The Option Investor Newsletter Sunday 08-12-2001 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/3564_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 8-10 WE 8-3 WE 7-27 WE 7-20 DOW 10416.25 - 96.53 10512.78 + 96.11 10416.67 -159.98 + 37.59 Nasdaq 1956.47 -109.86 2066.33 + 36.60 2029.73 + .36 - 55.42 S&P-100 611.41 - 12.24 623.65 + 3.39 620.26 - 5.33 - 1.26 S&P-500 1190.16 - 24.19 1214.35 + 8.42 1205.93 - 4.92 - 4.83 W5000 10994.45 -248.49 11242.94 + 76.94 11166.00 - 46.37 - 59.55 RUT 475.52 - 11.63 487.15 + 2.13 485.02 - 2.91 - 2.78 TRAN 2860.77 - 53.25 2914.02 + 4.14 2909.88 - 55.78 + 25.31 VIX 22.81 + .42 22.39 - 2.34 24.73 - .24 + 1.10 Put/Call .72 .76 .47 .82 ****************************************************************** The "D" Word Appears Again! by Jim Brown The Producer Price Report blew out estimates with a decline of -0.9% compared to estimates of only a -0.3% drop. Suddenly the worry about possible future inflation turned into worry about a possible deflation cycle. The PPI was driven by a -5.8% drop in energy prices which was the largest one month drop since August 1989. The report energized the Dow as traders counted on the Fed to act aggressively on the 21st and cut rates again. Unfortunately the Nasdaq was hit with a downgrade of two software giants and was not able to shake off the curse. Goldman Sachs downgraded Oracle and Siebel Systems due to a slowdown in enterprise software spending. The downgrade was specific but the ripples were felt throughout the entire software sector as investors fled the other stocks in advance of further warnings. Goldman said the software business is continuing to worsen with estimates dropping daily. They said the street has yet to capture the magnitude of capital spending constraints going into 2002 and also considering the negative data coming out of Europe. Oracle fell to a two month low at $15 and SEBL fell to a five month low of $26. Other software stocks are rumored to be in trouble as well with BEAS the most mentioned as likely to miss estimates. PSFT would be next on the bubble as a provider of large corporate systems. BEAS fell -1.72 and PSFT dropped -1.87. CHKP lost -1.39 and VRTS -1.59. If major companies are not buying software then investors reasoned that they might not be buying storage systems either. BRCD, EMLX, EMC and NTAP all fell as investors ran for the sidelines before the NTAP earnings next week. The Nasdaq just could not get a break with EBAY dropping -1.75 on a false rumor about layoffs. The Wall Street Journal nixed the rumor of impending 15% layoffs after conversations with the company. Amazon dropped another -.51 to break under $10 and hit a five month low on no news other than the $37 million stock sale by CEO Jeff Bezos. QCOM dropped -1.95 on good news that IBM and OmniSky had signed contracts to produce applications using their new BREW software. YHOO dropped again on news that Internet advertising would get worse before it got better. YHOO hit a two month low at $15.30. Just not a fun day on the Nasdaq when stocks fall on good news. The only bright spots were fractional (or should we say decimal now?) INTC +.30, MSFT +.51, DELL +.27 and CSCO +.04. Certainly not market moving numbers. Speaking of Microsoft, the Justice Dept urged a federal appeals court to reject Microsoft's request to delay the antitrust case. They argued that the case should proceed as quickly as possible and dismissed the idea that it should wait for a decision from the Supreme Court first. The government said Microsoft had "little prospect" of obtaining a Supreme Court review. Rumor has it that Microsoft will release XP early to avoid any chance of a remedy that could impact that product. MSFT dropped to a low of $62.90 at the open but recovered to close positive at 65.51 and was a major factor in bringing the Nasdaq back from the brink of oblivion. Also helping bring the markets back were comments from Texas Instruments analog head, Syrus Madavi. Merrill Lynch hosted a conference call and reported that Madavi is seeing some stabilization in the analog order backlog, is seeing new order activity and business could be up sequentially in Q4. Merrill Lynch said this was better than expected news and reiterated its BUY rating. Syrus has two decades of experience in this arena and is well respected by the analyst community. TXN hit a low of $32.90 before the news and rebounded to trade at $35.20 in after hours. TXN floated most of the chip sector back into positive territory with the comments. Several chip equipment makers failed to make it completely back however. The headline economic report today was the Producer Price Index which dropped drastically due to drops in energy prices. The news shocked the markets at first but analysts were quick to point out that with inflation turning into deflation the Fed would be promoted to act even quicker and more aggressively to prevent losing control. While analysts were debating the report the major averages broke recent support levels and triggered program buying which in turn triggered another wave of short covering. The combination powered the Dow back to respectable levels which it held to close over 10400 again. The Nasdaq never had a chance. With the software downgrades, pressure on Internet stocks, storage stocks tanking and chip stocks gasping for breath, the Nasdaq made it six in a row on the losing side. The Nasdaq dropped -15 points under the July lows before rebounding on the MSFT and TXN news. Still, losing seven points and closing at a four month low on a day that the Dow posted a +117 point gain, is not a good sign. You have to go back to April 17th for a lower close. When tech stocks are so beaten up and un-loved that investors flock to Dow stocks like JNJ, SBC, CAT and AA instead, can the bottom be far away? For the contrarian readers this could be a sign. I finally could find nothing positive to point to on the Nasdaq and can easily see some new relative lows in the next week or two. This is usually when the index soars to new highs and leaves me standing on the sidelines. If that is our future then I will gladly wave goodbye as the train leaves the station in hopes that our readers bought a ticket. Somebody has to be cannon fodder and I volunteer. It just looks very negative for the Nasdaq. About the only positive sign was a rebound over the 1950 level at the close but that is simply grasping at straws. August is just a bad month for techs even in good times and this is far from good times. Tech earnings next week include HWP, DELL, CIEN and BEAS but investors are more likely to be interested in earnings from the retail sector. Those stocks include HD, FD, PLCE, KSS, GPS and JCP. If the retail sector shows signs of cracking then investors may decide the economy has farther to fall. Equity funds lost -$2.5 billion in deposits last week compared to -$500 million the week before indicating investor disgust. If you are still waiting on the sidelines for my suggested entry point of Nasdaq 2100 then congratulations. Your patience may payoff big over the next couple weeks as we might get a chance to lower that number between now and the FOMC meeting on Aug-21st. I will keep you posted. Until then 2100 is still the target! I am really excited to announce our biggest Denver Stock and Option Trading Expo ever. Over fifteen speakers from many different trading environments. Jon Najarian, Dr "J" on the CBOE, David Nassar, Tim Truebenbach, Russ Wasendorf, Patrick Lafferty, Don Bright, Joe Lombard, Robin Dayne, Carolyn Boroden, to name just a few. Of course Austin Passamonte, Jeff Bailey, Jon Farnlof, Buzz Lynn, Eric Utley and myself will also take center stage. We have changed the format to a weekday schedule instead of a weekend in order to do real time trades and analysis every day. Bring those laptops as WE WILL ALSO HAVE INTERNET ACCESS AVAILABLE FOR ALL ATTENDEES in the main hall so you can follow our research and trades as well as trade yourselves. This is also EXPIRATION WEEK and we will be taking full advantage of cheap options and expected market swings. In order to move to an open market format we had to change the date to November 12-16th. Make the change on your calendar and plan on being there! Could you actually make enough trading that week to pay for the seminar? That is of course up to you but it will not be due to a lack of opportunity! Seating is limited, sign up now! http://www.premierinvestorseminars.com/expos/oi_fall01.asp Definitely, enter passively, exit aggressively! Jim Brown Editor ****************************************************************** ONLINE SEMINAR - Expiration Week info for you to use immediately!! ****************************************************************** In response to overwhelming request for more how-to info on day trading, Austin Passamonte has revised and enhanced his previous web cast seminar. Included are more: -specific entry points -specific exit points -trade management tactics for stocks, options and e-mini futures More charts, more specifics, more advanced info for those who seek the fine points of trading frequent, profitable moves in your favorite market Tuesday - August 14th, 8:00 pm PST Austin will be giving an updated presentation of "Optimize Your Day Trading Skills." Click here to sign up or for more information: http://www.premierinvestorseminars.com/onlineseminars/austin081401.asp ****************************************************************** ************************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 ************** Buying The Bounce Last week in this column I suggested there may be another buying opportunity over the next couple weeks. We got a sample this week but we could easily see another deeper dip before August is over. When trying to decide what stocks to play in a market like this you should look for relative strength, strong support and a rebound off those support levels. This minimizes your risk and highlights your possible entry points. I chose three examples of this for today's play candidates. ASYT - Current price $14.40 This stock has bounced off the $14 level four times in the last three months. The downside risk appears limited to the $14 area and buying a long term option should be fairly safe. Once the semiconductor sector wakes up Asyst is positioned for strong growth. I like the March-2002 $15 call at $3.10. ************ Harmonic Inc. - Current Price $16.04 I really like this stock today. I like the relative strength in light of the Nasdaq weakness and I think once the market heads up again this stock could explode. Again, go for the longer term options for added safety. The high for this stock is $160 so there is plenty of room for upside potential. I don't think it will ever see that level again but $40-$50 is entirely possible. *********** IBM - Price $104.90 IBM has been beaten up in August based on a strong dollar and a weak Europe. Now that the dollar is falling it appears that investors bought the dip at support of $103 and we could see upward movement from here. Caution would be the keyword since tech stocks and Dow component stocks may be subject to further weakness. I would buy calls on IBM between here and $103 and I would also buy more time than I actually wanted. This time will soften any immediate drops and give the tech sector time to recover in the fourth quarter. ************* Other stocks that could be good relative strength rebound candidates include PPDI which bounced off $30 this week, NVLS which bounced off support at $46. ************* Be very careful this week. (same thing I said last week!) Our buying opportunity could still be ahead and it may be much lower than 1950. Be patient and choose your entry points carefully! Come to the seminar in November and we will teach you everything you ever wanted to know about support, resistance, technical analysis, entry and exit points as well as how to use them to make money! Good Luck Jim Brown **************** MARKET SENTIMENT **************** Half and Half By Jeffrey Canavan Lower than expected wholesale prices were enough to spark a nice gain in the Dow, but a software sell off stumped the Nasdaq. Dow Jones Industrial Average Daily Chart After a morning sell off, the Dow mounted the kind of rally that was needed to validate yesterday's hammer as a possible turning point, thanks primarily to cyclical stocks. Should cyclical stocks be able to power the Dow higher, 10,600 would be the most optimistic short-term target. Before that target can be hit, the Dow is going to have to fight through the May downtrend and 38.2% retracement level. The failure of the Nasdaq to finish in positive territory also casts a shadow of doubt on the Dow's ability to move higher. Watch out for a head fake similar to one on June 28th. Nasdaq Composite Daily Chart The situation looked pretty grim for the Nasdaq this morning when it took out July 11th low, but was able to rally on the strength of semiconductors. With just enough buyers coming in to stave off a sell off, the Nasdaq formed yet another doji. The Nasdaq is still oversold and due for a bounce, but software stocks could limit the amount of the bounce. Software Index Daily Chart Goldman Sachs cut their earnings estimates for Oracle and Siebel on Friday, and added that the software business is likely to worsen. CSFB also came out and reduced estimates on BEA Systems due to a deteriorating backlog, economic assumptions, and their exposure to Europe. With software stocks declining on heavy volume Friday, it doesn't bode well for BEA Systems earnings announcement on Tuesday. Using the Jeff Bailey fitted retracement, keep an eye on the 174 level for the Software Index (GSO.X). Technically we look ready for a bounce, but a few downgrades, poor earnings announcements, or weak economic reports could force nervous bulls to sell. Bears still look to have the most risk, but the bulls upside is limited. With the upside for the major indices falling into the 2% to 7% range, any profits over 10% in stocks are gold these days. As always, keep an eye bonds. For the week ending August 8th, Trim Tabs reported $2.5 billion in outflows for equity funds, compared to outflows of $500 million the previous week. Bond funds on the other hand had $900 million in inflows this week, and $1.3 billion in inflows last week. ----------------------------------------------------------------- Market Volatility The VXN is stuck at 48, and the VIX continues to reside in the 22 to 23 area. VIX 22.81 VXN 48.52 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total .72 521,369 377,091 Equity Only .66 440,333 292,002 OEX .68 25,184 17,141 QQQ .59 60,052 35,709 ----------------------------------------------------------------- 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 ----------------------------------------------------------------- 5-Day Arms Index 0.94 10-Day Arms Index 1.15 21-Day Arms Index 1.15 55-Day Arms Index 1.08 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 1915 1158 NASDAQ 1678 1878 New Highs New Lows NYSE 166 41 NASDAQ 65 98 The NYSE has gained the upper hand in both advance/decline, and new highs/new lows. ----------------------------------------------------------------- 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: 08/07/01 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 