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Daily Newsletter, Monday, 11/13/2000

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The Option Investor Newsletter                   Monday 11-13-2000
Copyright 2000, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
        11-13-2000        High      Low     Volume Advance/Decline
DJIA    10517.30 - 85.60 10595.70 10369.70 1.12 bln   1184/1660
NASDAQ   2966.72 - 62.27  3063.31  2859.39 2.05 bln   1393/2564
S&P 100   712.16 -  6.95   719.13   698.77   totals   2577/4224
S&P 500  1351.26 - 14.72  1365.98  1328.62           37.9%/62.1%
RUS 2000  476.55 -  4.35   480.92   463.44
DJ TRANS 2773.21 + 68.99  2775.79  2703.15
VIX        31.89 -  0.61    34.30    30.83
Put/Call Ratio      0.92

Not Another Earnings Shortfall!

The last thing the market needed was another profit miss and
more words from Secretary Christopher.  Amid continued election
uncertainty, the market was rocked by yet another earnings
shortfall.  This time, the culprit was Hewlett-Packard (HWP).
The bearish details are discussed below.  Thanks, in part, to
the HWP warning the NASDAQ Composite (COMPX) closed in negative
territory for the sixth consecutive session.  The Dow Jones
Industrial Average (INDU) didn't fare any better.

Early this morning, Hewlett-Packard reported fiscal fourth-
quarter results that missed Wall Street's consensus estimates
by a full dime.  Analysts had expected the company to report
51 cents per share in profits - the 41 cent per share number
didn't cut it!  The company blamed its shortfall on a variety
of factors, which included pricing pressures, higher-than-
expected operating costs, and, of course, unfavorable
currency exposure (the euro).  The shortfall from HWP was
unexpected by many analysts because the company had
reassured its numbers as recently as two weeks ago.  The
bad surprise resulted in shares of Hewlett shedding nearly
13%.  The stock closed at $34.13, down -$5.00.

Despite the Hewlett warning and weak overall tech sector, the
beaten down semiconductor sector sparked buying interest.  The
Philadelphia Semiconductor Index ($SOX) finished the day with a
solid 4.3% gain.  Although the gains in the SOX were relatively
impressive, many traders shrugged off the action as mere short
covering.  Two big chip companies are slated to report numbers
in the coming days, which some believed induced a short covering
rally today.  The two chip companies expected to report this week
are Analog Devices (ADI) tomorrow, and Applied Materials (AMAT)
on Wednesday.  A surprise from either of the aforementioned
could light a rally in chips, which could have been a reason
for today's rally in the SOX.  Nonetheless, the action in
chips was welcome.  Today's notable winners in the chip sector
included Plexus (PLXS) +4.00 Xilinx (XLNX) +3.69, Analog Devices
(ADI) +3.69, Texas Instruments (TXN) +3.56, and Vitesse (VTSS)

Away from the chip sector, the recent weakness in the broader
markets caught up with the biotech sector.  Add to that bearish
comments about the biotech bubble ready to burst reported over
the weekend and traders were ready to sell.  A few of those
traders blamed the weakness in the biotech sector on the
uncertainty surrounding the election, but what's new?  Many
analysts have been calling for a sharp sell-off in the biotech
sector as it has remained well intact during the recent weakness
in the broader markets.  As such, the weakness was not unexpected.
However, the damage was detrimental to many issues.  Today's big
losers in the sector included, IDEC Pharmaceuticals (IDPH)
-$30.19, Protein Design Labs (PDLI) -$30.13, Myriad Genetics
(MYGN) -$25.63, and Pe Biosystems (PEB) -$17.31.  Those losses
weighed heavily on the COMPX and might have prevented the index
from finishing in positive territory today.

Despite the heavy weight of the biotech sector, the COMPX staged
an impressive rebound this afternoon.  The afternoon bounce began
around the time a federal judge in Florida turned down the Bush
campaign's request to halt the vote recount.  The prospects of
a conclusion to the election deadlock spurred some buying
interest in leadership tech stocks this afternoon, which was a
welcome sign for many traders.  Along with the above mentioned
chip sector, the rebound in the COMPX was led by the generals
including Intel, Cisco, and Dell.

