The Option Investor Newsletter Sunday 12-09-2001 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/1209_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 12-07 WE 11-30 WE 11-23 WE 11-16 DOW 10049.46 +197.90 9851.56 -108.15 9959.71 + 92.72 +258.99 Nasdaq 2021.26 + 90.68 1930.58 + 27.39 1903.19 + 4.61 + 70.10 S&P-100 591.78 + 6.98 584.80 - 8.47 593.27 + 5.20 + 10.08 S&P-500 1158.31 + 18.96 1139.45 - 10.89 1150.34 + 11.69 + 18.34 W5000 10745.37 +213.92 10531.45 - 64.95 10596.40 +109.73 +189.46 RUT 481.21 + 20.43 460.78 + 2.36 458.42 + 7.11 + 13.21 TRAN 2628.26 +116.48 2511.78 - 23.12 2534.90 + 37.53 +176.68 VIX 24.89 - 1.25 26.14 + 1.36 24.78 - 2.39 - 1.59 VXN 50.18 + 1.73 48.45 - 2.36 50.81 - 4.23 - 3.55 TRIN 1.18 1.19 0.70 0.99 TICK +828 +852 +976 +750 Put/Call .78 .63 .61 .50 ****************************************************************** Profit Takers Get Their Fill! by Jim Brown Weaker than expected economic reports provide another excuse for traders to take profits from the recent rally. In reality we should thank them for providing us another buying opportunity. Despite the down day all the major indexes finished the week with another healthy gain. Even a major hit to many stocks by a ruling in an asbestos case could not push the Dow/Nasdaq below 10000/2000. Chart of the Nasdaq Chart of the Dow The best news of the day in my opinion was interpreted by traders as an excuse to sell. The Jobs Report showed a larger than expected drop in November with -331,000 jobs lost. Analysts had expected only -200,000. October job losses were revised downward to -468,000 as well which was a 25 year low. The unemployment rate increased to 5.7% and a six year high. The impact of the 9/11 attack is slowing but increasingly being felt in the service sector which had been stronger before September. Manufacturing cuts accounted for almost half of the job losses. Remember, this is a trailing indicator. This was the picture for November and it shows an improving trend over October. Still the numbers will almost certainly cement another rate cut when the Fed meets on Tuesday. The numbers may have been negative on the surface but the lasting impact is bullish. The other positive economic news was a jump in consumer sentiment to 85.8 and the third consecutive monthly improvement. At 85.8 it has yet to achieve the pre-attack levels of 91.5 but it is accelerating from the 81.8 September bottom. The expectation portion of the index rose to 76.6 and the present conditions component rose to 95.3. In light of the increasing unemployment any gains now point to an explosion when the economy actually turns around. With traders looking at this news as positive one analyst suggested stock prices were already looking farther ahead than Nostradams. Chip stock investors must have seen a negative prediction in the three tech affirmations on Thursday. Investors sold the news from Intel as "not good enough" and SUNW as too vague. AMD was the only winner with news that sales of the Athalon processor were hot. The chip sector also took a hit with a downgrade on Altera. Morgan Stanley cut ALTR to neutral from outperform. They also increased the price targets on SLAB from $30 to $50 and XLNX from $40 to $50. The Semiconductor index had been close to breaking the 600 level but rolled over as investors sold the INTC/AMD news to close at 571. Investors should not interpret this news and reaction as negative but just a normal reactionary event. INTC had gained +20% since Nov-21st in anticipation of the quarterly update. This was simple profit taking again. Microsoft help influence the major averages to the downside after the dissenting states filed their own plan to remedy the antitrust concerns. They want a stripped down Windows or unbundled product which is cheaper and more affordable. They also want full release of Internet Explorer as an independent product and an release of the Java code for developers. An independent "special master" would oversee the plan and complaints for a ten year period. MSFT fell to an intraday low of $66.60 before analysts shrugged off the proposal as no big deal. It has to go to the court and it will be mid-2002 before any action is taken on it. Hewlett-Packard rose in after hours after the family foundation voted against the Compaq merger. The Packard Foundation, which controls 10% of HWP stock, sided with other family members already on record and bringing the total to 17% of the voting stock against the transaction. HWP jumped to $25 in after hours and CPQ fell to $10. The foundation said the merger would over expose HWP to very low margin products like personal computers. I am still on record as suggesting Dell buy CPQ. It takes out a huge competitor and puts them into the retailer marketplace. The additional volume would only decrease their costs. Of course it would probably not pass the regulators but it should be worth a try. You can't tell me Michael Dell has not thought about it. The major averages came right back down to "psychological" support intraday on Friday but the minor selling was bullish in my mind. There were several negative events, which could have easily killed the markets just weeks ago. Argentina was at deaths door again as Economy Minister Domingo Cavallo was in Washington trying to get a last ditch reprieve from the IMF. After a strong run on the banks over the last two weeks it was feared that Argentina would default as early as this weekend. This event has been predicted for months and is already priced into the markets but the actual event could have caused a knee jerk reaction. There was a flurry of rumors that the drop in the U.S. bond market was due to Argentina selling U.S. Zero coupon bonds, which had been held to secure their debt, to raise cash and avoid a weekend default. This rumor was never substantiated but the bond market sold off heavily. Japan announced another recessionary quarter and continues to spiral downward. Nobody even noticed. Halliburton (HAL) fell more than -40% on news that a Baltimore jury had awarded $30 million in asbestos damages against its Dresser subsidiary. The verdict brings the total to over $150 million in awards against the company. The recent flurry of verdicts in asbestos cases have brought the problem to the forefront again. Other companies including GP, CBE, GR, SEE and even Viacom dropped on worries about their own exposure problems. Why does Viacom (VIA), a media company, have asbestos exposure? VIA purchased CBS many years ago and CBS was originally Westinghouse which was involved in manufacturing. It appears that you can't distance yourself far enough from the problem to escape it. Many of the companies have sold or divested themselves of the problem units decades ago but the problem continues to haunt them even through bankruptcies. The point to this paragraph is that even a major loss by over a dozen companies, HAL dropped from $22 to $11, failed to crash the markets. That is bullish in my opinion. The bottom line to this article today is good times are still ahead. The Fed will likely cut rates yet again and even though they will take back some of these cuts next year the low interest rates are impacting the economy in a positive way. The rebound is beginning and huge rallies always follow recessions. The only question remaining is how soon the recovery will catch fire and rocket the markets. The absence of earnings warnings should be our clue to the future. On Friday the Dow and Nasdaq pulled back to within two points of their critical psychological support of 10000/2000. No kidding both hit 10002/2002 before the rebound. Slap a retracement bracket on both of them and you will see exactly a 38.2% Fibonacci retracement of the gains from the Monday close to the Thursday's high. The convergence of the technical numbers with the psychological numbers may be pure coincidence but the drop stopped and as traders we should be happy. The selling in the bond market over the last three days has produced billions in cash which could be poised to enter the stock market next week. Normally a jobs report like we saw Friday would have sent investors running for the safety of the bond market. Exactly the opposite of what happened. This could be a leading indicator of next weeks trading. No, I have not lost my mind since my Thursday commentary where I restated the strength of the resistance above us. It is still there but just maybe it will take the place of the wall of worry that is eroding daily. The only almost sure thing is that the markets will go up over the next several months and they will not go up in a straight line. For traders that is a great scenario. Rallies that create profits and dips on profit taking that will create new entry points. As option traders we do not want to be married to our positions like some stock investors. Rapid rises increase call premiums and profits for those that capture those gains. Rapid drops decrease call premiums and produce profitable entry points for new positions. As traders we need to be alert for these cycles. I said on Thursday that there was a better entry point ahead and someone sent me an email saying I was an idiot for not realizing we were in a rally. Fortunately our "rally" produced a better entry point on Friday as expected. It is not heresy to teach market cycles. It is sound investing to expect them. My directions for next week have not changed. A. Buy the dips. B. Take profits early. C. Repeat A&B. Enter Passively, Exit Aggressively! Jim Brown Editor@OptionInvestor.com Editors note: We will be announcing our annual renewal special next week and we think you will be really excited about the plans we have for OptionInvestor. We will be offering you special renewal bonuses YOU CANNOT GET ANYWHERE ELSE ! Stay tuned ! ************************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 ************** Rebound Candidates Today I am going to focus on several stocks that have been beaten severely but still have considerable value which will eventually be rediscovered by traders. AMR $23.34 chart= AMR was hit with massive selling after the 9/11 attacks. Two of their planes were used in the attack but the real problem was the drop in passenger traffic. With no follow on attacks and the holidays approaching the passenger traffic has increased. The cheap oil and reduced flight schedules will make airlines more profitable once passenger traffic reaches prior levels. I would play the longer term May options to benefit from first quarter earnings which could show a significant rebound. The May-2002 $25 call, AMR-EE is $2.75 ***************** Boeing $37.30 chart= Boeing (BA) suffered from the attack as airlines postponed or cancelled orders for planes. Many of those orders have now returned or been replaced by other airlines. Fewer flights and grounding of older planes which are expensive to operate along with the need to compete on equal with more modern carriers have taken up the slack at Boeing. Not yet up to the same level of orders as pre-attack but they did not suffer as much as investors first thought. This company also has a significant defense business and will benefit from the war buildup. BA is poised to breakout to a new post attack high next week and could easily be back at $50 once an economic recovery gains speed in 2002. I would use the May-2002 options. I prefer the $35 call since breakeven on it is $40.10. The $40 call is cheaper but breakeven is $42.85. A rise to $45 would double your money on either option. *************** WPI $32.13 chart= Watson missed earnings in November and announced a restructuring to take the company out of the competitive and cut throat generic drug sector. They are going to focus on more profitable drugs and the switch will depress earnings slightly in 2002 but increase them in 2003. Investors don't like surprises and WPI was knocked for a big loss. They are recovering and should eventually regain their old price. I would use the May-2002 $30 call at $5.60 (2.13 in the money) because the breakeven is $35. Using the cheaper $35 call at $3.30 makes the breakeven $38.30. A rise to $41 would probably double either position. ********************** Top 20 List There were a lot of good looking plays this week. Many had pulled back to support and offered a better entry point. Please only play these calls if the market is in rally mode. CALLS ACS 97.54 Play breakout over $98 BRL 77.14 Nice breakout over $75 on drug news CBRL 29.25 Held gains from recent rally CCL 27.57 Excellent recovery from attack CI 94.30 Resistance at 102 CR 24.23 Friday pullback to uptrend line DAL 30.61 Post attack high DLX 40.90 No weakness here FDC 77.43 New high FFIV 25.45 New relative high GAP 25.60 No tech risk GTW 9.90 Back to support, catchy ads IKN 11.32 Wait for breakout over $11.50 IMNY 8.76 New relative high INTC 33.23 Pullback to support. Entry point? KRON 48.20 Nice trend, no weakness. LOW 46.33 Pullback to support, entry point MAR 40.16 Post attack high MCDT 28.10 Entry point MGAM 38.53 Games are hottest gift item MTSN 8.16 Strong recovery in progress NXTP 10.32 Strong trend PDII 19.75 New life, back from the dead! PVTL 5.88 Stock for the price of an option RATL 20.88 Break over $20 SANM 23.95 Strong chip stock SEPR 52.00 Entry point? SKYW 26.44 Back from the dead SLR 16.25 Recovering tech SNA 33.73 No weakness here TELM 7.95 Back to support? WFMI 45.62 New high XMSR 12.90 Thinking about buying one... All of the above plays involve risk. You need to do your own research before initiating any of these plays. Good Luck Jim **************** MARKET SENTIMENT **************** Market Mechanics By Eric Utley I've received a lot of reader e-mail recently expressing disbelief in the current rally. Some suggest that valuations are too high. Others believe the economy will stumble next year. The extremists think the market has reached the mother of all put opportunities. My buddy, Buzz Lynn, created an acronym for that expression: MOPO. In the end, whenever that may be, stocks trade on earnings. But the market is a forward-looking mechanism, which means it discounts the future in the present by about six to nine months. Therefore, the recent rally in stocks discounted a significant rebound in corporate earnings next year. Right? The market is omniscient; it is efficient. At least that's what academia and Vanguard would have you believe. Traders, however, know that inefficiency and irrationality coexist in the market. The two exist because a free market is comprised of humans. Humans are fallible. There are two explanations for the recent rally: Corporate profits will rebound by a significant margin next year. or The big buyers are carrying stocks higher into the end of the year, no matter the price paid; in fact, the higher the better. If it's the latter, then the market is currently inefficient and irrational. Mutual funds, part of the buy-side of Wall Street, are powerful entities that control a lot of cash. The managers of many funds are in a tight spot again this year. Perhaps on the brink of losing their jobs. Fight or flight, which is it going to be? I hate to use Janus as an example, but they're such an easy target. Take, for instance, the Janus Fund (JANSX). Assets are down and so is performance. The fund is down by about 25 percent year-to-date. As of a few weeks ago, Enron (NYSE:ENE) was among the funds top holdings, which partially explains the fund's under performance. But also among its top holdings is eBay (NASDAQ:EBAY). As of December 7, the Janus Fund held about 3 million shares of eBay. If the Janus Fund wanted to make-up performance in a quick way, it could deploy its cash into EBAY, which has been one of the better performing tech stocks this year. In carrying the stock higher into the end of the year, the fund could "mark-up" its existing position, in doing so, boosting performance. Hence the higher the price paid the better. eBay could very well hit its $5 billion revenue target before '05. It could meet or exceed its lofty 50 percent growth targets in the coming years. Either accomplishment would justify the stock's recent rally; at the very least, it would weaken the valuation argument. Conversely, eBay could disappoint. Hell, I don't know if the stock is worth 90 times next year's earnings. I don't think the funds know either. I don't think the funds care. What the funds care about is performance because that is what attracts assets and assets are what constitute compensation. Compensation is a powerful force that can cause irrational behavior. I don't know if Janus is "marking up" EBAY. They could be selling it for all I know. But Janus in only one fund in a universe of thousands and EBAY is just one stock among thousands of others. The practice of "marking up" stocks exists on a very large scale in the universe of funds and stocks. When the stars align, it becomes a very powerful force, next to unstoppable. The stars may be in-line now, which could help to explain the "unjustified" rally. That's not my term. Quite frankly, I really don't care if the rally is justified. It's for real, I know that