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Daily Newsletter, Monday, 12/11/2000

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The Option Investor Newsletter                   Monday 12-11-2000
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        12-11-2000        High      Low     Volume Advance/Decline
DJIA    10725.80 + 12.90 10792.20 10670.10 1.21 bln   1671/1180
NASDAQ   3015.10 + 97.67  3028.75  2901.48 2.45 bln   2312/1674
S&P 100   733.97 - 14.84   739.71   725.55   totals   3983/2854
S&P 500  1380.20 +  0.62  1389.05  1364.14           58.3%/41.7%
RUS 2000  487.23 +  8.16   487.23   477.92
DJ TRANS 2938.37 + 58.42  2939.89  2860.91
VIX        26.51 +  0.38    27.00    25.75
Put/Call Ratio      N/A
******************************************************************

Hello 3000!

For the first time since mid-November the NASDAQ Composite
traded above the 3000 level.  The increased likelihood of
election resolution and, more importantly, the fact the Fed is
expected to soon begin easing its hawkish interest rate policy
combined to lift all major market averages for the second
consecutive session.  And because of the two aforementioned items,
the NASDAQ's pop above the 3000 resistance level today may be just
the beginning of a strong rally.

Three high-profile market pundits publicly stated Monday morning
that the major market averages should enjoy a big rally into the
end of the year, and beyond.  In a research note to Credit Suisse
First Boston's clients, Tom Galvin wrote of the high probability
of the Fed lowering interest rates to prevent a recession and
achieve the soft landing that the market desperately wants and
needs.  UBS Warburg's Ed Kerschner declared that the recent
oversold conditions in the market have given investors "one of the
five most attractive opportunities of the past 20 years."  The
third, and final pundit to opine this morning was the recently
converted bear from Morgan Stanley Dean Witter known as Barton
Biggs.  Just last month, Mr. Biggs was predicting a hard landing
in the U.S. economy and continued weakness in the major market
averages.  However, Mr. Biggs converted his long-running bearish
stance last week and reaffirmed his beliefs this morning by
calling tech stocks "extremely oversold."  Biggs told his
clients at MSDW to expect a 10% rally in the Dow and S&P, and
possibly a move back to the 3500 level for the NASDAQ by year's
end.

As we enter into the new year, we have the major Wall Street
pundits on our side, and more importantly, the Fed is now on
our team.  The sentiment has definitely shifted to the
bulls favor and the bears are running out of ammunition.  And
although it seems more and more likely we'll finally get our
year-end rally, it doesn't mean we can throw caution to the
wind.  In order to take advantage of any forthcoming rallies,
it will be key to remain disciplined and practice sound money
management.  There will be plenty of opportunities to profit
from the long-side in the coming weeks, but any operation in
the stock market should be approached with defined risk
parameters, which means cutting losses.  And equally important
is to let profits run.

After breaking back above the key 3000 level this afternoon,
the NASDAQ Composite (COMPX) will now face resistance near the
3045 level, and 3100 soon thereafter.  The 3100 resistance
level may prove to be a major pivotal point for the COMPX as it
marks the index's descending trend-line which was established
in early September and reaffirmed in early November.  When
looking to enter new long positions, it may be prudent to monitor
the action in the COMPX as it approaches its near-term resistance
levels and its descending trend-line.  There's no doubt that
major market technicians will be monitoring the COMPX's
behavior around the 3100 level, and we may see a burst of
buying accompany a breakout above that level.  On the other
hand, institutional investors may have a large supply of stock
sitting near that level and might be looking to sell.  Either
way, it may be helpful to watch how the COMPX acts at 3100
in the coming days.




Along with the COMPX's behavior around 3100, it may also be
useful to watch how the NASDAQ-100 (NDX.X) behaves around the
3000 level.  Many traders and market technicians feel the
3000 level for the NDX.X is both psychologically and
technically significant - more so than 3000 for the COMPX.  If
the NASDAQ is going to take a rest before rallying into the
end of the year, it may do so with the NDX.X at 3000.  The fact
is the NDX.X has rallied by over 20% since hitting bottom
around 2450 in late November and a little profit taking may
be in order - it feels so good to be able to write 'profit
taking.'  However, a resolution to the election may throw any
potential for profit taking out the window.  Nonetheless, keep
an eye on the NDX.X as it negotiates the 3000 level.




