The Option Investor Newsletter Wednesday 07-25-2001 Copyright 2001, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/3155_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 07-25-2001 High Low Volume Advance/Decline DJIA 10405.67 +164.55 10405.67 10241.19 1.25 bln 1896/1167 NASDAQ 1984.32 + 25.08 1984.98 1942.58 1.68 bln 1912/1758 S&P 100 613.95 + 9.79 613.99 603.79 totals 3808/2925 S&P 500 1190.49 + 18.84 1190.52 1171.28 RUS 2000 476.99 + 2.73 476.99 471.52 DJ TRANS 2865.00 + 1.55 2866.27 2841.88 VIX 26.70 - 0.93 28.49 26.46 Put/Call Ratio 0.64 ****************************************************************** The Theory And Its Application The S&P 500 (SPX.X) continues to out perform the Nasdaq, relatively speaking. If that much holds true, "easier" profits may be found in the SPX over the short- and intermediate-terms. Of course, when I say "easier" profits, I'm referring to moves of the advancing nature. Wednesday's price action across the broad market averages reinforced the fact that the S&P 500 is leading. For the day, the SPX finished 1.60 percent higher, while the Nasdaq-100 finished 1.42 percent higher. Meanwhile, the Nasdaq Composite (COMPX) finished with a 1.25 percent gain, while the Dow Jones Industrial Average finished 1.59 percent higher. The following chart depicts the relative strength of the S&P 500 versus the Nasdaq-100. (I like to compare and contrast the SPX versus the NDX because those two cash indexes are also liquid futures contracts.) By employing simple direction analysis on the chart, we can determine that the SPX's out performance since early June is accelerating. Therefore, can we conclude: SPX = Profits * Relative Strength^2? Alright, that's stretching it; the point is, the path of least resistance to the upside is in the S&P 500. Because the SPX is out performing the NDX, that probably means the Nasdaq market is oversold, relatively speaking. The bullish percent figures for the two indicate that much. Through Tuesday's session, about 52 percent of the S&P 500's components were on sell signals, while 75 percent of the Nasdaq-100's components were on sell signals. Furthermore, daily stochastic readings for the NDX are more oversold than those for the SPX. Therefore, a short-term, strong market advance would probably allow for the NDX to outpace the SPX, due to the former's oversold condition. We must take into account, however, that the NDX is a higher beta index, thus greater risk. So we arrive at a question of preferences. Which is better, higher probabilities with less risk, or greater risk with potentially greater profits? The answer to that question depends upon individual preferences, and should dictate which index is the "better" to trade. To digress from my theorizing, there are three observations I'd like to point out concerning the price action of the S&P 500. The first is that the SPX bounced from its aggressive, ascending support line Tuesday around the 1165 level. That bounce marked the third observation, with the other two traced in late March and early April. Second, the SPX CLOSED on its 61.8 percent retracement level Tuesday at 1170. Although it dipped below that level Tuesday, its settlement around 1170 was more important. The third observation I'd like to make is of the voodoo black magic variety, and brought to my attention by Jeff Bailey. But it's compelling enough to write about, so bare with me. The SPX traced its year low at 1081 on March 22. Exactly nine days later, it bounced from 1091 before going on to stage an advance of historic proportions. Here's where it gets interesting. The SPX traced a relative low at 1168 on July 11. Exactly nine days later (Tuesday), it bounced from 1165. I'll let readers draw their own conclusions. The National Association of Realtors reported Wednesday that previously owned single family home sales fell by 0.6 percent during June, which was a smaller drop than expected. The housing market remains one of the strongest in the U.S. economy, as Greenspan reminded the Senate Tuesday. And one sector of the stock market that may be benefiting from the healthy housing business is the Forest & Paper Products Index (FPP.X). In fact, the FPP has been trading relatively strong versus the S&P 500, which may, in part, stem from the strong housing market. Components of the FPP that are especially leveraged to the housing market include Weyerhauser (NYSE:WY), Temple Inland (NYSE:TIN), Boise Cascade (NYSE:BCC), Georgia Pacific (NYSE:GP) and International Paper (NYSE:IP). It's worth noting, however, that any spike in energy prices does not serve this group of stocks well. But the natural gas stocks would most certainly be well served by a spike in energy prices. The Natural Gas Index (XNG.X), in contrast to the Forest & Paper Products Index, has traded extremely poorly relative to the S&P 500 recently. But OPEC's actions Wednesday could reverse that trend over the short-term. Oil Producing & Exporting Countries' (OPEC) ministers agreed Wednesday to cut production by 4 percent in an