $ -0.17 0.0% *$ = Stock price is above the sold striking price. Comments: Sawtek (NASDAQ:SAWS) warned this week that it expects fiscal 3rd quarter earnings to fall below Wall Street estimates. Is it time to take a small loss or do you believe the news is already priced in? We will take the small loss. Sbs Technologies (NASDAQ:SBSE) has pulled back to its 150 dma - a key moment. Tuesday, Semtech (NASDAQ:SMTC) reported 1st quarter earnings that met expectations, but warned of a weaker 2nd quarter. Stephens Inc. downgraded the company on Wednesday and Banc of America Sec. upgraded on Friday. Will support hold near our cost basis? That is the question you must answer, then act accordingly. Monitor Placer Dome (NYSE:PDG) closely as gold is under some selling pressure amid speculation the current rally will fail. Now why didn't we just buy calls on Genesis Microchip (NASDAQ:GNSS)? 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 AMLN 10.85 JUN 10.00 AQM RB 0.60 51 9.40 20 22.3% DTHK 8.74 JUN 7.50 DTU RU 0.25 20 7.25 20 15.2% FIBR 13.33 JUN 10.00 QFW RB 0.35 78 9.65 20 17.6% GENE 13.60 JUN 10.00 GUG RB 0.35 586 9.65 20 17.3% MCAF 12.02 JUN 10.00 CFU RB 0.30 166 9.70 20 14.8% PLUG 35.40 JUN 25.00 PQL RE 0.40 1033 24.60 20 8.1% SEAC 20.37 JUN 17.50 UEG RW 0.50 40 17.00 20 13.2% 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 AMLN 10.85 JUN 10.00 AQM RB 0.60 51 9.40 20 22.3% FIBR 13.33 JUN 10.00 QFW RB 0.35 78 9.65 20 17.6% GENE 13.60 JUN 10.00 GUG RB 0.35 586 9.65 20 17.3% DTHK 8.74 JUN 7.50 DTU RU 0.25 20 7.25 20 15.2% MCAF 12.02 JUN 10.00 CFU RB 0.30 166 9.70 20 14.8% SEAC 20.37 JUN 17.50 UEG RW 0.50 40 17.00 20 13.2% PLUG 35.40 JUN 25.00 PQL RE 0.40 1033 24.60 20 8.1% 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). ***** AMLN - Amylin Pharmaceuticals $10.85 *** Drug Speculation! *** Amylin Pharmaceuticals (NASDAQ:AMLN) is engaged in the discovery and development of potential drug candidates for the treatment of metabolic disorders. The company pioneered research of a hormone called amylin and is also developing Symlin, a synthetic analog of the human hormone amylin for the treatment of people with diabetes who use insulin. The company's second drug candidate, synthetic exendin-4, which is a naturally occurring peptide derived from the salivary secretions of the Gila monster is now in Phase II studies. The company is also evaluating another drug in for potential use in the treatment of metabolic disorders relating to cardiovascular disease. Amylin shares rallied on Thursday after Lehman Brothers said the company will present new information from recent clinical tests at the American Diabetes Association's meeting highlighting developmental therapies that promote weight loss and reduce the risk of hypoglycemia among diabetics. Investors appear to favor the news and the relatively stable support area near $10 provides a reasonable risk/reward outlook in this position. JUN 10.00 AQM RB LB=0.60 OI=51 CB=9.40 DE=20 TY=22.3% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=AMLN ***** DTHK - DigitalThink $8.74 *** Bottom Fishing! *** DigitalThink (NASADAQ:DTHK) provides online learning solutions designed to address the strategic business objectives of its customers by helping them to increase employee productivity, sales channel effectiveness and customer loyalty and satisfaction. The company's e-learning environment consists of technologies that it has designed and created to function as an integrated solution. The company's business is divided into seven operating segments: content delivery system, system architecture, course enrollment options, tracking and reporting systems, tutoring, collaboration tools, testing and assessment. There's no public news to explain the recent activity but a 20% gain in just two sessions warrants a closer look. The heavy trading volume suggests that "someone" is very interested in owning the issue and we will speculate on its future upside activity with this conservative position. JUN 7.50 DTU RU LB=0.25 OI=20 CB=7.25 DE=20 TY=15.2% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=DTHK ***** FIBR - Sorrento Networks $13.33 *** Awesome Earnings! *** Sorrento Networks (NASDAQ:FIBR), formerly Osicom Technologies, is a supplier of end-to-end, intelligent optical networking solutions for metro and regional applications worldwide. Sorrento Networks' products support a wide range of protocols and network traffic over linear, ring and mesh topologies. Their existing customer base and market focus includes communications carriers in the telecom, cable television, fixed wireless and utilities markets. The Storage Area Network (SAN) market is addressed though alliances with