Option Investor

Daily Newsletter, Wednesday, 01/03/2001

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The Option Investor Newsletter                Wednesday 01-03-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
        01-03-2001        High      Low     Volume Advance/Decline
DJIA    10945.80 +299.70 11019.00 10581.10 1.87 bln   2294/ 782
NASDAQ   2616.69 +324.83  2618.03  2251.71 3.18 bln   3062/ 986
S&P 100   703.97 + 36.84   704.58   664.56   totals   5356/1768
S&P 500  1347.56 + 64.29  1347.76  1274.62           75.2%/24.8%
RUS 2000  484.39 + 21.90   484.39   459.28
DJ TRANS 3015.07 +140.96  3016.53  2853.39
VIX        28.67 -  5.53    34.04    28.47
Put/Call Ratio      0.48

The Dynamic Has Changed

Around 1:15 EST, during a rare inter-meeting gathering, the FOMC
cut the Fed funds rate by a full 50 basis points - from 6.50
percent to 6 percent.  The results from the FOMC's actions were
of historic proportions.  The Nasdaq Composite (COMPX) enjoyed
its largest percentage gain EVER on the most active trading
EVER.  When the bullish buying had finished, the COMPX gained
over 14 percent on over 3 billions shares traded.  The action
in the Dow Jones Industrial Average (INDU) was equally impressive.
The blue chip index gained roughly 300 points and at its peak
advanced measurably above 11,000 to levels not seen since late
September.  The price action and trading volume in the major
indices gave much credence to the Fed's actions and may portend
an end to the bear that ravished so many investors during 2000.

The action by Greenspan and his cohorts this afternoon marks a
brief moment in financial history.  Greenspan is well known to
be a gradualist - he moves interest rates slowly but surely.
The cut by 50 basis points in Fed funds, along with the 25
basis point cut in the discount rate is a rare event, indeed.
As many market watchers know, Greenspan has historically moved
rates in 25 basis point increments.  In fact, Greenspan has
lowered rates by a full 50 basis points on only one other
occasion, which was in 1991.  The Fed backed its move this
afternoon with the following statement: "These actions were
taken in light of further weakening of sales and production,
and in the context of lower consumer confidence, tight
conditions in some segments of the financial markets, and
high energy prices sapping household and business purchasing

Going forward, the market will be listening and watching for
further indications of rate cuts to follow the one we received
today.  There's a 90 percent chance, according to the Fed funds
futures, that the FOMC will cut by another 25 basis points at
its January meeting at the end of the month.  On top of that
rate cut, the same futures are predicting another 50 basis
points by June.  If the futures are a sign of things to come,
the Fed will be cutting rates aggressively in 2001.  And that
means good news for equities.

Now that we know Greenspan and his gang are back on our team,
what do we do now?  As I have written before, the immediate
beneficiaries of a rate cut are the most sensitive to the cost
of capital and the business cycle.  The sectors to look in are
the old economy blue chip names in such spaces as papers,
financials, retailers, capital goods makers and industrials,
among many others.  The financials are worth examining closely
at this juncture.  Some specific names to watch over the next
48 hours (and nine months) include:  J.P. Morgan (JPM),
Charles Schwab (SCH), Bank One (ONE), Merrill Lynch (MER),
Citigroup (C), Goldman Sachs (GS) and General Electric (GE)
- a very interest rate sensitive company.  Of course, the
preceding names are simply a starting place to look for
opportunities in light of the friendlier interest rate
environment we were given today.  But lower interest rates
will immediately benefit those very types of companies and
should send their respective share prices higher.

And if you're looking for more interest rate sensitive names,
look no further than the good old Dow Jones Industrial
Average (INDU).  If you don't believe that the INDU likes
lower rates, take a look at the chart below.  The INDU gained
over 350 points in the space of the fifteen minutes following
the Fed's announcement.  Now that's what I call confirming
price action!

And although the INDU enjoyed a monstrous gain today, it was
still unable to close above the psychologically significant
11,000 level.  However, the INDU was able to pierce that
level during its peak, as I previously wrote.  Going forward,
the 11,000 resistance level will be the key hurdle for the
INDU to clear.  A strong move above that level may allow for
traders to gain entry into some of the blue chip names that
comprise the INDU, such as the aforementioned General Electric.
If the bulls have truly gained control of the battle, we
could see the INDU clear the 11,000 level early tomorrow.
Watch it closely!

While the pictures in the INDU and the more interest rate
sensitive sectors are becoming very clear, the picture in the
Nasdaq Composite is a little more clouded.  And the reason
for that is the debate whether or not today's interest rate
cut will immediately benefit the tech sector.  Some market
watchers argue today's move by the Fed, in effect, formed a
bottom for the tech sector.  And while the Nasdaq may have
found bottom, others argue that the tech sector needs time
to repair and consolidate its heavy losses from 2000.
Furthermore, the bears argue that today's rate cut won't
prevent any shortfalls of tech bellwethers during the first
half of 2001.  Many market watchers are still speculating that
several big cap tech stocks have yet to warn, and they feel
those warnings are looming in the shadows of today's rate
cut.  Case in point was this evening's warning from fallen
Internet star, Inktomi.  The Internet software developer
said its first quarter earnings and sales would fall short
of expectations.  And while Inktomi is no Cisco Systems or
Sun Microsystems, its warning does serve as an example of
the risks that remain in the tech sector.  Shares of Inktomi
gave up all of their post-Fed announcement gains following
the warning.  The stock settled at $18 11/16 during the
regular session and was last trading around $14 in the
after hours session follow the warning.