attempt to lift sagging crude prices. As a result, crude futures (CL01U) rose to $26.80 per barrel Wednesday - their highest level in two weeks. In addition, the American Gas Association (AGA) reported midday that inventories recently rose less than expected. (It's all about supply and demand, baby!) Following the AGA report, with the momentum of OPEC's actions, the Natural Gas Index and its components skyrocketed to a 5 percent gain for the day, far outpacing the broader market averages. This group of stocks and indeed the broader energy sector is deeply oversold, more so than the Nasdaq-100. As such, a sustainable advance is possible if crude prices continue working higher. Stocks in the Natural Gas Index worth investigating include Anadarko Petroleum (NYSE:APC), Burlington Resources (NYSE:BR), EOG Resources (NYSE:EOG), El Paso (NYSE:EPG) and Noble Affiliates (NYSE:NBL). There may be a compelling trade setting up in the XNG relative to the FPP if energy prices continue higher. One earnings report in the after hours session that may perpetuate the momentum in the Natural Gas Index was that from Haliburton (NYSE:HAL). The world's largest oil service company and former child of Vice President Dick Cheney reported earnings that beat estimates by 3 cents per share. Shares rose by a little more than $1 in after hours. Like the XNG and its components, shares of Haliburton have performed extremely poorly recently. (Haliburton is a component of the Oil Service Index (OSX.X).) In other after hours earnings news, Homestore.com (NASDAQ:HOMS), which is a rather unique dot com, reported earnings of 13 cents per share. Its numbers handily beat estimates, which had the company pegged to earn 11 cents per share. What's even better is that Homestore projected full year earnings of 55 cents per share, while previous estimates had called for 53 cents for the year. Yes, Homestore raised guidance. It makes sense business should be good for Homestore because it is, after all, a real estate company. Its earnings report was well received in the after hours session as shares rose roughly $3. Elsewhere, the reports from the tech sector were mixed, with a slightly negative tone. Compaq Computer (NYSE:CPQ) matched estimates for its second quarter, but guided lower for its fiscal third quarter. Analysts had been expecting Compaq to earn revenue around the $9.3 billion mark during its next quarter, but officials from the box maker guided expectations lower to between $8 and $8.4 billion. That's obviously a significant revision lower and is a testament to the ongoing price wars between PC makers. Judging by the recent price action in the box makers, Dell (NASDAQ:DELL) is winning the war in a big way over Compaq and Gateway (NYSE:GTW). The optical cable maker Corning (NYSE:GLW) reported quarterly earnings that were slightly better than what estimates had been predicting. But get this: During the same quarter in 2000, Corning reported a profit of 17 cents per share; it reported a loss of $5.13 this quarter. Granted, the company took a $4.8 billion charge this quarter, but it's still very ugly. Corning officials recently decided to NOT give guidance, so no financial targets were given during the conference call. But one official was quoted as saying that the telecom business remains "turbulent." Nevertheless, shares of Corning rose modestly in the after hours session. Wednesday's earnings reports may serve as a microcosm for the market. Homestore.com, a company highly leveraged to the U.S. consumer and housing market, reported numbers that were pretty darn good on the surface. And the same goes for Haliburton - officials issued guidance that was most bullish during the conference call. But the comments from the likes of Compaq and Corning reflected how difficult of a place tech remains, whether you're trading or investing in that sector. Officials from Corning used words such as "turbulent." And Compaq's CEO said, "It's an understatement to say that we're in the midst of an extremely challenging global market." So which group of stocks are probably "easier" to trade? I may not have the answer to that question, but I do not which group of stocks is the most "difficult" to trade: Technology. Sure, by foregoing tech you're missing the opportunity of short, sharp, large rallies, which was the premise behind my Market Wrap Monday. But with that comes added risk. So it comes down to one question: Relatively speaking, is the risk worth the potential reward? (The operative word is potential.) "When you sit with a nice girl for two hours, it seems like two minutes. When you sit on a hot stove for two minutes, it seems like two hours. That's relativity." - Albert Einstein Eric Utley Option Investor **************** MARKET SENTIMENT **************** Relatively Speaking By Jeffrey Canavan On a relative strength basis the Russell 2000 has been outperforming the Dow, S&P 500, and Nasdaq, but could small caps be losing their appeal? Yesterday the Russell 2000 fell 1.6% more than any other major index. Today