Option Investor

Daily Newsletter, Wednesday, 01/31/2001

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The Option Investor Newsletter                Wednesday 01-31-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
        01-31-2001        High      Low     Volume Advance/Decline
DJIA    10887.40 +  6.20 10957.50 10832.60 1.26 bln   1769/1371
NASDAQ   2772.73 - 65.62  2872.47  2772.35 2.38 bln   1767/2066
S&P 100   715.20 -  3.26   725.42   714.30   totals   3536/3437
S&P 500  1366.01 -  7.72  1383.37  1364.66           50.7%/49.3%
RUS 2000  508.34 -  3.32   515.22   508.03
DJ TRANS 3107.76 + 48.98  3118.24  3053.68
VIX        24.29 -  0.91    25.91    24.04
Put/Call Ratio      0.61

Looking for an entry point!

The excitement is over. The FOMC meeting is history. The "sell
on the news" event happened just as we expected. Now the fun
begins! The Dow came within 43 points of hitting 11000 for
the first time since the surprise rate cut back on Jan-3rd but
rapidly sold off to close back under 10900 yet again. The Dow
gave back -70 points in the post Fed sell off but still managed
to close slightly positive.

Earnings are still lingering and AOL was the Internet mover
today. Nyse:AOL beat analysts estimates by a penny at $.15.
Combined earnings from AOL/TWX were $.28 compared with $.24
last quarter. AOL added +2.1 million subscribers to bring
their total to 26.7 million members. Growth for the merged
company is expected to be in the +18% range and AOL affirmed
these estimates.

Nyse:MO missed estimates by a penny and closed down slightly
at $44. Philip Morris has been on a run since it was apparent
that George Bush was going to become president. NYSE:KO also
announced earnings that were inline with estimates and closed
flat for the day.

Nasdaq:PSFT dropped -$8 after posting strong earnings on
Tuesday. While several analysts were busy upgrading PSFT based
on their guidance, Morgan Stanley shot it down with a comment
that it was likely to "remain stagnant in the near term." PSFT
held to previous estimates and even raised them slightly but
investors evidently wanted something higher.

Proving it is all in the call and outlook, Nasdaq:ERTS
gained $5.75 to $45.81 after missing estimates but offering
encouraging comments going forward. They missed estimates by
-10% but still rocketed on the outlook.

ADBE followed through with the drop started after the close
on Tuesday with a -$9 loss. Using the "slowing economy"
excuse they said sales had slowed in all areas.

Bill Gates decided that he need some spare change and filed
to sell another three million shares. This was on top of
the ten million shares he has sold in the last three months.
That nets him about $795 million after commissions. The street
did not take this well and MSFT lost -$2.31 on the news.
Don't feel sorry for him, he still has 750 million shares left.

Not all the earnings news today was bad. The stage was set
for a possible Nasdaq rebound soon with the following positive
results. Nasdaq:STOR beat by estimates by +.08, ARXX +.02,
WEBM +.04, CERN +.02, MPPP +.08, CLS +.08 and DIGL led the list
beating estimates by a whopping +.14. CLS warned slightly but
peppered the warnings with positive comments and jumped +$6 in
after hours trading.

Only 50 points?

You would have thought they dropped a dime in our tin cup by
the way the market and analysts reacted. Only 50 points? Why
you would have thought they expected a full point or more.
The Chicago PMI report came in today at only 40.2 its lowest
point in eighteen years. As a leading indicator for the NAPM
report due out tomorrow it suggests there is serious trouble
in the economy. Still the prices paid index rose to 62.9%
in January which is the second month in a row. This suggests
that inflation is still present with a slowing economy. The
double whammy! The GDP report showed the economy grew only
+1.4% in the fourth quarter which was below expectations.
This was the weakest quarter since Q2-1995 and is the clearest
sign that economic growth is decelerating rapidly.

These factors prompted the Fed to cut 50 basis points even
when it appears that more was needed. The fear that investors
would worry the Fed was out of control kept them from making
a stronger cut. The language of the official statement was
strong, the economy is slowing at a pace that "requires a rapid
and forceful response." The full language suggested this was
just another cut in a series of cuts. 22 of 25 primary bond
dealers are now factoring in another 50 point cut by the March
20th FOMC meeting. There is a 34% chance of an inter-meeting
rate cut in February.