There were a few notable announcements and warnings after the
market closed that are worth mentioning.  Intel-rival, Advanced
Micro Devices, warned of lower-than-expected profits due
to a slowdown in consumer spending on PCs.  How many times
have we heard that?  The AMD warning wasn't a real big surprise
given the fact Intel warned last week.  And like Intel, AMD
actually traded higher on the news in the after hours session.
The warning will probably not have a major impact on the chip
sector Tuesday, but traders should be cognizant of the news.

After Yahoo received a downgrade due to a slowdown in online
advertising this morning, Double Click confirmed the soft ad
market with an earnings warning this evening.  The online
advertiser said it was seeing softer ad spending and lowered
its guidance for the fourth-quarter.  And you guessed it, the
stock added $1 in the after hours session.

As crazy as it sounds, the recent earnings warnings in the tech
sector by the likes of Intel, and the above mentioned AMD and
DCLK, are actually healthy for the overall group.  Wall Street
is gaining better visibility on future earnings through the
recent warnings and a lot of uncertainty has been removed.  The
clearer the earnings picture the better.

And one earnings picture that hasn't been very clear over the
past two trading sessions is that of Sun Microsystems.  The
company has been attacked by a professional short-seller and
debated by analysts over the past two days.  But after the
market close, Sun's CFO, Michael Lehman, issued a press release
in defense of the company's stock.  Lehman said the rumors of
Sun's bad accounting, which were raised by a bear last week,
were false.  Shares of Sun have lost over 20% since last Friday,
and may be due for a rebound as the rumors were refuted by
the company's CFO.  The stock gained $2 above its 4:00 EST
closing price in the after hours session.

The 10% rally in the NASDAQ last week was a breath of fresh
air to traders and investors alike.  With the earnings picture
becoming more clear every day, and the Fed waiting in the
shadows to lower interest rates, we may see a few more weeks
with double digit gains before this year is over.  There is
still a lot of cash on the sidelines sitting in money
managers' pockets just waiting to be put to work.  Add to that
capital all the foreign money that has left the market while
the whole election mess has played out.  It's highly likely
that some of the foreign capital worked its way back into
the U.S. equities market last week, but I think there is
still some international investor money sitting out.  As
soon as we get resolution in Florida, that money will quickly
move back into the markets and boost stock prices further.
At time of writing, there was not yet any news from the U.S.
Supreme Court.  Obviously that news will influence trading
tomorrow and may help the NASDAQ break above the key
resistance levels I mentioned above.

Remain disciplined and trade smart!

Eric Utley
Assistant Editor


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*************
NEW CALL PLAY
*************

EXTR - Extreme Networks $88.75 +6.81 (+6.81 this week)

Extreme Networks is a leading provider of high-performance,
broadband networking solutions designed for the Internet
economy.  The company's family of BlackDiamond, Alpine, and
Summit switching solutions are built on a unique combination of
ExtremeWare management software and an ASIC-based architecture.

The networkers have led the recent rebound in the NASDAQ, and
EXTR is no exception.  Since hitting bottom around $46 two
weeks ago, the stock has tacked on over $40 and in the process
moved back above all of its major moving averages.  The last
hurdle was cleared last Friday when EXTR advanced above its
50-dma which now sits at the $80 level, which is also the site
of our protective stop.  If, for some reason, EXTR were to
pullback and close below $80 we would no longer cover the
stock.  But, from the way EXTR has been acting lately, it may
be quite some time before $80 is revisited.  New positions
can be added early tomorrow if EXTR advances above the $90
level on healthy volume.  Make sure to confirm strength in
the NASDAQ and specifically the Networking Index (NWX.X) before
entering any new positions tomorrow.  A more conservative
entry might be found if EXTR gains momentum and rallies above
its near-term high at $91.63, which was traced in early
November.  After that resistance level, it's a clear shot to
the century mark.  If EXTR does pullback in the coming days
on profit taking, aggressive traders might consider target
shooting bounces off support levels.  Look for the buyers to
step in around the $85 level first, and lower near $80 on
an extended pullback.  Confirm any bounces off support with
heavy volume before entering on a pullback.