much. And so long as funds need to make-up performance, it could continue into the end of the year. Why? If the Janus Fund, for example, can squeeze out a few more basis points from EBAY while the stock is still on the books, then its performance may turn out better for 2001, attracting or retaining more assets. Maybe the recent rally is justified. Maybe it isn't. We won't know for sure until next spring and summer. In the meantime, all a trader can do is be willing to operate from either side of the market. The most important trader attribute, in my opinion, is objective observation. If you can find that, you're light years ahead of most mutual fund managers. I'm not pooh-poohing the rally. Not at all. I've been trading from the long side. And will continue to do so until the market dictates otherwise. Whether you "think" the rally is for real or not, you have to be able to set your beliefs aside and trade what you observe. Psychology is a powerful force. More powerful than fundamentals over the short- and intermediate-terms. For that reason, objective observation is a necessity. ----------------------------------------------------------------- Market Volatility VIX 24.89 VXN 50.18 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.78 569,600 445,743 Equity Only 0.59 506,900 348,421 OEX 1.27 11,868 15,033 QQQ 2.38 12,851 30,548 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 50 + 1 Bull Confirmed NASDAQ-100 77 - 1 Bull Confirmed DOW 63 + 0 Bull Confirmed S&P 500 66 + 1 Bull Confirmed S&P 100 65 + 0 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 0.84 10-Day Arms Index 1.10 21-Day Arms Index 1.03 55-Day Arms Index 1.05 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 1401 1680 NASDAQ 1753 1876 New Highs New Lows NYSE 94 30 NASDAQ 102 30 Volume (in millions) NYSE 1,243 NASDAQ 1,897 ----------------------------------------------------------------- Commitments Of Traders Report: 12/04/01 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 shed a significant number of longs in the prior reporting period, while the group's short position remained relatively flat. While the commercials' net position is far off from the year's most bearish reading, it did increase by a measurable amount last week. Meanwhile, small traders added a meaningful number of long positions and simultaneously dumped a number of short positions. Commercials Long Short Net % Of OI 11/13/01 381,539 421,284 (39,745) (5.7%) 11/27/01 371,336 421,405 (50,069) (6.3%) 12/04/01 360,315 420,919 (60,604) (7.8%) 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 11/13/01 136,047 87,645 48,402 22.0% 11/27/01 151,317 92,807 58,510 24.0% 12/04/01 159,336 86,534 72,802 29.6% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 Commercial traders added to both long and short positions, with a decrease in their net short position. Small traders exited a few long positions while holding their total short position relatively flat during the prior reporting period. Commercials Long Short Net % of OI 11/13/01 38,751 49,257 (10,506) (12.0%) 11/27/01 37,259 48,315 (11,056) (12.9%) 12/04/01 42,191 51,426 ( 9,235) ( 9.9%) 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 11/13/01 11,568 6,505 5,063 28.0% 11/27/01 12,540 8,359 4,181 20.0% 12/04/01 11,808 8,311 3,497 17.4% 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 Both commercial and small traders held to their biases in the prior week. Commercials shed long and short positions, amounting to unchanged % of OI. Small traders shed long and short positions, growing slightly more bearish. Commercials Long Short Net % of OI 11/13/01 24,145 10,204 13,941 40.6% 11/27/01 24,243 11,496 12,747 35.7% 12/04/01 22,703 10,739 11,964 35.8% 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 11/13/01 4,094 12,121 (8,027) (50.0%) 11/27/01 4,228 10,630 (6,402) (43.1%) 12/04/01 3,677 9,799 (6,122) (45.4%) 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 *************** The Hierarchy of Needs By Eric Utley Maslow, who was a psychologist, thought the better of people. He believed that humans searched for growth and love. Maslow, unlike other psychologists who studied the mentally ill, studied exceptional humans such as Albert Einstein and Frederick Douglas. Freud, for example, came to the conclusion that there existed marginal differences between the behavior of animals and humans. I like to believe that humans are motivated by more than the search for food and sex. Needless to say, I didn't enjoy reading Freud in Psych 101. Maslow developed a hierarchy of needs, which explained how humans were motivated by unsatisfied needs. The "higher" needs in the hierarchy could only be met, explained Maslow, after the "lower" needs had been fulfilled. The hierarchy looks like this: image= Physiological needs are at the bottom of the pyramid because they are the most basic of needs, such as food, water, and sleep. Only after physiological needs have been met can a human move onto Safety needs, which are synonymous with a family and home. After Safety needs have been met, a human graduates to Love needs. Love needs are universal, not the romantic; they incorporate the sense of belonging to a group. After Love needs are met, humans search for Esteem needs, which come in two forms: self-esteem and recognition by others. The peak of the pyramid is Self-actualization, which is the full potential of humans. Self-actualization is unique to each individual. Maslow said that Self-actualization is "the desire to become more and more what one is, to become everything that one is capable of becoming." For some, Self-actualization is the insatiable desire for knowledge, while others search for peace or self-fulfillment in whatever forms they may come. The Point: For me, fulfillment comes in many forms. Oftentimes, it comes in the form of a 20 inch rainbow trout. Recently, fulfillment has come from my readers. It's so very cool to receive questions from readers based upon the strategies and methods I write about in this column. For instance, several of this weekend's questions incorporate the ideas of point & figure charting, including price objectives. I'm not a good teacher, never will be. But if I can relay my experiences and ideas about the market to my audience in a way that helps them to make more money, then I'm one step closer to self-actualization. The peak of the pyramid is a goal of mine, so I thank each and every one of my readers who have ever taken the time and effort to send in a thoughtful question. That's all mushy, I know. I just wanted to express my gratitude, that's all. Now, on with show! The point and figure charts that appear in this column were created using www.Stockcharts.com. Please send your questions and suggestions to: Contact Support ---------------------------- EMC - (NYSE:EMC) EMC once a darling of many. What are your views on this company? Please give some details on their business and what will be the future prospects with economy on the rebound. - Thanks, Sunil Thanks for the question, Sunil. It's nice to hear from you. EMC was once the darling of many. I made the mistake of being bullish on the stock around $50 and again around $30. It's in the teens now. I'm working on redeeming myself for that mistake. The problem with EMC is that it's facing stiff competition from the likes of Sun Micro (NASDAQ:SUNW), Big Blue (NYSE:IBM), and even Dell (NASDAQ:DELL). For a long time, EMC enjoyed fat margins, which allowed its bottom-line to blossom during the last decade. The company controlled a massive amount of the data storage business. It still does control the majority, but its market share is shrinking because of the entrance of the aforementioned competitors. As a result, margins are shrinking. Such is capitalism. Even if the data storage business rebounds to its levels of a few years ago, which I don't think it will, it won't benefit EMC as much because of the new players in the business. Nevertheless, EMC is one of the best-managed IT companies in the world and controls a lot of market share. Suppliers in the data storage business have been reporting good things recently. For example, Brocade (NASDAQ:BRCD) reported a decent quarter a week ago and analysts raised forecasts for its next quarter. Indeed, QLogic (NASDAQ:QLGC) and Emulex (NASDAQ:EMLX) have been among the better performing stocks in the tech space recently -- both are data storage suppliers. With added competition among the manufacturers of data storage equipment -- the big box sellers -- it may be more intelligent to play a rebound in the business through the suppliers, who still enjoy relatively fat margins. That's not to say EMC won't rebound along with the data storage business and the economy, but its advance may be less than others in the group because of the added competition in EMC's specific space. If you disagree with my findings and want to be in EMC now, I think it would be best to wait for a pullback in the stock. Between $15.50 and $16.50 might offer a better risk/reward scenario than buys at current levels. From a purely technical standpoint, the stock appears to have put in a solid base during September and late October, from which it recently broke out. The next meaningful level of resistance sits at $21. chart of EMC ---------------------------- WorldCom - (NASDAQ:WCOM) I've really been enjoying your column lately (well I always have enjoyed it, just more so lately). Anyway, I've happened to notice WorldCom today. It is sitting just under resistance at 15.5 on the P&F chart, not to mention the double top buy signal it just made. So if I've done this right, the double top suggests a 38% gain ($5.89) and the bullish price objective is 26. Plus the daily stochastic look to be sailing northbound very nicely. I guess my question is, first, is my analysis right, and second, is there any reason that one shouldn't be getting longer here? - Thanks, Michael Michael, very cool question! And thank you for the compliment. Your analysis is almost correct. WCOM's advance to the 15.50 box last week generated its most recent buy signal. Remember, when determining a bullish price objective, you want to find the BUY signal following the most recent SELL signal. The most recent sell signal was generated in the column of 'Os' from 15.00 to 11.50 (A). Therefore, use the most recent buy signal to determine the bullish price objective. The buy signal to focus on when determining WCOM's bullish price objective was generated in the current column of 'Xs.' Since the column could extend higher before reversing, the bullish price objective could increase. Based upon Friday's rally to the 16.00 box, WCOM's current bullish price objective is: $24.50. Point and figure chart of WCOM WCOM hasn't traded above $16 since mid-June. I view last Friday's advance past $16 as very meaningful. I can't present a fundamental argument for the stock, but know that the technical argument is growing stronger. Does price lead fundamentals? The stock broke out last Friday and in doing so went on a buy signal. Is that reason enough to get long? I think so. But how do you get long at current levels? That depends on the market and WCOM's sector, the North American Telecom Index (XTC). With the support of the market and the XTC, I think a breakout can be pursued. WCOM recently gained ground relative to the market and its sector, which I think will continue and support a further advance above $16 assuming the market and its sector continue higher. The problem with chasing a stock higher on a breakout is that risk becomes difficult to measure and manage. Where do you set your stop? At a certain percent loss? At a support level on the daily chart? Maybe at the 10-dma? Of course difficulty in managing risk doesn't mean the stock can't or won't go higher. WCOM, in my opinion, is a good stock to look to get long on a pullback. Maybe down to its 10-dma, which currently sits at $15.00. Or maybe a little lower. Where you look to get long depends on your unique risk preference, trading style, et cetera. To be clear, I like the stock and think it makes sense for a bullish play so long as you have risk managed. chart of WCOM ---------------------------- Harmonic Lightwave - (NASDAQ:HLIT) Would you please comment on HLIT strength and near-term (1-2 weeks) potential. HLIT "just came back from an abyss"; a 100% P&F low pole reversal of 10 boxes. How would you play the stock, if at all, at this point in time. A trade of $13 would put it on a P&F buy, resistance is at $13.5 and $17.5. - Thanks, Villi Villi, very cool question. Thank you. HLIT has had a substantial run over the last few weeks. How would I play it? I wouldn't. The Networking Index (NWX), of which HLIT is a component, has had an equally impressive run over the last several weeks. There exists risk to the downside in the NWX and HLIT after such big rallies. Yes, the NWX and HLIT could continue higher, but not with me. If I miss the next leg higher in the NWX and HLIT, so be it. That's part of the game. How do I know there exists risks to the downside in HLIT and the NWX? That's definitely a judgment call on my part, and very subjective. I look at HLIT's recent run from $8 to $15 and its overbought daily Stochastics and come to the conclusion that risk is skewed to the downside. In addition, I see on its point and figure chart that the stock's recent rally stopped at a previous high at $15. No coincidence there. Your findings might disagree with my mine. But that's quite all right because two sides make a market. Because I wouldn't buy HLIT, does that mean I should short it? NO! HLIT is one of the stronger stocks in the NWX. The NWX is one of the stronger sectors of tech. I don't like shorting strong stocks in strong sectors. What I would look for is a period of consolidation in HLIT, then work from there. The low pole reversal that Villi alluded to has left a lot of empty space below current levels on the point and figure chart. (The low pole reversal was the move off the bottom from 8.00 to 15.00.) You can see on the chart below that HLIT is in no man's land currently. It's quite a distance away from support with resistance just above at 15.00. What to do, what to do? Nothing. Find a stock that you can better visualize risk and wait for HLIT to consolidate. point and figure chart of HLIT ---------------------------- J.P. Morgan Chase - (NYSE:JPM) What's your outlook for JPM? I understand that JPM was pretty hot sometime in 1999 due to their Internet investment. Now that tech bubble has busted, the ENE and third country potential default on loan, JPM may not come back to their prior level for some time. - Thank you!, Yung Thank you for the question, Yung. JPM is referred to as a money-center bank, it's a one-stop shop for financial products and services. The current entity was created through the merger of J.P. Morgan and Chase Manhattan Bank, which was completed almost exactly one year ago. JPM has exposure to the Enron debacle. Along with Citigroup (NYSE:C), JPM invested several hundred million dollars of equity into Enron in addition to both secured and unsecured debt. Moody's, the credit rating agency, said Friday that JPM's exposure to Enron was "manageable." Debt analysts are much more trustworthy than stock analysts, so I give Moody's comments credence. (Although, the debt rating agencies didn't handle the Enron demise as well as I wish they would have. But that's another topic.) I don't know what exposure JPM has to Argentina. I'm sure JPM has some, but I don't know to what extent. It's something worth researching if you're looking into this stock. Sorry, I ran out of time. Problem loans and defaults have been on the rise with the continued loss of jobs and the slumping economy. At the same time, however, there are signs of a pick-up. As the economy rebounds and consumers and companies re-liquify there balance sheets, the loan loss problem becomes less of one. In addition, IPOs are slowly returning, which is a big profit source for JPM's investment banking business. Plus, at this point in the business cycle, the money-center banks are better plays than the pure play interest rate companies such as savings and loans. That's because a rebounding economy tends to snuff out the aforementioned problems and increases the higher margin businesses such as investment banking. JPM isn't one of the strongest banking stocks. I think that's because of its loan loss risks. Citi and Bank of America (NYSE:BAC) have been among the better performing bank stocks. But JPM may warrant a closer look right here and now. Demand has been building for the stock, noting its relatively higher lows recently. The stock is on the verge of a big breakout, which would be marked with an advance past $41. There may be a trade here up to $44. But JPM will need the support of the Bank Sector Index (BKX) to sustain any rally attempt. chart of JPM ---------------------------- 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 ************* ============================================================== Economic Reports Last Friday's employment number was the big economic report that the