The Option Investor Newsletter Wednesday 09-26-2001 Copyright 2001, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/3600_1.asp Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 9-26-2001 High Low Volume Advance/Decline DJIA 8567.39 - 92.58 8718.16 8527.05 1.53 bln 1493/1648 NASDAQ 1464.04 - 37.60 1516.12 1458.34 1.73 bln 1380/2243 S&P 100 516.29 - 1.63 522.45 513.29 Totals 2873/3891 S&P 500 1007.04 - 5.23 1020.29 1002.62 RUS 2000 389.79 - 6.39 397.66 389.11 DJ TRANS 2076.79 - 16.01 2118.36 2072.70 VIX 39.26 + 0.39 39.71 37.95 VXN 65.94 - 1.63 68.67 65.65 TRIN 1.63 Put/Call 0.74 ******************************************************************* The Buyer's Dilemma With tensions escalating in the Middle East, earnings disappointments increasing in frequency and magnitude, and Yom Kippur around the corner, there weren't many reasons to buy stocks Wednesday. The decrease in day-over-day volume reflected the market's apathetic and reluctant nature. It's difficult to discern whether or not the anti-American demonstrations in Kabul, Afghanistan, played a role in Wednesday's pullback. But, the images of the abandoned U.S. Embassy set a light may have caused some uneasiness among already shaken bulls. If not, then the tensions in Afghanistan contributed to the rumor mongers' causes Wednesday. Talk of large blocks of stock for sale ran rampant following that big margin call in Disney (NYSE:DIS) stock last week. It's unfortunate, but times of uncertainty such as these allow stock manipulators greater freedom, so to speak. However, those spreading rumors in an attempt to knock down stocks and profit from their manipulations will eventually face justice in the form of a massive short squeeze. On the topic of short covering, Monday and Tuesday's advance across the broader markets is shaping up to be another failed bear market rally in light of the lack of follow-through Wednesday. Then again, Wednesday's price action could've been a precursor to a basing period. Some might argue that the light volume pullback was constructive, while others might argue that we've witnessed the pattern of failed rallies for the last 18 months. Only price and time will tell. Both the S&P 500 (SPX.X) and the Nasdaq-100 (NDX.X) have worked off some of their oversold condition judging by daily Stochastics readings. Of course Stochastics is only one measure of overbought versus oversold, so it must be taken in context with other indicators such as Bullish Percent. Both the S&P and NDX remain grossly oversold by way of Bullish Percent. On a shorter time period, such as the 30-minute charts below, it's easy to see that the SPX is holding up much better than the NDX. The SPX has managed to stay above the psychologically significant 1000 level during Wednesday's pullback, while the NDX settled below the psychological 1150 level. The SPX's out performance can be attributed to several sectors, most notably the financial sector. Both the Insurance Sector (IUX.X) and the Bank Sector (BKX.X) finished in positive territory - the former tacked on almost 2 percent. The Insurance sector has been an inspiring source of strength over the last three days. Its bids are most likely stemming from bargain hunters who were reassured by the industry's comments that it would be able to handle the more than $30 billion in claims from the terrorist attacks. Also, industry representatives were meeting with government officials Wednesday to propose government backing for insurance claims in any future attacks. In the wake of the talks on Capitol Hill, industry leaders such as AIG, CB, JHF, AFL, PGR, and ALL worked higher. The bid in banks Wednesday may have stemmed from the Fed's upcoming meeting. The FOMC meets next Tuesday and is expected to cut rates again. The consensus is currently calling for another 50 basis points which, if the Fed actually cuts by that much, will take Fed Funds down to 2.50 percent - the current target rate is 3.00 percent. While the financial sector has helped prop up the SPX, it hasn't been able to do the same for the NDX. That's because the NDX does not include any financial components. But the NDX does contain a whole lot of technology. The three worst performing sectors within technology Wednesday were Semiconductors (SOX.X), Internets (INX.X), and Softwares (GSO.X). The semiconductor and software sectors are the heart and soul of the NDX, and neither the SOX nor GSO look very technically strong at current levels. Micron's (NYSE:MU) disappointing results Tuesday night resulted in a slew of lowered earnings estimates and downgrades across the chip spectrum. For the day, the SOX shed nearly 8 percent and shares of Micron lost almost 19 percent. On top of the downgrades in the chip sector, three prominent brokerages cut their third-quarter and full year 2001 estimates on several software companies. Merrill, Prudential, and U.S. Banc Piper Jaffray reduced ratings on the likes of BEA Systems (NASDAQ:BEAS), i2 (NASDAQ:ITWO), and Ariba (NASDAQ:ARBA). The GSO finished lower by 4.46 percent. There are a total of 37 semiconductor and software companies in the Nasdaq-100, which goes to show just how influential the SOX and GSO are on the broader tech sector. The downgrades across both sectors Wednesday in addition to Micron's earnings report Tuesday might be a precursor to third-quarter earnings season. As Jim alluded to Tuesday, the third-quarter is typically back-end loaded, which means a lot of business is done in the final two weeks of the