The Option Investor Newsletter Wednesday 07-11-2001 Copyright 2001, All rights reserved. 1 of 1 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/3512_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 07-11-2001 High Low Volume Advance/Decline DJIA 10241.02 + 65.38 10274.02 10120.89 1.38 bln 1341/1747 NASDAQ 1972.04 + 9.25 1975.79 1934.67 1.73 bln 1550/2168 S&P 100 607.01 - 1.78 610.95 601.05 totals 2891/3915 S&P 500 1180.18 - 1.34 1184.93 1168.46 42.5%/57.5% RUS 2000 475.83 - 2.31 478.14 471.36 DJ TRANS 2819.79 + 44.10 2825.04 2773.84 VIX 26.98 + 0.45 28.21 26367 Put/Call Ratio 0.74 ****************************************************************** Mr. Softee to Argentina: "Don't Cry for Me." Amid continued earnings blow-ups, the major market averages rebounded Wednesday. What's more, volume picked up which may have added credence to the advance. About 1.4 billion shares exchanged on the New York Stock Exchange (NYSE), while 1.7 billion shares traded on the Nasdaq. To put Wednesday's trading activity into perspective, the 30-day average volume for the NYSE and Nasdaq is 1.09 and 1.57 billion, respectively. Was Wednesday's pick-up in volume due to short covering? Or, was it due to bulls taking the lead of bonds and buying the recent dip across the broader market averages? Or did Bill Gates whisper sweet nothings into the ears of market participants? Longer term Treasury (Notes and Bonds) yields rose across the board Wednesday, which may have lent some of the bid that equities caught. But, the shorter-end of the yield curve in the form of the 13-week Treasury Bill (IRX.X) continued to fall, which means market participants were looking for a "safe" place to park some capital in the short-term. Might we conclude, however, that some of the proceeds from the longer term Treasury sales were moved into stocks? I think yes. However, the buying of 13-week bills (Read: Falling Yield), in conjunction with the rise in Gold Futures and Gold Equities (XAU.X), is a cause for concern. Perhaps the flight to safety that we witnessed Wednesday to short-term Treasuries and Gold had something to do with the reports from Latin America. It's been suggested that Argentina might default on some $130 billion of debt. If that event is realized, it would come at a most inopportune time for the global economy. What's especially disconcerting is that several U.S. money center banks have lent billions to Argentina over the years. Banks such as Citigroup (NYSE:C) and J.P. Morgan Chase (NYSE:JPM). And take a look at the charts of these two stocks, keeping in mind that the Fed has cut interest rates by 275 basis points this year. Perhaps the rumblings from South America partially explain the ultra tight and conservative lending practices of domestic banks that have contributed to the slowdown in capital expenditures... Speaking of the Fed cutting interest rates amid foreign crises, aren't the current concerns over Argentina and greater South America eerily reminiscent of the Asian Flu back in 1997, which spread to Russia and came to a head with the blow-up of Long-Term Capital Management in the fall of 1998? Is it possible that the Fed drops the discount rate by another 25 basis points, in inter-meeting fashion, if the Argentina problems escalate. I think yes. In the meantime, I suggest that bullish and bearish traders alike cast an eye to the bond market for clues. The 30-year Treasury Bond (TYX.X) will serve our purposes, but traders may want to monitor the gamut of Treasuries, starting with the IRX.X. In Monday's Market Wrap, I opined that the TYX needed to get above roughly 58.00 (5.80%) for the broader markets to substantially advance. Well, it didn't. And I'm rather disappointed in myself for not making more of the drop in yield on Monday, which continued into Tuesday's session, all the while pressuring stocks. But the TYX did rebound in Wednesday's session which, like I mentioned above, probably helped to prop stocks up. The lack of demand due to the selling of bonds Tuesday allowed for the bears to push the Nasdaq Composite (COMPX) below the psychologically significant support level at 2000, followed by a breach of our technically significant support level around 1975. Well, not by surprise, 1975 now serves as resistance, evidenced by Wednesday's intraday high in the COMPX at 1975.79. But 1975 will most likely be a moot level Thursday in the wake of Microsoft's (NASDAQ:MSFT) guidance after the bell, but more on that later. In terms of support, the COMPX bounced from the 1935 area Wednesday, which was the site of its gap higher opening from April 17. Alright, gap filled. Below that general area, I think it's reasonable to expect support to materialize around the 1900 level should the COMPX continue falling over the short- to intermediate-terms. (The 1900 level should serve as psychological support and technical for it's the site of the COMPX 61.8 percent retracement level. And Keep in mind the bearish price objective of the COMPX from its head-and-shoulders lies around 1875.) The S&P 500 (SPX.X) suffered a fate similar to that of the COMPX by taking out support levels. But as illustrated on the chart below, it continues to trade fairly predictably