Option Investor

Daily Newsletter, Wednesday, 01/17/2001

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The Option Investor Newsletter                Wednesday 01-17-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
        01-17-2001        High      Low     Volume Advance/Decline
DJIA    10584.30 - 68.40 10705.90 10545.30 1.33 bln   1591/1330
NASDAQ   2682.78 + 64.23  2756.63  2668.48 2.82 bln   2370/1600
S&P 100   691.98 -  1.07   703.15   689.61   totals   3961/2930
S&P 500  1329.47 +  2.82  1346.92  1325.41           57.5%/42.5%
RUS 2000  493.46 +  0.18   501.05   493.22
DJ TRANS 3062.49 -  2.25  3075.50  3047.55
VIX        28.51 +  0.33    28.77    26.93
Put/Call Ratio      0.49

Blackouts, earthquakes and IBM beats earnings estimates!

That title sounds like a multiple choice question you would
hear on a TV game show. Name three things that cannot happen
on the same day. If that was your answer, you lost.
After a huge gap up at the open the Nasdaq gave back over half
of the gains before the day ended. The Dow traded above 10705
only briefly before losing ground to close down -68 points.
It was a frustrating day. The huge gap up was untradable and
then the slow point burn as the day progressed offered no real
opportunity to go long. Fear of the IBM earnings due after the
bell today kept tech stocks from holding their gains.

Before the bell today JPM announced earnings that missed estimates
by -.08 cents. After dropping to a low of 52.13 at the open JPM
actually rallied to close almost flat for the day at $53. There
was no dramatic drop or investor flight. Evidently the bad news
was already priced in and traders breathed a sigh of relief that
it was not worse.

The biggest loser on the Dow today was MMM which dropped over
-$5 after reporting earnings of $1.12 instead of the expected
$1.20. MMM claimed the missed earnings were a result of a
significant slowdown in the U.S. economy. Their plans going
forward include significant restructuring and layoffs. The
impact to the Dow was about -30 points at the worst level but
MMM rallied off its lows to close down only -3.50. Other Dow
stocks reporting included GE which announced earnings inline
as expected and EK which also matched estimates. Boeing beat
estimates by a dime and had an upbeat forecast but still lost
-2.25 as investors moved on to other trades. GM also announced
earnings that beat estimates by three cents but warned that
there was trouble ahead. The estimates had already been cut
by -75% from earlier numbers so it was no surprise that GM
beat them slightly. Estimates for 2001 of $.91 were guided
down by GM to zero or a break even for the year.

The big earnings winner for the day was IBM. Widely expected
to warn and didn't, IBM announced earnings that beat the
street by two cents AND said they were comfortable with
analysts estimates for all of 2001. Incredible and totally
unexpected. IBM was widely seen as suffering from currency
issues, PC slowdowns, IT spending restrictions and a host
of other problems. Instead they beat the estimates and said
good things about the future. Just shows that nobody can
predict the future. IBM stock soared over +$10 in after hours
trading which if it holds in pre-market tomorrow will provide
a significant lift for the Dow. However the futures are not
showing that as of 7:PM.

Other major earnings tonight included ITWO who beat estimates
by a penny and EXTR which announced inline with estimates.
AAPL announced its first loss in three years but pledged to
do whatever necessary to move back into profitability. AMD
missed estimates by -$.02 but said it was still gaining market
share from Intel at about 2% per quarter. SYMC beat estimates
by a nickel and continued its breakout from the under $30
bottom from last month. BGEN also beat estimates by a penny
as well as RBAK. RBAK sees revenues increasing going forward
but margins shrinking.

Only one day after the semiconductor earnings rally began,
Dan Niles from Lehman Brothers, broadcast negative comments
to his firm. Calling it a sucker rally he cautioned that
there was more downside to go before the semiconductor sector
could rally. He fells the weakness in PC sales will continue
into the summer and not pickup until fall. The rally by the
chip equipment manufacturers on the news that Intel would
invest almost $8 billion in new equipment was misplaced
optimism according to Mr. Niles. Chip stocks ignored his
comments with AMCC +10, PMCS +11, AMAT +3.50, VTSS +8.

All in all this has been a very positive earnings week. Most
big name companies have met or exceeded estimates when almost
everyone expected a very rocky quarter. We are not out of the
woods yet but the forecast is good. The economic reports out
today were positive with the CPI only gaining +0.2% as expected.
The core rate was only up +0.1% which was less than the expected
0.2%. The report continued to show inflation trending upward but
not at a rate that would mean trouble to the economy or the
Fed. Industrial Production fell faster than expected at -0.6%,
the largest decline in more than two years. The weakness in
the industrial sector is broadening and the pace of the decline
is accelerating. The Beige Book today showed a further slowdown
in economic activity. Retail sales have slowed, inventories
are beginning to rise, manufacturing activity is weakening and
some pressure is beginning to ease in labor markets. Bond traders
today indicated that these reports nudged the possibility of
another -.50% rate cut much closer to 100%. Actually there is
a rumor making the rounds that there is a secret (sure) and
unscheduled Fed meeting either Thursday or Friday of this week.
(Wonder what market maker started this rumor?) I have heard it
several times today and if they really meet it will either
be to talk about the California energy crisis or another inter-
meeting rate cut. Now that would be a real shocker!