Alice Rivlin, former Fed member and Andrew Brimmer, former
Fed governor both said the Fed would cut again soon and could
be behind the curve. With the Consumer Confidence erosion that
Greenspan specifically mentioned last week the path of the
economy is clear, down!

What does all of this mean? We are not on Fed watch any more.
We are on "Entry Point" watch. The day after a Fed meeting,
cut or hike, is normally down as traders take profits from
the pre-Fed hype and run up. With the Fed's path clear to
cut rates for the next several months the market is now free
to run as well. When the Fed cuts rates the market rallies.
We should look at every dip now as a buying opportunity. The
key here is to wait for the bounce, not try and catch the
falling knife. There is a good possibility we will see a
dip on Thursday and maybe even Friday but I would not count
on it being a serious one. The funds got the green light
today to throw money at the market. Historically this is the
perfect scenario for them with a high probability of a big
win. Trust me, they will do it. There was a flood of buy orders
on the afternoon dip as money came into the market as fast as
profit takers wanted out. We should be proactive in buying
any bounce. Nasdaq 2700 should be a floor but remember we
do not want to try and pick the bottom. Wait for a bounce on
strong volume and make your entry. If the Nasdaq falls below
2700 then wait for the rally back over that level before
buying. If it fails to dip that far and you want to be sure
then wait for a breakout over 2870 which was today's high.
To repeat, aggressive traders buy any rebound around 2700,
or conservative traders wait for a breakout over 2870. Rate
cuts are coming, tax cuts are coming and there is over $600
billion in cash on the sidelines! The only pothole in our
immediate future is the non-farm payrolls on Friday but unless
several hundred thousand jobs just appeared out of thin air
it should be a non-event. Fasten your seatbelts, this
ride could be fun!

Enter passively, exit aggressively!

Jim Brown

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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COST - Costco $46.25 +2.50 (+4.44 this week)

Costco Wholesale Corporation operates membership warehouses
based on the concept that offering members very low prices on
a limited selection of nationally branded and selected private
label products in a wide range of merchandise categories will
provide high sales volumes and rapid inventory turnover. Costco's
warehouses generally operate on a seven day, 68-hour week, and
are open somewhat longer during the holiday season.

After being trapped in a tight trading range between $32 and
$38 for most of last year, Costco made a break above both its
50 and 200-dma in December.  Since then, Costco has remained
range bound between strong support at $40.44 and impenetrable
resistance at $44.  However, Wednesday seems to have been a
key turning point, fueled by stimulus from multiple upgrades,
strength in the retail sector, and an anticipation of an
increase in consumer confidence due to the Federal Reserve's
rate cuts.  Costco basked in the glory of three new analyst
upgrades this week, as JP Morgan picked up initial coverage,
Dain Rauscher Wessels upgraded Costco to a strong buy, and
AG Edwards upgraded Costco to accumulate.  On Tuesday, Costco's
trading range narrowed to a tight wedge between $43 and $44.
On Wednesday, Costco burst out above $44, and never looked back.
By 10:30 Costco had cleared $46, where it spent most of Wednesday,
only touching the $45.13 level immediately after the rate cut
decision.  Costco appears ready to shoot all the way up to the
next resistance level at $50, which hasn't been visited since
last March.  Wednesday's volume was robust with over 9 million
shares trading.  The impact of the rate cut seems to have been
factored in to many sectors of the market, but consumer
confidence is still low, and retailers may be moving on an
anticipation of an increase several months from now.  Traders
can take positions at current levels, or at a possible pull
back to $45.  Watch the retail sector (RLX) for strength, as
well as other retailers like CC and HD, and set stops at $44.

BUY CALL FEB-45  *PRQ-BI OI=1274 at $2.81 SL=1.50
BUY CALL FEB-47.5 PRQ-BW OI=1946 at $1.56 SL=0.75
BUY CALL MAR-45   PRQ-CI OI=  88 at $4.13 SL=2.50
BUY CALL MAR-47.5 PRQ-CW OI=  85 at $2.94 SL=1.50



IDPH - IDEC Pharmaceuticals $58.81 -3.81 (-4.50 this week)

IDPH is a biopharmaceutical company engaged primarily in the
research, development and commercialization of targeted
therapies for the treatment of cancer, autoimmune, and
inflammatory diseases.  The company's first FDA-approved
product, Rituxan, treats non-Hodgkin's lymphoma.  Delivered
intravenously, Rituxan is a monoclonal antibody used in place
of chemotherapy or radiation.  IDPH is also developing products
for the treatment of various autoimmune diseases such as
psoriasis, rheumatoid arthritis and lupus.