around the key technical levels we've determined using retracement brackets. The SPX bounced from the 1170 level Wednesday, which is the site of its 61.8 percent retracement. Traders can reference this level going forward. And on the upside, keep a close watch on 1180 and 1190, followed by 1200. One point I'd like to emphasize is that the Bank Sector Index (BKX.X), due to worries over Argentina, has traded quite poorly and needs to at the very least establish a bottom before the S&P can substantially advance. Otherwise, continued weakness in the BKX will lead the S&P lower. That's because financials are the largest component of the S&P 500, accounting for about 18 percent of the broad market index. Although the S&P 500 has pulled back in recent sessions, it remains neutral in terms of overbought versus oversold. While the Dow Jones Industrial Average (INDU) is fast approaching oversold conditions. That fact alone may allow for a short-term pop in the Dow, but keep in mind that an weak market can always grow more oversold. In terms of technicals, the 10,235 level is acting like a price magnet, as the Dow continues to churn around that level. On the upside, resistance lies around 10,300, while support is located below current levels at 10,200 and around 10,150. With earnings season upon us, a trifecta of positive reports and guidance after the bell light the after hours markets a blaze. Most notably, Microsoft announced that its recorded revenues within the range of $6.5 to $6.6 billion, as previously guided. It's worth noting that rumors have ran rampant recently that Microsoft was going to warn, which had, in retrospect, unfairly punished the stock. Well, Microsoft's announcement effectively smashed those rumors and its stock exploded in after hours trading. At time of writing, the stock was up $4 in the after hours session, on top of its $2 gain during the day. Remember that Microsoft accounts for roughly 11 percent of the Nasdaq-100 and QQQs (AMEX:QQQ). Motorola (NYSE:MOT), the beleaguered chip and handset maker, reported a lost that was slightly better than Wall Street's expectations. However, the company's CEO said, "[We are] already seeing signs of recovery." He went on to forecast a return of customer demand for handsets and double digit growth in its chip business next year. At time of writing, shares of Motorola were up by about $1 in the after hours session. Finally, Yahoo (NASDAQ:YHOO) reported numbers that bested Wall Street's expectations on both the revenue and profit front. Its shares surged in the after hours session by $2. The triple dose of positive tech earnings news Wednesday evening may portend a second-quarter earnings season that is better than anyone had expected. Is it possible that the Dells (NASDAQ:DELL), Intels (NASDAQ:INTC) and Ciscos (NASDAQ:CSCO) of the market will surprise to the upside over the coming month of reports? Is it possible that Wednesday evening's hint towards a recovery in corporate profits ignites a summer rally and forecasts an economic recovery? I think maybe. But as traders, the aim is NOT to measure and manage reward. Instead, we are risk managers. That said, my suggestion is to cast an eye towards the bond market, monitor the financial complex and the Argentina issues and measure risk with the levels we have set forth. Eric Utley Editor www.OptionInvestor.com **************** MARKET SENTIMENT **************** Rock Paper Transports By Jeffrey Canavan Based on today's performance, sexy sectors like gold, paper products, and transports were the only places to be long. Rock beats transports, and nuggets of gold were the best stocks, up 2.91%. Gold looks like it has a little bit of upside potential, but all of these groups are starting to look a little overbought from a bullish percent standpoint. Paper may cover rock, but Microsoft crushes all. The software behemoth announced that fourth quarter revenues will top estimates, and most of techland should benefit tomorrow. Adding to the bullish ecstasy was Yahoo and Motorola, both of whom posted better than expected earnings. Internet and cell phone stocks should prosper, but Motorola did warn about slowing semiconductor sales, so that sector may be hurt slightly. If the triple Qs $2.00 gain in after hours trading is any gauge, we should be in for a good day tomorrow. How long the Microsoft euphoria will last remains to be seen. Bounce, rally, or perhaps Nasdaq 6000? Before we get ahead of ourselves, we must first overcome the technical damage that has been done in recent days. Even closing on a strong note tomorrow could be a challenge. One day at a time. *************************Sector Watch**************************** Weekly Daily Overbought Support Resistance Trend Trend Oversold DJIA Bearish Bearish Neutral 10,200 10,500 NASD Bearish Bearish Oversold 1,940 2,000 S&P 500 Bearish Bearish Neutral 1,170 1,200 Rus 2000 Neutral Bearish Oversold 465 485 Semis Bearish Bearish Oversold 525 585 Biotech Neutral Bearish Netural 510 550 Internet Neutral Bearish Oversold 160 186 Networking Bearish Bearish Oversold 300 365 Software Neutral Bearish Neutral 188 210 Banking Bullish Neutral Overbought 625 650 Retail Bearish Bearish Neutral 815 