Option Investor

Daily Newsletter, Tuesday, 01/09/2001

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The Option Investor Newsletter                  Tuesday 01-09-2001
Copyright 2001, All rights reserved.                        1 of 2
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MARKET WRAP  (view in courier font for table alignment)
        01-09-2001        High      Low     Volume Advance/Decline
DJIA    10572.50 - 48.80 10680.70 10531.10 1.20 bln   1617/1285
NASDAQ   2441.30 + 45.38  2474.16  2406.08 1.97 bln   2243/1561
S&P 100   679.45 +  2.14   686.65   676.07   totals   3860/2846
S&P 500  1300.80 +  4.94  1311.72  1295.14           57.6%/42.4%
RUS 2000  463.95 +  2.31   466.40   461.39
DJ TRANS 3068.60 - 73.43  3142.03  3047.44
VIX        30.79 -  2.56    32.61    30.36
Put/Call Ratio      0.89

Look out below, Barton Biggs is bullish!

What went wrong today? The Nasdaq actually finished in positive
territory. Was there a solar eclipse or huge sunspot? Even more
astounding the Nasdaq bucked a negative Dow to do it! Did
investors actually start selling old economy stocks and buying
techs? I would not make that leap of faith just yet. Still it
was an encouraging day. The +90 point rally off the lows of the
day on Monday and then a positive day today, what more could we
ask for?

The Nasdaq gapped open and ran for a gain of +75 points before
pulling back as the Dow faltered early. Even with an upgrade to
T and a +2.44 gain as well as almost a +$3 gain by MSFT the
Dow just could not recover. The top six stocks on the Nasdaq set
a one day streak of positive closes with DELL, MSFT, INTC, CSCO,
ORCL and WCOM all green for the day.

The Nasdaq rally, notice how quickly we attach the rally tag to
any positive day, was helped by of all things, the Internet
sector. Posting a +5% gain today on good news from AMZN and EBAY
even YHOO was up +$3 only one day before they announce earnings.
Earnings which almost everyone expects them to miss estimates I
might add. Simply incredible. Do you think the bad news is priced
in or are retail investors still in denial? AOL joined the crowd
with almost a $3 gain.

Another sector that has been abused recently and outperformed
today was the biotechs. HGSI, INCY and MLNM were upgraded by
AG Edwards and the entire sector gained. The telecom sector
rallied on the upgrade to AT&T and the improved outlook for
VZ and SBC. This is encouraging that bargain hunters are moving
into the sectors most ignored over the last several weeks.

Amazon.com must be on to something. One day after AMZN affirmed
their earnings estimates and improved outlook, their competitor
BNBN warned that slow holiday sales would impact earnings. BGRP
had already warned for the same reasons. Amazon, with $1.1 bil
in cash, looks like they won the book war. The fact that they
are winning the Internet sales battle and appear to be on track
to be a successful Internet story, gave new life to the Internets.
EBAY, who just announced a cash purchase of a Korean auction site,
is also flush with cash and reported a growing client base. The
Internet is not dead it just needed pruning. Remember PCLN? The
almost defunct name your price website won a court ruling on
a patent infringement suit. MSFT through its travel site, Expedia,
will pay PCLN an undisclosed sum to settle the case. PCLN jumped
+.35 in after hours trading. Don't laugh that is a +20% gain for
the remaining PCLN shareholders. Now if only YHOO could meet
estimates on Wednesday and not warn about future problems. Well,
one can at least wish!

One area that did not win today was the cell phone manufacturers.
Nokia warned that they only sold 128 million phones last year
which was a +64% increase but well short of the 140 million they
were expecting. NOK dropped -$4 but the news rippled through the
entire sector including their suppliers. A shortage of 12 million
units sold means there were quite a few suppliers with millions
of parts either unmade, unfilled or unsold. QCOM bore the brunt
of the selling with a -4.63 loss.

Financial stocks also took a hit today for reasons not quite clear.
Many analysts pointed to the California energy crisis as the culprit.
It is true California banks bore the brunt of the selling but even
the credit card issuers like COF, PVN and KRB were weak and I don't
see how a PG&E bankruptcy would impact them. More likely the rate
cut bounce is over and traders are moving on to other stocks. This
would not bode well for the expected rate cut on Jan-31st. Do you
think they are already discounting that as a done deal?

The earnings warnings have slowed with only a couple after hours
today. Cymer was the most visible and one that could impact the
trading for tomorrow. Cymer said sales of their semiconductor
manufacturing equipment had slowed. This could throw cold water
on the semiconductor makers if investors feel the slowdown was
due to weak chip sales. Companies like AMAT, NVLS, KLAC, PMTC
had been firming as of late and don't need any negative news.
Still, after 594 earnings warnings so far this quarter, as reported
by First Call, there are not many companies left to warn. This
is 91% more warnings than this time last year. Fortunately not
all companies are warning. The EMC CEO said today that despite
the economic slowdown sales were good and he did not think EMC
would have any trouble hitting sales targets foe 2001. JDSU was
reported on CNBC today as having affirmed estimates but I could
not find it reported anywhere else. JDSU lost -1.56 so I doubt
the origin of that story. If warnings are about over then worry
about real earnings is about to take center stage. This is a
good news bad news story. If companies hit estimates and do not
caution on future results then the market should recover quickly.
If headline companies start missing estimates on a daily basis
and warning that the outlook is grim then look out below. The
next three weeks will be crucial to market direction the next
three months. The Fed may cut rates again in three weeks but if
every headline is bad earnings news then we have our work cut
out for us.

The leading contrarian indicator for the last two years, Barton
Biggs, Chairman of Morgan Stanley Asset Management, says the
Nasdaq is very oversold and ready for a +40% to +50% rally.
Wow! What a turnaround. Barton has been negative on the Dow for
the last 5000 points and the Nasdaq since passing 2000. He was
wrong on both counts for the last two years. If he has now
capitulated and thinks the Nasdaq is currently a buy then that
has to be a contrarian indicator. Let's hope not! Maybe in
reality he was just having a hard time getting people to let
his firm manage their assets after being bearish for two years.

A positive day, I am speechless. Advances beat declines on both
exchanges with new highs far out stripping new lows. The S&P-500
again closed over 1300 which is seen as a critical level. The
Nasdaq rallied back over 2400 again and held the gains from
Monday's lows. It is tough to be negative considering the past
month of declines. Volume was moderate but there was no
conviction. We have been basing or moving sideways on either
side of 2400 since Dec-21st. Until we can put several positive
days together it is too early to call today's move a rally.
As traders we need to start new long positions only as long
as the Nasdaq is over 2400. Aggressive traders could risk buying
any dip to 2300 again but very carefully and very selectively.
There are quite a few small cap stocks with new up trends forming
and the Russell-2000 appears to have support at 460. I am
cautiously optimistic but you should proceed with care. Choose
smaller positions than normal and possibly fewer positions until
a real trend is established. A nice breakout and close over 2550
would be really ideal and would confirm to me that better days
may be ahead.

Good Trading, Don't buy too soon!

Jim Brown

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It Slices & Dices
By Austin Passamonte

Today's market action defined chop to a "T."  We basically went
nowhere at all and spent the entire session getting there. Is
anyone surprised that Monday's powerful short squeeze at the
close failed to hold into the next session?

Market opinions are polarized and getting wider. Just like
Tuesdays' divergent action, one camp feels we're close to a
bottom while the other fears new market lows lie straight ahead.

We happen to think either scenario has the chance to materialize,
with a slight bias to the downside. That bearish outlook exists
from a number of technical and fundamental studies. Where to

Poor earnings, currency crisis, power company defaults and
negative investor sentiment weigh heavily on the market. From a
technical standpoint there is very little bullish news except for
the multiple bottoms we are logging, especially in the NASDAQ
indexes and to a lesser extent other markets. It will take some
surprisingly bad news to drive us further down from there.

Which could happen. Rumors persist about big-caps missing numbers
and no word of correction or guidance up have emerged from any in
self-defense yet. This Friday evening after the markets close
could be an opportune time for an 11th hour warning in the event
one should be coming forth.

Bearish technical bias? All major indexes are below any moving
average that matters. Most have chart signals mixed to bearish
with a procession of lower highs and lower lows to battle through
as well. Nothing we can see on the charts that moves us to load
up on calls at this time.

Nor are we ready to buy puts. This mixed action could continue
into the week as buyers & sellers match up. However, it is likely
that at least one of the remaining three will be a large-range
day allowing for excellent trade opportunities. Which one or
ones? We never can tell without hindsight.

Escaping further damage as the FOMC nears could be a catalyst for
rallied markets soon. We still don't see the long-term reversal
signs needed to confirm any bottom to us, but a tradable rally
that can hold beyond part of one session would certainly be a
welcome event indeed!

Trade the trend and prosper carefully.


Tuesday 01/09 close: 30.79

30-yr Bonds
Tuesday 01/09 close: 5.44%

Support/Resistance Indicator
The Index Support/Resistance(S/R)Ratio is a formula used to
gauge possible support or resistance based on open-interest
disparity. Ratio listed is percentage of calls to puts or
puts to calls respectively.