Combine a weakening sector, weak technicals, and post-earnings
depression, and you get the makings of an attractive put play.
That's exactly the setup we are presented with in IDPH.  After
running up more than 40% between its early January lows and its
earnings announcement on January 29th, our new play was due for
a bit of profit taking.  As expected, it began to materialize
yesterday, despite a positive earnings report.  The Biotech
index (BTK.X) has also gotten a bit overextended lately, and
its weakness weighed heavily on shares of IDPH today, turning
normal profit taking into a nice selling opportunity for the
bears.  The stock gave up nearly $4 today, adding to a more than
$4 loss yesterday, and the combined effect dropped the stock
through its ascending trendline (now at $62), and pulled the
daily stochastics down from overbought territory.  Volume
clocking in at nearly double the ADV is just icing on the cake,
and it appears that all our signals are converging in favor of
the bears.  We'll play the emerging trend for all it is worth,
so we are placing our stop at the $62 level, right at the
trendline that was violated today.  Aggressive traders can
consider new entries on any intraday rally that fails to
penetrate this level.  More conservative traders will want to
wait for selling pressure to drive the stock down through the
$57 support level before initiating new positions.  Regardless
of your entry strategy, confirm weakness on the BTK.X before

BUY PUT FEB-60*IHD-NL OI=342 at $5.25 SL=3.25
BUY PUT FEB-55 IDK-NK OI=107 at $2.94 SL=1.50
BUY PUT FEB-50 IDK-NJ OI=175 at $1.44 SL=0.75



MUSE - call play
Adjust from $73 up to $78

CNC - call play
Adjust from $15 up to $16

ACF - call play
Adjust from $33 up to $35

NITE  - call play
Adjust from $21 up to $22

QCOM - call play
Adjust from $76 up to $80

UBS - call play
Adjust from $170 up to $173

FDRY - call play
Adjust from $20 up to $21

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

CTXS - call play
Adjust from $32 up to $34

MEDI - put play
Adjust from $45 down to $43

SPW - put play
Adjust from $109 down to $104

ADBE - put play
Adjust from $58 down to $46


BGEN $64.50 -2.13 (-1.63) Having moved up to a higher range ahead
of the Fed meeting, BGEN looked poised to rally but the stock has
now fallen back below both its 5 and 10-dmas (at $66.53 and
$64.60 respectively).  While volume to the downside so far has
been weak, the break below our stop price $65 and a stumbling
Biotech sector suggests that BGEN may be headed lower to fill a
gap in the low-60's.  As a result, we are dropping coverage of
this play.

MERQ $86.88 -8.88 (-8.06) The psychological $100 resistance level
is proving to be formidable indeed.  With the bulls attempting
unsuccessfully to break through this barrier yet again, the
sellers took control today, as the stock, gave up almost 9
percent of its value on 140% of ADV.  In doing so, MERQ dropped
below not only support at the $93 level with the 5 and 10-dma
converged at that level, but also our stop price of $90.  In
light of this weakness, we are no longer recommending this play.

PPRO $26.19 -1.25 (+0.69) We are taking pre-emptive measures to
protect our capital in our PPRO call play.  While still above our
stop price of $25, the first signs of a rollover are already
beginning to show, with the stochastics curling southward and
today's close below the 5-dma at $26.50.  With sector leaders
such as ARBA and ITWO also showing weakness, PPRO could find
itself moving lower on sympathy in the B2B space.  While there is
support from the 10-dma just below at $24.88, that support is
tenuous at best.  Keeping in mind that capital preservation is
key to a successful trading strategy, we are taking our money off
the table.

