The Option Investor Newsletter Sunday 07-15-2001 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/8535_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 7-13 WE 7-06 WE 6-29 WE 6-22 DOW 10539.06 +286.38 10252.68 -249.72 10502.40 -102.19 - 19.05 Nasdaq 2084.79 + 80.63 2004.16 -156.38 2160.54 +125.72 + 6.39 S&P-100 626.85 + 13.90 612.95 - 19.07 632.02 - 4.13 + 9.52 S&P-500 1215.68 + 25.09 1190.59 - 33.79 1224.38 - .97 + 10.99 W5000 11271.92 +212.36 11059.56 -347.59 11407.15 + 94.70 + 74.45 RUT 490.71 + 7.45 483.26 - 29.38 512.64 + 23.99 - 6.48 TRAN 2940.35 +191.43 2748.92 - 81.04 2829.96 +153.47 - 17.13 VIX 23.87 - 1.10 24.97 + 3.34 21.63 - .87 - 3.83 Put/Call .65 .90 .58 .69 ****************************************************************** Was It Really Friday The Thirteenth? by Jim Brown No black cats in the form of monster earnings warnings crossed our path on Friday but the major markets jumped with every news story. Still there were no surprises and the summer Friday passed into the history books without incident. Argentina is still there, Bejing's got games and there is still no inflation in sight. Yawn! Throw a couple steaks on the barbecue and grab a cold drink to ward off the summer heat. In case you can't tell Friday was a slow news day. Traders held their breath all day as the Nasdaq traded on both sides of positive several times and the Dow bumped against resistance at 10550 all afternoon. Other than a strong dip slightly after the open the feared sell off never came. Large blocks of puts were being bought all afternoon but the drop never came. The Dow closed out its first winning week in two months with a +286 point gain, about one third of the prior four weeks losses. Apparently the gains from Thursday are going to stick. The bulls only gave passing notice to the Latin American problem and instead focused on positive statements from JNPR and AMD. Surprise! The economy in the second quarter was bad. Surely that is no longer a surprise to anyone and the glimmer of hope in the guidance from AMD, JNPR and GE is energizing investors again. If you liked last weeks trickle of earnings then the coming week will really light your fire. There are almost 850 companies actually reporting earnings next week and 181 of those are S&P-500 companies. We should get a very good picture of what business for the 3Q will look like. There will be no shortage of good news and of course bad news. We all know about the 2Q bad news so investors will be looking for the silver lining in each announcement. Economic reports on Friday were mixed and showed that the economy was still inflation free but also growth free. The ECRI Weekly Leading Index declined for the third week in a row and the recent skid is accelerating. Since it is a leading indicator it tends to point to conditions six months in our future. This would indicate that the 4Q recovery everyone is hoping for is not yet a sure thing. Retail Sales grew slower than expected at .2% and stretched the slide to three months. Excluding vehicle sales, retail sales actually fell -.2% during the last month. Analysts hope the tax rebate in the mail shortly will help inject some cash into the retail sector as well as lower interest rates. The Fed is banking on this to prevent them from having to cut rates again. The biggest report on Friday was the fall in the PPI for June of -0.4%, substantially more than the consensus estimate of -0.1%. This was largely a result of lower energy prices and without energy the core rate actually grew +0.1%. Inflation is virtually zero and falling energy prices will take the pressure off profits for heavy energy dependent manufacturers. With zero inflation the Fed is free to continue to cut rates if needed without fear of stagflation. Currently the Fed fund futures are pricing in a 100% chance of another 25 point rate cut in August. There is only a 6% chance of a 50 point cut at this time. Next week we have a light week of economic reports highlighted by CPI on Wednesday. More importantly we get to listen to several hours of what used to be called Humphrey Hawkins testimony by Alan Greenspan on Wednesday. Our elected officials get to grill him on anything they want related to the economy and his plans to deal with it. Greenspan on the other hand gets to practice his careful control of the English language and say "I don't know" or "you would not understand" in as many ways possible in the time allowed. Still fireworks have been known to occur and the markets will be watching carefully. Get used to hearing the up to the minute Microsoft/DOJ results as reporters strain to sift every possible story from any mention by the parties. With the settlement by New Mexico the pressure is on the DOJ to settle before the coalition self destructs. On Friday the DOJ requested "fast track" status for the case and MSFT sold off slightly on the news and profit taking. MSFT reports earnings on Thursday. So, with over 850 companies reporting earnings next week we should be off to the races with positive guidance pouring from every tech stock. If you feel that way I hope you are right. I was very encouraged by the lack of a sell off on Friday with Argentina a weekend wildcard. Historically the latter part of July has not been kind to investors as shown by the graphic below. This is a snapshot of July for the last four years. Ugly! Granted this July is starting from an entirely different basis than any of the last four years. There has not been a rise into earnings and we are nearly -800 points below the May highs on the Dow. There is a feeling that the bad news is priced in and the worst of the selling is behind us. This is our only saving grace. Cash has piled up on the sidelines for months while institutions waited for the dog days of summer to make their purchases. Are those days in front of us or behind us? Even if they are still in front of us does that mean we will retest 10,000 again. I doubt that scares anybody at this point. The greater risk is not being in the market if the dip last week was the successful retest of the April lows. With investors seizing the very small scraps of hope from each companies guidance there will be the possibility to positively "pig out" from the smorgasbord of earnings next week. Traders will be able to ignore those that are negative as "not relative" and hype those that are positive as previews of things to come. Everybody, well almost everybody, wants to be bullish. Even shorts like to play the long side in a bull market. That chance will come next week. If ever we had a chance of NOT REPEATING the July sell off from the last four years, it would be next week. We have already sold off! The news would have to be so bad that Bill Fleckenstein would cringe before the bulls would move to the sidelines again. They want to buy! They want to bet on the 4Q recovery even if it comes a couple quarters later. This creates the problem we have all seen in the past. Excessive bullishness. Most market declines occur when market sentiment is at its highest. Note that each July decline in the graphic above occurred ot a high point. We want to believe that the worst is over even if it is wrong. Investors want to hit play with the Nasdaq 5000 history tape in the VCR and feel the thrill of victory all over again. All we need is a little help from earnings and we are good to go. IBM will be the key for the week on Wednesday. ANY positive guidance from them and the lid could come off. Microsoft has already announced a positive surprise on the revenue side to set the tone for the market. INTC does have a chance to kill the whole thing on Tuesday if they say something negative but with AMD saying positive things about the future Intel would be shooting itself in the foot by giving negative guidance even if they need to. With 850 earnings announcements we are sure to have our share of winners and losers. Hopefully the winners will swamp the losers and worries about a repeat of the summer slump will evaporate into thin air. Nasdaq 2140 is the next resistance point and Dow 10550 was pretty convincing as a ceiling on Friday. A breakout above either of those numbers on Monday would be buyable but you should close the positions if the indexes fall back below those levels. The markets could be very volatile with news popping like firecrackers on the fourth. Definitely, enter passively, exit aggressively! Jim Brown Editor PS. I was talking with Preferred Trade last week about their Premier Option Service. They have been offering for some time a service for professional ex-floor traders that now trade options as individuals. Dave said they had decided to offer this to a select group of retail customers on a trial basis. (OIN readers) The features available are lower commissions, direct phone access to the options desk, verbal stop orders on options, manual adjustment of GTC orders, verbal ORDER-CANCELS-ORDER orders, automatic exercise, daily faxed sheets of 20-day equity review with commissions, Delta, Gamma and decay on each option position, positive and negative dividend alerts. Qualified traders will also receive theoretical sheets with graphing for individual positions, daily margin calculations by position, a news watch list including after hours news. Investors will have five skilled option desk traders on their team to work orders and monitor positions. This level of support is not for everyone! They only want to offer this to serious and ACTIVE traders who trade over 100 option contracts per day. If you are an active trader with this kind of volume then Preferred would like to talk to you about this service. They are going to limit it to about 10 accounts at this time. First come, first served! Once they are comfortable with the feedback from these accounts they may offer it to the general readership. Call Doug Patterson at 888-889-9178 if you are interested. ************************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 ************************************************************** ************** Editor's Plays ************** A Blowout, A Profit And A False Start The plays from last week cover the entire range of emotions. The DGX call play has not taken off yet but we got a really good entry this week. No complaints there. The QQQ play is looking good and we also got a better entry than we planned. The highlight of course was the Wellpoint Health Oct-$90 call play. The stock was at $94.26 last Sunday and looking like a breakout over $95 was in the cards. The call option was the OCT-$90 @ $10.00. This week Wellpoint did breakout and ran to $105.27 on Friday. I recommended closing the play at $105 due to resistance and the Friday high would have taken us out with a quarter to spare. The option on Friday was $18.00 for an 80% return in five days. Take the money and run! ********** New Plays ********** This week I was thinking about Abbey Joseph Cohen and her price targets for the major indexes for year end. If she is even close to right then there are some really cheap lottery plays available. Her target for the Dow is 12,500 and 1550 on the S&P. Using the DJX options on the Dow we have several ways to play this. You can be as aggresive as you want or as passive as your budget dictates. Using the December options limits your play to one week before the technical year end and prevents a Santa Claus rally from helping out any lingering positions. Still the December positions are cheap. The DJX is a numerical subset of the Dow. 12500 on the Dow equates to 125 on the DJX. The December strikes to consider would be: Dec $116 - DJW-LL @ $1.75 Dec $120 - DJW-LP @ $0.95 The $116 strike would be $9 (900 points) in the money if the 12500 prediction came true. Obviously a $9 option price would return about +414% profit and any trader would be thrilled at the outcome. The $120 strike would be $5 (500 points) in the money if the 12500 was met. That would represent a +426% gain on a lesser investment but have slightly higher risk. The $116 option would need the Dow to hit 11750 by expiration Friday to breakeven where the $120 option would need the Dow to hit 12100 to avoid a loss. In every trade you make you should calculate this data to help you determine which strike you should use. The March strikes allow for a three month safety factor. What if she was off by a month or two? Your December options could be toast and the March options tremendously successful. The March strikes are: Mar $116 - DJW-CL @ $3.00 Mar $124 - DJW-CT @ $1.15 My favorite is the $116 for obvious reasons. It is only 1.25 more than the December $116 and there is three more months for success. It is entirely possible that the recovery could not show until the first quarter and the biggest part of the move occur in Jan/Feb. The Dow only need to hit 11900 to breakeven and 12500 in early January would still imply time premium in the option as well. It could trade over $10 at that time for almost a 300% gain with much more safety. ************* S&P-500 Year end target $1550 Using the same logic on the S&P-500 the possibilities are endless. The strikes I would look at are these: Dec 1450 - SXZ-LJ @ $5.00 Dec 1550 - SXM-LJ @ $1.15 Mar 1500 - SXM-CT @ $6.50 Mar 1550 - SXM-CJ @ $3.30 Because of the big price swings on the S&P the profit potential on these strikes is huge. You can also lose 100% if she is wrong. It is entirely possible for the SPX to be 50-100 points over any of these strikes if we get a really good bull market on recovery news. I would probably split this play and not put all my money in one strike. Possibly 1/3 of the Dec-1450, 1/3 Dec-1550 and 1/3 Mar 1500. I don't like the difference in the risk reward between the two March strikes. (personally) The $3.20 difference in price is nothing compared to the $50 difference in worth if the SPX hits 1550. At 1506 you break even on the 1500 strike and everything between there and 1550 is profit. 1549 is a loser for the 1550 strike. Spend the extra $3.20 for the Mar-1500 option. ********* Now Abbey did not predict a target for the Nasdaq but using the Dow/S&P as a guide it is probably safe to assume 3000 or higher. 3000 on the Nasdaq equates to 75 on the QQQ. That gives us many opportunities. Because of the liquidity of the QQQ you can pick any strike between here ($43) and $75 and let your budget be your guide. I like the Jan-$60 for $1.10 (you could probably buy it for $1.00) It is cheap and should the Nasdaq actually hit 3000 it would return you around $15 for every $1 spent. (just an estimate!!) ********* There is something here for everybody and these options are not something you need to watch every day. You should assume that any money you put into a lottery play like this could be lost and you should only use a small portion of your risk capital. This does assume Abbey Joseph Cohen is right about the direction and distance of the market and as a woman analyst she can change her mind and numbers at any time. You know how they do that. They had the targets right but the timing was off by a year. OOPS! Good Luck Jim Brown **************** MARKET SENTIMENT **************** Capre Diem, Quam Minimum Credula Postero By Jeffrey Canavan The baby bull that was born Thursday managed to avoid the matador's sword Friday. It lost some of its verve, but left the door open for next week. The door is only open a crack as long as we have more resistance to overcome that support bolster it. Bullish percent data is also telling bullish traders to proceed with caution. Three of the four major indices remain in bear confirmed status, and the gains over the past two days have done little to repair the situation. PPI and consumer sentiment data are suggesting the economic situation is improving, but softening retails sales say otherwise. The Economic Cycle Research Institute's Weekly Leading Index also hints that an economic recovery isn't a sure bet. The index is a composite of seven leading business cycle indicators - money supply, industrial material prices, mortgage applications, stock prices, bond yields, bond quality spread, and initial claims for unemployment. The index provides insight into the state of the economy six months into the future, and was suggesting that a recovery should occur by the end of the year. But the index has declined for the past three weeks, raising some doubts about the certainty of a recovery. Sentiment indicators aren't giving any directional clues for the stock market. The VIX has halted its steep climb, but has only dropped to 23.87. Put/Call ratios are mixed. The OEX is approaching a bullish signal, but QQQ remains dangerously low. COT data has improved, but not enough to signal any meaningful reversals. So what will Monday bring? In 2001, the Nasdaq Composite has lost an average of 4.5 points on Mondays. There have been 11 positive Mondays with an average gain of 38 points, and 13 negative Mondays with an average loss of 41 points. The best Monday was on 5/21/00 when the Nasdaq gained 106 points. The worst Monday was four weeks earlier when the Nasdaq lost 104 points. My best guess is that resistance will be too much for the