Support is factored from dividing puts by calls at strike
levels beneath index closing price. Resistance is factored
from dividing calls by puts at strike levels above current
closing price.

  (Open Interest)       Calls        Puts          Ratio
S&P 100 Index (OEX)
720 - 705               13,699        4,078         3.36
700 - 685               12,455        6,733         1.85

OEX close: 679.45

675 - 660                4,014       10,037         2.50
655 - 640                  217        9,128        42.06

Maximum calls: 700/6,487
Maximum puts : 640/5,488

Moving Averages
 10 DMA  686
 20 DMA  692
 50 DMA  712
200 DMA  766

NASDAQ 100 Index (NDX/QQQ)
 67 - 65               115,991        21,728         5.34
 64 - 62                53,700        35,974         1.49
 61 - 59                97,227        49,913         1.95

QQQ(NDX)close: 57.25

 56 - 54                38,342        35,328          .92
 53 - 51                 3,655        28,093         7.69
 50 - 48                 8,407        20,571         2.45

Maximum calls: 60/75,915
Maximum puts : 60/39,320

Moving Averages
 10 DMA 59
 20 DMA 61
 50 DMA 68
200 DMA 85

S&P 500 (SPX)
1375                    9,449        10,466           .90
1350                   38,604        31,559          1.22
1325                    9,678        11,508           .84

SPX close: 1300.78

1275                      454        11,419         25.15
1250                    1,315        13,530         10.29
1225                      104        14,154        136.10

Maximum calls: 1350/38,604
Maximum puts : 1350/31,559

Moving Averages
 10 DMA 1315
 20 DMA 1319
 50 DMA 1351
200 DMA 1427


CBOT Commitment Of Traders Report: Friday 01/05
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts on the
Chicago Board Of Trade.

Small specs are the general trading public with commercials being
financial institutions. Commercials are historically on the
correct side of future trend changes while small specs are not.
Extreme divergence between each signals a possible market turn in
favor of the commercial trader's direction.

                     Small Specs             Commercials
DJIA futures     (Current)  (Previous)   (Current)  (Previous)
Open Interest
Net Value         -2008       -818         -2167     -2589

Total Open
interest %       (-25.35%)  (-12.51%)    (-9.59%)    (-11.60%)
                 net-short  net-short    net-short   net-short

NASDAQ 100       (Current)  (Previous)   (Current)  (Previous)
Open Interest
Net Value         -1028       +1428        -1825      -2569
Total Open
Interest %       (-4.77%)    (+8.65%)     (-3.45%)   (-4.43%)
                 net-short   net-long     net-short  net-short

S&P 500          (Current)  (Previous)   (Current)  (Previous)
Open Interest
Net Value         +59586      +67807      -81851      -85776
Total Open
Interest %       (+29.89%)   (+38.16%)    (-11.09%)  (-11.94%)
                 net-long    net-long     net-short  net-short

What COT Data Tells Us
Indices: The Commercials show a minimal decrease in their net-short
positions on the DJIA, NASDAQ 100, and the S&P 500
Small Specs show a dramatic increase their net-short positions on
the DJIA.

Interest Rates: Commercials are still moderately short T-Bond and
T-Note futures. (Bearish)

Currencies: Commercials heavily short Euro futures while small
specs build net long. Small specs are betting on interest rate
reduction while commercials remain skeptical. (Bearish)

Energies: Commercials are net-short all oil products. These
producers are hedgers and almost always take the opposite side of
expected market action to lock-in production prices. (Bullish)

Metals: Commercials are moving from net-long towards neutral in
Gold, could be under distribution. Silver, Copper and Platinum
are net-short. (Mixed to Bearish)

Data compiled as of Tuesday 12/26 by the CFTC.


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Let's Start At The Beginning
By Lee Lowell

This being my first article of the New Year, I'd like to begin
from the top and explain some basics of options trading.  Some
of you might find this elementary, some of you might find this as
a nice review, and some of our new readers might find this as your
first step.

We know that there are two types of options: calls and puts.  What
you can do with them is practically endless.  Each one can be
bought or sold as a single contract or can be combined to form
almost any strategy to fit your risk profile and time frame.  I'm
not going to discuss all the types of strategies you can create
with options at this time, but I will discuss what an option is
and how its premium is derived.

The price of an option that is bought or sold on the options
exchanges is called the "premium."  The premium isn't a number
that is magically pulled out of the air.  It's a number that is
mathematically calculated using a pricing formula that can be
solved with an options calculator.  There are a few different
option pricing models, but the first and most popular one is
called the "Black-Scholes" model.  This is named after the two
gentlemen that created the formula.

The pricing model takes into account six different inputs that
are used to derive the option's premium.  They are:

1.  underlying stock price
2.  strike price of the option
3.  days until option expiration
4.  volatility
5.  current interest rates
6.  dividends of the stock

Once all these inputs are fed into the model and calculated, the
resulting number is the premium of your option.

Let's take a closer look at some of the inputs.  The first two
items are self explanatory but there is a name for the relationship
between these two numbers.  It is called "intrinsic value."  The
relationship between the stock price and strike price will
determine if the option is in-the-money, at-the-money, or
out-of-the-money.  Any option that is in-the-money (call or put),
has intrinsic value.  Any option that is at-the-money or
out-of-the-money has no intrinsic value.

A call option has intrinsic value and is in-the-money if the
strike price is lower than the stock price.  A put option has
intrinsic value and is in-the-money if the strike price is higher
than the stock price.

A call option has no intrinsic value and is out-of-the-money if
the strike price is higher than the stock price.  A put option has
no intrinsic value and is out-of-the-money if the strike price is
lower than the stock price.

YHOO trading at $30 per share
$25 call=$8, is $5 in-the-money, so it has $5 of intrinsic value
$35 call=$3, is out-of-the-money, so it has $0 of intrinsic value

$35 put=$8, is $5 in-the-money, so it has $5 of intrinsic value
$25 put=$3, is out-of-the-money so it has $0 of intrinsic value

To figure out the in-the-money portion, just take the difference
between the stock price and the strike price.  Whatever amount of
points the option is in-the-money, that's how much intrinsic value
it has.

The last four inputs on the list also have a name for their
relationship to the option premium.  It is "extrinsic value" (or
"time premium").  These inputs add extra value to the option above
and beyond its intrinsic value.  "Days to expiration" and
"volatility" are really the ones that add the extra value whereas
"interest rates" and "dividends" play a very small role.  So I
will only concentrate on days to expiration and volatility.

Going back to our YHOO example:
YHOO trading at $30 per share
$25 call=$8, $5 of intrinsic value and $3 of extrinsic value
$35 call=$3, $0 of intrinsic value and $3 of extrinsic value

$35 put=$8, $5 of intrinsic value and $3 of extrinsic value
$25 put=$3, $0 of intrinsic value and $3 of extrinsic value

No matter what, all options have extrinsic value, but only options
that are in-the-money will have intrinsic value.

Intrinsic + Extrinsic  = Option Premium

Figuring out the intrinsic value is the easy part.  Figuring out
the extrinsic value is a little tricky so I will spend some time
clarifying it.  We all know that longer dated options have more
time until expiration.  The more time we have, the more the
underlying stock can move in our favor.  Thus, we will pay higher
prices for the opportunity to get it right.  If you are bullish on
a stock but not sure when it will move higher, then you should buy
some LEAP calls.  This gives you plenty of time to be right.  But
the extra months of time will add more extrinsic value to the
premium.  For example, a one month out-of-the-money call option
may have $1 of extrinsic value whereas a 12 month LEAP call may
have $6 of extrinsic value.  You're paying $500 more for that
option for the extra eleven months of opportunity.

Just remember, the intrinsic value (or in-the-money value) will
always be the difference between the stock price and the strike
price.  But the extrinsic value is constantly changing because the
days to expiration are always getting smaller.

"Volatility" is the other important component of the extrinsic
value and is the most difficult to quantify.  It too adds extra
value to the option just as the "days to expiration" do.
Volatility is a term that signifies the erraticness of the stock
in question.  The more erratic the stock, the higher the
volatility.  The less fluctuations of the stock, the smaller the
volatility.  The volatility number is derived from its own formula
using past closing prices of the stock and is expressed in % terms.
Once this number is figured out, it is then added into the option
calculator along with the other five inputs.  A higher volatility
number will bump up the extrinsic value level and a lower
volatility number will decrease the extrinsic value.

YHOO trading $30 per share with 45% volatility:
$25 call=$8, $5 of intrinsic value and $3 of extrinsic value
$35 call=$3, $0 of intrinsic value and $3 of extrinsic value

YHOO trading $30 per share with 85% volatility:
$25 call=$12, $5 of intrinsic value and $7 of extrinsic value
$35 call=$6,  $0 of intrinsic value and $6 of extrinsic value

As you can see, as we bump up our volatility number, the price of
the option goes up from the extrinsic portion.  It is very
important that you get a handle on how to figure and use
volatility because that will help you to better price the option

So that's it.  In a nutshell, the price of the option is comprised
of six components.  Two of which are considered intrinsic value
and four are considered extrinsic value.  The relationship between
the stock price and the strike price, the days to expiration, and
the volatility of the stock are the most important features.

