The Option Investor Newsletter Sunday 12-23-2001 Copyright 2001, All rights reserved. 1 of 5 Redistribution in any form strictly prohibited. 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 12-21 WE 12-14 WE 12-07 WE 11-30 DOW 10035.34 +224.19 9811.15 -238.31 10049.46 +197.90 -108.15 Nasdaq 1945.83 - 7.34 1953.17 - 68.09 2021.26 + 90.68 + 27.39 S&P-100 586.41 + 14.03 572.38 - 19.40 591.78 + 6.98 - 8.47 S&P-500 1144.89 + 21.82 1123.07 - 35.24 1158.31 + 18.96 - 10.89 W5000 10644.93 +201.37 10443.56 -301.81 10745.37 +213.92 - 64.95 RUT 484.02 + 12.73 471.29 - 9.92 481.21 + 20.43 + 2.36 TRAN 2605.23 + 28.13 2577.10 - 51.16 2628.26 +116.48 - 23.12 VIX 23.29 - 2.68 25.97 + 1.08 24.89 - 1.25 + 1.36 VXN 50.96 - 1.83 52.79 + 2.61 50.18 + 1.73 - 2.36 TRIN 1.08 1.06 1.18 1.19 TICK +1184 +388 +828 +852 Put/Call .69 .72 .78 .63 ****************************************************************** Ready, Set, Shop! by Jim Brown The heading for this article was directed at the male population and I should have actually said ready, set, BUY. As everyone who has been married for sometime knows, the males of the species are not adept at shopping. They are "buyers" not "shoppers' and will only venture into a retail environment after they have completely made up their mind OR are forced to accompany their better half on a "fun and exciting shopping experience." The other trigger that can send males into a buying panic is the last shopping day before Christmas. No longer able to procrastinate the task they are forced to join the other hordes of last minute shoppers to find just the "perfect" gift among the scattered remains of the billions of dollars of merchandise that "early" shoppers picked over or already returned. With the good stuff already gone or consigned to out of the way boutiques, places males would not be caught dead visiting, the "perfect" gift for that special someone more often than not becomes something that the someone wishes they could return the day after but can't because "dad/husband/ boyfriend" bought it for them. Surely he spent days researching and shopping for this present and I could not be so heartless in returning it. Just because it does not fit, is the wrong color and 20 years out of my age bracket, I can't return it! It is the thought that counts and he was so sweet to spend all that time and effort picking it out. (If they only knew!)(Actually my wife knows and that is why I am in the office writing at 11:PM Friday night and she is closing store after store always mindful of the next store with a later closing schedule.) The economic reports on Friday came in bullish and the markets jumped at the open and held their ground all day. The Consumer Sentiment number surprised analysts and jumped up to 88.8 for December which was a large increase from November's 83.9. The index is still below last summer's levels but rebounding strongly and indicates consumers are comfortable with the current environment. This was the third month of increase and the expectations index rose almost six points indicating they were encouraged about the future. Only slightly below the 9/11 levels it shows that the impact from the attacks has almost completely dissipated. The rise in consumer confidence is somewhat confusing since personal income declined in November. Spending was down as well by -.7%. Consumers earned less, spent less and were happier about it. Something is wrong with this picture. We have heard the term cocooning for three months and this economic data is clear evidence of that impact. Consumers worked less, stayed home and saved their money. Fears of impending layoffs and terrorist attacks kept a lid on the economy. The positive consumer sentiment is a sign that they may be starting to come out of their cave again. That same cocooning was seen in the GDP revision which was revised downward to -1.3%. The bright side to this entire set of reports is simply a consumer that is reviving, at least for the 4Q, and the prospect that the recession could be limited to one quarter is good. We may still be in a recession but nowhere near the -1.3% suffered in Q3. Some analysts are speculating on -0.5% for Q4. All this bullish economic news was offset by some not so exciting news in the semi book to bill report. New orders in November were only 73% of billings for orders shipped. In English this means orders are still falling at an alarming rate. It appears that the sector has yet to hit bottom. The percentage number was up slightly from the prior months but the new bookings dropped to a new low of $612 million. To put this in perspective shipments in April were $1.654 billion. The bookings have stabilized for the last three months at just over the $600 million level but do not show any signs of growth. Considering the long lead times for new chips it could appear that any recovery in the 1Q is out. Once those orders start coming in, real signs of progress should appear over the following three months. In the markets on Friday there was mostly good news and even the warnings were ignored. Caterpillar said it was cutting 900 jobs to increase efficiency and close a plant. Even with the job cuts and $55 million charge they affirmed previous profit estimates. Those estimates were for up to a -15% drop in profits but the good news was they did not lower them again. Honeywell announced that it would take a $540 million charge but it was on track for achieving $1.3 billion in savings from 15,800 job cuts and closing 51 facilities. Excluding the charge HON said it was on track to post earnings in the range of .54 to .56 and well within analyst's estimates of .50 to .56 cents. Those press releases didn't hurt the Dow and even a warning from Nortel failed to blunt enthusiasm. Nortel warned that they would post a loss in the 4Q but it will be less than the 3Q loss. It will be bad but not as bad as analysts feared. NT gained +.77 on the news and had a beneficial impact on several other stocks in the sector like RSTN which jumped over $2. JNPR and CIEN also gained ground. Airlines gained ground early after an UBS Warburg said in a research note that those stocks could rise +80% to +200% over the next two years. The euphoria was short lived when Moody's Investor Service announced later they were cutting the debt ratings on UAL and CAL from junk to worse than junk. Earlier this week they cut AMR and DAL as well. Sometimes you just can't get a break. The nice gains we saw on Friday were motivated in part by options expiration and a rebalancing of the Nasdaq-100. The expiration was quiet on Thursday but provided some of the volume at Friday's open. The Nasdaq rebalancing helped the stocks going in and hurt those being dropped. (duh!) Stocks being dropped for non-representation (read that as too cheap) were ARBA, BVSN, CMGI, CNET, COMS, INKT, LVLT, MCLD, MFNX, NOVL, PALM, PMTC and RNWK. Stocks being added included IMCL, CHTR, CDWC, SYMC, SEPR, IVGN, ESRX, CEPH, ICOS, CYTC, PDLI, IDTI and SNPS. Those being added saw sharp volume spikes, and I really mean sharp, in the last 15 min of trading. CYTC for instance sometimes trades less than a million shares a day and almost eleven million shares traded on Friday, much of it in the last hour. I am really surprised the Nasdaq finished in positive territory considering that several of the big cap Nasdaq stocks finished down. CSCO, SUNW, ORCL and the others were only fractionally positive. INTC, +.43, MSFT +.78, DELL .00, JDSU +.25 and WCOM +.45. Other than the tame affirmations and the Nasdaq rebalance the news was pretty mild. Traders were heartened by the consumer sentiment numbers and started placing bets in front of the "expected" Santa Claus rally. (sure going to be a lot of people disappointed if it does not happen) Remember, we trade what we get. There has been a lot of conflicting information about the expected rebound and if the facts start showing that it is nowhere n sight investors will move back to the sidelines. Things like the semi book to bill, which in my mind was bearish, were glossed over with holiday sentiment. Retailers are reporting a wide mix of good news/bad news. While sales are ahead of estimates "officially", those estimates were already lowered. Unofficially, there is a war on in the retail market place. Retailers get 40% of their annual sales between Dec-18th and Dec-31st. 40%!! Many stores are having 30-50 even 75% off sales to get consumers to buy their merchandise with little success. Sure the malls are full three days before Christmas but retailers are giving away merchandise to draw them in. When the numbers are released in January it could be a bloodbath. One retail analyst said this has been the worst holiday season in a decade and the first quarter was shaping up as a serious disaster. Retailers are pulling out all the stops to coerce people to buy in December and they are compressing the available sales into this quarter. Consumers who are buying are reported to be putting most sales on credit cards which will come back to haunt them in January. More rounds of layoffs are expected in January as well as companies start a new year and look back over the scorched financial statements from 2001. Remember the consumer income above dropped last month. According to TrimTabs tax collections from paycheck deductions in December are already more than 10% behind last December. There is a significant and growing problem that many investors are overlooking. I personally think that the markets are walking a very thin tightrope over these problems and as long as investors don't look down until we get to the recovery we will be ok. Until then I expect the markets to become more volatile the higher they climb. Now, let me come out of my bear cave for a minute. Everyone wants to rally into the new year. Good, no complaint there. Everyone knows that markets perform best when they have to climb a wall of worry. No complaint there, we got one in front of us that looks more like a bed of hot coals than wall. Most institutional investors feel there is little downside. I really can't complain with that concept. I think the 9/11 event was a pretty convincing washout and I can't imagine returning to those levels. So the case I am building here looks like this. We are likely to rally next week because, big investors think there is little downside and that should put a floor under the market. Retail investors think stocks are cheap, relatively, and have been conditioned that the week after Christmas is a good time to buy. Mutual funds are faced with a flood of new retirement cash over the next several weeks and they have to put it to work somewhere. Almost $10 billion has come into stock funds already in December. (Somebody out there must have gotten a bonus although they are said to be 50-60% below last years.) Volume on Friday was the best in recent memory with 1.7 bil on the NYSE and almost 2.3 bil on the Nasdaq. Tax selling is not over and can hit any stock at any time. Funds holding winners could be waiting for that last pop up next week before selling. Keep those stops close. The scenario as I see it is a positive week ahead as bulls trade on emotion. That emotion could push the indexes back up to test resistance once again. That resistance for the Dow is just above 10150, Nasdaq 2050 and S&P 1175. Those levels will not be broken without a lot more than emotion behind the bulls. HOWEVER, should we get an upside surprise a break above those levels next week could trigger the mother of all short covering rallies since most technicians believe it is impossible. Based on the sentiment I think the plan is to go long until the market tells us otherwise. I am going to raise the exit points to Dow 9950, S&P 1135 and lower the Nasdaq to 1900. Stay long above these levels and go flat if they are broken. Monday is only a half-day of trading and for obvious reasons we will not be publishing a end of day newsletter. The market monitor team, led by Jeff Bailey, will be hard at work however until the market closes. The intra-day alerts will be limited to market hours. That leaves a good 3-4 hours for the male population to get all their shopping done! Happy Holidays To All! Jim Brown Editor@OptionInvestor.com ************************ YEAR END RENEWAL SPECIAL ************************ I am really happy to announce this years annual renewal special. We spent considerable time and effort deciding what would be something traders could actually use instead of something to collect dust. Each of the editors was tasked to produce an investor guide covering the topics that our readers have requested most. We spent hundreds of hours compiling these five special investor guides to help our readers be better investors. Each is done with full color charts and graphs and is something you can refer back to for years to come. Winning Option Strategies - By Jim Brown Over 200 pages of strategies from simple calls and puts to spreads, straddles, naked puts, combination plays, leaps etc. Each strategy is explained in detail and then followed with real life applications of how to profit from each one. Jim teaches entry points, market cycles and general trading psychology as well as money management and money saving tips for dealing with your broker when errors occur. Swing Trading For Success - Austin Passamonte A descriptive outline providing simple guidelines that allow you to identify current market direction and profit from the high-odds price swings that occur within. The secret of swing trading is exposed: Identify underlying price direction and wait for brief market moves counter to that trend. Enter short-term trades at key points where price action is poised to snap back with the trend and enjoy a large percentage of winning trades! This guide has been written as only Austin can and is full of real tips and profitable trading knowledge. Lots of full color charts enhance the readers understanding. Point-and-Figure Charting - Jeff Bailey In this trading guide, Jeff Bailey reveals the secrets to interpreting those intriguing supply and demand charts characterized by columns of X's and O's - Point & Figure charts. If you have never used Point-&-Figure charts in your investment analysis you're missing a vital clue that institutional traders have been using for years. Jeff illustrates the basic interpretations for beginners while also discussing more advanced concepts like the bullish percent for advanced traders. Those readers who have seen the power in Jeff's point-and-figure charts can now understand and profit from this powerful charting method. Real winning tips from our point-and-figure pro. Technical Analysis Explained - Eric Utley There are myriad technical analysis tools for today's trader. Eric has sorted through the choices and found a mix that provides traders with a solid foundation for observing and operating in the market. Long-time subscribers of Option Investor have seen tools such as Fibonacci retracement brackets used by Eric Utley and Bollinger bands used by our Leaps Editor, Mark Phillips. This manual details the aforementioned indicators and others used by the Option Investor staff. Within the manual, subscribers will discover the philosophy, integration, and application of many of the most effective technical analysis tools used by the professionals. For the first time, the tools used by the Option Investor staff will be made available in a resource that will enrich and educate its readers. 2002 Mutual Fund Guide - Steve Wagner Our 2002 Mutual Fund Guide has everything you need to know about mutual funds. It covers the basics of mutual funds, such as what they are, how they work and are traded, as well as the different types and objectives of mutual funds. The guide also offers our top fund choices in eight broad investment objectives for 2002 and beyond. We provide an unbiased perspective on fund performance, risks and costs, speaking in terms you can understand and use. As of May 2001, 93 million individuals, representing 52 percent of all U.S. households, owned mutual funds. Whether you are an experienced mutual fund investor or new to mutual funds, you'll find something of value in our 2002 Mutual Fund Guide. Aggressive, conservative or income producing, there are funds for everyone. Where should your retirement savings be? Not in options we hope! 2002 Options Expiration Calendar Mousepads You will get two of these handy mousepads with the 2002 options expirations dates including a reference of month and strike price codes. These are very popular and this will be our fourth year of providing these to our readers. You get two, one for home and one for your office. This way you will never be scrambling for that date of code. This may be our best annual renewal special yet. Don't miss out on this offer. Click here for more details: https://secure.sungrp.com/02renewal.asp ************** Editor's Plays ************** A couple good candidates for this weeks plays and one stock that is really ticking me off. The first one is ABI, a biotech company with a great chart. This company was selling for over $100 late last year and took a hit on some negative drug news like all companies do from time to time. They are back on the road to recovery and just set a new relative high. ABI $37.45 I like the March $35 call for $5.20 which is already +2.45 in the money. Breakeven on this strike price is $40.20. The $40 call is cheaper but the breakeven is much higher at $42.75. My preference is the in the money strikes. *************** Next is Bradley Pharmaceuticals a stock that closed at an all time high on Friday. It would be nice to catch this one on a pull back but I doubt it will happen. Louis Naviller made this his pick of the week and says it can go much higher. BPRX $19.85 This is a tough one. The Jan-$20 call (ATM) is only $1.80 but there is only four weeks till expiration. In the last four weeks the stock gained +$5 but that may be too aggressive to expect it to do it again. This means we are better off going with a longer strike like the April-$20 but it is $4.00. We get four months instead of one but we need $28 to double. If we are willing to pay $4.00 for April we should bite the bullet and pay $5.10 for July and now we have seven months with a break even of $25.10. Plenty of time for the stock to double again and provide us with a nice profit. Another way to play this would be to sell the July-$20 put for $4.90 or wait for the new option series to post next week and sell the July $25 put which should be something in the $8 range based on the current price for the $20. A 100% profit would be gained if the stock moved over $25 by July. Almost a sure bet based on the chart. (There are no sure bets, this is just a figure of speech but you know what I mean) The down side to this is you cap your profit at $8. Using the call you have unlimited profit once the breakeven point is passed. ************* This stock is ticking me off. I have tried to get an entry point in ACS for three weeks and just when I think it is going to let me in it blasts off again. Of course now that I am writing about it the turkey will probably roll over -20%. ACS $102.96 In theory it should eventually pull back to the 30 DMA (blue line) and give us an entry point. In practice it could run another $10 before pulling back and the retracement point would be higher than it is today! I would probably use the front month options because of price. The April $105 are $7.50 and the July $10.20. Both would require a huge move to be profitable. The Jan-$100 at $6.00 and $2.90 in the money would be my choice. Breakeven would be $106 and only $3 away. You could also sell the April $120 put for $18.50 and score a full profit with a close over $120 by April expirations. ********************** Top 20 List This is the last top-20 list I will be producing. It is very time consuming and with some new features we will have on the site in January it will be redundant. Please only play these calls if the market is in rally mode. CALLS AFC 43.31 Close to a breakout to new relative high. AET 33.00 Near new high ADVP 30.20 Strong bounce off bottom ACF 29.10 Buy breakout over $30 CHS 40.21 New high DGX 69.90 Buy breakout over $70 FMC 57.93 Strong bounce, new relative high FRX 81.00 Buy breakout over $82 GE 41.35 Buy breakout over $41.50 HP 31.62 Buy breakout over $33 HRB 42.60 New high HSY 68.29 Chocolate is hot EMMS 21.58 New relative high MDT 50.55 Replacing RAL in S&P GNSS 65.84 This is the pullback NTAP 22.60 Strong storage stock ODP 17.91 New high PDII 21.69 Rising from the ashes RCII 33.55 Breakout RDN 42.00 Buy breakout over $42.50 SBAC 13.20 New relative high NVDA 64.58 This is the pullback SII 51.90 Buy breakout over $52.50 SLAB 37.00 Strong chip in weak sector SPWX 10.99 New relative high TXN 28.00 Entry point? UN 57.90 New relative high WMT 57.57 Finally broke $55 to make new high PUTS AMCC 10.01 If it closes under $10, it could hit $6 AMZN 10.00 Why is it weak when Internet sales are so high? 