Option Investor
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Daily Newsletter, Wednesday, 04/26/2000

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The Option Investor Newsletter           Wednesday  4-26-2000
Copyright 2000, All rights reserved.
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com

Also provided as a service to The Online Investor Advantage
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MARKET WRAP  (view in courier font for table alignment)
******************************************************************
       4-26-2000           High     Low     Volume Advance Decline
DOW    10945.50 - 179.30 11141.90 10902.10   999,650k 1,408  1,530
Nasdaq 3,630.09 -  81.14  3777.08  3629.36 1,592,604k 1,813  2,324
S&P-100  789.07 -   2.24   801.59   786.09    Totals  3,221  3,854
S&P-500 1460.99 -   0.08  1482.94  1456.98            45.5%  54.5%
$RUT     484.24 -   4.79   495.02   483.58
$TRAN   2883.52 -  30.51  2914.33  2881.12
VIX       29.46 +   2.40    30.26    26.83
Put/Call Ratio       .50
******************************************************************

Will The Markets Pay For Tomorrow's Employment Cost Index?

The action on Wall Street today mirrored that of bulls and 
bears sleeping, not battling.  The bears finally awoke to 
take control in the final hour, but the word on the street 
wasn't one of panic or heavy selling (the volume confirms this 
too).  Instead, it was the lack of buyers which have plagued 
the markets for the past month.  The Dow and Nasdaq had been 
slowly sinking all day before traders gave up in the final hour 
and watched the markets sink until trading curbs were put in 
place to quench the sellers.  Let's face it, today was one 
boring, unproductive day for daytraders.  But will today's late 
day sell-off provide the launching pad for a monster rally on 
Thursday?  The key will be the inflation sensitive ECI and GDP 
reports due out tomorrow morning.

For a closer look at the action on the Nasdaq, you have to 
start with the 10-dma.  It is currently at 3627 and has been 
acting as resistance for most of the past month.  Tuesday was 
the first day it had a solid close about that mark since late 
March.  A confirmation of that trend reversal would be key to 
really awake the bulls.  After trading higher during the first 
two hours of trade, the Composite rolled over, but held above 
the 10-dma all day.  It was with only 45 minutes to go that all 
buyers walked away and let this market slip back below the 
10-dma, before bouncing to close 3 points above it.  The final 
tally left the Nasdaq at 3630.09, down 81.14.

Despite the close at the 10-dma, this may not be the heavy 
anesthesia that knocks the markets cold for an extended period.  
More like a sleeping pill ahead of the ECI and GDP wake up 
calls for tomorrow.  Keep in mind there is still a big pile of 
cash building in fund managers pockets and it will eventually 
need to get put to work.  How did Jim put it yesterday..."Now 
we are likely to see a test of wills as buyers face each other 
over a banquet table of juicy steaks.  All the funds would like 
to see prices drop a little more but if someone across the table 
flinches and starts grabbing for the best steaks the resulting 
feeding frenzy would make a room full of lumberjacks afraid of 
losing fingers and hands trying to grab a morsel."  I wouldn't 
be surprised to see this kind of action soon.  Also remember 
that traders are extremely scared of inflation after the CPI 
and PPI numbers on the 13th and 14th of this month which caused 
a market massacre.  This is the first major inflation news 
since then and you can smell the fear on Wall Street.  

So let's take the contrarian view and see if the bias lends 
itself towards upside or downside.  The chart below is the view 
of the Nasdaq for the past week.  Note the number of times it 
has bounced at 3600, disregarding Monday's gap down and retest 
of last week's low.  It is a positive sign to see the Nasdaq 
test the same support level over and over in a short period of 
time and not breakdown.  You could make an argument that 3600 
is the downside to a bad report tomorrow.  Now if you can concede 
that today's move back to the 10-dma was daytraders getting 
out in the final hour and no one buying ahead of the report, 
then we are still looking at 3800 as short-term resistance.  
That puts the upside potential greater than the downside for 
the short-term.  The other factor is that if we do rally on 
Thursday, that will likely give us our third close over the 
10-dma in three days and confidence will build.  Perhaps the 
steak grabbing will begin.


 

The Dow on the other hand, was less than inspiring.  It wanted 
to go lower all day long and did just that.  It finally bounced 
with ten minutes to go off support at 10,900.  Nothing special 
happening here, just more range-bound trading.  Wake me when 
the DJIA trades over 11,400 for more than 15 minutes.  Volume 
was light at 985 million while the Nasdaq turned in a subtle 
1.6 billion.  The S&P 500 finished down 16.15 to 1460.99.


 

AT&T's Wireless Group IPO, launching tomorrow, will be history in
the making.  Trading under the symbol AWE, this tracking stock
will be the largest IPO in U.S. history.  After the close on 
Wednesday, AWE was priced at $29.50, just about in the middle of
its anticipated range of $26-$32.  The hype and expectations for 
the tracking stock are immense as the issue is oversubscribed by 
a 2-1 ratio.  This IPO will be a hefty 360 mln shares, brought to
market by a 25 firm global underwriting team.  Lead underwriters
include Goldman Sachs, Merill Lynch, and Citigroup's Salomon Smith
Barney unit.  There are mixed feelings regarding the wireless 
tracking stock among analyst and investment professionals.  One 
reason is that the current market frailty has resulted in a less
attractive IPO market, with many scheduled IPOs of the past month
postponing until better market conditions.  The other reason is 
that tracking stocks typically do not act like company stocks and 
thus, may have less potential upside.  Yet, as one IPO analyst
said, "This is an institutional darling."  AT&T Wireless has 12 mln 
customer subscribers and an existing network covering almost 65% 
of the U.S. population.

