The Option Investor Newsletter Wednesday 10-24-2001 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/6118_1.asp Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 10-24-2001 High Low Volume Advance/Decline DJIA 9345.62 + 5.54 9388.86 9278.70 1.34 bln 1359/1733 NASDAQ 1731.54 + 27.10 1763.17 1697.69 1.86 bln 1931/1646 S&P 100 558.69 - 0.36 561.94 556.55 Totals 3290/3379 S&P 500 1085.20 + 0.42 1090.26 1079.98 RUS 2000 427.65 + 0.28 428.00 426.33 DJ TRANS 2221.01 - 40.98 2281.85 2216.04 VIX 32.87 - 0.32 34.49 32.31 VXN 61.91 - 1.82 64.90 61.91 TRIN 1.01 Put/Call 0.49 ******************************************************************* A Little Bit Of Everything Mixed earnings reports and ugly economic data led to flat trading in the Dow Jones Industrial Average ($INDU) and S&P 500 (SPX.X). Meanwhile, big cap tech worked higher as measured by the almost three percent gain in the Nasdaq-100 (NDX.X). All the while, bonds advanced as measured by the decline in yields across the gamut of treasuries. The Federal Reserve released its Beige Book report on the economy Wednesday afternoon for the period between September to early October, which revealed that the U.S. economy further weakened in the wake of the September 11 attacks. The report was expected to be weak, so it didn't do much to embolden the bears. The Fed reported that some businesses have recovered, but that retail and manufacturing remained weaker than during the pre-attack period. The Fed also reiterated that inflation remained in check as mounting layoffs have eased pressure on wages and prices. Two old economy companies added to the layoffs that the Fed referred to. Eastman Kodak (NYSE:EK) - a component of the INDU - guided lower Wednesday morning. The company said that it may have difficulty meeting its fourth-quarter numbers, which would necessitate the elimination of 3,500 to 4,000 jobs, which is on top of previously planned job cuts. Shares of Kodak shed $3.46, or 10 percent. The oldest U.S. department-store chain, Sears (NYSE:S), reported numbers that met estimates. In conjunction with its earnings release, Sears announced that it would undergo a massive restructuring over the next three years, which includes cutting 4,900 jobs. The stock finished fractionally higher by 1.37 percent. What's the Catalyst? With dismal economic and earnings reports filtering out over the past two weeks, I've been wondering what's been driving stock prices higher. Going into September 21, the market was so historically oversold that it had nowhere to go but up. But, the rally over the past five days has been somewhat perplexing insofar as the driving force behind it, especially in technology (NDX). I, by far and away, give the most credence to price action, or supply and demand, but still like to form a market thesis based upon fundamental findings. Naturally, I've been curious about the recent moves in Broadcom (NASDAQ:BRCM), QLogic (NASDAQ:QLGC), Brocade (NASDAQ:BRCD), and the like. The recent moves in the aforementioned stocks, and others like them, have been illogical to me because they are expensive stocks; their current earnings don't justify their valuations. That's not to say that I haven't tried to take advantage of recent rallies in the aforementioned because, in the end, I defer to supply and demand. But the moves just haven't made sense. My good friend and colleague, Jeff Bailey, quite often curls up his nose and adopts a funny little accent and says, "Trade what you observe." I've been observing a dynamic demand situation, especially in big cap tech, over the past five days. I suppose that there are myriad justifications for the rise in stocks, such as the massive amounts of liquidity that the Fed has pumped into the system, the historically low level of rates, and the accompanying low level of interest bearing cash accounts, to name just a few. More concrete, perhaps, are the current goings on amongst U.S. politicians. Late Wednesday, the House narrowly passed a $100 billion economic stimulus package. There are several facets to the package, but the important parts of the package are the ones aimed at stimulating business investment because the current recession, unlike so many others, has been a business-led contraction. The bill proposes to repeal the corporate alternative minimum tax, or AMT, refunding payments dating back more than 15 years. The refunding of past payments would "give back" billions to corporate America. For instance, some estimates have suggested that IBM (NYSE:IBM) would get a $1.4 billion refund. Suddenly, the $2.60 move in IBM Wednesday doesn't seem all that illogical. In addition to the repeal of the AMT, the bill proposes to temporarily increase business capital loss deductions, which would expedite the write-down process and clearing of inventories. I don't know if the package will eventually pass, nor do I know if the news of the House passage has already been factored into stock prices. What I do know, however, is that bringing biases to the trading terminal is awful