SAN system integrators. FIBR shares rallied last week after the company's two operating subsidiaries, Sorrento and Meret Optical rose 130% in the current quarter. Sorrento reported first quarter revenues of $13 million, the highest in Sorrento's history, an increase of 179% over the prior year's first quarter revenues and a sequential growth of 19% over the fourth quarter of fiscal year 2001. Those are great numbers, considering the current economy and investors have flocked to the issue. Traders who think the recent rally will continue can speculate on that outcome with this position. JUN 10.00 QFW RB LB=0.35 OI=78 CB=9.65 DE=20 TY=17.6% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=FIBR ***** GENE - Genome Therapeutics $13.60 *** On The Move! *** Genome Therapeutics (NASDAQ:GENE) is primarily engaged in the commercialization of genomics-based drug discovery. Through the identification of genes and the characterization of the function of those genes, the company is seeking to accelerate the discovery and development of products to treat and diagnose a number of diseases. The U.S. government has selected the company to participate in a number of gene discovery programs, including the Human Genome Project, and the Rat Genome Sequencing Program. Genome's depth of experience in the genomics field permits it to be a leader in creating industrial scale genomics tools for product development. Shares of GENE rocketed last week after Ladenburg Thalmann raised its rating on the stock to a "strong buy" and gave it a 12-month price target of $84. Analysts said Genome was a leader in using pathogen genomes to find anti-infective drugs and analysts believe the company will discover several anti-infective agents with large potential markets. The firm also believes Genome is developing expertise in positional cloning, as demonstrated by its discovery of a key disease gene in asthma. Traders who agree with a bullish outlook for the company can use this play to establish a favorable cost basis in the issue. JUN 10.00 GUG RB LB=0.35 OI=586 CB=9.65 DE=20 TY=17.3% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=GENE ***** MCAF - McAfee.com $12.02 *** Microsoft Deal! *** McAfee.com (NASDAQ:MCAF) provides a range of online computer management products and services for consumers. Through its web site, www.McAfee.com, the company allows consumers to secure, repair, update and upgrade their PCs. As an applications service provider, the company generates revenue by encouraging PC users to subscribe to its service. Subscriptions allow users to access online, version-less PC security and management software, which the company hosts on its servers. Shares of the software maker rallied last week after the company announced it had signed a strategic alliance with Microsoft. McAfee said it plans to integrate its software, including anti-virus, privacy, and firewall products, with Microsoft's .Net Internet servers. In addition, the two companies will also work to integrate McAfee's software with other web-based software services from Microsoft. The news is great for McAfee's share value and this position establishes an acceptable cost basis from which to speculate on its future movement. JUN 10.00 CFU RB LB=0.30 OI=166 CB=9.70 DE=20 TY=14.8% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=MCAF ***** PLUG - Plug Power $35.40 *** Up, Up and Away! *** Plug Power (NASDAQ:PLUG) is a designer and developer of on-site, energy generation systems utilizing proton exchange membrane fuel cells for stationary applications. The company's goal is to make reliable, efficient and safe fuel cell systems at affordable cost for mass-market consumption. Plug is now focusing its efforts on overall system design, component and subsystem integration, and also quality control processes. Plug Power's shares jumped to $35 last week after the firm agreed to sell 75 of its commercial fuel cell systems to an undisclosed public utility for $7 million. The deal includes installation, maintenance, training, engineering and other technical support, and its a great way for the company to establish its products in the field. Despite the strong upward trend, the issue is due for a pull-back. Target a higher premium in the position initially, to allow for a brief consolidation. JUN 25.00 PQL RE LB=0.40 OI=1033 CB=24.60 DE=20 TY=8.1% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=PLUG ***** SEAC - SeaChange International $20.37 *** A Big Day! *** SeaChange (NASDAQ:SEAC) develops, markets and supports products to manage, store and distribute digital video for television operators, including cable, broadcast, telecommunications and other new media companies. The