the Russell 2000 gained a measly 0.57%, while everybody else gained well over 1.2%. Relative Strength Charts of Russell 2000 to S&P 500 and Nasdaq Looking at the first chart, we can see that the Russell 2000 has been gaining relative strength against the S&P 500 since December of 2000. That means that small caps stocks have been gaining more, or falling less, than the S&P 500. But that trend spiked in June, and has been falling since. Now the long-term up trend is in jeopardy. If that trend is broken, the S&P 500 might be a better place to look for bullish stocks, and the Russell 2000 better for shorting. The Russell 2000 has also been smoking the Nasdaq Composite, but that trend has flattened out a little since early April. If technology is starting to outperform, small caps must be in trouble. Small caps will continue to go as the rest of the market goes, but their period of outperforming may be coming to an end if these trends are broken. *************************Sector Watch**************************** Weekly Daily Overbought Support Resistance Trend Trend Oversold DJIA Bearish Bearish Oversold 10,200 10,600 NASD Bearish Bearish Oversold 1,940 2,125 S&P 500 Bearish Bearish Oversold 1,170 1,205 Rus 2000 Bearish Bearish Oversold 465 485 Semis Bearish Bearish Neutral 525 585 Biotech Bearish Bearish Neutral 490 550 Internet Bearish Bearish Oversold 140 170 Networking Bearish Neutral Neutral 300 365 Software Bearish Bearish Oversold 180 200 Banking Neutral Neutral Neutral 625 670 Retail Neutral Bullish Neutral 875 920 Drugs Bearish Neutral Neutral 380 410 Percent Change Last Last Last Relative Strength 5 Days 10 Days 30 Days vs S&P 500 DJIA (3.4%) 0.6% (6.2%) Positive NASD (1.6%) 0.6% (8.6%) Neutral S&P 500 (1.4%) 0.8% (5.2%) N/A Rus 2000 (3.3%) (0.8%) (6.4%) Neutral Semis (1.8%) (0.9%) (15.5%) Negative Biotech (2.3%) (3.4%) (14.2%) Negative Internet (10.0%) (9.7%) (30.4%) Negative Networking (1.2%) 1.5% (23.0%) Neutral Software (1.7%) (3.2%) (17.3%) Negative Banking (1.8%) 2.4% 0.4% Positive Retail 0.4% 8.1% 0.5% Positive Drugs (2.2%) 1.5% (4.1%) Neutral ***************************************************************** *********** OPTIONS 101 *********** News Flash! LEAPS Editor Bitten by Gold Bug By Mark Phillips The men in the white coats haven't shown up to haul me away in the wake of Sunday's new LEAPS Watchlist Plays, so perhaps the idea of buying into a Gold stock isn't so crazy after all. The basic premise is that the Gold and Silver index (XAU.X) has been on a steady recovery path since tracing a solid double-bottom in November/December of last year near the $42 level. As the economy has continued to worsen, more investors are apparently taking a liking to the defensive nature of this sector. After the sharp rally in April and May, helped along by a spike in the price of the yellow metal, the XAU retraced right to its gently ascending trendline near $51 in early July before beginning another upward leg. Confirming the fledgling rally is the weekly Stochastics oscillator, which is just emerging from oversold territory with a brand new bullish crossover of the fast (blue) line over the slow (red). Contrary to the adrenaline-spiked and irregular moves in the Technology sector, this looked to me like a solid trend that could provide some steady, if sedate profits. Of course, we don't have any LEAPS available on the XAU, so I went hunting for LEAP-able mining stocks that seemed to have a good correlation with the XAU. The first of the many charts that I pulled up was Barrick Gold (NYSE:ABX) and the resemblance to the XAU was uncanny. To top it all off, the stock had LEAPS available with cheap premiums and some decent open interest. Look at the ABX chart below, and you can see the strong correlation. This allows us to play a major market trend, without having to incur either the expense or the lack of liquidity of trading the index. The weekly Stochastics indicates that we are catching this move near its beginning, and the fact that ABX is continuing to follow the ascending trendline will give us a good measure of the health of the stock as times marches by. Drilling down to the daily chart, we can see that the current rally is getting close to running out of steam. What we will want to see is the stock retrace back near the $14.25 level before we initiate our LEAP position. Ideally, that will coincide with the daily Stochastics oscillator dipping into oversold and then beginning to emerge; similar to the picture we now see on the weekly chart. What that means is that we aren't even close to an entry as of this writing. But we have a clear idea of what to target and will be able to recognize it when it materializes in the weeks ahead. That is only stage one of our trade setup. Now that we have our targeted security and a defined entry point, we need to decide how we will manage the play after we take a position. We can play it nice and easy, buying our LEAP and sitting on the position, but that's not the focus of our discussions here on Wednesdays. We're