The net bearish position of commercial traders increased slightly, but that was the result of more long positions being dumped than short positions, and not a significant amount of new shorts being added. The % of Open Interest for small traders is at bullish levels similar to February and March. Commercials Long Short Net % Of OI 7/24/01 317,241 392,146 (74,905) (10.56%) 7/31/01 335,532 409,352 (73,820) ( 9.91%) 8/07/01 331,881 406,210 (74,329) (10.07%) 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 7/24/01 141,372 61,665 79,717 39.26% 7/31/01 129,648 54,552 75,096 40.77% 8/07/01 128,454 53,191 75,263 41.43% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 Commercial traders added a few long positions and dropped a few shorts, but the most encouraging sign is the fact that small traders are starting to give up hope. Commercials Long Short Net % of OI 7/24/01 27,396 39,198 (11,802) (17.72%) 7/31/01 28,009 39,613 (11,604) (17.16%) 8/07/01 28,867 38,956 (10,089) (14.88%) 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 7/24/01 12,170 7,744 4,426 22.23% 7/31/01 11,216 8,938 2,278 11.30% 8/07/01 9,715 8,098 1,617 9.08% 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 Commercials continue to get slightly more bullish, small traders continue to get more bearish. Commercials Long Short Net % of OI 7/24/01 16,080 12,812 3,268 11.3% 7/31/01 17,748 13,669 4,079 13.0% 8/07/01 18,644 13,733 4,911 15.2% 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 7/24/01 5,599 9,526 (3,927) (25.96%) 7/31/01 5,049 9,079 (4,030) (28.52%) 8/07/01 4,841 9,909 (5,068) (34.36%) 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 *************** Mona Lisa By Eric Utley I'm not a big connoisseur of art. That's not to say I can't appreciate a quality piece. But I will concede that my visceral abilities are lacking. What can I say?, I'm a left-brained individual. Maybe that has something to do with my terrible failures at establishing and maintaining intimate relationships with women? Anyway, I've at least recognized my limitations, and recently vowed to do something about them. So, in my quest for self-improvement, and over a few too many beers at the poker table, my buddy Jeffrey Canavan recently recommend that I delve into the world of Leonardo da Vinci; if he wasn't genius, who is? Canavan, for reasons still unknown to me, had purchased a book on tape a few years back, whose aim it is to teach listeners how to think like da Vinci. Aside from the irritating nature of the narrator's voice, and the fact that I had to forgo listening to U2 or Pink Floyd, I found a few useful techniques on that tape. The narrator suggested keeping a notebook of questions and observations. And before falling to sleep, reading over the notes and observations that had been made throughout the day. And repeating the process of examining the notes after waking in the morning. The aim of this exercise is to awaken the subconscious, possibly through dreams, to things that might otherwise be hidden from the conscious; that is, the subtleties and/or the nature of things. I took a tangent on this little exercise. I've been hand charting each of the 100 stocks that comprise the Nasdaq-100 for the past few months. So my little notebook IS 100 charts. And each night, for about 45 minutes, I review all 100 charts. And repeat the process in the morning. Much to my surprise, I've become the Nasdaq-100. Not literally, of course. Rather, I've gained a much better understanding into the nature of the Nasdaq-100. And let me tell ya', it's getting easier! 'It' being the art we call trading. WHOA! Please send your questions and suggestions to: Contact Support ---------------------------- IDEC Pharmaceuticals - IDPH Please advise if the stock has touched the support and is rightly positioned for uptrend now. - Thanks, Sunil Thanks for the question, Sunil. IDEC Pharmaceuticals (NASDAQ:IDPH) is trying to build upon its success with Rituxin with a new drug called Zevalin, which is aimed at treating non-Hodgkin's lymphoma. The FDA has formally announced its review of Zevalin for September 11, which may be a catalyst for the stock if all goes well. In terms of technicals, IDPH, like the Biotech Sector (BTK.X), is in a severe descending trend. For its part, the BTK is flirting with a major breakdown, but avoided such last Friday. As evidenced by the chart below, the 500 level for the BTK is not only significant psychologically, but also technically. IDPH did manage to rebound from its aggressive, ascending support line last Thursday at roughly $46. That bounce marked the third observation at its support line, which does give the support itself a bit more credence. But if the BTK breaks down next week, I'd expect IDPH to lose the $46 level. Thereafter, support lies around the $43 level. But again, whether or not that support holds depends upon the direction of the BTK. I could envision IDPH around $38 or $39 over the short- to intermediate-terms if the BTK continues sliding. By using the two support areas I've set forth, bullish traders can more easily quantify risk in buying IDPH down here. But that's only half of the equation. The other half concerns supply and demand, and the probabilities in buying the stock down here. And currently, I just don't see a favorable situation in buying IDPH. ---------------------------- Homestore.com - HOMS Where do you think the support lies? - Thanks, Sunil Thanks again, Sunil! (I've never met Sunil, but there's something I like about him. He always requests the same stocks. I like that because by following the same stocks, or sectors for that matter, traders can begin to build an edge over other market participants. As I frequently opine, the methodology doesn't matter. What matters is discerning that ever-elusive edge, and being better with your particular methodology than the next guy.) Before we get to the technicals of Homestore.com (NASDAQ:HOMS), there's something I'd like to touch upon. First, the company had a hell of an earnings report in late July, which, at the time, I thought would be enough to carry the stock higher. As it turned out the market had a different direction in mind for the stock. Fast forward to Friday morning, Homestore announced the acquisition of IPlace for about $150 million. So here's the question: Did someone know about the acquisition prior to Friday morning, resulting in the stock selling off following the company's good earnings report? There were some rather large shareholders who proposed the sale of stock between July 30 and August 1...Coincidence? Maybe. But here's the point: Forget what you think you know about the market. Instead, observe what the market is telling you. Then again, maybe Homestore's weakness was attributable to the Beige Book; the company is, after all, closely tied to the consumer. Either way, the point is to think different like Steve Jobs and his iMac suggest. Boy, I've rambled on long enough. What was the question, Sunil? HOMS looks pretty ugly and I think the best bet for support is around $20 - good psychological level and also the site of its ascending support line. If $20 breaks, look for the stock to fall down to $18. ---------------------------- General Electric - GE What is your outlook for GE over the next 2-3 months? Do you see further downside, or do you think it will reverse? - Thank you, ST Thanks, ST. Predicting the next 2-3 months for General Electric (NYSE:GE) is like predicting the movement of the S&P 500 and the U.S. economy - in a word: difficult. That's because General Electric is not only the largest U.S. corporation, but it's also one of the most diversified. Therefore, it's an excellent gauge for the health of the economy and the broader equity market. And judging by the price action in GE recently, neither is healthy. I wonder if GE's poor performance recently has anything to do with the Honeywell (NYSE:HON) deal falling apart? In fair disclosure, I'm of European descent, right mom? But I think that the EU needs to read Adam Smith's Wealth of Nations to get a grasp on capitalism. And perhaps a refresher course on the Sherman Act wouldn't hurt. Antitrust laws are NOT intended to protect weak (Read: European) competitors. I know it's old news, but I just wanted to get that off of my chest. Another possible explanation for GE's poor performance is the fear of losing the Welch magic after the chief retires from his post. Jack Welch is one of the greatest managers ever and his departure from GE is obviously a cause for concern to some market participants. Whether or not Jeffrey Immelt can pick up where Welch is leaving remains to be seen, which is probably being worked out in the stock currently. At any rate, I don't know which way GE is headed over the next 2-3 months. My best guess is that the stock bides time between its current level and $40, similar to what it did during early March and into April. As I was writing this review, I noticed something on GE's weekly chart that was of interest. In the past decade, maybe even longer, GE has only traded below its 200 weekly moving average once - March 22. The stock is again approaching that moving average, which currently sits right under $40. Traders might do well to watch this situation as it pertains to the broader market and the health of the U.S. economy. ---------------------------- Plug Power - PLUG What do you think about PLUG for the next 3-4 months? - Thank you, ST Thanks again, ST. Plug Power (NASDAQ:PLUG) makes "energy generation systems utilizing proton exchange membrane fuel cells for stationary applications." It's been awhile since my last physics and chemistry classes, so let's skip the details. In essence, PLUG is an alternative energy play. (Coincidentally, PLUG intends to sell its product through a division of GE.) The company doesn't make any money, and isn't expected to for at least several more years. An energy aficionado that I happen to know quite well doesn't believe that the economies exist to support the type of product that PLUG makes, not yet anyway. That's because, contrary to what many environmentalists will have you believe, fossil fuels are ubiquitous and will stay that way for a long time to come. It's just too cheap to pump oil out of the ground and refine it. Furthermore, the recent pullback in traditional energy prices creates a situation that is not conducive to the pursuit of alternative energy sources. That being the case, however, PLUG is a good stock to TRADE as it pertains to the price of traditional energy. As for longer term consideration, I'd take a close look at PLUG's balance sheet. Specifically, the bleeding of cash. In its last five quarters, PLUG's cash position has been dwindled from $122 million to about $55 million. What's more, the company generated a nearly meaningless $5 million in sales in the last year - its current market cap is $626 million. So let me make this clear: In the next 3-4 months, PLUG could be good for a TRADE, ONLY IF/WHEN the price of oil rallies. Otherwise, avoid the stock and its peers. The chart pretty much says the same. ---------------------------- 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 13, 2001 Monday ====== None Tuesday ======= Retail Sales Jul Forecast: -0.2% Previous: 0.2% Retail Sales ex-auto Jul Forecast: 0.1% Previous: -0.2% Wednesday ========= Business Inventories Jun Forecast: -0.3% Previous: 0.0% Industrial Production Jul Forecast: -0.3% Previous: -0.7% Capacity Utilization Jul Forecast: 76.6% Previous: 77.0% Thursday ======== Initial Claims 8/11 Forecast: N/A Previous: 385K CPI Jul Forecast: 0.0% Previous: 0.2% Core CPI Jul Forecast: 0.2% Previous: 0.3% Housing Starts Jul Forecast: 1.625M Previous: 1.658M Building Permits Jul Forecast: N/A Previous: 1.568M Philadelphia Fed Aug Forecast: -10.0 Previous: -12.2 Friday ====== Trade Balance Jun Forecast:-$29.5B Previous:-$28.3B Mich Sentiment-Prel Aug Forecast: 93.0 Previous: 92.4 Week of August 20 ========================= Aug 20 Leading Indicators Aug 20 Treasury Budget Aug 23 Initial Claims Aug 24 Durable Orders Aug 24 New Home Sales *************************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 08-12-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/3564_2.asp ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* IBM - International Business Machines $104.95 (-3.23 last week) See details in sector list Put Play of the Day: ******************** PSFT - PeopleSoft $38.84 (-4.12 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 BRCD $32.79 (-3.80) BRCD acted like a dog with fleas during the latter half of trading last week. The stock continued to work lower, ultimately closing below our stop at $33 last Friday. As such, we're dropping coverage this weekend and bullish traders with open positions can use any strength early next week to cut losses. PUTS LSS $19.55 (+0.20) Well, we gave LSS plenty of time to break down, but with a bottom forming in the Oil Services index (OSX.X) the past couple days, it doesn't look like it is going to happen. The OSX is starting to recover and looks like it will post a double-bottom at the $80 level. Accordingly, LSS found support on Friday at the $19 level and while it couldn't break above $20, recovering daily Stochastics point to the next high-odds move being up. So we'll take our cue and drop coverage before the move really gets underway. *********** 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 ************** ELNT - Elantec Semi $36.62 +0.55 (-2.88 last week) Elantec is a designer, manufacturer and marketer of high performance analog integrated circuits, which provide specific analog solutions to manufacturers in the high growth markets for video, optical storage, communications and power management products. Put quite simply, this play is predicated upon relative strength. Shares of Elantec have trading exceptionally well relative to the Semiconductor Sector Index (SOX.X). Perhaps part of their strength stems from Elantec's analog nature. Another of the big analog players in Texas Instruments recently reported an improvement in orders and visibility. That much would be consistent with the price action in ELNT recently. The stock ran up to its 200-dma at $41.27 in early August, and has since pulled back in profit taking fashion. Its bounce last Thursday from the $35 level and the subsequent and very subtle crossover in stochastics on the daily chart may lend to upside over the short-term. But make no mistake about it. Although ELNT has its relative strength and reversal in stochastics, it still needs both the COMPX and SOX to rebound next week in order for the stock to advance. If the COMPX and SOX strengthen next week, new entries can be taken around current levels. Any weakness next week could be met with further demand around the $35 level, so options traders might look for entry points around that area. Momentum traders should wait for a decided break back above the $38 level before entering new plays. Our stop is initially set at $33. BUY CALL SEP-35 UET-IG OI= 1 at $5.40 SL=3.50 BUY CALL SEP-40*UET-IH OI= 40 at $3.10 SL=1.50 BUY CALL NOV-35 UET-KG OI=612 at $8.00 SL=5.75 BUY CALL NOV-40 UET-KH OI=355 at $5.40 SL=3.50 Average Daily Volume = 521 K IBM - International Business Machines $104.95 (-3.23 last week) IBM provides