costly. Very few individual traders are privy to the information that the large institutions are, such as whether or not a certain economic package will receive the necessary votes in the House. Because of that fact, it's paramount for individual traders to "trade what [they] observe." The Big Three The INDU and SPX made no progress in either direction Wednesday. For its part, the INDU continued to churn around the 9300 retracement level that I've been writing about. Meanwhile, the SPX closed at 1085.20, need I write more? Check out Tuesday's Market Wrap if these levels are unfamiliar. The "Pullback or Push Higher" thesis is coiling with anticipation. I don't think that the INDU and SPX are going to spend the next several weeks toying around their retracement levels. When least expected, the INDU and SPX will either breakout or breakdown. The way to trade any forthcoming move, like I wrote Tuesday, is to have the appropriate levels in place to detect a change in price patterns. Or, in the words of my partner in adventure, Austin Passamonte, "watch for the wedges." It could be argued that the NDX is forming an ascending wedge with a top around the 1440 level. The NDX did snug right up to its short-term resistance at 1420 near the close Wednesday, reaching as high as 1430 earlier in the day. But there are two problems I have with trading a breakout above 1440: First, so far, there's really only one reference as resistance at 1440 from last Wednesday. Second, the 1460 (38.2 percent retracement level) level sits just above the upper-end of the wedge. For bullish plays, ideally, I'd like to enter on a pullback down to the NDX's ascending support line with an ultra-tight stop. That way, I can easily manage risk and be in ahead of any breakout attempt above 1440. Also, if the breakout fails, then I have some room to manage positions. Tech Sector Take The Networking Sector Index (NWX.X) has out performed the NDX to the downside for the past year-and-a-half. But starting back on October 11, it began to out perform to the upside. In fact, the NWX.X out performed again Wednesday. Its strength may be stemming from the proposal to temporarily increase write-downs for businesses. The index could breakout in the coming days above the 284 level. A breakout attempt is worth watching in here in the NWX.X because the index really doesn't have much resistance immediately above current levels. From where I sit, the NWX.X's next major resistance area lies between 308 and 314. CIENA (NASDAQ:CIEN) and Juniper (NASDAQ:JNPR) have been two of the stronger stocks in the group. The Software Sector Index (GSO.X) gave a buy signal Wednesday with its advance past the 156 level, albeit only fractionally. It could have 10, or possibly 16, more points of upside if they keep buying tech stocks. Notice the similarities and differences between the GSO.X chart and the NDX chart above. Of the components of the GSO.X, Symantec (NASDAQ:SYMC) and Intuit (NASDAQ:INTU) have been two of the stronger performing stocks in the group. The GSO.X and NWX.X could serve as leading indicators of the NDX over the coming days. If we witness follow-through in the two sectors into Thursday's session, then we could see the next wave of short capitulation, which would carry the tech sector higher. Then again, Wednesday's late-day pop could've been a head fake. In either case, "trade what you observe." And for profit's sake, be objective about it. 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 ************************************************************** ***************** STOP-LOSS UPDATES ***************** FFIV - call Adjust from $14 up to $14.50 DELL - call Adjust from $21.50 up to $23 NVDA - call Adjust from $40 up to $42 ORCL - call Adjust from $13.50 up to $14 JNPR - call Adjust from $20.50 up to $22.50 JNJ - call Adjust from $56 up to $57 SNPS - call Adjust from $44 up to $45 IMNX - call Adjust from $20 up to $22 BRCM - call Adjust from $27.50 up to $30 ************* DROPPED CALLS ************* No Dropped Calls for Wednesday. ************ DROPPED PUTS ************ EMLX $26.29 +3.13 (+1.64) EMLX didn't offer many entry opportunities early today with its charge out of the gates after the opening bell. The stock did rollover midday at $26.50, but finished the day strongly and above our stop at $26. For readers who did enter plays today, consider using a tight stop above relative highs to protect against any further upside. ***** LEAPS ***** Putting Our Best Foot Forward By Mark Phillips Contact Support I've been soliciting your input for some time now on the advisability of adding put plays to the LEAPS section and I must say the variety of responses has been rather interesting. I've had readers write that it is too late to play the downside, as the markets have bottomed and are in the process of building the base from which they will recover later this year and next. At the other end of the spectrum, I've gotten bearish responses, which point to valuations that are still too rich to sustain any sort of long-term