Option Investor

Daily Newsletter, Monday, 01/29/2001

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The Option Investor Newsletter                   Monday 01-29-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
        01-29-2001        High      Low     Volume Advance/Decline
DJIA    10702.20 + 42.20 10725.10 10612.50 1.03 bln   1970/1170
NASDAQ   2838.34 + 57.04  2840.02  2742.50 1.97 bln   2322/1572
S&P 100   711.55 +  2.44   712.56   705.71   totals   4292/2742
S&P 500  1364.17 +  9.22  1365.54  1350.36           61.0%/39.0%
RUS 2000  507.91 +  9.23   507.91   498.67
DJ TRANS 3001.33 + 45.14  3012.89  2955.01
VIX        24.93 -  0.21    25.76    24.80
Put/Call Ratio      0.48

Enter The Fed

For the second time this month, John Chambers, CEO of Cisco
Systems (NASDAQ:CSCO), warned of a possible slowdown in business.
As a result of Chambers' guidance, Lehman Brothers lowered its
revenue estimates and price target on shares of the leading
networking gear maker this morning.  Chambers attended the
World Economic Forum over the weekend, held in Davos,
Switzerland, where he made the remarks concerning a possible
slowdown in business due to lower cap-ex spending by major
telecom carriers.  Earlier this month, Chambers presented to
analysts at a tech conference and warned in a similar

The cautious comments from Chambers over the weekend were not
all that surprising.  After all, PMC Sierra (NASDAQ:PMCS), one
of Cisco's key suppliers, guided lower during the company's
conference call last Thursday evening.  So it makes sense
that if PMC Sierra is experience a slowdown, its largest
customer in Cisco should also be experiencing a slowdown.

However, what was surprising in today's trading was the
market's recently-acquired ability to shrug off bearish news.
Amid the disconcerting tones of Chambers and Lehman Brothers
this morning, the broader networking sector as measured by
the AMEX Networking Index (NWX.X), was able to shrug off the
bears and pair the majority of its earlier losses into the
close of trading.  In fact, several of Cisco's competitors
finished with substantial gains, including shares of CIENA
(NASDAQ:CIEN) and Redback Networks (NASDAQ:RBAK).  Had
Cisco warned a month or two ago, during the peak of the great
bear market of 2000, its stock would have been taken apart.
However, for shares of Cisco to finish only -$1.13 lower on
a day its CEO effectively warned is a testament to the shift
in market sentiment and psychology, which has everything to
do with the Federal Reserve.

Alan Greenspan, and his soldiers at the FOMC, effectively
killed the Bear of 2000 with their surprise rate cut earlier
this month.  And the bulls will turn to Greenspan again this
week as the FOMC conveys for its two-day meeting, which
begins tomorrow and culminates with an official announcement
on interest rates Wednesday afternoon.  At this point, a
cut in rates is next to guaranteed.  What's uncertain,
however, is the magnitude of the expected rate cut.  The
majority of market participants and economists expect the
Fed to cut by another 50 basis points.  To emphasize that
view, the fed funds futures are currently discounting a 90
percent chance of the Fed cutting by 50 basis points.  With
that said, if the Fed only moves by 25 basis points, I would
expect the market to substantially sell-off on disappointment.
But that's rather obvious.

What's not obvious is how to trade around a 50 basis point
cut.  Jim is of the belief that if the Fed does cut by 50
basis points the market will pullback on a "sell the news"
thesis.  Whereupon the dip can be bought.  I tend to lean
towards Jim's beliefs.  However, I do think there exists the
possibility of the market substantially rallying on the news
of a 50 basis point cut.  And I believe that for two reasons.
The first reason is that the Fed announcement will take
place on the last day of the month - a time when fund managers
are particularly cognizant of end-of-the month performance
reports.  The second reason the market might rally on a
50 basis point cut is because of the large amount of cash
sitting on the sidelines and the continued influx of cash
into equity mutual funds.  And after last year's drubbing,
fund managers are very willing to put that cash to work in
an attempt to NOT miss any big advance in the broader
market averages.

In short, if the Fed only cuts by 25 basis points it'll
probably be safe to hit some bids or enter some puts for
the near-term disappointment reaction.  However, if the 50
basis point cut is realized, it's going to be harder to game.
And when uncertainty exists, the only thing any trader should
employ is discipline.  And if that means standing aside and
waiting for an edge, so be it!

But for those unable to stand still (myself included) before
the Fed's announcement Wednesday, we should address a few
points.  The Nasdaq Composite's (COMPX) impressive rebound
this morning and subsequent advance above the 2800 level
set the tech-heavy index to retest resistance at 2840.  That
level has been a site of resistance on three occasions in
the past two weeks, with today's intraday high of 2840.02
marking the third test.  If the COMPX clears 2840 early
tomorrow, it might make a run for 2900, especially if the
anticipatory Fed-related buying continues.  As I've mentioned
before, after 2900, it's a clear shot to 3000 for the COMPX.
And if the COMPX breaks 2900, some of those fund managers I
alluded to earlier may be induced to step in and buy.