In anticipation of its earnings report after the close, AMZN 
shares ran up $1.06 to $53.50.  The report was much in line with 
expectations as AMZN came in with narrower than expected losses
of $0.35 per share vs. $0.36.  Revenues, which has become the 
most scrutinized earnings component, were a strong $574 mln, 
about 10% better than the expectation of $521 mln.  AMZN managed
to attract an additional 3.1 mln new customers, on the higher 
end of analysts' predictions of 2-3 mln.  Analysts will further
dissect this number and the revenue per customer in order to 
determine repeat business and incremental costs.  An analyst at
Paine Webber said that at first glance, these numbers indicate
a flat to slight buying bias, yet maintained that the brokerage
house has a Neutral rating on the stock.  AMZN said that its 
losses have peaked this quarter and foresee a narrowing 
throughout the year.  Recently, investors and analysts have been
frustrated with the company's performance as it continues to 
spend liberally and remains in the red.  AMZN was trading lower
in after-hours at $52.

The AOL-TWX merger has heated up some opposition.  Today, consumer
and media groups asked the Federal Communications Commission(FCC) 
to block the proposed acquisition.  They argue that such a 
concentration of television and Internet content, along with 
distribution means, will severely limit consumer choices.  A
marriage of the two companies would join multimedia forces such
as CNN, TNT, Sports Illustrated, Warner Bros., EMI, and MovieFone
just to name a few.  Also, those groups opposed to the merger 
argued that AOL has engaged in "monopolistic behavior" with its
instant messaging market.  Oh, how we hate to hear those words, as
does AOL.  In response to these complaints, an AOL spokeswoman 
said that the merger would "deliver tremendous benefits to 
consumers, bringing people around the world more choice and more
convenience, and accelerate the roll out of broadband services."
AOL and TWX plans to complete the merger by the end of the year.
In trading, AOL was off $1.38 to $59.63 and TWX was down $1.44 to 
$88.50.

With so many uncertainties in this market, there is one sure 
bet.  Which is the ECI and GDP will be the market movers tomorrow.  
The ECI is expected to come in up 0.9-1.1%.  The GDP will likely 
run between 6.0-7.0%.  The GDP price deflator is expected at 
2.7%.  These are all big numbers and anything bigger will result 
in more fear on Wall Street.  Of course, anything under may 
result in a solid rally.  The only real fear I see right now is 
if the numbers are good for Wall Street and we gap higher only 
to bleed away the gains all day.  That would be disheartening 
to say the least.  In that case, look for another retest of the 
3300 level.  I am optimistic of a rally, but will be prepared 
for a disaster.  

When in doubt, get out.

Ryan Nelson
Asst. Editor



**********
STOCK NEWS 
**********

Theory and Reality
By: S.P. Brown

Anyone who has ever perused an economics textbook has, no 
doubt, been led to believe people are rational beings.  After 
all, most standard theories of economic behavior and financial 
analysis are based on rational thought, meaning people always 
act in their own best interest.  Famed Nobel Prize winning 
economist Milton Friedman has even gone so far as to state  
people weigh utility curves before making a decision.

Being relatively well-versed in economic theory, I have to 
admit to never weighing utility curves.  What's more, looking 
back at some of my recent trades, my decision making processes 
have been less than rational, which has me wondering if people 
- investors in particular - are indeed rational beings.  

Unfortunately, the evidence suggests that even the most 
rational investors are prone to fits of irrationality and 
illogical thought.  

One of the most common acts of irrationality is considering 
sunk costs in the investment decision-making process.  For 
example, it's not unusual for an investor to buy a stock and 
then have that stock drop in price below the investor's cost 
basis.  There may be nothing wrong with the company, except 
it's suffering from temporary market neglect.  On the other 
hand, some event may have occurred which has permanently 
changed its outlook for the negative.  If that's the case, the 
logical action would be to bail out.

Nevertheless, its not unusual for an investor to "average down" 
in an attempt to lower his cost basis to try and re-coup his 
investment, even though the stock isn't likely to rise based on 
the company's current outlook.  

This sunk cost concept ties in with people's natural aversion 
to accepting a loss.  As any good trader knows, losses should 
be cut and profits should be ridden.  However, this is the 
exact opposite of what many traders do because they are loathe 
to accept a loss.   

Additionally, many traders attempt to distinguish between 
"paper losses" and "realized losses," believing the former is 
more onerous than the latter.  Make no mistake, paper losses 
are every bit as real as realized losses.  Wealth is fungible, 
meaning a million dollar portfolio is a million dollar 
portfolio, regardless of it's all cash or all stock, or a
combination of any other assets.  

Decision framing can also hinder investor success.  For 
example, many investors believe that derivatives are always 
high-risk , but that's not always the case.  

For example, say an investor has a diversified portfolio of 
stocks valued at $500,000.  This same investor also has 
$100,000 in cash that he wants to use to lower the portfolio's 
risk.  He has two options:  He can either invest the $100,000 
in US Treasury notes, or he can short $100,000 worth of S&P 500 
Index futures contracts.

On the surface, it would appear the logical choice would be to 
purchase T-notes because on stand-alone basis they're the less 
risky instrument.  However, in this case, that would be the 
wrong choice.  Returns on T-notes are virtually uncorrelated 
with stock, meaning if stocks move up or down, T-notes 
generally remain neutral.  

However, returns on a short position of S&P 500 Index futures 
would be negatively correlated with a long position in stocks, 
meaning as the stocks move in one direction, the short position 
in the S&P 500 futures contracts would move the opposite 
direction, which would reduce the portfolio's overall risk more 
than the T-notes. 

