The Option Investor Newsletter Sunday 11-11-2001 Copyright 2001, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/5592_1.asp Entire newsletter best viewed in COURIER 10 font for alignment Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** WE 11-11 WE 11-02 WE 10-26 WE 10-19 DOW 9608.00 +284.46 9323.54 -221.63 9545.17 +341.06 -140.05 Nasdaq 1828.48 + 82.75 1745.73 - 23.23 1768.96 + 97.65 - 32.09 S&P-100 577.99 + 18.00 559.99 - 7.99 567.98 + 14.18 - 6.98 S&P-500 1120.31 + 33.11 1087.20 - 17.41 1104.61 + 31.13 - 18.17 W5000 10297.21 +280.40 10016.81 -168.72 10185.53 +290.64 -154.23 RUT 438.10 + 5.03 433.07 - 5.58 438.65 + 12.95 - 2.89 TRAN 2320.69 + 74.03 2246.66 - .92 2247.58 + 73.30 - 60.45 VIX 28.76 - 3.64 32.40 + 1.87 30.53 - 5.31 - .61 VXN 58.59 - 2.60 61.19 + 4.28 56.91 - 12.37 + 3.30 TRIN 0.90 0.92 0.87 1.19 TICK +784 +701 +828 +342 Put/Call .74 .70 .53 .80 ****************************************************************** Bears Remain Frustrated From Lack of Sell Off! by Jim Brown How can you complain about a week with almost a +300 point Dow gain? The Nasdaq posts almost a +5% gain for the week and many traders are miffed because it did not roll over. Go figure! I guess that is what happens when you have a preconceived idea about the market and the market moves in the opposite direction. Everyone knows I have been on the wrong side many times but normally I am expecting a bullish direction. I guess the bears are now experiencing the same thing we bulls saw for over a year now. It is about time for a change! Wow! More positive economic reports? Is that the sun actually peeking through the clouds? The PPI number announced on Friday was the lowest since record keeping started in the 1940s. Producer prices fell -1.6% in October helped by sharply falling energy prices. Producer prices of gasoline and fuel oil fell by 21.2% and 20.9% respectively. Wholesale prices for crude goods fell by 9.1% in October compared to September. Vegetables fell by 11.4% and passenger cars were down 4.7% compared to the prior month. Inflation has completely disappeared from the economy and the Fed has no roadblocks to future rate cuts should they decide they are needed. Because of weak demand after the attack producers have zero pricing power and some analysts are afraid deflation is creeping in as a result. Since the fall out from the attack is an extraordinary one time event and the majority of the drop was energy related, I doubt the deflation threat is going to stick. Also surprising traders on Friday was a better than expected consumer sentiment number showing that consumers are shaking off the impact of the attack and starting to go back to their daily routines. Given the daily barrage of negative bioterror news and continued terrorist alerts this was even more amazing. We all know that "out of sight is out of mind" and it appears that viewers are turning off news TV and going back to Friends, football and soap operas. Some networks even elected to not show the presidents speech on Thursday and kept regular programming instead. Definitely a sign of boredom by the public. The hope now is that maybe the holiday shopping season will be better than previously expected especially since more consumers are going to be spending the holidays at home instead of traveling as much as normal. The markets were also bolstered by news that the Northern Alliance has taken Mazar-e Sharif which would be a major victory if true. The public has been warned for weeks that fighting for this city would be long and hard and it appears the Taliban troops turned tail and fled instead. If this is true then the morale of the Taliban troops is worse than expected and the war may be farther along then anyone thought. Capturing the airport in Mazar-e Sharif will provide a ground base for coalition fighters and allow them to fly many more sorties per day and be on target quicker. We are far from an end to the conflict but the flow of battle just took a significant turn against the Taliban if the news reports are true. The news produced a rally off the lows of the day and provoked some short covering at the close as well. Shorts do not want to be short if there really is a major change in status over the weekend. The Dow finished Friday with only a minor gain of +20 points but closed above the September-10th pre-attack close of 9605. This is not a technical level but a sentiment level that could comfort investors and bring them back into the markets. The volume was light in front of the long weekend as many traders will observe Veterans Day on Monday even though the stock markets will be open. The bond markets will be closed and that means stocks will be on their own and struggling for direction. Many times this is beneficial for stocks since arbitrage trading is not active to put pressure on stocks. Given all the gains over the last two weeks the action on Friday was very encouraging. Disney posted terrible earnings and warned that business was still down and the stock was still up fractionally on Friday. QCOM missed street estimates and warned that earnings would be weaker going forward and after falling as low as $51.19 on Wednesday rallied to over $58 on Thursday and closed the week on an uptrend and with a gain. Cisco beat estimates and had the audacity to say orders were increasing. Nivida beat estimates with a $.26 profit and flaunted in the face of the bears higher guidance for not only 2002 but also 2003. Not all stocks recovered from bad news and Heinz bled red, green and purple ketchup with a warning that food service sales had slowed significantly since the attack and their earnings would suffer. Yawn. The markets traded on both sides of zero all day but the lack of a serious sell off is telling for future prospects. Whether you are ready or not it appears the foundation for a recovery in 2002 is slowly falling into place. Every day that passes with no tales of further earnings drops puts us closer to a real rally with legs. If you listen carefully there are tidbits of information almost every day now that point to better earnings ahead. Come on, how much worse can they get anyway? There appears to be a bottom under the market and the bears are having a tougher time pushing and holding it down. Twice in the last three days sellers have tried to take the Dow back down and they were unable to even reach 9500. Support on Mon/Tue was in the 9400 level and that support level is rising daily. Traders still short are watching uneasily as every day the tape goes against them. Noted technical analysts continue to call for a retest of the September lows but sentiment is slowly but surely turning against them. The old adage that the market needs a wall of worry to climb in order to build a successful rally is proving true. The continued news stories cover every gamut from terrorists, earnings, bioterror, recession, deflation, cocooning, layoffs etc but the markets continue to look ahead and build on their base. I was criticized for being bullish this week. Sorry, come out of your cave and enjoy the sunlight! There may be dips ahead but I continue to believe that they will be buying opportunities. If you took my advice to buy dips at 9500 you had two great entry points in the last three days. Can the Dow fall below 9500 again? Sure! The next level of support is 9400 but nothing says it has to stop there. Every market, regardless of time or era, will cycle up and down regardless of trend or direction. The current market is trending up but the dip on Nov-1st proves that nothing goes up in a straight line. The -140 point drop from the high of the day on Thursday was pure profit taking. More could be in front of us. We have had a good, no great run. I personally believe that we have move gains ahead of us but we while we position ourselves for those gains we should also protect ourselves against the next wave of profit taking. We take a risk just driving to work every day but that does not mean we should cower in fear at home. You get in the car and go, fully expecting to arrive safely. You do however maintain insurance in case somebody runs into you. Using the same analogy we should get in the market and fully expect gains as the projected 2002 recovery begins to take shape. While in the markets we need to maintain insurance in case a bear mauls our expectations. That insurance is a stop loss whether physical or mental. It separates the real traders/investors from those who are gambling with their future. What would happen to your retirement if you were in an accident on the way to work on Monday, your car totaled and you were laid up for three months in the hospital without insurance? The same thing is true for investing in the stock market. Many are afraid to get back in. They have post traumatic stress syndrome and are afraid to lose again. They have been shell shocked by month after month of dips since the May highs. Commentators have beaten them senseless with story after story about how bad it is. I have a clue for you. These stories are about how bad it WAS not is. Everyone believes the worst is behind us, even the biggest bears. So where is the beef? Now I will temper my bullishness with a little caution. We are setting exactly at the long term resistance of the S&P since May of this year. If the markets are going to fail they should fail here. If they don't it would signal a perfect Fall breakout buy signal like in Oct-1998 & 1999. We should be so lucky! Next week should be an exciting week in the markets. The economic calendar is slim with Retail Sales on Wednesday, Business Inventories on Thursday and CPI and Production/Utilization on Friday. There are several biotech conferences this week which should help the depressed biotech sector. IBM has an analyst conference and should attempt to pump up expectations about their very broad product line. Microsoft officially releases the XBox video game. The smash hit Harry Potter makes its debut and is widely expected to generate an economic recovery in the movie/video/toy sectors all by itself. Estimated net profits for AOL Time Warner are somewhere in the $350 million range. Did I mention COMDEX in Vegas this week? Major earnings for the week include BEAS/NTAP on Tuesday, AMAT on Wednesday and DELL/HWP on Thursday. The underlying thread here is that life is continuing and there are plenty of positive things to encourage investors. Don't get me wrong the 4Q has already set a record for earnings warnings. I just think it is already priced into the markets. Consumers are refinancing homes and cashing out equity at a record pace thanks to the cheap interest and that money either saved by cheaper payments or received from excess equity will find its way into the economy or into the markets. We know the end of the story. The economy will recover. We will win the economic war at home and life as we know it will improve. Cash in money markets at 2% a year will decide that a one day gain in most tech stocks will equal that with ease. Option investors will continue to capitalize from those trends. Nasdaq 3,000 soon, not hardly, but BRCM @ $50, NVDA $60, FDX $50, CHKP $40, count on it! The profit opportunities are there if you are not afraid to play them. The trading plan for next week should be buy any rebound from the 9500 level on the Dow and 1780 on the Nasdaq. Be prepared for dips as well as bounces. Maintain stops on any open position and let's roll! Enter passively, exit aggressively! Jim Brown Editor@OptionInvestor.com ********************* Letter to the editor: ********************* Jim, As always, I really enjoy your market wraps. I know you guys deal with some very frustrated readers, especially if you talk bearish and all they want to hear is bullish views. Your wrap tonight (Thursday) was certainly bullish and I'm sure a lot of readers will be pleased. But, ... I listened to John Murphy today on CNBC talk about the broker/dealers, XBD.X, and how they lead the market. At the time he reviewed the sector today it had just passed its 200-dma--very bullish. But with the pullback today, back below its 200-dma, it formed a very bearish gravestone doji with an especially bearish long tail. This in combination of being rejected at its 200-dma, above its upper BB and with daily/weekly stochastics overbought and beginning to roll, it can only be considered very bearish and a potential indicator of a major trend change about to occur. I checked back for a similar pattern and found it in May of this year after the strong April rally--looks the same in every respect. Will the pattern repeat or will it pull back slightly (perhaps to the 20-dma) and force its way back up through the 200-dma? Who knows. My only point is that perhaps it would be better to temper readers' bullishness with caution at this point. You did say honor your stops, but how many get in trouble because they believe the market "must" turn around and go back up and therefore pull their stops--Jim told me to buy the dips! Money management is not your responsibility, and you guys make a better point than any educational/advisory service I know of about this, but too many traders will believe the experts (you) over their own beliefs/observations. The "Market" is made up of all of us with differing opinions and that's what makes this an exciting game. Your whole team does great work and I'd be lost without all of you. Keep up the great work and thank them for doing a job I know they're not doing for the money. Keene Little Answer: Great letter Keene, I don't know where to start. First, thank you for your kind comments about our team. We try to call them like we see them and let the chips fall where they may. You are right about the money, you could not pay these guys enough for the number of hours they put in each week because they love the markets as well as the readers. You, the readers are the drugs we live on. The email, positive and negative, just encourages us to research harder and strive to do better. Nobody is right all the time and we try to teach that as well. Now to Mr. Murphy. I created a chart like you described on the XBD.X and listed it for your viewing below. I agree with the fact that the XBD went up in conjunction with the market rally in April/May but I am not sure I agree with the reasoning from that point on. The Broker/Dealer index jumped with the market because traders thought the 2000 bear market had climaxed with the April crash and a return to good times was ahead. Good times meant high volume and a return to the high commissions of 1999. Unfortunately the scenario did not pan out and the markets continued to crash culminating in the Sept 21st bottom. The XBD is now recovering on exactly the same sentiment that powered it in April except that almost nobody expects a return to anything like the 1999 trading volumes anytime soon. What I am getting to is that the XBD is doomed to flounder since broker/dealer profits will take years to return to the same levels as before. This does not mean the markets are doomed as well. The markets can continue to rise based on a favorable economic picture and prospects of better tomorrows. Look at the smaller banks, they are close to a breakout because their profits will increase in the current low interest rate environment. (VLY, WABC, UB, BK, FBF, STT) The brokers (XBD.X) exhibited problems on Thursday because they hit resistance at 496 from the August highs. I do not believe the Dow is tied to the XBD. The Dow is made up of many other components besides financials. Citicorp and JPM are not going to be Dow leaders at this point and neither is the XBD. The real rally is going to come from less sexy stocks. Have you noticed the materials sector? Check out DOW, ASD, AA, AL, APD. All are doing great but you do not hear about them in the news. Believe it or not MMM which said this was the worst period in 30 years just hit a new 3 month high. I believe the markets will continue to move up (not rally) because as I said in the commentary tonight, we will win the economic war and life as we know it will improve including the markets. My real problem with the analysis from John Murphy is simple. John is a "technical analyst" bent on finding charts that fit his idea of what is going to happen. He has had more airtime lately than Bush and Osama combined. In each interview he tries to find a different reason why the markets are going to crash. He is trying to be a one man wrecking crew. I think the truth came out on the final CNBC segment on Friday. When pressed he said "I just think the markets are overbought and I wish they would pull back some so we could get a little better entry." I have it on tape! He is frustrated because the market is running away from him and his crash never came. (I know I will get mail on this!) Secondly, John is a "pure technician". That means that sentiment is immaterial and if it is not on a chart he does not care. I heard him say one time several years ago when asked about the earnings of a particular sector, "I don't care about earnings, everything I need to know is factored into my charts". I have several "pure technicians" that