The market internals continue to be good. Advance/declines are
still positive with up volume on the Nasdaq swamping down
volume by 10:1 in early trading. New highs are beating new
lows by 5:1. Sounds like a very positive picture. However,
I am concerned about the Nasdaq roll over this afternoon. Sure,
there were significant profits to be taken and investors were
afraid to hold over night again with IBM expected to miss
earnings. The fragile market is still afraid of the evening
darkness. On one hand JPM misses earnings by -.08 and nothing
happens, AMD misses by -.02 cents and rallies +$1 in after hours
but nobody wants to hold over night. This fear of holding is
a serious problem. It means there is no conviction in the markets.
Traders rush in at the open and rush out at the close. Remember
last week when we dipped at the open and rallied into the close?
That was funds buying not retail investors. The current reverse
scenario means investors are again selling into rallies.
Historically, as I mentioned last Sunday, there is a market dip
at the end of this week. The earnings excitement is starting to
wane and investors who played the earnings runs will move to
the sidelines and decide what to do next. Earnings are far from
over but the big headline names will be mostly done. IBM, INTC,
MSFT, etc, will be history.

The only thing to move the markets from this point is expectation
of another rate cut on Jan-31st. That expectation, two weeks from
today, is a driving force. That expectation can make investors
quickly forget weak earnings on selective stocks, bad decisions
on previous trades and fear of a slowing tech sector. With most
tech earnings coming in above expectations and the Fed in our
future it is entirely possible there will not be a pull back
this year. Still we need to be focused and ready to capture any
move and/or protect ourselves should it move against us.

The California energy crisis is rapidly approaching a flash point.
While it may be just another news item for most of us in states
that have no problem, it is our problem as investors. With BAC
and JPM facing a bankruptcy of the entire California utility
system and billion of dollars of debt, we have no way to tell
how that may impact the Fed or the economy. With the California
governor talking about "eminent domain" meaning a government
takeover of private assets, that alone could cause serious
repercussions. My point here is that just because we are warm
and comfortable in our homes and offices we need to keep an
eye on the blackouts in California and the impact on the markets.
The stock market outlook looks too good to be true and when that
happens something always shows up to spoil the picnic. OPEC
voted to cut -1.5 million bbls of oil as expected so energy
prices for the rest of us are not going down any time soon

Just to emphasize my point there was an earthquake today in an
area that could seriously impact your trading profits had it
been any worse. Where? Queens New York and Newark New Jersey.
There were no injuries and no serious damage reported but add
several points on the Richter scale and you would have had a
real problem for the NYSE and trading in general. Now you can't
plan for something like this but as traders we should NEVER be
100% committed as long as Murphy is alive and well. Earthquakes,
blackouts, government takeover of private companies. Shucks,
and all you thought we had to worry about was hitting earnings
estimates! Alan, you have our approval to hold that unscheduled
meeting but only if you promise to cut rates again this week.
No rate cut and we will move your office to California!

Enter passively, exit aggressively!

Jim Brown

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RATL - Rational Software $50.06 +5.38 (+2.84 this week)

Rational Software Corporation, the e-development software
company, helps organizations develop and deploy software
for e-business, e-infrastructure, and e-devices through a
combination of tools, services, and software engineering
best practices.  Rational's e-development solution helps
helps organizations overcome the e-software paradox by
enhancing time to market while improving quality.

After falling from $70 in September to a low of $27 in November,
RATL rallied with the markets after the Fed's rate cut
on January 3.  However, the real catalyst for RATL's strength
this week may have been a superb earnings report released on
January 10, as well as upwardly revised 2002 forecasts, and
multiple analyst upgrades.  RATL beat the estimates by a wide
margin for the third quarter and nine months ending December
31, reporting third quarter net income up 57% from the year
ago quarter.  RATL's CEO Paul Levy stated on an analyst
conference call that he expects the company to earn 85 to 90
cents per share in fiscal year 2002, 10 cents above the
analysts' expectations.  RATL is one of the companies which
can directly benefit from a slowing economy, as their
products enhance clients' competitiveness by reducing costs.
As the analysts jumped to upgrade RATL, the stock easily
crossed its 50-dma of $40.55 last week.  Prudential, First
Albany, and Dain Rauscher Wessels upgraded RATL, and
Goldman Sachs picked up coverage last week.  RATL had been
struggling all week to cross resistance at $47, just above
the 200-dma of $46.24, and on Wednesday, the stock made a
critical break and closed above this level on strong volume.
RATL may pull back to $48, which would be a possible entry
point, as it begins its ascent to the next resistance levels
at $52.44, and $60.  Watch the software index for an indication
of sector strength, and set stops at $44.

BUY CALL FEB-45 RAQ-BI OI=837 at $ 8.75 SL=6.50
BUY CALL FEB-50*RAQ-BJ OI=223 at $ 6.13 SL=4.25
BUY CALL FEB-55 RAQ-BK OI=140 at $ 4.13 SL=2.50
BUY CALL APR-50 RAQ-DJ OI=201 at $10.25 SL=7.50
BUY CALL APR-55 RAQ-DK OI=230 at $ 8.38 SL=6.25



LH - Laboratory Corp. of America $129.94 -4.31 (-5.00 this week)

Laboratory Corporation of America Holdings (LabCorp) is the #2
clinical laboratory service in the world, behind Quest
Diagnostics.  LH performs 2000 types of tests for more than
100,000 clients, including health care providers, pharmaceutical
firms, physicians, government agencies and employers.  With 25
major laboratories and some 1200 service sites nationwide, the
company emphasizes specialty and niche testing such as allergy
tests, HIV tests, blood analyses, and substance abuse