here to learn about writing Covered Calls against our LEAP, right? If we were just going to buy the LEAP and hold it, then the $15 strike would probably be more than sufficient to allow us a good mix of high delta and high leverage (a big advantage of LEAPS). But if we are going to write front-month calls against the LEAP, then there is a distinct advantage to buying a lower strike LEAP. That gives us more flexibility in the selection of the short-term call to sell, especially early in the play, before our LEAP has begun to appreciate very much. Recall from my article Fine Points of LEAPS Strike Selection that I prefer to buy as much time as is available when I intend to write covered calls. This minimizes my monthly carrying cost on the LEAP and allows me more time to profit from the play after I have reduced my cost basis to zero. So I'll be targeting the 2004 $10 LEAP (Symbol:LBX-AB) for the long leg of the trade. I estimate the actual cost of this LEAP when our entry target is achieved will be in the $6.00-6.25 range. That means that we only have to take in $6 in premium before we have the LEAP for free. And we have up to 29 months in which to take in that premium. After that, any additional premium we receive from selling calls is pure profit, added to the appreciation of our LEAP. Judging by current front-month call premiums, each time we sell a call, the premium we take in will likely be less than $1 as we need to be careful to prevent our sold call from expiring in the money. As I have covered before, that is how LEAPS covered calls differ from equity covered calls -- we never want to have our sold call expire in the money. Of course with such cheap option premiums, we need to pay attention to commission costs, and this trade will clearly become more favorable if we are trading more than one contract. Multiple contracts will reduce the commission costs per contract to a level where that becomes a less significant factor. Just make sure when deciding on the size of your own trades to abide by good money management rules, keeping the size of your trade in that zone where you are not exposed to undue amounts of risk in a single trade. My intention in profiling this trade in detail is primarily to give you another real-world example of how the LEAPS Covered Call example works. The primary goal is education, and nothing would make me happier than to hear success stories from you after you have found your own trades employing this strategy and brought them to successful conclusions. But for now, I'm hoping I can provide a clear roadmap allowing each of you to see the trade develop in detail, removing the mystery of the many potential "what if" scenarios. Follow along as you see fit, either watching from afar or following my lead on paper or with real money. Just remember that the education you receive should be far more valuable in the long run than any real profits achieved in this one trade. Stay Tuned! Mark Contact Support ************* NEW CALL PLAY ************* No new call plays ************ NEW PUT PLAY ************ No new put plays ***************** STOP-LOSS UPDATES ***************** DO - call Adjust from $28 up to $29 DIGL - put Adjust from $22 down to $21 CIMA - put Adjust from $60 down to $57 ************* DROPPED CALLS ************* BEAS $19.90 -1.28 (-3.11) Despite strength in the Nasdaq Wednesday, shares of The Beazer headed south. Unfortunately, the stock settled below the pivotal $20 level, which is also the site of our stop. There was isolated weakness in the software sector Wednesday, despite what the GSO.X revealed on the surface. Part of the blame may be cast towards I2 and its 16 percent drop. If BEAS' violation of the stop didn't allow for traders to cut loose open positions, any strength above that level Thursday should offer exit points. ************ DROPPED PUTS ************ GILD $50.83 +0.85 (-3.20) GILD dipped ever-so-slightly below the $50 level again Thursday, which hopefully allowed for traders to book gains and exit positions ahead of the company's earnings report Thursday. The stock staged a substantial advance early Thursday, but actually rolled over during midday trading to a rather large degree. As such, further weakness may be in the offing Thursday. SGR $33.75 +4.10 (+0.90) Jefferies & Co. upgraded shares of Shaw Group Wednesday morning from an accumulate to a buy rating. Perhaps Jeffries had some inventory to get rid of. But whatever the motives, SGR opened near its day low and closed right on its day high, en route to trading through and subsequently closing above our recently lowered stop at $32. Its bullish price action Wednesday is obviously a cause for concern, and bearish traders who didn't get out on the move above $32 could use any weakness early Thursday to exit open positions. VRSN $47.24 +2.98 (+4.29) VRSN's trading over the past four days represents an excellent case study in supply and demand. In the four trading days prior to Wednesday, VRSN had garnered demand at the $42.25 level - the site of