The Option Investor Newsletter Sunday 07-22-2001 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/3021_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 7-20 WE 7-13 WE 7-06 WE 6-29 DOW 10576.65 + 37.59 10539.06 +286.38 10252.68 -249.72 -102.19 Nasdaq 2029.37 - 55.42 2084.79 + 80.63 2004.16 -156.38 +125.72 S&P-100 625.59 - 1.26 626.85 + 13.90 612.95 - 19.07 - 4.13 S&P-500 1210.85 - 4.83 1215.68 + 25.09 1190.59 - 33.79 - .97 W5000 11212.37 - 59.55 11271.92 +212.36 11059.56 -347.59 + 94.70 RUT 487.93 - 2.78 490.71 + 7.45 483.26 - 29.38 + 23.99 TRAN 2965.66 + 25.31 2940.35 +191.43 2748.92 - 81.04 +153.47 VIX 24.97 + 1.10 23.87 - 1.10 24.97 + 3.34 - .87 Put/Call .82 .65 .90 .58 ****************************************************************** Tech Wreck Turning Into A Fender Bender? by Jim Brown The giants warned and the market yawned? Despite all the noise and fury attached to the IBM and MSFT warnings the markets did not self destruct. S&P futures down 9 points, Nasdaq futures -50 but traders refused to budge. Gosh, did we actually see a bullish event? A weak sell off on weak volume produced a positive sentiment on the floor. The consensus of opinion was a collective sigh of relief as the Friday drew to a close. Microsoft warned that revenues would fall due to weak global PC sales and the Nasdaq only lost -17 points. Garnter Dataquest says a recent survey showed a -1.9% negative growth in personal computers and the first drop since 1986 and the Nasdaq lost -17. Chipmakers and chip equipment makers warned left and right all week and the semiconductor index finished higher than two weeks ago. Many chip stocks actually gained ground on Friday. Normally this would be a highly positive set of circumstances resulting in a rally as buyers decided that all the bad news is priced into the market. The only flaw in this analysis is the time of year and the continued uncertainty about the economy. Summer earnings just don't normally cause rallies even when they come in better than expected. This is the dog days of summer and many investors are simply not watching the events unfold. They were so frustrated with the spring drop into the April lows they simply closed all their positions until summer is over. The reports from brokers that online trading volume has dropped between 35% and 50% prove this theory. The day trading boom has bust and the markets are going back to a more traditional pattern. The more traditional pattern was not evident in the double option expiration on Friday. Volume was positively anemic and volatility closed at a four day low. Another yawn! This is yet another sign that there is simply a lack of interest in trading until something energizes the markets again. This was a near record week for earnings announcements and they were generally positive yet the Dow only managed a +37 point gain and the Nasdaq a -55 loss. Over 850 companies reported and over 60% of them beat estimates. Only 12% missed estimates. In 1999 or 2000 we would have had a +500 point week. This lack of movement suggests that when earnings are over and there is nothing left to produce daily news on a major scale we could be in trouble. Am I talking out of both sides of my mouth? Yes. The markets are basing just above major support levels of 10550 and 2000. The trading range for the Nasdaq on Friday was less than the range for some stocks on a good day last year. Twenty-six points is a non-event for the Nasdaq on an expiration Friday. An old adage is "never short a dull market" and the market on Friday was definitely dull. The moves during the week with 100 point gap opens in alternating directions is driving traders to drink. The term directionless is definitely appropriate. If we are directionless and resting on strong support then that represents a basing period that we can build on for the next move, normally. There have been no successful penetrations of 2000 since July-11th but there have been a series of lower highs. There is no rush to sell off but nothing is motivating traders to take the index higher. In order to take the Nasdaq higher the Nasdaq big caps need to catch fire. By analyzing the bigcaps we should be able to determine if a bounce to the upside is imminent. Microsoft just warned but even after their warning they will make about $2.5 billion next quarter. Not shabby in a negative growth PC environment. Still news after the bell shows that MSFT may still be too hot too handle for most institutional traders. They asked the appeals court to hold the order sending the case back down to a lower court. They now appear poised to attempt a Supreme Court challenge and that is a suicidal wild card. With the differing views held by the free thinking justices they could as easily get stuffed with a bigger penalty as a smaller one. This could be a settlement ploy but it effectively puts MSFT stock on the sidelines again and we should not expect any major moves here. SUNW beat the street but had nothing positive to say about the future. They said their European business was falling with sales dropping -$200 million in the last quarter. They said they would probably "at least break even" for the current quarter if the economy did not get any worse. Kings X, there is a serious qualifier in that sentence and after the Garnter report today that PC sales were now in a negative growth mode it does not look good for growing earnings for SUNW. They did hold on to .59 of positive gains on Friday but that kind of move is not going to cause the Nasdaq to soar. CSCO CEO John Chambers was interviewed on Thursday night and he refrained from calling a bottom in their sector and also kept from saying anything positive other than CSCO would still be number one when and IF the recovery came. The comments still had a positive tone and succeeded in adding several points to a very negative Nasdaq futures but was only able to garner a +.23 gain during trading on Friday. The most positive thing he said was they had $17 billion in cash and were not afraid to use it if the opportunity arose. Still CSCO is showing no signs of movement and with them not reporting earnings until August they are not likely to move much before then. No help for the Nasdaq here. Intel is seen as gaining ground in the AMD price/share war but at the cost of profit margins. AMD is committed to taking the battle to Intel and in reality they have to in order to survive. When faced with survival companies tend to do things that are not good business or cut prices to cost in order to maintain bookings and personnel. Intel will have to fight this battle in the retail trenches and even though they will be the eventual winner they may bleed a lot of profit getting there. There is a serious top on INTC at $30-31 and until they can breakout of this trap they will not be able to help the Nasdaq. Dell is probably the best positioned to hold up the Nasdaq. The only company with positive PC sales growth according to the Garnter survey was Dell. They are gaining share and according to Michael Dell on Thursday they will meet their lowered earnings estimates in August. No major downside risk other than the sinking economy and dropping PC sales. Dell has resistance at $29 but by being seen as a leader on any recovery they could break that barrier the moment the economy starts looking up. I would rate Dell a possible for Nasdaq help. Compaq announces next week and the odds are good that they will warn about coming quarters. This could be a negative for Dell depending on the language of the warning. ORCL is neutral to positive. The software environment they sell into is less dependent on new PC sales than MSFT. They have said things are looking up and larger orders are being closed. They have been unable to break and hold $20 to the upside since February but keep knocking on that $20 door. I would rate them a neutral until the Nasdaq techs start to move as a group and then they should be a strong performer. The software sector is split and a lead put candidate, CHKP, announces next week. They are so beat up that any good news could rally the sector but more bad news could be contagious. QCOM is the wild card that could actually be the leader out of the summer doldrums. With Nokia saying positive things and new CDMA deals seemingly weekly QCOM appears to be ready to break the $65 barrier and start a new uptrend. Telecoms and cell phone companies may have bottomed and once positive news replaces bad news the entire sector could benefit with QCOM leading the league. On the Internet side YHOO and EBAY have already announced and should continue flat to down as the excitement leaves those stocks and looks for profit elsewhere. AMZN announces on Monday and while the outlook is good the possibility for a negative event is strong. This would indicate that there is no serious Nasdaq help coming soon from the Internet crowd. The chip sector is split. Some chips are trending up while others are falling. Until something energizes this sector or investors decide that all the bad news is priced in, we are not going to get any convincing leadership from here. They are trying to build a bottom but every time a chip stock announces and lowers guidance the buyers simply look the other way. This sector is so beaten up that any positive news could provide the lure for buyers with 6-9 month time horizons to nibble their way into a rally. Fighting the trend TXN will announce next week and Dan Niles with Lehman Brothers thinks they will guide lower, possibility even to a loss. Biotechs would be the best chance for a positive bounce. They are not really techs, the bad news is always there and company not sector specific and there are some biotech stocks showing buying interest today. Since biotechs don't normally have positive earnings any surprise is normally a good surprise. To recap, the bigcaps appear to offer no hope for a Nasdaq rally anytime soon. Chips and Biotechs in general are about the only hope for any gains in the index. There is not a rush to buy or any indications by institutions eager to put money to work. Everyone appears willing to sit and wait for the rate cuts to take effect and summer to be over. There is just not any urgency for institutions to buy. Don't get me wrong. They are buying whenever support levels are hit but they are not chasing stocks above those levels. This basing pattern should keep us out of major trouble but may not provide any fireworks to the upside until September. Still, remember the adage from above, "never short a dull market" because dull markets tend to eventually explode. Once the starters gun fires and a real rally on real volume appears the urge to not be left behind becomes unbearable. Shorts run for cover and longs start high fiving anybody within reach. Greenspan takes center stage again on Tuesday when he gives the same speech to the Senate Banking Committee. Unfortunately they read the Cliff Notes from last weeks version and they will be better prepared to question him on what he really meant and why the rate cuts have not worked. He will get a chance to re-spin anything he said and did not like from last week. Just another chance for a market dip on Greenspeak. I think the lack of serious selling on Friday was bullish but I also think we are locked in a trading range and not likely to bounce much anytime soon. Nasdaq 2100 is the top of the range and provides a solid top. I don't like being the bearer of bad or in this case mediocre news but this is my opinion, right or wrong. Everyone wants a rally but nobody is willing to put up the billions necessary to make it happen. Until then we wait. Turn on the baseball and pass the watermelon. Definitely, enter passively, exit aggressively! Jim Brown Editor ************************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 ************** How do you say "no play" politely? I think this is a great week to sit on the sidelines and simply watch the market and wait for a direction. Every earnings event contains the potential for a gap open (up or down) for everyone in that sector. You know we do not recommend holding over an earnings announcement and that also means other stocks in the same sector. Holding HWP over the CPQ announcement could be dangerous. Holding MU over the TXN announcement could also be a challenge. This makes earnings week very difficult to trade successfully. There are only a few ways to play a directionless market with manic depressive tendencies. Since we pretty well know that companies in the tech sector with earnings this week are likely to move quickly in one direction we can skew our plays to capitalize on the expected direction with insurance if it goes against us. While I would personally wait for the earnings event to be over and then pick a play based on the outcome, there are many readers who live to trade and want to see plays here regardless of the risk. For those readers I offer the following earnings combos. TXN - $30 Call/Put Eventually there will be a chip stock that says good things about the future and TXN could be that stock. They make logic chips instead of memory chips and therefore are less exposed to the PC glut. Volatility on TXN is very low and the PUT side is very cheap. I would buy the Aug-$30 put since any negative earnings news is likely to tank the stock immediately. I would sell the put when the stock appears to have bottomed and hold the call. You can buy the call when you buy the put to protect you against an upside earnings surprise. HOWEVER the possibility of an upside surprise is so slim that a better choice would be to simply buy the call when you sell the put. It will be cheaper and instead of the put being insurance against the call it is simply a profit play on its own. ********* Amazon $15 Put/Call Amazon could say positive things about the fourth quarter and the chances of actually showing a profit. The expectation is already priced into the stock in the closest thing to an earnings run we have see recently. There is a good chance they will say something positive but an equally good chance they could say the economic conditions have depressed book sales and pushed profits back another couple of quarters. Either way the stock could move quickly. I would buy the Aug $15 put at $1.00 since a bad report could easily take the stock back down to the $12 range. If you want to play the upside as well the buy the Oct $15 call which is already $1.98 in the money at $4.30. Your $15 put should save you from any earnings disaster but is cheap enough that an earnings surprise will not hurt you. With AMZN they could say good things and still fall since the stock has been positive for six weeks. I think the best play would be to just buy the put and wait. If they fall back to $13 sell the put for enough to give you a free call play for October and then go buy the calls. ********* Sometimes the best play is no play at all and I think this is one of those weeks. Choose your plays carefully and exit quickly should they turn against you. Good Luck Jim Brown **************** MARKET SENTIMENT **************** Week of Wallow on Wall Street By Jeffrey Canavan With the hubbub surrounding earnings, we ended the week pretty much where we started. The Dow gained 2.1%, the S&P 500 lost 0.4%, and the Nasdaq Composite lost 2.7%. We had some surprising and disappointing earnings, but no significant support or resistance levels were broken. According to First Call, 60% of the S&P 500 companies that have reported earnings beat estimates, and 25% met. But most of those estimates were already lowered, and the results were from cost cutting measures, not increased demand. In general, revenues fell, margins were slashed, and future guidance remains cloudy. I'm not sure where I heard or read it, but for Cisco to sustain 30% annual revenue growth, they would have to add revenue equivalent to pre-merger AOL the first year, and revenue equal to that of Apple in the second year. That's a lot of revenue. But mutual fund investors don't seem to care. For the five-day period ended Wednesday, mutual fund investors ingested $9.5 billion into stock funds. That compares to an $11 billion withdraw last week. Wednesday's inflow of $10 billion was the fourth largest daily inflow ever recorded. Money also came out of bond and money market funds, with respective withdraws of $300 million and $1.6 billion. So if new money continues to find its way into stocks next week, where could it end up? The COT data below echoes this weeks percentage data. Institutions favor the Dow, are getting less bearish on the S&P 500, and have gotten more bearish on the Nasdaq. The Dow also reversed into bull alert status on Friday. === Market Volatility VIX 24.97 VXN 53.64 === Put/Call Ratio Call Volume Put Volume Total .82 937,264 771,889 Equity Only .77 867,920 670,443 OEX 1.22 33,880 41,499 QQQ .97 79,414 76,800 === Bullish Percent Data ***The Dow has moved to bull alert status*** Current Change Status NYSE 36 - Bear Confirmed NASDAQ-100 26 - Bear Confirmed DOW 36 +6 Bull Alert 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 1.05 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 1544 1492 NASDAQ 1688 1882 New Highs New Lows NYSE 87 42 NASDAQ 110 96 === Advisory Sentiment Bullish Bearish Correction Net 51% 25.0% 24.0% 26.0% A bearish reading of 25% to 30%, combined with a bullish reading greater than 55% is typically considered bearish by contrairians. A net percentage greater than 30% is also viewed as bearish. === Commitments Of Traders Report: 07/17/01 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. COT data can be found at www.cftc.gov. 