If the COMPX is going to breakout above 2900 anytime soon, I
feel that the Philadelphia Semi Index (SOX.X) will need to
cooperate.  The SOX.X acted very well in today's session
despite the Cisco-related ramifications.  The chip index has
been consolidating for about two weeks, after staging a nice
run in the first half of the month.  The SOX.X has had trouble
with resistance between roughly 725 and 735.  If the SOX.X
can hurdle that range of resistance, it will then have to
clear major resistance at 750.  And if that happens, the SOX.X
should trade up to 800 and carry the COMPX well above 2900.

Along with the tech sector, traders might want to take a look
at two very interest rate dependent sectors ahead of the FOMC
announcement Wednesday.  The two sectors I'm think of are the
banks and brokers.  Both groups of stocks staged a solid
performance today, and both are poised to breakout above key
resistance levels.  Traders might consider zoning in on the
S&P Banks Index (BIX.X) tomorrow and Wednesday morning as it
approaches resistance at the 680 level.  One stock in the group
that has been acting well, hence its inclusion on the OI call
list, is J.P. Morgan Chase (NYSE:JPM).

Like the bank index, the AMEX Securities Broker/Dealer Index
(XBD.X) is approaching a key resistance level.  Traders might
want to pay attention to the XBD.X as it approaches the 650
level.  And a stock in this group that has been acting well,
hence the inclusion on the OI call list, is Goldman Sachs

I'm by no means suggesting to our readers to recklessly enter
into any of the sectors or individual issues I've mentioned
this evening.  My intentions, however, are to give our readers
several variables to watch for ahead of the FOMC announcement
on Wednesday.  Furthermore, the tech and finance sectors
typically dictate the direction of the broader market averages.
And if traders have a handle on those two sectors the plan of
attack should be made much easier.

So now that I've given our readers a few metrics to monitor
before the Fed announcement, I must reiterate my stance on
trading at the actual time of the announcement.  When the Fed
releases its move in interest rates, liquidity will be very
thin, at best!  That said, it'll probably be best to stand
aside after the initial reaction to the news and wait for
the real trend to show itself - whether it be up or down.

Looking beyond the Fed announcement this week (it's hard to
do that, I know) I see very encouraging signs.  The merger
and acquisition space is beginning to pick up.  Just this
morning, Ariba (NASDAQ:ARBA) agreed to pay a hefty premium
for Agile Software (NASDAQ:AGIL) - unfortunately and
coincidentally, OI was on the wrong side of that announcement.
Also, Maxim Integrated (NASDAQ:MXIM) said it would buy Dallas
Semiconductor (NASDAQ:DS).  There's nothing like a little
consolidation to get the tech bulls running!

Furthermore, the equity and debt markets have welcomed new
issues with open arms.  Most recently, Peet's Coffee (NASDAQ:
PEET) debuted last week with a warm reception.  The stock
was offered in the secondary market for $8.13 - it closed
at $16.13 today.  Not too bad for a coffee maker!

Finally, and most importantly, the Fed is on the move.  If
Greenspan delivers the expected 50 basis point cut this
Wednesday and promises subsequent cuts, the broader market
averages could be set to rally BIG!  Reflecting on the action
in Cisco Systems today, it sure is nice to have the Fed back
on the bulls' side.

Make sure to tune in Tuesday evening to get Jim's take on
the tape and how to trade around the Fed's announcement the
following day (Wednesday).

Eric Utley
Assistant Editor

Spring Options Workshop and Bootcamp
April 5th-9th, Denver Colorado

OptionInvestor is proud to announce our third annual Spring
option workshop in Denver Colorado. This power packed five-day
event is structured to fully educate you on advanced option
strategies and will make you a better and more profitable trader.

If you attended the March Denver Expo last year and thought it
was the best function you had ever attended.. You haven't seen
anything yet! Great food, entertainment, education and just
plain fun in sunny Denver. The biggest complaint in March was
the massive weight gain experienced by the attendees from the
gourmet menu. We know how to put on a function. Ask anyone who
came last March!

We guarantee the speaker lineup to be second to none. In the
October seminar not only did we have Jim Brown and over 15 of
the OIN staff but Steve Nison, the father of modern candlestick
charting. Also, Dick Arms, creator of the Arms Index or the Trin
Indicator, Gregory Spear, author of the Spear Report, Stan Kim,
founder of the Snail Trader System and Jim Crimmins, president
of TradersAccounting.com. We promise the lineup this April will
exceed your expectations again!

This is not a beginner seminar but if you feel the need to brush
up on the basic trading strategies then we have an optional boot
camp the day before the four day seminar begins. If you have
traded options before and you are comfortable with the basic
strategies then this seminar will take you to a new trading
level. If you have been trading options for sometime and are
ready to broaden your knowledge and improve your trading results
in all kinds of markets then this is for you. Meet and interact
in a small group setting with the writers you have seen in
OptionInvestor for the last four years.