quarter. Since this week is the last in the quarter, companies may be scrambling to make sales in order to meet their quarters, which may also be the reason that we haven't heard many warnings this week. Because many buyers are taking a 'wait and see' approach to the third-quarter, especially in technology, some of the defensive sectors caught a bid as capital flowed to quality. Both the Healthcare Index (HCX.X) and Drug Index (DRG.X) performed quite well Tuesday, with roughly 2.3 percent gains in each. Indeed, the flight to quality in the bond market Wednesday seemed to reflect defensive positioning. Part of the flight to defensive issues Wednesday may have stemmed from Yom Kippur, which also explained the rather light volume. Whether or not the defensive positioning continues this week will probably depend on news on the earnings and military fronts. There may be a trade looming in the HCX and DRG to the upside this week, but one would think that some end of quarter window dressing would unfold Thursday. If the mutual fund buyers show up, targets of window dressing may include some of the defense industry stocks that have done extremely well in the wake of the terrorist attacks. Aside from the window dressing that may or may not occur in the next two days, there are not a lot of reasons to be buying stocks in the current economic and political environment. Of course contrary opinion suggest to buck conventional wisdom and swim against the tide. But, with so much uncertainty in the market, it's hard to get a hold on what exactly conventional wisdom is currently. Eric Utley Option Investor ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** **************** MARKET SENTIMENT **************** Snap Stocks snapped a two-day winning streak under the weight of profit warnings, downgrades and margin call rumors. The Dow avoided a triple digit loss, but still closed down 92 points. On a percentage basis the S&P 500's 0.51% drop was the best amongst the major indices, and the Nasdaq's 2.50% drop was the worst. Micron Weekly Chart Part of the Nasdaq's woes can be attributed to awful earnings, or lack thereof, from Micron Technology (MU). The chipmaker reported a loss of $575 million compared to a profit of $726 million a year ago. $289 million of the loss was due to inventory write-downs, and an additional $118 went to a write down of its equity investment in Interland Inc. The 96 cents per share loss was well below analysts' expectations of 34 cents, excluding write downs, and the 18% drop in stock price reflected investors' disappointment with a 79% drop in sales. The company declined to give future guidance, but Micron's future stock price could be $10 if support at $17 is broken. Semiconductor Index Daily Chart Micron's bleak outlook had semiconductor stocks reeling, and the Semiconductor Index lost 7.89%. Yesterday it looked like the SOX was trying forming a small base, but today's drop could have the sector being one of the first to test last week's low. Should that fail to hold, support looks like 345. IBM Daily Chart A downgrade from Goldman Sachs helped to spark a $3.15 decline in IBM, making it the biggest loser on the Dow. Analyst Laura Conigliaro noted that the effects of the September 11th attacks appear sizable, and could effect corporate spending on IBM products. She also lowered estimates for Sun and EMC. If that is indeed the case, IBM stock might need to rely on support at $90, or even $80, if sales do continue to decline. Healthcare, drug and gold stocks found some buyers as investors look for something a little more defensive, and bank stocks attracted interest, perhaps due to low interest rates. Tomorrow the markets will have to digest another batch of earnings warnings from Sonus Networks (SONS), Allegiance Telecom (ALGX), Guitar Center (GTRC), and Speedway Motorsports (TRK). Not quite the magnitude of Micron, but could nevertheless be a drag on investor psychology. We also get a full plate of economic data. Durable goods and initial jobless claims are released before the bell tomorrow, and new home sales and the Help-Wanted Index is released at 10:00 a.m. *************************Sector Watch**************************** Support Close Resistance DJIA | 8,062 | | | 8567 | | | 9,110| NASD | 1,385 | | 1464 | | | | 1,670| S&P 500 | 944 | | | 1007 | | | 1,100| Rus 2000 | 373 | | 390 | | | | 420| Semis | 363 | 371 | | | | | 455| Biotech | 405 | | 424 | | | | 475| Internet | 70 | | 81 | | | | 105| Networking | 210 | 214 | | | | | 260| Software | 100 | | 117 | | | | 159| Banking | 550 | | | | 585 | | 595| Retail | 695 | | | | 743 | | 765| Drugs | 353 | | | | | 374 | 377| Support Alerts: Internets Resistance Alerts: ____________________________________________________ | Long | Short | Strength | Relative | | Term | Term | of | Strength | | Trend | Trend | LT Trend | vs S&P 500 | DJIA | Bearish | Bearish | Strong | Negative | NASD | Bearish | Bearish | Strong | Negative | S&P 500 | Bearish | Bearish | Strong | -- | Rus 2000 | Bearish | Bearish | Strong | Negative | Semis | Bearish | Bearish | Strong | Negative | Biotech | Bearish | Bearish | Strong | Negative | Internet | Bearish | Bearish | Strong | Negative | Networking | Bearish | Bearish | Strong | Negative | Software | Bearish | Bearish | Strong | Negative | Banking | Bearish | Bearish | Strong | Positive | Retail | Bearish | Bearish | Strong | Neutral | Drugs | Bearish | Bearish | Strong | Positive | _____________________________________ | Short-Term | | Point