But, what seemed like an incredible reversal for the COMPX was
soon shot down by ominous words from the Gore campaign.  One of
Gore's advisors, Secretary Christopher, appeared before cameras
near market close and stopped the prospects for a rally.  In
fact, the sellers returned as soon as Secretary Christopher's
face appeared on CNBC.  After peaking above the 3050 level, the
COMPX rolled over to settle below the 3000 level for the first
time since last November.  The COMPX is sitting at a new 52-week

With the 3000 level now precariously positioned above the COMPX,
the only major support below is located near the 2850 level,
which happens to be approximately four standard deviations below
its 200-dma.  The COMPX's bounce off its intraday low at 2859
could have been a test of that significant level.  However, many
market watchers were calling for the COMPX to fall as low as the
2500 level, and even lower around 2300.  The pessimism was thick
today!  Also worth nothing was the fact declining issues outpaced
advancing issues by a 5 to 1 margin at one time this morning.
A 5 to 1 ratio of decliners to advancers is viewed as capitulation
selling by many market participants.  Whether that heavy selling
this morning marked a bottom remains to be seen.

The INDU's support levels are disappearing as rapidly as the
COMPX's are.  The Hewlett-Packard warning combined with continued
political rhetoric dragged the Dow down for the fifth consecutive
day.  It's hard to believe the INDU was flirting with the 11,000
level just five short days ago.  Along with HWP, the finance and
drug components weighed heavily on the INDU.  Also in the losers
column were shares of Phillip Morris (MO), which finished at
$34.63, down -$2.25.  The tobacco giant's shares have been
rallying recently, which many viewed as a sign Bush would win the
election.  MO's sell-off today reflects the uncertainty
surrounding the election and investors nervousness.  In that same
camp, shares of Microsoft pressured the INDU by shedding -$0.94,
after recently running up.

As mentioned above, the INDU has fallen well off its near-term
highs around the 11,000 level.  Though, the blue chip index did
manage to rebound well off its intraday low at 10,369.  After
the INDU's massive rebound this afternoon support is now located
just below near the 10,500 level and lower around 10,400.  If
the INDU is going to stage a rebound into tomorrow's trading,
it will need to get through resistance 10,600.

Along with the political uncertainty, the price of energy
rose higher on the back on continued clashes in the Middle
East and an OPEC meeting.  In Vienna, Austria, OPEC ministers
decided not to raise production.  OPEC said it has already
boosted production enough.  The price of crude oil rose 81 cents
to $33.76.

Despite the volatility in the broader markets, capital continues
to flow into equity mutual funds.  In fact, funds took in
approximately $1.3 billion last week.  Although investors have
been taking more money out of funds in light of the election
uncertainty, the fact remains money managers are sitting on a
pile of cash that needs to be invested before the end of the
year.  Once the election nervousness is resolved, that capital
will be put back into the market with great velocity, which
presents a compelling case for a quick snap-back rally in
major indices once a president is chosen.

Along with the continued election uncertainty, investors will
receive a host of economic reports in the coming week.  Most
notably will be numbers in the form of the consumer price
index and retail sales.  Also on the economic tap is industrial
production and capacity utilization.

And let us not forget the Federal Reserve meets on Wednesday.
While Wall Street almost unanimously agrees the Fed will sit
tight with interest rates, some nice comments from Mr. Greenspan
might help to stabilize the broader markets.

With continued election uncertainty, the markets are sure to
hinge on every word coming from the Bush and Gore camps.
Although the recent market volatility presents many
opportunities for day traders to capitalize upon, it makes it
extremely hard to decipher a discernible trend.  Because of
that volatility, we are not adding any new plays to tonight's
newsletter.  Make sure to set tight stops in this
tumultuous market and wait for the trend to show itself.
Trade smart!

Eric Utley
Assistant Editor

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Dropped Calls

IMGN $32.25 -7.00 (-7.00) The bearish Barron's comments published
over the weekend about the biotech sector wreaked detrimental
havoc on our call play.  The selling was uninhibited right from
the opening as IMGN gapped down at the opening bell.  Although the
stock bounced off its 50-dma at $31.38, we are dropping the play
tonight in light of its technical breakdown and the surge in
selling volume this morning.  Near-term support at the $32 level
might provide a bounce with which to exit any existing positions,
if stops haven't already done so.  Should IMGN stage a rebound,
the stock will face resistance at the $34 level.

LH $137.00 -10.00 (-10.00) The rampant selling in the biotech
sector spilled over into our newly added call play.  We set our
stop at the $138 level, and since LH closed just slightly below
that level, we are dropping coverage on the short-lived call
play.  Volume came in slightly better than average, which was
somewhat disconcerting while witnessing LH's sell-off and
violation of several support levels today.  After today's sharp
sell-off, there's not much resistance until the $140 level,
where traders with existing positions might look to exit should
LH rebound.