work for me and if you have been reading their recent articles you know that we see the current market differently. What I mean is that John's charts only portray what has happened in the past and the XBD chart for April for instance does not take into account massive sell offs from terrorist attacks, ten Fed rate cuts, Cisco's increasing orders, the capture of Mazar-e Sharif, Microsoft's XBox release, the settlement of the Justice Dept case, GE breaking above $40, COMDEX, etc. All of these things make up the market, as we know it today. If I turned off TV, cancelled my subscription to the newspaper and locked myself in a closet with food, water and a charting system I would probably be bearish also! This is why you have to take EVERYTHING into account when planning your investing strategy. Don't get me wrong I like John and (at least before this article) he had agreed to come to our next seminar and speak. He is just one man with a set of ideas on the market just like I am only one viewpoint. When planning your investment strategy you need to have multiple viewpoints from multiple analysts and then form your own opinion. John Dessauer and I were talking in Switzerland recently about market direction and his comment to me was "who cares". It will go up and it will go down. He sees his task as being a cheerleader and keeping his readers fully invested at all times because nobody knows when the next bull market will begin. If you are invested you will profit from it and if you are out when it begins you could lose 35-50% of the move in individual stocks according to Dessauer. I admire his conviction and determination since CD, LU, ERICY, NOVL, GX and T are among his core holdings. The point here is that everyone should not bet the family farm on any one analyst just because he has a big name or makes a good case. Look at the whole picture, develop a trading plan that should profit from future events and then protect that plan with stops to prevent disaster. Will the XBD lead the market up? I doubt it. Will it lead it down again? I doubt that also! The XBD consists of only 13 companies and there are over 7000 stocks on the NYSE/Nasdaq. Keene, I hope I did not bore you with my extended answer but you just happened to hit my hot button today. Thank you for your letter and good luck in your trading! Jim Brown ************************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 ************************************************************** ************** Editor's Plays ************** Recap, Expiration Week Options, Top 20 The Barr Labs play from last week broke the 20DMA and fell to a low of $65.50. While all fundamentals pointed to a bounce the sector was under attack. If you took this play then the put side should be doing very well. Look for a bounce from the biotech conferences this week. Microsoft The Microsoft play from Sept-30th is proceeding according to plan. Please refer to the Editors Play archives for the details. You can compare the chart below from the 30th with the chart from today to see the progress. The Jan-$ 55 call is now $12.20 for a nice profit with time still on the clock. The $50 put was recommended at $4 or below and traded at $2.50-$3.00 a couple days later. Resistance is at $70 on MSFT so I would close the call at about $68-69. Take your profit and buy something else. November Expiration Plays For the expiration week option plays this month I limited them to a select few since the Top 20 list will accomplish the same purpose. No opinion is expressed on any of these stocks. They were chosen based on positive charts and closeness to a strike price with a cheap option. Stock Price Strike Symbol Ask ASYT $11.19 12.50 call QQY-KV $ .20 CCUR $12.60 12.50 call URC-KV $ .70 CD $14.55 15.00 call CD-KC $ .35 CSCO $19.20 20.00 call CYQ-KD $ .35 FDX $44.96 45.00 call FDX-KI $ .95 FON $22.00 22.50 call FON-KX $ .35 GE $40.41 40.00 call GE-KH $1.10 ($.41 ITM) RHAT $ 5.40 5.00 call RCV-KA $ .40 What is happening here? Editors Play of The Day Providian Financial $3.04 For the price of an option you can own a very good company that has literally been taken out and shot based on fears that the economic slowdown will cause loan problems. While this may be true and PVN has taken additional loss reserves to allow for it, the company itself is very strong and the sell off is way over done. The ambulance chasing securities lawyers are out in force but Providian has $32 billion in high interest credit card loans at 18% or more plus fees. That is over $6 billion a year in interest and they were penalized for claiming a +2.7% jump in bad loans to only $900 million. They can write that off in a heartbeat and never feel the pain in the long run. I see almost zero risk and at the price of an option $3.04 you can own stock that will eventually trade much higher. Want an even cheaper entry? The Jan-2003 $5.00 leap is $1.15. Top 20 List The following list is stocks that appeared as I was doing my research for the weekend articles. I make no representations for any individual stock but each has a trend which I would not hesitate to play. Please do your own research before going long on any of these stocks. I have not checked for earnings dates or any news relating to any of these stocks. ALGX $ 9.06 Next resistance 12.25 AOL $37.12 New relative high ASYT $11.19 New relative high BRCM $43.73 New relative high, resistance $50 CD $14.55 New relative high, resistance $18 FDX $44.95 New relative high FFIV $19.20 Pull back provides new entry point CHKP $35.96 New relative high, resistance $45 CHS $28.80 New relative high, resistance $34 KLAC $47.25 Pull back provides new entry point CNC $ 3.99 Cheap play, could be the start of rebound MRVL $30.00 Testing resistance PMCS $19.44 A break over $20 would be bullish VTSS $11.56 Strong recovery off base at $7 RHAT $ 5.40 Strong recovery underway but slow mover UTX $57.05 At resistance, breakout soon? UVN $31.64 Breakout in progress FON $21.99 Resistance at $24. These are just food for thought and not expected to be guaranteed winners. Good Luck **************** MARKET SENTIMENT **************** On Hold By Eric Utley The major averages spent last Friday on hold. Ranges were fairly tight and volume light. Notable strength was observed in the tech complex especially in the Internets (INX.X) and the Disk Drive Sector (DDX.X). Only the Semis (SOX.X) finished lower, but only fractionally. There was a number of new longs added in the NDX futures market as evidenced by the COT report below. The commercial buying of the tech-laden NDX may have helped to lend the bid to that market last week. But the actions of futures market participants in the SPX and INDU were muted, which echoed last Friday's trading in the averages. Rotation from financials, industrials, and healthcare propped higher the energy and telecom sectors. The ebb and flows from sector to sector late last week revealed more non-commitment. Not much progress is made in such a market. The bullish percent data was virtually unchanged from Thursday to Friday. Yet another sign of waiting. The case set forth last Thursday played into Friday's session. The bulls would argue that Friday was a routine profit taking day. While the bears will label the market 'tired.' Time will tell. ----------------------------------------------------------------- Market Volatility VIX 28.76 VXN 58.59 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.74 527,462 388,935 Equity Only 0.61 467,110 286,419 OEX 1.27 10,796 13,722 QQQ 1.37 42,826 58,685 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 32 + 0 Bull Alert NASDAQ-100 71 + 0 Bull Confirmed DOW 57 + 0 Bull Confirmed S&P 500 52 + 0 Bull Alert S&P 100 51 + 1 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 0.99 10-Day Arms Index 1.24 21-Day Arms Index 1.14 55-Day Arms Index 1.16 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when the do, they can signal significant market turning points. ----------------------------------------------------------------- Advancers Decliners NYSE 1593 1474 NASDAQ 1727 1804 New Highs New Lows NYSE 73 29 NASDAQ 41 44 Volume (in millions) NYSE 1,095 NASDAQ 1,503 ----------------------------------------------------------------- Commitments Of Traders Report: 11/06/01 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercial traders grew slightly more bearish last week. Their positioning wasn't pronounced. Small traders added more contracts. Their collective position grew less bullish. Commercials Long Short Net % Of OI 10/23/01 377,177 413,658 (36,481) (4.6%) 10/30/01 377,468 413,729 (36,261) (4.6%) 11/06/01 376,807 416,063 (39,256) (5.0%) Most bearish reading of the year: (111,956) - 3/6/01 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 10/23/01 127,016 71,212 55,804 28.2% 10/30/01 123,546 71,225 52,321 26.9% 11/06/01 132,106 81,208 50,898 23.9% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 Commercial interest grew measurably less bearish last week by adding a substantial number of new long positions. Their net short position dropped by 5,000 contracts. Small traders went the other way by shedding long positions and adding to shorts. Commercials Long Short Net % of OI 10/23/01 29,920 40,358 (10,438) (14.9%) 10/30/01 32,055 45,574 (13,519) (17.4%) 11/06/01 39,410 47,890 ( 8,480) ( 9.7%) Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: (1,825) - 1/02/01 Small Traders Long Short Net % of OI 10/23/01 11,567 6,934 4,633 25.0% 10/30/01 12,725 6,475 6,250 32.5% 11/06/01 11,406 8,143 3,263 16.7% Most bearish reading of the year: (1,028) - 1/02/01 Most bullish reading of the year: 8,460 - 3/13/01 DOW JONES INDUSTRIAL Commercial traders added a few longs and covered a few shorts last week to increase their bullish position, which is about 1,000 net long contracts away from the year's most bullish reading. Meanwhile, small traders went the other way. Small traders are 65 net short contracts away from their most bearish reading of the year. Commercials Long Short Net % of OI 10/23/01 25,568 11,832 13,736 36.7% 10/30/01 25,872 12,556 13,316 34.7% 11/06/01 25,977 11,951 14,026 37.0% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 10/23/01 4,902 11,900 (6,998) (41.6%) 10/30/01 4,261 11,220 (6,959) (45.0%) 11/06/01 3,569 12,281 (8,712) (55.0%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************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 ************************************************************** *************** ASK THE ANALYST *************** RISK By Eric Utley It comes in many forms. And across many paths. I'm referring to risk, of course. Not the board game. But the bigger idea of risk taking. I suppose you take risks in everyday life. The explorers took risks. Einstein did. So did Edison. It's a necessary aspect of capitalism and progress. Risk is perhaps more pronounced, or identifiable, in speculative endeavors in the capital markets. Yet, the salesman that is Wall Street never addresses risk. Correction: Wall Street never sells risk. It sells rewards. Has Fidelity ever instructed you on how to manage risk? Maybe through a brief discussion of Modern Portfolio Theory, but that's the extent of it. Has Merrill told you how to set stops? Did Janus ever elaborate on the potential risks of its funds? The marketing department of Janus, however, would like to point out that their Twenty Fund has a 10-year average annual return of 12.56 percent. Fair enough. The average, individual, retail investor has been sold on the idea of taking money out of the market without ever addressing risk. That's why Jeff Bailey, Austin Passamonte, and myself use risk measuring tools such as point & figure charts, retracement brackets, chart formations, and oscillators. We like to measure risk and hope to show you how to do the same. It's been a process, but I've come from the average mindset of searching only for rewards to one that addresses risk before entering a trade. It's not a self-righteous mindset. It's the right mindset. Bailey and Austin live there, too. I was reminded of that Thursday night over dinner: "Austin, did you hear [CNBC guest] talking about a buy-and-hold strategy today," I asked. "No, what's that?," Austin inquired. "Don't know. I thought you might," I replied. "Never mind. Please pass the pudding" Please send your questions and suggestions to: Contact Support ---------------------------- Insurance Sector (IUX.X) Update: Frustration They tell me not to let emotion into the game. But I must confess that I'm mad. Very mad. Those just joining might want to read the following two pieces, for I am about to rant. http://www.OptionInvestor.com/ask/102801_1.asp http://www.OptionInvestor.com/ask/110401_1.asp After the IUX gave the sell signal and completed its bearish triangle, the rebound seemed natural and routine. But the rebound went further that I wished last Tuesday. The IUX ran up to its descending trend line on the Daily chart, just slightly above its 61.8 percent retracement level around the 730 level. There wasn't much damage done to the bearish thesis on the Daily chart because the IUX rolled over at a relatively lower high, near its descending trend line. By all accounts, the Daily chart reveals that the bearish thesis is still strong. Chart = But the bearish thesis took a hit on the point & figure chart. The conviction in the IUX bearish trade came from the bearish triangle on the point & figure chart. However, the bearish triangle was negated last Tuesday when the IUX traded above the 730 box. In doing so, generating a new buy signal, thus negating the previous sell signal, which had completed the bearish triangle. Moreover, the IUX's long standing bearish resistance line on the point & figure chart was violated with the index's trade past 730. But that's where it stopped. So we have an index giving a new buy signal, yet halting its advance at the bearish resistance line on the point & figure chart. Frustrating! Stopped out on bearish plays with the buy signal, only to watch the index rollover. Chart = It gets worse. Late last week, the IUX gave up a significant amount of relative strength versus the S&P 500 (SPX.X). In other words, it's getting weaker. So that should make the bearish thesis stronger. Right? I can't express how upset I am with this situation. It's eerily similar to two trades I botched over the summer. They were both bearish trades; one on PeopleSoft (NASDAQ:PSFT) and the other on Abercrombie & Fitch (NYSE:ANF). PSFT was up around $40. It traded as low as $17 a few months AFTER I was stopped out. ANF was up around $40, too. It traded as low as $16 a few months later AFTER I was stopped out. Discipline should trump conviction, which is why I was stopped out on the PSFT and ANF shorts, and is the reason I was stopped out of my IUX short positions last week. But now, I'm trapped in a world of frustration, thinking that the IUX is going lower. Wondering why it "had" to trade at 730? Looking Forward, Always Forward The IUX did lose a lot of relative strength late last week. It traded poorly versus the S&P 500. That tells me that if the S&P 500 works lower, the IUX should revisit, if not break below, its relative low around 680. But if the market continues working higher, bearish trades are futile. So it's paramount to get a hold on the direction of the broader market. The buy signal generated last week discounted the bearish triangle. That doesn't mean that the IUX can't go lower. But it does require an alteration of the bearish thesis; a loss of some conviction. I'll continue writing about the IUX set-up, so please stay tuned. ---------------------------- Check Point Software (NYSE:CHKP) ...I was trying to get a handle on CHKP and was wondering if you could help me out? Thanks for your opinion. - Marvin Thanks, Marvin. Check Point finally broke above its long standing descending trend line a few weeks ago. The stock also broke above its bearish resistance line of the point & figure chart. In other words, the stock has made some significant progress to the upside. I'd dare speculate that CHKP reached an inflection point recently, when its six month bearish trend was broken. It still has a lot of work to do to the upside; a lot of retracing of its past decline. I don't know if the stock is going straight back to its relative highs. Much of its price action will be linked to the Software Sector Index (GSO.X). And if you're monitoring the GSO, you have to closely observe Microsoft (NASDAQ:MSFT). As for the short-term, CHKP broke out of it three week base just last week with its breakout above $35. The stock has a key retracement level above current levels at $40. I'd think that CHKP would face some resistance around $40, noting not only the retracement level but also the historical bounces at that level prior to the breakdown in July. Reason dictates to buy stocks on breakouts, but I don't yet see a real incentive to chase CHKP higher. I think there are still quite a few shorts in the stock who may be selling into the recent strength. Those shorts, some of whom probably have a basis up around $60 or $70, won't have a real reason to cover until CHKP advances past the $40 level, where risk may shift back to the upside, from the downside. Don't get me wrong. There may be a trade in CHKP over the short-term up to $40. But if you're thinking longer term, it might pay to have a few more buyers on your side. And I think the buyers will step-up if/when CHKP advances past $40. At that point, there may be an underlying bid in the stock, enough to support pullbacks anyway. chart = ---------------------------- Sun Micro (NASDAQ:SUNW) Can you please give me your current views on SUNW? - Thanks and regards, Gruff Thanks for the question, Gruff. SUNW completed a lot of repair work over the past two weeks. Over the recent past, the stock has reasserted its previously held leadership status. As of this weekend, SUNW is again one of the stronger big cap tech stocks. The question is whether or not to chase it higher from current levels. I think the risks in buying SUNW at current levels outweigh the potential reward, OVER THE SHORT-TERM. I think the upside over the short-term is up around $15, while the downside is somewhere between $9.50 to $11. Not the best risk/reward ratio for establishing new positions at current levels. The argument could be made that SUNW could find support at the $13 level - a retracement level - or down around its unfilled gap between $11.50 and $12. Does the gap "need" to be filled? Mo-mo traders might scoff at my assessment, but I think it's better to wait for a pullback before buying the stock. Hey, if it runs higher from current levels, I'd use the same process and wait for a better risk/reward ratio at higher prices. But until that happens, currently I think it's better in terms of risk to wait for the stock to come in. chart = ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* Monday, 11/12/01 None Tuesday, 11/13/01 None Wednesday, 11/14/01 Retail Sales Oct Forecast: 2.0% Previous: -2.4% Retail Sales ex-auto Oct Forecast: 0.2% Previous: -1.6% Thursday, 11/15/01 Business Inventories Sep Forecast: -0.3% Previous: -0.1% Initial Claims 11/10 Forecast: 475K Previous: 450K Philadelphia Fed Nov Forecast: -25.0 Previous: -27.4 Friday, 11/16/01 CPI Oct Forecast: -0.1% Previous: 0.4% Core CPI Oct Forecast: 0.1% Previous: 0.2% Industrial Production Oct Forecast: -0.9% Previous: -1.0% Capacity Utilization Oct Forecast: 74.7% Previous: 75.5% ************************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 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to Contact Support with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Sunday 11-11-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/5592_2.asp ************************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 ************************************************************** ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* FFIV - F5 Networks $19.19 (+2.28 last week) See details in sector list Put Play of the Day: ******************** ENZN - Enzon $57.54 (-2.56 last week) See details in sector list ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ SIAL $39.23 (-0.18) The CEX.X pulled back ever so slightly last Friday. SIAL broke its ascending support line, but rebounded later in the day. Although the stock finished fractionally higher, we didn't like the break of support and are choosing to let this play go this weekend. Look for any strength early next week to exit positions. PUTS ^^^^ AHC $61.86 (+3.50) The energy sector continued higher last Friday. The OSX.X and OIX.X were among the best performing sectors last Friday. AHC followed suit by gapping measurably higher. The stock finished well above our stop and we're dropping coverage this weekend. Look for weakness early next week to cut losses. PPDI $24.45 (-1.55) PPDI opened higher last Friday and headed back down to the $24 level. It bounced yet again from that level. Its reluctance to breakdown is becoming tiresome and could lead to a sustained rebound in the coming days. We're dropping coverage this weekend, which means the stock will probably breakdown next week below the $24 level. So it goes. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** PMCS - PMC-Sierra $19.52 (+2.12 last week) PMC-Sierra designs, develops, markets and supports high performance semiconductor networking solutions. The company's products are used in high speed transmission and networking systems, where are being used to restructure the global telecommunications and data communications infrastructure. The networking sector has been on the mend recently thanks in part to Cisco Systems. The Networking Sector Index (NWX.X) has been reflecting the renewed bullishness in the group. The NWX broke above the 300 level last week and is poised to work higher next week if the Nasdaq continues its march to higher highs. PMCS is a key supplier to Cisco, which is why shares of PMCS have been rallying in recent weeks. The stock is approaching the key $20 level again. It actually broke above that level briefly last week, but pulled back on profit taking late last week. The stock has very little resistance above the $20 level. The closest area of congestion is around the $24 level, which is a nice $4 move away from current levels. Traders looking for the breakout above $20 should keep a close eye on the NWX early next week. An continued advance in the NWX would support a breakout in PMCS above the $20 level. Traders should also keep close tabs on the Semiconductor Sector Index (SOX.X). A good set-up would be strength in both the SOX.X and NWX.X in conjunction with the move we're looking for in PMCS. Stops are initially in place at the $17.50 level. ***November contracts expire next week*** BUY CALL NOV-17 SQL-KW OI=6559 at $2.70 SL=1.75 BUY CALL NOV-20*SQL-KD OI=4335 at $1.15 SL=0.50 BUY CALL DEC-17 SQL-LW OI= 647 at $4.10 SL=3.00 BUY CALL DEC-20 SQL-LD OI=2333 at $2.90 SL=2.00 BUY CALL DEC-22 SQL-LX OI= 890 at $1.95 SL=1.00 Average Daily Volume = 10.1 mln --- FFIV - F5 Networks $19.19 (+2.28 last week) F5 Networks is a provider of integrated Internet traffic and content management solutions designed to improve the availability and performance of mission critical Internet based servers and applications. FFIV recently assumed a leadership role within the Networking Sector (NWX.X). The stock has been one of the strongest in the group over the past several weeks. Although it pulled back last Thursday in a big way, it should resume its climb higher if the NWX continues advancing. That said, it's important to key off of the NWX when trading this stock. In an advancing market and sector, FFIV should lead to the upside. The stock broke above its summer highs last week. How many other networking stocks did the same? Its relative strength should lead it even higher if the tech sector remains strong. In fact, a rally in the NWX and Nasdaq next week should see FFIV revisit its relative highs around the $23 level. That's a solid move from current levels, especially in the options because the stock is still relatively low priced its options are cheaper. Traders who take entries around current levels can look for an exit point up around the $23 area. If the market and NWX pullback early next week, look for FFIV to bounce from the $17.50 area, which is the site of its 10-dma. Our stop is in place at $17. ***November contracts expire next week*** BUY CALL NOV-17 FLK-KW OI= 547 at $2.15 SL=1.25 BUY CALL NOV-20*FLK-KD OI=1197 at $0.80 SL=0.25 BUY CALL DEC-17 FLK-LW OI= 119 at $3.50 SL=2.25 BUY CALL DEC-20 FLK-LD OI= 172 at $2.20 SL=1.25 BUY CALL DEC-22 FLK-LX OI= 278 at $1.25 SL=0.75 Average Daily Volume = 591 K --- CHKP Check Point Software $35.96 (+5.65) Check Point provides Internet security. The company provides secure enterprise networking solutions that enable customers to implement centralized policy-based management with enterprise- wide distributed deployment. Simply put, CHKP has benefited from rising demand for its virtual private networks software which lets remote workers, business allies and customers securely access corporate computer networks. With Technology stocks back in favor, the Software index (GSO.X) managed to break out above the $160 resistance level, helped by the positive catalyst of the Microsoft settlement with the Department of Justice. The positive movement in the GSO index has helped the stronger stocks in the sector, such as our new play on CHKP, to break above their own resistance levels. After clearing the $34 resistance level early last week, the stock repeatedly used that level as support and then advanced right to the $36 level on Friday. Look for some profit taking next week to give us an attractive entry, either on a pullback to the $34 level or the converged 10-dma ($32.08) and 20-dma ($31.46), also the site of major support (prior resistance). Accordingly, we are setting our stop at $31. Once CHKP manages to work above $36, its next challenge will come from major resistance in the $39-40 range. Keep a sharp eye on the GSO index, as we'll need it to continue to advance if CHKP is going to work higher from here. ***November contracts expire this week*** BUY CALL NOV-35 KEQ-KG OI=11565 at $2.10 SL=1.00 BUY CALL DEC-35*KEQ-LG OI= 2274 at $4.30 SL=2.75 BUY CALL DEC-40 KEQ-LH OI= 5045 at $2.20 SL=1.00 BUY CALL DEC-45 KEQ-LI OI= 1092 at $1.00 SL=0.50 BUY CALL JAN-40 KEQ-AH OI= 4853 at $3.80 SL=2.50 BUY CALL JAN-45 KEQ-AI OI= 3984 at $2.25 SL=1.25 Average Daily Volume = 9.11 mln --- CMVT - Comverse Technology $21.12 (+1.61) Comverse is the world leader in multimedia telecommunications applications. Through its Comverse Network Systems division, the company markets its Access NP and TRILOGUE INfinity Enhanced Services Platforms, which enable wireless, wireline, and internet companies to offer enhanced telecommunications services to business and residential customers. Among these services are voice and fax messaging, call answering, and web information services. Comverse also offers Intelligent Peripheral/Service Node, supporting next-generation personal communication services such as pre-paid wireless, mobile number portability, call screening, and mobile attendant functions. After the earnings-related tumble in July, shares of CMVT have been working to build a new base, and judging from the recent price action, the stock is ready to run. The stock found support near $16 in late October, and has been working hard to create a new upward trend. While it hasn't been a screamer, CMVT is definitely looking more positive, now that the bulls have pushed the price back over the $20.50 resistance level. This level is confirmed by the 3-week ascending trendline, and pullbacks to the $20 level look good for new entry points. There will be some significant resistance between $25-26, but that is fully 20% above the current price, giving us room to profit as the stock rises to that level. If the bulls really get excited, they could drive CMVT all the way to the $30 level, which has acted as resistance ever since the large gap down in early July. That would make a great point to harvest some profits. Place stops at $18.50. ***November contracts expire this week*** BUY CALL NOV-20 CQV-KD OI=2889 at $1.75 SL=1.00 BUY CALL DEC-20* CQV-LS OI=2780 at $3.30 SL=1.75 BUY CALL DEC-22.5 CQV-LD OI= 465 at $2.20 SL=1.00 BUY CALL DEC-25 CQV-LX OI= 356 at $1.30 SL=0.75 BUY CALL JAN-22.5 CQV-AX OI=2162 at $2.95 SL=1.50 BUY CALL JAN-25 CQV-AE OI=4650 at $1.90 SL=1.00 Average Daily Volume = 6.00 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 11-11-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/5592_3.asp ************************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 ************************************************************** ****************** CURRENT CALL PLAYS ****************** SPW - SPX Corp. $106.25 (+2.60 last week) SPX Corp is a global provider of technical products and systems, industrial products and services, service solutions and vehicle components Its products include storage area network, fire detection and building life-safety products, television and radio broadcast antennas and towers, transformers, substations and industrial mixers and valves. SPW spent late last week consolidating its recent gains. The pullback at this point is routine and healthy, and may allow a new entry point into the play. The stock has been finding support around the $105.75 to $106 area recently. If the market continues to hold, entries around that general support area can be pursued with tight stops. The price action of the broader market is going to influence the trading of SPW as it has done in the recent past. Traders should be monitoring the S&P 500 (SPX.X) closely when gauging SPW. If the SPX continues advancing next week, entries on a breakout above the 200-dma might be worth consider if SPW does in fact breakout. With the recent consolidation, an entry on a breakout above the 200-dma is worth considering as the stock has a short term base in place that could potential propel it higher. SPW doesn't have much resistance immediately overhead. The stock has some congestion up around the $115 area, so a breakout above the 200-dma at $108 could see some upside movement. Also, the stock has an unfilled gap around the $110 level, which is the level prior to the September 11 attacks. A breakout above the 200-dma and subsequent follow-through past the $110 level could portend a move up to the $115 area. ***November contracts expire next week*** BUY CALL NOV-100 SPW-KT OI= 36 at $7.60 SL=6.00 BUY CALL NOV-105 SPW-KA OI= 22 at $4.10 SL=2.50 BUY CALL NOV-110 SPW-KB OI=278 at $1.75 SL=1.00 BUY CALL DEC-105 SPW-LA OI=454 at $8.50 SL=7.25 BUY CALL DEC-110*SPW-LB OI=445 at $5.80 SL=4.25 Average Daily Volume = 410 K --- SUNW - Sun Microsystems $12.92 (+1.46 last week) Sun Microsystems is a worldwide provider of products, services, and support solutions for building and maintaining network computing environments. Sun sells scalable computer and storage systems, high-speed microprocessors, and a comprehensive line of high-performance software for operating network computing equipment. SUNW pulled back last Friday on routine profit taking. We knew the pullback was coming. After the stock made its big run up to the $14 level, a pullback was necessary. SUNW closed right around the $13 level last Friday which could provide support going forward into next week's trading, especially if the Nasdaq market continues to hold. If the Nasdaq advances next week, traders targeting new entries into SUNW calls might look for a bounce from the $13 level. On the other hand, if the Nasdaq weakens early next week, wait for SUNW to pullback to a lower level. The support area around $12 has held in the recent past, which would make it a good target to look for entries on further weakness. We want to watch for relatively lighter volume on any pullback as it would signal continued profit taking. As for further upside potential, SUNW has some strong resistance at the $15 level. If you're going to enter new plays around current levels or into further strength, consider booking profits as SUNW approaches the $15 resistance area. ***November contracts expire next week*** BUY CALL NOV-10 SUQ-KB OI=48007 at $3.00 SL=2.00 BUY CALL NOV-12 SUQ-KV OI=42185 at $0.85 SL=0.25 BUY CALL DEC-10 SUQ-LB OI=27827 at $3.30 SL=2.50 BUY CALL DEC-12*SUQ-LV OI=34071 at $1.50 SL=0.75 BUY CALL JAN-15 SUQ-AC OI=88451 at $1.05 SL=0.50 Average Daily Volume = 46.9 mln --- AMAT - Applied Materials $38.57 (+0.60 last week) Applied Materials develops, manufactures, markets and services semiconductor wafer fabrication equipment and related spare parts for the worldwide semiconductor industry. Many of AMAT's products are single-wafer systems designed with two or more process chambers attached to a base platform. The platform feeds a wafer to each chamber, allowing the simultaneous processing of several wafers to enable high manufacturing productivity and precise control of the process. These platforms support chemical vapor deposition, physical vapor deposition, etch and rapid thermal processing technologies. As the broad markets capped off another positive week, Semiconductor stocks resisted the surge to sell off, with the SOX index remaining above the critical $500 level. We could still see some profit taking next week and the $480 level should provide much stronger support and a potential entry point. Shares of AMAT had a great week too, breaking out above the $38 resistance level and then finding support near that level on both Thursday and Friday. This level could provide for attractive entries next week, although we would really like to see an intraday dip to the 10-dma ($37.15) or the ascending trendline at $36 for a truly great entry. Overhead resistance at $41 has been a tough nut to crack so far, so momentum traders will want to wait for a volume-backed move through that level before taking a position. Keep in mind that AMAT has some serious resistance at $42, and a move to that level might be a good place to lock in some profits. AMAT reports earnings Wednesday after the market closes, so we'll be dropping the play Tuesday night. Keep stops in place at $36. ***November contracts