The Option Investor Newsletter Wednesday 07-18-2001 Copyright 2001, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/3030_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 07-18-2001 High Low Volume Advance/Decline DJIA 10569.83 - 36.56 10594.54 10480.88 1.03 bln 1326/1760 NASDAQ 2016.17 - 51.15 2056.06 2003.95 1.48 bln 1381/2347 S&P 100 623.06 - 3.85 629.91 617.40 totals 2707/4107 S&P 500 1207.71 - 6.73 1214.44 1198.33 RUS 2000 483.62 - 6.95 490.57 483.62 DJ TRANS 2976.32 - 30.76 3003.97 2953.00 VIX 26.31 + 0.95 26.94 25.89 Put/Call Ratio 0.71 ****************************************************************** Greenspan and Gerstner, Where's the Guidance? When will the economy recover? And how long before corporate profits rebound? These two questions are at the essence of the battle that IS the market. Unfortunately, the earnings releases Wednesday and Greenspan's testimony provided little in the way of clarification, let alone closure. My friend Mr. Hockey tells me that closure is the key to life and, from where I sit, the market hasn't yet reached closure with its 'issues.' The three primary drivers of the supply/demand dynamic in the market are: Inflation, Interest Rates and Earnings. It's that simple. Greenspan addressed each of the aforementioned issues, in one way or another, during his testimony Wednesday morning. "The lack of pricing power reported overwhelmingly by business people underscores the quiescence of inflationary pressures," reported Greenspan. On interest rates, Greespan said that, "Should conditions warrant, [The FOMC] may need to ease further." And on earnings, Greespan offered the following: "Although earnings weakness has been most pronounced for high-tech firms...weakness is evident virtually across the board." In summary, inflation remains benign, the Fed is willing to cut rates again and the economy and corporate profits have yet to turn the corner. Despite the strong housing report and larger than expected rise in the June consumer price index, the bond market advanced in the wake of Greenspance's hints toward further Fed easings. Yields dropped across the board and broke below key support levels, which does not bode all that well for equities in the short-term. The earnings releases from corporate America are not offsetting the pressure from the bond market. The data storage sector was knocked out Wednesday by a double dose of bearishness from Veritas Software (NASDAQ:VRTS) and Emc (NYSE:EMC). Emc reported numbers that met previously lowered estimates, but offered nothing in the way of guidance for the next quarter, which underscores the difficulty in the information technology business. Veritas, on the other hand, offered guidance, but it wasn't good. The company reported late Wednesday, and guided revenues lower by about 30%. The combination of Emc's and Vertias' dismal outlooks pressured Nasdaq issues, ranging from QLogic (NASDAQ:QLGC) and Emulex (NASDAQ:EMLX) to Brocade Communications (NASDAQ:BRCD). Veritas is one of the ten largest components of the Nasdaq- 100 (NDX.X) and the stock's 26 percent loss most certainly weighed on the Nasdaq. But the Composite (COMPX) managed to bounce from the 2000 level yet again Wednesday afternoon. It should breakdown below that level Thursday morning in the wake of a less than inspiring tech earnings report Wednesday evening. But traders should keep a close eye on the 1975 support level. After the bell, Big Blue (NYSE:IBM) reported earnings that met estimates, but its sales came in a little light. CEO, Lou Gerstner, offered the following guidance: "[IBM] saw ongoing weakness in PCs and hard disk drives and continued to be hurt by the negative effects of currency translations." In addition, Gerstner said, "We expect that these factors will continue to work against us in the second half of the year." IBM is one of the last tech stocks standing, so its report after the bell Wednesday was highly anticipated and should impact trading over the short-term. It wasn't the worst report, and could've been worse. At the same time, however, it wasn't the type of report that the bulls were hoping for. Shares of Big Blue shed $2 in after hours. Watch IBM if it approaches $100 Thursday or Friday. A breakdown below that level for Big Blue might represent a psychological defeat for the bulls. IBM is one of the largest components of the S&P 500 (SPX.X). If IBM gaps measurably lower Thursday, traders might watch for the S&P to fall below its critical support at 1200, from which it bounced yet again Wednesday. Building momentum to the downside in the S&P should lead the index below its relative lows around the 1170 level and offer traders profits on the short side. Among the other 'big' earnings releases after the bell, aside from Big Blue, included Siebel Systems (NASDAQ:SEBL). The CRM software king reported earnings that beat estimates, but lowered its next quarter revenue guidance by about 15 percent. Its shares shed about $3 in the after hours session. Broadcom (NASDAQ:BRCM) reported a loss that