After a stellar December performance to close out what had been
a stellar year, LH started the new year in free fall.  Investors
that wanted to postpone the pain of taxes for another year, held
their breath and waited for the beginning of a new year.
Sellers attacked the stock with a vengeance on January 2nd, and
the bleeding didn't stop until LH reached apparent support near
$131-132.  LH investors were stunned as they watched their stock
hit for a 25% loss, off nearly $50 from its late-December high.
Recovering from the oversold zone last week, LH was actually
starting to look a little healthier until it rolled over near
the $150-152 resistance level.  The important thing about this
level is that it is also the level of the ascending trendline
that had supported LH's rally going all the way back to April of
last year.  The stock's inability to climb back over this level
is disconcerting for the bulls, as it indicates that the
emerging weakness is now more serious than simple profit taking.
Volume is confirming the strength of the selling, climbing today
to 50% over the ADV.  So what is the driver behind the recent
losses, you ask?  Looking at a daily chart of the Health Care
Index (HCX.X), it provides a nearly perfect mirror image of the
price action of LH over the past several months.  This sector
saw some great gains last year, and it is now time for that cash
to move to another sector.  As options traders, we don't have to
figure out where it is going to profit.  We can simply focus on
where it is coming from and profit from the trend.  With that in
mind, it looks like we are about to be awarded with a nice
conservative entry point.  The $130-132 support level is in the
process of being violated and selling that drops the stock below
today's low ($127.50) looks like a good trigger for new entries.
Intraday resistance sits at $135, followed by $140.  We are
placing a fairly tight stop between these two levels ($138), and
would use any failed rally below our stop as an opportunity to
initiate more aggressive positions.  Confirm sector strength by
monitoring the HCX.X before playing.

BUY PUT FEB-130 LH-NF OI= 11 at $12.88 SL=9.75
BUY PUT FEB-125*LH-NE OI= 57 at $10.50 SL=7.75
BUY PUT FEB-120 LH-ND OI=245 at $ 8.38 SL=5.75


DGX - Quest Diagnostics $96.87 -6.63 (-4.38 this week)

Based in Teterboro, New Jersey, Quest Diagnostics is the
nation's leading provider of diagnostic testing, information
and services, with annualized revenues of over $3 billion.
Quest Diagnostic's gene based testing focuses on infectious
disease, oncology, and hereditary conditions, and helps
physicians target individual treatment regimes and monitor
resistance to therapies.

Quest is experiencing profit taking with the rest of the
medical products and services sector.  This sector, along with
the managed care, pharmaceuticals, and hospital management
sectors, is selling off as investors rotate money back into
the more dynamic technology sector.  The superb earnings
report from Juniper, and positive guidance going forward
from a number of technology companies has served as a catalyst
for a sector rotation out of the defensive health care stocks
which rallied last year.  Quest announced yesterday that their
earnings would be on target to meet expectations, and revised
expectations for next year.  However, today's market shows
that Quest is now selling on good news, a bearish indicator.
Having fallen below the 50-dma of $117.65 on January 4th,
Quest is now resting right on the 200-dma of $96.61, and looks
like it will break beneath this support level.  With a P/E of
79, and a revenue growth rate of between 7 and 8 percent,
Quest is starting to look unattractive to investors.  A break
below $96 on strong volume would be an excellent put entry, as
it could lead Quest to the next major support level at $88.  More
aggressive traders might look for a failed rally at $101.50,
or $102.50.  Keep stops set at $104, and watch others in the
medical services sector, like LH and HRC for sector movement.

BUY PUT FEB-100*DGX-NT OI=98 at $13.50 SL=10.75
BUY PUT FEB- 95 DGX-NS OI= 1 at $10.38 SL= 7.75
BUY PUT MAY- 95 DGX-QS OI= 3 at $13.75 SL=11.00
BUY PUT MAY- 90 DGX-QR OI=13 at $11.50 SL= 9.00



Q - call play
Adjust from $43 up to $44

GX - call play
Adjust from $19 up to $21

NETE  - call play
Adjust from $40 up to $42

VRSN - call play
Adjust from $78 up to $82

LRCX - call play
Adjust from $18.50 up to $20

BRCM - call play
Adjust from $114 up to $120

SLR - call play
Adjust from $35 up to $37

WCOM - call play
Adjust from $18.50 up to $20

BEAS - call play
Adjust from $59 up to $62


SFA $55.19 +3.94 (+4.19) SFA burst out of resistance at $54 early
Wednesday morning as the exuberance from Juniper's excellent
earnings, as well as a benign CPI report, ignited investors'
interest in networking and communications equipment stocks.
SFA rode all the way up to $57.50 before settling down as the
profit takers brought a sense of reality back to the markets.
SFA reports earnings Thursday after the close, so we are
dropping it tonight.  Traders should take profits and close
positions before the close of trading on Thursday to avoid any
extreme volatile moves.

MSFT $52.94 +0.38 (-0.56) As mentioned last night, we are
dropping our call play on Microsoft ahead of its earnings report,
due tomorrow after the close.  Helped by Intel's well-received
earnings report, shares of MSFT gapped up at the open this
morning, moving higher until hitting resistance at the $55 level.
From there the buyers took a break resulting in a pullback, but
Mr. Softee finished the day up fractionally on 70 percent of ADV.
For traders currently with an open play, we recommend closing
positions before tomorrow's announcement to avoid any volatile
moves.  Look to support at $52.50 as a key level.  If MSFT
bounces and sentiment in the NASDAQ is positive, aggressive
traders could make one last play, but be aware of overhead
resistance at $55 and our stop price below at $51.