customer solutions through the use of advanced information technology. These solutions include technologies, systems, products, services, software and financing. For the 3 months ended 3/31/01, total revenues rose 9% to $21.04B. Net income applic. to Common rose 15% to$1.75B. Revenues reflect higher Global Services, Hardware, Personal and Printing Systems and Enterprise Systems revenues. Net income also reflects improved margins. IBM closed beneath its support at the 200 DMA yesterday after gapping down in the morning and without enough conviction to take it higher into the close. Today, however, was a bit of a different story. Closing above the 200 DMA of $104.43 on moderate volume, shares have reinforced support and the risk/ reward ratio looks to be solidly in the favor of the bulls. Technical indicators are beginning to turn up as investors realize, once again, that the computer giant has quite a diverse array of product offerings that in many ways, shield it from sector specific downgrades. On July 11th, shares traded as low as $101.50, providing a short-term low that we feel should function as a viable stop. At this price, the level of risk appears to be mitigated compared to plausible rewards. BUY CALL SEP-100 IBM-IT OI= 292 at $7.60 SL=5.25 BUY CALL SEP-105*IBM-IA OI=3063 at $4.30 SL=2.75 BUY CALL SEP-110 IBM-IH OI=4659 at $2.05 SL=1.00 BUY CALL OCT-105 IBM-JA OI=3113 at $6.50 SL=4.50 BUY CALL OCT-110 IBM-JB OI=9177 at $4.00 SL=2.50 Average Daily Volume = 6.9 mln NTIQ - NetIQ Corp. $36.40 (-2.20 last week) NetIQ Corporation develops application management software that enables businesses to optimize the performance and availability of their Windows NT-based systems and applications. For the 9 months ended 3/31/01, revenue totaled $108.3M, up from $27.6M. Net loss totaled $337.1M vs. an income of $4.1M. Results reflect continued strong demand for the Company's products, offset by increased amortization of goodwill and intangibles. Shares of NTIQ traded as high as $42.45 on August 2nd- the highest the stock has been since March, but this week's declines in NASDAQ translated into complicit selling that took the stock back down to test the 20 DMA at $33.45. Two consecutive days of increasing upside volume have since pulled the stock higher, despite Goldman's downgrades of competitors in the software sector today. All things considered, this recent dip, coupled with the stock's obvious resilience has created a nice buying opportunity. Short- term traders should look to $40.00 as a compelling level of resistance that presents a good exit point. Those with a longer- term perspective might consider closing the trade in the $42.00- 43.00 range. Either way, volatility, as evidenced by today's 20% range call for a stop under recent lows. We'll use $32.00 in this case. BUY CALL SEP-35 CQT-IG OI= 48 at $5.10 SL=3.00 BUY CALL SEP-40 CQT-IH OI=309 at $2.80 SL=1.50 BUY CALL OCT-35 CQT-JG OI=205 at $6.70 SL=4.50 BUY CALL OCT-40 CQT-JH OI= 85 at $4.50 SL=2.75 Average Daily Volume = 1.00 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 08-12-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/3564_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 $16.21 (-1.51 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 is SUNW's nemesis. It's that simple. Of course, the broader tech sector isn't helping our bullish cause in SUNW. But the fact that EMC - the data storage giant - continues to be a target of the bears is causing problems in SUNW. Late last week, EMC was rumored to be having a difficult quarter in addition to offering some new paper. The result was sluggish trading in anything related to the storage sector, which unfortunately included SUNW. Without a fast, sharp reversal, our SUNW play appears headed for the drop list. The stock actually pierced our stop intraday last Friday at $16. But because it was able to rebound and CLOSE back above that level we decided to hold the play over the weekend. Going forward, however, we need to see SUWN regain its footing before considering new plays. A quick pop back above $17.75 would allow for an entry into new plays for momentum type traders. Those who prefer entering on dips should wait until SUNW's stochastics crossover on the daily chart - stochastics have yet to cross, although they're not in overbought territory yet. As always, keep close tabs on the COMPX when trading SUNW, along with the Hardware Sector Index (GHA.X). BUY CALL SEP-15.0 SUQ-IC OI= 4043 at $2.15 SL=1.00 BUY CALL SEP-17.5*SUQ-IW OI=17448 at $0.90 SL=0.25 BUY CALL SEP-20.0 SUQ-ID OI= 8711 at $0.30 SL=0.00 BUY CALL OCT-17.5 SUW-JW OI=28451 at $1.30 SL=0.50 BUY CALL OCT-20.0 SUQ-JD OI=19252 at $0.65 SL=0.25 Average Daily Volume = 39.9 mln BRCM - Broadcom $42.55 (-4.44 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. BRCM's weak price action is disconcerting. The stock has recently begun under performing both the COMPX and SOX, on a relative price basis. What's more, it's relative lows continue getting lower. That being the case, bullish traders should be cautious before entering new call plays in BRCM going forward. At the very least, stringent risk management should be employed by those trading BRCM. The stock twice bounced from the $41 area in as many days late last week; but that is not much consolation due to the fact that our stop is in place at the $42 level. BRCM was barely able to close above that level last Friday, and reinforces our cautious bullish stance currently. Of course the stock could easily reverse course, and fast. But until the Nasdaq and SOX show signs of stabilization, BRCM is likely to remain under pressure. There's a possible catalyst next week in the form of CIENA's earnings report that, if positive, could reverse the direction of the Networking sector and those companies closely tied to it such as BRCM. And there's also the earnings report from Applied Materials. So there are a few possible bullish catalysts on the horizon. Perhaps the most prudent strategy would be to wait for BRCM to advance past $44 and break its string of relatively lower highs before considering new entries into the play. BUY CALL SEP-40 RCQ-IH OI= 484 at $6.30 SL=4.25 BUY CALL SEP-45*RCQ-II OI=3901 at $3.80 SL=2.50 BUY CALL SEP-50 RCQ-IJ OI=1384 at $2.05 SL=1.00 BUY CALL NOV-45 RCQ-KI OI=1152 at $6.40 SL=4.25 BUY CALL NOV-50 RCQ-KJ OI=3971 at $4.70 SL=3.25 Average Daily Volume = 10.2 mln MRK - Merck & Co. $69.03 (+0.92 last week) Merck is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit services through Merck-Medco Managed Care. Analysts and investors warmed up to shares of Merck late last week. Bayer, a large German drugmaker, announced last week that it would recall its cholesterol lowering drug following reports that linked its use with the deaths of 31 consumers. Merck makes a drug called Zocor, which competes directly with Bayer's offering. And analysts suggested Friday that Merck's sales should definitely get a shot in the arm (pardon the pun). This is exactly the news that we've been looking for in order to allow MRK to breakout. Those who bought the dip last Thursday could've used Friday's advance above $69 to book some gains. But the stock's pop above $69 could've also allowed for new entries into the play. Although we were a bit discouraged with the stock's late-day rollover back down to the $69 level, we are comfortable with staying bullish in the play and think MRK could work its way up to the $71 level in the short-term, and possibly as high as $75 over the next few weeks, especially if the U.S. dollar continues to weaken versus the euro. Like we alluded to last week, MRK is a large exporter to European countries and the strong dollar has been slicing into the company's profits. But further erosion of the dollar should pave the way for further upside in shares of MRK. So traders might do well to at least keep tabs on where the dollar is trading versus the euro as it relates to MRK. BUY CALL SEP-65 MRK-IM OI=1652 at $5.10 SL=3.50 BUY CALL SEP-70*MRK-IN OI=3133 at $1.90 SL=1.00 BUY CALL OCT-65 MRK-JM OI=3854 at $5.90 SL=4.00 BUY CALL OCT-70 MRK-HN OI=5526 at $2.80 SL=1.75 Average Daily Volume = 5.48 mln QQQ - Nasdaq-100 Tracking Stock $40.28 (-2.90 last week) Representing 100 of the largest non-financial U.S. and non U.S. companies listed on the National Market tier of The Nasdaq Stock Market, the Nasdaq-100 Index reflects Nasdaq's largest companies across major industry groups, including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. The bearish remarks and downgrades concerning the software sector last Friday certainly weighed on the QQQs. After all, the software sector is the largest within the Nasdaq-100. Like we wrote about last Thursday, there are actually several "big" earnings reports due out next week, especially as they concern the Nasdaq-100. Applied Materials, CIENA, and Dell are perhaps the most significant, and each have the potential to get the Nasdaq-100 out of its funk. The catalyst to turnaround the QQQs is, however, the variable. But its worth noting that the fast stochastic line, on the daily chart, began to turnaround during last Friday's session, which may in itself portend a reversal in the QQQs next week. The contract shed 6.7 percent last week, and as any market participant knows, assets typically don't fall in a straight line. That said, our premise behind this play is to take advantage of any forthcoming oversold bounce. As for new entries, buying into weakness offers bullish traders an easier means of measuring and managing risk. Our stop is at $39.30, but traders should adjust their own stops to reflect their unique risk tolerance. Another possible entry strategy is to get long QQQ calls on an advance above $40.75, or slightly higher at $40.90 with an upside target of roughly $42.50. BUY CALL SEP-39 QQQ-IM OI= 1526 at $3.20 SL=1.75 BUY CALL SEP-40*QQQ-IN OI=33630 at $2.65 SL=1.50 BUY CALL SEP-41 QQQ-IO OI=11835 at $2.15 SL=1.25 BUY CALL DEC-40 QQQ-LN OI=18367 at $4.60 SL=2.75 BUY CALL DEC-41 QQQ-LO OI= 4775 at $4.10 SL=2.50 Average Daily Volume = 66.0 mln ABT - Abbott Laboratories $52.28 (+0.02 last week) Abbott Laboratories is engaged in the discovery, development, manufacture and sale of healthcare products and services. ABT's pharmaceuticals and hospital products (accounting for more than 40% of sales) include antibiotics, synthetic hormones, and drugs such as Norvir, which is used to treat HIV. Its products are sold directly to retailers, wholesalers, healthcare facilities, laboratories, and government agencies throughout the world. It was a real nail-biter this past week as we watched ABT repeatedly test the $51.50 level, but Friday's trading brought the week to a close on a positive note. Positive movement in the Pharmaceutical index (DRG.X) gave our play a boost right from the ascending trendline (now at $51.50) and ABT rallied throughout the day on solid volume. The bulls aren't out of bear territory yet though, as there is overhead resistance looming at $52.50 and then again at $53.50. We'll need to see the DRG index add to its gains next week in order to fuel ABT's rise. For new positions, we'll continue to target bounces from the $51.50 level, also the site of our stop. Of course a push through resistance can be used for triggering new entries as well. Just make sure ABT has the support of solid buying volume and positive movement on the DRG index before playing. BUY CALL SEP-50*ABT-IJ OI= 284 at $3.50 SL=1.75 BUY CALL SEP-55 ABT-IK OI=1590 at $0.90 SL=0.00 BUY CALL NOV-50 ABT-KJ OI=2415 at $4.60 SL=2.75 BUY CALL NOV-55 ABT-KK OI=5947 at $1.85 SL=1.00 SELL PUT SEP-50 ABT-UJ OI=1061 at $0.80 SL=1.50 (See risks of selling puts in play legend) Average Daily Volume = 3.55 mln ADSK - Autodesk, Inc. $36.08 (-1.70 last week) Beginning with the AutoCAD computer-aided drafting program, ADSK has built itself into a software design and digital content company for the architectural design and land development, manufacturing, utilities, telecommunications and entertainment industries. The company provides design software, Internet portal services, wireless development platforms and point-of-location applications that empower more than four million customers in over 150 countries. That wasn't exactly how we envisioned starting our ADSK earnings run, but an entry point is an entry point. While it looked like the stock was going to fall right through our $35.50 stop, the bulls showed up just in time, helping the price to reverse with a mere 20 cents to spare. Buying volume on the rebound was respectable, but we'll need to see some follow through next week. Recall that we are playing ADSK for a run into earnings on August 16th due to their pattern over the past several quarters of handily beating estimates. Friday's dip looked like a decent entry into the play once the tide reversed towards the bulls, but the real test will come next week when we see if the stock can clear the $39 resistance level. This is the top of the ascending wedge that has been narrowing since April. Keep in mind that we have a short fuse on the play, as we need to close it out prior to earnings on the 16th. In the meantime, target dips to the ascending trendline or a breakout over resistance for attractive entries into the play. BUY CALL SEP-35*ADQ-IG OI= 2 at $3.40 SL=1.75 BUY CALL SEP-40 ADQ-IH OI=130 at $1.40 SL=0.75 BUY CALL OCT-35 ADQ-JG OI=241 at $4.30 SL=2.75 BUY CALL OCT-40 ADQ-JH OI=463 at $2.05 SL=1.00 BUY CALL OCT-45 ADQ-JI OI= 96 at $0.95 SL=0.00 SELL PUT SEP-35 ADQ-UG OI= 15 at $2.00 SL=3.75 (See risks of selling puts in play legend) Average Daily Volume = 735 K IMPH - IMPATH, Inc. $44.59 (-4.46 last week) Applying their broad knowledge and research capabilities, IMPH specializes in providing patient-specific cancer diagnostic and prognostic information, with a particular expertise in difficult to diagnose tumors, prognostic profiles in breast and other cancers, and lymphoma/leukemia analysis. The company currently works with more than 7400 physicians specializing in the treatment of cancer patients and their database currently contains more than 550,000 patient profiles. In addition IMPH can link its information with that of its tumor registry business to provide data on the full continuum of care, from diagnosis through treatment and outcomes on many patients. Continuing the rebound that began on Thursday, shares of IMPH didn't so much as hiccup as the broader market headed south on Friday. Instead the stock steadily climbed higher throughout the day. Now before you get excited, the daily gain was only 22 cents and volume was about 20% below the ADV. So it wasn't a stellar move, but it was enough to solidify the stock's support at the 30-dma (currently $43.63) and help the daily Stochastics oscillator to flatten out in oversold territory. Now if only the bulls can come back next week in an enthusiastic mood, we might actually find ourselves at the early stages of a bullish recovery. Aside from its mid-July dip, IMPH has been finding support at the ascending trendline (currently $43.50) since early May. Helped along by the fact that the Biotechnology index (BTK.X) halted its decline (at least temporarily) on Friday, IMPH looks like it is ready to take a run at resistance, first at $45.50, then $49. A move through $49 could