expire this week*** BUY CALL NOV-37.5 ANQ-KU OI= 7267 at $2.40 SL=1.25 BUY CALL NOV-40 ANQ-KH OI=14613 at $1.15 SL=0.50 BUY CALL DEC-37.5 ANQ-LU OI= 3905 at $4.30 SL=2.75 BUY CALL DEC-40* ANQ-LH OI= 4824 at $3.10 SL=1.50 BUY CALL DEC-42.5 ANQ-LV OI= 6412 at $2.10 SL=1.00 Average Daily Volume = 16.8 mln --- AOL - AOL-Time Warner $37.10 (+5.09 last week) AOL-Time Warner is an integrated, Internet-powered media and communications company. The company was formed when America Online and Time Warner merged in January, 2001. The company's America Online branch consists of interactive services, Web brands, Internet technologies and electronic commerce. The Time Warner division contributes cable television systems, filmed entertainment and television production. Additionally the joint company is involved in cable and broadcast television networks, recorded music, music publishing and magazine and book publishing. After the strong breakout in shares of AOL on Thursday, we might have expected to see some profit taking ahead of the weekend. But it just didn't happen. After a brief dip at the open, AOL continued working its way higher, adding fractionally to the week's gains and closing at its highest level since late August. Although partially motivated by gains in other publishing stocks, there is also the breakout in the Internet sector (INX.X) over the $120 level to consider. This has the looks of a solid breakout, both for the INX and AOL, and as such appears to have some room to run. Look for the INX to move through the $124 level next week, which will likely push AOL towards the next major obstacle near $40 (also the site of the 38% retracement of the decline since the May highs). Consider new positions either on a breakout over the $38 resistance level or on a dip and bounce from the $34-35 support level. The 10-dma ($33.62) is just crossing up through the 50-dma ($33.45), making that a likely level of strong support. Accordingly, we are raising our stop to $33.50. ***November contracts expire this week*** BUY CALL NOV-35 AOE-KG OI=36405 at $2.50 SL=1.25 BUY CALL NOV-37.5 AOE-KU OI=11865 at $0.85 SL=0.00 BUY CALL DEC-35 AOE-LG OI=15642 at $3.80 SL=2.50 BUY CALL DEC-37.5*AOE-LU OI= 8386 at $2.30 SL=1.25 BUY CALL DEC-40 AOE-LH OI= 8615 at $1.25 SL=0.50 Average Daily Volume = 18.4 mln --- BAC - Bank of America Corp. $63.05 (+2.18 last week) Providing a diversified range of banking and certain non-banking financial products and services, BAC's operations consist of Consumer Banking, Commercial Banking, Global Corporate and Investment Banking, and Principal Investing and Asset Management. Consumer Banking targets individuals and small businesses, while Commercial Banking targets businesses with annual revenues up to $500 million. Global Corporate and Investment Banking provides investment banking, trade finance, treasury management, leasing and financial advisory services. Principal Investing includes direct equity investments in businesses and general partnership funds, while the Asset Management businesses are split into three branches; Private Bank, Banc of America Capital Management and Banc of America Investment Services. Financial stocks are continuing to perform well, as the broad markets chip away at overhead resistance, and shares of BAC built nicely on the breakout over the $61 level last week. Quickly rising as high as $64, it was a given that the stock would have some trouble working through the $64 level, which is an area of congestion from July and August. There could be some profit taking early next week, although it was interesting to note that it didn't materialize at all as the week drew to a close. The ascending trendline is sitting right on top of the 10-dma ($61.03), making that a logical location for our stop. Look for any weakness next week to provide fresh entry points on a bounce from intraday support at $62 or at firmer support at $61, also the location of our stop. As an additional point of reference, look for the $820 level to support the Banking index (BKX.X) on a pullback, setting the index up to move towards the next level of resistance, near $860. ***November contracts expire this week*** BUY CALL NOV-60 BAC-KL OI=32779 at $3.60 SL=1.75 BUY CALL NOV-65 BAC-KM OI=18091 at $0.50 SL=0.00 BUY CALL DEC-60 BAC-LL OI= 3878 at $4.80 SL=2.50 BUY CALL DEC-65*BAC-LM OI= 6986 at $1.75 SL=0.75 BUY CALL JAN-65 BAC-AM OI=12223 at $2.60 SL=1.25 Average Daily Volume = 6.45 mln --- BRCM - Broadcom Corporation $43.73 (+5.88 last week) Sitting in the sweet spot between the Broadband and Semiconductor sectors, BRCM is a provider of highly integrated silicon solutions that enable broadband digital transmission of voice, video and data to and throughout the home and within the business enterprise. These integrated circuits permit the cost-effective delivery of high-speed, high-bandwidth networking using existing communications infrastructures that were not originally designed for the transmission of broadband digital content. Using proprietary technologies, the company designs, develops and supplies integrated circuits for several markets including digital cable set top boxes, cable modems, high-speed office networks, home networking, and digital subscriber lines. That sure was one heck of a rebound! After tagging the ascending trendline 9 days ago, BRCM has been marching steadily higher, taking out one resistance level after another. With Friday's solid 5.6% rally, BRCM finally punched through the 200-dma ($42.35) and closed above it for the first time in over a year. While the stock isn't likely to return to triple-digit status any time soon, the recent strength is certainly encouraging. The bulls are now setting their sights on the $45 resistance level, and once they clear that, they can target the $48-49 level, which has turned back the bulls three times since the April lows. After the strong rally in the past 2 weeks, BRCM is due for some profit-taking, and we would expect to see buyers defend support between $40-41 or at the ascending trendline at $39. As a last line of defense, the $38 support level should halt any selling and a bounce there would make for a great entry point, so long as the Semiconductor index (SOX.X) can continue its ascent. Move stops up to $38. ***November contracts expire this week*** BUY CALL NOV-40 RCQ-KH OI=6209 at $4.70 SL=2.75 BUY CALL NOV-45 RCQ-KI OI=7621 at $1.60 SL=0.75 BUY CALL DEC-40 RCQ-LH OI=2569 at $7.20 SL=5.00 BUY CALL DEC-45*RCQ-LI OI=2018 at $4.70 SL=2.75 BUY CALL JAN-45 RCQ-AI OI=3893 at $6.50 SL=4.50 Average Daily Volume = 12.8 mln --- GE - General Electric $40.41 (+2.45 last week) As one of the largest and most diversified industrial companies in the world, GE's products include major appliances, lighting products, industrial automation equipment, medical diagnostic equipment, electrical distribution and control equipment and power generation and delivery products. Additionally, GE provides commercial and military aircraft jet engines, locomotives and nuclear power support services. Through the National Broadcasting Company (NBC), GE delivers network television services, operates television stations and provides cable, Internet and multimedia programming and distribution services. As a proxy for the broad market, GE tends to mirror the action of the Dow Jones Industrials (DJIA), and last week was no exception. The DJIA managed to clear the 9600 level for the first time since early September, and GE rallied through the $40 level for the first time since the first week of September. This is a significant resistance level, and the stock's action last week is a big positive sign for the broader markets. It took several attempts for GE to clear the $38 level and hold above it for more than a day, as that is the 38% retracement of the stock's decline from the May highs. GE will need some more strong buying volume to push through the $42 resistance level, especially with the 50% retracement resting at $41.20. That makes buying the dips the best entry strategy, and we want to target a pullback near the $38 level, so long as it is followed by solid buying volume. Our stop is resting at $37, as a drop below there would definitely call into question the longevity of the current rally. BUY CALL DEC-40* GE-LH OI=23056 at $2.15 SL=1.00 BUY CALL DEC-42.5 GE-LV OI=13241 at $1.10 SL=0.50 BUY CALL JAN-40 GE-AH OI=24332 at $2.70 SL=1.25 BUY CALL JAN-42.5 GE-AV OI=14532 at $1.65 SL=0.75 Average Daily Volume = 21.3 mln --- IBM - Int'l Business Machines $114.08 (+4.58 last week) International Business Machines uses advanced information technology to provide customer solutions. The company provides value to its customers through a variety of solutions including technologies, systems, products, services, software and financing. IBM's three hardware product segments are comprised of Technology, Personal Systems and Enterprise Systems. Other major operations consist of a Global Services segment, a Software segment, a Global Financing segment and an Enterprise Investments segment. Patience is rewarded. We had to wait long enough, but IBM finally delivered last week with a powerful breakout over the $111 resistance level and quickly powered up near $115. Just as we expected, strength in the broad markets was just the shot in the arm that our play needed. Since then, the stock has been consolidating near $114 in preparation for the next move. With last week's rally, IBM moved into the $111-120 trading range from earlier in the year, and we can look forward to testing both ends of that range again. For new positions, we want to wait for some profit taking to drag the stock back towards the $111-112 level, and then we can enter on the ensuing bounce. Our stop is currently resting at $109. Alternatively, any volume-backed move that clears the $115.50 level can be used for initiating new momentum-based positions. IBM will likely move with the broad markets, so use the strength on the DJIA as a measure of the strength of the current environment for our play. Consider locking in profits as IBM nears the $118 level, as resistance between there and $120 will likely be met by waves of eager sellers. ***November contracts expire this week*** BUY CALL NOV-110 IBM-KB OI=20098 at $4.90 SL=3.00 BUY CALL NOV-115 IBM-KC OI=15636 at $1.55 SL=0.75 BUY CALL DEC-115*IBM-LC OI= 5912 at $4.60 SL=2.75 BUY CALL DEC-120 IBM-LD OI= 7473 at $2.50 SL=1.25 BUY CALL JAN-115 IBM-AC OI=17986 at $6.50 SL=4.50 BUY CALL JAN-120 IBM-AD OI=35933 at $4.30 SL=2.75 Average Daily Volume = 8.79 mln --- MSFT - Microsoft $65.21 (+3.81 last week) Although best known for its ubiquitous Windows PC operating system, MSFT develops, manufactures, licenses and supports a wide range of software products for a multitude of computing devices. The company's software products include scalable operating systems for servers, PCs and intelligent devices, server applications for client/server environments and software development tools. The MSFT's online efforts include the MSN network of Internet products and services and alliances with companies involved with broadband access and various forms of digital interactivity. MSFT is once again trading on its own merits, now that the DOJ decision is behind it, and things are still looking pretty strong. The breakout over the 200-dma (then at $62.42) last Monday motivated more buyers, and by Friday's closing bell, the stock had poked its nose through the $65 level for the first time since early August. There is some decent resistance just below $66, so it is a good bet that we'll need to see some profit taking before MSFT is ready to advance much higher. The best case for entry points will be on a pullback to the $63 support level, or possibly the 200-dma. The ascending trendline at $61 is resting just above the 20-dma (currently $60.79), and the combined supportive effect should keep MSFT above there, barring any unforeseen dire developments. Accordingly, our stop remains at $61. The whole Software index (GSO.X) has been on a tear lately (in large part due to the MSFT DOJ settlement), and managed to clear the $160 resistance level early last week. Look for continued strength in the GSO to confirm that MSFT is still finding favor with the bulls. ***November contracts expire this week*** BUY CALL NOV-65 MSQ-KM OI=49664 at $1.55 SL=0.75 BUY CALL DEC-65*MSQ-LM OI=17916 at $3.70 SL=2.25 BUY CALL DEC-70 MSQ-LN OI=30515 at $1.50 SL=0.75 BUY CALL JAN-65 MSQ-AM OI=65254 at $4.80 SL=3.00 BUY CALL JAN-70 MSQ-AN OI=79054 at $2.55 SL=1.25 Average Daily Volume = 35.3 mln --- QLGC - QLogic Corporation $46.00 (+5.16 last week) Somebody has to make the equipment that lets your computer talk to all its peripheral equipment, and QLGC does it well. A leading designer and supplier of semiconductor and board-level input/output (I/O) management products, QLGC has been providing SCSI-based connectivity solutions to this market sector for over 12 years. QLGC's I/O products provide a high performance interface between computer systems and their attached data storage peripherals, such as hard disk and tape drives, removable disk drives and RAID (redundant array of independent disks) subsystems. The company is also the market share leader in Fibre Channel host bus adapters, a market segment that is receiving tremendous attention from investors. Even fear of darkness couldn't dampen the bulls' enthusiasm on Friday, as they continued to snap up shares of QLGC. The selloff on Thursday afternoon turned out to be just another entry point, as the stock continued to push skyward after clearing the 200-dma (currently $42.47) on Monday. Support is still looking solid in the $43.50 area, and is backed up by the rising 10-dma (currently $42.83), which has now crossed up through the 200-dma. After such a stellar rally (up nearly 200% since early October), we need to be on the watch for some serious profit taking. But in the meantime, buying the dips seems to be the prudent course of action. Target intraday dips near support, so long as the selling comes on lighter volume than the buying. Our stop is currently resting at $42, just below the 200-dma. It is alright to buy continued strength, but if that is your favored approach, wait for the bulls to push the price above the formidable $50 resistance level. ***November contracts expire this week*** BUY CALL NOV-45 QLC-KI OI=4005 at $2.90 SL=1.50 BUY CALL NOV-50 QLC-KJ OI=3032 at $0.90 SL=0.50 BUY CALL DEC-45 QLC-LI OI=1185 at $6.30 SL=4.00 BUY CALL DEC-50*QLC-LJ OI=1075 at $4.10 SL=2.50 BUY CALL DEC-55 QLC-LK OI= 608 at $2.50 SL=1.25 BUY CALL JAN-50 QLC-AJ OI=1685 at $6.00 SL=4.00 BUY CALL JAN-55 QLC-AK OI= 856 at $4.20 SL=2.50 Average Daily Volume = 10.0 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 11-11-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/5592_4.asp ************************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 ************************************************************** ************* NEW PUT PLAYS ************* ENZN - Enzon $57.54 (-2.56 last week) Enzon is a biopharmaceutical company that develops and commercializes enhanced therapeutics for life threatening diseases through the application of its two proprietary platform technologies: polyethylene glycol (PEG) and single chain antibodies. The AMEX Biotechnology Sector Index (BTK.X) pulled back in the last three trading days. The index looks tired after its big run from its lows and may be due for an extended profit taking pullback. Several stocks within the group displayed breakdowns late last week, including ENZN. The company reported earnings last Thursday and apparently the market didn't like the news. The stock broke down below several support levels, including the 200-dma at $59.26. Volume was more active during the sell-off which might suggest further downside early next week, especially if the Biotech Sector continues to weaken. ENZN has some support around the $55 area, which could serve as a short term downside target for those entering put plays around current levels. Below $55, ENZN doesn't have much in the way of support until $50, which could serve as a longer term price objective for put traders. The stock close near the low of its day last Friday. Traders might enter new put plays on further weakness early next week if the BTK and market are declining. In the event of a rebound, look for a rollover around the 200-dma at $59.26 or near the $60 level. Our stop is initially in place at $61.50. ***November contracts expire next week*** BUY PUT DEC-60*QYZ-XL OI= 68 at $6.20 SL=5.00 BUY PUT DEC-55 QYZ-XK OI=179 at $3.80 SL=2.75 Average Daily Volume = 1.15 mln ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** CURRENT PUT PLAYS ***************** BRL - Barr Labs $67.65 (-3.34 last week) Barr Labs is a pharmaceutical company engaged in the development, manufacture, and marketing of generic and proprietary prescription pharmaceuticals. The company was formed in October 2001 as the result of a merger between a subsidiary of Barr Labs and Duramed Pharmaceuticals. BRL rebounded last Friday but faded into the close of trading. The rebound may have set up