BUY CALL JAN- 85 EXR-AQ OI= 346 at $15.63 SL=11.25
BUY CALL JAN- 90*EXR-AR OI= 244 at $13.50 SL=10.00
BUY CALL JAN- 95 EXR-AS OI=1068 at $11.50 SL= 8.75
BUY CALL MAR- 95 EXR-CS OI= 380 at $17.63 SL=12.50
BUY CALL MAR-100 EXR-CT OI=2102 at $16.00 SL=11.50

http://www.premierinvestor.com/oi/profile.asp?ticker=EXTR


*********************
NEW LOTTERY CALL PLAY
*********************

SUNW - Sun Microsystems $34.00 -4.94 (-4.94 this week)

Since its inception in 1982, a singular vision - "The Network Is
The Computer" - has propelled Sun Microsystems to its position as
a leading provider of industrial-strength hardware, software, and
services that power the Internet and allow companies worldwide to
dot-com their businesses.  With $17.6 billion in annual revenues,
Sun can be found in more than 170 countries.

We're looking for SUNW to rise in the coming days.  The stock has
been hammered over the past two trading sessions on the belief
that the company had irregularities in its accounting procedures.
The rumors of the accounting problems surfaced last week in a
newsletter published by a well-known short-seller.  Since that
time, several brokerage firms have raised concerns while others
have come to SUNW's defense.  This evening, the company's CFO
issued a press release and called the accounting rumors false.
As expected, SUNW rebounded in after hours trading and may be
due for a rally given the fact the stock has lost over 20% since
the rumors surfaced last week.  We're looking to capitalize on
the probability of SUNW rebounding by using December options
contracts, which expire this Friday.  Trading December contracts
this close to expiration involves greater risk but the return
potential is also greater due to the lack of time value.  For
those with lower risk tolerances, you may consider trading
contracts further out.  In after hours, SUNW settled right
around $36.  If the stock opens at that level tomorrow,
aggressive traders might consider entering new positions at
the open only after confirming strength in the NASDAQ.  A
more conservative approach might be to wait for the buyers
to return to SUNW in a big way and look to enter on a move
above $37.

***December contracts expire this week***

BUY CALL DEC-30 SUX-LF OI=  525 at $5.63 SL=3.50
BUY CALL DEC-35*SUX-LG OI= 5548 at $2.50 SL=1.25
BUY CALL DEC-40 SUX-LH OI=12566 at $0.81 SL=0.00  High Risk!
BUY CALL JAN-40 SUX-AH OI=12555 at $3.13 SL=1.50
BUY CALL APR-40 SUX-DH OI= 2163 at $5.88 SL=4.00

http://www.premierinvestor.com/oi/profile.asp?ticker=SUNW


************
NEW PUT PLAY
************

No new puts today


*****************
STOP-LOSS UPDATES
*****************

NT  - call play
Adjust from $36 up to $39

AOL - call play
Adjust from $42 up to $45

QQQ - call play
Adjust from $65 up to $71

ORCL - call play
Adjust from $26 up to $28

TERN - call play
Adjust from $13 up to $15

PALM - call play
Adjust from $47 up to $50

MEDX - call play
Adjust from $41 up to $45

ADBE - call play
Adjust from $62 up to $68

ARBA - call play
Adjust from $70 up to $78

BRCM - call play
Adjust from $115 up to $129

BRCD - call play
Adjust from $200 up to $210

MUSE - call play
Adjust from $118 up to $128

IDPH - call play
Adjust from $200 up to $208


*************
DROPPED CALLS
*************

No dropped calls today


************
DROPPED PUTS
************

No dropped puts today

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

Delta? Theta? Gamma?... It's All Greek To Me
By Austin Passamonte

If that title hooked you here expecting in-depth technical
explanation of these option values, will you at least settle for
simple basics instead?

Plenty of very good books on basic option trading will cover all
of the Greeks in depth. I own a couple of books that focus
completely on the subject involving enough complex math equations
to solve pi, theory of relativity and greater challenges than
either of those; the 2000 U.S. Presidential election.

You will not find such in here. This is a forum dedicated to
simple trading topics with an emphasis on simple. Whenever any
detailed complexities attempt to rear their ugly heads in my
domain they will be trounced & trampled at first sight.

A number of letters I receive each week inquire on how to decide
which option contract to choose and where to set stop-loss and
sell targets. Many ask if there is software available to
facilitate this aspect as well. Yes there is. The programs I'm
aware of can be found within "Technical Analysis of Stocks and
Commodities" magazine full-page advertisements.