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 Institutions have lightened up on their net bearish for the second straight week, and the S&P 500 remains above 1,200. Coincidence? The commercial sentiment is still bearish, but improving. Commercials Long Short Net % Of OI 7/03/01 316,543 395,410 (78,867) (11.08%) 7/10/01 309,374 385,178 (75,804) (10.91%) 7/17/01 336,836 403,561 (66,725) ( 9.01%) 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 7/03/01 133,098 54,865 78,233 41.62% 7/10/01 135,587 59,889 75,698 38.72% 7/17/01 122,525 50,211 72,314 41.86% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 About face! After slowly reducing their net bearish position for seven straight weeks, institutions abruptly switched gears. Keep in mind this data is from 6/17/01, before the start of earnings week. Perhaps some institutions sold some futures contracts to limit their risk. This change could be a one or two week anomaly. Commercials Long Short Net % of OI 7/03/01 26,544 34,880 ( 8,336) (13.57%) 7/10/01 26,688 34,640 ( 7,952) (12.97%) 7/17/01 26,721 37,225 (10,504) (16.43%) 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 7/03/01 10,443 7,063 3,380 19.31% 7/10/01 9,073 7,486 1,587 9.58% 7/17/01 11,680 8,183 3,497 17.61% 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 got slightly more bullish on the Dow for the second week in a row. This is the only index with a commercial net bullish position, and the Dow was the only index to finish the week higher than it started. Commercials Long Short Net % of OI 7/03/01 12,761 14,623 (1,862) (6.8%) 7/10/01 13,743 12,999 744 2.8% 7/17/01 14,145 12,963 1,182 4.4% 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 7/03/01 4,708 5,715 (1,007) ( 9.66%) 7/10/01 5,048 7,835 (2,787) (21.63%) 7/17/01 5,255 9,144 (3,889) (27.01%) 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 *************** A Random Walk By Eric Utley No, not the book nor theory about strolling down Wall Street via index funds. But that does bring up an interesting question. Why did shares Priceline.com (NASDAQ:PCLN) trade over $160 per share on a several-times-over split-adjusted basis? That's right, efficiency. Yea, efficient like my ten cylinder Ford Excursion. At any rate, let's randomly walk. The Nasdaq-100 (NDX.X) finished a miniscule 1.14 percent lower Friday after Microsoft (NASDAQ:MSFT) guided lower during its conference call Thursday evening. MSFT accounts for about 11 percent of the Nasdaq-100. Shares of Mr. Softee shed 4.67 percent Friday. The energy sector (E&Ps, Refiners, Integrateds, Drillers, etc) was sold to the point of excess through last Thursday. OPEC hinted towards reducing production Friday, due to decreased demand. Inflation has remained subdued, thanks in part to lower energy prices. The U.S. consumer IS the U.S. economy. Arguably, between late 1998 and early 2000 was perhaps the most excessive period in capitalism's history. Perhaps the most widely participated in period of excess, too. Post excess, Japan's equity averages remain in a ten year mire. Alright, enough with the observations. This weekend's column is minus any stock reviews and charts. I received some good questions throughout the week and thought I'd try something a little different this weekend. Let me know if you like if you like it or not. Please send your questions and suggestions to: Contact Support ---------------------------- Summer Reading Can you please advise me some good book on investing...I bought 2 books previously which I found a very good read. These are: On Candlesticks by Nison Technical Analysis from A to Z by Steven B. Achelis - Sunil Good question as always, Sunil. I'm one who loves to read. In fact, I'm currently reading three trading/finance/investing titles and one novel. Sometimes it's difficult to keep the stories straight, but I like to keep my brain busy. WHOA! I think it's beneficial for the armchair, occasional trader to read of the super stars on Wall Street. I write that because, from what I gather, that's the group that most my readers fall into, but not sure so let me know if I'm wrong. Of course, professional traders can benefit from the same info. The first title is rather dated, but a must read. The second was just recently published. The first is an excellent read, the second is good. Pit Bull: Lessons from Wall Street's Champion Trader by Martin Schwartz Stock Market Wizards: Interviews with America's Top Stock Traders by Jack D. Schwager I also think that individual traders - both professional and amateur - can benefit from learning of the inner - and sometimes shady - workings of the money busy. This title, while older, is a hilarious account of what is Wall Street. Liar's Poker: Rising Through the Wreckage on Wall Street by Michael Lewis I'm interested in hedge funds, not only because they move the market, but because I'm going to run one in the future, Jones style. Two books that get into the mind of a hedge fund [manager] follow. When Genius Failed: The Rise and Fall of LTCM by Roger Lowenstein Hedge Funds: Courtesans of Capitalism by Peter Temple I get a lot of questions concerning the bond market and how it impacts equities. I'm planning on writing a piece to address this question in the coming week or two. In the meantime, I'd suggest reading a bond book. If you don't think delta, gamma, theta and vega are fun enough, delve into duration and convexity...just kidding, just focus on the 'big picture' stuff. The Bond Bible by Marilyn Cohen If you're looking for a new frame and perspective to view the market with, check out this next book. My friend, Mr. Hockey, turned me onto this one and I learned A LOT. Mind Over Markets: Power Trading With Market Generated Info by Dalton and Jones I would've liked to share a glass or two of whiskey with Jesse Livermore, who was, at one time and another, a speculator king at the turn of the 20th century. And although he killed himself in 1940 and most of his trading 'strategies' are now illegal, I love reading anything about him. The Amazing Life of Jesse Livermore by Richard Smitten How To Trade in Stocks by Jesse Livermore Reminiscences of a Stock Operator by Edwin LeFerve For those who still find the point & figure work we do on the site should read this next book. Take my word for it, it's not voodoo magic. Point and Figure Charting by Thomas J. Dorsey Also, readers can check out www.stockcharts.com, which is a site that provides free point & figure charts, limited bullish percent data and a short tutorial on the voodoo. Two types of books I'll never read: Anything written by a CNBC personality One that promises to reveal the 'secret' ---------------------------- Remember The Asian Flu I'm buying the bank sector weakness scenario at this time. Which bank stock will you play on this weakness? Better yet, which are the most exposed banks to South America/Argentina? In case of debt default they can be hurt the most. - Thanks, Villi Through a little preliminary digging, I found three banks with larger exposure to Argentina are: Citigroup (NYSE:C), FleetBoston Financial (NYSE:FBF) and J.P. Morgan Chase (NYSE:JPM). There's debate over the Argentina situation, and whether or not a default would have the same impact on emerging markets as the Asian Flu in 1997, which came to a head with the Russian default in late 1998. (By the way, one of the books I detailed above elaborates in great detail on what led to the debacle in emerging debt markets.) There are two big differences between what's going on in Argentina currently and what went on back in 1997 and 1998. For starters, the news is already out about Argentina, while the Russian default came as a bit of a surprise (Read: LTCM's Blunder). The second difference is that the amount of capital and leverage in emerging market debt is far lower than what it was back in 1997 and 1998 (Read: LTCM's Greed). Is it possible that another LTCM is on the wrong side of some debt in Argentina? Sure. But not of the same magnitude, so I don't think that a blow-up of the caliber we witnessed back in October of 1998 is on the horizon. Still, the money center banks that I listed above have NOT acted in accordance with a 275 basis point reduction of interest rates over the span of six months. Is that because of Argentina? Or, over credit concerns of failing dot coms and telecoms? Probably a little of both. Of note, I've found that the KBW Bank Sector Index (BKX.X) best represents the larger money center banks. It currently trades right around where it was back on January 3rd, when the Fed first cut rates. The S&P Banks Index (BIX.X), on the other hand, has more components and is a bit more diversified in that it contains a few more regionals and S&Ls. Compare and contrast the BKX and BIX on their point & figure charts. From where I sit, it appears that the BIX is close to breaking out above a key resistance level. And if it does, I'd be comfortable with discounting the situation in Argentina. But come to your own conclusions. ---------------------------- Options Data I am looking for a source of daily data on a particular option; such as CHKP Oct. 50 calls (KEQ JJ) with the same data as CHKP: (open, high, low, close, volume). - Thanks, Ben Ben, thanks for the question. I receive this question often, and have yet to find a good, reliable source on the Web. I have the ability to view the trading characteristics (high, low and volume, etc) of options through QCharts, and that's all I've ever used for such information. But to be perfectly honest, I don't see the value in monitoring a particular option's high or low, unless one can somehow infer what market makers are doing with implied volatility. But maybe I'm missing something, so I'd appreciate any insight from readers so I could pass it along to others. Conversely, I do believe that monitoring volume and especially open interest is worth while. Again, QCharts is a great program for monitoring those two metrics, but there are several sources on the Web. Yahoo! Finance just recently added an options feature to their data: http://finance.yahoo.com/q?s=chkp&d=o And, of course, the Chicago Board Options Exchange (CBOE) provides that data. Through its Web site, the CBOE recently introduced several quote packages, ranging from free to a real-time $19.95 per month option. I haven't used their real-time package, but have spoken with several options pros who use it and approve. Here's the link to the various quote packages: http://www.cboe.com/MktQuote/ ---------------------------- Interpreting Shorts Could you quickly simplify what rising short positions/declining shorts means - also what put/call vol IN RELATION to put/call open interest means. In other words, continue to extrapolate on the TXN example - you seemed to cut it a little too short. - Thanks, Mike Sorry for cutting it short - no pun intended - in my last column, Mike. And I don't think declining shorts are a good thing, especially if you're wearing them. Here's my Texas Instruments (NYSE:TXN) observation from last weekend: 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. I can't, with any intelligence, make sense of what the put/call volume and open interest numbers meant in TI last weekend. That's because I don't follow the stock closely, so I have no idea where those figures I wrote last weekend lie in relation to TI's options history, so to speak. That's why I suggested that traders should track, on whatever level possible, the open interest figures for the stocks they personally follow. Insofar as rising and declining short positions, there are several take aways to consider. A rising short position obviously indicates that increasing numbers of market participants are bearish on a stock. So does it pay to go with the trend or against it? That question should be answered in relation to where the stock has traded in the past month, assuming the short interest data you have is a month dated. Conversely, declining short positions indicate that smart money is covering its bearish bets and something fundamental is about to change with the particular company you're following. But that much is rather obvious. There are innumerable ways to interpret short interest and strategize around your findings. So instead of rambling on, let me keep it simple. I don't short stocks with excessive short positions: - The bearish side is crowded, and any edge is probably gone - Shorts are jumpy creatures, avoid their crowds - Excessive is relative The put/call volume and open interest observations need to be taken into account relative to what the stock is doing. But keep it simple. How about another sampling of my don'ts in relation to put/call data. I don't short stocks/buy puts with excessive put/call ratios: - The crowd is generally wrong; the market has a funny way of proving that - Too much pessimism is fear; buy when others are afraid - Excessive is relative ***Obviously, the inverse is true for extremely low put/call ratios (Read: Greed). ---------------------------- 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 23, 2001 Major economic data will continue to recede to the commotion of earnings during the coming week. Reports due out include Existing Home Sales on Wednesday; Jobless Claims, Durable Orders, and the Employment Cost Index on Thursday; GDP and New Home Sales will close the week on Friday. Monday ====== None Tuesday ======= None Wednesday ========= Existing Home Sales Jun Forecast: 5.26M Previous: 5.37M Thursday ======== Initial Claims 7/21 Forecast: NA Previous: 414K Employment Cost Index Q2 Forecast: 1.0% Previous: 1.1% Durable Orders Jun Forecast: -1.0% Previous: 2.9% Help-Wanted Index Jun Forecast: NA Previous: 60 Online Help Wanted Jul Forecast: NA Previous: 96.1 Friday ====== GDP-Adv Q2 Forecast: NA Previous: 1.2% Chain Deflator-Adv Q2 Forecast: NA Previous: 3.2% Mich sentiment-Rev Jul Forecast: NA Previous: 93.7 New Home Sales Jun Forecast: 923K Previous: 928K Week of July 30 =============== Jul 31 Personal Income Jul 31 PCE Jul 31 Chicago PMI Jul 31 Consumer Confidence Aug 01 Auto Sales Aug 01 Truck Sales Aug 01 Construction Spending Aug 01 NAPM Index Aug 02 Initial Claims Aug 02 Factory Orders Aug 03 Nonfarm Payrolls Aug 03 Unemployment Rate Aug 03 Hourly Earnings Aug 03 Average Workweek Aug 03 NAPM Services *************************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. 