But if your specialty is the Nasdaq, and you must trade
tech from the long side, let me offer the following.  While I
feel a trader can aggressively pursue the financial and other
interest rate sensitive names following the Fed cut today, I
do believe the names in the tech sector will require much
more discretion and careful selection.  Along with increased
selectivity in the tech sector, I feel that it's imperative
to trade with extreme discipline while the Nasdaq tries to
digest today's actions from the Fed.  I think there will be
increased volatility as the bulls and bears duke it out in
the tech sector and that battle will require traders to use
tight stops - clearly defining any risk to the downside.
I want to write that the Nasdaq is going to keep trading
higher and that readers can buy calls on any four-letter
stock, but I just don't think that's the case, not yet anyway.
The Nasdaq was a complete disaster last year and that type
of damage requires a lot of time to repair.  And while the
Fed's actions clearly shifted the psychology in the tech
sector today, whether the bulls are free to run remains to
be seen.  Don't get me wrong.  I'm not bearish on the Nasdaq
by any means.  I just want to make it clear that risks still
exist in the tech sector and if you do wade into that group
of stocks, be careful!

While today's rally erased much of the damage done over the
past two weeks, let us not forget about the overwhelmingly
negative trend the Nasdaq has been battling since September.
And let me reiterate that I'm not bearish on the Nasdaq, but
the path of least resistance is not yet clearly to the
upside.  Only the Nasdaq will tell us when it's ready to
roll higher and we must pay heed to its clues.  And at the
risk of boring our readers, I must reiterate again that if
you're trading four-letter names from the long side use
tight stops that will clearly define downside risk.

Now that I've begged for caution among the Nasdaq traders,
let's cover how today's interest rate cut adds a little
ammunition to the tech bulls' case.  The lowered interest
rates today, and additional cuts expected, will allow for
higher price-to-earnings multiples among the tech
high-flyers.  The reasons for that is the obvious up-tick
in the business cycle along with the lower cost of capital.
The bulls might also argue that there still exist a large
number of shorts in the Nasdaq, along with the S&P 500.
I know a few professional shorts, and I know they don't
like lower interest rates.  The historically high levels
of shorts in the S&P 500, along with the bears in the
Nasdaq, will be bringing in some of their shorts over the
next few days and I bet the bulls will try to squeeze them
out of their positions.  It will take some time to cover
all of the short interest that is currently residing in
the equities, options and futures markets.  That said, an
extension of the Nasdaq's rally over the next two days
might not be out of the question if those big shorts start
bringing stock in.

And those shorts may have enjoyed 2000, but their fun may
soon come to an end.  Today's move by the Fed may very
well bring an end to the bear that tortured the better
part of U.S. equity markets for the last nine months.  The
Fed IS more powerful than any bear.  The threat of a
nasty recession has been looming in the shadows for some
time now, and the Fed just erased the lion's share of those
fears today.  While we may still witness a mild contraction
in GDP, the worst fears are gone.  Isn't it amazing how
much can change in one day?

Although the Fed is now on our team, it doesn't mean we can
go out with reckless abandon and buy everything in sight.
Our usual rules of discipline and risk management remain
in the toolbox, but the tape might become a lot easier to
read as the market foreshadows a pickup in the U.S. economy.
It's been a historic day on many fronts and it's only
going to get better for those who stay the course and
trade with discipline.  Good luck in 2001 and stay tuned to
OptionInvestor to help guide you through the game we call
the stock market!

Eric Utley
Assistant Editor

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ONE - Bank One $39.56 +2.44 (+2.94 this week)

Headquartered in Chicago, Illinois, Bank One is the #4 bank in
the U.S., (after Bank of America, Chase Manhattan, and
Citigroup).  ONE operates some 1800 banking offices in 14
mostly Midwestern and Wouthwestern states, providing domestic
retail banking, finance and credit card services.  Its other
business activities, which span the U.S. and more than 10
other countries, include commercial, corporate, and
institutional banking, as well as loan and leasing services,
and investment, brokerage, and insurance services.

Greenspan kicked the Financials into rally mode today, giving
investors an early 50 basis point decrease in interest rates.
Traders were clearly thrilled with the news as the broader
markets took off, led higher by the Financials.  Not wanting to
be left behind, our new play, ONE, managed to tack on a
respectable gain of more than 6.5%.  There was no shortage of
volume to support the move, as ONE traded 7.6 million shares,
well over twice the ADV.  Now here is the dilemma; with today's
gain, ONE is now at its upper Bollinger band, the $39-40
resistance level that has been in place for over a year, and
Stochastics are deep in overbought territory.  It seems the
prudent approach will be to wait for some profit taking before
initiating new positions.  As long as the current rally has
legs, we would look for support to hold near $36-37 on any
profit taking.  A bounce near this level would make for a great
entry as ONE gets set to rally into its earnings announcement.
That's right, the company is set to release its quarterly
numbers on January 17th before the opening bell, giving us just
2 weeks in which to play.  While the combination of the changing
interest rate environment and the approach of earnings could
propel ONE higher without a pullback, it seems unlikely, given
the barrier imposed by the upper Bollinger band.  If you do buy
the breakout over $40, monitor the position closely and keep
your stop in place.  We expect some profit taking first, and
have placed our stop at $35, just below the near-term support.
Regardless of your entry strategy, use the strength of the
broader markets and the Financial sector (The Banking Index,
BKX.X, will work fine) to keep you on the right side of the

BUY CALL JAN-35   ONE-AG OI=12401 at $4.88 SL=3.00
BUY CALL JAN-37.5*ONE-AU OI= 8717 at $2.75 SL=1.50
BUY CALL JAN-40   ONE-AH OI=14701 at $1.31 SL=0.50
BUY CALL FEB-37.5 ONE-BU OI= 2936 at $3.75 SL=2.25
BUY CALL FEB-40   ONE-BH OI= 4252 at $2.13 SL=1.00
BUY CALL FEB-42.5 ONE-DV OI=  649 at $1.25 SL=0.50


MER - Merrill Lynch & Co., Inc. $73.44 +7.69 (+5.25 this week)

Merrill Lynch & Co., Inc. has a strong client focus with a goal
to deliver superior returns to their shareholders.  They are
determined to create value for their clients by providing wisdom
and high quality services that meet their needs.  Merrill Lynch
has a track record of delivering strong returns to their
shareholders, and has aligned employee and shareholder interests
through a high level of employee stock ownership.  They are
leveraging the global investments they have made to sustain
profitable growth.