We are starting the seminar with an optional one day boot camp
which will cover all the basic strategies, calls, puts, leaps,
covered calls, naked puts, spreads, straddles, etc. This will
help investors not familiar with all the basic strategies get
up to speed before the intensive education and the advanced
material in the main seminar. The boot camp will be 8 hrs of
personal instruction by the OIN staff.

The main seminar will begin with a reception, dinner and
entertainment on Thursday night and continue non-stop until
noon on Monday. We mean non-stop. We don't quit until you do
and many optional sessions last until 10:PM or later.

The detailed schedule will be posted in about two weeks. There
will not be individual breakout sessions during the day. Each
topic will be covered in 1-2 hr general sessions taught by one
or more OptionInvestor staff and presented on three giant screens.
In the evening we will offer five of our popular chalk talk
sessions for that personal question and answer interaction.

The list of instructors is led by Jim Brown and will include
many OIN staff with outstanding guest speakers during lunch
and dinner each day. The Spring Denver Expo seminars fill up
fast and seating is limited! SIGN UP NOW or risk missing out
on this opportunity.

Unlike other seminars with only two or three instructors, you
will get in-depth knowledge from many different instructors
who are experts in their field.

The cost for the four-day workshop, April 6th to 9th is only
$2995 (spouse only $1495). This includes breakfast, lunch and
supper each day. All course materials, a CD of all the
presentations and a professional video package of the entire
seminar so you can review the material at home in the comfort
of your living room.  There is also a $500 discount if you
have attended a prior OIN seminar.

This is not a prepackaged presentation that gets repeated over
and over with stale information. This is a one-time production
and everything is fresh, live and as current as we can make it.
The videos will have your real time questions and answers and
not some from a prior class. Where else can you get intensive
yet personalized options education like this?

Do not delay as seating is very limited.
We guarantee you will not be disappointed!

You can pay for your education one bad trade at a time or you
can invest less money one time to learn how to do it right.

Click here for more info:

If you have not been to one of our Denver Expo seminars before
here are some comments from previous attendees:

The words herein are totally inadequate to express what I am
feeling about you and all the OptionInvestor organization. But
this medium is all I have. Thank you more than these few simple
words can say.

Wow, what a seminar! In my 25 years of investing I have attended
many instructional conferences, but I have never, never experienced
one like your Options Expo. The instructors were absolutely tops.
Subjects, generally were on target. Especially for me, the Skybox,
index funds/options and the early morning strategies and trading
were particularly great. The attention to the many details and
nuances were especially evident, and I guess most of the credit
that area goes to your great support team.

Now, the real challenge is to apply and implement the powerful
knowledge I was exposed to.

Sincerely and warmly,
Kevin Hughes, Denver


Jim & Staff,

I am sitting in the hotel room after a great 3 days in your
seminar. I can't tell you how pleased I am and want to thank
each of you for a job well done. Having been responsible for
events like this, albeit on a much smaller scale, I can recognize
all the hard work that went into the seminar. Each member of the
staff is to be congratulated!! The seminar confirmed my belief
that the OIN staff really cares about the success of their
subscribers. Jim, you all should be proud of the work you do to
enrich the lives of so many people. It is one thing to amass a
personal wealth. It is a much higher calling to help others meet
their goals in life. I was very impressed that you were emotional
in your closing remarks. You have so much to be proud of -- helping
people fish all over the world! Thanks again and I look forward
to attending another seminar in the future.

My best regards,
Jim Boettcher
Austin, Texas


I must say, that your seminar was outstanding!!! Sign me up for
next year. It is rare that a person of your position would share
so generously your knowledge of his trade. I hope that I will be
able to put into place much of what you taught. Every aspect of
the seminar was first class, from the hotel, to the food, the
instructors and the luncheon speakers. One of the biggest
surprises was your generosity in handing out material, and gifts.

Two weeks ago I attended a competing option seminar in Chicago
and all I got from the was coffee at the morning break, No
handouts, no food and half of the final day was promoting their
web site and additional classes. I must say your seminar far
exceeds what I got from them.

Sincerely yours,
Mike Lillis


Please pass on my thanks to the entire OIN group for a fabulous
EXPO. The seminar far surpassed any expectation that I would have
fathomed, had I attempted to! OIN has the right attitude and the
obvious ability to be a leader and I look forward to many years
of positive experiences with you folks.

Kind regards,
Gwen Richardson



I described this event to my friends as a life changing event!
(options aside) ,the quality of people, dedication, sacrifice
of their time (the second 40+ hours a week they don't have to
work but do) they do this because they care, wanting to help
others change their life dramatically (My wife thinks I was
oxygen deprived up there !) I came back a different person for
those who know me that says a lot. Now for the options side
I have to admit there was so much info to absorb, most of it
came to me on the 2000+- mile ride home it all started to fall
into place I feel Very confident (yes Jim this can be bad but
I know this now!) Notice the patience here guys! that's one
change I have a plan to stick to !