company's products utilize its proprietary distributed application software and standard computer industry components to automate the management and distribution of video streams including advertisements, movies, news updates and other video programming requiring precise, accurate and continuous execution. The company's digital video products with their unique electronic storage and retrieval capabilities are designed to offer higher image quality and to be more reliable, easier to use and less expensive than analog tape-based systems. SEAC shares rose on Friday after UBS Warburg raised its price target on the company and said they expect SeaChange to report strong revenues this year as it is progressing well in establishing distribution agreements with cable operators domestically and abroad. That's a confident statement from a popular analyst and we think a cost basis near $17 is a favorable price at which to own the issue. JUN 17.50 UEG RW LB=0.50 OI=40 CB=17.00 DE=20 TY=13.2% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=SEAC ***** ***************** 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 LMNE 6.16 JUN 5.00 ULN RA 0.25 821 4.75 20 24.5% INKT 10.96 JUN 10.00 KFN RB 0.50 616 9.50 20 19.4% ISIL 36.00 JUN 30.00 UFH RF 0.75 92 29.25 20 12.5% WEBM 31.68 JUN 22.50 UUW RX 0.50 100 22.00 20 11.1% QSFT 36.13 JUN 30.00 QUD RF 0.60 84 29.40 20 10.2% ITWO 25.75 JUN 20.00 JQ RD 0.35 1698 19.65 20 9.7% ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=2220 ************************************************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Traders Take A Day Off! Friday, May 25 Stocks drifted lower today in light trading ahead of the Memorial Day Holiday. Profit-taking in technology issues drove the NASDAQ 30 points lower to 2,251 and the Dow lost 117 points to finish at 11,005. Unfavorable economic data weighed heavily on the broader market with the S&P 500 index closing 15 points lower at 1,277. The NASDAQ had its second slowest day of the year, with only 1.37 billion shares changing hands. Technology losers outpaced winners 19 to 18. Trading volume came in at 813 million on the NYSE where market breadth was marginally negative. Big Board losers outpaced winners 16 to 14. In the bond market, the 30-year Treasury fell 1/32, pushing its yield up to 5.83%. Thursday's new plays (positions/opening prices/strategy): Freemarkets (NASDAQ:FMKT) OCT20C/OCT12P $15.40 debit collar Next Level (NASDAQ:NXTV) SEP17C/SEP7P $10.75 debit collar Today's bearish market activity offered a great opportunity to initiate our new covered-collars at favorable prices. Market Activity: The stock market retreated Friday ahead of the upcoming Memorial Day holiday. Investors were less than inspired by the morning's batch of economic news and Fed chair Alan Greenspan's comments about the future of the economy. Speaking before the Economic Club of New York, the Fed chief said the economic slowdown hasn't yet run its course and that the central bank is ready to step in and slash rates again if needed. Greenspan noted "the period of sub-par economic growth is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated, requiring further policy response." His remarks on inflation proved reassuring to those concerned about future rate cuts and after the speech, Ian Shepherdson, chief U.S. economist at High Frequency Economics, said he now expects the Fed to ease interest rates by another 50 basis points in the coming months. Even with optimistic outlook, buying pressure was muted and the light trading volume suggested there was little interest in new positions. The technology group endured profit-taking in every major segment with networking, Internet, software and hardware issues pacing the decline. Semiconductor stocks performed better than most after Prudential issued a research note on equipment stocks, upgrading the group to a "strong buy" based on signs of selective end market stabilization. Among the blue-chip shares, Boeing (NYSE:BA), American Express (NYSE:AXP), General Electric (NYSE:GE), Honeywell (NYSE:HON), Wal-Mart (NYSE:WMT) and Disney (NYSE:DIS) were the worst performers. In the broader market, oil stocks generally traded lower but oil service shares advanced as analysts issued some positive comments on the sector. Stocks in the gold sector were also popular while transportation, retail, biotechnology, drug and utility issues moved lower. Portfolio Activity: Despite the widespread lack of interest in today's market, the spreads portfolio enjoyed a few favorable surprise as traders speculated on the small-cap segment. WatchGuard (NASDAQ:WGRD) continued its recent technical recovery and Stratos