Option Investor

Daily Newsletter, Monday, 10/23/2000

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The Option Investor Newsletter                   Monday 10-23-2000
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MARKET WRAP  (view in courier font for table alignment)
        10-23-2000        High      Low     Volume Advance/Decline
DJIA    10271.70 + 45.10 10361.30 10216.20 1.03 bln   1279/1578
NASDAQ   3468.69 - 14.45  3523.69  3432.44 1.69 bln   2080/1874
S&P 100   734.35 -  3.81   741.17   729.68   totals   3359/3452
S&P 500  1395.78 -  1.15  1406.96  1387.75           49.3%/50.7%
RUS 2000  489.96 +  2.51   490.50   487.45
DJ TRANS 2436.86 - 32.21  2471.31  2436.86
VIX        26.98 -  0.44    28.07    26.59
Put/Call Ratio      0.48

Earnings And Merger News Boost Dow For Third Straight Day

While the NASDAQ took baby steps back.  After last week's massive
rebound in the NASDAQ, the tech-heavy index may have been due for
a breather today.  The lack of conviction today, in the form of
price or volume, left many market watchers debating if last
week's rebound was truly a bottom, or just another bounce.
Aside from a handful of earnings reports and merger news, many
traders called today's trading down right dull.  Nonetheless, the
INDU's third consecutive day of higher prices and the rebound
from day lows on the NASDAQ was encouraging to witness.

The 1.66 billion shares traded on the NASDAQ today might suggest
the modest pullback was no more than a natural reaction to last
week's big rally.  What's more, advancing issues outpaced
declining issues by a slight margin.  Although the NASDAQ's
internals remained relatively strong, the big cap leaders of the
COMPX fell especially hard after last week's rally.  MSFT and
CSCO both weighed heavily on the COMPX, with the latter's
weakness resulting from a bearish report issued by Barron's over
the weekend.  Other notable losers on the NASDAQ included ORCL
-$1.19, DELL -$0.94, NTAP -$8.25, VRTS -$9.44, and JNPR -$7.13.

The COMPX fell as low as 3432 before dip buyers stepped in during
the final hour of trading, whereupon the index staged an
impressive rally into the close.  The COMPX has attempted to
close above the 3500 level twice in as many days of trading.  The
COMPX's failure to close above 3500 has caused some concern among
market technicians.  The 3500 level should prove to be a
battleground for the bulls and bears tomorrow as each camp tries
to gain control.

The big news of the day involved several Dow components.  The
Honeywell (HON) story, which Jim mentioned in Sunday's wrap,
unfolded this morning, which culminated in General Electric (GE)
agreeing to acquire the diversified tech concern for $45 billion.
Jack Welch, GE's CEO, and possibly the most highly regarded
executive in corporate America, said he would delay his highly
publicized retirement to see the deal through.  Welch was
expected to end his 20 year role as CEO of GE in April.  If the
proposed merger is approved by government regulators, the
combined entity would create one of the world's biggest
industrial manufacturing companies.  HON will better position GE
to capitalize on the aircraft and aerospace markets, and help
with contract negotiations with major aircraft manufacturers.
As such, analysts are bullish on the deal, especially given the
10 cent boost to GE's EPS in the first year of operations.
The merger announcement caused GE to fall well below its 200-dma
- a rare event in and of itself.  Several analysts defended GE's
drop by suggesting the stock is undervalued by as much as $10
relative to its current level.  The last time GE traded below
its 200-dma for a sustained period of time was during the lows
of October 1998.  GE's -$2.50 drop weighed on both the Dow and
S&P, while HON's +$3.94 gain buoyed the INDU.

GE's acquisition of HON sparked a significant rally in the
latter's sector.  Rockwell (ROK) rose +$5.06, Raytheon (RTN.B)
gained +$2.00, and Litton Industries (LIT) added +$2.25.

The above mentioned merger news, combined with several bullish
earnings reports, helped the INDU rally for the third straight
day.  The blue chip index charged higher after the opening bell
this morning, but faded into the close of trading as investors
took profits in recent tech winners.  Notable losers on the INDU
included the aforementioned GE -$2.50, MSFT -$3.31, UTX -$1.50,
and IBM -$1.88, which flirted with its 52-week low today.  Big
winners on the INDU included, of course, HON +$3.94, HWP +$2.38,
MRK +$2.88, MMM +$2.56, and SBC +$3.38.

The INDU's fall below 10,000 last week proved to be a bear trap,
at least for the time being.  The INDU's early morning rally
took the index up to the 10,361 level before profit takers
impeded its advance.  If the INDU's end-of-day retreat turns
into selling tomorrow, the index could very well re-test the
10,200 level.  On the other hand, if the buyers show up early
tomorrow, watch for the INDU to retest its day high, thereafter
the 10,400 level will be the next area of resistance.