Allan O'Neill


Need we say more? If you want to learn how to be a better trader,
making more and losing less then you should come to this seminar.
We guarantee you will not be disappointed!

For more info:


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AFFX - Affymetrix Inc. $72.88 +2.88 (+2.88 this week)

Affymetrix is a leader in developing and commercializing systems
to acquire, analyze and manage complex genetic information in
order to improve the quality of life.  The company's GeneChip(R)
system consists of disposable DNA probe arrays containing gene
sequences on a chip, reagents for use with the probe array, a
scanner, and other instruments to process the probe arrays and
software to manage and analyze genetic information.  The company's
spotted array system enables individual researchers to create
and analyze custom microarrays on an easy-to-use cost efficient

The biotech index has been strong for the last several weeks,
and genomic companies have helped to lead the charge with their
vast array of exciting new products in development.  Last week,
a bellwether biotech stock Amgen won a key patent infringement
lawsuit against a competitor, which was interpreted as a
significant victory for the industry.  On Thursday, Affymetrix
won a significant court victory of its own, and since then, has
cleared a key technical hurdle.  On January 25, the U.S District
Court for the Northern District of California issued a Markman
ruling confirming the broad scope of four U.S. patents that
Affymetrix had asserted in litigation against Incyte Genomics,
Inc, and Hyseq, Inc.   The court accepted Affymetrix' position
on four key issues regarding their proprietary arrays containing
nucleic acids, and software computer programs which identify
a base using hybridization.  This news propelled AFFX over a
stubborn resistance level at its 50 dma of $64.74 last week.
The momentum continued today, and was strong enough to push
AFFX above its 200 dma of $68.72, which has eluded the stock
since late December.  Good earnings and upbeat forecasts from
biotech and pharmaceutical bellwethers Elan and Amgen have
helped this sector, and will likely help AFFX start a strong
earnings run into its own earnings date next Monday Feb. 5.
All of the biotech stocks are volatile, so play this one very
carefully.  Aggressive traders might want to take positions on
a pullback to support at $72, if it is accompanied by strength
in the biotech index BTK.X.  Ideally, we are looking for a break
above the next heavy levels of resistance at $74, and $76, which
could lead AFFX on a trajectory up to $80.  Conservative traders
might want to wait for a breakout.  Watch others like HGSI, and
BGEN for an indication of sector strength, and set stops at $68.

BUY CALL FEB-70 FIQ-BN OI=917 at $ 8.38 SL=6.00
BUY CALL FEB-75*FIQ-BV OI=436 at $ 7.13 SL=5.00
BUY CALL MAR-70 FIQ-CN OI= 14 at $12.13 SL=9.00
BUY CALL MAR-75 FIQ-CO OI= 45 at $ 9.88 SL=7.00


PPRO - PurchasePro.com, Inc. $29.31 +3.81 (+3.81 this week)

PurchasePro.com is a provider of Internet business-to-business
electronic commerce services.  The company's e-commerce solution
is comprised of public and private communities or "procurement
networks," where businesses can buy and sell a range of products
and services over the Internet in a competitive and cost-effective
manner.  PPRO's solution leverages the growth, pervasiveness, low
costs and community building nature of the Internet as a unique
basis for e-commerce for the broad business-to-business market.

So far, this has been a great year for shares of PPRO.  Moving
back above all its major moving averages this past month, the
stock has been breaking through key levels of resistance with
support from its 5 and 10-dma.  Morgan Stanley recently initiated
coverage with an Outperform rating.  That along with a string of
good news from the company in the form of new product
announcements and customer wins has helped the stock to power
forward.  Today, Lehman Brothers re-iterated their Strong Buy
rating on the stock, with a $60 price target, calling the stock
at current levels an attractive buying opportunity as they
anticipate strong forth quarter results on February 12 when the
company reports its earnings.  What's more, a deal previously
made with AOL has expanded in scope, with higher than expected
revenues going forward.  With that, PPRO surged almost 15 percent
today on over 155% of ADV.  Now within striking distance of
formidable resistance at $30, a break through this level on
volume would allow for an entry on strength and from there, could
quickly head to $35.  For traders targeting entry points on
pullbacks, look for support from the 5 and 10-dma at $26.10 and
$23.05 respectively.  Horizontal support can also be found at
$28.50, $27, and the 100-dma and our stop price of $25.  In both
cases, use Merrill Lynch's B2B HOLDR (BHH) as a measure of sector
strength when making a play.