an entry early last Friday as BRL rolled over from the $69 level. The stock's 200-dma is up around the $70 area, so traders might want to watch for a relief rally up to that level followed by a rollover. Such a situation would set up a favorable entry point as traders can employ a tight stop just above the 200-dma in order to manage risk. The rebound last Friday wasn't out of the ordinary following the stock's big down day last Thursday. And as long as BRL rolls over at resistance on any forthcoming strength we'd feel comfortable with higher prices. Although, its divergence from the Drug Sector Index (DRG.X) last Friday was a bit unsettling. The DRG finished slightly lower. We'll want to watch the two closely early next week to discern whether or not last Friday's strength was a one day event or if it was the beginning of a new trend. To the downside, momentum traders might look for weakness below the $66.50 level or a breakdown below the $65 level as possible entry points. ***November contracts expire next week*** BUY PUT NOV-70*BRL-WN OI=1250 at $3.80 SL=3.00 BUY PUT DEC-65 BRL-XM OI= 115 at $4.10 SL=3.00 Average Daily Volume = 1.3 mln --- CAH - Cardinal Health $63.30 (-1.76 last week) Cardinal Health is a provider of products and services to healthcare providers and manufacturers, helping them improve the efficiency and quality of their healthcare services and products. CAH rebounded last Friday and closed near its day high. The stock had been down in the three consecutive sessions prior to last Friday so a little relief rally wasn't out of the ordinary. The strength last Friday could've allowed put traders to enter new positions at higher prices. However, we want to see CAH rollover near resistance if it continues higher. The stock could make its way up to the $64 level early next Monday, which is the first site to look for a potential rollover. If it powers through the $64 level, then traders might want to wait for signs of intraday weakness. Above $64, CAH has some congestion up to the $66 level. A stumble in that congestion area might serve as an entry point as well. If CAH weakens early next week, traders might look for a move back below the $62 level as a possible entry point. Make sure to confirm weakness in the Healthcare Index (HCX.X) before entering put positions into weakness in CAH. The HCX did slip a bit further last Friday and we'll want to see that trend continue, which should pressure CAH if it does. ***November contracts expire next week*** BUY PUT NOV-65*CAH-WM OI=3616 at $2.65 SL=1.50 BUY PUT DEC-60 CAH-XL OI= 816 at $2.25 SL=1.25 Average Daily Volume = 1.88 mln --- CVTX - CV Therapeutics $34.69 (-1.77 last week) CVTX is a biopharmaceutical company engaged in the discovery and development of new small-molecule drugs to treat cardiovascular disease. The company is conducting clinical trials for three of its drug candidates. Ranolazine, the first in a new class of compounds known as partial fatty acid oxidation inhibitors, is in Phase III trials for the potential treatment of chronic angina. CVT-510, is in Phase II clinical trials for the potential treatment of atrial arrhythmias. CVT-3146 is in Phase I trials for the potential use as an adjunctive pharmacologic agent in cardiac perfusion imaging studies. Just like we expected, CVTX had a rough time this week, with much of the carnage suffered on Thursday, when the stock dropped more than $5 intraday. And that came the day after it was kind enough to give us an entry point right at the descending trendline near $40. The late-day bounce in the stock price on Thursday provided a great opportunity to lock in some profits and now we are waiting for the next good entry point. It looks like resistance may be building near $35, but we could get lucky next week with an intraday spike near the $36.50 resistance level, which just happens to be the current level of the descending trendline. Coincidence? I think not! It looks like the downside may be limited to the $28-30 level, so that seems like a likely level to take some profits on the next move down. But for now, target new positions on the bounce up to resistance and then hold on. The premiums may be inflated, but that doesn't mean we can't make money. In fact, with inflated premiums, it is almost a sure thing that the market pros know something big is coming -- and that almost always means a big move in the price of the stock. Since the premiums still seem overly inflated, there is likely some more excitement around the corner. Keep stops set at $38. ***November contracts expire this week*** BUY PUT NOV-35 UXC-WG OI= 947 at $6.70 SL=4.75 BUY PUT NOV-32.5 UXC-WZ OI= 122 at $5.30 SL=3.25 BUY PUT DEC-35 UXC-XG OI= 76 at $8.30 SL=6.00 BUY PUT DEC-32.5*UXC-XZ OI= 562 at $7.00 SL=5.00 BUY PUT DEC-30 UXC-XF OI= 107 at $5.70 SL=3.75 Average Daily Volume = 504 K ***** LEAPS ***** The Greenspan Bunny: It Keeps Going and Going... By Mark Phillips Contact Support I spent most of this past week watching in stunned fascination as the broad markets not only continued to rally, but broke through serious resistance levels. I lost count of the number of Tech stocks that I saw power through multi-month resistance levels and on strong volume to boot. Simply put, I am truly encouraged to see this show of strength and it is a strong reminder of just how resilient our equity and capital markets really are -- at least when 'Easy Al' is priming the pump with free money. And Congress isn't far behind, burning the midnight oil to bring a stimulus package to the President, so that they can send billions of our tax $$ back into the economy to get it revved up again. What do you figure the odds are that as soon as it is humming along smoothly again, some government functionary will step in to gum up the works again? But I digress... While the recent rally in the broad markets has been healthy in my opinion, it has now gone too far. I know many of you are asking how I could make such a bold and inflammatory statement. Easy. Look at the questionable signs of economic recovery... that is, if you can find them. Do they justify 100-200% gains on stocks in the Semiconductor, Networking and Software sectors? Of course not, and that is precisely my point. Investors have ramped equities too far, too fast on anticipation that the economy will be solidly on the road to recovery in 6-9 months, due in large part to the stimulus from the Federal Reserve and the Federal Government. Along those lines, fear has been dropping steadily for the past six weeks, and the VIX is walking an interesting path right now. Throughout the summer, the VIX topped out four times between 27.50-28.75. Well, don't look now, but the closing number for the VIX on Friday was 28.76, just below the 200-dma (28.79). So here's the BIG QUESTION -- Are we entering the normal VIX range again and this is a buying opportunity, or is the VIX about to reverse and head higher as fear returns to the market? Pardon me for this bit of ambiguity, but I think we are going to get a bit of both. It is just one man's opinion, but I think that we could see the VIX continuing lower (and the markets higher) over the near term, but there is a price to pay. Eventually it will become clear that the 2nd half recovery that the current bullish hopes are built upon will be shown to be overly optimistic and fear will return. It may happen by the end of the year, but I think more realistically will be March/April of next year. Returning fear will likely pull the rug out from under the bulls, finally sending us back down for a retest of the September lows. When we see whether those lows hold, we'll really have the answer as to whether the bull is back in town. My advice for the near-term is to enjoy (and profit from) the current rally as long as it lasts, but be ready to grab a seat as soon as the music stops. This is precisely the reason why we have added LEAP Put plays to this column, in hopes that we can position ourselves to profit whether the markets rally or collapse. Hopefully we will be able to position ourselves to profit on the downside from weak stocks and at the same time in strong stocks that will lead the current rally. If forced to choose though, I'd say the current rally is running on borrowed time, and would be very careful about initiating new long-term positions. Nearly every chart I looked at this week (and I looked at a lot!) had both the daily and weekly Stochastics trapped in overbought territory. The one constant with oscillators is that they, well, oscillate. I for one will be watching those weekly charts for indications that it is once again relatively safe to buy. As long-time readers know, I'm very hesitant to chase stocks higher when they refuse to give me the entry point I'm looking for. I got burned several times this past spring, as the market suckered me into moving my entry targets up just far enough to catch the highs on several plays, only to be stopped out shortly thereafter. So it may come as a bit of a surprise to see that I increased the entry targets on both General Electric (NYSE:GE) and Tyco International (NYSE:TYC) this weekend. While I don't want to go into a lot of detail on the TYC play, suffice to say that it has shown impressive strength in the latest market advance, clearing several levels of resistance "in a single bound", as it were. Along with the broad market strength, this goes a long way towards convincing me on a subjective level that TYC isn't going back to the $45-46 level anytime soon. So if I want to be in the play, I figured I better move up the target. But I think it could be instructive to look at a veeerrrryyy long-term chart of GE. We've got a chart pattern setting up that can be very powerful, depending on how things play out for the rest of the year. chart = After three tests of the $36 support level (ignoring the post-attack dip), we can see that the bulls have regained control. We are seeing the early stage of some bullish divergence with declining price lows being accompanied by increasing Stochastic lows -- usually a strong bullish indication. The fact that it is happening on the monthly chart underscores the importance of the pattern in my mind. So long as that last candle remains white at the end of November (we still have 3 weeks to go until the candle is complete), I think the next cycle down on the weekly Stochastics will be a very solid entry point. Daily and weekly Stochastics are currently overbought, but I expect the transition back down on the weekly will likely give us a solid bounce in the vicinity of the $36 support level, and we'll be in. While we're looking at charts, how about we peek in on the Eli Lilly chart? This is another interesting chart pattern that is getting close to resolution. The neutral wedge has been building since April of last year, and the range just keeps narrowing. Since any violation of the trendlines creating the wedge is likely to be significant, we can tighten up our stop on LLY to $74 this weekend, while we wait for the pattern to resolve itself. The only real violation of this pattern was the week after the markets reopened in September, and you remember how quickly the stock bounced back from that dip. By the way, did you notice how the stock just reversed from the upper edge of the wedge over the past 2 weeks? Speaking of stop adjustments, I raised our stop on Calpine (NYSE:CPN) this week. Things appear like they are improving, even if only slightly. The $23 support level looks like it is going to hold going forward, and September 21st was the only day that the stock closed below our new $21 stop. Well it is official! We've taken entries on both our first AND second LEAP put plays. Let's hope that I don't turn into the "Mark Phillips Contrarian Indicator", as that would mean that now the bull market is back! But seriously, both eBay (NASDAQ:EBAY) and American International Group (NYSE:AIG) gave us the entry points we were looking for (although I jumped the gun a bit on AIG), and the details are recorded below for all those who are interested. I've had several email questions lately on how to handle Covered Calls, since we don't discuss that aspect of our plays on a regular basis. To review, the covered call strikes that are listed in all of our LEAP Call plays are the recommended LEAPS to buy when initiating the play to allow some room to sell covered calls with the sold strike remaining above the LEAP strike. We spent a fair amount of time discussing this strategy last summer, including how to enter, manage and exit these combination positions. For those of you that missed that series of articles, I've included links to them below. They should answer most questions related to the Covered Call strategy, as we utilize it here in the LEAPS column. Of course, if there are any questions unanswered by that series, feel free to email me with specifics and I'll attempt to fill in the blanks. Covered Calls on the Cheap http://members.OptionInvestor.com/options101/061901_1.asp Covered Calls on the Cheap - A Success Story http://members.OptionInvestor.com/options101/062601_1.asp Questions on LEAPS Covered Calls - Part 1 http://members.OptionInvestor.com/options101/070201_1.asp Questions on LEAPS Covered Calls - Part 2 http://members.OptionInvestor.com/options101/070301_1.asp AOL-Rest In Peace http://members.OptionInvestor.com/options101/071801_1.asp More on Entry Points - The Covered Call http://members.OptionInvestor.com/options101/080801_1.asp LEAPS Covered Calls Trade Management - Target:SUNW http://members.OptionInvestor.com/options101/082201_1.asp In response to a number of emails asking for further clarification on how to use our entry targets, and manage positions from Watchlist to Portfolio to Drop, let me refer all our newcomers to the Strategy section. It can be accessed through the Strategy link at the top of each week's LEAPS column on the OIN website and should answer most of the basic questions that arise. Well, I think that just about does it for another week. I'm out of space and time and the old noodle is running out of gas. Be careful out there. Remember to set up your plan of action while the markets are closed, and it will be easier to make intelligent trading decisions when they are open. Have a great week, and take some time out on Monday and thank a veteran for providing the incredible opportunities we enjoy in this country! Mark Phillips Contact Support LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: LLY 10/17/01 '03 $ 75 VIL-AO $10.80 $12.50 15.74% $ 74 '04 $ 80 LZE-AP $12.20 $14.20 16.39% $ 74 CPN 10/25/01 '03 $ 25 OLB-AE $ 6.00 $ 7.60 26.67% $ 21 '04 $ 30 LZC-AF $ 6.50 $ 7.90 21.54% $ 21 Puts: AIG 11/07/01 '03 $ 80 VAF-MP $ 8.40 $ 9.30 10.71% $86.50 '04 $ 80 LAJ-MP $10.60 $11.40 7.55% $86.50 EBAY 11/08/01 '03 $ 50 OIY-MJ $12.50 $12.40 - 0.80% $62 '04 $ 50 KAF-MJ $16.20 $16.00 - 1.23% $62 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: GE 08/12/01 $36 JAN-2003 $ 40 VGE-AH CC JAN-2003 $ 30 VGE-AF JAN-2004 $ 40 LGR-AH CC JAN-2004 $ 30 LGR-AF TYC 09/16/01 $47-48 JAN-2003 $ 45 VYL-AI CC JAN-2003 $ 40 VYL-AH JAN-2004 $ 50 LPA-AJ CC JAN-2004 $ 40 LPA-AH NOK 09/23/01 $16-17 JAN-2003 $17.5 VOK-AW CC JAN-2003 $ 15 VOK-AC JAN-2004 $17.5 LOK-AW CC JAN-2004 $ 15 LOK-AC BRCM 10/28/01 $27-28 JAN-2003 $ 30 OGJ-AF CC JAN-2003 $ 25 OGJ-AE JAN-2004 $ 30 LGJ-AF CC JAN-2004 $ 25 LGJ-AE EMC 11/04/01 $11 JAN-2003 $12.5 VUE-AV CC JAN-2003 $ 10 VUE-AB JAN-2004 $12.5 LUE-AV CC JAN-2004 $ 10 LUE-AB MRK 11/11/01 $60-61 JAN-2003 $ 65 VMK-AM CC JAN-2003 $ 60 VMK-AL JAN-2004 $ 70 LMK-AN CC JAN-2004 $ 60 LMK-AL PUTS: None New Portfolio Plays AIG - American International Group $80.97 ** PUT PLAY** Remember that neutral triangle in the Insurance sector (IUX.X)? I have been watching it for weeks, and a couple weeks ago, we saw the first indication that it was going to break in favor of the bears. Of course, the bulls are a stubborn lot, stepping in near the $680 level to support the sector. That bounce took the IUX right to the upper edge of that triangle, and then the bears were back. The reversal earlier this week gave us a similar reversal in shares of our AIG Watchlist play, and it quickly fell back from the $83 level. Now I know that we had our target listed as $85-86, but dynamic markets demand flexibility. With the weekly Stochastics already rolling over, the developing weakness in shares of AIG had me jumping in on Wednesday's sharp downward move. AIG is back under its 200-dma and we appear headed lower over the near term, with the $75 support level a speedbump on the way to testing the September lows near $68. We'll initially place our stop just above the October highs at $86.50, and look to move it lower as AIG falls below the $78 support level. Any failed intraday rally below the $82.50 level still looks attractive for new entries, so long as the IUX continues to weaken. BUY LEAP PUT JAN-2003 $80.00 VAF-MP $ 8.40 BUY LEAP PUT JAN-2004 $80.00 LAJ-MP $10.60 --- EBAY - eBay $55.35 ** PUT PLAY** If it seems like we've been focusing too heavily on EBAY lately, it isn't due so much to a fixation with the Internet auction site, as a desire to