its 61.8 percent retracement level. Once supply dried up - in the form of the Nasdaq advancing Thursday - VRSN was free to trade higher. Obviously, we had been gaming a breakdown below $42.50, which never transpired. The stock's settlement above $47 could've allowed for traders to exit any open positions. If not, use any weakness below that level early Thursday to exit any open positions. ********************* PLAY OF THE DAY - PUT ********************* CIMA - Cima Laboratories $54.00 -1.25 (-7.20 this 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. Most Recent Write-Up Besieged by sellers on Monday, CIMA fell sharply, shattering the $60 support level and coming to rest on Tuesday at the upper edge of the $53-55 support level. This breakdown allows us to move our stop down to the $60 level, as this prior support should now act as resistance. Our Point and Figure chart is still predicting a $43 price target, so we can use any weak intraday rallies as attractive entry points. Target rollovers first at $57 and then $59, as these are the sites of intraday resistance from the past 2 days. If you'd like to see more weakness before taking the plunge, then wait for CIMA to fall through the $53 level before taking a position. Watch for renewed weakness in the Pharmaceutical index (DRG.X) as confirmation that our play still has legs, as we buckle up to ride the stock lower into the company's earnings announcement on August 2nd. Comments CIMA took out several near-term support levels Wednesday, despite the favorable price action in the Biotechnology Index (BTK.X). The stock is technically weak and may be susceptible to further downside Thursday with any weakness in the BTK. Look for new entries on a breakdown below Thursday's intraday low around $53, or on rollovers near $56. BUY PUT AUG-60 UVK-TL OI=100 at $7.80 SL=5.50 BUY PUT AUG-55*UVK-TK OI= 24 at $4.30 SL=2.75 Average Daily Volume = 330 K ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Oversold Conditions Lead To A Rally; But Will It Last? Industrial stocks led the recovery rally today as traders moved to cover short positions after a string of bearish sessions. Among the blue-chip leaders were popular "old-economy" issues such as Alcoa (NYSE:AA), Home Depot (NYSE:HD), McDonald's (NYSE:MCD), International Paper (NYSE:IP), Minnesota Mining (NYSE:MMM) and Wal-Mart (NYSE:WMT). Dow stock SBC Communications (NYSE:SBC) was a big winner, up over 5% after posting second-quarter earnings of $0.61 a share, well ahead of the $0.57 that analysts had expected. The telecom giant said it remains cautious on the balance of 2001 due to the U.S. economy and said it expects future results to be marked by continued modest revenue growth. Chemical maker Dupont (NYSE:DD) also announced second-quarter profits that topped First Call estimates by a penny but reported that it doesn't believe the second quarter marked the bottom of the economic downturn and that it expects conditions to continue to deteriorate into the third quarter. In addition, company officials said any modest upturn in the U.S. economy is likely to be offset by further declines around the globe. Dupont says the third quarter will be "substantially" more challenging than the second quarter and projects revenues to show a sequential decline. The blue-chip laggards included Philip Morris (NYSE:MO), General Electric (NYSE:GE), Kodak (NYSE:EK) and United Technologies (NYSE:UTX). In the technology group, software shares were popular after PeopleSoft (NASADAQ:PSFT) posted better than expected earnings and the hi-tech index eventually managed a small advance after slumping earlier in the session. PeopleSoft lifted the segment in the wake of a second-quarter profit of $0.15 a share, well above the consensus estimate on revenue that jumped 27% from the year-ago period. Salomon Smith Barney upped its view on the company, based on the perception that Peoplesoft can easily "outperform" in the current environment. Computer hardware stocks were less impressive but Dell (NASDAQ:DELL) enjoyed some bullish activity after the recent slump and the issue appears poised for a test of the yearly highs. Storage stocks did not fare well after QLogic (NASDAQ:QLGC) plunged on news of a $0.23 per share profit and forecasts of zero profit growth in the third quarter. Salomon lowered its rating on QLogic as it expects the stock to come under pressure due to the economic downturn and expected delays in new adoption cycles. The broker also downgraded storage outfit Emulex (NASDAQ:EMLX), based on recent data that indicates the economic downturn is starting to impact vendors. In the telecom segment, Lucent Technologies (NYSE:LU) recovered from Tuesday's sell-off as Lehman Brothers upped the troubled company to a "strong buy" amid optimism of continued improvement in Lucent's balance sheet. The brokerage said the company should produce a significant operating margin in fiscal year 2003. In the broader market, oil service, utility, natural gas, biotechnology and cyclical shares improved