Even within the world of derivatives, investors will often view 
the same trading strategy as possessing different levels of 
risks.  For example, many investors believe a strategy of 
writing covered calls against a portfolio is a fairly 
conservative strategy, while selling a naked put short is a 
risky strategy.  The fact is, the payoff diagrams of both 
strategies are the same.  

Overconfidence is another bane of successful investing.  
Studies show whenever a security analyst believes that the 
probability of a stock rising is 80 percent or more, he is 
correct only 50 percent of the time.  

Another reasoning mistake investors make is to equate good 
stocks with good companies.  It's probably not a stretch to say 
Cisco Systems has a brighter future that US Steel, but does 
fact alone make Cisco the better investment?  Not necessarily.

The capital asset pricing model (CAPM) proselytizes that all 
risk-adjusted returns should be equal, meaning the expected 
returns from investing in the shares of "good" companies should 
be lower than the expected returns on the shares of "bad" 
companies, and that's generally the case when examining 
different companies' earnings yields.  

So, if investors attempt to maximize some sort of excess 
return-to-risk ratio, the market prices of securities will 
adjust so that one investment is as good as any other from a 
return-to-risk perspective.  

Therefore, an investor who sought to maximize returns 
irrespective of risk would rationally seek out companies with 
dim prospects because, on average, their expected return would 
be higher.  But investors often do the opposite; they seek out 
the Ciscos of the world when the US Steels of the world are 
more likely to provide higher absolute returns.  

The herd instinct also poses a problem, particularly for the 
long-term investor.  Most everyone knows that in order to 
outperform the market, an investor must shun conventionality by 
making unconventional choices.  Even so, employing 
unconventional wisdom and shunning today's "hot" stock can 
cause an investor to look incredibly stupid in the short-run 
(Warren Buffett comes to mind).  

Nevertheless, most investors will opt for short-term euphoria 
(Cisco over US Steel when Cisco is trading at 150 times 
earnings), despite the statistical likelihood that a Cisco 
purchased at a high price will produce mediocre results in the 
long-run.  

Finally, be careful of spurious correlations.  For years, the 
performance of the US stock market correlated highly with 
whether or not the winner of the Super Bowl came from the old 
American Football League.  But this high "correlation" was 
spurious because the supposed relationship between the winner 
of the football game and the subsequent behavior of the stock 
market was statistical and not logical. 

I can't understate the importance of knowing and and 
understanding the difference between a legitimate "cause-and-
effect" relationship and statistical happenstance, particularly 
for technical traders who are looking at past trading patterns 
to determine future performance.     

Standard finance and economic theories assume people make 
rational, wealth-maximizing decisions.  In other words, people 
don't make cognitive errors.  In the real world, though, when 
the perception of reality come into conflict with reality 
itself, the perception usually wins.  



**************
TRADERS CORNER
**************

THE OEX SKYBOX: OptionInvestor's Best-Kept Secret
By: Austin Passamonte

E-mail messages have been streaming in over the past three days. 
Rest assured that I do read every single one.  Many have questions 
or comments on the OEX index and/or Skybox trading system, and 
we'll try to cover them in one fell swoop over the next few
discussions. 

Actually, I had my wife Wendy count the messages received that
mentioned the OEX and she totaled more than one hundred so far. 
I promised her if she did this for me we'd buy expensive jewelry 
with the profits of my next big trade, and she replied she 
couldn't wait until next year, maybe I should talk to Jim about 
a writer's raise instead.  See the kind of spousal support & 
respect I command in my own home office? 

Let's move right into discussion about the OEX and what I feel 
might be some ways to trade it.  Today will outline my 
interpretation of the Skybox system.  Tomorrow we'll detail the
specific methods and discipline guidelines required for trading 
it precisely.  Sunday is for discussing some actual scenarios, 
market behavior and experiences I've had trading the OEX that may
help you become better prepared.

First of all, let me STRONGLY emphasize that the OEX index and its
options are a fast-moving game, especially during these volatile 
times.  Big money is there to be made or lost on most given days. 
Seems much easier to lose than make money without following some 
sort of discipline and methodology guideline.  Buying calls or 
puts on gut feeling or market whim is the fastest track to broke 
I can think of.

For those who asked for the website that provides this trading 
method I'm pleased to say it's right here in OI!  In the upper 
left-hand column of the home page you will see an icon that says
"OEX Skybox".  Click on this to open up a simple but all-inclusive
environment for trading the index with success.  Let me encourage 
those who are interested in trading this market to study and 
explore the section in great detail; it has everything one needs 
to perform successfully.

Skybox is the product of Pinnacle Capital Advisors.  It is a 100% 
objective, mechanical system known as a trend following method.
The concept in a nutshell is to identify key points of support & 
resistance on a daily basis and test-enter the market only when 
these critical areas are reached.  It is truly market neutral and
without subjective bias, taking trades every time all of the 
parameters indicate to.  Tight protective stops after entering 
the market lets one exit quickly without great loss if the 
direction proves wrong.  There are other safeguards built in that 
help prevent a trader from being in the market when it isn't safe 
to trade as well.

With a futures trading background, I have examined quite a number 
of mechanical systems for volatile markets like pork bellies, 
soybeans, bonds, currencies and S&P 500.  I've never run 
profit/loss analysis on any of them that target a specific market 
that even begin to approach the historical performance of the 
Skybox.  Very impressive indeed. 

The only tough part about this trading model for many is the fact 
that it's 100% objective (mechanical) instead of subjective 
(emotional).  It's a well-known fact that most traders feel more 
in control of their trading and results when they make most 
decisions based on technical and/or fundamental news.  In reality, 
most traders and practically all new ones would be much better off
following a proven mechanical system in part or whole instead of 
calling their own shots.  The key word here is PROVEN, for there 
is no end of "get-rich" systems for sale out there that only 
drive wealth to a single person...the one selling it! 