Fed was waiting for. The Fed meets next week, on Tuesday, and is expected to cut rates again. In addition to the Fed's official announcement on interest rates, traders will focus on the November retail sales numbers on Thursday and the wholesale inflation figures. Retail inflation figures will be released on Friday. ============================================================== Monday, 12/10/01 None Tuesday, 12/11/01 Wholesale Inventories Oct Forecast: -0.3% Previous: -0.1% FOMC Meeting Wednesday, 12/12/01 Export Prices ex-ag. Nov Forecast: N/A Previous: -0.7% Import Prices ex-oil Nov Forecast: N/A Previous: -0.7% Current Account Q3 Forecast:-$94.2B Previous:-$106.5B Thursday, 12/13/01 Retail Sales ex-auto Nov Forecast: 0.2% Previous: 1.0% Retail Sales Nov Forecast: -2.8% Previous: 7.1% PPI Nov Forecast: -0.3% Previous: -1.6% Initial Claims 12/08 Forecast: N/A Previous: 475K Core PPI Nov Forecast: 0.0% Previous: -0.5% FOMC Minutes 11/06 Friday, 12/14/01 Business Inventories Oct Forecast: -0.4% Previous: -0.5% CPI Nov Forecast: -0.1% Previous: -0.3% Core CPI Nov Forecast: 0.2% Previous: 0.2% Industrial Production Nov Forecast: -0.5% Previous: -1.2% Capacity Utilization Nov Forecast: 74.2% Previous: 74.6% ************************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. You may also fax the information to: 303-797-1333 ********** 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 12-09-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/1209_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 ************************************************************** *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thr Week SPW 131.73 -0.99 3.55 3.82 3.51 10.23 Higher still PMCS 27.42 -0.91 2.66 2.84 1.86 4.63 Big pullback PDLI 37.95 -0.99 0.34 2.52 1.01 -0.26 Dropped CNXT 17.05 -0.14 1.56 1.19 -0.02 2.16 Profit taking MCDT 28.10 -0.52 1.37 3.85 -1.05 2.90 Light volume INTC 33.24 -0.62 0.77 1.80 -0.45 0.58 Sell the news IBM 120.40 -1.46 2.51 4.76 -1.26 4.81 Above $120 IMCL 70.45 -0.05 0.40 2.18 -1.89 -1.55 Dropped NVDA 59.95 0.83 4.33 4.69 -0.99 5.31 Drifting lower QLGC 52.97 -1.12 4.62 3.23 -0.69 3.52 Taking a rest XMSR 12.94 -0.34 -0.19 1.72 -0.75 1.35 New, testing AMR 23.34 -0.42 0.35 0.91 -0.16 1.98 New, flying CI 94.30 -0.08 0.35 -0.35 1.80 3.07 New, marching FFIV 25.40 -0.19 1.96 1.00 0.00 3.12 New, stepping LOW 46.31 0.24 -0.03 1.28 -0.51 1.00 New, breaking PUTS NOC 94.81 1.22 1.03 -1.06 -0.07 0.93 Dropped KKD 40.00 -0.05 -0.51 1.49 0.67 2.75 Dropped WWCA 23.68 -0.78 0.08 -0.10 -0.15 -0.89 Another low VZ 47.86 0.47 0.51 0.26 0.41 0.86 Entry point! LH 76.25 0.20 0.43 0.75 -0.45 -0.65 At the 200-dma CB 67.71 -1.15 -0.47 0.06 -1.95 -2.35 Relief rally CAH 66.14 0.20 0.37 -1.35 -1.57 -2.18 Halted slide FRE 64.25 -0.39 -0.08 -0.25 -2.14 -1.92 New, sliding HGSI 36.09 1.03 -2.26 0.12 1.38 -6.42 New, running ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* XMSR - XM Satellite Radio $12.94 (+1.35 last week) See details in play list chart= Put Play of the Day: ******************** FRE - Freddie Mac $64.25 (-1.92 last week) See details in play list chart= ************************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 ^^^^^ PDLI $37.95 (-0.26) PDLI's release of the data on its cancer drug was mixed last Friday. The company reported that the drug increased patient response but it did not increase remission rates. The street didn't like the news as PDLI shed more than 6%. Traders with open positions should look for a bounce early next week to exit plays and cut losses. IMCL $70.45 (-1.55) It's been a heck of a run, but IMCL appears to be out of gas. After trading as high as $75 on Thursday, the bears took control and pushed the stock right back to the $70 level. While our $69 stop is still intact, IMCL's momentum has stagnated. Rather than wait for a substantial breakdown, we'll drop the play this weekend and go fishing for other opportunities, of which there are plenty. PUTS ^^^^ NOC $94.81 (+0.93) NOC attempted to breakdown in last Friday's session but once again bounced. The stock is testing our patience and rather than watch more time value erode, we're dropping coverage this weekend in search of a play that will move more. Traders waiting for the breakdown can watch for a decline below the 10-dma at $94.09 early next week. KKD $40.00 (+2.75) KKD rallied up to and closed at our stop at $40 last Friday. The stock's strong close in the face of a weak market has us concerned with the prospects of further upside. Those who took entries near $40 last week should have a tight stop in place to protect against further upside. *********** 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 ************** XMSR - XM Satellite Radio $12.94 (+1.35 last week) XM Satellite Radio is a development stage company that seeks to become a premier nationwide provider of audio entertainment and information programming. The company owns one of two FCC licenses to provide a satellite digital radio serve in the United States. It plans to transmit its XM Radio service by satellites to vehicle, home and portable radios. If you like trading breakouts from wedges read on. This one is ready to go. XMSR rallied above the $13 mark every so slightly last week. The stock staged a breakout attempt on Wednesday but pulled back in Tuesday's trading based on the news of its secondary offering. The company sold 10 million shares in the secondary market last week, for an average price of $11.25. The cash raised from the offering is reportedly going towards funding operations. It helped to fund XMSR through the end of next year. While the news initially caused weakness, the stock immediately rebounded in Friday's session, which reinforced the underlying strength. A shorter time frame chart reveals a distinct pattern of relatively higher lows, with a top in place at the $13 level. XMSR rallied up to the $13.05 level on Wednesday, which is the level that traders will want to monitor in next week's trading. A rally past $13.05 is the action point. Ideally we'll see an advancing market in conjunction with any breakout attempt above $13.05. Above $13.05, the stock has resistance between $14.50 and $15. That's the area to target for an exit point. Our stop is initially in place at $11. ***December contracts expire in 2 weeks*** BUY CALL DEC-10 QSY-LB OI=1514 at $3.40 SL=2.25 BUY CALL DEC-12*QSY-LV OI=1235 at $1.00 SL=0.50 BUY CALL JAN-12 QSY-AV OI=1298 at $1.75 SL=1.00 BUY CALL JAN-15 QSY-AC OI=1199 at $1.45 SL=0.75 Average Daily Volume = 1.30 mln AMR - AMR Corp. $23.34 (+1.98 last week) AMR is engaged in the airline industry through its principal subsidiary, American Airlines. American provides scheduled jet service to more than 169 destinations throughout North America, the Caribbean, Latin America, Europe and the Pacific. The lower cost of fuel is helping this play along. Returning demand is too. A report Friday revealed that air traffic was on the rise during the month of November. The report also suggested that recent pricing trends are reversing. While not good for consumers, the firming in pricing is boosting shares of AMR. In addition to the industry related positives, AMR is close to completing the integration of TWA, which it acquired late last year. With several catalysts under its wings, AMR is set to fly higher. The stock broke out to a post-09/11 high last Friday on increasing volume. With the unfilled gap up to $30, the path of least resistance appears to be to the upside. The Airline Sector Index (XAL) is close to breaking out to a post-09/11 high. Watch for the XAL to advance past 93 early next week. If that happens, target entries in AMR around its current levels. For a pullback related entry, look for weakness down around the $22 level. Our stop is initially in place at $21. ***December contracts expire in 2 weeks*** BUY CALL DEC-20 AMR-LD OI=1841 at $3.70 SL=2.75 BUY CALL DEC-22*AMR-LX OI=1397 at $1.50 SL=0.75 BUY CALL JAN-22 AMR-AX OI= 692 at $2.50 SL=1.25 BUY CALL JAN-25 AMR-AE OI=3121 at $1.25 SL=0.75 Average Daily Volume = 2.38 mln CI - CIGNA Corporation $94.30 (+3.07 last week) CIGNA is an employee benefits organization in the United States. The company and its subsidiaries are major providers of employee benefits offered through the workplace, including healthcare products and services, group life, accident and disability insurance, retirement products and services and investment management. Somebody has neglected to inform CI investors that the Insurance index (IUX.X) can't seem to gain any bullish traction. The stock has been marching steadily higher since gapping higher on November 2nd. The catalyst for that jump in price was the company's surprisingly strong earnings report. Since that report, the stock has added more than 31%, capping off the recent rise by blasting through the 200-dma ($93.49) on Friday. What we're talking about here is relative strength, and it looks like the stock is intent on maintaining that leadership position. After clearing the $92 resistance level last week, CI has a solid base (with solid support at $90) from which to launch itself at the $96 resistance level. After that, the bulls will likely be setting their sights on the century mark, which also happens to be the top of two separate gaps from July (read: strong resistance). Target intraday dips near the $92 level (or even $90 on heavy profit taking) for the initiation of new positions and set stops at $89. ***December contracts expire in 2 weeks*** BUY CALL DEC- 90 CI-LS OI=596 at $5.20 SL=3.25 BUY CALL DEC- 95*CI-LR OI=322 at $2.00 SL=1.00 BUY CALL JAN- 95 CI-AS OI=233 at $4.10 SL=2.50 BUY CALL JAN-100 CI-AT OI=335 at $2.15 SL=1.00 BUY CALL JAN-105 CI-AA OI= 63 at $1.10 SL=0.50 Average Daily Volume = 911 K FFIV - F5 Networks $25.45 (+3.12 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. The company's products monitor and manage local and geographically dispersed servers and intelligently direct traffic to the server best able to handle a user's request. FFIV's content management products enable network managers to increase access to content by capturing and storing it at points between production servers and end users, while ensuring that newly published or updated files and applications are replicated uniformly across all target servers. Since bottoming near $7 in early October, FFIV has stutter-stepped its way up the charts, performing one amazing breakout after another. Just when it seems that it will finally violate its upward trendline (currently $22.75), a fresh surge of buying volume arrives to launch the stock through its next level of resistance. And the stock did it again on Wednesday, vaulting through the $24.25 level on strong volume, and coming to rest just above $25. Since then the price action has been rather impressive, continuing to advance while the Networking sector (NWX.X) attempts to solidify its breakout over the 200-dma ($363). Make no mistake, FFIV will need to see the NWX continue to move higher if it is going to continue its winning ways, but for now the bullish trend looks tradable. Throughout the 2-month rally, FFIV has been finding support on the major pullbacks, right at the 20-dma ($22.74), and it did it again early last week. Look for a mild dip near $23.50 to provide an attractive entry into the play and set stops at $22.50, just below the 20-dma. There is a lot of resistance arrayed just overhead, so we would lean towards buying the dips rather than trying to chase the stock higher on breakouts. ***December contracts expire in 2 weeks*** BUY CALL DEC-22 FLK-LX OI= 916 at $3.50 SL=1.75 BUY CALL DEC-25*FLK-LE OI=1270 at $1.95 SL=1.00 BUY CALL DEC-30 FLK-LF OI= 8 at $0.40 SL=0.00 BUY CALL JAN-25 FLK-AE OI= 426 at $3.20 SL=1.50 BUY CALL JAN-30 FLK-AF OI= 231 at $1.20 SL=0.50 Average Daily Volume = 648 K LOW - Lowe's Companies $46.31 (+1.00 last week) As a retailer of home improvement products, Lowe's has a specific emphasis on retail do-it-yourself and commercial business customers. The company specializes in offering products and services for home improvement, home décor, home maintenance, home repair and remodeling and maintenance of commercial buildings. While Home Depot (symbol:HD) may be better known as the home improvement store, LOW has been the stronger of the two stocks lately. The stock had already broken out above the $40 resistance level in mid-November ahead of their earnings report, and beating estimates just added fuel to the rocket. Since then, the stock has tacked on an additional $6 and doesn't look like it is going to stop anytime soon. Last week HD broke out over its descending trendline amid bullish comments about the future and LOW is benefiting from that as well. Since breaking above the 10-dma (currently $44.90) in early November, the stock has been finding support at that moving average each time there is a bout of profit taking. This is clearly a momentum run, so we'll ride the trend as long as it lasts. Look to initiate new positions on intraday dips to the 10-dma, so long as the dips are met by solid buying support. More aggressive traders may want to look for new entries near stronger support at $43 (also the site of the 20-dma), but only if support holds. We are initially placing our stop at $43. ***December contracts expire in 2 weeks*** BUY CALL DEC-45*LOW-LI OI=6490 at $2.10 SL=1.00 BUY CALL DEC-47 LOW-LT OI=1076 at $0.85 SL=0.25 BUY CALL JAN-45 LOW-AI OI=6308 at $3.10 SL=1.50 BUY CALL JAN-47 LOW-AT OI=1048 at $1.75 SL=1.00 BUY CALL JAN-50 LOW-AJ OI= 647 at $0.85 SL=0.25 Average Daily Volume = 9.37 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 12-09-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/1209_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 ****************** PMCS - PMC-Sierra $27.42 (+4.63 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. PMCS pulled back to the tune of 6.22% last Friday. That's certainly more than we wanted to see in one day, especially for our readers holding open positions. PMCS sold off significantly more than the SOX and NWX, but we need to keep in mind that the stock rallied more than the two sector measures last week. That's why the stock is considered high beta, it goes up more than the market and does the same to the downside. The good news is that PMCS bounced last Friday ever so slightly from the $26.50 area. Traders might look for that level to continue attracting buyers early next week. If it does, then traders might consider entry points around the $26.50 level. Below, support is likely to materialize between the $25 and $26 levels. Although our stop is currently in place at $26, weakness down to that zone may offer a favorable entry point on further sector related weakness. If PMCS trades higher early next week, look for an advance past the $27.50 to $28 congestion zone. Confirm strength in the NWX and SOX before entering on strength. ***December contracts expire in 2 weeks*** BUY CALL DEC-22 SQL-LX OI=3132 at $5.60 SL=4.25 BUY CALL DEC-25*SQL-LE OI=3757 at $3.60 SL=2.50 BUY CALL DEC-30 SQL-LF OI=2491 at $1.00 SL=0.50 BUY CALL JAN-25 SQL-AE OI=5985 at $5.10 SL=4.00 BUY CALL JAN-30 SQL-AF OI=3302 at $2.80 SL=1.75 Average Daily Volume = 10.1 mln SPW - SPX Corp. $131.73 (+10.23 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 finished fractionally higher last Friday to cap off a week that saw the stock advance by more than $10. Not bad for five days of trading! SPW's advance last week put it above its historical congestion zone, which was traced between May and August of this year. The breakout could very well portend further upside in this super strong stock. Last Friday, SPW bounced from the $130 level in a similar fashion to its rebound from the $120 level early in the week. It remains to be seen whether or not the $130 level continues to hold. Monitor it closely next week. If SPW refuses to go below $130 on any further market weakness, then that may be the level to consider new entries at. If the stock does lose the $130 support level, then wait for a pullback down around the $125 to $126 area. A tight stop can accompany any entry taken near that area, such as the 10-dma at $124.87. If you're thinking about taking a momentum entry into further strength, consider waiting for a few more days of sideways trading, which would help to work off some of SPW's short-term overbought condition. ***December contracts expire in 2 weeks*** BUY CALL DEC-125 SPW-LE OI=135 at $ 9.20 SL= 7.50 BUY CALL DEC-130*SPW-LF OI=445 at $ 5.80 SL= 3.50 BUY CALL DEC-135 SPW-LG OI=486 at $ 3.00 SL= 1.75 BUY CALL JAN-130 SPW-AF OI= 91 at $ 8.60 SL= 6.75 BUY CALL MAR-130 SPW-CF OI=261 at $13.50 SL=11.00 Average Daily Volume = 410 K CNXT - Conexant Systems $17.05 (+2.16 last week) Conexant provides semiconductor products and system solutions for a wide variety of communications electronics. Conexant delivers semiconductor integrated circuit products and system level solutions for a broad range of communications applications. CNXT pulled back in routine fashion in Friday's session. Its decline pretty much mirrored the 2% drop in the SOX. A few more