RIMM $65.81 -4.63 (-5.75) It appears that RIMM's recent test of
the 50-dma while successful, was without conviction.  The low
volume with which it surpassed the moving average (now at $72.21)
on Monday, resulting in a quick retrace back below that level on
Tuesday.  Today, with the 50-dma acting as opposition, the stock
retreated further, ending the day below its 5 and 10-dma at
$69.35 and $66.86.  With the loss of upward momentum and the
close below our stop price of $68, we do not recommended taking
any new positions.

MSFT $61.06 -2.31 (-2.94) As the techs sold off after the Fed
announcement today, so did MSFT.  At first glance it appeared to
be simple profit taking, but it increased into the close as the
stock finished just near the day low.  News in after-hours sent
MSFT lower to $60.50.  It was announced that MSFT CEO Bill
Gates filed with the SEC to sell 1.5 mln shares, estimated to
be worth $92.7 mln.  This added to the downward pressure that
the stock experienced during the day.  Buyers might be stepping
away while profits are taken, as are we this evening.

CPN $39.91 -1.83 (-2.09) Profit takers came in today and book
their hard-earned winnings from last week.  While this was a
Low Volatility play, today's action to the downside represented
an almost 5% move.  The stock bounced from its 50-dma at $38.64
and may continue to act as support.  This evening's announcement
that the CA Legislature will allow the State to purchase energy
by selling general revenue bonds should help bolster this call
play.  However, today's close was under our stop of $40 and we
are dropping it tonight.

CIEN $90.06 -7.94 (-0.50) The Fed delivered the 50 basis point
cut that was expected this afternoon, and the CIEN bulls were
handed another failed rally.  After testing the $102-103 area
this morning, our play began deteriorating by lunch time and
accelerated its decline into the close, ending just slightly
above the 50-dma.  While our $89 stop is still intact, it seems
silly to keep CIEN on the call list, especially given the fact
that the stock plunged through its descending trendline again.
Although volume was a bit on the light side, the vast majority
of it was on the sell side, dropping CIEN by 8% and making a
strong case for removing the play from our list before an
apparent entry point materializes.

GS $113.75 -4.88 (-0.94) The "sell the news" gang is alive and
well and came out to punish the bulls in Financial stocks today.
While it wasn't an unbridled selloff, our GS play finally got
out of its narrow range today and broke below its ascending
trendline near $115, and closed near the low of the day.
Everything looked good until the interest rate announcement came
out, but then we watched GS give up more than $4 in the final
90 minutes of trading, to close very near its low of the day.
So let's see - violated our stop, broke its ascending trendline,
Stochastics rolling over, closing near the low of the day - yep,
definitely a drop tonight.


NKE $55.02 +2.00 (+1.88)  Nike offered several profitable
opportunities to put players over the last week with rolls
from $54.31 and $53.  However, today's pattern demonstrated
uncharacteristic strength with a clear break over our stop
level of $54 in the morning, and $55 in the afternoon.
Retailers rallied after the Fed rate cut and NKE broke above
its 10-dma at $53.48.  While NKE was readying to break one way
or the other, today's action made it clear that our put play is

PWER $47.06 +2.19 (+2.06) After spending the early part of the
week trading sideways on low volume, shares of PWER finally
picked a direction.  Gaining almost 5 percent on above average
volume, this move put the stock back above its 5 and 10-dma, at
$45.46 and $46.13 respectively.  While today's attempt to close
above the 50-dma (at $47.37) was thwarted, the intra-day pierce
above that level could be a sign of things to come.  The action
of the last four trading days puts PWER in a minor uptrend and as
such, we are closing out this play before it closes above our
stop price of $48.

WFII $40.88 +3.06 (+2.88)  An 8% gain on a day that the NASDAQ
cracked after the Fed announcement and with no news anywhere.
After flatlining at $38 yesterday, there didn't seem to be any
apparent catalysts for this stock.  Yet, this morning, right off
the open strong volume bid up the stock and WFII climbed $2 in the
first half hour of trading.  This should have triggered warning
signals.  The rollover at $41 did afford and quick put trade, but
you had to be nimble to close before the buyers showed up again
at $39.  WFII climbed higher into the close and finished near
our stop of $41.  This renewed and unexpected buying interest has
led us to close this position tonight.

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Thanks for your support!