AIG $85.00 +0.19 (+2.81) The question we posed in last night's
update (entry point or end of the play?) was unequivocally
answered at the open this morning as AIG gapped right through
its stop.  Early strength across the broader markets had no
follow through as all of the major indices gave back the lion's
share of their early gains.  AIG followed this pattern, bouncing
south from the 200-dma, but still managed to keep from falling
back below our stop.  While the stock did look weak coming into
the close, we need to follow our discipline and call an end to
the play.  Use any weakness tomorrow morning as an opportunity
to grab a more attractive exit point.


Trading Wedges
By Mary Redmond

Bullish wedges have been popping up all over the place in the
last few weeks, and they can be one of the most easily
identifiable and potentially profitable trading strategies.

A bullish wedge is generally characterized by a pattern of
at least three higher lows, and at least two attempts to
break out above resistance at a particular price.  Once the
resistance is penetrated, the stock almost always makes a
strong pop up to the next major resistance level.  Traders
who take positions on a breakout of a bullish wedge have a
high probability of success.

We have had a number of call plays over the last few weeks
which were bullish wedges, and presented many opportunities
for profit.  One of these was Costco(NASDAQ: COST).

One of the keys is timing and accuracy.  You need to watch the
stock carefully, and to be able to distinguish a strong breakout
from heavy resistance.

Resistance is usually heavy when a stock has made repeated
attempts to penetrate the price over a period of time.  A strong
breakout is usually characterized by heavy volume which is much
higher than the average daily volume.  In addition, a stock's
technical pattern is generally stronger when it is above the
major moving averages, which are generally considered the 50-
and 200-dma, as well as the 50- and 200-period moving averages.
Trading from a technical pattern in a stock is generally
easier when it accompanies the same technical pattern in the
stock's index.  Stocks in certain sectors are more susceptible
to sector movement.

For example, there are so many diverse retail stocks that it
is difficult to gauge the strength of one stock by that index.
However, the semiconductor stocks tend to move very closely
in tandem, as do the networking stocks.  A daily chart of NWX.X
looks very similar to a daily chart of JDSU, or SCMR.

Within the financial sector, there are many individual sectors
which move in tandem.  For example, the major regional banks,
the savings and loans, the consumer finance stocks, and the
broker dealer stocks tend to move as individual sectors.

However, sometimes you can identify situations in which a stock
and a sector both appear poised for a breakout.  If the breakout
occurs simultaneously, the bullish stock trade is more likely
to be profitable.

Profits should be taken quickly, as a breakout from a bullish
wedge does not necessarily mean that the stock will continue
to rise ad infinitum.  Nortel presented an opportunity to
profit from a bullish wedge in November, but the stock retreated
shortly afterward.

After having been burned in treacherous markets last year, traders
are more likely than ever to take profits quickly.  This is
particularly important when trading options.  A 20% return on a
short-term option can be a good profit level to aim for, although
experienced option traders frequently trade for 50 to 100% profits.

A bearish wedge pattern also offers the potential for profits
for put players.  A bearish wedge looks like a bullish wedge
upside down.

If a stock has been trading in a downward channel for a period
of time, with strong support holding, it can be profitable to
buy a put if the support level is broken.  This is articularly
effective in a down market.  For example, CSC(NYSE: CSC) offered
the potential for a profitable put play last week, even while the
market rallied.  However, traders needed to take profits quickly,
as put profits can evaporate quickly in a rising market.

Cash levels in money market funds are now higher than they
have ever been, and higher as a percentage of the total
stock market than they have been since 1991.  The amount of
cash held in money market funds is now equal to 15% of the
Wilshire 5000.  This is a highly bullish indicator.  Despite
the fact that consumer spending on certain items may be
decreasing, individuals do not lack buying power when it
comes to the stock market.

During the month of December, the four week moving average of
cash to equity funds was negative, as funds suffered redemption.
There have only been a few months in the last decade in which
funds suffered net redemption, and each of these was a good
buying opportunity for long-term investors.

It is also important to note that the stock market has performed
well in the past when the ten-year government bond yield dropped
to 5% or below.  Lower yields from treasury bonds, CDs, and money
market funds can increase the comparative yields of dividend
paying equities.  In addition, the reduction of high interest
payments on corporate debt can show up in certain company earnings
almost immediately.

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Regarding the Motorola (MOT) Calendar Spread - Combos section 1/11/01:

Dear OIN,

Wow, I am having fun and making money but not getting carried away.

I am interested in your recommendation on MOT.  How do you play this
Combo?  Do you roll the Feb 25 short call out and up at some point
around the price of 25?  In short, how long do you intend to play
this position?

I have done a bullish calendar spread with recently with WCOM but
bought an in the money LEAP to start and have had to happily roll
the short option twice. It looks like it is ready for another roll
right now assuming I want to hold the position long term.



Thanks for your question, PH.  Concerning the Motorola position,
a bullish calendar spread using LEAPS and Covered-calls:

Here is a brief narrative on Calendar Spreads...and regarding MOT
specifically, the range near $20 should be relatively comfortable
for a month or so and then we will make adjustments based on
changes in its technical character.  The resistance near $25
should protect our upside (for now) and each month we will sell
the option that appears most appropriate, based on our outlook
for the underlying issue.  The best information on the subject
(which I would simply be repeating) can be found in "Options
as a Strategic Investment" (McMillan), and "Option Pricing and
Volatility" (Natenburg), both available in the OIN bookstore.