bullish market movement. In fact, I've had some readers write telling me their projections for ultimate bottoms in the major indices far below current levels. Namely DOW 5000 and NASDAQ below 1000. I happen to believe the truth lies somewhere in the middle. While I don't expect to see extreme bearish levels like those listed above, I can see how investors could arrive at those conclusions. We've been mired in a bear market for 18 months now, and die-hard bulls have been repeatedly punished for failing to accept that it was possible for prior levels of support to be smashed to bits on the next downleg. The tragic events of September 11th didn't really change anything in the market itself, although it did hasten the drop to index levels not seen for years. That created an oversold condition that needed to be unwound and the market recovery of the past month has relieved much of that pressure. What that means to me is that we are once again faced with a market that can respond to real economic and market-related factors. There has been a concerted effort from the Federal Reserve and the Federal government to stimulate the economy for much of this year, and that effort was further intensified after September 11th. And that stimulus will move our economy back into an expansion phase...the big question is when. There is no question we are currently in a recession and that fundamental factor is reflected in the currently depressed levels of the major market averages. But that doesn't mean that the negative fundamentals are fully reflected in the financial market. One of the most common metrics used to gauge the health of the market is the Price to Earnings (P/E) ratio. With prices coming down so precipitously, many stocks have seen their P/E ratio decline to more reasonable levels, but there are still some troubling signs. Price declines, particularly in many Technology stocks have been matched by even greater declines in earnings and earnings estimates for 2002. The net result is that the average P/E ratio for the S&P500 is actually increasing, which isn't a healthy sign in a recessionary environment. If you've been following the earnings releases in the past few weeks, you should have noticed that visibility is still elusive and many CEOs are still reluctant to give guidance beyond the end of 2001. Clearly the economic recovery we are all waiting for is not here yet. With that lack of fundamental health as our backdrop, I'd like to spend the remainder of our time together here talking about EBAY, our first LEAP Put play. As one of the few remaining Internet stocks that can still claim a triple-digit P/E ratio (currently 187), the stock is starting to show some of the signs of weakness we saw from the bulk of Internet stocks as the dot-com bubble began to deflate. First up is the company's earnings growth, which continues to slow. The company released its most recent earnings report last Thursday and apparently EBAY investors didn't like what the company had to say. While they posted earnings a penny ahead of estimates, they didn't report real GAAP earnings, but instead issued those murky pro-forma earnings that allow companies to hide one-time items so that they can still meet or beat their estimates. The revenue growth rate has continued to atrophy in recent quarters, and with the most recent results rests near 71%. No question that is impressive, particularly in the current economic environment, but does it deserve a Price to Earnings multiple of 187? There is no question that EBAY is a very well run Technology company, and I don't mean to suggest that there is any funny business going on with the company's balance sheets. But the sharp drop the day after earnings indicates that I'm not the only investor who is nervous about the company's future. Anything that points to uncertainty is liable to induce selling in the current market environment, and concerns that the company will not see its traditional strong fourth quarter results, had investors rethinking their exposure to the stock. But that didn't stop bottom-fishers from snapping up the stock at a perceived bargain over the past several days. That buying interest has helped to lift EBAY off its recent lows and we've now seen the post-earnings gap get filled. While I think there may be a bit more upside in the near-term, I would be very surprised to see EBAY manage to fight its way above $62-63. It has been caught in a downtrend since topping out in early July and I think the necessary valuation compression is just getting started. The monthly chart of EBAY shows the long-term downtrend is still in place, as the descending series of highs is likely to continue until the stock can post a monthly close above the trendline, currently at $67. The monthly chart identifies the dominant trend, but does little to pinpoint entry/exit points for traders. For that sort of information, we need to take a look at the weekly/daily charts, and there we can see an attractive put opportunity beginning to set up. Here we