Lightwave (NASDAQ:STLW) finished higher after announcing a new group of miniaturized transceivers for next generation Metropolitan area networking equipment applications. Visx (NYSE:EYE) was a big mover, up $1.30 to $21.50 on news of some negative comments about its main competitor. Analysts at Dain Rauscher said that Alcon USA, a producer of unique ophthalmic products and technologies, may be issuing a recall on its laser system due to unanticipated laser pulses. The announcement bolstered optimism in the Visx product line and some traders believe the company's market share will increase as a result of Alcon's problems. In the finance sector, Providian (NYSE:PVN) was very strong, moving higher in opposition to the overall sector trend. On the downside, shares of bellwether American Express (NYSE:AXP) continued to decline and we decided to make an early adjustment, in the event of a continued slump after the holiday weekend. Our new position is short at $40 (Put) in July and we sold the (long) JUN-$42.50 Put to retain a small credit in the overall play. A recent bearish candidate, Optimal Robotics (NASDAQ:OPMR) has performed better than expected and one of our new debit straddles also achieved profitability today. Union Pacific (NYSE:UNP) traded as low as $55 and the move provided a $5.00 closing credit in the neutral position. That is a 20% profit after just one week in play and traders who want to "lock-in" a gain might consider selling the bearish portion of the straddle to pay for the entire position. The remaining option will be "risk-free" with unlimited profit potential; a viable exit strategy, considering the technical support near the current price. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - This week, our publishing deadline has been moved to Friday night so that the OIN's dedicated research staff can spend the holiday weekend with their families. Since there will be little time for extensive research, I decided to provide some favorable straddle candidates for your review. Based on the analysis of historical option pricing and technical backgrounds, these issues meet the basic criteria for delta-neutral (debit) strategies. As you know, profitable straddles are relatively simple to uncover and there are three common 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 straddle. These stocks have acceptable values in all three categories and traders who think the volatile trends will continue can profit from that outcome with neutral outlook positions. Our opening targets in each straddle will be slightly lower than the current quoted prices, to allow for some shrinkage in the premiums over the long holiday weekend. Please review each play individually and make your own decision about the outcome of the position. ****************************************************************** MWD - Morgan Stanley Dean Witter $69.48 *** Broker Revenge! *** Morgan Stanley Dean Witter (NYSE:MWD) is a worldwide financial services firm that maintains major market positions in each of its three business segments: Securities, Asset Management and Credit Services. MWD conducts its businesses through several highly integrated subsidiaries and affiliates. The company provides execution, trading and research services to a variety of clients for listed equity securities, over-the-counter equity securities, options, Actual Deferral Ratios and a broad range of fixed income securities. In addition, MWD provides its clients with an array of investment and credit products and services, such as individual retirement planning, individual annuities and complete defined contribution plan services for businesses, including 401(k) plans. PLAY (speculative - neutral/debit straddle): BUY CALL JUN-70 MFZ-FN OI=2880 A=$2.40 BUY PUT JUN-70 MFZ-RN OI=2974 A=$2.80 INITIAL NET DEBIT TARGET=$5.00 TARGET PROFIT=25% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=MWD ****************************************************************** VIA'B - Viacom (class B) $58.00 *** A Calculated Gamble! *** Viacom (NYSE:VIA'B) is a diversified worldwide entertainment company with operations, during 2000, in seven segments. The Cable Networks segment operates MTV; Showtime; Nickelodeon; VH1; TNN, and CMT. The Television segment consists of the CBS and UPN television networks, 39 owned broadcast television stations and the company's television production and syndication business. The Infinity segment operates 184 radio stations through Infinity Broadcasting, and outdoor advertising properties. The company's Entertainment segment includes Paramount Pictures and Paramount Parks. The Video segment consists of an approximately 82% equity interest in