The Option Investor Newsletter Wednesday 12-19-2001 Copyright 2001, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/8126_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 12-19-2001 High Low Volume Advance/Decline DJIA 10070.50 + 72.10 10088.30 9919.80 1.45 bln 1528/1643 NASDAQ 1982.80 - 21.90 2007.76 1971.07 1.90 bln 1605/2059 S&P 100 588.72 + 5.34 590.25 580.10 totals 3133/3702 S&P 500 1149.56 + 6.64 1152.44 1134.75 RUS 2000 482.07 - 3.42 485.49 480.02 DJ TRANS 2644.66 - 12.61 2662.08 2632.30 VIX 23.57 - 0.59 25.01 22.90 Put/Call Ratio 0.61 ****************************************************************** To Stimulate Or Not To Stimulate... That is the question. The political battle is heating up in Washington, as business as usual has replaced the love-fest of cooperation that existed in the wake of the September attacks. Partisan politics are back, and are serving to bog down approval process for the much-hyped economic stimulus package. President Bush spoke of a compromise, but Senate Majority Leader Daschle argued that a compromise had not yet been reached. So the waiting game continues. On the economic front, the Leading Economic Indicator provided the initial push to the upside this morning, as it came in stronger than expected (+0.5% vs. expectations of +0.3%). While this is encouraging for those counting on a recovery in the first half of 2002, it should be noted that the uptick was due entirely to factors already well known; namely the recent rally in the stock market, steepening yield curve and a decline in jobless claims. Good news, yes. But already priced into the market. Energy and in particular Oil Service stocks were at the top of the leader board today following a news report that the U.S. intercepted an oil tanker in the Persian Gulf. The Oil Services sector (OSX.X) tacked on 4.6%, bringing it right back to the $85 resistance level that has kept a lid on each rally for the past month. Will the third time be the charm, or just another opportunity to buy puts? Whatever the outcome, it is likely there could be some profits in store for those that manage to guess the outcome correctly. My guess is that it is going to be another failed rally. Regardless of what the underlying cause was, the DJIA managed to claw its way back over the psychologically important 10,000 level again today, and it looks like another test of the highs is in the cards for tomorrow. Financial stocks such as Citigroup (NYSE:C) and American Express (NYSE:AXP) led the charge with gains of 3.95% and 3.65% respectively. International Business Machines (NYSE:IBM) helped out too, closing at another 52-week high after trading as high as $124.70 in late-afternoon trading. Not to be left out of the bullish party, General Electric pushed back above $40 to close at its highest level since November 27th. The biggest drag on the Industrials came from Alcoa (NYSE:AA), losing more than 6% on the heels of the company's earnings warning last night. So the battle continues with the bulls focused on economic recovery in the first half of 2002 and the bears gaining traction as the pace of earnings warnings accelerates into the end of the year. The winning camp is hard to pick right now, but the near-term bias is favoring the bulls. With the bullish bias that normally accompanies triple witching expiration, I would look for a retest of the recent highs before the end of the week. The real problem is what to expect after that. The DJIA is once again nearing the 200-dma at 10109, with the 62% retracement of the May-September decline looming at 10,153. And that is just the beginning of the challenge for the bulls, as they then have to contend with A LOT of overhead resistance between 10,200-10,600. It was encouraging to see the participation from the Financials, particularly the Brokerage sector (XBD.X) today, which managed a 1.9% advance, closing right at resistance. But the internals are certainly not convincing, with decliners slightly ahead of advancers on fairly solid volume. Conviction isn't there, at least not yet. After last night's trifecta of earnings warnings in the Semiconductor sector (SOX.X) from Motorola (NYSE:MOT), Micron (NYSE:MU) and Triquint Semiconductor (NASDAQ:TQNT), it was no surprise to see the SOX at the top of the loser list today. Weak right from the opening bell, the chip index dropped 5.2% by the closing bell, closing right at the low of the day and just above critical support at $536.50. This level has served as a price magnet for the SOX for over a month now as hopes for economic recovery are doing battle with the reality that all is not rosy in Tech-land. I continue to focus on the SOX