BUY CALL FEB-25 PXZ-BE OI=2214 at $5.88 SL=4.00
BUY CALL FEB-30*PXZ-BF OI=1660 at $2.94 SL=1.50
BUY CALL FEB-35 PPU-BG OI= 375 at $1.25 SL=0.75
BUY CALL MAR-30 PXZ-CF OI= 326 at $5.00 SL=3.00
BUY CALL MAR-35 PPU-CG OI=  10 at $3.13 SL=1.50


RIMM - Research In Motion Ltd. $74.50 +2.94 (+2.94 this week)

Based in Waterloo, Ontario, Canada, Research In Motion Limited is
a leading designer, manufacturer and marketer of innovative
wireless solutions for the mobile communications market.  Through
development and integration of hardware, software and services,
RIMM provides solutions for seamless access to time-sensitive
information including email, messaging, Internet and
intranet-based applications.  RIMM technology also enables a
broad array of third party developers and manufacturers in North
America and around the world to enhance their products and
services with wireless connectivity.

When fundamental and technical forces converge, this can lead to
strong moves in stock price.  It is with this in mind that we are
initiating coverage on RIMM and adding it to our call play list.
The economic environment as a whole appears to be in the process
of improving for the company.  Following Alan Greenspan's lead,
Canada recently cut its interest rates as well, helping equities
trading on the Toronto Stock Exchange move higher.  On a more
company-specific level, RIMM has recently been aggressively
expanding its sales channels, helping to greatly boost revenue
outlook going forward.  A distribution deal with IBM in which Big
Blue will sell RIMM's BlackBerry wireless devices and services to
its enterprise-level clients was a big win for the company.  In
the retail space, prominent e-tailer Buy.com announced that it
would also offer BlackBerry products on its web site.  The
technical picture agrees with the fundamental outlook, as the
stock broke above its key 200-dma (now sitting at $67), thanks to
support from the 5 and 10-dma (at $70.35 and $64.36).  Today's
gain of over 4 percent resulted in a close above the 50-dma
($72.91) for the first time since last December.  For aggressive
traders, look for the aforementioned moving averages to serve as
support but in buying off a bounce, make sure RIMM closes above
our stop price of $68.  For a more conservative entry, wait for
continued upward momentum to carry the stock past $75.50 on
volume, with sector sisters HAND and PALM confirming upward

BUY CALL FEB-70 RUL-BN OI=351 at $ 9.75 SL=7.00
BUY CALL FEB-75*RUL-BO OI=740 at $ 7.00 SL=5.00
BUY CALL FEB-80 RUL-BP OI=943 at $ 4.88 SL=3.00
BUY CALL MAR-75 RUL-CO OI=161 at $11.75 SL=9.00
BUY CALL MAR-80 RUL-CP OI=249 at $ 9.50 SL=6.50

SELL PUT FEB-65 RUL-NM OI= 82 at $ 2.88 SL= 5.00
(See risks of selling puts in play legend)



ADBE - Adobe Systems $54.00 -4.06 (-4.06 this week)

A long-time leader in desktop publishing software, ADBE
provides graphic design, publishing, and imaging software
for Web and print production.  Offering a line of application
software products for creating, distributing, and managing
information of all types, the company generates nearly 75% of
sales through publishing software products such as Photoshop,
Illustrator, and PageMaker.  Its Acrobat Reader, which uses
portable document format (PDF) is popping up all over the
Internet, as businesses shift from print to digital
communications.  In addition, ADBE licenses its industry
standard technologies to major hardware manufacturers,
software developers, and service providers, as well as
offering integrated software solutions to businesses of all

A long ways south of its November highs north of $87, ADBE
finally succumbed to the incessant selling pressure in the
Technology sector in general, and Software stocks specifically.
While it looks like we may have a bottom in place on the NASDAQ,
that doesn't mean a retest of the lows is out of the question,
and the same follows for our new play, which could fall another
$10 before finding bottom.  Despite a strong fourth quarter,
which was followed by analyst upgrades, shares of the software
company have been under pressure ever since.  After struggling
to keep its head above the 200-dma (then at $64), ADBE fell as
low as $44 before finding any help from buyers.  While the stock
benefited from the recent NASDAQ recovery, that buoyancy seems
to have disappeared, and left on its own, ADBE seems destined
to slide downhill for a bit.  The enemies arrayed against ADBE
are legion, with solid resistance at $60 appearing like a brick
wall.  Additionally, we have the descending 30-dma ($57.25),
daily stochastics rolling over from the overbought zone, and
coupled with today's 7% loss on heavy volume, ADBE looks like
it is headed further south.  We want to play the downward trend
while it lasts, so we are putting a tight stop at $58.  Any
intraday bounces that fail to take this level out look
attractive for new entries, while more conservative players will
want to jump into the play as the stock falls below $53, just
below today's low.