Not only will most traders feel out of control following a 
mechanical system, they'll usually confirm these feelings while 
watching the model take a series of small losses.  This drives 
new traders crazy.  What commonly happens is that a newbie will 
test a system, take a small loss or two and abandon the model 
just before it hits a string of inevitable winners.  That can be
downright maddening! 

Good mechanical systems usually lose more trades than they win, 
but are of course profitable overall.  The Skybox history is no 
exception to this...on average it has six losses and four gains 
out of every ten trades taken.  I can almost feel you wince as you 
read that.  The good news is that the six losses average 3 points 
each while the winners average 9 points apiece.  Totaled up, you 
lose +/-18 points and gain +/-36 points for a NET GAIN of +/-18 
points on every ten trades by historical data's average.  Compound 
a systematic, 2/1 profit-loss ratio for a few months or years and 
see where you end up financially.

The Skybox method isn't the most exciting option trading one could
experience, either.  With a history of only two trades executed 
per week on average, that leaves too much idle time for 
undisciplined traders to have on their hands.  The urge to tinker 
and second-guess is powerful, let the voice of experience tell 
you.  If these are the worst possible factors involved with 
Skybox, what's the problem?  Think about subjective trading over 
the past few months during these tumultuous times where many 
traders' accounts have literally been chopped to pieces.  Do you 
feel they might prefer boring to gut-wrenching right now? 

Let me close this note with some fun & interesting homework.  Go 
into the OEX Skybox environment and click on "Scoreboard".  This 
will give you the actual history of profit/loss performance from 
every trade since January 2000.  Take a moment to add up the total
profits and subtract the total losses to see where a trader who
followed this system EXACTLY might be today.  Don't forget to 
include today's winning trade listed underneath the live chart's
applet, and keep an eye on the current play tomorrow.

The second request I'll make is for you to enter the "Game Plan"
section in the environment and write down tomorrow's benchmark
instructions from the list at the bottom.  We will use these to 
explain just what the objective plan should have been for 
tomorrow with the benefit of hindsight to examine what might 
have theoretically taken place if we did. 

Have fun with your brief assignment, and let's begin learning in
earnest tomorrow!

Trade the Right Direction 

Open positions: long OEX puts




**********************
PLAY OF THE DAY - CALL
**********************

MERQ - Mercury Interactive Corp. $80.25 +4.81 (+7.88)

Mercury Interactive Corp. is the leading provider of Web
performance management solutions that help e-businesses deliver
a positive user experience.  Mercury Interactive solutions enable
its customers to turn Web application performance, scalability
and user experience into competitive advantage. The company's
performance management products and hosted services are open and
integrated to best test and monitor business-critical Web
applications.  Mercury Interactive is headquartered in Sunnyvale,
California and has more than 40 offices worldwide.
 
Most Recent Write-Up

A top rebounding candidate?  Not Shaq, but MERQ.  Shaq may have
received his first scoring title in the NBA, but MERQ certainly 
exemplified a strong rebound.  We entered on April 16th at $58.75 
and saw just that.  And although trading has been volatile, up has 
been the general direction.  Last week, MERQ managed to hold its 
head above $70 but with yesterday's NASDAQ sell-off, MERQ gapped 
down and found intraday support at $63.  Yet it was today that 
MERQ reestablished itself firmly above the $70 level.  Even more
encouraging for this call play was the strong volume into the 
close, which was just off its highs.  Last Tuesday and Wednesday, 
the stock tested $80 and encountered resistance.  This is the 
next level to look toward on the upside.  On the downside, MERQ 
found support last Thursday at $70 and below that, look to $65.  
These would be timely entry points, depending on personal risk 
levels.  The NASDAQ has been the catalyst in this market, both up 
and down, so look to it for overall direction.

Comments

Today, MERQ essentially opened at its low and never looked back.
On a day that the overall markets grew weak as the day went on, 
MERQ did the opposite.  It worked hard throughout the day and 
managed to close up over resistance of $80.  Looking forward to
tomorrow, after the economic data is announced(ECI and GDP), the
markets will likely move strongly.  Watch for support at $75 if
MERQ doesn't hold $80.  This would be a good entry point if it 
holds.  Targetshoot in this uptrend based on personal risk levels.

BUY CALL MAY-75*RQB-EO OI=468 at $11.63 SL= 9.25
BUY CALL MAY-80 RQB-EP OI=455 at $ 9.25 SL= 6.75
BUY CALL MAY-85 RQB-EQ OI=134 at $ 7.25 SL= 5.50
BUY CALL JUL-75 RQB-GO OI= 33 at $18.50 SL=14.50

SELL PUT MAY-65 RQB-QM OI= 62 at $ 2.63 SL= 3.50
(See risks of selling puts in play legend)

Picked on Apr 16th at    $58.75    PE = 165
Change since picked      +21.50    52 week high=$134.50
Analysts Ratings     10-3-1-0-0    52 week low =$ 11.38
Last earnings 04/00   est= 0.11    actual= 0.10 
Next earnings 07-13   est= 0.12    versus= 0.09
Average daily volume = 1.53 mln
/charts/charts.asp?symbol=MERQ



***************
ASK THE ANALYST
***************

Looking for Answers
By: Eric Utley

Questions loom ahead of Father Greenspan's sermon.  Traders
await the release of two key economic indicators, the ECI and
GDP, along with guidance from Mr. Greenspan.  The closely watched
ECI (employment cost index) is the broadest measure of wage
inflation.  Greenspan is worried the tight labor conditions are
putting upward pressure on wages.  The market is expecting the
Fed to continue to raise interest rates and a strong ECI would
only confirm those fears.  However, analysts suggest that an ECI
less than 0.9% may prompt the Fed to ease its tightening ways and
send the market into rally mode.  Estimates for the GDP growth
range from 6% to over 7%.  Needless to say, traders remained
cautious Wednesday ahead of the economic data.  It was just two
weeks ago when traders got an inflation scare from a higher than
expected CPI number.  That surprise produced a market malaise.