market on Monday, and we will revert back to the mean, gaining or losing only minimal points. === Market Volatility VIX 23.87 VXN 53.47 === Put/Call Ratio Call Volume Put Volume Total .65 633,553 412,720 Equity Only .59 537,910 315,119 OEX 1.56 15,318 23,860 QQQ .27 48,102 12,859 === Bullish Percent Data Current Change Status NYSE 36 - Bear Confirmed NASDAQ-100 26 - Bear Confirmed DOW 32 -2 Bear Confirmed S&P 500 50 - Bear Alert Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend === 10-Day Arms Index 1.18 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when the do, they can signal significant market turning points. === Advancers Decliners NYSE 1755 1279 NASDAQ 1949 1689 New Highs New Lows NYSE 116 41 NASDAQ 112 65 === Advisory Sentiment Bullish Bearish Correction 50% 25.5% 24.5% === Commitments Of Traders Report: 07/03/01 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and 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 tend to be wrong. S&P 500 Commercial traders have stopped their bearish trend, but not enough to signal any meaningful reversals. Commercials Long Short Net % Of OI 6/26/01 307,889 379,955 (72,066) (10.48%) 7/03/01 316,543 395,410 (78,867) (11.08%) 7/10/01 309,374 385,178 (75,804) (10.91%) Most bearish reading of the year: (111,956) - 3/6/01 Most bullish reading of the year: ( 41,144) - 5/1/01 Small Traders Long Short Net % of OI 6/26/01 130,914 56,269 74,645 39.88% 7/03/01 133,098 54,865 78,233 41.62% 7/10/01 135,587 59,889 75,698 38.72% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 Institutions have decreased their net bearish position for seven straight weeks, and small traders are about to turn net bearish. The overall picture is still net bearish, but things are looking up. Commercials Long Short Net % of OI 6/26/01 26,263 35,690 ( 9,427) (15.22%) 7/03/01 26,544 34,880 ( 8,336) (13.57%) 7/10/01 26,688 34,640 ( 7,952) (12.97%) Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: (1,825) - 1/02/01 Small Traders Long Short Net % of OI 6/26/01 10,519 6,064 4,455 26.86% 7/03/01 10,443 7,063 3,380 19.31% 7/10/01 9,073 7,486 1,587 9.58% Most bearish reading of the year: (1,028) - 1/02/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Institutions have quickly reversed their position back to net bullish. I would like to see this trend persist for a few more weeks before I buy it. Commercials Long Short Net % of OI 6/26/01 11,371 12,759 (1,388) (5.8%) 7/03/01 12,761 14,623 (1,862) (6.8%) 7/10/01 13,743 12,999 744 2.8% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 8,925 - 5/22/01 Small Traders Long Short Net % of OI 6/26/01 4,756 6,341 (1,585) (14.28%) 7/03/01 4,708 5,715 (1,007) ( 9.66%) 7/10/01 5,048 7,835 (2,787) (21.63%) Most bearish reading of the year: (7,572) - 5/08/01 Most bullish reading of the year: 1,909 - 1/16/01 *************** ASK THE ANALYST *************** Round Mound of Rebound By Eric Utley I don't really care if Barkley returns to the NBA. The same goes for Jordan. But I do care about the market and this column. Hopefully last weekend's reviews helped to partially offset the blunder I made the weekend prior, especially the Calpine (NYSE:CPN) comments, which was a request from a most astute reader. I've decided to try to answer commonly asked questions through this column, in an open format, so that more readers will benefit. I've started this weekend with a simple question concerning short sellers. So if readers have questions that have not yet been answered either through a personal e-mail or this column, please feel free to drop me a line via the link below and I'll do my best to answer. Please send your questions and suggestions to: Contact Support ---------------------------- Short Sales Thanks again for your insight and normally reliable opinions! You often make reference to the amount of "shorts" on a stock and I'd sure like to know how I can find that same info. - Thanks, Mike "Normally reliable" is the operative idea, Mike, after my recent errors. I'll make it up to my readers, though, just you watch. Alright, enough with the poor attempt at redeeming whatever credibility I might have. Oftentimes in this column I do mention the amount of shorts in a stock or particular sector. I generally start my search for short interest on a financial portal, such as Yahoo! Finance, for example. The link below takes me to the 'Profile' section of Yahoo's site that lists, among various other metrics, the short interest in the a particular stock. In this case, I've provided a link to Texas Instruments (NYSE:TXN): http://biz.yahoo.com/p/t/txn.html The problem, however, is that this information is rather dated and rear looking, as is most data that is published on short interest. Indeed, the Nasdaq and NYSE publish various short interest data sets on their respective Web sites. And there are several Web sites that are dedicated to reporting just on short activity. But because the data dated, I like to keep track of the month-to-month changes in short interest to discern whether or not a trend is developing. I do this for the stocks that I watch and trade rather closely. In addition to monitoring the figures attained from the aforementioned sources, I also closely monitor the put/call ratios in the stocks that I'm following. That's because shorts, that is professional shorts, tend to be more sophisticated than other market participants - they have to be. And these traders often employ the use of puts to establish their short positions. I've found that monitoring put/call ratios is a much better indicator for short-term applications because it's real-time. I'm sure that there are Web sites devoted to monitoring put/call ratios, but a simple Excel program can be used by those who have a data feed. Or, it's quite quick and easy to attain put/call ratios from an options quote service, such as that from the CBOE, Dreyfus or even Yahoo! Finance. There are two ratios to monitor: put/call volume and open interest ratios. The former gives you the day's activity while the latter reveals a 'bigger picture.' For example, using rudimentary observations, I found that Texas Instruments put/call volume ratio last Friday was around 0.30, while its put/call open interest ratio is around 0.70. I don't follow this stock, per se, so I don't know where these figures lie in the greater scheme of things. But by tracking these figures on a fairly regular basis, a trader can get a good feel for how many shorts are in a particular stock. Finally, some readers might begin to wonder what exactly the open interest is comprised of when monitoring put/call ratios. Are the options sold short, bought or covered? To be quite frank, I don't concern myself with these details. Call me ignorant, but complicating the matter defeats the purpose. Keep it simple and whatever you do, don't call me after 10:00 p.m. MST. ---------------------------- Texas Instruments - TXN Also, how would you evaluate TXN at this stage of the game? - Thanks, Mike And now onto your request, Mike. Texas Instruments is a diversified semiconductor company that offers myriad products and services. The company's chips are used in a host of applications, from cell phones to PCs. The semiconductor business as a whole is still battling with the excess inventory that was created during the boom. While the demand for the chips has yet to substantially resurface. But it will. The growth in the chip sector will return to its long-term rate of around 15%, it's only a question of time. Because Texas Instruments is one of the time tested greats in the business, I think that investors who need exposure to the group can selectively enter positions in the stock at current levels for the long-term. It may take another nine to twelve months before demand substantially returns and orders pick-up. In the meantime, it looks like Texas Instruments has built a pretty solid base and offers limited downside risk. If demand returns sooner, however, investors won't have to chase the stock higher. But keep in mind that my observations are not intended for trader types. Those who are under invested in technology (If that's possible?) and looking for exposure to the semi sector can consider Texas Instruments at current levels. In the very short-term, I think that if the stock clears $35, it could pop for a quick $2 up to $37. Also worth noting are the two aggressive trend lines on the daily chart. The stock rolled over near its descending resistance line last Friday, which currently lies in the neighborhood of $35. The ascending support line that has three observations, currently sits around $29 and change. ---------------------------- Exodus - EXDS Do you think this company will be in business a couple of years from now? If they can make it through this slump it may be a good company to write deep in the money puts on. - Thanks, Brandon Thanks for the question, Brandon. The Jan '03 5 puts were bid at $3.80 last week - that's only $10 worth of time premium per contract, taking into account Exodus' (NASDAQ:EXDS) closing price last Friday. The 10 strike had about $20 in time premium. Further, the cost to carry those options is so low because of the underlying price and that fact also deflates the options premium. Is it worth the risk? So what's the risk? The stock goes to zero. In all honesty, I don't know if Exodus will survive. There have been issues concerning the company's liquidity and its bonds are reflecting bankruptcy. Of course there's the possibility that the company makes it and the stock rebounds, which could result in a home run for a trade. Hell, Priceline.com (NASDAQ:PCLN) bounced from $1 late last year and now trades north of $8. On the other side, 360 Networks fell below $1 in early June and doesn't trade any longer. In my estimation, Brandon, the game is about supply versus demand and probabilities. And in Exodus' case, I think it's on the wrong side of both equations. At this point, selling naked puts on Exodus is blind speculation, at least from where I sit. And I sure as hell wouldn't want to own the stock should the puts be exercised early. But that's just my opinion, so take it for what it's worth. ---------------------------- Tosco - TOS The oil industry is going down the dunny and I have played a TOS short (but covered...) for the past few days. I am thinking that after [Thursday's] weakness, combined with a large gap that there still is significant reward/risk here. And wouldn't mind entering a short again. - Cheers, Rob Thanks for the question, Rob. Before we address Tosco (NYSE:TOS), let me remind readers that the company entered into a merger agreement with Phillips (NYSE:P) back in February. That was the reason for the gap, and for that reason, the gap doesn't mean anything. Shares of Tosco trade in accordance with shares of Phillips. So any past gaps or trends on Tosco's chart are now irrelevant. Back to the request. The energy sector, as measured by the bullish percent of the S&P Energy Sector, is currently the most oversold it's been since early 1999. While the S&P Energy Sector is comprised of drillers, refiners and the integrated companies, I think it's worth monitoring to get a grasp of the bigger picture. Myself and several colleagues have been watching these stocks trade lower and lower in amazement. And have to remind ourselves that an oversold market can always grow more oversold. That said, shorting Tosco around its current levels is in sync with the trend of the sector. But, I'm wary of shorting stocks that are so deeply oversold because the risk is weighted to the upside in most cases. Furthermore, I see two key support levels in Phillips that bring the notion of risk/reward into question. The daily chart reveals an ascending support line just below current levels, which is reinforced by support on the point & figure chart at $55. ---------------------------- Rightchoice Managed Care - RIT Can you please give your comments on RIT. Appears to be a good stock for going long. Please advise the entry point. - Thanks, Sunil WHOA, Sunil, this is quite the request. Shares of Rightchoice (NYSE:RIT) went parabolic late last week. The company guided earnings growth higher last Wednesday which ignited a buying spree in its shares. In cases such as these, I don't think it's prudent to chase the stock at current levels. Again, it's risk versus reward and that much is rather difficult to quantify at current levels. I think the best approach would be to enter the stock on a pullback to a support level. But even that strategy is difficult because support is hard to find around current levels. On the daily chart, I've laid a retracement bracket over the stock's relative low and its near-term high, prior to last Wednesday's advance, around $46.50. This retracement bracket also includes the forecasts at the 127% and 161% levels, of which RIT blasted through the former last week. That 127% level lies around the $50 level, which is the logical place to look for support due to its psychological and technical significance. ---------------------------- 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. ************************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 ************************************************************** ************* COMING EVENTS ************* For the week of July 16, 2001 With 181 S&P earnings reports due out next week, that's obviously where the market's drive will be. Several economic reports due out will garner some attention though, possibly hinting at a definitive sign of economic direction. Among others, watch for the CPI report on Wednesday and the Philadelphia Fed Survey slated for Thursday. Monday ====== Business Inventories May Forecast: -0.1% Previous: 0.0% Tuesday ======= Industrial Production Jun Forecast: -0.5% Previous: -0.8% Capacity Utilization Jun Forecast: 76.9% Previous: 77.4% Wednesday ========= CPI Jun Forecast: 0.1% Previous: 0.4% Core CPI Jun Forecast: 0.2% Previous: 0.1% Housing Starts Jun Forecast: 1.6M Previous: 1.622M Building Permits Jun Forecast: NA Previous: 1.621M Thursday ======== Initial Claims 7/14 Forecast: 430K Previous: 445K Trade Balance May Forecast:-32.0B Previous: -32.2B Leading Indicators Jun Forecast: 0.3% Previous: 0.5% Philadelphia Fed Jul Forecast: -1.0 Previous: -3.7 Friday ====== Treasury Budget Jun Forecast: 34.0B Previous: 55.9B Week of July 23 =============== Jul 25 Existing Home Sales Jul 26 Initial Claims Jul 26 Employment Cost Index Jul 26 Durable Orders Jul 26 Help-Wanted Index Jul 27 GDP-Adv. Jul 27 Chain Deflator-Adv. Jul 27 Mich Sentiment-Rev. Jul 27 New Home Sales *************************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 07-15-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/8535_2.asp ************** BROKERS CORNER ************** KISS By Robert Ogilvie Have you ever heard the adage KISS? So that I don't offend anyone, it stands for Keep It Simple Silly. I am referring to the use of too many technical indicators and research tools. Many technical indicators display the same information in different formats. An investor using too many indicators can often find at least one to agree with their emotional opinion. Too much information can over complicate the process. Because the market's, sector's, and individual stock's fundamentals influence, respectively, many stocks' trends most, it is important to gauge the conditions of each starting with the broadest. Starting with the market, determine the health of the various indexes by observing the internals and the price level relative to the trend lines. Market sentiment is a popular indicator. Whether you are either a contrarian or not, market psychology can be a powerful tool when determining the market's direction. If your analysis has determined that the security markets are not a favorable location for your investments, then you just stop here. However, if the weather report says there is clear sailing ahead, then pack up your sandwiches and life jackets and go to the next test. Before sailing into big water, make sure there aren't any isolated storms or undertows on the horizon. Determining the condition of the different sectors can be done in a few ways. There are various chart services that do a lot of the work for you. Investor's Business Daily (IBD), TC 2000, and StockCharts' CandleGlance page are among the many available. OptionInvestor's market sentiment section beautifully displays the various sectors strength or weakness. Whether you are a bull and looking for the best performing sectors or a bear looking for the weakest sectors, it is important to find the broader strength or weakness before finding the best or worst stocks, respectively. The next step is to determine the best candidates in the sector for your strategy. As option traders, it is assumed that the stocks we are tracking trade options. Start with the fundamentals. Charts are a visual reference to the market's perception of the fundamentals of a security. Determine the Relative Strength, EPS, EPS and Revenue Growth, Return on Equity, and the Accumulation rating to name a few. After you have done the above