as an indicator of the health of the recent rally, as it typically leads any recovery in the broader Technology market. That recovery is now clearly in jeopardy, as demonstrated by the following chart. Just over 2 weeks ago, pundits were falling all over themselves saying that the breakout over the 200-dma (grey line) and the long-term descending trendline meant that the bottom was in for the techs and the sky was the limit. The price action (not to mention the less-than-inspiring news) since then is casting a dark cloud over that bullish prediction. This is the second time in a week that the SOX has posted a steep decline, stopping right at the red support line. If this sector is going to remain in a leadership role, it has to hold above support. The battle lines are drawn, and the outcome is likely to determine the fate of the broader NASDAQ, at least over the near term. So what's the outlook for tomorrow? Initial Jobless Claims are out before the opening bell tomorrow, with expectations of 440K vs. the last report at 394K. Anything near the consensus is likely to be a non-event, but lookout for a blowout in either direction. A drop in claims could be just what the bulls need to test recent resistance, while a sharp increase could have the bears sharpening their claws ahead of the holiday weekend in anticipation of fresh ground sirloin on the menu. All of the major indices are back over Jim's trigger levels of 9800/1950/1125 for the DJIA/COMPX/SPX, so cautious bulls should have already staked out their claims for the anticipated rally. Trade the rally as long as it lasts, but watch out for profit taking. The market is always right, so don't argue with it. Your trading account will thank you. Mark Phillips Research Analyst ************************Advertisement************************* GREAT TECHNOLOGY, LOW RATES * EASY screens for covered calls, spreads, and straddles * FREE REAL-TIME quotes and custom option chains * $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden Fees. * ZERO minimum deposit required to open an account Visit: http://www.optionsxpress.com/marketing.asp?source=optinv1 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ************************************************************** ***************** STOP-LOSS UPDATES ***************** None ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ***** LEAPS ***** Anatomy of LEAPS Candidate Selection By Mark Phillips Contact Support If I've said it once, I've said it a hundred times; some of the best ideas for my articles come from you, my faithful readers. After my article last week, I got the following email: The latest drop on CIEN has made me curious about entering into Jan'03 Leaps. Any comments? I would love to see some chart analysis on this stock with its latest drop. To be honest, my first reaction to this idea was that it was ludicrous. Not that it was a bad idea to look at the stock, but that no matter what I saw in the charts, I really didn't like the fundamental picture. Then it hit me -- this would be a perfect opportunity to lay out the evaluation process I routinely go through in selecting new LEAP plays. Assuming that I am starting with just a symbol (CIEN in this case), the first thing I want to know is what the company does and in what industry it operates. So here's the quick synopsis: CIEN makes dense-wavelength division multiplexing (DWDM) systems for use with long-distance fiber-optic communications networks. CIEN offers optical transport, intelligent switching and multi- service delivery systems that enable service providers to deliver and manage high-bandwidth services to their customers. The company’s MultiWave DWDM systems allow optical fiber to carry up to 40 times more data and voice information without requiring more lines. CIEN's customers include long-distance carrier, competitive local exchange carriers (CLECs), Internet service providers and wholesale carriers. There was a time in the not-too-distant past when any company doing anything remotely connected with the buildout of the optical internet would get any self-respecting bull salivating and typing in an aggressive Buy order. But with the collapse of capital expenditures in this arena, those days are long gone. All you have to do is look at the big players like Lucent (NYSE:LU), Nortel Networks (NYSE:NT) and JDS Uniphase (NASDAQ:JDSU) to determine that the industry has fallen on hard times. CIEN was one of the last to fall, and rightly so, given the fact that it still has earnings (albeit pro-forma) with which to calculate a P/E ratio. But that P/E ratio is a lofty 136 based on the past 12 months earnings, and a quick look at the