and | | Overbought/ | Momentum | Figure | | Oversold | | Signal | DJIA | Oversold | Falling | Sell | NASD | Oversold | Falling | Sell | S&P 500 | Oversold | Falling | Sell | Rus 2000 | Oversold | Falling | Sell | Semis | Oversold | Falling | Sell | Biotech | Oversold | Falling | Buy | Internet | Oversold | Flat | Sell | Networking | Oversold | Falling | Sell | Software | Oversold | Falling | Buy | Banking | AP OB | Falling | Sell | Retail | AP OB |turning up| Buy | Drugs | Oversold |turning up| Sell | AP OB = Approaching Overbought AP OS = Approaching Oversold ***************************************************************** *********** OPTIONS 101 *********** Bearish For The Rest of The Year? Consider LEAP Puts By Mark Phillips It has been a long time coming, due to delays necessitated by the tragic events of September 11th, but I've finally found both the time and space to address the issue of LEAP Puts and how we might apply them to our never-ending quest for profits. As I've mentioned recently, I've had a number of emails requesting the addition of LEAPS Put plays to our LEAPS Portfolio. I want to send my sincere thanks to all who have written, voicing their opinions and suggestions on whether it makes sense to utilize LEAP Puts in the current market, and possible strategies for doing so. Where possible, I've tried to integrate your comments into my ever-developing LEAPS strategy, and I hope all readers will benefit from your insights. Prior to the terrorist attacks of 2 weeks ago, my personal belief was that we had passed the point in the current market decline where buying LEAP Puts was a high-odds strategy. Just as we need an equity to stage a substantial advance to generate profits when we purchase LEAP Calls, we need a substantial decline in order to profit from LEAP Puts. Hindsight is 20-20, and looking at historical charts, it is clear we should have been playing LEAP Puts aggressively over the past 18 months. But that is water under the bridge. Instead of an economy flirting with recession, we now have one that has no hope of avoiding the official "recession" label that comes from 2 consecutive quarters of negative GDP growth. I expect this quarter to be the first, and only time will tell how many will follow it before we reach that final bottom. While the eventual TRUE market recovery will precede the actual rebirth of the expanding economy, I now feel that there will be ample opportunity to apply LEAP Puts to the pursuit of profits. LEAP Puts are to LEAP Calls, as normal puts are to normal calls. The only difference being that there is more time involved. Entry points materialize in much the same way that they do for LEAP calls, only we are looking for overbought conditions on the daily and weekly charts to align with a rollover from significant resistance levels. As with LEAP Calls, the Puts can be used for long-term to short-term trading, depending on the action of the underlying equity and the individual trader's time horizon and tolerance for risk. Before we delve into specific examples and potential trade candidates, we need to talk about the relative dynamics of the equity markets and their relative propensity to move up or decline. Barring a protracted economic downturn like the Japanese economy has seen for the past 17 years, the broad markets have a natural tendency to move up over time. When we are applying bearish strategies, we need to remain cognizant of the fact that we are trading against the market's natural tendency. That means that we need to look a bit deeper into the underlying company's condition when searching for LEAP Put candidates. If we are taking a position for an expected protracted decline, we want to pick on a weakling that is not only unlikely to move up, but likely to fall considerably due to a worsening economic condition. But given the historic market decline over the past 18 months, there is no question that there are ample opportunities to apply both short- and long-term bearish strategies, particularly in the wake of a massive speculative bubble. A study of historic charts for any equity or index will show that the downward moves are much steeper and faster than the rallies, meaning that our holding time for bearish trades should on average be shorter than that for bullish trades. That may lead you to ask the question, "Why use LEAPS? Can't we just use shorter-term (cheaper) puts instead of paying all that extra premium for the additional time?". The simple answer is "Yes", but there are some important advantages of LEAPS over near-term options. First, an At-the-Money (ATM) LEAP will have a significantly higher Delta than that of a near-term option. While the latter should have a delta of approximately 50 (meaning that the option will appreciate 50-cents for each favorable $1 move in the underlying equity), the ATM LEAP may have a delta of 65-70, due to the greater time value. Some readers have written to me, asking why we need to use LEAPS to capture these downward moves, pointing out that if we want to capture a high delta, all we need to do is purchase Deep In-the-Money (DITM) near-term Puts. This is actually a very good suggestion, but there are two strong reasons why it isn't quite as good in reality. First of all is the cost -- the cost of the DITM near-term option usually is higher than that of the LEAP. For example, if we were bearish on General Electric (NYSE:GE) and we opted to purchase a DITM Oct-45 Put, it would currently cost $9.70 or $970. By