days of sector related weakness could pressure CNXT down to another favorable entry target. The stock added more than $2 during last week's trading, so we view the late week weakness as normal profit taking. Volume was relatively lighter in last Thursday and Friday's sessions, which supports the profit taking thesis. As long as volume continues to decline, we'll hold to that view on any further weakness. If CNXT's pattern of relatively higher lows continues, then the stock could have downside potential to between $14 and $15. That's a big drop from current levels, but it could occur if the necessary market and sector weakness shows up next week. If the SOX and Nasdaq stabilize early next week, then look for CNXT to bounce between $15 and $16. However, if protracted weakness occurs in the SOX and Nasdaq, then look for CNXT to be pressured down to between the $14 or $15 levels, where a low risk potentially high reward entry could be taken. The 10-dma currently resides at $15.88, which is another potential bounce point. ***December contracts expire in 2 weeks*** BUY CALL DEC-15*QXN-LY OI=3320 at $2.60 SL=1.75 BUY CALL DEC-17 QXN-LW OI=5974 at $1.10 SL=0.50 BUY CALL JAN-15 QXN-AY OI=3135 at $3.30 SL=2.25 BUY CALL JAN-17 QXN-AW OI=1275 at $2.05 SL=1.25 Average Daily Volume = 4.71 mln INTC - Intel $33.24 (+0.58 last week) Intel is a semiconductor chip maker, supplying the computing and communications industries with chips, boards and system building blocks that are integral to computers, servers and networking and communications products. Its products are offered at various levels of integration, and are used by industry members to create advanced computing and communications systems. INTC pulled back on a typical buy the rumor sell the news event. Unfortunately the after hours strength we observed late Thursday didn't follow-through into Friday's session. The pullback in Friday's session was routine, noting the similar decline in the SOX. We were encouraged to see the stock rebound from its 10-dma at $32.78. Going forward, traders might consider taking entries on weakness near the 10-dma. Below, our stop resides at the $32 level, which is another potential entry level on further sector related weakness. Continue monitoring the SOX when targeting new entries in INTC early next week. If the SOX stabilizes, look for a rebound in the index and an ensuing bounce in INTC. If the SOX charges out of the gates early next week, then look for entries into strength above current levels. Traders might confirm any early strength in INTC with an advance back above the $34 level. ***December contracts expire in 2 weeks*** BUY CALL DEC-30 INQ-LF OI= 50375 at $3.70 SL=2.50 BUY CALL DEC-32*INQ-LZ OI= 77392 at $1.65 SL=0.75 BUY CALL JAN-30 INQ-AF OI= 81637 at $4.30 SL=3.25 BUY CALL JAN-32 INQ-AZ OI= 91436 at $2.60 SL=1.75 BUY CALL JAN-35 INQ-AG OI=193986 at $1.35 SL=0.75 Average Daily Volume = 4.71 mln MCDT - McDATA $28.10 (+2.90 last week) McDATA is a provider of high availability storage area network director switching devices that enable enterprises to connect and centrally manage large numbers of storage and networking devices. McDATA designs, develops, manufactures and sells switching devices that enable enterprise-wide high performance storage area networks (SANs). MCDT pulled back in the last two sessions. But the volume during the weakness was relatively light, which indicated that the pullback was profit taking related. MCDT followed the price action of others in the storage sector late last week, so we are now looking for another entry near support in this stock. The stock's 10-dma currently sits at the $25.79 which may be a level to consider taking new entries. The stock hasn't traded below its 10-dma since November 15th, so the first retest may lead to a bounce. If the stock does breakdown below its 10-dma then readers might turn to the $25 level for a possible entry point. The $25 level is significant because it was the breakout point from early last week. Coming back down, it may now serve as support. Continue watching others in the group such as SUWN, EMC, QLGC, EMLX, and BRCD. Take your cue from the price action of the group. ***December contracts expire in 2 weeks*** BUY CALL DEC-22 DXZ-LX OI=1144 at $6.20 SL=4.75 BUY CALL DEC-25*DMU-LW OI= 143 at $4.10 SL=3.25 BUY CALL JAN-25 DMU-AW OI= 506 at $5.40 SL=4.00 BUY CALL JAN-30 DMU-AX OI= 781 at $2.75 SL=1.75 Average Daily Volume = 4.71 mln IBM - Int'l Business Machines $120.40 (+4.81 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. Stealing the show on Wednesday, IBM rocketed through recent resistance and the $120 level to set a new 52-week high, coming to rest at $121.40. After its stellar 2-day move, it is only natural to expect a bit of consolidation before the bulls charge ahead again. That has been the story for the past 2 days, with the stock building intraday support near $119. What remains to be seen is whether this is all there is to the rally in IBM or if the stock can use support in the $117-119 area to launch another powerful leg up. To be sure, if the DJIA continues to work higher, we expect IBM to lead that charge. Target fresh entries on a bounce from the support level listed above, but watch out if the broad market doesn't confirm the strength. We've raised our stop to $115, just in case the bears get hungry and manage to push IBM below its ascending 20-dma (currently $115.73). ***December contracts expire in 2 weeks*** BUY CALL DEC-120*IBM-LD OI=39876 at $2.55 SL=1.25 BUY CALL DEC-125 IBM-LE OI=16185 at $0.80 SL=0.25 BUY CALL JAN-120 IBM-AD OI=38563 at $5.30 SL=3.25 BUY CALL JAN-125 IBM-AE OI=28622 at $2.95 SL=1.50 BUY CALL JAN-130 IBM-AF OI=21198 at $1.45 SL=0.75 Average Daily Volume = 8.56 mln NVDA - NVIDIA Corporation $59.95 (+5.31 last week) NVIDIA Corporation designs, develops and markets 3D graphics processors, graphics processing units and related software that set the standard for performance, quality and features for every type of desktop personal computer user. Used in a wide variety of application including games, the Internet and industrial design, the company's products were the first to incorporate a 128-bit multi-texturing graphics architecture. This design approach delivers to users a highly immersive, interactive 3D experience with compelling visual quality and stunning effects at real-time frame rates. NVDA sells its products to major PC manufacturers such as Compaq, Dell, Gateway, Hewlett-Packard and IBM. Living proof that stocks don't move in a straight line, shares of NVDA have been drifting lower over the past 2 days as investors digest the stellar gains from earlier in the week. While intraday support has been building just below $59, we can't rule out a drop near the $56 level before the bulls reassert their control. The biggest concern for bullish investors will be the behavior of the Semiconductor index (SOX.X). After its breakout over $550 last week, a retest of that level as support will likely be necessary before the rally can continue. Aggressive traders can target new entries near the $59.50 if buying volume picks up, but they need to watch out for more concerted selling in the SOX. The better entry will come on the heels of a dip near $56, with support being provided by the 10-dma (currently $56.38). A bounce from that level, confirmed by a rebound in the SOX from support near $550 looks like a high-odds entry for the next bullish leg up the charts. Keep stops set at $55. ***December contracts expire in 2 weeks*** BUY CALL DEC-57*RVU-LA OI=5088 at $4.60 SL=2.75 BUY CALL DEC-60 RVU-LL OI=6611 at $3.00 SL=1.50 BUY CALL DEC-62 RVU-LB OI=1838 at $1.85 SL=1.00 BUY CALL JAN-60 RVU-AL OI=7247 at $5.60 SL=3.50 BUY CALL JAN-62 RVU-AB OI=1903 at $4.40 SL=2.75 BUY CALL JAN-65 RVU-AM OI=2156 at $3.40 SL=1.75 Average Daily Volume = 9.37 mln QLGC - QLogic Corporation $52.97 (+3.52 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. After leading the charge as the NASDAQ broke through major resistance last week, QLGC took a rest as we headed into the weekend. After the stock launched through major resistance near $50, a bit of profit taking is to be expected and it was encouraging to see the price hold up rather well. Although intraday support seems to be building near the $53 level, it was a bit disconcerting to see the consolidation take place on rather heavy volume on Friday (15 million shares vs. the ADV of 11.3 million). While we can consider initiating new positions on a bounce from current levels next week, the higher odds play will mean waiting for a bounce near the $50 level, possibly at the 10-dma ($50.67), confirming the solidity of the breakout over that level. We now have our stop set at $50, as a close below that level would give us a failed breakout, and we would be forced to remove QLGC from the call list. Keep a sharp eye on the broader NASDAQ, as we need to see it confirm support and work higher as well if QLGC is going to challenge its recent highs. ***December contracts expire in 2 weeks*** BUY CALL DEC-50*QLC-LJ OI=4239 at $5.30 SL=3.25 BUY CALL DEC-55 QLC-LK OI=3338 at $2.55 SL=1.25 BUY CALL DEC-60 QLC-LL OI=2491 at $1.10 SL=0.50 BUY CALL JAN-55 QLC-AK OI=1847 at $5.10 SL=3.00 BUY CALL JAN-60 QLC-AL OI=3009 at $3.10 SL=1.50 BUY CALL JAN-65 QLC-AM OI= 888 at $1.90 SL=1.00 Average Daily Volume = 11.3 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. 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The Option Investor Newsletter Sunday 12-09-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/1209_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 ************* FRE - Freddie Mac $64.25 (-1.92 last week) Freddie Mac is a stockholder-owned corporation that was established by Congress in 1970 to support home ownership and rental housing. Freddie Mac purchases single family and multifamily residential mortgages and mortgage related securities, which it finances primarily by issuing mortgage passthrough securities and debt instruments in the capital markets. The mortgage related stocks have been on the slide recently. The prospects of the Fed ending its easing cycle could be pressuring these stocks lower. FRE broke below its 200-dma early last week. The stock's 200-dma currently sits overhead at the $65.79 level. Following the break below its big moving average, FRE continued to slide lower throughout the week. The stock rebounded last Friday on what appeared to be short covering off of the lousy economic data. But on an intraday basis, the stock rolled over near its recently established descending trend line. That trend line currently sits around the $65 level. FRE's pattern of relatively lower daily highs in last week's trading is unmistakably a descending trend. In light of its rollover last Friday, we're looking for the downside to continue in next week's trading. Look first for another rollover near the $65 area if the stock pops higher in next week's early trading. If it rolls over early Monday, then look for a decline back below the $64 level. Our stop is set at $66. ***December contracts expire in 2 weeks*** BUY PUT DEC-65*FRE-XM OI=2566 at $1.85 SL=1.00 BUY PUT JAN-65 FRE-MM OI=3146 at $2.85 SL=2.00 Average Daily Volume = 3.23 mln HGSI - Human Genome Sciences $36.09 (-6.42 last week) Possessing one of the largest human and microbial genetic databases, HGSI licenses its database of knowledge to pharmaceutical heavyweights like GlaxoSmithKline and Merck. Management has chosen to forgo the race to decode the entire human genome, and has instead focused on finding and patenting genes involved in developing gene-based therapeutics. Its four compounds currently in clinical trials are intended to limit the toxic effects of chemotherapy, promote the repair of damaged cells, stimulate antibody production, and spur regrowth of blood vessels. Although the Biotechnology sector (BTK.X) has continued to whittle away at overhead resistance near $620, you sure wouldn't know it if you looked at the chart of HGSI. After running out of steam near $47 two weeks ago, the stock has lost more than 23% and selling volume has been on the rise. In fact on Friday, HGSI saw selling volume more than double the ADV as the BTK gave up 2.5% and threatened to break its ascending trendline. While the BTK managed to salvage some dignity and recover a bit near the close, the late-day bounce in shares of HGSI had no staying power, and the stock fell back again to close just above $36 for a nearly 10% loss on the day. Since breaking the 20-dma (then at $44.62) a couple weeks ago, the bulls haven't been able to even seriously challenge the steeply declining 10-dma (now at $41.30). There is some support near $35 (the bottom of the gap from October 11th), it looks like the stock is intent on revisiting the $30 level and possibly the September lows near $28. The stock has been increasingly volatile in recent days, and we can take advantage of this volatility by targeting new entries on failed intraday rallies, first near $38.50 and then near $40. Should the selling continue without a bounce next week, look to enter the play as the stock falls below the $35 level. Initial stops are in place at $41.50, just above the 10-dma. ***December contracts expire in 2 weeks*** BUY PUT DEC-40*HHA-XH OI=1458 at $4.80 SL=3.00 BUY PUT DEC-35 HHA-XG OI= 535 at $1.85 SL=1.00 BUY PUT JAN-35 HHA-MG OI=1838 at $3.30 SL=1.75 BUY PUT JAN-30 HHA-MF OI= 457 at $1.45 SL=0.75 Average Daily Volume = 2.96 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 ***************** WWCA - Western Wireless $23.68 (-0.89 last week) Western Wireless provides wireless communications services in the United States, principally through the ownership and operation of cellular systems. The cellular operations are primarily in rural areas. WWCA traced another new low last Friday at $23. Following the tracing of its new low, the stock rebounded throughout the day but encountered selling at the $24 level. We would've liked to of seen more of a rebound to offer a better entry point into this weak stock, but it didn't materialize. We'd actually like to see WWCA rally up to around its 10-dma at $24.38 and then a rollover to provide at an entry point at a higher price. If you look to enter puts on weakness below current levels, then you run the risk of a quick short covering rally such as the one we saw last Friday. The best strategy may be to wait for a rally to carry the stock slightly higher above current levels then look to exit the put plays on the setting of a new relative low, below the $23 level. Watch the YLS for more insight into this play. The YLS ran into its 200-dma last Thursday and rolled over during Friday's session. Continued weakness in the YLS should pressure WWCA lower. ***December contracts expire in 2 weeks*** BUY PUT DEC-30 WRQ-XF OI=80 at $6.70 SL=5.25 BUY PUT DEC-25*WRQ-XE OI=72 at $1.80 SL=1.00 Average Daily Volume = 822 K VZ - Verizon $47.86 (+0.86 last week) Verizon provides communications services. The company has four reportable segments, which it operates and manages as strategic business units and organize by products and services. VZ rolled over right near our resistance level at $49 last Friday. The stock's daily stochastics reading began to head lower in last Friday's trading too. Hopefully that was a sign that the stock's recent strength is coming to an end and that it's trend is now reversing lower. Traders who took entries near resistance last Friday might look for confirmation of weakness with a decline below the $47 level early next week. Those looking for new entries into the play might use a breakdown below the $37 level as an entry point. The Wireless Services Sector Index (YLS.X) was lower last week. If the YLS.X continues lower, it should help our VZ play along to the downside. ***December contracts expire in 2 weeks*** BUY PUT DEC-50*VZ-XJ OI= 2747 at $2.40 SL=1.75 BUY PUT JAN-50 VZ-MJ OI=15369 at $3.20 SL=2.00 Average Daily Volume = 814 K CAH - Cardinal Health $66.14 (-2.18 last week) Cardinal Health is the second largest US wholesaler of pharmaceuticals, surgical and hospital supplies. The healthcare service provider offers these products and services to independent and chain drugstores, hospitals, alternate care centers, and the pharmacy departments of supermarkets throughout the United States. The company also offers support services including computerized order entry and confirmation systems. Through its subsidiary, Pyxis Corporation, CAH develops, manufactures, leases, sells and services systems that automate the distribution, management, and control of medications and supplies in healthcare facilities. After 2 days of heavy losses, shares of CAH halted their slide near $66 and traded fairly flat going into the weekend. A quick look at the Health Care index (HCX.X) shows there was little movement in the sector on Friday, so it was no great surprise to see a bit of consolidation in our play. The big technical problem for shares of CAH was the sharp drop under the 20-dma ($67.33) on Thursday and this level (along with failed support at $67.50) will make it tough for the