The Option Investor Newsletter Sunday 08-05-2001 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/2340_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 8-3 WE 7-27 WE 7-20 WE 7-13 DOW 10512.78 + 96.11 10416.67 -159.98 10576.65 + 37.59 +286.38 Nasdaq 2066.33 + 36.60 2029.73 + .36 2029.37 - 55.42 + 80.63 S&P-100 623.65 + 3.39 620.26 - 5.33 625.59 - 1.26 + 13.90 S&P-500 1214.35 + 8.42 1205.93 - 4.92 1210.85 - 4.83 + 25.09 W5000 11242.94 + 76.94 11166.00 - 46.37 11212.37 - 59.55 +212.36 RUT 487.15 + 2.13 485.02 - 2.91 487.93 - 2.78 + 7.45 TRAN 2914.02 + 4.14 2909.88 - 55.78 2965.66 + 25.31 +191.43 VIX 22.39 - 2.34 24.73 - .24 24.97 + 1.10 - 1.10 Put/Call .76 .47 .82 .65 ****************************************************************** Rally Stumbles Over Jobs Report and Crash Rumors! by Jim Brown An August Friday with the lightest Nasdaq volume of the year saw the markets trip over the Jobs Report as traders took profits from the six day rally. So close but yet so far! Just when the stars were aligning for a breakout the Jobs Report surprised everyone with better than expected employment. Employment fell by 42,000 jobs in July which was less than half the decline in June. The unemployment rate held at 4.5% instead of the 4.7% which analysts expected. When is good news bad? When it throws doubt on future Fed rate cuts. That doubt came roaring back on Friday morning and traders decided to take profits and start over again next week. Rumors of a pending crash kept bargain hunters from buying the dip. So close but fate stepped in stomped the rally flat. With the Nasdaq closing only 13 points away from breaking strong resistance the bullish sentiment was running rampant. Clearly after being up five of the last six days the market was ripe for some profit taking and the Jobs Report was simply the first excuse. Stocks that moved the market on Friday included Motorola which was downgraded by Sanford Bernstein on valuation concerns. MOT traded near $10 in March and had neared their profit target of $23. They said they did not see the communication sector recovering as fast as some other analysts and thought chips for cell phones had gotten a little ahead of expectations. MOT dropped about seventy-five cents on the news but the action also impacted QCOM, NOK and ERICY. Cisco dipped at the open after analysts said that maybe their earnings and guidance due out on Tuesday were not going to be as good as their recent +25% gains in the stock price would indicate. CSCO did recover all but about twenty cents before day's end but investors moved out of networkers in advance of their actual earnings next week. While nobody expects CSCO to say anything positive but there are some who still expect gloom and doom. Based on results and guidance from other tech stocks recently it is more likely that CSCO will announce inline with lowered estimates and say the sector has stopped falling but stop short of saying a recovery is underway. This is all that will be needed to spur the sector onward in anticipation of a future recovery. The worry here is Cisco's dependence on the telecom sector which has yet to see daylight. Other networkers like Juniper and Extreme are more network oriented and less phone company dependent. This is the wildcard analysts are worried about. Personally I think we could be surprised by CSCO. Remember the last two quarters when John Chambers was throwing out sound bites all over the world about how bad business was? He has been very quiet this quarter. Actually I watched an interview two weeks ago where he was borderline optimistic. He is scheduled to be on CNBC after earnings on Tuesday and I doubt he would make the appearance if they were going to miss earnings or warn about the future. He would send his CFO to be sacrificed instead. Just my opinion. Chambers may want to steal some spotlight from Intel which captured all the glory when Craig Barrett went public with his bullish comments last week. Intel gained about +10% from the weeks lows and powered the semiconductor sector to a near two month high. After the Merrill comments and the Intel comments the sector was on a roll and many analysts warned that it was too far too fast. The Motorola downgrade only succeeded in knocking -20 points off the SOX.X at midday but it was rising at the close. Clearly there is a desire to buy and nobody wants to be left at the station when the train leaves. One stock that disappointed traders on Friday was EMC. They said they were going to be more aggressive on price cutting in order to maintain share and when the 800LB gorilla speaks the rest of the sector shivered. EMLX, QLGC, BRCD and NTAP fell on worries that they would also have to aggressively cut prices to avoid losing market share. EMC refused to give guidance but said they were still feeling the effects of a global slowdown. Thanks for that cheerful piece of news! The stock news next week, other than Cisco, is probably not going to be material. The economic calendar starts with the Productivity Report on Tuesday. This report was the topic of a rumor on Friday that could have kept the Dow from rebounding at the open. The rumor said a German bank with a brokerage arm (later identified as Dresdner Bank) was expecting a -20% drop in the U.S. markets as a result of a sharp decline in productivity rates in the Tuesday report. This was a major factor in keeping traders from buying the dip. Uncertainty is a powerful rally killer. What did they know? Did some information leak out? Could this really happen? Dresdner said in a note to clients that U.S. productivity revisions on Tuesday would shatter the belief in the "new paradigm" economy where strong growth could live with low inflation. They theorized this could trigger a U.S. market crash. They said "revisions to productivity next week will undoubtedly leave Mr Greenspan looking very foolish". "Make a date in your diary! The U.S. new paradigm will then be officially revised away! The risks of an equity crash are high". Lehman and Goldman both made comments to the contrary but Goldman did say that their estimate of 2.25% productivity, which is below consensus of 2.5%, may still be too high. Other analysts dismissed the entire scenario as total bull even if the revisions were greater than expected. Story link: http://biz.yahoo.com/rb/010803/business_markets_crash_dresdner_dc_3.html Wow! Just what we needed another bolt out of the blue to knock the legs out from under our potential rally. Fortunately after the close on Friday the IMF said it was prepared to accelerate a fast track loan of $1.2 billion for Argentina and from out of nowhere a $15 billion "emergency" loan for Brazil. OOPS! Was Brazil in danger and nobody knew? Either way the two bailout packages should take any pressure off South America for the next several weeks. Investors may actually have more to fear from the European markets which are dropping fast and nearing April lows. Should those lows fail the U.S. markets could suffer in sympathy. Like I said, stock news may be the least of our worries next week. After the Productivity report on Tuesday, which will obviously be watched VERY closely, we get Wholesale Inventories on Wednesday, Import/Export Prices on Thursday and CPI/PPI on Friday. A very full week! Since we never broke 2100 on Friday you should still be flat if you are following my suggestions. The bullishness I expressed on Thursday night is still there but remember the qualification was "OVER 2100" which has been strong resistance for some time. In spite of all the rumors and economic news above I was very encouraged that the markets came back from a -118 decline for the Dow and -40 on the Nasdaq. I will gladly take -40 points of profit taking after a six day run right to resistance. It simply gives us a better start for any gains next week. I do admit the negative global news coupled with a flurry of economic reports could blunt any positive sentiment. This is very frustrating for traders. We suffered through earnings and low volume and prospered. Now concerns suddenly rise from Germany and Brazil where none existed before. A new entry point? Could be another opportunity for good relative strength stocks to stand out from the crowd regardless of what happens to the broader market. I am still bullish, over 2100, and I think you should be also. Aggressive traders that bought the dip on Friday may be rethinking their trades on Monday. Play it safe and wait for the breakout. Many bullish traders are becoming frustrated by the constant positive/negative swings in the market. Don't give up! Investing can be easy or hard. It is your choice! Definitely, enter passively, exit aggressively! Jim Brown Editor Editors Note: We are interested in your comments about our newsletter. Please email me at comments@OptionInvestor.com and tell me what you like and what you dislike about our product. Your input is very important and while we cannot answer every email we will try to act on your suggestions. The bottom line is making you a better and more profitable trader. What can we do to help? comments@OptionInvestor.com ************************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 ************** One More Buying Opportunity Ahead? The failure of the Nasdaq at 2100 is not serious yet but the flurry of global news as well as the sell off in the European markets could make the few investors still trading in August to move to the sidelines. This may be our last buying opportunity before October. For those investors who have money burning a hole in their pockets and want to be in the markets regardless of the facts should look at an often overlooked option called leaps. Before you hit the delete button hear me out. At these market levels there are some very attractively priced leaps that cost no more than a regular call option and have the potential to return literally 1000% over the next two years. Is 1000% worth your effort for a $4-$6 option? I hope so! Not every stock has leaps and not every leap is worth the price. Here are examples of both. ************** Corning - Current price $16.68 Corning has suffered a fall from grace as the largest fiber maker in the world. However they are showing signs of a bottom and once the market and economy starts to recover the demand for their products will again soar. While they may not get back to previous highs near $120 they could easily hit $40-$60 in the next two years. The $20 2003 call leap at $4.40 is roughly 25% of the stock price and half the margin requirement to buy the stock. If the stock reached broke $40 again the leap would be worth $20+ on a $4.40 investment. The 2004 leap is only $1.50 more and could see a $60 level in the stock price before expiration. *********** SunMicro - Current price $17.72 SUNW has put in a double bottom and is looking very promising. Once it breaks $20 institutional investors will come back into the stock and $40 could easily be hit by 2003. I would buy the 2004 leap for $6.10, cheaper on any pullback next week, and forget about it for the next two years. You could easily expereience a $25 profit on your $6 investment. ************ Cisco - Current price $20.05 Cicso quite possibly could make some optimistic statements with earnings next Tuesday that could push them over the $20 barrier for good. Even if they don't the downside risk is minimal. With a 2004 leap you are insulated against any short term swings and could ride out any August dips without any problems. My target for CSCO is $50 by 2004 which would equate to a $24 profit on a $6 leap. *********** JDSU - Current price $9.13 DO NOT BUY THIS LEAP! While the recent fall from highs in the $140 range may make JDSU a bargain the leap is far from it. The 2004 $10 leap is $4.40 or 48% of the stock price. It is only sisteen cents more than normal margin to simply buy the stock. The advantage of a leap is the lack of margin interest but it will expire worthless if JDSU fails to break $10 by 2004. The advantage to using margin on JDSU instead is the lack of expiration and should JDSU only be $10 in 2004 you can sell it for a profit (less interest). Your margin will not expire but your option will. As JDSU increases in value to say $20 you can then use the additional margin value to commit the mortal sin of leveraging your profits into buying something else. You can create more risk and more reward which you can't do without selling the leap or writing covered calls against it. Simply put, I would not recommend this type of leap. Buy the stock instead. ************ Be very careful this week. The economic news as well as global rumblings could give the bears one last selling spree and the bulls one last buying opportunity. Choose your entry points carefully! Good Luck Jim Brown **************** MARKET SENTIMENT **************** Oscillum By Jeffrey Canavan While the origins of the word oscillate are unsure, it most likely can be traced backed to the Latin word oscillum. One of its first uses comes from a passage in Georgics, where Virgil applies the word to a small mask of Bacchus hung from trees to move back and forth in the breeze. The verb has evolved to mean: to swing back and forth with a steady, uninterrupted rhythm, or to waver, as between conflicting opinions or courses of action; vacillate. Since May 22nd the markets have be vacillating, mostly to the downside, and stochastics have done a good job of marking changes in short-term opinion. By rolling over on Friday, the oscillator is saying that the short-term opinion has turned bearish. Since the downtrend started in late May, each time the S&P 500's stochastic has rolled over from overbought territory an average drop of 70 points over 5.5 days has ensued. The Nasdaq has similar statistics, losing an average of 238.5 points over 6.5 days. But past performance does not guarantee future results, and stochastics do not always swing back and forth in a steady uninterrupted motion. They still tell us that the odds favor a lower to neutral market next week, but the situation has improved since we started our decline in May. Nasdaq Composite Daily Chart In the early part of the decline the Nasdaq was setting lower lows, as was the oscillator. But in the month of July the oscillator set a higher low, and the Nasdaq was able to hold at support. This doesn't signal a raging bull market, but perhaps the bleeding has stopped. If we throw in some bullish percent data, the situation looks a little better. In May bullish percent data was overbought, and suggesting the risk of going long was high. Since then bullish percent has fallen into oversold territory and reversed up into bull alert status, which implies less risk of going long. But there is still risk, especially with Cisco reporting earnings on Tuesday. The odds of testing recent lows and