So what is a trader to do?  The famed and sometimes fictional
trader Jesse Livermore succinctly said, "There are times when one
should trade, and just as surely there are times when one should
not trade."  Noting Wednesday's tepid trading, the professional
traders and money managers chose the latter, do nothing.  One of
the most costly mistakes traders commonly make is forcing a
trade.  Sometimes the best thing to do is just sit and watch.  I
agree with Jim in that we will see a narrow trading range until
the FOMC meeting in May and then rally into the summer earnings
season barring any major catastrophe.  Until then, we can expect
more volatility.  If you can't wait for the market to establish a
discernible trend, you might try to take advantage of the
volatility and target shoot from day to day.  But proceed with
caution, set your stops, and know your risk levels.  Probably
the best strategy right now is to be patient, let the market
digest the inflation fears, and wait for a new bull to emerge.

I really appreciate the positive feedback from all of you after
my inaugural Ask the Analyst column.  I received a lot of
requests and I will try to do as many as time permits.  Send
your requests  to Contact Support.  Please put
the symbol in the subject line of the e-mail.

----------------------------

Exodus - EXDS

I am looking to sell volatility in this market (naked puts).
Please analyze EXDS and feel free to mention any other likely
candidates.  I look forward to your columns.  Many thanks.
- Cheri

Well Cheri, you probably know what happened to EXDS Monday after
the company announced stellar earnings but warned analysts that
sales would slow in the coming year.  Investors are less
concerned with the past and more focused on the future prospects.
The problem here is that investors had factored in 40% sequential
growth into the stock price.  The first sign of slowing growth is
bad news for a company like EXDS.

Traders have been particularly harsh on the infrastructure stocks
as of late.  You'll see on the chart below that EXDS gapped down
Monday morning and continued to slide in the following days.
Also of note, the volume has been heavy during the recent
selling, indicating that institutions have been liquidating.  You
mentioned you're looking to sell volatility.  CBOE has EXDS
historical volatility at 101, as of close on Wednesday, the MAY
70 put had implied volatility of 134.  You're right about the
high volatility, but remember, high volatility means high risk.

The stock is in a downward trend with support at $75, if EXDS
falls through support it could get real ugly.  If support fails,
the stock could retest its lows from last fall, all the way down
to $50.


 

----------------------------

General Electric - GE

Hi, please do the needful with GSTRF, CEFT, ERICY, GE, and NITE.
Thanks. - Kevin Ruberu

I thought it would be appropriate to take a look at GE since we
added it as a call play on Tuesday.  Since GE is so diversified
in its operations, the company is considered a barometer of the
US stock market.  We added GE because of the classic breakout 
on Tuesday and its upcoming stock split.  The stock showed
incredible strength Monday while the rest of the market
struggled.

The momentum from Monday and Tuesday carried GE to an all-time
high of $167.94 on Wednesday, but the stock fell to broad market
weakness later in the day.  The only thing that really concerns
me with the chart is the lack of volume during the recent rally.
A breakout on above average volume usually provides a clearer
sign of future prices.  The lack of conviction waves a caution
flag, but we have to consider the light trading in the broader
market recently.  If we get some decent numbers from the ECI and
GDP Thursday, GE could plow higher.  The stock could continue its
run in the next week fueled by the upcoming split on May 5th.
GE is an interest rate sensitive company, so if we get
detrimental numbers Thursday GE might suffer.  A breakdown below
support at $160 would most likely signal an end to its recent
trend.


 


----------------------------

Dell Computer - DELL

I have two OTM MAY 60 call options on Dell Computer, what is your
short-term outlook for DELL?  Thanks. - Ron Reimer

DELL has been relatively quiet lately in light of the NASDAQ
meltdown.  The composite index is down more than 30% since March
10th while DELL has lost about 17%.  Most tech stocks have been
slaughtered but DELL has held up relatively well.  Money managers
and individual investors alike have turned to the leading tech
names keeping stocks like DELL afloat.  Earlier in the year, DELL
was hurt by slow sales in Europe and a slowdown of corporate
spending in the US because of Y2K.  The PC business may be
picking up again noting the positive news coming from CPQ
Tuesday.  Another catalyst for DELL is the release of Windows
2000, which is expected to spur computer sales.

DELL will have to break through several formidable resistance
areas before your MAY 60 calls will be in the money.  You can
see on the chart that DELL is currently trading just below
resistance at $52.  The stock has even heavier resistance at $56.
Earnings may be the spark that lights the flame for DELL if it
is going to move higher.  The company is expected to report in
the coming weeks.  An earnings run combined with optimism
surrounding Windows 2000 could take out the various resistance
levels.  You can also see at the bottom of the chart that volume
has substantially declined during DELL's recent retreat.  That's
a good sign, signaling that sellers have disappeared and the
stock has built a strong base.  In all cases, remember we are 
not here to advise you on entry and exit points.  You are 
playing a front month option that is considerably out-of-the-
money and requires your undivided attention in this market.