earnings trend in that space of time is not encouraging. The per-share earnings last May topped out at 20 cents, fell to 17 cents in August, and then plunged to just a nickel in the most recent quarter. But that's all water under the bridge, right? What is truly important is what we can expect from the company in the future. Last Thursday, in the earnings conference call, the company forecast more hard times ahead, saying they expect sales to fall 30-40% in the fourth quarter, producing a pro-forma loss of 8-12 cents. Ouch! No matter how you slice it, that is some bad news. Investors agreed, knocking the stock back for a nearly 17% loss, its worst one-day performance since the August earnings release, which resulted in a 30% decline. Adding insult to injury was yet another warning from ailing LU. Ostensibly reaffirming their outlook that they expect the current quarter to be the low point for the revenues in the current downturn, the company is still expected to post a pro-forma loss of 23-26 cents, but return to profitability sometime in 2002. No matter what type of spin you put on it, there is little to pin bullish hopes on other than the oft-repeated refrain of economic recovery by mid-2002. Similar comments continue to come from other players in the industry, and boiling it all down to a quick summary leaves me with the following assessment. Demand for optical networking equipment is still abysmal and there is no concrete indication of an improvement. Any hopes for a recovery rest on hope of an economic rebound, the evidence of which cannot be seen. So if we are going to dabble in this sector from the bullish side, we need to understand that we are attempting to pick a bottom, or put another way, catch a falling knife. This is a high-risk proposition, but maybe there is an indication from the charts that we could manage that risk with long-term options (LEAPS), combined with a solid entry and a tight stop. On to the charts! Starting with the daily chart, we can see the damage inflicted by the past 2 earnings reports. The report in August dropped CIEN below the $20 level, and the top of that gap has served as resistance for the past four months. The stock appeared to have put in a significant bottom near the $9 level in early October and then proceeded to recover all the way to the $22 resistance level. Since then, a series of lower price highs (with corresponding lower Stochastic highs) has continued to paint a bearish picture. Last Thursday's earnings disappointment dropped CIEN back to the $15 support level, and the recent price action is indicating that this level may be changing to resistance. I sure wouldn't be excited about trying to pick a bottom here, unless we can see a more constructive picture on the longer-term charts. So let's pull up my trusty weekly/monthly chart montage and see what they have to say. Boy, that's a nasty decline! While there is a slight hint of a bottom forming on the monthly chart, the weekly is once again diving towards oversold. Definitely not an entry yet. The monthly Stochastics turning up could be signaling that a bottom is in, all we need to activate the caution flag is the picture from earlier this year, as the oscillator turned south again without ever exiting the oversold region. Based on the recent price action and the less-than-inspiring news from the company, I think it is a pretty solid bet that we'll see the monthly turn south again before breaking above the 20 level. So here's what I see. The fundamental outlook for both the Optical Networking industry and CIEN looks ugly. On top of that, the picture on both the near-term and long-term charts is favoring the bears. Venturing into a play such as this would not be high on my list of fun activities, as it looks like a stacked deck, and it is stacked against us. But for those brave souls that still want to fish for a bottom in the sector, CIEN could be a place to dabble, but ONLY with high-risk capital. Here's the scenario I would look for. Wait for the weekly Stochastics to flatten out in oversold territory again, and then go back to the daily chart. If CIEN is holding in the support zone ($11.00-12.50) defined on the daily chart, a bounce near $11 in conjunction with the daily Stochastics emerging from oversold would be the best setup for entering new positions. I wouldn't play using 2003 LEAPS though, as I think it is going to be a longer-term story. In this type of situation, we want to buy as much time as possible (read:2004 LEAPS), both to insulate our position against the ravages of time decay and to give it as much time as possible to move in our favor. Additionally, we would want to