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 Sentiment Russ Moore Calming words lead markets higher. For those of bullish persuasion today’s earnings reaffirmation’s by Caterpillar and Honeywell was just what the Doctor ordered. In addition, Nortel Networks announced a narrower than expected fourth quarter loss, giving a boost to the tech sector. The DOW tacked on +0.5 percent while the NASDAQ added +1.4 percent and the NDX +1.3 percent. Volume was heavy with 1.68 billion shares trading on the NYSE and 2.15 billion shares moving on the NASDAQ. Advancers were on top by a 21/11 at the NYSE and 23/14 on the NASDAQ. Broader market action saw Biotech, airline, oil service and retail sectors enjoying nice gains while gold, paper and forest, chemicals and banks were under pressure. On the tech side it was hardware, networking, Internet and chip sectors heading the pack. The Michigan Sentiment Index increased to 88.8 from last months 83.9. Personal spending slipped –0.7 percent, not quite as bad as the –0.8 percent forecast. Personal income declined –0.1 percent. Trim Tab numbers seem to fall in line with the sentiment move as 5.5 billion dollars flowed in to equity funds for the week ending December 19. As far as expiration weeks go, this was not one of the most exciting with the SPX managing only a 38-point trading range for the entire week. I guess we shouldn’t be too surprised considering the mixed signals investors are faced with. It’s awfully difficult to take a firm stance on either side of the market under the current circumstances. . Friday 12/21 close: 23.21 VXN Friday 12/21 close: 50.96 30-yr Bonds Friday 12/21 close: 5.46 Total Put/Call Ratio: .69 Equity Option Put/Call Ratio: .61 Index Option Put/Call Ratio: 2.36 === NASDAQ 100 Index (NDX/QQQ) 52-Week High: 103.51 52-Week Low: 28.19 Current close: 39.48 Volume/Open Interest Maximum calls: 40/118,173 Maximum puts : 40/ 77,955 Moving Averages 10 DMA 40 20 DMA 40 50 DMA 38 200 DMA 40 Fibanocci Retracements Relative High: 51.95 (05/22/01) Relative Low: 27.00 (09/21/01) 38% 36.60 50% 39.57 62% 42.59 === S&P 100 Index (OEX) 52-Week High: 834.93 52-Week Low: 491.70 Current close: 586.41 Volume/Open Interest Maximum calls: 580/3,695 Maximum puts : 520/4,168 Moving Averages 10 DMA 580 20 DMA 584 50 DMA 575 200 DMA 601 Fibanocci Retracements Relative High: 680.03 (05/22/01) Relative Low: 480.07 (09/21/01) 38% 556.14 50% 579.65 62% 603.55 === S&P 500 (SPX) 52-Week High: 1530.01 52-Week Low: 965.80 Current close: 1144.89 Volume / Open Interest Maximum calls: 1150/37,303 Maximum puts : 1150/30,674 Moving Averages 10 DMA 1136 20 DMA 1142 50 DMA 11120 200 DMA 1169 Fibanocci Retracements Relative High: 1315.93 (05/22/01) Relative Low: 944.75 (09/21/01) 38% 1086.75 50% 1130.62 62% 1175.23 == DJIA (INDU) 52-Week High: 11,518.83 52-Week Low: 8,235.81 Current close: 10,035.34 Volume / Open Interest Maximum Calls: 100/13,823 Maximum Puts 100/25,748 Moving Averages: 10 DMA 9,926 20 DMA 9,921 50 DMA 9,671 200 DMA 10,104 Fibanocci Retracements Relative High: 11,350.05 (05/22/01) Relative Low 8,062.34 (05/21/01) 38% 9,308.92 50% 9,693.99 62% 10,085.60 == Biotech Index (BTK) 52-Week High: 811.61 52-Week Low: 383.28 Current close: 581.72 Volume / Open Interest Maximum Calls: 650/231 Maximum Puts: 540/974 Moving Averages 10 DMA 575 20 DMA 589 50 DMA 567 200 DMA 537 Fibanocci Retracements Relative High: 811.61 (09/25/00) Relative Low: 383.28 (03/22/01) 38% 546.22 50% 596.57 62% 646.71 == Semiconductor Index (SOX) 52-Week High: 1280.84 52-Week Low: 362.00 Current close: 520.58 Volume / Open Interest Maximum Calls: 440/1,125 Maximum Puts: 470/2,004 Moving Averages 10 DMA 548 20 DMA 545 50 DMA 508 200 DMA 557 Fibanocci Retracements Relative High: 710.78 (05/22/01) Relative Low: 343.93 (09/27/01) 38% 484.50 50% 527.18 62% 570.57 == Pharmaceutical Index (DRG) 52-Week High: 455.28 52-Week Low: 339.49 Current close: 386.00 Volume / Open Interest Maximum Calls: 400/525 Maximum Puts: 400/253 Moving Averages 10 DMA 381 20 DMA 389 50 DMA 392 200 DMA 390 Fibanocci Retracements Relative High: 448.43 (12/29/00) Relative Low: 339.49 (03/22/01) 38% 382.22 50% 395.69 62% 409.03 ***** CBOT Commitment Of Traders Report: Friday, 12/21. Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. 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 are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader’s direction. S&P 500 Commercials Long Short Net %Change 12/04/01 360,315 420,919 (60,604) 21.0% 12/11/01 367,397 429,640 (62,243) 2.6% 12/18/01 391,995 456,968 (64,973) 4.3% Most bearish reading of the year: (111,956) - 3/6/01 Most bullish reading of the year: (41,144) - 5/1/01 Small Traders Long Short Net %Change 12/04/01 159,336 86,534 72,802 24.4% 12/11/01 158,490 86,717 71,773 (1.4%) 12/18/01 158,300 80,507 77,793 8.4% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 91,122 - 3/06/01 NASDAQ-100 Commercials Long Short Net %Change 12/04/01 42,191 51,426 (9,235) (16.5%) 12/11/01 45,468 51,392 (5,924) (35.9%) 12/18/01 55,276 58,433 (3,157) (46.7%) Most bearish reading of the year: (15,521) - 3/13/01 Most bullish reading of the year: (1,825) - 1/02/01 Small Traders Long Short Net %Change 12/04/01 11,808 8,311 3,497 (16.4%) 12/11/01 12,425 11,754 671 (81.0%) 12/18/01 17,649 18,626 (977) 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 Commercials Long Short Net %Change 12/04/01 22,703 10,739 10,739 (15.7%) 12/11/01 23,135 12,576 10,559 (1.7%) 12/18/01 21,919 13,810 8,109 (23.2%) Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 8,925 - 5/22/01 Small Traders Long Short Net %Change 12/04/01 3,677 9,799 (6,122) (4.4%) 12/11/01 3,469 9,065 (5,596) (8.6%) 12/18/01 6,790 10,943 (4,153) (25.8%) Most bearish reading of the year: (7,572) - 5/08/01 Most bullish reading of the year: 1,909 - 1/16/01 Small Specs Commercials S&P 500 (Current) (Previous) (Current) (Previous) Open Interest Net Value +77,793 +71,773 -64,973 -62,243 Total Open Interest % (+32.58%) (+29.27%) (-7.65%) (-7.81%) net-long net-long net-short net-short Small Specs Commercials DJIA futures (Current) (Previous) (Current) (Previous) Open Interest Net Value -4,153 -5,596 +8,109 10,559 Total Open interest % (-23.42%) (-44.65%) (+22.70%) (+29.57) net-short net-short net-long net-long Small Spec Commercials NASDAQ 100 (Current) (Previous) (Current) (Previous) Open Interest Net Value -977 +671 -3,157 -5,924 Total Open Interest % (-2.69%) (+2.78%) (-2.78%) (-6.12%) net-short net-long net-short net-short What COT Data Tells Us ---------------------- Indices:.Commercials held steady on the SPX while continuing to reduce their net-short positions on the NASDAQ 100. Small Specs were headed the other way on the NDX as they turned net-short. Increasing divergence is of key importance and something we’ll be watching closely on the tech index. Gold: It’s easy to see why gold is so difficult to play. After two weeks of building net-long positions, Commercial players decided to take the opposite side and are now sitting with net- short contracts. Looking at the charts we see that the XAU hit a high point on 12/18.before heading south. 11/20 2,489 contracts net-short 11/27 1,738 contracts net-long 12/04 2,534 contracts net-short 12/11 13,626 contracts net-long 12/18 15,198 contracts net-short Data compiled as of Tuesday 12/11 by the CFTC. ************************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 ************************************************************** ************** Traders Corner ************** Tales Of Woe: Lessons To Know Austin Passamonte Got a call this morning from a good friend of mine. He began with courteous small talk but rigid tightness in his voice told me idle chitchat about deer season past was not the purpose of our visit. (Weekly Chart: EEL) My friend's father started a private company decades ago that grew into a very successful venture. Back in year 1999 he sold out to a conglomerate type holding company attempting to consolidate the industry by purchasing key players in every region of the country. Back then the stock of that "CMGI" type-company was trading near $25 and the share conversion was made. My friend (his son) was a major shareholder in the family business who wisely divested some money into hard assets but kept a solid chunk of the new issue. His father had plenty of outside money but an even larger stake in the stock as one might imagine. After all, his company, his baby, his life's work was represented in those shares and selling out would be akin to severing all emotional ties. See where this story's going? My friend asked for an opinion throughout this period on how the stock was looking. I reiterated each time that stock strength or weakness differed from company fundamentals. Good companies can have a bad stock and vice-versa at any moment in time. It's not a mirror relationship, so try to separate emotion from the equation. I suggested they sell or at the very least hedge somehow if it broke below $9 at the first wedge and then below $8 at the second wedge. Each time my friend consulted with his father who consulted with their broker. Guess what the broker said? "Sell now and walk away?" Come on now; does that sound like any broker you ever heard? Of course he didn't say that... told them to hang in there for the "long haul" until it bounced back above $10. I'm thinking the broker has a license and maybe even more college degrees than a thermometer but that "professional" doesn't know the sheer, simple warning of a double-top failure when it smacks him in the chart. Assuming he even looks at any charts to begin with. Needless to say, my friend made one last call today for my advice and then told me he was getting out. Had enough of the painful, gut-wrenching ride down. Cost him two year's salary for the buy & hold lesson and his daddy's still hanging in there. Hanging in there with a seven-figure paper loss and I don't mean barely seven figures, either. Why didn't they listen when warned to get out, especially after seeking out advice? Think that's an anomaly? Please read on. (Weekly Chart: GLW) I grew up less than fifty miles from Corning and Rochester, New York respectively. Right betwixt both cities. Corning has GLW and Rochester has Kodak, Xerox, Bausch & Lomb and Global Crossing as the big employers there. A middle-age couple's husband I'm friends with down in Corning worked at GLW all his life. Guess what his 401K was chock full of? That worked like crazy when prices took off and they saw their retirement wealth rocket up almost +300% in one year's time. The husband promptly retired early, locked in his 401K gains and they lived rich & happy ever aft. Well, not quite. Everything seemed groovy until GLW stock broke down to $80 level and they saw roughly $175K evaporate from the rosy future. Guess who got the infamous call? Yep... me again. I told them the truth: telecom and networking was going to (and still is) get whacked in a big way. That was the bulk of their retirement future at risk and they needed to either hedge it off with long GLW put LEAPS or switch to bonds. But there's a catch: they have an eldest son who sells insurance, who has a best buddy that's a stockbroker. Guess who got the second call? Rightio... they called sonny-boy who spoke to the broker. Broker said stay the course, forget about bonds and for gosh sakes don't get mixed up with options. 90% of options expire worthless and that wouldn't help them at all. I never heard from them again on this matter and forgot we even had the conversation. When later told what the broker said to them I felt like reaching thru the phone to that broker's throat and squeezing until his eyeballs popped out. This joker passed a series-something test and didn't know enough to simply hedge a half-million dollars with puts? Come on... what do these clueless experts learn for their "professional" exams? His ill-advice changed my friend's lives and their families' lives forever, with one careless dismissal. End result is my trusting, conservative, devout Christian middle- aged friends listened to their son and his friend the expert. They did nothing except for watch more than $500K bleed away in front of their horrified eyes to the point it rests at today. That money invested in bonds back then would throw off enough yearly interest for them to live very well in Corning NY where expenses are cheap. I'm thinking interest earned on $40K remaining might not make ends meet quite so well. Think these two cases are unique? I can tell you dozens of others who refused to sell Kodak, Xerox or Global Crossing for all the usual lame reasons after specifically asking my advice. Tax implications, averaging down, new products in the pipeline, restructuring at the various companies, analyst upgrades, etc ad nauseum. Few Listen At The Top Back in 1999 I told both my aforementioned friends about a simple strategy to earn +100% to +150% annually with almost zero risk to their capital. I assured them it was far less risky than holding stocks, covered calls etc but neither cared. After all, GLW was up almost +300% and my other friend did his stock conversion at the top and was fixated on just getting back to even. Back to even never arrived and back to $575K from $40K will never happen for the Corning couple in their lifetime. Moral of the story? No one wanted a berth on Noah's Ark until the raindrops fell. Few people listen to words of warning when skies are bright and nary a cloud is seen. Why would they? To think of anything else brings on emotional feelings of worry, anxiety and distress. Pain. Ignore those thoughts and focus on the positive, the happy, the bright side. Pleasure. Tony Robbins touts that all living things seek pleasure and avoid pain. Is this what my friends did? How did such a comfortable approach turn out? Know anyone else who might have fallen hapless prey to such circumstance yourself? More than a few emailed me over the past two years with tales of massive loss as well. Sadly, for many people their first lesson of significant loss in the markets was one that cannot be recovered from. Will History Repeat? For two years now we've heard that the worst is over, a recovery is straight ahead and all that drivel. Nobody knows that. Not at all. I hope & pray the markets return to new all-time highs ASAP myself but don't mistake hope for opinion. My opinion is that markets will move in one big sideways range for months and maybe even years to come. Dick Arms, John Bollinger, Bernie Schaeffer and Warren Buffett (among many others) believe the same thing and said so before long I did. What if that's true? Are we prepared to buy support and sell resistance as it appears? Are we prepared for a prolonged period where buy & hold doesn't work and mutual funds get gutted like fish? Do we have defensive strategies in mind or is all of that too painful to ponder? Is it easier and more pleasurable to block out all such possibility while hanging on the words of analysts who've called the last twelve bottoms since March 2000? I wonder. Let me share this fundamental reality with you: the telecom and networking sectors have been touted by many analysts to lead the "V-shaped" recovery in 2002. I promise you beyond shadow of a doubt that will not happen: matter of fact, telecom is poised to collapse in one big consolidation of players and will drag the dependant sectors with it. Such is not my wish or desire, but since when do the markets care about me? It is fundamental fact based upon inside insight from several dozen personal contacts scattered thru the telecom industry at all levels. Most of those companies are in huge, huge trouble and cannot survive any scenario except a return to the 1999 go-go days. Anyone who cares to read more on this opinion can do so from this OI link: http://www.asianinvestoronline.com/traderscorner/121301_1.asp I share this educated, insider's opinion with you knowing that it could help a number of people hedge and defend current holdings or avoid stepping into an abyss. I also know full well that it will be met with anger, animosity, disbelief and probably flames from more than it helps. Why? Why would such a statement illicit strong emotional response? Could it be that many people NEED such a dismal forecast to be wrong in order to avoid pain and/or enjoy pleasure? If my opinion on telecom and networking sectors' future brings any kind of emotional response in you, please ask yourself why. Why does it matter what these sectors will do? If their future is insignificant to you there will be no emotional response. If by chance you need them to perform, there will certainly be an emotional response. That is basic human nature at work. That's what my friends experienced during their catastrophic rides down charts holding dead fish stocks praying they'd turn to