falling into a trading range for the rest of the summer is just as good as taking out recent highs. We could still take out recent lows and head even lower, but the market sentiment appears to be neutral to higher. === Market Volatility VIX 22.39 VXN 48.47 === Put/Call Ratio Call Volume Put Volume Total .76 405,072 308,963 Equity Only .69 359,900 248,394 OEX 1.57 7,247 11,392 QQQ .22 75,402 16,455 === Bullish Percent Data Current Change Status NYSE 34 - Bear Confirmed NASDAQ-100 50 - Bull Alert DOW 36 - Bull Alert S&P 500 54 - Bull Confirmed 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 1.22 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 1456 1583 NASDAQ 1689 1979 New Highs New Lows NYSE 121 21 NASDAQ 100 50 === Advisory Sentiment Bullish Bearish Correction Net Change 52.6% 23.7% 23.7% 28.9% -0.4% 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: 07/31/01 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 There were no significant changes in the bullish percent data this week. Commercials Long Short Net % Of OI 7/17/01 336,836 403,561 (66,725) ( 9.01%) 7/24/01 317,241 392,146 (74,905) (10.56%) 7/31/01 335,532 409,352 (73,820) ( 9.91%) Most bearish reading of the year: (111,956) - 3/6/01 Most bullish reading of the year: ( 41,144) - 5/1/01 Small Traders Long Short Net % of OI 7/17/01 122,525 50,211 72,314 41.86% 7/24/01 141,372 61,665 79,717 39.26% 7/31/01 129,648 54,552 75,096 40.77% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 There were no significant changes in the bullish percent data this week. Commercials Long Short Net % of OI 7/17/01 26,721 37,225 (10,504) (16.43%) 7/24/01 27,396 39,198 (11,802) (17.72%) 7/31/01 28,009 39,613 (11,604) (17.16%) 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 7/17/01 11,680 8,183 3,497 17.61% 7/24/01 12,170 7,744 4,426 22.23% 7/31/01 11,216 8,938 2,278 11.30% 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 There were no significant changes in the bullish percent data this week. Commercials Long Short Net % of OI 7/17/01 14,145 12,963 1,182 4.4% 7/24/01 16,080 12,812 3,268 11.3% 7/31/01 17,748 13,669 4,079 13.0% 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 7/17/01 5,255 9,144 (3,889) (27.01%) 7/24/01 5,599 9,526 (3,927) (25.96%) 7/31/01 5,049 9,079 (4,030) (28.52%) 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 *************** Passion By Eric Utley I was on the river last weekend for 13 hours. Well, actually it was more like 12 hours. But I don't necessarily count my one hour nap on the bank as being "off the river." Anyway, I've found that it's awful difficult to apply sunscreen to select parts of my back; maybe I'll wear my shirt this weekend. In the meantime, please pass the aloe vera...Ouch! As usual, I was in pursuit of oncorhychus mykiss and salmo trutta. There's this dandy little river known as the South Platte that winds its way through Colorado. It's not too far from where I live; consequently, it's not too far from where a lot of people live. Needless to say, it's crowded and damn difficult to fish. Now, I'm no piker on the river. I'm pre-River Runs Through It; yea, old school. Heck, I even spent one of my college years in Montana (The fly fishing Mecca) to pursue and perfect my passion. Ahh, but perfection is a myth in many worlds, including fly fishing. The dynamic of each river, including the South Platte's, is something of a small wonder. The bugs, barometric pressure, water flows, moon phase, temperature, and innumerable other variables all impact what is perceived to be success on the river; namely, catching fish. And I'll tell ya', when I'm not hooking 'em, success is defined differently. Unfortunately, I had been defining success in many ways. But that all ended last weekend, when a kind river colleague passed along a few tips. Now, I'm not one that normally relies on others when making important decisions, such as which fly to cast. But sometimes it just makes sense to lay pride to the side, and ask. Of course I'd prefer to figure it out on my own, but the insatiable desire to learn at any cost oftentimes causes me to do crazy things, like ask for help. Nevertheless, with that little help, I was finally able to crack the code that had become the South Platte. And let me tell ya', there's nothing quite like nailing a few 18 inchers at dusk after struggling the whole damn day to see a fish, let alone catch one. So I can safely say that I have added another river to the resume with a little help. And as I stood in the river last weekend, wader-less and waist high in water, burnt and dehydrated by the sun, hungry, and tired I thought to myself, "This is living." For some weird reason, as I made my way out of the water grinning ear to ear, I thought back to a recent and successful trade. Please send your questions and suggestions to: Contact Support ---------------------------- eBay - EBAY EBAY is technically going down, plus inside sell and momentum down with high p/e. Is short ok in breaking $60. - Anonymous Thanks for the question. eBay (NASDAQ:EBAY) has been somewhat of a mystery to me. Any way you slice, the stock is richly valued. And I've been told that this market is one that does not favor high multiples. We've tried shorting the stock (Read: Calling The Top) a few times. Each attempt ended terribly. And I was reminded by one of my trading demigods that it's not wise to short a stock that is in high demand. And it's blatantly obvious on eBay's point & figure chart that the stock has been in high demand since early April. The point & figure chart also reveals that the stock has done a lot of sideways trading in the short-term. What's more, it tested the long standing bullish support line recently. Another of my trading demigods told me that the first test of the bullish support line almost always results in a rebound. Sure enough, EBAY rebounded from its first test of the bullish support line at $60. The candlestick chart also reveals a toppy pattern in the stock. It's obvious after looking at the point & figure chart and referencing the findings to the daily chart that the $60 level is pivotal. Additionally, some might argue that EBAY has formed a head-and-shoulders top. By all means, the stock appears on the surface to be a good short candidate currently. But EBAY is a much-loved stock by the institutional crowd. Almost cult-like. Janus is the largest holder of the stock, and I wouldn't necessarily categorize that firm as a strong hand, more like a weak sister. At any rate, I could envision Janus absorbing supply in the stock to keep the books pretty - they own $1 billion worth of EBAY. If I were going to short EBAY, I'd feel more comfortable putting some stock out at higher prices as opposed to shorting the breakdown below $60. I'm sure there are a few hedge funds out there who are watching for the big break below $60. Call me crazy, but I'm agoraphobic. ---------------------------- Genesis Microchip - GNSS Perhaps you would consider GNSS as a subject to discuss. It's at levels that produced resistance in '99, but has been performing well the past couple months compared with more volatile neighbors in the group. Can we get above 35-38 here? - Thanks, Scott Thanks for the question, Scott. I've seen the ticker a few times, but have not really ever investigated Genesis Microchip (NASDAQ:GNSS). From what I gathered, the company makes chips used in high-end video displays, such as flat panel displays, digital TVs, and other consumer products. Another stock in this group is Planar Systems (NASDAQ:PLNR), which, like GNSS, has been trading rather well recently. A quick glance over Genesis' fundamentals revealed a good picture. No debt, some cash, and solid earnings growth estimates. It's a bit expensive on a trailing twelve month basis, but its multiple should come down over the next few quarters if the company meets or exceeds its estimates. In early 1999, shortly after the stock began trading, it had trouble clearing the $35 level. So it's not much of a surprise that GNSS is stalling around $35 following its 200 percent advance since April! It's hard to justify buying the stock up here in light of the current market and economic environments and its recent run, but there's ALWAYS an exception to every rule. I think it would make sense to wait for the stock to spend some time between maybe $25ish and $35ish before buying it up here. But if you must, I think it would be prudent to enter on weakness, as opposed to chasing it higher. That way, you're in ahead of any impending move up to the $35 to $38 range, and risk and emotion are easier to manage. ---------------------------- Gemstar - GMST Would you please give me your opinion on Gemstar (GMST) over the next 6 to 9 month period. I like writing naked puts on stock I would like to own, and this looks attractive to me over that period. - Thanks, Val Good question, Val. Shares of Gemstar (NASDAQ:GMST) had been trading relatively well up through the early part of July. It's worth writing about the stock's peculiar price behavior during that time because I think it demonstrated a good study of technical analysis. GMST's V-bottom recovery was followed by a narrow trading range earlier this summer. The highs were traced lower, and the lows kept getting higher. The coiling of its price had to lead to a break in one direction or another. And an intelligent speculation could've been made that GMST would breakout to the upside because of the direction of its pennant. Sure enough, the stock surpassed $40 and traded as high as $50 before turning lower. Lesson over. Perhaps some of Gemstar's recent weakness stems from the Justice Department's probe. The DOJ is investigating Gemstar for possible violations of antitrust laws. At the time of this revelation, which was early June, Gemstar said that the investigation did not pose a serious threat to its business. It's a shame that government regulators punish success. At any rate, the legal issues could resurface in the future, which is about the only negative I can find concerning Gemstar over the next six to nine months. It's an extremely solid company. ---------------------------- 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 August 6, 2001 Monday ====== None Tuesday ======= Productivity-Prel Q2 Forecast: 1.7% Previous: -1.2% Consumer Credit Jun Forecast: $8.4B Previous: $6.5B Wednesday ========= Wholesale Inventories Jun Forecast: N/A Previous: 0.2% Thursday ======== Initial Claims 8/04 Forecast: N/A Previous: 346K Export Prices ex-ag Jul Forecast: N/A Previous: -0.2% Import Prices ex-oil Jul Forecast: N/A Previous: -0.4% Friday ====== PPI Jul Forecast: -0.2% Previous: -0.4% Core PPI Jul Forecast: 0.1% Previous: 0.1% Week of August 13 ====================== Aug 14 Retail Sales Aug 14 Retail Sales ex-auto Aug 15 Business Inventories Aug 15 Industrial Production Aug 15 Capacity Utilization Aug 16 Initial Claims Aug 16 CPI Aug 16 Core CPI Aug 16 Housing Starts Aug 16 Building Permits Aug 16 Philadelphia Fed Aug 17 Trade Balance Aug 17 Mich Sentiment-Prel *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? 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The Option Investor Newsletter Sunday 08-05-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/2340_2.asp ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* Broadcom - BRCM $46.99 (+3.29 last week) See details in sector list Put Play of the Day: ******************** Jacobs Engineering - JEC $54.89 (-3.16 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 CSCO $20.05 (+0.99) In the end, our play on CSCO has been pretty darn successful. That much is certainly dependent on individual execution, but our general premise of buying on weakness and selling into strength proved to be a success. The company reports earnings next week, and instead of getting involved in the media glitz, we're opting to drop coverage on the play this weekend. For traders with open positions, consider any strength above current levels ($20) as a good exit point. JDAS $21.15 (+0.10) Getting the "boredom boot" this weekend, JDAS has been unable to break out of its narrow $0.75 range. After rocketing higher in the prior week, some consolidation would be expected, but with volume remaining heavy during the consolidation phase, we are becoming concerned that there could be a breakdown in the stock's future. Rather than wait for it to happen, we'll exit the play this weekend and look for plays with a greater willingness to move. MERQ $39.15 (-1.07) MERQ has been stuck in neutral for the past week after reaching the $40 level. But the stock just can't seem to attract any buyers to push it higher. By Friday, volume had withered to a mere one-third of the ADV as MERQ drifted back under the $40 level. With the stock unable to advance and the daily stochastics are rolling over, setting the stage for a more significant pullback. It hasn't happened yet, but we'll take our cue from the stock's lack of strength and close out the play this weekend. PHCC $24.65 (-0.13) Thursday's weak breakout over $25 was promptly rejected on Friday as bullish conviction faded. Symptomatic of the current rangebound markets, PHCC looks like it has run into a brick wall and rather than wait for our stop to be triggered, we'll drop coverage of the stock this weekend. 