really get the bulls excited and we would likely find ourselves in the middle of a momentum run. But that's putting the cart before the horse. For now, we want to use bounces from the $43-44 area or a breakout over $45.50 on strong volume as our signal to initiate new positions. BUY CALL SEP-40 QPH-IH OI= 10 at $6.40 SL=4.50 BUY CALL SEP-45*QPH-II OI=307 at $3.30 SL=1.75 BUY CALL SEP-50 QPH-IJ OI= 26 at $1.45 SL=0.75 BUY CALL OCT-45 QPH-JI OI=119 at $4.50 SL=2.75 BUY CALL OCT-50 QPH-JJ OI=281 at $2.40 SL=1.25 SELL PUT SEP-40 QPH-UH OI= 45 at $1.15 SL=2.25 (See risks of selling puts in play legend) Average Daily Volume = 248 K WAG - Walgreen Company $37.32 (+1.42 last week) Serving customers in 43 states and Puerto Rico, WAG is a drugstore retailer operating over 3200 stores and three mail service facilities. The drugstores are engaged in the retail sale of prescription and non-prescription drugs and carry additional product lines such as cosmetics, toiletries, household items, food and beverages. Customer prescription purchases can be made at the drugstores, as well as through the mail, telephone and Internet. A testament to the company's growth, it expects to open 500 new stores in fiscal 2000 and have a total of 6000 drugstores by the year 2010. Upgrades are fine, and WAG has had several of them in recent weeks, but what we love to see is a stock that is advancing in the face of broad market weakness. The stock has bounced the past 2 days just above the $36 support level, providing an attractive entry point on Friday. While volume isn't stellar, it has been stable in recent days near 2.5 million shares. Daily Stochastics have been working their way higher too, and are now deeply embedded in overbought territory. Based on the recent price movement, they could stay there too, as WAG takes aim on resistance at $38. A volume-backed rally that clears this level could allow eager bulls to enter the play. Given the overbought condition of the stock, buying the dips may make the most sense right now. A dip to $36 (just below the 50-dma) would make for an attractive entry. There is stronger support at $35 (also the site of our stop) and a dip to that level would make for an even better entry. But only if it is followed by a solid bounce with real volume behind it. BUY CALL SEP-35.0 WAG-IG OI=1095 at $3.00 SL=1.50 BUY CALL SEP-37.5*WAG-IU OI= 670 at $1.45 SL=0.75 BUY CALL SEP-40.0 WAG-IH OI= 533 at $0.50 SL=0.00 BUY CALL OCT-37.5 WAG-JU OI=1071 at $1.85 SL=1.00 BUY CALL OCT-40.0 WAG-JH OI=2159 at $0.95 SL=0.00 Average Daily Volume = 3.17 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 08-12-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/3564_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 ************* GMST - Gemstar-TV Guide $35.95 (-5.73 last week) Gemstar-TV Guide is a global media and technology company focused on developing, licensing and providing products and services that simplify and enhance consumer entertainment. Many of the company's products have a special emphasis on television oriented technologies and services, in particular, program guidance products including those marketed under the TV Guide name. GMST is trading rather poorly relative to the broader market and has done so since mid July. The stock is on the brink of breaking down below the $35 level, and we want to be there for any forthcoming move lower. The company is currently under investigation by the Department of Justice (DOJ) for alleged violations of antitrust laws. There hasn't been much news out concerning the investigation since the story broke back in early June. But the price action in the stock seems to suggest otherwise. Further revelations from the investigation in the coming weeks could be the catalyst the causes the stock to slide further from its current levels. Whether or not more news comes out about the DOJ's investigation is obviously speculation. But it seems the market is already discounting bad news. And if that's the case, it looks like GMST could breakdown below $35 in the coming week. Therefore, new bearish bets can be made on a break below $35, just make sure to confirm such a move with heavy volume to reinforce its conviction. Our stop is initially in place at $38. BUY PUT SEP-40 QLF-UH OI=1371 at $6.70 SL=5.00 BUY PUT SEP-35 QLF-UG OI=1285 at $3.80 SL=2.50 Average Daily Volume = 3.70 mln CERN - Cerner Corp. $52.14 (-1.62 last week) Cerner Corporation designs, develops, markets, installs and supports information systems and content solutions for health organizations and consumers. For the 13 weeks ended 3/31/01, revenues rose 39% to $121M. Net income totaled $6.3M, up from $2.4M. Revenues reflect an increase in new contract bookings and higher support and maintenance income. Net income reflects improved operating efficiencies and higher interest income. CERN tested short-term resistance above $56.25 on Wednesday, but the level was too much for the stock and investors quickly took profits. Over the course of the last two sessions continued selling has shaved almost -10% off the share price and taken the stock to a support level that could make or break it in the short- term. Today's close just above the 20 DMA may have come on sympathy after several influential software downgrades, but technical indicators suggest that the stock was over-bought and due for a drop. With more than double the average volume today, we think the price will decline further come Monday. The first level of downside resistance will likely be the 20 DMA at $51.46. Once through this level, CERN won't see any support until it dips under $50.00, but significant support does not present itself until the stock dips under $48.00 (200 DMA). It is at this level that we would recommend short-term players cover the short. Longer-term traders aren't likely to see much room beyond the 200 DMA with $46.50 looking like one of the best points at which to exit the short. Set your stop at $55.00. BUY PUT SEP-55*CQN-UK OI=383 at $5.20 SL=3.00 BUY PUT SEP-50 CQN-UJ OI= 57 at $2.65 SL=1.25 Average Daily Volume = 460 K ***************** CURRENT PUT PLAYS ***************** ADBE - Adobe Systems $34.05 (-3.89 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. Rewarding us for picking it at the right time, ADBE has declined nicely since we added it to the put list. It was kind enough to let us in near the $40 level and on Friday it dropped all the way to $33 before finding buyers that were willing to open their wallets. The company's earnings warning a little over a week ago was the catalyst bearish traders needed to lean a little heavier on the stock pushing it solidly below major support at $37. The daily Stochastics are buried in oversold territory and are struggling to turn up, but that hasn't done much for the stock's price in recent days. Nevertheless, the risk remains that much of the profit potential has been wrung out of the stock. Accordingly we are snugging our stop up nice and tight to the $35 level. That way, we get taken out right away on an adverse move, but we get to stay in the play in the event the bottom falls out for Software stocks again next week. A weak oversold bounce that can't clear that level could provide for fresh entries, but keep in mind that the bulls will try to defend the $33 support level. A drop through $33 on solid volume will mean that the bulls have failed and will allow us to add fresh positions for the next move down, likely to the $30 level. BUY PUT SEP-35*AEQ-UG OI=1472 at $3.80 SL=2.25 BUY PUT SEP-30 AEQ-UF OI= 404 at $1.65 SL=0.75 Average Daily Volume = 3.92 mln AIG - American International Grp. $81.68 (+0.04 last 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. The life is slowly being squeezed out of the Insurance sector and all one has to do to see it is look at the IUX index, which is gradually drifting lower. AIG has been similarly lackluster of late, although it actually caught enough bids Friday afternoon to post a fractional gain. The interesting thing with the daily chart is that price has been falling, while the stochastics is rising. That's a definite sign of weakness, and we're just sitting here waiting for the $81 support level to fail. In the meantime, use any intraday strength to establish new positions ahead of the drop. So long as our $83 stop isn't violated, those intraday rallies will just give us a more attractive entry point. The high-odds entry will be to jump aboard as the stock finally plunges below $81 accompanied by solid volume. BUY PUT SEP-85 AIG-UQ OI= 1548 at $4.60 SL=2.75 BUY PUT SEP-80*AIG-UP OI= 3057 at $2.00 SL=1.00 BUY PUT SEP-75 AIG-UO OI=12614 at $0.95 SL=0.00 Average Daily Volume = 4.51 mln VRTX - Vertex Pharmaceuticals $35.64 (-4.29 last week) Seeking to discover, develop and commercialize novel small-molecule drugs that address significant markets with major unmet medical needs, VRTX is a relatively small, but potent biotechnology company. Targeting the treatment of viral diseases, cancer, auto-immune and inflammatory diseases and neurological disorders, the company's drug design platform integrates advanced biology, chemistry, biophysics and information technology to make the drug discovery process more efficient and productive. Bearish traders in VRTX are asking themselves if Friday's little pop is the end of this downward move or just another in a long series of entry points. There was a little bit of life in the Biotechnology index (BTK.X) on the heels of President Bush's decision on stem cell research, but it wasn't nearly enough to challenge the persistent downtrend. The BTK is still in danger of breaking down in a big way, and a close under $475 is not out of the question. But the limited strength in the BTK does have its daily Stochastics turning up out of oversold, just like we see on the VRTX chart. Of course light volume days carry less weight, so we aren't too worried about Friday's 75 cent gain on just half the ADV. We'll keep playing the downward trend until we see some bullish conviction that can rally the stock through our $36 stop. Until that happens, we'll use weak intraday rallies as an opportunity to establish fresh positions. And of course, a breakdown under $34 (likely accompanied by a breakdown in the BTK) on heavy volume could give us another entry and extend the play that much longer. BUY PUT SEP-40 VQR-UH OI=1023 at $6.80 SL=4.75 BUY PUT OCT-35*VQR-VG OI= 736 at $4.80 SL=3.00 BUY PUT OCT-30 VQR-VF OI= 661 at $2.50 SL=1.25 Average Daily Volume = 1.05 mln DIGL - Digital Lightwave $17.79 (-1.41 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. Sooner or later you knew it would happen. Shares of DIGL rallied almost 5% on Friday closing 20 cents below our stop of $18. The stock has been in a serious decline and as you know nothing moves in a straight line. As the stock is extremely oversold, traders should be looking to lock in gains with this recent stall in the downtrend. While not likely the stock has the potential to rally up to $19 even $20 before sellers try and over power it again. It's possible the shorts were gunning for the April 3rd low of $12.75. We would urge caution. The stock has found support at a low of $16.25 for two days in a row. The rest of the stocks in this group don't look much better but you don't want to get caught in a short squeeze. On the other hand, if DIGL slips below 16.25, we might get another shot at that 52 week low. BUY PUT SEP-20.0*DGW-UD OI= 35 at $4.10 SL=2.00 BUY PUT SEP-17.5 DGW-UW OI=153 at $2.55 SL=1.25 Average Daily Volume = 1.85 mln CHKP - Check Point Software $39.20 (-4.09 last 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. Bears should be thanking a couple of major brokerages for their part in the ugliness that is the software sector. The NASDAQ posts its sixth straight decline and the GSO index breaks down below support at 180. The catalyst for this move in the software group was Goldman Sachs and CS First Boston. A Goldman Sachs analyst cut their estimates on Seibel Systems (SEBL) and Oracle (ORCL). They felt that the software group was going to see tougher times before it got any better. CS First Boston did a number on BEA Systems (BEAS). CSFB lowered both their 3Q and 4Q estimates for BEAS. This news sent the GSO index falling fast Friday morning but the index actually managed a decent bounce by the close (it remains under support of 180). Shares of Check Point did not bounce as strongly and the trend of lower highs remains intact. Truthfully, Friday's close under the key $40 level does not bode well for CHKP bulls. One might expect CHKP to continue its fall to the mid-July low of $35. However, while the cards may appear to be in our favor any strong recovery in the NASDAQ could send software shorts scurrying and give bulls hope for a turnaround. Trade cautiously and consider taking some profits off the table. We'll leave our stop at $43 for the time being. BUY PUT SEP-40*KEQ-UH OI=1132 at $4.80 SL=2.25 BUY PUT SEP-35 KEQ-UG OI=1472 at $2.40 SL=1.15 Average Daily Volume = 10.5 mln SKX - Skechers U.S.A. $19.70 (-2.68 last week) Skechers designs and markets branded contemporary causal, active, rugged and lifestyle footwear for men, women and children. The company, through its international distributors, sells its products in over 100 countries and territories. Skechers offers footwear in a broad range of styles, fabrics and colors. As a consumer, we actually like Sketchers shoes. As a trader, the stock looks terrible. The breakdown below $20 finally occurred. This is our trigger to buy puts if you were looking for confirmation. The S&P 500 may have closed positive on Friday but the retail sector (RLX) slipped again. We did note that the RLX bounced strongly off its Friday low of 875 closing at 890. This may be a caution flag for retail bears but the trend is still negative. The trend on SKX looks even worse. However, another side note, volume for SKX has been very low the last couple of days and we would have preferred more oomph in Friday's breakdown. We will leave our stop at $21 and now look for shares to aim for the July 25th low of $18.50. Beyond that support lies near $16.50 which was set back in late 2000. BUY PUT SEP-22.5 SKX-UX OI= 18 at $4.00 SL=2.25 BUY PUT SEP-20.0*SKX-UD OI= 6 at $2.30 SL=1.00 BUY PUT SEP-17.5 SKX-UW OI= 0 at $1.15 SL=0.50 Vol = 105 Average Daily Volume = 708 K PSFT - PeopleSoft $38.84 (-4.12 last week) PeopleSoft designs, develops, markets, and supports a family of enterprise application software products for use throughout large and medium sized organizations. These organizations include corporations, higher-education institutions and federal, state, provincial and local government agencies worldwide. If you read the update on CHKP then you already know what happened to the software sector on Friday. To quickly recap, Goldman Sachs lowered estimates on SEBL and ORCL while CS First Boston yanked the rug out from under BEAS with lowered estimates for 3Q, 4Q and a new lower price target to $29 from $49. BEAS ended the day off 8.5%. The concern is any turnaround may not occur until late 2002. PSFT fell over 4.5% on the day closing under significant support of $40. This would appear to be a good entry point for momentum traders. Yet all traders looking to play the downside should be watching the 200-dma (38.20) which