Dropped Puts

ADI $48.19 +3.69 (+3.69) The strong rally in the chip sector
today caused an end to our profitable put play in ADI.  The
stock managed to claw its way back above our stop, which we
recently lowered to the $48 level.  But, if the stop didn't
close our play, the fact that ADI announces earnings tomorrow
would have.  Make sure to exit all positions before the close
of trading tomorrow.  ADI now has support just below at $48
and lower near $44.  Profits could be taken into continued
weakness.  Also, be cautious of the $50 level, which ADI
flirted with today - a move above that level could signal an
intraday rally tomorrow.


LVLT - put play
Adjust from $41 down to $36

BLDP - put play
Adjust from $96 down to $93


Credit Spreads; Directional Plays
By Austin Passamonte

Life is full of tradeoffs. As option traders we have the ability
to make maximum dollar returns by watching live market action
every waking moment. That comes with a cost of diminished
personal time for enjoying life.

We can enjoy maximum free time which is the stuff life is made of
by being passive traders willing to give up maximum gains. The
choice you make is strictly up to you, but it is safe to say a
majority of option traders cannot or choose not to follow each
tick of live market action for weeks, months and years at a time.

Position trading is the answer for most and there are numerous
methods for this approach. Long calls and puts is by far the most
popular. Buy & hold option trading done right from the long side
enjoys unlimited upside potential with totally limited risk. We
can't ask for much more than that.

However, it is critically important to still hit entry points
well and be correct in major market movement over time. We must
be able to do this more often than not in order to succeed over
the long-term with long calls and puts.

Credit spreads give us much more margin for error. We have the
chance to win if the market moves in the direction guessed, if
the market trades sideways or even if it moves against us a
little bit depending on the strike prices we chose for our

Currently we are in the midst of a serious market decline. No
news there. Last week we noted that all major index daily charts
were flashing bearish divergence and a near-term top looked to be
in place. There were several ways to take advantage of this setup
and we used a few.

One of those was to sell an OEX November 780/770 call credit
spread for a net credit to our account of 3.25 on a 10-point
intrinsic value spread. We also sold a SPX November 1500/1475
call credit spread for net-credit of 4 and a SPX November
1475/1450 call credit spread for net-credit of 8.

The two SPX spreads were both 25-point intrinsic value at
expiration plays. The index was trading near 1440 at the time so
one was obviously more risky than the other based solely on odds
of probability calculated from volatility measures. Each had
positive expectations but the odds for our 1500/1475 play were of
course higher than the 1475/1450.

We added our near-term market bias that the SPX was likely to
decline in this equation and sold them short with confidence. We
had two choices for protection of adverse market moves in case we
were wrong in any case.

With benefit of time and hindsight we realize these plays were
easy winners but that wasn't certain then. Some may ask why we
didn't simply buy long puts and leave it at that. Answer is we
did within Position Trade model and it worked but that isn't
always the best approach.

The 1475/1450 SPX call-credit spread had a break-even point of
1458 at the time of execution. That gave us 18 index points of
breathing room before we had to consider buying this spread back
to prevent loss. A straight put would have suffered great
slippage by then if not stopped out, depending on your level of

The 1500/1475 call credit spread was miles away from danger and
enjoyed plenty of staying power before worry. Same goes for the
OEX 780/770 call credit spread as well. Nine sessions to
expiration and we have such negative chart signals as well?
Almost free money!

These plays enjoy easy entry. We could simply enter the sell-
limit order for the price desired and walk away from there. If it
fills, that's great. After that our trade management is simple as

There are two choices in handling such plays. We could simply
watch the markets tank and be content to let them expire 100% in
our favor on Friday's session opening value for the SPX and
Friday's session closing value for the OEX respectively.

Today we are 100 SPX index points away from being threatened on
our nearest spread and 60 points away in the OEX. Unless we see
the mother of all rallies in the next three and four sessions
respectively, why not just let them expire worthless for full
credit to us?

On the other hand, if these were actually December contracts with
more time until expiration we would be certain to buy them back
as debit-spreads to close out and capture profits generated.

I like to use a 100% above credit received buy-stop on my
spreads. When I sold the initial 780/770 OEX call credit spread
for 3.25, its opposite trade as a debit-spread was probably near
4.5. That is how we actually close the play, buying a debit
spread to offset selling the credit spread.

Using a mental or physical stop at 6.5 to protect from maximum
loss is my approach. Knowing I will win the vast majority of
credit spreads for 100% credit kept, there are no qualms about
cutting the losers short when necessary. I do use a tactic that
makes this a "free-trade" in many instances as described below.

We prefer not to buy-close credit spreads unless necessary
because of higher commission rates on all spread orders to open
and also close. We won't hesitate to buy them back if threatened
but there are other choices as well.

If we had fear of adverse market movement, selling an equal-value
credit spread in the opposite direction is a good tactic to
consider. For example, if our SPX 1475/1450 call credit was in
danger by a rallying market we could simply sell a put-credit
spread near 8 points credit and hold a short-spread strangle.