I hope this review hasn't bored too many of you.  It's always good
to re-visit the basics.

Good luck.


Are Valuations High or Low?
By Scott Martindale

Another day, another lack of direction.  It's evident that
investors want to put their money back to work, but they're
afraid.  Are valuations still too high, or are we looking at
bargains right now?  Will the economy enter a prolonged recession
or just a brief (and necessary) slowdown prior to the next
economic boom?

No doubt about it, fear and uncertainty on the Street continues
to run rampant, especially after the lack of follow-through in
the wake of the surprise Fed announcement and resultant euphoria
(and short-covering).  By the way, it's lamentable that every
gesture or utterance by one man (Mr. Greenspan) can have such
impact on the markets.  This is the ultimate in speculative,
directionless, news-driven uncertainty.  When fear balances greed,
we have this kind of market.  Daily charts of the indices and most
stocks are of little value since market sentiment determines the
trend and sentiment changes daily.  It seems you have to be a day
trader to play the market these days, but even day traders are

However, there are individual stocks that have managed to sustain
uptrends beyond one or two days.  In fact, my quick perusal came
up with the following stocks that have shown pretty sustained
uptrends over the past three months: ADM, ASO, CCR, CNC, HLT,
NWL, PLB, and WMI.  Note that none of them are sexy tech stocks.
However, there are a number of tech stocks that for a variety of
reasons have managed to hold the line over the past three months,
such as USIX, TTN, ORCL, TXN, and MOT.

I'll come clean now that I was more heavily invested at year-end
than I wanted to admit to you readers last week.  I bought stocks
and some calls and sold OTM naked puts the last couple of days of
the year in anticipation of some market relief, after tax-loss
selling and with renewed optimism.  [Premiums were too high and
rally timing was too uncertain to buy many calls.]  Although I
wasn't exactly predicting a Fed rate cut so soon, at the same
time I couldn't believe that our leaders would just stand around
and let our markets (and their associated impact on consumer
spending, i.e., "the economy") continue to crumble without doing
something.  After all, this is the U.S. of A. by golly!  We're
not passive victims -- we act when we must!

I can't say that my bullish strategy has paid off in proportion
to the risk I took on, but I'm up nonetheless, and my stops are
in place.  I was disappointed in the lack of follow-through after
the Fed acted.  The initial euphoria was met with worry that
things must be more dire than most everyone previously thought,
thus prompting the Fed to act quickly.  [Of course, many of us
thought that the Fed never should have made the last couple of
rate hikes in the first place!]

How do we know whether the market is currently under or
overvalued?  Of course, nobody can point to one measure as the
definitive indicator, but I'll touch briefly on three: price to
earnings ratio (P/E), P/E to earnings growth rate ratio (PEG),
and the "enterprise value" to earnings ratio (EVE).

P/E is the old standby with which we are all familiar, and you
often see analysts use a company's forward earnings projection
for the next year (four quarters) rather than trailing earnings.
The historical value for the S&P 500 had been around 15 for a
long time, and many market watchers still consider that to be the
valuation target.  Moreover, bears like to point out that in 1995
the Nasdaq 100 had a P/E of 23, but today still trades around 130
even after the 50 percent decline.  However, many value plays can
be found that trade at apparently reasonable multiples, such as

However, many analysts believe that you must look at high-growth
stocks differently, particularly those with little or no
earnings.  Thus, the PEG ratio was invented, which generally
looks at the projected annual growth rate in earnings per share
over the next five years.  By this measure, the S&P tech index is
now selling below 1.0 while the rest of the S&P index is valued
around 1.2.  Many analysts believe that certain dominant high-
growth companies can justify multiples of two to three times
projected earnings growth rates.  For example, CSCO at $37 and
with a 25 percent estimated growth rate has a PEG of less than
2.0, which many consider to be reasonable (or even cheap) given
CSCO's industry dominance and proven sustained growth.  However,
it is definitely speculative to buy JNPR around $120, with its
triple-digit P/E and PEG over 3.0, although many still believe in

But some conservative analysts believe that both P/E and PEG miss
an important component of a company's financial health -- its
debt load. The Jan/Feb issue of Bloomberg Personal Finance talks
about an "enterprise value" to earnings ratio for checking a
stock's valuation.  Enterprise value per share is computed by
taking the stock's market capitalization (equity) plus its long-
term debt, minus its cash on hand, divided by the number of
outstanding shares.  This is then divided by EPS to get EVE,
which can be evaluated similarly to P/E.  Many of the speculative
stocks have little debt (non-interest rate sensitive), so EVE is
very close or even less than P/E.  However, the Bloomberg article
points out that many apparent "value" stocks are not so cheap
when considered in this way, and mentions JCP as a particular
example in that its P/E is 13, which seems low, but its EVE is
34, which seems quite high.  On the other hand, INTC has both a
forward P/E and EVE of around 20.

Hey, look at that: INTC also has a PEG of only 1.0.  I don't know
when it will start moving up, but unless we enter a prolonged
recession, I'd be willing to bet it will eventually.

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on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


NOK $39.31 -3.81 (-3.81) Nokia reported today that they sold
128 million cell phones in 2000, up 64% from 1999, and topping
overall market growth.  However, some analysts had given
guidance in the range of 140 million handsets, and thus the
market perceived the reported number as a disappointment.
This is one of the reasons it is always best to assess the
market's reaction to news released on each company before
taking positions, and to take bullish positions only on a
positive reception to news and analysts forecasts.  While
Nokia did not revise their guidance for next year's estimates,
the stock closed below our stop price of $40 on heavy volume,
and we are dropping it tonight.

ONE $37.94 -0.44 (-0.81) Another failed attempt to burst
through the $40 resistance level has left ONE weak and
vulnerable to the bears' latest assault.  Although our $35
stop is still intact, credit concerns are weighing heavily on
the entire Financial sector, and ONE is feeling this pressure.
All of the technical signals are pointing to further downside,
and if the credit concerns are valid, this is a train we don't
want to be on when it derails.  If you are in the play, use
any strength as an opportunity to exit at a more favorable
level, but don't initiate new positions on the bounce.  The
odds are stacked against a significant rally in ONE in the near

UBS $170.75 -5.22 (-3.16) Despite a down day for the markets
yesterday, UBS managed to buck the trend and trade higher,
closing up $2.06 or 1.18 percent.  Volume however, was light, at
only 75 percent of ADV.  As a result, we are still awaiting an
entry point for this play.  The gap between $165 and $170 is
something we are watching closely.  While not all gaps fill, a
majority of them do, providing traders with an ideal entry point.
Today the stock successfully tested the $170 support level,
closing down about 3 percent. At this point if buying volume
picks up, taking UBS back above its 5-dma at $171.15, an entry on
strength could be had.  Aggressive traders will most likely
continue to watch the gap, waiting for a bounce of support at our
stop price of $165, reinforced by the 10-dma at $166, for an
ideal place to taking a position, provided that other stocks in
UBS' sector such as BSC, LEH, MWD confirm upward movement.

TBL $66.81 -6.13 (-3.69) We raised our protective stop on TBL
just in time yesterday as the stock sold off today on heavy
volume.  The sell-off today stemmed from the weakness in the
broader retail sector, which fell for the fourth consecutive
session, measured by the S&P Retail Index.  The pullback we've
witnessed over the past four sessions may be no more than
normal profit taking.  Nevertheless, we're dropping coverage
on TBL this evening and would exit any open positions on a
bounce early Wednesday morning.

BBT $35.63 -1.13 (-1.50) Continued weakness in the broader
finance sector combined with a rollover at the $38
resistance level have caused us to drop coverage on BBT tonight.
No to mention the fact the stock is quickly approaching our
protective stop at $35.  BBT closed its acquisition of FCNB
corp. today, which may have caused some of the weakness, but we
tend to feel the concerns in the finance sector accounted for
the majority of the losses.  Use any bounce off the $35.50
level early tomorrow morning to exit any open positions.

EMN $46.13 -1.56 (-0.88) Eastman Chemical slid lower today
along with the broader chemical sector (CEX.X).  It appears
investors are rotating out of the chemical space into other
growth sectors of the market, which has hampered EMN since
the beginning of the year.  Although EMN bounced off its
50-dma today, it did close below our protective stop at $47,
and with that failure we're dropping the play tonight.  Exit
open positions on any strength early tomorrow morning.


CELG $20.63 -3.19 (-4.06) Right on track, CELG has continued to
decline through one support level after another, arriving this
morning at a new 52-week low.  The $18-19 support level was our
downside target, and given the heavy buying volume that ensued
in the afternoon, it looks like CELG may have run its course to
the downside.  Rather than hold on and attempt to squeeze a
little more profit out of the play, we are content to lock in
our profits here and look for another high-odds play.