caviar instead. See the emotional trap? See how easy it can ensnare any one of us? Most importantly, are you prepared to spot such a noose lying in your financial path ahead? Please be careful where you step and don't be afraid to jump off the path when danger signs appear. Hope This Helps! austinp@OptionInvestor.com Defining The Market Austin Passamonte "The Market" means different things to many people. Trying to define that in one little corral is impossible. Believe me... I've tried! Friday night I met Jeff Bailey at the end of his shift for dinner and drinks. Typical Bailey, he worked an extra two hours into the evening flipping thru, doodling on & copying charts for Premier Investor. I managed to scrounge up some dinner on the premises and our outing was reduced to drinks. Over a few beers we swapped war stories mostly about (what else?) trading and markets in general. We agreed on a simple diagram I learned almost twenty years ago. "The Market" can be described as a triad consisting of three corners: U.S. dollar, U.S. Govt. bonds and U.S. stocks. From those three corners of the triad blooms everything else: foreign currencies against the dollar is one. U.S. corporate debt, foreign debt and the Euro against government bonds is another. The third is U.S. stocks, by far the most expansive of all. From there sprouts variations too numerous for coverage and the array grows wider and deeper all the time. Of those three, smart (or informed) money plays strongly in the currency and bond markets. Those two corners of the triad hold little participation by the retail trader, otherwise known as dumb (or uninformed) money. In professional economists' view the stock market has a high degree of dumb money by comparison to the currency & bond markets, which is quite true. Now I might resemb... uh, resent that statement that I'm "dumb money" but it's true. There is no way under the sun I could possibly match fundamental news research efforts with even the smallest brokerage house, let alone a big one. What am I to do? Two Streams Of Money Flow There is essentially two streams of money in the marketplace. The first being active money at risk in one of the three triad corners, and the second is passive cash parked in safety away from market risk. Money flows from bonds to currencies to equities and around not in direct or obverse fashion but crisscrossed between the three. It is very important to watch bond yield and dollar against foreign currency behaviors to gauge what smart money is doing. It's safe to say that Bailey, Eric Utley and others have that pretty-well covered for us in here. Part of the active money flow stream makes its way through sector rotation in the stock markets. This means the same weary dollars play "ring around the sector" as one sells off as another rallies. Part of the passive cash flow comes into play from time to time in the stock market as well, given the right catalyst to do so. Watching The Sectors There was a time when "the market" was NASDAQ Comp to most traders. One could say that the highest concentration of dumb money overall was found in that index and perhaps still is. After all, where is the percentage of retail traders highest? Simple question, simple answer. Our job in this forum will be to keep an eye on the sexy sectors most retail traders love without neglecting more obscure ones that may offer profitable opportunity as well. Many retail traders get stuck in the mud watching one or two sectors or stocks concentrated within. That does create opportunity cost when money flows out of there, into another sector and leaves the beloved sector or components flat for awhile. So, with input and contribution from all OI's cast of characters we will feature four - six indexes and sectors each night right here at Index Spotlight. We'll do our best to monitor markets on the move and uncover some relatively obscure sectors along the way that may just find sleeping stocks or options that turn to gold. How's that sound? (Weekly Chart: NWX) First up, the Networking Index. Stuck in this persistent channel since Spring of 2001, it finally looked like a bottom was in on that launch near early October. Since then price action spent five weeks just below resistance with hopes of cracking it. In order for a market to smash thru overhead supply, it must gather energy, compress it and exert that force like a bullet fired from a gun. Sound like a familiar analogy? Instead, NWX posted higher highs AND lower lows, an expanding formation of bearish nature. Why is it bearish? Because precious energy needed to mount the assault on resistance is squandered, not stored. With weekly stochastic values in full bearish reversal mode I would not be excited about bullish plays here, unless/until support is found and stochastic values reverse back up in bullish mode. Long puts, short shares, bear-debit and bear-call credit spreads on the Morgan Stanley Index Fund iShares (IGN) or index components showing similar weakness are high-odds plays right now. (Weekly Chart: SOX) Similar long-term story for the sexy semis. This index commonly gets two or three analyst upgrades and downgrades in a single week. Who can figure that out? Anyway, similar chart to the one we saw before (and QQQ in general, not pictured here). Support looks to be around 450+ area based on this channel support (black line, center) just below. Long puts, short shares, bear-debit and bear-call credit spreads on the SOX, SMH HOLDR shares or options or SOX index components showing similar weakness are higher-odds plays right now. (Weekly Chart: BTK) Biotechs are an interesting study. The index made a clear bullish break from a long-term triangle ten weeks ago (count the candles). It has since consolidated with higher highs and higher lows (not drawn) that could be construed as a bear flag. However, let's look for support from the 550 area (blue line) down to 500 (green line) and finally 450 area (red line) below. Why look for support? Who's to say it isn't going higher from here? Just might, but clearly bearish stochastic values show price action in this baby is full-bear mode right now until those oscillators reverse once more. I'd personally lay off new entries either way until one of the various pivot points are reached to base risk/reward parameters from there. (Weekly Chart: OSX) Oil services are another story. Price action seems to be gettin' jiggy over there as a neutral wedge is being tested while stochastic values have turned to full-bull mode. How to play this one? (Daily Charts: M.S. Oil Service Index / Oil Service HOLDR) Could buy call options in the Morgan Stanley Oil Services Index (MGO) where the March 02 75 (MGO-CO) calls are fetching 6.00 at "ask" right now. Oil Service HOLDRs (OIH) are also a choice for trading options or shares. The April 65 calls (OIH-DM) fetching 3.90 bid – 4.30 would get my nod as the option play here. The wedge measures a 15 index-point spread in the MGO from low to high. A break above 70 should run 15 points higher, listing a potential target of 85 ahead. The OIH wedge spans 48 to 62, or 14 index points tacked onto a break above 60. Target? The 74 area above. My only hesitation would be those toppy stochastic values at or in overbought extreme that could mark sideways to lower prices near term. I'd be quite happy to see those oscillators roll down out of overbought extreme and reverse higher below the 80% line where the better entry point than buying a breakout here would then emerge. (Weekly/Daily Charts: XNG) And how about natural gas? A weekly/daily view shows a little Beano may have been swallowed the past two days near 180 area of resistance. Daily chart stochastic values are kind of toppy and might suggest another trip to support near 170, but according to weekly charts that would be a gift entry for bullish plays there. How to play it? Natural gas iShares listed on Amex as linked here: http://www.amex.com/asp/indexshares.asp?symbol=XLE This shows a strong concentration of natural gas components and lists liquid option contracts as well. The March 27 calls (XLE-CA) have over 1,000 contracts open interest at bid 1.00 - ask 1.25. It has a good chance of doubling before expiration in three months if natural gas catches fire and pops a bit from here. Summation Time to put the lens cap back on our spotlight for the night. This section will be a nightly feature in the new OI next week and we'll have two Gameplan sections that list sector share and sector option plays for lower gamma trades than most, but days like Enron recently had can make anything a bit wild! There's no telling what we may cover in here, as the market means different things to different folks. I have a few multi- millionaire friends when asked about the market will speak of northern heavy beaver pelts or winter, shearable muskrats. While it's safe to say we won't be covering either of those, I do understand high-grade muskrats might fetch $4 each if the Russians step in to buy low supply in strong demand for those Siberian trooper hats. Supply & demand are the only two things that move price action in any market, and we'll do our dead-level best ferreting out any index or sector about to switch from one balance to the other. Watch For Coiled Markets! Contact Support ************* COMING EVENTS ************* Monday, 12/24/01 None -- markets closed early (1/2 day) -- Tuesday, 12/25/01 None -- markets closed -- Wednesday, 12/26/01 None Thursday, 12/27/01 Initial Claims 12/22 Forecast: N/A Previous: N/A Help Wanted Index Nov Forecast: N/A Previous: 46 Friday, 12/28/01 Durable Orders Nov Forecast: -5.5% Previous: 12.8% Consumer Confidence Dec Forecast: 82.0 Previous: 82.2 Chicago PMI Dec Forecast: N/A Previous: 41.1 Existing Home Sales Nov Forecast: 5.10M Previous: 5.17M New Home Sales Nov Forecast: 868K Previous: 880K ************************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 12-23-2001 Sunday 2 of 5 *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thr Week BRKS 41.38 1.37 0.48 0.85 -1.20 1.13 New, support EMMS 21.58 0.06 1.35 -0.09 0.39 1.99 Media strength ESRX 47.99 1.90 1.17 0.19 0.70 5.09 New, NDX GNSS 65.84 -0.91 -0.21 0.47 -4.26 -3.97 Strong chip KRON 49.41 0.76 1.59 0.16 -2.73 0.56 Dropped, weak MDT 50.55 1.27 -1.33 0.91 0.33 1.70 Inching higher NVDA 64.58 2.36 -1.75 -1.81 -2.54 -1.06 Ready to run SLAB 37.00 1.68 3.54 -1.63 -2.53 3.71 New, strong SYMC 65.91 0.09 2.52 -0.97 -4.68 -1.25 Back from dead VRTS 43.99 0.35 1.72 -2.13 -2.14 0.04 Strong bounce XMSR 17.88 0.48 0.33 0.25 -1.00 1.64 Breakout? PUTS ADVS 49.81 -0.69 0.74 -0.53 -3.01 -1.29 Below 200-dma BBOX 53.08 1.32 -0.10 -0.99 -2.73 0.47 Short covering DYN 24.71 -3.24 -0.80 3.08 -0.13 -0.23 Dropped, debt ERTS 59.60 1.64 -0.45 -0.24 -1.89 -1.55 New, topping FLIR 39.00 1.25 1.16 -4.21 -3.36 -5.00 Sagging QCOM 49.99 -2.32 0.08 -1.32 -2.72 -5.85 Still falling THC 57.42 -1.06 -0.25 -1.21 0.17 -3.43 New, weak WEBX 24.75 -0.39 -1.66 -1.19 -1.71 -4.65 New, obsolete ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* BRKS – Brooks Automation $41.38 (+1.13 last week) See details in play list Put Play of the Day: ******************** WEBX - WebEx Communications Inc. $24.75 +0.30 (-4.65) See details in play list ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS ^^^^^ KRON $49.41 (+0.56) While the selloff on Thursday seemed to be excessive, the rebound in shares of KRON left a lot to be desired. The initial rebound looked good, but the stock weakened in the afternoon, falling back significantly from its intraday highs. Sure KRON might be setting up for another run at its recent highs, but we think there are better opportunities available. We're dropping coverage of KRON this weekend. PUTS ^^^^ DYN $24.71 (-0.23) Shares of energy-trader DYN continued to bounce in Friday's session but on lower volume. Another energy company, Mirant (MIR), produced positive news for the sector as they raised new capital by selling stock and thus saved their credit rating. The group as a whole is pretty oversold and could be due for a correction (a.k.a. multi-day bounce higher). Currently, DYN has rallied for three days but remains under round number price resistance at $25. Its MACD is starting to reverse and shares did close above its 10-dma, a technical level that has acted as resistance. We have not yet been stopped out but don't plan on waiting for it to occur. *********** 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 ************** BRKS – Brooks Automation $41.38 (+1.13 last week) Brooks Automation is a supplier of integrated tool and factory automation solutions for the global semiconductor and related industries such as the data storage and flat panel display manufacturing industries. The company's product offerings have grown from individual robots used to transfer semiconductor wafers in advanced production equipment to fully integrated automation solutions that control the flow of resources in the factory from process tools to factory scheduling and dispatching. A technician's dream, BRKS has been steadily working higher since hitting the $25 level in early October. What is bound to appeal to the technician is the consistency with which the retracement levels have come into play over the past 2 months. After the initial move higher, the stock spent more than a month gradually working through the 38% retracement ($36) of its decline from the early August highs. Once clear of that level in late November, BRKS quickly began using it as support, a launching pad for its assault on the 50% level ($39.50). Quickly clearing that level in early December paved the way for a move to the 62% retracement at $43, which it has now tested twice in the past 3 weeks. The lows continue working higher, supported by the 20-dma ($40.25), while resistance is being reinforced by the 200-dma at $42.76. If that sounds like a bullish wedge, then you win the prize. We're looking for the next rally to take the stock through the 62% retracement level, initiating the next leg of the rally. On Friday, BRKS fell to just above the 20-dma before bouncing into the close. While intraday support has been building in the $40-41 area, we might get lucky enough to catch a brief dip as low as $39 for a great entry point. We would consider any such dip as an attractive entry so long as the bounce is accompanied by solid buying volume. Our stop is initially set at $38. BUY CALL JAN-40*BQE-AH OI= 58 at $4.40 SL=2.75 BUY CALL JAN-45 BQE-AI OI=236 at $2.10 SL=1.00 BUY CALL APR-45 BQE-DI OI=284 at $5.20 SL=3.25 BUY CALL APR-50 BQE-DJ OI=286 at $3.60 SL=1.75 Average Daily Volume = 775 K ESRX – Express Scripts $47.99 (+5.09 last week) Express Scripts provides health care management and administration services on behalf of clients that include health maintenance organizations, health insurers, third-party administrators, employers and union-sponsored benefit plans. The company's fully integrated pharmacy benefit management services include network claims processing, mail pharmacy services, benefit design consultation, drug utilization review, formulary management, disease management, medical information management services and informed decision counseling services through its Express Health Line division. Finally, the much-anticipated reshuffling of the NASDAQ-100 is occurring on Monday, and along with the necessary re-weighting of the existing components, several stocks are being added to the benchmark index. ESRX is one of those stocks and it is entirely possible that this shift could give the stock another boost. While the stock's recovery from the October lows has been more sedate than most, (a "paltry" 30%), the move has been picking up steam in the past week since rebounding from the 20-dma near $42. Perhaps it is anticipation of being added to the NDX on Monday, or maybe it is due to the confluence of technical indicators that point towards a move of some significance. On Friday, ESRX cleared the 200-dma ($47.67) for the first time since mid October. But the price advance stopped just below the top of the gap left on October 18th. Another point of interest is that the high of the day on Friday just happened to be the 50% retracement level of the decline from October 11th to November 12th. So we have a breakout of sorts, but with significant resistance still needing to be conquered. We'd prefer to nab new positions on a dip near the 38% retracement level, but with the potential for a Santa Claus rally next week, we may have to content ourselves with buying the breakout over the $48.60 level. More significant profit taking could give us an entry near the $44.75 level (the site of the most recent breakout, but given the recent strength, we view that as rather unlikely. Place stops at $44.50. BUY CALL JAN-45 XTQ-AI OI= 206 at $4.70 SL=2.75 BUY CALL JAN-50*XTQ-AJ OI= 720 at $2.00 SL=1.00 BUY CALL FEB-50 XTQ-BJ OI= 181 at $3.90 SL=2.50 BUY CALL FEB-52 XTQ-BX OI=1176 at $2.60 SL=1.25 BUY CALL FEB-55 XTQ-BK OI= 77 at $1.80 SL=1.00 Average Daily Volume = 2.23 mln SLAB – Sage Laboratories $37.00 (+3.71 last week) Silicon Laboratories designs, manufactures and markets proprietary high-performance mixed-signal integrated circuits (ICs) for the wireless, wireline and optical communications industries. The company initially focused its efforts on developing ICs for the personal computer modem market and is now applying its mixed-signal and communications expertise to the development of ICs for other high growth communications devices, such as wireless telephones and optical network applications. With the strength seen in the Semiconductors sector (SOX.X) over the past 3 months, volatility comes with the territory. But the bulls have managed to fend off each of the bears' assaults. Strong chip stocks like SLAB (up 235% since the October lows) are helping the bulls' case. Despite the recent profit taking on the SOX due to earnings warnings, SLAB bounced back strong on Friday and as trading very near both post-attack and yearly highs. Trade has been rather volatile over the past week due to the dueling influence of warnings in the chip sector and multiple upgrades to SLAB from the analyst community over the past month, the most recent of which came from Morgan Stanley on December 10th. Citing expectations of increased earnings, the firm raised their price target from $30 to $50. The stage is set for a continuation of the rally, but we'll need to see the SOX continue to work higher as well. Look to initiate new positions on a dip to support at between $34-35 or possibly $32.50. We're initiating the play with our stop set at $31.50, just below the 20-dma ($31.71). Due to the volatile trade that has been seen over the past week, we would avoid chasing the stock higher, but would instead wait for the inevitable pullbacks. BUY CALL JAN-35 QFJ-AG OI=443 at $4.60 SL=2.75 BUY CALL JAN-40*QFJ-AH OI= 34 at $2.25 SL=1.00 BUY CALL APR-40 