Blockbuster. The Publishing segment publishes and distributes consumer books and related multimedia products. The Online segment provides online music and children's destinations through Internet sites. PLAY (very speculative - neutral/debit strangle): BUY CALL JUN-60 VMB-FL OI=6795 A=$0.75 BUY PUT JUN-55 VMB-RK OI=1638 A=$0.60 INITIAL NET DEBIT TARGET=$1.20 TARGET ROI=25% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=VIAb ****************************************************************** RETK - Retek $39.15 *** Pure Volatility! *** Retek (NASDAQ:RETK) provides advanced application software to help retailers create, manage and fulfill consumer demand. The company's software solutions enable retailers to use the Internet to communicate and collaborate efficiently with their suppliers, distributors, wholesalers, logistics providers, product brokers, transportation companies, consolidators and manufacturers. The company's advanced predictive capabilities provide forecasts of consumer demand, and integration between planning and execution functions enables retailers to respond more rapidly to changes in either supply or demand. With regard to its customers, Retek is primarily focused on retailers with sales of $500 million or more. PLAY (very speculative - neutral/debit straddle): BUY CALL JUN-40 QRD-FH OI=905 A=$2.20 BUY PUT JUN-40 QRD-RH OI=46 A=$3.10 INITIAL NET DEBIT TARGET=5.00 TARGET PROFIT=25% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=RETK ****************************************************************** SRNA - Serena Software $29.25 *** Always Moving! *** Serena (NASDAQ:SRNA) is a provider of eBusiness infrastructure software change management, or SCM, solutions. Serena's products and services are used to manage and control software change for organizations whose business operations are dependent on managing information technology, or IT. The company's product offerings support the industry standard IBM mainframe platforms, including MVS, and are marketed under the brand name Full.Cycle mainframe. This product suite automates the software application life cycle and creates an IT environment that facilitates concurrent develop- ment efforts by separate programming teams, improves process consistency, enhances software integrity and protects valuable software assets. The Full.Cycle mainframe product suite includes Change Man, Comparex, Merge+Reconcile, OR M+R, StarTool, StarWarp, Detect+Resolve MainFrame, and Change Transfer. PLAY (speculative - neutral/debit straddle): BUY CALL AUG-30 NHU-HF OI=160 A=$4.90 BUY PUT AUG-30 NHU-TF OI=39 A=$5.40 INITIAL NET DEBIT TARGET=10.00 TARGET PROFIT=50% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=SRNA ****************************************************************** TRW - TRW, Inc. $43.56 *** New Trading Range! *** TRW (NYSE:TRW) is an international company engaged in the design, manufacture and sale of products and the performance of systems engineering, research and technical services. The principal businesses of TRW and its subsidiaries provide advanced technology products and services for industry and the U.S. Government in the automotive, aerospace and information systems markets. In 2000, TRW operated its business in seven segments: Occupant Safety Systems, Chassis Systems, Automotive Electronics, Automotive, Space & Electronics, Systems and Information Technology and Aeronautical Systems. PLAY (conservative - neutral/debit straddle): BUY CALL JUL-45 TRW-GI OI=480 A=$1.60 BUY PUT JUL-45 TRW-SI OI=20 A=$2.80 INITIAL NET DEBIT TARGET=4.25 TARGET PROFIT=40% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=TRW ****************************************************************** HSY - Hershey Foods $59.76 *** Probability Play! *** Hershey Foods (NYSE:HSY) and its subsidiaries are engaged in the manufacture, distribution and sale of consumer food products. The company produces and distributes a broad line of chocolate and non-chocolate confectionery and grocery products. Hershey's principal product groups include chocolate and non-chocolate confectionery products sold in the form of bar goods, bagged items and boxed items, and grocery products sold in the form of baking ingredients, chocolate drink mixes, peanut butter, dessert toppings and beverages. PLAY (conservative - neutral/debit straddle): BUY CALL AUG-60 HSY-HL OI=216 A=$2.75 BUY PUT AUG-60 HSY-TL OI=981 A=$2.50 INITIAL NET DEBIT TARGET=5.00 TARGET PROFIT=50% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=HSY ****************************************************************** *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. 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