describe the setup we were looking for to give us an attractive entry into our first LEAP Put play. The analysis that we have gone through on this stock can (and should) be applied to any prospective trade before taking a position. I won't rehash any of our prior commentary here tonight -- those that have missed the prior commentary can find all they want in the education department by reviewing my commentaries on the subject (Wednesdays and Sundays) beginning on October 21st. Simply put, we finally got the attractive entry I was looking for as the stock began to weaken Thursday afternoon. As the stock failed to hold above $58, that would have given vigilant traders the signal to open new positions based on weakness in both the daily and weekly Stochastics oscillator. The long-term descending trendline is currently resting just below $62, so that is where we are initially placing our stop. If EBAY is able to rally through that level, it will be a clear sign that I was wrong on this play. We'll wait for the $52 support level to fail before ratcheting our stop loss lower. I would continue to use failed intraday rallies in the $58-59 area to initiate new positions, as the bulls continue to rail against the developing downtrend. BUY LEAP PUT JAN-2003 $50.00 OIY-MJ $12.50 BUY LEAP PUT JAN-2004 $50.00 KAF-MJ $16.20 -------------------- New Watchlist Plays MRK - Merck & Company $64.61 ** CALL PLAY** Are you ready for another winning Pharmaceutical play? The Pharmaceutical index (DRG.X) has been consolidating for several months now, and I would expect to see bullish interest in this sector over the months ahead. The first indication that things are getting significantly better in the sector will be when the DRG index pushes back through the $410 resistance level, which has been capping rallies for much of the past year. Once that level is cleared, the sector will be in a position to move back towards the late 2000 highs. Similar to our Eli Lilly (NYSE:LLY) play, MRK has been consolidating recently in an ever tightening neutral wedge. The upper trendline is capping the rallies and currently rests near $68.50, while the supportive trendline has risen to the $64 level. Both the daily and weekly Stochastics are currently pointing south, so we've got some time before an ideal entry point arrives. The monthly chart is just starting to show signs of recovery, but the real clincher could come in the form of bullish divergence on the weekly Stochastics oscillator. If it can bottom and turn up above the latest trough, we'll have 3 ascending lows with price holding at higher levels. Additionally, we have solid support in the $60-61 level. A dip near that level will likely provide for attractive entries, especially if it coincides with bullish developments on the weekly and daily oscillators. While a dip near that level would represent a break below the ascending trendline, I expect that the dip would be short-lived. We can protect ourselves from significant weakness with a stop at $59, as MRK hasn't traded that low since early 2000. Once MRK begins to turn up, it will have to slog through a lot of resistance, first at $68, and then $71 (also the site of the 200-dma). Once above that significant level, MRK appears ready to move significantly higher, and we want to take advantage of any near-term weakness in the stock to position ourselves for the next big rally. BUY LEAP CALL JAN-2003 $65 VMK-AM BUY LEAP CALL JAN-2003 $60 VMK-AL **Covered Call** BUY LEAP CALL JAN-2004 $70 LMK-AN BUY LEAP CALL JAN-2004 $60 LMK-AL **Covered Call** Drops None ************************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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The Option Investor Newsletter Sunday 11-11-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/5592_5.asp ************************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 ************************************************************** ************* COVERED CALLS ************* Options 101: A Question About Electronic Trading By Mark Wnetrzak Today's discussion concerns the function of auto-execution with regard to electronically-traded options. The basic concept of an electronic exchange system is to allow multiple participants to trade simultaneously with one another using software that provides automatic execution of corresponding orders. Dear OIN, I recently had a problem with an option order that was routed to the "auto-execution" system at the CBOE. I know the new process allows trade requests to be automatically filled by a computer system, without having to go to a market-maker, when the quoted price of the option is equal to my order. In my case, the order (for twenty contracts) was not filled, even though the option was offered at the price I agreed to pay in the (limit) order. What am I missing here? Is there a special criteria for this type of trading that I am unaware of? Any help or information would be much appreciated. Thanks, RJ Concerning electronic trading and auto-execution: Over the past decade, a truly unique marketplace for securities has emerged through the development of interactive electronic trading. One of the key features of this mechanism is a matching system that allows multiple participants to trade simultaneously with each other using direct electronic access and software that provides automatic execution of corresponding orders. It is a powerful tool that enhances the way stocks and options are traded and despite the problems with this new process, the system is a tremendous benefit to both public and professional participants. In the derivatives markets, the function of "auto-execution" came to pass when options on popular (mostly NASDAQ and large-cap Dow) stocks began trading in higher volumes, causing delays in filling the orders due to the limited capability of manual order-input systems. But, the advent of computerized order routing changed the way stock and option exchanges do business and now the CBOE claims that, "with very few exceptions, public customer market or marketable limit orders of up to twenty contracts can be filled automatically in seconds" using their proprietary system. Through RAES, or Retail Automatic Execution System, public customer orders are executed instantaneously at the market price, and confirmation is immediately returned. RAES is a part of CBOE's ORS system that automatically fills customer market and marketable limit orders at the prevailing market quote in the most active series. The CBOE's "marketable limits" are defined as orders to buy at a limit price equal to or greater than the market offer, or to sell at a price equal to or less than the market bid. The automated system has certainly improved the retail trader's ability to execute orders during periods of heavy volume in a more timely manner but there are still flaws in the procedure. For example, in the past there have been complaints that the options exchanges' automated execution systems are programmed to route most incoming orders that are eligible for execution against an order on the limit-order book, including marketable limit orders, to manual handling instead of routing them for automatic execution against the order in the limit-order book. While this activity can lead to delays in order execution (and potential abuse of the system), most retail complaints stem from the fact that auto-execution is still based on the demand for options bid at that price, whether by a market-maker or a public (book) order. When traders say they have been treated unfairly by the system, they usually discover (after a trade inquiry) that there was simply no market for the number of options they offered to buy (or sell) at the limit price. To make matters worse, the size of the order also alerts the market-maker (or specialist) of an increased demand for that particular series and the price is adjusted accordingly. Another important fact is there are some major differences among the various exchanges with regard to the ability to provide liquidity enhancements, including the size of "guaranteed" auto-executions. In addition, all of the option-trading exchanges (CBOE, PHLX, AMEX, PSE & ISE) have special rules and policies regarding the kinds of orders and activities that are prohibited from entry onto their automatic customer order execution systems. Traders who are interested in learning more about the way orders are handled should visit the CBOE or one of the other exchanges for a firsthand look at the trading floor and its unique systems. Most brokerages have representatives that can provide clients with a guided tour of the facility and the people who work there are very customer-oriented and happy to answer your questions. The CBOE also has a "virtual" tour that allows new traders to learn more about the exchange without traveling to Chicago -- which is very cold during this time of the year. Trade Wisely! SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield AVNT 11.30 11.28 NOV 10.00 2.30 *$ 1.00 16.1% GSPN 11.04 11.05 NOV 10.00 1.85 *$ 0.81 12.8% INFA 7.99 11.18 NOV 7.50 1.20 *$ 0.71 11.4% RETK 21.89 25.82 NOV 20.00 2.70 *$ 0.81 9.2% AMLN 8.59 7.87 NOV 7.50 1.65 *$ 0.56 7.0% ARXX 14.61 15.70 NOV 12.50 2.50 *$ 0.39 7.0% ISSX 19.01 25.75 NOV 15.00 5.10 *$ 1.09 6.8% ANAD 16.95 17.41 NOV 15.00 2.40 *$ 0.45 6.7% MEDC 21.20 19.00 NOV 17.50 4.20 *$ 0.50 6.4% KROL 13.75 16.75 NOV 12.50 2.10 *$ 0.85 6.3% LWIN 16.33 17.38 NOV 15.00 1.95 *$ 0.62 6.2% TERN 9.22 10.44 NOV 7.50 2.10 *$ 0.38 5.8% PCYC 23.15 21.39 NOV 20.00 3.90 *$ 0.75 5.6% IMDC 21.30 23.22 NOV 20.00 1.80 *$ 0.50 5.6% NMTC 25.44 25.51 NOV 22.50 3.50 *$ 0.56 5.5% FFIV 15.43 19.19 NOV 12.50 3.50 *$ 0.57 5.2% ALTR 22.65 23.62 NOV 20.00 3.10 *$ 0.45 5.0% BRCD 25.36 30.24 NOV 17.50 8.80 *$ 0.94 4.9% CIEN 17.13 17.18 NOV 12.50 5.30 *$ 0.67 4.9% CELG 33.44 34.98 NOV 30.00 4.40 *$ 0.96 4.8% ISSX 25.16 25.75 NOV 20.00 6.00 *$ 0.84 4.8% AFCI 21.98 18.25 NOV 17.50 5.20 *$ 0.72 4.7% OVER 19.19 23.38 NOV 15.00 4.80 *$ 0.61 4.6% BRCD 24.69 30.24 NOV 17.50 7.90 *$ 0.71 4.6% MCAF 21.35 26.18 NOV 17.50 4.70 *$ 0.85 4.4% GNTA 14.40 16.75 NOV 12.50 2.25 *$ 0.35 4.2% TRMB 18.26 16.36 NOV 17.50 1.50 $ -0.40 0.0% *$ = Stock price is above the sold striking price. Comments: Expiration week already! Where does the time go? For those investors wishing to retain their stock positions, now is the time to consider rolling forward: buying back the sold calls and selling new calls with more time. Rolling forward and up (to a higher strike) is another solution which will increase profit potential at the expense of downside protection. It is also time to re-evaluate any positions that did not act as ex- pected or are now showing unusual weakness. Amylin Pharma (NASDAQ:AMLN) is continuing to consolidate and may test the support area around $7. The next few days should tell the tale. Some issues that are displaying rather disturbing technical signals and should be monitored closely during this last week are: Internet Security Systems (NASDAQ:ISSX), Advanced Fibre (NASDAQ:AFCI), and Pharmacyclics (NASDAQ:PCYC). Trimble Nav. (NASDAQ:TRMB) will be shown closed as it has moved below its 30- and 50-dmas. Those investors with a longer-term outlook may consider rolling down to a MAR-$15 call, which will lower the cost basis to approximately $14. So many decisions, so little time... NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield GMST 22.70 DEC 20.00 QLF LD 4.30 3436 18.40 42 6.3% GNTA 16.75 DEC 15.00 GJU LC 2.85 561 13.90 42 5.7% MCDT 18.80 DEC 15.00 DXZ LC 4.80 17 14.00 42 5.2% RMBS 8.88 DEC 7.50 BNQ LU 1.95 93 6.93 42 6.0% SURE 12.20 DEC 10.00 UGN LB 3.10 139 9.10 42 7.2% TELM 6.20 DEC 5.00 UHE LA 1.80 42 4.40 42 9.9% VTSS 11.61 DEC 10.00 VQT LB 2.45 641 9.16 42 6.6% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield TELM 6.20 DEC 5.00 UHE LA 1.80 42 4.40 42 9.9% SURE 12.20 DEC 10.00 UGN LB 3.10 139 9.10 42 7.2% VTSS 11.61 DEC 10.00 VQT LB 2.45 641 9.16 42 6.6% GMST 22.70 DEC 20.00 QLF LD 4.30 3436 18.40 42 6.3% RMBS 8.88 DEC 7.50 BNQ LU 1.95 93 6.93 42 6.0% GNTA 16.75 DEC 15.00 GJU LC 2.85 561 13.90 42 5.7% MCDT 18.80 DEC 15.00 DXZ LC 4.80 17 14.00 42 5.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** GMST - Gemstar-TV Guide $22.70 *** Bottom Fishing! *** Gemstar-TV Guide (NASDAQ:GMST) is a global media and technology company focused on developing, licensing and providing products and services that simplify and enhance consumer entertainment. The company was formed on July 12, 2000 through the merger of Gemstar International, a technology company focused on consumer entertainment, and TV Guide, a provider of television information and guidance in the United States. Gemstar-TV Guide's products have a special emphasis on television-oriented technologies and services, in particular, program guidance products including those marketed under the TV Guide name. Gemstar-TV Guide has been forming a Stage I base though the company's shares did fall a bit after it was announced that General Motors (NYSE:GM) agreed to sell its satellite television unit to EchoStar Communi- cations (NASDAQ:DISH). Analysts downplayed the impact and have noted that Gemstar-TV Guide's management had said several times that it expects to hit its year-end 2001 target of 20 million subscribers for its interactive program guides (IPGs) without a News/Hughes deal. With earnings due on Wednesday, November 14, investors can use this play to obtain a favorable cost basis from which to speculate on the company's future. DEC 20.00 QLF LD LB=4.30 OI=3436 CB=18.40 DE=42 TY=6.3% ***** GNTA - Genta $16.75 *** New Multi-Year High! *** Genta (NASDAQ:GNTA) is a biopharmaceutical company whose research efforts are focused on the development of new biopharmaceutical products for the treatment of patients with cancer. Genta's research portfolio is currently divided into 4 areas including the Antisense Program, which involves the administration of synthetic oligonucleotides that are complementary to specific mRNA transcripts; the Gallium Products Franchise, which is a bone-seeking element that exerts potent effects on the skeletal system; Androgenics Compounds, which are products comprised of a portfolio of small molecules that are useful for the treatment of prostate cancer; and Decoy Aptamers, which employ oligonucleo- tides to bind to specific proteins known as transcription factors. GNTA shares rallied strongly after announcing in September that it had received notice from the FDA that Genasense(TM), its lead anticancer compound, has been granted Fast Track designation for multiple myeloma. Genasense(TM) had previously received such designation for treatment of patients with malignant melanoma. On Friday, UBS Warburg initiated coverage of Genta with a "buy" rating on strong expectations for the company's experimental cancer treatment. A reasonable entry point for investors who wish to add GNTA to their stock portfolio. DEC 15.00 GJU LC LB=2.85 OI=561 CB=13.90 DE=42 TY=5.7% ***** MCDT - McDATA $18.80 *** Storage Networking sector *** McDATA (NASDAQ:MCDT) is the worldwide leader in open storage networking solutions and provides highly available, scalable and centrally managed storage area networks (SANs) that address enterprise-wide storage problems. McDATA's core-to-edge enter- prise SAN solutions improve the reliability and availability of data to simplify SAN management and reduce the total cost of ownership. McDATA distributes its products through its OEMs, network of resellers and Elite Solution Partners. On Thursday, Deutsche Banc Alex. Brown analysts Sabrina Ricci and George Elling launched coverage of the Storage Networking sector, and they included MCDT. They believe that the right companies will have a competitive advantage and command "premium" returns in the future. We simply favor the short-term "head-n-shoulders" bottom that is emerging, which creates a support area (end-of -August and Mid-October highs) near our cost basis. DEC 15.00 DXZ LC LB=4.80 OI=17 CB=14.00 DE=42 TY=5.2% ***** RMBS - Rambus $8.88 *** 5 Million Share Buy-back! *** Rambus (NASDAQ:RMBS) is an intellectual property company that designs, develops and licenses high-bandwidth chip-connection technologies which enable semiconductor memory devices to keep pace with faster generations of processors and controllers. To date, these efforts have resulted in more than 100 U.S. and foreign patents issued to Rambus. Rambus has licensed its technology to approximately 30 semiconductor companies for the development, manufacture and sale of Rambus-compatible ICs. Providers of Rambus-based integrated circuits include the world's leading DRAM, ASIC, controller and microprocessor manufacturers. In October, Rambus reported a fairly large drop in fourth-quarter operating income but did manage to report a pro forma profit that beat expectations. Rambus also authorized the repurchase of up to 5 million shares of its stock. Though the company said next quarter revenue will drop by about 15%, Rambus still expects the quarter to be profitable. Reasonable speculation on a bottoming sector. DEC 7.50 BNQ LU LB=1.95 OI=93 CB=6.93 DE=42 TY=6.0% ***** SURE - SureBeam $12.20 *** Titan Contract Supplier *** SureBeam (NASDAQ:SURE) is a provider of electronic irradiation systems and services for the food industry. Their electronic food irradiation process significantly improves food safety, prolongs shelf life and provides disinfestation, without compromising food taste, texture or nutritional value. The company offers services for the electronic irradiation of food through in-line turnkey systems and centrally located service centers allowing growers, packers and processors to choose the most convenient and effective way to utilize its SureBeam system for electronically irradiating their products. Titan Corporation (NYSE:TTN) received a contract from the U.S.P.S. to irradiate the mail and they said they will subcontract the order for the systems, which use electron beam and X-ray technology to destroy harmful bacteria, to its majority owned subsidiary SureBeam. The Defense Department recently added to the normal military food procurement authorization lists ground beef and poultry products that will be processed using electron beam food safety technology. Attractive speculation on a company that can "cure" the current fears of unsafe mail and food products. DEC 10.00 UGN LB LB=3.10 OI=139 CB=9.10 DE=42 TY=7.2% ***** TELM - Tellium $6.20 *** Cheap Speculation *** Tellium (NASDAQ:TELM) designs, develops and markets high- speed, high-capacity, intelligent optical switching solutions that enable network service providers to quickly and cost- effectively deliver new high-speed services. The company's products include hardware, standards-based operating software and integrated network planning and management tools designed to deliver intelligent optical switching for public telecom- munications networks. Tellium's products are specifically designed to manage very high-speed optical signals and can be easily expanded, enabling service providers to grow and manage their networks quickly and efficiently to keep pace with dynamic requirements of data services. In October, Tellium reported revenues of $40.1 million for the 3rd-quarter, a 32% increase over last year. The company expects to meet the high-end forecast for revenues this year, and believes revenues in 2002 will be approximately $288 million. Just this week, the company again re-affirmed their year-end and next year estimates. We simply favor the positive technical divergences as Tellium forges a Stage I base. DEC 5.00 UHE LA LB=1.80 OI=42 CB=4.40 DE=42 TY=9.9% ***** VTSS - Vitesse Semiconductor $11.61 *** Is This The Bottom? *** Vitesse Semiconductor (NASDAQ:VTSS) is a supplier of high- performance integrated circuits (ICs) principally targeted at systems manufacturers in the communications markets. The company is also a supplier of ICs to other markets such as the automatic test equipment (ATE) market. The company's major customers include Alcatel, Ciena, Cisco, Fujitsu, LTX, Lucent, Nortel, Sycamore and Tellabs. In October, Vitesse reported a 4th-quarter loss in line with reduced guidance as sales tumbled 73%. No recent news since the end of October when the Vitesse said it expects a 1st-quarter loss of between 11 cents and 14 cents a share. The question that a potential investor needs to ask is: Has the bad news already been priced in? This plays offer an exciting entry point for speculators who believe they have already witnessed the "bottom" in the Semiconductor sector. DEC 10.00 VQT LB LB=2.45 OI=641 CB=9.16 DE=42 TY=6.6% ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ACPW 5.53 DEC 5.00 ACQ LA 1.10 111 4.43 42 9.3% MONE 8.19 DEC 7.50 MOU LU 1.50 241 6.69 42 8.8% ALGX 9.00 DEC 7.50 QGX LU 2.10 361 6.90 42 6.3% ASYT 11.19 DEC 10.00 QQY LB 1.90 296 9.29 42 5.5% MACR 22.08 DEC 20.00 MRQ LY 3.50 2997 18.58 42 5.5% WEBX 34.10 DEC 30.00 UWB LF 6.20 1318 27.90 42 5.5% AMCC 12.65 DEC 10.00 AEX LB 3.30 5311 9.35 42 5.0% ***************** NAKED PUT SECTION ***************** Option Trading Basics: Q&A with the Editor By Ray Cummins Last week, one of our readers asked about the strategy of selling Put LEAPS to generate conservative, long-term profits or acquire new stocks at substantially discounted prices. Dear Ray, There are stocks that appear to be in a bottom (consolidation) process and I have been wondering about selling "naked" LEAPS on some of them. For example, Lucent is currently at $6.95 and the Jan 04 $10 Put sells for $4.40. LU would have to fall to $5.60 by expiration to break even. It seems that there is only a small risk here since the stock has been above $5 for a long time. In general, could this be a viable strategy? Thanks, JL Regarding the strategy of selling Put LEAPS: In my opinion, selling (naked) Put LEAPS is a great strategy at the present time for two reasons: the market appears to be near the bottom of its recent correction and Put option premiums are relatively favorable with regard to historic pricing trends. First, about LEAPS... LEAPS - Long-term Equity AnticiPation Securities are long-term options with expiration dates as far as three years in the future that allow investors to establish long or short positions. The strategies involving selling LEAPS do not differ much from those involving shorter-term options. LEAPS can be sold "naked" or against an underlying stock or other options. An investor that writes LEAPS will take in a substantial premium when compared to short-term Put options and thus has a smaller cash or collateral investment, since he is selling a more expensive option. The larger premiums in LEAPS also establish a much lower break-even price for the overall position and because of the additional time value in these options, there is relatively little chance of early assignment. There are two ways to approach this popular strategy: writing out-of-the-money (OTM) strikes for low risk and low return, or selling in-the-money (ITM) Puts for potential stock ownership or short-term capital appreciation. Both techniques are viable depending on your risk tolerance and outlook for the underlying issue. Writing OTM Put LEAPS offers a limited profit potential, but will outperform the more aggressive strategy if the stock price declines or remains relatively unchanged. While the OTM approach is most common, Jim's (OIN founder - managing editor) popular ITM technique is also quite attractive. You can learn more about that strategy here: http://members.OptionInvestor.com/editorplays/042201_1.asp The most significant difference in LEAPS is their slow rate of time-value decay. While this effect is initially beneficial to option writers, it can be a major obstacle in future position adjustments. The premiums (due to future potential) inherent in LEAPS prices can be very large even when they are substantially in- or out-of-the-money. This characteristic will significantly affect a trader's ability to roll-out of a position because the sold (short) option is relatively expensive to repurchase. At the same time, a short-term Put writer who is faced with rolling down -- buying back the current short position and selling a new option with a lower strike price -- may transition to LEAPS as a means of reducing the overall basis in the underlying issue, even though he may be moving to a potentially less profitable position. The large absolute premiums available in this type of strategy make these positions unusually attractive. The key to a correct assessment of this popular strategy, whether used for capital appreciation or in an attempt to establish a new position in an issue during a period of falling stock prices, lies in comparing the difference in annualized returns generated from the sale of LEAPS versus those that can be achieved from repeatedly writing shorter-term options. One point of advice: Never sell Puts on stocks you don't want to own! Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield PWAV 15.52 16.11 NOV 12.50 0.40 *$ 0.40 24.2% MRVL 27.73 29.95 NOV 22.50 0.45 *$ 0.45 15.5% KLIC 17.34 17.06 NOV 15.00 0.35 *$ 0.35 15.4% GNSS 47.85 45.09 NOV 40.00 0.80 *$ 0.80 14.4% CNXT 10.15 13.37 NOV 7.50 0.35 *$ 0.35 12.8% TTN 27.00 25.82 NOV 22.50 0.60 *$ 0.60 12.6% SURE 13.25 12.20 NOV 7.50 0.25 *$ 0.25 12.5% FFIV 16.55 19.19 NOV 12.50 0.30 *$ 0.30 12.0% SMTC 41.69 39.82 NOV 35.00 0.55 *$ 0.55 11.3% GNSS 39.18 45.09 NOV 30.00 0.90 *$ 0.90 11.2% OVER 25.50 23.38 NOV 20.00 0.40 *$ 0.40 10.5% JNPR 23.66 23.44 NOV 15.00 0.50 *$ 0.50 10.4% PWAV 16.20 16.11 NOV 12.50 0.25 *$ 0.25 10.4% AFFX 30.04 29.99 NOV 25.00 0.35 *$ 0.35 10.4% SMTC 40.21 39.82 NOV 32.50 0.60 *$ 0.60 9.7% EMLX 24.65 27.86 NOV 15.00 0.45 *$ 0.45 9.1% CELG 34.58 34.98 NOV 30.00 0.40 *$ 0.40 9.0% SAGI 21.65 25.03 NOV 17.50 0.40 *$ 0.40 8.8% NETA 18.38 20.82 NOV 15.00 0.45 *$ 0.45 8.8% RFMD 24.30 23.90 NOV 15.00 0.55 *$ 0.55 8.8% IMMU 16.30 20.10 NOV 12.50 0.35 *$ 0.35 8.4% CMNT 15.25 15.47 NOV 12.50 0.35 *$ 0.35 8.2% AFFX 31.70 29.99 NOV 25.00 0.35 *$ 0.35 7.6% BRCM 31.80 43.73 NOV 20.00 0.60 *$ 0.60 7.5% QLGC 37.06 46.00 NOV 22.50 0.65 *$ 0.65 7.0% STE 23.24 23.08 NOV 20.00 0.30 *$ 0.30 6.8% WEBX 29.77 34.10 NOV 20.00 0.35 *$ 0.35 6.0% QLGC 38.50 46.00 NOV 22.50 0.45 *$ 0.45 6.0% VRTS 29.08 35.42 NOV 17.50 0.30 *$ 0.30 5.3% *$ = Stock price is above the sold striking price. Comments: QLT Inc. (NASDAQ:QLTI) provided a great exit opportunity early in the week for traders who were still in the bullish position after last Friday's unexpected sell-off. The closing debit in the play was near $1.25, which produced a small loss overall. All of our current positions are at maximum profit and with only one week remaining until expiration, we expect November to be another outstanding month for the Naked-Puts portfolio. Positions Closed: QLT Inc. (NASDAQ:QLTI) NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield CNXT 13.37 DEC 10.00 QXN XB 0.30 186 9.70 42 7.3% IMNY 7.24 DEC 5.00 MQN XA 0.25 25 4.75 42 10.7% MACR 22.08 DEC 17.50 MRQ XW 0.45 33 17.05 42 6.7% MANU 10.66 DEC 7.50 ZUQ XU 0.35 172 7.15 42 10.2% MCSI 24.00 DEC 20.00 QIP XD 0.50 0 19.50 42 5.9% NTAP 16.51 DEC 12.50 NUL XV 0.65 1271 11.85 42 11.9% SLAB 28.26 DEC 22.50 QFJ XX 0.85 52 21.65 42 9.5% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield NTAP 16.51 DEC 12.50 NUL XV 0.65 1271 11.85 42 11.9% IMNY 7.24 DEC 5.00 MQN XA 0.25 25 4.75 42 10.7% MANU 10.66 DEC 7.50 ZUQ XU 0.35 172 7.15 42 10.2% SLAB 28.26 DEC 22.50 QFJ XX 0.85 52 21.65 42 9.5% CNXT 13.37 DEC 10.00 QXN XB 0.30 186 9.70 42 7.3% MACR 22.08 DEC 17.50 MRQ XW 0.45 33 17.05 42 6.7% MCSI 24.00 DEC 20.00 QIP XD 0.50 0 19.50 42 5.9% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** CNXT - Conexant Systems $13.37 *** Entry Point! *** Conexant Systems (NASDAQ:CNXT) provides semiconductor products and system solutions for a variety of communications electronics. Conexant delivers semiconductor integrated circuit products and system-level solutions for a range of communications applications. These products allow communications globally through wire-line voice and data communications networks, cordless and cellular wireless telephony systems, personal imaging devices and equipment, and emerging cable and wireless broadband communications networks. The company operates in two primary business segments: Personal Networking and Internet Infrastructure, which it plans to spin-off in the future. CNXT has established a relatively stable support area between $9 and $10 and this position offers a conservative entry point in that price range. DEC 10.00 QXN XB LB=0.30 OI=186 CB=9.70 DE=42 TY=7.3% ***** IMNY - I-Many $7.24 *** Bottom-Fishing! *** I-Many (NASDAQ:IMNY) provides unique software and Internet-based solutions and related professional services that allow its clients to effectively manage their business-to-business relationships. The company's customers include supply chain participants in different vertical markets that engage in business-to-business commerce, such as manufacturers, distributors, demand aggregators, retailers, public and also private business-to-business e-commerce exchanges and purchasers. The components and features of their products are designed to address particular business areas. In combination they are referred to as Trade Relationship Management. To date, substantially all of the company's revenues derive from the sale of software licenses to healthcare manufacturers and from the provision of related professional services. IMNY shares have established a relatively solid base near $5 and that's a reasonable price from which to speculate on the future of this unique company. DEC 5.00 MQN XA LB=0.25 OI=25 CB=4.75 DE=42 TY=10.7% ***** MACR - Macromedia $22.08 *** Entry Point! *** Macromedia (NASDAQ:MACR) develops, markets, and supports software products, technologies, and services that enable people to define what the Web can be. The company's customers, from developers to enterprises, use Macromedia solutions to help build compelling and effective Websites and eBusiness applications. The company has one primary business segment, the Software segment, which develops software that creates Website layout, graphics and media content for Internet users and develops and markets aggregated content to provide online entertainment on the Web. Shares or MACR jumped last week on news of an upgrade from USB Piper Jaffray and now the issue is well established in a new bullish trend. Investors can either wait for a consolidation to buy the issue or they can open this position for a cost basis near $17.00. DEC 17.50 MRQ XW LB=0.45 OI=33 CB=17.05 DE=42 TY=6.7% ***** MANU - Manugistics $10.66 *** Low Risk Speculation! *** Manugistics Group (NASDAQ:MANU) is a global provider of Enterprise Profit Optimization solutions, which is a category of solutions for enterprise management. MANU is also a provider of solutions for supply chain management, pricing and revenue optimization and electronic marketplaces. The company's solutions help companies lower operating costs, increase revenues, enhance profitability and accelerate revenue and earnings growth. Their products are grouped in four categories: NetWORKS intelligent engines, NetWORKS collaborative applications, WebConnect integration platform and NetWORKS Marketplace platform. Software stocks have recovered in recent weeks on expectations the industry is will rebound in the coming months. Manugistics is one of the leaders in the sector and traders can profit from future upside activity in the group with this conservative position. DEC 7.50 ZUQ XU LB=0.35 OI=172 CB=7.15 DE=42 TY=10.2% ***** MCSI - MCSi Inc. $24.00 *** Video Conferencing *** MCSi, Inc. (NASDAQ:MCSI) is a provider of integrated technical services and audio-visual presentation, broadcast and computer technology products. The company is a unique computer technology product reseller, designer and integrators of custom-configured and integrated audio and video display, broadcasting, conferencing and networking systems. These systems are designed for use in board and conference rooms, lecture halls, theaters, command and control centers, museums, professional broadcast facilities and streaming network facilities. MCSi markets and supports more than 75,000 different audio-visual, presentation, broadcast and computer technology and computer-consumable products, and regularly updates its product line to reflect new advances in technology and avoid product obsolescence. Video conferencing has become very popular for businesses since the 9/11 terrorist attacks and this issue has moved higher amid new interest in the industry. Investors can use this position to speculate on the success of the technology with relatively low risk. DEC 20.00 QIP XD LB=0.50 OI=0 CB=19.50 DE=42 TY=5.9% ***** NTAP - Network Appliance $16.51 *** Earnings Are Due! *** Network Appliance (NASDAQ:NTAP) is engaged in the business of network-attached data management and storage solutions. Network Appliance hardware, software, and service offerings are used to create, manage and scale seamless data fabrics, moving information to users globally. Their products consist of filer storage and caching appliances, data management and content delivery software, and support services. Network Appliance storage appliances, or filers, are systems that provide highly reliable data storage management. The company's NetCache appliances allow customers to scale network infrastructure, reduce bandwidth costs, ease network bottlenecks, and simplify data management and content delivery. The company's NetApp software offers a set of features that ensure mission-critical availability and also reduce the complexity of enterprise storage management. Network Appliance has a customer service and support organization to provide technical support, education and training. NTAP's earnings are due next week and the option premiums reflect the potential volatility in the issue. Investors who like the data storage sector can use this position to establish a discounted basis in one of the industry leaders. DEC 12.50 NUL XV LB=0.65 OI=1271 CB=11.85 DE=42 TY=11.9% ***** SLAB - Silicon Laboratories $28.26 *** New 2001 High! *** Silicon Laboratories (NASDAQ:SLAB) designs, manufactures and sells proprietary high-performance mixed-signal integrated circuits (ICs) for the wireless, wireline and optical communications industries. The company initially focused its efforts on developing ICs for the personal computer modem market and is now applying its mixed-signal and communications expertise to the development of ICs for other high growth communications devices, such as wireless telephones and optical network applications. The company's mixed-signal design engineers use standard complementary metal oxide semiconductor, or CMOS, technology to create ICs that can reduce the cost, size and system power requirements of devices that the company's customers sell to their end user customers. The chip sector is "hot" and the long-term trading range support near $20 along with the rally to a 11-month high makes this position in SLAB a favorable speculation opportunity. DEC 22.50 QFJ XX LB=0.85 OI=52 CB=21.65 DE=42 TY=9.5% ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield RFMD 23.90 DEC 17.50 RFZ XQ 0.85 3503 16.65 42 10.9% LWIN 17.38 DEC 15.00 UIN XC 0.80 206 14.20 42 10.8% TERN 10.44 DEC 7.50 TUN XU 0.25 25 7.25 42 7.7% CMNT 15.47 DEC 12.50 QDO XV 0.35 1 12.15 42 7.1% AMAT 38.57 DEC 30.00 ANQ XF 0.80 2100 29.20 42 6.8% IMDC 23.22 DEC 20.00 UZI XD 0.55 0 19.45 42 6.0% ZIGO 17.11 DEC 12.50 UZY XV 0.30 0 12.20 42 5.8% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Blue-chip Stocks Finish The Week Strong! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, November 9 The Dow Industrial Average achieved an important benchmark today, closing at a level not seen since the terrorist attack that took place in early September. The bullish activity emerged after investors were comforted by reports of growing consumer optimism and a belief that 2002 will be a successful year for U.S. equity markets. The fact that short-term interest rates were slashed to 40-year lows also helped "old economy" stocks recover this week and on Friday, the blue-chip average advanced 20 points to 9,608 on strength in Alcoa (NYSE:AA), Hewlett-Packard (NYSE:HWP), Exxon Mobil (NYSE:XOM), Philip Morris (NYSE:MO), Wal-Mart (NYSE:WMT), and SBC Communications (NYSE:SBC). Most technology sectors ended higher after a lackluster start with Internet, computer software and networking shares among the best performers. The NASDAQ 100 outdistanced the composite index, which ended almost unchanged at 1,828. In the broader market, energy stocks led the charge after a cut in crude oil production was announced by Russia. Shares of oil service, natural gas, utility, gold and retail issues climbed while selling pressure in biotechnology, insurance, airline and transportation stocks limited the advance of the S&P 500 index. Trading volume was 1.09 billion shares on the Big Board and 1.53 billion shares on the NASDAQ exchange. Market breadth was mixed, with winners edging past losers on NYSE while decliners outpaced advancers by a small margin on the NASDAQ. The 10-year Treasury note slumped 7/32 to yield 4.31% while the 30-year long bond gave back 5/32 to yield 4.88%. Last week's new plays (positions/opening prices/strategy): Sun Micro (NSDQ:SUNW) DEC12C/DEC10P $0.60 debit synthetic Biogen (NSDQ:BGEN) NOV65C/NOV60C $0.60 credit bear-call Intuit (NSDQ:INTU) JAN45C/NOV45C $2.90 debit calendar Abiomed (NSDQ:ABMD) NOV22C/NOV22P $2.25 debit straddle Juniper (NSDQ:JNPR) NOV20C/NOV20P $3.75 debit straddle Stor-Tek (NYSE:STK) NOV20C/NOV20P $1.65 debit straddle Sun Microsystems (NASDAQ:SUNW) was the big winner in the Spreads portfolio this week with the synthetic position yielding up to a $1.15 gain in only 4 days. The Juniper Networks (NASDAQ:JNPR) straddle was also an outstanding play, offering a $1.25 profit on $3.75 invested for traders who closed the position Thursday. The bullish calendar spread in Intuit (NASDAQ:INTU) was off to a great start but an unexpected sell-off late in the week pushed the volatile issue well below our sold strike at $45. The recent support area near $40 will provide the first test of technical strength and the upcoming earnings report is certain to keep the play interesting. The speculative straddle positions in Storage Technology (NYSE:STK) and Abiomed (NASDAQ:ABMD) were available at favorable prices but they have yet to produce a profit. Portfolio Activity: The recent volatility in the market has provided some terrific opportunities for option traders and with only one week until the November expiration, our portfolio has enjoyed an excellent month. In the credit-spreads section, all of the current plays are at maximum profit, including the dual positions in the S&P 100 index (OEX). The calendar-spreads portfolio has offered a number of potentially profitable candidates including Astoria Financial (NASDAQ:ASFC), Hollywood Entertainment (NASDAQ:HLYW), and Newell Rubbermaid (NYSE:NWL). The sole Covered-calls with LEAPS position in Microsoft (NASDAQ:MSFT) yielded a $2.50 gain on $8 invested in only 4 weeks and the (adjusted) time-selling position in Drexler Technology (NASDAQ:DRXR) has surpassed all expectations with the underlying issue climbing over 50% since mid-September. Among the bullish synthetic plays, Cabot Micro (NASDAQ:CCMP) was the top performer, providing a profit of up to $3 in less than two weeks. Other successful positions were offered in Powerwave Technologies (NASDAQ:PWAV), JDS Uniphase (NASDAQ:JDSU), RPM Inc. (NYSE:RPM), Vodaphone (NYSE:VOD) and our newest winner, Open Text (NASDAQ:OTEX). The delta-neutral category has not been as popular recently, however both of the current credit-strangles; Murphy Oil (NYSE:MUR) and Invitrogen (NASDAQ:IVGN), are at maximum profit. There is only one issue on the watch-list and that is the bullish, time-selling spread in Technitrol (NYSE:TNL). The stock made a valiant "break-out" effort early in the week but the rally failed again at $27, an area that may prove to be insurmountable in the closing months of 2001. Since we do not want to ride the issue back down to the bottom of the recent trading range (near $22), we will use any close below the current price as a potential "early-exit" signal, due to the increased probability of further weakness. Questions & comments on spreads/combos to Contact Support ****************************************************************** - SPECULATION PLAYS - One of our new readers asked for some low cost synthetic plays on bullish issues. All of these positions are based on recent increased activity in the stock and underlying options. While these plays offer favorable risk/reward potential, they should also be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** LWIN - Leap Wireless $17.37 *** Bracing For A Rally? *** Leap Wireless (NASDAQ:LWIN) is a wireless communications carrier that offers digital wireless service in the U.S. under the brand Cricket. Cricket service is operated by the company's wholly owned subsidiary, Cricket Communications, Inc., a wholly owned subsidiary of Cricket Communications Holdings, Inc. Under a license from Leap, Chase Telecommunications, Inc., a company that Leap acquired in March 2000, introduced the Cricket service in Chattanooga, Tennessee, in March 1999. Leap has introduced Cricket service in additional markets in the U.S. in 2000, and plans to introduce Cricket service in additional markets in 2001, and beyond. The Company also has a 20.1% interest in Pegaso Telecomunicaciones, S.A. de C.V., a Mexican company that operates a wireless network in Mexico. In October, Leap Wireless posted a wider than expected net loss, but said quarterly revenues jumped as it added more subscribers to its "Cricket" wireless telephone service. Despite the recent slowdown in the economy, the company said it expects to become EBITDA positive during 2002 and free-cash-flow positive in the first half of 2003. In addition, a recent decision by the FCC to gradually relax, and then eliminate the current restrictions on how much spectrum mobile telephone companies can hold in a single urban market could generate a number of mergers in the wireless industry. LWIN is a popular target in this scenario and although any deals are likely still a year away, analysts and traders are beginning to speculate on the potential combinations among the companies in the sector. The recent technical indications suggest a bullish change of character is taking place in LWIN and this position offers a conservative method to speculate on the future performance of the issue. PLAY (speculative - bullish/synthetic position): BUY CALL DEC-20 UIN-LD OI=122 A=$1.10 SELL PUT DEC-15 UIN-XC OI=206 B=$0.80 INITIAL NET DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.50-$0.70 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $550 per contract. ****************************************************************** LVLT - Level Three $4.97 *** Cheap Speculation! *** Level 3 Communications (NASDAQ:LVLT) and its subsidiaries provide a broad range of integrated communications services, and engage in communications, information services and coal mining. Level Three is a facilities-based provider, a provider that owns or leases a substantial portion of the plant, property and equipment necessary to provide its services. The company has also created, by constructing its own assets, and through a combination of new purchases and leasing of facilities, the Level Three Network; an international, facilities-based communications system to provide services that employ and leverage rapidly improving underlying optical and Internet Protocol technologies. The company has a total of approximately 63 markets in service, comprised of 52 markets in the United States, nine in Europe and two in Asia. Shares of this unique fiber-optic network builder rallied last week after the company announced it had signed an agreement to provide network services to the nation's #3 wireless telephone firm, AT&T Wireless Services. LVLT said it would provide AT&T Wireless with dedicated amounts of bandwidth to connect fixed locations, effectively bypassing common carrier networks. The company said the bandwidth would be used to transport voice and data for AT&T Wireless' next-generation wireless network, which offers high-quality voice and speedy Internet access. Investors were generally bullish on the news but most analysts believe the deal will not substantially alter the company's near-term outlook. At the same time, almost everyone is agrees that a "fundamental" bottom is in place for the Wireless Telecom sector and there are likely more contracts with major carriers in the company's future. Technically, the issue appears to be successfully completing a basing phase and we expect LVLT to benefit significantly from the next technology rally. Traders who are bullish on fiber-optic networking stocks can use this synthetic position to speculate on the future performance of the group. Target a credit in the play initially, to allow for a brief pullback in the underlying issue. PLAY (very speculative - bullish/synthetic position): BUY CALL JAN-5.00 HGY-AA OI=7988 A=$1.10 SELL PUT JAN-5.00 HGY-MA OI=2838 B=$0.95 INITIAL NET CREDIT TARGET=$0.00-$0.15 TARGET PROFIT=$0.75-$0.90 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $300 per contract. ****************************************************************** - TECHNICALS ONLY - Here are two favorable combination positions that emerged in a search for "bearish" issues with speculative options activity. Since these plays are so evenly matched with regard to technical history and risk/reward outlook, we decided to publish them both and let the readers make a choice. In addition, news and market sentiment will have an effect on these issues, so review each one thoroughly before making your decision. ****************************************************************** HB - Hillenbrand $50.61 *** Rolling Over? *** Hillenbrand Industries (NYSE:HB) is a diversified, public holding company and the owner of 100% of the capital stock of its three operating companies serving the funeral services and healthcare industries. The company's Health Care Group consists of Hill-Rom company, a manufacturer of equipment for the healthcare market and provider of wound care, and pulmonary and trauma management services. Hillenbrand's Funeral Services Group consists of the Batesville Casket Company, a manufacturer of caskets and other products for the funeral industry, and Forethought Financial Services, a provider of funeral-planning financial products. Note: Next week, the company plans to update earnings guidance for the fourth quarter of 2001 and provide an initial earnings outlook for its 2002 fiscal year. PLAY (conservative - bearish/credit spread): BUY CALL DEC-60 HB-LL OI=122 A=$0.25 SELL CALL DEC-55 HB-LK OI=254 B=$0.75 INITIAL NET CREDIT TARGET=$0.60-$0.70 PROFIT(max)=14% ****************************************************************** KMB - Kimberly Clark $55.90 *** No Safety Here! *** Kimberly-Clark (NYSE:KMB) is engaged in the manufacturing and marketing throughout the world of a range of consumer products. The company is organized into three global business segments, Tissue, Personal Care, and Health Care and Other. The Tissue segment includes facial and bathroom tissue, towels, wipers and napkins for household and away-from-home use; disposable wipes; printing, business and correspondence papers, and other related products. The Personal Care segment includes disposable diapers, training, youth, and swim pants, feminine and incontinence care products and related products. The Health Care segment includes healthcare products, consisting of surgical gowns, drapes, exam gloves, infection-control products, sterilization wraps, masks, respiratory products and other disposable medical products, as well as specialty and technical papers and other products. PLAY (conservative - bearish/credit spread): BUY CALL DEC-65 KMB-LM OI=45 A=$0.10 SELL CALL DEC-60 KMB-LL OI=709 B=$0.60 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** MERQ - Mercury Interactive $29.45 *** Expiration Week! *** Mercury Interactive (NASDAQ:MERQ) is a provider of integrated performance management solutions that enable businesses to test and monitor their Web-based applications. Its software products and hosted services help Global 2000 companies enhance the user experience by helping the performance, availability, reliability and scalability of their Web-based applications. The company's hosted services provide its customers a cost-effective solution that quickly meets business needs without dedicating significant time and internal resources. Mercury's integrated performance management solutions enable customers to more quickly identify and correct problems before users experience them. Its hosted services provide outsourced load testing and Web performance monitoring services that complement its software products. Here's a great "expiration week" straddle, based on the issue's historical option-pricing trends and technical background. The stock has options that are undervalued (cheap) and also has the potential to move more than enough to make the play profitable. In addition, MERQ has a history of multiple movements through a sufficient range in the required amount of time to justify the overall risk/reward of the position. PLAY (speculative - neutral/debit straddle): BUY CALL NOV-30 RQB-KF OI=9766 A=$1.00 BUY PUT NOV-30 RQB-WF OI=262 A=$1.60 INITIAL NET DEBIT TARGET=$2.35-$2.50 TARGET PROFIT=15% ****************************************************************** POT - Potash $60.10 *** Range-Bound! *** Potash Corporation of Saskatchewan (NYSE:POT), along with its direct and indirect subsidiaries, is an integrated fertilizer and related industrial and feed products company. Their main customers for fertilizer products are retailers, cooperatives, dealers, distributors and other fertilizer producers. Their primary customers for industrial products are chemical product manufacturers. The majority of their purified phosphoric acid is sold directly to consumers of the product, with the balance sold through an authorized non-exclusive distribution network. Potash is a great candidate in the "premium-selling" category of options trading. The issue has robust option premiums, a well-defined trading range and no expected news or events to change its fundamental outlook in the coming weeks. With this combination of qualities, there is a high probability that the issue will remain between the sold (short) strike prices until next month. In addition, the "range-bound" characteristics of its recent price activity should provide an easy opportunity for position adjustment, if the issue moves beyond the profit envelope prior to the December options' expiration. As with any recommendation, the play should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. PLAY (moderately aggressive - neutral/credit strangle): SELL CALL DEC-65 POT-LM OI=690 B=$1.50 SELL PUT DEC-55 POT-XK OI=327 B=$1.25 INITIAL NET CREDIT TARGET=$2.85-$3.00 PROFIT(max)=18% UPSIDE B/E=$67.85 DOWNSIDE B/E=$52.15 ************************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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