Financial stocks for the most part had been moving tentatively
higher in December on hopes that the New Year would bring forth a
friendlier Fed and a more favorable fundamental backdrop.
Nonetheless, the uncertainty has kept MER in a trading range but
today, with the Fed coming out with an unexpected but much-needed
rate cut, traders celebrated on the news.  With the cost of
borrowing money now 50 basis points lower, this has a direct
positive effect on the core business of the Financial sector, and
with the Fed funds futures expecting a series of rate cuts ahead,
this can only be good news for MER.  Which is why shares of MER
closed up almost 12 percent on well over twice the ADV.  An
environment in which the cost of doing business becomes
progressively lower will give MER's bottom line a lift, meaning
that earnings estimates will most likely be raised.  Factoring
that into the Price-Earnings (PE) equation, more E means a higher
P, which is what traders are expecting.  After such a big day, a
pullback is quite possible, so exercise patience and discipline
when targeting an entry.  Support can be found at $72, $70, the
5-dma at $68.42 and our protective stop placed at the $68 level.
There is also support from the 10 and 100-dma, converged at
$66.15, and the 50-dma at $65.18 but in buying a bounce off these
levels, make sure that MER closes above our stop price.  As well,
when taking a position, confirm bounces with buying volume and
confirm direction with that of peers such as GS and LEH.

BUY CALL JAN-65 MER-AM OI=11572 at $9.38 SL=6.50
BUY CALL JAN-70 MER-AN OI=46272 at $5.25 SL=3.25
BUY CALL JAN-75*JMR-AO OI= 9402 at $2.06 SL=1.00
BUY CALL FEB-70 MER-BN OI=  620 at $7.38 SL=5.25
BUY CALL FEB-75 JMR-BO OI=  417 at $4.50 SL=2.75



CELG - Celgene Corpation $30.00 -2.38 (-2.50 this week)

Celgene specializes in immunotherapy medications, focusing on
small-molecule compounds that suppress the body's overproduction
of tumor necrosis factor alpha, which has been linked to several
inflammatory diseases.  Not one to shy away from the
controversial, CELG makes leprosy treatment THALOMID (a form of
thalidomide, which was blamed for thousands of birth defects
when used as a sedative in Europe in the 1950s and 60s).  The
company is exploring the use of THALOMID for brain tumors and
other cancers.  CELG is also developing its own version of
Ritalin, which is used to treat children with Attention
Deficit Disorder.

Even with the pain inflicted on Biotechnology stocks in February
and March of last year, CELG managed to keep from losing its
way.  The stock spent much of the year 2000 posting higher highs
and higher lows, using the 200-dma as solid support on the
recoveries.  This pattern began to fall apart last October, when
the bulls were unable to push through the $75 resistance level.
Early December sealed the deal, as the stock posted another
lower high, followed by a quick violation of the 200-dma as it
entered free-fall mode.  The wimpy bounce seen in the past week
is not the kind of solace the bulls are looking for, and the
stock's inability to participate in today's interest rate rally
paints a dim picture.  Even a modest rally in the Biotech sector
wasn't enough to float this sinking boat.  Earnings are
currently scheduled to be released on January 25th, but it is
unlikely to help with the ailing stock price.  Although the
company is gradually approaching profitability, the revenue
growth has been slowing over the past several quarters.  That
is clearly not the kind of financial pattern that investors like
to see.  So where to from here?  The bulls are desperately
trying to hold the line at the $30 support level, but it appears
the bears are gaining the upper hand, as evidenced by today's
loss, which came on volume that nearly tripled the ADV.  A break
below current levels should provide a decent entry point,
although more aggressive players may want to wait for a bounce
and rollover near resistance of $34-35 before taking the
plunge.  The stock is likely to be volatile, so we have given
ourselves some room by placing a fairly loose stop at $37.
Although today's drop came with a gain in the Biotech Index
(BTK.X), your odds of success will be greater if both the BTK
and CELG are heading south when you initiate your position.

BUY PUT JAN-35 LQH-MG OI=104 at $7.50 SL=5.25
BUY PUT JAN-30*LQH-MF OI=187 at $4.13 SL=2.50
BUY PUT JAN-25 LQH-ME OI= 39 at $2.13 SL=1.00


FRX - Forest Laboratories Inc. $121.50 -6.69 (-11.38 this week)

Forest Laboratories develops, manufactures and sells both branded
and generic ethical drug products that require a physician's
prescription, as well as non-prescription pharmaceutical products
sold over the counter.  Forest's most important United States
products consist of branded ethical drug specialties marketed
directly, or detailed, to physicians by Forest Pharmaceuticals,
Forest Therapeutics and Forest Specialty Sales forces.

The year 2000 was a golden time for FRX, gaining over 125 percent
on a steady uptrend on higher lows and higher highs.  Most
investors were reaching for the Prozac but finding it a little
too rich for their lighter wallets, went for FRX's less expensive
anti-depressant Celexa.  While most Tech stocks were well below
all their major moving averages, dips to the 50 and 100-dma for
FRX were rare buying opportunities that were bought up with
enthusiasm, as traders huddled to this defensive stalwart.  But
ever since hitting the $140 level in late October, the stock has
struggled, unable to break what appears now to be formidable
resistance.  Having recently fallen below its 50-dma (now at
$132.54), the stock appears now to be perched perilously above
its 100-dma at $119.93, threatening to drop further, thereby
completing a rounded top formation.  Today's close marks the
second time in less than two weeks that FRX has tested its
100-dma.  The last bounce, while dramatic, lacked the volume
necessary to count as conviction so upon hitting a brick wall at
$140 yet again, FRX sold off.  But this time around, the selling
volume has been gaining strength, suggesting that there may be
further downside ahead.  Today's drop of 5.22 percent on well
over twice the ADV in a rallying market suggests that traders may
not be in as defensive a mood any longer.  While there is a
2-for-1 stock split ahead on January 11th, FRX could be much
lower by then on its own.  For a conservative entry, the signal
to buy would be a break below the 100-dma on strong volume,
confirming sentiment with other Drug stocks such as LLY and MRK.
For aggressive traders, failed rallies off resistance at $124,
the 5 and 10-dma (converged at $129) and our stop price of $130
could allow for possible entries.