analysis, you should have a short defined list of candidates. Now it is time to look at the charts. This is where it is important not to over complicate the process by using a lot of technical indicators. So many people think that there is a secret to making money in the market. Whether it is a trading program or every technical indicator available. An investor could have so many technical indicators overlapping the chart that one could barely make out the price pattern of the security. Cluttering your mind with too much information is the biggest reason investors fail. I use a few indicators to display pending strength or weakness as well as a couple of moving averages. The process I have outlined may seem hypocritical to the title, but it really isn't very time consuming. Because you are only watching a few broad market indicators, the market analysis takes a few minutes a day. A few examples include advance/decline lines, new highs/lows, VIX (Volatility Index) and VXN (Volatility Index NASDAQ), Investor Sentiment Readings, CBOT Commitment Of Traders Report, Bullish Percentage Charts, and the market bar charts. To identify the strong sectors quickly, read the IBD or view OIN's market sentiment section. The stock selection is up to you. You may choose to do scans through your charting service or start with scanning the stock lists for strong fundamentals. There is no one right way. There is no secret combination. You may want to spend some time initially to make a standard checklist of the steps I have outlined so that there is always a standard format to your analysis. I can help those of you that need some additional guidance to construct a checklist that fits your investment style and goals. I am an Options Broker and ROP that trades and educates investors on many strategies. Please contact me at: firstname.lastname@example.org Neither Cutter & Company, Inc. nor Robert J. Ogilvie makes any representation as to the accuracy, reliability or completeness of any charts, formulas, and /or research opinions presented herein. This article is intended solely for educational purposes. Nothing herein should be construed as an offer or solicitation to buy or sell any securities. Cutter and Company is a Member of the NASD, MSRB, and SIPC. Please read the OptionInvestor.com Disclaimer: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* AT - Alltel $64.28 (+3.50 last week) See details in sector list Put Play of the Day: ******************** AES - AES Corp. $38.42 (-4.03 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 No dropped calls this weekend PUTS ANN $34.02 (+2.22) The fears of continued strength in our put play on ANN were realized last Friday. The stock took the lead of the Retail Sector Index (RLX.X) and traded past our upside stop at the $33 level. As such, we're dropping the play this weekend. Traders with open positions might use any dip back down to the $33 level, near the 10-dma, to close out positions and cut losses. Also, watch the 50-dma just above around $34.70. BA $55.07 (+0.77) The Dow Jones Industrial Average dragged BA higher last Friday on volume that was weak, at best. The possibility of a rollover from current levels is good, noting the lack of conviction of the buyers last week and the fact that BA stopped right at its 10-dma last Friday. Nevertheless, the stock just barely closed above our stop and for that reason we're dropping coverage this weekend. ANF $42.09 (+1.23 last week) After following our script of breaking below the $40 level on Wednesday, ANF did the unexpected, reversing on a dime and bouncing vigorously from the $38 level on Thursday. For an encore, the stock reacted positively to a mixed Retail Sales report on Friday, regaining the $42 level and clearly violating our $41 stop. Although nimble day-traders could have made a respectable profit earlier in the week, the past two days have clearly belonged to the bulls. With the change in sentiment and a violated stop, it is time to close the book on ANF. *********** 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 ************** SLVN - Sylvan Learning Systems $26.39 (+2.99 last week) Sylvan Learning Systems is the world's leading provider of educational services to families, schools, and industry. In the year 2000, Sylvan Learning Systems embarked on a new strategy to optimize operations, focus on new emerging markets and further build on its strong brand identity. The learning services sector has been on fire for the last year. A quick glance over the charts of Education Management (EDMC), Career Education Corp (CECO), Corinthian Colleges (COCO) and Sylvan Learning Systems reveals that much. Each of the aforementioned stocks are trading at or very near new all-time highs. This comes despite the sever economic downturn, which has yet to adversely impact the earnings of each company. And with several among the group already reporting outstanding quarterly numbers, Sylvan is positioned to stage a solid earnings run. The company reports its quarterly results in about two weeks, on Thursday, July 26. But that should give us plenty of time to capitalize on any run. The stock broke out in a big way last Friday, on very big volume. Over 1.3 million shares traded, while the stock's 30-day average volume is 393 thousand shares. So make no mistake about it, currently the play on Sylvan is of the momentum type and predicated upon the catalyst of an earnings run. Its breakout last Friday makes gaining entry into the play more of a challenge. So bullish traders will most definitely want to consider risk preferences and time frames before considering trading this stock. That said, the momentum crowd can confirm strength in the Nasdaq early next week, watch for sector confirmation and consider entering new positions at current levels. Those who prefer entries of the pullback variety can wait for SLVN to decline on light volume to support. In terms of support, the stock's platform around $25.50 may attract buyers and traders can look for a bounce from that level. Below, the $23 level should also provide support, hence our reason to choose that level as the initial site of our stop. BUY CALL AUG-25*NQV-HE OI=374 at $2.15 SL=1.00 BUY CALL AUG-30 NQV-HF OI= 0 at $0.45 SL=0.00 Wait for OI!! BUY CALL NOV-25 NQV-KE OI= 60 at $3.70 SL=2.25 BUY CALL NOV-30 NQV-KF OI= 0 at $1.55 SL=0.75 Wait for OI!! Average Daily Volume = 393 K LEA - Lear Corp $39.70 (+3.39 last week) Lear Corporation is an automotive supplier that serves the global automotive interior, seat systems and automotive electrical distribution systems markets. Lear supplies every major automotive manufacturer in the world, including General Motors, Ford, Daimler Chrysler, Fiat, BMW, Volkswagen, Peugeot, Toyota, Subaru and Renault. We've been having success trading the auto parts sector (See: JCI call play) recently, and for good reason. The sector has been out performing the broader markets recently, led higher by the General: General Motors (GM). Obviously GM is not an auto parts supplier, per se, rather quite a large customer to the likes of Lear. That being the case, the price action in GM has been most impressive recently and suggests that business is improving for the auto giant. So follows the logic that if business is good for GM, it is also good for Lear, since the latter is a large supplier to the former. In Lear's case, it's shares have certainly reflected the prospects for improving business, noting the big breakout above resistance late last week. The stock advanced past triple top resistance last Friday on volume that most certainly confirmed the move. Over 600 thousand shares traded last Friday, while the stock's average daily volume is more like 400 thousand shares. Therefore, it should be rather obvious that this play is a momentum/breakout trade at this point. So bullish traders can enter new call positions at current levels early next week, or wait for a strong advance past the $40 level. While those who'd rather wait for a pullback can use any light volume related weakness down to $38 for entries. The company is scheduled to report earnings on Tuesday, July 24, which gives us a decent amount of time to stay in the play. Initially, we're setting stops at the $37 level. BUY CALL AUG-35 LEA-HG OI=169 at $5.30 SL=3.25 BUY CALL AUG-40*LEA-HH OI= 14 at $1.80 SL=1.00 BUY CALL SEP-35 LEA-IG OI=603 at $5.40 SL=3.25 BUY CALL SEP-40 LEA-IH OI=158 at $1.90 SL=1.00 Average Daily Volume = 428 K KOPN - Kopin Corp. $12.41 (+1.46 last week) Kopin uses its proprietary technology to design, manufacture and market advanced semiconductor products used in wireless communications and miniature flat panel displays used in high-resolution consumer electronics applications. KOPN produces two types of high-performance components; its heterojunction bipolar transistor (HBT) wafers, and its CyberDisplay products. The HBT wafer product consists of a customer-specific array of vertically oriented transistors that its customers use primarily to produce integrated circuits for wireless communications products. Current applications of the company's CyberDisplay products are currently limited to viewing images in camcorders and digital cameras, but KOPN is targeting new applications such as reading email and browsing the Internet using digital wireless handsets, pagers and other consumer electronics devices. Shares of KOPN have endured a long and painful slide since early 2000, but it appears that a new base is in place from which the stock can stage a new bullish move. The stock found support near $5 in early April and since then has been gradually advancing, most recently finding solid support near $10. Solid buying volume emerged the past two days, propelling the stock through the 200-dma (currently $11.15) and bringing it within striking distance of breaking through the $13 resistance level. Earnings are set to be released on July 26th after the close, and it looks like the stock could be setting up to make a decent earnings run. The Point and Figure chart is forecasting a bullish price target of $24, and trading $13 will give us another double top breakout, adding to the bullish sentiment. We are setting our stop at $10 and will target new entries on a pullback and bounce above that level. Waiting for the breakout before playing may be the most prudent course of action, and a volume-backed move through $13 will be our trigger in that case. BUY CALL AUG-10.0 KQO-HS OI=233 at $2.65 SL=1.25 BUY CALL AUG-12.5*KQO-HB OI=380 at $1.10 SL=0.50 BUY CALL SEP-10.0 KQO-IS OI=366 at $3.00 SL=1.50 BUY CALL SEP-12.5 KQO-IB OI=831 at $1.60 SL=0.75 BUY CALL SEP-15.0 KQO-IC OI=286 at $0.80 SL=0.00 Average Daily Volume = 1.09 mln LH - Laboratory Corp. of America $83.98 (+6.48 last week) Laboratory Corporation of America Holdings (LabCorp) is the #2 clinical laboratory service in the world, behind Quest Diagnostics. LH performs 2000 types of tests for more than 100,000 clients, including health care providers, pharmaceutical firms, physicians, government agencies and employers. With 25 major laboratories and some 1200 service sites nationwide, the company emphasizes specialty and niche testing such as allergy tests, HIV tests, blood analyses, and substance abuse screenings. It took some time to build a new base after the sharp decline in shares of LH that commenced in early January, but the price action over the past 4 months has done a good job of establishing a new uptrend. The ascending trendline is now resting near $79, giving us a reasonable location for our stop. Breaking above the top of the long-term bullish wedge at $82 on strong volume Friday is what really got our attention though, as it opens the door for LH to move up and retest its January highs near $90. Chiming in with an ascending triple-top breakout on Friday, the Point and Figure chart casts its vote in favor of the bulls as well. CS First Boston helped to get the stock moving up last week by reiterating their Strong Buy rating and with earnings scheduled for the afternoon of July 23rd, it looks like a momentum run is in the making. We'll target intraday pullbacks to the $82 or $80 level for new entries, although a volume-backed move through $84 looks attractive as well. BUY CALL AUG-80 LH-HP OI=732 at $7.10 SL=5.00 BUY CALL AUG-85*LH-HQ OI=403 at $4.30 SL=2.75 BUY CALL AUG-90 LH-HR OI=121 at $2.25 SL=1.25 BUY CALL NOV-85 LH-KQ OI= 32 at $8.60 SL=6.00 SELL PUT AUG-80 LH-TP OI= 45 at $2.50 SL=4.00 (See risks of selling puts in play legend) Average Daily Volume = 486 K CSC - Computer Sciences Corp. $36.28 (+2.92 last week) As a world leader in the information technology (IT) services industry, CSC helps its clients use IT more efficiently to improve their operations and profitability. The company offers a broad array of professional services to clients in the commercial and government markets. Its service offerings include outsourcing, systems integration, IT and management consulting, and other professional services, including e-business solutions. Positive press has helped to put a floor under shares of CSC in recent weeks, as the stock traced a double bottom near $33, before attracting buyers again towards the end of last week. With that bottom solidly above the $29-30 floor posted in March and April, CSC looks to be on the mend. While there is lots of overhead resistance, the recovery that is beginning in the broader markets combined with earnings approaching on July 30th have bullish traders voting with their wallets. Volume is still rather light (less than half the ADV last week), but the push through the near-term resistance at $36 is encouraging. Ideally, we'll get one more mild pullback to the $34-35 area before the rally really gets underway, affording us an attractive entry into the play. If you'd rather wait to enter on strength, look for CSC to clear the $37 level on increasing volume before playing. Additional resistance will be encountered at $38, $39 and then $40. We are starting the play with our stop at $34, as a drop below that level on a closing basis would raise the concern that the bulls lack conviction. BUY CALL AUG-35*CSC-HG OI= 66 at $3.60 SL=1.75 BUY CALL AUG-40 CSC-HH OI= 125 at $1.35 SL=0.75 BUY CALL SEP-35 CSC-IG OI=11921 at $4.40 SL=2.75 BUY CALL SEP-40 CSC-IH OI= 1491 at $2.25 SL=1.25 BUY CALL SEP-45 CSC-II OI= 2294 at $1.15 SL=0.50 SELL PUT AUG-35 LLY-SO OI= 40 at $1.85 SL=3.50 (See risks of selling puts in play legend) Average Daily Volume = 1.28 mln *************************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 07-15-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/8535_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 ****************** AT - Alltel $64.28 (+3.50 last week) ALLTEL, with more than 10 million communications customers and more than $7 billion in annual revenues, is a leader in the communications and information services industries. ALLTEL has communications customers in 24 states and provides information services to telecommunications, financial and mortgage clients in 55 countries and territories. AT confirmed our bullish stance last Friday with its out performance to the upside. Granted, the Dow and S&P finished solidly higher, but the Nasdaq only posted a modest gain. And telecom stocks such as AT are perhaps more closely tied to the price action of the tech and telecom heavy Nasdaq. What's more, AT's competitors in XOXO, Q, SBC and VZ all finished slightly lower. To be paranoid is prudent in the current market environment, hence the red flags we're monitoring in that the play's sector has yet to give confirmation. Nevertheless, AT did generate the buy signal we're looking for with its advance above $64 last Friday, on volume that was twice its average daily trade. We might conclude that the buyers are for real in the stock currently and as long as the Nasdaq and its components confirm, AT could work up to the $68 level in the short-term. Keep in mind that the stock, with its advance and close above $64, is currently in unfilled gap territory and faces little, if any resistance above current levels. As for new entry points, bullish traders can enter calls in an advancing market (Sector and Nasdaq) if AT breaks above the $65 level. In a weak market, those traders who prefer to enter bullish trades on weakness may watch for a light volume pullback to the $61 level, which is the site of our new stop. Those traders who've already entered positions might start thinking about scaling out of calls if/when AT approaches the $66.50 to $67 range in the short-term in an attempt to better manage capital and instill discipline. BUY CALL AUG-60 AT-HL OI= 62 at $5.90 SL=4.00 BUY CALL AUG-65*AT-HM OI=103 at $2.55 SL=1.25 BUY CALL AUG-70 AT-HO OI= 5 at $0.80 SL=0.00 BUY CALL OCT-65 AT-JM OI=587 at $4.20 SL=2.50 BUY CALL OCT-70 AT-JN OI=552 at $2.25 SL=1.00 Average Daily Volume = 683 K BBY - Best Buy $68.17 (+3.33 last week) With a powerful bricks and mortar foundation composed of over 400 retail stores throughout the U.S., Best Buy offers great products at great prices - off-line. The largest volume specialty retailer