 

----------------------------

DISCLAIMER:
This column is an information service only.  The information 
provided herein is not to be construed as an offer to buy or 
sell securities of any kind.  The Ask the Analyst picks are not 
to be considered a recommendation of any stock or option but an 
information resource to aid the investor in making an informed 
decision regarding trading in options.  It is possible at this 
or some subsequent date, the editor and staff of The Option 
Investor Newsletter may own, buy or sell securities presented.  
All investors should consult a qualified professional before 
trading in any security.  The information provided has been 
obtained from sources deemed reliable, but is not guaranteed 
as to its accuracy.



*****************************************
BIG CAP COVERED CALLS & NAKED PUT SECTION
*****************************************

Inflation concerns plagued the market today...

A bullish commerce department report revived fears the Federal
Reserve will continue to raise interest rates.  The latest sign
of economic growth; an increase in orders for durable goods,
brought the recent rally to a screeching halt.  With uncertainty
rising to extreme levels, many investors retired to the sidelines
to await Thursday's release of the first-quarter gross domestic
product figures.  Corporate earnings reports continued to generate
volatility in the major groups and technology companies held up
better than their blue-chip counterparts.  Our portfolio fared
relatively well considering its broad market base and with the
current range-bound outlook, our focus will be on conservative,
high probability positions.  

Summary of Previous Picks:

Covered Calls: (Margin would double the listed Monthly Return)

Stock  Strike Strike Cost   Current Profit  Monthly
Symbol Month  Price  Basis  Price   (Loss)  Return

CY      MAY    45    42.06   50.00   $2.94   7.1%
SEPR    MAY    75    70.75   88.25   $4.25   6.1%
AMD     MAY    60    55.25   82.25   $4.75   5.9%
PVN     MAY    85    80.38   91.13   $4.63   4.7%
BRKS    MAY    70    66.88   81.75   $3.12   4.7%
AHP     MAY    55    52.75   56.63   $2.25   4.3%
CSCO    MAY    68    62.88   66.75   $3.87   4.3%
INSUA   MAY    35    32.19   33.56   $1.37   3.5% Consolidating
CGNX    MAY    55    51.34   51.25  -$0.09   0.0% No Lower!
IMNX    MAY    50    46.56   36.63  -$9.93   0.0% Closing


Naked Puts:

Stock  Strike Strike Cost   Current Profit  Monthly
Symbol Month  Price  Basis  Price   (Loss)  Return

CY      MAY    40    38.56   50.00   $1.44  12.6%
SEPR    MAY    65    63.25   88.25   $1.75   8.8%
INSUA   MAY    30    29.06   33.56   $0.94   8.7%
BRKS    MAY    60    58.94   81.75   $1.06   5.9%
AHP     MAY    50    49.12   56.63   $0.88   5.8%
PVN     MAY    70    68.75   91.13   $1.25   5.2% 
CGNX    MAY    45    44.25   51.25   $0.75   4.8% Watch Closely!


Naked Calls:

Stock  Strike Strike Cost   Current Profit  Monthly
Symbol Month  Price  Basis  Price   (Loss)  Return

CMTN    MAY   115   117.19   83.50   $2.19  12.4%
ITWO    MAY   185   187.25  114.50   $2.25   9.5%
CHKP    MAY   270   273.25  171.00   $3.25   9.3%


New Candidates:

This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your skill level, risk-reward tolerance and
portfolio outlook.  In addition, we recommend that you avoid any
strategy or technique in which you are not completely comfortable
with the potential loss, the necessary adjustments and the common
entry-exit strategies.


***************
BULLISH PLAYS - Covered Calls & Naked Puts
***************


NVLS - Novellus  $59.69  *** On The Rebound! ***

Novellus Systems manufactures, markets, and services advanced
automated wafer fabrication systems for the deposition of thin
films within the semiconductor equipment market.  Novellus is a
supplier of high productivity deposition systems used in the
fabrication of integrated circuits.  These unique systems include
Chemical Vapor Deposition, Physical Vapor Deposition, and a
technique called Electro-fill.  CVD systems employ a chemical
plasma to deposit all of the dielectric (insulating) layers and
certain of the conductive metal layers on the surface of a
semiconductor wafer.  PVD systems are used to deposit conductive
metal layers by sputtering metallic atoms from the surface of a
target source via high DC power.  Electro-fill systems are used
for depositing copper conductive layers in a dual damascene
design architecture using an aqueous solution.

Novellus has been on the rebound since it recently beat analysts'
estimates in its first quarter earnings report.  The semiconductor
equipment-maker reported net income of $57 million, or $0.45 per
share.  First Call's survey of 22 analysts predicted a profit of
$0.39 per share for the quarter.  Revenue rose to $274.1 million,
a 43% gain sequentially and a 138% improvement year-over-year.
In addition, revenue grew strongly in all geographic markets.  The
company's record bookings, revenues, and net income are the result
of accelerated capital spending by their customers for expanded
capacity and advanced technology.  Fortunately, the growth trend
is expected to continue.

The company is currently participating in an offering of over 8
million shares of its common stock at $59.62 per share.  The
offering is being made by Banc of America Securities and the
proceeds, expected to total about $488 million, will be used for
general corporate purposes.  This should provide support for the
issue near our cost basis.

NVLS - Novellus  $59.69 

Action    Month &  Option  Open     Closing  Cost     Monthly
Req'd     Strike   Symbol  Interest Price    Basis    Return

Sell Call MAY 50   NLZ EJ  605      11.63    48.06     5.3% ***
Sell Call MAY 55   NLZ EK  1707      8.50    51.19     9.8%

Sell Put  MAY 45   NLQ QI  368       0.94    44.06     9.7% ***
Sell Put  MAY 50   NLZ QJ  2793      1.94    48.06    15.9%
Sell Put  MAY 55   NLZ QK  1478      3.63    51.37    21.0%

Chart =
 /charts/charts.asp?symbol=NVLS

*****

PLXS - Plexus  $75.56  *** New All-Time High! ***

Plexus provides product realization services to original equipment
manufacturers in the medical, computer (mainframes, servers and
peripherals), industrial, networking, telecommunications and
transportation electronics industries.  Plexus offers product
development and design, material procurement and management,
prototyping, manufacturing and assembly, and functional and
in-circuit testing.  Plexus provides these services primarily
through its Plexus Technology Group, SeaMED Corporation, and
Plexus Electronic Assembly Corporation subsidiaries.