Full-page ads aren't cheap and neither are these programs. They
allow you to input certain data and will spit out a myriad of
trade selections and parameters from start to finish. This is all
well & good if the markets are static & methodical, but have you
seen much of that lately?

Let's say you spend a monthly auto payment on one of these
programs and spend hours plugging in data on symbols across the
spectrum. Several hot plays are sifted out and you are ready for
tomorrow's action. Turn off the tubes and call it a night.

Next morning finds pre-market futures limit up or down. Prices
take a big gap away from your plays and all that work & effort
last night is erased at the bell. Is there a better way? Perhaps.

Financial trading in general and option trading in particular
attracts a high percentage of mathematically oriented people. It
seems a perfect marriage and expectations are that extensive
number crunching equates higher probability for profit.

That I believe is true when we are selling (writing) options short
when odds of success are in our favor and quantifiable. Selling
options gives much more chance to statistically predict results
due to the nature of this approach. We take in a temporary
"profit" by selling premium and only need manage limited market
moves from there. Time is on our side. If the market does nothing,
moves in our favor or moves against us just a little we still win.

This approach is more science than art. Statistical probability in
one's favor only requires proper trade and account management to
profit over time.

Buying options is a totally different story. Statistical odds are
always against us. This approach is much more art than science. It
takes a certain amount of subjective skill to profit over time.

One of many factors is how to play the option Greeks. I am
assuming everyone is familiar with the basics or will go out and
research to their satisfaction in any basic book on trading
options from here.

Delta is the factor measuring the relative value of an option
contract versus the underlying instrument. In-The-Money (ITM)
contracts have a Delta closer to a value of 1 while Out-of-The-
Money (OTM) contracts are less than one incrementally. The further
an option is OTM the lower its delta is.

On its face that means an ITM option will increase in value with
less underlying move than OTM contracts will. Simple logic would
say ITM is the way to go, but who ever said trading options was
simple?

Gamma is the factor based in part on how time value (Theta) will
increase the Delta during significant price level moves of the
underlying. The very simple explanation of Gamma is that Delta
increases rapidly when OTM contracts approach At-The-Money (ATM)
and ITM values. Make sense? OTM options have low deltas until the
market moves in their direction and they now become ATM and ITM
contracts. The faster this happens, the higher option premiums
inflate.

Switching from Greek to English, our trading method and choice of
underlying market determines which is best for us to buy. There's
a discussion for buying ITM or OTM contracts accordingly. I can't
think of a situation where ATM contracts should ever be purchased.
They are almost always the most "expensive" premium values of all
and are best sold instead of purchased.

An easy rule of thumb is this:
If you expect to hold an option short-term and the underlying
market to make significant directional moves, OTM options will
always yield far bigger percent returns of profit based on
contract purchase cost.

If you expect to hold an option long-term and doubt how fast the
underlying will move in your favor, ITM contracts might be the
better choice to minimize premium-value decay, especially when
volatility values are high.

Traders who expect to hold contracts over a period of time might
consider ITM contracts especially with high-volatility premiums.
If tech stocks are on the move and option contracts two strikes
OTM have a volatility value of +137%, one might consider the ITM
contracts three strikes deep at 60% volatility. This will return
smaller percentage of profit on option cost but will minimize
premium decay should the underlying market stall out.

My preference is always to buy OTM option contracts. If premium
values are so inflated I'm hesitant to buy, I simply click out of
that symbol and find another. I realize equity option traders are
addicted to the JDSU-type tech plays and there is no cure for
that. However, traders who recently followed Jeff Bailey's advice
in his Intraday Updates to consider call plays on CAT have reaped
great reward while JDSU continued to languish.

It boils down to this; do you want to play favorite symbols or
simply make money? Yesterday's darlings may also be tomorrow's but
the fact is that most of them remain today's dogs. The only thing
that should matter to a trader is what symbol is ready to move
TODAY that has reasonable option pricing to profit from. What was
hot months ago or possibly months from now means nothing to your
account balance growing by this Friday's close, now does it?

I favor index options for 90% of my trading for several reasons.
They seldom sit still very long without moving, especially these
days. This allows us to hit proper entry points when markets are
on the move with OTM contracts and profit handsomely. I don't
consider myself a day-trader by definition, but when I enter a
short-term trade it usually lasts about four hours total from open
to close.

My short-term trade approach can be seen at IndexSkybox.com in the
Swing Trade model. Some days I don't enter the markets at all if
they remain range-bound or quiet. On large-range days I usually
enter in the direction of market flow with calls or puts as called
for.