Market Cap And Volatility
By Mary Redmond

In addition to monitoring a stock's sector for an indication
of strength, traders may find it useful to monitor the index
which corresponds to the market capitalization of the stock.
It is also informative to pay attention to the money flows and
volatility levels of stocks in different market capitalization

For example, during 1998 through 1999 and the first quarter of
2000, we witnesses huge gains in certain market indexes and
stock sectors to the exclusion of others.  For the most part,
the largest gains occurred within the Nasdaq 100, which is the
index of the 100 largest stocks in the Nasdaq measured by
market capitalization.  Stocks like Cisco, Microsoft, and Intel
grew to enormous market capitalizations while the majority of
the small- and mid-cap stocks underperformed.

The best performing mutual funds during that time period were
the large-cap technology stock funds, many of which doubled
and tripled.  This led to a self-perpetuating trend in the levels
of cash flows which were deposited to various sectors.

For example, during January, February and March of 2000, large-
cap technology growth funds took in approximately $40 to $50
billion per month.  Growth and income funds, which generally
refer to dividend paying stocks, suffered substantial redemption.
It seemed the only way to profit during this time period was to
buy stocks like Cisco and EMC.  For a while, nobody paid any
attention to valuation ratios like P/E because it didn't seem
to matter.

The Investment Company Institute reported that equity mutual
funds took in over $309 billion during 2000, and money market
funds took in $159 billion.  There is still plenty of money
coming into the market.  However, the last few month's trends
indicate that money is being fairly evenly distributed to
different sectors.  Aggressive growth funds are still taking
in money, but not to the exclusion of growth and income funds.
Ultimately, this is a healthier trend, as a sustained rally
needs to include more than one sector.

It is also important to note that the small- and mid-cap sectors
have shown excellent gains and opportunities since the Fed rate
cut, and may offer better opportunities than large-cap stocks
in the coming months.

One of the reasons why this may occur is due to the fact that
small-cap stocks are generally hurt the most when the Fed raises
rates, and often benefit to a larger degree when the Fed lowers
rates.  This is partly due to the impact the rate changes have
on the credit markets.  The spread between Treasuries and high
yield debt has narrowed significantly since the first rate cut.
Several telecom and CLECs have successfully issued high-yield
bonds, which would have been impossible a few months ago,
since the market for such debt instruments had dried up.  Small
company stocks are generally more dependent on the debt markets
to finance their expansion than large, profitable companies.
The spreads are still wide by historical standards which
indicates that there may be further downside to the spreads,
and would benefit small cap stocks even more.

Also, investors may be becoming bored with the slow growing
behemoths like Cisco, which have been range bound for months.
While very small companies with market caps of $500 million
or less are often less liquid, which can be a disadvantage to
traders, mid-cap stocks in the range of $2 to $5 billion
can usually grow at a much more rapid pace than the Ciscos of
the world.  This is because a stock with a market cap of $250
billion or more requires a huge inflow of money to significantly
impact the stock price.

An added advantage of trading small- and mid-cap stocks is the
lower level of volatility of these indexes, compared to the
volatility of the QQQ, as measured by the VXN.X.

For example, the implied volatility of the S&P mid-cap sector,
MDY, is currently 21.90, significantly lower than the VIX.X at
25 and the VXN.X at 63.  The MDY's volatility range this year
has been much lower than that of the other sectors.  Many of
the options in this sector have less expensive premiums.

The implied volatility of the Russell 2000, RUT is currently 28,
and is oscillating toward the mid to high level of its yearly
trading range.  The IV of the RUT actually dropped to under
10 at one point last year, and spiked to over 40 early in

In contrast, the high implied volatility of the VXN.X increases
the premiums of the options on the QQQ, and thus increases the
risk.  While they can still be appropriate for aggressive
trading strategies, traders might want to balance their option
risk with some of the less expensive, lower volatility calls on
smaller stocks.

It is also important to note that options within the individual
stock's chain have often have widely different implied
volatility.  For example, WCG has a 30-day historic volatility
of 107.53.  The average IV of its options chain is 87.  However,
the May 17.50 calls(at-the-money) have an implied volatility of
63, whereas the August at the money 17.50 calls have an implied
volatility of 53.   The May 17.50 calls are $2.75, and the August
17.5 calls are $3.10.  The difference in price is primarily
attributed to volatility.  It appears that in this case,
the August calls are undervalued relative to the May calls.