has acted as support for the last three days. If you're looking for more conviction wait for the stock to close below this key level. Next level of support for PSFT is $35, then $32.50 and then $30. Don't forget that BEAS is expected to announce earnings next week on Tuesday and their results and conference call could have impact on the short-term direction of the major software stocks. BUY PUT SEP-40.0 PQO-UH OI= 351 at $4.70 SL=3.00 BUY PUT SEP-37.5*PQO-UU OI= 151 at $3.60 SL=1.75 BUY PUT SEP-35.0 PQO-UG OI= 678 at $2.50 SL=1.25 Average Daily Volume = 7.67 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 ***** Humble Pie for the Analysts! By Mark Phillips Contact Support Not bloody likely! It's not that they don't deserve to have it force-fed to them, but I'll bet they are already full from the double helping of crow they were forced to eat this week. After Abbey Joseph Cohen reiterated those excessively bullish targets for the DJIA and the S&P500, did you notice how silent she was this week? Not a peep from Goldman Sachs' chief cheerleader. Maybe she was having her pom-poms cleaned? It took until mid-week before my undisguised scorn for bullish analyst upgrades from just over a week ago appeared justified, but here I sit smug in the knowledge that I wasn't swayed by the foolish and irresponsible statements from the likes of Ms. Cohen and those at Merrill Lynch who had the gall to once again call the bottom in the Chip sector. I know we got a bit of a rebound in the Semiconductor index (SOX.X) on Friday, but we're once again nearly 10% below the level where Merrill Lynch issued their bullish comments on the sector. More importantly, the descending resistance line at $650 held up against the bulls and the SOX is once more under $600. I may be wrong, but I think it is way too early to be calling a bottom in this sector - there just aren't any hard facts to support such a conclusion. And advising clients to buy on the nebulous data that IS available is criminally irresponsible in my opinion! Cisco Systems (NASDAQ:CSCO) tanked the techs on Wednesday and there wasn't much help from the bulls to stem the bleeding. But the Networking giant held above the $18 level and with Stochastics once again bottoming, maybe the bulls are ready to try another breakout over 20. CSCO and SUNW both pulled back this week, but holding above support on the pullbacks underscore the value of picking our entry points carefully. Take a look at the Portfolio and you can see that both plays are still sitting in a profitable position. Status of recent plays (both Portfolio and Watch List) is testament to the power of picking the right entry points. Even the sharp selloff this week has left most of our plays bruised but ready to fight again on the next upward leg. We've been watching Oracle Corp. (NASDAQ:ORCL) for over a month now, waiting for it to come back to the $15-16 level, allowing us to take a favorable entry into the play. As I've discussed many times before, this is the type of market that rewards patient investors that will demand the stock come to them. Ask, and it shall be given! Sure enough, the weakness in the software sector knocked the legs out from under ORCL this week, as it dropped right to $15. Now all we need is a recovery over $16, and suddenly we have an attractive entry into another of the NASDAQ Generals. I'm sure you're tired of hearing this, but can you believe WM? The bulls just refuse to give up, and after holding above our $40 stop, it is looking like the stock is going to take another run at new highs. But who am I to complain, when one of our more sedate plays is at the top of the leader board? As we expected last week, ADBE bit the dust right out of the gate on Monday, falling through our $37 stop amid further weakness in the Software sector. We're still waiting for the verdict on our Broadcom (NASDAQ:BRCM) and International Business Machines (NYSE:IBM) plays. They are holding above critical support, but a market breakdown could spell the end of them next week. On the other hand, market-wide bullish euphoria could be just the catalyst to push these two stocks through near-term resistance. In the case of IBM, look for a move through $110 and BRCM's test will come at $49. Three cheers for defensive plays as we watch mighty Merck (NYSE:MRK) slog its way higher, just kissing the $69 descending trendline on Friday. It looks like the bulls are starting to flex their muscles in the stock following news Bayer is recalling its cholesterol-fighting drug, Baycol. This opens up more opportunities for MRK to continue to grab market share with its own cholesterol drug, Zocor. Philip Morris (NYSE:MO) is trying mightily to build a base as it battles with the 200-dma. With litigation-related costs once again fading from investor's minds, the tobacco, beverage and food giant looks like it is poised to rally from here.. Eli Lilly (NYSE:LLY) is playing hard to get up there in the $77 range, and it looks like we may have to wait for another cycle on the daily oscillators before we'll be handed an entry at our desired target. But the Nasdaq-100 Trust (AMEX:QQQ) is being coy, having now entered our target zone. A little bit of strength (and it's going to take more than that afternoon recovery on Friday) and in we go with a $37 stop. Calpine (NYSE:CPN) can't seem to put a stop to the selling, but the further it falls, the more attractive it becomes. The PE ratio is now approaching 20, and when the bearish sentiment abates, we will be in a position to grab it cheap and hold on for the rebound...afterall, there really is nothing wrong with either the business or the company...just the falling price of natural gas and the Barron's article from last weekend raising the spectre of a power glut. I find that prospect rather unlikely, and expect CPN to shine later this year. The current decline could extend all the way to $25, which would take the PE below 20, which I would consider a truly attractive valuation. I wonder if Barron's is rethinking the premise of their article this weekend after the East coast heat wave and the hassle of brown-outs? We are ratcheting our entry target ever lower on CPN, as we don't want to miss our entry point when it arrives. While we are waiting for some strength to put the Portfolio into the play, aggressive traders might be able to grab themselves a bargain if CPN bounces from the $25 area. Enron (NYSE:ENE) gave us the weakness we were waiting for...now we need to see some strength. Will it post a triple bottom or break to new yearly lows? The bulls attempted a breakout on Friday, but it wasn't to be, with the stock falling back in the afternoon. As you can see from my comments on CPN above, I think these Energy plays are getting downright attractive, but I'm not going to argue with the charts. If they give us our entry, that's great! If not, I'll either ratchet those entry points down (not up!) or stand aside. Even Global Marine (NYSE:GLM) has been kind enough to fall into our target zone. With the Oil Services sector (OSX.X) making a convincing show of putting in a bottom, it looks like our wish for an entry will be fulfilled next week as GLM pushes through the $16 level. If this one is on your target list, remember that we want to see solid volume and a close above our target before taking a position. Ok, I know it violates the letter of the law, but hopefully you'll forgive me for taking an entry on ABX on Monday. I know we were waiting for it to bounce from $14-14.25, but I'm not going to quibble over a mere 15 cents. The bounce from $14.40 looked strong...check out the writeup below for further details. With the dollar weakening and the economy still refusing to get healthy, the appeal of the yellow metal is increasing. Did you notice what the best performing sector in the market was this past week? That's right! Precious Metals!! Coming back to my market commentary, I know we actually had a pretty decent end of the week. After intraday violations of 10,200 on the DJIA and 1934 on the NASDAQ Composite, the bulls managed to stage a pretty decent recovery. Not stellar, but passable. The real question is whether it was real buying or just more short-covering ahead of the weekend. My vote goes with the latter. Next week we get earnings reports from a whole basket of retailers and Walmart (NYSE:WMT) leads the parade on Tuesday. I don't know about you, but I'm not expecting any great news from this group and that would call into question the strength of the almighty consumer. I think they're slowing their spending...I know I am! The VIX had a rather bizarre week, continuing to fall WITH the markets and showing the lack of fear in this market by closing out the week at 22.91. When it is that low and the major indices are so close to major support, it makes me nervous. Here's hoping those support levels hold up next week. But if they don't remember to honor your stops. They are the primary tool sitting between you and a painfully busted play. I am making a concerted effort to provide less general market commentary and instead focus more on the significant developments on the stocks in our Portfolio and Watch List. As I make this transition, feel free to drop me a line and let me know how I can better provide the information you need for making your own trading decisions. This service is for you, and feedback is the best way to make sure I'm on the right course. 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 $ 6.60 8.20% $ 34 WM 03/22/01 '03 $33.8 OBN-AY $ 6.13 $11.30 84.34% $ 40 FON 04/09/01 '03 $ 25 VN -AE $ 4.40 $ 3.50 -20.45% $ 19 DELL 04/27/01 '03 $ 25 VDL-AE $ 9.00 $ 8.00 -11.11% $ 24 BRCM 06/05/01 '03 $ 40 OGJ-AH $14.00 $17.90 27.86% $ 40 VRSN 06/12/01 '03 $ 60 OVX-AL $20.40 $15.70 -23.04% $ 42 CSCO 07/11/01 '03 $ 20 VYC-AD $ 3.90 $ 4.80 23.08% $ 17 '04 $ 20 LCY-AD $ 5.70 $ 6.40 12.28% $ 17 IBM 07/11/01 '03 $110 VIB-AB $17.70 $15.70 -11.30% $ 99 '04 $110 LIB-AB $23.70 $23.30 - 1.69% $ 99 MRK 07/09/01 '03 $ 70 VMK-AN $ 7.40 $ 9.30 25.68% $ 59 SUNW 07/24/01 '03 $ 15 VZX-AC $ 4.80 $ 5.40 12.50% $15.50 '04 $ 15 LSU-AC $ 5.70 $ 6.80 19.30% $15.50 MO 07/30/01 '03 $ 45 VPM-AH $ 8.50 $ 8.50 0.00% $ 40 ABX 08/06/01 '03 $ 15 VBX-AC $ 2.75 $ 3.30 20.00% $12.50 '04 $ 15 LBX-AC $ 3.70 $ 4.20 13.51% $12.50 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 $33 JAN-2003 $ 35 OLB-AG CC JAN-2003 $ 30 OLB-AF JAN-2004 $ 40 LZC-AH CC JAN-2004 $ 30 LZC-AF 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 GE 08/12/01 $40-41 JAN-2003 $ 45 VGE-AI CC JAN-2003 $ 40 VGE-AH JAN-2004 $ 45 LGR-AI CC JAN-2004 $ 40 LGR-AH New Portfolio Plays ABX - Barrick Gold $14.86 As the broader markets continued to weaken again this week, gold bugs moved into the limelight. Responding to fears of a worsening economy, the Gold futures contract (October) shot higher the past couple days, reaching the $278 level, this highest price seen for the yellow metal since late June. Whether this is the beginning of a sustained move, we don't know. But those that followed our recommendation were in a position to profit as ABX found support just above our entry target on Monday. Although we were looking for the stock to decline to the $14.00-14.25 area before bouncing, it seemed reasonable to bend that entry level just a bit. Last Friday's dip to $14.40 was met with solid buying on Monday and the rebound had begun. And then the surge in the price of gold seemed to drive ABX higher on Wednesday and Thursday. It didn't take long before the stock was testing the $16 resistance level. It remains to be seen whether this is just a short-term move or the beginning of a longer-term move, but the volume earlier this week was pretty convincing. The important point is that by selecting our entry point carefully, we start off the play in the black and can now give it room to move. We are initially placing our stop at $12.50. Traders that missed the entry point this week will want to target another dip into the mid-$14 range for new positions. BUY LEAP JAN-2003 $15.00 VBX-AC $2.75 BUY LEAP JAN-2004 $15.00 LBX-AC $3.70 New Watchlist Plays GE - General Electric $42.57 Ever since the EU blocked GE's acquisition of HON, the stock has been unable to gain any traction. Falling from the $52 area in late June, the stock violated several significant support levels over the past six weeks and it is now bouncing in the $41-42 area. It is hard to find an area of business that the industrial conglomerate doesn't operate in, and despite CEO Jack Welch's pending retirement, it is likely to remain one of the best-managed companies in the market for the foreseeable future. Technically, the stock is rapidly approaching levels where it makes sense to nibble on new positions. With major support near $40 (with lots of trading near that level in late March and early April), weekly Stochastics entering oversold territory and the daily Stochastics just starting to emerge from oversold, it looks like we are close to an entry. If you are looking for a way to play an expected recovery in the Dow Jones Industrials, then GE is your play due to the fact that it tends to track the "old-economy" index. We are looking for one more cycle of the daily Stochastics into oversold to give us that optimum entry point, so we are setting our entry target at $40-41. After taking a position, we will be placing our stop in the $37-38 level, which corresponds to solid support in late 1999 and then again with the severe dip earlier this year. BUY LEAP JAN-2003 $45.00 VGE-AI BUY LEAP JAN-2003 $40.00 VGE-AH For Covered Call BUY LEAP JAN-2004 $45.00 LGR-AI BUY LEAP JAN-2004 $40.00 LGR-AH For Covered Call Drops ADBE $36.76 Struggling along in its $38-48 trading range, ADBE made one final push higher in late July, but the bears turned it back as the broader Technology market meandered lower through the earnings season. It turned out that the bears were right, proven on July 29th as the company issued a revenue warning for the third quarter. That put the entire Software sector under pressure again, and we were left with nothing but a $37 stop between us and another busted play. The bulls just couldn't hold the line and ADBE crashed through this level last Monday, kicking the stock out of our Portfolio. A continuing stream of bad news in the Software sector just added to the pain being heaped on ADBE, culminating with Friday's downgrades on ORCL and BEAS and ADBE falling as low as $33. See? Those stop losses do help us to mitigate our losses when a play goes against us. *************************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 08-12-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/3564_5.asp ************* COVERED CALLS ************* Market Timing Strategies: Q&A With The Covered-Calls Editor By Mark Wnetrzak Today's discussion concerns the basic criteria for Covered-call positions and the techniques used to evaluate portfolio stocks for potential exits and adjustments. Mark, I appreciate your recent response to my question on Covered-Call exits. I've been going thru the (OIN website) archives but did not find an answer to a question I have on entries. I understand the reason for simultaneously purchasing the stock and selling the call (buy-write order) due to the possible (bid) premium drop, which could occur by "legging" in. But, I did not