BUY PUT FEB-55*AXX-NK OI=1416 at $4.88 SL=3.00
BUY PUT FEB-50 AEQ-NJ OI=2853 at $2.69 SL=1.25
BUY PUT FEB-45 AEQ-NI OI=1889 at $1.44 SL=0.75



BBY  - call play
Adjust from $45 up to $46

CPN  - call play
Adjust from $39 up to $40

RATL - call play
Adjust from $48 up to $50

BGEN - call play
Adjust from $64 up to $65


HAL $39.90 -0.85 (-0.85) HAL's chart almost mirrored that of the
OIX.X over the last two days.  Halliburton is maintaining the
slow upward trend which started early in December, but was unable
to penetrate very heavy resistance at the 200 dma of $41.81.
While a breakout may occur in the near-term future, Halliburton
is scheduled to release earnings after the close on January 30th,
and so we are dropping it tonight as we don't recommend holding
over earnings.

ARBA $38.38 -1.63 (-1.63) Shares of Ariba fell today when the
company announced that it would acquire AGIL for about $2.5
billion in a stock deal.  Paying a hefty premium of over 25
percent, ARBA gapped down at the open, and while the stock spent
the remainder of the day heading higher, analysts are concerned
with the price being paid.  Piercing our stop price of $38
intra-day, ARBA managed to make it back above that level before
the end of the day, but with the uncertainty surrounding this
deal, we are going to lean on the side of caution drop
coverage on ARBA tonight.

PFE $43.30 -1.01 (-1.01) As has been the pattern lately, every
time we jump into a trend, that nasty sector rotation jumps up
to foil our plans.  As Techs began to weaken and the Drug sector
came back to life, PFE put together a nice move, clearing the
200-dma last Thursday.  Well, Friday's gap up kept us from
playing and turned out to be the last positive move for the
stock, as the sector rotation took effect.  Techs seem to be
back in favor, so that cash is flowing back out of defensive
stocks like PFE.  Although our $43 stop has yet to be violated,
it looks like all but certain to happen tomorrow, so we'll say
goodbye to PFE tonight.


AGIL $50.38 +7.56 (+7.56) News that Agile Software would be
acquired by B2B giant Ariba was music to the ears of
shareholders.  Under the terms of the deal, each share of AGIL
would be exchanged for 1.35 of ARBA stock, a premium of roughly
26 percent.  This resulted in a gap above our stop price of $44
at the open and from there the stock broke through 50-dma
resistance at $49.29 and then the psychological $50 barrier.  Now
with less than $1.50 arbitrage spread between the two stocks,
AGIL's stock should now closely track ARBA's.  Based on the
uncertainty of the deal and ARBA's languishing stock price, we
are dropping coverage of this play.

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Proper Account Allotment
By Austin Passamonte

We've covered the topic of strategic account management in depth
here recently but perhaps missed an important step before that.
How we divide and apply our total balance is certainly square
one. Let's explore some ideas from here with a book report at the
end (fast forward for those who get bored).

Option trading attracts a wide range of personalities but one
core group comprises the bulk: People with small amounts of
capital and equally large dreams. The massive leverage and
quantified risk option trading offers appeals to this group who
have little money and are anxious to make it big. Count me in as
one of those for sure.

Exacerbating this quandary is shameless hype spread by those with
interest of self-promotion. Promise of easy riches and high odds
to get there have lured more new traders to their fiscal death
than all other factors combined. Once this seed of low risk (fear
of loss) and vast reward (greed of gain) is planted in a trader's
sub-conscious it's all but impossible to verbally dislodge.

Of course we've heard all the caveats and warnings from our
family, friends, SEC and the people we care most about, option
website writers. We don't even bother to read all that SEC mumbo-
jumbo cluttered between signature lines when opening our new
trading account. Enough of such negativity... that's for other
people. I'm destined to be rich!

A four-color flyer arrives by bulk mail touting its "super-secret
system" that never loses trading options. An automatic ticket to
fiscal success. I'll sure look good sitting in my own foreign
convertible sports car parked in front of my new lavish mansion.
Won't my in-laws be jealous? They've had it coming for a long
time anyway. This is going to be easy... I've dreamed of it so
long... it must be real... I need it to be real!

Believe me, words of warning exist for a reason. Statistical odds
alone for any trader's success are impossible to overcome.

I firmly believe that all traders who have a financial account
must divide it into an ideal ratio for long-term survival and
growth through all market conditions. It should be heavily skewed
to option investing with a small percentage used for option

100% of capital account should be divided as suggested:
70-80% in covered-calls/credit spreads
10-20% in buy & hold option strategies
10% or less in short-term buy & hold

Now that I've alienated many small-capped traders and most type-A
gamblers, let's rationalize with facts from here.

Experience in the marketplace is the only thing that will shake
new traders low on cash/high on dreams in a hurry for wealth to
reality. This was a delayed event from late 1998 until early 2000
when a vast number of small accounts ratcheted huge returns.
Count me amongst the bunch. I ran several accounts from $5,000
into much, much more. This allowed paying off massive debt and
spoiling with material goods as well. Hey, this game is easy.
Just one big cash machine that never ends.