850 Drugs Bearish Neutral Oversold 375 400 Percent Change Last Last Last Relative Strength 5 Days 10 Days 30 Days vs S&P 500 DJIA (3.1%) (2.2%) (7.2%) Negative NASD (7.9%) (4.5%) (9.4%) Neutral S&P 500 (4.4%) (3.0%) (6.9%) N/A Rus 2000 (4.2%) (3.1%) (5.3%) Positive Semis (13.3%) (8.6%) (11.0%) Negative Biotech (12.6%) (8.8%) (12.8%) Negative Internet (12.1%) (10.4%) (24.1%) Negative Networking (14.0%) (8.2%) (29.2%) Negative Software (11.4%) (9.9%) (12.9%) Neutral Banking (3.7%) (2.1%) (3.1%) Positive Retail (3.9%) (3.7%) (7.1%) Negative Drugs (0.8%) (2.7%) (5.2%) Positive *********** OPTIONS 101 *********** Fine Points of LEAPS Strike Selection By Mark Phillips As I mentioned over the weekend, I want to take the time to comment on the different factors that should influence how we pick the appropriate strike price when contemplating the purchase of a LEAP. Let's assume for the sake of argument that you have already done all the fundamental research and technical analysis to convince yourself that a given stock is poised to deliver a sustained upward move over a period of several months and is currently trading at $23. What strike should we trade? What expiration year? Let's deal with the expiration issue first. The simple fact is that if we are targeting LEAPS for a long-term move, we want to insulate ourselves from the effect of the passage of time, and my preference is to buy as much time as possible. For most equities, that is now the 2004 strikes, although those LEAPS on cycle 3 won't have their 2004 strikes released until the end of July. While there may be occasions where it makes sense to use the shorter-term LEAP, it is hard to go wrong with buying as much time as you can afford. The simple math that underlies this conclusion is the amount we end up paying for each month of time we purchase with our LEAP. For the sake of example, let's look at the EMC $30 LEAPS for 2003 and 2004 (I would have used the $25 LEAP as it is the strike we would prefer to purchase, but there is no $25 strike available for 2004). Purchasing the 2003 LEAP for $4.00 gives us 18 months of time at an average "time cost" of 22.2 cents ($4.00/18) per month. But the 2004 LEAP at $6.20 only costs 20.6 cents per month, since it is good for a total of 30 months. It may seem like a small amount, but in the trading game, we need to stack as many factors in our favor as possible. If we are contemplating selling covered calls against our LEAP, then that lowers our monthly carrying cost of the LEAP and makes it easier to pay it off by taking in premium. The intangible effect of buying as much time as possible is that we give ourselves an extra year to be right and for the underlying stock to appreciate significantly. The issue of which strike price to select is more dependent on your intention for the trade. If you are just looking to purchase the LEAP and ride the equity higher, then the best selection is typically one strike out of the money. In the case of EMC, with it trading in the $20-21 range, I would look to target the $25 strike. Knowing that LEAPS have a higher delta than short-term options of the same strike, even though it is one strike out of the money, the $25 strike likely has a delta close to 50, meaning that we should see a nice appreciation in our LEAP as the stock begins to move upward. If however, we are intending to reduce our cost basis (preferably to less than zero) by selling covered calls, it may make more sense to buy the $20 strike, which is slightly in the money. The reason for this is our established policy of only selling short-term calls with a higher strike price than our LEAP, which keeps us from having to utilize margin on the combined position. Remember that most brokers will treat covered calls on LEAPS as a spread trade, selling a higher strike than the LEAP we own gives us a debit spread, and most brokers will not require any margin to maintain that position. So buying the $25 LEAP on EMC will allow us to sell the $25 front-month calls which will still have some decent premium for us to sell as the next upward move runs out of steam. For those of you unfamiliar with the term, delta refers to the degree of movement we can expect to see in our option for a given movement in the underlying stock. If our option has a delta of 50, that means that it will move $0.50 for each $1.00 the stock moves. So obviously, when we are purchasing options, higher deltas are good, as our option will more closely match the movement of the stock as it appreciates. We just don't want to overdo it by buying an option with very high delta (i.e. greater than 90), as the option costs so much, we give up the advantage of leverage inherent to option trading. Let's take a quick look at some actual data on EMC. With a current price of $20.30, let's look at some options and see what I am referring to in terms of delta. The AUG-25 Call is currently trading for $0.75, and has a delta of only 26, meaning that EMC would have to move nearly $4 to get a $1 movement in the option. That isn't too bad if we are trading for a short-term move, as it would equate to a 133% gain. But with recent market developments, that seems more like a gamble don't you