The positive profit reports scattered across several sectors,
which inspired buying in select areas of the market today, helped
the INDU hold onto much of its gains.  One such report was
delivered by Minnesota Mining and Manufacturing (MMM).
Shareholders to the manufacturing giant breathed a profitable
sigh of relief after the company reported third-quarter results
that edged past Wall Street consensus estimates by one penny.
Many on Wall Street had speculated MMM would miss estimates due to
the weak euro, which had afflicted many other multinational
concerns during the third-quarter.  Shares of MMM gained a
respectable +2.56 on the day.

Optical giant, Corning (GLW), reported third-quarter profits of
35 cents per share - a penny ahead of estimates.  The company
recorded $317 million in income, which more than doubled from
the same time last year.  During its conference call, GLW
officials guided analysts to 25% earnings growth for 2001.
Despite the blowout numbers and upbeat guidance, GLW slid
-$4.56 after running up +$10.75 last Friday.  The buy the news
and sell the rumor-effect pressured the optical-related
issues with CIENA (CIEN) falling -$7.38 and JDS Uniphase (JDSU)
shedding -$1.19.

Financial sector heavyweight, American Express (AXP), reported
third-quarter numbers that met analyst expectations.  The
company's earnings rose 15% from the year-ago period, in part
from strong consumer spending with its Amex charge cards.
AXP slid -$1.69, in what was a generally weak financial sector.

Not all the earnings news was positive today.  After lowering
earnings estimates, again, officials from Lucent Technologies
(LU) said this morning acting CEO, Rich McGinn, had been
replaced by former chief, Henry Schact.  Before announcing the
CEO change, the company trimmed revenue estimates by 7% for its
fiscal first-quarter.  LU watchers began speculating about the
removal of McGinn after the company lowered earnings estimates
last month; its third warning in less than a year, before today's
announcement.  The company's decision to remove McGinn came with
little surprise and actually gave the stock a nice boost in early
trading.  But the sellers quickly took advantage of the early
morning strength to unload stock.  LU finished down -$0.56 in the
regular trading session.  The company was expected to announce
fiscal fourth-quarter results tomorrow, but moved its earnings
announcement to this afternoon.  Lucent met its much reduced
estimates and edged higher in after hours trading.

National Semiconductor (NSM) warned of lower-than-expected
earnings during its next two quarters.  The company said sales
of its chips used in cell phones would fall between 6 to 8
percent.  The company blamed its shortfall on irregularities
in orders from its cell phone-related customers and also on
a slowness in the PC area.  Shares of NSM fell nearly $13, or
35%, in after hours trading.  The semiconductor sector held
up quite well today as measured by the 3.23% gain on the Philly
Semi Index ($SOX) today.  However, the semis recent strength
may come under pressure if the market receives NSM's warning
with bearish tendencies.

Tomorrow's earnings calendar is filled with a diverse group of
companies, who are likely to set the tone for the day.  Wall
Street will be listening closely to the reports from the energy
sector in light of the high price of crude oil.  Several
integrated oil concerns are expected to report, including Chevron
(CHV), Exxon Mobil (XOM), and Texaco (TX).  Oil service
heavyweight Haliburton (HAL) is also expected to release third-
quarter results.

In tech-related issues, Nortel (NT), Qwest (Q), LSI Logic (LSI),
and Amazon.com (AMZN) are all expected to report profits.  And,
in the drug sector, Schering-Plough (SGP) and Pfizer (PFE) will
be worth watching, especially after the positive report from Merck
(MRK) last Friday.  Aided by its upbeat earnings guidance late last
week and an upgrade from Salomon Smith Barney today, MRK gained
an impressive +$7.19 over the last two trading days.

Beyond tomorrow's earnings reports, the market will be anticipating
two key economic reports scheduled for release later in the week.
The Labor Department will report the third-quarter Employment Cost
Index (ECI) on Thursday.  And on Friday, the market will get its
first look at third-quarter gross domestic product (GDP).  Both
numbers could prove to be market moving as the Federal Reserve is
sure to be watching for a slowing economy, and lessening threats
of inflation.  The consensus estimate for the ECI is right at 1%,
and the GDP estimates range from 3.1% to about 3.4%.

Before the economic numbers later this week, traders will continue
to monitor third-quarter earnings reports for signs of slowing
corporate profits.  Volatility will be the name of the game as
traders sort through the remaining earnings reports.  The
volatility should continue to provide opportunities, but will
require trading with your head and not emotions.

Good trading!  See you at the seminar this weekend!