of consumer electronics, personal computers, entertainment software and appliances, Best Buy is headquartered in Eden Praine, Minnesota. Best Buy currently operates stores in 41 states and is on track to have more than 550 stores nationwide by 2004. BBY appears to forming somewhat of a trading range between the $65 and $69 levels. At least judging by last week's price action. There are two points to address if this type of price action persists. First, a trading range can be very profitable for disciplined traders who enter near support and exit positions near resistance. For those who choose to pursue this strategy by entering positions on weakness, keep in mind that our stop currently lies at $64, which means risk can be mitigated with an entry near support at $65. The second point to address is that a trading range near a 52-week high can be indicative of a near- to intermediate-term top in a stock. Whether this is the case with BBY remains to be seen, but it's important to note that the stock has staged a significant run recently so a bit of consolidation is not unreasonable to expect. That's not to say that the stock won't work higher, instead bullish traders should simply be aware of this notion. There's still the tax rebate checks to be delivered later this summer, and that much may not be fully discounted into the stock quite yet. Bullish traders can look for new entries if BBY advances above its near-term at $69.22, only after confirming strength in the Retail Sector Index (RLX.X). Followers of the RLX will note that the index stopped just short of its 50-dma last Friday, which currently sits at 887 - the RLX closed at 884 last Friday. Failure to trade above that level may cause BBY to pullback to its support around $65. BUY CALL AUG-65 BBY-HM OI= 513 at $6.00 SL=4.00 BUY CALL AUG-70*BBY-HN OI= 900 at $3.10 SL=1.50 BUY CALL AUG-75 BBY-HO OI= 429 at $1.60 SL=0.75 BUY CALL SEP-70 BBY-IN OI=2812 at $5.40 SL=3.50 BUY CALL DEC-75 BBY-LO OI= 288 at $7.10 SL=5.00 Average Daily Volume = 2.66 mln BSYS - BISYS Group $63.29 (+4.47 last 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. BSYS continues to trade well relative to the broader markets because its sector cohorts are delivering exceptional earnings this quarter. Remember that the company competes directly or indirectly with the likes of FDC, CEFT and another OI call play in EFDS. Astute observers will notice that each of the aforementioned stocks are trading at or near their 52-week highs, which is confirmation of our bullish stance on BSYS. After all, buying the strongest stocks in the strongest sectors only makes sense. However, no matter how strong a sector is, it's imperative that the broader markets continue to advance for BSYS to work higher. We still believe that the play will out perform the broader market if, in fact, the broader market continues to advance. Bullish traders looking to gain entry into new call plays might wait for an advancing market and watch for BSYS to clear the $64 level on heavy volume. The $64 area has proved to be resistance during last Thursday's and Friday's sessions. As such, traders should keep a close watch on that site early next week. In terms of support, buyers seem to be defending the $62 level, and below that level lies support around $61, which is the current site of our stop. For traders with open positions, keep in mind that the stock posted a decent gain last week. Therefore, depending upon specific entry points and risk preferences, traders could use any strength early next week to book some profits. BUY CALL AUG-60 BQY-HL OI= 18 at $5.30 SL=3.50 BUY CALL AUG-65*BQY-HM OI=130 at $2.15 SL=1.00 BUY CALL SEP-60 BQY-IL OI=680 at $6.60 SL=4.50 BUY CALL SEP-65 BQY-IM OI=516 at $3.70 SL=1.75 Average Daily Volume = 602 K JCI - Johnson Controls $78.75 (+5.21 last week) Johnson Controls is a global market leader in automotive systems and facility management and control. In the automotive market, it is a major supplier of seating and interior systems, and batteries. For nonresidential facilities, Johnson Controls provides building control systems and services, energy management and integrated facility management. Johnson Controls, founded in 1885, has headquarters in Wisconsin. Its sales for 2000 totaled $17.2 billion. Shares of Johnson Controls are trading rather well, which stems from the out performance of its sector. As we mentioned last week, the company's competitors in Dana (DCN), Visteon (VC), Delphi (DPH) and Lear (LEA) are all trading at are near their 52-week highs - the latter of which was added to the OI call list this weekend. Our play edged ever higher last Friday on continued heavy volume, which indicates the buyers are out in the strength. However, JCI has yet to break above the $79 resistance level. In fact, the stock has topped out around that level in the last three trading sessions, which is somewhat discouraging. But, bullish traders looking to gain entry into the play can use a solid advance above that level to enter new calls ahead of the company's earnings report next Wednesday. The company is slated to release its quarterly report on Wednesday, July 18, so that gives us only two trading days before we exit the play - we'll be dropping coverage on the stock Tuesday. But the company's upcoming earnings report may provide the anticipatory catalyst that we need to see JCI break above its $79 resistance level. Because we only have two days remaining, bullish traders might only consider entering on a breakout above $79 on strong volume, after confirming strength in JCI's aforementioned competitors, then using any strength past the $80 level to exit those positions before the company's report Wednesday. We have moved stops up to the $76 level. BUY CALL AUG-75*JCI-HO OI= 10 at $5.10 SL=3.00 BUY CALL AUG-80 JCI-HP OI= 23 at $2.00 SL=1.00 BUY CALL OCT-75 JCI-JO OI=123 at $7.00 SL=5.00 BUY CALL OCT-80 JCI-JP OI= 62 at $4.40 SL=2.75 Average Daily Volume = 360 K LLY - Eli Lilly $75.78 (+0.67 last week) LLY discovers, develops, manufactures and sells Pharmaceutical products targeted at the diagnosis, prevention and treatment of human diseases. The company's best known commercial product is the anti-depressant Prozac, although there are numerous other lesser-known drugs that treat conditions such as Parkinson's disease, diabetes, osteoporosis along with a broad range of antibiotics. The company also conducts research to find products to treat diseases in animals and to increase the efficiency of animal food production. The see-saw battle between the bulls and bears continues as LLY is pulled between support near $74 and resistance near $76. This lack of direction is a direct result of the uncertain direction of the broad Pharmaceutical index (DRG.X), which is trying valiantly to reclaim and hold the $378-380 support level. Slowing FDA approvals and earnings warnings have rocked the sector in recent weeks, but it is starting to look like a bottom is forming due to stocks like MRK reaching their bearish price objectives and beginning to slowly recover. Earnings are now center stage though, and LLY is set to report its numbers on Thursday morning, before the market. That puts a short fuse on our play as we will want to have all positions closed before the announcement. Intraday bounces near $74 appear attractive for new positions, although waiting for a breakout over $76 may be the better move as it will indicate the stock is ready to move. Either way, keep steps set at $74 and keep an eye on the DRG index. It will need to recover further in order for LLY to really get moving. BUY CALL AUG-75*LLY-HO OI=5293 at $3.50 SL=1.75 BUY CALL AUG-80 LLY-HP OI= 526 at $1.40 SL=0.75 BUY CALL OCT-75 LLY-JO OI= 537 at $5.80 SL=3.75 BUY CALL OCT-80 LLY-JP OI=3026 at $3.40 SL=1.75 BUY CALL OCT-85 LLY-JQ OI=2072 at $1.80 SL=1.00 SELL PUT AUG-75 LLY-TO OI=6976 at $2.40 SL=4.00 (See risks of selling puts in play legend) Average Daily Volume = 2.77 mln TGH - Trigon Healthcare $68.11 (+2.51 last week) Based in Virginia, TGH is a managed healthcare company, serving over two million members primarily through statewide and regional provider networks. The company divides its business into four segments, which include health insurance, government programs, investments and all other. The health insurance segment provides a comprehensive spectrum of managed care products primarily through three network systems with a range of utilization and cost-containment controls. The government is TGH's largest customer, as the company services the Federal Employee Program. The 'all other' category includes disease management programs, third-party administration for medical and workers compensation, and health promotions. Like a snowball rolling downhill, (although this one is rolling uphill), TGH seems to be garnering more enthusiasm from investors the higher it goes. After several days of consolidation between $65-66, the bulls decided to cooperate, pushing the stock higher on heavy volume and bringing it right to major resistance at $68 by the close of trading on Friday. The real hero in this story is the underlying sector, as the Healthcare Payor index (HMO.X) has advanced a solid 6% in the past 3 days. While it isn't a home run, it is a far sight better than the performance of Drug or Biotech stocks over the past week. Having daily Stochastics and RSI buried deep in overbought territory has us a bit nervous, as profit taking could occur at any time, especially now that the $68 resistance level has been reached. So we are raising our stop to $66 to make sure we keep our hard-won gains. Target intraday dips near this level for new entries, but only if the rebound comes on strong volume. There is a fair amount of congestion between $68-70, but a breakout above $70 looks attractive for new entries as well. BUY CALL AUG-65 TGH-HM OI=431 at $5.20 SL=3.25 BUY CALL AUG-70*TGH-HN OI=200 at $2.60 SL=1.25 BUY CALL AUG-75 TGH-HO OI= 8 at $1.05 SL=0.00 BUY CALL OCT-70 TGH-JN OI= 26 at $5.50 SL=3.50 BUY CALL OCT-75 TGH-JO OI=123 at $3.50 SL=1.75 Average Daily Volume = 316 K CD - Cendant Corporation $20.81 (+0.31 last week) Cendant is a diversified provider of business services, especially in the real estate and travel industry. Cendant's Real Estate Division is the leader in the world's largest industry, with affiliates responsible for more than one out of every four homes sold or purchased in the U.S., the leading relocation services company, and a leading home-related Internet portal. As one of the world's leading franchisers of mid-economy market lodging brands and a leading car rental company, and the world's largest timeshare exchange company, Cendant's Travel Division is one of the largest providers of travel services around the globe. Still meandering between $20-21, CD has failed to provide what we could call a tradable move since we added it. The chart pattern looks great with the lows getting higher and pressure building for a breakout over the $21 level, but we are quickly running out of time. Earnings are set for release after the market close on Wednesday, so CD is officially a short-term play. Continue to target new entries near $20.50 (mild support) or $20 (stronger support) and keep stops in place at $19. Since CD has had such a hard time getting moving, the better entry strategy may be to wait for a breakout above the $21 level accompanied by strong volume. We should be able to ride that move right up to earnings before stepping aside. BUY CALL AUG-20.0*CD-HD OI=28442 at $1.55 SL=0.75 BUY CALL AUG-22.5 CD-HX OI= 1333 at $0.45 SL=0.00 BUY CALL NOV-20.0 CD-KD OI= 9361 at $2.45 SL=1.25 BUY CALL NOV-22.5 CD-KX OI= 1342 at $1.30 SL=0.50 Average Daily Volume = 7.04 mln EFDS - eFunds Corp. $22.71 (+4.26 last 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. EFDS investors took a pass on Friday's trading session, giving new meaning to anemic volume. Barely 25% of the average daily volume of shares traded hands, so it was encouraging that the stock didn't give up more ground. This is actually the kind of pattern we like to see; consolidation on light volume, so that the bulls can charge forward with renewed vigor. There is a significant resistance at $23, so it is no wonder the bulls had to stop to rest, especially after those stellar gains (+24% in 3 days) on heavy volume. Recall from our initial writeup that by trading over $21 (also the site of the 50-dma), EFDS completed a triple-top breakout on the Point and Figure chart. That breakout gives us a tentative bullish price target of $28, although we'll need to contend with the $24 and $26 resistance levels first. Look for new entries to appear on a low-volume dip into the $20-21 range, or if you are so inclined, wait for volume to return, propelling our play through the $23 level before initiating new positions. Either way, keep stops in place at $19, and remember that earnings are set to be released on July 27th. BUY CALL AUG-20.0 EFU-HD OI=307 at $3.80 SL=2.50 BUY CALL AUG-22.5*EFU-HX OI= 56 at $2.20 SL=1.00 BUY CALL AUG-22.5 EFU-IX OI=431 at $2.80 SL=1.50 BUY CALL AUG-25.0 EFU-IE OI=597 at $1.55 SL=0.75 Average Daily Volume = 814 K *************************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 07-15-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/8535_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 ************* MYGN - Myriad Genetics $48.59 (-6.21 last week) Myriad Genetics is creating safer, more effective therapeutics on the discovery of drug targets in important human diseases. The company employs two primary technology resources in this process. First, Myriad uses its high throughput, automated protein interaction technology, ProNet, to discover drug targets and entire disease pathways, which are essential in determination of the optimal point of therapeutic development. Option Investor has had success recently with playing puts on biotech stocks, which is the reason we've added MYGN to the put list this weekend. The stock has been working lower in steady fashion since early June, without much pause. In fact, the biotech sector has followed a fairly similar pattern, which may be a function of seasonality or earnings and sales shortfalls within the group, including those from Affymetrix (AFFX) and IDEC Pharmaceuticals (IDPH). Or perhaps the weakness can be attributed to the recent rejections from the Federal Drug Administration (FDA) for drug approvals. It's most likely a combination of these events, and could continue in the short term. Bearish traders will note the rollover in MYGN last Friday, which may portend weakness early next week. Traders can use any high volume drop below the $48 support level to gain new entries into put positions. Additionally, a rollover from the $51 level, or lower near $50 may also provide entry opportunities on strength. Also, bearish traders will want to keep a close watch on the AMEX Biotechnology Index (BTK.X). The BTK has bounced from around the 515 level in the past few sessions, so bearish traders will want to witness the BTK trade below that level before entering positions in MYGN on weakness. We're initially setting our upside, protective stop at the $53 level in an attempt to prevent any whipsaws. BUY PUT AUG-50 GSQ-TJ OI=338 at $5.90 SL=4.00 BUY PUT AUG-45*GSQ-TI OI= 55 at $3.40 SL=1.75 BUY PUT AUG-40 GSQ-TH OI= 16 at $1.65 SL=0.75 Average Daily Volume = 677 K CIMA - Cima Laboratories $62.89 (-17.36 last week) Cima Labs develops and manufactures pharmaceutical products based on its proprietary OraSolv and DuraSolv fast-dissolve technologies. The company manufactures five pharmaceutical brands utilizing these technologies, three prescription and two over-the-counter. The products include Triaminic Softchews for Novartis; Tempra FirsTabs for a Canadian affiliate of Bristol-Myers Squibb; Zomig-ZMT for AstraZenica; Remeron SolTab for Organon, and NuLev for Schwarz Pharma. In addition to its established technologies, CIMA is developing transmucosal drug delivery technologies, which will allow for drug delivery under the tongue, or between the cheek and gum. After finally posting a close over the $80 resistance level on Monday, it seems that CIMA buyers had a change of heart and swiftly moved to the bear camp. In 4 short days the bottom fell out and the stock gave up a whopping 22%, coming to rest just above the 200-dma ($61.99). The decline seemed to step from concerns of disappointing conversion rates by users of the Remeron anti-depressant to a tablet using the CIMA fast-dissolve technology. Earnings for the company are still a little over 2 weeks away on August 2nd, but the negative news seems to be the dominant factor right now. Given the drastic decline in price, a rebound in the near term could be in the cards, but the technical violation seems to be pointing to more weakness ahead. The precipitous decline generated a double-bottom breakdown on the Point and Figure chart that points to a bearish price target of $43, although the bears will first have to overcome support in the $53-55 area. The high-odds entry strategy will be to wait