TQNT $35.69 -3.63 (-6.31) Analysts and investors alike got
spooked this morning when Nokia (NOK) issued preliminary sales
figures that were slightly below expectations.  Despite the
fact that the figures do not represent a significant change
from the company's prior guidance, shares of both NOK and its
component suppliers spiraled lower.  TQNT gapped down by more
than $5 (13%) this morning before more rational thinking
prevailed and buyers began appearing.  For our part, the drop
today looks like an over-reaction due to a skittish marketplace.
We are looking as the drop as a gift, and are glad to take a
little extra profit out of the play.  It's time to take our
profits and run, before the bulls wake up and decide to take
them back.

ARTG $20.50 +1.50 (+2.56) Support at $17.50 continued to hold on
Monday as a bounce off oversold conditions helped ARTG to close
up $1.06 or almost 6 percent on average volume.  Considering the
recent selling at over twice the ADV, up volume for the day was
light and the stock was unable to break through resistance at the
5-dma.  Today, the entire B2B sector got a lift, thanks to supply
chain management software maker ITWO, when the company announced
that they would surpass revenue and earnings estimates for the
fourth quarter.  The rising e-Business tide lifted shares of
ARTG, which closed up almost 8 percent.  Volume was average and
the stock was unable to close above our stop price of $21.
However, improving sentiment in the B2B space could carry ARTG
higher and as such, we are dropping coverage of this play.

FRX $121.50 +7.50 (+4.25) The brief pause in FRX's decline on
Friday allowed the 5-dma to catch up to the stock price and
hitting that line of resistance on Monday, the sellers came in
force and with that, the stock closed down $3.25 or 2.77 percent
on 140% of ADV.  Today, the stock was upgraded by Lehman
Brothers, from a Buy to an Outperform rating.  This helped FRX to
power through its 5-dma resistance at $117.77.  While the stock
encountered tough resistance from its 10-dma at $124, the close
above our stop price of $120 suggests that the downtrend in FRX
may be in the process of reversing.  As a result, we are taking
our profits and dropping this play.

RIMM $48.94 +1.25 (+1.44) After losing almost 50 percent of its
value last week, shares of RIMM are enjoying a brief respite from
the recent selling pressure, with the stock closing relatively
unchanged in yesterday's trading.  Volume continues to be high,
at 128 percent of ADV, but this is less than half of the amount
of shares traded in sessions last week.  Today, the stock
continued to edge higher, closing up 2.62 percent on 70% of ADV.
It appears at this point that the stock has found support at the
$45 level.  With selling volume drying up and the stock deeply
oversold, a move to the upside appears likely.  With that, we are
taking our money off the table in search of higher-probability

UNH $54.31 +0.56 (+0.38) Consolidation is the name of the game so
far this week, with shares of UNH trading in a tight range on
declining volume after the sell-off on massive volume last week.
In fact, the stock has traded between support at $53 and
resistance at $55.50 for the past three sessions.  Volume has
moved back to average levels and with what looks to be firm
support at the $53 level, it appears that the best we can hope
for in this play is more sideways action, with the prospect of a
large move favoring the up side.  With a high risk of loss and
low probability of gain, we are no longer recommending this play.

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The Option Investor Newsletter                  Tuesday 01-09-2001
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

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COST $41.81 -0.13 (+1.00) Costco remains in a short-term upward
trend, and is encountering resistance at $42, and stronger
resistance at $44.69.  With a little help from the market, Costco
should be able to break resistance and forge higher.  A break
through the 5-dma of $42.27 on strong volume would be an
excellent entry point, and could lead the stock to the next level
of resistance at $44, and $44.69.  The key here is volume, which
was very heavy on Costco's strong days last week.  Ideally, look
for volume of over 10 million shares, and assess strength in the
retail sector (RLX.X) before taking positions.  Keep stops at $39.

SBC $51.94 +1.81 (+1.94) Telecom stocks continued to march into
positive territory today with a nearly 5% gain in the Merrill
Lynch Telecom HOLDR (AMEX:TTH).  SBC was a major contributor to
today's move, as it received a positive ruling from the U.S.
appeals court regarding its 1999 purchase of Ameritech.  The
court voided the condition that had originally required SBC to
move its high-speed Internet operations into a separate
affiliate.  This seems to have been a positive sign for the
industry as a whole, as noted above, and SBC benefited to the
tune of 3.6%, keeping the recent up-trend intact.  While the
trendline is only about 2 weeks old, it is encouraging to see
our play bounce at the 10-dma ($49.44), climb back over the
converged 5-dma ($50.94) and 30-dma ($51.13), and post its
highest close since the earnings warning on December 19th.
Earnings are just over 2 weeks away, on January 25th, so use
any profit taking dips as an opportunity to take advantage of
any pre-announcement rally.  Our stop at $47 is still in place
and any bounce above this level, particularly near the $50
support level, looks like a good target for aggressive
investors.  Conservative players will still need to wait for
the bulls to scale the $53 level before opening new positions,
and all players will want to confirm strength in the sector
before putting their cash at risk.

BRCM $97.00 +3.56 (+10.00) Positive price-volume action was one
of reasons we added BRCM to our call play list yesterday, as the
stock rallied $6.44 or 7.40 percent on almost 120% of ADV despite
a down day for the NASDAQ.  The surge came on news that the
company had acquired privately held chipmaker ServerWorks for
about $1 billion in stock.  This was a deal which analysts
applauded, and for good reason, since this gives BRCM an entry
into the lucrative server market.  JP Morgan re-iterated their
Long-Term Buy rating and offered bullish comments about the
company going forward, helping BRCM to gain another 3.81 percent
on 120% of ADV today.  Currently sitting right on its 5-dma, an
entry at these levels could be a good idea but make sure buying
volume confirms positive direction before entering.  A bounce off
$95 and the 10-dma at $92 could also provide for aggressive entry
points.  There is also support at $90 and our stop price of $84,
but make sure BRCM closes above this level.  For an entry on
strength, a break through today's resistance at $103 could be a
possible play, but resistance at $105 is formidable so we
recommend waiting for this level to be taken out before taking a
position, confirming entries with the Philadelphia Semiconductor
Index (SOX).

LRCX $18.94 -0.33 (+0.63) A break from a downtrend line that has
been in place since April of 2000 and the stock's recent advance
on heavy volume were two of the factors which landed LRCX on our
call play list on Monday, as the stock gained over 5 percent on
117% of ADV.  Today, LRCX pulled back 1.7 percent on light
volume, digesting its recent gains, bouncing off support from the
5-dma, a level which going forward, could provide aggressive
traders with an entry point.  Support from the 10 and 50-dma, now
at $16.50 and $16.80 respectively, as well as our stop price of
$16 provide additional support, and possible targets to shoot for
but confirm bounces with volume.  For more risk averse traders, a
break through the 100-dma (now at $20.31) would be the signal to
enter this play, but make sure that Merrill Lynch's Semiconductor
HOLDR (SMH) is moving in the same direction.

MER $70.25 -1.00 (-1.31) Ever since the huge up move last
Wednesday courtesy of the 50 basis point cut in interest rates
from the Fed, shares of MER have been digesting its gains as the
stock has drifted lower on decreasing volume.  Trading on Monday
continued to reflect this pattern of consolidation, with MER
closing down fractionally, less than half a percent on 90% of
ADV.  Today the stock headed lower, along with the rest of the
financial sector, closing down 1.4 percent.  Trading volume was
light however, only 85 percent of ADV the bounce off the 10-dma,
currently sitting at $69.36, was a good sign.  Pullbacks to
support from the 10-dma as well as $70 and our stop price of $68
could provide higher risk players with entry points while a break
above its 5-dma (now at $72) on volume could allow for a safer
play, but in doing so, make sure that the sector is also moving
in the right direction by following rivals such as GS and LEH.

AEOS $47.00 -0.44 (+0.56) Retail stocks across the board started
the week rather flat.  Overall, the likes of WMT, GPS and TLB
hung on to last week's gains and experienced only mild profit
taking.  AEOS held steady at near-term support of $46 on
respectable volume.  The stabilization at the $46 level and
consistent efforts to trade above $48 demonstrates the stock's
individual spunk.  A clean break through this first line of
opposition followed by a rally through the pivotal $50 resistance
would provide better confirmation.  However, we continue to
maintain our optimism of new highs going forward; and in light of
the unfaltering developments above the advancing 5-dma ($47.76),
we've raised our protective stop to $43.  USB Piper Jaffray also
made positive adjustments to its coverage on AEOS.  The brokerage
firm reiterated a Strong Buy recommendation and upped its 12-
month price target to $59 from $50 p/s.  A conservative approach
is to wait for another breakout and buy into high-volume

CTXS $27.94 +1.56 (+1.25) Monday's test of the $25 support level
followed by today's peak above the $28 resistance offers
technical evidence that CTXS can rise to the occasion.  The
quickly approaching earnings' release, slated for January 17th
(after the market), does impose a tight time frame to trade
within; but nevertheless, the potential to profit exists.  We're
also looking for investors to rotate back into the techs and for
CTXS to get swept up in the momentum buying.  Depending on your
personal risk factors and trading style, you could either buy on
the intraday dips and lock in gains as CTXS challenges $28 and
$30 or take positions as CTXS rallies through the 200-dma ($31.35).
In recent weeks, both UBS Warburg and Gerard Klauer
Mattison offered Buy ratings on CTXS and issued price targets of
$28 and $40, respectively.