BUY PUT JAN-125 FRX-ME OI=22 at $7.25 SL=5.00
BUY PUT JAN-120*FRX-MD OI=66 at $4.63 SL=2.75
BUY PUT JAN-115 FRX-MC OI=75 at $2.88 SL=1.50



No stop-loss updates today


IVGN $74.00 -7.06 (-12.38) While the selling volume in shares of
IVGN was light yesterday, today, traders continued to head for
the exits, this time on strong volume, on a day when most stocks
were being bid up on a record day for the NASDAQ.  Having already
closed below its 5-dma ($81.83) the previous day, IVGN opened
today below its 10-dma ($80.45) and from there, proceeded to drop
further.  Like most of the market, the stock got a lift after the
Fed announcement but it was not enough, as IVGN closed down 8.71%
on over twice the ADV.  High volume drops on high volume up days
for the market is not a good sign, nor is the close below the
50-dma ($75.17) and our stop price of $79.  As a result, we are
closing out this play.

MO $42.25 -3.94 (-1.75)  An unexpected rate cut midday today has
changed the sentiment on the Street.  While MO had been a strong
performer on our call list, the reversal of sentiment in the
market as a whole was evident in the rotation of money today.
After some morning consolidation of yesterday's gains, news of the
rate cut resulted in selling of many perceived safe havens: drugs,
tobacco, and energy.  With our stop at $42.50, we must drop this
play and book our profits.  MO very well may maintain its uptrend
yet it remains to be seen if this rotation back into big cap techs

ENE $75.06 -4.81 (-8.13)  Profit takers stepped in early this
morning and ENE drifted lower.  Initially after the Fed rate cut
at about 1:10pm ET, ENE surged almost $4.  But as investors began
rotating back into the beaten down techs, many energy stocks fell
by the wayside as profits were booked to raise cash.  Our stop of
$79 was nearly violated yesterday and it was the point at which
ENE bounced.  However, today that level was quickly violated and
should have signaled a red flag to stay away.  With this violation
of our stop and the major shift in monetary policy, we will be
closing this call position tonight.

JNJ $98.75 -3.25 (-6.31) JNJ finished out the year at a 52-week
high last Friday.  It has been an incredible performer for OI's
call list.  Two factors of 2001 contributed to the selling this
week: tax-gain selling on Monday and a 50 basis point rate cut
today, both fairly unpredictable.  After the investors locked in
some gains on Monday, JNJ looked poised to continue its strong
uptrend, offering a nice entry point.  Yet, the second factor hit
the market like a ton of bricks, entirely by surprise.  As a
result, many of the drug and healthcare stocks were sold and cash
was thrown at the tech sector.  Our stop of $102 was violated
intraday and JNJ closed well below it, therefore we are dropping
this call play.


VSTR $112.88 +11.88 (+12.25) Our first hint of trouble was
VSTR's refusal to break below the critical $100 support level.
This is the real trigger we were looking for before initiating
playing.  The fact that this event never came to pass kept us
out of the play, and out of hot water this morning when
Greenspan finally acquiesced and handed the markets a surprise
interest rate decrease.  The entire Telecom sector rallied on
the news, and it was clear from the start that the bulls were
going to trample the bears today.  After the news broke, VSTR
quickly traded through our $106 stop and proceeded up the
charts by another $7 before slowing down.  If you took the
aggressive entry when VSTR rolled over near $105 yesterday
morning, you should be congratulating yourself on your
disciplined use of stop loss orders, which took you out of
the trade today before the damage got out of hand.  Needless
to say, VSTR is a drop tonight, as it held onto a nearly 12%
gain, closing right at the high of the day.

QCOM $84.06 +13.19 (+1.88) It appears that the Fed is mightier
than the head and shoulders reversal pattern, as a surprise rate
cut today helped QCOM to rally almost 19 percent on over 145% of
ADV.  Breaking through the neckline of the head and shoulders
formation yesterday made this an attractive put play but today's
turn of events have in one fell swoop put QCOM back above all its
major moving averages.  This was an impressive move indeed, and
the close well above out stop price of $78 more than suggests a
break in QCOM's downtrend.  With our entry objectives not
forthcoming, we are reversing our recommendation.

JNPR $132.00 +29.44 (+5.94) When we started this put play
yesterday, we mentioned two possible ways to enter this play.
The conservative entry called for a break below support at $98.
Opening right at that level, support held up and the stock moved
higher.  Fast forward to the more aggressive entry points we
mentioned and once again, there was no signal to buy, as dips
were on light volume while buying pressure was on high volume.
For the day, JNPR closed up almost 29 percent on over twice the
ADV.  With the stock now out of range of our trading plan, we are
taking this play off the table with no harm done.

SFA $38.69 +8.69 (+6.13)  SFA was performing quite nicely and
maintaining its dominant trend until the FOMC made their
midday announcement of a rate cut.  While this was good news
for the economy and the market, it was not for our put play.
This interest rate shift simply launched SFA from $31 to a
high of $40 where the sellers stepped in.  Technically, for
both SFA and tech stocks, this is a major reversal of sentiment.
On the SFA chart, a bullish engulfing pattern on high volume
indicates that this recent downtrend may be temporarily over
for SFA.  Intraday, SFA paused at our stop level of $36 to
consolidate the post-announcement gain and then used that
previous resistance as support to move higher.  Today's close
stopped us out of this put play that performed well until this
unexpected rate cut.

EXDS $22.13 +5.56 (+2.19) This was a short-lived put play that
was foiled by the FOMC.  EXDS gapped down this morning and then
rallied to the $18 level and offered a very nice entry point.
From there, EXDS rolled over and dropped almost $2, which would
have been an very nice intraday trade.  The stock stabilized at
the $16.50 level just before the rate cut announcement.  After
that, there was no looking back.  These kind of beaten down
tech stocks found bids as the euphoria of a 50 basis point rate
cut took hold of the market.  Our tight stop of $19 was blown
out and results in a drop this evening.