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The Option Investor Newsletter Sunday 07-22-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/3021_2.asp ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* IBM - Int'l Business Machines $105.70 (-2.83 last week) See details in sector list Put Play of the Day: ******************** PDII - Professional Detailing Corp. $68.39 (-7.56 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 AT $62.00 (-2.28) The telecom services sector finished the week mixed last Friday. Unfortunately, AT ended on the wrong side of the spectrum. The stock slipped lower throughout the day and finished right on our stop at $62. AT appears to be slipping into a descending short-term trend, which is obviously a cause for concern. Traders with open call positions can use an advance up to $63 to exit positions early next week if the Nasdaq is advancing. Otherwise, beware of any further weakness below $62. BBY $68.21 (+0.04) BBY advanced up towards the $70 level yet again last Friday, but failed to penetrate that price level. And again, the stock bounced from its 10-dma. But the fact that the Retail Sector Index (RLX.X) finished in positive territory and BBY finished measurably lower gives us reason to drop coverage this weekend and book gains in this long running play. LEA $39.80 (+0.10) LEA weakened again Friday, actually dropping as low as its 10-dma, but never below our stop at the $38 level. Its rebound was encouraging, but the fact that the stock can't get out of its own way has us on red alert for a possible rollover. Look to exit open plays around current levels early next week. SLVN $26.01 (-0.38) SLVN bounced up against the $26 level for the better part of Friday's session. That level is a veritable brick wall, keeping SLVN contained from further advancement. What's more, several of its sector cohorts pulled back Friday, which may have portended weakness for the broader group. Therefore, we're dropping coverage this weekend, instead opting for plays with less resistance. EFDS $21.25 (-1.46 last week) Even though our $20 stop is still intact, EFDS is looking a little long in the tooth. With Friday's intraday violation of the 50-dma ($21.18) and the daily Stochastics oscillator falling out of the overbought region, it looks like the $21 support level is going to fail on Monday. Rather than wait for our stop to be violated, we're going to take a pre-emptive exit and look for more stronger plays. LH $86.50 (+2.52) LH has given us a small, but profitable move, but it is time to get out of the way of the approaching earnings train. The company will announce its quarterly results on Monday after the market close. Even with the broad markets reeling under the onslaught of negative earnings announcements on Thursday and Friday our play continued to bounce from the $85 level as investors sought a safe haven for their cash. Take advantage of any strength on Monday to gain a more favorable exit and congratulate yourself on successfully navigating through the earnings minefield. PUTS No dropped puts this weekend *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** IBM - Int'l Business Machines $105.70 (-2.83 last week) International Business Machines uses advanced information technology to provide customer solutions. The company operates using several segments that create value by offering a variety of solutions, including either singularly or in some combination, technologies, systems, products, services, software and financing. Wasn't IBM supposed to issue a terrible earnings warning that would bring the tech sector to its knees? What happened? Well, the company did guide lower during its earnings report late last week, but it ended Friday's session higher by $1.70, after Microsoft guided lower. Is it possible that the lowered guidance from IBM had already been factored into its stock price? And now the bears, who'd been expecting a far greater warning, may be a little on edge. The stock advanced up to its 10-dma at $105.66 last Friday, and should it continue to advance above that level early next week, the bears who'd shorted IBM are likely to run for cover. As such, bullish options traders can look for continued strength above the 10-dma early next week for a sign to enter new call positions at current levels. But make sure to confirm strength in the Nasdaq along with the S&P 500 before entering call positions into strength. A pullback to near-term support around $103 may offer more favorable entry points in terms of risk versus reward. Look for bounces from that level if Big Blue pulls back on light volume. On the upside, if the broader market cooperates, IBM could make its way back up to the $110 or $112 levels, which would offer options traders favorable reward in light of the relatively low implied volatility in IBM's options currently. Initially, we're setting our stops at $102. BUY CALL AUG-105 IBM-HA OI= 6163 at $4.20 SL=2.50 BUY CALL AUG-110 IBM-HB OI=17776 at $1.75 SL=1.00 BUY CALL OCT-110 IBM-JB OI= 4072 at $5.20 SL=3.00 BUY CALL OCT-115 IBM-JC OI= 4325 at $3.50 SL=1.75 Average Daily Volume = 7.53 mln --- FDRY - Foundry Networks $19.14 (+1.55 last week) Foundry Networks designs, develops, manufactures and markets a comprehensive, end-to-end suite of high performance networking products for enterprises, educational institutions, government agencies, Web hosting companies, ASPs, electronic banking and finance service providers, and ISPs. Demand is building for shares of Foundry Networks. There's no arguing that FACT! Perhaps it stems from the fact that Foundry caters more to the enterprise customer than the lowly telecom customer. In fact, Cisco Systems has been reporting off and on over the past two months that its enterprise customers have begun to show life. And if that much is true for Cisco, it's also true for Foundry. In terms of technicals, the stock is perched just beneath the $20 level, which marks a quadruple top on its point & figure chart. Therefore, a print at the $21 level would mark a most impressive breakout for FDRY and most likely carry the stock up to its relative high around $23, allowing for a quick, but profitable trade. Unfortunately, the company announces earnings next week on Wednesday, July 25th. So we've got only three days to the play. But they may turn out to be three profitable days if the stock can breakout early next week. As such, the obvious plan of attack is to wait for the stock to advance above $21 before entering new call plays ahead of the earnings report. On the other hand, a pullback down around the 10-dma at $18.30 may offer favorable entries. We're setting stops at the $17 level initially. BUY CALL AUG-17.5 OUJ-HW OI= 167 at $3.60 SL=2.00 BUY CALL AUG-20.0*OUJ-HD OI= 680 at $2.10 SL=1.00 BUY CALL SEP-17.5 OUT-IW OI= 938 at $4.40 SL=2.75 BUY CALL SEP-20.0 OUT-ID OI=2359 at $3.10 SL=1.50 Average Daily Volume = 3.70 mln --- BEAS - BEA Systems $23.01 (-2.50 last week) BEA Systems, Inc is a provider of e-commerce infrastructure software that helps companies of all sizes build e-commerce systems. For the 3 months ended 4/30/01, revenues rose 67% to $257.2M. Net income totaled $20.6M vs. a loss of $12.4M. Revenues reflect the continued adoption of software solutions, the addition of new customer accounts and increased product & service offerings. Earnings reflect the absence of a $2.2M acquisition charge. BEAS has trended south along with the COMPX ever since gapping down in the middle of June on negative news. Over the last four trading sessions, the stock has teetered just above its 52 week low set in April with no impetus for a breakout. This week has been a period of consolidation with the stock testing minor resistance just under $24.00 while maintaining support just under $21.00. Earnings aren't due out until August 14th and if the Broad markets can finally muster a rally, BEAS is quite likely to be a part of the move. Short-term traders might look to a price level of just under $26.00 as an initial target. The bullish price objective rests at approximately $30.00 so longer-term traders may wish to use that figure as a guideline for exit. A warning from Microsoft and an advance in BEAS suggests that current levels might represent the best entry point. However, with solid support at the double bottom, a low volume decline could present a better entry point at about $22.00. Either way, significant support at the double bottom compels us to use $20.00 for our stop. At this level, BEAS offers a very persuasive argument for limited downside risk with a strong reward potential. BUY CALL AUG-20.0*BUC-HD OI= 274 at $4.80 SL=3.00 BUY CALL AUG-25.0 BUC-HE OI=4820 at $2.35 SL=1.25 BUY CALL SEP-20.0 BUC-ID OI= 218 at $5.80 SL=4.00 BUY CALL SEP-25.0 BUC-IE OI= 944 at $3.40 SL=1.75 Average Daily Volume = 12.5 mln --- DO - Diamond Offshore $30.50 (+0.66 last week) Diamond Offshore Drilling engages in the worldwide contract drilling of offshore oil and gas wells, and deep water drilling. For the 3 months ended 3/31/00, revenues rose 22% to $205.2M. Net income increased 25% to $36.8M. Revenues benefited from new drilling programs and increased day rates for high specification floaters and jack-ups. Earnings also reflect improved operating margins, increased interest income and a lower effective income tax rate. Rumors surfaced today that OPEC was considering cutting oil production shortly after the per barrel price of the commodity dipped to recent lows under $25.00. Since reaching a high of $43.13 in the middle of May, shares of DO have slid to their lowest level in over a year. Three days ago support was established at $27.02 and buyers returned to the shares in droves as proven by the three consecutive days of increasing upside volume. The chart for DO is virtually a classic V pattern, with increasing volume has the stock dipped further down to the current level of support. A $2.00 advance from today's closing price just over $30.00 ($32.50) would take the stock just beyond short-term resistance and would represent one of the best levels for the trader with a shorter time horizon. For those looking to hold a bit longer, $34.00 could represent the best bet with more defined resistance at or just around that level. The strong bullish moves over the course of the last few days suggest that current levels may be the most viable entry points. Obviously any retraction in the price, down to about $29.00, would present an even more compelling argument. Set your stop at $28.00 and you have a trade that represents limited risk with a strong potential for reward. BUY CALL AUG-30.0*DO-HF OI=680 at $2.15 SL=1.00 BUY CALL AUG-35.0 DO-HG OI=154 at $0.60 SL=0.00 BUY CALL SEP-30.0 DO-IF OI=271 at $2.80 SL=1.50 BUY CALL SEP-35.0 DO-IG OI=587 at $1.00 SL=0.25 Average Daily Volume = 1.10 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 07-22-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/3021_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 ****************** MOT - Motorola $18.50 (+0.91 last week) Motorola provides integrated communications solutions and embedded electronic solutions. The company's solutions include software enhanced wireless telephone, two-way radio and messaging products and systems, as well as networking and Internet access products, for consumers, network operators and commercial, government and industrial customers. Is this it? Yesterday we initiated a play on Motorola because it looked like a new bullish trend had finally formed for the stock. Investors we seeing dollar signs after what was initially interpreted as a positive earnings report from rival mobile phone maker, Nokia. Now industry watchers are buzzing about Nokia's lack of future guidance going forward. NOK expects things to improve in 2002 but the next six months is too unclear to make any predictions. NOK is the world leader in handset sales with over 30% of the global market. MOT is gaining on them but only have a 15% market share. Thursday's write up mentioned that a patient trader might wait for a new entry point if MOT pulled back to $18.50. Well, here it is. The 200-dma rest just below it at 18.43. Our view on MOT has not changed in one day's trading and we do expect it to trade up to $20 and potentially higher. However, the overall market needs to cooperate somewhat. Make sure MOT is not falling before initiating a new play. As we mentioned yesterday, the stock could drop to 18 or even 17.50 before bouncing higher again. BUY CALL AUG-17.5*MOT-HT OI=12465 at $1.70 SL=0.85 BUY CALL AUG-20.0 MOT-HD OI= 6256 at $0.55 SL=0.25 BUY CALL OCT-17.5 MOT-JT OI=11135 at $2.70 SL=1.25 BUY CALL OCT-20.0 MOT-JD OI=19794 at $1.55 SL=0.75 Average Daily Volume = 10.5 mln --- GMST - Gemstar-TV Guide Int'l $46.40 (+0.72 last week) Gemstar-TV Guide International is a global media and technology company focused on developing, licensing and providing products and services that simplify and enhance consumer entertainment. The company was formed in July 2000 through the merger of Gemstar International, a technology company focused on consumer entertainment and TV Guide, a provider of television information in the United States. Many of the company's products have a special emphasis on television-oriented technologies and services, particularly those marketed under the TV Guide name. The past couple days have been tough for the bulls as each rally seems to be met with eager sellers, but GMST is holding up pretty well, consistently finding support near $46. This will be a pivotal level next week, as the bulls are clearly defending positions in hopes that they'll be able to propel the stock through the formidable $50 resistance. Thursday's morning euphoria faded near this level and the bears had their way with the stock until it reached $46 midday on Friday, at which point the volume rapidly dried up in advance of options expiration. We want to see $46 hold next week, and a bounce from current levels looks attractive for new entries. Our stop is still resting at $44, and positions can also be considered down to that level, but only if the dip is met by strong buying volume. We have plenty of time in the play before the company announces its earnings on August 13th. Entering on strength may be the more conservative strategy, and a solid (Read: Volume) push through $50 will be the trigger to focus on. That breakout will allow the bulls to focus on challenging serious resistance, which rests at $55. BUY CALL AUG-45 QLF-HI OI=5602 at $4.90 SL=3.00 BUY CALL AUG-50*GST-HJ OI=7738 at $2.40 SL=1.25 BUY CALL AUG-55 GST-HK OI=2978 at $1.05 SL=0.00 BUY CALL NOV-50 GST-KJ OI=1432 at $6.60 SL=4.50 BUY CALL NOV-55 GST-KK OI= 895 at $4.80 SL=3.00 SELL PUT AUG-45 QLF-TI OI=5818 at $3.10 SL=5.00 (See risks of selling puts in play legend) Average Daily Volume = 3.69 mln --- KOPN - Kopin Corp. $13.79 (+1.38 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. In an amazing show of strength, KOPN is ignoring the weakness in both the broad Technology market and the narrower Semiconductor index (SOX.X). Breaking above the $12.50 resistance level in the middle of last week only emboldened bullish traders to buy more. While volume was not stellar on Friday (about 75% of the ADV), it was encouraging to see buying volume