while gold and airline issues retreated. The insurance group also slumped in sympathy with the decline in Aflac (NYSE:AFL) shares. The company posted late third-quarter earnings of $0.33 per share, barely meeting consensus expectations and Merrill Lynch lowered its near-term view on AFL, due to weak sales in Japan. Analysts noted that the market is oversold on a short-term basis and with the Dow and NASDAQ having retraced almost half of the gains from the April lows, the potential for a brief rally is very high. At the same time, the fact that the S&P 500 index dropped below a recent support area on Tuesday suggests there will likely be a test of levels not seen since April. Lets hope that forecast doesn't come true... Summary of Previous Candidates: NOTE: JULY prices as of Friday's Expiration Covered Calls: (Margin not used in calculations) Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield MSCC AUG 50 46.00 56.54 $4.00 7.1% Monitor Closely Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield BRCM JUL 30 29.50 41.00 $0.50 20.7% SEBL JUL 30 29.55 33.12 $0.45 17.4% MSCC JUL 45 44.65 68.93 $0.35 9.7% HON JUL 33 31.50 36.90 $1.00 8.7% THQI JUL 50 49.60 53.86 $0.40 8.7% EBAY JUL 55 53.90 66.80 $1.10 7.4% TARO JUL 70 69.00 92.50 $1.00 6.6% MVSN JUL 55 54.15 67.44 $0.85 6.2% LXK JUL 55 54.20 58.65 $0.80 5.7% CEPH JUL 60 59.20 61.88 $0.80 5.6% GMST AUG 35 34.40 41.02 $0.60 6.2% Testing 150-dma PLMD AUG 30 29.40 36.90 $0.60 5.9% At Support BRL AUG 65 64.10 85.78 $0.90 5.0% Positions Closed: HGSI, MANU, PDLI, and ADVS, which is the lone Murphy's Law play this month! Sell Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield MU JUL 33 31.75 39.09 $0.75 6.9% MU JUL 50 50.70 39.09 $0.70 6.5% IMCL AUG 35 33.85 44.49 $1.15 11.5% IMCL AUG 60 60.80 44.49 $0.80 8.3% Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield FCEL JUL 43 43.30 20.08 $0.80 8.8% Adj 2-1 split ENZN JUL 75 75.80 58.68 $0.80 6.2% DIGL JUL 60 60.65 22.30 $0.65 5.9% BBOX AUG 70 70.60 59.18 $0.60 5.3% Monitor Closely NVDA AUG 100 100.80 71.69 $0.80 5.1% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status LNCR $32.70 $30.87 JUL25p/27.5p $0.30 $27.20 $0.30 Expired * THC $48.50 $54.85 JUL40p/45P $0.60 $44.40 $0.60 Expired JPM $46.84 $43.40 JUL55c/50c $0.75 $50.75 $0.75 Expired RJR $56.46 $50.65 JUL65c/60c $0.65 $60.65 $0.65 Expired TM $66.50 $68.44 JUL75c/70c $0.65 $70.65 $0.65 Expired ELN $65.00 $60.09 JUL55p/60p $0.65 $59.35 $0.65 Expired LNCR $33.38 $30.87 JUL27.5p/30p $0.38 $29.62 $0.38 Expired * IBM $113.09 $105.70 JUL130c/125c $0.70 $125.70 $0.70 Expired MEDI $45.17 $43.31 JUL35p/40p $0.60 $39.40 $0.60 Expired APC $55.39 $51.51 JUL65c/60c $0.60 $60.60 $0.60 Expired HMC $85.58 $85.16 JUL95c/90c $1.00 $91.00 $1.00 Expired FISV $61.61 $61.25 JUL55p/60p $0.65 $59.35 $0.65 Expired IFIN $74.33 $79.50 JUL65p/70p $0.70 $69.30 $0.70 Expired STJ $69.94 $69.96 AUG60p/65p $0.60 $64.40 $0.60 Open * LNCR: Adjusted for a 2-1 split Positions Closed: GE, RETK Debit Straddles: Stock Position Debit Target Value Gain Status IDPH JUL70c/70p $11.00 $13.75 $13.75+ $3.75+ Closed DST AUG55c/55p $5.75 $7.19 $6.15 $0.70 Open * * The DST debit straddle traded as high as $6.55 this week. New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations *************** MU - Micron Technology $38.38 *** Own This One! *** Micron Technology (NYSE:MU) and its subsidiaries manufacture and market DRAMs, very fast SRAMs, Flash Memory, other semiconductor components and memory modules. The company is organized into two primary operating segments pursuant to its principal product categories, semiconductor operations and PC operations. Sales to external customers for semiconductor operations and PC operations constituted 86% and 14%, respectively, of the company's total net sales for 2000. Analysts are always commenting that the chip companies will lead the technology recovery, when it occurs, and one of our favorite companies in the sector is Micron. Today, MU's shares rebounded from a recent sell-off and speculation on the company's upcoming earnings should help the issue remain in its current trading range near $40. In addition, Bear Stearns upped its rating on the stock to a "buy" after analyst Charles Boucher said that Micron should benefit from a slight upturn in the PC market during the second half of the year. Boucher has a 12-month target price of $55 on shares of Micron and investors who are interested in owning the issue at a discounted price should consider these positions. MU - Micron Technology $38.38 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put AUG 32.5 MU TS 1074 0.55 31.95 7.3% *** Sell Put AUG 35 MU TG 8510 1.10 33.90 11.1% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=MU ***** SZA - Suiza Foods $57.49 *** Break-Out! *** Suiza Foods (NYSE:SZA) is a manufacturer and distributor of dairy products in the United States. Since the acquisition of Suiza Dairy in 1993, the company has completed 43 dairy acquisitions, including seven during 2000. The company sells primarily fresh dairy products