Looking forward, it is important to realize that liquidity
trends are far more powerful in this investing period than
ever before.  Despite the fact that last year was one of the
worst years for the indexes in history, equity funds still
took in over $300 billion in investors cash.  It is possible
that we may even see a higher level of cash flow to the
markets this year, which will most likely increase volatility
levels further.  Nowadays, traders need to keep an eye on
fixed income markets, liquidity trends as well as the
volatility  and sector of the stocks they are trading.

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

Learn how to invest in the OEX, QQQ, and SPX.  Get intraday
market updates, plays, education and daily commentaries by
those who know.

Sign up for a two week free trial and see for yourself at


RATL - Rational Software $51.94 -2.94 (+1.56 last 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.

Most Recent Write-Up

What a breakout! Rational burst out of its bullish wedge pattern
on Monday morning with a clean move above $52.50.  From there it
was smooth sailing up to $55, at which point profit taking ensued.
On Tuesday, Rational pulled back to support at $53 before
consolidating at $54.50 for the afternoon.  Strength in the
mid-cap index (MDY) helped as old resistance became new support.
Depending on the Nasdaq's reaction to the FOMC meeting, Rational
may very well clear heavy resistance at $55, which could
potentially position the stock to sail all the way up to $60.
A pullback to support at $53 could be an entry point, as well as
a break above $55.  Watch the software index for signs of
strength before initiating positions, and keep stops at $50.


After Monday's breakout from the $50 level, today's action is
no more than light volume profit taking in the face of the Fed
announcement.  Previous resistance at $50 should be a solid
support level now, buoyed with the 10-dma at $50.34.  Bounces
from here would provide an attractive entry point.  On the
upside, resistance lies at $54 and a breakout from that level
would also warrant entry.

BUY CALL FEB-50*RAQ-BJ OI= 567 at $4.75 SL=3.00
BUY CALL FEB-55 RAQ-BK OI= 747 at $2.50 SL=1.25
BUY CALL APR-50 RAQ-DJ OI= 401 at $9.50 SL=7.00
BUY CALL APR-55 RAQ-DK OI=1030 at $7.50 SL=5.75



Onward and upward - after some collective profit-taking...

Investors breathed a collective sigh of relief today after the
Federal Reserve did exactly what the market expected by lowering
its target for the federal funds rate by 50 basis points to 5.5%.
In a statement released after the meeting, the Fed announced that
"Consumer and business confidence has eroded further, exacerbated
by rising energy costs that continue to drain consumer purchasing
power and press on business profit margins."  With inflation now
contained, the Fed believes the current circumstances call for a
rapid and forceful response of monetary policy and retaining its
easing bias.  By the end of the session, the NASDAQ had actually
retreated into the negative, but the sell-off was attributed to
profit-taking rather than a bearish outlook for equities.  Within
the technology segment, buying interest remained in semiconductor,
networking, and select Internet shares while retail, transport and
cyclical issues were the best performers in the broader market.
Stocks had advanced ahead of the announcement, but quickly pulled
back after the rate cut became public knowledge in a classic "sell
the news" effect.  In the final hour of trading, investors moved
out of hi-tech issues and into defensive and cyclical shares.  The
prevalent attitude at the close was an optimistic outlook for the
future with most analysts boosting their target ratios for equity
holdings in long-term portfolios.

On another subject, one of our subscribers asked why the number
of Covered-call positions had declined over the past few months.
It was a very practical question, and one that deserves mention
for the benefit of all of our readers.  First, I must apologize
to all the traders who have been unable to participate in the more
aggressive plays (based on broker requirements, not overall risk)
in the section.  The past few months have offered some excellent
opportunities in what has been one of the most productive periods
since we began offering the weekly "BIG CAP" section.  While we
have received far more requests for "premium selling" plays (maybe
because Jim talks about it so much), the reason for the lack of
Covered-calls is very simple: When the market began to decline (in
a broad sense) last year, the relative premiums for call options
started to fade, and as we moved further into the bearish trend, we
found fewer and fewer favorable positions.  Generally, we look for
a 4-6% monthly return with at least 15-20% downside protection and
even when the market is in a neutral trend, that can be a difficult
task.  Writing covered-calls is not a favorable strategy in bearish
markets and the time value for call options remains at historical
lows.  Until the speculative option buyer returns to the market,
that fact won't change.  In addition, if we don't have confidence
in what we have to offer, it won't be published, and that's really
the overriding measure of any play we list in the section.  We all
hope the market will soon return to its long-term upward trend, so
we can get back to playing the old way; Covered-calls - both with
stocks and LEAPS, diagonal spreads, ATM put-credit spreads and of
course, buying speculative call options.