find an answer to entry criteria precedence. Specifically, is it more important to enter the trade near the listed cost basis, without much weight given to the state of the oscillators (ex., Stochastic coming out of an oversold condition), or wait for the oscillators to start heading higher? Or both? Your help would be greatly appreciated. JB Regarding Covered-call entry strategies and timing techniques: It just depends on what strategy you are using. A "single entity" approach, where an investor is not interested so much in stock ownership or bullish movement, but rather in obtaining a consistent return on investment, is not really dependent on oscillators. The primary goal is to find positions that achieve acceptable returns while still receiving an above-average amount of downside protection. Using this strategy, an investor will be more interested in the overall technical outlook of the underlying issue for the duration of the option series chosen. Is there a high probability the stock will remain above the cost basis (break-even point) until expiration and does the overall position meet my risk-reward tolerance? That's the question you must answer. Regardless of whether the ITM covered write strategy is applied short-term or even in the longer term, it requires a neutral to slightly bullish outlook on the underlying issue and its industry as well as the overall market. If you think the underlying equity will fall below the cost basis or the overall market is due for a correction, then searching for a different candidate or waiting for a more optimum entry point is sage advice. However, if you desire stock ownership or are writing calls on stocks in your long-term portfolio that you don't want to sell, short-term timing becomes much more important. Essentially, an investor begins trading calls against his stock positions and with the use of chart oscillators (or other technical signals) he can often increase the profit potential. It simply depends on your personal preference and the manner in which you choose to initiate combination positions. Lawrence McMillan adeptly outlines the covered write strategies in his book, "Options: As a Strategic Investment" and "Trading for a Living," by Dr. Alexander Elder, may provide some insight on market psychology and the best techniques for short-term trading. Regards, OIN Another subscriber asked about the techniques we use to evaluate portfolio stocks on a daily basis and the methods for determining when to exit a position, based on its technical outlook. It's important to understand the fundamentals of basic technical analysis and market timing strategies. In fact, when successful investors discuss their best traits, the most common qualities are knowledge of entry-exit indicators and the use of proven historical patterns in their trading systems. In addition, the majority of option trading strategies are of a short-term nature, thus technical analysis is generally the best approach to use for researching potential candidates as well as monitoring the progress of the underlying issue after a position is initiated. We base most of our charting techniques on the "4-Stages" system originated by Stan Weinstein, author of "Secrets of Profiting in Bull and Bear Markets." Stan describes the performance of stocks with regard to their overall trend and he utilizes stage analysis not only on individual issues, but also with industry sectors as well as indexes and averages such as the Dow and NASDAQ. In his book, he depicts the four stages of a stock as basing, trending higher, topping, and declining. The area where an issue encounters weakness and fails to make new highs is the third stage (or stage III). This trend is usually marked by the stock heading sideways after a long rally and a flattening of a long-term moving average. It is the time that traders should consider taking profits or tightening "stops" to prevent losses. Stage III doesn't mean a stock will fall, but once it does, it enters Stage IV. Generally, Stage IV is depicted by a falling stock that has violated its long-term (150 - 200 day) moving average and the support area of its Stage III top. The moving average will turn downward as the share value continues to decline and make new lows. Usually traders are offered a second chance exit when the stock rallies back to its long-term moving average. Successful traders avoid the tendency to hold on to an issue in the hope that it will rebound at some future date. They know that statistics prove it is better to take the loss while it is small and commit the remaining funds to a profitable position rather than wait for a long-term recovery. 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 23.55 AUG 17.50 2.15 *$ 1.59 8.7% SPCT 15.49 16.00 AUG 15.00 1.25 *$ 0.76 7.7% ILUM 30.95 31.01 AUG 30.00 1.95 *$ 1.00 7.5% NMTC 27.85 26.36 AUG 25.00 3.60 *$ 0.75 6.7% MCAF 14.31 16.65 AUG 12.50 2.70 *$ 0.89 6.7% TERN 6.12 5.75 AUG 5.00 1.60 *$ 0.48 6.6% HTCH 17.80 18.94 AUG 17.50 1.45 *$ 1.15 6.1% NBTY 15.45 15.90 AUG 15.00 1.05 *$ 0.60 6.0% RFMD 29.33 27.52 AUG 25.00 5.20 *$ 0.87 5.2% VNT 24.22 21.06 AUG 20.00 5.10 *$ 0.88 5.0% CLPA 6.08 6.50 AUG 5.00 1.40 *$ 0.32 5.0% AHAA 34.80 34.90 AUG 30.00 6.10 *$ 1.30 4.9% PHTN 38.17 36.15 AUG 35.00 4.30 *$ 1.13 4.8% DSPG 23.21 22.78 AUG 22.50 1.65 *$ 0.94 4.7% POWI 22.22 22.50 AUG 20.00 2.85 *$ 0.63 4.7% GZMO 12.80 11.90 AUG 10.00 3.40 *$ 0.60 4.6% NFLD 17.51 16.22 AUG 15.00 3.10 *$ 0.59 4.4% ELNT 38.08 36.63 AUG 35.00 4.10 *$ 1.02 4.3% CY 26.16 24.57 AUG 25.00 1.95 $ 0.36 2.2% RCGI 31.16 29.30 AUG 30.00 2.35 $ 0.49 1.8% NFLD 18.45 16.22 AUG 17.50 2.20 $ -0.03 0.0% CFLO 5.20 4.15 AUG 5.00 0.90 $ -0.15 0.0% LU 7.61 6.51 AUG 7.50 0.75 $ -0.35 0.0% NTIQ 38.60 36.40 SEP 35.00 6.50 *$ 2.90 5.6% SPCT 15.85 16.00 SEP 15.00 2.05 *$ 1.20 5.4% PHTN 39.97 36.15 SEP 35.00 7.70 *$ 2.73 5.3% ISSI 15.00 14.32 SEP 15.00 1.25 $ 0.57 2.6% NETA 16.36 13.48 SEP 15.00 2.45 $ -0.43 0.0% *$ = Stock price is above the sold striking price. Comments: Ok, another week and the Markets are visiting their support areas. Do we break-through or does the roller-coaster ride continue? Will a test of the April lows become a self- fulfilling prophecy? I do know there is only one week until the August option series expires and it's time once again to compare an early exit verses rolling forward and/or down on any issue you may end up owning. Compania Anonima Nacional (NYSE:VNT) has now broken the July low on fading volume. The question is, will it need to test support near $20 or will a technical bounce reduce any expiration-week anxiety? Dsp Group (NASDAQ:DSPG) is at a key moment as it tests the top of its support area. Northfield Laboratories (NASDAQ:NFLD) appears to have made a successful test of its 50-dma and its April to June trend-line. Have you researched their PolyHeme product? Cypress Semiconductor (NYSE:CY) suffered from the recent sector-wide downgrades (What? Huh? Downgrade now when the issues are in basing formations? Isn't that coming a bit late to the party?). The selling appears to be abating near the top of its support area - a sign of strength? Renal Care Group's (NASDAQ:RCGI) bounce off its 150- dma lacked volume support - a second chance exit? Cacheflow (NASDAQ:CFLO): an exit candidate or a long-term speculation play? The SEP or OCT option series should be reasonable in a week if the stock holds at support near $4.00. Are you still holding Lucent Technologies (NYSE:LU)? It may be necessary to roll forward and down to a JAN-$5 call; and that's just to break even. Hmmm. As for September issues, Networks Associates (NASDAQ:NETA) looks a bit worrisome after announcing a $300 million convertible. Monitor the position closely as its tests support near $13. Positions Closed: Boston Communications (NASDAQ:BCGI), Digimarc (NASDAQ:DMRC), Cytogen (NASDAQ:CYTO), Corvas (NASDAQ:CVAS), Pacificare Health Systems (NASDAQ:PHSY), Network Peripherals (NASDAQ:NPIX), and F5 Networks (NASDAQ:FFIV). Note: BCGI is the current Murphy's Law candidate. It rallied after announcing its inclusion into the Russell 2000 Index. 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 APCS 18.36 SEP 17.50 CUT IW 2.00 69 16.36 42 5.0% HLIT 16.04 SEP 15.00 LOQ IC 2.20 2406 13.84 42 6.1% IGEN 32.28 SEP 30.00 GQ IF 4.50 1697 27.78 42 5.8% NTIQ 36.40 SEP 30.00 CQT IF 8.10 12 28.30 42 4.4% PMCS 34.40 SEP 30.00 SQL IF 6.50 2137 27.90 42 5.5% PTEC 15.05 SEP 15.00 PKQ IC 1.20 279 13.85 42 6.0% SEAC 23.55 SEP 20.00 UEG ID 4.70 30 18.85 42 4.4% 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 HLIT 16.04 SEP 15.00 LOQ IC 2.20 2406 13.84 42 6.1% PTEC 15.05 SEP 15.00 PKQ IC 1.20 279 13.85 42 6.0% IGEN 32.28 SEP 30.00 GQ IF 4.50 1697 27.78 42 5.8% PMCS 34.40 SEP 30.00 SQL IF 6.50 2137 27.90 42 5.5% APCS 18.36 SEP 17.50 CUT IW 2.00 69 16.36 42 5.0% NTIQ 36.40 SEP 30.00 CQT IF 8.10 12 28.30 42 4.4% SEAC 23.55 SEP 20.00 UEG ID 4.70 30 18.85 42 4.4% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** APCS - Alamosa Holdings $18.36 *** On The Move! *** Alamosa Holdings (NASDAQ:APCS) is a holding company, and through its many subsidiaries, provides wireless personal communication services (PCS) in the Southwestern, Northwestern and Midwestern United States. The company is a network partner of Sprint PCS, and through affiliates, provides wireless services in more than 4,000 cities and communities across the United States. Alamosa offers products and services throughout its territories under the Sprint and Sprint PCS brand names, and its services are designed to mirror the service offerings of Sprint and to integrate with the Sprint PCS network. Though APCS reported a net loss of $34.3 million, it said total revenues rose to $83.5 million from $17.6 million. The company was also upbeat about its subscriber base which rose 21% to about 316,000 at the end of the second quarter. We simply favor the bullish technicals as the stock rallies out of a year-long consolidation phase. SEP 17.50 CUT IW LB=2.00 OI=69 CB=16.36 DE=42 TY=5.0% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=APCS ***** HLIT - Harmonic $16.04 *** Rally Mode! *** Harmonic (NASDAQ:HLIT) designs, manufactures and markets digital and fiber optic systems for delivering video, voice and data services over cable, satellite, telco and wireless networks. Harmonic's products fall into two principal groups, Broadband Access Networks Products and Convergent Systems Products. In addition, the company provides Professional Services and Systems Support to its customers worldwide. In July, Harmonic posted favorable results for the most recent quarter with net sales of $49.3 million, up 22% from $40.3 million in the previous quarter. During the period, the company made the first volume shipments of its next-generation digital systems, including the new NSG for video-on-demand and MV50 encoder. The CEO said he was pleased with their strong execution and improved operating performance, despite a continued weak capital spending environment. Based on the recent bullish activity, it appears investors agree with an optimistic outlook for the company. SEP 15.00 LOQ IC LB=2.20 OI=2406 CB=13.84 DE=42 TY=6.1% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=HLIT ***** IGEN - IGEN International $32.28 *** The Rally Continues! *** IGEN International (NASDAQ:IGEN) develops and markets biological detection systems based on its proprietary ORIGEN technology, which provides a unique combination of sensitivity, reliability, speed, and flexibility. ORIGEN-based systems are used in a wide variety of applications, including clinical testing, life science research, and food and environmental safety testing. These systems are marketed by IGEN and its licensees and/or distributors: Roche Diagnostics, Organon Teknika, Eisai Co. Ltd., Sumitomo Corp., and Sanko Junyaku Co. Ltd. IGEN and ORIGEN are registered trademarks of IGEN International Inc. IGEN was halted midday Friday as it announced that it was awaiting a judge's decision regarding its breach of contract lawsuit against Roche Diagnostics. In a release late Friday, IGEN said a federal court ruled that a division of the Swiss-based Roche Holdings AG, breached a licensing agreement with IGEN by settling a patent infringement suit with a third party without IGEN's consent. Monday's trading may offer a reasonable entry point for those wishing to speculate on the company's future. Technically, the Stage II rally is showing no sign of stopping. SEP 30.00 GQ IF LB=4.50 OI=1697 CB=27.78 DE=42 TY=5.8% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=IGEN ***** NTIQ - NetIq $36.40 *** The Rally Resumes! *** 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. At the end of August, the stock broke-out of its base on high volume and on Friday, the issue rallied after a brief consolidation to the 30-dma. Based on the new technical strength, this position offers a conservative entry point with a favorable cost basis. SEP 30.00 CQT IF LB=8.10 OI=12 CB=28.30 DE=42 TY=4.4% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=NTIQ ***** PMCS - PMC-Sierra $34.40 *** Chip Sector Giant! *** 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 earlier in the month after Standard & Poor's announced that it will be added to the S&P 500 index. The fact that Merrill Lynch upped 11 stocks in the chip sector also recently boosted semiconductor stocks and even though the technology group has been in a slump, we believe PMCS would be a great addition to any long-term technology portfolio at this discounted cost basis. SEP 30.00 SQL IF LB=6.50 OI=2137 CB=27.90 DE=42 TY=5.5% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=PMCS ***** PTEC - Phoenix Technologies $15.05 *** Next Leg Up? *** Phoenix Technologies (NASDAQ:PTEC) is a global provider of system enabling software solutions for PCs and connected digital devices. Their software provides compatibility, connectivity, security, and manageability of the various components and technologies used in such devices. Phoenix provides these products primarily to platform and peripheral manufacturers that range from large PC manufacturers to small system integrators. Phoenix also provides training, consulting, maintenance and engineering services to its customers. The company markets and licenses its products and services mainly through a direct sales force, as well as through regional distributors and sales representatives. PTEC is opposing the trend in the software group and the technical indications may be pointing to a move back to the old trading range near $18. SEP 15.00 PKQ IC LB=1.20 OI=279 CB=13.85 DE=42 TY=6.0% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=PTEC ***** SEAC - SeaChange $23.55 *** Consolidation Complete? *** SeaChange (NASDAQ:SEAC) develops, manufactures and sells systems that automate the management and distribution of both short-form video streams (advertisements) and long-form products (movies), and related services and movie content to television operators, telecommunications companies and broadcast television companies. In May, SeaChange reported record revenues of $30.2 million, up 35% and net income of $182,000 or $0.01 per share. SeaChange believes it has established itself as the leader in Video-on- Demand as it recorded a record $11.0 million in revenue. The company continues to improve its product, recently shipping