for CIMA to fall through the $62 level before taking a position, although you may be able to gain a more favorable entry on an intraday bounce that fails to penetrate the $66 resistance level, also the location of our stop. BUY PUT AUG-65 UVK-TM OI= 0 at $6.90 SL=5.00 Wait for OI!! BUY PUT SEP-65*UVK-TM OI=24 at $8.90 SL=6.25 Average Daily Volume = 314 K ***************** CURRENT PUT PLAYS ***************** HGSI - Human Genome Sciences $48.49 (-0.36 last week) Possessing one of the largest human and microbial genetic databases, HGSI licenses its database of knowledge to pharmaceutical heavyweights like GlaxoSmithKline and Merck. Management has chosen to forgo the race to decode the entire human genome, and has instead focused on finding and patenting genes involved in developing gene-based therapeutics. Its four compounds currently in clinical trials are intended to limit the toxic effects of chemotherapy, promote the repair of damaged cells, stimulate antibody production, and spur regrowth of blood vessels. Early in the day on Friday, it seemed clear that our HGSI put play was done for, having moved above our $49 stop as the Biotech index (BTK.X) was one of the biggest gainers in the market. But that was before the afternoon rollover that pushed our play back below our stop, and had us thinking "Entry Point". After the early morning rally, volume waned throughout the day until the selling picked up steam in the final hour, making us think this could be a hint of what is to come on Monday. But we are definitely on our guard after a 7% rally on above-average volume. Daily Stochastics are waving a bullish flag too, as the fast line has now crossed over the slow line and is threatening to emerge from oversold territory. We are keeping our stop in place at $49, and a close above that level will spell the end of the play. If however, price continues back down, we are looking at fresh entries, either on a retreat lower from the vicinity of $49 or a drop through the $47 intraday support level. A drop through $45 should open the door for the stock to continue its descent to the next major support at $40. Keep an eye on the calendar, as HGSI reports earnings on July 27th. BUY PUT AUG-50*HHA-TJ OI= 331 at $5.80 SL=3.75 BUY PUT AUG-45 HHA-TI OI=1286 at $3.30 SL=1.75 Average Daily Volume = 3.16 mln AES - AES Corp. $38.42 (-4.03 last week) As a global power company, AES participates in two primary lines of business, electricity generation and distribution. The company's electricity generation business consists of sales from its power plants to non-affiliated wholesale customers (electric utilities, regional electric companies, electricity marketers and wholesale commodity markets known as "power pools") for resale to end users. AES' distribution business is characterized by sales of electricity directly to end users such as commercial, industrial, governmental and residential customers. As expected, AES continued its precipitous decline on Friday as selling volume remained solidly above the ADV. None of the power-generator stocks have been in favor lately, but AES is particularly distasteful to investors for a couple of key reasons. First there is the currency crisis in Argentina which threatens to spill over into neighboring South American countries. AES derives a fair amount of their revenue from that market and that isn't setting well with investors. Secondly, the company is under scrutiny by the Department of Justice for allegedly violating anti-trust laws by agreeing (along with WMB) to limit expansion of some AES plants. It doesn't take a rocket scientist to connect the dots and see that there is likely more pain in store, and we are more than happy to go along for the ride. Rolling over right at the long-term trendline (near $44) earlier this week gave early birds a great entry into the play. We got another entry opportunity on Friday as the stock failed to crest the $40 resistance level (previous long-term support) and fell back to set another yearly low. Earnings are set for July 26th, but that seems to only be making investors more nervous right now. Target new entries as the stock once again fails to crest the $41 level or falls through $38 on its way to testing the next major support level at $36. Move stops down to $42. BUY PUT AUG-40*AES-TH OI=9673 at $3.90 SL=2.50 BUY PUT AUG-35 AES-TG OI=1279 at $1.50 SL=0.75 BUY PUT AUG-30 AES-TF OI= 272 at $0.60 SL=0.00 Average Daily Volume = 2.58 mln AMGN - Amgen, Inc. $55.64 (-1.52 last week) The biggest of the Biotech big guns, AMGN makes and markets therapeutic products for hematology, oncology, bone and inflammatory disorders, as well as neuroendocrine and neurodegenerative diseases. Anti-anemia drug Epogen and immune system stimulator Neupogen account for about 95% of sales. Its Infergen has been commercialized as a treatment for hepatitis C, and Stemgen is approved for stem cell therapy in Australia, Canada, and New Zealand. The company has a strong pipeline of new drugs in various stages of development as well as research and marketing alliances with Hoffman-La-Roche and Johnson & Johnson. Well, what do you know? Those bearish price objectives from Point and Figure charts really do work. AMGN flashed a bearish price objective of $55 when it traded down to $63 in June, and look where it stopped on Thursday and Friday, right at $55. So you may be wondering why we are still keeping it on the put list. Simply put, the recovery had no staying power and the stock still looks vulnerable here. After rebounding as high as $57 early in the day, AMGN fell back through the remainder of the day, giving back the majority of its intraday gains, with selling volume picking up near the close. Since AMGN is a principal component of the Biotechnology index (BTK.X), it gives the BTK even greater utility in trying to determine the direction for our play. With intraday resistance holding back the bulls at $57 on Friday, we can lower our stop to that level and consider new entries on any rally that fails to move through that level. Alternatively, new entries will materialize as AMGN falls through the $54 level on its way to testing major support near $52. Earnings are set for July 26th, so that event will start to factor into investors thinking over the next week. BUY PUT AUG-60 YAA-TL OI= 721 at $6.00 SL=4.00 BUY PUT AUG-55*YAA-TK OI=3290 at $3.20 SL=1.50 BUY PUT AUG-50 AMQ-TJ OI= 874 at $1.50 SL=0.75 Average Daily Volume = 7.92 mln ************************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 ***** Is That The Beginning Of The Summer Rally? By Mark Phillips Contact Support I'll be the first to admit that I'd like to think so. As I expected, all the major indices broke substantial support levels at some point last week, with the S&P500 falling through 1180, the DJIA breaking 10,200 and the NASDAQ Composite breaching the venerable 2000 level. But like a Phoenix rising from the ashes, all three staged impressive comebacks over the past couple days, closing well above those violated support levels. But was it buying, or short-covering. As of right now, I think I'd have to say short-covering, but that doesn't mean that we don't have fresh cash ready to enter the market next week. Only time will tell. A major cloud that is hanging over the market (even if the trading action over the past 2 days refuses to acknowledge it) is the looming currency crisis in Argentina. Just what the stock market needs is another global financial crisis threatening to spread to surrounding nations and further delay the much-ballyhooed "second-half" recovery. Speaking of which, have you noticed that there isn't nearly as much inane chatter about said recovery appearing like magic during the second half? Investors seem to be adapting to the reality that a serious recovery will have to wait until the calendar rolls over to January again. Despite the negative economic climate investors are currently faced with, they do appear to have received some benefit (even if it is only psychological at this point) from the series of Fed interest rate inoculations over the past six months. The first of these rate cuts is just starting to be felt by the economy, while it will take until the end of this year for the recent June 25 basis point cut to work its way into the economy. There are other factors at work here as well, such as the absolute dearth of Telecom spending that has yet to show any sign of picking up. And as we all know, it just isn't possible to have a sustained market advance without the participation of Financial stocks - an event that seems unlikely until we see how the Argentine currency problems are resolved. Needless to say, I'll be keeping my eyes peeled for attractive opportunities in the Financial sector so that we can benefit from their ascent during the eventual market recovery. But in the meantime, I've got a different concept to keep you entertained. Have you noticed that the Big-Cap Techs are starting to creep back into the LEAPS column? While we were early on DELL, CSCO and EMC look to have been timed just about right. With the addition of ORCL two weeks ago and SUNW this week to the Watch List, the Portfolio is poised to take advantage of a unique property of many of these former high-flying stocks. What we're referring to is solid support that allows us to pick attractive entry points and place tight stops. But the crowning glory of these plays is the fact that nobody has wanted to own the stocks for awhile now and volatility has collapsed, bringing LEAP premiums to ridiculously low levels. Look at the CSCO play, which we entered on Wednesday. The premium for the 2003 LEAP was a paltry $3.90, and the miniscule $2 move in the stock over the past 2 days has netted us a 38% return! Speaking of volatility, did you notice the recent gyrations in the VIX? Seven sessions to rocket from 20.95 to 28.21 and then back to 23.87. Now that's what I call volatility! There's no trend to follow on the VIX, except that it does appear to have dropped back into the historical 20-30 range, giving us another indicator to guide our entries. Remember the old wisdom, "When the VIX is high, it is time to buy. When the VIX is low, it is time to go." Old advice, but it still works today, especially when the VIX behaves itself and stays within the boundaries we have laid out. Wait until we start writing covered calls on these Big-Cap plays and you'll really start to see the payoff. Recoup that original investment in the first 6 months and then the gains over the next 12 effectively deliver infinite returns as we let other people's money work for us, while we take our money and put it to work elsewhere. What could be better than that? If you're new to the concept of Covered Calls combined with LEAPS, hop on over to the Options 101 section of the website and read through the recent series of articles I've written on the topic. While it has been a rocky road over the past 6 weeks, with a series of frustrating drops from the Portfolio, I think our Portfolio is well-positioned to profit throughout the remainder of the year. All we need to do now is avoid another earnings disaster like we experienced in April, and we could see the markets starting to firm nicely by the time we send the kids back to school. Continue to make the stocks you want to play give you the entry points you specify and keep those stops in place. While there is likely more turbulence ahead, I'm of the mind that the worst truly is behind us. Now is the time to be positioning your portfolio for the recovery when it comes. But we don't want to be suckered into chasing entries by the drivel from analysts and commentators on CNBC. We'll do our own thinking, thank you very much. One final note before I wrap this up for the week. Remember that we will be discontinuing coverage of all 2002 LEAPS at the end of July. A quick glance at the relative performance of the 2002s vs. the 2003s should be all you need do in order to understand why. Time decay is beginning to rear its ugly head, and with the notable exception of the WM play, it is hard to make a case for continuing to initiate or hold long-term positions with the 2002 strikes. Use any near-term rallies as an opportunity to exit the 2002 LEAPS, either waiting for a new entry (using 2003 or 2004 strikes) or immediately moving out to the later expiration. You'll be glad that you did! Have a Safe and Profitable week! Mark Phillips Contact Support LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP CLX 03/13/01 '02 $ 35 CLX-AG $ 3.50 $ 3.20 - 8.57% $ 33 '03 $ 35 VUT-AG $ 6.10 $ 6.10 0.00% $ 33 WM 03/22/01 '02 $33.8 BWT-AY $ 4.00 $ 7.50 87.50% $ 36 '03 $33.8 OBN-AY $ 6.13 $ 9.80 59.87% $ 36 FON 04/09/01 '02 $ 25 FON-AE $ 2.80 $ 1.55 -44.64% $ 19 '03 $ 25 VN -AE $ 4.40 $ 3.60 -18.18% $ 19 DELL 04/27/01 '02 $ 25 DLQ-AE $ 6.20 $ 5.80 - 6.45% $ 23 '03 $ 25 VDL-AE $ 9.00 $ 9.00 0.00% $ 23 ADBE 05/16/01 '02 $ 40 AEQ-AH $11.00 $ 8.00 -27.27% $ 37 '03 $ 40 VAE-AH $14.60 $13.20 - 9.59% $ 37 AOL 05/16/01 '02 $ 55 AOO-AK $ 9.60 $ 6.20 -35.42% $ 48 '03 $ 55 VAN-AK $14.60 $11.20 -23.29% $ 48 BRCM 06/05/01 '02 $ 40 RCQ-AH $ 9.70 $12.60 29.90% $ 34 '03 $ 40 OGJ-AH $14.00 $19.30 37.86% $ 34 SEBL 06/12/01 '02 $ 45 SGW-AI $13.00 $11.00 -15.38% $ 38 '03 $ 45 OIE-AI $18.40 $17.30 - 5.98% $ 38 VRSN 06/12/01 '02 $ 50 YXO-AJ $17.10 $15.60 - 8.77% $ 42 '03 $ 60 OVX-AL $20.40 $20.00 - 1.96% $ 42 CSCO 07/11/01 '03 $ 20 VYC-AD $ 3.90 $ 5.40 38.46% $ 13 '04 $ 20 LCY-AD $ 5.70 $ 7.00 22.81% $ 13 EMC 07/12/01 '03 $ 25 VUE-AE $ 5.50 $ 6.20 12.73% $ 19 '04 $ 30 LUE-AF $ 6.30 $ 6.90 9.52% $ 19 IBM 07/11/01 '03 $110 VIB-AB $17.70 $20.50 15.82% $ 99 '04 $110 LIB-AB $23.70 $28.30 19.41% $ 99 MRK 07/09/01 '03 $ 70 VMK-AN $ 7.40 $ 6.10 -17.57% $ 59 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL BEAS 06/24/01 $24-25 JAN-2003 $ 30 VZP-AF ORCL 06/24/01 $15-16 JAN-2003 $17.5 VOC-AW CPN 07/08/01 $40-41 JAN-2003 $ 45 OLB-AI JAN-2004 $ 50 LZC-AJ SUNW 07/15/01 $14 JAN-2003 $17.5 VZX-AW JAN-2004 $ 20 LSU-AD New Portfolio Plays CSCO - Cisco Systems $16.70 As if catering to my whims, CSCO dropped to $16.01 before buyers stepped forward in sufficient numbers to halt the stock's slide. That served our purposes quite nicely, considering our $16 price target allowed us to take a position in the Portfolio at almost the exact bottom of this cycle. Any trepidation I felt about the new position quickly vanished on Thursday as CSCO gapped higher and held onto its gains in anticipation of earnings from JNPR. Those earnings didn't light anybody's imagination on fire, coming in at the drastically reduced 8 cents per share estimate, but it was enough to give bullish traders in the Networking sector hope that the worst is behind. CSCO led the Networking index (NWX.X) higher again on Friday, posting a 5% gain and starting the play out in the green. While there are some definite bullish indications in both the sector and the broader market, I would be hesitant to chase this one higher if you missed your shot last week. Instead, wait for the daily Stochastics to cycle up into overbought and then back down into oversold. So long as the price holds above $16 on the next cycle, new entries will probably be a good bet. Our stop is starting out at $13, just below April's closing low. Clearly a drop below that level would be a very bad development and would have us moving to the sidelines in a hurry. BUY LEAP JAN-2003 $20.00 VYC-AD $3.90 BUY LEAP JAN-2004 $20.00 LCY-AD $5.70 EMC - EMC Corporation $21.51 Falling victim to the earnings warning syndrome just over a week ago, EMC took a serious tumble on the news, and I gave serious thought to removing it from the Watch List last weekend. But then calmer thoughts prevailed and I remembered why it was there in the first place - dominance in the Enterprise Storage sector and a well-run business. The problems the company is currently facing are a direct result of the softening economy, and with tenuous signs of an improvement on that front, we could be looking at the best entry point we are likely to see for some time to come. As the recent decline got underway, the Point and Figure chart predicted a price target of $20, and sellers were kind enough to deliver a low price on Wednesday of $20.10! You've got to love those Point and Figure Chartologists! The bounce and entry didn't come until Thursday when EMC crested the $21 level, and we took our entry accordingly. The technicals are just starting to point skywards, and hopefully there will be no more bad news when the company releases its earnings on Wednesday morning. Just in case, we are starting the play with a tight stop at $19. BUY LEAP JAN-2003 $25.00 VUE-AE $5.50 BUY LEAP JAN-2004 $30.00 LUE-AF $6.30 IBM - International Business Machines $103.85 Vindication is a wonderful thing. I know you were thinking I was a bit off my rocker when I added IBM with a $100-102 price target, but the market handed exactly that to patient traders this week. While it didn't quite get to $100, I was more than pleased to take that bounce from the $101.50 level on Wednesday. Since then, IBM has been on a