VZ $55.50 +1.25 (+0.94) The telecoms got a nice boost from
AT&T's (T) positive coverage today.  The enthusiasm quickly
spread to VZ and it saw a sharp uprising in early trading.  The
traders who took the more enterprising entries off yesterday's
lows of $53, or even at the converged 5, 30 & 50 DMA lines near
$54, reaped grand rewards today.  VZ shattered the immediate
resistance at $55 and peaked at $56.81 mid-day on robust volume.
In addition, the bullish close above the formidable resistance
and the elevating level of short-term support at $56 offers
supplementary evidence of VZ's upward potential.  Consider
taking entries off the current level, if more buyers jump into
the momentum and VZ makes the charge for $60.  Otherwise, a
pullback to the 10-dma ($52.18) might be an option for the more
aggressive types who like to play the spreads.  Continue to
watch WCOM, VOD and T to forecast the sector sentiment and look
for VZ to successfully penetrate $57 as it approaches its
earnings' date.  The company is scheduled to report on February
1st, before the market open.


CSC $53.31 -2.63 (-4.25) After dropping below the support level
of $60 last week, CSC drifted lower with the market on Monday,
but failed to recuperate at the end of the day with the indexes.
CSC suffered from an analyst downgrade on Tuesday, as CSFB cut
the rating to hold, citing concerns about near term softness in
consulting demand, and a lengthened translation of bookings
signed into revenues generated.  CSC is now at a 52-week low,
and shows few indications that it will recuperate at any point
in the near term future.  CSC has a daily pattern of rolling over
from key resistance levels at $56.50 and $53.50.  The next support
levels are $52.75 dating back to October of 1998 and $51.94
dating back to May of 1998.  An aggressive trader could take
positions on a roll over from $56.50, or the 5 dma of $57.92.
Conservative traders can wait for a plunge below $51.56, which
could lead CSC to $42.50.  Move stops down to $59.

CALP $28.00 -2.31 (-2.56) There's nothing like being in the
right place at the right time.  After giving up a whopping 38%
in the prior week, CALP staggered under the weight of another
huge down day for the entire Biotech sector on Monday.
Although the sector stabilized today, CALP continued its losing
ways, bringing it to the $25 level and putting it within
striking distance of a new all-time low.  The sweet spot of
providing picks and shovels to the Biotech industry isn't so
sweet lately, especially when the company is saddled with
litigation concerns with a primary competitor (ACLA).  Although
the litigation has been settled, apparently to CALP's benefit,
investors are not in a hurry to support the stock price.  Until
investor sentiment in the Biotech sector improves, there is
little to suggest that CALP will be able to mount any sort of
meaningful rally.  Even competitor AFFX moved up today,
highlighting the relative weakness of CALP relative to the rest
of its industry.  Our stop is still sitting at $35, and any
rally that rolls over below this level looks like a good entry
point for aggressive traders.  More conservative players can
consider new positions as the bears push the price below $25 on
continued heavy volume.

CB $74.06 -2.38 (-1.06) The sell-off in shares of CB late last
week put CB deep into oversold territory, so it's no surprise
that the stock needed some consolidation before making another
major move.  This is exactly what we got to start the week, with
CB closing up $1.31 or 1.75 percent on light volume on Monday,
making the second trading session in a row in which the stock
traded in a range between support at $74.50 and resistance at
$77.50.  After being denied by the 5-dma today, the stock
continued to slide lower, closing down 3.11 percent on 68 percent
of ADV.  Look for further tests of the 5-dma, now at $76.90, as a
potential entry point as well as resistance at $75 and our stop
price of $80.  For an entry on weakness, a break below recent
support at $73.50 with conviction could be a signal to jump in.
When making a play, keep an eye on rivals CI and ALL to gauge
sector sentiment.

P $55.06 -0.88 (-0.81) After the recent volatility in shares of
Phillips Petroleum, the stock enjoyed a day of rest as it traded
in a right range to close pretty much unchanged on half the ADV
on Monday.  Today, P closed down 1.56 percent, thanks to falling
oil prices, as can be seen in the AMEX Oil Index (XOI).  The
break in the XOI below its 50-dma could signal a further drop in
oil prices in the short term, helping to take our put play deeper
into profitable territory.  Now back below its 5-dma ($55.46), a
failed rally at this point as well as the 10-dma at $56.36 and
formidable resistance at our stop price of $57 could allow
aggressive traders to enter this play.  For more conservative
traders, if selling volume increases, taking P below support at
$54.75, this could allow for an entry but wait for weakness in
the XOI as well as in peers such as TX and XOM before making a

PDLI $50.25 -2.00 (-9.25) Continued negativity in the Biotech
sector helped to take our PDLI put play into high-profitable
territory yesterday, as the stock fell $11.38 or over 19 percent
on five and a half times the average daily trading volume.  After
such a huge sell-down, it's no surprise that shares of PDLI
enjoyed a bounce off oversold conditions today, closing up 4.42
percent.  While volume was over twice the ADV, it was light
considering that recent selling was on three to four times the
ADV.  At this point, overhead resistance at our stop price of $57
should be heavy, with a test of this level as well as $55
resistance providing potential entries but confirm a rollover
with volume.  If the sellers return tomorrow and the PDLI falls
below $45 on volume, this would allow conservative traders to
pull the trigger, provided that AMEX Biotech Index (BTK) and
Merrill Lynch's Biotech HOLDR (BBH) is moving in the same

IVX $31.55 -0.39 (+0.55) IVX maintained its bearish disposition
this week; although it failed to penetrate the $31 level and
rival Friday's $30.15 low.  On the topside, IVX also couldn't
rally through the 5-dma ($32.62) ceiling in despite of the
Biotechnology Index (BTX.X) coming off its lows.  The diverge
from the sector benchmark illustrates IVX's weakened state.  If
the BTX.X moves to the underside of its 500 support that would be
icing on the cake.  In that scenario, IVX could very well see
heavy losses forthcoming.  As it is now, aggressive entries might
be found on convincing rollovers near our protective stop at the
$35 level.  But if we're not afforded such an opportunity, then
consider buying into weakness as sellers take IVX through the $30
historical support.  In the news this week, IVAX Corp received
approval from the FDA for its Abbreviated New Drug Application
(ANDA) for Cefaclor extended-release tablets, which are the
generic equivalent of Ceclor CD tablets.

MMC $105.69 -0.88 (-1.31) Our new put play on MMC played out
like a charm in today's trading session.  For the second
consecutive time, MMC broke through the previous day's low,
while continuing to establish a pattern of lower highs.  Early
in the session, entries could be found around the $106 level.
The confirmation was MMC's subsequent decline on heavy intraday
volume.  The stock easily slide through yesterday's bottom
support at $105.06 and saw $103.06 before buyers came into the
picture.  As the bulls and bears battled it out, the $104 level
provided intraday support.  A strong upside surge was cut short
at $107, which from our perspective, offered a nice entry for
the more aggressive traders.  Now if you're more the cautious
type, wait for MMC to breakdown below $104 and look for more
conclusive downside bias across the insurance sector.  A good
index to watch is the S&P's Insurance Index (IUX.X) - a move to
the underside of 750 would indicate overall weakness.

Why put all your risk into one stock when you can play the
index instead?

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market updates, plays, education and daily commentaries by
those who know.

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SNPS - Synopsys Inc $49.25 +1.13 (+1.25 this week)

Synopsys supplies electronic design automation solutions to the
global electronics market.  The Company provides design
technologies to manufactures of advanced integrated circuits,
electronic systems, and systems on a chip.  Synopsys also
provides consulting services and support to its customers to
streamline the overall design process and accelerate time to

In early December, SNPS began building a strong wedge formation.
And now it appears, SNPS is poised to make a major move to the
upside.  A momentum breakout through the $50 and $51 resistance
levels today prompted immediate coverage.  The added endorsement
from investors taking another look at the depressed chip sector
also bodes well for our play on SNPS.  Consider taking entries
on a big breakout through the immediate resistance found at
today's $51.25 peak or enter along the ascending support near
$47 or $48 in an advancing market place.  From a technical
perspective, the 5 and 10 DMAs at $48.64 and $47.86,
respectively, are bolstering SNPS on the climb, too.  This is a
bullish indication and also provides an additional method of
gauging entry and exit points.  Take a look at a daily chart for
visual confirmation.  Accordingly, our protective stop is set
just below these technical measurement devices at $45.  A close
below that mark and we'll move on to more opportune call plays.