was slightly less than expected, but its CEO reaffirmed his opinion that business was showing signs of bottoming and stabilization. Shares of Broadcom added about $2 in the after hours session following its CEO's comments. Applied Micro Circuits (NASDAQ:AMCC) met lowered estimates of a 5 cent loss, but mentioned the magical word on its conference call. That word, of course, is 'bottom.' Its shares added about $1 in the after hours session. Keep in mind that Applied Micro is a supplier to Cisco (NASDAQ:CSCO), which was slightly higher in the after hours session. There exists the potential for the networking group to rally from its oversold condition on the heels of Broadcom and Applied Micro, so keep that complex in mind when look for trades in the morning. Another possible trade worth monitoring in the short-term is the potential for the multinational, cyclical stocks to get a pop if the U.S. dollar continues to weaken. The dollar has held incredibly strong during the recent global economic slowdown. And it has wreaked havoc on large exporters, such as IBM, and especially the cyclicals. In fact, the cyclicals saw a nice pop Wednesday so bullish traders might keep an eye on the dollar and its impact on that group. And how about the Oil Service Sector Index (OSX.X)? How low can it go? As for broad market strategy, I'm still favoring buying/covering near support and selling/shorting near resistance. The strategy has been working in the QQQs (AMEX:QQQ) rather well, and with some regularity. The range between roughly $41.25 and $43.50 has been working for about the past month and a half. There have been outliers in that range, however, so the strategy hasn't been perfect. But, the breakdown in the bond yields (breakout in bond prices) caught my eye Wednesday and has me thinking the downside may be more favorable in equities over the next three to five trading days. That doesn't rule out the possibility of an advance over the short-term, however. I could foresee a gap down Thursday morning, followed by a sharp advance just for the sake of confounding market participants, with the catalyst short covering induced buying from the 'bottom' talk by some of the chip companies Wednesday evening. This market is one of frustration for momentum type traders. But for those who favor trading with the trend, I think trading breakdowns below support levels over breakouts above resistance is prudent. That's because the fear factor yields greater profits faster, at least in this market. Eric Utley Editor www.OptionInvestor.com **************** MARKET SENTIMENT **************** Win, Place, or Show By Jeffrey Canavan I believe Alan Greenspan sums up the current market sentiment. "The period of sub par economic growth...is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated." Technically the trend for most sectors is down, but as Al says, "The rate of deterioration is clearly slowing." I don't know if I would say the decline in stocks is clearly slowing, but as long as support levels continue to hold, bulls can be optimistic. One blow to bullish optimism today was the flight to bonds. With the hint of more rate cuts, investors scooped on bonds, and sent yields below some key support levels. It also made bank and gold stocks the smart bet today. Some of the buying in gold can be attributed to a pending strike in South Africa, but nevertheless, gold won the horse race today, up 3.74%. Drugs and healthcare stocks placed (came in second for those of you who don't bet on horses), gaining over 3% today. Retail and chemical stocks showed, while semiconductors and networking brought up the rear. Internet and software stocks pulled up lame, and couldn't even finish the race. According to their trainer, they were down over 6% due to a bad case of earnings. Ebay only had symptoms of bad earnings, dropping 96 cents today, and we won't know the full prognosis until the results are back from the lab tomorrow after the bell. Earnings continue to be the focus, and if I could fly to Vegas and place a bet, I would only bet on technology to show - meet earnings but lower guidance. What horse is going to win the next furlong? Tough call, but odds favor a mudder, a horse that runs well in poor conditions, like say cyclicals. If you bet on a horse, that's gambling. If you bet you can make three spades, that's entertainment. If you bet cotton will go up three points, that's business. See the difference? -Blackie Sherrod *************************Sector Watch**************************** Weekly Daily Overbought Support Resistance Trend Trend Oversold DJIA Bearish Bearish Overbought 10,200 10,600 NASD Bearish Bearish Overbought 1,940 2,125 S&P 500 Bearish Bearish Overbought 1,170 1,240 Rus 2000 Neutral Neutral Overbought 465 500 Semis Bearish Bearish Overbought 525 585 Biotech Bearish Bearish Oversold 490 550 Internet Neutral Bearish Overbought 160 186 Networking Bearish Bearish Overbought 300 365 Software Bearish Bearish Overbought 188 210 Banking Neutral Bullish Overbought 625 670 Retail Neutral