contrast, using the LEAP Put (I would choose the JAN-2003 $35 Put) would only cost $5.40 or $540. The delta of the two options would be very similar, and LEAP traders would have the added advantage that the LEAP would be far less susceptible to wild swings in volatility like we have seen over recent weeks. But there is another, possibly more important reason why I like LEAPS over near-term options, and that is the time window. When you are trading a front-month option, you have a much narrower window of time for your trade to be proven correct. The move needs to take place shortly after you place the trade, because even though you may have a DITM option (which will suffer minimal time-decay losses), when expiration Friday arrives, that option is no longer viable and we would need to roll out to the next expiration month. The LEAP on the other hand, gives us the luxury of time and we can wait for the market to prove us right (so long as the stock doesn't move sharply against us, stopping us out of the trade). So now that we've laid out the basic dynamics and motivations for LEAP Put trading, what are the basic parameters that I look for when searching for an attractive candidate? While this is by no means a comprehensive list, it is a good starting point. 1. Earnings declining on a quarter-over-quarter basis, particularly in a deteriorating business climate. One example might be a company that is losing market share and suffering margin compression due to competition in a shrinking market. PC box makers like Hewlett-Packard (NYSE:HWP) and Compaq (NYSE:CPQ) certainly come to mind as satisfying this first requirement. 2. Excessive valuation relative to either the rest of the market or other companies in the same sector. Just having a high P/E ratio isn't enough here, as we also want to see it as unjustified based on the company's recent earnings and revenue growth. A P/E ratio that is justified when the company is growing revenue and profits by 40% quarter-over-quarter will be utterly ridiculous if the growth slows to 20%. 3. Of course we also need a stock price that hasn't already been hammered into the dirt. No doubt, shares of Nortel (NYSE:NT) are in trouble according to the first two criteria, but at $5, the stock just doesn't have enough downside to get our attention. Just those three can identify some good candidates, but then we have to go to the charts. Entry points are important here just like in all trading and as I mentioned above, the picture we are looking for is daily and weekly Stochastics rolling over from overbought territory, and ideally this will occur at a major resistance level. Even better is if we have the monthly Stochastics rolling over at the same time, but I'll exclude that time-frame from our discussion tonight. Since we've already talked about GE up above, I'll continue to use it as my example, searching back through the historical charts to find what would have been a high-odds entry point to the downside. Needless to say, it didn't take long to find one! The Weekly/Daily chart montage shown below shows 2 attractive Put entries roughly a month apart. Price began to roll over from the formidable $53 resistance level towards the end of May, with the added bearish weight of Stochastics rolling over in both the daily and weekly timeframes. As if that weren't enough, GE was banging up against the upper Bollinger band in both timeframes and the band on the daily chart was completely flat, indicating that this barrier wasn't going to give way easily. For those that missed the entry point, there was another invitation almost exactly one month later as the stock ran out of steam, posting a lower high with oscillators rolling over yet again. A little research could likely unearth some even better candidates both in the past several months and in the current market. I've rambled on far too long for tonight, but we'll pick up the discussion next time, highlighting some potential LEAP Put candidates and attractive conditions for ushering us into new positions. Until then, remember that preservation of capital is our primary focus. Trade only when it is profitable to do so. Questions are always welcome! Mark Phillips Contact Support ***************** STOP-LOSS UPDATES ***************** ATK - call Adjust from $79 up to $80 CHKP - put Adjust from $27 down to $26 CHV - put Adjust from $82 down to $81 PMCS - put Adjust from $16.50 down to $15 BBY - put Adjust from $49 down to $47 EBAY - put Adjust from $50 down to $49 ENE - put Adjust from $30 down to $28.50 ************* DROPPED CALLS ************* CMVT $21.40 -3.09 (-3.68) Salomon Smith Barney cut its rating on CMVT to a neutral rating from buy. That downgrade combined with an already weak tech sector ruined our play on CMVT. The stock fell back towards the $20 level and looks like it wants to head lower over the near-term. Bullish traders who weren't stopped out today can use any relief rally tomorrow to exit plays. SYMC $34.69 -3.81 (-2.27) SYCM took it on the chin Wednesday following several downgrades in the software sector. The stock succumbed to heavy sector selling and fell below its near-term support at $35. The stock clearly violated our stop that was recently raised to $36. We're dropping coverage in light of SYMC's steep pullback. Bullish traders with open positions can use any strength early Thursday to exit positions. ************ DROPPED PUTS ************ No Dropped Puts for Wednesday. ************************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.