Good Luck!

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

EMLX    FEB    70    66.94  93.00    $3.06   4.6%

Naked Puts:

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

EMLX    FEB    60    57.94  93.00    $2.06   9.7%
VSTR    FEB   105   102.75 123.94    $2.25   7.7%
EMLX    FEB    65    63.94  93.00    $1.06   6.5%
IDTI    FEB    35    34.44  48.91    $0.56   5.1%

Sell Strangles:

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

AFFX    FEB    50p   49.19  66.63    $0.81   7.4%
AFFX    FEB    98c   98.31  66.63    $0.81   7.4%

VECO    FEB    30p   29.06  56.72    $0.94   7.3%
VECO    FEB    95c   96.13  56.72    $1.13   8.7%

Naked Calls:

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

OSIP    FEB    85    86.13  64.03    $1.13   8.6%
BRCD    FEB   135   136.25  90.31    $1.25   7.4%
CIEN    FEB   145   146.00  90.06    $1.00   6.2%
MYGN    FEB   100   100.69  72.13    $0.69   6.1%

Credit Spreads:

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

A     $61.88   $54.55  FEB45p/50p   $0.56   $49.44  $0.56   Alert
CMVT  $121.63 $113.31  FEB95p/100p  $0.75   $99.25  $0.75   Open
ITG   $45.81   $47.01  FEB35p/40p   $0.69   $39.31  $0.69   Open

Debit Straddles:

Stock  Pick    Last     Position   Debit   G/L   Status

AC    $55.44  $58.10   FEB55c/55p  $3.50  $0.75  Closed 1/30 *

* Profit target met and we will show the position closed.

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

ADI - Analog Devices  $62.60  *** Bullish Reversal! ***

Analog Devices (NYSE:ADI) is engaged in the design, manufacture
and marketing of high-performance analog, mixed-signal and digital
signal processing integrated circuits (ICs).  The company's broad
line of high-performance ICs incorporate analog, mixed-signal and
digital signal processing technologies that address a wide range
of real-world signal processing applications.  The company has a
generic list of approximately 2,000 products and many of their
products are proprietary, while equivalents to other products are
available from a limited number of other suppliers.  The company
also designs, manufactures, and markets a wide range of assembled

Analysts say that chip companies will be the sector that leads the
NASDAQ back to its previous stature and ADI has a head start on the
group.  Although the company has revised downward its estimates for
the first half of 2001, analysts expect sequential revenue growth
beginning in the third quarter as ADI begins to benefit from new
production builds in key high-volume communications programs.  The
company believes it is realistic to assume that revenues could grow
20% to 25% in 2001, with pro forma earnings increasing about 30%
from last year's results.  Traders who want to own a great company
in the semiconductor group should consider these bullish positions.

ADI - Analog Devices  $62.60

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

Sell Call FEB 55   ADI BK  1310      8.90    53.70     4.6% ***

Sell Put  FEB 50   ADI NJ  485       0.45    49.55     6.6%
Sell Put  FEB 55   ADI NK  2826      1.20    53.80    12.2% ***



CMVT - Comverse Technology  $113.31  *** Bracing for a Rally? ***

Comverse Technology (NASDAQ:CMVT) designs, develops, manufactures,
markets and supports computer and telecommunications systems and
software for multimedia communications and information processing
applications.  The company's products are used in a broad range of
applications by wireless and wireline telephone network operators,
government agencies, call centers, financial institutions and many
other public and commercial organizations worldwide.  They provide
unique enhanced services platform products, digital monitoring and
recording systems for call centers, a range of customer management
applications, public networks and government agencies, network
signaling software for wireless, wireline and web communication
services known as Signalware, and many other telecommunications
hardware and software products and services.