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 ************** BRCM - Broadcom $46.99 (+3.29 last week) Broadcom Corporation is a leading provider of highly integrated silicon solutions that enable broadband digital transmission of voice, video and data. For the 3 months ended 3/31/01, revenues rose 62% to $310.5M. Net loss totaled $356.9M, vs. an income of $38.6M. Revenues reflect increased volume shipments of semiconductor products. Net losses reflect a $109.7M in-process R&D charge and a $200.7M amortization of goodwill charge. A mildly upward consolidation phase had taken shares of BRCM under its wings for much of July, but the first few days of August have seen a breakout above a triple top just above $45.00. That level was retested today and volume poured in to push shares back up. Buying interest in the stock has been steadily increasing since it bottomed out in mid June. Today's volume was somewhat anomalous in the sense that it was well under the average number of shares that trade, however, today's overall exchange volume was much to speak of either. Psychological resistance at $50.00 could pose a problem for BRCM so short-term traders might wish to look to this level as an exit point. However, if the news is good from CSCO Tuesday night, NASDAQ may make a very nice run and BRCM will likely follow suit. If you prefer to hold for the longer term, look to $54.00 as an area for your exit. As always, protecting your position with a stop that allows for some volatility in the stock is a wise idea. In this bullish trade we've selected $42.00 for ours. ***August contracts expire in two weeks*** BUY CALL AUG-45*RCQ-HI OI=7349 at $3.90 SL=2.50 BUY CALL AUG-50 RCQ-HJ OI=6638 at $1.50 SL=0.75 BUY CALL SEP-45 RCQ-II OI=3484 at $6.70 SL=4.50 BUY CALL SEP-50 RCQ-IJ OI=1138 at $4.00 SL=2.50 Average Daily Volume = 10.2 mln PDLI - Protein Design Labs $57.75 (-1.18 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. Following the broad Biotechnology sector lower over the past month, PDLI fell as low as $52.50 on the heels of its less-than-stellar earnings report Thursday evening. In their usual timely fashion, Lehman Brothers cut their 2002 earnings estimates for the Biotechnology firm on Friday. Investors seem to have figured the game out because they took the bearish comments as a buy signal, driving the stock $5.50 higher than its intraday low on very heavy volume. If the bulls can maintain their enthusiasm, and the Biotechnology index (BTK.X) can keep from breaking down again, PDLI seems poised for a solid recovery. By reclaiming the $56 support level on Friday, the stock cleared its 61% retracement level (of the decline from the April-May rally). Look for support to hold in the $55-56 area, as the bulls take aim on the $60 resistance level. Target entries on a bounce from $55, unless you like to live dangerously. In that case, you might consider a rebound from the $52 level (the low from the recent decline and the level of our stop) as an attractive entry target. If the bulls keep the stock moving up, wait for them to clear the $60 level before playing. ***August contracts expire in two weeks*** BUY CALL AUG-55 PQI-HK OI= 254 at $5.50 SL=3.50 BUY CALL AUG-60*PQI-HL OI= 395 at $2.85 SL=1.50 BUY CALL AUG-65 PQI-HM OI= 542 at $1.40 SL=0.75 BUY CALL SEP-60 PQI-IL OI= 241 at $6.40 SL=4.50 BUY CALL SEP-65 PQI-IM OI= 30 at $4.50 SL=2.75 BUY CALL SEP-70 PQI-IN OI=1064 at $3.20 SL=1.50 SELL PUT AUG-55 PQI-TI OI= 196 at $2.40 SL=4.00 (See risks of selling puts in play legend) Average Daily Volume = 1.83 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 08-05-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/2340_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 ****************** SUNW - Sun Microsystems $17.72 (+1.43 last week) Sun Microsystems is a worldwide provider of products, services and support solutions for building and maintaining network computing environments. The company sells scalable computer systems, high speed microprocessors and high performance software for operating network computing equipment and storage products. EMC's CEO's comments during the data storage giant's analyst meeting weighed on shares of SUNW Friday. EMC officials waxed cautious on the global economy and information technology spending. Although SUNW gapped lower Friday morning, it did stage a solid rebound into the close, which was a testament to the stock's recent relative strength. What's more, the pullback Friday could turn out to be a routine day of profit taking, with the EMC-related news the catalyst to book gains. Going forward, SUNW is likely to be impacted by the CSCO earnings report early next week, so bullish traders will want to consider that much before entering new plays in SUNW. The $17.50 level held pretty strongly Friday, so traders might gravitate towards that level early next week when searching for entry points. Conversely, in an advancing market, momentum traders might look for an advance above the $18.25 level to signal that SUNW has regained its footing and its time to enter call plays. Our stop remains in place at the $16 level. ***August contracts expire in two weeks*** BUY CALL AUG-17.5 SUQ-HW OI=35941 at $1.00 SL=0.50 BUY CALL AUG-20.0 SUQ-HD OI=12498 at $0.15 SL=0.00 BUY CALL SEP-17.5*SUQ-IW OI=19719 at $1.75 SL=1.00 BUY CALL SEP-20.0 SUQ-ID OI= 7136 at $0.70 SL=0.25 BUY CALL OCT-20.0 SUQ-JD OI=19252 at $1.20 SL=0.50 Average Daily Volume = 39.9 mln MSFT - Microsoft $66.89 (+1.42 last week) Microsoft develops, manufactures, licenses and supports a wide range of software products for a multitude of computing devices. Microsoft software includes scalable operating systems for servers, personal computers and intelligent devices, server applications for client/server environments, knowledge worker productivity applications, and software development tools. MSFT's price action Friday mirrored that of the Nasdaq. The stock, for the most part, traded in a fairly narrow range before staging a rally into the close. We expect that the Nasdaq and MSFT will pretty much trade in tandem over the short-term, so it's paramount that bullish traders in MSFT keep close tabs on the Nasdaq, perhaps both the COMPX and the NDX. That means watching support levels in the indexes and monitoring direction. Also, it would be helpful to monitor the Software Index (GSO.X). The GSO actually traded decently last Friday, only dipping down to the 195 level. Again, we'd like to see the GSO trade above the 200 level, which would alleviate some of the supply that has kept MSFT down lately. In fact, an advance in the GSO above the 200 level in conjunction with the COMPX breaking above the 2100 level would set up a nice situation for a bullish trader looking to enter call positions into strength in MSFT. For its part, MSFT is creeping towards the upper end of its recent trading range, so how you approach the stock is a matter of style. As previously mentioned, the momentum crowd can confirm strength in the GSO and COMPX, and use an advance in MSFT above $67.50 or $68 to get into some calls. Otherwise, entering on weakness has been working. MSFT seems to continue attracting buyers at the $65 and $66 area, so a dip down into that range may serve as a solid entry point in terms of risk versus reward. ***August contracts expire in two weeks*** BUY CALL AUG-65*MSQ-HM OI=44684 at $3.00 SL=1.75 BUY CALL AUG-70 MSQ-HN OI=63524 at $0.55 SL=0.25 BUY CALL SEP-65 MSQ-IM OI= 3459 at $4.80 SL=3.25 BUY CALL SEP-70 MSQ-IN OI= 4598 at $2.20 SL=1.25 BUY CALL OCT-70 MSQ-JN OI=20378 at $3.40 SL=2.50 Average Daily Volume = 35.6 mln BRCD - Brocade Communications $36.59 (+4.91 last week) Brocade Communications Systems is a supplier of open Fibre Channel Fabric solutions that provide the intelligent backbone for Storage Area Networks. For the 6 months ended 4/28/01, revenues totaled $280.2M, up from $104.8M. Net income totaled $44.5M, up from $20.6M. Revenues reflect higher demand for the SAN switching products and an increased customer base. Net income also reflects lower component and manufacturing costs. EMC's comments late last week didn't do much to further our bullish cause in BRCD. The stock stalled around the $38 level in the latter part of last week, and spend Friday bouncing from the $36.20 level. While the stock is above most of its short-term resistance levels, it still needs to clear the $40 level in order to confirm that the momentum is still alive in the play. We'll need to see the Nasdaq continue climbing higher if BRCD is going to get above $40. If weakness becomes the Nasdaq early next week, BRCD will most likely fall below the $36 level and trade down to its pivot point at $34. That level marks a breakout point from just a few days ago, and should serve as support on the way back down. Therefore, bullish traders who fancy entering on weakness may think about waiting for BRCD to bounce from $34 before entering any new call plays on a pullback. On the other hand, if the market strengthens early next week bullish traders might look for a strong advance, on healthy volume, above the $38 level. But if that strategy is pursued, make sure to confirm strength in others in BRCD's group, including EMC, NTAP, EMLX, QLGC, and VRTS. Our stop remains in place at the $33 level, which is rather liberal so traders will want to take into account risk tolerance when placing their own stops. ***August contracts expire in two weeks*** BUY CALL AUG-35 UBF-HG OI=6876 at $4.10 SL=2.50 BUY CALL AUG-40*UBF-HH OI=7599 at $1.80 SL=1.00 BUY CALL SEP-35 UBF-IG OI=4080 at $6.40 SL=4.50 BUY CALL SEP-40 UBF-IH OI= 988 at $4.30 SL=2.75 Average Daily Volume = 14.0 mln JBL - Jabil Circuits $32.99 (+0.27 last week) Jabil Circuit designs and manufactures electronic circuit board assemblies and systems for original equipment manufacturers in the communications, computer peripherals, personal computers, and consumer product industries. For the 6 months ended 2/01, revenues rose 53% to $2.34B. Net income rose 46% to $88.5M. Results reflect increased production of communication and personal computer products, partially offset by lower levels of capacity utilization. We were on alert of JBL's relative weakness last Thursday, but its solid rebound Friday painted a slightly different picture. The bounced from the $32 level and staged a $1 climb later in the day, which actually out performed the Nasdaq Composite (COMPX). However, before we bust out the bubbly, there's still some short-term resistance between the $33 and $34 levels that JBL needs to clear before advancing above the $35 level. Early next week, bullish traders should continue to monitor JBL's group, including CLS, SANM, and FLEX. If we witness some solid participation from its group, JBL should be able to clear its overhead supply early next week. Otherwise, on the downside, we'll want to watch its price action closely around the $32 level early next week. If the buyers lose their strength around that level, JBL may be in danger of violating our stop at the $31 level, resulting in a drop. As such, bullish traders with open positions should consider using a tighter stop to prevent any erosion of premium in the options. ***August contracts expire in two weeks*** BUY CALL AUG-30*JBL-HF OI=3012 at $3.80 SL=2.75 BUY CALL AUG-35 JBL-HG OI=3436 at $1.00 SL=0.25 BUY CALL SEP-30 JBL-IF OI=3765 at $5.20 SL=3.75 BUY CALL SEP-35 JBL-IG OI=5460 at $2.65 SL=1.75 Average Daily Volume = 2.3 mln AHAA - Alpha Industries $39.75 (+1.75 last week) Alpha Industries designs, 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. The primary applications for the company's products include wireless handsets, wireless infrastructure and broadband communications equipment. AHAA also produces integrated circuits, discrete components, electrical ceramics and ferrites used in wireless base station equipment, cable television, cable modems and other broadband applications, wireless local loop, wireless personal digital assistants and wireless local area networks. The bears extracted their pound of flesh from AHAA Friday morning, driving the stock down to test our $38 stop, but fortunately the bulls were able to stage a recovery. Keeping the uptrend alive into the weekend, the bulls were able to post a close just a nickel below the open, and keeping the stock within striking distance of the $40 level. Despite very light trading volume on the broad markets, AHAA saw nearly double its daily average number of shares trade hands on Friday. This is actually a bit disconcerting, as the consolidation of the recent rise is occurring on relatively heavy volume, possibly paving the way for a price breakdown. But until such an event materializes, we'll continue to play the trend. Target new entries on either a bounce from the $38-39 level or a volume-backed breakout over $40.50. ***August contracts expire in two weeks*** BUY CALL AUG-35 GAQ-HG OI=388 at $5.40 SL=3.50 BUY CALL AUG-40*GAQ-HH OI=510 at $2.10 SL=1.00 BUY CALL AUG-45 GAQ-HI OI=460 at $0.65 SL=0.00 BUY CALL SEP-40 GAQ-IH OI=630 at $4.00 SL=2.50 BUY CALL NOV-40 GAQ-KH OI=917 at $6.00 SL=4.00 Average Daily Volume = 1.19 mln CDWC - CDW Computer Centers $47.62 (+5.08 last week) Providing customized computing solutions to its customers, CDWC is a direct marketer of over 80,000 computer products, including hardware, software, peripherals, networking/communication and accessories. The company provides a nearly endless list of products, from companies such as Apple, Canon, Epson, Hewlett-Packard, IBM, Microsoft, Adobe, Cisco, and 3Com. Using catalogs, telesales, and the Internet, the company has over 630,000 customers and receives most of its business online. Breaking out above resistance earlier this week on the heels of positive news in the Semiconductor sector, CDWC vaulted through the $45 resistance level. Apparently investors expect an improvement in chip sales to translate into increased demand for computers and computer-related equipment. Thursday's strong move left a gap between $45.50-46.50, and this will likely need to be filled before CDWC can extend it gains. Adding credence to this theory on Friday, the stock posted a bearish harami candle pattern, which usually portends near-term weakness when it follows an uptrend. And in the face of weak volume in the broad markets, CDWC traded nearly double its ADV -- not exactly an encouraging consolidation pattern. We still like the upside, but we want to make the stock prove itself before we commit cash to the trade. A volume-backed rebound from the $45 level would make for an attractive entry, although momentum traders should be able to gain favorable entries on a rally through the $50 resistance level. Keep stops in place at $44. ***August contracts expire in two weeks*** BUY CALL AUG-45*DWQ-HI OI= 338 at $3.90 SL=2.50 BUY CALL AUG-50 DWQ-HJ OI= 157 at $1.50 SL=0.75 BUY CALL OCT-45 DWQ-JI OI=4396 at $7.60 SL=5.25 BUY CALL OCT-50 DWQ-JJ OI= 737 at $5.00 SL=3.00 SELL PUT AUG-45 DWQ-TI OI= 171 at $1.30 SL=2.50 (See risks of selling puts in play legend) Average Daily Volume = 618 K MXIM - Maxim Integrated Products $50.34 (+5.82 last week) MXIM designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits. The company also provides a range of high-frequency design processes and capabilities that can be used in custom design. MXIM's objective is to develop and market both proprietary and industry-standard analog integrated circuits that meet the increasingly stringent quality standards demanded by customers. After the stellar move in chip stocks this past week, it came as no surprise to see them retrace a bit on Friday. Following that trend, MXIM gave back a bit of its gains on Friday, but managed to recapture most of its intraday losses by the closing bell. Ending just below the $51 resistance level, the stock is poised to continue its rally next week, so long as the Semiconductor index (SOX.X) can continue its recovery. Daily stochastics are flattening out in overbought, so we'll need sector strength and buying volume to propel the stock higher. While we can target intraday bounces from the $48-49 level, we want to make sure volume accompanies the bounce. Alternatively, wait for buyers to push MXIM through the $51 resistance level before getting your feet wet. Just keep a watchful eye on overhead resistance at the 200-dma ($52.65) and then $54. Keep stops set at $47. ***August contracts expire in two weeks*** BUY CALL AUG-50*XIQ-HJ OI=2716 at $3.10 SL=1.50 BUY CALL AUG-55 XIQ-HK OI=2968 at $1.05 SL=0.50 BUY CALL SEP-50 XIQ-IJ OI=1569 at $5.10 SL=3.00 BUY CALL SEP-55 XIQ-IK OI= 382 at $2.85 SL=1.50 BUY CALL SEP-60 XIQ-IL OI= 272 at $1.40 SL=0.75 SELL PUT AUG-45 XIQ-TI OI=4975 at $0.80 SL=1.50 (See risks of selling puts in play legend) Average Daily Volume = 4.56 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 08-05-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/2340_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 ************* JEC - Jacobs Engineering $54.89 (-3.16 last week) Jacobs Engineering provides a broad range of project services; process, scientific and systems consulting services; operations and maintenance services; and construction services. For the 6 months ended 3/31/01, revenues rose 15% to $1.94B. Net income totaled $41.7M, up from $12.3M. Revenues reflect the growth of consulting services. Earnings also benefited from the absence of a FY 1999 litigation settlement provision. Shares of JEC fell about -13% back on July 24th after a downgrade took the share price through the 100 DMA. Today's declines came on better than average volume, suggesting that conviction for further declines might be in the mind of traders. The dip under the 200 DMA- a break in support not seen in nearly 2 years, tells us that investors have decided to cash in after a long, very impressive run by the stock. The first level of support presents itself at right about tonight's close, say $50.00. The lack of liquidity could come to haunt the stock should sellers step up to the plate on Monday. Downside resistance will present itself at $50.00 and this short-term volatility could spell big gains for those on the short side of the trade. It is at this price that short-term holders should look to exit the trade. The exit price for the longer-term trader is a bit less discernible, but another level of minor downside resistance exists at $46.00 and that would likely be the best area to exit. As mentioned before JEC is not a heavily traded stock and can be prone to volatility. Make sure to cover your trade with a stop at $58.00. ***August contracts expire in two weeks*** BUY PUT AUG-55*JEC-TK OI= 0 at $2.05 SL=1.00 Wait for OI!! BUY PUT OCT-50 JEC-VJ OI=706 at $1.80 SL=1.00 Average Daily Volume = 314 K LSS - Lone Star Technologies $19.35 (-3.65 last week) A domestic manufacturer of premium welded "oil country tubular goods", LSS makes steel tubular products used in the completion and production of oil and natural gas wells. The company is also a major manufacturer of line pipe, which is used in the gathering and transmission of oil and natural gas. Additionally, LSS is a manufacturer of specialty tubing products used in power technology, automotive, construction, agricultural, and industrial applications. It's said that there's no rest for the wicked, and if that's true, then the Oil Services sector must have been very bad. It just can't seem to stop falling, but even the Oil Services index (OSX.X) looks healthy compared to the chart of our new play, LSS. Shares of the piping manufacturer broke down again this week, this time below the $22.50 level, and on extremely heavy volume. The stock is now resting on major support in the $19 area that dates back to fall of 1999. Just because the stock has major support and a PE ratio of only 11 doesn't mean the stock can't continue to fall. The stock will continue to drop until the sellers and buyers reach equilibrium, and that hasn't happened yet. Target a drop under $19 for new momentum-based entries, or wait for an intraday rally to provide a slightly more attractive entry point. Likely levels for a rollover are intraday resistance at $20 and then $22, also the level of our stop. As long as demand for its products remains slow, LSS should continue its descent towards the 1998 lows in the $8-9 range. ***August contracts expire in two weeks*** BUY PUT AUG-25.0*LSS-TE OI=52 at $6.00 SL=4.00 BUY PUT AUG-20.0 LSS-TD OI= 0 at $1.60 SL=0.75 BUY PUT SEP-22.5 LSS-UX OI= 1 at $4.00 SL=2.50 BUY PUT SEP-20.0 LSS-UD OI= 0 at $0.70 SL=0.00 Average Daily Volume = 187 K ADP - Automatic Data Processing $46.94 (-4.06 last week) Through its many subsidiaries, ADP is a provider of computerized transaction processing, data communication and information services. The company's operations are divided into Employer Services, Brokerage Services, Dealer Services and Claims Services. Among the activities managed by the Employer Services division are payroll, human resources, benefits administration, tax filing and reporting and retirement plan services. Everybody loves a good old-fashioned technical breakdown and that is precisely what shares of ADP have given us over the past week. As price has continued to fall, puncturing the $50 support level, volume surged to well over double the ADV (nearly triple on Thursday). ADP fell to new all-time lows, and despite stochastics that are well into the oversold region, the stock looks like it has more pain to endure. The Point and Figure chart is lined up in with the bears too, as it just posted a descending triple-bottom breakdown and is forecasting a bearish price target of $42. Another momentum play, we want to enter ADP either on a failed intraday rally below our $50 stop or on continued weakness that takes the stock below $46.50 on continued heavy volume. ***August contracts expire in two weeks*** BUY PUT AUG-47.5*ADP-TW OI=333 at $1.85 SL=1.00 BUY PUT AUG-45.0 ADP-TI OI=188 at $0.80 SL=0.00 BUY PUT SEP-47.5 ADP-UW OI= 14 at $2.70 SL=1.25 Average Daily Volume = 1.39 mln ***************** CURRENT PUT PLAYS ***************** DIGL - Digital Lightwave $19.20 (-1.18 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. We just knew that any market weakness would result in DIGL dropping below the $20 level, which is exactly what happened last Friday. While the stock only fell $1, it's trading last week provided an excellent case study of what it means when a stock is trading heavily. There was obviously a seller present that week every time DIGL traded up to, or slightly above, the $21 level. That supply when combined with additional supply in the form of a weak market almost results in a breakdown in price. To digress, DIGL's breakdown last Friday may have offered bearish traders with open positions a chance to exit with some gains. After all, the stock did trade as low as $18.78, which is just off its relative lows around $18.50. That being the case, any further weakness in the Nasdaq next week should result in DIGL trading below the $18.50 and searching for a new distribution. That could take the stock as low as $15 or $16. Nevertheless, bearish traders with open positions should be thinking exit point as this juncture, and any weakness below $18.50 would offer a favorable out. We're keeping our stop in place at $21, because that's where the big seller is. ***August contracts expire in two weeks*** BUY PUT AUG-22.5 DGW-TX OI= 61 at $3.90 SL=2.50 BUY PUT AUG-20.0*DGW-TD OI=406 at $2.00 SL=1.00 Average Daily Volume = 1.85 mln CHKP - Check Point Software $44.24 +1.73 (-0.20 this week) Check Point Software is the worldwide leader in securing the Internet. The company's Secure Virtual Network (SVN) architecture provides the infrastructure that enables secure and reliable Internet communications. CHKP finally rolled over last Friday. Its under performance was certainly encouraging for those of us on the bearish side of things. The stock dropped more than 5%, while the Nasdaq shed an even 1%. We expect this under performance to continue in CHKP, but it's still crucial that the Nasdaq pullback from its current levels if our play in CHKP is going to be successful. At this point, we need to see the stock breakdown below the $43.00 level, which is the current site of an old ascending support line. Although recently violated, these old trend lines can be of use when gauging risk. That said, a breakdown below the $43 level in conjunction with further weakness in the COMPX should allow traders to enter new positions or add to existing positions. On the upside, we'd like to see resistance at the $44 level hold, which it did for the most part last Friday. Above that, our stop still rests at the $46 level. As for targets to the downside, we could see CHKP fall to the $40 level if it breaks below $43. As such, traders can use any decline down to $40 as a short-term exit point. ***August contracts expire in two weeks*** BUY PUT AUG-45*KEQ-TI OI=2549 at $3.50 SL=2.00 BUY PUT AUG-40 KEQ-TH OI=4082 at $1.25 SL=0.50 Average Daily Volume = 10.5 mln ADBE - Adobe Systems $37.70 (-5.36 last week) A long-time leader in desktop publishing software, ADBE provides graphic design, publishing, and imaging software for Web and print production. Offering a line of application software products for creating, distributing, and managing information of all types, the company generates nearly 75% of sales through publishing software products such as Photoshop, Illustrator, and PageMaker. Its Acrobat Reader, which uses portable document format (PDF) is popping up all over the Internet, as businesses shift from print to digital communications. In addition, ADBE licenses its industry standard technologies to major hardware manufacturers, software developers, and service providers, as well as offering integrated software solutions to businesses of all sizes. The bearish wedge continues to build for shares of ADBE. Looking at a chart, one can see the bulls putting up a tough fight at support near $37 but the intraday highs keep getting lower and the technical bias is definitely pointing for a decline. Volume was less than normal but for a late summer Friday we can't expect much. We've mentioned before to keep your eyes on the software index and the GSO.X is struggling to breakout but the bulls can not push through resistance at the 200 mark. The MACD on ADBE continues to be bearish and we reiterate out comments from Thursday. More passive traders could look to initiate put plays when the stock trades or closes under $37. Active aggressive traders can try targeting failed rallies on intraday moves. Remember, if the trade proceeds as planned, we're looking for a downward price target of $29. There has been no significant news on ADBE for Friday. We will keep our stop at $41. ***August contracts expire in two weeks*** BUY PUT AUG-40 AEQ-TH OI=2258 at $3.30 SL=1.75 BUY PUT AUG-35*AEQ-TG OI=1508 at $0.95 SL=0.00 BUY PUT SEP-40 AEQ-UH OI= 218 at $5.00 SL=3.25 BUY PUT SEP-35 AEQ-UG OI= 960 at $2.55 SL=1.25 Average Daily Volume = 3.85 mln CHBS - Christopher & Banks Corp. $24.75 (-3.64 last week) Formerly known as Braun's Fashions, Christopher & Banks is a Minneapolis-based regional retailer of women's specialty apparel. CHBS sells sportswear, sweaters, dresses, and accessories in nearly 250 stores, spread over 27 states, mostly in the northern U.S. The company is currently expanding its offerings for larger women with a new store format - C.J. Banks - which will carry plus-size apparel. The C.J. Banks concept is expected to launch with 20 stores by the end of 2001. As expected the Retail Index (RLX.X) ticked downward on Friday but kept its losses mild to -0.69%. Surprisingly, shares of CHBS were able to ring up a sale of 75 cents or +3.12%. This may be our signal to step in. Shares gapped up at the open and climbed to 25.21 before slipping through the rest of the trading session. The conflict between bulls and bears was intense as 1.1 million shares traded compared to its normal volume of 550K. The candlestick formed on Friday might be considered a doji which can typically indicate indecision on the stock's future direction. However, sellers were able to keep the stock under new resistance of $25 and the downward trend remains intact. New put players should confirm direction on Monday before choosing to initiate a play. As long as the price remains under $25 traders should be okay. We'll keep our stop at $27. ***August contracts expire in two weeks*** BUY PUT AUG-25*URH-TE OI=320 at $1.85 SL=1.00 BUY PUT SEP-25 URH-UE OI=159 at $2.90 SL=1.50 BUY PUT DEC-25 URH-XE OI=114 at $4.50 SL=3.00 Average Daily Volume = 554 K MEDI - MedImmune Inc. $37.49 (-3.10 last week) MedImmune is a biotech company focused on developing and marketing products that address medical needs in areas such as infectious disease, autoimmune disorders, cancer, and transplantation medicine. The company has six products on the market and a diverse product development portfolio. The products currently on the market include Synagis, CytoGam, RespiGam, Ethyol, Neutrexin, and Hexalen. Many of our readers know that stocks move in cycles. Nothing moves in a straight line. After four down days in a row, shares of MEDI offered a small bounce to close out the week. The Biotech index (BTK.X) also bounced on Friday which was likely due to news that GENZ and TKTX both received European approval to sell their rival treatments for Fabry disease. On Thursday we lowered our stop to $38 but new readers may need to be reminded that 1) these are on a closing basis and 2) our stops are only suggestions. We encourage each trader to pick their own stops to suit their own level of risk. MEDI remains in its downtrend and even Friday's bounce showed that sellers pushed the stock from its intraday highs. Strangely, there was support at $37.40 multiple times on Friday afternoon. Confirm direction on Monday before initiating any new plays. Readers may want to wait for a close under $37. ***August contracts expire in two weeks*** BUY PUT AUG-40*MEQ-TH OI= 615 at $3.40 SL=1.50 BUY PUT AUG-35 MEQ-TG OI=1025 at $0.95 SL=0.00 Average Daily Volume = 2.66 mln PDII - Professional Detailing $57.65 (-7.05 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. We were not surprised when PDII managed a small bounce on Friday. When shares crashed through support in Thursday's session odds of an oversold bounce or some short covering where high. To be honest, we expected a bigger bounce. This might be a clue that the selling really isn't done yet. PDII is already down almost 39% from its intraday high just a few weeks ago on June 29th. The stock could rally several points and still remain in its downward trend. Unfortunately for the bulls, this doesn't seem to be in the cards. Despite the perilous drop both bulls and bears will be keeping their eyes on the up coming earnings report on August 13th. That's only six trading sessions away. Our play on PDII has been pretty successful and we would probably only look to initiate new put plays on failed rallies in the $60-$61 area (or a breakdown below support at $55). We'll leave our stop at $61. ***August contracts