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* EBAY - eBay, Inc. $44.04 -2.85 (+0.25 this week) After developing a Web-based community in which buyers and sellers are brought together in an efficient format, EBAY has emerged as the dominant online auction site. The eBay dynamic pricing format permits sellers to list items for sale, buyers to bid on items of interest and all eBay users to browse through listed items. Items listed on eBay include collectibles, automobiles, art objects, jewelry, consumer electronics and a host of practical and miscellaneous items. Although based in the United States, through its subsidiaries, EBAY also operates trading platforms in Germany, the United Kingdom, Australia, Japan, Canada, France, Austria, Italy and South Korea. Most Recent Update Select Internet stocks have managed to recover this week on the back of the broad market rebound, and we've seen the AMEX Internet index (IIX.X) recover off the $100 lows. EBAY has benefited from the rebound, briefly pushing above the $48 level on Tuesday before falling back for much of the day. Daily stochastics are moving higher as well, but the stock is about to run into some formidable resistance near $49, reinforced by the 200-dma ($50.42). We gave this play a wide stop because we were expecting a rebound from the recent low at $41.50. That rebound looks like it is running out of steam and we should get an attractive entry into the play as EBAY rolls over in the $49-50 range. One other interesting observation is that the daily Stochastics hasn't been able to move above the mid-line since early August, so it would seem reasonable to expect a rollover in this oscillator in the near term, especially with the RSI indicator continuing to post lower highs. Comments EBAY reliably rolled over near its 10-dma Wednesday, and looks to be headed the way of the Internet Sector Index (INX.X). The stock has very short-term support at the $44 level, which may be broken with further weakness in tech. Look for a break below that level early Thursday in conjunction with further weakness in the COMPX and INX. BUY PUT OCT-45*QXB-VI OI=7172 at $4.40 SL=3.50 BUY PUT OCT-40 QXB-VH OI=4688 at $2.40 SL=1.50 Average Daily Volume = 6.06 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Profit Warnings Renew Fear Among Investors By Ray Cummins Stocks retreated today, ending a brief recovery from last week's massive sell-off as nervous investors attempted to dissect new profit warnings and the continued outlook for a recession. The attitude among traders remained tenuous as reports of declining product orders and additional layoffs eroded the prospects for a broad-market rally and spoiled optimism for a near-term economic rebound. The Market also continued to suffer the emotional and financial effects stemming from the recent terrorist attacks that left thousands of people dead and missing in New York's business district and at the Pentagon in our nation's capital. Investors pushed share values higher early this week after the major stock averages slumped to three-year lows but the bullish activity was short-lived as confidence in a recovery faded with the negative reports issued by Goodyear (NYSE:GT), AES Corp. (NYSE:AES) and Textron (NYSE:TXT) during the morning session. Goodyear reduced its third-quarter earnings outlook due to weak markets that were further disrupted by the recent attacks and said it now expects net income for the third quarter to be only $0.05 a share. First Call had expected earnings of $0.22 a share. Textron lowered its second-half financial targets and announced it plans to slash an additional 2,500 jobs in the face of the slow economy, citing the impact of the terrorist bombings. The company now expects a loss of $0.25 per share in the third quarter. Power-company AES said its full-year earnings would fall below expectations due to the weakening Brazilian currency, falling electricity prices in the United Kingdom, and slowing economic growth. In the technology group, the slide in shares of Micron Technology (NYSE:MU) after its earnings announcement sapped enthusiasm from the chip sector. Micron reported Tuesday evening a quarterly sequential decline in revenue of 41% while posting a loss of $0.76 a share, much wider than the $0.34 loss that had been expected by analysts. Almost every other technology segment followed the semiconductor sector lower, led by software and Internet issues. Among broader-market industries, stocks in the banking and finance segment were active as traders took shares of both Goldman Sachs (NYSE:GS) and Bear Stearns (NYSE:BSC) higher in the wake of "better-than-expected" earnings results. However, the group eventually retreated after early gains amid bearish analysts' comments on the investment banking industry. In the S&P 500 sectors, utility, oil service, natural gas and cyclical stocks endured another drubbing while select biotechnology, insurance, gold and drug issues saw limited buying pressure. Summary of Previous Candidates (as of 9/25/01): Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield IMCL OCT 40 39.30 54.75 0.70 5.9% Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield ABK OCT 55 55.75 51.39 0.75 5.9% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status ACS 86.90 78.80 OCT75P/80P 0.60 79.40 (0.60) Closed JEC 64.63 61.21 OCT50P/55P 0.70 54.30 0.70 Open NOC 97.00 98.13 OCT85P/90P 1.00 89.00 1.00 Open PGR 119.01 124.50 OCT135C/130C 0.65 130.65 0.65 Watch! VZ 