Know anyone who felt the same way? Know anyone who since learned

Does this mean option trading is pure folly or impossible to
succeed at today? Certainly not! Just understand and manage the
risk/reward first.

Critical mass is a natural law. Once a body reaches certain size,
survival hits the apex of likelihood on its bell-curve. This
applies to everything under the sun, trading accounts included.

We'll consider any account below $10,000 as small. An account
below $2,000 has almost no chance of long-term success buying
options long, in my opinion. I realize there are brokers who open
accounts for anyone with $500 and a fogged mirror in hand but
that doesn't mean they have a good chance for long-term success.

Small accounts are in grave danger of going bust no matter what.
Cost of doing business (commissions, slippage on stop-loss fills)
is a significant drain. Buying one single option contract means
we pay full commission price that eats into overall yield. Larger
accounts can afford several contracts to average down commission
cost versus overall profit/loss return.

This means that a small account will struggle to post profits
above & beyond operational costs. $10,000 and more give greater
leverage to compound wins above the rate of operational cost.

Secondly, small accounts must have favorable chance (luck) on
their side as well. An early string of wins is necessary with an
early string of losses debilitating indeed. No way to tell which
will come first with foresight at the time of trade entries.

Small accounts can grow over time to impressive size but it takes
much longer than larger ones in relation. For example, we will
open a $5,000 cash account within IndexSkybox and swing trade the
QQQ, OEX and eventually the SPX as size permits. My preference
was to start with $10,000 as a minimum balance for success. A
number of readers requested we use less, which confirms what was
already suspected of high-risk option trader's profile.

I hoped to begin with $10,000 and target $100,000 by year's end.
This was not a figure based on irresponsible hype; numerous past
performance factors were used to determine what might be possible
on the highest end.

It would take favorable conditions to achieve, especially early
on and may not be possible in such a brief time frame. The
hardest part would be going from $10,000 to $50,000. Doubling
that would be far easier indeed.

It will be much tougher to take $5,000 and attempt $50,000 as a
goal in the same span. From $5,000 to $25,000 will be a yeoman's
effort when trying to overcome a poor trade cost/return leverage
multiplier. Bell-curve analysis would tell us it takes much
longer to multiply $5,000 account up 1,000% than it would a
$10,000 or larger account.

How long? Who knows! We'll have fun trying in full view of
everyone and hope to demonstrate valuable trading lessons in the
process. Whether we reach our lofty goals, run this account into
the ground or settle somewhere in the middle, it promises to
teach us more than countless words alone could.

Traders with large accounts ($100,000 or more) are properly
positioned for option investing with almost certain odds for
success. Key word being investing. A 90/10 division of funds
allocated in the following manner provides a semblance of
expected rewards:

$10,000 (10%) used for high-risk trades. $90,000 (90%) used for
option investing. Covered calls or credit spreads with quantified
risk... no naked shorts with massive downside risk! We will
assume a blended 5% monthly return on capital compounded for
simple math to illustrate a point:

Month   Balance  5% Return
Jan     $90,000   $4,500
Feb     $94,500   $4,725
Mar     $99,225   $4,961
Apr    $104,186   $5,209
May    $109,395   $5,469
Jun    $114,864   $5,743
Jul    $120,607   $6,030
Aug    $126,637   $6,331
Sep    $132,968   $6,648
Oct    $139,616   $6,980
Nov    $146,596   $7,329
Dec    $153,925   $7,696
Total: $161,621  $71,621
Other: $ 10,000  $ X-value return

I don't mean to project income here. Please don't expect to take
$90,000 and duplicate these results exactly. We might do better
or worse in live action. I would expect a 7% monthly return 10
out of 12 months with the other two months ending flat. Your
risk/reward parameters would dictate personalized results.

Here's the point: If you enjoyed any similar return like this on
90% of your account, would it really matter if the other 10%
languished or soared? While loss is never painless it can be
muted when placed in perspective.

Year two finds us with $160,000 in our option investing account
and X-value in the high-risk. We can subtract $10,000 and add it
to the high-risk balance (value-X), and compound $150,000 safely
in the same manner we did before. Does that make fiscal sense?

The problem is not option trading. The problem is option traders.
Too many of us aren't satisfied earning $70,000 annual returns on
a $90,000 capital nest-egg while using the remaining $10,000 to
speculate wildly. Nope, that just won't do. Takes too long to
reach a million like that (six years?) so we better risk the
entire $100,000 and swing-trade that to make our million by this
summer. Maybe, maybe not will be the result but allure of massive
gain calls like a siren's song to those who've won a few big
trades with small amounts of capital.

Newsletter editors get plenty of email. As editor of IndexSkybox
I enjoyed hundreds and hundreds of letters from ecstatic traders
who multiplied their speculative accounts greatly the last four
months of 2000. Some were ready to name their next-born child
after me (or Wendy... better idea as she is gorgeous and I ain't)
in gratitude.