through Suiza Dairy Group, with the product mix weighted heavily toward fluid milk, including flavored milks and buttermilk. Other products that the company sells through Suiza Dairy Group include ice cream and novelties, half-and-half and whipping cream, condensed milk, cottage cheese, sour cream, yogurt, dips, coffee creamers, juice and juice drinks and water. Morningstar Foods sells primarily extended shelf life (ESL) fluid, aerosol and other dairy and non-dairy products. Its many product offerings include dairy and non-dairy coffee creamers, flavored and unflavored ESL milks, lactose-free milks and soymilk, aerosol whipped topping, dairy and non-dairy frozen whipped topping, egg substitute and cultured dairy products The Food and Beverage group has performed very well over the past few sessions and based on the improving technical outlook for the sector, we decided to look for a conservative position to hedge our bearish outlook for the broader market. The search uncovered some excellent candidates but most of the option premiums in the segment are relatively small. However, this position offers a reasonable reward with limited downside risk and today's activity in SZA's shares suggest the bullish trend will continue. SZA - Suiza Foods $57.49 PLAY (conservative - bullish/credit spread): BUY PUT AUG-50 SZA-TJ OI=45 A=$0.30 SELL PUT AUG-55 SZA-TK OI=0 B=$0.90 INITIAL NET CREDIT TARGET=$0.65-$0.70 PROFIT(max)15% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=SZA ***** TARO - Taro Pharmaceutical $95.13 *** Pre-Split Rally! *** Taro Pharmaceutical Industries (NASDAQ:TARO) commenced operations as a manufacturer of solid dosage form products, but an agreement with American Home Products in 1954 allowed the company to expand operations to include sterile products. The company entered the steroid market following an agreement with the Schering in 1955. In 1957, an agreement with Endo Laboratories provided Taro with products such as Percodan and Coumadin, which Taro continues to manufacture and sell in Israel today. Shares of Taro Pharmaceutical Industries have continued to rally, despite the slump in broader market stocks, due to the upcoming stock split and some favorable announcements concerning their many drug products. In early June, the stock price renewed its bullish trend after the company said the U.S. Food and Drug Administration had approved its anti-fungal skin cream. Taro says its unique cream (Clotrimazole/Betamethasone Dipropionate) can now be used to treat a variety of skin diseases and conditions. The FDA approval of the skin drug was the second Taro had received in recent months from the U.S. regulatory body and in April, the company announced the FDA had approved the firm's 200 milligram generic version of a drug for life-threatening irregular heartbeats. Both of these new product approvals will benefit the company's bottom line and most analysts expect Taro's profits to double this year. Taro's recent earnings report was stellar and based on the solid performance of the company's shares and the upcoming stock split (7/27/01), the issue should continue its current bullish activity. TARO - Taro Pharmaceutical $95.13 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Put AUG 70 QTT TN 150 0.70 69.30 4.7% Sell Put AUG 75 QTT TO 219 1.25 73.75 8.2% *** Sell Put AUG 80 QTT TP 342 2.00 78.00 10.6% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=TARO ***** TEVA - Teva Pharmaceutical $68.79 *** Solid Earnings! *** Teva Pharmaceutical (NASDAQ:TEVA) is a fully integrated global pharmaceutical company producing drugs in all major therapeutic categories. In the area of proprietary drugs, Teva has focused on products for central nervous system disorders, primarily the development of Teva's first globally marketed branded drug, Copaxone, a treatment for relapsing-remitting multiple sclerosis. Teva also has significant manufacturing operations for active pharmaceutical ingredients. Teva Pharmaceuticals USA, Teva's principal United States subsidiary, is a generic drug company in the United States. Teva manufactures over 100 generic products in a number of generic forms, which are distributed and sold in the United States together with additional generic products in specific dosage forms manufactured by third parties. Teva also manufactures other generic products in multiple dosage forms, which are sold primarily in the Netherlands, the United Kingdom and Hungary. Generic drug-makers rallied today after several sector leaders posted strong quarterly profits, due to an increase in the number of generic products. Teva Pharmaceutical Industries was among the group, posting a 41% jump in second quarter net profit amid rising sales of its blockbuster multiple sclerosis drug Copaxone. Teva posted a net profit of $65 million, or $0.47 per American Depositary Receipt (ADR), in the second quarter, compared with a net of $10 million, or $0.08 per ADR, in the same period a year ago. The results beat consensus estimates of $0.42 per ADR and Teva also said it