bulls to repair much of the damage done last week. But that doesn't mean the stock has to keep falling, just that odds favor that direction right now. We want to target a rollover near the $67.50 level or possibly near the 10-dma ($67.95) for initiating new positions. Alternatively, look for the stock to drop under near term support at $65.50 before opening new positions. Major resistance now rests at $69, making that an ideal location for our stop. ***December contracts expire in 2 weeks*** BUY PUT DEC-70*CAH-XN OI=3360 at $4.20 SL=2.50 BUY PUT DEC-65 CAH-XM OI=2690 at $1.55 SL=0.75 BUY PUT JAN-65 CAH-MM OI=1063 at $2.55 SL=1.25 BUY PUT JAN-60 CAH-ML OI= 779 at $1.10 SL=0.50 Average Daily Volume = 2.32 mln CB - Chubb Corporation $67.71 (-2.35 last week) Chubb Corporation, incorporated in June 1967, is a holding company with subsidiaries principally engaged in the property and casualty insurance business. The Company presently underwrites most forms of property and casualty insurance. The Company's Property and Casualty Insurance Group writes non-participating policies. Several members of the Property and Casualty Insurance Group also write participating policies, particularly in the workers' compensation class of business, under which dividends are paid to the policyholders. CB investors breathed a sigh of relief on Friday, as their precious stock finally found a bid and lifted off the lows created by the selling frenzy on Thursday. While buying volume was solid and came in above the ADV, it was far less than that seen on Thursday, indicating this could be no more than an oversold bounce. Thursday's gap likely needs to be filled in the near term, and that process could provide us with an attractive entry to the downside. The top of the gap sits near $68.50, right at historical support (now resistance), and then there are the converged and descending 10-dma and 20-dma, just above $69. Target new entries on weakness near these levels, but keep in mind that our stop is set at $69. A daily close above that level would be in favor of the bulls and having us moving to the sidelines. The Insurance index (IUX.X) looked weak all last week, but hasn't broken down yet. Look for the IUX to drop under its 20-dma ($720), as that will add further pressure on CB and likely push it back into its downtrend. ***December contracts expire in 2 weeks*** BUY PUT DEC-70*CB-XN OI=304 at $3.50 SL=1.75 BUY PUT DEC-65 CB-XM OI=192 at $1.00 SL=0.50 BUY PUT JAN-70 CB-MN OI=240 at $4.50 SL=2.75 BUY PUT JAN-65 CB-MM OI=545 at $1.95 SL=1.00 Average Daily Volume = 1.30 mln LH - Laboratory Corp. of America $76.25 (-0.65 last week) Laboratory Corporation of America Holdings (LabCorp) is the #2 clinical laboratory service in the world, behind Quest Diagnostics. LH performs 2000 types of tests for more than 100,000 clients, including health care providers, pharmaceutical firms, physicians, government agencies and employers. With 25 major laboratories and some 1200 service sites nationwide, the company emphasizes specialty and niche testing such as allergy tests, HIV tests, blood analyses, and substance abuse screenings. Like the cat on the poster, LH is hanging in there. The wedge continues to narrow, as bullish moves are still being capped by the descending trendline (now at $77.75), while support at the 200-dma ($76) is keeping the bears in check. Despite the weak price action, daily Stochastics have been rising over the past week, but that came to an end on Friday, as they once again turned south. This wedge will likely break in the next couple days and the direction of the break will either prove us correct or bring the play to an end. More favorable entries can be taken on failed intraday rallies near the descending trendline, although more cautious investors may want to wait for price to fall below the 200-dma before taking a position. Volume has been downright anemic for the past week, and Friday's session was no exception, barely reaching half the ADV. Look for an increase in volume to further illuminate the picture and confirm a continuation of the bearish trend. Keep stops in place at $80. ***December contracts expire in 2 weeks*** BUY PUT DEC-80*LH-XP OI= 570 at $5.10 SL=3.00 BUY PUT DEC-75 LH-XO OI= 400 at $2.40 SL=1.25 BUY PUT DEC-70 LH-XN OI=1237 at $0.85 SL=0.25 BUY PUT JAN-75 LH-MO OI= 125 at $4.20 SL=2.50 BUY PUT JAN-70 LH-MN OI= 171 at $2.45 SL=1.25 Average Daily Volume = 738 K ***** LEAPS ***** The Big MO is back! By Mark Phillips Contact Support And I'm not talking about Philip Morris (NYSE:MO). Try as I might to deny it, Momentum (the Big MO) has made one heck of a comeback in recent weeks. Despite what I consider to be questionable justification for the recent rise in equity prices, the bulls have been driving virtually every sector of the market (especially Technology) higher and they are doing it on impressive volume. While my long-term outlook for the markets remains unchanged (I still expect a substantial selloff in the markets when the current rosy expectations for a strong rebound in the economy early next year fail to be met, it looks like we aren't going to see that pullback this year. By focusing so heavily on the bearish case for the economy, I fear I have done my readers a great disservice. While we have positioned the Portfolio and Watch List in anticipation of that pullback, it has never materialized and we've been left on the sidelines watching the broad markets rise to levels I never expected to see in such short order. Although I still think I'm right in my belief that we are still in a bear market, this is the most impressive rally in the past 20 months, and there are indeed indications that the economy is bottoming. There is no question that I was dead wrong about the strength and longevity of the current bull run, and I have no choice but to offer you, my readers, my most sincere apologies. Loading up the truck with momentum stocks like Broadcom (NASDAQ:BRCM), Nvidia (NASDAQ:NVDA) and Veritas (NASDAQ:VRTS) in early October would have paid off huge in the past 2 months, as each of them are up 120-225% since the lows of a couple short months ago. 2003 LEAPS are up 300-500% in that time, proving that price action far outpaces the effect of declining volatility in option premiums. Even our Tyco International (NYSE:TYC) play, which is still sitting on the Watch List, is up more than 50% from its lows, having climbed steadily through one resistance level after another. And what about my bearish comments targeted at Intel (NASDAQ:INTC) and Home Depot (NYSE:HD) last weekend? Wrong again as both stocks broke out above strong support this week. Don't get me wrong. I still have a bearish slant on these stocks, but I'm clearly too early to that party. Thanks so much to all of you that wrote in asking for more details on my thoughts for those two stocks. Despite the charts that are arguing with me as of this writing, I'll explore my long-term outlook for INTC on Wednesday. I may be wrong, but I will paint the picture for you, at least the way I see it. So where did I go wrong? In my desire to get attractive entry points by waiting for the "inevitable" pullback that never came, I was left watching from the sidelines as the markets snapped back from the extreme pessimism of late September. I think the real key to avoiding such a frustrating experience in the future lies in one of my favorite indicators, the VIX. I had been waiting for months in the expectation of extreme pessimism, and when we got it following the terrorist attacks in September, I froze like a deer in headlights, wondering how much worse things would get. That spike in the VIX to 57.31 was a screaming "Buy" signal for long-term investors and I neglected to heed its instructions due to my fear of loss (both for myself and for my readers). Let me share the conclusion that I have belatedly come to. When the VIX spikes well above its traditional range (above 45) it is always a screaming buy for long-term investors. Rest assured that the next time (because there is always a next time) the VIX moves that high, I'll have an action plan in place (both for myself and my readers) that will capture handsome profits from the inevitable reactionary rally. Now the markets are up sharply while the VIX has steadily fallen, now back in the middle of its traditional 20-30 range at 24.80. Is now the time to buy? I really don't think so. There has been too much bullish movement in the past 2 months, and now many stocks are trading well ahead of where their anticipated earnings will be, even at the end of 2003! The markets cannot go up forever, just as they cannot go down forever without periods of trade in the opposite direction. I believe the risk is currently weighted much more heavily to the downside than to the upside. Of course, I've been saying that for weeks now, and look what the bulls have accomplished in the interim. I think select bullish plays could still provide solid profits over the near- to medium-term, but we need to be very careful, given the stellar rise that the markets have seen in recent weeks. Areas that are getting my attention for long plays are those defensive sectors that have recently pulled back and ought to move well in a corrective phase for the broader markets. It may take until early next year when earnings disappointments put a damper on momentum traders' bullish hopes, but it is coming. When that happens, defensive stocks like Johnson and Johnson (NYSE:JNJ) could be set for a run at new highs. See the new play write up below. LEAP Puts are looking more attractive too, although the potential gains will be more sedate. I think the place to be looking for new plays right now is on stocks that are starting to weaken relative to the broader market. While we've made money on the stock to the upside in the recent past, I like the bearish prospects for shares of Philip Morris. See, you knew I'd get back to MO before our discussion came to an end. At any rate, MO is a new put play this weekend. Unfortunately, we've had to pull the plug on our Calpine Corporation (NYSE:CPN) play this week. The Enron debacle really shot a hole in many of the Utility stocks and CPN was no exception. With the violated stop and poor technical performance of the stock, there's no way to justify continuing to feature CPN in either our Portfolio or on the Watch List. For the most part, our Portfolio and Watch List remain unchanged this week (with the exception of the new plays) and I'm leaving the entry targets unchanged until we see the resolution of the current battle at resistance. I'm expecting more near-term strength that will ultimately weaken and don't want to put the Portfolio in new positions near the top. That's what happened to us in May and June, and I don't want to repeat that experience. One note about the current Watch List is necessary though. Did you notice the action in General Electric (NYSE:GE) this week? It gave up a fair amount of relative strength and declined very near our $36 entry target. My primary reason for not jumping into a new Portfolio position is the overextended condition of the broad markets and my expectation that GE will see more weakness before bottoming -- especially with the steep downward slope of the weekly Stochastics. We'll give this one some more time to come back to us. Since its breakout just over 2 weeks ago, Eli Lilly (NYSE:LLY) has been consolidating just above the $81 level. While I think there is more upside in the play, its inability to move through the $84 level has me a bit nervous. Rather than risk giving back our gains, I'm snugging up the stop to $81 this weekend. This is just below the 20-dma ($81.15), as a drop below this moving average would likely set the stage for LLY to fall back into its old trading range. We would want to exit the play if that were to occur. In a nutshell, I think the upside for the broad markets is limited due to looming heavy overhead resistance. The bull market may be back, but prudence still demands that we err on the side of caution, waiting for that pullback, which will give us higher odds bullish entries. Having missed the recent bullish run is frustrating, but that doesn't mean we should throw caution to the wind and chase the recent leaders higher. Unfortunately, we need to wait for the markets to realize that their current bullish hopes are overextended. When this realization hits, we'll be in position to take advantage of the selloff by positioning our Watch List accordingly over the next couple months. I know patience is a virtue, but I want it right now! Maybe my admission of the current bullish strength will be just what the markets are waiting for to commence with the necessary profit taking. Hey, I can hope, can't I? Just remember that missed opportunities are always preferable to lost money, and there is always another opportunity just around the corner. I'll do my best to uncover some in the weeks ahead. The waiting is still the hardest part... 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 $14.10 30.56% $81 '04 $ 80 LZE-AP $12.20 $16.00 31.15% $81 Puts: AIG 11/07/01 '03 $ 80 VAF-MP $ 8.40 $ 8.00 - 4.76% $86.50 '04 $ 80 LAJ-MP $10.60 $10.40 - 1.89% $86.50 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 $50 JAN-2003 $ 55 VYL-AK CC JAN-2003 $ 50 VYL-AJ JAN-2004 $ 60 LPA-AL CC JAN-2004 $ 50 LPA-AJ NOK 09/23/01 $20-21 JAN-2003 $ 25 VOK-AE CC JAN-2003 $ 20 VOK-AD JAN-2004 $ 25 LOK-AE CC JAN-2004 $ 20 LOK-AD BRCM 10/28/01 $31-32 JAN-2003 $ 35 OGJ-AG CC JAN-2003 $ 30 OGJ-AF JAN-2004 $ 35 LGJ-AG CC JAN-2004 $ 30 LGJ-AF EMC 11/04/01 $12-13 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 $64 JAN-2003 $ 65 VMK-AM CC JAN-2003 $ 60 VMK-AL JAN-2004 $ 70 LMK-AN CC JAN-2004 $ 60 LMK-AL JNJ 12/09/01 $54, $52.50 JAN-2003 $ 55 VJN-AK CC JAN-2003 $ 50 VYN-AJ JAN-2004 $ 55 LJN-AK CC JAN-2004 $ 50 LJN-AJ PUTS: MO 12/09/01 $48, $50 JAN-2003 $ 50 VPM-MJ JAN-2004 $ 50 LMO-MJ New Portfolio Plays None New Watchlist Plays JNJ - Johnson & Johnson $56.65 ** CALL PLAY** What General Electric is to the broad industrial sector, JNJ is to the Health Care sector. Engaged in the manufacture and sale of a broad range of health-related products in virtually every corner of the world, JNJ is riding the wave of increasing health care costs that permeate our society. While the stock has had one heck of a run over the past 7 months from the $40 level in late March, it looks like it could still have some gas in the tank. Last month, JNJ topped out near the $61 level and has been under some fairly heavy selling pressure, as money has rotated out of defensive stocks and into the sexier Technology sector. While that rotation isn't quite yet complete, now is the time to start setting up an action plan for how to take advantage of the stock when it resumes its upward trend. Drawing an ascending trendline shows support should materialize near the $54 level, and we got pretty close to that on Friday before buying support appeared near $55.50. The daily Stochastics oscillator is just starting to turn up from oversold territory, but I don't think this is the screaming buy signal. Rather, I think we'll get another cycle into oversold before we want to take a position, either near $54 or ideally at the 200-dma (currently $52.25). But what about the weekly oscillator you ask? Afterall, it is just midway back to oversold territory. Here's the interesting point -- the weekly Stochastics hasn't made it to oversold since January and with the current upward bias in the broad markets, I don't think it will make it there this time either. Let this cycle on the daily chart run its course, and then we'll look to initiate new positions on the next dip. Contrary to our usual procedure, I'm listing two entry targets, the first at $54 and the second at $52.50, which I think would be a gift. We'll be setting our stop near $49 and will be looking to ride the stock back up to its November highs. BUY LEAP CALL JAN-2003 $55.00 VJN-AK BUY LEAP CALL JAN-2003 $50.00 VYN-AJ **Covered Call** BUY LEAP CALL JAN-2004 $55.00 LJN-AK BUY LEAP CALL JAN-2004 $50.00 LJN-AJ **Covered Call** MO - Philip Morris $45.08 ** PUT PLAY** While typically viewed as a defensive play due to its broad-based consumer staples business, MO has been losing its attractiveness to investors in recent months. To be fair, the stock had quite a run over the past 18 months, but quite frankly, it is looking tired. While perusing some Point and Figure charts this week, my compatriot, Eric Utley pointed out that the stock has given up a lot of strength relative to the broader S&P500. The tobacco litigation issue seems to have run its course for the time being, but there could be another bogeyman on the horizon. Whether it is economic weakness, fear of inflation, or a rotation back into more exciting stocks, I can't say. But the company's recent announcement that they would be changing their name caught my attention. It seems as though the company is trying to distance the corporate image from that evil tobacco image, and that sort of obfuscation never sits well with investors. But I digress. Recently, the