If the entry was poor on a failed move I'm usually stopped out
quickly. When the entry is solid, markets are caught breaking out
of a range and option values quickly swell. We hit targets of 30%
to 100+% return on cost within hours using OTM index options
when markets move big.

The best part about index options are they offer solid gains
almost every trading session. Equity traders who follow one stock
or sector can easily hit higher percentage returns when the
underlying stock moves big. Difference is that most stocks rest in
a tight range longer than entire indexes do.

Regardless of your market choice, waiting for solid entries into
moving markets will always favor buying OTM contracts and letting
Delta values swell greatly regardless of prior pricing value. Miss
the entry and you'll risk having over-priced contracts deflate to
stop you out.

Jim Brown is famous for buying deep ITM options or selling deep
ITM puts to capture intrinsic value and avoid paying for time
premium when possible. He makes a very convincing case why this
method is sound and I would never question one word based on his
success.

Considering I have almost never bought ITM options in either
direction, we'll leave that approach to Jim and his archived
articles. Next week here I will share some actual examples of
trades available this week on five different equity and five index
option markets with January OTM contracts. Let's see if we can
form a game plan approach on how to select entry and stop-loss
targets from there.

Contact Support


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

BRCM - Broadcom Corporation $142.81 +14.63 (+14.63 last week)

Broadcom Corporation is a provider of highly integrated silicon
solutions that enable broadband digital transmission of voice,
video and data to and throughout the home and within the business
enterprise.  These integrated circuits permit the cost-effective
delivery of high-speed, high-bandwidth networking using existing
communications infrastructures that were not originally designed
for the transmission of broadband digital content.  Using unique
proprietary technologies and advanced design methodologies, the
company designs, develops and supplies integrated circuits for a
number of the most significant broadband communications markets.

Most Recent Write-Up

Despite warnings from Intel, Motorola and Xilinx this past week,
Chip stocks for the most part have traded higher, suggesting the
possibility that the Semiconductor sector may have found a
bottom.  With that, BRCM continued to rally, closing near its
highs for the week.  There has been heavy buying volume in the
stock recently, as advances have been backed by as much as twice
the ADV while any pullbacks have been on light volume, with
support holding firmly at the 5 and 10-dma.  Even a downgrade by
Prudential, from a Strong Buy rating to Accumulate, did little to
halt the stock's advance.  With the next moving average, the
50-dma, all the way up at $180, and light resistance in
increments of $5 overhead, there is plenty of room for a
sustained intermediate-term rally.  Support can be also found in
increments of $5 at $125, $120 and our stop price, adjusted from
$108 up to $115.  This level is reinforced by the 5-dma, now at
$116.87.  A bounce off the 10-dma, currently at $106.42 is also
possible, but make sure BRCM closes above our stop price.  After
Friday's close, the Florida Supreme Court's ruling brought new
uncertainty to the Election situation, causing shares of many
NASDAQ companies to fall in after-hours trading.  As a large cap
NASDAQ 100 (QQQ) stock, we would recommend entering this play
only with an advancing NASDAQ, confirmed by positive sentiment in
the Chip sector (SOX).  A pullback on Monday morning is quite
possible but if sentiment changes from now until the opening bell,
look for a break through $130 with conviction as a conservative
entry point.

Comments

BRCM continued on its tear Monday in part from the news that the
company had entered into an agreement with 3Com to jointly
market high-speed network products.  BRCM's momentum appears to
be building and the stock could continue climbing as long as
the NASDAQ continues advancing.  That said, confirm strength in
the NASDAQ early tomorrow before entering any new positions.
An advance above its intraday high at $144.25 could provide a
solid entry for new positions.  Additionally, a pullback to
support at $140 or lower near $137 could make for a solid
entry.

BUY CALL JAN-140 RDW-AH OI= 350 at $23.50 SL=17.50
BUY CALL JAN-145*RDW-AI OI= 177 at $21.00 SL=14.75
BUY CALL JAN-150 RDW-AJ OI=1048 at $18.88 SL=13.25
BUY CALL JAN-155 RDW-AK OI= 267 at $17.25 SL=12.50
BUY CALL FEB-150 RDW-BJ OI= 375 at $23.75 SL=17.75

http://www.premierinvestor.com/oi/profile.asp?ticker=BRCM


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