can see the weekly Stochastics beginning to weaken, but they aren't yet into the overbought zone. With the daily oscillator just beginning to reverse out of oversold, I would expect EBAY to continue to recover in price over the next couple weeks. That should lift the weekly oscillator closer to the overbought region and price should top out in the $58-60 area. We've now filled the post-earnings gap, so our likely firm resistance will be in the $62-63 area as shown on the charts above. So what we are looking for in terms of a long-term put entry is for daily Stochastics to begin their next rollover from overbought as price begins to weaken below resistance, ideally in the $58-59 area. Should the bulls manage to push EBAY through resistance without a rollover in the daily/weekly Stochastics, it would be a clear sign that my premise is flawed and we obviously would be standing aside from the play. Remember our approach in the LEAPS column is to define the entry setup we are looking for and trade ONLY if the conditions we are looking for actually materialize. It does us no good to try and force a trade when the market is telling us we are wrong. With such a rich valuation, EBAY has a lot of room to fall if conditions continue to worsen in the economy, and that is clearly what we are hoping for in this play. For now, we watch and wait. Stay tuned to the LEAPS column, as we will update this play in the Watch List as we look for confirmation of our expectations. ************************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 - CALL ********************** DELL - Dell Computer $24.90 +0.26 (+0.85 this week) Dell Computer is a direct computer systems company. The company offers its customers a full range of computer systems, including desktop computer systems, notebook computers, workstations, network servers and storage products, as well as an extended selection of peripheral hardware, computing software and related services. Most Recent Update A bit at a time, DELL is inching closer to breaking above the $25 resistance level, which has kept buyers in check for much of the past 2 weeks. As the clear winner in the PC war, DELL was unaffected in the afterhours session by the CPQ earnings report and appears poised to continue working higher in the days ahead. Target fresh positions on intraday pullbacks near the aggressive ascending trendline at $24, or near $23. We'll need solid buying volume to continue the advance, but for now we're content to continue riding the gradual advance. Alternative entry points will materialized as DELL pushes through resistance, and more cautious investors will want to wait for this development before stepping into the play. Comments If the Nasdaq continues higher Thursday DELL should move past the $25 level. The stock has been basing for the past several sessions and could be ready to rally over the next few days. Look for an advancing Nasdaq in conjunction with a high volume breakout past relative highs around $25.30. The stock could move up to the $27 level if the Nasdaq continues to strengthen. BUY CALL NOV-22 DLQ-KX OI=16627 at $3.20 SL=2.25 BUY CALL NOV-25*DLQ-KE OI=44265 at $1.55 SL=0.75 BUY CALL NOV-27 DLQ-KY OI=37786 at $0.55 SL=0.25 BUY CALL JAN-25 DLQ-AE OI=47128 at $2.95 SL=2.00 BUY CALL JAN-27 DLQ-AY OI=12335 at $1.85 SL=1.00 Average Daily Volume = 27.3 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Option Pricing Fundamentals By Ray Cummins! One of the most common questions we receive concerns the "fair value" of options. To understand this complex term, you must be familiar with the various "Greeks" and the concept of "Delta," which measures the rate of change in an option's price compared to the movement in the underlying security. Learn The Greeks... An option's price is determined by mathematical equations that use variables from all of the factors affecting its value. Each aspect of option pricing is a separate component of the formula and they have Greek titles; Delta, Gamma, Theta, Vega, and Rho. The primary influence on an option's price is the movement of the underlying security. This concept relates directly to the first and most important of the Greeks; Delta. Delta measures the rate of change in an option's price compared to a one point movement in the underlying security. It can be thought of as a percentage of the movement of the stock price. If the stock price moves up $2 while the option on that stock gains $1, it has a delta of 50 (or 50%). An at-the-money (ATM) call option will typically have a delta of 50. In-the-money (ITM) calls will have higher deltas; a greater percentage move, based on the change in the underlying issue. The opposite is true for out-of-the-money (OTM) call options; their deltas are lower. A deeply out-of-the-money call option will have a delta very close to zero. Call deltas are positive; put deltas are negative, reflecting the fact that the put option price and the underlying stock price are inversely related. The delta of an option is also occasionally called the "hedge ratio" and it can be used to determine the number of calls one would need to be short to create a risk-less hedge; a position which would be worth the same whether the stock price rose by a very small amount or fell by a very small amount. In such a "delta-neutral" portfolio, any gain in the value of the shares held due to a rise in the share price would be exactly offset by a loss on the value of the calls written. Of course, as the delta changes with the stock price and time to expiration, the number of shares would need to be adjusted to maintain the hedge. How quickly the delta changes with regard to the stock price is given by Gamma, one of the lesser known Greeks. Gamma is sometimes considered the "delta" of the delta. Market makers use this component almost exclusively in the management of large option accounts. Specialists who hedge portfolios using the delta technique try to keep gamma as small as possible to help limit the adjustments necessary to maintain a risk-free position. If the position gamma is too large, a small change in stock price can devastate the hedge. Adjusting gamma can be difficult, thus computers are used to monitor portfolio positions and alert the specialists when corrections are needed to maintain the complex ratios. Vega is the change in option price given a one-percentage point change in volatility. Similar to delta and gamma, vega is also used for hedging. Theta is the change in option price given a one-day decrease in time to expiration. This component is basically a measure of time decay. Time value and time decay are actually two of the easiest aspects of option pricing to understand. The time value of any option can be simply viewed as everything but the intrinsic value. Time costs money and more time equals more money. The amount of time value in an option's price decays each day it is in existence. The closer the option gets to expiration, the faster it decays. In a strictly mathematical sense, time value decays at its square root and this rate of decay is known as theta. Rho, while not commonly used by retail traders, is the change in option price given a one-percentage-point change in the risk-free interest rate. Option Pricing Is Important! The most important factors in option trading are market movement, option volatility (with regard to pricing and probability), and time decay. The knowledge of these concepts is paramount to profitable trading and without a suitable basis, you will likely enter the market at a theoretical disadvantage. The primary requirement is familiarity with option pricing. In volatile issues, the emotional optimism of traders can cause prices to vary widely from their true worth. Without a realistic estimate of the value of an option, you will often pay an excessive amount for the rights inherent in the contract and that usually results in a much lower return (if any) when the issue finally makes the expected move. As intelligent traders, we have the ability to measure the value of an option through mathematical evaluation, but if you aren't partial to formulas, pricing models will help you determine the fair market value of an option. Many of the established tools for pricing options are free and they should be used before opening any new position. Remember, in the majority of trading techniques, the end result is almost always a product of what you know, and how well you act upon it. There are option pricing and volatility calculators at various sites on the Internet. One of the most popular (free) tools is available at the CBOE's website (www.cboe.com). In addition, there is a great freeware program that downloads data from the CBOE website and displays a quote montage along with the Greek values available from Rocky Point Software (www.rpsw.com). Good Luck! Summary of Current Positions (as of 10/23/01): Covered Calls: (Margin not used in calculations) Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield EBAY NOV 50 47.28 55.58 2.72 4.6% Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield CERN NOV 45 44.20 56.01 0.80 5.0% EBAY NOV 40 39.05 55.58 0.95 6.2% GILD NOV 50 48.85 66.10 1.15 6.7% IMCL NOV 45 43.85 60.86 1.15 7.2% SYMC NOV 35 34.40 56.44 0.60 4.8% ACS NOV 80 78.90 91.82 1.10 4.1% The new position in Symantec (NASDAQ:SYMC) was not available at the target price as the stock gapped higher (the next day) after reporting positive earnings. The "target-shooting" order in Affiliated Computer (NYSE:ACS) was available at a better-than-expected credit of $1.10. Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield ABK NOV 60 60.85 48.20 0.85 4.1% Sell Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield IDPH NOV 40-P 39.25 57.12 0.75 6.6% IDPH NOV 65-C 65.65 57.12 0.65 5.8% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status FDC 66.02 67.86 NOV55P/60P 0.70 54.30 0.70 Open PCSA 58.17 53.50 NOV45P/50P 0.75 49.25 0.75 Open PEP 49.90 47.90 NOV45P/47P 0.45 47.05 0.45 Open SBC 47.44 38.78 NOV35P/40P 0.05 39.95 (1.17) Closed JNJ 57.77 58.85 NOV50P/55P 0.65 49.35 0.65 Open MMC 102.51 101.10 NOV85P/90P 0.50 89.50 0.50 Open ERTS 52.70 54.94 NOV65C/60C 0.90 60.90 0.90 Open LLY 75.00 77.56 NOV85C/80C 1.00 81.00 1.00 Open The recent adjustment in SBC Communications (NYSE:SBC) bought a little extra time for the issue to recover but the additional downside margin was not enough to offset the earnings-related decline in its share value. Monday's move below a near-term technical support level (near $43) was ominous and Tuesday's activity left the no doubt that the position should be closed for a loss. 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 *************** ELNT - Elantec $34.15 *** Earnings Speculation! *** Elantec Semiconductor (NASDAQ:ELNT) 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. The company presently offers approximately 150 products, including amplifiers, drivers, faders, transceivers and multiplexers. The company's principal markets include North America, Asia, Europe and other countries and their products are sold to leading original equipment manufacturers such as Globespan, Hitachi, Lucent, Lucky Goldstar, Motorola, Olympus, Philips, Ricoh, Samsung, Sanyo, Sony, Toshiba and Yamaha, either directly or through its distributors, such as Microtek Intl., and Insight Electronics. Shares of ELNT rallied today in tandem with other semiconductor issues as investors became optimistic for the group after some recent upbeat earnings reports. Indeed, chip stocks were among the standouts in the technology sector, with a broad rally that extended to the equipment-makers as well as the communications companies. Traders ignored data from the Semiconductor Equipment & Materials International that revealed orders for chip equipment in North America dropped 11% in September due to weak consumer and corporate spending. SEMI reported that recent global events have exacerbated the already poor outlook for hi-tech industries but investors chose to look with a positive perspective at the timing of the recovery for semiconductor and capital equipment issues. Today's bullish activity was supported by heavy trading volume, suggesting that investors are confident about the company's earnings report due on Thursday after the close. The stock has recent buying support near our cost basis and the robust option premiums will allow traders to speculate, in a conservative manner, on the future movement of the company's share value. ELNT - Elantec $34.15 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 NOV 30 UET KF 79 5.20 28.95 4.6% - or - SELL PUT NOV 30 UET WF 44 1.15 28.85 13.7% SELL PUT NOV 25 UET WE 130 0.40 24.60 7.0% *** *************** GILD - Gilead $68.30 *** Another New High! *** 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 was scheduled to review Viread, the company's new drug 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 in late September, 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. In early October, a U.S. advisory panel backed GILD's HIV-fighting drug, saying it supports experimental use of the antiviral treatment on adults who have already received antiretroviral therapy. Based on evidence in Gilead's application, members of the FDA's antiviral drugs advisory committee recommended adult use of Viread and the committee's decision, while not binding, usually is heeded by the full FDA. Investors were pleased with the news and the issue has shown signs of a new bullish trend. These positions offer a way to speculate conservatively on the company's future share value. PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT NOV 65 GDQ WM 1,236 2.60 62.40 12.4% SELL PUT NOV 60 GDQ WL 247 1.35 58.65 8.4% SELL PUT NOV 55 GDQ WK 3,084 0.70 54.30 6.0% *** *************** IBM - Intl. Business Machines $108.57 *** Reader's Request! *** 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. International Business Machines has been among the leaders in the recent technology rally and one of our subscribers requested that we identify a favorable spread position in the issue. Based on today's continued upside and the excellent buying support near $100, this position offers a great speculation play for those who are bullish on "Big Blue." IBM - Intl. Business Machines $108.57 PLAY (conservative - bullish/credit spread): BUY PUT NOV-95 IBM-WS OI=10973 A=$0.60 SELL PUT NOV-100 IBM-WT OI= 14406 B=$1.10 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=13% *************** IMCL - Imclone Systems $61.98 *** New 2001 High! *** ImClone Systems (NASDAQ: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 main strategies for treating cancer, growth factor blockers, cancer vaccines and unique angio-genesis inhibitors. The company's lead product candidate, IMC-C225, is a 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 clinical trials to have an acceptable safety profile, to be well tolerated and, when administered with either radiation therapy or chemotherapy, to enhance tumor reduction. Bristol-Myers Squibb's (NYSE:BMY) recent $2 billion agreement to co-develop a cancer drug formulated by ImClone