increase into the close, as the stock finished just below the $14 resistance level. All this strength came in the face of continued earnings disappointments in the Semiconductor sector. Investors clearly are expecting good news from the company when it reports its own quarterly results the evening of July 26th. While we will exit the play prior to the report, we are plenty happy to continue riding the apparent earnings run until then. We are keeping our stop in place at the $11 level and want to use any intraday dips to the $12.50-13.00 level as fresh entry points. Even a dip near $11.50 is buyable, but only for aggressive traders, as a dip that far would raise a warning flag that the bullish run could be coming to an end. Of course, the highest odds entries at this point will appear as KOPN clears the $14 level, especially if volume ramps up again. BUY CALL AUG-12.5*KQO-HB OI=652 at $2.15 SL=1.00 BUY CALL AUG-15.0 KQO-HC OI=101 at $0.85 SL=0.00 BUY CALL SEP-12.5 KQO-IB OI=824 at $2.80 SL=1.50 BUY CALL SEP-15.0 KQO-IC OI=432 at $1.50 SL=0.75 Average Daily Volume = 1.05 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=2207 ************************************************************ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 07-22-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/3021_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 ************* NVDA - NVIDIA $74.89 (-6.07 last week) NVIDIA designs, develops and markets graphics processors and related software for personal computers and digital entertainment platforms. NVIDIA provides a "top to bottom" family of performance 3D graphics processors and graphics processing units that, in the Company's opinion, has set the standard for performance, quality and features for a broad range of applications. There's a lot of hype surrounding the release of Microsoft's X-Box this holiday season. But is that hype enough to keep shares of NVIDIA propped up? The stock has slid from its relative high around the $100 level and continues to trade very heavily. That is, on each rally attempt, the stock's advances are met with heavy supply which, in turn, drives it back down. The level that continues to prop the stock up is located around $72.50, which also happens to be a significant retracement level. So, the strategy for bearish traders might be to wait for the Nasdaq and the Semiconductor Sector (SOX.X) to decline and look for NVDA to breakdown below the $72.50 level on heavy volume. That would allow for momentum type traders to gain a favorable entry into this put play. If NVDA breaks below $72.50, it may have downside all the way down to the $65 area. We have plenty of time to wait for a sizeable downside move in the stock because the company doesn't announce earnings until later in August. Because a lot of the enthusiasm over NVDA concerns its video game graphics processing chips, bearish traders might do well to keep an eye on other stocks associated with that business, including THQI and ERTS. Stops are in place at $78. BUY PUT AUG-75 RVU-TO OI=369 at $7.20 SL=5.00 BUY PUT AUG-70*RVU-TN OI=894 at $5.20 SL=3.25 Average Daily Volume = 4.56 mln --- DIGL - Digital Lightwave $22.30 (-8.09 last week) Digital Lightwave designs, develops and markets a portfolio of portable and embedded products and technologies for monitoring, maintaining and installing fiber optic circuits and managing fiber optic networks. Network operators and other communications service providers use fiber optics to provide increased network bandwidth. Digital Lightwave is levered to the telecom industry. And that's not necessarily a good thing. At least under the current conditions. Those companies that supply to the telecom industry have yet to see a stabilization in earnings. Recent reports from the likes of Tellabs and Corning indicate that much. And the price action in the leaders of the fiber business continues to portend further weakness, including that in CIENA. The overriding negative trend of the optical networking business should continue throughout the remainder of the summer and pressure shares of second-tier companies such as Digital Lightwave. The stock broke below all of its major near-term support levels last week and finished Friday's session rather poorly. As such, at current levels, DIGL is more a momentum play, to the downside of course. So bearish traders should take that into account before entering positions and consider risk preferences. In terms of entry points, continued weakness in the Nasdaq should take DIGL lower in the short-term and bearish traders can enter new plays at current levels if that scenario unfolds. Conversely, any short-lived, low volume rally attempt up to resistance near $25 would offer entry opportunities, provided the stock rolls over. On the downside, the obvious near-term target lies at $20. But exit points should be dictated by time frames and risk tolerances, so bearish traders should keep in mind that DIGL could retest its lows around $12 to $15 area if the Nasdaq and networking sector continue to deteriorate. Set stops at $26 to begin with. BUY PUT AUG-25.0 DGW-TE OI=889 at $4.80 SL=3.00 BUY PUT AUG-22.5*DGW-TX OI= 12 at $3.30 SL=1.50 Average Daily Volume = 1.85 mln --- VRSN - Verisign $42.95 (-11.53 last week) Verisign is a provider of infrastructure services to Website owners, enterprises, e-commerce service providers and individuals. Its Mass Markets Division focuses on delivering all of its products and services to small and medium-size enterprises. Its Enterprise and Service Provider Division focuses on delivering all of its products and services to larger enterprises and service providers. Will Verisign miss numbers when it reports next week? It's a good and potentially profitable question. After all, one of its competitors in Internet Security Systems (ISSX) recently suffered the fate of falling short. And Symantec (SYMC), although not a direct competitor of Verisign, recently disappointed in a big way. Finally, the price action in another competitor in Check Point Software (CHKP) portends further disappointment in the security software business. Check Point reports earnings early next week, on Monday, July 23. Verisign, on the other hand, reports later in the week on Thursday, July 26. Therefore, the Check Point earnings announcement does present some risk, but it could be very good risk if the company disappoints early next week. As for entry points into VRSN put positions, bearish traders can wait for confirmation by looking for a breakdown below the $41 level. A decline below $41 should allow for entries in a momentum fashion and could carry VRSN as low as $35 next week, ahead of the company's report. Because Verisign announces earnings next Thursday, it leaves only three days to the play, but that should allow for plenty of time to gain a solid entry and exit point if the Nasdaq along with Verisign's sector counterparts continue to decline. Our stops are in place at $47 initially. BUY PUT AUG-45 QVR-TI OI=512 at $7.10 SL=5.00 BUY PUT AUG-40*QVR-TH OI=388 at $4.20 SL=2.50 Average Daily Volume = 7.75 mln ***************** CURRENT PUT PLAYS ***************** PDLI - Protein Design Labs $56.88 (-7.12 last week) Pursuing the prevention and treatment of disease through the development of humanized monoclonal antibodies, PDLI has fundamental patents that cover many such antibodies. Eleven companies have licenses under these patents for humanized antibodies that they have developed. PDLI has licensed certain rights to its first humanized antibody product, Zenapax, to Hoffman-La Roche and its affiliates, which market Zenapax for the prevention of kidney transplant rejection. In addition to testing Zenapax for the treatment of autoimmune disease, the company has several other humanized antibodies in clinical development for autoimmune and inflammatory conditions, asthma and cancer. Continuing to slide down the slippery slope, shares of PDLI have temporarily managed a small gain of 66 cents on Friday. The Biotech index scratched out 10 points but the bears appeared to be able to keep any bullishness to a minimum. Closing off its high for the day, the BTK has technically added a new lower low despite its effort to rebound. Bearish opportunities for PDLI still remain and a new entry point to buy puts could be a failed rally between $59 - $60 or lows under $56 - $55. One point of interest to point is potential support for the stock at $54.51 where the stock price bounced back on May 14th. Don't forget that PDLI has earnings on August 2nd. BUY PUT AUG-60 PQI-TL OI=358 at $7.60 SL=5.25 BUY PUT AUG-55 PQI-TK OI=187 at $4.90 SL=3.00 BUY PUT AUG-50 PQI-TJ OI=359 at $2.90 SL=1.50 Average Daily Volume = 1.79 mln --- GILD - Gilead Sciences $54.03 (-2.60 last week) Gilead Sciences is dedicated to providing accelerated solutions for patients and the people who care for them. The evolution of Gilead - from a promising biopharmaceutical company to a leader in the international development and commercialization of medicines for infectious diseases and oncology - is testament to what the company has achieved through disciplined science, visionary thinking and diversified planning. You've heard it before. The majority of a stock's move is directly related to the overall market's direction or the trend in the sector. GILD moved pretty closely with the BTK index on Friday by adding 1.88% while the BTK added 1.99%. Despite the $1 gain on Friday, GILD remains in its downtrend and is dangerously close to the top trendline. Our stop is at $56.50 but a breakthrough over $55 would be a big red flag. All of the signs are telling us that the stock should rollover again soon and the downside should be $50. This appears to be a solid entry point before the next downturn. Don't forget that GILD has earnings on July 26th and we'll likely close the play before they announce. Obey your stops and keep an eye on the BTK. BUY PUT AUG-55 GDQ-TK OI= 93 at $4.70 SL=2.75 BUY PUT AUG-50*GDQ-TJ OI=1760 at $2.50 SL=1.25 Average Daily Volume = 1.84 mln --- MYGN - Myriad Genetics $43.70 (-4.89 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. Trading is about opportunity. MYGN is setting up for a great put opportunity right now. We caught MYGN last Friday at 48.59. The stock has since collapsed to support at $40. The bulls and bears are really fighting with this one as volume turned in big numbers on Monday and Tuesday. Looking at an intraday chart one can see that shares of MYGN have started to create a small trading range between $40 and $44. It certainly looks like the stock could rollover from here and fall back to $40 with ease. Using a longer-term picture, $39 is still the level to watch for renewed confirmation that the downtrend is intact. If the BTK index starts to falter again, it's possible MYGN could hit April lows of $30. Myriad earnings aren't expected until the middle of August so the near-term future of the stock will be closely tied to the ups and downs of the BTK. We will leave our stop at $45 in case the bulls try and make another run. BUY PUT AUG-50 GSQ-TJ OI=331 at $9.00 SL=6.75 BUY PUT AUG-45*GSQ-TI OI= 47 at $5.70 SL=3.25 BUY PUT AUG-40 GSQ-TH OI= 61 at $3.20 SL=1.50 Average Daily Volume = 677 K --- SGR - Shaw Group $32.85 (-6.06 last week) Shaw Group is a supplier of fabricated piping systems in the U.S. and integrated piping systems and construction services for the electric power, chemical, petrochemical, and refining industries worldwide. In addition to its pipe manufacturing services, SGR provides design and engineering systems for its customers. The downtrend continues for shares of Shaw Group. From looking at the chart one might think that someone had discovered a new power source that didn't require the use of a power plant. It is obvious that SGR is oversold but the selling shows no signs of letting up. With investors looking for growth companies, some analysts can't believe that no one wants SGR who is expected to grow EPS by 29% a year. Despite it all, the selling continues on stronger than average volume. Where it stops no one knows. Down from 36.50 from two days ago and down from 43.50 on the 10th of July, SGR really could see an oversold bounce. We have our stop set to $37, which is just over Wednesday's high. For some of you this may be too far away so adjust accordingly. Don't get us wrong - we still like SGR as a short play and the failed support at $35 was a key turning point but don't let this one surprise you if it bounces. BUY PUT AUG-35 SGR-TG OI=44 at $4.00 SL=2.00 BUY PUT AUG-30 SGR-TF OI=42 at $1.60 SL=0.75 Average Daily Volume = 1.02 mln --- AES - AES Corp. $35.72 (-2.70 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. It seems nothing can stem the flow of selling that has swept AES southward in the past 2 weeks. The exposure the power generator has to the South American marketplace is wreaking havoc with the stock, driving it to levels not seen since April 2000. And if buyers cannot hold the $35 support level, it looks like the stock will continue to fall until finding support near $32.50, followed by $30. Despite deeply oversold daily and weekly Stochastics, there is nothing to motivate buyers and sellers are plentiful. We'll ride the downward trend as long as it lasts, but need to be mindful that an oversold bounce can occur at any time. With the negative fundamentals (the company's PE ratio is still north of 30), such a bounce is likely to be short lived, providing for fresh entry points. We are moving our stop down to $37 and would consider any rally that fails to penetrate this level as attractive for fresh entries. Alternatively, consider new positions as the stock falls through the $35 level. Time is growing short on the play, as we'll want to exit all open plays before the company's earnings announcement on July 26th after the closing bell. BUY PUT AUG-40 AES-TH OI=9858 at $5.30 SL=3.25 BUY PUT AUG-35*AES-TG OI=1283 at $2.10 SL=1.00 Average Daily Volume = 2.69 mln --- CIMA - Cima Laboratories $61.20 (-1.69 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. Downward pressure is continuing to build in shares of CIMA as the intraday highs get lower and buyers continue to show up near the $60 support level. This bearish wedge is likely to resolve in the next few days, and when it does, a drop through the $60 level will usher in an attractive entry point. Ahead of options expiration, volume dried up to a trickle as the price weakened into the close. We can continue to use any intraday rallies to establish positions ahead of the anticipated breakdown, but only if the stock is unable to break through our $65 stop. Likely rollover targets are $62 and $63, helped along by the 200-dma (now at $62.27). Earnings are a ways off still, scheduled for August 2nd, but we don't expect the approach of that event to provide much hope for the bulls, especially not with the current negative tone of earnings announcements. Recall that the Point and Figure chart is forecasting a bearish price target of $43, although we are expecting possible support to materialize in the $53-55 range. Watch for renewed weakness in Drug stocks to add to the bearish pressure in the days ahead. BUY PUT AUG-65 UVK-TM OI=122 at $7.10 SL=5.00 BUY PUT AUG-60*UVK-TL OI= 80 at $4.30 SL=2.75 Average Daily Volume = 330 K --- PDII - Professional Detailing $68.39 (-7.56 last 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. A relatively quiet market day was shattered for PDII investors this morning around 11am ET when the company announced the termination of its product detailing contract with Pfizer. It looked like a bad data point on the intraday chart as the stock quickly fell to $46 before buyers stepped in to grab the stock at fire-sale