place a tight stop just below the October lows ($9) to prevent a catastrophic loss should conditions continue to deteriorate. While this play wouldn't fit my personal risk profile, I hope the details I've gone through here this evening helps you to see the process I go through when trying to find attractive long-term bullish plays. Happy Holidays, and we'll talk again next week. -Mark ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** XMSR - XM Satellite Radio $17.30 +0.25 (+1.06 this 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 service in the United States. It plans to transmit its XM Radio service by satellites to vehicle, home and portable radios. Most Recent Write-Up A couple of our analysts had suspected that XMSR could be in the middle of a short squeeze but without any short interest data we couldn't confirm it. The stock does have at least 58M shares in float but a squeeze is/was possible. The huge move on Friday could have scared a few bears into covering their positions. Add to that any momentum traders willing to chase the stock and we get a big gap up on Monday morning at the open. XMSR opened at $17.37 then traded to a high of $18.48 before sliding back to close at $16.72 on Monday. We mentioned in the weekend letter that it may have been a good time to consider taking profits and the fading rally on Monday could have been affected by profit takers. However, the stock has continue to make gains as it tries to hold on to its new position above the $16 level. We get the impression that buyers may be too eager to buy XMSR. The high on Friday was $16.30. XMSR continued to consolidate on Tuesday and bounced several times at $16.30 effectively "filling the gap" from Monday's open. More volume followed this bounce and the stock traded higher again on Tuesday afternoon. We're going to raise our stop on the play to $15.99 now that shares have bounced at $16.30. XMSR could see resistance at $18 or $18.50. Comments Shares of the satellite radio company XMSR continue to orbit the $17 level and appear close to breaking above that level for real. Despite the weakness seen in the broader Technology sector on Wednesday, the stock posted another fractional gain, after an intraday dip near $16 that provided for a fresh entry point. The $18 level has been acting as resistance, but once the stock clears that level, it is likely to make a quick trip to the next level of resistance, $20. Continue targeting new positions on bounces above $16, or on a volume-backed move above $18. BUY CALL JAN-15 QSY-AC OI=1860 at $3.50 SL=1.75 BUY CALL JAN-17*QSY-AW OI=2930 at $2.40 SL=1.25 BUY CALL JAN-20 QSY-AD OI=3752 at $1.60 SL=0.75 BUY CALL APR-17 QSY-DW OI= 107 at $4.20 SL=2.50 BUY CALL APR-20 QSY-DD OI= 591 at $3.50 SL=1.75 Average Daily Volume = 1.74 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Santa Claus Rally Continues For Blue-Chip Stocks By Ray Cummins The Dow Industrials climbed for the fifth consecutive session today, breaching the 10,000 mark on speculation the slumping U.S. economy is on the road to recovery. Despite an early session sell-off, "old economy" stocks made a sharp recovery as investors overlooked negative earnings news and continued the recent buying streak amid hopes that President Bush and congress will soon be able to finalize an economic stimulus deal. Traders also took comfort in bullish data from a key economic forecasting gauge; the Conference Board's index of leading indicators, which rose for a second straight month in November. The report points to possible economic recovery in the first half of 2002 and analysts were quick to point out the "recession could be losing steam." The blue-chip average was bolstered by shares of Citigroup (NYSE:C), which rallied after the nation's largest financial services company said it would sell up to 20% of its Travelers Property Casualty unit in an initial public offering early next year. General Electric (NYSE:GE) was also a popular issue, rising on news of an upbeat earnings outlook. On the downside, shares of Alcoa (NYSE:AA) tumbled after the company warned its quarterly profits would fall well short of consensus expectations. The NASDAQ struggled to limit its losses following a rash of profit warnings from Motorola (NYSE:MOT), Micron Technology (NYSE:MU) and other leading companies. Chip stocks were hardest hit with much of the bearish activity due to Micron's announcement of a wider-than-expected loss and Dataquest data showing that chip industry revenues fell 33% this year; the worst decline in the history of the group. Telecom-equipment issues also slid lower after Motorola announced it is expecting a bigger