Calendar Spreads: The Concept of Selling Time...

A calendar spread (also known as a horizontal spread), involves
the purchase of an option with one expiration date and the sale
of another option with the same strike price but a different
expiration date. The philosophy for using calendar spreads is
that time will erode the value of the short term option at a
faster rate than it will the long term option. A spread that is
established when the underlying stock is at or near the strike
price of the options used is a neutral spread. If the stock price
remains relatively unchanged until the near-term option expires,
the neutral spread will make a profit.

It is important to understand how a calendar spread profits from
the passage of time. When opening a horizontal spread, we buy a
long term option and sell a short term option. Both options have
the same exercise price, thus they have the same intrinsic value.
Regardless of the movement of the stock, time value will always
be less in the near term option. As long as the underlying stock
price remains relatively close to the exercise price, the value
of the spread will be determined by the time premium of each
option. When we close the position at expiration, the remaining
time value in the short term option will be very low relative to
that of the long term option.

A horizontal spread is completely dependent upon the relative
behavior of time value decay in each of the option positions.
Since the profitability of this strategy is determined solely
by the difference in time values of the options, it is important
for the underlying issue to remain near the strike price; where
time premium is theoretically the highest. If the stock price is
at the high or low extreme, the time values of both options will
be low and the position will likely incur a loss; the remaining
credit will be less than the opening debit.

To the average trader, it would appear that this technique can't
lose. One would simply buy the longer-term option and sell the
shorter-term option. As both time values decayed, the spread
would gain value. In reality, it's rarely that easy because the
the underlying stock does not remain constant. One way to reduce
the negative effects of a volatile stock is to establish the
spread at least two to three months before the near-term option
expires, capitalizing on the ability to sell a second position
against the longer-term option. Ideally, the stock price would
be just below the sold strike when the near-term option expires
but if the options are in-the-money, they must be re-purchased
to preserve the long-term position.

Another method that is commonly used to increase the probability
of profit in this strategy requires an understanding of implied
volatility in option pricing. When opening any type of spread,
it's important to take advantage of premium disparities to create
the best possible position. (We try to open new plays when there
is excess value in the sold option. This allows us to enter a
position with a theoretical edge; a discount.)

There is always the risk of early exercise in a calendar spread.
The degree of risk depends on which options are bought and sold
and the distance to the underlying stock price. The greater the
time value in the sold option, the lower the probability of it
being exercised. If it does occur, a trader can always fulfill
the obligation by simply purchasing the underlying stock. The
important issue is to be notified by the broker in a timely
manner so that the appropriate action can be taken before the
stock price increases.

Ray Cummins
Spreads Editor


MER - Merrill Lynch & Co., Inc. $74.56 +0.94 (+0.31 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.

Most Recent Write-Up

Despite closing down fractionally for the day, shares of Merrill
Lynch made a new all-time intra-day high.  Trading volume was
average and it appears that traders were willing to take some gains
off the table as MER headed higher into blue-sky territory.
However, the uptrend since late November is still firmly intact,
with the 5- and 10-dma continuing to serve as support.  Look for
pullbacks to these two moving averages (currently at $72.83 and
$71.95 respectively) as potential aggressive targets to shoot for,
along with horizontal support at $73.50, $72 and our stop price of
$70.  As always, confirm bounces with buying volume before
initiating a play.  For an entry on strength, if the buyers return
with conviction, taking MER definitively through the $75 mark,
this could allow conservative traders to take a position, but in
doing so, make sure that competitors GS and LEH are also moving in
the same direction.


Financial stocks have been acting well in anticipation of another
rate cut by the end of the month, along with the benign CPI data
this morning.  MER broke above resistance at $74 and closed the
day at an all-time high.  The stock has been building a bullish
wedge and today's record close occurred on stronger than average
volume.  We are looking for a follow through on this move.  Look
for entries into this call play on either a pullback and bounce
from intraday support at $73, or on a break above resistance at

BUY CALL FEB-70 MER-BN OI=1887 at $7.63 SL=5.75
BUY CALL FEB-75*JMR-BO OI=2739 at $4.50 SL=2.75
BUY CALL FEB-80 JMR-BP OI=2260 at $2.31 SL=1.00
BUY CALL APR-75 JMR-DO OI=5380 at $7.63 SL=5.75
BUY CALL APR-80 JMR-DP OI=7776 at $5.25 SL=3.50



Earnings season: Technology investors begin to test the waters...