tear, charging back up the chart and threatening to crest $110 again. IBM's rebound helped to lead the broader market higher as the bears seem to have given up on the notion that IBM will fail to deliver when it issues its earnings next Wednesday. Solid earnings results will likely propel the stock back into its familiar trading range between $112-120 in preparation for a breakout to the upside later this year. We need to protect ourselves against the possibility that the earnings will not please the street though, so we are placing our stop at $99, just below the solid $100 support level. BUY LEAP JAN-2003 $110.00 VIB-AB $17.70 BUY LEAP JAN-2004 $110.00 LIB-AB $23.70 MRK - Merck & Co. $64.60 After achieving our bearish price target of $63 and change a little over a week ago, we were lying in wait for signs of strength to guide us into taking a position in shares of MRK. The beleaguered drug maker had led the decline in Pharmaceutical stocks after issuing an earnings warning. Sure enough, Monday gave us all the signs we were looking for, with MRK trading up on strong volume, the Pharmaceutical index (DRG.X) posting a strong rebound from the $378 support level and we took our entry with the stock resting just above the $64 level. Alas, it turned out there was more weakness in store, with the stock declining throughout most of the week, just kissing the $61 level on Thursday. Strength in the DRG index on Friday along with a mild bounce in shares of MRK has us hopeful that our bottom-fishing technique will prove fruitful. We are placing our stop at $59 to give the play a bit of room to move, but if that level should fail, we'll have no choice but to cut the play loose. If you were lucky enough to miss the entry on Monday, it looks like you'll get another chance. A renewed bounce from the $61 level is still buyable, but make sure it is accompanied by strong volume. BUY LEAP JAN-2003 $70 VMK-AN $7.40 New Watchlist Plays SUNW - Sun Microsystems $15.64 As noted above, we're making a deliberate move back into the Large-Cap Technology stocks and this week SUNW gets the nod. This is clearly a bottom-fishing expedition, but with a solid double-bottom near the $13 level and early signs of a bottoming in the domestic economy, this could be a good time to start nibbling at new long-term positions. The company fundamentals do not appear to have turned yet, and we don't expect any great news when SUNW announces its earnings Thursday evening. But barring another major unexpected confession, SUNW looks poised to recover nicely from near its current level as the global economy begins to mend. An aggressive entry (we are targeting a dip near $14) combined with a tight stop ($12.50) just below the April lows gives us an attractive risk/reward ratio. BUY LEAP JAN-2003 $17.50 VZX-AW BUY LEAP JAN-2004 $20.00 LSU-AD Drops LRCX $24.50 Bringing another frustrating play to a less-than-inspiring close, we had no choice but to throw in the towel on LRCX on Wednesday when it plunged through our $25 stop to close at $24.50. Adding insult to injury, the stock rebounded the past 2 days just to spite me. Try as I might, I couldn't find the error of my ways in selecting the $25 stop level. It was more than a dollar below the lowest level for the stock since mid-April, and even the long-term ascending trendline said that a severe decline should have halted above $25. I'll have to chalk this one up to being a bad play rather than a mismanaged one. I do take consolation in the fact that LRCX is once again posting lower highs, with the 2-month descending trendline forecasting a rollover near $29 this time. If that comes to pass, LRCX will likely take out this week's lows and we'll look back on our exit as a wise decision. If you ignored the exit signal this week, I would use the current recovery as an opportunity to exit the play before the stock rolls over again. *************************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 07-15-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/8535_5.asp ************* COVERED CALLS ************* Option Trading Basics: Covered-Call Strategies and Adjustments By Mark Wnetrzak We recently received some great questions regarding potential adjustments for covered-calls and selling LEAPS for larger premiums. One reader asked about an unusual technique for closing losing covered-call positions: Dear OIN, I've enjoyed your articles on Covered Calls. I've not used them to date but intend to in the near future. I'd like your opinion on the following strategy to avoid a loss. Assume you're in one of the plays in your list and the stock price starts heading down to the cost basis. Instead of closing the entire position for a loss, what if you sell the stock just above the cost basis (I have option writing authority) and then repurchase it if it reaches the sold strike price? Would this be a reasonable method to avoid a loss, or would it be an execution nightmare? I can monitor the markets all day if desired. Any help would be appreciated. JM Regarding "covered-call" exit strategies: There are a couple things to consider. First, getting approval to sell cash-secured (naked) calls usually requires a substantial account size ($100,000 at Preferred) and the highest experience level. Many brokerages, E*trade for example, do not even offer the option to sell naked calls because of the high risk involved. Once you sell the stock and the calls become uncovered (naked), your risk becomes unlimited as the stock can climb to infinity (think QCOM back in 1999). The main purpose of an exit strategy is to reduce risk, not increase it. Also, because the cost basis is generally within or just below a technical support area (in a perfect world, an area where you would expect the stock price to stop falling and resume climbing), there is a high probability of being whipsawed, possibly more than once. Finally, if the stock declines to the cost basis and the calls are now out-of-the-money, they will be relatively inexpensive to buy back and close. In most cases, if you become bearish on an issue, it is usually better to simply exit the position and devote your capital to more deserving positions. However, there are other strategies you can use to adjust a losing position or take protective action besides an all-out exit. Buying puts can protect for downside movement depending on how badly you want to hold on to the stock and how much insurance (cost of the puts) you're willing to pay. Rolling down (buying back the short calls and selling lower strike calls) and/or forward (moving to a future month) may lower your cost basis in an issue for the current correction but could "lock-in" a loss if the issue rebounds before expiration. Again, these are personal choices and only you can decide what is best for your portfolio. Another reader asked about a strategy where you buy stock and sell "in-the-money" LEAPS, using the premium received from the written calls to satisfy the margin requirement (initially 50% with most brokers). The reader noted, "It would appear that some plays could be entered with no cash outlay as the premium from the sold call would satisfy the entire margin requirement." While it is true that this approach can generate a large amount of premium, sometimes as much as the entire margin requirement, there is still substantial risk in the position and the margin interest charges must be factored in to the overall return on investment. In addition, the margin rules are not the same for ITM positions. The initial collateral requirement for a covered write in a margin account when the option is "out-of-the-money" is 50% of the stock price less the premium from the call. But, the collateral requirement for a position in which the option is "in-the-money" is less favorable with regard to this strategy. In most cases, a broker will only allow one-half of the value of the underlying stock, or the strike price of the sold option, whichever is less, in calculating the collateral requirements of an ITM covered-write. In other words, if you have a stock that is trading at $30, and the JAN(03)-$15 Call is bid at $15, there would still be a margin requirement of $7.50. Here's the math: Current stock price = $30.00 JAN(03) - $15 Call = $15.00 Less 50% of $15 Call = $7.50 Initial Collateral = $7.50 Of course, even with the relatively small collateral requirement, the strategy involves tremendous leverage and that's why novice traders are more likely to get into trouble with this technique. The lack of committed funds (due to the extremely large option premiums) often produces a false sense of security and insinuates there is virtually an unlimited amount of downside protection. In addition, margin calls will be issued if the share value declines substantially and interest must be paid on the borrowed portion of portfolio balance while the position in place. Traders who are considering this unique strategy should weigh the advantages of increased leverage against the costs of maintaining the position and in all cases, utilize proper money management to maintain an acceptable level of risk in their portfolios. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield NUAN 18.02 18.35 JUL 17.50 2.05 *$ 1.53 13.9% BCGI 15.01 15.90 JUL 15.00 0.85 *$ 0.84 12.9% PCLN 7.68 8.70 JUL 7.50 0.85 *$ 0.67 10.7% AKSY 10.31 9.87 JUL 10.00 0.80 $ 0.36 8.2% DRMD 15.30 18.63 JUL 15.00 1.20 *$ 0.90 6.9% WEBX 20.31 22.47 JUL 17.50 4.00 *$ 1.19 6.3% LEXG 11.66 11.70 JUL 10.00 2.45 *$ 0.79 6.2% CCRD 8.60 9.11 JUL 7.50 1.60 *$ 0.50 6.2% SAGI 15.50 13.05 JUL 12.50 3.50 *$ 0.50 6.0% FNSR 14.87 15.38 JUL 12.50 3.00 *$ 0.63 5.8% ORCH 5.65 5.90 JUL 5.00 0.95 *$ 0.30 5.5% MCAF 11.90 14.31 JUL 10.00 2.70 *$ 0.80 5.4% SCI 25.50 25.17 JUL 22.50 3.80 *$ 0.80 5.3% MCAF 14.56 14.31 JUL 12.50 2.90 *$ 0.84 5.2% CWST 10.90 13.45 JUL 10.00 1.35 *$ 0.45 5.1% BTX 8.50 7.11 JUL 7.50 1.90 $ 0.51 4.8% Z 15.54 15.58 JUL 15.00 1.30 *$ 0.76 4.6% SONE 13.85 13.00 JUL 12.50 1.85 *$ 0.50 4.5% CWST 10.92 13.45 JUL 10.00 1.40 *$ 0.48 4.4% TCNO 9.25 9.04 JUL 7.50 2.10 *$ 0.35 4.3% WCNX 31.50 33.22 JUL 30.00 2.90 *$ 1.40 4.3% ROS 5.49 4.43 JUL 5.00 1.05 $ -0.01 0.0% ACTR 11.00 8.80 JUL 10.00 1.70 $ -0.50 0.0% TERN 6.12 5.01 AUG 5.00 1.60 *$ 0.48 6.6% FFIV 16.90 16.25 AUG 15.00 3.10 *$ 1.20 6.3% CYTO 5.40 4.87 AUG 5.00 0.95 $ 0.42 5.9% CLPA 6.08 5.99 AUG 5.00 1.40 *$ 0.32 5.0% DMRC 22.88 26.59 AUG 20.00 4.10 *$ 1.22 4.7% GZMO 12.80 12.70 AUG 10.00 3.40 *$ 0.60 4.6% CVAS 11.80 10.43 AUG 10.00 2.35 *$ 0.55 4.2% *$ = Stock price is above the sold striking price. Comments: Ah, thank you Mr. Softee! That was like a breath of fresh air after being locked in a dungeon for the last year or so. Now, if the positive "MoJo" will continue into next week's earnings salvo! Nuance Communications (NASDAQ:NUAN) did not violate its recent trend-line and has now edged out the June high. Keep an eye on Aksys (NASDAQ:AKSY) as it moves towards its 50-dma. Biotime (AMEX:BTX) is testing a key trend-line (MAR - JUN lows) and should be monitored closely during the current biotechnology weakness. S1 Corp. (NASDAQ:SONE) is looking a little "toppy" and may test its 150-dma near $11. Rostelecom (NYSE:ROS) is testing its support area - a key moment! Remember, there is only one week left until July options expire, so reconfirm the long-term outlook on any issue you choose to own. Oh, and thanks TIVO (NASDAQ:TIVO), for waiting until this week to confirm 2Q and fiscal 2002 earnings! Positions Closed: MRV Communications (NASDAQ:MRVC), TiVo (NASDAQ: TIVO), Optical Communication (NASDAQ:OCPI), Valence Technology (NASDAQ:VLNC), Precise Software Solutions (NASDAQ:PRSE), Genomic Solutions (NASDAQ:GNSL), Amylin Pharmaceuticals (NASDAQ:AMLN). 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 BCGI 15.90 AUG 15.00 QGB HC 2.05 29 13.85 35 7.2% CFLO 5.20 AUG 5.00 JSD HA 0.90 5 4.30 35 14.1% HTCH 17.80 AUG 17.50 UTQ HW 1.45 505 16.35 35 6.1% MCAF 14.31 AUG 12.50 CFU HV 2.70 10 11.61 35 6.7% NFLD 18.45 AUG 17.50 DHQ HW 2.20 403 16.25 35 6.7% PHSY 20.98 AUG 17.50 HYQ HW 4.50 432 16.48 35 5.4% SEAC 18.06 AUG 17.50 UEG HW 2.15 0 15.91 35 8.7% 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 CFLO 5.20 AUG 5.00 JSD HA 0.90 5 4.30 35 14.1% SEAC 18.06 AUG 17.50 UEG HW 2.15 0 15.91 35 8.7% BCGI 15.90 AUG 15.00 QGB HC 2.05 29 13.85 35 7.2% MCAF 14.31 AUG 12.50 CFU HV 2.70 10 11.61 35 6.7% NFLD 18.45 AUG 17.50 DHQ HW 2.20 403 16.25 35 6.7% HTCH 17.80 AUG 17.50 UTQ HW 1.45 505 16.35 35 6.1% PHSY 20.98 AUG 17.50 HYQ HW 4.50 432 16.48 35 5.4% 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). ***** BCGI - Boston Communications Group $15.90 *** Rally Mode! *** Boston Communications Group (NASDAQ:BCGI), an S&P Small Cap 600 Index company, is a leader in real-time transaction processing for services including prepaid wireless, enhanced voice, and m- commerce. BCGI provides real-time transaction processing and payment services to wireless carriers through its Intelligent Voice Services Network (IVSN) and its proprietary, highly scalable transaction processing platform. Through this nationwide real- time infrastructure, BCGI provides one or more of its services to approximately 70 wireless carriers and resellers, including seven of the ten largest domestic carriers. The IVSN and trans- action processing platform support BCGI's Prepaid Wireless and Prepaid Connection services, market leaders in one of the highest growth segments of the wireless communications industry. BCGI handles approximately 1.5 billion minutes of service a year. BCGI continues to rally off its April low and has recently moved above its 150-dma. The company is due to report earnings on Wednesday, July 18. AUG 15.00 QGB HC LB=2.05 OI=29 CB=13.85 DE=35 TY=7.2% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=BCGI ***** CFLO - CacheFlow $5.20 *** Cheap Speculation *** CacheFlow (NASDAQ:CFLO) is focused on building a new layer of content intelligent infrastructure that makes the Internet content-smart. CacheFlow's market-leading appliances and innovative content delivery technologies enable enterprises, service providers and content providers to deliver the right content to the right place at the right time. CacheFlow beat estimates last quarter but warned about the future. The stock has formed a Stage I base as investors await signs of improve- ment. The question is, did they lower the bar far enough for this quarter and will they warn again on the future? This play offers a reasonable cost basis from which to speculate on the company's future. AUG 5.00 JSD HA LB=0.90 OI=5 CB=4.30 DE=35 TY=14.1% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=CFLO ***** HTCH - Hutchinson Technology $17.80 *** Earnings Rally? *** Hutchinson Technology (NASDAQ:HTCH) is a leading supplier of suspension assemblies for hard disk drives. During 2000, HTCH shipped approximately 488 million suspension assemblies of all types. The company is a supplier to nearly all domestic and many foreign-based users of suspension assemblies, including Alps, IBM and its affiliates, Maxtor, Quantum, Read-Rite, SAE Magnetics/TDK and its affiliates, Samsung, Seagate Technology, Toshiba and Western Digital. No recent news to explain the end-of-June rally, yet somebody seems interested in Hutchinson. We favor the bullish move above its 6-month consolidation area and simply desire a cost basis closer to support. Earnings are due Tuesday, July 17. AUG 17.50 UTQ HW LB=1.45 OI=505 CB=16.35 DE=35 TY=6.1% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=HTCH ***** MCAF - McAfee.com $14.31 *** Beat the Street! *** McAfee.com (NASDAQ:MCAF), a majority-owned subsidiary of Network Associates (NASDAQ:NETA), is a consumer security Application Service Provider (ASP). The company delivers software benefits through an Internet browser, virtually eliminating the need to install, configure and manage the technology on a local PC or network. McAfee.com hosts software application services on its vast technology infrastructure and provides these services to users online. On Wednesday, McAfee posted a pro forma 2Q profit, excluding acquisition costs, that solidly beat Wall Street's expectations, due to strong growth in its Internet subscriber revenues. The company also surprised analysts by boosting their earnings outlook for the third quarter and full year. McAfee now boasts 1.2 million users, up from 920,000 subscribers last quarter. One of the few bullish companies that actually increased revenues (up $14.4 million from $11.9 million) and did NOT warn about the future. We simply favor a conservative entry point. AUG 12.50 CFU HV LB=2.70 OI=10 CB=11.61 DE=35 TY=6.7% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=MCAF ***** NFLD - Northfield Laboratories $18.45 *** Break-out!