Bullish Overbought 850 900 Drugs Bearish Neutral Neutral 385 410 Percent Change Last Last Last Relative Strength 5 Days 10 Days 30 Days vs S&P 500 DJIA - - - Positive NASD 2.2% (5.8%) (9.7%) Neutral S&P 500 2.3% (2.2%) (5.9%) N/A Rus 2000 1.6% (2.7%) (6.4%) Neutral Semis 0.8% (12.0%) (13.2%) Negative Biotech (1.1%) (13.9%) (22.8%) Negative Internet 0.3% (11.8%) (26.8%) Neutral Networking 2.7% (11.6%) (28.1%) Neutral Software (1.5%) (13.3%) (17.7%) Negative Banking 4.3% 0.5% (1.0%) Positive Retail 7.7% 3.6% 0.0% Positive Drugs 3.7% 2.9% (4.3%) Neutral ***************************************************************** *********** OPTIONS 101 *********** AOL-Rest In Peace By Mark Phillips I had originally intended to pen another educational article on the topic of LEAPS covered calls today, but the market had other ideas, especially after AOL issued its earnings report this morning. On the surface, things were looking good as the company beat estimates by 3 cents. But revenues came up short of expectations, prompting investors to extract their pound of flesh from the stock and forcing me to bring my successful AOL trade to a close. So those of you that have been waiting for me to detail how we exit our Covered Call LEAPS play under less than ideal circumstances get their wish this evening. The way we handle exits from our LEAPS Portfolio plays when our stops are triggered, is to wait for the closing price to execute the trade. And that is how it will be reflected when we formally cover the drop this weekend. But the precipitous drop at the open this morning had me closing out my LEAPS Covered Call play shortly after the open, as it was clear there would be no rebound to save me this time. Since I prefer to exit my spread trades one leg at a time (similar to the way I enter them), the first order of business was to close out the short-term call. Most traders will want to either exit the entire position as a spread (if their brokers provide this ability) or leg out as I do, which avoids the situation of being short a naked call after selling the LEAP. So I pulled up the real time quote on my July Call, and found that I could get out for a nickel. If it weren't for the precipitous drop in AOL this morning, I would have been happy to let the call expire worthless on Friday, but I didn't have that luxury. So I bought back the 10 JUL-55 calls (AOO-GK) for a total of $50. Not bad on the CC side of the trade, but then I had to close out the LEAP, and it was painful to have given up some of the accrued gains that had been present a few short weeks ago. As recently as June 28th, my LEAP had been trading as high as $19, and by the time the closing bell rang today, my $40 2003 LEAP was worth just over $13. That's quite a haircut and I was glad I got out when I did. By the time I had live quotes for the LEAPS and had closed out the short-term call, my $40 Jan-2003 LEAP (VAN-AH) had fallen to $14.20. I quickly put in my market order and was more than happy to get filled at $14.00, especially as I watched both AOL and my LEAP continue to decline throughout the market day. So let's review the history of our play. Recall that I entered the long side of the position when AOL began its long rebound on April 4th. Every once in awhile the blind squirrel finds an acorn and this was my acorn, picking AOL very near its low. Anyways, I picked up the Jan-2003 $40 LEAPS for $8.70 and sat back to let the LEAPS appreciate, which they did in quite a hurry. Beginning with the May expiration cycle, I started selling covered calls against my LEAPS, taking in premium in my attempt to move the LEAPS cost basis down to zero. Well, I didn't quite do that well, but after selling the May, June and July calls, I managed to move the cost basis of the LEAPS down to only $5.05 (after taking in a total of $3.70 in call premium and then buying back the July calls this morning for $0.05). So with a cost basis of $5.05, and a closing price of $14.00, I netted $8.95 profit per contract for a 179% profit on the position in about two and a half months. That's not half bad! This is really a good case study of the power of using covered calls in conjunction with our LEAPS. If we had just taken a Buy-and-Hold approach with our AOL LEAP, using the same entry and exit points, our results would have been respectable but certainly not stellar. With a cost basis of $8.70, and a closing price of $14.00, our return would have been $5.30 or 61%. This is only one example, but it paints a clear picture of what can be accomplished by using more active management of our LEAPS plays. Each trader could have found different ways of managing the AOL LEAPS play. One alternative using just the Buy-and-Hold approach would have been to exit the LEAP for approximately $19 in late June, which would have provided a profit of more than $10 or 118%. But our intent here was to detail a LEAPS covered call play from beginning to end, providing a roadmap for traders looking to employ the strategy in their own portfolios. I'm sure there