53.90 53.95 OCT45P/50P 0.70 49.30 0.70 Open Closed Positions: Shares of ACS plunged unexpectedly Tuesday after the company said it will commence a public offering of 7 million Class A shares and may offer up to $300 million in senior notes. The company plans to use with proceeds used to repay all or part of a $550 million bridge loan taken in connection with the acquisition of Lockheed Martin's IMS unit. Investors were unhappy with the news and the drop in price left little opportunity to exit the play with a favorable debit. New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations *************** ACDO - Accredo Health $35.11 *** On The Rebound! *** Accredo Health (NASDAQ:ACDO) provides unique contract pharmacy and related services pursuant to agreements with biotechnology drug manufacturers relating to the treatment of patients with certain costly chronic diseases. The company addresses the needs of the manufacturers by providing specialized services that facilitate product launch and patient acceptance including the collection of timely drug utilization and patient compliance information, patient education and monitoring through the use of written materials and telephonic consultation, reimbursement expertise and overnight drug delivery. The company has designed its specialty services to focus primarily on biotechnology drugs that are used on a recurring basis to treat chronic, and life threatening diseases, are expensive, are administered through injection, and require temperature control or other specialized handling as part of their distribution process. There is little news to explain the recent bullish activity in ACDO but this week the issue rebounded off of an old support area amid renewed buying pressure and excellent volume. Traders say the rally may be related to a recovery in the Pharmaceutical Services industry and the potential for positive announcements at the company's upcoming presentation during the Raymond James Healthcare Conference in Nashville, Tennessee on October 1, 2001. Regardless of the reason for the movement, ACDO is once again established in a strong up-trend and those who favor the outlook for its share value can use these positions to speculate on the future activity of the issue. ACDO - Accredo Health $35.11 PLAY (buy stock and sell covered call; or sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL OCT 35 DZU-JG 372 1.90 33.21 6.8% *** SELL PUT OCT 30 DZU-VF 25 0.35 29.65 4.8% *** http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=ACDO *************** ATK - Alliant Techsystems $83.55 *** Defense Sector Rally! *** Alliant Techsystems (NYSE:ATK) conducts business through three industry segments: Aerospace, Conventional Munitions and Defense Systems. Within these segments, ATI has four primary business lanes: Propulsion and Composites, each of which falls within the company's Aerospace segment; Conventional Munitions, which now corresponds to the company's Conventional Munitions segment; and Precision Capabilities, which corresponds to the company's main Defense Systems segment. In fiscal 2001, the company moved its missile products business, Alliant Missile Products Company, to its Aerospace segment. In February 2001, ATI sold its infrared decoy flare business, Alliant Kilgore Flares Company. Also, the company recently sold the secure electronics product line of Alliant Integrated Defense Company. Shares of the nation's defense contractors kept their winning streak intact this week with a robust rally in the wake of terrorist attacks on New York and the Pentagon. The primary players in the group, Northrop Grumman (NYSE:NOC), Lockheed Martin (NYSE:LMT) and General Dynamics (NYSE:GD) have posted substantial gains since the terrorist attacks and the recently renamed "Operation Enduring Freedom" has all the looks of the catalyst the defense industry needs to reestablish a bullish outlook. A Gallup Poll of Americans also revealed that 73% of the public believes we're at war, while nine in 10 respondents think the campaign will be both long and difficult. At the same time, government spending on defense equipment is at a historic (proportional) low and for analysts, lobbyists and politicians, the current situation provides a number of convincing arguments for hefty increases in military spending. It is obvious that defense industry stocks are performing very well and our target position offers a method to participate in the future movement of this issue with relatively low risk. ATK - Alliant Techsystems $83.55 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 70 AKA-VN 181 0.70 69.30 4.3% *** SELL PUT OCT 73 AKA-VY 11 1.10 72.28 5.7% SELL PUT OCT 75 ATK-VO 50 1.65 73.35 7.9% Note: The bid/ask spreads in these options are very large so you should target shoot a higher entry price initially to improve the monthly yield. http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=ATK *************** GILD - Gilead Sciences $54.96 *** On The Rebound? *** Gilead Sciences (NASDAQ:GILD) is an independent biopharmaceutical company that seeks to provide accelerated solutions for patients and the people who care for them. Gilead discovers, develops, manufactures and commercializes proprietary therapeutics for challenging infectious diseases (viral, fungal and bacterial infections) and cancer. Gilead also has expertise in liposomal drug delivery technology. Currently, Gilead markets AmBisome (amphotericin B) liposome for injection), an antifungal agent, DaunoXome (daunorubicin