***January contracts expire next week***

BUY CALL JAN-45 YPQ-AI OI= 266 at $5.25 SL=3.25
BUY CALL JAN-50*YPQ-AJ OI=1731 at $1.88 SL=1.00
BUY CALL JAN-55 YPQ-AK OI= 604 at $0.50 SL=0.00
BUY CALL FEB-50 YPQ-BJ OI=  85 at $4.13 SL=2.50
BUY CALL FEB-55 YPQ-BK OI= 463 at $2.25 SL=1.25


KLAC - KLA Tencor $41.50 +1.13 (+4.50 this week)

KLA Tencor is the world leader in yield management and process
control solutions for semiconductor manufacturing and related
industries.  The company's portfolio of products, software,
analysis, services and expertise is designed to help integrated
service manufacturers manage yield, throughout the entire wafer
fabrication process, from research and development to final mass
production yield analysis.

Like most stocks in the semiconductor sector, KLAC has had a
difficult year.  However, after hitting a 52-week low of $25.50
on October 10, KLAC has formed a rounded bottom pattern since
November, which often portends a strong breakout.  The stock
cleared the 50 dma of $34.12 this week.  A series of higher
lows has been developing in the last two months, with support
at $27.50, $29.94, $34.13, and the 10 dma of $36.87.  We are
looking for a breakout over resistance at $42.50, which could
lead KLAC past the 200 dma of $43.69.  After that, it could be
smooth sailing up to the next resistance levels at $44.69 and
$50.  While the semiconductor index is still weak, certain semi
stocks are starting to show patterns which can be indicative of
the beginning of a new cycle, as the market generally looks
forward one or two quarters to discount news.  Semiconductor
inventory levels can be drained much more quickly than in
previous years, and a little strength in SOX.X could lead to
a strong breakout for KLAC.  Traders should consider taking
positions on a breakout from $42.50, after monitoring SOX.X
and SMH for strength.  Set stops at $38.

***January contracts expire next week***

BUY CALL JAN-40*KCQ-AH OI=1583 at $4.00 SL=2.50
BUY CALL JAN-45 KCQ-AI OI=1332 at $1.75 SL=1.00
BUY CALL FEB-40 KCQ-BH OI= 759 at $6.75 SL=4.75
BUY CALL FEB-45 KCQ-BI OI= 180 at $4.50 SL=2.75


PLAB - Photronics Inc  $28.88 +2.06 (+1.75 this week)

Photronics manufactures photomasks, which are high precision
quartz plates that contain microscopic images of electronic
circuits.  Photomasks are a key element in the construction of
semiconductors.  The Company's products are used to transfer
circuit patterns onto semiconductor wafers during the
fabrication of integrated circuits.  US chip makers account for
nearly 85% of sales; although Photronics operates manufacturing
facilities in Asia, Europe, and North America.  They recently
acquired rival Align-Rite in a move to become the world's
largest independent maker of photomasks.

An explosive move with the semiconductors last Wednesday
resulted in PLAB's clean break out of the tight trading range
between $20 and $24.  The building momentum took PLAB upwards of
$27 by the end of the week.  To top off the fantastic advances,
bullish comments from CSFB on Friday provided the icing on the
cake.  The influential brokerage firm raised its 12-month price
target on PLAB to $35 from $30 citing the company should benefit
from an uptick in demand for its products - "the continuing
shift to sub-wavelength (integrated circuit) processing is
fueling demand for advanced photomasks".  In this week's
trading, PLAB continued to not only trade above the previous
resistance at the $25 level and corresponding 200-dma, but it
also tacked on additional gains.  Today's pinnacle at $29.13 and
strong close near that intraday high provided the bullish
evidence we wanted before adding PLAB to our call list.  You
might take positions on a pullback to $25, which also designates
our exit point, but make sure there's plenty of buying interest
before taking that aggressive approach.  A nice breakout through
$30, which we believe would be quite a bullish turning point in
this momentum play, offers a more conservative entry.  Keep an
eye on the Semiconductor Index (SOX.X) to foretell overall
sector sentiment and remember, don't fight the trend.

***January contracts expire next week***

BUY CALL JAN-20 PQF-AD OI= 21 at $9.25 SL=6.25
BUY CALL JAN-25 PQF-AE OI= 45 at $4.38 SL=2.75
BUY CALL FEB-20 PQF-BD OI=  0 at $9.50 SL=6.50  Wait for OI!
BUY CALL FEB-25 PQF-BE OI=457 at $5.25 SL=3.25
BUY CALL FEB-30*PQF-BF OI= 17 At $2.25 SL=1.00



GX - Global Crossing Ltd. $21.38 +1.88 (+2.38 this week)

Global Crossing provides integrated telecommunications solutions
over the world's most extensive global IP-based fiber optic
network, which will have more than 100,000 route miles, reaching
5 continents, 27 countries and more than 200 major cities by mid
2001.  Global Crossing serves many of the world's largest
corporations, providing a full range of managed data and voice
products and services.

Global Crossing is one of several telecommunications companies
which are growing so rapidly they needs constant infusions of
cash to finance expansion.  Earlier in the year, the Federal
Reserve practically cut off the life line of many of these
rapidly expanding companies with a series of aggressive rate
hikes.  Perhaps the most devastating impact of the rate hikes
was felt in the credit markets, as the rates for high yield
debt soared this year to levels not seen since the recession
of 1991.  However, the Fed's most recent rate cut had an
immediate and dramatic impact on the credit markets, as many
new high yield telecommunications debt offerings were issued
just in the last few days.  Lower interest payments means
higher earnings for these companies, and, in addition, on
Monday, GX released an optimistic revenue projection for 2001 of
$7.1 to $7.2 billion.  After hitting a 52-week low of $11.25
on November 29, GX has crossed the 50 dma of $17.77, and the
5 day moving average of $19.73.  This stock has a very high
short interest, which may lead to covering with more rate cuts.
Entry points can be taken at current levels, or on a move
above the next resistance level of $22, with a positive
telecom sector(TTH).  Watch others like MFNX for strength
before entering new positions and set stops at $18.

***January contracts expire next week***

BUY CALL JAN 20   GX-AD OI=12996 at $2.44 SL=1.25
BUY CALL JAN 22.5 GX-AX OI= 5557 at $1.13 SL=0.50
BUY CALL FEB 20   GX-BD OI= 2653 at $3.75 SL=2.00
BUY CALL FEB 22.5*GX-BX OI= 1020 at $2.44 SL=1.25


Q - Qwest Communications $44.88 +2.88 (-2.63 this week)

Qwest is a leading broadband Internet communications company.
Qwest's services include Internet, multimedia, data and voice
services that are sold to business, consumer and government
customers. Internet and multimedia services include Internet
Protocol (IP) enabled services such as dedicated and dial up
Internet access, web hosting, co-location access, voice over IP,
application hosting and mass storage services.  Qwest also
provides high-volume voice and conventional private line services
to other communications providers, as well as to Internet service
providers (ISPs), and other data service companies.

Since finding strong support at the $32 level in mid-December,
shares of Qwest Communications have rebounded strongly.
Improving sentiment in the Telecom sector has helped shares of
competitors T and WCOM to definitively break through their
long-term downtrend lines.  Having recently pierced this level,
Qwest appears poised to do the same.  Connecting the highs and
lows since late last year reveals an upward trending regression
channel.  A downgrade this past Friday by AG Edwards, from an
Accumulate rating to Maintain, caused some low volume
profit-taking but today, the stock not only bounced off the
bottom of its uptrend line, but closed above its 100-dma at
$44.85.  The 200-dma, now at $46.24, represents the last line of
moving average resistance, with a surge through this level on
volume allowing more cautious traders to take a position.
Support can be found at the 100-dma and the 5-dma at $43.98,
providing for aggressive entries.  The mid-41 level, with the 10
and 50-dma converged at that point, would be an ideal target to
shoot for but make sure that Q closes above our stop price of
$41. In planning a play, confirm market sentiment using Merrill
Lynch's Telecom HOLDR (TTH).

***January contracts expire next week***

BUY CALL JAN-40 Q-AH OI=5675 at $5.38 SL=3.50
BUY CALL JAN-45*Q-AI OI=4633 at $1.81 SL=1.00
BUY CALL FEB-45 Q-BI OI=1112 at $3.75 SL=2.50
BUY CALL FEB-50 Q-BJ OI=1166 at $1.69 SL=0.75
BUY CALL APR-50 Q-DJ OI=2090 at $4.00 SL=2.50


COMS - 3Com Corporation $10.06 +0.56 (+1.03 this week)

Specializing in straightforward solutions to complex
networking challenges, COMS focuses on broadband connections,
wireless network access, and Internet Protocol (IP) telephony.
The company serves three primary customer markets: commercial
enterprises with small- to mid-sized locations, consumers, and
carriers and network service providers.  COMS' commercial
products include both traditional and advanced access products,
Local Area Network (LAN)/Wide Area Network (WAN) infrastructure
products, LAN telephony products, and services.  The company's
consumer product list include broadband connections, home
networking products and Internet appliances.