*** Northfield (NASDAQ:NFLD) is engaged in the development of a safe and effective alternative to transfused blood for use in the treatment of acute blood loss. Its PolyHeme blood substitute product is a solution of chemically modified hemoglobin derived from human blood. Clinical studies, to date, indicate that PolyHeme carries as much oxygen, and loads and unloads oxygen in the same manner, as transfused blood. Clinical studies also indicate that PolyHeme is universally compatible (should not require blood typing prior to infusion) and has an extended shelf life compared to blood. In early May, Northfield's management told investors that it was confident and optimistic about bringing its blood substitute product, PolyHeme(TM), through the regulatory review process, once its application is filed. Northfield is currently in the final stages of preparing a biologic license application for FDA review. Investors have bid the stock up ever since and Friday's explosive move on heavy volume signaled a break-out above a year-long base. New drug speculation on a bullish chart! AUG 17.50 DHQ HW LB=2.20 OI=403 CB=16.25 DE=35 TY=6.7% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=NFLD ***** PHSY - PacifiCare Health $20.98 *** Change Of Character? *** PacifiCare Health Systems (NASDAQ:PHSY) is one of the nation's largest health care services companies. Primary operations include health insurance products for employer groups and Medicare beneficiaries in eight states and Guam, serving approximately 3.7 million members. Other specialty products and operations include behavioral health services, life and health insurance, dental and vision services and pharmacy benefit management. PacifiCare fell from grace in May after warning that they did not expect to meet earnings guidance for the full year 2001. Now the shorts are scrambling as rumors fly that PacifiCare will preannounce to the upside! In any case, the tape doesn't lie and PacifiCare is breaking out of a short-term base. We still favor a cost basis closer to recent support. AUG 17.50 HYQ HW LB=4.50 OI=432 CB=16.48 DE=35 TY=5.4% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=PHSY ***** SEAC - SeaChange $18.06 *** Bottom Fishing In The Sea *** SeaChange (NASDAQ:SEAC) develops, manufactures and sells systems that automate the management and distribution of both short-form video streams (advertisements) and long-form video streams (movies), and related services and movie content to television operators, telecommunications companies and broadcast television companies. In May, SeaChange reported record revenues of $30.2 million, up up 35%, and net income of $182,000 or $0.01 per share. SeaChange believes it has established itself as the leader in Video-on- Demand as it recorded a record $11.0 million in revenue. The company continues to improve its product, recently shipping its new IMC 4000 video server configurations. On Friday, Adams Harkness initiated coverage with a buy rating. We simply favor the bullish technicals as SeaChange forges a Stage I base. AUG 17.50 UEG HW LB=2.15 OI=0 CB=15.91 DE=35 TY=8.7% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=SEAC ***** ***************** 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 FIBR 8.50 AUG 7.50 QFW HU 2.00 970 6.50 35 13.4% ACTU 8.01 AUG 7.50 UHQ HU 1.15 76 6.86 35 8.1% SPWX 14.15 AUG 12.50 USP HV 2.70 5 11.45 35 8.0% GOTO 22.14 AUG 20.00 GUO HD 3.60 359 18.54 35 6.8% BRCM 43.04 AUG 35.00 RCQ HG 9.90 5691 33.14 35 4.9% PMCS 30.05 AUG 22.50 SQL HX 8.70 107 21.35 35 4.7% ***************** NAKED PUT SECTION ***************** Market Psychology: Overcoming The Herd Mentality By Ray Cummins There are a number of ingredients that must be present in any successful investment portfolio. The inventory of resources that one needs to stay ahead of the market can be daunting to new traders. Most novice participants become overwhelmed with the vast amount of information and ideas that must be absorbed before consistent profits can occur. The best way to begin is to focus on those strategies and techniques that have a proven history of generating a prosperous outcome. Today we will discuss the effects of public sentiment in the stock market. The first thing that new investors must learn when they enter the market is the importance of human psychology in the buying and selling of stocks. This emotional component has absolutely nothing to do with the fundamentals of the company, but it does have an overwhelming affect on the share value. Of course, the idea that emotion determines stock prices may contradict the opinions of many valuation investors but when you understand the changes produced by public sentiment, it becomes much easier to discern the broader, more technical movements in the market. The primary unwritten rule is that rumors are one of the prime movers of stock prices. It's amazing how quickly speculation of upcoming events can change the character of the current trend. The market anticipates the movement of the economy and shows us in advance what we can expect with regard to corporate health, unemployment, interest rates and other financial trends. When investors and analysts begin to discuss bearish trends, the market generally reacts negatively because the public believes it is destined for a downturn. In contrast, when an upcoming financial report is rumored as favorable, the market erupts far in advance of the actual announcement. Understanding the many subtleties of the media's affect on the stock prices is one of the basic prerequisites for long-term success. As strange as it may seem, the common trait among professional traders is they rarely go along with the crowd. That is the primary reason institutional investors are so successful when stock values are ruled by emotion. History suggests the first indication of a potential bull-market correction is a period of euphoria. That occurs when risk is no longer discussed and previous losses are forgotten. As the bullish trend becomes prominent and well-defined, the investing public grows more comfortable with higher price-earnings ratios and historically low yields. The idea that "this time it will be different" becomes an accepted theme. Monetary greed drives undisciplined buyers to purchase stocks near the market top and when the inevitable correction finally occurs, they are unable to accept the truth. Fear eventually pushes the same investors to sell near the market bottom, at the worst possible time. The key is to avoid the impulse to buy near the height of the rally just because the market is up and everyone is talking about their successes. You must fight the fear that would draw you into the stampede. Unfortunately, resisting the impulse to sell amid panic is only half the battle; the even tougher challenge is to buy during this hysteria, when it appears the market is at its worst. Of course, that is indeed the case, and it is the one reason you should be buying while everyone else is selling. When large numbers of traders act the same way at once, a classic climax ensues, bringing opportunities for those who are adept enough to recognize the activity. The central basis for this type of thinking is the requirement to approach the stock market from a contrarian viewpoint; one that opposes the views of the collective majority. Only in this manner can you avoid the tendency to react emotionally in the heat of the moment rather than using a sound and sensible investment method based on proven strategies. 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 ARBA 5.82 5.64 JUL 5.00 0.25 *$ 0.25 30.9% VION 8.82 7.58 JUL 7.50 0.50 *$ 0.50 26.7% AMZN 15.27 16.98 JUL 12.50 0.25 *$ 0.25 15.1% DLTR 31.27 31.90 JUL 30.00 0.75 *$ 0.75 13.6% PPD 19.66 18.30 JUL 15.00 0.50 *$ 0.50 12.3% CBST 34.50 36.03 JUL 30.00 1.35 *$ 1.35 11.0% MDCC 22.61 20.50 JUL 17.50 0.80 *$ 0.80 10.9% MCHP 33.43 33.49 JUL 30.00 0.80 *$ 0.80 10.8% ANAD 23.00 20.94 JUL 17.50 0.35 *$ 0.35 10.2% ALXN 24.00 21.20 JUL 20.00 0.40 *$ 0.40 9.7% CTXS 31.00 33.53 JUL 27.50 0.85 *$ 0.85 9.5% ACTN 22.50 22.54 JUL 20.00 0.95 *$ 0.95 9.2% KSWS 26.10 28.32 JUL 25.00 0.40 *$ 0.40 8.9% EXBD 38.57 37.80 JUL 35.00 1.05 *$ 1.05 8.8% DMRC 22.95 26.59 JUL 20.00 0.70 *$ 0.70 8.8% UIS 12.94 13.73 JUL 12.50 0.65 *$ 0.65 8.7% ALKS 34.65 30.34 JUL 30.00 1.00 *$ 1.00 8.5% DMRC 18.06 26.59 JUL 15.00 0.65 *$ 0.65 8.4% ISIL 36.40 32.00 JUL 30.00 0.50 *$ 0.50 8.4% CSTR 22.25 23.36 JUL 20.00 0.40 *$ 0.40 8.2% WEBX 26.30 22.47 JUL 17.50 0.40 *$ 0.40 7.7% SCIO 27.03 20.47 JUL 20.00 0.60 *$ 0.60 7.2% PXLW 30.66 24.68 JUL 22.50 0.65 *$ 0.65 6.9% NSM 26.91 28.01 JUL 22.50 0.55 *$ 0.55 6.9% SLVN 22.14 26.39 JUL 20.00 0.45 *$ 0.45 6.8% NKE 44.55 45.13 JUL 40.00 0.85 *$ 0.85 6.5% LPNT 39.70 42.89 JUL 35.00 0.70 *$ 0.70 6.4% HCR 27.20 31.90 JUL 25.00 0.65 *$ 0.65 6.1% GNSS 33.49 32.50 JUL 25.00 0.60 *$ 0.60 6.0% AVGN 21.25 18.15 JUL 15.00 0.45 *$ 0.45 5.9% PRHC 30.87 36.58 JUL 25.00 0.40 *$ 0.40 5.1% PLUG 20.25 18.55 AUG 15.00 0.70 *$ 0.70 10.7% ZRAN 32.97 33.59 AUG 25.00 0.60 *$ 0.60 6.0% PCL 28.49 28.55 AUG 25.00 0.60 *$ 0.60 5.1% *$ = Stock price is above the sold striking price. Comments: Thursday's surprise rally provided a much-needed boost in a number of technology issues but the pharmaceutical group did not benefit from the renewed buying pressure. Most of the current stocks on our watch-list are in that market segment and only a few of them are performing well. Amylin Pharma (NASDAQ:AMLN) dropped below our cost basis on Wednesday and since we listed it as an early exit candidate last week, it will now be officially closed in the play summary. Alkermes (NASDAQ:ALKS) and Scios (NASDAQ:SCIO) are also treading water and any failure to recover from the recent selling pressure should be seen as a potential exit signal. Pixelworks (NASDAQ:PXLW) was hammered in the recent technology sell-off, but it rebounded on Friday after a string of losing sessions. With a cost basis near $22.00, it may be best to close the position on any future rally. The company reports earnings next week and although they have a history of beating revenue estimates by 10%, the market environment may limit any potential for bullish activity. Intersil Holding (NASDAQ:ISIL) traded in a range over the past few days and remains at a key moment. We will watch the issue closely for signs of further selling pressure. Positions Closed: MRV Communications (NASDAQ:MRVC), Intermedia Communications (NASDAQ:ICIX); which are both currently positive, Maxitrone (NASDAQ:MONE) and Amylin Pharmaceuticals (NASDAQ:AMLN). 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 AHAA 33.47 AUG 25.00 GAQ TE 0.55 207 24.45 35 6.6% AMZN 16.98 AUG 12.50 ZQN TQ 0.50 2799 12.00 35 11.2% APCS 16.93 AUG 15.00 CUT TC 0.55 0 14.45 35 8.9% AREM 17.75 AUG 12.50 UKM TV 0.70 266 11.80 35 14.3% CTXS 33.53 AUG 25.00 XSQ TE 0.45 88 24.55 35 5.5% ICST 18.54 AUG 15.00 IUY TC 0.35 24 14.65 35 7.2% NMTC 23.00 AUG 17.50 QEK TW 0.55 15 16.95 35 9.3% NTIQ 34.14 AUG 25.00 CQT TE 0.65 115 24.35 35 7.6% 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 AREM 17.75 AUG 12.50 UKM TV 0.70 266 11.80 35 14.3% AMZN 16.98 AUG 12.50 ZQN TQ 0.50 2799 12.00 35 11.2% NMTC 23.00 AUG 17.50 QEK TW 0.55 15 16.95 35 9.3% APCS 16.93 AUG 15.00 CUT TC 0.55 0 14.45 35 8.9% NTIQ 34.14 AUG 25.00 CQT TE 0.65 115 24.35 35 7.6% ICST 18.54 AUG 15.00 IUY TC 0.35 24 14.65 35 7.2% AHAA 33.47 AUG 25.00 GAQ TE 0.55 207 24.45 35 6.6% CTXS 33.53 AUG 25.00 XSQ TE 0.45 88 24.55 35 5.5% 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). ***** AHAA - Alpha Industries $33.47 *** Breakout! *** Alpha Industries (NASDAQ:AHAA) designs, develops, manufactures and markets proprietary radio frequency, microwave frequency and millimeter wave frequency integrated circuits and discrete semiconductors for wireless voice and data and broadband communications. Their Wireless Semiconductor Products Group supplies gallium arsenide integrated circuits and discrete semiconductors in high volume for wireless telephone handsets and wireless data applications. The Ceramic Products Group uses electrical ceramic and ferrite technologies to supply resonators and filters. The Application Specific Products Group supplies radio frequency, microwave and millimeter wave frequency GaAs integrated circuits, and discrete semiconductors and components for the broadband and satellite communications markets. Alpha recently announced a partnership with SAW filter and passive component supplier Epcos and the companies intend to develop and market Switch & Filter modules for handsets. The agreement could help AHAA increase its market share in European countries and should positively affect the company's bottom line in the coming quarters. Earnings are due July 18. AUG 25.00 GAQ TE LB=0.55 OI=207 CB=24.45 DE=35 TY=6.6% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=AHAA ***** AMZN - Amazon.com $16.98 *** Own This One! *** Amazon.com (NASDAQ:AMZN) is a web-site where customers can find and discover anything they may want to buy online. The web-site lists millions of unique items in categories such as books, music, DVDs, videos, consumer electronics, toys, camera and photo items, software, computer and video games, tools and hardware, lawn and patio items, kitchen products, and wireless products. Through its Amazon Marketplace, Auctions and zShops services, any business or individual can sell virtually anything to 30 million cumulative customers, and with Amazon.com Payments, sellers can accept credit card transactions. The company also operates four internationally focused web-sites and the Internet Movie Database, a comprehensive source of information on movies and entertainment titles, and cast and crewmembers. Shares of rallied in late June after an analyst said the online retail giant's recent streamlining would help it exceed revenue and per-share loss estimates for its second quarter. A popular Bear Stearns analyst said he expected Amazon to announce revenues of more than $700 million, well ahead of the $678 million that Wall Street expects. This position offers a low-risk entry point in the issue. AUG 12.50 ZQN TQ LB=0.50 OI=2799 CB=12.00 DE=35 TY=11.2% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=AMZN ***** APCS - Alamosa Holdings $16.93 *** On The Move! *** Alamosa Holdings (NASDAQ:APCS) is a holding company, and through its many subsidiaries, provides wireless personal communication services (PCS) in the Southwestern, Northwestern and Midwestern United States. The company is a network partner of Sprint PCS, and through affiliates, provides wireless services in more than 4,000 cities and communities across the United States. Alamosa offers products and services throughout its territories under the Sprint and Sprint PCS brand names, and its services are designed to mirror the service offerings of Sprint and to integrate with the Sprint PCS network. First Union Securities recently issued a "buy" rating on the company's shares, indicating that the second quarter looks to be in good shape. Analysts are comfortable with the current Q2 2001 estimates and traders who want to own a solid company in the wireless communications group should consider this position. Alamosa is scheduled to report Q2 results on August 8. AUG 15.00 CUT TC LB=0.55 OI=0 CB=14.45 DE=35 TY=8.9% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=APCS ***** AREM - Aremissoft $17.75 *** Revenge Play? *** Aremissoft (NASDAQ:AREM) develops, sells, implements and supports enterprise-wide software applications, primarily for organizations in the manufacturing, hospitality, healthcare and construction industries. The company's suite of Internet-enabled products is designed to allow customers to manage and execute mission-critical functions within their organization such as accounting, purchasing, manufacturing, customer service, sales and marketing. The design of its products enables the company to provide customers with a cost-effective scalable solution that can be easily implemented. Those of you who are familiar with AREM may remember that we listed the company as a bullish candidate back in May, only to watch the issue tumble on rumors they had misreported some software contract specifications. Now the company has filed a major lawsuit against online financial news site TheStreet.com and several hedge-fund management firms it said had conspired to drive down AREM's stock price. The legal action follows a series of articles by TheStreet that called into question the value of contracts AremisSoft had signed to supply its software to various government and health-care agencies in Bulgaria. This position is for "speculators only" and due diligence is mandatory. AUG 12.50 UKM TV LB=0.70 OI=266 CB=11.80 DE=35 TY=14.3% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=AREM ***** CTXS - Citrix Systems $33.53 *** Bracing For A Rally? *** Citrix Systems (NASDAQ:CTXS) develops, markets, sells and supports comprehensive application delivery and management software that enables the effective and efficient enterprise-wide deployment and management of applications, including those designed for Microsoft Windows operating systems and UNIX Operating Systems. Their unique products operate by executing the applications on a multi-user Windows NT, Windows 2000 or UNIX server and provide users access to the server from a variety of client platforms through the ICA protocol. The company's primary market for its products is large and medium-sized enterprises that require the ability to