SEBL $69.88 +15.88 (+2.13)  After yesterday's technical breakdown
to a new relative low taking out 12/21's low, SEBL looked
technically weak.  But the extraordinary circumstances of today
changed everything for SEBL and the market as a whole.  Prior to
the rate cut news, SEBL rolled over from $55 and appeared to be
heading for a retest of support at $50.  Yet, the rate cut fueled
SEBL and high volume accumulation continued until the very last
tick, as SEBL closed on the high of the day.  Technically, SEBL
has a bullish engulfing candlestick as today's trading spanned
below yesterday's low and above yesterday's high.  A move of this
type typically indicates a reversal.  In the heat of the buying,
SEBL surpassed our stop loss level of $64 and never looked back.
We are dropping this put play as the NASDAQ puts in a record day
with a 14% gain on over 3 bln shares.


Was I Hallucinating?
By Mary Redmond

That was the thought which first crossed my mind when I looked
away from the market when it was down 30 and looked back when it
was up over 250.  Without any warning or indication, the Federal
Reserve cut rates by 50 basis points, the answer to a (long)
trader's dream.  While we may still have a few earnings warnings
left, at least we know that the Fed is not in a coma.

This type of occurrence may only happen once in a lifetime, and
it can result in certain market irregularities.  For example, the
market popped as soon as the decision was announced, and about
twenty minutes later, there were so many crossed and locked
markets on Nasdaq securities that order execution reports were
delayed, due to extraordinarily heavy trading.

This is also one reason why it can be dangerous to short an
oversold market.  We are not necessarily out of the woods, and
rate cut may not be a panacea, but it can be the first catalyst
to a major turning point.

While we were being bombarded by downgrades and warnings over
the last few weeks, it is interesting to remember what was
occurring last year around this time.  We were in such a strong
bull market for the Nasdaq that one analyst upgrade could send a
stock and its sector soaring 20 points in one day.  Yesterday, one
analyst downgraded several internet software and infrastructure
stocks, and these stocks, as well as others in the sectors lost
double digits.  Are either of these extremes rational?

Last year, there were a number of analysts who predicted a bear
market in 2000, and practically no one believed it.  They were
considered the same grumpy party spoilers who had been calling
a bear market since 1994.  Bear market analysts were contrarians
last year.  In contrast, bull market analysts are the contrarians
at this point, that is, up until today's rate cut.  For the last
few weeks, everyone ignored the bulls and concentrated on the bad
news.  No analyst can ever predict the market 100% of the time,
but most of the time, investors believe what they want to

Last year around this time, most people were overjoyed that
their appliances still worked, and that Y2K induced Armageddon
had been postponed.  While it is unclear whether the billions
spent on Y2K preparation were wasted, the actions taken by
the Federal Reserve to prepare the banking system for Y2K
may have impacted the market.  Last fall, the Fed pumped the
banking system with approximately $500 billion in excess cash,
in case we had a panic-induced run on the banks.  While their
actions may have been prudent, considering the public's anxiety,
the liquidity had to be drained from the market during 2000, and
some analysts have speculated that this factor may have
contributed to liquidity problems.

Around the end of March, the liquidity crisis reached a peak,
and, combined with the inflationary indictors, which led the Fed
to increase rates by 50 bp, contributed to the market decline.
When the Fed raises rates, it draws liquidity out of the market.
When rates are lowered, liquidity is added.  Analysts may
speculate for years about whether the Fed raised rates
excessively in 2000.  While the liquidity issue seems almost
certain to improve from last year, no one can control the
levels of volatility.

Certainly last year was the most volatile in market history,
and it is entirely possible that Y2K01 may be even more
volatile.  During 2000, it was common to see the Dow move
1000 points in a month, and 20-40% monthly moves in the Nasdaq
were the norm.  Volatility in the market can result from
traders perceptions about market actions, the speed with
which information travels, and the number of market participants.
None of these factors contributing to market volatility are
likely to decrease, in fact, we are likely to see even more
volatility in the years ahead.

While the VIX.X is a broad gauge of OEX option volatility,
traders also want to assess the volatility of the other market
indexes, sectors, and individual stocks.  For example, the
QQQ currently has an implied volatility of 71.5, nearly
double the VIX.X.  The QQQ's implied volatility and the
VIX.X generally move in tandem, however, the QQQ IV is
almost always considerably higher, since this index moves
faster than the OEX.  Implied volatility is a measure of the
market's perception of how much the option will move over
the life of the option.

For example, the implied volatility of the QQQ was under 30
In September, and rose as the Nasdaq declined, reaching 60
in November.  The highest level of volatility the last
year was over 80, and occurred during the market sell off
last April.

Many investors are currently thinking that this may be an
historic buying opportunity, particularly for stocks which
fared poorly this year, like technology and telecom.  Option
investors may be making the same plans.  There are so many
high quality tech stocks which have been battered beyond
belief that the shopping opportunities seem unlimited.

However, it may be a good idea to check the historic volatility
and implied volatility of the options before buying.  If a
call option has a very high implied volatility, compared to
the historic volatility of the stock, it may be harder to
profit from an increase in the stock price.

For example, the implied volatility of the options of many
high tech stocks tends to rise considerably after a market
correction.  Volatility basically measures speed of movement.
The velocity of market corrections is almost always higher
than that of rallies.  If put options are priced very high,
the call options will be price high also, since there is  a
put/call ratio which exists for every stock such that the
stock price plus the at the money put price minus the at the
money call price is always less than or equal to the cost of
borrowing money for the particular time period.

Look at the iv of NT, SUNW, and ORCL, three stocks which have
made very rapid corrections in the last several months.  NT has
a six month average historic volatility of 73, and the current
implied volatility of the options is 94.5.  ORCL's historic
volatility doubled from 57 in September to the current level of
118, and the implied volatility of the options is 93.  SUNW's
historic volatility also doubled in the correction, from 48 to
99.47, and the implied volatility of SUNW's calls is 116.7.