prices. The contract was scheduled to expire at the end of October anyways, and once investors figured out that the news wasn't a disaster, they stepped up to push the stock close to unchanged by the closing bell. But for those that were sitting in puts before the carnage ensued, it was a nice windfall profit. The excitement pushed volume to nearly 20 times the ADV, but the fact that the stock couldn't reclaim the $70 level has us thinking there may be some more profits in store for the play. We're moving our stop down to $73, and would consider new positions on any failed rally attempts below this level, particularly if the stock is unable to clear $70. Intraday support seemed to form near $65, and a drop through that level would represent an additional entry opportunity. Keep one eye on the Pharmaceutical index (DRG.X) as well; renewed weakness there is likely to spill over into trading in PDII. BUY PUT AUG-70 PKU-TN OI=1000 at $8.30 SL=6.00 BUY PUT AUG-65*PKU-TM OI= 44 at $5.70 SL=3.75 Average Daily Volume = 178 K --- SRNA - Serena Software $20.85 (-5.09 last week) Serena Software is a provider of eBusiness software change management (SCM) solutions. The company's products and services are used to manage and control software change for organizations whose business operations are dependent on managing information technology (IT). SRNA's product offerings support the industry standard IBM mainframe platforms, including MVS, and are marketed under the brand name Full Cycle mainframe. This product suite automates the software application life cycle and creates an IT environment that facilitates concurrent development efforts by separate programming teams, improves process consistency, enhances software integrity and protects valuable software assets. A bit at a time, SRNA is heading towards a violation of the $20 support level, helped along by one negative earnings announcement after another in the Software sector. With bearish comments from MSFT and SEBL in recent days, it has made for nice entries into the play over the past few days. Wait for buyers to attempt a rally, and then enter the play as the stock rolls over from a lower level than the last time. Resistance is now sitting at $22 and then $23, and with the current negative tone in the Software sector, entering near these levels should continue to provide attractive entries in advance of the company's August 16th earnings announcement. The Software index (GSO.X) continues to deteriorate, falling through the $190 level on Friday, helping to propel SRNA lower. Continued selling of Software stocks will push the GSO index below the $180 level, and this will likely coincide with SRNA falling below $20, providing for additional entry points. Move stops down to $24. BUY PUT AUG-22.5 NHU-TX OI=240 at $3.80 SL=2.25 BUY PUT AUG-20.0*NHU-TD OI=204 at $2.50 SL=1.25 Average Daily Volume = 726 K ************************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 ***** I Want a "Do Over!" By Mark Phillips Contact Support Remember when you were a kid and you and your friends had complex rules for every game you played? We actually had established conditions under which we could repeat our turn, if we were disappointed with the outcome the first time around. How many times have you wished you could do that with one (or more) of your trades? If you're like me, it's been rather frequent lately. The market has seemingly conspired in recent weeks to sucker me into apparently attractive trades just in time to yank the rug out from under me. This week was a perfect example with Wednesday being the low point. Three of the major earnings disappointments of the day were from residents of our LEAPS Portfolio, namely AOL-Time Warner (NYSE:AOL), EMC Corp. (NYSE:EMC) and Siebel Systems (NASDAQ:SEBL). Needless to say, all three of them make the drop list this weekend. Sure, AOL provided me with a very profitable trade in my personal account (which also came to an end this week), but the more restricted timeframe of a once-per-week update schedule kept us from getting such an attractive entry point for the LEAPS Portfolio. Since we can't go back in time, our only choice in the stock market is to learn from our mistakes and apply those lessons in an earnest attempt to avoid repeating them. As I have discussed here in recent weeks, the most important lesson is to not chase entry points higher, especially in sectors that are vulnerable to continuing weakness from the worsening economy -- namely Technology stocks. So with that lesson fresh in my mind, I've got a couple of new Watch List plays that should provide some attractive opportunities in the months ahead. The first one is Global Marine (NYSE:GLM), an Oil Service stock that appears ready to embark on a significant recovery. The second candidate is an unlikely play, where we are looking to profit from the defensive nature of the precious metals market. If the economy should continue to deteriorate, Gold stocks should rebound nicely from their current oversold condition. We are targeting shares of Barrick Gold (NYSE:ABX) for both a basic LEAP play as well as an attractive LEAP Covered Call play. I've described the basics of the play below and will use the Wednesday column to fill in more details in the weeks ahead. Now that the AOL Covered Call play has been brought to a successful close, we need another case study for continuing the educational process in that column. The extended economic decline is making it clear that using Covered Calls on our LEAPS plays will allow us to reduce our cost basis as well as turbo-charge our returns. To that end, I have started listing recommended strikes for both normal LEAPS players and those interested in utilizing the Covered Calls strategy. Those plays that have my attention for Covered Calls right now are Dell Computer (NASDAQ:DELL) and Cisco Systems (NASDAQ:CSCO) in the Portfolio, as well as ABX, Oracle (NASDAQ:ORCL) and Sun Microsystems (NASDAQ:SUNW) on the Watch List. Note that we have highlighted lower LEAP strikes for these plays for those intending to utilize the Covered Call strategy. For a review of our strike selection rationale, refer to my recent article on the topic: Fine Points of LEAPS Strike Selection We've got another play in the Portfolio that just barely avoided a trip to the Drop list this weekend, but it is only hanging on by a thread. Versign (NASDAQ:VRSN) took a big tumble through major support and bounced from our $42 stop level both of the last 2 days. With earnings set for next week and rival Internet Security firm Checkpoint Software (NASDAQ:CHKP) reporting its own results on Monday, it appears highly likely that this play will exit the Portfolio before our next visit. This play is yet another example of what happens when we fail to wait for a play to return to our original entry point. Recall that I originally added it to the Watch List on 4/29/01 with an entry target of $42-44. If instead of chasing the stock higher until getting an entry in mid-June, I had left the entry target unchanged, we would be contemplating an attractive entry point this weekend instead of a drop with the LEAPS in our portfolio down by 35-45%! As proof that that concept works, look at the entry points we recently obtained on International Business Machines (NYSE:IBM) and Merck (NYSE:MRK). We picked those entry points long before the declines that brought the price right to us based on reading our Point and Figure charts. Sure enough we got just what we asked for, and even in an ugly market environment, both plays are holding up nicely. Only time will tell if that strategy holds water long term, but the initial indications are quite positive. Finally, I think we have squeezed just about all the profit we can out of the Washington Mutual (NYSE:WM) play and I am really tightening up on the stop. The spike through the $42 level this past week has me thinking blowoff top and with more than 100% gain on the 2002 LEAP, I think it is time to move on. While I am not dropping the play this weekend, I am tightening the stop to the point that you could say I am daring the market to stop us out of the play. If you'd prefer to stay in the play for a hopefully longer ride, I would recommend moving your stop to the $36.50 level, just below the long-term ascending trendline. I'm going to forgo my usual market commentary this weekend. I doubt I have anything constructive to add to Jim's excellent Market Wrap, and with the VIX meandering in the middle of its historical 20-30 range (Friday's close was 24.97), there is little guidance to be found there. Keep a tight reign on your profitable plays and use extreme discipline to avoid chasing entry points higher. Earnings season is just getting started, and it isn't looking pretty. I think it is a safe bet that we will get filled on most, if not all, of our Watch List plays without adjusting our targets. All we need is a heavy dose of patience and an equally heavy dose of bravery when those targets are reached. Have a Great 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 $ 4.20 20.00% $ 34 '03 $ 35 VUT-AG $ 6.10 $ 6.80 11.48% $ 34 WM 03/22/01 '02 $33.8 BWT-AY $ 4.00 $ 8.30 107.50% $ 40 '03 $33.8 OBN-AY $ 6.13 $10.80 76.18% $ 40 FON 04/09/01 '02 $ 25 FON-AE $ 2.80 $ 1.45 -48.21% $ 19 '03 $ 25 VN -AE $ 4.40 $ 3.70 -15.91% $ 19 DELL 04/27/01 '02 $ 25 DLQ-AE $ 6.20 $ 5.70 - 8.06% $ 24 '03 $ 25 VDL-AE $ 9.00 $ 8.70 - 3.33% $ 23 ADBE 05/16/01 '02 $ 40 AEQ-AH $11.00 $ 8.10 -26.36% $ 37 '03 $ 40 VAE-AH $14.60 $13.30 - 8.90% $ 37 BRCM 06/05/01 '02 $ 40 RCQ-AH $ 9.70 $11.00 13.40% $ 34 '03 $ 40 OGJ-AH $14.00 $17.60 25.71% $ 34 VRSN 06/12/01 '02 $ 50 YXO-AJ $17.10 $ 9.50 -44.44% $ 42 '03 $ 60 OVX-AL $20.40 $13.10 -34.80% $ 42 CSCO 07/11/01 '03 $ 20 VYC-AD $ 3.90 $ 4.90 25.64% $ 13 '04 $ 20 LCY-AD $ 5.70 $ 6.40 12.28% $ 13 IBM 07/11/01 '03 $110 VIB-AB $17.70 $17.30 - 2.26% $ 99 '04 $110 LIB-AB $23.70 $23.80 0.42% $ 99 MRK 07/09/01 '03 $ 70 VMK-AN $ 7.40 $ 8.60 16.22% $ 59 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL ORCL 06/24/01 $15-16 JAN-2003 $17.5 VOC-AW CC JAN-2003 $ 15 VOC-AC CPN 07/08/01 $40-41 JAN-2003 $ 45 OLB-AI JAN-2004 $ 50 LZC-AJ SUNW 07/15/01 $14 JAN-2003 $ 15 VZX-AC CC JAN-2003 $12.5 VZX-AV JAN-2004 $ 15 LSU-AC CC JAN-2004 $ 10 LSU-AB ABX 07/22/01 $14 JAN-2003 $ 15 VBX-AC CC JAN-2003 $ 10 VBX-AB JAN-2004 $ 15 LBX-AC CC JAN-2004 $ 10 LBX-AB GLM 07/22/01 $15-16 JAN-2003 $ 20 OML-AD JAN-2004 $ 20 KLW-AD New Portfolio Plays None New Watchlist Plays ABX - Barrick Gold $15.60 Economic fears seem to lurk around every corner with pathetic earnings in virtually every sector of the market. With the economies of Europe and Asia slowing as well, it doesn't look like the expected increased demand is going to come from those areas. To make things worse, forward-looking comments from leading Technology CEOs point towards the much-hyped second-half recovery occurring a year late, in 2002. Then we have the meltdown of the Argentine currency spreading monetary fears throughout the South American region. What's a bull to do? Look for an expected pocket of strength. It looks like that pocket is starting to emerge in the form of Gold stocks. Yes, you read that right. Take a quick look at the long-term charts of the Gold and Silver index (XAU.X). The weekly Stochastics has flattened and is starting to turn as the index has steadily advanced throughout the month of July. ABX almost perfectly mirrors the movement of the XAU, giving us a convenient way to play the index, which typically performs well in troubling economic times. Support looks very solid at $14 with even stronger support just above $13, giving us a play with easily managed risk. We want to target new entries on a dip near $14.00-14.25. That should coincide with the daily Stochastics returning to oversold. We will then place our stop at $13. Note that I have listed more strikes than usual, as I like this trade for Covered Calls. If you plan to reduce your cost basis by following this strategy, I would recommend using the strikes listed followed by 'For Covered Call', as it will allow greater flexibility in the selection of which front-month calls to sell. BUY LEAP JAN-2003 $15.00 VBX-AC BUY LEAP JAN-2003 $10.00 VBX-AB For Covered Call BUY LEAP JAN-2004 $15.00 LBX-AC BUY LEAP JAN-2004 $10.00 LBX-AB For Covered Call GLM - Global Marine, Inc. $17.37 Has anybody else noticed the carnage in the Oil Services sector? The relevant index (OSX.X) fell 40% between mid-May and the middle of this past week. Do you think the selling is likely to continue? Neither do I! With rising crude oil inventories pressuring the price of petroleum products, investors have been expecting the outsized profits in the sector to begin to wane. But OPEC is rattling sabers, talking of production cuts, and it looks like the OSX is ready to recover with the weekly Stochastic oscillator reversing from its most oversold reading since the summer of 1998. GLM is looking like a good bet in the sector, after posting inline earnings on Wednesday and rallying solidly in response. It's chart is almost a perfect match for the OSX index and there has been strong buying volume over the past few days. While we need to let the stock go for this cycle on the Stochastics oscillator, we should get an attractive entry when it runs its course and returns to the oversold region, likely dropping the price back into the $15-16 range. A bounce from that area will be our signal to enter the play in anticipation of a run at the first level of major resistance between $23-24. A close below $14 would be a very negative development and would have us removing the stock from our list. BUY LEAP JAN-2003 $20.00 OML-AD BUY LEAP JAN-2004 $20.00 KLW-AD Drops BEAS $23.01 Given the carnage in the Software sector this week thanks to scary earnings reports from the likes of MSFT and SEBL, and the resultant selling in shares of BEAS, this stock is not looking nearly as attractive as it did a few short weeks ago. We may be cutting bait just as an entry point materializes, but it looks like there is a lot more risk in the Software sector than the potential reward. Rather than leave it on the Watch List where we could get a bad entry, we'll remove it and consider playing it in the future when Software stocks start seeing more positive movement. AOL $44.65 Announcing earnings 3 cents ahead of estimates on Wednesday wasn't enough to prop up AOL, especially when the company confessed that they achieved those numbers on lighter than expected revenues. Raising a cautionary flag for the rest of the year due to weak online ad spending was all investors needed to push them into sell mode and AOL plunged through our $48 stop at the open and never looked back. With solid support near our stop firmly broken, the bulls will need to do some damage control and we don't want to be part of that activity. We'll move to the sidelines until conditions improve. EMC $18.05 Quick in and quick out. We knew that we were playing with fire, stepping into EMC after its recent plunge, but were really expecting to see the $19-20 level hold as support. After another disappointing earnings report on Wednesday, the selling pressure was too much for the bulls to withstand as the Storage stock fell sharply, coming to rest just above $18. So while the downside was limited, it wasn't limited enough for our purposes. The Tech correction continues, and we were once again punished for trying to find a bottom in a group that hasn't finished falling. EMC will likely shine when growth returns to the sector, but now is apparently not the time to play. We'll move to the sidelines for now and lick our wounds. SEBL $37.64 Strong second quarter results were not enough to save our SEBL play, especially when CEO Tom