Unable to dodge the selling frenzy that hit Networking stocks
in late October, COMS gave up 35% before confirming investor
fears of an earnings shortfall.  The company warned about their
results for the current quarter on December 4th, and gave up
another 32% by the time it hit its December low of $6.94.
After beating reduced earnings estimates on December 21st, the
stock has been gradually improving, and has now moved back over
the 30-dma ($9.75), and has even regained the $10 level,
although just barely.  Stochastics have just re-entered the
overbought zone, and with the upper Bollinger band looming just
overhead at $10.56, don't expect the stock to have an
uninterrupted rally.  We are setting a nice tight stop at $9, a
level which should provide solid support going forward.  COMS
looks like it should be able to sustain the move already
underway, and aggressive players can consider new plays on a
bounce from support, while conservative players will want to
wait for COMS to rally through resistance at $10.

***January contracts expire next week***

BUY CALL JAN-7.5  THQ-AU OI= 785 at $2.81 SL=1.50
BUY CALL JAN-10   THQ-AB OI=3281 at $0.69 SL=0.00
BUY CALL FEB-7.5  THQ-BU OI= 579 at $3.00 SL=1.50
BUY CALL FEB-10  *THQ-BB OI=7758 at $1.50 SL=0.75
BUY CALL FEB-12.5 THQ-BV OI= 183 at $0.63 SL=0.00
BUY CALL APR-10   THQ-DB OI=2280 at $2.25 SL=1.00




PMI - PMI Group $54.00 -3.88 (-4.00 this week)

PMI Group is a holding company that conducts its residential
mortgage insurance business through its subsidiaries.  PMI
provides primary insurance coverage, insuring mortgage lenders
and mortgage loan investors against borrower default on
individual first mortgage loans.  At the end of 1997, PMI
began offering a pool insurance product, primarily to Fannie
Mae and Freddie Mac, as a part of the company's value-added
strategy.  This product is also sold to state housing finance
authorities, and is generally used as an additional credit
enhancement for certain secondary market mortgage transactions
to protect against loss on a defaulted mortgage loan which
exceed the claim payment under the primary coverage.

Insurance stocks have not gotten the new year off to a good
start, but our new put play has something else working for it.
Concerns are surfacing about an increase in loan defaults due
to the slowdown in the economy.  Despite the fact that the Fed
is working to lower interest rates, many feel that it may be
too little, too late.  As PMI insures against defaulted
mortgages, that buts the stock right in the bears' crosshairs,
and they have been pressuring the stock mightily over the past
7 sessions, dropping it for a 22% loss as it fell right through
the 200-dma ($58.75) and the early December low of $56.50.
There is some support near current levels, but the first major
support it found in the vicinity of $50-51.  Barring a marked
change in sentiment, it looks highly likely that the stock will
break below this level as the bears set their sights on the $45
level.  This decline is unlikely to come as fast as the drop
over the past week though, as the stock is now resting on the
lower Bollinger band.  Until the bands expand further, PMI will
have a hard time falling much below $52-53.  With that in mind,
we would advocate waiting for a relief rally to provide a better
entry point.  The concerns driving the decline aren't going to
go away, so any rally is likely to be short-lived - open new
positions as the rally loses steam and the bears reassert
control.  Just make sure the stock remains below the $58
intraday resistance level (also the location of our stop).
Earnings are set to be released on January 24th, but in the
current environment, we don't expect much of an anticipatory
rally ahead of the numbers.  One note of caution on this play
is the extremely light open interest on all the options - take
this into account when planning your trade.

***January contracts expire next week***

BUY PUT JAN-60 PMI-ML*OI= 2 at $6.38 SL=4.25
BUY PUT JAN-55 PMI-MK OI= 0 at $2.44 SL=1.25  Wait for OI!
BUY PUT FEB-60 PMI-NL OI=12 at $7.25 SL=5.00
BUY PUT FEB-55 PMI-NK OI= 0 at $3.75 SL=2.25  Wait for OI!



SBC - SBC Communications $51.94 +1.81 (+1.94 this week)

With 61 million phone lines in 13 states, SBC is the #2 local
phone outfit in the United States.  It's not just a local
operation either, as the company has stakes in Telecom
operations in 23 other countries around the world.  The
services and products that SBC offers vary by market, and
include local exchange services, wireless communications, long
distance services, Internet services, cable and wireless
television services, security monitoring, telecommunications
equipment, messaging, paging, and directory advertising and

Most Recent Write-Up

Telecom stocks continued to march into positive territory today
with a nearly 5% gain in the Merrill Lynch Telecom HOLDR(AMEX:TTH).
SBC was a major contributor to today's move, as it received a
positive ruling from the U.S. appeals court regarding its 1999
purchase of Ameritech.  The court voided the condition that had
originally required SBC to move its high-speed Internet operations
into a separate affiliate.  This seems to have been a positive sign
for the industry as a whole, as noted above, and SBC benefited to
the tune of 3.6%, keeping the recent uptrend intact.  While the
trendline is only about 2 weeks old, it is encouraging to see
our play bounce at the 10-dma ($49.44), climb back over the
converged 5-dma ($50.94) and 30-dma ($51.13), and post its
highest close since the earnings warning on December 19th.
Earnings are just over 2 weeks away on January 25th, so use
any profit taking dips as an opportunity to take advantage of
any pre-announcement rally.  Our stop at $47 is still in place
and any bounce above this level, particularly near the $50
support level, looks like a good target for aggressive
traders.  Conservative players will still need to wait for
the bulls to scale the $53 level before opening new positions,
and all players will want to confirm strength in the sector
before putting their cash at risk.


SBC rallied with the rest of the Telecom sector on the heels of
AT&T's upgrade.  This pushed SBC solidly above its 100-dma near
the $50 level.  We are looking for the rotation into the beaten
down Telecom stocks to continue.  Look for entries off of bounces
from intraday support at $51 or the 100-dma.  With positive sector
sentiment, SBC could break through the $52 and challenge resistance
at the 50-dma of $53.54.

***January contracts expire next week***

BUY CALL JAN-45 SBC-AI OI= 3979 at $7.25 SL=5.50
BUY CALL JAN-50 SBC-AJ OI=10591 at $2.81 SL=1.50
BUY CALL FEB-50*SBC-BJ OI=  718 at $4.38 SL=2.75
BUY CALL FEB-55 SBC-BK OI= 1303 at $2.00 SL=1.00
BUY CALL APR-50 SBC-DJ OI= 8295 at $6.25 SL=4.50
BUY CALL APR-55 SBC-DK OI=16001 at $3.75 SL=2.00


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Telecom, Software and Internet shares lead the way...

The Nasdaq rallied today as technology stocks recovered from
recent selling pressure.

Monday, January 8

Stocks consolidated further today but ended above early lows as
selling pressure abated in the final hour of trading.  The Dow
ended down 40 points at 10,621 and the Nasdaq closed 11 points
lower at 2,395.  The S&P 500 index finished almost unchanged at
1,295.  Trading volume on the Nasdaq reached 1.8 billion shares,
with losers beating winners 2,225 to 1,634.  Volume on the NYSE
was light at 1.10 billion shares, with declines edging advances
1,617 to 1,338.  In the bond market, the 30-year Treasury fell
16/32, pushing its yield up to 5.43%.

Sunday's new plays (positions/opening prices/strategy):

Allergan      AGN    JAN100C/JA95C   $0.50   credit   bear-call
Lyondell      LYO    MAR17C/MAR15P   $1.69   debit    straddle
Mips Tech.    MIPS   JAN25C/JAN25P   $3.50   debit    straddle
Orthodontic   OCA    JAN35C/JAN25P   $1.38   credit   strangle
Boston Sci.   BSX    FEB15C/JAN17C   $1.62   debit    diagonal

All of our new positions were available at (or near) the target
entry prices.  Allergan and Lyondell are the only positions that
might be improved upon in the coming sessions.  We feel that a
debit of $1.62 is the most one should have paid for the Lyondell
straddle, but will post the best (simultaneous) price observed
until a lower debit occurs.  The Allergan spread could also have
been improved with a little patience and based on AGN's recent
volatility, it will likely provide a better premium in the next
few sessions.

Portfolio Plays:

Despite widespread selling pressure early in the day, stocks
made a valiant recovery late in the session as investors began
to speculate on a recovery in the technology segment.  Several
analysts said Monday that despite the negative outlook on the
economy over the next six months, the market is beginning to
price in better earnings and profit growth for the second half
of the year.  According to First Call, fourth-quarter earnings
growth will average 2% to 4% and continue in the bottom of that
range for the first quarter of 2001.  Overall earnings growth
among S&P 500 companies for the upcoming year is expected to be
in the 10%-15% range.  On the Dow, General Motors (GM), General
Electric (GE), American Express (AXP), Walt Disney (DIS), and
Home Depot (HD) were among the losers while Philip Morris (MO),
Procter & Gamble (PG) and Alcoa (AA) rose as investors rotated
money into defensive issues.  Among Nasdaq companies, shares of
JDS Uniphase (JDSU), Qualcomm (QCOM), Applied Materials (AMAT),
Dell Computer (DELL) and Sun Microsystems (SUNW) led the index.
Within the broader market, utility, semiconductor, networking
and oil service issues moved higher while Internet, financial,
biotechnology and retail shares generally consolidated.