are some unanswered questions, but I think this series should give us a good starting point for discussing the strategy on additional attractive candidates from the LEAPS portfolio in the weeks and months ahead. As always, keep those questions coming. Education is our primary goal here, and with your assistance, we'll continue down that path, following specific examples as those opportunities present themselves. With the growing list of stocks that have been severely beaten down again in recent weeks, the covered call strategy will likely prove quite valuable for those willing to invest the time necessary to employ the strategy in the months ahead. Now that we have brought the AOL example to a close, I'll start focusing on other candidates for this strategy in the weeks ahead. Have a Great Week! Mark Phillips Contact Support ************* NEW CALL PLAY ************* No new calls today ************ NEW PUT PLAY ************ PDII - Professional Detailing $70.00 -3.31 (-5.95 this week) As a provider of sales and marketing services to the pharmaceutical industry, PDII is divided into three operating segments; Contract Sales, Product Sales and Distribution and Marketing Services. The company provides dedicated contract sales services, sales, marketing and distribution services for companies facing portfolio optimization challenges, and commercial launch services for emerging and biotechnology companies to independently launch new brands. PDII also provides marketing research and consulting services, as well as medical education and communication services, through which clients can access continuing medical education and peer-to-peer promotions. Looking for another bearish play? With the continued market weakness, PDII could be just the ticket. After running smack into the $92 resistance level in early July, shares of the Pharmaceutical Services company have been in a sharp downtrend. Bullish traders were hoping a rebound from the mid-June $73 support level would provide an opportunity to recoup some of their recent losses. Alas, it wasn't to be as the stock plunged right through that level on more than double the ADV on Wednesday. Although there was a bit of a late-day bounce from the $68 level, the buying volume was quite weak, which likely portends further weakness in the days ahead. Even a sharp rebound in Pharmaceutical stocks couldn't help the stock and the Point and Figure chart paints a bearish picture too, tracing a descending triple-bottom breakdown as it fell below $75. We need to be careful initiating new positions though, as the daily Stochastics oscillator is buried deep in oversold territory, making the stock ripe for an oversold bounce. That is where we want to strike, targeting new entries on a rebound that rolls over below the $75 resistance level to resume its decline. Entering on further weakness is permissible, but make sure that PDII drops through $68 on heavy volume before taking the plunge. Place stops at $76. BUY PUT AUG-75 PKU-TO OI=30 at $8.20 SL=5.75 BUY PUT AUG-70*PKU-TN OI=12 at $5.10 SL=3.00 Average Daily Volume = 173 K ***************** STOP-LOSS UPDATES ***************** BBY - call Adjust from $65 up to $66 AES - put Adjust from $40 down to $38 CIMA - put Adjust from $66 down to $65 SRNA - put Adjust from $27.50 down to $25 ************* DROPPED CALLS ************* BSYS $60.95 -0.66 (-2.34) Even though the Biotechnology index managed to reclaim the $520 level on Wednesday, BSYS just couldn't hold its ground, falling below our $61 stop at the open. The bulls tried to rally the stock throughout the day, but gave into the bears in the final hour, pushing BSYS down to settle below $61, wiping out most of the intraday gains and forcing us to move it to the drop list tonight. ************ DROPPED PUTS ************ AMGN $60.05 +4.99 (+4.41) All good things must come to an end, and our AMGN play is no exception. While it didn't fall far from where we picked it, it certainly provided some attractive profits for nimble day-traders. With the Biotech sector apparently solidifying and AMGN rebounding sharply from the $55 level, which was our bearish target, we'll take the violation of our $56 stop as a signal to bring the play to a close. FLR $39.40 +4.10 (-0.58) FLR was due for a bounce given the magnitude of the recent decline, but a 12% rebound was more than we bargained for. Not only that, but the stock ended the day at the high of the day, performing significantly better than the broader market. Despite the fact that volume was weak, we need to honor our $39 stop and discontinue coverage of the play. Needless to say, we never got an entry into the play since we just added it yesterday, so the damage is minimal. ********************** PLAY OF THE DAY - CALL ********************** BBY - Best Buy $68.43 +0.93 (+0.26 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. Most Recent Write-Up BBY is having problems clearing the $69 level, which is somewhat disconcerting because the Retail Sector Index (RLX.X) continues to advance. The under