its new IMC 4000 video server configurations. SEAC shares have been in "rally mode" since an LA Times report announced that Vivendi Universal has inked deal to license its movies to cable operators for new video-on-demand services. According to the article, the agreement could make video-on-demand films viable and that would certainly favorable for the company. A much needed consolidation has brought the issue down to a reasonable price and this position offers a favorable cost basis in the issue. SEP 20.00 UEG ID LB=4.70 OI=30 CB=18.85 DE=42 TY=4.4% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=SEAC ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield OPWV 20.76 SEP 17.50 UGE IW 4.70 67 16.06 42 6.5% NXCD 8.44 SEP 7.50 DQX IU 1.55 77 6.89 42 6.4% WGRD 11.00 SEP 10.00 RUH IB 1.75 51 9.25 42 5.9% GERN 13.95 SEP 12.50 GQD IV 2.25 175 11.70 42 5.0% FIBR 6.70 SEP 5.00 QFW IA 2.00 20 4.70 42 4.6% CSCO 18.33 SEP 17.50 CYQ IW 1.85 4758 16.48 42 4.5% BRCD 32.79 SEP 25.00 UBF IE 9.10 77 23.69 42 4.0% ***************** NAKED PUT SECTION ***************** Trading Basics: Naked-Put Entry Strategies By Ray Cummins Today we are honored to have a guest writer on a subject that is both popular and timely. Indeed, many of our readers will find this article very helpful when it comes to selling Naked Puts for consistent profits. On any day when I meet someone new and tell him or her I am an Investment Broker, they always ask me when the market is going to get better. For the most part, I explain the current environment and realize, as their eyes glaze over, that they don't understand or believe a word I'm saying. The average person out there doesn't believe that there are securities on the rise and methods to make money. Because many don't understand the strategies, they think I am "full of it" and don't believe that making money is possible. The investing public doesn't realize what many of you do; that there are various investment strategies to take full advantage of markets that are "stuck in the mud" and there are many stocks or indexes that defy the market's drowning effect. Why am I talking about selling "naked" Puts, a traditionally bullish strategy? Because there are still some up-trending and/or consolidating stocks and indexes out there. I am also determined to educate investors so they can earn consistent profits in any environment. I prefer to sell Puts "out-of-the-money" as a precautionary manner. I usually sell the strike price at or below a support level. Some may choose to sell in-the-money in order to gain the "delta" effect. Before you do this, always calculate the margin requirement versus the cash requirement of buying the stock or in-the-money Calls. I sell Puts with the preconceived notion that I want to actually own the stock but just because you have a different reason for selling options, don't stop reading. I plan on covering entry strategies that will help no matter what your trading preference. In keeping with my KISS (Keep it Simple Silly) approach, I will give just a few indicators to follow. Everyone has different parameters that they use and someone out there might even have "tweaked" the numbers better than me. I prefer to use Bollinger Bands with 20 periods and a standard deviation of 2. Many charting programs use this as the default. I also use Fast Stochastics with an 8:3:3 for the basic (Period:SK;SD) settings. I find these two indicators work well together and confirm tops and bottoms more frequently than other indicators. Many of the other indicators are hard to read and can be interpreted to support one's emotional perception instead of the actual reading. For oversold conditions, I look for the Stochastics to break below 20 and the stock price must also drop to the bottom Bollinger envelope line (preferred) or the 20-day moving average and bounce. Both indicators must hold up. A near-term bottom must be confirmed by the security's price moving up from the lower Bollinger Band while the Stochastics line moves back up through the 20 level. Some up-trending security's Stochastics lines don't always drop down to 20 or lower. Look for the average low. This is also true with the Bollinger Bands. When the above indicators reach "oversold" conditions, I look for upward confirmation and then sell the Puts. As I stated before, because I believe the security is oversold, I may choose to sell in-, at-, or out-of-the-money Puts. I can always "buy-to-close" if I am right and lock-in the profit (preferred). The latter technique is a good practice in an uncertain market. It frees up cash, which may be applied to the same security, if it drops down again and there is still sufficient premium to warrant a new position. In some cases, it is better to look for a completely different security. The important thing to remember when selling naked Puts is finding a security that is either consolidating or up-trending over the long term. Exit strategies are also important. If the stock moves up and then gives a "head fake" and goes down past the recent low, close the position! Another exit strategy on out-of-the-money Puts is to close the position if it doubles in price. This means taking a loss, but it usually preserves capital. If the Put is in-the-money, then the premium received is usually larger than the out-of-the-money premium and a different approach is needed. The stop-loss amount depends on one's personal risk tolerance and investment goals. For example, one could place a percentage (buy-to-close) stop on the Put at 10%, 20% or 30% etc. To illustrate, let's assume you write an in-the-money Put for $15 per contract and place a 25% stop-loss on it. You would close out the position if the Offer (Ask) hit $18.75. As stated before, if the stock moves up, the option may move down in price enough to close it out at a decent profit. The key is to always protect your profits and limit your losses... Happy Trading! Robert J. Ogilvie, ROP Cutter & Company, Inc I am an Options Broker and ROP that trades for and educates investors on many strategies. Please contact me toll free at 877-925-0880 or email Robert.Ogilvie@verizon.net if there are any questions. Neither Cutter & Company, Inc. nor Robert J. Ogilvie makes any representation as to the accuracy, reliability or completeness of any charts, formulas, and /or research opinions presented herein. This article is intended solely for educational purposes. Nothing herein should be construed as an offer or solicitation to buy or sell any securities. Cutter and Company is a Member of the NASD, MSRB, and SIPC. Please read the OptionInvestor.com's Disclaimer *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield PPD 20.16 20.50 AUG 17.50 0.70 *$ 0.70 24.9% HLIT 15.08 16.04 AUG 12.50 0.40 *$ 0.40 15.0% PMCS 36.57 34.40 AUG 30.00 0.55 *$ 0.55 13.9% MRVL 33.32 30.80 AUG 27.50 0.50 *$ 0.50 13.6% KOPN 15.01 14.34 AUG 12.50 0.35 *$ 0.35 13.2% ESST 13.95 15.20 AUG 12.50 0.25 *$ 0.25 12.4% SAGI 15.41 16.02 AUG 12.50 0.30 *$ 0.30 12.2% IDTI 36.14 36.15 AUG 30.00 0.70 *$ 0.70 11.2% NMTC 24.34 26.36 AUG 20.00 0.45 *$ 0.45 11.1% DTHK 14.21 13.11 AUG 10.00 0.30 *$ 0.30 10.4% NMTC 22.84 26.36 AUG 17.50 0.45 *$ 0.45 9.7% NMTC 23.00 26.36 AUG 17.50 0.55 *$ 0.55 9.3% OEI 19.68 19.39 AUG 17.50 0.25 *$ 0.25 9.1% APCS 16.93 18.36 AUG 15.00 0.55 *$ 0.55 8.9% SEAC 27.18 23.55 AUG 22.50 0.40 *$ 0.40 8.8% SEAC 22.00 23.55 AUG 17.50 0.35 *$ 0.35 8.0% NTIQ 34.14 36.40 AUG 25.00 0.65 *$ 0.65 7.6% ICST 18.54 17.70 AUG 15.00 0.35 *$ 0.35 7.2% AFCI 26.30 25.75 AUG 22.50 0.35 *$ 0.35 7.2% AHAA 33.47 34.90 AUG 25.00 0.55 *$ 0.55 6.6% PHTN 33.18 36.15 AUG 25.00 0.40 *$ 0.40 6.2% ZRAN 32.97 33.88 AUG 25.00 0.60 *$ 0.60 6.0% ILUM 30.30 31.01 AUG 25.00 0.40 *$ 0.40 6.0% CTXS 33.53 33.08 AUG 25.00 0.45 *$ 0.45 5.5% PCL 28.49 29.42 AUG 25.00 0.60 *$ 0.60 5.1% BRCM 41.00 42.55 AUG 25.00 0.40 *$ 0.40 5.1% SLAB 23.00 19.45 AUG 20.00 0.45 $ -0.10 0.0% ZIGO 20.16 14.99 AUG 17.50 0.55 $ -1.96 0.0% *$ = Stock price is above the sold striking price. Comments: The downward trend in NASDAQ issues finally sealed the fate of Amazon.com (NASDAQ:AMZN) and the renewed selling pressure has pushed the stock to a recent low. Traders who held out for a miracle rally were greeted with another round of downgrades and it appears there is little hope for a recovery in the near future. Another unexpected drubbing occurred in one of our speculative technology positions; Zygo (NASDAQ:ZIGO) and although we deemed the issue a "bottom-fishing" candidate, we were surprised to see it retreat to yearly lows without any negative news. Luckily, the slump began early Monday morning (just as the options market was opening) and it doesn't appear there were any victims from our camp. One of the issues we are watching for signs of a new bearish trend is Silicon Laboratories (NASDAQ:SLAB). SLAB ended near a recent low on Friday and the stock is at the proverbial "key" moment. A continued move to the downside would signal an exit in the position. Closed Plays: Amazon.com (NASDAQ:AMZN), AremisSoft (NASDAQ:AREM), Plug Power (NASDAQ:PLUG). 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 AFCI 25.75 SEP 22.50 AQF UX 0.90 139 21.60 42 8.2% CENT 8.98 SEP 7.50 EQH UU 0.35 0 7.15 42 10.3% IMCL 44.89 SEP 30.00 QCI UF 0.70 246 29.30 42 5.2% ISIL 39.20 SEP 30.00 UFH UF 0.90 3 29.10 42 7.5% MDCC 20.50 SEP 17.50 MCQ UW 0.95 13 16.55 42 11.2% PPD 20.50 SEP 15.00 PPD UC 0.80 495 14.20 42 11.8% PWAV 18.14 SEP 15.00 VFQ UC 0.75 37 14.25 42 11.2% 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 20.50 SEP 15.00 PPD UC 0.80 495 14.20 42 11.8% MDCC 20.50 SEP 17.50 MCQ UW 0.95 13 16.55 42 11.2% PWAV 18.14 SEP 15.00 VFQ UC 0.75 37 14.25 42 11.2% CENT 8.98 SEP 7.50 EQH UU 0.35 0 7.15 42 10.3% AFCI 25.75 SEP 22.50 AQF UX 0.90 139 21.60 42 8.2% ISIL 39.20 SEP 30.00 UFH UF 0.90 3 29.10 42 7.5% IMCL 44.89 SEP 30.00 QCI UF 0.70 246 29.30 42 5.2% 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). ***** AFCI - Advanced Fibre Communications $25.75 *** Entry Point! *** Advanced Fibre Communications (NASDAQ:AFCI) develops, manufactures and supports telecommunications access products and services that enable telecommunications companies and other service providers to connect their central office switches to end users for voice and high-speed data communications. The company's products include integrated multi-service access platforms, integrated access devices, network management systems, indoor and environmentally hardened outdoor cabinets for the portion of the telecommunications network between the service provider and their customers, often referred to as the "local loop," or "last mile." Advanced Fibre's stock rallied in July after the telecommunications systems maker reported strong second-quarter results and made positive comments about the future. Analysts at Lehman Brothers, U.S. Bancorp Piper Jaffray, WR Hambrecht, J.P. Morgan H&Q and Pacific Growth Equities increased future earnings estimates and several brokerages raised their price targets for AFCI's share value, based on the bullish outlook. We like the opportunity to own the issue at a discounted price. SEP 22.50 AQF UX LB=0.90 OI=139 CB=21.60 DE=42 TY=8.2% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=AFCI ***** CENT - Central Garden & Pet $8.98 *** Technicals Only! *** Central Garden & Pet Company (NASDAQ:CENT) offers an array of branded lawn and garden and pet supply products. The company's operations are grouped into three business segments. Garden Products manufactures a broadening array of proprietary branded lawn and garden products while Pet Products is a manufacturer of proprietary branded pet supplies. Distribution supports Central's lawn and garden and pet supply branded products and also performs logistics and sales activities for a variety of manufacturers of lawn and garden and pet supply products. CENT emerged in a scan of bullish issues with good relative strength and the technical support area near our cost basis makes this position a reasonable speculation play. SEP 7.50 EQH UU LB=0.35 OI=0 CB=7.15 DE=42 TY=10.3% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=CENT ***** IMCL - Imclone $44.89 *** Premium Selling! *** ImClone Systems (NASADAQ:IMCL) is a biopharmaceutical company that is developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. The company focuses on three strategies for treating cancer, growth factor blockers, cancer vaccines and angio-genesis inhibitors. The company's lead product candidate, IMC-C225, is a unique therapeutic monoclonal antibody that inhibits stimulation of a receptor for growth factors upon which certain solid tumors depend in order to grow. IMC-C225 has been shown in several Phase I/II trials to have acceptable safety, to be well tolerated and, when administered with radiation therapy or chemotherapy, to enhance tumor reduction. This issue has a relatively well-defined trading range and a high probability of remaining above the sold strike price. Traders who are interested in selling premium for credit should consider this position. SEP 30.00 QCI UF LB=0.70 OI=246 CB=29.30 DE=42 TY=5.2% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=IMCL ***** ISIL - Intersil $39.20 *** Rally In Progress! *** Intersil (NASDAQ:ISIL) is a systems-oriented manufacturer and designer of analog and digital integrated circuits for wireless access and communications analog markets. Within communications, the company is focused on several key markets, including high data rate wireless connectivity; power management, and wireless and wired software design to deliver chip sets, component software and licensable applicable designs for communications customers. Their many products include components performing complex communications functions, such as its PRISM chips for wireless data communications, digital radios and high speed converters in cellular base stations, and power management integrated circuits used in Internet servers and computers. ISIL was on the move Friday amid speculation of the potential growth in broadband users. The recent consolidation in the issue appears to be over and this play offers a reasonable risk-reward outlook for technology investors. SEP 30.00 UFH UF LB=0.90 OI=3 CB=29.10 DE=42 TY=7.5% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=ISIL ***** MDCC - Molecular Devices $20.50 *** Bottom Fishing! *** Molecular Devices )NASDAQ:MDCC) is a developer of high-performance bioanalytical measurement systems that accelerate and improve drug discovery and other life sciences research. The company's systems enable pharmaceutical and biotechnology firms to leverage advances in genomics and combinatorial chemistry by facilitating the high throughput and cost effective identification and evaluation of drug candidates. Their instrument systems are based on an advanced core technology, which integrate the company's expertise in engineering, molecular and cell biology and chemistry. The company's systems are fundamental tools for drug discovery and life sciences research, and its MAXline series of microplate readers and its FLIPR Cell Analysis systems are well-known leaders in their respective markets. MDCC appears to be a good bottom-fishing candidate, based on its recent technical indications and the buying support near our cost basis. SEP 17.50 MCQ UW LB=0.95 OI=13 CB=16.55 DE=42 TY=11.2% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=MDCC ***** PPD - Pre-Paid Legal $20.50 *** 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 in early August when PPD announced it will not pursue 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. In addition, the company remains debt free, cash flow positive and serves a large, growing market with a unique product. Without the concerns of a negative earnings surprise, the issue should remain comfortably in its current trading range. SEP 15.00 PPD UC LB=0.80 OI=495 CB=14.20 DE=42 TY=11.8% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=PPD ***** PWAV - Powerwave $18.14 *** Entry Point! *** Powerwave Technologies (NASDAQ:PWAV) designs, manufactures and markets ultra-linear radio frequency (RF) power amplifiers for use in the wireless communications market. RF power amplifiers, which are key components of wireless communications networks, increase the signal strength of wireless transmissions from the base station to the handset while reducing interference, or "noise." Powerwave manufactures both single and multi-carrier RF power amplifiers for a variety of frequency ranges and transmission protocols. Shares of PWAV rallied early in early August after receiving upgrades from USB Piper Jaffray and Robertson Stephens and after a brief consolidation, the issue appears ready to resume it upward trend. This position offers a low-risk entry point in the stock. SEP 15.00 VFQ UC LB=0.75 OI=37 CB=14.25 DE=42 TY=11.2% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=PWAV ***** ***************** 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 NXCD 8.44 SEP 7.50 DQX UU 0.60 10 6.90 42 14.3% NSM 32.30 SEP 30.00 NSM UF 1.50 317 28.50 42 9.0% HLIT 16.04 SEP 12.50 LOQ UV 0.45 108 12.05 42 8.9% RFMD 27.52 SEP 20.00 RFZ UD 0.75 162 19.25 42 8.7% TWAV 15.47 SEP 12.50 TQB UV 0.40 15 12.10 42 8.0% PMCS 34.40 SEP 25.00 SQL UE 0.80 944 24.20 42 7.5% SNDK 23.49 SEP 17.50 SWQ UW 0.45 15 17.05 42 6.3% NMTC 26.36 SEP 20.00 QEK UD 0.50 0 19.50 42 6.3% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Title: Blue-Chips Hold The Line! ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, August 10 Industrial stocks staged an impressive rally Friday with the Dow recovering from an early slump as investors searched for bargains among "old economy" issues. The blue-chip average ended up 117 points at 10,416 on strength in its cyclical components. Stocks on the NASDAQ did not fare as well with the technology composite falling for a sixth consecutive session. Weakness in computer software shares pulled the hi-tech index 7 points lower to 1,956. The S&P 500 finished 6 points higher at 1,190 amid a recovery in oil service issues. Trading volume on the NYSE reached just 948 million shares with advances beating declines 19 to 11. NASDAQ volume hit 1.36 billion, with losers outpacing winners 9 to 8. In the bond market, the 30-year Treasury rose 11/32, pushing its yield down to 5.51%. Last Sunday's New Plays (positions/opening prices/strategy): Genzyme (NASDAQ:GENZ) AUG50P/AUG55P $0.60 credit bull-put Microsoft (NASDAQ:MSFT) AUG75C/AUG70C $0.40 credit bear-call United Th. (NASDAQ:UTHR) SEP15C/AUG15C $0.90 debit calendar Amdocs (NYSE:DOX) SEP45C/SEP45P $7.30 debit straddle Dial (NYSE:DL) AUG17C/AUG17P $1.10 debit straddle Elec. Data (NYSE:EDS) AUG65C/AUG60P $1.15 credit strangle Our new credit-spread candidates were a mixed bag with Microsoft offering a mediocre premium, but with little risk, while Genzyme provided an excellent entry before slumping on concerns over the labeling requirements of their recently approved drug Fabrazyme. Genzyme also surprised investors on Tuesday when it announced an agreement to acquire privately held Novazyme Pharmaceuticals for $137.5 million in stock, gaining technology to help it create new and improved drugs. Genzyme said the acquisition will lower its earnings in 2001 by about $0.03 per share and the company may take an unspecified one-time charge to write off certain of Novazyme's research projects. Our speculation play in United Therapeutics is performing very well with the issue rising nearly 60% percent on Friday after the biotechnology company said it received a crucial regulatory recommendation for its experimental treatment for a lung disorder. The bullish calendar spread was easily entered at the target debit and now we are waiting for the premium in the near-term options to erode. With any luck, the issue will end the expiration period near our sold strike at $15. Amdocs and Dial both offered reasonable entry prices in their respective straddles and Electronic Data Services remains in the maximum profit range with only one week until the August options' expiration. Portfolio Activity: This week's market activity was a boon to volatility traders and we enjoyed some big winners in the Straddles section. The top performer was Verity (NASDAQ:VRTY) which plummeted to a 2-year low near $8.75 on weakness in the Internet Software segment. The $9 move produced a gain of almost 300% in less than one month in the neutral position and it was our most profitable straddle this year. Another successful candidate was Stericycle (NASDAQ:SRCL), which dropped to a recent low of $41 prior to its earnings report on Tuesday. The sell-off was a complete surprise but it provided straddle traders with a $4 profit on $5 invested in just over two weeks. Lowe's (NYSE:LOW) continued to move lower in tandem with the majority of industrial stocks and when the issue dipped to $35, the AUG-$40 Put easily paid for the entire position and yielded a nice profit as well. EMC Inc. (NYSE:EMC) has also been an active issue and the straddle exceeded our exit target of 25% in just 10 days. Among the other profitable plays in August were Cable and Wireless (NYSE:CWP) and Symantec (NASDAQ:SYMC) however, Bank of New York (NYSE:BK) and our Reader's Request straddle in AOL-Time Warner (NYSE:AOL) have not been as productive and should probably be closed to preserve capital. In the Credit Spreads category, all of our current positions are positive but we are monitoring Medtronic (NYSE:MDT) and Genzyme (NASDAQ:GENZ) for potential exit and adjustment opportunities. In the Calendar Spreads group, our new speculation play in United Therapeutics (NASDAQ:UTHR) was a "timely" offering and among the synthetic positions, only Isis Pharmaceuticals (NASDAQ:ISIP) failed to yield a favorable profit. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** FNM - Fannie Mae $84.40 *** No Slump Here! *** Fannie Mae (NYSE:FNM) is a private, shareholder-owned firm that works to assure that mortgage money is readily available for existing and potential homeowners in the United States. Fannie Mae does not directly lend money to homebuyers, but works with lenders to make sure that there is no shortage of funds available for mortgage loans. Fannie Mae was initially part of the Federal Housing Administration and authorized to purchase only FHA-insured loans to replenish lenders' supply of money. Today, Fannie Mae's objective is to increase the availability and affordability of homeownership for low-, moderate- and middle-income Americans. The method in which Fannie Mae accomplishes this is by purchasing mortgages from a variety of institutions, which make up the major mortgage market. Fannie Mae then buys the mortgage thus allowing the primary market lender to replenish their funds and allow them to lend more money to home buyers. Fannie Mae has always been an excellent broad-market hedge when other stocks are struggling and even though the economy is in a recent slump, the housing industry remains robust. Analysts say mortgage lending will reach record highs this year, as new home purchases and refinances continue, and the mortgage market is growing at 6%-8% on an annual basis. That's great news for FNM, a government-sponsored entity which provide liquidity to housing markets by buying pools of mortgages that are eventually sold on the secondary markets. In addition, Fannie Mae is looking for new sources of growth to supplement its solid balance sheet and with the company's history of revenue and earnings, FNM's share value should remain relatively stable regardless of the overall market movement. PLAY (conservative - bullish/credit spread): BUY PUT SEP-75 FNM-UO OI=2149 A=$0.40 SELL PUT SEP-80 FNM-UP OI=3558 B=$0.90 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=FNM ****************************************************************** BBY - Best Buy $60.05 *** Reader's Request! *** Best Buy Company (NYSE:BBY) is a specialty retailer of consumer electronics, home office equipment, entertainment software and appliances. The company operates retail stores and commercial Websites under the brand names Best Buy (BestBuy.com), Media Play (MediaPlay.com), On Cue (OnCue.com), Sam Goody (SamGoody.com), Suncoast (Suncoast.com) and Magnolia Hi-Fi (MagnoliaHiFi.com). Best Buy stores offer customers a broad selection of name-brand models consisting of approximately 6,000 products and they account for 68% of the company's total retail square footage. Best Buy was submitted as a bearish candidate by one of our new readers and indeed, the issue appears to be suffering from the recent selling pressure in the retail group. However, since it is somewhat oversold on a near-term basis, it may be better to initiate a limited-risk position that allows for a small amount of upward movement in the coming sessions. We can also use that activity to improve the position credit and the potential for a successful (technical) recovery is significantly affected by the resistance at the sold strike price; a perfect condition for a bearish combination play. PLAY (conservative - bearish/credit spread): BUY CALL SEP-75 BBY-IO OI=230 A=$0.95 SELL CALL SEP-70 BBY-IN OI=164 B=$1.60 INITIAL NET CREDIT TARGET=$0.75-$0.85 PROFIT(max)=17% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=BBY ****************************************************************** PTEC - Phoenix Technologies $15.05 *** Cheap Speculation! *** Phoenix Technologies (NASDAQ:PTEC) is a global provider of system enabling software solutions for PCs and connected digital devices. Their software provides compatibility, connectivity, security, and manageability of the various components and technologies used in such devices. Phoenix provides these products primarily to platform and peripheral manufacturers that range from large PC manufacturers to small system integrators. Phoenix also provides training, consulting, maintenance and engineering services to its customers. The company markets and licenses its products and services mainly through a direct sales force, as well as through regional distributors and sales representatives. We noticed this play while searching for Covered-call candidates and based on the underlying issue's technical characteristics and the small disparities in option pricing, the position offers a favorable risk-reward outlook for traders who have a bullish view on PTEC. PLAY (speculative - bullish/synthetic position): BUY CALL SEP-17.50 PKQ-IW OI=40 A=$0.45 SELL PUT SEP-12.50 PKQ-UV OI=45 B=$0.25 INITIAL NET DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.40-$0.50 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $380 per contract. http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=PTEC ****************************************************************** - STRADDLES - Option premiums have increased slightly in recent sessions, but the current conditions still favor option buying strategies and we have some great straddle candidates for traders who like to participate in short-term speculation plays. These stocks have statistically undervalued options and the potential to move high or low enough to make the straddles profitable. In addition, the underlying issues have a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk-reward of the position. As with any recommendation, each play should be evaluated for portfolio suitability and also reviewed with regard to your strategic approach and trading style. ****************************************************************** AHAA - Alpha Industries $34.90 *** Big Mover! *** Alpha Industries (NASDAQ:AHAA) designs, develops, manufactures and markets proprietary radio frequency, microwave frequency and millimeter wave frequency integrated circuits and discrete semiconductors for wireless voice, data and also broadband communications. The primary applications for the company's products include wireless handsets, wireless infrastructure and broadband communications equipment. The company 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. PLAY (very speculative - neutral/debit straddle): BUY CALL AUG-35 GAQ-HG OI=393 A=$1.55 BUY PUT AUG-35 GAQ-TG OI=225 A=$1.60 INITIAL NET DEBIT TARGET=3.00 TARGET PROFIT=15% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=AHAA ****************************************************************** CRUS - Cirrus Logic $17.20 *** Volatile Sector! *** Cirrus Logic (NASDAQ:CRUS) is a leading supplier of unique, high-performance analog and DSP chip solutions for Internet entertainment electronics, analog and magnetic markets. The company designs and manufactures integrated circuits, or chips, that use high-performance analog and digital signal processing technologies. Its various mixed signal devices are designed for specific markets that derive value from expertise in advanced mixed-signal design processing, systems-level engineering and software knowledge. The company's products enable its customers to quickly deliver leading-edge technology products that are in high demand from consumers. PLAY (very speculative - neutral/debit straddle): BUY CALL AUG-17.50 CUQ-HW OI=397 A=$0.75 BUY PUT AUG-17.50 CUQ-TW OI=299 A=$1.05 INITIAL NET DEBIT TARGET=$1.60-$1.70 TARGET PROFIT=15% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=CRUS ****************************************************************** JEC - Jacobs Engineering $58.90 *** Probability Play! *** Jacobs Engineering Group (NYSE:JEC) is a professional services company that offers four categories of professional services: project services (which includes engineering, primary design, architectural and other related services); process, scientific and systems consulting services; operations and maintenance (O&M) services; and construction services. The company offers its services through offices and subsidiaries located in the United States, Europe, Asia, Mexico, Chile and Australia. This play is based on the price activity of the underlying issue and its recent technical history or trend. The probability of profit from this position is higher than other plays in the same strategy, based on disparities in option pricing. Current news and market sentiment will have an effect on the issue, so review the play thoroughly and make your own decision about its future outcome. PLAY (conservative - neutral/debit straddle): BUY CALL OCT-60 JEC-JL OI=230 A=$3.90 BUY PUT OCT-60 JEC-VL OI=47 A=$4.60 INITIAL NET DEBIT TARGET=$8.25-$8.30 TARGET PROFIT=25% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=JEC ****************************************************************** *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? 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