expire in two weeks*** BUY PUT AUG-65 PKU-TM OI=48 at $9.70 SL=7.00 BUY PUT AUG-60*PKU-TL OI=55 at $5.60 SL=3.25 BUY PUT SEP-55 PKU-UK OI=15 at $5.70 SL=3.25 BUY PUT SEP-60 PKU-UL OI= 0 at $8.90 SL=6.50 Average Daily Volume = 232 K AIG - American International Grp. $81.64 (-0.08 this week) Engaged in a broad range of insurance and insurance-related activities through its subsidiaries, AIG's primary focus is on its general and life insurance businesses. Additionally, the company is growing its presence in financial services and asset management. Other operations include auto insurance, mortgage guaranty, annuities, and aircraft leasing. With operations in 130 countries, AIG generates more than half of its revenues outside the United States. It doesn't take a rocket scientist to see that the Insurance index (IUX.X) is taking a beating lately, and the index's close at $736 on Friday was the lowest settlement since late April. Since it is so closely correlated with the IUX, AIG makes a great proxy for the index, as we can see by its continued decline on Friday. Thursday's bounce quickly reversed, and the subsequent selling spree quickly dragged the stock to its lowest close in over 6 weeks. The uptrend that had been building since mid-March is clearly broken and the bears are starting to drool. With the stochastics rolling over mid-stroke while the price is testing a relative low, it looks like the bulls are in trouble. We are lowering our stop to $83, and would consider any failed rally near this level as an attractive entry point. Of course, we can also target a breakdown under $81 (near Friday's low) as an acceptable sign of continued weakness and permission to enter new positions. ***August contracts expire in two weeks*** BUY PUT AUG-85 AIG-TQ OI=9042 at $3.60 SL=1.75 BUY PUT AUG-80*AIG-TP OI=8177 at $0.65 SL=0.00 BUY PUT SEP-85 AIG-UQ OI= 48 at $4.30 SL=2.75 BUY PUT SEP-80 AIG-UP OI=2653 at $1.90 SL=1.00 Average Daily Volume = 4.54 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=2219 ************************************************************** ***** LEAPS ***** Who's Afraid of the Big, Bad Bear? By Mark Phillips Contact Support Not the bulls, it seems. And why should they be after Merrill Lynch's dubious upgrade of a basket of chip stocks, followed closely by Goldman Sach's own Abby Joseph Cohen, reiterating her year-end targets for the DJIA and S&P500, 12,500 and 1550 respectively. C'mon Abby! It's bad enough to call for a 27% advance in the Big Index, but even more egregious a disservice to individual investors when you consider that is the high traced by the S&P500 in March of 2000. I'd like nothing better than to see that kind of an advance in a scant 5 months, but even I don't have the gall to tell my faithful readers that it has any bearing on reality. We don't even have any hard evidence that the economy has reached bottom yet. Don't get me wrong. Like the X-Files' Fox Mulder, I want to believe, but I need more than smoke and mirrors to motivate me to put my hard-earned cash at risk. And right now, that is all the Wall Street 'experts' are providing - a hope and a prayer for the illusory second-half recovery. Further distancing Ms. Cohen's targets from reality is the fact that many of the companies that helped to propel the market to its March 2000 highs are faint shadows of their former selves, and don't appear likely to recover to those distant highs in anything less than a year. It is likely to take significantly longer. It's not that I don't expect some solid gains from the likes of Intel (NASDAQ:INTC), Cisco Systems (NASDAQ:CSCO) and Sun Microsystems (NASDAQ:SUNW). I just don't think it is realistic to look for CSCO (currently near $20) to regain the $80 level in the next 12 months, much less in the next 5. INTC rocketing from $30 to north of $70 or SUNW shooting from $18 to above $50 in short order are equally ridiculous fantasies. And I actually like CSCO and SUNW, especially with the performance these technology heavyweights are giving us in the LEAPS Portfolio. One of the key events to keep an eye on this next week is the CSCO earnings report on Tuesday. A part of the recent strength in Technology stocks is due to the expectation that the company will actually have something positive to say, given its recent return to the acquisition trail. If CSCO actually impresses the street, it could strengthen this baby bull's legs. Otherwise, it could be the catalyst for the bears to extend their claws again. My apologies for the brief rant, but it really angers me to see such silly and potentially damaging 'advice' given by those on Wall Street that are supposed to be providing actionable investment advice. So let's move on to discuss something more meaningful, like what happened in the markets this week and how it affected our Portfolio. As the markets responded to positive economic news and bullish comments from analysts, they continued to rise in agony, testing some important resistance levels. The NASDAQ tried to breakout over the 2100 level, the DJIA is once again flirted with 10,600 and the venerable bulls are snorting as though they are ready to take on the 1240 level on the S&P500. Of course with the pullback on Friday, all of these resistance levels are still firmly in place and each of the major indices are showing signs of technical weakness. The only saving grace is the fact that Friday's decline came on very weak volume. So maybe it is just some needed consolidation. Only time will tell. The strength this week helped many of our Portfolio plays post nice gains. SUNW and CSCO were a couple of the standouts, but I'd be remiss in not mentioning Philip Morris (NYSE:MO) and Washington Mutual (NYSE:WM). After handing us a picture perfect entry, MO advanced solidly quickly before pulling back a bit. And WM continued to defy the bears as it continued refusing to take out our $40 stop. I'm still daring the market to trigger that stop as I think the stock may be getting a bit over extended. Coming back to the SUNW and CSCO plays, take notice of the fact that our stops have now been raised above the break-even point. No matter what happens, we should be assured of a profit on these plays. Making the picture even better is the fact that we can target these two for Covered Calls plays. Tune in on Wednesday, as these two stocks will figure prominently in the second installment of my tutorial on entry points as they relate to the covered call side of the trade. While I'm on the subject of raised stops, you'll notice that we have advanced our stop on BRCM to $40. This may not be a strong enough support level to hold on a severe pullback, but it should serve to keep us from posting a loss on the play. As you can see, we have a 50% profit in the play and nervous bulls might want to consider harvesting their gains near current levels, waiting for a fresh entry so they can play again. Now that we have moved into the month of August, you'll notice that the 2002 strikes have been excised from our Portfolio. These are too close to expiration for us to continue covering here and as you can see from the performance figures in recent weeks, they are rapidly losing ground on the 2003 LEAPS which are not yet feeling the pinch of time decay. Not only that, but the last of the 2004 LEAPS have been issued by the CBOE, meaning that we are able to list 2004 strikes for all of our Watch List plays. Despite my ranting above, I really am starting to see the light at the end of the tunnel, as you can see by the fact that I bit the bullet and added the Nasdaq-100 Trust (AMEX:QQQ) back onto the Watch List. I won't be chasing the QQQ higher, but if the market gods cooperate, the $40-41 level could provide an attractive entry for the eventual recovery. And just to keep things in balance, we're adding a second Drug stock, Eli Lilly (NYSE:LLY) to the Watch List. This should help us to maintain some diversification, so that winning plays will be abundant, regardless of the near-term market conditions. The lone disappointment in the Portfolio this week was Adobe Systems (NASDAQ:ADBE), which fell sharply following the company's revenue warning Monday night. Similar to Verisign (NASDAQ:VRSN) a couple weeks ago, ADBE is skating along just above our $37 stop. We're not there yet, but keep your radar on, if you are currently in the play. Who knows, maybe the bulls will pull a rabbit out of their collective hat and rescue ADBE from the brink just like they did with VRSN. Hey, I can hope, can't I? We are getting close to entries on our Barrick Gold (NYSE:ABX) and Global Marine (NYSE:GLM) Watch List plays, due to continued weakness in their respective sectors. While I'm willing to take entries on these plays, should our targets be hit, I am hesitant to initiate new positions in several of our other mainstream plays due to the action of the VIX. The Volatility Index spent the past week heading south. After reaching a low of 22.39 by Friday's closing bell, the VIX is pressuring its lower Bollinger band and nearing the lower end of its historical range (20-30). While we know that the VIX can remain in the lower end of its range (even below 20) for months at a time, this isn't the scenario that I think is the most likely. Rather, I would expect a reversal to push the VIX higher in the weeks ahead, providing a more favorable environment for new long-term positions. For those of you just joining us, we prefer to enter new LEAPS plays when the VIX is high, due to the fact that it typically signals a near-term market bottom. And LEAPS premiums fluctuate far less with changing VIX readings than short-term options, allowing us to use the VIX as a market-timing tool to confirm the wisdom of our trading decisions. So as the saying goes, "When the VIX is high, it's time to buy. When the VIX is low, it's time to go." Once again, I'm fresh out of time and space for this week. Until our next visit, remember to plan your trade and by all means, stick to the plan! Mark Phillips Contact Support LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP CLX 03/13/01 '03 $ 35 VUT-AG $ 6.10 $ 6.80 11.48% $ 34 WM 03/22/01 '03 $33.8 OBN-AY $ 6.13 $10.70 74.55% $ 40 FON 04/09/01 '03 $ 25 VN -AE $ 4.40 $ 4.00 - 9.09% $ 19 DELL 04/27/01 '03 $ 25 VDL-AE $ 9.00 $ 8.80 - 2.22% $ 24 ADBE 05/16/01 '03 $ 40 VAE-AH $14.60 $10.90 -25.34% $ 37 BRCM 06/05/01 '03 $ 40 OGJ-AH $14.00 $21.00 50.00% $ 40 VRSN 06/12/01 '03 $ 60 OVX-AL $20.40 $19.50 - 4.90% $ 42 CSCO 07/11/01 '03 $ 20 VYC-AD $ 3.90 $ 6.00 53.85% $ 17 '04 $ 20 LCY-AD $ 5.70 $ 7.90 38.60% $ 13 IBM 07/11/01 '03 $110 VIB-AB $17.70 $17.90 1.13% $ 99 '04 $110 LIB-AB $23.70 $25.30 6.75% $ 99 MRK 07/09/01 '03 $ 70 VMK-AN $ 7.40 $ 9.00 21.62% $ 59 SUNW 07/24/01 '03 $ 15 VZX-AC $ 4.80 $ 6.50 35.42% $15.50 '04 $ 15 LSU-AC $ 5.70 $ 8.00 40.35% $15.50 MO 07/30/01 '03 $ 45 VPM-AH $ 8.50 $ 9.60 12.94% $ 40 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 JAN-2004 $ 20 LRO-AD CC JAN-2004 $ 15 LRO-AC CPN 07/08/01 $38-39 JAN-2003 $ 40 OLB-AI CC JAN-2003 $ 35 OLB-AG JAN-2004 $ 40 LZC-AJ CC JAN-2004 $ 30 LZC-AF 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 CC JAN-2003 $ 15 OML-AC JAN-2004 $ 20 KLW-AD CC JAN-2004 $ 15 KLW-AC ENE 07/29/01 $43 JAN-2003 $ 45 VEN-AI CC JAN-2003 $ 40 VEN-AH JAN-2004 $ 50 LYN-AJ CC JAN-2004 $ 40 LYN-AH LLY 08/05/01 $73-74 JAN-2003 $ 75 VIL-AO CC JAN-2003 $ 70 VIL-AN JAN-2004 $ 80 LZE-AP CC JAN-2004 $ 70 LZE-AN QQQ 08/05/01 $40-41 JAN-2003 $ 45 VZQ-AS CC JAN-2003 $ 40 VZQ-AN JAN-2004 $ 45 LRI-AS CC JAN-2004 $ 40 LRI-AN New Portfolio Plays MO - Philip Morris $43.67 MO wasted no time putting on the "Big Mo" after we added it to the Watch List last weekend. As we mentioned last week, it appeared the selling had been overdone, and apparently we were right, as MO bounced from our $43 entry target (actually $43.19) and posted a fractional gain for the day. While the gain wasn't stellar and volume was a bit under the ADV, we were willing to take the chance, as we felt comfortable in both the fundamental and technical picture. Besides that, we were able to place a nice tight stop at $40 to protect us in the event we were wrong. If we hadn't taken the position on Monday, we certainly would have on Tuesday, as MO really got moving, clearing the 200-dma with style (and volume, too), tacking on more than 4%. With daily Stochastics entering overbought territory already, we will most likely get another test of the $43 support level before the real recovery begins. So for those of you that missed it this time, you just might get a second entry opportunity on the next cycle of the stochastics oscillator. The 2004 LEAPS finally got listed this past week, but too late for us to list them in the Watch List. If another entry opportunity arises in the next week or two, you may want to consider the 2004 $50 LEAP (symbol:LMO-AJ) or the $40 LEAP (symbol:LMO-AH) for you covered call players. BUY LEAP JAN-2003 $45.00 VPM-AH $8.50 New Watchlist Plays LLY - Eli Lilly and Company $79.30 I'm so happy with the performance of our MRK play and the fledgling recovery in Drug stocks in general, that I thought it might make sense to add another play in the sector. LLY has been performing fairly well lately, recovering once again from the $74 level since posting solid earnings in mid-July. The stock is now testing the $80 resistance level, but I don't really expect the bulls to prevail this time around. But one look at the weekly chart shows the strength of the support in the mid-$70s. The weekly chart of the Pharmaceutical index (DRG.X) shows the same thing with stochastics on the rise out of oversold territory. I'm looking for the daily stochastics to retrace one more time, dragging the stock down for a retest of the $74 support level before it really gets moving. Target new positions on a bounce from $74-75, as this is right on the long-term ascending trendline that began last September. Make sure the DRG index maintains its positive weekly trend and volume on the bounce is solid. Once filled, we'll place our stop at $69, just below the intraday lows in March. For you technology die-hards out there, LLY should help to stabilize your portfolio while the markets go through their bottoming process. BUY LEAP JAN-2003 $75.00 VIL-AO BUY LEAP JAN-2003 $70.00 VIL-AN For Covered Call BUY LEAP JAN-2004 $80.00 LZE-AP BUY LEAP JAN-2004 $70.00 LZE-AN For Covered Call QQQ - Nasdaq-100 Trust $43.18 I've been holding my breath for what seemed an eternity, waiting to see if the NASDAQ Composite was going to fall apart again and breach the 1950 support level. I'm pleased to report that the tech index is actually holding up fairly nicely, thanks in large part to the generals like INTC, DELL, CSCO, SUNW and MSFT, which have all failed to break down over the past couple weeks. The net result is that bulls held off