QFJ-DH OI=284 at $5.80 SL=4.00 BUY CALL APR-45 QFJ-DI OI=390 at $4.10 SL=2.50 Average Daily Volume = 625 K ************************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 12-23-2001 Sunday 3 of 5 ****************** CURRENT CALL PLAYS ****************** EMMS – Emmis Communications $21.58 (+1.99 last week) Emmis Communications is a diversified media company with radio broadcasting, television broadcasting and magazine publishing operations. The company operates the sixth largest publicly traded radio portfolio in the United States based on total listeners. The company serves the nation's three largest radio markets of New York City, Los Angeles and Chicago. EMMS' 15 television stations serve geographically diverse mid-sized markets in the U.S., and the company has a variety of television network affiliations including five with CBS, five with FOX, three with NBC and one each with ABC and WB. Initial signs that the advertising picture is starting to improve for broadcasters has lit a fire under shares of EMMS over the past 2 months, and the stock has now reclaimed almost all of its post-9/11 losses. Buying volume has been strong over the past month as momentum players continue to drive the stock higher. After completing its cup and handle formation in early December, EMMS launched higher and is showing no signs of slowing down. The only fly in the ointment is the looming resistance at $22, followed by firmer resistance at $24, also the site of the 200-dma at $23.93. But for now, we have a strong uptrend to take advantage of, where dips are very buyable. Note that the stock tends to move strongly upwards before trading sideways for a few days. With the strong move last week, we're now waiting for the next intraday dip to provide entry, likely near the $20 level, also the site of the 10-dma at $20.15). Stronger support exists at the $19.00-19.50 level, which would make for a really solid entry point if followed by strong buying volume. Stops are currently set at $18.50. BUY CALL JAN-20 QMJ-AD OI=62 at $2.45 SL=1.25 BUY CALL JAN-22*QMJ-AX OI= 0 at $1.15 SL=0.50 BUY CALL MAR-20 QMJ-CD OI=23 at $3.30 SL=1.75 BUY CALL MAR-22 QMJ-CX OI=10 at $1.95 SL=1.00 Average Daily Volume = 899 K GNSS – Genesis Microchip $65.84 (-3.97 last week) Genesis Microchip designs, develops and markets integrated circuits that receive and process digital video and graphic images. Its integrated circuits are typically located inside a display device and process images for viewing on that display. The company also supplies reference boards and designs that incorporate its proprietary integrated circuits. GNSS is focused on developing and marketing image-processing solutions and targets the flat-panel computer monitor and other potential mass markets. True to form, expiration Friday had a little bit of excitement in store for our play on GNSS. The morning session was looking unpleasant, as the stock fell right from the open, but the slide was halted a mere 24 cent above our $63 stop. Then the afternoon buying spree began, helping the bulls to recapture all the early losses, plus a bit more by the closing bell. While the daily gain was just under $1, the move was significant from a technical standpoint, as it showed the resilience of the stock. The bulls battled back from an early deficit to post a "doji" candlestick, with the closing price above the ascending trendline. We're not out of the woods yet though, as there is now resistance to scale at $66.50, and then $70. And the daily Stochastics have now dropped out of overbought territory, potentially creating an uphill battle. We'll continue to target intraday dips in the $63-64 region for fresh entries, although a rally next week would make a move through $66.50 the most likely entry point. The stock has failed to hold above $70 for 5 of the last 6 trading days, so it is a safe bet that this level will continue to be a point of contention between the bulls and the bears. BUY CALL JAN-65 QFE-AM OI= 598 at $6.00 SL=4.00 BUY CALL JAN-70*QFE-AN OI=2290 at $4.00 SL=2.50 BUY CALL JAN-75 QFE-AO OI= 247 at $2.30 SL=1.25 BUY CALL MAR-70 QFE-CN OI= 234 at $8.10 SL=5.75 BUY CALL MAR-75 QFE-CO OI= 267 at $6.00 SL=4.00 Average Daily Volume = 2.54 mln MDT - Medtronic, Inc. $50.55 (+1.70 last week) As a medical technology company that provides lifelong solutions for people with chronic disease, MDT offers therapies to restore patients to fuller, healthier lives. Reading like a medical journal, applications for the company's primary products include bradycardia pacing, tachyarrhythmia management, atrial fibrillation, heart failure, coronary and peripheral vascular disease, cardiac surgery, spinal and neurosurgery and neurodegenerative disorders. It took all week to accomplish, but MDT finally completed that breakout we talked about last weekend. Monday's move above $50 was met by a sharp dip on Tuesday (which was a great entry, by the way), and the rest of the week was owned by the bulls. MDT gradually worked its way higher and then on Friday, it actually spent the entire day above the $50 level, closing right at the high of the day on volume 20% above the ADV. While the volume picture may be less important due to expiration-related monkey business, there is no arguing with the price movement. There is plenty of overhead congestion to work through, but the next serious level of resistance will be between $52-53. Target intraday dips to the $49 level or even $48.50 support, reinforced by the 10-dma ($48.66). Given the stock's solid advance over the past week, we're raising our stop to the $48 level this weekend. BUY CALL JAN-50 MDT-AJ OI=5015 at $1.75 SL=1.00 BUY CALL FEB-50*MDT-BJ OI=6093 at $2.55 SL=1.00 BUY CALL FEB-55 MDT-BK OI=2453 at $0.75 SL=1.00 BUY CALL MAY-50 MDT-EJ OI=3485 at $4.10 SL=2.50 BUY CALL MAY-55 MDT-EK OI=2006 at $1.90 SL=1.00 Average Daily Volume = 4.12 mln NVDA – NVIDIA Corporation $64.58 (-1.06 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. Another play that coerced us into temporarily repealing our stop loss rule, NVDA provided rewards for that lack of discipline on Friday. The stop violation was small, and the bullish action on Friday confirmed that the prior day's selling was overdone as NVDA rebounded sharply, advancing throughout the day and coming to rest more than 4% higher. Will the rebound continue? It's hard to say, with daily Stochastics plunging towards oversold, but based on the way price is holding up, any price dip in the next couple days could prove to be just another entry point for the rally into the end of the year. Our stop is currently sitting at $60, just below the 20-dma ($60.27), which hasn't been violated since NVDA broke above the 200-dma in early October. Jeff Bailey has talked about the power of "inside day" formations, and NVDA posted just that on Friday. So we have a couple of possible entry strategies to employ. Dip buyers can continue to target dips near $62 while those using the "inside day" technique will want to enter on a break above Friday's high of $65. Inside day traders will want to play with a tighter stop at the $62.50 level. BUY CALL JAN-65 RVU-AM OI=2846 at $4.80 SL=3.00 BUY CALL JAN-67*RVU-AC OI=1411 at $3.80 SL=2.50 BUY CALL JAN-70 RVU-AN OI=2616 at $2.80 SL=1.50 BUY CALL MAR-70 RVU-CN OI=1356 at $6.80 SL=5.00 Average Daily Volume = 9.65 mln SYMC – Symantec Corp. $65.91 (-1.25 last week) A world leader in Internet security technology, SYMC provides a broad range of content and network security solutions to individuals and enterprises. The company is a leading provider of virus protection, risk management, Internet content and e-mail filtering, remote management and mobile code detection technologies. The desktop battleground is where SYMC derives nearly 60% of its sales. Duking it out with Network Associates in this arena, the company is best known for its security software (Norton AntiVirus), desktop efficiency (Norton CleanSweep), and PC utility (Norton Ghost) products. Sometimes it pays to break the rules, and that is certainly the case with our SYMC play. Thursday's plunge looked like it was overdone, and certainly was borne out by the price action on Friday, which was consistently up. With volume more than doubling the ADV, it is clear that there were a lot of buyers shopping for bargains on Friday, and they weren't all doing last-minute Christmas shopping. After violating our stop on Thursday, we held our breath and reset the stop to the $60 level and that violation of our discipline was well rewarded. The stock bounced right out of the gate on Friday and managed a 2.7% bounce by the closing bell, ending very near the high of the day. We're keeping our stop in place and will continue to target intraday dips near the $64 level for fresh entries, as the stock prepares for another run at the $70 resistance level. Intraday resistance is now arrayed overhead at $67, $68 and $69, making for acceptable entry levels for those that like to chase momentum stocks. Just keep in mind that chasing stock's higher in an uncertain market environment increases your risk exposure. Recall that we're playing this one for its 2-1 split run, with the record date set for January 17th. So long as the bulls can maintain the upper hand, this could be a fun way to kick off the new year. BUY CALL JAN-65*SYQ-AM OI=3332 at $5.10 SL=3.00 BUY CALL JAN-70 SYQ-AN OI=2991 at $2.90 SL=1.50 BUY CALL JAN-75 SYQ-AO OI=1423 at $1.40 SL=0.75 BUY CALL APR-70 SYQ-DN OI= 481 at $7.60 SL=5.25 BUY CALL APR-75 SYQ-DO OI=1182 at $5.70 SL=3.75 Average Daily Volume = 2.67 mln VRTS – Veritas Software $43.99 (+0.04 last week) As an independent supplier of storage management software, VRTS develops and sells products that protect against data loss and file corruption, allowing rapid recovery after disk or computer system failure. The company's products provide continuous data availability in clustered computer systems with shared resources. This enables IT managers to work efficiently with large file systems, making it possible to manage data distributed on large computer network systems without harming productivity or interrupting users. VRTS provides products for most popular operating systems, including UNIX and Windows NT, as well as a full range of services to assist its customers in planning and implementing their storage management solutions. Did you catch a piece of that entry point? The warnings-related drop in the NASDAQ on Thursday, gave us a great entry, as VRTS dipped right to the ascending trendline and 20-dma (currently $41.94), which converged to present solid support. Friday's more than 5% rebound came on solid volume and cleared the 10-dma ($43.58), although it fell short of clearing the $44 resistance level from July and August. While there is some mild congestion in the $44-45 area, the real test of bullish resolve will come just a bit higher at the 200-dma ($46.36). Then there is resistance at $48, the top of the dramatic gap left in the middle of July. That's why we want to target intraday dips for new entries, rather than chasing the stock higher, as it pushes through resistance levels. The action in the broader Software index will be important to monitor as well. The GSO has now fallen below both the 200-dma (which acted as resistance on Friday) and the ascending trendline, converged near $185. Target fresh entries on a dip and bounce near the $41-50-42.00 level and keep stops set at $41. BUY CALL JAN-40 VIV-AH OI=15276 at $6.30 SL=4.25 BUY CALL JAN-45*VIV-AI OI=10114 at $3.50 SL=1.75 BUY CALL JAN-50 VIV-AJ OI= 8185 at $1.75 SL=1.00 BUY CALL FEB-50 VIV-BI OI= 3832 at $5.00 SL=3.00 BUY CALL FEB-55 VIV-BJ OI= 1505 at $3.10 SL=1.50 Average Daily Volume = 15.2 mln XMSR - XM Satellite Radio $17.88 (+1.64 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 service in the United States. It plans to transmit its XM Radio service by satellites to vehicle, home and portable radios. Did you know that subscribers to XMSR's satellite radio can listen to CNBC in their car? Personally, I have to turn down the noise all those talking heads produce but it would be an interesting feature to have in the car. XMSR's product was highlighted on the TV show this Friday, which may have influenced the late day rally in the stock price. Actually, shares of XMSR were strong all day after gapping up in the morning. Friday's close did mark the first close over resistance at $17.50, which might have bears wondering if the stock is headed for $20. We still think the stock is looking pretty extended and could deliver a painful bout of profit taking at any time but somehow the bulls kept the trend alive all week with shares never falling below new support at $16.30. Thus, we're left with the market maxim, the trend is your friend. The close at the high of the day is bullish for Monday and with our new stop it might make sense to try new positions if you get the right entry point. We would consider dips back to $17 or a breakout over $18. Short-term resistance is the high from Monday near $18.50. We're going to raise our stop to $16.49, which is more than a quarter below the intraday low on Friday. This is definitely becoming an enter passively and exit aggressively type of play. BUY CALL JAN-15 QSY-AC OI=1862 at $3.60 SL=1.75 72 cent premium BUY CALL JAN-17 QSY-AW OI=3231 at $2.55 SL=1.25 BUY CALL JAN-20*QSY-AD OI=3818 at $1.20 SL=0.60 more aggressive BUY CALL APR-17 QSY-DW OI= 120 at $4.80 SL=3.00 Average Daily Volume = 1.30 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 12-23-2001 Sunday 4 of 5 ************* NEW PUT PLAYS ************* ERTS - Electronic Arts Inc $59.60 -0.61 (-1.55 last week) Electronic Arts, headquartered in Redwood City, is the world's leading interactive entertainment software company. Founded in 1982, Electronic Arts posted revenues of more than $1.3 billion for fiscal 2001. The company develops, publishes and distributes software worldwide for the Internet, personal computers and video game systems. (source: company press release) For months we've heard that the gaming industry, make that the video gaming industry, is on the verge of a multiyear boom. In response, the Nasdaq is down for the year but gaming stocks as a group have almost doubled. One analyst estimates that interactive entertainment sales will grow by 80% in the next couple of years. Frankly, we believe them. The video game industry is poised to become the dominant form of entertainment. If this is true, then why are we turning bearish on ERTS, the current gorilla of game (title) producers? Given a long-term horizon, we are not bearish on ERTS or the group but short-term the stock could see more selling pressure. The holiday season produces more than 60% of hardware and software game sales for the whole year. Even though we expect sales to be very strong for ERTS based on America's new need to cocoon themselves at home and the introduction of MSFT's Xbox to the industry, the stock price could be in for a post-Christmas pull back and it looks like it has already begun. In the news you'll probably read several new game releases coming out from ERTS but these are to be expected this time of year. You might also notice that analysts seem to have different opinions. Early last week one broker downgraded the stock from a "buy" to a "hold" based on valuations while on Friday another analysts initiated coverage with a "buy". Shares of ERTS saw a 25% rally about three weeks ago based on expectations of strong Christmas sales. After closing at an all time high of $66 on Dec. 5th, the stock has been plagued by profit taking. The stock built a bearish wedge against support near $60. Friday's close at $59.60 may be the trigger to go short. Initially, we're looking for a 7% to 8% drop to its 200- dma just near the $55 mark. If a more prolonged pull back is in the works ERTS might fall to $52.50 or even $50. We glanced at the point-and-figure chart and the stock does appear to be on the verge of a more potent breakdown but it could find support at the ascending bullish trend line near $57. We're going to start with our stop at $62.52, just above Wednesday's high. Wall Street expects earnings for ERTS on 01/24/02. BUY PUT JAN-60 EZQ-ML OI= 625 at $3.70 SL=1.75 BUY PUT JAN-55*EZQ-MK OI=1764 at $1.60 SL=0.75 BUY PUT MAR-55 EZQ-OK OI= 388 at $4.10 SL=2.00 Average Daily Volume = 3.35M --- THC - Tenet Healthcare $57.42 -1.08 (-3.43) Tenet Healthcare, through its subsidiaries, owns and operates 116 hospitals with about 28,750 beds and numerous related health care services. The company employs approximately 113,000 people serving communities in 17 states and services its hospitals from a Dallas-based operations center. Tenet's name reflects its core business philosophy: the important of shared values among partners -- including employees, physicians, insurers and communities -- in providing a full spectrum of health care. (source: company press release) Believe it or not, the healthcare sector has been enjoying a very strong Santa Claus rally. The HCX.X is up six days in a row and has reclaimed its 200-dma. Yet for some reason we can't identify, shares of THC have been falling all week. Is this a delayed reaction to their announcement to file for another $2B in debt on Dec. 6th? Whatever the cause, THC has been trading lower on rising volume, which is never a good sign. Friday's close put it under the $58 level that has acted as support for nearly four weeks. With the MACD picking up steam to the downside we might be able to scalp a few points before buyers decide to defend the stock price again. Be forewarned that many fund managers believe that healthcare will be a leader in the market's recovery next year and if we do see a first quarter pull back traditionally investors flee to drugs and healthcare stocks as "safe havens". We are aiming for a move to the 200-dma near $52.50 where the stock has bounced twice in the last several months. We'll start the play with a stop at $60.01 or several cents above Wednesday's high. Traders should also take note that THC is expected to announce earnings on January 4th, 2002 and we will not likely hold over the event. BUY PUT JAN-60 THC-ML OI= 37 at $3.90 SL=2.00 BUY PUT JAN-55*THC-MK OI= 153 at $1.65 SL=0.75 BUY PUT FEB-55 THC-NK OI=1022 at $2.20 SL=1.00 Average Daily Volume = 2.02M --- WEBX - WebEx Communications Inc. $24.75 +0.30 (-4.65) Founded in 1996, WebEx Communications, Inc. is the leader in Internet infrastructure for interactive business communications. WebEx provides Web-based carrier-class communication services using its multimedia-switching platform deployed over a global network. WebEx's services enable end-users to share presentations, documents, applications, voice, and video spontaneously in a seamless environment. WebEx services are used across the enterprise in sales, support, training, marketing, engineering, and various other functions. With