performance on the part of BBY may stem from its recent rally as fund managers rotate out of so-called rich retail shares into the cheaper stocks. To that end, we'll monitor the price action closely in BBY in the coming sessions in light of its lackluster performance relative to the Dow Jones and the Retail Sector Index. If the stock does, however, breakout above the $69 level in conjunction with a rally in the Dow and the Retail Sector Index, bullish traders might look to get long such a move. Comments The Retail Index's (RLX.X) relative strength Wednesday was most impressive. And that of BBY's was no exception. The RLX is on the verge of breaking out above the psychological 900 level in a big way. Bullish traders can look to enter new BBY call plays at current levels early Thursday if the RLX advances above 900. BUY CALL AUG-65 BBY-HM OI= 548 at $6.10 SL=4.00 BUY CALL AUG-70*BBY-HN OI= 975 at $3.30 SL=1.75 BUY CALL AUG-75 BBY-HO OI= 439 at $1.40 SL=0.75 BUY CALL SEP-70 BBY-IN OI=4850 at $5.30 SL=3.50 BUY CALL DEC-75 BBY-LO OI= 292 at $6.90 SL=5.00 Average Daily Volume = 2.66 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** No Indication of "Irrational Exuberance" in Greenspan's Outlook The stock market retreated today as traders were hit with another barrage of profit warnings and comments from Federal Reserve chief Alan Greenspan suggested the economy may not recover as quickly as expected. Technology issues slumped amid dismal revenue outlooks from Apple (NASDAQ:AAPL) and Veritas Software (NASDAQ:VRTS) while blue-chip stocks suffered in the wake of a mediocre profit report from J.P. Morgan Chase (NYSE:JPM). Investors were also troubled by Wednesday's economic news, which included better-than-expected data on retail inflation. The June consumer price index rose 0.2%, slightly higher than the 0.1% that had been expected and analysts said the report confirms the belief that goods prices may not fall fast enough to offset the upward pressure in services. Greenspan was also less than optimistic in his semi-annual testimony before Congress on the state of the economy. The Fed chair said further rate cuts may be needed, noting that the period of weakness for the economy is not yet over. He also unveiled the new forecasts for growth and employment and left the door open for future rate cuts, should conditions require additional stimulus. The next Fed meeting takes place on August 21, with most economists projecting another 25-basis-point reduction. The hi-tech group put the most pressure on the averages, with computer software and hardware and Internet issues among the biggest losers. Chip stocks backpedaled with Intel (NASDAQ:INTC) leading the slide after posting a second quarter profit that was 76% below year-ago levels. Intel said it also expects to incur a $100 million loss in the upcoming quarter due to the company's equity investments. Data storage issues were also hit hard in the wake of EMC's (NYSE:EMC) profit announcement. EMC posted a profit that was 75% below last year's results and the company said in its conference call that the third quarter will be more difficult than the second. They also failed to give specific financial forecasts due to the uncertainty in the economy. On the Dow, American Express (NYSE:AXP), General Motors (NYSE:GM), Disney (NYSE:DIS), Coca-Cola (NYSE:KO) and International Business Machines (NYSE:IBM) saw renewed selling pressure while some buying interest was apparent in Alcoa (NYSE:AA), Boeing (NYSE:BA), International Paper (NYSE:IP), Merck (NYSE:MRK) and Philip Morris (NYSE:MO). The broader market experienced declines in oil, oil service, financial and transportation shares but select drug, biotechnology, gold and consumer products stocks moved higher. Summary of Previous Candidates: Covered Calls: (Margin not used in calculations) Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield MSCC AUG 50 46.00 64.65 $4.00 7.1% Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield BRCM JUL 30 29.50 39.00 $0.50 20.7% SEBL JUL 30 29.55 37.64 $0.45 17.4% MSCC JUL 45 44.65 64.65 $0.35 9.7% HON JUL 33 31.50 36.50 $1.00 8.7% THQI JUL 50 49.60 56.88 $0.40 8.7% EBAY JUL 55 53.90 66.54 $1.10 7.4% TARO JUL 70 69.00 90.09 $1.00 6.6% MVSN JUL 55 54.15 70.19 $0.85 6.2% LXK JUL 55 54.20 59.95 $0.80 5.7% CEPH JUL 60 59.20 62.20 $0.80 5.6% Positions Closed: HGSI, MANU, PDLI, and ADVS, which is the lone Murphy's Law play this month! Sell Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield MU JUL 33 31.75 38.25 $0.75 6.9% Trend-line! MU JUL 50 50.70 38.25 $0.70 6.5% Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield FCEL JUL 43 43.30 21.50 $0.80 8.8% Adj 2-1 split ENZN JUL 75 75.80 55.15 $0.80 6.2% DIGL JUL 60 60.65 25.40 $0.65 5.9% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status LNCR $32.70 $30.79 JUL25p/27.5p $0.30 $27.20 $0.30 ALERT! * THC $48.50 $55.75 JUL40p/45P $0.60 $44.40 $0.60 Open JPM $46.84 $43.58 JUL55c/50c $0.75 $50.75 $0.75 Open RJR $56.46 $51.33 JUL65c/60c $0.65 $60.65 $0.65 Open TM $66.50 $67.76 