Technology stocks led the rally today as investors responded
positively to benign economic data and an upbeat earnings report
from Intel (INTC).  The chip giant posted its quarterly results
late Tuesday, announcing fourth-quarter profits that were a penny
ahead of the consensus estimates.  The company also reported that
it increased planned 2001 capital expenditures to $7.5 billion,
lending optimism to the outlook for a potential industry recovery
in the second half of the year.  Among the technology segments
affected by the news, semiconductor equipment and communications
stocks were the best performers, but virtually every NASDAQ sector
moved higher.  A favorable economic report also helped boost the
market in early trading.  The consumer price index rose by 0.2% in
December while the core index, which excludes the food and energy
components, edged up 0.1%.  The numbers suggest that the economy
is moderating at a relatively stable pace and provides room for an
expected improvement in business conditions in the latter half of
2001.  On the Dow, trading activity was less confident as a number
of industrial companies posted mediocre revenues due to a stronger
dollar and the slowing U.S. economy.  Among the blue-chip losers
were Minnesota Mining (MMM), Merck (MRK), Boeing (BA), Home Depot
(HD), and General Motors (GM).  The newly-merged J.P. Morgan Chase
(JPM) also slumped after announcing fourth-quarter revenues that
were well below consensus estimates, due to declines in trading
and private equity and increased spending on investment banking.
Technology stalwarts Hewlett-Packard (HWP), Microsoft (MSFT), and
International Business Machines (IBM) kept the Dow's losses to a
minimum.  Among the broader market groups, brokerage shares edged
higher but oil service, major drug, paper and biotechnology issues
generally retreated.  Analysts say that expectations are for lower
growth and stock prices have likely discounted much of the current
outlook.  That sets the stage for bullish activity, even for those
companies that just meet the lowered forecasts.  With that idea in
mind, we will continue to focus on positions that have good upside
potential along with a high probability of a reasonable profit and
relatively low risk.

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

NEWP    JAN    65    62.56  94.94    $2.44   7.4%
IMPH    JAN    45    42.69  48.38    $2.31   5.5% Key moment

Naked Puts:

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

XLNX    JAN    30    29.62  48.31    $0.38  11.9%
NEWP    JAN    55    53.88  94.94    $1.13  11.2%
JNPR    JAN    70    69.25 136.19    $0.75  10.3%
QCOM    JAN    70    68.50  73.00    $1.50  10.2% 2 days to go?
DPMI    JAN    40    39.62  72.50    $0.38   9.7%
AFFX    JAN    55    53.81  61.44    $1.19   9.6%
IMPH    JAN    40    38.87  48.38    $1.13   9.2%
LEH     JAN    55    54.12  78.88    $0.88   7.8%
JNPR    JAN    70    68.94 136.19    $1.06   7.3%
IVGN    JAN    60    58.50  66.94    $1.50   7.0% Looking weak!
DCTM    JAN    40    38.94  49.00    $1.06   6.8%
IDPH    JAN   120   117.50 163.31    $2.50   6.4% 3-1 split 01/18
EMLX    JAN    45    43.69  97.19    $1.32   6.3% Adj 2-1 Split
BGEN    JAN    50    49.37  56.00    $0.63   6.3%
MWD     JAN    65    64.44  80.88    $0.56   6.2%
NOK     JAN    40    39.25  40.19    $0.75   4.7% Own it?

Sell Strangles:

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

BRCM    JAN    45    43.75 128.69    $1.25   8.6%
BRCM    JAN   160   161.06 128.69    $1.06   7.4%

CEPH    JAN    40    39.06  55.19    $0.94   8.2%
CEPH    JAN    70    71.19  55.19    $1.19  10.1%

CMVT    JAN    75    74.37 112.13    $0.63  10.2%
CMVT    JAN   125   125.63 112.13    $0.63  10.2% Getting Close

EMLX    JAN    55    54.44  97.19    $0.56  11.8%
EMLX    JAN    98    98.06  97.19    $0.56  11.8% Ready to Cover?

GMST    JAN    25    24.37  54.63    $0.63   5.8%
GMST    JAN    65    65.75  54.63    $0.75   6.8%

IMPH    JAN    35    33.25  48.38    $1.75  11.7%
IMPH    JAN    80    82.75  48.38    $2.75  17.0%

ITWO    JAN    30    29.50  53.88    $0.50  16.7%
ITWO    JAN    70    70.56  53.88    $0.56  18.6%

MERQ    JAN    60    59.31  80.94    $0.69   6.7%
MERQ    JAN   140   141.00  80.94    $1.00   9.6%

NTIQ    JAN    50    49.44  61.25    $0.56  12.6%
NTIQ    JAN   105   105.56  61.25    $0.56  12.6%

RIMM    JAN    50    48.44  57.13    $1.56  12.1%
RIMM    JAN   115   115.94  57.13    $0.94   7.6%

Naked Calls:

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

RIMM    JAN   110   111.06  57.13    $1.06  13.4%
QLGC    JAN   130   131.50  78.00    $1.50  10.1%
BEAS    JAN    85    86.25  65.56    $1.25  10.1%
ADBE    JAN    80    81.00  53.50    $1.00   8.1%
IVGN    JAN   100   100.63  66.94    $0.63   7.7%
VRTS    JAN   160   161.69  91.75    $1.69   6.1%

Credit Spreads:

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

ESRX  $88.88  $89.50   JAN65p/70p   $0.50   $69.50  $0.50   Open
AFFX  $63.63  $61.44   JAN40p/45p   $0.69   $44.31  $0.69   Open
VAR   $62.00  $60.00   JAN50p/55p   $0.50   $54.50  $0.50   Open
FCEL  $72.25  $68.75   JAN45p/55p   $0.56   $49.44  $0.56   Alert

MRK   $89.13  $81.25   JAN100c/95c  $0.62   $95.62  $0.62   Open

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

A - Agilent  $61.88  *** On The Rebound! ***

Agilent Technologies is a diversified technology company that
provides enabling solutions to high growth markets within the
communications, electronics, life sciences and healthcare
industries.  The company provides test instruments, standard
and customized test, measurement and monitoring systems for the
design, manufacture and support of electronic and communication
devices, and software for the design of high frequency electronic
and communication devices.  The company also provides fiber optic
communications devices and assemblies, integrated circuits for
wireless applications, application-specific integrated circuits,
optoelectronics and image sensors.  Agilent manufactures patient
monitoring, ultrasound imaging and cardiology products and other
systems.  In addition, they make analytical instruments, systems
and services for unique technologies such as chromatography,
spectroscopy and bio-instrumentation.