Broadcom (BRCM) was among the leaders in our portfolio, rising
7% to $93 after announcing it will buy ServerWorks Corporation
as part of a new effort to enhance its semiconductor equipment
capability.  Our recent credit strangle is off to a good start.
On the downside, BEA Systems (BEAS) was in the news headlines,
falling over $7 to $47 after analysts at Prudential Securities
lowered their 12-month price target for BEA shares to $85 from
$100, citing valuation concerns.  Separately, Wit Soundview cut
its earnings estimates on BEAS, although the analyst firm kept
its "strong buy" rating on the stock, with a $90 price target.
Analysts cited the possibility of reduced spending by dot-com
companies for the revision but Bill Coleman, chief executive of
the e-business software company, touted their sales backlog and
argued that BEA's business is bounding, regardless of economic
worries that plague many software companies.  He said that BEAS
will enter its fiscal-first quarter having nearly all of its
software license revenue already booked, and that the company
is limited only by how fast they can build a sales channel and
hire new people.

In the industrial group, some the recently downtrodden issues
have begun to recover, possibly offering another chance at a
profitable exit for traders in those positions.  Laboratory
Holdings (LH) rebounded $4 to $136 and it appears to be on a
technical comeback.  The first test will be a resistance area
near $140.  Our position in Pharmaceutical Products (PPDI),
which was never really in doubt, moved deep ITM following a $4
rally in the company's share value.  PepsiCo (PEP) and Pepsi
Bottling (PBG) rebounded from earlier selling pressure, and at
least one of those plays (PEP) should expire profitably.  In
the small-cap category, a few bullish issues have started to
retreat and should be monitored for further downside activity.
Akysys (AKYS), Placer Dome (PDG) and Magnetek (MAG) are among
the most obvious candidates for early exit.  Of course Placer
Dome (PDG) is a hedge play in the Precious Metals group, so it
will generally move in opposition to the broader market.  The
Straddles section has been rather subdued this week, after
offering a slew of big winners earlier in the month.  Although
British Telecom (BTY) has already provided a profitable early
exit, it did not reach the downside breakeven point (trading to
a low near $83).  However, there is plenty of time for future
returns and traders who used the "double bottom" formation to
exit the bearish side of the play (APR-100 Puts) were rewarded
with a nice profit.  SCM Microsystems (SCMM) may be one of the
few plays to achieve excellent profits both on the upside and
downside.  The issue is testing a three-year low near $25 and
there is little support below that level.

Tuesday, January 9

The Nasdaq rallied today as technology stocks recovered from
recent selling pressure.  The Dow industrials consolidated as
cyclical, financial and retail issues declined on persistent
worries about earnings growth.   The Nasdaq ended up 45 points
at 2,441 and the Dow finished 48 points lower at 10,572.  The
S&P 500 was up 4 points to 1,300.  Volume on the NYSE hit 1.19
billion shares, with winners beating losers 1,622 to 1,291.  On
the Nasdaq exchange, trading activity was average with over 1.9
billion shares changing hands.  Technology advances outpaced
declines 2,249 to 1,563.  In the bond market, the U.S. 30-year
Treasury rose 5/32, pushing its yield down to 5.42%.

Portfolio Plays:

Technology buyers drove the Nasdaq to a positive finish today,
interrupting its recent losing streak as investors shopped for
bargains in telecom, computer software and Internet B2B shares.
Chip stocks also advanced with semiconductor shares receiving
the most attention from analysts.  Experts say it's the place
to be for traders looking for technology stocks as the sector
is gaining internal momentum and has remained healthy despite
the weakness in the Nasdaq.  On the Dow, AT&T (T) jumped more
than 10% after Morgan Stanley Dean Witter upgraded Ma Bell to
a "strong buy," citing compelling valuation and the existence
of significant catalysts for future share value growth.  The
brokerage set a price target of $35 on the stock, and our two
Reader's Request positions in the issue profited substantially
from the movement.  DuPont (DD) was among the losers, falling
$2 to $46 after J.P. Morgan downgraded the Chemicals group on
valuation concerns and continued deterioration in the global
macroeconomic environment.  Also limiting blue-chip advances
were losses in American Express (AXP), General Electric (GE),
Procter & Gamble (PG), Honeywell (HON) and International Paper
(IP).  In the broader market, oil service, drug, biotechnology,
and consumer products companies edged higher while chemical,
airline, and utility shares generally retreated.  Stocks in
the paper segment also slumped after Goldman also slashed its
cut estimates on Bowater (BOW), Georgia Pacific (GP) and Boise
Cascade (BCC).  Those of you in the BOW call-credit position
should thank GS for their excellent timing.  Overall, the tone
in today's trading was a cautious one, ahead of the fourth
quarter reporting season.

Our portfolio enjoyed a relatively good performance all-around,
with many sectors experiencing upside activity.  However, there
were few issues that made significant moves and almost no major
activities were observed in the current positions.  Of course,
there were a number of good opportunities to make adjustments
in the long-term plays and with any luck, most of the positions
expiring this month will finish profitably.

Questions & comments on spreads/combos to Contact Support
                         - NEW PLAYS -
WCII - Winstar Communications  $17.75  *** Reader's Request! ***

Winstar Communications provides businesses with unique broadband
services.  Winstar offers its services across its own end-to-end
broadband network in 60 major markets in the United States,
including each of the top 30 U.S. markets.  The Company also has
services in 12 overseas markets, including London, Brussels,
Buenos Aires and Tokyo.  Winstar's broadband network allows it
to offer an integrated suite of communications and information
services, including local and long distance voice services;
always-on and dial-up Internet access; ATM, frame relay and IP
data transport services; web hosting and design and development
services; online business content, including office.com, from
the company's online business center; online application hosting
services, including Microsoft Office 2000 Online; network and
applications solutions for vertical business communities; and
LAN and WAN systems integration.

One of our readers requested a bullish position in this issue,
based on the recovery in the Telecom Services sector.  Winstar
has rallied substantially in the past few sessions, but there
is still much work to be done before it can move back to last
year's trading range near $30-$40.  In this case, the premium
disparities for a bullish calendar spread are favorable and the
potential for a successful (technical) recovery is affected by
the resistance at the sold strike price; a perfect condition
for a time-selling strategy.

The basic premise in a calendar spread is simple; time erodes
the value of the near-term option at a faster rate than it will
the far-term option.  A less neutral and more bullish type of
calendar spread is when the underlying issue is below the strike
price of the options.  It is generally best to establish this
type of spread at least 2 - 3 months before the long position
expires, capitalizing on the ability to sell another option
against the longer-term position.  Ideally, the spreader would
like to have the stock finish just below the sold strike when
the near-term option expires.  If the short options are ITM at
expiration, he will have to repurchase (or offset) them to
preserve the long-term position.

PLAY (conservative - bullish/calendar spread):

BUY  CALL  APR-20  WQS-DD  OI=954  A=$3.62
SELL CALL  JAN-20  USR-AD  OI=162  B=$0.62

ABIZ - Adelphia Business Solutions  $6.19  *** Low Cost Play! ***

Adelphia Business Solutions is a majority owned subsidiary of
Adelphia Communications Corporation that provides integrated
communications services to business customers through its
state-of-the-art fiber optic communications network.  ABIZ has
substantially completed the construction of its fully redundant,
18,000-mile long-haul fiber optic network in the eastern-half of
the United States, which, combined with an estimated 8,000 local
fiber route miles in its operating markets, will support ABS's
full line of communication service offerings, including local
and long-distance voice services, messaging, high-speed data and
Internet services.

Adelphia Business Solutions has endured a steady downtrend since
early last year, falling to all-time lows just a few weeks ago
near $3.  Now the share value is finally establishing a base and
the company is in the midst of growth and expansion restructuring
intended to refocus success-based capital to connect customers to
ABIZ's networks and ensure the completion of fiber construction
in the markets in which the company will continue to operate.  As
a result of these changes, Adelphia Business Solutions expects
revenue growth of 40%-45% in 2001 and their EBITDA is expected
to improve to a positive $8-$12 million by the fourth quarter of
the year.  That sounds like a very optimistic outlook, but based
on the recent technical indications, investors are confident that
the end result will be favorable.

PLAY (very conservative - bullish/collar):

SELL CALL  FEB-7.50  QPI-BU  OI=235  B=$0.62
BUY  PUT   FEB-5.00  QPI-NA  OI=5    A=$0.69
TARGET COST BASIS=$6.25  ROI(max)=20% RISK(max)=20%

                         - STRADDLES -
FII - Federated Investors  $24.69  *** Earnings Speculation! ***

Federated Investors, along with its consolidated subsidiaries,
provides investment management and related financial services.
Federated sponsors, markets and provides investment advisory,
distribution and administrative services primarily to mutual
funds.  Federated provided investment advisory services to over
100 funds that are offered through banks, broker/dealers and
other financial intermediaries who use them to meet the needs
of th


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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