its modular framework and standards-based APIs, WebEx's real-time communications platform is the "dial-tone" for meetings on the Web. (source: company press release) As is normally the case on Wall Street, the professional stock watchers have opposite opinions of highly visible stocks in each sector but more on this later. WEBX caught some attention in the post-9/11 rally as commentators speculated if the web-based meeting company would outperform now that corporate America was looking for safer alternatives to flying. Shares certainly appreciated in the mid-September to mid-November time frame but after topping out near $37 the rally appears to have ended. This last Friday produced differing opinions about WEBX's potential. Two analysts gave the stock positive comments while another, appearing on CNBC, felt the company's technology was already obsolete and thus the stock was overvalued. I don't know if I agree with his assessment of WEBX being "obsolete" but the charts certainly seems to favor his convictions. WEBX has been in a terrible decline for most of December. The stock bounced at support of $25 over a week ago but the bears returned and shares broke through this level on Thursday. The positive comments on Friday were enough to provide a small bounce but not enough to reclaim the $25 level. We glanced at the point-and-figure chart for WEBX and found the stock in new downtrend and on a fresh sell signal. The bearish price objective points to $16, which would be great if we could get it but WEBX might find support at its 200-dma (near $20). Therefore, we're going to try and catch the 20% drop to $20 and reevaluate the put play when (if) it gets there. We're going to start the play with a stop at $27.51, which is 53 cents above the 10-dma. More conservative traders might choose something tighter and very conservative traders might look to Friday's high. Another alternative for more risk-averse traders is to wait for shares to close below $24 (but then part of the risk is missing the move down). Wall Street expects WEBX to announce earnings on 01/16/02. BUY PUT JAN-25 UWB-ME OI=333 at $3.20 SL=1.60 BUY PUT JAN-22*UWB-MX OI= 79 at $1.95 SL=0.88 BUY PUT JAN-20 UWB-MD OI= 83 at $1.10 SL=0.50 BUY PUT MAR-20 UWB-OD OI=279 at $2.55 SL=1.25 Average Daily Volume = 1.67M ************************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 ***************** ADVS – Advent Software $49.81 (-1.29 last week) ADVS is a provider of Enterprise Investment Management solutions that automate and integrate mission-critical functions of investment management organizations through software products, services and data integration. The company's solutions enable organization of all sizes to run their business more effectively, enhance client service and performance, and improve productivity and communication throughout their organization. A rebound, sure. But is it for real? After falling nearly non-stop for the past w weeks, shares of ADVS got a boost on Friday, helped in large part by the slight rebound in the Software sector (GSO.X). Volume picked up from the levels seen on Thursday, but the move lacked conviction. After the morning gap up, the stock gradually recovered from Friday's sharp loss, right up to the final 90 minutes, as sellers pushed it back from the day's highs. It is interesting to note that the highs coincided almost exactly with the 200-dma ($50.46), which looks like it could provide some resistance next week. Just above that, we have the 10-dma ($51.11) crossing down through the 20-dma ($51.46), and creating another level of resistance. The recovery in the daily Stochastics oscillator over the past week lacks any sort of conviction, so all it has done is remove a bit of the oversold condition in preparation for the next leg down in price. Target failed rallies between the 200-dma and the 20-dma, setting stops at the $52 level. Those waiting for renewed weakness will want to see ADVS fall back below the ascending trendline ($48) before taking a position. BUY PUT JAN-50 UIV-MJ OI=10 at $3.90 SL=2.50 BUY PUT JAN-45*UIV-MI OI=54 at $1.85 SL=1.00 Average Daily Volume = 792 K BBOX – Black Box Corporation $53.08 (+0.47 last week) As a technical services company, Black Box Corp. designs, builds and maintains network infrastructure systems. The Black Box team serves more than 150,000 clients in 132 countries, providing technical services on the phone, on site and online. Through its catalogs and Website, the company offers more than 90,000 infrastructure and networking products, and designs and builds more than 650,000 custom products each year. Only a day after a very significant breakdown, shares of BBOX were back in rally mode on Friday, recapturing Thursday's loss and then some. Not only did the bounce come on solid volume (75% above the ADV), but the stock managed to regain the 200-dma ($52.94) and closed right at the ascending trendline ($53). This has the appearance of short-covering, possibly related to the triple-witching expiration. At any rate, we never got an entry into the play on Friday, and new positions can now be considered with significantly less risk. With our stop set at $54 and strong resistance at $53.50, also the site of the 20-dma ($53.63), we would look to initiate new positions on a rollover near current levels. Traders looking for some sort of confirmation before playing will want to see BBOX fall below $52, and preferably the $51.50 level, also the site of the 50-dma ($51.65) before initiating new positions. Keep a sharp eye on the volume too, as the increase in volume on Friday was likely due to expiration-related activity. BUY PUT JAN-55 QBX-MK OI= 7 at $4.40 SL=2.75 BUY PUT JAN-50*QBX-MJ OI=74 at $2.05 SL=1.00 Average Daily Volume = 395 K FLIR – FLIR Systems $39.00 (-5.00 last week) FLIR is engaged in the design, manufacture and marketing of thermal imaging and stabilized camera systems for a wide variety of commercial, industrial and government applications. The company's products are divided into two categories, which include the thermography products and imaging products. In the Thermography division, FLIR manufactures products that are sold to commercial, industrial, research and machine vision customers. For industrial customers, FLIR has developed thermography systems that feature accurate temperature measurement, storage and analysis. The Imaging division caters to military, law enforcement, surveillance and security customers. Still flirting with a breakdown under the $39 level, shares of FLIR are still being pressured by the effect of the secondary offering last week. This is really a technical play, as the drop on Thursday was only the second time since the middle of June that the stock had closed below the impressive ascending trendline. The last time was a month ago, and was met the next day with a strong bounce and subsequent rally. No such luck this time, as the stock was stuck in a tight range "doji" pattern all day. If not for a bounce in the final 20 minutes (more than likely expiration related), the stock would have ended right at the low of the day. The ascending trendline ($39.75) appears to have been solidly broken, allowing the bears to start taking back some of the stellar gains accrued over the past year. Look for new entries to materialize on a rollover from the $40 level, or even $42, setting stops at $43. There's a lot of overhead resistance at that level and a rally above there would be a sign of hidden strength. Consider following the stock lower only on a drop below Friday's lows ($37.60) on strong volume. We'll likely see mild support near $35, followed my much stronger support in the $27-30 area. BUY PUT JAN-40 FFQ-MH OI=224 at $3.70 SL=2.25 BUY PUT JAN-35 FFQ-MG OI=146 at $1.65 SL=0.75 Average Daily Volume = 402 K QCOM - Qualcomm $49.99 (-5.85 last week) Qualcomm is engaged in developing and delivering digital wireless communications products and services based on the company's CDMA digital technology. The company's business area include integrated CDMA chipsets and system software, technology licensing, Eudora email software, and satellite based systems. It was a rough week for QCOM investors as they watched their stock decline by more than 10% in a week when the overall NASDAQ ended the week nearly unchanged. Despite growing implementation of the company's CDMA technology, investors are seeing the reality that the revenue stream is growing slower than originally anticipated. That negative development, along with overall weakness in the Wireless sector has kept the stock locked in a steep downtrend for more than 2 weeks, and it is showing no sign of letting up. Even with the mild bounce in the broad markets on Friday due to triple-witching expiration, QCOM couldn't gain any traction, falling back again from the $51 level. We could see a bit more consolidation or even a mild bounce next week, before the stock resumes its downward motion. Look to initiate new positions on a failed rally near $52 (the site of the 2-week descending trendline) or $53, recent broken support. Alternatively, consider initiating new positions on a drop below recent support at $49. We're keeping our stop set at $54 BUY PUT JAN-50 AAO-MJ OI=26613 at $3.50 SL=1.75 BUY PUT JAN-47*AAO-MW OI= 5399 at $2.35 SL=1.25 BUY PUT JAN-45 AAO-MI OI=16934 at $1.65 SL=0.75 Average Daily Volume = 16.7 mln ***** LEAPS ***** Year End Reflections By Mark Phillips Contact Support It's hard for me to believe, but we are winding down another year, and no matter what major index you use to measure the progress in the markets, the past 12 months have been a victory for the bears. With only 5 trading days remaining until we bid farewell to 2001 and usher in 2002, let's look at the statistics as they currently exist. Index 1/02/01 12/23/01 % Change S&P 500 1283 1144 -10.83% Dow Industrials 10656 10035 - 5.83% NASDAQ Composite 2291 1945 -15.10% And those losses are effectively the same for the Dow and the S&P500 over the prior 12 months. Due to the implosion of the Tech bubble in 2000, the 17% loss in the NASDAQ Composite seems rather tame when laid side-by-side with last year's 42.5% 12-month loss. With back-to-back declines like that we had no excuse for losing money with the rest of the herd, right? Afterall, we are savvy enough to follow the smart analyst crowd (you see where I'm going with this) and protect ourselves, right? Wrong! That's the lunacy of the supposed advice we receive from the so-called professionals. If there is one thing I have learned over the past 2 years, it is that I will NEVER believe one word I hear from a broker or analyst without being able to verify the veracity of what they have to say by doing my own research. And you should have come to the very same conclusion yourselves. And go ahead and lump me in with that crowd if you like. I'm getting paid to offer my opinion, just as they are. Although I think the telling difference is that I have no conflict of interest. I share with you each and every week in no uncertain terms exactly what I think is the future for the major market averages as well as whatever stocks seem to strike my fancy. I'm frequently wrong, and when I am, I think I am pretty forthright about sharing with you the error of my ways. We're all here to make money to provide a better and more secure lifestyle for our respective families. It is my job to help you understand what is driving the market, so that at some point in the future, you'll no longer need the wisdom I hopefully provide. I hope you'll still stick around though and help me continue illuminating the path for the next wave of fledgling investors. Buzz Lynn over at sister site Index Skybox really encapsulated the lunacy of listening to analysts in his Market Wrap on Thursday. Rather than paraphrase, I've copied his comments here for all to enjoy. "UBS Warburg's chief analyst and number one-rated analyst for 2000 called for a 27% increase on the S&P this year. Goldman's Abbey Joseph Cohen, top analyst in 1998 and 1999 called for a 25% S&P increase this year. The average of all top firm analysts was for +21%. Actual performance? Negative 13% to date. Not one of them called for a loss. Still, the same group of fortunetellers calls for 10% gains on the S&P next year - this while P/E ratios have never been higher (at 37), even at the height of the bubble in March of 2000 (29). Those P/E numbers aren't made up. They come from Barron's calculations. Analyst projections thus imply a forward P/E target of 40.7 on the S&P IF (big IF) profits remain the same as now throughout 2002. My personal bet is that profits will fall further precisely because analysts, almost without exception, think they will rise. Anybody still want to bet with the herd? Wherever the analysts go, bet against them." Amen, Buzz! I couldn't have said it better myself. What really launched me on this long diatribe tonight is the kind of reflection that all traders should do at the end of the year. Reviewing what worked, what didn't and what you learned in between. The most painful lesson I have experienced in the past 12 months is the realization that you can't help someone that doesn't want to be helped. I'm not talking about a reader here, but family members that can't see past the biggest lie on Wall Street, namely that the only way to make money over the long haul is to "Buy and Hold", as investors that attempt to time the market miss out on most of the profits. I won't name names, but someone very close to me watched a fortune disappear in shares of Cisco Systems (NASDAQ:CSCO) over the past 20 months. Well-versed in the mantra of Buy and Hold, this individual is still sitting on a profitable position due to a the low cost basis from accumulating the shares during the early 1990s. But the paper loss has been devastating to his once-rosy hopes of a comfortable retirement. As the stock culminated its meteoric rise in the spring of 2000, I implored him to harvest some profits or at least take some protective action like buying LEAP puts for protection. My exhortations fell on deaf ears, as his broker reassured him that any dip would be short-lived. We repeated this process several times throughout the ensuing decline, when the stock broke support at $50, then $35, then $20. Each time, he turned to his "trusted" broker and was reassured that CSCO would be back in no time. Now he is watching the stock languish between $15-20 (20-25% of its peak value), slowly coming to the realization that the glory days may not return until well after he needs to sell the stock for living expenses in his retirement years. The irony is that his rationale for not selling was that he didn't want to have to pay capital gains taxes on the profit accrued on the position over the past several years. Yet even after paying taxes on a sale near the $50 level (well off the highs and after numerous strong sell signals), that amount of cash would nearly double the value of the position at current market value. I don't share this to pick on anyone or to disparage CSCO, which I think is a very well run company. My point is that there are cycles to the market, and if we can identify those cycles and take the correct action, we are going to be far more successful over the long run. There is no denying that the Telecom and Networking sectors have had a very rough year, but none of us should have enduring crushing losses because of it. The handwriting was on the wall well over a year ago that there was going to be some pain. Now is the time to re-evaluate our strategy for the year ahead. Do you think Networking stocks are going to return to their momentum days in the next 12 months? I don't, as I expect the downturn in that arena to involve more pain and further consolidation before a healthy recovery can begin. This isn't an isolated story, as demonstrated by Austin's Trader's Corner piece on Thursday, highlighting 2 similar tales of woe. For those few readers that have been patient enough to stay with me this far, there actually is a common thread. It is my belief that the days of Buy and Hold investment success are gone for the foreseeable future. Those that are able to identify reliable buy and sell signals in the charts will prosper, while those that continue to deny the reality of rangebound markets will watch their investments stagnate. I'm not alone in this view either, as far more successful long-term investors like Warren Buffet and John Templeton said it long before I did. The talking heads and Wall Street "pros" are calling for a recovery in the first half of 2002, which they say justifies the recent market recovery due to the market's forward-looking nature. But, as demonstrated by the comments from Buzz, we need to see a LOT of earnings recovery, just to get back to the bubble status that existed in March of 2000. Stocks are tremendously inflated right now, and buying just about anything because it is a "compelling value" according to some analyst is simply participation in the "greater fool" theory. Speaking of Warren Buffet, did you catch his comments on Thursday, where he said he isn't finding any stocks that represent a good value right now? I'm not saying we can't have very tradable rallies over the next year, but I will consider each of them to be yet another bear-market rally until proven wrong. That means that the truly successful investors over the next year will be those that can recognize and trade the ebbs and flows of the market, selling resistance and buying support. And most importantly, harvesting profits when they are available. The markets will go up and the markets will go down, and our job is to skim off profits in the middle of these cycles. Despite the stimulative action of the Fed, there is a lot of weakness out there, and the best evidence of that is the series of dire earnings warnings over the past couple weeks in the big momentum sectors like Networking and Semiconductors. With the Biotechs also losing ground, the NASDAQ is going to have a hard time mounting a serious advance over the near term. But fear isn't yet making a comeback in the markets, as demonstrated by the VIX, which hit a post-attack low of 22.90 on Wednesday. Taken together, I think we are nearing that near-term market top. I would favor put plays at this point in time, and we've got a few of them sitting on the Watch List. American International Group (NYSE:AIG) has really gone nowhere since we added it to the Portfolio, but the Insurance index (IUX.X) continues to weaken as well, posting continuing lower highs. On the flip side, the IUX is posting higher lows too, meaning that we have a wedge that is destined to break eventually. AIG has some decent support near $78-79, but if that fails, we could be in store for drop back towards the $70 level, possibly with a brief rest near $76. This is the advantage of playing slow moving stops with LEAPS -- it