Eric Utley
Assistant Editor


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The Bid/Ask Spread
By Austin Passamonte

I thought trading options was the closest thing to free money a
person would ever find. How hard can it be? Just pick a market
heading up or down, buy calls or puts and place our protective
stops. Most of the time the market moves strong in our favor and
we profit wildly, right?

Isn't that what the books & flyers you've read about the subject
repeatedly affirm? I've got shelves & shelves full of expensive
titles and cheap promotional trash that all state the same if
you're running a little shy on such assurance in your library.

Moving over from the commodities field, I was sure this would be
a most welcome escape of bad fills away from my market entries,
slippage on each end of execution and stop-loss orders falling
prey to devious floor traders probing dull markets. All those
aforementioned books forgot to talk about reality in the

Imagine my surprise to find options were actually traded on a
bid/ask system. No matter - we'd simply buy the things right, set
our stops and rake in profits just like the books tell us to.

Sometimes that really works, especially during fast markets on
high volume when we actually guess the right direction. Too often
there is much more to the game than that as all of us have or
soon will learn for ourselves.

We really have two choices when it comes to using stops; forgo
the use and enjoy a very abbreviated career or learn to use them
best and suffer a few shortcomings. Personally, I plan on me & my
trading capital living a long & prosperous life together so
trading without stops isn't a possibility. I tried that numerous
times all ending with disastrous results before long.

The common theory is we buy at the "ask" price and sell at the
"bid" price when trading options, and give up the spread to hard
working market makers and their impoverished families living in
the Hamptons. That is true much of the time, but we do have some
other choices as well.

Bid-ask spreads vary widely among markets. Quiet, slow-moving
issues with good volume have relatively tight spreads while
volatile markets and/or those with thin volume can have gaps
between them bigger than our maximum risk amount per contract.
What's a trader to do?

First we need to pick the market that suits our portfolio; the
reverse does not work. A $5,000 account should not trade the
SOX.X index with it's five-point bid/ask spreads. Try the QQQs

Many of the hot stocks and bigger indexes like the SPX have two-
point bid/ask spreads or wider. Does that mean we must go in the
hole this deep each time we enter? Depends on how bad you want in
and how fast your markets are moving.

Let's say you are bullish on the SPX and want to play an OTM call
option trading at 14 bid/16 ask. This is the most common scenario
here. If you enter an order for 20 current-month index options or
10 current-month equity options (last time I checked) at the
current ask price or higher you should be filled instantly
through the electronic exchange.

Nice little perk to protect us small guys from getting pushed by
the big sharks in the sea. Most of the time (depending on the
speed of the broker you're using) you will get filled right near
or at the prevailing price on your screen.

The reality exists that fast markets and erratic price movement
can have your order jumped quite some distance from where you
expected. I've seen the SPX, OEX and numerous volatile stock
options gap up or down three and four points from one trade
cleared to the next. I promise you there were some surprised
traders who clicked a small market order in at 16 for those SPX
contracts at the worst possible moment only to see their fill at
20 or higher!

We have choices. Enter a "buy-limit" order at or below the ask
and have it fill most of the time while missing a few moving
markets is one. Use market orders and live with the occasional
gap-move against that eats up a vast majority of your intended
profit or much worse. One or the other.

I've done both and have regretted each. Here's the way I play it
now for those who are interested.

First of all, I once heard from a trading guru that you should
always try to buy "inside" the spread. In other words, if the
spread is 14 bid/16 ask, enter the order at 15 or less and try to
split the spread. You might get filled on a downtick in the
market and save yourself a point. Doing so over the long haul can
really add up into extra savings, he said from the stage.

That would be true if you never missed a single hot market
playing this game, but let me tell you about being 1/4 wise and
dollar stupid like that.

I was targeting 10 OEX puts trading for 7.75 - 8.25 one morning
right after the opening bell. I got cute and placed a limit order
@ 8, figuring I'd save a cool $250 in the process. Then the index
began to move and I jumped my offer a couple times until prices
ran away without me. The high sale price for the day on that
contract was 24.38, and I could have owned 10 of them for 8.25 in
a flash.

Let's see; I tried to save $250 from an $8,250 trade that wound
up reaching a value of $24,375 six hours later. Quite a savings,
wouldn't you say? What I really needed was to be saved from
myself and this worthless advice from a delta-neutral trader who
must maximize pennies within those complex strategies. Ours is a
risky venture but done right will reward us with percentage of
profit returns within hours it takes the "condor crew" months to
reach. Nor can we use their exact entry approach as well.

I've also entered market orders where it sits for hours in my
pending screen without being filled. Calls to the broker at the
trade desk get an answer of, "let me check the floor and see if
it was filled". What he meant to say was, "I'll see if that trade
went against you yet so we can stick it to you. You realize that
if the market moved in your favor we buried your order and you
have no prayer of me telling you it got filled".