While these stocks are very cheap, the options are relatively
high priced.  It is not necessarily a bad idea to buy high
volatility call options, as this can be an aggressive strategy
which could work well if the stock makes a significant rise.
However, high volatility options are expensive and therefore
riskier.  A move in the wrong direction could result in a very
large, fast loss.  These are options which should be monitored
very carefully.  Some bullish option traders may also consider
covered calls for stocks with high volatilities, as the premiums
sold can yield substantial profits.

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NOK - Nokia $44.69 +3.81 (+1.19 this week)

Nokia is the world leader in mobile communications.  Backed by
its experience, innovation, user-friendliness and secure
solutions, the company has become the leading supplier of mobile
phones, and a leading supplier of mobile, fixed and IP networks.
By adding mobility to the Internet, Nokia creates new
opportunities for companies, and further enriches the daily
lives of people.

Most Recent Write-Up

Considering the widespread carnage in the tech sector Tuesday,
Nokia held up fairly well.  The stock actually moved to $44.81 in
morning trade, however, the weak NAPM report, and several analyst
downgrades of technology stocks proved to be too much for even
Nokia to handle.  Strong support at $40 has held since
mid-November, faltering only once on November 13th, which brought
Nokia to $37.56.  A possible entry point would be a move above
$43, which would position Nokia to move above the major moving
averages to the next resistance at $45.  Watch the telecom sector
for strength, and keep stops at $40.


If there's a tech stock that could continue advancing in the wake
of Wednesday's massive rally it's NOK.  Shares of the cell phone
giant have held up well recently and are poised to breakout above
a key resistance level.  New positions can be added on a strong
move above the key $45 level.  Make sure to confirm volume with
any advance along with direction in the broader tech sector and
peers ERICY and QCOM.  Light volume pullbacks to support at $44
or lower near $43 might also provide entry points if the buyers
step in on any dip.

BUY CALL JAN-40 NAY-AH OI=19057 at $5.75 SL=4.00
BUY CALL JAN-45*NZY-AI OI=22531 at $2.63 SL=1.25
BUY CALL FEB-45 NZY-BI OI= 2304 at $4.38 SL=2.75
BUY CALL FEB-50 NZY-BJ OI= 2151 at $2.38 SL=1.25



The Fed comes to the rescue!

The stock market soared today after news that the Federal Reserve
cut key interest rates by half a percentage point.  Normally the
FOMC raises or lowers interest rates at regularly scheduled policy
meetings and the central bank's next engagement is not until late
January.  The last time the Fed cut rates between regular meetings
occurred in mid-October 1998 as the market contended with a global
financial crisis, which included Russia's loan payment default.
The decision to reduce the overnight lending rate and the discount
rate was a pleasant surprise but it was not entirely unexpected,
given the recent outlook for the economy.  Earlier this week, data
indicated that outlays for U.S. construction activity moved lower
in November along with spending on government projects.  This news
and other recent reports suggesting the economy would grow at a
relatively sluggish pace this year, prompted the Fed to act early.
The FOMC said that, "These actions were taken in light of further
weakening of sales and production, and in the context of lower
consumer confidence, tight conditions in some segments of financial
markets, and high energy prices sapping household and business
purchasing power."  Now investors will look to Friday's employment
report for more indications about the economy and hints of whether
to expect another interest-rate cut from the Federal Reserve in
the coming weeks.

With today's flurry of buying pressure, it will be difficult to
determine which issues have simply rebounded from substantially
oversold conditions on "short-covering" and those that are truly
engaged in a significant change in character.  With that fact in
mind, we will limit the number of selections until the underlying
market trend is positively reestablished and focus only on those
positions that offer conservative entry points in favorable issues
and a high probability of a reasonable profit with low risk and
limited potential for loss.

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

IMPH    JAN    45    42.69  65.63    $2.31   5.5%

Naked Puts:

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

QCOM    JAN    70    68.50  84.06    $1.50  10.2%
AFFX    JAN    55    53.81  68.94    $1.19   9.6%
IMPH    JAN    40    38.87  65.63    $1.13   9.2%
LEH     JAN    55    54.12  76.13    $0.88   7.8%
IVGN    JAN    60    58.50  75.00    $1.50   7.0%
DCTM    JAN    40    38.94  45.88    $1.06   6.8%
IDPH    JAN   120   117.50 186.31    $2.50   6.4% 3-1 split 01/18
EMLX    JAN    45    43.69  81.00    $1.32   6.3% Adj 2-1 Split
BGEN    JAN    50    49.37  58.00    $0.63   6.3%
NOK     JAN    40    39.25  44.69    $0.75   4.7%

Sell Strangles:

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

IMPH    JAN    35    33.25  65.63    $1.75  11.7%
IMPH    JAN    80    82.75  65.63    $2.75  17.0%

CEPH    JAN    40    39.06  60.50    $0.94   8.2%
CEPH    JAN    70    71.19  60.50    $1.19  10.1%

RIMM    JAN    50    48.44  70.00    $1.56  12.1%
RIMM    JAN   115   115.94  70.00    $0.94   7.6%

BRCM    JAN    45    43.75 106.94    $1.25   8.6%
BRCM    JAN   160   161.06 106.94    $1.06   7.4%

GMST    JAN    25    24.37  46.56    $0.63   5.8%
GMST    JAN    65    65.75  46.56    $0.75   6.8%

Naked Calls:

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

QLGC    JAN   130   131.50  86.94    $1.50  10.1%
BEAS    JAN    85    86.25  67.88    $1.25  10.1%
ADBE    JAN    80    81.00  57.94    $1.00   8.1%
VRTS    JAN   160   161.69  86.38    $1.69   6.1%

Credit Spreads:

Stock  Pick    Last     Position   Credit    C/B    G/L   Status

ESRX  $88.88  $92.44   JAN65p/70p  $0.50   $69.50  $0.50   Open
AFFX  $63.63  $68.94   JAN40p/45p  $0.69   $44.31  $0.69   Open
VAR   $62.00  $61.38   JAN50p/55p  $0.50   $54.50  $0.50   Open
FCEL  $72.25  $60.88   JAN45p/55p  $0.56   $49.44  $0.56   Alert

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.  (We monitor the positions marked with ***).


BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations

JNPR - Juniper Networks  $132.00  *** A Big Day! ***

Juniper Networks is a global provider of Internet infrastructure
solutions that enable Internet service providers and other
telecommunications service providers, to meet the new demands
resulting from the rapid growth of the Internet.  The company
delivers next generation Internet backbone routers that are
specifically designed, or purpose-built, for service provider
networks.  The company's flagship product is the M40 Internet
backbone router, and it recently introduced the M20, an Internet
backbone router purpose-built for emerging service providers.
The company's Internet backbone routers combine the features of
the JUNOS Internet Software, high performance ASIC-based packet
forwarding technology and Internet-optimized architecture into a
purpose-built solution for service providers.

The stock market came back to life Wednesday, with the Nasdaq
posting its biggest gain ever, after the Federal Reserve surprised
investors with an unexpected interest-rate cut to keep the world's
largest economy from slowing too much.  The technology composite
was bolstered by a surge in the price of leaders in the Internet
Equipment group and Juniper Networks was one of the big movers.
Investors who "shorted" stocks with the aim of buying them back
later at lower prices, rushed to cover positions on the Fed move
and that boosted prices even higher.  Now the question is whether
the recovery rally will continue and traders who are bullish on
the technology sector can speculate on that outcome with these
conservative positions.

JNPR - Juniper Networks  $132.00

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

Sell Put  JAN 70   JUX MN  415       1.06    68.94     7.3% ***
Sell Put  JAN 75   JUX MO  542       1.50    73.50    10.2%
Sell Put  JAN 80   JUX MP  1516      2.00    78.00    13.4%



MWD - Morgan Stanley Dean Witter  $83.69  *** Hot Sector! ***

Morgan Stanley Dean Witter is a global financial services company
that maintains leading market positions in each of its primary
businesses: securities; asset management; and credit services.
The company combines global strength in investment banking and
institutional sales and trading with strength in providing full
service and on-line brokerage services, investment and global
asset management services and, primarily through its Discover
Card brand, quality consumer credit-card products.  The company
also provides its products and services to a large, diversified
group of clients, including corporations, governments, financial
institutions and individuals.

In recent weeks, the performance of the financial sector has been
improving and today Bank and brokerage shares rallied amid a wider
market surge spurred by news that the FOMC had cut interest rates.
The surprise announcement by the Fed to reduce a key short term
interest rate and the signal that the Fed was prepared to decrease
borrowing costs further was viewed favorably by investors because
lower rates reduce lending costs and also spurs demand for loans.
In addition, the rate cut helps banks that assist companies with
new bond and stock offerings, a business that was hurt by recent
rate hikes and the subsequent U.S. economic slowdown.

With the recent bullish activity in the issue, it's obvious that
investors believe the Financial Services group is "back on track"
and we favor the recent technical support near the target cost

MWD - Morgan Stanley Dean Witter  $83.69

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

Sell Put  JAN 65   MWD MM  7042      0.56    64.44     6.2% ***
Sell Put  JAN 70   MFZ MN  6095      0.94    69.06     8.6%
Sell Put  JAN 75   MFZ MO  7967      1.63    73.37    11.7%



NEWP - Newport  $90.31  *** Own This One! ***

Newport Corporation is a global supplier of high-precision test,
measurement and automation systems and subsystems that enable
manufacturers of fiber optic components, semiconductor capital
equipment, industrial metrology, aerospace and high-precision
products to automate their manufacturing processes, enhance new
product performance, and improve manufacturing efficiencies and
yields.  Their high precision products enhance productivity and
capabilities of test and measurement and automated assembly for
precision manufacturing, engineering and research applications.

Newport has been a favorite of the OIN over the past year and
with the recent slump in technology issues, there are some
excellent premiums available for traders who wish to initiate
new portfolio positions through the use of (ITM) Covered-calls
or the sale of (OTM) Naked puts.  Based on today's activity,
the issue has demonstrated excellent upside potential and those
who favor the bullish technical outlook for the company can use
the inflated premiums to establish an acceptable cost basis in
the underlying issue.

NEWP - Newport  $90.31

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

Sell Call JAN 65   NZZ AM  25       27.75    62.56     7.4% ***
Sell Call JAN 70   NZZ AN  65       24.25    66.06    11.3%

Sell Put  JAN 55   NZZ MK  166       1.13    53.88    11.1% ***
Sell Put  JAN 60   NZZ ML  109       1.88    58.13    17.9%
Sell Put  JAN 65   NZZ MM  67        2.88    62.13    26.1%


Neutral Plays - Straddles & Strangles

The issues are excellent candidates in the "premium-selling"
category of options trading.  Based on analysis of statistical
option pricing and the underlying stock's technical history,
these positions meet our fundamental criteria for profitable
Credit Strangles.  Each issue has robust option premiums, a
well defined trading range and a high probability of remaining
between the target strike prices.  However, current news and
market sentiment will have an effect on these issues and, as
with any recommendations, these positions should be carefully
evaluated for portfolio suitability and reviewed with regard
to your strategic approach and personal trading style.  Some
traders may favor a more aggressive approach, selling options
that are closer to the current price of the issue, to produce
a higher initial return.  While that technique may be more
attractive, it also increases the theoretical risk of loss.
Only you can know what plays are suitable for your risk-reward
tolerance and portfolio outlook.

MERQ - Mercury Interactive  $94.31  *** Trading Range? ***

Mercury Interactive is a provider of integrated performance
management solutions that enable businesses to test and monitor
their Internet applications.  The company's software products
and hosted services help e-businesses enhance the user experience
by improving the performance, availability, reliability and
scalability of their Web sites.  By using its solutions to help
identify and assess performance problems, e-businesses can
increase their ability to attract and retain customers, and
improve their competitive advantage.  The company's customers
represent a range of industries including Internet companies such
as Amazon.com, America Online, Ameritrade, E*Trade, Healtheon,
HomeGrocer.com, Jobs.com, ShopLink.com and WingspanBank.com;
Internet infrastructure providers such as Ariba, Broadbase,
Broadvision, i2 Technologies and Oracle; and Fortune 1000
enterprises such as Apple Computer, Caterpillar, Cisco Systems,
Ford Motors and Wal-Mart.