gives us the luxury of time to be right while we wait for a stock to prove itself. The Put plays currently on the Watch List, Philip Morris (NYSE:MO) and General Motors (NYSE:GM) are not yet ripe for the picking, but we have the luxury of time on our side. We've laid out the action plan that would usher us into these plays. If the entry conditions are satisfied, we have an entry that limits our risk while giving us the opportunity to harvest some respectable profits. The current uncertainty in the market place has me favoring lower risk plays right now, and these two certainly qualify. I had an email this week questioning why we would pursue LEAP Puts on MO with my expectations of such a limited potential move, and I think the best explanation is that we can limit our risk, while still positioning ourselves to picket a solid profit. The stock isn't going to move rapidly, and that is precisely what makes the LEAP play so attractive. They are relatively cheap and will not suffer the ravages of time or volatility decay over the near term. For those that only want to play LEAP Calls, we've got some selections for you as well, and several of them are making great strides towards giving us some attractive entry points. I felt confident that they would come back to us. Now the only question is whether we've got the entries set too high, too low or just right. Without going into details on all of the LEAP Call plays currently on the Watch List, I think the general theme is that many of them are either running out of bullish steam right now (preparing to come back towards our entry points) or are already well under way towards that goal. A good example of this progress is Broadcom (NASDAQ:BRCM) which has given up quite a bit of ground in recent weeks, falling as low as $36.57 on Thursday. With the daily Stochastics bottoming in oversold, we are likely to see a bounce into the end of the year, but the weekly chart tells an interesting story, with the Stochastics in sharp decline, heading back for oversold territory. And take note of the 50-week moving average, which has rebuffed each bullish move for the past 4 weeks. Another cycle on the daily chart should have the stock setting up for an attractive entry very close to our listed target. Nokia (NYSE:NOK) looks to be topping out as well, also thwarted by the 50-week moving average. Another tech stock that is looking interesting is EMC Corp. (NYSE:EMC), as it has given up a fair amount of strength and is nearing our entry target. I've been impressed with the resilience of stocks like General Electric (NYSE:GE) and Tyco International (NYSE:TYC), both of which are trading near their post-attack highs. But the longer-term charts tell me that we're likely to see our entry targets achieved before either of these stocks trade significantly higher. Again, patience is key -- so long as we can tune out the daily noise. Readers that have been keeping an eye on our Eli Lilly (NYSE:LLY) and WorldCom (NASDAQ:WCOM) plays will notice that we abstained from taking an entry on either stock this week. LLY got smacked down as low as $76.69 on Friday before bouncing back to just above $78 at the close. While the dip on Friday could have been a decent entry point, I'm concerned by the pattern we're seeing across the Pharmaceutical sector, with earnings warnings and the long list of products that are coming off patent protection. A continuation of Friday's rebound may be a decent entry, but given the weakness on both the daily and weekly charts, I think we're going to revisit the supportive trendline near $75 before seriously challenging the $84 resistance level again. So I have lowered our target to $75. As to the WCOM play, I think we are too early in the consolidation cycle to take a position, so even though the stock traded within 6 cents of our entry target on Thursday, I think patience is the watchword here as well. Give the stock some time to consolidate for its next rally. I wouldn't rule out a dip as low as $13.50 before getting an attractive entry that is confirmed by strength on the long-term chart. In light of the holiday-shortened week, I decided to refrain from adding any new plays to the Watch List. There are plenty of plays listed there currently to take advantage of any favorable action in the broad markets. Take advantage of the usual lull between Christmas and New Years to recharge your batteries for what is likely to be a lively trading year in 2002. Rest assured that we will be back to adding to the Watch List next weekend, as we endeavor to pick the right areas for profit in the year ahead. For those that observe it, have a very Merry Christmas! Mark Phillips Contact Support LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP Calls: None Puts: AIG 11/07/01 '03 $ 80 VAF-MP $ 8.40 $ 8.70 +3.57% $86.50 '04 $ 80 LAJ-MP $10.60 $10.70 +0.94% $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 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 LLY 12/16/01 $75 JAN-2003 $ 80 VIL-AP CC JAN-2003 $ 75 VIL-AO JAN-2004 $ 80 LZE-AP CC JAN-2004 $ 80 LZE-AP WCOM 12/16/01 $13.50-14 JAN-2003 $ 15 VQM-AC CC JAN-2003 $12.5 VQM-AV JAN-2004 $ 15 LQM-AC CC JAN-2004 $ 10 LQM-AB PUTS: MO 12/09/01 $48, $50 JAN-2003 $ 50 VPM-MJ JAN-2004 $ 50 LMO-MJ GM 12/16/01 $50-51 JAN-2003 $ 50 VGN-MJ JAN-2004 $ 50 LGM-MJ New Portfolio Plays None New Watchlist Plays None Drops None ************************Advertisement************************* Tired of waiting on trades to execute? 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The Option Investor Newsletter Sunday 12-23-2001 Sunday 5 of 5 ************* COVERED CALLS ************* Market Mentality: When In Doubt, Avoid The Crowd! By Mark Wnetrzak The abrupt end to the recent broad-market rally has investors wondering if they should "buy the dip" in hopes of a long-term economic recovery or "sell on strength" in anticipation of a continued bearish environment. In fact, the underlying basis for that question echoed through a number of this week's E-mail inquiries and with the outlook for stocks somewhat unclear, it is a great time to review the concept of "contrarian" thinking. Successful investing requires observation, comprehension and action. Experienced traders learn to understand the facts, and the reasons behind market-moving events, observe the trends, and identify the early stages of a rally or decline. But, it is not enough to merely observe the activity and discern the movements. You must also develop a sense of market emotion and learn to put a range of indicators together in context, including the ability to perceive when a trend is approaching an extreme. Of course, all that aptitude will be worthless if you take no useful action. Acting upon your observations is without doubt the most difficult skill to master, and when the market is overwhelmed by rampant selling pressure, the task can be all the more daunting. Unless you are a seasoned investor, it is difficult to evaluate the market's unusual behavior for lack of past experience. However, there is one condition that is easy to observe: the opinion of the masses. For example, when the majority of participants are in agreement on the current outlook, there is a high probability that a move in the opposite direction is forthcoming. In simple terms, stocks will rally when every seller has been accommodated. In contrast, when everyone who wants to buy is fully invested, there is little potential for further upside activity. You have all heard the phrase, "In the stock market, the public is right during the trends but wrong at both ends," and that statement was never more correct than in the current environment. When the market is in a bullish trend, the emotion of the moment generally dictates the activity, causing the majority of typical traders to enter new positions near the top, when most stocks are finishing the rally. At that point, everybody who is bullish on the issue already has it and there is no one left to support the price. The professionals are the first to exit, quietly closing out their positions while the public is overwhelmed by glowing earnings reports and bullish forecasts. As the stock struggles to hold its gains, trading volume drifts lower and the primary groups trading the issue; the technicians, the fundamentalists and the general public compete to determine the next trend. When the historical pattern exhibits the first signs of failure, the technical traders begin to sell in earnest. Analysts raise the company's targets to support the inflated share value, but when the issue no longer responds to good news, the outcome is clear. Soon the public becomes nervous and as the correction takes shape, closing orders increase in number. The fundamentalist is the last to go, generally after a full-scale downtrend is in effect. With this type of psychological analysis, it obvious how human nature determines our actions in the stock market. Hope leads to fear, and then to panic, and the few that remain through it all (the inexperienced), eventually unload their positions for significant losses. After the market has endured a substantial decline, it's hard to overcome the public's fear and loathing, and the widespread disbelief that any recovery is forthcoming. The general panic propagated by dour doomsayers and the media's sensationalistic coverage of every negative event often creates an apparently insurmountable obstacle. The act of buying into weakness, in opposition of the crowd, will always feel uncomfortable and when the time comes to make the trade, its unlikely you'll have all the necessary information. With that in mind, it's easy to see why anticipating a change in the direction of the market is more an art than a science. In addition, those who hear your opposing views and witness your contra-intuitive behavior will likely voice their opinions, and they may eventually convince you to abandon your independent line of thinking, at precisely the wrong time. The important issue is to always consider the contrarian viewpoint, even if the perspective leaves you alone in your outlook, without confirmation from the masses. Remember, the stock market moves quickly from one extreme to the next, and success in investing requires that you act as an individual during those times when being part of the crowd simply contributes to the current market behavior. Trade To Profit! 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 TELM 6.20 6.30 DEC 5.00 1.80 *$ 0.60 9.9% CANI 5.97 5.57 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 22.66 DEC 20.00 2.25 *$ 1.05 8.0% NTPA 5.68 5.80 DEC 5.00 1.10 *$ 0.42 8.0% MDCO 11.43 10.65 DEC 10.00 2.10 *$ 0.67 7.8% EMBT 19.16 25.00 DEC 17.50 2.25 *$ 0.59 7.6% SURE 12.20 10.80 DEC 10.00 3.10 *$ 0.90 7.2% QSFT 22.64 22.30 DEC 20.00 4.10 *$ 1.46 6.8% VTSS 11.61 11.60 DEC 10.00 2.45 *$ 0.84 6.6% SURE 12.38 10.80 DEC 10.00 2.80 *$ 0.42 6.4% PXLW 14.95 16.53 DEC 12.50 3.30 *$ 0.85 6.3% GMST 22.70 26.88 DEC 20.00 4.30 *$ 1.60 6.3% SNDK 14.19 13.41 DEC 12.50 2.20 *$ 0.51 6.2% RMBS 8.88 8.01 DEC 7.50 1.95 *$ 0.57 6.0% AMZN 8.95 10.00 DEC 7.50 1.90 *$ 0.45 5.5% MCDT 18.80 25.30 DEC 15.00 4.80 *$ 1.00 5.2% INVN 19.42 28.51 DEC 15.00 5.10 *$ 0.68 5.2% FMKT 19.75 22.97 DEC 17.50 2.85 *$ 0.60 5.1% STEL 23.54 29.60 DEC 20.00 4.20 *$ 0.66 4.9% VRTY 15.09 19.56 DEC 12.50 3.00 *$ 0.41 4.9% CRXA 14.74 16.00 DEC 12.50 2.90 *$ 0.66 4.8% ARQL 11.10 15.95 DEC 10.00 1.50 *$ 0.40 4.5% EXFO 14.18 11.25 DEC 12.50 2.55 $ -0.38 0.0% PROX 11.50 9.04 DEC 10.00 1.90 $ -0.56 0.0% JDSU 11.60 8.45 DEC 10.00 2.20 $ -0.95 0.0% PCLN 5.37 5.41 JAN 5.00 0.95 *$ 0.58 11.4% NPRO 11.70 11.81 JAN 10.00 2.60 *$ 0.90 8.6% NPRO 11.81 11.81 JAN 10.00 2.70 *$ 0.89 7.1% DTHK 11.11 10.50 JAN 10.00 1.80 *$ 0.69 6.4% FALC 8.81 8.78 JAN 7.50 1.90 *$ 0.59 6.2% OAKT 13.53 14.00 JAN 12.50 1.90 *$ 0.87 5.4% CAMP 6.36 5.43 JAN 5.00 1.65 *$ 0.29 5.4% VSNX 16.58 15.17 JAN 12.50 4.80 *$ 0.72 5.3% MRVL 36.96 35.83 JAN 32.50 6.60 *$ 2.14 5.1% NTAP 21.04 22.60 JAN 17.50 4.50 *$ 0.96 5.0% ACXM 15.63 18.05 JAN 15.00 1.35 *$ 0.72 4.4% XICO 14.00 11.94 JAN 12.50 2.35 $ 0.29 1.8% *$ = Stock price is above the sold striking price. Comments: The Covered Call portfolio did fairly well during the December expiration period. Of the positions we closed, Pharmacyclics (NASDAQ:PCYC), Genta (NASDAQ:GNTA), and Echelon (NASDAQ:ELON); Genta managed to move back above the sold strike. Echelon appears to have formed a bottom and may offer some favorable premiums for those investors looking to roll forward. As we said last week, JDS Uniphase (NASDAQ:JDSU), Proxim (NASDAQ: PROX), and Electro-Optical Engineering (NASDAQ:EXFO) are a toss-up: take the small loss and move on or try salvaging the positions by rolling forward and/or down. Anybody have a quarter? Time to concentrate on January positions as this year is almost toast. Monitor closely any positions that are acting weaker than expected and follow your exit plan without fail. 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 GZTC 5.72 JAN 5.00 GEQ AA 1.10 99 4.62 28 8.9% MANU 19.47 JAN 17.50 ZUQ AM 3.30 1393 16.17 28 8.9% MDR 11.37 JAN 10.00 MDR AB 2.00 270 9.37 28 7.3% NPRO 11.81 JAN 10.00 NYQ AB 2.70 732 9.11 28 10.6% SIRI 8.98 JAN 7.50 QXO AU 2.00 1233 6.98 28 8.1% SPWX 10.99 JAN 10.00 USP AB 1.70 98 9.29 28 8.3% VRTY 19.56 JAN 17.50 YQV AW 3.00 311 16.56 28 6.2% 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 NPRO 11.81 JAN 10.00 NYQ AB 2.70 732 9.11 28 10.6% GZTC 5.72 JAN 5.00 GEQ AA 1.10 99 4.62 28 8.9% MANU 19.47 JAN 17.50 ZUQ AM 3.30 1393 16.17 28 8.9% SPWX 10.99 JAN 10.00 USP AB 1.70 98 9.29 28 8.3% SIRI 8.98 JAN 7.50 QXO AU 2.00 1233 6.98 28 8.1% MDR 11.37 JAN 10.00 MDR AB 2.00 270 9.37 28 7.3% VRTY 19.56 JAN 17.50 YQV AW 3.00 311 16.56 28 6.2% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** GZTC - Genzyme Transgenics $5.72 *** What's Up Doc? *** Genzyme Transgenics (NASDAQ:GZTC) is engaged in the application of transgenic technology to the development and production of recombinant proteins for therapeutic and other biomedical uses. To date, GTC has produced more than 65 such proteins, 45 through collaborations with various commercial and academic organizations and 20 independently. More than half of the transgenic proteins actively under development by the company are monoclonal anti- bodies (MAB) or immunoglobulin (Ig) fusion proteins. There is no news to explain Friday's heavy volume break-out. The stock appears poised to move higher in the coming sessions and traders who are bullish on the issue can speculate on the future of the company with this conservative position. JAN 5.00 GEQ AA LB=1.10 OI=99 CB=4.62 DE=28 TY=8.9% ***** MANU - Manugistics Group $19.47 *** Earnings Rally! *** Manugistics Group (NASDAQ:MANU) is a global provider of Enterprise Profit Optimization solutions, which is a category of solutions for enterprise management. Manugistics is also a provider of solutions for supply chain management, pricing and revenue optimiz- ation and electronic marketplaces. The company's solutions help companies lower operating costs, increase revenues, enhance profitability and accelerate revenue and earnings growth. The shares of Manugistics surged Friday after its quarterly loss beat Wall Street analysts' expectations. Investors were pleased when Manugistics' CEO said: "We clearly have seen that the worst is behind us" and "Stability has happened and growth has returned." We simply favor the heavy volume rally above the 150-dma and the improving fundamental outlook of the company. JAN 17.50 ZUQ AM LB=3.30 OI=1393 CB=16.17 DE=28 TY=8.9% ***** MDR - McDermott $11.37 *** Oil Sector Recovery *** McDermott International (NYSE:MDR) is the parent company of the McDermott group of companies that includes J. Ray McDermott, S.A., McDermott Incorporated, Babcock & Wilcox Investment Company, BWX Technologies, Inc., and The Babcock & Wilcox Company. The company operates in four business segments, Marine Construction Services, Government Operations, Industrial Operations and Power Generation Systems. J. Ray McDermott recently announced two contracts and the Babcock & Wilcox Company has been awarded a contract, valued at more than $37 million, to engineer, procure the materials for and construct an environmental system to reduce nitrogen oxide (NOx) from Dominion Generation's Chesapeake Energy Center near Norfolk, Virginia. We simply favor the technical support near the cost basis in this position for investors who are interested in a long-term portfolio position in the Oil Services sector. JAN 10.00 MDR AB LB=2.00 OI=270 CB=9.37 DE=28 TY=7.3% ***** NPRO - NaPro BioTherapeutics $11.81 *** Litigation Settled! *** 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=732 CB=9.11 DE=28 TY=10.6% ***** SIRI - Sirius $8.98 *** Satellite Radio Stocks Soar! *** Sirius Satellite Radio (NASDAQ:SIRI), formerly CD Radio Inc., is building a subscription radio service that will broadcast up to 100 channels of audio entertainment directly from satellites to vehicles throughout the continental US. Sirius is one of only two companies licensed by the FCC to operate a national satellite radio system. Upon commencing commercial operations, the company expects its primary source of revenues to be sub- scription fees, which Sirius expects will be included in the sale or lease of certain new vehicles. In addition, Sirius expects to derive revenues from directly selling or bartering limited advertising on its non-music channels. Shares of Sirius rallied earlier this month on analysts' reports about strong consumer demand for rival XM Satellite's (NASDAQ:XMSR) service. On Thursday, SG Cowen started coverage of Sirius with a "neutral" investment rating and a 12-month price target of $10 a share. Conservative speculators can profit from future bullish movement in the issue with this position. JAN 7.50 QXO AU LB=2.00 OI=1233 CB=6.98 DE=28 TY=8.1% ***** SPWX - SpeechWorks $10.99 *** Bottom Fishing! *** SpeechWorks International (NASDAQ:SPWX) is a provider of software products and professional services that enable enterprises, communications carriers and voice portals to offer automated, speech-activated services over any telephone. The company offers two speech recognition solutions for over- the-telephone applications, the SpeechWorks 6.5 platform and the SpeechSite package. SpeechWorks offers two text-to-speech products, Speechify and SpeechWorks ETI-Eloquence. Finally, the company offers a speaker verification solution, called SpeechSecure, which authenticates callers by their unique voiceprint. SpeechWorks complements its products with a professional services organization that offers a range of services, including application development and project management. We simply favor the bullish technical signals and our conservative position offers a method to participate in the future movement of the issue with relatively low risk. JAN 10.00 USP AB LB=1.70 OI=98 CB=9.29 