Plexus is another issue that is rallying through the current
sell-off and as you might expect, the fundamental reason is solid
earnings.  The company recently reported record net income of $9.4
million, or $0.49 per share, for the second quarter of fiscal 2000.
Net income and EPS were up 49% and 44% respectively, over the same
period last year.  Second quarter net sales increased 35% to a
record $162 million, up from $119 million in the prior-year period.
Gross profit increased 37% percent to $23 million and the return on
average equity for the second quarter was 23%, compared to 19% in
the year-ago quarter.  Overall, the company accelerated growth in
both revenues and earnings and the outlook for the future is very
favorable.

New upgrades by Prudential and A.G Edwards helped the issue reach
a new all-time high this week and with the strength in the trend,
we believe there is an excellent opportunity for future upside
potential.

PLXS - Plexus  $75.56 

Action    Month &  Option  Open     Closing  Cost     Monthly
Req'd     Strike   Symbol  Interest Price    Basis    Return

Sell Call MAY 65   QUA EM  54       13.00    62.56     5.2% ***

Sell Put  MAY 60   QUA QL  20        1.25    58.75    10.1% ***
Sell Put  MAY 65   QUA QM  0         2.13    62.87    12.9%

Chart =
 /charts/charts.asp?symbol=PLXS

*****

TER - Teradyne  $102.19  *** New Trading Range? ***

Teradyne is a leading manufacturer of automatic test equipment
and related software for the electronics and communications
industries.  Their unique products include systems to test
semiconductors, circuit boards, telephone lines and networks,
and software.  The company also is a leading manufacturer of
backplanes and associated connectors used in electronic systems.

Teradyne rallied this week with a $12 move on Tuesday to a new
closing high near $103.  The bullish trend has enjoyed support
from the short-term recovery in the technology index, solid
semiconductor industry performance, earnings that beat analysts
expectations, and some optimistic comments from several experts
in the chip sector.  In fact, most brokerages that follow the
issue consider Teradyne to be the leading growth opportunity in
the group.

Our technical opinion is also bullish but we favor a conservative
approach to profit with a cost basis near the recent bottom of
the trading range.

TER - Teradyne  $102.19 

Action    Month &  Option  Open     Closing  Cost     Monthly
Req'd     Strike   Symbol  Interest Price    Basis    Return

Sell Call MAY 85   TER EQ  77       20.63    81.56     5.6% ***
Sell Call MAY 90   TER ER  754      17.25    84.94     7.9%

Sell Put  MAY 75   TER QO  152       1.50    73.50     9.0% ***
Sell Put  MAY 80   TER QP  126       2.31    77.69    13.4%
Sell Put  MAY 85   TER QQ  112       3.75    81.25    18.1%
Sell Put  MAY 90   TER QR  128       5.50    84.50    21.3%

Chart =
 /charts/charts.asp?symbol=TER

*****

TQNT - Triquint Semiconductor  $93.53  *** On The Move! ***

TriQuint Semiconductor designs, develops, manufactures, and
markets a broad range of high performance analog and mixed
signal integrated circuits for communications markets.  Their
integrated circuits are incorporated into many communications
products, including cellular phones and pagers, fiber optic
telecommunications equipment, satellite communications systems,
high performance data networking products and various aerospace
applications.  Triquint uses its proprietary gallium arsenide
technology to enable products to overcome the performance
barriers of silicon devices in a variety of applications.

Earnings and revenues are driving the market these days and last
week TriQuint Semiconductor reported record financial results for
the first quarter of the year 2000.  Revenues increased 76% to
$59.3 million while net income rose 237% to $10.8 million.  Net
revenues for the first quarter of fiscal 2000 increased 20% over
the $49.4 million reported in the previous quarter and operating
income increased 42% to $13.4 million over the $9.4 reported the
previous quarter.  Company officials were elated with the results
and the CEO commented that record bookings, revenues, operating
income, and net income all reflected Triquint's strength in their
target markets.

It appears that investors agree with the results and the bullish
outlook for the issue as the share value has rebounded sharply
in the past few days.  With the semiconductor sector expected to
outperform the broad market, this should be a favorable issue for
any long-term portfolio.

TQNT - Triquint Semiconductor  $93.53 

Action    Month &  Option  Open     Closing  Cost     Monthly
Req'd     Strike   Symbol  Interest Price    Basis    Return

Sell Call MAY 80   TNN EP  313      16.88    76.65     5.8% ***
Sell Call MAY 82.5 TNN EX  28       15.25    78.28     7.1%

Sell Put  MAY 70   TQN QN  81        1.13    68.87     7.5% ***
Sell Put  MAY 72.5 TQN QV  20        1.50    71.00     9.8%
Sell Put  MAY 75   TQN QO  219       2.00    73.00    12.7%
Sell Put  MAY 77.5 TNN QW  31        2.56    74.94    14.1%
Sell Put  MAY 80   TNN QP  83        3.25    76.75    15.8%

Chart =
 /charts/charts.asp?symbol=TQNT


***************
BEARISH PLAYS - Covered Puts & Naked Calls
***************


AAPL - Apple Computer  $121.31  *** A Great Run At An End? ***

Apple designs, manufactures and markets personal computers and
related personal computing and communicating solutions for sale
primarily to education, creative, consumer and business customers.
The majority of the company's net sales are derived from the sale
of personal computers from its Apple Macintosh line of computers
and related software and peripherals.  Their subsidiary FileMaker
makes database software.  The company manages its business on a
geographic basis.  Geographic segments include the Americas,
Europe, Japan and Asia Pacific.  Each operating segment provides
similar hardware and software products and similar services.