the bears during the most dangerous time; namely July earnings season. Underscoring the bulls' case is the recent improvement in the Semiconductor sector, helped along by Merrill Lynch's comments this past week, stating that the worst is over. While I doubt those comments are enough to keep the chip stocks in ascent mode, the bullish move in the Semiconductor index (SOX.X) this past week should help to solidify the overall NASDAQ as we head through the August/September timeframe. The $40 support level on the QQQ has held up nicely over the past month and a return to the $40-41 level should provide for attractive long-term entries for the eventual tech recovery. We may miss out on getting an entry by asking for the QQQ to come back to this level, but remaining disciplined will keep us from getting into the play at a less-than-desirable level, which would subject us to undue downside risk. After we get our entry, we'll start out with an initial stop in the $37-38 area. BUY LEAP JAN-2003 $45.00 VZQ-AS BUY LEAP JAN-2003 $40.00 VZQ-AN For Covered Call BUY LEAP JAN-2004 $45.00 LRI-AS BUY LEAP JAN-2004 $40.00 LRI-AN For Covered Call Drops None *************************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 08-05-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/2340_5.asp ************* COVERED CALLS ************* Option Trading Basics: Terms And Definitions By Mark Wnetrzak One of our new readers asked for a simple explanation of entry and exit transactions that occur in option trading, including exercise and assignment. As you know, ownership of an option provides the right, but not the obligation, to buy or sell a stock for a specific price on or before a given date. A call option gives the owner the right to buy a stock, while a put gives the owner the right to sell a stock. The trader who purchases the option, whether it is a put or a call, is the option "buyer" and conversely, the person who originally sells the put or call is the option "writer." After you have purchased the option, there are two methods (other than simply allowing it to expire) that can be used to achieve a gain or avoid a loss: exercise it, or offset it with another option. A trader who exercises an option agrees to take delivery of (in the case of call) or to sell (with ownership of a put) the asset at the option's strike price. Only option buyers have the choice to exercise an option whereas option sellers have an obligation, for which they have been paid a premium, and they may be assigned the underlying issue at any time prior to the expiration date. There are a number of unique terms that describe specific option trading activities but the most important fact to remember is the initial trade in any position is always an "opening" transaction and the order to exit a play is called the "closing" transaction. An opening trade occurs when a person establishes a new position as either the holder (or writer) of an option and that position can be closed only through the sale (or purchase) of an identical option. The word "offsetting" is sometimes used to describe the trade that closes a position and that action is initiated when it is necessary to remove an investor's previous obligation in the underlying issue. If an option has not been offset or exercised before expiration, it will become worthless. Fortunately, the potential loss to the buyer of an option can be no greater than the initial premium paid for the position. If you are an option writer, you benefit when it expires worthless because you retain the credit received from the initial sale of the option with no future obligation. It is important to understand that most derivatives traded on U.S. exchanges are "American" style options. That means they can be exercised at any time prior to the expiration date. However, holders of American-style options generally elect to realize any profits or losses by making closing or offsetting trades because the costs of these transactions are usually much lower than those associated with exercising. In addition, a closing transaction may provide an opportunity for the option holder to profit from any remaining time value (potential) in the option that would be lost through exercise. At expiration, all option exchanges will automatically exercise an option if the underlying issue's last trade in its primary market is at least $0.75 "in-the-money," unless the holder has issued instructions not to exercise. Once the exercise of an option has been assigned to an option writer, even though he may not yet have been notified of the assignment, the trader can no longer effect an offsetting transaction in that option but must instead purchase (or sell) the underlying interest at the exercise price. The Options Industry Council, a non-profit association created to educate the investing public and brokers about the benefits and risks of exchange-traded options, provides some interesting facts concerning the topic of assignment. Surprisingly, only 10% (on average) of options end up being exercised and the percentage hasn't varied much over the years. The data suggests that option exercises are not that common and based on recent statistics, the majority of option assignments occur when the option approaches expiration. That's a very important fact since one of the most frequent questions we receive from novice traders concerns the potential for early assignment of in-the-money" options. In most cases, the probability of being "exercised" prior to the option's expiration is relatively low and only when you are "short" in a position with little or no extrinsic value does the likelihood of an unwanted assignment become a concern. Next week, we'll talk more about option trading fundamentals and the most common exit and adjustment strategies. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield SEAC 18.06 26.80 AUG 17.50 2.15 *$ 1.59 8.7% SPCT 15.49 15.85 AUG 15.00 1.25 *$ 0.76 7.7% MCAF 14.31 15.90 AUG 12.50 2.70 *$ 0.89 6.7% TERN 6.12 6.44 AUG 5.00 1.60 *$ 0.48 6.6% HTCH 17.80 19.60 AUG 17.50 1.45 *$ 1.15 6.1% NBTY 15.45 15.66 AUG 15.00 1.05 *$ 0.60 6.0% RFMD 29.33 29.96 AUG 25.00 5.20 *$ 0.87 5.2% VNT 24.22 22.00 AUG 20.00 5.10 *$ 0.88 5.0% CLPA 6.08 6.28 AUG 5.00 1.40 *$ 0.32 5.0% AHAA 34.80 39.75 AUG 30.00 6.10 *$ 1.30 4.9% NPIX 11.15 9.93 AUG 10.00 1.65 $ 0.43 4.9% PHTN 38.17 39.97 AUG 35.00 4.30 *$ 1.13 4.8% DSPG 23.21 25.59 AUG 22.50 1.65 *$ 0.94 4.7% CY 26.16 27.25 AUG 25.00 1.95 *$ 0.79 4.7% POWI 22.22 25.46 AUG 20.00 2.85 *$ 0.63 4.7% GZMO 12.80 12.02 AUG 10.00 3.40 *$ 0.60 4.6% NFLD 17.51 16.69 AUG 15.00 3.10 *$ 0.59 4.4% ELNT 38.08 39.50 AUG 35.00 4.10 *$ 1.02 4.3% FFIV 16.90 14.27 AUG 15.00 3.10 $ 0.47 2.5% NFLD 18.45 16.69 AUG 17.50 2.20 $ 0.44 2.4% CFLO 5.20 4.30 AUG 5.00 0.90 $ 0.00 0.0% LU 7.61 6.60 AUG 7.50 0.75 $ -0.26 0.0% RCGI 31.16 27.93 AUG 30.00 2.35 $ -0.88 0.0% *$ = Stock price is above the sold striking price. Comments: Are we at the top of a trading range looking down or getting ready to step higher? Base building is so much fun (...not). I would really like to tell you I made a bundle when I called the turn on Hutchison Tech (NASDAQ:HTCH) last week...ahhh the pains of being a time merchant. Compania Anonima Nacional (NYSE:VNT) is testing near-term support (July low) and should be monitored closely. Network Peripherals (NASDAQ:NPIX) may move back down to its old trading range around $8 and an early exit may be prudent. Northfield Laboratories (NASDAQ:NFLD) has sold off into Friday's earnings report, which was rather dry (what, no PolyHeme news?), and closed right on its 30-dma. A test of the 50-dma ($16) may be next; evaluate your long- term outlook. F5 Networks (NASDAQ:FFIV) continues to weaken and an early exit may be wise. Cacheflow (NASDAQ:CFLO) may be offering a second chance exit - depending on your risk- reward tolerance. The Lucent Technologies (NYSE:LU) saga continues! Yes, dilution is a worry but there was huge investor demand for the convertible security. Technically, I find it favorable that the July low held during the selling frenzy. Fun and games with a speculative position. Some post- earnings selling for Renal Care Group (NASDAQ:RCGI). The stock is testing long-term support at the 150-dma: a key moment! Positions Closed: Boston Communications (NASDAQ:BCGI), Digimarc (NASDAQ:DMRC), Cytogen (NASDAQ:CYTO), Corvas (NASDAQ:CVAS), and Pacificare Health Systems (NASDAQ:PHSY). 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 ILUM 30.95 AUG 30.00 ILU HF 1.95 34 29.00 14 7.5% ISSI 15.00 SEP 15.00 XUS IC 1.25 242 13.75 49 5.6% NETA 16.36 SEP 15.00 CQM IC 2.45 1224 13.91 49 4.9% NMTC 27.85 AUG 25.00 QEK HE 3.60 160 24.25 14 6.7% NTIQ 38.60 SEP 35.00 CQT IG 6.50 36 32.10 49 5.6% PHTN 39.97 SEP 35.00 PDU IG 7.70 26 32.27 49 5.3% SPCT 15.85 SEP 15.00 QCS IC 2.05 30 13.80 49 5.4% 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 ILUM 30.95 AUG 30.00 ILU HF 1.95 34 29.00 14 7.5% NMTC 27.85 AUG 25.00 QEK HE 3.60 160 24.25 14 6.7% ISSI 15.00 SEP 15.00 XUS IC 1.25 242 13.75 49 5.6% NTIQ 38.60 SEP 35.00 CQT IG 6.50 36 32.10 49 5.6% SPCT 15.85 SEP 15.00 QCS IC 2.05 30 13.80 49 5.4% PHTN 39.97 SEP 35.00 PDU IG 7.70 26 32.27 49 5.3% NETA 16.36 SEP 15.00 CQM IC 2.45 1224 13.91 49 4.9% 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). ***** ILUM - Illuminet Holdings $30.95 *** 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 July 19, 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. Short-term speculation on a long-term prospect. AUG 30.00 ILU HF LB=1.95 OI=34 CB=29.00 DE=14 TY=7.5% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=ILUM ***** ISSI - Integrated Silicon Solution $15.00 *** Bottom Fishing *** Integrated Silicon Solution (NASDAQ:ISSI) designs, develops and markets high performance memory semiconductors used in internet access devices, networking equipment, telecom and mobile communi- cations equipment, and computer peripherals. Their high speed and low power SRAMs and their low to medium density DRAMs enable customers to design products that meet the demanding connectivity, portability, and bandwidth requirements of the internet infra- structure. A substantial majority of ISSI's sales come from the data communications and telecommunications markets. On July 25, ISSI reported revenues in the third quarter were $20.0 million with a net loss of $0.14 per share. The company believes that the combination of new products, process technology expertise, and tier one customer base will allow them to return to growth as market conditions improve. We simply favor the technical support area near $14 as ISSI forges a Stage I base. SEP 15.00 XUS IC LB=1.25 OI=242 CB=13.75 DE=49 TY=5.6% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=ISSI ***** NETA - Network Associates $16.36 *** Software Security *** Network Associates (NASDAQ:NETA) is a leading supplier of security and availability solutions for e-businesses. Network Associates is comprised of four product groups: McAfee (NASDAQ:MCAF), delivering world class anti-virus products; PGP, providing firewall, intrusion detection and encryption products; Sniffer, a leader in network and application management; and Magic, providing web-based service desk solutions. On July 19, NETA reported a smaller expected loss and stated that it will be profitable next quarter by focusing on overseas markets and tight cost controls. With a bullish outlook, Lehman Brothers raised its 12-month price target on NETA to $18 and issued a "strong buy" rating. The recent virus scare has boosted the software security stocks and this position offers a reasonable entry point to speculate on the company's future. SEP 15.00 CQM IC LB=2.45 OI=1224 CB=13.91 DE=49 TY=4.9% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=NETA ***** NMTC - Numerical Technologies $27.85 *** Rally Mode! *** 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. The company has recently announced new products and there has also been some speculation on a possible major design win from Advanced Micro (NYSE:AMD). We simply favor the strong rally and the move above the May and June highs, which now becomes technical support. AUG 25.00 QEK HE LB=3.60 OI=160 CB=24.25 DE=14 TY=6.7% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=NMTC ***** NTIQ - NetIq $38.60 *** A Record Fourth Quarter! *** NetIQ (NASDAQ:NTIQ) NetIQ is a leading provider of e-business infrastructure management and intelligence solutions for all the components of an organizations' e-business infrastructure - from back-end servers, networks and directories to front-end Web servers and applications. Their solutions cover Manageability, Windows 2000 Migration, Exchange Migration, Security Management, Network Performance Management, Storage Administration, Automated Provisioning, Directory Management, Web Analytics and Visitor Relationship Management. NetIQ's more than 52,000 customers include e-businesses, medium to large enterprises and xSPs. The company reported earnings on July 25, with revenues increasing 189% to $58.6 million and a net income of $7.5 million or $0.14 per diluted share. The stock has broken-out of its base on high volume and has moved above its 150-dma. This position offers a conservative entry point with a cost basis near technical support. SEP 35.00 CQT IG LB=6.50 OI=36 CB=32.10 DE=49 TY=5.6% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=NTIQ ***** PHTN - Photon Dynamics $39.97 *** 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. The stock appears to be completing a "saucer-bottom" formation with buying support near our cost basis. SEP 35.00 PDU IG LB=7.70 OI=26 CB=32.27 DE=49 TY=5.3% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=PHTN ***** SPCT - Spectrian $15.85 *** More Bottom Fishing! *** Spectrian (NASDAQ:SPCT) is a leading designer and manufacturer of single carrier and multicarrier high-power RF amplifiers for the worldwide wireless communications industry, utilized in both wireless data and voice applications. Spectrian supports AMPS, CDMA, TDMA, GSM and 3G technologies for mobile and fixed wireless networks. A familiar pattern now, Spectrian reported less than spectacular earnings a few weeks ago but has rallied recently as investors look to the future. The stock is forging a Stage I base and the improving technicals suggest an upside resolution. We simply favor the support area near the cost basis and signs of accumulation on this speculative issue. SEP 15.00 QCS IC LB=2.05 OI=30 CB=13.80 DE=49 TY=5.4% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=SPCT ***** ***************** 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 CCRD 10.73 SEP 10.00 UCD IB 1.75 54 8.98 49 7.1% SONS 24.50 AUG 22.50 UJS HX 2.60 1226 21.90 14 6.0% MRVL 33.32 SEP 30.00 UVM IF 5.80 1129 27.52 49 5.6% ULCM 20.86 SEP 17.50 UUL IW 4.80 5 16.06 49 5.6% LBRT 11.37 