first-quarter loss and that it plans to cut 9,400 employees from its payroll and shut more chip manufacturing plants over the next year. In the broader market, tensions between the U.S. and Iran helped oil stocks as crude prices rose over uncertainty about exports. Oil and oil services issues were the top gainers among S&P 500 sectors but financial shares also rallied after Morgan Stanley (NYSE:MWD) reported better-than-expected profits, despite the flagging U.S. economy. One analyst noted that the market is showing great resilience amid negative earnings news and appears set to rise ahead of Friday's "triple witching" of stock and derivative products. Sam Stovall, senior investment strategist at S&P, suggested that investors would do best to buy companies that are going to benefit from an economic turnaround next year such as banks and financials, consumer products, health care and select technology stocks. If those optimistic opinions do come true, it would be a great Christmas present for everyone. Happy Holidays! Summary of Current Positions (as of 12/18/01): Covered Calls: (Margin not used in calculations) Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield INTU DEC 45 40.85 43.60 2.88 4.8% TMPW DEC 35 33.20 43.91 1.80 4.5% ELBO DEC 35 33.50 42.09 1.50 3.7% VRTS JAN 40 37.42 46.02 2.58 5.7% Naked Puts: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield INTU DEC 35 34.20 43.60 0.80 5.6% ELBO DEC 30 29.50 42.09 0.50 5.0% TMPW DEC 30 29.40 43.91 0.60 6.0% EBAY DEC 50 48.85 66.81 1.15 6.8% BBY DEC 55 54.00 72.55 1.00 5.1% PCSA DEC 45 44.05 46.66 0.95 6.0% CVTX DEC 42.5 41.90 55.55 0.60 5.1% IGEN DEC 30 24.65 36.39 0.35 4.5% SMTC DEC 30 29.50 40.23 0.50 7.9% NVDA DEC 57.5 57.10 66.25 0.40 7.1% VRTS DEC 40 29.50 46.02 0.60 14.5% NVDA JAN 50 48.95 66.25 1.05 6.2% VRTS JAN 35 43.80 46.02 1.20 9.8% EMLX JAN 27.5 26.80 38.64 0.70 6.5% Naked Calls: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield CCMP DEC 80 80.65 80.15 0.50 4.2% CHIR DEC 50 50.45 45.75 0.45 5.3% IDPH DEC 75 75.70 71.16 0.70 5.2% EASI DEC 55 55.50 30.40 0.50 4.5% ICOS JAN 65 65.95 63.90 0.95 5.1% Sell Strangles: Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield AZN DEC 50-P 51.30 44.69 1.30 4.9% AZN DEC 45-P 43.60 44.69 1.09 4.1% ERTS DEC 50-P 48.45 62.34 1.55 7.9% Closed: Electronic Arts (NASDAQ:ERTS) DEC-$60 call. Credit Spreads: Stock Pick Last Position Credit C/B G/L Status PCAR 62.59 65.43 DEC50P/55P 0.70 54.30 0.70 Open AHP 58.75 58.25 DEC65C/60C 0.65 60.65 0.65 Open CSC 45.09 47.24 DEC35P/40P 0.60 39.40 0.60 Open PEP 50.28 47.38 DEC45P/47P 0.35 47.15 0.23 Closed NKE 51.56 52.78 DEC45P/47P 0.40 47.10 0.40 Open AGN 76.10 72.73 DEC65P/70P 0.60 69.30 0.60 Open LLY 83.33 82.64 DEC75P/80P 0.80 79.20 0.80 Closed CHIR 45.59 45.75 DEC55C/50C 0.60 50.60 0.60 Open IGEN 35.44 36.39 DEC25P/30P 0.85 29.15 0.85 Open ENZN 54.79 53.50 DEC70C/65C 0.60 65.60 0.60 Open BMY 50.45 51.19 DEC60C/55C 0.30 55.80 0.30 Open ADSK 39.39 39.18 JAN30P/35P 0.50 34.50 0.50 Open KBH 37.82 39.63 JAN30P/35P 0.55 34.45 0.55 Open MCHP 40.33 41.67 JAN30P/35P 0.75 34.25 0.75 Open Murphy's Law has always been a big part of our portfolio and since we closed the positions in Pepsi (NYSE:PEP) and Eli Lilly (NYSE:LLY), both issues are staging a comeback and the bullish plays are profitable again. New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** ACF - Americredit $30.20 *** Bottom Fishing! *** AmeriCredit (NYSE:ACF) has been operating in the automobile finance business since September 1992. Through its branch network, the company purchases auto finance contracts without recourse from franchised and select independent automobile dealerships and makes loans directly to consumers buying late model used and new vehicles. AmeriCredit targets consumers who are typically unable to obtain financing from traditional sources. Funding for the company's auto lending activities is obtained mainly through the sale of loans in securitization transactions. The company services its automobile lending portfolio at regional centers using automated loan servicing and collection systems. AmeriCredit's typical borrowers have experienced prior credit difficulties or have limited credit histories. Americredit was on the move today as rumors spread after a number of blocks were traded that "shorts" are covering their positions. The commentary from Briefing.com suggested that, "Despite general skepticism on lending-related operations, many people are financing new cars, which benefits ACF; also, aggressive monetary policy could produce a liquidity-driven rally, which should cause the economy to rebound and auto sales to improve." That's a very likely outcome, given