Apple Computer has enjoyed a great run since last summer but the
end may have finally arrived.  As expected, the issue enjoyed a
brief earnings rally but the recent technical failure indicates
there is a potential change of character underway.  In today's
trading, AAPL fell $7 and with slower-than-expected personal
computer sales forecast, the issue has little incentive to move
higher.  There is of course the split in late June but until that
rally begins, we don't foresee a substantial upside move in the
issue.

AAPL - Apple Computer  $121.31 

Action    Month &  Option  Open     Closing  Cost     Monthly
Req'd     Strike   Symbol  Interest Price    Basis    Return

Sell Call MAY 135  QAA EG  1527      3.38   131.62     8.8%
Sell Call MAY 140  QAA EH  2572      2.25   137.75     7.0%
Sell Call MAY 145  QAA EI  379       1.56   143.44     5.9% ***
Sell Call MAY 150  QAA EJ  494       1.00   149.00     4.0%

Chart =
 /charts/charts.asp?symbol=AAPL

*****

AMAT - Applied Materials  $90.44  *** Much Work To Do! ***

Applied Materials is the world's largest semiconductor equipment
company.  AMAT develops, manufactures, markets and services
semiconductor wafer fabrication equipment and related spare parts
for the worldwide semiconductor industry.  Customers for these
products include semiconductor wafer manufacturers and
semiconductor integrated circuit (IC or chip) manufacturers that
either use the ICs they manufacture in their own products or sell
them to other companies.  These ICs are the key components in most
advanced electronic products such as computers, telecommunications
devices, automotive engine management systems and electronic games.

Applied Materials has been one of the leading stocks in the chip
industry over the past few months but recently the bullish trend
has begun to lose momentum.  Technically this issue has performed
fairly well given the overall performance of the technology group
but it appears a short-term trading top is firmly established and
a brief consolidation is the likely outcome.  Looking forward, the
issue is expected to continue sideways for a few weeks and there
is relatively little chance the stock will test our sold positions.

AMAT - Applied Materials  $90.44 

Action    Month &  Option  Open     Closing  Cost     Monthly
Req'd     Strike   Symbol  Interest Price    Basis    Return

Sell Call MAY 115  ANC EC  1465      2.06   112.94    10.2%
Sell Call MAY 120  ANC ED  4102      1.56   118.44     7.9%
Sell Call MAY 125  ANC EE  1425      1.13   123.87     5.9% ***

Chart =
 /charts/charts.asp?symbol=AMAT

*****

NEWP - Newport Corporation  $107.00  *** Finding A New Range! ***

Newport Corporation, together with its consolidated subsidiaries,
is a global supplier of high precision components, instruments,
micro-positioning and measurement products and systems to the
fiber optic communications, computer peripherals, semiconductor
equipment and scientific research markets.  The company designs,
manufactures and markets components and systems that enhance
productivity and capabilities of automated assembly and test
and measurement for high precision manufacturing and engineering
applications.  Newport also provides sophisticated equipment to
commercial, academic and governmental research institutions
worldwide.  The company operates in three business segments, two
comprising domestic operations, Components and Subassemblies,
and Instruments and Systems.  The third business segment is
comprised of the Company's Europe operations.

In early April, Newport reported that first-quarter profits more
than tripled, easily beating analyst's expectations, as sales to
the optical communications and semiconductor equipment markets
soared.  The company's sales rose 55% on strength in the fiber
optic and chip sectors.  Looking ahead, Newport said it expects
revenue in the second quarter to rise sequentially based on its
current backlog and anticipated sales in their target markets.
Total expenses, however, are expected to rise in coming quarters
because of sales commissions and incentives, higher personnel
costs and increased research and development spending.

Overall, Newport is a great company and we like the chart in the
long-term.  However, the probability of the share value reaching
our sold strikes appears rather low and we will use the inflated
option premiums to benefit from this outlook.

NEWP - Newport Corporation  $107.00 

Action    Month &  Option  Open     Closing  Cost     Monthly
Req'd     Strike   Symbol  Interest Price    Basis    Return

Sell Call MAY 150  NZZ EJ  12        2.00   148.00     8.5%
Sell Call MAY 155  NZZ EK  1         1.56   153.44     6.8%
Sell Call MAY 160  NZZ EL  8         1.25   158.75     5.5% ***
Sell Call MAY 165  NZZ EM  0         1.00   164.00     4.5%

Chart =
 /charts/charts.asp?symbol=NEWP



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This newsletter is a publication dedicated to the education 
of options traders. The newsletter is an information service 
only. The information provided herein is not to be construed 
as an offer to buy or sell securities of any kind. The 
newsletter picks are not to be considered a recommendation 
of any stock or option but an information resource to aid the
investor in making an informed decision regarding trading in 
options. It is possible at this or some subsequent date, the 
editor and staff of The Option Investor Newsletter may own, 
buy or sell securities presented. All investors should consult 
a qualified professional before trading in any security. The 
information provided has been obtained from sources deemed 
reliable but is not guaranteed as to accuracy or completeness.
The newsletter staff makes every effort to provide timely 
information to its subscribers but cannot guarantee specific 
delivery times due to factors beyond our control.

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