think? Instead, let's look at the JAN2003-25 LEAP, currently trading for $4.00. The delta of that option is 61 (greater than 50) and looks like a pretty good deal, provided the stock quits falling. The same $4 move in the price of EMC will yield (theoretically) a $2.44 appreciation in our LEAP. While the percentage movement in our option is smaller (61%), the dollar movement is significantly larger, putting greater profits in our account while giving us even more time to watch our LEAP appreciate. You can see how this equation really favors the holder of LEAPS when selling covered calls. Since the LEAP has a higher delta, it will always appreciate faster (on a dollar basis) than a shorter-term option of the same strike price. Even if the stock appreciates sharply, forcing us to buy back our covered call at a "loss", the gain in the LEAP will far outdistance the "gain" in the short-term call, leaving us with a net profit in the overall position. What is really important here is to know what our plan is before initiating the position. We need to know what our exit strategy is for any trade we initiate, but with LEAPS we also need to know how long we intend to hold the position and if it is strictly a buy-and-hold approach or if we will use a spread technique to try reducing our cost basis. Hopefully this quick discussion gives you an idea of how to factor expiration cycle and strike selection into your decision process. I'm just about out of time for this evening, but I know you're dying of curiosity about what is happening with our AOL trade. Remember last weekend, I said things were going fine, and we should have nothing to report this week. Well, boy was I wrong! AOL actually dipped right to our $48 stop during the day today, and I almost had to close out the whole position. But fate was kind to me, as buyers came to the rescue at the close. So those who are waiting for the real-world description of a LEAPS covered call trade gone bad will have to wait just a little longer. I think it's a foregone conclusion that the JUL-$55 call will expire worthless, but now we have to hope that the stock will hold above $48 so I can repeat the process for the August expiration cycle. Stay tuned, and I'll do a full update to the AOL trade next week. Happy Trading! Mark Contact Support ************* NEW CALL PLAY ************* EFDS - eFunds Corp. $21.44 +1.25 (+2.99 this week) Primarily involved in the electronic payments business, EFDS provides electronic transaction processing, automated teller machine outsourcing and risk management services to financial institutions, retailers, electronic funds transfer networks, e-commerce providers and government agencies. Supplementing its electronic payments business, the company also offers information technology and business process outsourcing services. You have to dig deep, but there are actually stocks bucking the overall market's downtrend, providing profitable trading opportunities for those with a bullish bias. There are few with a chart as favorable as EFDS, which just broke out of a month-long basing pattern between $17-20. The lows have been getting higher, and the past 2 days saw increasing volume propel the stock through the $20 resistance level. Closing above the 50-dma (currently $21.07) was a nice touch, confirming the bullish pattern on the Point and Figure chart. There we see that EFDS just completed a triple-top breakout by cresting the $21 level. The bullish support line on the Point and Figure chart (currently at $19) has been providing support since mid-June, giving us a nice level for controlling our risk. Accordingly we are starting the play with our stop at $18.50. The company has been growing earnings steadily over the past year, and with its Q2 earnings set to be released July 27th before the open, we could be looking at the beginnings of a nice little earnings run. Remember those? The 16% move over the past 2 days may require a bit of consolidation before continuing higher, so use any near-term weakness to establish new positions at more attractive levels. A low-volume pullback to near-term support, first at $20, and then $19 looks like a good level for dip buyers. The next serious resistance is sitting at $23, and a volume-backed move through that level will provide good entries for momentum traders. ***July contracts expire in less than two weeks*** BUY CALL JUL-20.0*EFU-GD OI=212 at $2.00 SL=1.00 BUY CALL JUL-22.5 EFU-GX OI= 85 at $0.70 SL=0.00 BUY CALL AUG-20.0 EFU-HD OI=306 at $2.80 SL=1.50 BUY CALL AUG-22.5 EFU-HX OI= 11 at $1.60 SL=0.75 BUY CALL AUG-25.0 EFU-HE OI= 0 at $0.75 SL=0.00 Average Daily Volume = 828 K ************* NEW PUT PLAYS ************* No new puts tonight ***************** STOP-LOSS UPDATES ***************** BSYS - call Adjust from $57 up to $59 JCI - call Adjust from $73 up to $74 LLY - call Adjust from $73 up to $74 ANF - put Adjust from $42 down to $42 BEAS - put Adjust from $27 down to $25 ************* DROPPED CALLS ************* DGX $69.35 -0.05 (-3.80) Although it managed to claw its way back over our $68 stop at the close on Wednesday, DGX effectively experienced the breakdown we warned about last night, falling as low as $66 before finding any