Siebel warned of tough times ahead, guiding estimates lower for the 4th quarter. There was no ambivalence in investors' response as they sold the stock in volume, dropping it below our $38 stop on volume of more than 50 million shares. That took us out of the play and it is a good thing as the stock continued to plunge later in the week, breaching $32 before finding any buying support. Another of the plays that I got suckered into buying on strength, this one never recovered far enough to get our play into the black. With the gloomy guidance for the remainder of the year, the stock needs to spend some time in rehab before we want to consider it 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. Sign up for a two week free trial and see for yourself at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=2208 ************************************************************ ********** 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 07-22-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/3021_5.asp ************* COVERED CALLS ************* Success Basics: Trading The Trend By Mark Wnetrzak Trading with the trend increases the probability of success in almost every situation because by definition, a "trend" is more likely to continue than to change. In most cases, the trend is simply the general direction of the market and the bias of any financial instrument will usually persist until something occurs to change the balance of supply and demand. When a stock price moves above a recent channel or trading range, it's an indication the character of the trend has changed and successful investors go with the momentum of the issue, not against it. Those who trade in the direction of the primary trend are following the market, rather than trying to predict it and the probability of profit is much higher when you participate in positions that benefit from the underlying issue's prevailing tendency. Most investors have heard the saying "The trend is your friend" and using the trend to your advantage is certainly one of the tried and true market principles. This is a common approach utilized by the majority of successful traders in the industry and there are numerous advantages to systems that profit from simply following the primary direction of the underlying issue. One of the most important aspects is the virtually effortless placement of profit targets and stop limits, which eliminate the human elements of subjective judgment and emotion in determining the future movement of the market. Trading with the trend means you will participate in liquid markets because volume generally coincides with any definitive movement in a financial instrument. The amount of trading activity is also an important component of technical analysis and where there is high volume, there will be stronger, more obvious trends. Of course, active markets usually provide better opportunities for traders because the increased liquidity produces timely executions of orders and the technical signals are much more accurate. Defining primary trends and trading in the appropriate direction is relatively easy, however it can be difficult to time the exit for maximum return. In addition, entering on the correct side of the prevailing trend is important but if you don't know how to close the play with a profit, there is little point in initiating the trade. Exploiting each portfolio position for the greatest possible gain is a critical element of any profitable trading plan and the technique must be mastered for consistent success. If you take profits too quickly on each trade, it will be difficult to achieve long-term prosperity because the small capital gains will rarely exceed the portfolio's overall losses. A popular adage suggests you should "let your profits run" and that maxim holds true in almost every financial endeavor. One way to ensure that outcome is identify the price levels that will signal a change in trend, giving you precise entry and exit points for each position. In most cases, you should close any play in which the underlying trend changes significantly, thus protecting current gains and minimizing losses. To be successful, a trader must be disciplined and act according to the predetermined plan regardless of whether it "feels" right. Unfortunately, losses are an inescapable part of trading and even simple "trend-following" strategies endure a sizable percentage of losing positions. That's why it is so important to limit the size of the these losses; so you will have adequate funds to capitalize on the major trends when they occur. Professional investors know that taking losses is a necessary element of trading in the stock market, however they are able to remove the biggest obstacles to consistent returns (ego and other emotions) by adhering to profit targets and stop-limits. These traders also have confidence in a systematic approach to profiting in the market and they evaluate their performance based on many positions over an extended period of time. In short, they know the formula for successful trading: a proven, well-defined strategy; the discipline to implement it correctly and in a timely manner; and the patience to allow it to profit over the long-term. 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 PCLN 7.68 8.38 JUL 7.50 0.85 *$ 0.67 10.7% AKSY 10.31 9.91 JUL 10.00 0.80 $ 0.40 9.1% DRMD 15.30 21.79 JUL 15.00 1.20 *$ 0.90 6.9% LEXG 11.66 10.55 JUL 10.00 2.45 *$ 0.79 6.2% CCRD 8.60 9.12 JUL 7.50 1.60 *$ 0.50 6.2% SAGI 15.50 14.20 JUL 12.50 3.50 *$ 0.50 6.0% WEBX 20.31 17.37 JUL 17.50 4.00 $ 1.06 5.6% ORCH 5.65 5.16 JUL 5.00 0.95 *$ 0.30 5.5% MCAF 11.90 16.99 JUL 10.00 2.70 *$ 0.80 5.4% SCI 25.50 25.69 JUL 22.50 3.80 *$ 0.80 5.3% MCAF 14.56 16.99 JUL 12.50 2.90 *$ 0.84 5.2% CWST 10.90 13.77 JUL 10.00 1.35 *$ 0.45 5.1% Z 15.54 15.81 JUL 15.00 1.30 *$ 0.76 4.6% CWST 10.92 13.77 JUL 10.00 1.40 *$ 0.48 4.4% TCNO 9.25 11.50 JUL 7.50 2.10 *$ 0.35 4.3% WCNX 31.50 34.35 JUL 30.00 2.90 *$ 1.40 4.3% BTX 8.50 6.91 JUL 7.50 1.90 $ 0.31 2.9% ROS 5.49 4.40 JUL 5.00 1.05 $ -0.04 0.0% FNSR 14.87 11.77 JUL 12.50 3.00 $ -0.10 0.0% SONE 13.85 11.65 JUL 12.50 1.85 $ -0.35 0.0% BCGI 15.01 13.76 JUL 15.00 0.85 $ -0.40 0.0% NUAN 18.02 14.96 JUL 17.50 2.05 $ -1.01 0.0% ACTR 11.00 7.86 JUL 10.00 1.70 $ -1.44 0.0% SEAC 18.06 22.00 AUG 17.50 2.15 *$ 1.59 8.7% NFLD 18.45 17.51 AUG 17.50 2.20 *$ 1.25 6.7% MCAF 14.31 16.99 AUG 12.50 2.70 *$ 0.89 6.7% TERN 6.12 5.44 AUG 5.00 1.60 *$ 0.48 6.6% HTCH 17.80 17.41 AUG 17.50 1.45 $ 1.06 5.6% CLPA 6.08 6.09 AUG 5.00 1.40 *$ 0.32 5.0% GZMO 12.80 13.00 AUG 10.00 3.40 *$ 0.60 4.6% CFLO 5.20 4.52 AUG 5.00 0.90 $ 0.22 4.4% CVAS 11.80 12.13 AUG 10.00 2.35 *$ 0.55 4.2% FFIV 16.90 14.30 AUG 15.00 3.10 $ 0.50 2.6% PHSY 20.98 16.92 AUG 17.50 4.50 $ 0.44 2.3% BCGI 15.90 13.76 AUG 15.00 2.05 $ -0.09 0.0% CYTO 5.40 4.27 AUG 5.00 0.95 $ -0.18 0.0% DMRC 22.88 17.16 AUG 20.00 4.10 $ -1.62 0.0% *$ = Stock price is above the sold striking price. Comments: A week later and now it's Mr. Softee: "How dare you!" Well, fasten your seat belts because it appears we're back on the "Trading Range" rollercoaster ride. Unfortunately, we may already be at the top of the hill. Next week may offer a clearer picture without the exaggerated moves of expiration week. Time to re-evaluate your outlook on any issues you may now own and act appropriately. Weigh taking profit or cutting losses quickly (to reinvest in more promising candidates) verses trying stay with an issue and/or attempting to roll forward. Obviously not an easy decision. As for August positions, the technical breakdown in Boston Comm. (NASDAQ:BCGI) and Digimarc (NASDAQ:DMRC) is quite worrisome and they become exit candidates. Using any rally to make a less painful exit may be wise. Cytogen (NASDAQ:CYTO) has not violated its June low but waiting for this confirmation may be too costly. 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 AHAA 34.80 AUG 30.00 GAQ HF 6.10 579 28.70 28 4.9% DSPG 23.21 AUG 22.50 DPQ HX 1.65 305 21.56 28 4.7% LU 7.61 AUG 7.50 ULU HU 0.75 17055 6.86 28 10.1% NFLD 17.51 AUG 15.00 DHQ HC 3.10 364 14.41 28 4.4% NPIX 11.15 AUG 10.00 XMQ HB 1.65 455 9.50 28 5.7% RCGI 31.16 AUG 30.00 NUQ HF 2.35 65 28.81 28 4.5% VNT 24.22 AUG 20.00 VNT HD 5.10 200 19.12 28 5.0% 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 LU 7.61 AUG 7.50 ULU HU 0.75 17055 6.86 28 10.1% NPIX 11.15 AUG 10.00 XMQ HB 1.65 455 9.50 28 5.7% VNT 24.22 AUG 20.00 VNT HD 5.10 200 19.12 28 5.0% AHAA 34.80 AUG 30.00 GAQ HF 6.10 579 28.70 28 4.9% DSPG 23.21 AUG 22.50 DPQ HX 1.65 305 21.56 28 4.7% RCGI 31.16 AUG 30.00 NUQ HF 2.35 65 28.81 28 4.5% NFLD 17.51 AUG 15.00 DHQ HC 3.10 364 14.41 28 4.4% 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). ***** AHAA - Alpha Industries $34.80 *** Positive Forecast! *** 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 Industries reported a 1st-quarter loss last Wednesday that was in line with analysts estimates. The good news was that the company didn't warn about the future, and in fact, AHAA said it is on track to return to profitability in its 3rd quarter. We simply favor the bullish breakout and a cost basis closer to technical support. AUG 30.00 GAQ HF LB=6.10 OI=579 CB=28.70 DE=28 TY=4.9% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=AHAA ***** DSPG - DSP Group $23.21 *** Stage I Speculation *** DSP Group (NASDAQ:DSPG) is a global leader in the development and marketing of high-performance, cost-effective, licensable digital signal processing cores. The company's family of DSP cores provides solutions for low-power, cost- driven applications, such as cellular, broadband communication, VoIP, multimedia, advanced telecommunication systems, disk drive controllers and many other types of embedded control applications. By combining its DSP core technologies with its proprietary, advanced speech- processing algorithms - DSP Group also delivers a wide range of enabling, application specific ICs for full-featured integrated telephony products and applications, including 900 MHz and 2.4 GHz wireless technologies. DSP Group reported earnings on Wednesday with revenues increasing 3% to $26,358,000 and a net income of $5.4 Million. Investors apparently were pleased with the results as the stock rallied sharply on Thursday. The current bullish technicals suggest further upside potential as DSPG forges a Stage I base. AUG 22.50 DPQ HX LB=1.65 OI=305 CB=21.56 DE=28 TY=4.7% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=DSPG ***** LU - Lucent Technologies $7.61 *** A Dog In The Pound *** Lucent Technologies (NYSE:LU) USA, designs and delivers the systems, software and services for next-generation communications networks for service providers and enterprises. Backed by the research and development of Bell Labs, Lucent focuses on high- growth areas such as broadband and mobile Internet infrastructure; communications software; Web-based enterprise solutions that link private and public networks; and professional network design and consulting services. Ok, everyone knows Lucent is expected to post another loss next week; but how does the company plan to accelerate its restructuring? Analysts expect Lucent's cost- cutting efforts will show fruit this quarter with an improving balance sheet and strong results in the company's wireless and optical businesses. And what about the fiber-optic deal? Hey, every dog has its day! We feel this play offers a favorable entry point from which to speculate on Lucent's future share value. AUG 7.50 ULU HU LB=0.75 OI=17055 CB=6.86 DE=28 TY=10.1% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=LU ***** NFLD - Northfield Laboratories $17.51 *** 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. Another week and the rally continues. Again, we simply like Northfield's bullish move up and out of a year-long base. Make sure you do your homework! AUG 15.00 DHQ HC LB=3.10 OI=364 CB=14.41 DE=28 TY=4.4% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=NFLD ***** NPIX - Network Peripherals $11.15 *** New Trading Range? *** Network Peripherals (NASDAQ:NPIX) supplies a full range of Layer 2/3 Ethernet switching solutions based on its NuWaveArchitecture, a combination of proprietary chips and high-performance software. The Company's product development and customer care efforts are focused on market-specific solutions to help network owners handle increased traffic, including media-rich applications. NPIX's technology helps end users dynamically manage bandwidth to increase the power, flexibility and business value of their networks. There's no recent (public) news as Network Peripherals consolidates after a dashing rally out of a 6-month base in May. Maybe investors are waiting to see the results of the new merger agreement with FalconStor. The stock appears to have moved up to a new trading range with technical support near our cost basis. AUG 10.00 XMQ HB LB=1.65 OI=455 CB=9.50 DE=28 TY=5.7% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=NPIX ***** RCGI - Renal Care Group $31.16 *** Health Sector *** Renal Care Group (NASDAQ:RCGI) is a dialysis services company that provides care to patients with kidney disease. The Company currently treats approximately 17,000 patients through 209 owned outpatient dialysis facilities, in addition to providing acute dialysis services to more than 112 hospitals. Over 5,000 associates provide services across the Company's 25-state network. Renal Care Group continues to rally higher on bullish technicals and is on the verge of making a new all-time high. The Health Services Sector has been one of the few strong areas during the last year and RCGI should make a fine addition to any long-term portfolio. We simply favor the breakout above a two-year consolidation area. Earnings are due August 1. AUG 30.00 NUQ HF LB=2.35 OI=65 CB=28.81 DE=28 TY=4.5% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=RCGI ***** VNT - Compania Anonima Nacional $24.22 *** Take-over Target? *** Compania Anonima Nacional Telefonos de Venezuela (NYSE:VNT) is a full service telecommunications provider offering switched, fixed, local and domestic and international long distance tele- phone service throughout Venezuela. The Company also offers wireless services, public telephones, telecommunications centers, private networks, rural telephone services, packet-switched data transmission, Internet access, directory information services and other value-added services. The Company owns all of the Venezuelan public exchanges and the nationwide network of public telephone lines and public national and international long distance telephone transmission facilities. It has been reported that there is no concrete news to confirm widespread past speculation about a possible takeover battle for VNT between Spain's Telefonica and Verizon Communications (NYSE:VZ). I'm just noticed the tape and finding the action quite interesting. Hmmm, if you believe someone will buy the company...they will? Ok, I'm pushing the "Field of Dreams" thing to far...maybe... AUG 20.00 VNT HD LB=5.10 OI=200 CB=19.12 DE=28 TY=5.0% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=VNT ***************** 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 8.53 AUG 7.50 QFW HU 1.90 1096 6.63 28 14.3% CLRS 8.20 AUG 7.50 RPU HU 1.40 729 6.80 28 11.2% SEAC 22.00 AUG 20.00 UEG HD 3.10 14 18.90 28 6.3% ICST 18.39 AUG 17.50 IUY HW 1.80 0 16.59 28 6.0% GZMO 13.00 AUG 12.50 QGG HV 1.15 124 11.85 28 6.0% CNXT 8.82 AUG 7.50 QXN HZ 1.70 371 7.12 28 5.8% POWI 19.77 AUG 17.50 FPW HW 2.90 80 16.87 28 4.1% ***************** NAKED PUT SECTION ***************** Successful Investing: Attitude and Outlook is Important! By Ray Cummins A well-known stock market expert once said, "There may be as many different investment goals as there are