citrate liposome injection), a drug approved for the treatment of Kaposi's Sarcoma, and VISTIDE (cidofovir injection) for the treatment of cytomegalovirus (CMV) retinitis. Roche markets Tamiflu (oseltamivir phosphate) for the treatment of influenza, in a collaborative agreement with Gilead. In addition, Gilead is developing products to treat diseases caused by human immunodeficiency virus and hepatitis B virus, bacterial infections and cancer. The recent buying interest in Gilead Sciences began last month after the company said that a U.S. Food and Drug Administration panel is scheduled to review Viread, the company's drug intended to treat HIV infection, on October 3. Viread is a single tablet taken once daily and works by blocking an enzyme crucial to the replication of HIV. The company filed a New Drug Application for Viread earlier in the year and the agency issued priority review status that could allow for action by the FDA by November 1. In the weeks following the news, GILD shares suffered from extreme profit-taking but yesterday, Goldman Sachs gave investors a new catalyst to buy the issue as they initiated coverage of Gilead with a "market out-performer" rating, saying the company's future growth is linked to their unique AIDS drug. The brokerage said the company had established a strong clinical and commercial track record and that at maturity, Viread may see a market worth more than $400 million. Investors were pleased with the upgrade and the issue has shown new signs of a bullish trend. These positions offer a way to speculate conservatively on the company's future share value. PLAY (buy stock and sell covered call; or sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL OCT 50 GDQ-JJ 1505 6.60 47.65 6.3% *** SELL PUT OCT 45 GDQ-VH 2281 0.45 44.55 4.4% *** http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=GILD *************** LLL - L-3 Communications Holdings $84.30 *** Rally Underway! *** L-3 Communications Holdings (NYSE:LLL), including its wholly owned subsidiary L-3 Communications, is a merchant supplier of sophisticated secure communication systems and specialized communication products. Its customers include the United States Department of Defense (DoD), certain United States government intelligence agencies, major aerospace and defense contractors, foreign governments and commercial customers. The company has two major business segments, Secure Communication Systems and Specialized Communication Products. Shares of security device companies have been among the best performing issues in the stock market since hijacked commercial jets destroyed the World Trade Center and damaged the Pentagon earlier this month. L-3 Communications Holdings, which supplies secure communications and specialized products for aerospace and military industries, has also been in a strong up-trend in the wake of the attack, due to bullish expectations for the security industry. Technology from L-3 is used in a number of security devices including a bomb detection system that can reconstruct the entire contents of a travelers baggage in three dimensions. The demand in that industry alone could easily rise into the billion-dollar range, based on the tens of millions of bags that are inspected daily and that's one of the reasons analysts say L-3 will be a popular issue in the coming months. LLL - L-3 Communications Holdings $84.30 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 70 LLL-VN 112 0.90 69.10 5.6% *** SELL PUT OCT 75 LLL-VO 336 1.45 73.55 7.1% SELL PUT OCT 80 LLL-VP 955 2.35 77.65 9.4% http://www.OptionInvestor.com/charts/aug01/charts.asp?symbol=XXX *************** SBC - SBC Communications $47.34 *** Reader's Request! *** SBC Communications (NYSE:SBC) is a holding company that, through its many subsidiaries, provides a comprehensive offering of communications services and products in the United States and has investments in more than 20 countries. The company's many services and products are marketed under several established brands including Ameritech, Nevada Bell, Pacific Bell, SBC Telecom, SNET, Southwestern Bell, and its newly formed joint venture with BellSouth Corporation, Cingular Wireless. The company offers its unique services and products to businesses, consumers and other providers of telecommunications services. One of our readers submitted this issue for a bullish position and based on the upside activity in the stock and its industry group, SBC warrants consideration from conservative investors. The stock has excellent buying support near our cost basis and the favorable option premiums in this spread will allow traders to speculate, in a conservative manner, on the future movement of the company's share value. SBC - SBC Communications $47.34 PLAY (conservative - bullish/credit spread): BUY PUT OCT-40 SBC-VH OI=10305 A=$0.20 SELL PUT OCT-45 SBC-VI OI=5219 B=$0.75 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=SBC *************** SZA - Suiza Foods $63.00 *** Dean Foods Merger! *** Suiza Foods (NYSE:SZA) is a manufacturer and distributor of dairy products in the United States. Since the acquisition of Suiza Dairy in 1993, the company has completed 43 dairy acquisitions, including seven during 2000. The company sells primarily fresh dairy products through Suiza Dairy Group, with the product mix weighted heavily toward fluid milk, including flavored milks and buttermilk. Other products that the company sells through Suiza Dairy Group include ice cream and novelties, half-and-half