Then January came along to knock me around a bit and others as
well. A bit of recent mail has been filled with names, but none
fit for children.

I can't speak for Jim or the excellent editors here at OI, but I
get two diverse streams of feedback. One from patient new and
veteran traders who invest most of their accounts into steady,
methodical methods such as covered calls and/or credit spreads.
They don't like to endure losing streaks in their speculative
accounts any more than the next person, but it's merely a
nuisance in the overall scheme of things.

The second stream of mail comes from people just like I was for
so very, very long: high-risk gamblers with low tolerance for
loss. Much, most or all of these trading accounts are applied in
speculative methods and emotions swing wildly as account balances

Whether $2,000 or $200,000 no trader ever wants to suffer one
penny's draw down from the apex. One of human nature's core
emotions is fear of loss. We naturally hate to lose, and it is
painful. If our entire account is at risk and gyrates wildly the
pleasure/pain emotions that follow can be debilitating at best or
financially terminal at worst.

Traders who eschew option investing for any of various reasons to
concentrate on speculating will eventually experience their own
"freak out" stage. Sometimes it takes longer but eventually
happens to everyone. In 1999 it was greatly delayed while call-
buyers got real adept at buying every dip. When this one-
dimensional approach with no hope for longevity ran it's course,
numerous five, six, seven and eight-figure accounts melted down
to fractions or zero in personal capitulation.

Had these traders built small accounts large during times of
plenty and rotated most of their capital to option-investing
strategies, total loss and ruin may have been avoided.

Which brings us to the #1 question: If a trader only has $5,000
scraped together for trading, what is the best approach to safely
growing it big? Let me begin by insisting that time, caution and
discipline are of the utmost importance. I'll end by leaving the
topic for complete discussion next week, same time & channel.

(Note: Two easy-to-read books on trading options and in general
are an absolute "must-have" for beginners and veterans alike.
"How I Trade Options" by Jon Najarian is a floor-trader & market
maker's 20-year experience and instructions. "Technical Trading
Online" written by Roth & Trader X is a hilarious read that will
improve any trader's long-term results. Both books produced by
Wiley are instructional products you don't want to miss!)

Best Trading Wishes!

Contact Support

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index instead?

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market updates, plays, education and daily commentaries by
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EMC - EMC Corporation $79.89 (+0.83 this week)

EMC wants to be your storage solution.  The company designs,
manufactures and markets a wide range of enterprise storage
systems, software, networks, and services.  The company’s
products store, retrieve, manage, protect and share information
from all major computing environments including mainframe, UNIX,
and Windows NT.  With offices around the world and a 35% growth
rate for the first 9 months of the year, EMC is effectively
filling its role as the worldwide storage leader.

Most Recent Write-Up

"I think I can. I think I can", you can almost hear EMC chant.
After a stellar earnings report last week, along with a bullish
outlook for the future, the enterprise storage leader is making
a mighty effort to crest its 200-dma ($79.94) as it continues
to recover from the December selloff that took the price all the
way down to $53.  The company beat estimates by 2 cents, and
posted revenue growth just under 40%.  Reading between the
lines, you could almost hear management saying "What slowdown?".
As we head into the FOMC meeting where the only question seems
to be how much of an interest rate cut we will get, look for
EMC to continue to shine.  Once it crests the 200-dma, along
with the $80 resistance level, all its moving averages will be
in the rear-view mirror, and the bulls can take aim at
resistance at $85 and then $90.  Support seems to be solidifying
near $75, so we are raising our stop to that level, and
aggressive traders can consider new entries on any intraday
bounce above there.  Watch out for the bears, though.  The
daily stochastics have now dipped out of overbought, and without
a move higher in the near term, downside pressure could begin to
build.  More conservative investors will want to wait for a
decisive move through $80, backed by solid volume, before taking
a position.  Although not a NASDAQ stock, monitor this index to
confirm positive sentiment is still intact.  If the tech sector
rolls over ahead of the FOMC meeting, it will be tough for EMC
to buck the trend and march higher.


EMC is once again on the brink of breaking out.  With cooperation
from the Nasdaq Tuesday morning, EMC could be set to fly.  The
stock edged up to the $80 level near the close of Monday's
session, which happens to be the site of the stock's 200-dma.
Monitor direction in the Nasdaq and look to enter new positions
on a strong move above $80 backed by heavy volume.  The more
conservative traders might wait for EMC to hurdle its intraday
high at $80.40 before entering new positions.

BUY CALL FEB-75 EMB-BO OI= 8025 at $7.50 SL=5.25
BUY CALL FEB-80*EMC-BP OI=11832 at $4.20 SL=2.50
BUY CALL FEB-85 EMC-BQ OI=10401 at $2.10 SL=1.00
BUY CALL APR-80 EMC-DP OI= 9480 at $9.70 SL=6.75
BUY CALL APR-85 EMC-DQ OI= 4856 at $7.50 SL=5.00


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

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