investors." Indeed that is a true statement and determining how best to profit from the market is one of the most difficult obstacles that inexperienced investors must overcome. The recent market slump makes obvious the pitfalls of the "buy and hold" concept and the problems with long-term portfolio positions. However, there is merit to this type of investing when it is incorporated into a balanced approach to financial security and it is still the most successful method today in all financial markets. Most experts say that a combination of investments will provide the best balance of risk and reward in a long-term portfolio. A diverse group of long-term issues is a good foundation for any novice investor and a qualifying retirement account can help defer taxes. Those who need current income can choose from a vast number of dividend paying securities, many of which also have an excellent record of share price growth. Investors who choose to avoid certain types of business activity (based on ethical or financial principles) can still find many value-based stocks that meet their investment objectives. Those who wish to achieve the same performance as an individual industry or sector can purchase mutual funds and other financial instruments that mirror specific groups of stocks. More aggressive traders can apply value-investing principles to blue chip companies; buying stocks that are undervalued (generally identified by a low P/E ratio) and selling those that are overvalued. As a portfolio matures, investors can also diversify into bonds or treasury instruments to benefit from market and interest rate fluctuations. While strategy is important, it is also imperative to approach investment activities with the right attitude and expectations. Trying to achieve too much from a portfolio can put the account "in the red" quickly (greed can lead to terrible decisions), and accepting returns that barely surpass the current inflation rate will prevent a portfolio from growing. The "Buy-Hold" approach has worked well over the last quarter of the century but it is still important to be proactive with your core holdings. While most investors who make the effort to learn about the stock market are not satisfied to achieve the same return as the Dow or the S&P 500 index, others will actively seek mediocrity. Just look at the number of index funds that are proffered to investors who then are relegated to losing just what the market loses and gaining no more than the market gains. Fortunately, today's modern trading forums provide a variety of profit opportunities and there are numerous stock and option strategies for the average investor. The key to success is to follow a carefully planned approach with discipline and patience and always focus on limiting losses. So how do you determine a reasonable expectation? Most investors who participate in historically profitable strategies will easily average 15%-25% return on an annual basis. In the long-term, 10% a year is the typical return for broad market stocks in general. In comparison to a rigid investing plan, the Dow's performance is just what it's described as; average, and yet Warren Buffett made his fortune (Berkshire Hathaway is worth over a billion dollars), by focusing on a mere 15% annual return on assets. His primary goal however, was to maintain a substantial margin of safety in all of the portfolio's holdings. From a long-term viewpoint, that approach is valid even today as the recent activity suggests the underlying trend of the protracted bull-market is definitely in question. Benjamin Graham has long been the master for investors who ascribe to the "buy-hold" mentality but Charles Dow may have said it best, "The man who is prudent and careful in carrying on his business seems to think that totally different methods should be employed in dealing with stocks. Of course, nothing could be further from the truth." 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 AMZN 15.27 16.98 JUL 12.50 0.25 *$ 0.25 15.1% DLTR 31.27 34.54 JUL 30.00 0.75 *$ 0.75 13.6% PPD 19.66 19.15 JUL 15.00 0.50 *$ 0.50 12.3% CBST 34.50 35.61 JUL 30.00 1.35 *$ 1.35 11.0% MDCC 22.61 19.05 JUL 17.50 0.80 *$ 0.80 10.9% MCHP 33.43 33.60 JUL 30.00 0.80 *$ 0.80 10.8% ANAD 23.00 21.00 JUL 17.50 0.35 *$ 0.35 10.2% ALXN 24.00 20.05 JUL 20.00 0.40 *$ 0.40 9.7% CTXS 31.00 31.65 JUL 27.50 0.85 *$ 0.85 9.5% ACTN 22.50 25.19 JUL 20.00 0.95 *$ 0.95 9.2% KSWS 26.10 30.80 JUL 25.00 0.40 *$ 0.40 8.9% EXBD 38.57 36.39 JUL 35.00 1.05 *$ 1.05 8.8% DMRC 18.06 17.16 JUL 15.00 0.65 *$ 0.65 8.4% CSTR 22.25 24.90 JUL 20.00 0.40 *$ 0.40 8.2% PXLW 30.66 22.70 JUL 22.50 0.65 *$ 0.65 6.9% NSM 26.91 27.78 JUL 22.50 0.55 *$ 0.55 6.9% SLVN 22.14 26.01 JUL 20.00 0.45 *$ 0.45 6.8% NKE 44.55 47.36 JUL 40.00 0.85 *$ 0.85 6.5% LPNT 39.70 45.05 JUL 35.00 0.70 *$ 0.70 6.4% HCR 27.20 31.70 JUL 25.00 0.65 *$ 0.65 6.1% GNSS 33.49 34.40 JUL 25.00 0.60 *$ 0.60 6.0% AVGN 21.25 17.27 JUL 15.00 0.45 *$ 0.45 5.9% VION 8.82 7.10 JUL 7.50 0.50 $ 0.10 5.3% WEBX 26.30 17.37 JUL 17.50 0.40 $ 0.27 5.2% PRHC 30.87 35.01 JUL 25.00 0.40 *$ 0.40 5.1% UIS 12.94 12.14 JUL 12.50 0.65 $ 0.29 3.9% SCIO 27.03 19.11 JUL 20.00 0.60 $ -0.29 0.0% ISIL 36.40 29.10 JUL 30.00 0.50 $ -0.40 0.0% ARBA 5.82 4.18 JUL 5.00 0.25 $ -0.57 0.0% DMRC 22.95 17.16 JUL 20.00 0.70 $ -2.14 0.0% AREM 17.75 14.46 AUG 12.50 0.70 *$ 0.70 14.3% AMZN 16.98 16.98 AUG 12.50 0.50 *$ 0.50 11.1% NMTC 23.00 22.84 AUG 17.50 0.55 *$ 0.55 9.3% APCS 16.93 15.75 AUG 15.00 0.55 *$ 0.55 8.9% NTIQ 34.14 29.60 AUG 25.00 0.65 *$ 0.65 7.6% ICST 18.54 18.39 AUG 15.00 0.35 *$ 0.35 7.2% AHAA 33.47 34.80 AUG 25.00 0.55 *$ 0.55 6.6% ZRAN 32.97 37.70 AUG 25.00 0.60 *$ 0.60 6.0% CTXS 33.53 31.65 AUG 25.00 0.45 *$ 0.45 5.5% PCL 28.49 28.34 AUG 25.00 0.60 *$ 0.60 5.1% PLUG 20.25 12.46 AUG 15.00 0.70 $ -1.84 0.0% *$ = Stock price is above the sold striking price. Comments: Expiration Friday provided very little of the historic "bullish" bias and with new technology issues continuing to "crash and burn" almost every session, this month's results were actually somewhat surprising. All of the issues on the watch-list; Scios (NASDAQ:SCIO), Intersil (NASDAQ:ISIL) and Alkermes (NASDAQ:ALKS) finally succumbed to selling pressure but they had previously offered favorable exit opportunities. Ariba (NASDAQ:ARBA) was a speculative entry position, so ownership of the issue with a cost basis near the current price is an acceptable outcome. The unexpected losers were Digimarc (NASDAQ:DMRC), which tanked after the firm reported a second-quarter loss that was a penny wider than the consensus estimate and Plug Power (NASDAQ:PLUG), which slumped on news the company priced a follow-on offering of 4 million shares of its common stock at $12 per share. The announcement came after the issue had already retreated 25% in sympathy with a weak profit outlook by one of its competitors and with the company offering to sell shares at a price below the current market value, there was little hope for a positive outcome. Traders who did not make a move when the news became public may consider adding to their current position when the stock begins to stabilize in its new price range. Positions Closed: MRV Communications (NASDAQ:MRVC), Intermedia Communications (NASDAQ:ICIX), Maxitrone (NASDAQ:MONE), Amylin Pharmaceuticals (NASDAQ:AMLN), and Alkermes (NASDAQ:ALKS) 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 AMZN 16.98 AUG 12.50 ZQN TQ 0.45 3717 12.05 28 12.7% BRCM 41.00 AUG 25.00 RCQ TE 0.40 11185 24.60 28 5.1% DTHK 14.21 AUG 10.00 DTU TB 0.30 21 9.70 28 10.4% ILUM 30.30 AUG 25.00 ILU TE 0.40 20 24.60 28 6.0% NMTC 22.84 AUG 17.50 QEK TW 0.45 33 17.05 28 9.7% PHTN 33.18 AUG 25.00 PDU TE 0.40 10 24.60 28 6.2% SEAC 22.00 AUG 17.50 UEG TW 0.35 20 17.15 28 8.0% 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 AMZN 16.98 AUG 12.50 ZQN TQ 0.45 3717 12.05 28 12.7% DTHK 14.21 AUG 10.00 DTU TB 0.30 21 9.70 28 10.4% NMTC 22.84 AUG 17.50 QEK TW 0.45 33 17.05 28 9.7% SEAC 22.00 AUG 17.50 UEG TW 0.35 20 17.15 28 8.0% PHTN 33.18 AUG 25.00 PDU TE 0.40 10 24.60 28 6.2% ILUM 30.30 AUG 25.00 ILU TE 0.40 20 24.60 28 6.0% BRCM 41.00 AUG 25.00 RCQ TE 0.40 11185 24.60 28 5.1% Company Descriptions LB=Last Bid price, OI=Open Interest, CB=Cost Basis or break-even point, DE=Days to Expiry, TY=Target Yield (monthly basis). ***** AMZN - Amazon.com $16.98 *** Earnings Speculation! *** 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. Now the news reports are saying that sales are sluggish, but the key metric to look at is gross profit dollars. Amazon has said it will post its first profit in the fourth quarter and to deliver, the company has turned its attention to squeezing profits from the stuff it already sells. Traders who think the earnings report will be acceptable to investors can speculate on that outcome with this position. AUG 12.50 ZQN TQ LB=0.45 OI=3717 CB=12.05 DE=28 TY=12.7% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=AMZN ***** BRCM - Broadcom $41.00 *** Low Risk Entry Point? *** Broadcom (NASDAQ:BRCM) is a provider of highly integrated silicon solutions that enable broadband communications and networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies system-on-a-chip solutions for applications in digital set-top boxes and cable modems, high-speed local, metropolitan and wide area and optical networks, home networking, Voice over Internet Protocol (VoIP), carrier access, residential broadband gateways, direct broadcast satellite and also terrestrial digital broadcast, digital subscriber line (xDSL), wireless communications, server solutions, and network processing. The company's quarterly earnings report was favorable and the news of a decision in the patent infringement lawsuit by Intel (NASDAQ:INTC) may provide the just dip we need to increase the initial premium in the position. Traders who like Broadcom as a long-term portfolio holding should consider this low-risk entry point and "target shoot" a higher credit initially, to allow for any near-term consolidation in its share value. AUG 25.00 RCQ TE LB=0.40 OI=11185 CB=24.60 DE=28 TY=5.1% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=BRCM ***** DTHK - DigitalThink $14.21 *** A Big Day! *** DigitalThink (NASDAQ:DTHK) is the leading provider of e-learning business solutions to Global 2000 companies. DigitalThink is at work training employees, making sales channels more effective and assuring customer loyalty at companies such as Sun Microsystems, EDS, Deutsche Bank, GE Capital, KPMG Consulting, Charles Schwab, Cisco Systems and Circuit City. DigitalThink shares rallied last week after the company announced record revenues for the first quarter of fiscal year 2002. Revenues for the first quarter of 2002 were $15 million, compared with $6.3 million for the period last year, an increase of 140%, and an increase of $2.2 million or 17% over the previous quarter. The company delivered strong revenue growth and exceeded the consensus for both revenues and earnings. DigitalThink also continues to demonstrate its unique e-learning business solutions are indispensable as corporations look towards educating both their customers and employees quickly and with measurable results. We just like the technical breakout! AUG 10.00 DTU TB LB=0.30 OI=21 CB=9.70 DE=28 TY=10.4% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=DTHK ***** ILUM - Illuminet Holdings $30.30 *** Solid Earnings! *** Illuminet Holdings (NASDAQ:ILUM) operates an unaffiliated Signaling System 7 network in the United States, and provides complementary intelligent network and SS7 services to telecommunications carriers. The majority of the company's products and services are directly related to its SS7 network, as either part of the connectivity, switching and transport function of the network or as intelligent network services. In addition, the company provides clearinghouse services and licenses specially designed software for measuring network usage. On Thursday, the network services provider reported that second-quarter earnings more than doubled as core database and wireless roaming services business remained strong. Revenues rose 30% in the second quarter to $47 million up from $36 million a year ago. The company expects revenues to grow 23-25% year-over-year, with operating income margins of about 30% and they are comfortable with First Call's consensus estimate of $0.28 earnings per share in the third quarter. AUG 25.00 ILU TE LB=0.40 OI=20 CB=24.60 DE=28 TY=6.0% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=ILUM ***** NMTC - Numerical Technologies $22.84 *** Second Chance! *** 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=0.45 OI=33 CB=17.05 DE=28 TY=9.7% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=NMTC ***** PHTN - Photon Dynamics $33.18 *** Growing Smarter! *** Photon Dynamics (NASDAQ:PHTN) is a leading global supplier of yield management solutions for the display, electronics and glass markets. Photon Dynamics' patented image acquisition and image processing, electro-optical design, and systems engineering expertise are currently used for test, repair and inspection of flat panel displays; inspection of cathode ray tube displays and automotive glass; and inspection of printed wiring assemblies and advanced semiconductor packaging. PHTN develops systems that help manufacturers collect and analyze data from the production line, and quickly diagnose and repair process-related defects, thereby allowing manufacturers to decrease material costs and improve throughput to gain an incremental yield edge critical to success. The company also recently completed the acquisition of privately held Intelligent Reasoning Systems, a business that develops and manufactures advanced, automated optical inspection (AOI) systems utilizing its patented adaptive knowledge-based software. Photon says the acquisition will provide increased growth opportunities in yield management for printed wiring assembly and high-density interconnect (technologies in the electronics market. In PHTN's latest earnings report, cash flow was positive and their balance sheet remains strong with over $100 million in existing capital and related investments. AUG 25.00 PDU TE LB=0.40 OI=10 CB=24.60 DE=28 TY=6.2% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=PHTN ***** SEAC - SeaChange $18.06 *** On The Move! *** SeaChange (NASDAQ:SEAC) develops, manufactures and sells systems that automate the management and distribution of both short-form video streams (advertisements) and long-form products (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 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. In early July, Adams Harkness initiated coverage of SEAC with a "buy" rating and on Friday, SEAC shares rallied on news of an LA Times report that Vivendi Universal has inked deal to license its movies to cable operators for new video-on-demand services. According to the article, the agreement could make video-on-demand films viable. We favor the bullish technicals as SEAC moves to the top of a recent trading range. AUG 17.50 UEG TW LB=0.35 OI=20 CB=17.15 DE=28 TY=8.0% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=SEAC ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ZRAN 37.70 AUG 30.00 ZUO TF 0.90 132 29.10 28 11.6% YHOO 17.94 AUG 15.00 YHZ TC 0.50 3273 14.50 28 11.5% NTIQ 29.60 AUG 22.50 CQT TX 0.60 0 21.90 28 10.0% BGC 18.52 AUG 17.50 BGC TW 0.65 15 16.85 28 10.0% PPDI 36.09 AUG 30.00 PJQ TF 0.65 26 29.35 28 7.8% EXTR 26.08 AUG 17.50 EUT TS 0.35 1020 17.15 28 6.8% ************************ SPREADS/STRADDLES/COMBOS ************************ ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, July 20 Stocks moved lower Friday as a new round of disappointing revenue forecasts from the technology group ended