Systems is the main reason for the company's bullish share-price activity. Last month, Bristol-Myers said it will pay $1 billion for a 20% stake in IMCL, and will co-develop and sell the biotechnology firm's experimental cancer drug, IMC-C225. The companies believe this investigational drug already has great potential in the treatment of many cancers, including colon, head and neck, pancreatic and non-small cell lung cancer. Analysts predict ImClone's new drug will generate annual sales of $1 billion and that's the rationale behind Bristol Myers contract to buy 14 million IMCL shares at a price of $70 per share. Today Bristol Myers reported higher third-quarter profits, driven by robust sales of key prescription medicines and the company says it is in the process of closing lower-margin businesses to focus on its more-profitable core drug operations. That's positive news IMCL shareholders and traders who agree with a positive outlook for the co-development of the company's new drug can use these positions to speculate on the future movement of the issue in a conservative manner. IMCL - Imclone Systems $61.98 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT NOV 55 QCI WK 3,998 1.60 53.40 10.4% SELL PUT NOV 50 QCI WJ 808 0.65 49.35 6.1% *** *************** SEPR - Sepracor $48.58 *** Own This One! *** Sepracor (NASDAQ:SEPR) is a research-based pharmaceutical company dedicated to treating and preventing human disease through the discovery, development and commercialization of pharmaceutical products that are directed toward serving unmet medical needs. Sepracor's drug development program has yielded an extensive portfolio of pharmaceutical candidates that are focused on the treatment of respiratory, urology and central nervous system disorders. There is little news to explain the recent rally in SEPR shares but analysts say the company has one of the best pipelines in the specialty pharmaceuticals business and will benefit financially as more drug manufactures enlist Sepracor to improve products already on the market. The fundamental outlook for the company is improving and their segment of the pharmaceutical sector is performing very well. The bullish technical indications suggest the issue is poised for additional gains and these conservative positions provide a low risk cost basis in SEPR with a reasonable expectation of profit. SEPR - Sepracor $48.58 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT NOV 45 ERQ WI 160 1.85 43.15 13.2% SELL PUT NOV 40 ERQ WH 183 0.65 39.35 7.2% *** *************** SYMC - Symantec $57.71 *** Solid Earnings! *** Symantec (NASDAQ:SYMC) provides a broad range of content and network security solutions to individuals and enterprises. The company is a provider of virus protection, firewall, virtual private network, vulnerability management, intrusion detection, remote management technologies and security services to consumers and enterprises around the world. The company currently views its business in five operating segments: Consumer Products, Enterprise Security, Enterprise Administration, Services and Other. Shares of software and Internet security firm Symantec rallied last week after the company issued a positive earnings report. Symantec beat analysts' earnings expectations by $0.13 per share, citing a streamlined approach and increased demand for anti-virus security. The trend for more security was obvious as Symantec's total anti-virus product sales increased 46% during the quarter as compared to the year ago quarter, nearly double the industry growth rate. Sales of the company's intrusion detection solution increased 43% from the same quarter a year ago, with sequential growth of 25%, and demand for Symantec's vulnerability management solution grew 53% sequentially. The growth statistics offer a great example of the demand for the company's unique products and the trend is expected to continue in the coming year. Based on the recent bullish activity, traders believe that SYMC is one of the leading issues in the Internet Security sector and the company would certainly be a candidate for any conservative stock portfolio. These positions allow investors to establish a discounted cost basis in the issue. SYMC - Symantec $57.71 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT NOV 55 SYQ WK 11,683 3.00 52.00 16.3% SELL PUT NOV 50 SYQ WJ 314 1.30 48.70 9.9% SELL PUT NOV 45 SYQ WI 1,256 0.60 44.40 6.3% *** *************** TECD - Tech Data $45.00 *** Break-out Coming? *** Tech Data (NASDAQ:TECD) is a provider of IT products, logistics management and other value-added services, and is the second largest based on worldwide sales. The company distributes unique microcomputer hardware and software products to value-added resellers, corporate resellers, retailers, direct marketers and Internet resellers. The company and its subsidiaries distribute to more than 70 countries and serve over 100,000 resellers in the United States, Canada, the Caribbean, Latin America, Europe and the Middle East. The recent rally in TECD