expects to meet or exceed preliminary consensus expectations of a net profit of $0.46 in the third quarter. With today's rally, the stock has moved out of a recent trading range on heavy volume and the potential for continued upside activity is excellent. Traders who agree with a bullish outlook for the issue can speculate on its future movement with this conservative, credit spread. TEVA - Teva Pharmaceutical $68.79 PLAY (conservative - bullish/credit spread): BUY PUT AUG-60 TVQ-TL OI=420 A=$0.30 SELL PUT AUG-65 TVQ-TM OI=339 B=$0.95 INITIAL NET CREDIT TARGET=$0.75-$0.80 PROFIT(max)=17% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=TEVA *************** Neutral Plays - Straddles & Strangles *************** Traders have been asking for more "earnings" volatility plays, where the underlying issues have discounted option premiums and the potential to move significantly upon announcement of their quarterly profit results. Here are two favorable candidates, based on analysis of the historical option pricing and technical background. In addition, both stocks have a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk of the positions. As always, review each play individually and make your own decision about the future outcome of the position. ***** CVS - CVS Corporation $40.05 *** Cheap Speculation! *** CVS Corporation (NYSE:CVS) is principally engaged in the retail drugstore business. The company operates over 4,000 retail and specialty pharmacy drugstores and various mail-order facilities located in 31 states and the District of Columbia. During the previous 12 months, CVS dispensed over 300 million prescriptions. The company's operations are grouped into four businesses, Retail Pharmacy, Pharmacy Benefit Management, Specialty Pharmacy and Internet Pharmacy. The company's quarterly earnings are due on July 31, 2001. CVS - CVS Corporation $40.05 PLAY (conservative - neutral/debit straddle): BUY CALL AUG-40 CVS-HH OI=3788 A=$1.65 BUY PUT AUG-40 CVS-TH OI=3566 A=$1.60 INITIAL NET DEBIT TARGET=$3.15-$3.25 TARGET PROFIT=25% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=CVS ***** EMR - Emerson $55.24 *** Probability Play! *** Emerson (NYSE:EMR) is engaged principally in the worldwide design, manufacture and sale of a range of electrical, electromechanical and electronic products and systems. The divisions of the company are organized into unique business segments based on the nature of the products and services provided: Process Control, Industrial Automation, Electronics/Telecommunications, Heating, Ventilating and Air Conditioning and Appliance and Tools. Emerson's quarterly earnings are due on August 7, 2001. EMR - Emerson $55.24 PLAY (conservative - neutral/debit straddle): BUY CALL AUG-55 EMR-HK OI=612 A=$2.20 BUY PUT AUG-55 EMR-TK OI=611 A=$2.15 INITIAL NET DEBIT TARGET=$4.25-$4.35 TARGET PROFIT=25% http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=EMR *************** BEARISH PLAYS - Naked Calls & Combinations *************** ENZN - Enzon $54.98 *** Trading Range? *** Enzon (NASDAQ:ENZN) is a biopharmaceutical company that develops and commercializes enhanced therapeutics for life-threatening diseases through the application of its two proprietary platform technologies: polyethylene glycol (PEG) and single-chain antibody (SCA). The company applies its PEG technology to improve the delivery, safety and efficacy of proteins and small molecules with known therapeutic efficacy. The company also applies its single-chain antibody technology to produce antibody molecules that offer many of the unique therapeutic benefits of monoclonal antibodies, while addressing some of their limitations. Shares of Enzon have retreated in recent weeks after testing its all-time highs near $80 in early June. The stock has declined even as the biotechnology sector has enjoyed mild gains and to make matters worse, US Bancorp Piper Jaffray lowered its outlook on the issue to "neutral," saying the company's staying power is greatly exaggerated and that Schering-Plough's manufacturing woes pose timing risks for the company's future sales. Technically, Enzon appears to be forming a significant Stage III "top" and the recent violations of its 150-dma are especially worrisome. The stock has failed to rebound above the resistance at $60 and has historically failed near $75 over the last two years. The drop in June came on rising volume and a major support level near $65 was violated. That area will become a new resistance level and it appears the share value has little chance of reaching our sold positions in one month. ENZN - Enzon $54.98 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield Sell Call AUG 60 QYZ HL 6103 4.30 64.30 26.7% Sell Call AUG 65 QYZ HM 1735 2.85 67.85 25.4% Sell Call AUG 70 QYZ HN 1721 1.80 71.80 18.6% Sell Call AUG 75 QYZ HO 1218 0.90 75.90 10.0% *** http://www.OptionInvestor.com/charts/jul01/charts.asp?symbol=ENZN ******************* 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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