support from buyers. The rebound came on solid volume and did offer a profitable day-trade to those nimble and brave enough to take it, but when all was said and done, DGX closed below yesterday's final price, adding to the developing bearish picture. The daily Stochastics are in full roll now, and even stronger stocks in the sector like LH were heavily sold today. We can take a hint and are dropping the play tonight. QCOM $56.45 -2.60 (-1.73) Bearish traders continued to punish QCOM this morning, extending the slide that began yesterday afternoon, as the stock fell to within a fraction of major support at $55. Although buyers did appear, helping the stock to recover a bit, the end of the day saw QCOM trading well below our $58 stop. Adding insult to injury, the stock saw heavy selling volume, 20% above the ADV, on a day where the NASDAQ actually managed a positive close. The rebound that we rode on Monday has clearly run its course and it is time to step aside. ************ DROPPED PUTS ************ No dropped puts tonight ********************** PLAY OF THE DAY - CALL ********************** BSYS - BISYS Group $62.20 +1.86 (+2.30 this week) BISYS is a leading provider of outsourced business process solutions, strategically positioned as the only single-source integrator of banking, investment, and insurance solutions. This unique array of products and services integrates core processing platforms with contemporary Internet- and browser-based solutions, and currently supports more than 15,000 financial institutions and corporate clients. Most Recent Write-Up BSYS managed to shake off the broad market weakness Tuesday, en route to advancing back above the $60 level. While its relative strength is certainly encouraging, without the cooperation of the broader markets any rally attempt is likely to be capped. Remember: Market, Sector, Stock. Speaking of sector, BSYS' cohorts also traded relatively well Tuesday, including First Data (FDC) and Fiserv (FISV). Again, the sector is moving in our direction, but we need to see the Nasdaq Composite and S&P 500 trade higher for BSYS to substantially advance. Also, keep in mind that FDC announces earnings Thursday, which could impact BSYS one way or the other. As for new entries, bullish traders can use an advance above $61 to enter new call positions if the Nasdaq and S&P are advancing. For those who prefer entering on pullbacks, look for a bounce around support at $59. Our stop currently lies at the $59 level. Comments With relief across the broader markets, BSYS was able to break above resistance to trace a new 52-week high. With momentum in the Nasdaq poised to roll higher, BSYS could continue working to the upside. But bullish traders should be aware the BSYS competitor FDC announces earnings before the bell Thursday morning. That event could act as a catalyst, however, and carry BSYS higher. Watch for an advance above the $62.50 level on healthy volume, or a pullback to $61. ***July contracts expire in two weeks*** BUY CALL JUL-55 BQY-GK OI= 89 at $7.60 SL=5.25 BUY CALL JUL-60*BQY-GL OI=245 at $3.00 SL=1.50 BUY CALL AUG-60 BQY-HL OI= 10 at $4.50 SL=2.75 Average Daily Volume = 602 K ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Warnings Season Ends, Earnings Season Begins...Yahoo! for Mr. Softee! The major averages traded in a range today as technology issues rebounded from early lows and select blue-chip stocks saw renewed buying pressure in the wake of the recent sell-off. Most of the popular sectors moved in a choppy fashion as investors weighed the outcome of another series of revenue warnings in the hi-tech group. Analysts say that is likely to be a common theme over the next few weeks as the quarterly earnings season comes to a climax. Today's sporadic upside activity was bolstered by a report from Salomon Smith Barney, which named 15 "exceptional" stocks based on fundamental valuations and the compelling profit opportunity they promise over the next 12 months. The stocks cover a range of diversified industrial sectors and some of the more well known were America Online (NYSE:AOL), Ford (NYSE:F), Pfizer (NYSE:PFE), Tyco International (NYSE:TYC) and Wal-Mart (NYSE:WMT). Since the list's inception in 1994, Salomon claims it has outperformed the S&P 500 index with a compounded average investment return of 19%. On the Dow Jones Industrial Average, General Motors (NYSE:GM) was a big winner, up over $2 to a recent high near $65 even after a report suggested that GM will announce a sharp drop in quarterly earnings. Industry experts say GM will earn $1.13 per share, or about $645 million, well below the $1.75 billion earned last year. Positive activity was also seen in Honeywell (NYSE:HON), Procter & Gamble (NYSE:PG), SBC Communications (NYSE:SBC), Walt Disney (NYSE:DIS) and Wal-Mart (NYSE:WMT). The technology sector ended mixed, with semiconductor and hardware stocks managing some gains A warning from Comverse Technology (NASDAQ:CMVT) had far-reaching effects on the NASDAQ as the company's shares slid over 30% after officials announced that second-quarter earnings would come in at only $0.28 per share, well short of the consensus $0.43 per share. Comverse cited the capital