securely deploy, manage and access business applications across the extended enterprise. Credit Suisse First Boston recently raised its rating on the software maker to a "buy" and lifted its profit estimate for fiscal year 2002 to $0.92 a share. Separately, Merrill Lynch also started coverage on the company with an intermediate and long term "accumulate" rating and the renewed buying pressure in hi-tech stocks has helped the issue move to the top of a 6-month trading range. Investors who are interested in owning the issue can use this position to establish a favorable cost basis in the stock. Target a higher premium initially to allow for any consolidation. AUG 25.00 XSQ TE LB=0.45 OI=88 CB=24.55 DE=35 TY=5.5% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=CTXS ***** ICST - Integrated Circuit Systems $18.54 *** Technicals Only! *** Integrated Circuit Systems (NASDAQ:ICST) was initially engaged in designing and marketing custom application specific integrated circuits (ASICs) for various industrial customers. In particular, the company focused on designing ASICs, which combined both analog and digital, or mixed-signal, technology. By 1988, the company had adopted a strategy of developing proprietary integrated circuits to capitalize on its complex mixed-signal design technology and pioneered the market for frequency timing generators or silicon timing devices which provide the signals or "clocks" necessary to synchronize high performance electronic systems. More recently, the company has extended into communications, which develops high performance clocking solutions supporting networking, telecom, workstation and server applications. The long-term basing pattern in this issue provides a favorable situation in which to speculate on the company's future. Quarterly earnings are due August 6. AUG 15.00 IUY TC LB=0.35 OI=24 CB=14.65 DE=35 TY=7.2% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=ICST ***** NMTC - Numerical Technologies $23.00 *** Solid Earnings! *** Numerical Technologies (NASDAQ:NMTC) is a commercial provider of proprietary technologies and software products that enable the design and manufacture of sub-wavelength semiconductors. The company offers a comprehensive solution that enables the basic production of smaller, faster and cheaper semiconductors using existing equipment. This solution enables its customers and industry partners to realize increased return-on-investment, and deliver new high-performance semiconductors more quickly. The company's patented phase-shifting technology, combined with its proprietary optical proximity correction and process modeling technologies form the foundation of its sub-wavelength solution. NMTC recently announced record revenues and profitability for the second quarter of 2001. Revenues were amazing at $11 million, an increase of 147% compared with the second quarter of last year and an increase of 13% over the previous quarter. This is the sixth consecutive quarter that NMTC has exceeded revenue and earnings expectations and they see strong growth in the demand for their core phase-shifting technology in the future. AUG 17.50 QEK TW LB=0.55 OI=15 CB=16.95 DE=35 TY=9.3% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=NMTC ***** NTIQ - NetIq $34.14 *** New Trading Range? *** NetIQ (NASDAQ:NTIQ) is a provider of eBusiness infrastructures management software that enables organizations to optimize the performance and availability of Windows NT and Windows 2000-based systems and applications. NetIQ's Administration, Operations and Network Performance Management product lines reduce the cost of operations and increase the security, performance and general availability of eBusiness applications, directories, servers and networks. NetIQ recently announced that it has combined security products from NetIQ and WebTrends to provide a unique management solution covering real-time security incident management, security event correlation, host-based intrusion detection, security policy management, vulnerability assessment, firewall security reporting, user security administration and file security administration. The company's strategy is to provide an end-to-end solution that enables organizations to effectively administer, assess, enforce and protect all aspects of security in their enterprise. Based on the recent activity in the stock, investors are happy with the outlook for the company. Quarterly earnings are due on July 25. AUG 25.00 CQT TE LB=0.65 OI=115 CB=24.35 DE=35 TY=7.6% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=NTIQ ***** ***************** 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 SLAB 22.34 AUG 17.50 QFJ TW 0.6 0 16.90 35 10.3% BRCM 43.04 AUG 30.00 RCQ TF 0.95 3367 29.05 35 8.6% PMCS 30.05 AUG 20.00 SQL TD 0.60 1941 19.40 35 7.9% CRUS 26.06 AUG 20.00 CUQ TD 0.50 213 19.50 35 7.6% INTC 30.19 AUG 27.50 INQ TY 0.90 17299 26.60 35 7.6% AVX 21.15 AUG 20.00 AVX TD 0.65 149 19.35 35 7.1% PLMD 47.65 AUG 30.00 PM TF 0.85 833 29.15 35 7.1% ARNA 33.00 AUG 25.00 UGG TE 0.55 10 24.45 35 6.7% TA 26.95 AUG 22.50 TA TX 0.50 0 22.00 35 6.4% ************************ SPREADS/STRADDLES/COMBOS ************************ ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, July 13, 2001 Bullish momentum from the recent rally carried the major averages higher today as investors began to search for downtrodden issues that will recover in the coming months. Industrial stocks led the upside movement with the Dow Jones industrial average closing 60 points higher at 10,539. The NASDAQ Composite index finished 10 points higher at 2,084. The S&P 500 index closed 7 points higher at 1,215. Trading volume on the NYSE reached 1.10 billion shares, with winners beating losers 17 to 12. Activity on the NASDAQ was relatively light with 1.55 billion shares exchanged, and advances outpacing declines 19 to 16. In the bond market, the U.S. 30-year Treasury rose 12/32, pushing its yield down to 5.62%. Portfolio Activity: Stocks were active this week as broader-market issues plummeted on Tuesday in the wake of numerous profit warnings and then rallied Thursday after positive announcements from Microsoft (NASDAQ:MSFT) and Yahoo! (NASDAQ:YHOO). The bullish activity helped many of our positions in the Spreads Portfolio and only one play suffered from the upside movement. Capital One Financial (NYSE:COF) jumped $5 on Thursday and the abrupt change in character signaled an early exit in the bearish credit-spread position. A profitable closing trade was available on Thursday morning and if you chose to "leg" out of the position, you reaped some significant rewards as the issue continued to rally through Friday's session. One other alternative was a transition to the JUL-$70 Calls (short), but the current momentum will likely propel the issue to a test of that range in the next few weeks. In the calendar spreads section, all of our plays are performing very well and only a significant move in the market will prevent the current positions from profiting. Traders who are participating in the bearish Cisco (NASDAQ:CSCO) time spread enjoyed a great exit opportunity on Tuesday when the technology sell-off occurred, and those who remain bullish on the issue also had a chance to roll into a put-credit position with a small premium. The big winner among this week's new candidates was the Homestore.com (NASDAQ:HOMS) debit straddle. The position offered on Sunday (JUL-$35C/35P) yielded a 100% gain in less than one week. Nokia (NYSE:NOK) was also an active issue and the drop to $17.30 on Tuesday provided a small but favorable, short-term profit in the neutral position. Symantec (NASDAQ:SYMC) and Philip Morris (NYSE:MO) were volatile as well, however they both finished the week near their respective opening prices. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** ALTR - Altera $31.16 *** Reader's Request! *** Altera (NASDAQ:ALTR) designs, manufactures and sells programmable logic devices (PLDs) and associated development tools. PLDs are semiconductor integrated circuits that customers program using a proprietary software, which operate on personal computers and engineering workstations. Altera was one of the first suppliers of complementary metal oxide semiconductor programmable logic devices. Altera offers a broad line of CMOS programmable logic devices that specifically address high-speed, high-density, low- power applications. Its products serve a wide range of markets, including telecommunications, data communications, electronic data processing and industrial applications. One of our readers identified ALTR as a potentially bullish stock, based on the recent technical indications and the upside activity that may occur as the company's earnings date approaches. Here is a simple strategy that can profit from future upward movement in the underlying issue. Altera's quarterly earnings are due July 23. PLAY (conservative - bullish/synthetic position): BUY CALL SEP-40 LTQ-IH OI=16043 A=$1.45 SELL PUT SEP-25 LTQ-UE OI=960 B=$1.25 INITIAL NET DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.75-$1.10 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $750 per contract. http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=ALTR ****************************************************************** FDC - First Data $69.35 *** New Trading Range? *** First Data (NYSE:FDC) is a diversified financial services entity that operates in the four business segments of payment services, merchant services, card issuing services and emerging payments. The payment services segment includes Western Union, Integrated Payment Systems and Orlandi Valuta, and is a provider of non-bank money transfer and payment services to consumers and commercial entities. The merchant services group is comprised of First Data Merchant Services, TeleCheck and First Data Financial Services. The segment provides merchants with credit/debit card transaction processing services. The card issuing services segment, which is represented by First Data Resources, provides a comprehensive line of products and processing and other related services to financial institutions, issuing Visa and MasterCard credit cards and other debit cards. The emerging payments segment is comprised solely of eONE Global. First Data surprised investors last week, reported outstanding revenue and earnings numbers in the second quarter as the company experienced growth opportunities in its core markets. Earnings per share were $0.61, an increase of 17% over second quarter 2000 and the results mark the company's ninth consecutive quarter of double-digit EPS growth. Revenue grew 11% to $1.6 billion and First Data continued to produce strong free cash flow during the quarter, generating almost $300 million after capital expenditures. The CEO noted, "We are extremely pleased with our strong financial performance and continued consistency in the business. We have sustained our profitable growth through persistent international expansion efforts, entry into new adjacent markets, and through sound execution in our core businesses." First Data expects to continue to capitalize effectively on market dynamics, including the shift to electronic payments, growth in outsourcing of payment processing, and rising demand for money transfers. Apparently, investors believe the future is bright for the company as they pushed the issue to an all-time high last week and this position offers a conservative way to profit from the new upward momentum. PLAY (conservative - bullish/credit spread): BUY PUT AUG-60 FDC-TL OI=720 A=$0.35 SELL PUT AUG-65 FDC-TM OI=486 B=$0.95 INITIAL NET CREDIT TARGET=$0.70-$0.75 PROFIT(max)=16% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=FDC ****************************************************************** MHP - McGraw-Hill $65.96 *** Technicals Only! *** McGraw-Hill (NYSE:MHP) serves business, professional and numerous educational markets around the world with information products and services. Key markets include finance, business, education, construction, medical and health, aerospace and defense. As a multimedia publishing and information company, it employs a broad range of media, including books, magazines, newsletters, software, on-line services, CD-ROMs, facsimile and television broadcasting. The company is focused on three markets: Financial Services, Education and Business Information. The company's earnings are due July 24. The media publishing (books) segment has performed very well over the past few months but there are signs the sector is beginning to lose some of its upside momentum. McGraw-Hill is one of the top companies in the industry and it has also benefited from the recent bullish trend but with technology issues beginning to show indications of a recovery, the buying pressure in the industrial stocks may decline in the coming weeks. The current technical trend is "neutral" and with the well-defined resistance at our sold strike price, this position offers reasonable speculation for traders who are bearish on the issue. PLAY (conservative - bearish/credit spread): BUY CALL AUG-75 MHP-HO OI=54 A=$0.25 SELL CALL AUG-70 MHP-HN OI=308 B=$0.80 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% This position was discovered with one of our primary scan/sort techniques; identifying potentially failed rallies on issues with bullish options activity. In this case, the premiums for the (OTM) call options are slightly inflated and the potential for a successful (technical) recovery is significantly affected by the resistance at the sold strike price; a perfect condition for a bearish credit spread. http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=MHP ****************************************************************** - STRADDLES & STRANGLES - ****************************************************************** VRTY - Verity $17.65 *** Probability Play! *** Verity (NASDAQ:VRTY) is involved in powering business portals. These include corporate portals used for sharing information in an enterprise, e-commerce portals for on-line selling, and market exchange portals for business-to-business activities. Verity develops, markets and supports products for corporate Intranets, extranets, corporate portals, online publishers and e-commerce providers, original equipment manufacturers and other independent software vendors. The company's comprehensive and integrated products enable enterprise-wide document indexing, classification, search and retrieval, organization and navigation, personalized dissemination and hybrid online and CD publishing all from the same underlying Verity information index. The company's software has been licensed directly to over 1,200 corporations, government agencies, software developers, information publishers and other e-commerce vendors. This position meets our criteria for a favorable straddle; cheap option premiums, a history of adequate price movement and future events or activities 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 position, it should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - neutral/debit straddle): BUY CALL AUG-17.50 YVQ-HW OI=64 A=$1.95 BUY PUT AUG-17.50 YVQ-TW OI=69 A=$1.75 INITIAL NET DEBIT TARGET=$3.50 TARGET PROFIT=25% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=VRTY ****************************************************************** CWP - Cable & Wireless $16.22 *** Cheap Speculation! *** Cable & Wireless (NYSE:CWP) is a major global telecommunications business focused on the provision of high performance global Internet protocol (IP) and data services to business customers. CWP specializes in providing services to business customers in eight market segments, in 70 countries throughout the world. These segments include Internet service providers; online content providers; smaller businesses; corporates and governments; dot com companies; global enterprises; carriers; and mobile operators. The company's services span traditional voice to the more complex data and IP services, such as web hosting, e-commerce solutions and integrated communications services. One of our readers asked for some speculative debit-strangles on low cost issues and this position appears to fit that description perfectly. CWP has undervalued options as well as the potential to move (high or low) enough to make the play profitable and the stock has a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk of the position. In addition, the company's quarterly earnings are due in mid-August and there is speculation that CWP may soon announce a major acquisition. Traders who believe the stock will experience volatility in the coming weeks should consider this speculative play. PLAY (speculative - neutral/debit strangle): BUY CALL AUG-17.50 CWP-HW OI=61 A=$0.40 BUY PUT AUG-15.00 CWP-TC OI=33 A=$0.60 INITIAL NET DEBIT TARGET=$0.85-$0.95 TARGET PROFIT=50% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=CWP ****************************************************************** *************************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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