shares continued today with the closing price falling just $0.25 short of the 52-week high. Traders say the upward movement is due to the bullish outlook for technology stocks and the belief that the company is poised to benefit from the return of demand in IT services. Tech Data projects it will earn $27 million to $31 million ($0.49 to $0.55 per share) in the third quarter, well above the most recent consensus estimates, and analysts say the company continues to execute their business plan very well. The stock will likely test the yearly high in the coming sessions and conservative traders can profit from bullish movement in the issue with this combination position. TECD - Tech Data $45.00 PLAY (conservative - bullish/credit spread): BUY PUT NOV-35 TDQ-WG OI=9 A=$0.30 SELL PUT NOV-40 TDQ-WH OI=383 B=$0.80 INITIAL NET CREDIT TARGET=$0.55-$0.65 PROFIT(max)=12% *************** BEARISH PLAYS - Naked Calls & Combinations *************** ADVP - AdvancePCS $57.37 *** Sell-off Underway! *** AdvancePCS (NASDAQ:ADVP) is a provider of health improvement services in the United States. As a pharmacy benefit management company (PBM) AdvancePCS currently serves more than 75 million health plan members and manages $20 billion in prescription drug spending on an annualized basis on behalf of the company's health plan sponsors. In addition, the company offers a range of other health improvement products and services, such as prescription discount cards for the uninsured and under-insured, Web-based programs, ongoing disease management, clinical research trials and outcomes studies. The Company generates revenues by providing its health improvement services to two primary customer groups: health plan sponsors and pharmaceutical manufacturers. ADVP shares have slumped over the past few sessions and there is little news to explain the decline. The majority of stocks in the Specialized Health Services sector have performed well in recent weeks and only a few issues have endured selling pressure similar to that in ADVP. The sell-off has been so severe that the company issued a statement saying it was "unaware of any information that would cause the recent decline in its stock price." In addition to the abrupt change in technical character, the issue experienced additional profit-taking from the passing of the record date for the company's split, which was on 10/23. Now the stock is established in major downtrend and traders that employ premium-selling strategies can use the recent volatility and the overpriced options to initiate a bearish position in the issue with a favorable credit. The probability of the share value reaching our target strike price is rather low, but there is always the possibility of an unexpected reversal from the recent trend, so monitor the stock daily for any changes in technical character. ADVP - AdvancePCS $57.37 PLAY (moderately aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL NOV 65 QVD KM 387 2.25 67.25 16.2% SELL CALL NOV 70 QVD KN 744 1.30 71.30 12.9% SELL CALL NOV 75 QVD KO 318 0.65 75.65 6.8% *** *************** HI - Household International $55.44 *** Technicals Only! *** Household International (NYSE:HI) is principally a non-operating holding company. The company's subsidiaries primarily provide middle-market consumers with several types of loan products in the United States, the United Kingdom and Canada. The company offers real estate secured loans, auto finance loans, MasterCard and Visa credit cards, private-label credit cards, tax refund anticipation loans, retail installment sales finance loans and other types of unsecured loans, as well as credit and specialty insurance. The company's operations are divided into three major segments, Consumer, Credit Card Services and International. The Company's Consumer segment includes its consumer lending, retail services and auto finance businesses. The Company's Credit Card Services segment includes its domestic MasterCard and Visa credit card business. The company's International segment includes its foreign operations in the United Kingdom and Canada. Stocks in the financial services industry have been in a slump recently and with interest rates expected to move lower, the trend will likely continue for the next few months. Household International is one of the companies that has been hit hard by the effects of lowered borrowing costs and the sharp decline in its share value suggests that most investors are bearish on the issue. From a purely technical viewpoint, the potential for a successful recovery is significantly affected by the resistance at $60 and the premiums in this position provide an excellent opportunity for conservative credit spread at that price. HI - Household International $55.44 PLAY (conservative - bearish/credit spread): BUY CALL NOV-65 HI-KM OI=819 A=$0.25 SELL CALL NOV-60 HI-KL OI=275 B=$0.80 INITIAL NET CREDIT TARGET=$0.65-$0.75 PROFIT(max)=15% *************** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? 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