spending recession and the economic slowdown as reasons for the expected shortfall and noted that customers have postponed discretionary purchases and are being more selective. Emerson Electric (NYSE:EMR) was another surprise, announcing it expects to post its first earnings decline in over 40 years. The company anticipates fiscal third-quarter earnings to decline 11% due to the shortfall on customer demand issues of "unprecedented" magnitude. Stocks in the fiber-optic group made little headway as they were still feeling the effects of Tuesday's profit warning from Corning (NYSE:GLW) and Morgan Stanley buried the wireless telecom sector with a reduced forecast for mobile phone sales in 2001, amid recent concerns over weak demand in the replacement market. The one bright spot was the PC industry as Compaq (NYSE:CPQ) led the segment higher after announcing that it won't meet revenue targets in the second quarter but expects to meet earnings-per-share targets. The PC maker also said it would eliminate 1,500 more jobs, due to slowing demand. Among broader market shares, major drug stocks retreated with Merck (NYSE:MRK) and Pfizer (NYSE:PFE) leading the sector lower and biotechnology issues also experienced sharp losses for a second consecutive day. Oil service stocks were poor performers amid a bearish report on the crude oil supply. The American Petroleum Institute said late Tuesday that crude supplies rose by 909,000 barrels over the past week. Natural gas and financial shares were also in the red, but airline, retail, paper and gold issues generally moved higher. Summary of Previous Candidates: Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield HON JUL 32.5 31.50 35.50 $1.00 8.7% At support EBAY JUL 55 53.90 60.18 $1.10 7.4% TARO JUL 70 69.00 83.26 $1.00 6.6% MVSN JUL 55 54.15 62.64 $0.85 6.2% Worrisome LXK JUL 55 54.20 59.03 $0.80 5.7% Key Moment CEPH JUL 60 59.20 62.84 $0.80 5.6% Time to go? PDLI JUL 65 64.00 62.77 -$1.23 0.0% Closed ADVS JUL 55 53.80 51.50 -$2.30 0.0% Closed Positions Closed: HGSI, MANU Sell Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield MU JUL 32.5p 31.75 39.50 $0.75 6.9% MU JUL 50c 50.70 39.50 $0.70 6.5% Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield FCEL JUL 42.5 43.30 20.84 $0.80 8.8% Adj 2-1 split ENZN JUL 75 75.80 54.24 $0.80 6.2% DIGL JUL 60 60.65 27.26 $0.65 5.9% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status LNCR $32.70 $30.90 JUL25p/27.5p $0.30 $27.20 $0.30 Open * THC $48.50 $54.99 JUL40p/45P $0.60 $44.40 $0.60 Open * JPM $46.84 $42.05 JUL55c/50c $0.75 $50.75 $0.75 Open RJR $56.46 $52.58 JUL65c/60c $0.65 $60.65 $0.65 Open TM $66.50 $69.56 JUL75c/70c $0.65 $70.65 $0.65 ALERT! ELN $65.00 $62.85 JUL55p/60p $0.65 $59.35 $0.65 ALERT! * GE $50.77 $44.61 JUL45p/47.5p $0.45 $47.05 ($2.44) Closed!* LNCR $33.38 $30.90 JUL27.5p/30p $0.38 $29.62 $0.38 Open * RETK $42.70 $35.74 JUL30p/35p $0.60 $34.40 $0.60 Open IBM $113.09 $103.85 JUL130c/125c $0.70 $125.70 $0.70 Open * MEDI $45.17 $42.61 JUL35p/40p $0.60 $39.40 $0.60 Open APC $55.39 $50.78 JUL65c/60c $0.60 $60.60 $0.60 Open HMC $85.58 $87.82 JUL95c/90c $1.00 $91.00 $1.00 ALERT! * LNCR: Adjusted for a 2-1 split. * GE: As noted June 27, a break below the 150-dma (July 6) should have signaled a reasonable exit, which was available on July 6,9. * THC: Should have just bought calls! * IBM: Should have just bought puts! Debit Straddles: Stock Position Debit Target Value Status IDPH JUL70c/70p $11.00 $13.75 $9.30 Open? Are you still holding the IDEC Pharmaceuticals (NASDAQ:IDPH) debit straddle? Tomorrow, aggressive traders will be well rewarded as the stock is trading down almost $14 (after-hours). Sometimes you just get lucky! New Candidates: This following group of plays is simply a list of 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 are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations *************** BRCM - Broadcom $38.35 *** Low Risk Entry Point? *** Broadcom (NASDAQ:BRCM) is a provider of highly integrated silicon solutions that enable broadband communications and networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies system-on-a-chip solutions for applications in digital set-top boxes and cable modems, high-speed local, metropolitan and wide area and optical networks, home networking, Voice over Internet Protocol (VoIP), carrier access, residential broadband gateways, direct broadcast satellite and also terrestrial digital broadcast, digital subscriber line (xDSL), wireless communications, server solutions, and network processing. The company's quarterly earnings are due on July 18. Traders are always asking for our favorite companies in specific sectors and when it comes to issues in the Integrated Semiconductor group, Broadcom is a leading contender. The company has solid fundamentals and from a technical viewpoint, this may be a perfect entry opportunity. Broadcom continues to forge a Stage I base with near-term support at $30 and today's high volume rally closed above BRCM's 30-dma, suggesting an end to the brief downward trend. Those who want to speculate on the future movement of BRCM's share value should consider these positions. BRCM - Broadcom $38.35 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put