stock has traced a broad head-and-shoulders pattern, with the neckline resting near $43. And over the past 2 months, MO has been tracing a series of lower lows and lower highs. During that process, the weekly Stochastics has been dragged back near oversold territory, so now is definitely not the time to consider a new position. I want to see a solid upward move before initiating new positions. I think the ideal entry will materialize on a move up near $48, seeing as how the 200-dma is currently at $47.81. Of course, there is the outside chance that the bulls could push the price as high as the $50 level and I would consider that a gift of an entry point. This is not the type of play that is going to produce a home run, but I think we could see a solid double, with the stock declining near the $41 level (the site of the 38% retracement of the gains since the lows in early 2000). Remember to wait for the oscillators to get back towards overbought territory before taking the plunge, and then jump into what I think is a high-odds play. Given the limited move (from $48-50 down to $41) that we are targeting, I have actually listed in-the-money contracts, which should give us a solid move in the option prices because of the higher delta. Once we initiate the position, we'll place our stop at $52, just above the recent highs. BUY LEAP PUT JAN-2003 $50.00 VPM-MJ BUY LEAP PUT JAN-2004 $50.00 LMO-MJ Drops CPN $18.50 So much for that ascending trend we were watching in shares of CPN. The meltdown in Enron shot a hole in the stock price of many utility stocks and the declaration of bankruptcy over the weekend really rocked the boat for CPN shareholders, sending the stock down to a new yearly low, closing at $18.50 and closing our play with a whimper. So much for moving our stop up to $21, as the stock danced around just above that level for several days, before cratering last Monday. In retrospect, I should have raised the stop near $25 to get us out if the ascending trendline had been broken. An interesting side note is that the violation of the trendline came at the same time as the stock violated the 20-dma. That makes it a double bearish signal that should have had us exiting the play nearly 3 weeks ago at a profit rather than this week at a loss. I would use any strength over the next week to obtain a better exit, as I think the worst news has now been factored into the stock. But I wouldn't use the current low price to initiate new positions, as the technicals do not support a bullish move over the near to medium term with the weekly Stochastics in a power dive. ************************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 12-09-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/1209_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 ************* Option Pricing Basics: Volatility Fundamentals - Part II By Mark Wnetrzak The first requirement for successful option trading is to understand the basic laws of pricing theory. Before a trader can accurately assess a position's value, he must fully comprehend the components of option pricing. These are the primary factors that determine the value of an option: 1. The price of the underlying stock 2. The strike price of the option itself 3. The time remaining until the option expires 4. The volatility of the underlying stock There are two, less important factors that also affect the price of an option: 5. The current risk free interest rate (usually the 90 day T-Bill is used for this calculation) 6. The dividend rate of the underlying stock Volatility is the most important variable in valuing an option. All other factors are known: share value, option strike price, dividends, interest rates, and time remaining until expiration. The volatility of the underlying issue is also the most difficult value to accurately determine. Professional traders use several different timeframes to assess a stock's potential movement. In most cases, the 20-day historical volatility provides a reasonable projection of the short-term volatility of any instrument. But, for longer-term strategies, the 50-day and/or 100-day historical volatility values should be compared with the near-term numbers to identify any disparities in the recent character of the issue. A significant move in the underlying instrument, due to an earnings report or other major event, can cause an artificial change in volatility, thus skewing the short-term data. In general, 20-day, 50-day, 90-day and 1-year periods are the most common timeframes used to reflect the magnitude of future movement that can be expected over the life of an option. Comparing historic volatility to implied volatility helps a trader determine whether options are cheap or expensive. The most common way to use implied volatility is to observe an average of some past period of time, such as a 100-dma. Experienced traders also use an adverse volatility estimate, based on historical volatility, in order to provide a more conservative appraisal of an option's true value. By definition, implied volatility is a mathematical measure of the relative cost of an option, and it is largely based on the historical volatility of the underlying issue. In reality, the implied volatility of an option is mostly determined by market expectations of the underlying security. When evaluating historical and implied volatility for specific option trades, it is best to use the most conservative values in pricing calculations. For example, if you are going to sell an an option, use a high estimate, perhaps the maximum value of the most common (20-, 50- and 100-dma) short-term volatility data. With that approach, the current price of the option will have to be inflated for the premium to appear "overpriced." In contrast, if you plan to engage in a strategy where you expect the underlying issue to be active, then a low volatility estimate (the minimum of the 20-, 50-, or 100-dma) would be more appropriate. Using that technique, the option will look "cheap" only when it is relatively inexpensive, based on historical stock movement. For more information, read the appropriate chapters in McMillan's "Options as a Strategic Investment" and Sheldon Natenburg's "Option Volatility and Pricing." These are the bibles of floor traders and they will help you understand the complex subject of volatility and theoretical derivatives pricing. 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 PCYC 25.82 25.50 DEC 22.50 5.20 *$ 1.88 9.9% TELM 6.20 7.85 DEC 5.00 1.80 *$ 0.60 9.9% CANI 5.97 6.10 DEC 5.00 1.35 *$ 0.38 8.9% NPRO 11.32 11.81 DEC 10.00 1.85 *$ 0.53 8.1% TUNE 21.20 22.65 DEC 20.00 2.25 *$ 1.05 8.0% NTPA 5.68 6.42 DEC 5.00 1.10 *$ 0.42 8.0% MDCO 11.43 10.37 DEC 10.00 2.10 *$ 0.67 7.8% SURE 12.20 11.60 DEC 10.00 3.10 *$ 0.90 7.2% QSFT 22.64 25.17 DEC 20.00 4.10 *$ 1.46 6.8% VTSS 11.61 14.82 DEC 10.00 2.45 *$ 0.84 6.6% EXFO 14.18 12.60 DEC 12.50 2.55 *$ 0.87 6.5% SURE 12.38 11.60 DEC 10.00 2.80 *$ 0.42 6.4% PXLW 14.95 17.75 DEC 12.50 3.30 *$ 0.85 6.3% GMST 22.70 29.67 DEC 20.00 4.30 *$ 1.60 6.3% SNDK 14.19 15.88 DEC 12.50 2.20 *$ 0.51 6.2% RMBS 8.88 9.38 DEC 7.50 1.95 *$ 0.57 6.0% AMZN 8.95 11.71 DEC 7.50 1.90 *$ 0.45 5.5% JDSU 11.60 10.53 DEC 10.00 2.20 *$ 0.60 5.5% MCDT 18.80 28.10 DEC 15.00 4.80 *$ 1.00 5.2% INVN 19.42 31.25 DEC 15.00 5.10 *$ 0.68 5.2% FMKT 19.75 22.09 DEC 17.50 2.85 *$ 0.60 5.1% STEL 23.54 26.57 DEC 20.00 4.20 *$ 0.66 4.9% VRTY 15.09 16.28 DEC 12.50 3.00 *$ 0.41 4.9% CRXA 14.74 14.78 DEC 12.50 2.90 *$ 0.66 4.8% ARQL 11.10 13.48 DEC 10.00 1.50 *$ 0.40 4.5% PROX 11.50 10.42 DEC 10.00 1.90 *$ 0.40 4.5% GNTA 16.75 13.35 DEC 15.00 2.85 $ -0.55 0.0% *$ = Stock price is above the sold striking price. Comments: Next week should be interesting with the FOMC meeting on Tuesday: Will they or won't they? Cut interest rates one more time, that is. A few issues above are at key moments and should be monitored closely: Pharmacyclics (NASDAQ:PCYC) continues to consolidate at its 150-dma; The Medicines Company (NASDAQ:MDCO) appears to be holding at $10 but a test towards the 50-dma around $9.25 seems likely; JDS Uniphase (NASDAQ:JDSU) is looking a bit weak after failing to move above the November high; Corixa (NASDAQ:CRXA) is still having problems moving through $16, suggesting a retest of of support near $12.50 may be needed; and Proxim (NASDAQ:PROX) may still fill that November gap. Echelon (NASDAQ:ELON) allowed a second-chance exit this week for those still in the position. Genta (NASDAQ:GNTA) is the lone issue that acted horrid this week. We will "listen to the tape" and show the position closed. The congestion from June through July should provide support but the heavy volume drop on Friday doesn't bode well for the near term. Those investors who remain bullish on the issue may consider adjusting the position by rolling forward and/or down to a lower strike price (and cost basis). Positions Closed: ELON 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 EMBT 19.16 DEC 17.50 MBQ LW 2.25 20 16.91 14 7.6% FALC 8.81 JAN 7.50 XMQ AU 1.90 0 6.91 42 6.2% MRVL 36.96 JAN 32.50 UVM AZ 6.60 6 30.36 42 5.1% NPRO 11.81 JAN 10.00 NYQ AB 2.70 602 9.11 42 7.1% NXTV 6.44 JAN 5.00 NUZ AA 2.00 563 4.44 42 9.1% OAKT 13.53 JAN 12.50 KAU AV 1.90 734 11.63 42 5.4% XICO 14.00 JAN 12.50 UOB AV 2.35 77 11.65 42 5.3% 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 NXTV 6.44 JAN 5.00 NUZ AA 2.00 563 4.44 42 9.1% EMBT 19.16 DEC 17.50 MBQ LW 2.25 20 16.91 14 7.6% NPRO 11.81 JAN 10.00 NYQ AB 2.70 602 9.11 42 7.1% FALC 8.81 JAN 7.50 XMQ AU 1.90 0 6.91 42 6.2% OAKT 13.53 JAN 12.50 KAU AV 1.90 734 11.63 42 5.4% XICO 14.00 JAN 12.50 UOB AV 2.35 77 11.65 42 5.3% MRVL 36.96 JAN 32.50 UVM AZ 6.60 6 30.36 42 5.1% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** EMBT - Embarcadero $19.16 *** Bottom Fishing! *** Embarcadero Technologies (NASDAQ:EMBT) provides software products that enable organizations to build and manage e-business appli- cations and their underlying databases. The company's suite of products allows customers to manage the database life cycle, which is the process of creating, deploying and enhancing e- business applications and their underlying databases, in response to evolving business requirements. During the 4th-quarter of 2000, Embarcadero completed 3 acquisitions: Embarcadero Europe, Advanced Software Technologies, and Engineering Performance. J.P. Morgan recently upgraded its rating on the company to a "long-term buy" from "market perform." Analysts believe that Embarcadero's business will stabilize in the 4th-quarter and have recently raised their estimates. Apparently, investors agree as the issue has shown new signs of a bullish trend and this "short-term" position offers a way to conservatively speculate on the company's future share value. DEC 17.50 MBQ LW LB=2.25 OI=20 CB=16.91 DE=14 TY=7.6% ***** FALC - FalconStor Software $8.81 *** Bracing For A Rally? *** FalconStor Software (NASDAQ:FALC) is a provider of storage net- working infrastructure software. The company's open software approach to storage networking enables companies to capture and manipulate the expanding volume of enterprise data and existing storage solutions, without rendering those solutions obsolete. IPStor, the company's flagship product, is a storage solution that combines industry-standard connectivity with next-generation network storage services. On August 23, 2001, FalconStor, Inc. completed a reverse merger with Network Peripherals, Inc. to form FalconStor Software, Inc. Hmmm...very complex indeed. However, the technical indications suggest a "head-n-shoulders" bottom may be in the making. The stock appears poised to move higher in the coming sessions and traders who believe the issue is destined for a future rally can profit from upside movement with this conservative position. JAN 7.50 XMQ AU LB=1.90 OI=0 CB=6.91 DE=42 TY=6.2% ***** MRVL - Marvell Technology $36.96 *** Earnings Rally! *** Marvell Technology (NASDAQ:MRVL) designs, develops and markets integrated circuits utilizing proprietary communications mixed signal and digital signal processing technology for communication markets. The company's products provide the critical interface between analog signals and the digital information in computing and communications systems and enables its customers to store and transmit digital information quickly and reliably. The company also develops high-performance communications internetworking and switching products for the broadband communications market. MRVL has continued to rally after a bullish earnings report in November. Net revenue for the 3rd-quarter of fiscal 2002 was $73.1 million, an increase of 102% over last year and a 6% sequential increase last quarter. Based on the bullish technicals, investors agree that MRVL had a tremendous quarter in terms of solid revenue growth and this company would certainly be a candidate for any long-term portfolio. JAN 32.50 UVM AZ LB=6.60 OI=6 CB=30.36 DE=42 TY=5.1% ***** NPRO - NaPro BioTherapeutics $11.81 *** Good News! *** NaPro BioTherapeutics (NASDAQ:NPRO) is a biopharmaceutical company focused on the development, production and licensing of complex natural-product pharmaceuticals. NaPro is also engaged in the development and licensing of novel genetic technologies for applications in human therapeutics and diagnostics. NaPro has partnerships with Abbott Labs, F.H. Faulding & Co., Tzamal Pharma and JCR Pharmaceuticals Co. NaPro's lead product is the cancer drug paclitaxel. NaPro believes its resources, technology and international partner- ships position it for significant participation in the growing worldwide paclitaxel market. NaPro's stock surged recently after it announced an agreement with Bristol-Myers Squibb (NYSE:BMY), to market a paclitaxel injection, pursuant to an ANDA approval (expected later this month). This agreement also settles the paclitaxel-related litigation currently pending between the two companies. A conservative entry point from which to speculate on the company's future. JAN 10.00 NYQ AB LB=2.70 OI=602 CB=9.11 DE=42 TY=7.1% ***** NXTV - Next Level $6.44 *** What's UP? NXTV! *** Next Level Communications (NASDAQ:NXTV) designs and markets broadband communications equipment that is designed to enable telephone companies and other communications service providers to cost-effectively deliver a full suite of voice, high-speed data and digital video services over the existing copper tele- phone wire infrastructure. Next Level's products consist of equipment located at the telephone company's central office or exchange, in the field and at the subscriber's home or business. The company's customers include Qwest, Hutchinson Telephone, Paul Bunyan Rural Telephone, Chibardun Telephone, Horizon, New ULM, Washington, Wood County, Hickory Tech, Clearlake, Cable- vision, Bell Canada, All West and Northstar Telephone. No news to explain the strong 2-day rally but the "tape" is speaking loud and clear! We simply favor the technical break-out and this position offers a great way to speculate on the future movement of the issue in a conservative manner. JAN 5.00 NUZ AA LB=2.00 OI=563 CB=4.44 DE=42 TY=9.1% ***** OAKT - Oak Technology $13.53 *** Heading Higher? *** Oak Technology (NASDAQ:OAKT) designs, develops and markets high- performance integrated semiconductors, software and platform solutions to OEMs worldwide that serve the optical storage and digital imaging equipment markets. The company's products consist primarily of ICs and supporting software and firmware, all designed to store and distribute digital content, thereby enabling the company's OEM customers to deliver systems to the end user for the home and enterprise. OAKT's operations are organized along its two market-focused groups: the Optical Storage Group and the Imaging Group. OAKT met expectations in October and the company said that it anticipates revenues for this quarter to increase by approximately 5 - 10%. The chart indications suggest the issue has successfully completed a year-long consolidation and is poised for future gains. JAN 12.50 KAU AV LB=1.90 OI=734 CB=11.63 DE=42 TY=5.4% ***** XICO - Xicor $14.00 *** On The Move! *** Xicor (NASDAQ:XICO) designs, develops, manufactures and markets a wide variety of programmable mixed-signal integrated circuits and nonvolatile memory products used in networking, computing, communication, consumer and industrial applications. Xicor's products are sold in a variety of packages, including plastic, ceramic and chip scale packages for small footprint and height. Xicor's sales are derived from two product groups, mixed-signal products (their core market) and memory products. Xicor is "on the move" and this week's rally to a new 18-month high on heavy volume suggests there is further upside potential for the issue. JAN 12.50 UOB AV LB=2.35 OI=77 CB=11.65 DE=42 TY=5.3% ***** ***************** 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 ENTU 10.11 DEC 10.00 EXH LB 0.65 54 9.46 14 12.4% CRUS 15.50 DEC 15.00 CUQ LC 1.25 3553 14.25 14 11.4% ICST 21.18 DEC 20.00 IUY LD 2.05 791 19.13 14 9.9% OSIS 21.90 DEC 20.00 UOJ LD 2.75 74 19.15 14 