JUL75c/70c $0.65 $70.65 $0.65 Open * ELN $65.00 $60.56 JUL55p/60p $0.65 $59.35 $0.65 ALERT! LNCR $33.38 $30.79 JUL27.5p/30p $0.38 $29.62 $0.38 ALERT * RETK $42.70 $33.23 JUL30p/35p $0.60 $34.40 -$1.17 Closed! IBM $113.09 $104.28 JUL130c/125c $0.70 $125.70 $0.70 Open MEDI $45.17 $42.52 JUL35p/40p $0.60 $39.40 $0.60 Open APC $55.39 $48.35 JUL65c/60c $0.60 $60.60 $0.60 Open HMC $85.58 $84.44 JUL95c/90c $1.00 $91.00 $1.00 ALERT! FISV $61.61 $60.04 JUL55p/60p $0.65 $59.35 $0.65 ALERT! IFIN $74.33 $77.91 JUL65p/70p $0.70 $69.30 $0.70 Open * LNCR: Adjusted for a 2-1 split and looking weak! * TM: Back at the bottom of its trading range! Positions Closed: GE JUL45p/47.5p Debit Straddles: Stock Position Debit Target Value Gain Status IDPH JUL70c/70p $11.00 $13.75 $13.75+ $3.75+ Closed DST AUG55c/55p $5.75 $7.19 $6.45 $0.70 Open New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations *************** BRL - Barr Laboratories $79.50 *** Lilly Appeal Denied! *** Barr Laboratories (NYSE:BRL) is a specialty pharmaceutical company engaged in the development, manufacture and marketing of generic and proprietary prescription pharmaceuticals. The majority of the company's products represent generic forms of brand pharmaceutical products. Among the company's key generic products are Tamoxifen Citrate, Hydroxyurea, Methotrexate and Megestrol Acetate for use in oncology, Warfarin Sodium and Dipyridamole for cardiovascular functions, Medroxyprogesterone Acetate, Danazol, Estradiol and Estropipate for female healthcare and Naltrexone, Meperidine, Oxy-APAP, Diazepam and Trazodone for other functions. Barr shares received a big boost today after the U. S. Court of Appeals, Federal Circuit in Washington, D.C., announced it has denied Eli Lilly's request for a re-hearing of the May 30, 2001 decision invalidating the patent protecting Eli Lilly's ProzacŪ anti-depressant that was due to expire in December 2003. The denial of the request for a re-hearing allows for the issuance of a mandate by the Court of Appeals directing the issue of a final order invalidating the Prozac patent. Based on the news, Barr officials say they expect to launch their generic product after the District Court issues the final order in the next few weeks. Barr's Chairman and CEO said the decision paves the way for the launch of a generic Prozac, resulting in competition for Lilly's product nearly three years earlier than would have occurred, had Barr not successfully challenged the patents protecting Prozac. In addition, generic drug companies continue to enjoy a favorable industry environment and valuations in the sector are reasonable. Over the next few years, patents on a number of brand-name drugs will expire and the generic drug segment is expected to realize significant upside earnings growth. Traders who agree with a positive outlook for the industry and BRL can speculate on its short-term movement with the conservative "target" position. BRL - Barr Laboratories $79.50 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put AUG 65 BRL TM 688 0.90 64.10 5.0% *** Sell Put AUG 70 BRL TN 555 1.85 68.15 7.8% Sell Put AUG 75 BRL TO 120 3.50 71.50 11.5% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=BRL ***** GMST - Gemstar-TV Guide $46.25 *** New Trading Range? *** Gemstar-TV Guide (NASDAQ:GMST) is a global media and technology company focused on developing, licensing and providing products and services that simplify and enhance consumer entertainment. The current company was formed last year through the merger of Gemstar International Group Limited, a technology company focused on consumer entertainment, and TV Guide, a provider of television information and guidance in the U.S. Many of their products have a special emphasis on television-oriented technologies and services, in particular, program guidance products including those marketed under the TV Guide name. Shares of GMST have been attracting attention in recent sessions and traders say much of the interest is due to a bullish report by Deutsche Banc Alex. Brown. Last week, analysts at the popular investment bank initiated new coverage of Gemstar-TV Guide with a "strong buy" rating and a year-end target of $60. The research note suggested that "Gemstar is at the cusp of exploiting its dominant position in the interactive television guide business, while driving the development of exciting new opportunities in e-books and TV Games Network." DBAB expects these businesses to deliver 50% compound annual EBITDA growth for the company over the next three years and the bullish rating on GMST is also supported by some key investment attributes including: a highly scalable and profitable business model, high barriers for competitors to market entry, a leveraged sales platform, long-standing distribution and technology relationships, and strong management and sponsorships. The recent bullish activity suggests additional upside movement will occur in the future and traders can speculate on that outcome with these positions. GMST - Gemstar-TV Guide $46.25 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put AUG 35 QLF TG 5027 0.60 34.40 6.2% *** Sell Put AUG 40 QLF TH 1365 1.60 38.40 11.7% Sell Put AUG 45 QLF TI 705 3.30 41.70 16.3% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=GMST ***** PLMD - PolyMedica $48.43 *** Big Premiums! *** PolyMedica (NASDAQ:PLMD) is a national medical products and services company best known through its Liberty brand name. The company serves the senior chronic disease marketplace and focuses on Compliance Management using its Technology Platform to help seniors manage their disease more effectively. Liberty pioneered National Direct to Consumer Advertising to seniors with chronic diseases. We originally found this position while scanning for charts of bullish issues with favorable option premiums. Unfortunately, there is little reason to explain the strength of the stock, considering the bearish market conditions and the inflated option premiums suggest there is potential for a large downside move. However, based on the current price of the underlying issue and its recent technical history, these positions offer reasonable speculation for traders who are bullish on the drug manufacturing industry. The company's quarterly earnings are expected on July 24, 2001. PLMD - PolyMedica $48.43 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put AUG 30 PM TF 843 0.60 29.40 5.9% *** Sell Put AUG 35 PM TG 5508 1.30 33.70 12.0% Sell Put AUG 40 PM TH 454 2.00 38.00 15.7% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=PLMD ***** STJ - Saint Jude Medical $69.94 *** On The Move! *** St. Jude Medical (NYSE:STJ) together with its subsidiaries, is engaged in the development, manufacturing and distribution of medical technology products for the cardiac rhythm management, cardiology and vascular access, and cardiac surgery markets. St. Jude has two segments, Cardiac Rhythm Management and Cardiac Surgery. The CRM segment, which includes the results from the company's Cardiac Rhythm Management Division and Daig Division, develops, manufactures and sells bradycardia pulse generator and tachycardia implantable cardioverter defibrillator (ICD) systems, electrophysiology and interventional cardiology catheters and vascular closure devices. The CS segment develops, manufactures and markets mechanical and tissue heart valves and valve repair products, and suture-free devices to facilitate coronary artery bypass graft anastomoses. Medical device maker St. Jude Medical announced today that second quarter profits rose 25%, led by strong sales of their implantable cardiac defibrillators, and the company also forecast continued strength in some key markets for cardiac devices. The maker of ICDs, pacemakers, artificial heart valves and other unique cardiac devices said its second-quarter profits rose to $48.8 million, or $0.55 per diluted share. In the year-earlier period it earned $39 million, or $0.46 per share. St. Jude said its second quarter net sales rose almost 12% to $336 million and sales of its Angio-Seal vascular closure devices jumped 52% over the year-earlier period, while pacemaker sales rose 7% from a year ago. The CEO said sales of these products should remain strong through the year and in a conference call with analysts, he also affirmed the upper end of consensus earnings per share estimates for the third quarter and full year, as the company is expected to gain from many new product launches slated for the second half of 2001. We favor the bullish technical outlook for the issue and traders who agree with that opinion can speculate on the future movement of the stock with this conservative position. STJ - Saint Jude Medical $69.94 PLAY (conservative - bullish/credit spread): BUY PUT AUG-60 STJ-TL OI=0 A=$0.30 SELL PUT AUG-65 STJ-TM OI=34 B=$0.75 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=STJ *************** Neutral Plays - Straddles & Strangles *************** IMCL - Imclone $45.11 *** Premium Selling! *** ImClone Systems (NASADAQ:IMCL) is a biopharmaceutical company that is developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company focuses on three strategies for treating cancer, growth factor blockers, cancer vaccines and angio-genesis inhibitors. The company's lead product candidate, IMC-C225, is a unique therapeutic monoclonal antibody that inhibits stimulation of a receptor for growth factors upon which certain solid tumors depend in order to grow. IMC-C225 has been shown in several Phase I/II trials to have acceptable safety, to be well tolerated and, when administered with radiation therapy or chemotherapy, to enhance tumor reduction. Even with the recent decline in the implied volatility in options, readers have been asking for additional "premium selling" plays. While there are relatively few candidates for this strategy, IMCL appears to be one of the more theoretically favorable positions and based on current the option pricing and the underlying stock's technical history, the issue meets our basic criteria for a credit strangle. The