the current economic conditions and the Fed's recent actions, and this position offers investors a way for investors to speculate conservatively on a recovery in the company's share value. ACF - Americredit $30.20 PLAY (buy stock and sell covered call; or sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL JAN 30 ACF AF 325 2.55 27.65 8.6% *** SELL PUT JAN 25 ACF ME 734 0.65 24.35 8.8% *** SELL PUT JAN 30 ACF MF 43 2.25 27.75 16.1% *************** GENZ - Genzyme General $60.80 *** New S&P 500 Addition! *** Genzyme General Division (NASDAQ:GENZ) is a division of Genzyme Corporation, a biotechnology and human healthcare company that develops products and provides services for major unmet medical needs. Genzyme General develops and markets therapeutic and diagnostic products and services with an emphasis on genetic disorders and other chronic debilitating diseases with defined patient populations. Genzyme General primarily consists of the Therapeutics and Diagnostics business units and its wholly owned subsidiary GelTex Pharmaceuticals, which the company acquired in December 2000. Genzyme General recently announced it was added to the S&P 500 Index. Genzyme is now included in the Biotechnology group within the Global Industry Classification Standard health care sector and in the Biotechnology industry group. The issue has replaced pet-food group Ralston-Purina (NYSE:RAL) as Ralston was acquired by Swiss food group Nestle Holdings. The S&P 500 is tracked by fund managers and changes to the index are usually followed by heavy trading in shares of the companies affected as funds holdings are adjusted to match the popular market gauge. In other news, Genzyme recently announced it will receive Dutch biotechnology firm Pharming's licences to intellectual property, pre-clinical and clinical data for its unique alpha-Glucosidase treatment for Pompe's disease. Genzyme will also purchase all shares in Pharming's Belgium subsidiary that owned manufacturing facilities and in return, the company is releasing Pharming from claims for agreed capital contributions to their joint venture and will forgive, under certain conditions, a promissory note. Genzyme is also moving towards an appeal in the ongoing patent infringement suit against Transkaryotic Therapies (NASDAQ:TKTX) and that may eventually result in a favorable judgment. From a technical viewpoint, GENZ is once again established in a bullish trend and those who favor the biotechnology sector can use this position to speculate conservatively on the future movement of the issue. GENZ - Genzyme General $60.80 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT JAN 55 GZQ MK 1,931 1.10 53.90 5.7% *** SELL PUT JAN 57.5 GZQ MY 375 1.75 55.75 7.8% SELL PUT JAN 60 GZQ ML 984 2.65 57.35 10.3% *************** IGEN - IGEN International $38.99 *** Legal Successes? *** IGEN International (NASDAQ:IGEN) develops and markets products that incorporate the company's proprietary ORIGEN technology, which permits the detection and measurement of unique biological substances. ORIGEN is incorporated into instrument systems and related consumable reagents. IGEN also offers assay development and other services used to perform analytical testing. Products based on the company's ORIGEN technology currently address the following markets: Life Science; Clinical Testing-In Vitro; and Industrial Testing. Shares of IGEN have rallied in recent weeks amid speculation the company will eventually win a lucrative settlement in its ongoing legal fight with German medical company Roche Diagnostics. In a lawsuit filed in 1997, IGEN charged that Roche, a subsidiary of Swiss health-care giant F. Hoffman-La Roche, breached an earlier contract in which Roche licensed IGEN's biological-detection technology, called Origen, for use in clinical testing products. Among other claims, IGEN accuses Roche of violating the contract by underreporting royalties and selling Origen-based systems in markets not covered by the contract. Earlier this year, a U.S. judge granted a summary judgment in IGEN's favor on three of 14 claims and analysts believe the final settlement could exceed $1 billion. Separately, Roche has dismissed all claims against IGEN in a patent infringement action and is reimbursing IGEN for the legal fees that IGEN incurred in defending that suit, which total approximately $5.7 million. The company also recently announced a $30 million private placement, under which it sold a total of 1,018,808 shares of stock to Acqua Wellington Private Placement Fund and Acqua Wellington Opportunity I Limited. The Wellington group targets investment opportunities in mid-cap and small-cap