9.6% PRCS 5.00 JAN 5.00 FGU AA 0.55 104 4.45 42 9.0% ARIA 5.29 JAN 5.00 UAQ AA 0.80 95 4.49 42 8.2% IMNY 8.76 JAN 7.50 MQN AU 2.00 500 6.76 42 7.9% INVN 31.34 DEC 25.00 FQQ LE 7.20 2649 24.14 14 7.7% CMOS 20.90 DEC 20.00 CQS LD 1.50 131 19.40 14 6.7% AMZN 11.71 JAN 10.00 ZQN AB 2.55 12257 9.16 42 6.6% ULCM 11.80 JAN 10.00 UUL AB 2.60 244 9.20 42 6.3% MCDT 28.10 DEC 25.00 DMU LW 3.70 143 24.40 14 5.3% ***************** NAKED PUT SECTION ***************** Secrets Of Success: Stick To The Basics In Volatile Markets! By Ray Cummins Investing can be lots of fun and playing the market is the best game there is, providing you study diligently, learn the rules and acquire the necessary trading and analysis tools. In this unique game, the education never ends, and since stocks are dynamic, ever-changing entities, investors must continuously improve their skills to be successful. When the market becomes unruly or difficult to forecast, it's important to focus on historically proven methods that provide the most accurate means of identifying primary directional trends and the character of individual issues. In most cases, the preferred technique for experienced traders is charting or technical analysis. The recent rally in technology and industrial issues highlights the renewed optimism now prevalent in the stock market. It also accounts for the widespread speculation among investors, and the rise of the "buy-it-now-or-never" analysts. However, technical traders should not be persuaded by the onslaught of stock hype and propaganda, such as "blanket" upgrades, that is fashioning much of the current market sentiment. Historical charts should continue to guide your decisions and during periods of excessive pessimism, the most important patterns to study are long-term. Traders generally use daily charts for entry and exit signals but the best way to determine major support and resistance levels is through the analysis of weekly or monthly time frames. Primary support and resistance levels are especially significant during periods when the market appears to be overextended or near a potential climax and by carefully reviewing long-term cycles and trends, a trader can identify areas where significant supply or demand will likely be encountered. In addition, major reversal and continuation patterns found in daily charts also occur with both weekly and monthly periods and the significance of these formations is strikingly similar. In the Covered-Call and Naked-Put sections, our methodology of selecting stocks with chart analysis and option pricing models has been very successful regardless of the market's condition. In most cases, we take a purely technical view with regard to each individual issue and our decision-making process is based on the stock's past trading history along with its current share value and primary directional trend. We carefully analyze the price action of each candidate using a wide range of technical indicators to determine if the issue meets our minimum criteria for a favorable position. The secret is to identify relatively strong issues early in a bullish cycle where there is far less downside risk and longer time frames often provide more accurate indications in that respect. After we have compiled a list of potential stocks, a thorough review of the option premiums is conducted to determine if the overall position offers sufficient downside protection, relative to the issue's technical history and price support. Once the minimum acceptable cost basis has been established, it is relatively easy to select positions in which the return on investment warrants our participation in a play. Most traders agree that technical analysis is an art and this concept is even more apparent when we are near the end of a bearish market environment. The best indicators can be highly unreliable when extreme emotion dictates the daily movements in stocks and it is far more difficult to earn consistent returns under these conditions. The best we can do is focus on methods that have worked well in the past and simply let the technical condition of each individual issue be our guide. In short, we use the more recent price action of the stock to alert us to favorable opportunities while at the same time relying on the longer-term patterns to determine if the movement is likely to continue. After the position is initiated, the performance of the issue will determine our future actions. If we are wrong about the character of the underlying stock, we simply exit the position and look for another potential play. The worst outcome that can occur with this approach is a modest loss in capital and usually, that limited shortfall is more than offset by other gains in the portfolio. In fact, the primary reason that novice investors achieve poor results with low risk, low return trading strategies is not due to a deficiency in play selection, but rather their inability to effectively manage failing positions for minimum loss. Of course, that's another subject entirely... 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 LVLT 6.82 6.40 DEC 5.00 0.30 *$ 0.30 15.7% WGRD 11.92 11.40 DEC 10.00 0.60 *$ 0.60 15.1% INVN 25.15 31.25 DEC 17.50 0.55 *$ 0.55 14.3% IGEN 35.95 32.97 DEC 30.00 0.90 *$ 0.90 14.0% CRXA 15.01 14.78 DEC 12.50 0.35 *$ 0.35 13.2% FNSR 12.96 12.37 DEC 10.00 0.35 *$ 0.35 12.9% NTAP 16.51 19.03 DEC 12.50 0.65 *$ 0.65 11.9% CRXA 15.32 14.78 DEC 12.50 0.40 *$ 0.40 11.7% IMNY 7.24 8.76 DEC 5.00 0.25 *$ 0.25 10.7% RSAS 15.75 16.65 DEC 12.50 0.25 *$ 0.25 10.7% MANU 10.66 15.60 DEC 7.50 0.35 *$ 0.35 10.2% MCDT 22.75 28.10 DEC 17.50 0.45 *$ 0.45 9.8% SLAB 28.26 32.56 DEC 22.50 0.85 *$ 0.85 9.5% MCDT 25.20 28.10 DEC 20.00 0.35 *$ 0.35 9.4% MCDT 21.10 28.10 DEC 15.00 0.50 *$ 0.50 9.2% TERN 13.19 13.25 DEC 10.00 0.30 *$ 0.30 8.9% SRNA 22.90 25.42 DEC 17.50 0.50 *$ 0.50 8.6% SRNA 22.25 25.42 DEC 17.50 0.35 *$ 0.35 7.9% PMCS 23.27 27.36 DEC 15.00 0.45 *$ 0.45 7.7% CEGE 22.86 23.59 DEC 20.00 0.35 *$ 0.35 7.6% CNXT 13.37 17.05 DEC 10.00 0.30 *$ 0.30 7.3% AFFX 37.13 37.30 DEC 30.00 0.55 *$ 0.55 7.2% CREE 25.25 26.13 DEC 20.00 0.45 *$ 0.45 7.1% IMMU 23.49 21.80 DEC 20.00 0.40 *$ 0.40 6.9% MACR 22.08 22.63 DEC 17.50 0.45 *$ 0.45 6.7% MCSI 24.00 21.62 DEC 20.00 0.50 *$ 0.50 5.9% SMTC 37.55 41.47 DEC 27.50 0.35 *$ 0.35 4.8% PLMD 23.00 19.37 DEC 20.00 0.65 $ 0.02 0.4% *$ = Stock price is above the sold striking price. Comments: Our position in Polymedica (NASDAQ:PLMD) received an unwanted surprise this week when the issue dropped over 25% after the medical supply company revealed it is being investigated by the Securities and Exchange Commission. Their subsidiary Liberty Medical Supply is already the subject of a federal criminal probe and the new investigation into "accounting matters, financial reports, other public disclosures and sales of the company's securities," did not bode well for its share value. The issue closed Friday's session at our cost basis and from this point, it's anybody's guess as to how it will perform in the coming weeks. Since it was a speculative position, the volatility was somewhat expected but that does not mean we can simply wait for the outcome and hope for the best. Traders should evaluate the current small loss versus the possibility of owning the issue at an unfavorable price and act in accordance with their personal risk/reward attitude and portfolio outlook. 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 ALOY 19.06 JAN 15.00 YLQ MC 0.35 10 14.65 42 6.1% ICST 21.18 DEC 17.50 IUY XW 0.30 2325 17.20 14 12.8% OSIS 21.90 DEC 17.50 UOJ XW 0.30 11 17.20 14 13.9% PCYC 25.49 DEC 17.50 QPY XW 0.65 850 16.85 14 24.6% RCOM 11.14 JAN 10.00 RAU MB 0.45 45 9.55 42 8.7% RIMM 23.48 DEC 20.00 RUL XD 0.35 5133 19.65 14 12.1% RSTN 18.15 DEC 15.00 RQJ XC 0.30 696 14.70 14 14.8% 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 PCYC 25.49 DEC 17.50 QPY XW 0.65 850 16.85 14 24.6% RSTN 18.15 DEC 15.00 RQJ XC 0.30 696 14.70 14 14.8% OSIS 21.90 DEC 17.50 UOJ XW 0.30 11 17.20 14 13.9% ICST 21.18 DEC 17.50 IUY XW 0.30 2325 17.20 14 12.8% RIMM 23.48 DEC 20.00 RUL XD 0.35 5133 19.65 14 12.1% RCOM 11.14 JAN 10.00 RAU MB 0.45 45 9.55 42 8.7% ALOY 19.06 JAN 15.00 YLQ MC 0.35 10 14.65 42 6.1% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ALOY - Alloy $19.06 *** The Next Generation! *** Alloy (NASDAQ:ALOY), formerly Alloy Online, is a multi-channel media company and direct marketer providing community, content and commerce to Generation Y, the approximately 58 million boys and girls between the ages of 10 and 24. Alloy has developed and aggregated a wide array of branded media properties that interact directly with the Generation Y group. Through these media properties, Alloy sells Generation Y-focused merchandise and provides engaging content and community services that appeal to teenagers. Alloy's media-based properties include catalogs, web-sites, books, and magazines. Alloy recently enjoyed its most profitable quarter to date and the eleventh consecutive quarter of meeting or beating EPS consensus since Alloy's IPO. Total revenues for the third quarter of 2001 increased 58% to $44.5 million due to strong sales performances in the Alloy and CCS direct marketing operations and the company expects to improve on those numbers in the coming year. Investors can establish a conservative cost basis in the company's stock with this position. JAN 15.00 YLQ MC LB=0.35 OI=10 CB=14.65 DE=42 TY=6.1% ***** ICST - Integrated Circuit Systems $21.18 *** Chip Sector! *** Integrated Circuit Systems (NASDAQ:ICST) is engaged in the business of designing and marketing custom application specific integrated circuits (ASICs) for various industrial customers. The company's business is divided into two categories: Core and Non-Core Segments. The Core segment supplies a broad line of timing products for use in PC motherboard and also peripheral applications. The Non-Core segment sells mixed-signal (analog and digital) integrated circuits customized to the specific requirements of a broad range of customers and applications. The semiconductor sector is performing well and this company is one of the more favorable, low cost issues in the industry. Traders can speculate on the future performance of the group with this conservative position. DEC 17.50 IUY XW LB=0.30 OI=2325 CB=17.20 DE=14 TY=12.8% ***** OSIS - OSI Systems $21.90 *** On The Move! *** OSI Systems (NASDAQ:OSIS) is a vertically integrated, global provider of devices, subsystems and end products based on opto-electronic technology. The company designs and builds these devices and other value-added subsystems for original equipment manufacturers for use in a range of applications; security, medical diagnostics, fiber optics, telecommunications, gaming, office automation, aerospace and defense electronics, computer peripherals and industrial automation. In addition, the company utilizes its opto-electronic technology and design capabilities to manufacture security and inspection products that are used to inspect people, baggage, cargo and objects for weapons, explosives, drugs and other contraband. In the medical field, the company manufactures and sells bone densitometers, which are used to provide measurements in the diagnosis of osteoporosis. The security business is booming and Rapiscan Security Products, a subsidiary of OSI, is one of the leading manufacturers of X-ray-based detectors for aviation security. The parent issue is performing well and speculators can use this position to attempt to profit, in a conservative manner, from the bullish activity. DEC 17.50 UOJ XW LB=0.30 OI=11 CB=17.20 DE=14 TY=13.9% ***** PCYC - Pharmacyclics $25.49 *** Speculation Only! *** Pharmacyclics (NASDAQ:PCYC) is a pharmaceutical company that develops products to improve upon current therapeutic approaches to the treatment of cancer, atherosclerosis and retinal disease. The company uses its expertise in the chemistry of porphyrin-like biomolecules to develop patented compounds called texaphyrins. Texaphyrins are a new class of molecules that are rationally designed to accumulate in diseased cells and disrupt energy metabolism. Pharmacyclics' lead texaphyrin-based product candidates are XCYTRIN, LUTRIN, ANTRIN and OPTRIN. PCYC expects to report its late-stage Xcytrin test results during the latter part of December. Investors are beginning to speculate on the expanded use of Xcytrin which could turn the drug into a billion-dollar seller. The stock has rallied strongly off the September low and has recently moved above a trading range near $23, suggesting higher prices in the future. Extensive due-diligence is mandatory on this volatile issue! DEC 17.50 QPY XW LB=0.65 OI=850 CB=16.85 DE=14 TY=24.6% ***** RCOM - Register.com $11.14 *** Everything In A Name! *** Register.com (NASDAQ:RCOM) is a provider of Internet domain name registration products and services worldwide for businesses and individuals that want a unique address and branded identity on the Internet. Domain names serve as part of the infrastructure for Internet communications, including Websites, e-mail, audio, video and telephony. They also offer a suite of value-added products and services targeted to assist customers in developing and maintaining their online identities, including real-time domain name management, Website creation tools under the name FirstStepSite, domain name forwarding and domain name re-sale services, such as auctions, through its subsidiary Afternic.com. RCOM shares jumped last week with no public news to explain the activity. Now the issue is comfortably above a support area near $9 and this position offers a low risk entry point in the unique company. JAN 10.00 RAU MB LB=0.45 OI=45 CB=9.55 DE=42 TY=8.7% ***** RIMM - Research In Motion $23.48 *** A Wireless World! *** Research In Motion Limited (NASDAQ:RIMM) is a designer, maker and marketer of wireless solutions for the mobile communications market. Through development and integration of hardware, software and services, RIM provides solutions for seamless access to time- sensitive information including e-mail, messaging, Internet and Intranet-based applications. RIM technology also enables a broad array of third party developers and manufacturers in North America and around the world to enhance their products and services with wireless connectivity. RIM's portfolio of products includes the RIM Wireless Handheld product line, the BlackBerry wireless email solution, wireless personal computer card adapters, embedded radio modems and software development tools. BlackBerry is the first completely integrated wireless mobile email solution. The unique technology means that BlackBerry users are 'always on' and always connected to their business email and that emails are received automatically without the need to log in to a server or network. Wireless communication is the way of the future and investors who want to own RIMM can use this position to establish a discounted cost basis in the issue. DEC 20.00 RUL XD LB=0.35 OI=5133 CB=19.65 DE=14 TY=12.1% ***** RSTN - Riverstone Networks $18.15 *** Earnings Speculation! *** Riverstone Networks (NASDAQ:RSTN) builds routers that convert raw bandwidth into profitable services for Metropolitan Area Networks. Riverstone's products enable the creation of profitable services and the delivery of these services over next-generation and legacy networks, including SONET/SDH, Gigabit Ethernet, T1/E1, T3/E3, ATM, and Dense Wavelength Division Multiplexing (DWDM). RSTN products bring together fourth-generation Application Specific Integrated Circuits, battle-tested routing software, and media versatility to deliver comprehensive solutions for Metropolitan Area Networks. Riverstone's products are deployed in more than 40 countries and in some of the world's largest networks, including British Telecom, Korea Telecom, Qwest Communications, MAE West Ames, EarthLink, NTT, and Telefonica. The company's quarterly earnings are due in two weeks and traders are already speculating on the outcome of the report. Our position offers a (potentially) favorable reward with relatively low risk. DEC 15.00 RQJ XC LB=0.30 OI=696 CB=14.70 DE=14 TY=14.8% ***** ***************** 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 TUNE 22.65 DEC 20.00 TUF XD 0.45 240 19.55 14 14.3% STEL 26.57 DEC 22.50 URU XX 0.45 25 22.05 14 14.0% INVN 31.34 DEC 20.00 FQQ XD 0.40 896 19.60 14 13.0% FFIV 25.45 DEC 22.50 FLK XX 0.45 157 22.05 14 12.7% RATL 20.87 DEC 17.50 RAQ XQ 0.30 2630 17.20 14 12.3% OAKT 13.53 DEC 12.50 KAU XV 0.25 3 12.25 14 11.7% JDAS 19.36 JAN 17.50 QAH MW 0.70 50 16.80 42 7.7% FEIC 35.03 DEC 30.00 FQE XF 0.30 164 29.70 14 7.0% ************************ SPREADS/STRADDLES/COMBOS ************************ Time To Lock-In Some Profits! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, December 7 U.S. equities retreated today as investors reacted negatively to a report showing continued signs of weakness in the labor market. The Labor Department said that the unemployment rate rose to 5.7% last month from 5.4% in October. Economists surveyed by Thomson Global Markets expected a jobless rate of 5.6%. The news weighed on the market, as analysts fretted that a recovery in the economy may not come as quickly as some were anticipating. The blue-chip average slumped 49 points to 10,049 on weakness in oil shares and the NASDAQ slid 33 points to 2,021 as computer hardware, software and Internet sectors all lost ground. The Standard & Poor's 500 Index edged down 8 points to 1,158 with the biotechnology sector among the worst performers. Decliners beat advancers by a 1,680 to 1,401 margin on the NYSE and by a 1,876 to 1,749 margin on the NASDAQ. Total trading volume hit 1.23 billion on the Big Board and 1.92 billion on the technology exchange. Bond prices moved lower while yields surged, despite the ominous labor data. The yield on the 10-year Treasury bond was up to 5.13%, the highest level since August 8. Some analysts said Friday's profit-taking came at just the right time, with investors correctly exercising caution in a market with recent heavy gains. In addition, the jobs report provided the Fed with ample ammunition for another rate cut at Tuesday's FOMC meeting, and that could fuel the next rally. Portfolio Activity: Well, it's good to be back and although I had little opportunity to follow the Spreads/Combos section while overseas, it appears the market acted favorably during my absence. My laptop computer was rendered inoperable by a power surge on the third day of the trip but thankfully, there were plenty of Internet Cafes along my route and they allowed me to correspond with the home office as well as get some closing quotes after each session. The week started off at a mediocre pace but after the bullish activity on Thursday, the Combos portfolio was in excellent shape. All but one of the current credit-spread positions are at maximum profit and the lone dissenter, United Health Group (NYSE:UNH) offered a a number of great adjustment opportunities after the unexpected recovery rally late in November. Some traders chose to exit the bearish play (on the 11/26 dip) while others decided to roll up to a December position with a cost basis near $75. Our outlook was cautiously neutral, even after the sudden trend reversal but it now appears that $70 is the support level for the near-term and that means a "break-even" exit is probably the best that can be expected. Sonus Networks (NASDAQ:SONS) was the big winner in the group of synthetic positions, with the issue up over 35% in the last three days. The bullish play yielded a nice profit for less than three weeks in the position and there will likely be further upside in the long-term spread over the next few months. In the Straddles Group, Goldman Sachs (NYSE:GS) was a big mover, trading in a $10 range over a three-day period last week. The play offered a favorable short-term gain for aggressive traders. The premium-selling category is on track this month and both of our neutral credit strangles; Andrx (NASDAQ:ADRX) and Potash (NYSE:POT) are at maximum profit. The small group of calendar spreads has also performed very well with Intuit (NASDAQ:INTU) enjoying a healthy rebound, up to our sold strike at $45, while Biovail (NYSE:BVF) produced a small gain after just one week in the play. The Covered-calls with LEAPS position in Microsoft (NASDAQ:MSFT) is trading almost to a script with the issue near the sold call at $70. MSFT appears comfortable in the current range with the long-term resistance at that price and we should be able to safely sell another $70 call for the month of January. Questions & comments on spreads/combos to Contact Support ****************************************************************** - SPECULATION PLAYS - These positions are based on recent increased activity in the stock or underlying options. Both of these plays offer favorable risk/reward potential but they should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ****************************************************************** PVTL - Pivotal $5.88 *** Cheap Speculation! *** Pivotal (NASDAQ:PVTL) enables large and medium-sized businesses worldwide to acquire, serve and manage customers by providing customer relationship management and other electronic business solutions. The company refers to its solutions as the Pivotal Customer Relationship Management and eBusiness solution suite. The Customer Relationship Management and eBusiness solution suite is designed to complement and integrate with a business' supply chain, thus enabling businesses to improve efficiency and increase revenues. PVTL shares have been "on the move" in recent sessions and the rebound potential for this downtrodden issue is excellent. The distinctive company offers functionality in a wide range of CRM applications from marketing to sales and commerce. Its software is relatively easy to customize and integrate, and it is priced within the reach of small businesses, yet is complex enough to serve the needs of the middle market. With regard to growth, Pivotal has recently signed 38 new customers, including a global financial institution, a Fortune 500 property developer and an international cosmetics company. The new CEO, Bo Manning, says "things have finally bottomed-out" and traders apparently agree with that outlook as they have pushed the price of PVTL up 50% in the last week. The technical indications are bullish and this speculative position offers a method to participate in the future movement of the issue with relatively low risk. PLAY (very speculative - bullish/synthetic position): BUY CALL JAN-7.50 QFK-AU OI=1 A=$0.50 SELL PUT JAN-5.00 QFK-MA OI=70 B=$0.30 INITIAL NET DEBIT TARGET=$0.05-$0.10 TARGET PROFIT=$0.35-$0.50 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $185 per contract. ****************************************************************** TELM - Tellium $7.98 *** Bottom Fishing! *** 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 help deliver intelligent optical switching for public telecommunications networks. Tellium's products are designed to manage high-speed optical signals and can be easily expanded, enabling service providers to grow and manage their networks quickly and more efficiently to keep pace with the dynamic requirements of data services. The company's optical switches operate with existing optical networking equipment to support the transition from older networks to advanced, intelligent optical networks without service disruption. This capability protects service providers' prior investment in fiber optics and transmission equipment. Tellium shares have been active in recent sessions, due in part to management's decision to extend the lock-up period for their personal stock positions and an optimistic report that suggests the company's market share is growing at a better-than-expected rate. The Tellium management team recently signed new contracts with the company to extend the lock-up period for their shares for an additional 75 days; until after the company posts fourth quarter 2001 results. Tellium's chairman and CEO noted that the actions of Tellium's management team are "a strong indication of the commitment of the team and their confidence in our future." In addition, a new study released by a leading market research firm said Tellium will increase its market share of the global optical core switching market in 2001 by more than 50% from a year ago. According to the study's data, Ciena (NASDAQ:CIEN) will maintain its leadership in the switching equipment market with a 46% share, dropping from 60% a year ago. Tellium will be second in market share, with 29% of the market, an increase of 53% compared to its 19% share a year ago. Tellium was the only company in the study to see double-digit market growth, not to mention a nearly ten-fold increase in projected annual revenues. Based on the outlook for the industry, Tellium is well poised to benefit from future growth and traders who agree with a bullish outlook for the issue can speculate on that outcome with this combination position. PLAY (speculative - bullish/debit spread): BUY CALL JAN-7.50 UHE-AU OI=1541 A=$1.25 SELL CALL JAN-10.00 UHE-AB OI=336 B=$0.40 INITIAL NET DEBIT TARGET=$0.75-$0.80 PROFIT(max)=$1.70 ****************************************************************** - TECHNICALS ONLY - These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. Current news and market sentiment will have an effect on these issues, so review each position individually and make your own decision about its outcome. ****************************************************************** WLP - Wellpoint Health $120.00 *** Safety Stock! *** WellPoint Health Networks (NYSE:WLP) is a United States managed healthcare company. Wellpoint offers a range of network-based managed care plans. The company offers these plans to the large and small employer, individual, Medicaid and senior markets. The company's managed care plans include preferred provider organizations, health maintenance organizations and standard point-of-service and hybrid plans and traditional indemnity plans. In addition, the company offers managed care services, including underwriting, actuarial services, network access, medical cost management and claims processing. The company also provides a broad array of specialty and other products, including pharmacy, dental, utilization management, life and specialized healthcare insurance, preventive care, disability insurance, behavioral health services, COBRA and flexible benefits account administration. Wellpoint is widely recognized as a leader its industry and the balance sheet for the company has historically been very good. Wellpoint is also very innovative and they are adding to their best growth opportunities such as managed-care related products. The technical outlook for WLP is favorable and our conservative position offers an excellent way to participate in the future movement of the issue with relatively low risk. PLAY (conservative - bullish/credit spread): BUY PUT DEC-110 WLP-XB OI=39 A=$0.30 SELL PUT DEC-115 WLP-XC OI=182 B=$0.75 INITIAL NET CREDIT TARGET=$0.50-$0.55 PROFIT(max)=11% ****************************************************************** CBE - Cooper Industries $35.75 *** Asbestos Woes? *** Cooper Industries (NYSE:CBE) operates in two business segments: Electrical Products and Tools & Hardware. Cooper manufactures, markets and sells its products and provides services throughout the world. Cooper serves three major markets: construction, industrial and electrical power distribution. The markets for Cooper's products and services are worldwide, though the United States is the largest market. Cooper believes that it is among the top manufacturers in the world of electrical distribution equipment, wiring devices, support systems, hazardous duty electrical equipment, emergency lighting, lighting fixtures, fuses, non-power hand tools and industrial power tools. Cooper's stock price plummeted Friday in sympathy with the drop in Halliburton (NYSE:HAL). Shares of Halliburton fell to their lowest level in almost 10 years after the U.S. Securities and Exchange Committee announced that a Baltimore jury had awarded $30 million in asbestos damages against its Dresser Industries subsidiary. Cooper Industries' past association with Federal Mogul is the reason for concern in the wake of Halliburton's precipitous decline and traders can speculate on the issue's asbestos-related activity with this combination position. PLAY (conservative - bearish/credit spread): BUY CALL DEC-45 CBE-LI OI=12596 A=$0.40 SELL CALL DEC-40 CBE-LH OI=1294 B=$1.00 INITIAL NET CREDIT TARGET=$0.65-$0.75 PROFIT(max)=14% ****************************************************************** - STRADDLES AND STRANGLES - I received some new requests for debit straddles this week and since there are a number of favorable candidates in the category of "speculative" plays, I have decided to publish a variety of of issues and let you decide if any of the positions meet your personal risk/reward criteria. These plays will not be tracked with the regular portfolio positions. ****************************************************************** AH - Armor Holdings $25.40 *** Active Sector! *** Armor Holdings (NYSE:AH) is a manufacturer of security products for law enforcement personnel around the world through its Armor Holdings Products division. The company is a global provider of security risk management service to multi-national corporations and governmental agencies with its ArmorGroup Services division. Armor Holdings Products Division offerings include: ballistic resistant vests and tactical armor, hard armor, police batons, forensic, fingerprint and evidence collection equipment, unique less-lethal munitions, holsters and duty gear, and anti-riot products, among others. ArmorGroup Services division provides complicated security planning and risk management, humanitarian support, demining, mine awareness training, electronic security systems integration, computer forensic, consulting and training services, as well as intellectual property asset protection, business intelligence and investigative services. PLAY (speculative - neutral/debit straddle): BUY CALL DEC-25 AH-LE OI=713 A=$1.10 BUY PUT DEC-25 AH-XE OI=335 A=$0.65 INITIAL NET DEBIT TARGET=$1.60-$1.70 TARGET PROFIT=20% ****************************************************************** FMKT - FreeMarkets $22.05 *** Big Mover! *** FreeMarkets (NASDAQ:FMKT) creates business-to-business online markets and provides electronic commerce technology and services for the procurement of industrial parts, materials, commodities and services. FreeMarkets has created over 9,200 online markets and has enabled its customers to source products from more than 165 supply verticals. More than 9,300 suppliers from over 55 countries have participated in unique online markets created by FreeMarkets. In addition to its new FullSource offering, which provides customers with the range of its technology, services and information, FreeMarkets offers its DirectSource and QuickSource hosted services, which enable customers to run their own online markets. FreeMarkets also operates the Asset Exchange for buyers and sellers of surplus assets and inventory. PLAY (speculative - neutral/debit straddle): BUY CALL DEC-22.50 FAQ-LX OI=186 A=$1.20 BUY PUT DEC-22.50 FAQ-XX OI=25 A=$1.65 INITIAL NET DEBIT TARGET=$2.65-$2.75 TARGET PROFIT=20% ****************************************************************** CRA - Celera Genomics $28.95 *** Earnings Speculation! *** Celera Genomics (NASDAQ:CRA), a business of Applera, conducts its business through two groups: the Applied Biosystems Group (Applied Biosystems), which is engaged mainly in the development, manufacture, marketing, and service of instrument systems and associated consumable products for life science and related applications; and the Celera Genomics Group (Celera Genomics), which is engaged principally in integrating high throughput technologies to create therapeutic discovery and development capabilities for internal use and for its many customers and collaborators. Celera Genomics' businesses are its online information business and its therapeutic discovery business. The company's quarterly earnings and shareholder report are scheduled for December 12. PLAY (very speculative - neutral/debit straddle): BUY CALL DEC-30 CRA-LF OI=2623 A=$0.85 BUY PUT DEC-30 CRA-XF OI=197 A=$1.90 INITIAL NET DEBIT TARGET=$2.50-$2.65 TARGET PROFIT=20% Note: The Delta or "hedge ratio" in the position suggests that we should buy two calls for every put (2:1 ratio) to maintain a neutral outlook. However, any upward movement in the issue on Monday should allow both sides of the position to be purchased at similar prices. ****************************************************************** FLEX - Flextronics $27.56 *** Active Sector! *** Flextronics International (NASDAQ:FLEX) is a global provider of electronics manufacturing services to equipment manufacturers, mainly in telecommunications, networking, consumer electronics and computer industries. The company's manufacturing services include the fabrication and assembly of plastic/metal enclosures, printed circuit boards or PCBs, backplanes and the assembly of complete systems and products. In addition, with its photonics division, the company makes and assembles photonics components and integrates them into PCB assemblies and systems. During the production process, the company offers design and technology services; logistics services, such as materials procurement, inventory and vendor management, packaging and distribution; and automation of key components of the supply chain through advanced information technologies. In addition, the company has added other after-market services such as network installation. PLAY (speculative - neutral/debit straddle): BUY CALL DEC-27.50 QFL-LY OI=5211 A=$1.50 BUY PUT DEC-27.50 QFL-XY OI=590 A=$1.35 INITIAL NET DEBIT TARGET=$2.65-$2.75 TARGET PROFIT=20% ****************************************************************** ************************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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