and whipping cream, condensed milk, cottage cheese, cream, yogurt, dips, coffee creamers, juice drinks and water. Morningstar Foods sells primarily extended shelf life fluid, aerosol and other dairy and non-dairy products. Its product offerings include dairy and non-dairy coffee creamers, flavored and unflavored ESL milks, lactose-free milks and soymilk, aerosol whipped topping, dairy and non-dairy frozen whipped topping, egg substitute and cultured dairy products. The long-awaited merger between Dean Foods (NYSE:DF), the second largest U.S. dairy, and Suiza is now expected to be completed by the end of the calendar year and investors are apparently happy with the news. Shareholders from both companies approved the deal earlier in September and today Dean's Chief Executive reiterated that the merger is expected to close in the next few months. In a conference call with analysts, Dean said that after discussions with the U.S. Justice Department, he is more confident that the deal will close before the end of 2001, and the share values of both companies moved higher after the announcement. We simply favor the bullish technical indications of SZA (and DF) and our conservative position offers a method to participate in the future movement of the issue with relatively low risk. SZA - Suiza Foods $63.00 PLAY (moderately aggressive - bullish/credit spread): BUY PUT OCT-55 SZA-VK OI=549 A=$0.40 SELL PUT OCT-60 SZA-VL OI=58 B=$1.25 INITIAL NET CREDIT TARGET=$0.85-$1.00 PROFIT(max)=20% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=SZA *************** Neutral Plays - Straddles & Strangles *************** IVGN - Invitrogen $60.57 *** Technicals Only! *** Invitrogen Corporation (NASDAQ:IVGN) develops, manufactures and markets more than 10,000 products for the life sciences markets. The company's products are principally research tools in reagent and kit form, biochemicals, sera, media, and other products and services, which the company sells to corporate, academic and government entities. The company focuses its business on two principal segments, Molecular Biology Products and Cell Culture Products. Invitrogen is a good candidate for "premium-selling" strategies, based on the underlying issue's technical background and the robust option premiums. IVGN has a relatively stable trading range and no (expected) upcoming events that will substantially alter its fundamental or technical character prior to the October options expiration. The issue continues to move laterally in a Stage I base within a short-term trading range from $55 to $70 and near-term indications suggest the current trend will continue. At the same time, news and market sentiment will have an effect on the position, so review the play thoroughly and make your own decision about its outcome. IVGN - Invitrogen $60.57 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 50 IUV-VJ 169 0.80 49.20 7.0% SELL CALL OCT 70 IUV-JN 64 0.85 70.85 6.9% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=IVGN *************** BEARISH PLAYS - Naked Calls & Combinations *************** IBM - Intl. Business Machines $91.30 *** Bearish Outlook! *** International Business Machines Corporation (NYSE:IBM) utilizes advanced information technology to provide customer solutions. The company operates using several segments that create value by offering a variety of solutions, including, either singularly or in some combination, technologies, systems, products, services, software and financing. Organizationally, the company's three hardware product segments are comprised of Technology, Personal Systems and Enterprise Systems. IBM's other major operations consist of the Global Services segment, the Software segment, the Global Financing segment and Enterprise Investments segment. Shares of International Business Machines retreated today after a pair of influential Wall Street analysts cut their earnings and revenue expectations for the global computer hardware and services company. The brokerage houses that lowered earnings on IBM for 2001 and 2002 were Goldman Sachs and Merrill Lynch and the analysts said it was clear that "Big Blue," like many other companies, will be affected by the business disruptions and the uncertain economic outlook following the terrorist attacks on the World Trade Center and the Pentagon. In addition, Merrill analysts say they believe technology spending will be down in the September quarter despite incremental replacement hardware sales related to companies relocating after the attacks. IBM hasn't given new guidance for the current third quarter, but industry experts noted there have been a number of downwardly revised estimates and the sense is that the company has sort of been suggesting that it would be appropriate for numbers to be lower. With the today's activity the short-term technicals have become very bearish and the high-volume trading suggests that a "sell" mentality is firmly in place, further reducing the probability of a sustained upward move in the coming sessions. IBM - Intl. Business Machines $91.30 PLAY (moderately aggressive - bearish/credit spread): BUY CALL OCT-105 IBM-JA OI=9783 A=$0.45 SELL CALL OCT-100 IBM-JT OI=19602 B=$1.05 INITIAL NET CREDIT TARGET=$0.70-$0.75 PROFIT(max)=16% http://www.OptionInvestor.com/charts/sep01/charts.asp?symbol=IBM *************** SEE DISCLAIMER ***************************** ************************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. 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