SEP 10.00 IEY IB 2.15 1661 9.22 49 5.3% ICST 21.45 SEP 20.00 IUY ID 2.85 0 18.60 49 4.7% ***************** NAKED PUT SECTION ***************** Market Strategies: Bond Basics - Convertible Securities By Ray Cummins This week we continue our discussion of conservative investing strategies with a review of convertible securities. These unique financial vehicles offer worthwhile opportunities for investors who need current income, yet want to invest in companies that will benefit from the bullish market trends. Although this category of investing is not well known, it can offer favorable annual returns along with potentially high rewards for those that choose to learn the fundamentals of the strategy. Bonds and preferred stock that can be exchanged for common stock are the most conventional types of convertible securities. These instruments provide the necessary means for companies to raise capital for growth and ongoing operations. Most corporations fund their future activities through bank loans or the sale of bonds or common stock. Bondholders are reimbursed for their investment with interest added but inflation will often erode their profits. Shareholders can benefit from appreciation of a company's share value but they have no guaranteed income from the investment. Convertible bondholders enjoy the best of both worlds as they receive a fixed rate of interest, are virtually assured a return of their principal, and also have the right to exchange or convert the bond into a fixed number of shares of common stock. Convertible preferred stock is a similar financial instrument. In this case however, the investor receives a regular distribution or dividend premium rather than a periodic interest payment. Unlike convertible bonds, the distribution is usually not guaranteed. This type of issue can be exchanged or converted into a fixed number of shares of common stock but it will not be redeemed at the end of a specific term; it simply exists as preferred stock until physically converted. When a company's stock grows in value, the convertible bondholder can exchange his holdings and participate in the appreciation of the issue. It the company fails to perform in the short-term, at least the investor gets paid a good rate of interest for waiting. It's a well-known fact that most of the technology companies pay little or no dividend however, convertible instruments on the same issues generally offer attractive yields, plus the opportunity for future profit at a substantially lower risk. Convertible instruments are ideal investments for IRA's and other qualified plans. The distribution income can often be deferred or sheltered and the growth of the common stock will protect against losses from inflation and higher interest rates in other vehicles. Regular premium bonds have only a small yield advantage over most convertibles and the risk-reward ratio favors the profit potential inherent in the future growth of the underlying equity. In most cases, convertible instruments will provide a conservative and yet competitive method to participate in the growth of the current bull market. 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 HLIT 15.08 16.60 AUG 12.50 0.40 *$ 0.40 15.0% KOPN 15.01 16.38 AUG 12.50 0.35 *$ 0.35 13.2% SAGI 15.41 16.25 AUG 12.50 0.30 *$ 0.30 12.2% IDTI 36.14 37.92 AUG 30.00 0.70 *$ 0.70 11.2% NMTC 24.34 27.85 AUG 20.00 0.45 *$ 0.45 11.1% DTHK 14.21 14.00 AUG 10.00 0.30 *$ 0.30 10.4% NMTC 22.84 27.85 AUG 17.50 0.45 *$ 0.45 9.7% NMTC 23.00 27.85 AUG 17.50 0.55 *$ 0.55 9.3% APCS 16.93 17.05 AUG 15.00 0.55 *$ 0.55 8.9% SEAC 27.18 26.80 AUG 22.50 0.40 *$ 0.40 8.8% SEAC 22.00 26.80 AUG 17.50 0.35 *$ 0.35 8.0% NTIQ 34.14 38.60 AUG 25.00 0.65 *$ 0.65 7.6% ICST 18.54 21.45 AUG 15.00 0.35 *$ 0.35 7.2% AFCI 26.30 27.12 AUG 22.50 0.35 *$ 0.35 7.2% AHAA 33.47 39.75 AUG 25.00 0.55 *$ 0.55 6.6% PHTN 33.18 39.97 AUG 25.00 0.40 *$ 0.40 6.2% ZRAN 32.97 38.99 AUG 25.00 0.60 *$ 0.60 6.0% ILUM 30.30 30.95 AUG 25.00 0.40 *$ 0.40 6.0% CTXS 33.53 35.88 AUG 25.00 0.45 *$ 0.45 5.5% PCL 28.49 27.84 AUG 25.00 0.60 *$ 0.60 5.1% BRCM 41.00 46.99 AUG 25.00 0.40 *$ 0.40 5.1% AMZN 16.98 12.15 AUG 12.50 0.50 $ 0.15 3.3% AMZN 16.98 12.15 AUG 12.50 0.45 $ 0.10 2.8% *$ = Stock price is above the sold striking price. Comments: The speculation over AremisSoft's (NASDAQ:AREM) recent volatile activity came to an end last week when the company's shares were halted on the NASDAQ. The issue was placed in a "non-trading" status until AremisSoft can fully satisfy the NASDAQ's request for additional information concerning the amount of money the company claimed it was paid by the Bulgarian Health Insurance Fund. BHI Fund officials said they paid AremisSoft $1.7 million but AremisSoft said it received and recognized as revenue from the fund more than $7 million. The $5.3 million discrepancy is now the source of an SEC investigation and according to a press release, AremisSoft has engaged independent auditors in London to conduct a special review of the payments. In the meantime, two of its top executives have resigned and the company also said its earnings and revenues for the second quarter would fall substantially short of analysts' expectations. When I said that traders who did not exit the short Put option in a timely manner would likely own the stock in three weeks, I had no idea there could be this much downside potential in the issue. Of course, that lends credence to the technician's motto: "The tape tells all." Another issue in which the chart pattern may be telling a disappointing story is Amazon.com (NASDAQ:AMZN) and although our positions are still positive, this may be the last opportunity to avoid ownership of the stock for a relatively small price. If you choose to remain in the original play, monitor the issue for any move below the current support area near $11. Positions Closed: Plug Power (NASDAQ:PLUG), AremisSoft (NASDAQ:AREM). 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 ESST 13.95 AUG 12.50 SEQ TV 0.25 247 12.25 14 12.4% MRVL 33.32 AUG 27.50 UVM TY 0.50 6 27.00 14 13.6% OEI 19.68 AUG 17.50 OEI TW 0.25 8667 17.25 14 9.1% PMCS 36.57 AUG 30.00 SQL TF 0.55 5073 29.45 14 13.9% PPD 20.16 AUG 17.50 PPD TW 0.70 3294 16.80 14 24.9% SLAB 23.00 AUG 20.00 QFJ TD 0.45 252 19.55 14 14.7% ZIGO 20.16 AUG 17.50 UZY TW 0.55 25 16.95 14 20.1% 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 PPD 20.16 AUG 17.50 PPD TW 0.70 3294 16.80 14 24.9% ZIGO 20.16 AUG 17.50 UZY TW 0.55 25 16.95 14 20.1% SLAB 23.00 AUG 20.00 QFJ TD 0.45 252 19.55 14 14.7% PMCS 36.57 AUG 30.00 SQL TF 0.55 5073 29.45 14 13.9% MRVL 33.32 AUG 27.50 UVM TY 0.50 6 27.00 14 13.6% ESST 13.95 AUG 12.50 SEQ TV 0.25 247 12.25 14 12.4% OEI 19.68 AUG 17.50 OEI TW 0.25 8667 17.25 14 9.1% 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). ***** ESST - ESS Technology $13.95 *** Vialta Spin-off! *** ESS Technology (NASDAQ:ESST) designs, markets and supports highly integrated mixed-signal semiconductor solutions for multimedia applications in the Internet, personal computer and consumer marketplaces. The company offers comprehensive solutions for networking and Digital Versatile Disk (DVD), Internet-related semiconductor, Communications, Video Compact Disk (VCD)/Super Video Compact Disk (SVCD) and PC Audio applications. ESST shares have rallied in recent sessions amid speculation over the value of Vialta (OTC:VDHS), which will be distributed by ESS on August 10, 2001. Holders of ESS common stock on the record date (7/23) will receive approximately 1.2 shares of Vialta common stock for each share of ESS common stock they own. The question is, "How high will ESST rise before the distribution and where will it go after the value of Vialta is deducted from its share value?" AUG 12.50 SEQ TV LB=0.25 OI=247 CB=12.25 DE=14 TY=12.4% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=ESST ***** MRVL - Marvell Technology $33.32 *** Chip Sector Rally! *** Marvell Technology Group (NASDAQ:MRVL) designs, develops and markets integrated circuits utilizing proprietary communications mixed-signal and digital signal processing technology for related markets. The company's products provide the critical interface between analog signals and the digital information used in many computing and communications systems and enables its customers to store and transmit digital information reliably, at high speeds. Marvell also develops high-performance communications networking and switching products for the broadband communications market. The semiconductor group is in "rally mode" and MRVL appears to be bracing for a move out of its recent trading range near $25-28. Our position allows for conservative speculation on the eventual outcome of the bullish activity. AUG 27.50 UVM TY LB=0.50 OI=6 CB=27.00 DE=14 TY=13.6% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=MRVL ***** OEI - Ocean Energy $19.68 *** Disparity Play! *** Ocean Energy (NYSE:OEI) is an independent energy company engaged in the exploration, development, production, and acquisition of crude oil and natural gas. North American operations are focused primarily in the shelf and deepwater areas of the Gulf of Mexico, the Permian Basin, Mid-continent, and Rocky Mountain areas. In the international markets, OEI conducts oil and gas activities in Equatorial Guinea, Ctte d'Ivoire, Angola, Egypt, Tatarstan, Pakistan, and Indonesia. This position emerged in a search for over-priced options and with the relatively solid support area near the cost basis, it offers a favorable risk-reward outlook. The company has already reported earnings for the quarter with 22% growth in production and an 85% increase in year-over-year performance. AUG 17.50 OEI TW LB=0.25 OI=8667 CB=17.25 DE=14 TY=9.1% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=OEI ***** PMCS - PMC-Sierra $36.57 *** Own This One! *** PMC-Sierra (NASDAQ:PMCS) designs, develops, sells and supports high-performance semiconductor networking solutions. Their products are used in high-speed transmission and networking systems, which are being used to restructure the global telecom and data communications infrastructure. The company's overall strategy is to provide customers with networking semiconductor solutions that address a range of products and applications. PMC-Sierra shares rallied late in the week after an announcement by Standard & Poor's that it will be added to the S&P 500 index. The fact that Merrill Lynch upped 11 stocks in the chip sector also boosted semiconductor stocks and we believe PMCS would be a great addition to any long-term technology portfolio at the discounted cost basis. AUG 30.00 SQL TF LB=0.55 OI=5073 CB=29.45 DE=14 TY=13.9% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=PMCS ***** PPD - Pre-Paid Legal $20.16 *** Speculation Only! *** Pre-Paid Legal Services (NYSE:PPD) was one of the first companies in the United States organized solely to design, underwrite and market legal expense plans. The company's legal expense plans (referred to as Memberships) currently provide for a variety of legal services in a manner similar to medical reimbursement plans. Plan benefits are provided through a network of independent law firms, typically one firm per state or province. Members have direct, toll-free access to their Provider law firm rather than having to call for a referral. The company has over a million memberships in force with members in all 50 states, the District of Columbia and the Canadian provinces of Ontario and B.C. The ongoing saga surrounding PPD's accounting practices came to an end this week when PPD announced it will not pursue any further appeals with the SEC related to the company's accounting policies for commission advance receivables. PPD will amend its previously filed reports to reflect the SEC's decision and will immediately begin the process of selecting new auditors to monitor all future accounting. Without the concerns of a negative earnings surprise, the issue should remain comfortably in its current trading range. AUG 17.50 PPD TW LB=0.70 OI=3294 CB=16.80 DE=14 TY=24.9% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=PPD ***** SLAB - Silicon Laboratories $23.00 *** Trading Range? *** Silicon Laboratories (NASDAQ:SLAB) designs, manufactures and markets proprietary high-performance mixed-signal integrated circuits for the wireless, wireline and optical communications industries. The company has focused its efforts on developing ICs for the personal computer modem market and is now applying its mixed-signal and communications expertise to the development of ICs for other high growth communications devices, such as wireless telephones and optical network applications. Their mixed-signal design engineers use standard complementary metal oxide semiconductor technology to create ICs that can reduce the cost, size and system power requirements of devices that the company's customers sell to their end user customers. Since the chip segment is performing better than most technology groups, we decided to select some additional positions in the industry. Based on the recent trading-range support near our cost basis, SLAB offers an acceptable risk-reward outlook for traders who are bullish on the chip sector. AUG 20.00 QFJ TD LB=0.45 OI=252 CB=19.55 DE=14 TY=14.7% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=SLAB ***** ZIGO - Zygo Corporation $20.16 *** Bottom Fishing! *** Zygo (NASDAQ:ZIGO) delivers high performance metrology and automation solutions for manufacturers of semiconductor equipment and precision parts, and manufactures optical components, systems and fiber optic modules for next generation optical networks. Zygo makes unique non-contact metrology instruments and systems and accessories, and optical components and systems to precise tolerances both for sale and for use as key elements in its own products. Zigo's products are based on its core competencies: interferometry, confocal scanning optical microscopy, systems integration, automated piece parts handling, precision optics and modules, and MEMS manufacturing. There's not much news on this issue but the technical indications suggest the support area near $18-$20 is relatively solid and the company's earnings are not due until after the sold options expire in mid-August. AUG 17.50 UZY TW LB=0.55 OI=25 CB=16.95 DE=14 TY=20.1% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=ZIGO ***** ***************** 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 HLIT 16.60 AUG 15.00 LOQ TC 0.40 492 14.60 14 16.0% ICST 21.45 AUG 20.00 IUY TD 0.50 170 19.50 14 14.2% ULCM 20.86 AUG 17.50 UUL TW 0.30 38 17.20 14 12.3% PHTN 39.97 AUG 35.00 PDU TG 0.60 35 34.40 14 11.2% RCOT 19.01 AUG 17.50 ROQ TW 0.30 125 17.20 14 10.2% GOTO 22.85 AUG 20.00 GUO TD 0.30 1114 19.70 14 9.9% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Title: Optimism Prevails Despite Friday's Lackluster Session... ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, August 3 The major equity averages retreated today as stocks consolidated after a string of upbeat sessions. A "better-than-expected" jobs report failed to give the market a lift and semiconductor stocks were among the worst performers after climbing for seven straight days. The Dow industrial average ended down 38 points at 10,512 and the NASDAQ Composite slipped 21 points to finish at 2,066. The S&P 500 index closed 6 points lower at 1,214. Trading volume was light with just 935 million shares exchanged on the Big Board. Broad market declines outpaced advances 15 to 14. Activity on the NASDAQ was also subdued with only 1.2 billion shares traded. Technology losers edged past the winners 19 to 16. In the bond market, the U.S. 30-year Treasury fell 2/32, pushing its yield up to 5.58%. Last Sunday's new plays (positions/opening prices/strategy): Compuware (NASDAQ:CPWR) SEP15C/12P $0.10 credit synthetic Kohl's (NTSE:KSS) AUG65C/60C $0.75 credit bear-call Bank N.Y. (NYSE:BBK) AUG45C/45P $2.65 debit straddle EMC Inc. (NYSE:EMC) AUG20C/20P $2.20 debit straddle Lowe's (NYSE:LOW) AUG40C/40P $2.90 debit straddle Compuware was our best pick of the week, offering a favorable entry opportunity on Monday and finishing Friday at a recent high near $14. The rally on Thursday produced an acceptable "early-exit" credit (near $0.60) and the play should provide additional gains in the coming weeks. The Lowe's debit straddle also offered a nice (short-term) gain when the issue dipped to $36.40 on Friday. The overall credit for the position was near $3.70, an $0.80 profit on $2.70 invested for less than one week. Portfolio Activity: The Reader's Request position in Altera (NASDAQ:ALTR) became a new winner on Thursday when it jumped above $33 amid the rally in semiconductor issues. The upside movement produced a profit near $0.80 in the speculative synthetic position and with the sold (short) Put at $25, there is little downside risk before the August expiration. Most of the positions in the Calendar Spreads category are performing as expected and three of the stocks are trading almost exactly at the sold strikes. John Hancock Financial (NYSE:JHF) is at $39.80, Cadiz (NASDAQ:CLCI) closed at $9.90 and Sinclair Broadcasting (NASDAQ:SBGI) last traded at $10.05. Clarus (NASDAQ:CLRS) is the only issue in the group that has yet to yield a profitable outcome. There was relatively little activity in the Straddles group but there is hope for one of the older positions. Verity (NASDAQ:VRTY) fell over $2 to a recent low on Friday and the (AUG15C/15P) position is now trading at a small profit. Cable and Wireless (NYSE:CWP) rebounded from a recent sell-off and traders who initiated the risk-free exit (selling the bearish portion of the play for a small overall credit) were rewarded with an excellent profit when the issue rallied on Thursday. The speculative strangle enjoyed a profit potential of over 50% for just three weeks in the play. In the Credit Spreads section, Medtronics (NYSE:MDT) slumped Wednesday on reports of a change in the rates Medicare pays hospitals for certain procedures. The new guidelines will mean cuts in reimbursement for some key procedures for patients enrolled in the federal insurance program for the elderly and that will force hospitals to discontinue certain procedures that are not profitable. One analyst suggested that Medtronic would benefit from the changes, due to their technology and breadth of product line, but investors obviously disagree. The move below a recent support area and the 30-dma is indicative of a "failed" rally and any further downside activity will be ample cause for an exit in the bullish position. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** UTHR - United Therapeutics $12.30 *** Speculation Only! *** United Therapeutics (NASDAQ:UTHR) is a biotechnology firm focused on combating cardiovascular, inflammatory and infectious diseases with unique therapeutic products. These products include unique pharmaceuticals, arginine products and telemedicine services. Pharmaceutical products include Remodulin, which the company is developing for treating advanced pulmonary hypertension and late- stage peripheral vascular disease and Beraprost, which is for the treatment of peripheral vascular disease. Pulmonary hypertension patients require monitoring of certain bodily measurements such as heart and lung function. Much of this monitoring can be achieved with less expense and inconvenience by using telemedicine devices that enable physicians to monitor patients remotely. United Therapeutics intends to provide telemedicine services for a fee to patients and physicians using and prescribing their products. United Therapeutics recently reported that the Cardiovascular and Renal Drugs Advisory Committee review of Remodulin for Pulmonary Arterial Hypertension (PAH) will occur August 9, 2001, and the Implied Volatility in its options has increased since the news became public. The outcome of the meeting could significantly affect the value of UTHR shares and traders are speculating on the near-term movement of the issue with "out-of-the-money" options. With the large disparities in front-month option premiums, there are a number of viable positions and we have chosen a speculative calendar spread for traders who anticipate a favorable Advisory Committee recommendation. PLAY (very speculative - bullish/calendar spread): BUY CALL SEP-15.00 FUH-IC OI=303 A=$1.60 SELL CALL AUG-15.00 FUH-HC OI=851 B=$1.00 INITIAL NET DEBIT TARGET=$0.45-$0.50 TARGET PROFIT=25% Note: This position is based on recent increased activity in the stock and underlying options. Although the play offers favorable risk-reward potential, it should also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=UTHR ****************************************************************** GENZ - Genzyme $58.75 *** Fabrazyme Approval! *** Genzyme General (NASDAQ:GENZ) is a division of Genzyme, a unique biotechnology and human healthcare company that develops products and provides services for major unmet medical needs. Genzyme General develops and markets therapeutic and diagnostic products and services with an emphasis on genetic disorders and chronic debilitating diseases with well-defined patient populations. Genzyme General consists of the Therapeutics and Diagnostics business units and its wholly owned subsidiary GelTex, which the company acquired in December 2000. GENZ shares rallied last week after the company said it received European Union approval to market Fabrazyme for long-term enzyme replacement therapy in patients with a confirmed diagnosis of Fabry disease. The disease is a genetic disorder characterized by a build-up of dead red blood cells in major organs such as the heart. The condition reduces blood flow to the organs and leads to kidney failure, stroke, cardiovascular disease, severe pain and numbness. These complications typically lead to death near the age of 40 and until now, there has been no treatment for the condition. Analysts say there are as many as 5,000 Fabry disease patients worldwide, 3,000 of whom are in the United States, and these few thousand patients constitute a global market that some experts estimate could reach as much as $800 million by 2005. Genzyme already has several products on the market, including Cerezyme, a treatment for a rare disorder called Gaucher disease, and the company is hoping to gain permission to market the Fabry disease treatment in the United States. Traders with a bullish outlook for the issue can speculate on its future movement with this conservative position. PLAY (conservative - bullish/credit spread): BUY PUT AUG-50 GZQ-TJ OI=818 A=$0.35 SELL PUT AUG-55 GZQ-TK OI=3257 B=$0.80 INITIAL NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=GENZ ****************************************************************** MSFT - Microsoft $66.89 *** Reader's Request! *** Microsoft (NASDAQ:MSFT) develops, manufactures, licenses and supports a wide range of software products for a multitude of computing devices. Microsoft software includes a number of scalable operating systems for servers, personal computers and intelligent devices, server applications for client/server environments, knowledge worker productivity applications, and software development tools. The company's online efforts include the MSN network of Internet products and services and alliances with companies involved with broadband access and various forms of digital interactivity. The company also licenses consumer software programs, sells hardware devices, provides consulting services, trains and certifies system integrators and researches and develops advanced technologies for future software products. Microsoft is divided into three main areas: the Business Divisions, the Sales, Marketing and Support Group, and the Operations Group. One of our readers commented on the recent slump in MSFT shares and asked if it would be a good candidate for a bearish position. Based on the current technical indications, the issue does have downside potential but it may be easier to profit from a strategy that allows for some upward movement in the underlying stock. A simple call-credit spread with the sold strike at $70 offers an acceptable risk-reward outlook. PLAY (conservative - bearish/credit spread): BUY CALL AUG-75 MSQ-HO OI=34330 A=$0.10 SELL CALL AUG-70 MSQ-HN OI=63524 B=$0.50 INITIAL NET CREDIT TARGET=$0.45-$0.50 PROFIT(max)=9% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=MSFT ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** DOX - Amdocs Limited $45.37 *** Probability Play! *** Amdocs (NYSE:DOX) is a provider of software products and services to major communications companies in North America, Europe and the rest of the world. The company's Business Support Systems products consist of families of customized software products and services designed to meet the critical business needs of specific communications market sectors. The company provides primarily Customer Care, Billing and Order Management Systems for major communications and IP service providers. Its systems support a range of communications services including wireline, wireless, broadband, electronic and mobile commerce and Internet services. The company also supports companies that offer multiple service packages. In addition, Amdocs provides a full range of Directory Sales and Publishing Systems to publishers of both traditional printed yellow page and white page directories and electronic Internet directories. This position meets our criteria for a favorable straddle; cheap option premiums, a history of volatile price activity and the potential to move (high or low) enough to make the straddle profitable. This simple selection process provides the foremost combination of low risk and potentially high reward. As with any position, it should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. PLAY (conservative - neutral/debit straddle): BUY CALL SEP-45 DOX-II OI=156 A=$4.00 BUY PUT SEP-45 DOX-UI OI=39 A=$3.50 INITIAL NET DEBIT TARGET=7.25-$7.30 TARGET PROFIT=25% http://www.OptionInvestor.com/charts/jun01/charts.asp?symbol=DOX ****************************************************************** DL - Dial $17.44 *** Cheap Speculation! *** The Dial Corporation (NYSE:DL) manufactures and sells consumer products. The company markets its products primarily under the Dial soaps, Purex detergents, Renuzit air fresheners and Armour canned meats brand names. The company also markets specialty personal care products under the brand names Freeman and Sarah Michaels. For organizational, marketing and financial reporting purposes, the company is organized into four segments: Domestic Branded, Specialty Personal Care, International and Commercial Markets and Other. Dial announced last week its board has determined that the sale of the company is in its best interest. The announcement came nearly a year after the company first suggested it was looking for a buyer, in light of the fact that small consumer-products makers are finding it increasingly difficult to survive in the retail world. Dial said as early as last September that it was considering putting itself up for sale and the company has also recently reported it is reviewing alternatives for its specialty personal-care unit, which had declining sales in the quarter. While pieces of the company have attracted some interest, Dial says no serious discussions for the entire company have taken place but officials confirmed that the board is committed to reviewing all potential opportunities. Prudential believes Dial is worth $19 to $22 per share and if the recent activity is any indication, the company's stock will continue to be active in the coming sessions. PLAY (speculative - neutral/debit straddle): BUY CALL AUG-17.50 DL-HW OI=150 A=$0.50 BUY PUT AUG-17.50 DL-TW OI=3 A=$0.55 INITIAL NET DEBIT TARGET=0.90-$1.00 TARGET PROFIT=20% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=DL ****************************************************************** EDS - Electronic Data Systems $62.96 *** Reader's Request! *** Electronic Data Systems (NYSE:EDS) is a professional services company that offers its clients a portfolio of related services worldwide within the broad categories of systems and technology services, business process management, management consulting and electronic business. The company's unique services include the management of computers, networks, information systems as well as information processing facilities, business operations and related personnel. Each week, we receive new requests for neutral Credit Strangles but with the recent decline in the Implied Volatility in options, the number of theoretically favorable candidates is quite low. However, we have identified a few potential positions, based on historical option pricing and the underlying issue's technical background. EDS is one of the best candidates, as it has a well defined trading range and no (expected) upcoming events that will substantially change its fundamental or technical character prior to the August expiration. Current news and market sentiment will have an effect on the position, so review the play thoroughly and make your own decision about its outcome. PLAY (speculative - neutral/credit strangle): SELL CALL AUG-65 EDS-HM OI=4876 B=$0.75 SELL PUT AUG-60 EDS-TL OI=4208 B=$0.60 INITIAL NET CREDIT TARGET=$1.40-$1.50 PROFIT(max)=10% UPSIDE B/E=$66.40 DOWNSIDE B/E=$58.60 http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=EDS ****************************************************************** *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. 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