If the OEX is in similar danger we could sell a put credit-spread
near the 3 net-credit as well. Now we hold a bear-call and bull-
put, credit-spread strangle on each market. Phew, that's a lot of
trade jargon terminology!

The idea is we generated a new credit to our account that can be
used together with our credit received in the first place to buy-
close with debit spreads at twice our entry credit received.
Plain as mud?

Here's a better attempt: We sold the 780/770 OEX call credit for
3.25 and the market declined. If the index begins to rally and
pressure our play we could sell the 740/730 put credit spread for
3 (or whichever strike series of puts will do so) and use both
credits combined to offset either on that may be under duress.

If we must close one, we still hold the other open and at risk
with no possible profit. We are at breakeven for both trades if
the second expires worthless, but what if it doesn't? Again we
can sell the opposite side again for a third play and use that
credit to buy the second one back if it goes underwater.

Some pros will double-down on spread strangles, selling one call
spread then two put spreads then four call spreads to offset the
last until expiration ultimately finds them on the winning side
of net-credit banked in their favor.

If this concept is new to you it probably reads like mush on
paper but if you work through this approach on paper in writing,
the simple genius of it will jump out at you. This is not to say
all risk is absolved and it takes a sizeable trading account with
extra diligence to execute but in my opinion it places astute
traders in the highest possible odds for profit & trade success
of any method I've ever seen.

Personally, I prefer to either buy-close an open play if it slips
below water or sell one opposite play in hopes that will work.
I'm careful to manage my spread trading account so that maximum
loss on any position doesn't hurt (that much) and make sure I
have at least two diverse plays open of equal and balanced
credit/risk amounts to keep singular risk at a minimum.

Rather than load the truck with my entire account I use portions
of it to scale into different spreads as time rolls on. The setup
of our lifetime comes along about every three weeks lately!

That's it for this part, we will next cover credit spreads on an
actuarial, market-neutral basis and tie it all up with account
and portfolio management for both methods in the end. See you
soon & best trading wishes.

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BLDP - Ballard Power Systems $85.00 -4.50 (-4.50 this week)

Ballard Power Systems is engaged in the development and
commercialization of proton exchange membrane (PEM) fuel cells
and related power generation systems for stationary units and
transportation vehicles.  Other usage includes portable
applications for emergency and recreational use.
DaimlerChrysler and Ford own 19% and 14% of Ballard,

Most Recent Write-Up

The confusion and turmoil surrounding the Presidential Election
has certainly taken its toll on the markets - and we still don't
have a certifiable winner!  In the case with BLDP, it would be
to the company's benefit for a Gore win.  In a Democratic White
House, environmentally friendly companies like Ballard Power
Systems would fare well since Gore is known to be concerned
about conservation and environmental issues.  But if BLDP's
chart is any indication of who'll be inaugurated, then we could
be looking at a Republican White House in 2001.  BLDP's chart
for is unmistakably bearish!  Starting on pre-election Monday,
BLDP began its descent.  By Wednesday it slipped under its
historical split-candidate level of $100 and crashed through all
the near-term DMA lines.  On Thursday, BLDP attempted to rally
late afternoon, but failed to breakthrough the psychological
century mark - it hit a wall at $99.  Friday's action took BLDP
down for the count.  The technical violation of the 200-dma
($92.26) and the potential for more uncertainty in the markets
next week prompted us to add BLDP to our put list.  Volume
remains average to strong, so look for increased trading on the
decline to foreshadow further weakness below $90.  First expect
some light support at Friday's near-term bottom of $89.25, then
lower at the $80 if BLDP went into a downward spiral.  Be
cautious if it starts to look like Gore may take the Presidency.
This event could send shares upward.  We've set a firm Stop at
$96 to minimize any positive impact.  More enterprising traders
might take entries on a rollover at this level, if the market
and world events are supportive to the downtrend.


The broad weakness in the tech sector continues to plague BLDP.
After gapping down this morning, BLDP attempted to rally above
resistance at $87 on two separate occasions, only to fail on
both attempts.  The stock sunk towards the $85 level near the
close of trading and looks poised to fall further tomorrow.
Aggressive entries could be found if BLDP falls below the $85
level early Tuesday.  A more conservative entry might be found
if BDLP falls below support around the $83 level.

BUY PUT DEC-90 DFQ-XR OI=52 at $9.75 SL=6.75
BUY PUT DEC-85*DFQ-XQ OI=66 at $6.88 SL=5.00
BUY PUT DEC-80 DFQ-XP OI=71 at $4.63 SL=2.75


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