JUL 30 RCQ SF 2970 0.50 29.50 20.7% *** Sell Put JUL 35 RCQ SG 4088 1.40 33.60 35.3% Sell Put AUG 25 RCQ TE 11020 0.70 24.30 6.9% Sell Put AUG 30 RCQ TF 3178 1.70 28.30 14.9% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=BRCM ****** FISV - Fiserv $61.61 *** Earnings Rally? *** Fiserv (NASDAQ:FISV) is a technology resource for information management systems used by the financial industry. FISV provides information management technology and related services to banks, broker-dealers, credit unions, financial planners and investment advisers, insurance companies, leasing companies, mortgage lenders and savings institutions. The company operates centers for full service financial data processing, software system development, item processing and check imaging, technology support and related product businesses. The company has two major business segments: financial institution outsourcing, systems and services; and securities processing and trust services. FISV has been "on the move "in recent months and the stock paused only for a brief consolidation, even as the majority of technology issue were falling to yearly lows. Now the issue is once again in an upward trend and with earnings due just after the July options expiration, this position offers a reasonable expectation of an acceptable profit with limited downside risk. FISV - Fiserv $61.61 PLAY (conservative - bullish/credit spread): BUY PUT JUL-55 FQV-SK OI=152 A=$0.25 SELL PUT JUL-60 FQV-SL OI=172 B=$0.75 INITIAL NET CREDIT TARGET=$0.50-$0.65 PROFIT(max)=12% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=FISV ****** IFIN - Investors Financial Services $74.33 ** Big Earnings! *** Investors Financial Services (NASDAQ:IFIN) is a holding company that provides asset servicing for the financial services industry through its wholly owned subsidiaries, Investors Bank & Trust Company and Investors Capital Services. The company provides a broad range of services to financial asset managers, such as fund complexes, investment advisors, banks and insurance companies. The company organizes these services into two categories: core services and value-added services. Its core services include global custody and multi-currency accounting. Its value-added services include mutual fund administration, securities lending, foreign exchange and cash management. The company provides services from offices in Boston, New York, Toronto, Dublin and the Cayman Islands. Investors Financial Services reported outstanding second quarter earnings this week with a per share amount of $0.36, an increase of 38% from the $0.26 reported in the second quarter of 2000. The company's net income for the second quarter was $11.9 million, up 47% from the $8.1 million posted in the second quarter of 2000. The CEO said he was extremely pleased with the second quarter results as the company surpassed its original earnings target and is now positioned to exceed the consensus expectations for the remainder of the year. Analysts from Dain Rauscher Wessels were quick to upgrade the issue and it appears that investors are on the "bullish" bandwagon as well. Traders can speculate on the future activity of the issue with this conservative position. IFIN - Investors Financial Services $74.33 PLAY (conservative - bullish/credit spread): BUY PUT JUL-65 FLQ-SM OI=227 A=$0.30 SELL PUT JUL-70 FLQ-SN OI=50 B=$0.85 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=13% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=IFIN ****** MSCC - Microsemi $59.00 *** Next Leg Up? *** Microsemi (NASDAQ:MSCC) is a designer, manufacturer and marketer of analog, mixed-signal and discrete semiconductors. The company's semiconductors manage and regulate power, protect against transient voltage spikes and transmit, receive and amplify signals. Their products include individual components, as well as complete circuit solutions that enhance its customers' end products by providing battery optimization, reducing size or protecting circuits. The company's commercial products are utilized in dynamic high growth mobile connectivity applications, including mobile phones and handheld Internet devices, and also broadband communications applications such as base stations, wireless LAN, cable and fiber optic systems. Microsemi's quarterly earnings are due on July 24. Technology stocks came back to life after the close today with the NASDAQ leaders rebounding from a test of recent lows amid strength in shares of Microsoft (NASDAQ:MSFT) and Yahoo! (NASDAQ:YHOO). Microsemi was one of the gainers, climbing higher on renewed buying support and the issue now appears to have made a successful test of its 50-dma as the four month up-trend continues to propel the stock into "Blue Sky" territory. The 150-dma (and the JAN-FEB highs) provide the next level of support near $45 and the big question is whether the recovery rally will continue. Traders who are bullish on the technology sector can speculate on that outcome with these positions. MSCC - Microsemi $59.00 PLAY (sell covered call or naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Call JUL 55 QMS GK 80 5.90 53.10 12.1% Sell Call AUG 50 QMS HJ 30 13.00 46.00 7.1% *** Sell Put