DE=28 TY=8.3% ***** VRTY - Verity $19.56 *** On The Move *** Verity (NASDAQ:VRTY) is engaged in powering business portals. These include corporate portals used for sharing information within an enterprise, e-commerce portals for online selling, and market exchange portals for Business-to-Business activities. Business portals provide personalized information to employees, partners, customers and suppliers. The company's product suite enables organizations to turn corporate intranets and extranets into a powerful knowledge base, making business information accessible and reusable across the enterprise. This month, Verity posted a narrower than expected loss for its 2nd-quarter and said it expects modest sequential revenue growth in its 3rd-quarter. Verity continues to develop its relationship with IBM (NYSE:IBM) and recently announced that it has joined the IBM Portlet Provider Program to provide advanced out-of- the-box portlets for IBM WebSphere Portal. We simply favor the bullish break-out earlier this month and the recent move above resistance near $18. JAN 17.50 YQV AW LB=3.00 OI=311 CB=16.56 DE=28 TY=6.2% ***** ***************** 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 CANI 5.57 JAN 5.00 CDU AA 1.00 95 4.57 28 10.2% IGEN 40.44 JAN 35.00 GQ AG 8.20 4083 32.24 28 9.3% CTXS 23.49 JAN 22.50 XSQ AX 2.35 648 21.14 28 7.0% ACXM 18.05 JAN 17.50 UQA AW 1.45 25 16.60 28 5.9% TELM 6.30 JAN 5.00 UHE AA 1.55 221 4.75 28 5.7% CAMZ 23.77 JAN 22.50 CGQ AX 2.35 8 21.42 28 5.5% TUNE 22.66 JAN 20.00 TUF AD 3.60 163 19.06 28 5.4% SEBL 28.85 JAN 25.00 SGQ AE 5.00 12490 23.85 28 5.2% MEDC 18.35 JAN 15.00 MQH AC 4.00 68 14.35 28 4.9% ***************** NAKED PUT SECTION ***************** Investing 101: Understanding Trends And Cycles By Ray Cummins One of our new readers asked us to comment on the various types of market analysis and suggest the best method for evaluating stocks in the current uncertain environment. Since last September, the market has enjoyed an unprecedented recovery amid growing hopes for a rebound in the U.S. economy. Despite the dour outlook for corporate profits and even with the tragic events of 9/11, share values have rebounded on optimism the recent correction will be over by mid-2002. Unfortunately, the rally stalled this week on renewed concerns the approaching earnings reporting season will offer a dismal outlook for the coming year. The bearish activity came as a complete surprise to a number of well known analysts who believed the projected V-shaped recovery would establish a firm upward bias in the wake of the holiday buying spree. Now that the trend has reversed, many experts are reviewing the latest economic data to determine if the lagged effects of monetary and fiscal policy measures enacted in 2001 will indeed provide a boost to the stock market in the first half of 2002. Determining the most likely outcome is a very difficult task and although analysts continue to regard the events of the past with considerable respect, rarely are they able to utilize this data to accurately predict what will happen in the future. In most cases, they use one or another of the more common methods of financial analysis. The first approach is backward-looking; it constitutes chart reading (technical analysis) or the study of an issue's historic price behavior. Unfortunately, past performance of the economy, the stock market, or an individual issue is no guarantee of future activity. In addition, while trading on this type of information (momentum-based) may appear easier and more profitable in the near term, it is very difficult for investors to achieve consistent returns in this manner. The reason these short-term trends are so difficult to profit from is that chart formations rarely evolve in a completely predictable (manageable) pattern; with a steady rise to the top, where there's an extensive plateau that provides ample opportunity to assess the situation and take profits before starting the trip back down. Instead, stock charts often resemble the contour of the Rocky Mountains, with staggering peaks and precipitous gorges, and ranges that rise sharply towards the tallest crest, with each getting higher than the last until reaching the summit. Traders that have recently participated in the stock market know that in real life, the trip down from the summit is always scarier (and more abrupt) than the climb. Another approach involves forward-looking analysis. This method is based on the economy and fundamental issues. It anticipates interest rate changes and other business and political conditions that might impact future earnings or the public's attitude toward the stock market. Investors who use this method should remember that market cycles usually precede economic cycles. The various facets of our economy, including the virtually limitless range of elements that determine the financial health of the nation as a whole are anticipated by the investing public and this sentiment is exhibited by the emotion of the market. A common example is when stock prices move higher in expectation of rising profits and down in anticipation of greater losses; an occurrence that we all witnessed in the most recent earnings quarter. In addition, the market can be substantially affected by other circumstances, even those that appear to have little outcome with regard to financial instruments. Any study of a detailed timeline that compares key historical events with the movement of the major equity indices will demonstrate how war, recession, or a presidential election can influence the stock market. The economy and the stock market both move in identifiable cycles. To be successful, you must be able to identify the current phase of activity. Many investors will try to utilize various types of analysis to spot the top and bottom of each cycle but the truth is, nobody can do this on a regular basis. The key to consistent profits is to have an accurate perception of the market's overall character and manage your portfolio with the correct risk/reward outlook while using the appropriate strategies to profit from the current trend. 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 WGRD 11.92 10.19 DEC 10.00 0.60 *$ 0.60 15.1% RSTN 18.15 17.09 DEC 15.00 0.30 *$ 0.30 14.8% INVN 25.15 28.51 DEC 17.50 0.55 *$ 0.55 14.3% IGEN 35.95 40.44 DEC 30.00 0.90 *$ 0.90 14.0% CRXA 15.01 16.00 DEC 12.50 0.35 *$ 0.35 13.2% FNSR 12.96 10.29 DEC 10.00 0.35 *$ 0.35 12.9% ICST 21.18 21.51 DEC 17.50 0.30 *$ 0.30 12.8% RIMM 23.48 22.49 DEC 20.00 0.35 *$ 0.35 12.1% NTAP 16.51 22.60 DEC 12.50 0.65 *$ 0.65 11.9% CRXA 15.32 16.00 DEC 12.50 0.40 *$ 0.40 11.7% IMNY 7.24 10.00 DEC 5.00 0.25 *$ 0.25 10.7% RSAS 15.75 15.13 DEC 12.50 0.25 *$ 0.25 10.7% LVLT 6.82 4.90 DEC 5.00 0.30 $ 0.20 10.5% MANU 10.66 19.47 DEC 7.50 0.35 *$ 0.35 10.2% MCDT 22.75 25.30 DEC 17.50 0.45 *$ 0.45 9.8% SLAB 28.26 37.00 DEC 22.50 0.85 *$ 0.85 9.5% MCDT 25.20 25.30 DEC 20.00 0.35 *$ 0.35 9.4% MCDT 21.10 25.30 DEC 15.00 0.50 *$ 0.50 9.2% SRNA 22.90 21.74 DEC 17.50 0.50 *$ 0.50 8.6% SRNA 22.25 21.74 DEC 17.50 0.35 *$ 0.35 7.9% PMCS 23.27 20.01 DEC 15.00 0.45 *$ 0.45 7.7% CEGE 22.86 23.24 DEC 20.00 0.35 *$ 0.35 7.6% CNXT 13.37 13.23 DEC 10.00 0.30 *$ 0.30 7.3% AFFX 37.13 34.82 DEC 30.00 0.55 *$ 0.55 7.2% CREE 25.25 29.69 DEC 20.00 0.45 *$ 0.45 7.1% IMMU 23.49 22.44 DEC 20.00 0.40 *$ 0.40 6.9% MCSI 24.00 23.13 DEC 20.00 0.50 *$ 0.50 5.9% SMTC 37.55 36.05 DEC 27.50 0.35 *$ 0.35 4.8% OSIS 21.90 14.50 DEC 17.50 0.30 $ -2.70 0.0% OSUR 12.38 11.73 JAN 10.00 0.45 *$ 0.45 12.9% IDNX 13.77 14.24 JAN 10.00 0.45 *$ 0.45 12.2% PPD 20.77 20.70 JAN 17.50 0.80 *$ 0.80 11.9% INRG 13.77 13.46 JAN 10.00 0.35 *$ 0.35 9.8% RCOM 11.14 11.85 JAN 10.00 0.45 *$ 0.45 8.6% CC 24.16 26.32 JAN 20.00 0.60 *$ 0.60 8.5% ASA 20.50 20.34 JAN 20.00 0.75 *$ 0.75 7.7% OAKT 14.69 14.00 JAN 12.50 0.35 *$ 0.35 7.5% ALOY 19.06 19.36 JAN 15.00 0.35 *$ 0.35 6.1% ICST 20.55 21.51 JAN 15.00 0.30 *$ 0.30 5.9% *$ = Stock price is above the sold striking price. Comments: Friday's bullish activity was definitely a bonus for the portfolio as it helped previously closed positions in Immunomedics (NASDAQ:IMMU), Finisar (NASDAQ:FNSR), and Macromedia (NASDAQ:MACR) finish the expiration period positive. However, it did not improve the condition of Pharmacylics (NASDAQ:PCYC), Polymedica (NASDAQ:PLMD), or Terayon (NASDAQ:TERN); three unprofitable positions that have suffered from recent selling pressure. Another surprise occurred Tuesday when OSI Systems (NASDAQ:OSIS) slumped in sympathy with the bearish activity in InVision Technologies (NASDAQ:INVN). Traders slashed the price of Invision after a news article in the Wall Street Journal suggested that the company's stock had become drastically overvalued in the post-9/11 rally. Shares of INVN were up over 1,300% from their early September levels and everyone knew it was a pace that couldn't be maintained. It's too bad (for OSIS shareholders) that traders chose this week to act on that knowledge. 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 CC 26.32 JAN 20.00 CC MD 0.30 3626 19.70 28 5.9% COGN 23.30 JAN 20.00 CRQ MD 0.45 22 19.55 28 7.6% EMBT 25.00 JAN 20.00 MBQ MD 0.65 10 19.35 28 12.5% EMLX 39.45 JAN 27.50 UMQ MY 0.65 223 26.85 28 8.3% FST 27.52 JAN 25.00 FST ME 0.45 2 24.55 28 5.5% IGEN 40.44 JAN 25.00 GQ ME 0.50 90 24.50 28 6.3% JDAS 22.39 JAN 17.50 QAH MW 0.30 50 17.20 28 6.8% NTAP 22.60 JAN 17.50 NUL MW 0.55 5167 16.95 28 11.8% RCOM 11.85 JAN 10.00 RAU MB 0.25 60 9.75 28 8.6% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield EMBT 25.00 JAN 20.00 MBQ MD 0.65 10 19.35 28 12.5% NTAP 22.60 JAN 17.50 NUL MW 0.55 5167 16.95 28 11.8% RCOM 11.85 JAN 10.00 RAU MB 0.25 60 9.75 28 8.6% EMLX 39.45 JAN 27.50 UMQ MY 0.65 223 26.85 28 8.3% COGN 23.30 JAN 20.00 CRQ MD 0.45 22 19.55 28 7.6% JDAS 22.39 JAN 17.50 QAH MW 0.30 50 17.20 28 6.8% IGEN 40.44 JAN 25.00 GQ ME 0.50 90 24.50 28 6.3% CC 26.32 JAN 20.00 CC MD 0.30 3626 19.70 28 5.9% FST 27.52 JAN 25.00 FST ME 0.45 2 24.55 28 5.5% 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). ***** CC - Circuit City Stores $26.32 *** Up, Up, And Away! *** Circuit City Group (NYSE:CC), a division of Circuit City Stores, is a national retailer of brand-name electronics, personal computers and entertainment software. The company sells video equipment, including televisions, digital satellite systems, video cassette recorders, camcorders, cameras and DVD players; audio equipment, including home stereo systems and compact disc players; mobile electronics, including car stereo systems and security systems; home office products, including computers, printers, peripherals, software and facsimile machines; other consumer electronic products, including cell-phones, telephones and portable audio and video products; and entertainment software and accessories. Shares of Circuit City rallied early in the month after an industry analyst offered a "buy" rating on the stock, citing better than anticipated November sales data and expectations of improved performance. BoA Securities retail analyst Shelly Hale placed a $26 price target on the retailer's stock and said she sees a 40% rise in the company's bottom line for the coming year. That's very optimistic but apparently investors agree as the stock has moved up over 50% in the past two weeks. Investors who want a conservative cost basis in the issue should consider this position. JAN 20.00 CC MD LB=0.30 OI=3626 CB=19.70 DE=28 TY=5.9% ***** COGN - Cognos $23.30 *** A Big Day! *** Cognos (NASDAQ:COGN) is a global provider of unique business software solutions. The company develops, sells, and supports an integrated business intelligence platform that allows its customers, as well as their partners, customers, and suppliers, to analyze and report data from multiple perspectives and to coordinate decision-making and actions across the extended enterprise through intranets, extranets, and the Internet. Cognos shares soared Friday in the wake of favorable earnings and a slew upgrades from analysts. Cognos posted quarterly that were roughly the same as last year but industry experts saw that performance as positive and issued bullish forecasts on the news. Canadian firm National Bank Financial, Goldman Sachs, and Deutsche Banc Alex. upped their ratings, citing an improvement in the Cognos' fundamentals. Investors who agree with a bullish outlook for the company can use this position to establish a conservative cost basis in the issue. JAN 20.00 CRQ MD LB=0.45 OI=22 CB=19.55 DE=28 TY=7.6% ***** EMBT - Embarcadero Technologies $25.00 *** Entry Point! *** 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" and a "buy" rating was issued Friday by RBC Capital Markets. Analysts believe that Embarcadero's business will stabilize in the 4th-quarter and have recently raised their estimates. Apparently, investors agree as the stock has shown renewed signs of strength in the current bullish trend and this position offers a conservative method to speculate on the company's future share value. JAN 20.00 MBQ MD LB=0.65 OI=10 CB=19.35 DE=28 TY=12.5% ***** EMLX - Emulex $39.45 *** Portfolio Position! *** Emulex (NASDAQ:EMLX) is a designer, developer and supplier of a broad line of storage networking host bus adapters, application specific computer chips and software products that provide the connectivity solutions for storage area networks (SANs), network attached storage and redundant array of independent disks storage. The company's products are based on internally developed ASIC, firmware and software technology, and offer support for a wide variety of SAN protocols, configurations, system interfaces and operating systems. The company's architecture offers customers a stable applications program interface that has been preserved across multiple generations of adapters, and to which original equipment manufacturers have customized software for mission critical server and storage system applications. When it comes to leading-edge technology for data storage, Emulex is widely recognized as one of the foremost companies in the industry. From our perspective, Emulex is simply an "old favorite" that has finally begun to recover from the recent market-wide slump and it's certainly an issue for any long-term stock portfolio. This position allows investors to establish a discounted cost basis in the issue. JAN 27.50 UMQ MY LB=0.65 OI=223 CB=26.85 DE=28 TY=8.3% ***** FST - Forest Oil $27.52 *** Oil Sector Bottom-Fishing! *** Forest Oil Corporation (NYSE:FST) is an independent oil and gas company engaged in the exploration, development, acquisition, production and marketing of natural gas and liquids. Forest operates from production offices located in Lafayette and Metairie, Louisiana; Denver, Colorado; Anchorage, Alaska; and Calgary, Alberta. The company runs its international business, excluding Canada, from an office located in Houston, Texas. Forest Oil is one of the smaller companies in the Alaska oil industry but their presence has increased in the wake of a ramp-up of investment in Anchorage's Cook Inlet. J.P. Morgan took note of this activity and recently upped its investment rating on Forest Oil to a "long-term buy" based on a possible 20% surge in production during 2003. We favor the technical support near the cost basis in this position and investors who are interested in a long-term portfolio position in the oil sector should consider this issue. JAN 25.00 FST ME LB=0.45 OI=2 CB=24.55 DE=28 TY=5.5% ***** IGEN - Igen Intl. $40.44 *** Favorable Settlement? *** IGEN International (NASDAQ:IGEN) develops and markets products that incorporate the company's proprietary ORIGEN technology, which permits detection and measurement of biological substances. ORIGEN is incorporated into instrument systems and consumable reagents. The company 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. IGEN International is currently in litigation with Hoffmann-La Roche and the recent favorable outcome of a trial in the U.S. District Court in Delaware has boosted the outlook for the issue. Traders can speculate on the future outcome of the Maryland lawsuit with this conservative position. Research this volatile issue thoroughly before initiating any position in the issue. JAN 25.00 GQ ME LB=0.50 OI=90 CB=24.50 DE=28 TY=6.3% ***** JDAS - JDA Software $22.39 *** Low-Risk Entry Point *** JDA Software Group (NASDAQ:JDAS) is a worldwide provider of sophisticated software solutions designed specifically to address the demand and supply chain management, business process, analytic application and e-commerce requirements of the retail industry and its suppliers. The JDA Portfolio consists of comprehensive, integrated software solutions designed to specifically address the demand and supply chain management, business process, decision support, e-commerce and other collaborative planning requirements of the retail industry and their suppliers. In short, JDAS is a leader in providing integrated software and professional services that address real-world issues to help multi-channel companies manage their mission critical operations. That makes the company's products very valuable in today's economy and the recent surge in JDAS' share value demonstrates the widespread popularity of the stock. Our outlook for the company is also bullish and this position allows investors to establish a low-risk cost basis in the issue. Target a higher premium in the position initially, to increase the overall return on investment. JAN 17.50 QAH MW LB=0.30 OI=50 CB=17.20 DE=28 TY=6.8% ***** NTAP - Network Appliance $22.60 *** Data Storage Sector *** Network Appliance (NASDAQ:NTAP) is engaged in the business of network-attached data management and storage solutions. Network Appliance hardware, software, and service offerings are used to create, manage and scale seamless data fabrics, moving information to users globally. Their products consist of filer storage and caching appliances, data management and content delivery software, and support services. Network Appliance storage appliances, or filers, are systems that provide highly reliable data storage management. The company's NetCache appliances allow customers to scale network infrastructure, reduce bandwidth costs, ease network bottlenecks, and simplify data management and content delivery. The company's NetApp software offers a set of features that ensure mission-critical availability and also reduce the complexity of enterprise storage management. Network Appliance has a customer service and support organization to provide technical support, education and training. In November, Network Appliance beat Wall Street's financial targets and the company recently announced some new products and several contracts which should bode well for the future. The Data Storage sector has been improving and this position offers a conservative entry point for investors who wouldn't mind having NTAP in their long-term