Should you doubt that kind of thing can and does happen, try a
few of the bigger discount brokers and enter some market orders
on low volume markets or fast conditions and see for yourself!

These days I enter "buy-limit" orders to open long plays and
"sell-limit" orders on credit spreads. If the market runs away
without my getting filled I wish it well and turn to the next
chart. The trade of our lifetime comes around about once a month
these days - no need to chase the one in front of us at all.

I do enter credit-spread orders between the prevailing spread
every single time. Unlike straight calls or puts, there is no
danger of a market running away from us here. If it does, so
what? We'll just sell the next strike series closer than we
planned to net the same amount.

Selling premium is a capped profit where long plays are not. This
is a very different approach. Soon we will cover credit spreads
in detail but suffice it to say that it is a great idea to ask
for more premium sold than the prevailing offer every time. Don't
like the offer? Don't sell it... simple as that.

Setting stops in relation to the spread is a topic in itself and
one I'd like to cover in detail. There are numerous things to
keep in mind and gosh darn it if they don't all occur during live
fire with money at risk. I'm not sure about you but too many of
my real-time lessons came at a cost while few of them resulted in
profit. We'll try to save others from our lessons, sort of dollar
cost average down the pain.

Considering we've pushed the space limits within our trading pit
here, let's pick up the conversation on Wednesday about setting
stops in relation to bid/ask spreads and how to avoid market
noise most of the time while limiting our loss to manageable

Trade prosperously and carefully to infinity and beyond!
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BRCM - Broadcom $251.81 (+9.63 this week)

Broad essentially means wide, and that's exactly what BRCM is
involved in.  A wide array of products that help customers
stream  vast amounts of data online at high speeds.  BRCM is the
company that provides the integrated circuitry that allows
cable, DSL, and satellite broadband communication to occur.  Now
with a fast growing broadband wireless market, things continue
to look promising for BRCM and their position.  Customers
include Motorola, 3Com, Cisco, and SFA just to name a few.

Most Recent Write-Up

Since BRCM is in the business of broadband, they are very
familiar with wave lengths.  The companies stock is looking like
a familiar wavelength as well; it's beginning the upside run of
its third cycle since July.  A long term support has been seen
in the area of $204, and Oct. 13th basically tested the area for
the third time.  The test has commenced BRCM on its current
rebound rally.  It appears to have considerable potential due to
the bounce off the underlying 200-dma support at $196, then on
Oct. 13th.  Since that time, it has performed very well in its
rebound despite the recent market weakness.  BRCM's strength has
taken it above all the major dma's which could have served as
resistance, but didn't.  Most recently, Friday's strength took
the play above the critical 50-dma which should now serve as
support as BRCM aims for a $270-target.  BRCM blew away
estimates last Wednesday by 6 cents, which is helping to fuel the
current momentum and outlook on the play.  On the heels of the
earnings news, nine analysts issued very bullish Buy and Strong
Buy opinions on the stock.  There is currently a very high
positive sentiment in the IC communications sector that is
attracting new found interest.  Investors once having determined
market direction can enter plays from two points.  The most
prudent is to ride the momentum, letting BRCM trade above $245 on
volume.  The second is to look for a pull-back to the 20-dma at
$231 and watch for a rebound bounce.  In both instances look for
positive market support to avoid a head fake in this rally.


Bucking the weakness on the NASDAQ, BRCM steadily rose throughout
the day's trading.  The stock bounced off support at $240 early
in the day and closed above the pivotal $250 level on a surge of
buying volume.  After confirming strength on the NASDAQ,
aggressive traders might consider entering new positions at
current levels.  A more conservative entry could be found if
shares of BRCM rally above $255 on strong volume.  A pullback
to support at $250, or lower near $245, could provide an
additional entry strategy.

BUY CALL NOV-240 RDU-KH OI=3121 at $26.13 SL=19.50
BUY CALL NOV-250*RDU-KJ OI=1009 at $21.25 SL=16.00
BUY CALL NOV-260 YRL-KL OI=1418 at $16.00 SL=11.50
BUY CALL NOV-270 YRL-KN OI=2108 at $12.88 SL= 9.75
BUY CALL JAN-260 YRL-AL OI= 389 at $35.50 SL=26.50

Picked on Oct 22nd at   $242.19    P/E = 340
Change since picked       +9.63    52-week high=$297.94
Analysts Ratings     7-11-0-0-0    52-week low =$ 54.28
Last earnings 10/00   est= 0.24    actual= 0.30
Next earnings 01-17   est= 0.27    versus= 0.16
Average Daily Volume = 4.77 mln

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