Agilent likes to call itself the original Hewlett-Packard, since
the company came into being when HWP spun off its testing and
measurement equipment and semiconductor businesses in late 1999.
The company also received control of HWP's health care solutions
and chemical analysis businesses and its research labs are also
considered among the best in the commercial world.  Now Agilent
is focused on becoming a "one-stop shop" for a range of unique
communications systems and they have potential for tremendous
impact in the industry.  Those of you who favor the outlook for
the company can use this position to speculate conservatively on
the future movement of its stock.

A - Agilent  $61.88

PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-45  A-NI  OI=534   A=0.38
SELL PUT  FEB-50  A-NJ  OI=1810  B=0.81
INITIAL NET CREDIT TARGET=$0.50-$0.56  ROI(max)=11%



EMLX - Emulex  $97.19  *** Break-out! ***

Emulex is a designer, developer and supplier of a broad line of
Fibre Channel host adapters, hubs, application-specific computer
chips (ASICs), and software products that provide connectivity
solutions for Fibre Channel storage area networks (SANs), network
attached storage (NAS), and redundant array of independent disks
(RAID) storage.  Its products are based on internally developed
ASIC technology, and are deployable across a variety of SAN
configurations, system buses and operating systems, enhancing data
flow between computers and peripherals.  Emulex's products offer
customers a combination of critical reliability, scalability, and
high performance, and can be also customized for mission-critical
server and storage system applications.

This company is simply one of our favorites for long-term stock
portfolios and the demand for data storage technology has helped
the issue remain relatively bullish in the midst of selling among
a number of industry-leading issues.  The fundamental outlook for
Emulex is very positive; revenues are expected to increase in the
coming year and the company should see higher share values in the
future.  The current technical trend is favorable and we offer
this position as an entry point, based on the recent bullish chart

EMLX - Emulex  $97.19

Sell Covered Call or Naked Put:

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

Sell Call FEB 70   UEL BN  112      30.25    66.94     4.6% ***
Sell Call FEB 75   UEL BO  152      26.38    70.81     6.0%

Sell Put  FEB 55   UMQ NK  60        1.25    53.75     6.1%
Sell Put  FEB 60   UMQ NL  225       2.06    57.94     9.7% ***
Sell Put  FEB 65   UMQ NM  56        2.75    62.25    12.6%
Sell Put  FEB 70   UEL NN  114       3.63    66.37    16.0%
Sell Put  FEB 75   UEL NO  70        4.25    70.75    18.2%



IDTI - Integrated Device Tech.  $52.94  *** Earnings Rally! ***

Integrated Device Technology designs, develops, manufactures and
markets a broad range of high-performance semiconductor products
and modules.  Applications for their products include networking
and telecommunications equipment, such as routers, hubs, switches,
cellular base stations and other devices; storage area networks
(SANs); other networked peripherals and servers, and personal
computers.  The company operates in two main business segments:
Communications and High Performance Logic and SRAMs.

The recent recovery in semiconductor stocks continued today as
investors returned to the group amid confidence that most of the
bearish news about earnings has been factored into prices.  The
big mover in the sector was Elantec Semiconductor (ELNT), which
rallied $10 to $50.50 after posting a quarterly profit of $0.37
per share, beating the consensus estimate.  The firm also said it
sees future earnings above the current estimates and that bodes
well for other issues in the group.  IDTI's earnings are due out
tomorrow, and we may be able to establish a position at a better
than expected cost basis, if the issue endures a brief sell-off.

IDTI - Integrated Device Tech.  $52.94

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

Sell Put  FEB 35   ITQ NG  224       0.56    34.44     5.1% ***
Sell Put  FEB 40   ITQ NH  593       1.25    38.75    10.7%
Sell Put  FEB 45   ITQ NI  309       2.50    42.50    16.1%



VSTR - Voicestream  $129.44  *** On The Move! ***

VoiceStream Wireless, through its subsidiaries, provides personal
communications services under the VoiceStream brand name in a
number of urban markets across the United States.  The company
holds over 100 broadband PCS licenses covering 62 million people.
VoiceStream Wireless' services and include rate plans, prepaid
services, wireless e-Mail, wireless data, and text messaging.  In
addition to offering home coverage in the aforementioned markets,
the company provides national and global roaming.  They also offer
phones and accessories manufactured by Nokia, Mitsubishi, Ericsson,
and Bosch; and hands-free Jabra earsets.

The planned buyout of Voicestream moved closer to reality today
after German telecommunications giant Deutsche Telekom AG said it
had reached an agreement with U.S. authorities regarding national
security and law enforcement matters.  The Justice Department and
the Federal Bureau of Investigation wanted assurances about the
ability to conduct lawfully-authorized surveillance of domestic
calls and those calls that begin or end in the United States.
Officials also said they wanted to prevent foreign-based or other
illegal surveillance of the nation's telecommunications system
that could be a security risk for the U.S.  In addition, Germany's
stake in Deutsche Telekom, which the government has pledged to
divest, has raised concerns among some in the U.S. Congress about
the impact the German government could have on competition in the

All of these issues appear to have been resolved and VSTR's share
value has moved above a recent trading-range top near $125.  Based
on recent technical indications, the likelihood of it retreating
to our cost basis seems rather remote.