any hopes for a bullish options expiration. In spite of the slew of negative reports, the major equity averages finished only modestly lower and stocks in the broader market groups such as biotechnology, oil service, and pharmaceuticals ended the session with an upbeat bias. General Motors (NYSE:GM) led the blue-chip gainers but the Dow industrial average ended 33 lower points at 10,576. The NASDAQ Composite was down 17 points at 2,029 even as Internet shares saw renewed buying pressure. The S&P 500 index ended 4 points lower at 1,210. On the NYSE, trading volume reached 1.15 billion shares with advances beating declines 15 to 14. NASDAQ volume was below average with 1.62 billion shares exchanged and declines pacing advances 9 to 8. In the U.S. bond market, the 30-year Treasury fell 3/32, pushing its yield up to 5.53%. Portfolio Activity: Despite the relatively unexciting activity during this expiration period, July has been a great month for the "Combos" portfolio. All of the plays in the Credit Spreads section were profitable and the Straddles group also produced some big winners in General Dynamics (NYSE:GD), Homestore.com (NASDAQ:HOMS) and Jabil Circuit (NYSE:JBL). Among the time-selling positions, only one position was negative at expiration (Providian - NYSE:PVN) and that play offered two favorable exit opportunities after the spread was initiated. The lone credit strangle for the month of July, ebay (NASDAQ:EBAY) finished at maximum return and the Reader's Request play (bearish calendar spread) in Cisco Systems (NASDAQ:CSCO) was also a profitable and popular position. The current offering in that category is a synthetic position in Altera (NASDAQ:ALTR) and although it has yet to produce a profit, our reader is confident the issue will rebound prior to September's option expiration. Summary of Current Positions: ****************************************************************** - CREDIT SPREAD SUMMARY - ****************************************************************** Stock Pick Last Position Credit C/B G/L Status AMGN $60.68 $60.71 JUL70C/65C $0.80 $0.00 $0.80 Closed COF $60.25 $63.43 JUL70C/65C $0.80 $0.50 $0.30 Closed FDC $69.35 $71.54 AUG60P/65P $0.60 $0.00 $0.60 Open GM $59.05 $65.00 JUL50P/55P $0.50 $0.00 $0.50 Closed ITG $49.50 $51.94 JUL60C/55C $0.75 $0.00 $0.75 Closed MHP $65.96 $61.33 AUG75C/70C $0.65 $0.00 $0.65 Open UHS $44.50 $49.85 JUL37P/40P $0.35 $0.00 $0.35 Closed SEPR $39.80 $39.95 JUL30P/35P $0.65 $0.00 $0.65 Closed TEVA $65.88 $65.61 JUL55P/60P $0.55 $0.00 $0.55 Closed WLL $48.88 $49.70 JUL55C/50C $1.05 $0.00 $1.05 Closed Note: Capital One (NYSE:COF) was closed early to prevent potential losses and PepsiCo (NYSE:PEP), an adjusted position from June, expired profitably. A credit spread is profitable if the underlying stock finishes the expiration period beyond (below call/above put) the sold option in the position. ****************************************************************** - CALENDAR SPREAD SUMMARY - ****************************************************************** Stock Pick Last Position Debit Value G/L Status CLCI $10.00 $9.78 JAN10C/JUL10C $1.10 $1.35 $0.25 Closed HCA $42.26 $45.20 AUG45C/JUL45C $0.55 $1.30 $0.75 Closed JHF $39.61 $41.04 SEP40C/JUL40C $1.10 $1.65 $0.55 Closed NCC $28.14 $30.95 OCT30C/JUL30C $0.80 $0.95 $0.15 Closed SBGI $9.00 $10.47 SEP10C/JUL10C $0.45 $0.60 $0.15 Closed Adjusted positions - new prices for August: CLCI $10.00 $9.78 JAN10C/AUG10C $0.85 $1.05 $0.20 Open JHF $39.61 $41.04 SEP40C/AUG40C $0.00 $0.70 $0.70 Open NCC $28.14 $30.95 OCT30C/AUG30C $0.55 $0.60 $0.05 Open SBGI $9.00 $10.47 SEP10C/AUG10C $0.20 $0.30 $0.10 Open Note: The Providian (NYSE:PVN) AUG-$65C offered another break-even opportunity on Tuesday and regardless of which way you played the Reader's Request position in Cisco (NASDAQ:CSCO), there were many occasions for profitable exits (or adjustments). The calendar (or time spread) is profitable if the value of the position exceeds the initial debit (or cost-basis) at the end of the expiration period for the long position. However, because we track the plays based on the current closing cost/value, the gains for time spreads will rarely be reflected until the play closes. Each month, as we sell a new option against the long position, the net cost should decline or the position value should increase. ****************************************************************** - CREDIT STRANGLES - ****************************************************************** Stock Pick Last Position Credit Cost G/L Status EBAY $64.99 $66.80 JUL85C/45P $1.50 $0.50 $1.00 Closed Credit strangles are profitable if both positions remain OTM until expiration. The cost-to-close price can be used to compare the initial opening credit to the current spread value. ****************************************************************** - DEBIT STRADDLES - ****************************************************************** Stock Pick Last Position Debit M/V G/L Status CWP $16.22 $15.61 AUG17C/15P $0.95 $0.75 ($0.20) Open ENE $49.06 $48.16 AUG50C/50P $6.00 $5.80 ($0.20) Closed GD $74.35 $82.95 AUG70C/70P $6.40 $10.00 $0.10 Closed HOMS $35.29 $27.53 AUG35C/35P $6.20 $8.50 $2.30 Closed HOMS $35.29 $27.53 JUL35C/35P $3.20 $8.30 $5.10 Closed JBL $30.86 $28.44 JUL30C/30P $3.60 $6.50 $2.90 Closed MO $45.71 $46.00 JUL45C/45P $2.20 $2.40 $0.20 Closed MO $45.71 $46.00 AUG45C/45P $4.10 $4.25 $0.15 Closed NOK $19.00 $19.20 AUG20C/20P $3.45 $3.90 $0.30 Closed SYMC $40.11 $45.93 AUG40C/40P $7.20 $8.50 $1.30 Open VRTY $17.65 $17.60 AUG17C/17P $3.50 $3.30 ($0.20) Open M/V = Maximum Value G/L = Potential Gain or Loss Note: General Dynamics (NYSE:GD) was a big winner this week with a profit of $3.60 on $6.40 invested. Symantec (NASDAQ:SYMC) also offered an acceptable "early-exit" profit Friday when the issue rallied to $47 early in the session. Philip Morris (NYSE:MO) and Enron (NYSE:ENE) enjoyed uneventful earnings announcements, but Nokia (NYSE:NOK) jumped 15% after issuing an upbeat outlook. All three of these plays have future potential but have been closed in the interest of capital preservation. A debit-straddle is profitable when the closing credit in the position exceeds the initial cost. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** CLRS - Clarus $8.20 *** Cheap Speculation! *** Clarus (NASDAQ:CLRS) develops, sells and supports Internet-based business-to-business e-commerce solutions targeted for large to mid-size enterprises that automate the procurement, sourcing and settlement of goods and services. The company's software helps organizations reduce the costs associated with the purchasing and payment settlement of goods and services and helps to maximize procurement economies of scale. The company's digital marketplace solution provides a framework that allows companies to create trading communities and additional revenue opportunities. The company's solutions also benefit suppliers by reducing sales costs and providing the opportunity to increase revenues. Products have been licensed by customers such as Comcast Corporation, Burlington Northern Santa Fe Railroad and Mastercard International. Here's a great candidate for traders who like to participate in speculative, time-selling positions. The issue is in a bullish trend and the front-month option premiums are inflated due to the upcoming earnings report. That's a perfect opportunity for a strategy that benefits from the effects of time value erosion. This position is a less neutral and more bullish calendar spread, where the underlying issue is slightly below the strike price of the options. This technique is speculative with low initial cost and large potential profits. Two favorable outcomes can occur: the stock rallies in the short-term and the position is closed for a profit as time value erosion in the short option produces a net gain or; the underlying stock consolidates, allowing the sold option to expire and then eventually rallies above the long option strike price. PLAY (conservative - bullish/calendar spread): BUY CALL NOV-10 RPU-KB OI=68 A=$1.05 SELL CALL AUG-10 RPU-HB OI=617 B=$0.45 INITIAL NET DEBIT TARGET=$0.50 TARGET PROFIT=25% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=CLRS ****************************************************************** MDT - Medtronic $48.58 *** New Trading Range? *** Medtronic (NYSE:MDT) is a medical technology company, providing lifelong solutions for people with chronic disease. Their main products include those for bradycardia pacing, tachyarrhythmia management, atrial fibrillation and heart failure management, coronary and peripheral vascular disease, heart valve replacement, extracorporeal cardiac support, less-invasive cardiac surgery, malignant and non-malignant pain, movement disorders, spinal and neurosurgery, neurodegenerative disorders, and ear, nose and also throat surgery. The company's operating business units include cardiac rhythm management; vascular; cardiac surgery; and ENT, neurological and spinal. On July 10, a U.S. advisory panel backed Medtronic's experimental devise InSync, a type of pacemaker that sends electrical shocks to treat congestive heart failure. This is a key endorsement because the FDA usually follows its panels' advice. Since Guidant Corp. (NYSE:GDT) failed to win the panel's endorsement for a similar device, Medtronic should be the first company with a device that can tap into a market estimated to top $1 billion in about five years. Medtronic also recently confirmed Wall Street's earnings per share estimates of 27 cents for its fiscal first quarter and in a conference call with analysts, the company said it expected sales to accelerate in the second half of its fiscal year as it reaps the benefits of new product introductions. Technically, MDT has broken up and out of a 3-month base, climbing back above its 150-dma, suggesting further upside potential. The next area of resistance is near $54 while the tops of the recent consolidation area should provide support at the sold strike price. PLAY (very conservative - bullish/credit spread): BUY PUT AUG-40 MDT-TH OI=4957 A=$0.20 SELL PUT AUG-45 MDT-TI OI=4832 B=$0.60 INITIAL NET CREDIT TARGET=$0.50-$0.60 ROI(max)=11% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=MDT ****************************************************************** ISIP - Isis Pharma $13.61 *** Break-out? *** ISIS Pharmaceuticals (NASDAQ:ISIP) is engaged in genomics-based drug discovery and development focused on RNA (ribonucleic acid). RNA contains all of the information the cell needs to produce proteins. Interaction with RNA can keep disease-causing proteins from being produced. The company has integrated its expertise in molecular and cellular biology, chemistry, RNA biochemistry, bioinformatics, pharmacology and clinical development to create two technologies. Antisense, the company's leading technology, directly uses gene-sequencing information to rationally design drugs. From this technology, the company has put one product on the market and built a robust pipeline of numerous products in development, of which six products are in late stage clinical trials. Isis came up on a number of technical scans this week and some of the popular charting services have identified the issue as a "break-out" candidate. Isis has been in a 15-month Stage I base since its last seismic event and now appears on the verge of an upside movement. The issue has become more bullish and the recent rally above near-term resistance should encourage new buyers. The January high should also provide support near the sold strike at $12.50. PLAY (conservative - bullish/synthetic position): BUY CALL OCT-15.00 QIS-JC OI=683 A=$1.25 SELL PUT OCT-12.50 QIS-VV OI=72 B=$1.05 INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.50-$0.75 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $550 per contract. http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=ISIP ****************************************************************** - STRADDLES - Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable straddles. As with any recommendation, each play must be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. The probability of profit from these positions is also higher than other plays in the same strategy based on theoretical option pricing. News and market sentiment will have an effect on these issues, so review each play individually and make your own decision about the future outcome of the position. ****************************************************************** SRCL - Stericycle $50.65 *** Probability Play! *** Stericycle (NASDAQ:SRCL) is a regulated medical waste management company in North America, serving approximately 250,000 customers throughout the United States, Canada, Puerto Rico and Mexico. The company's network includes a large number of treatment and collection centers as well as various transfer and collection sites. The company uses this network to provide a broad service offering, including medical waste collection, transportation and treatment and related consulting, training and education services and products. The company's main services and operations are comprised of collection, transportation, treatment, disposal and recycling and its treatment technologies include a proprietary electro-thermal-deactivation system, as well as many traditional methods such as autoclaving and incineration. The company's quarterly earnings are due August 8. PLAY (conservative - neutral/debit straddle): BUY CALL AUG-50 URL-HJ OI=523 A=$3.00 BUY PUT AUG-50 URL-TJ OI=23 A=$2.25 INITIAL NET DEBIT TARGET=$5.00 TARGET PROFIT=25% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=SRCL ****************************************************************** AOL - American Online $44.31 *** Reader's Request! *** AOL-Time Warner (NYSE:AOL) is an integrated, Internet-powered media and communications company. The company was formed in connection with the merger of America Online and Time Warner in January of 2001 and as a result, America Online and Time Warner each became wholly owned subsidiaries of AOL Time Warner. The company's fundamental business areas are comprised of America Online, consisting principally of interactive services, Web brands, Internet technologies and electronic commerce; Cable, consisting principally of interests in cable television systems; Filmed Entertainment, consisting principally of interests in entertainment and television production; Networks, consisting principally of interests in cable and broadcast television networks; Music, consisting principally of interests in recorded music and music publishing; and Publishing, consisting primarily of interests in magazine publishing, book publishing and direct marketing. One of our readers asked if AOL would be a good candidate for a debit straddle, with the recent volatility and inexpensive option premiums. Straddle candidates are relatively simple to uncover and there are three rules to identifying favorable conditions for this strategy. First, the trader should select options that are undervalued (cheap). Next, the underlying security must have the potential to move (high or low) enough to make the straddle profitable. Finally, the underlying stock should have a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk/reward of the position. Based on that criteria, AOL is an acceptable candidate for the debit-straddle strategy. PLAY (conservative - neutral/debit straddle): BUY CALL AUG-45 AOE-HI OI=2290 A=$2.00 BUY PUT AUG-45 AOE-TI OI=12074 A=$2.60 INITIAL NET DEBIT TARGET=4.35-$4.40 TARGET PROFIT=25% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=AOL *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? 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