publicly traded companies with a primary focus in the technology and life science sectors. We simply favor today's bullish "break-out" and this position offers a great way to speculate on the future movement of the issue in a conservative manner. IGEN - IGEN International $38.99 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT JAN 25 GQ ME 70 0.50 24.50 6.1% *** SELL PUT JAN 30 GQ MF 1,018 1.35 28.65 15.0% SELL PUT JAN 35 GQ MG 154 2.80 32.20 19.7% *************** LXK - Lexmark $57.37 *** On The Rebound! *** Lexmark International (NYSE"LXK) is a developer, manufacturer and supplier of printing solutions, including laser and inkjet printers, associated supplies and services for offices and homes. Lexmark develops and owns most of the technology for its laser and color inkjet printers and associated supplies, and that quality differentiates the company from a number of its major competitors, including Hewlett Packard, which purchases its laser engines and cartridges from a third party. Lexmark also sells dot matrix printers for printing single and multi-part forms by business users. In addition, Lexmark develops, makes and markets a broad line of other office imaging products, which include supplies for select IBM branded printers, aftermarket supplies for original equipment manufacturer products, and also typewriters and typewriter supplies that are sold under the IBM trademark. Lexmark has been under pressure in recent weeks from a barrage of class-action lawsuits, all of which specify in broad language that: "The complaint alleges that during the Period, defendants issued to the investing public false and misleading information that materially misstated the company's condition and prospects." Strangely enough, the company's current investors don't seem to care about the news as the issue has moved up 10% over the last two weeks. From our perspective, Lexmark is one of the leading companies in the computer hardware industry and among numerous institutional investors, it is also a popular core holding. The current technical outlook is favorable and our position offers excellent reward potential for traders who agree with a bullish future for the issue. LXK - Lexmark $57.37 PLAY (conservative - bullish/credit spread): BUY PUT JAN-45 LXK-MI OI=1905 A=$0.35 SELL PUT JAN-50 LXK-MJ OI=2584 B=$0.75 INITIAL NET CREDIT TARGET=$0.50-$0.55 PROFIT(max)=11% *************** NBIX - Neurocrine Biosciences $51.65 *** Speculation Only! *** Neurocrine Biosciences (NASDAQ:NBIX) is a unique, product-based biopharmaceutical company focused on neurologic and endocrine diseases and disorders. The company's primary products address pharmaceutical markets such as insomnia, anxiety, depression, cancer and diabetes. The company's product candidates include gamma amino-butyric acid, Corticotropin-Releasing Factor, IL-4 Fusion Toxin, Altered Peptide Ligands and Gonadotropin-Releasing Hormone Receptor. The company's unique research products include Excitatory Amino Acid Transporters, CRF R1 Peripheral Uses, CRF R2 Antagonists, CRF R2 Agonists/Urocortin Agonist, Melanocortin Receptor Agonists/Antagonists, Melanin-Concentrating Hormone Antagonists and Hypocretin. Shares of Neurocrine Biosciences rallied earlier this week after the results of the company's recent Phase II Clinical Trial with NBI-34060 in elderly patients with primary (chronic) insomnia were discussed with its shareholders. Based on the optimistic report, analysts at UBS said Neurocrine is one of its top picks, and it is "highly positive" on the future clinical and commercial prospects for NBI-34060. The investment bank said it believes that Neurocrine may sign a commercialization agreement with a large pharmaceuticals partner in the second half of next year and it now holds a "buy" rating on the issue with a target of $58, based on its belief in the potential commercial success of the new product. Apparently, investors are pleased with the news as the issue continues to show strength in the recent bullish trend and these positions offer a way to speculate conservatively on the future share value of the company. NBIX - Neurocrine Biosciences $51.65 PLAY (buy stock and sell covered call; or sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL JAN 45 UOT AI 61 8.30 43.35 3.9% SELL PUT JAN 40 UOT MH 5 0.55 0.75 5.1% *** SELL PUT JAN 45 UOT MI 13 1.65 1.90 10.7% *************** BEARISH PLAYS - Naked Calls & Combinations *************** ADI - Analog Devices $45.13 *** Semiconductor Slump! *** Analog Devices (NYSE:ADI) is engaged in the design, manufacture and sales of high-performance analog, mixed-signal and digital signal processing (DSP) integrated circuits (ICs) used in signal processing applications. The company has a generic list of approximately 2,000 products, with the highest revenue product accounting for approximately 4% of its revenue in fiscal 2000. Analog also designs, manufactures and sells a range of assembled products. Applications for its products include communications, cellular telephones, computers and computer peripherals, consumer electronics, automotive electronics, factory automation, process control and military and space systems. The overall weakness in technology shares was driven primarily by semiconductor issues today, which retreated broadly under heavy selling volume pushing the Philadelphia Semiconductor Index (SOX) down over 5% to a two-week low near 537. Some of the bearish pressure began Tuesday when Timothy Arcuri, an analyst at Deutsche Banc Alex. Brown, released 2003 earnings estimates for the chip-equipment group that were on average 25% below the existing consensus. Arcuri cited what he said were "unrealistic expectations" for a rebound in capital spending. Wednesday's news was no better as a Dataquest report showed that semiconductor revenues fell 33% this year, the worst industry decline in history. That's not good news for the semiconductor sector and with the recent pessimistic forecasts for the group, these positions offer favorable speculation for traders who agree with a bearish outlook for chip stocks. ADI - Analog Devices $45.13 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL JAN 55 ADI AK 2,267 0.55 55.55 5.8% *** SELL CALL JAN 52.5 ADI AR 2,249 0.90 53.40 7.9% SELL CALL JAN 50 ADI AJ 2,821 1.50 51.50 10.4% SELL CALL JAN 47.5 ADI AS 2,173 2.30 49.80 13.0% *************** IMCL - Imclone $61.60 *** Unfavorable Rumors! *** ImClone Systems (NASDAQ:IMCL) is a biopharmaceutical company that is developing a portfolio of targeted biologic treatments designed to address the medical needs of patients with a variety of cancers. Imclone focuses on three strategies for treating cancer, growth factor blockers, cancer vaccines and angiogenesis inhibitors. The company's primary product candidate, IMC-C225, is a therapeutic monoclonal antibody that inhibits stimulation of a receptor for growth factors upon which certain solid tumors depend in order to grow. IMC-C225 has been shown in several Phase I/II trials to have an acceptable safety profile, to be very well tolerated and, when administered with either radiation therapy or chemotherapy, to enhance tumor reduction. Shares of Imclone were hammered again today in the wake of market rumors that the FDA will ask for additional information on the company's primary product candidate Erbitux, previously known as IMC-C225. Imclone filed an approval application for Erbitux with the Food and Drug Administration at the end of October but fears are rising that the FDA's acceptance of that application, expected by December 31, could be delayed. In addition, a boutique research firm, OffWallStreet, is weighing in with its own concerns on the response rate of Erbitux in clinical trials. The company says its interpretation of the data leads it to doubt that the new drug will be approved and they also see unresolved patent issues with Genetech (NYSE:DNA) as another potential problem. Regardless of the eventual outcome, the near-term technical indications for IMCL are unfavorable and these positions offers a way to speculate on the future (bearish) movement of the issue in a conservative manner. Target a higher premium in the options initially, to allow for a brief recovery in the underlying issue. IMCL - Imclone $61.60 PLAY (aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL JAN 75 QCI AO 1,670 0.95 75.95 7.3% *** SELL CALL JAN 70 QCI AN 1,459 2.00 72.00 11.6% SELL CALL JAN 65 QCI AM 2,391 4.00 69.00 16.6% *************** SUPPLEMENTAL CREDIT-SPREAD CANDIDATES *************** BULLISH PLAYS: Stock Last Long Ask Short Bid Target Monthly Symbol Price Option Price Option Price Credit Gain SRCL 62.10 JAN-50P 0.40 JAN-55P 0.85 0.55 12% PCAR 66.55 JAN-55P 0.40 JAN-60P 0.90 0.60 13% TOL 44.45 JAN-35P 0.30 JAN-40P 0.90 0.70 16% RYL 73.20 JAN-60P 0.50 JAN-65P 1.10 0.70 16% FAST 64.99 JAN-55P 0.35 JAN-60P 1.00 0.75 17% BEARISH PLAYS: Stock Last Long Ask Short Bid Target Monthly Symbol Price Option Price Option Price Credit Gain VAR 67.25 JAN-80C 0.50 JAN-75C 0.95 0.55 12% SGP 36.86 JAN-42C 0.30 JAN-40C 0.55 0.30 13% RMD 54.76 JAN-65C 0.55 JAN-60C 1.05 0.60 13% *************** SEE DISCLAIMER ***************************** ************************Advertisement************************* Tired of waiting on trades to execute? 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