JUL 45 QMS SI 243 0.35 44.65 9.7% *** Sell Put JUL 50 QMS SJ 335 0.90 49.10 19.6% Sell Put JUL 55 QMS SK 72 2.10 52.90 32.7% Sell Put AUG 50 QMS TJ 12 4.10 45.90 18.0% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=MSCC ****** SEBL - Siebel Systems $41.35 *** Software Sector! *** Siebel Systems (NASDAQ:SEBL) is a worldwide provider of eBusiness applications software. Siebel Business Applications comprise a family of Web-based applications software designed to meet the sales, marketing and customer service information requirements of even the largest multinational organizations. Siebel eBusiness Applications enable organizations to market to, and service their customers across multiple channels, including the Web, call centers, field, resellers, retail and dealer networks. By employing their unique eBusiness applications to better manage their customer relationships, the company's customers achieve high satisfaction and continue to be competitive in their markets. Siebel's earnings are due on July 18. Analysts generally regard Siebel as a top-notch firm that will make its quarterly numbers despite the recent economic woes, and the lack of any profit warning appears to confirm that opinion. One of the reasons Siebel is a great company is that it has executed a solid business plan in very tough market conditions. In addition, Seibel has a number of unique application products that help the company maintain leadership in some key software segments and most industry experts believe that trend will continue. These positions allow you to establish a relatively conservative cost basis in the issue. SEBL - Siebel Systems $41.35 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put JUL 30 SGQ SF 6750 0.45 29.55 17.4% *** Sell Put JUL 32.5 SGQ SZ 1575 1.00 31.50 36.5% Sell Put JUL 35 SGW SG 8083 1.55 33.45 44.6% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=SEBL ****** THQI - THQ Incorporated $58.00 *** Hot Sector! *** THQ (NASDAQ:THQI) is a developer, publisher and distributor of interactive entertainment software for hardware platforms in the home video game market. The company publishes titles for Sony's PlayStation, Nintendo 64, Nintendo Game Boy Color and personal computers in most interactive software genres, including children's, action and adventure, driving, fighting, puzzle, role playing, simulation, sports and strategy. The company has released hundreds of games, consisting of Nintendo titles, Game Boy/Game Boy Color titles, Sega Game Gear titles, Sega Genesis titles, SNES titles, Sega Saturn titles, Sony PlayStation titles, Nintendo 64 titles, Sega Dreamcast titles, Sony PlayStation 2 titles and PC titles. Its customers include Wal-Mart, Toys "R" Us, Electronics Boutique, Target, Kmart Stores, Babbages Etc., Best Buy, other national and regional retailers, discount store chains and specialty retailers. The company's quarterly earnings are due on July 19. The electronic gaming industry has been very popular in recent months and it could enjoy more upside potential in the coming year. Analysts and company officials say the gaming software industry is on the cusp of its strongest growth cycle in years and most entertainment software stocks are trading at or near record levels. THQ Inc. is one of the leading companies in the industry and investors who want to establish a low-risk basis in the issue should consider the target position. THQI - THQ Incorporated $58.00 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put JUL 50 QHI SJ 302 0.40 49.60 8.7% *** Sell Put JUL 55 QHI SK 260 1.35 53.65 21.2% Sell Put AUG 45 QHI TI 14 0.80 44.20 5.3% Sell Put AUG 50 QHI TJ 87 2.00 48.00 9.6% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=THQI *************** Neutral Plays - Straddles & Strangles *************** DST - DST Systems $54.66 *** Earnings Speculation! *** DST Systems (NYSE:DST) is a global provider of information processing and computer software services and products to the financial services industry (mutual funds and investment managers), video/broadband/satellite television industry, communications industry and other service industries. The company's business units are classified into three operating segments: Financial Services, Output Solutions and Customer Management. Certain investments and interests are grouped in the Investments and Other Segment. The company's quarterly earnings are due on July 25. This position simply meets our criteria for a favorable straddle; cheap option premiums, a history of adequate price movement and future events (quarterly earnings) that may generate volatility in the issue or its industry. This selection process provides the foremost combination of low risk and potentially high reward. As with any strategy, it should be evaluated for suitability and reviewed with regard to your strategic approach and trading style. DST - DST Systems $54.66 PLAY (conservative - neutral/debit straddle): BUY CALL AUG-55 DST-HK OI=195 A=$2.85 BUY PUT AUG-55 DST-TK OI=15 A=$3.10 INITIAL NET DEBIT TARGET=$5.75 TARGET PROFIT=25% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=DST ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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