technology portfolio. JAN 17.50 NUL MW LB=0.55 OI=5167 CB=16.95 DE=28 TY=11.8% ***** RCOM - Register.com $11.85 *** Cheap Speculation! *** 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 rallied in early November with no public news to explain the activity. Traders say the move was related to an article in Business Week in which a popular Internet analyst said, "RCOM is a good play on the growth of the Net and is one of the few attractive takeover targets around." Now the issue is comfortably above a support area near $9 and this position offers conservative speculation on the company's future share value. JAN 10.00 RAU MB LB=0.25 OI=60 CB=9.75 DE=28 TY=8.6% ***** ***************** 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 SPWX 10.99 JAN 10.00 USP MB 0.70 28 9.30 28 18.5% XMSR 17.88 JAN 15.00 QSY MC 0.85 721 14.15 28 18.0% AWRE 8.50 JAN 7.50 WUQ MU 0.30 160 7.20 28 12.1% MRVL 35.83 JAN 27.50 UVM MY 0.70 5 26.80 28 9.7% CAMZ 23.77 JAN 20.00 CGQ MD 0.45 3 19.55 28 7.9% PCS 24.25 JAN 20.00 PCS MD 0.30 13854 19.70 28 5.7% SEBL 28.85 JAN 20.00 SGQ MD 0.30 9915 19.70 28 5.4% SEE DISCLAIMER IN SECTION ONE ***************************** ************************ SPREADS/STRADDLES/COMBOS ************************ Industrial Stocks Resume Holiday Rally! By Ray Cummins ****************************************************************** - MARKET RECAP - ****************************************************************** Friday, December 21 The major equity averages finished higher today amid reassuring reports from Dow heavyweights Honeywell and Caterpillar, and an upbeat profit outlook from technology stalwart Nortel Networks. The Dow Jones Industrial Average added 50 points to end at 10,035 on strength in American Express (NYSE:AXP), AT&T (NYSE:T), Intel (NASDAQ:INTC), Caterpillar (NYSE:CAT), Wal-Mart (NYSE:WMT), and Exxon Mobil (NYSE:XOM). The NASDAQ Composite added 27 points to finish at 1,945 with networking shares among the best technology performers while semiconductor, software and hardware companies helped boost the gains in the group. The Standard & Poor's 500 Index edged up to 1,144 as the broader market found new buyers in the airline, oil, oil service, retail, biotechnology and consumer sectors. Trading volume came in at 1.69 billion on the NYSE and at 2.15 billion on the NASDAQ. Market breadth was favorable with winners surpassing losers 21 to 11 on the Big Board and 23 to 14 on the technology exchange. On the fund-flow front, Trim Tabs said equity funds had inflows of $5.5 billion in the week ending December 19, compared with outflows of $3.7 billion in the prior week. Last week's new plays (positions/opening prices/strategy): Price (NYSE:PR) FEB20C/DEC20C $0.85 debit calendar Sandisk (NSDQ:SNDK) APR20C/APR15P $16.80 debit collar Goodyear (NYSE:GT) APR30C/APR20P $0.30 credit synthetic Amgen (NSDQ:AMGN) JAN70C/JAN65C $0.75 credit bear-call Yahoo! (NSDQ:YHOO) DEC17C/DEC17P $1.40 debit straddle Biogen (NSDQ:BGEN) JAN60C/JAN50P $3.10 credit strangle The volatility play in Price Communications certainly lived up to its title as the issue experienced some bizarre activity during the week. The movement was due to a unique revision in the previously announced acquisition of Price Communications' Wireless subsidiary (PCW) by Verizon Wireless. Under the terms of the new transaction, Verizon and Price will form a limited partnership and the conditions of the deal state that Price may exchange its interest for shares of Verizon Wireless stock at the IPO price after the public offering is finalized. Traders were concerned about the revisions to the agreement initially and they sold the issue down to $16 during Wednesday's session before the deal could be thoroughly analyzed. Now it seems that investors are happy with the upside potential in the arrangement and PR's share value has since recovered its losses. Those who want to reduce their investment in the long (FEB-$20C) should consider selling the JAN-$20 Call for a premium of $0.40-$0.50. The Reader's Request play in Sandisk (NASDAQ:SNDK) experienced an unexpected surprise Wednesday when the company's share value came under severe selling pressure after the global supplier of flash-data storage products announced plans to sell up to $120 million of five-year convertible subordinated notes. The notes will generate cash for the development of new technologies and fabrication facilities, and capital expenditures. Traders were less than pleased with the announcement and they fled the issue in droves. Fortunately, our position has downside protection at $15 and over four months to recover from the current slump. The speculative debit straddle in Yahoo! was the only other play that deserves mention and despite the lack of significant news, the issue did trade in a relatively large range during the week. Thursday's movement was the most aggressive with the stock down over $2 from the session high and the downward momentum yielded a brief "break-even" opportunity in the bearish portion of the position. With the straddle just short of our profit goal, the brisk sell-off in YHOO ended abruptly Friday morning in the wake of a broad-market rally and there was nothing to do but exit the play for a small loss. Some days you win and some days... Portfolio Activity: The month of December offered spread and combination traders a number of excellent opportunities and despite the volatility during the last week, our portfolio finished the expiration period with a majority of profitable positions. As usual, the credit-spreads section was the most successful and all of the selections in that group expired with positive returns. The bearish spread in Hillenbrand (NYSE:HB) was the only play that finished beyond the sold strike but the position still yielded a small profit. The time-selling plays in Intuit (NASDAQ:INTU) and Biovail (NYSE:BVF) performed very well with both positions offering favorable exits during the past two weeks. Biovail turned out to be an exceptional issue, finishing the expiration period just $0.60 above the sold strike price, and traders who closed the position Friday were rewarded with a +100% gain on their initial investment. The Covered-calls on LEAPS position in Microsoft (NASDAQ:MSFT) finished the expiration period just below the sold strike at $70, allowing traders to transition to the (short) JAN-$70 calls for a sizable credit of $1.30-$1.40. The cost basis in the long-term option (JAN03-$65C) is $6.45, well below the current value ($12) of the position. The small group of neutral-outlook (volatility) plays; Potash (NYSE:POT), Andrx (NASDAQ:ADRX), and Goldman Sachs Group (NYSE:GS) offered acceptable gains during the period and synthetic positions in Sun Microsystems (NASDAQ:SUNW), Leap Wireless (NASDAQ:LWIN), and Level 3 (NASDAQ:LVLT) also yielded satisfactory profits. One position we are concerned about during the coming week is the neutral-outlook credit strangle in Biogen (NASDAQ:BGEN). Our current position has an upside break-even point near $63 but the issue may soon test that area on momentum from Friday's announcement that the company expects 2001 revenues to top $1 billion, a first for the biotechnology firm. The company also said its multiple-sclerosis treatment Avonex maintained its position as the top-selling treatment for MS and since Biogen generates the bulk of its revenue through sales of Avonex, that is very favorable news. The most recent rally (AUG-SEP) failed near $62, so that is the price range we will focus on in the coming weeks. A move above that area on heavy volume would signal an early exit (or adjustment) in the position. Questions & comments on spreads/combos to Contact Support ****************************************************************** - SPECULATION PLAYS - One of our readers asked for some speculation plays on low cost stocks that may benefit from the historical "January Effect." This is a seasonal trend in which small-cap stocks outperform their larger-cap brethren during the first few months of the new year. The historically strong performance of lower-priced issues in January, February and March is well known and easily proven but there is no guarantee these stocks will duplicate that activity, so review each issue individually and make your own decision about the future outcome of the positions. ****************************************************************** COMS - 3Com $6.24 *** Upbeat Outlook! *** 3Com (NASDAQ:COMS) is a provider of unique networking products and solutions. 3Com specializes in products and services that provide straightforward solutions to networking challenges, particularly in the areas of broadband connections, wireless network access, and Internet Protocol telephony. The company serves three primary customer markets: commercial enterprises with small- to mid-sized locations, consumers, and carriers and network service providers. The company's commercial products include traditional access products, advanced access products, Local Area Network (LAN)/Wide Area Network infrastructure products, LAN telephony products, and services. The company's consumer products include broadband connections, networking products and Internet appliances. 3coms's carrier products include enhanced data services and new technologies. Shares of 3Com soared last week after the company posted a narrower-than-expected quarterly loss amid modest revenue growth and said it remains "on track or ahead of plan in nearly all parts of its turnaround." The networking-equipment maker reported a fiscal second-quarter loss of $47.1 million, or $0.14 per share, compared with $51.2 million, or $0.15 per share, in the same period a year ago. Analysts were upbeat about the announcement, as they had expected a loss of $0.22 per share for the period. In addition, they made positive comments about 3Com's gross margins, which were $133 million or 33.8%, an increase of $70 million from last quarter. Investors appear to agree with the optimistic outlook as the stock has moved up 25% during the past week. Technically, the issue appears to be successfully completing a basing phase and we expect the company's share value to benefit significantly from the next technology rally. Target a smaller debit (or a credit) in the play initially, to allow for a consolidation in the underlying issue. PLAY (speculative - bullish/synthetic position): BUY CALL APR-7.50 THQ-DU OI=3377 A=$0.55 SELL PUT APR-5.00 THQ-PA OI=1182 B=$0.35 INITIAL NET DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.75-$0.90 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $170 per contract. ****************************************************************** AWRE - Aware $8.50 *** Rally Mode! *** Aware (NASDAQ:AWRE) provides Digital Subscriber Line technology to semiconductor and equipment companies that make products to enable simultaneous high-speed data and voice transmissions over copper telephone lines. The company's many offerings include: Full-rate ADSL technology; G.lite technology; Voice enabled DSL technology; Dr. DSL technology; and DMTflex technology. The company also sells software-based compression products: WSQ by Aware, NistPack by Aware, CJIS Web, JPEG 2000 Codec by Aware, MotionWavelets Video, and SeisPact. Aware has been "on the move" in recent sessions amid speculation that Intel (NASDAQ:INTC) is preparing to rollout a new line of DSL chipsets. Intel is among AWRE's larger technology customers and the potential revenue from the company's future development of DSL chips could be substantial. In addition, the fundamental outlook for the company is improving and contracts with ADI, Infineon and Samsung are expected to bolster Aware's bottom-line in the coming quarters. For investors who are bullish on the issue, this position offers a reasonable expectation of profit at the risk of owning the issue at a conservative cost basis. Target a smaller debit (or a credit) in the play initially, to allow for a consolidation in the underlying issue. PLAY (very speculative - bullish/synthetic position): BUY CALL APR-10.00 WUQ-DB OI=52 A=$1.15 SELL PUT APR-7.50 WUQ-PU OI=50 B=$1.00 INITIAL NET CREDIT TARGET=$0.05-$0.10 TARGET PROFIT=$0.70-$0.90 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $340 per contract. ****************************************************************** SPWX - SpeechWorks $10.99 *** On The Move! *** SpeechWorks International (NASDAQ:SPWX) is a provider of software products and professional services that enable enterprises, communications carriers and voice portals to offer automated, speech-activated services over any telephone. The company offers two speech recognition solutions for over- the-telephone applications, the SpeechWorks 6.5 platform and the SpeechSite package. SpeechWorks offers two text-to-speech products, Speechify and SpeechWorks ETI-Eloquence. Finally, the company offers a speaker verification solution, called SpeechSecure, which authenticates callers by their unique voiceprint. SpeechWorks complements its products with a professional services organization that offers a range of services, including application development and project management. The Covered-calls editor contributed this issue and based on his assessment of the recent bullish technical indications, this position offers a favorable method to participate in the future movement of SPWX's share value with relatively low risk. PLAY (very speculative - bullish/synthetic position): BUY CALL JAN-12.50 USP-AV OI=50 A=$0.85 SELL PUT JAN-10.00 USP-MB OI=28 B=$0.70 INITIAL NET CREDIT TARGET=$0.05-$0.10 TARGET PROFIT=$0.50-$0.60 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $415 per contract. ****************************************************************** - CREDIT SPREADS - 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 the future outcome of the play. ****************************************************************** ADRX - Andrx $69.75 *** Trading Range! *** Andrx (NASDAQ:ADRX) formulates and commercializes a range of controlled-release oral pharmaceuticals using its proprietary drug delivery technologies. Andrx markets and sells Cartia XT and Diltia XT, its generic or bioequivalent versions of Cardizem CD and Dilacor XR. Andrx utilizes its proprietary drug delivery technologies and formulation skills to develop bioequivalent versions of selected controlled-release pharmaceuticals; and brand name controlled-release formulations of immediate-release or controlled-release drugs. Andrx is developing bioequivalent versions of specialty or niche pharmaceutical products. Through its distribution operations, Andrx primarily sells bioequivalent drugs manufactured by third parties to independent pharmacies, pharmacy chains which do not maintain warehousing facilities, pharmacy buying groups and physicians' offices. Andrx has been a popular issue in the "premium-selling" category of options trading but this week, the issue has moved into the credit-spreads section. For a technical viewpoint, the issue is comfortably entrenched in a 6-month trading range and unless a significant change (review the ongoing patent litigation over Omeprazole, a generic form of the heartburn/ulcer pill Prilosec) in the company's outlook occurs, there is little reason to think the trend will be altered significantly in the coming month. PLAY (conservative - bearish/credit spread): BUY CALL JAN-85 QAX-AQ OI=683 A=$0.50 SELL CALL JAN-80 QAX-AP OI=436 B=$1.05 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% ****************************************************************** KLAC - KLA Tencor $50.03 *** Sector Slump! *** KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and yield management solutions for the semiconductor and related microelectronics industries. The company's large portfolio of products, software, analysis, services and expertise is designed to help integrated circuit manufacturers manage yield throughout the entire wafer fabrication process, from research and development to final mass production yield analysis. The company offers a broad spectrum of products and services that are used by every major semiconductor manufacturer in the world. These customers turn to the company for in-line wafer defect monitoring; reticle and photomask defect inspection; CD SEM metrology; wafer overlay; film and surface measurement; and overall yield and fab-wide data analysis. Computer hardware and semiconductor stocks retreated last week amid gloomy economic data and a less than optimistic forecast for the chip industry recovery. The bearish activity began on 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. Wednesday's news was no better as a Dataquest report showed that semiconductor revenues fell 33% this year, the worst industry decline in history. The unfavorable news was a catalyst for profit-taking in the semiconductor group and traders who agree with a neutral-to-bearish outlook for the chip sector in the near-term can profit from that outcome with this conservative combination position. PLAY (conservative - bearish/credit spread): BUY CALL JAN-65 CKV-AM OI=1097 A=$0.25 SELL CALL JAN-60 KCQ-AL OI=3491 B=$0.75 INITIAL NET CREDIT TARGET=$0.60-$0.65 PROFIT(max)=14% ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** SMTC - Semtech $36.05 *** Premium Selling! *** Semtech (NASDAQ:SMTC) is a supplier of analog and mixed-signal semiconductors. Semtech designs, manufactures and markets a wide range of products for commercial applications, most of which are sold to the communications, industrial and computer markets. The company's semiconductors enable power management, test, protection and a range of other functions in products that require analog or mixed-signal processing. The company's end customers are primarily original equipment manufacturers that produce and sell electronics. Semtech shares slumped last week in sympathy with the sell-off in semiconductor stocks. The volatility quickly inflated the front-month option prices and the downside bias has provided an opportunity to sell "out-of-the-money" premium for credit to establish a discounted cost basis in the issue. The stock has solid support at $25-$26 however, if it falls below the profit envelope, we will consider a bearish adjustment in the position. If the issue climbs above the current resistance area near $42, we will buy the stock to cover the sold (short) call. As with any trading recommendation, the position should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and investing style. PLAY (aggressive - neutral/credit strangle): SELL CALL JAN-45.00 QTU-AI OI=207 B=$0.45 SELL PUT JAN-27.50 QTU-MS OI=0 B=$0.45 INITIAL NET CREDIT TARGET=$0.90-$1.00 PROFIT(max)=11% UPSIDE B/E=$45.90 DOWNSIDE B/E=$26.60 ****************************************************************** ************************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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