VSTR - Voicestream  $129.44

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

Sell Put  FEB 100  UVT NT  912       1.75    98.25     6.4%
Sell Put  FEB 105  UVT NA  150       2.25   102.75     7.7% ***
Sell Put  FEB 110  UVT NB  551       2.75   107.25     7.9%


Neutral Plays - Straddles & Strangles

VECO - Veeco Instruments  $60.25  *** Probability Play! ***

Veeco Instruments designs, manufactures, markets and services a
broad line of equipment primarily used by manufacturers in the
data storage, optical telecommunications and semiconductor
industries.  These industries help create a range of information
age products for today and tomorrow, such as personal computers,
network servers, fiber optic networks, digital cameras, set-top
boxes and personal digital assistants.  Veeco offers two primary
product lines: Metrology and Process Equipment.  A subsidiary of
the company, CVC provides cluster tool manufacturing equipment
used in the production of evolving tape and disk drive recording
head fabrication, optical components, passive components, MRAM,
bump metallization, and next generation logic devices.

Veeco shares have rallied 25% during the past week in the wake of
a rise in equipment orders and bullish comments by a US Bancorp
Piper Jaffray analyst.  The instrument maker said fourth quarter
orders were approximately $184 million, exceeding its forecast of
$150 million.  Based on the strong fundamentals and valuation, we
also favor the issue for a bullish position, but there are not
many ways to approach the inflated option premiums and there are
also some primary resistance areas to overcome as the share value
recovers.  In this conservative premium-selling position, we will
use the recent volatility and the inflated option prices to open
a neutral play with a favorable premium.  The probability of the
share value reaching our sold strikes is rather low, but there
is always the possibility of a significant change in character,
so monitor the position on a regular basis.

VECO - Veeco Instruments  $60.25

Credit Strangle:

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

Sell Put  FEB 30   QVC NF  168       0.94    29.06     7.3% ***
Sell Call FEB 95   QVC BS  0         1.13    96.13     8.7% ***

- or -

Sell Put  FEB 35   QVC NG  3730      1.13    33.87     8.7%
Sell Call FEB 90   QVC BR  0         1.63    91.63    12.1%



MYGN - Myriad Genetics  $54.06  *** Biotechnology Bust? ***

Myriad Genetics engages in the use of gene-based medicine to
develop novel therapeutic and molecular diagnostic products.
The company focuses on the emerging field of proteomics, which
involves establishing the relationship between protein function
and particular diseases by identifying disease-specific proteins.
Myriad employs a variety of proprietary proteomic technologies to
discover important disease genes and to understand the role these
genes and their related proteins play in the onset and progression
of disease.  Using proprietary technologies, they have identified
22 drug targets to date.  Myriad delivered some of these targets
to its strategic partners based on its discovery of genes involved
in breast cancer, brain cancer, prostate cancer, heart disease,
dementia and other disorders.  Their partners include Bayer, Eli
Lilly and Company, Hitachi, Hoffmann-LaRoche, Pharmacia, Novartis,
Schering-Plough and Schering AG.

This play is simply based on the current price or trading range
of the underlying stock and its bearish technical history.  MYGN's
recent downward movement has been on increasing volume and a major
support level near $60 was violated.  Now that range, along with
the NOV-DEC lows, becomes "resistance" and it appears the share
value has little chance of reaching our target position in one
month.  Consider covering the sold (short) position on any future
rally above $90, accompanied by strong volume; a very unlikely

MYGN - Myriad Genetics  $54.06

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

Sell Call FEB 92.5 QGD BF  23        1.38    93.88    11.5%
Sell Call FEB 95   QGD BS  509       1.13    96.13     9.6%
Sell Call FEB 97.5 QGD BG  200       0.81    98.31     7.1%
Sell Call FEB 100  QGD BT  324       0.69   100.69     6.1% ***



OSIP - OSI Pharmaceuticals  $60.63  *** Stage III Top? ***

OSI Pharmaceuticals is a pharmaceutical research and development
organization that utilizes a comprehensive drug discovery and
development capability to rapidly and cost effectively discover
and develop novel, small-molecule drugs for commercialization by
major pharmaceutical companies.  The company conducts its drug
discovery and product development programs independently, and in
collaboration with major pharmaceutical companies.  The company
also has drug candidates in clinical trials and pre-clinical
development.  These drug discovery efforts are primarily focused
in the areas of cancer, diabetes, cosmeceuticals and G-protein
coupled receptor, or GPCR, directed drug discovery.

OSIP is an excellent candidate in the premium-selling category
of options trading.  The issue has great option premiums, a well
defined trading range and a high probability of remaining below
the sold (short) strike prices.  Based on historical analysis of
option pricing and the underlying stock's technical history, the
issue meets our fundamental criteria for selling naked calls and
traders who agree with a bearish technical outlook can use this
position to profit from further downside movement.

OSIP - OSI Pharmaceuticals  $60.63

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

Sell Call FEB 75   GHU BO  18        2.38    77.38    16.6%
Sell Call FEB 80   GHU BP  56        1.63    81.63    12.0%
Sell Call FEB 85   GHU BQ  31        1.13    86.13     8.6% ***
Sell Call FEB 90   GHU BR  714       0.69    90.69     5.5%


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