With regard to the near-term outlook for Technical and System
Software issues and the relatively well-established trading
range for MERQ, these positions offer excellent speculation for
traders who participate in premium-selling strategies.  Review
the companies' earnings outlook as a quarterly report is due on
or about January 17.

MERQ - Mercury Interactive $94.31

PLAY (aggressive - neutral/credit strangle):

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

Sell Put  JAN 60   RQB ML  496       0.69    59.31     6.7% ***
Sell Call JAN 140  RBF AH  143       1.00   141.00     9.6% ***

- or -

Sell Put  JAN 65   RQB MM  157       1.31    63.69    12.3%
Sell Call JAN 135  RBF AG  260       1.38   136.38    13.0%



The issues are excellent candidates in the "premium-selling"
category of options trading.  Based on analysis of statistical
option pricing and the underlying stock's technical history,
these positions meet our fundamental criteria for profitable
naked-calls.  Each issue has robust option premiums, a well
defined resistance area and a high probability of remaining
below the target strike prices.  However, current news and
market sentiment will have an effect on these issues and, as
with any recommendations, these positions should be carefully
evaluated for portfolio suitability and reviewed with regard
to your strategic approach and personal trading style.  Some
traders may favor a more aggressive approach, selling options
that are closer to the current price of the issue, to produce
a higher initial return.  While that technique may be more
attractive, it also increases the theoretical risk of loss.
Only you can know what plays are suitable for your risk-reward
tolerance and portfolio outlook.

IVGN - Invitrogen  $75.00  *** Biotech Bubble? ***

Invitrogen develops, manufactures, and markets research tools in
kit form and provides other research products and services to
corporate, academic and government entities.  The company's
research kits simplify and improve gene cloning, gene expression
and gene analysis techniques as well as other molecular biology
activities.  These techniques and activities are used to study
how cells are regulated by genetic material, known as functional
genomics, and to search for drugs that can treat diseases.  The
company currently offers approximately 700 gene-identification,
cloning, expression and analysis services.  Since the merger with
Life Technologies and Dexter Corporation, Invitrogen announced
that it intends to reorganize the company into two primary lines
of business, a Molecular Biology division and a Cell Culture

With today's rally in hi-tech shares, rumors of a biotechnology
"bubble" began to make the daily commentaries.  While we believe
that Invitrogen is one of the top companies in its industry, its
share value may not be able to overcome the near-term selling
pressure that will likely occur if technology stocks continue to
recover.  Technically, the IVGN price trend remains bullish but
the recent failed rally at $85 suggests the possibility of a new
downtrend is very high.  In addition, today's decline came on
increasing selling pressure and heavy volume.  With substantial
resistance near $85, it appears the stock has little chance of
reaching our sold positions in two weeks.

IVGN - Invitrogen  $75.00

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

Sell Call JAN 90   IUV AR  675       1.81    91.81    20.5%
Sell Call JAN 95   IUV AS  44        1.13    96.13    13.3%
Sell Call JAN 100  IUV AT  403       0.63   100.63     7.7% ***



RIMM - Research In Motion  $70.00  *** Downtrend Intact! ***

Research In Motion is a designer, manufacturer and marketer of
wireless solutions for the mobile communications market.  With
the development and integration of hardware, software and other
ervices, RIM provides solutions for seamless access to valuable
information including e-mail, messaging, Internet and Intranet
applications.  RIMM's technology also enables an array of third
party developers and manufacturers in North America and around
the world to enhance their products and services with wireless
connectivity.  RIMM's portfolio of products includes the RIM
Wireless Handheld product line, the BlackBerry wireless email
solution, wireless personal computer card adapters, embedded
radio modems and software development tools.

This play is simply based on the current price or trading range
of the underlying stock and its recent technical history.  The
recent downward movement in RIMM's share value was halted near
$50 in late November and after an ensuing recovery rally, the
second sell-off found support near $65; a bullish indication.
However, the issue has also achieved lower lows in each of its
three attempts to reverse the bearish trend; a negative trait
that will affect its upward movement in the near-future.  Even
today's record rally failed to bring the issue to a test of its
short-term (30-day) moving average and with the heavy overhead
supply from $85-$95, the issue has little chance of reaching
our target strikes in the next two weeks.

RIMM - Research In Motion  $70.00

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

Sell Call JAN 100  RUL AT  475       1.88   101.88    22.5%
Sell Call JAN 105  RUL AA  670       1.44   106.44    17.7%
Sell Call JAN 110  RUL AB  298       1.06   111.06    13.4% ***


BEARISH PLAYS - Combinations

MRK - Merck  $89.13  *** Drug Sector Sell-off! ***

Merck is a global research-driven pharmaceutical company that
discovers, develops, manufactures and markets a broad range of
human and animal health products, directly and through its joint
ventures, and provides pharmaceutical benefit services through
Merck-Medco Managed Care, L.L.C. (Merck-Medco).  The company's
operations are principally managed on a products and services
basis and are comprised of two reportable segments: Merck
Pharmaceutical and Merck-Medco.  Merck Pharmaceutical products
consist of therapeutic agents, sold by prescription, for the
treatment of human disorders.  Merck-Medco revenues are derived
from the filling and management of prescriptions and health
management programs.

This position was discovered with one of our primary scan/sort
techniques; identifying potentially failed rallies on issues
with bullish options activity.  In this case, the premiums for
the (OTM) call options are slightly inflated and the potential
for a successful (technical) recovery is significantly affected
by the resistance at the sold strike price; a perfect condition
for a bearish credit spread.

MRK - Merck  $89.13

PLAY (conservative - bearish/credit spread):

BUY  CALL  JAN-100  MRK-AT  OI=14128  A=$0.25
SELL CALL  JAN-95   MRK-AS  OI=13672  B=$0.68
INITIAL NET CREDIT TARGET=$0.50-$0.62  ROI(max)=14% B/E=$95.50


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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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