position has higher-than-average option premiums, a relatively well-defined trading range and a high probability of remaining between the sold (short) strike prices. Traders who are interested in selling premium for credit should consider this issue. IMCL - Imclone $45.11 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put AUG 35 QCI TG 424 1.15 33.85 11.5% *** Sell Call AUG 60 QCI HL 1731 0.80 60.80 8.3% *** - or - Sell Put AUG 40 QCI TH 5579 2.45 37.55 16.1% Sell Call AUG 55 QCI HK 2238 1.60 56.60 15.3% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=IMCL *************** BEARISH PLAYS - Naked Calls & Combinations *************** BBOX - Black Box $54.21 *** Elevator Going Down! *** Black Box (NASDAQ:BBOX) is a worldwide provider of technical network services and related products to businesses of all sizes. Through its Black Box Catalog, available in nine languages, and its Black Box On-Line Website, the company offers more than 40,000 standard networking products and also designs and builds thousands of custom products every year. Black Box offers technical support services by telephone in 132 countries, 24 hours a day, seven days a week, and fee-based technical services are provided on-site in the United States and Western Europe. Black Box operates on five continents and is headquartered near Pittsburgh, Pennsylvania. This play is based on the current price or trading range of the underlying issue and the recent technical history or trend. The BBOX price history is bearish and reflects a pronounced negative divergence from an intermediate-period moving average. The recent failed rally in Black Box is quite worrisome as the stock pattern has completed a short-term "triple-top" formation. In addition, the decline occurred on increasing selling pressure and a major support level near $60-$65 was violated. The long-term viewpoint suggests the issue will now move to the bottom of its year-long trading range between $40 and $70. The first line of resistance for any rebound will be the May low near $59-$60. Based on that outlook, it appears the share value has little chance of reaching our target position in the coming month. BBOX - Black Box $54.21 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Call AUG 60 QBX HL 70 2.45 62.45 13.5% Sell Call AUG 65 QBX HM 60 1.25 66.25 10.4% Sell Call AUG 70 QBX HN 21 0.60 70.60 5.3% *** http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=BBOX ***** NVDA - Nvidia $75.89 *** The Trend Comes To An End! *** Nvidia (NAADAQ:NVDA) designs, develops and markets 3D graphics processors, graphics processing units and related software that set the standard for performance, quality and features for every type of personal computer user, from professional workstations to low-cost PCs. The company's 3D graphics processors are used in a wide variety of applications including games, the Internet and industrial design. Its graphics processors were the first to incorporate a 128-bit multi-texturing graphics architecture designed to deliver to users of its products a highly immersive, interactive 3D experience with compelling visual quality, with realistic imagery and motion, stunning effects, and complex object and scene interaction at real-time frame rates. The company sells its products to major OEMs such as Compaq, Dell, Gateway, Hewlett Packard, IBM, micronpc.com, NEC, Packard Bell and Sony and add-in board manufacturers such as ASUStek, Creative Labs, Elsa, Guillemot and Leadtek. Nvidia has finally succumbed to the pressure of the technology industry slump and based on the recent technical indications, the downward move may be substantial. Nvidia has broken a 5-month up-trend which suggests a negative change of character. The long- term stochastics are presenting a "sell" signal and any rebound off the 150-dma will meet resistance near the June low. A 3-month chart depicts a completed "head-n-shoulders" top, which makes it highly improbable that NVDA will find the strength to rally above the current resistance area. We also favor this issue for a bearish-outlook position because the top of the previous trading range defines a clear resistance area near our target strike price. In addition, the company's quarterly earnings announcement is expected in mid-August and with most of the sector leaders reporting mediocre results, it is unlikely that speculation of a positive report will alter the current trend. However, if the price of the stock rebounds through the recent resistance area near $95 on a heavy-volume rally, we will close the play at a small loss or buy the stock to cover our sold options. NVDA - Nvidia $75.89 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Call AUG 85 RVU HQ 360 3.50 88.50 14.3% Sell Call AUG 90 RVU HR 400 2.25 92.25 12.3% Sell Call AUG 95 RVU HS 449 1.40 96.40 8.6% Sell Call AUG 100 RVU HT 287 0.80 100.80 5.1% *** http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=NVDA ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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