The recent rally in Comverse Technology started early in January
after analysts at US Bancorp Piper Jaffray initiated coverage on
the company with a "strong buy" rating and a short-term target
price of $130.  ABN AMRO and Raymond James also issued positive
reports on the company and the bullish outlook propelled the stock
out of an old trading range to an all-time high near $120.  CMVT
shares have since consolidated and the recent downward movement
has boosted the premiums for OTM Puts.  Traders who are bullish on
the stock can use this conservative position to participate in the
future movement of the issue with low risk and favorable reward.

CMVT - Comverse Technology  $113.31

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

Sell Put  FEB 85   CQZ NQ  428       0.75    84.25     6.1%
Sell Put  FEB 90   CQZ NR  541       1.19    88.81     9.5% ***
Sell Put  FEB 95   CQZ NS  593       1.81    93.19    11.9%



CTLM - Centillium Communications  $48.56  *** Rumors Abound! ***

Centillium Communications (NASDAQ:CTLM) provides technologies that
enable broadband communications to the home and business enterprise.
Their system-level products integrate programmable digital signal
processors, its communications algorithms, its highly integrated
mixed-signal chip, its highly integrated digital chip and unique
related software.  The company provides broadband equipment vendors
with system-level products for the DSL market and are leveraging
its technology to develop products for complementary markets which
share common technologies and customers.  They also have near-term
plans to release products that target the voice-over-packet and
home networking markets.

Centillium surprised analysts last week, beating the consensus
earnings expectations for the fiscal fourth quarter by posting a
narrower-than-expected loss.  Revenue grew 38% on a sequential
basis, rising from $17.7 million in the 2000 third quarter, with
the growth in sales of Centillium's unique chipset solutions used
in various communications applications.  But, the real reason for
the stock's recent bullish activity may be the short-covering
that has occurred in the wake of a buyout rumor involving Intel
(NASDAQ:INTC).  In any case, the rally has come on heavy volume
and we see this position as a relatively conservative speculation
play for traders who are bullish on the issue.

CTLM - Centillium Communications  $48.56

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

Sell Call FEB 35   UUM BG  93       14.50    34.06     5.2% ***
Sell Call FEB 40   UUM BH  124      10.88    37.68    11.7%

Sell Put  FEB 30   UUM NF  122       0.38    29.62     7.2%
Sell Put  FEB 35   UUM NG  34        1.06    33.94    18.7% ***
Sell Put  FEB 40   UUM NH  98        2.44    37.56    34.9%



FTE - France Telecom  $92.25  *** Portfolio Play! ***

France Telecom (NYSE:FTE) is a telecom operator that provides
consumers, businesses and telecommunications carriers with a full
range of services, including local, long-distance and international
telephony, as well as data, mobile telecommunications, Internet,
cable television, broadcast and value-added services.  France
Telecom has a network of approximately 34 million telephone lines,
including almost 4 million ISDN channels, connected to homes and
businesses.  France Telecom's Itineris GSM service had more than 10
million subscribers as of the beginning of the year and with respect
to the Internet, FTE's Wanadoo sports over a million subscribers.
For Internet portals, France Telecom is also a giant with 8 million
pages viewed per day at last count, through Wanadoo Voila, its
general-public portal, and other thematic and professional portals.
France Telecom also develops Internet content, including online
games, directories and itineraries.

One of our readers asked for a blue-chip company in the Telecom
Services group and the ensuing search produced this candidate.
Although it's not an American company, there is plenty of reason
to own the issue and the most obvious is the growth potential for
the industry in Europe.  In addition, analysts have a favorable
outlook for the company, based on fundamental data, and the recent
technical indications suggest the issue has established a solid
Stage I base near $85.  Since our cost basis is near the middle of
this support area, we believe the position offers favorable upside
potential with reasonable downside risk, for traders who wouldn't
mind owning the issue.

FTE - France Telecom  $92.25

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

Sell Call FEB 85   FTE BQ  0         9.20    83.05     4.5% ***
Sell Call FEB 90   FTE BR  201       5.90    86.35     8.0%

Sell Put  FEB 85   FTE NQ  0         1.30    83.70     8.0% ***
Sell Put  FEB 90   FTE NR  2         2.95    87.05    14.9%



NUFO - New Focus  $60.19  *** On The Move! ***

New Focus (NASDAQ:NUFO) designs, manufactures and markets fiber
optic products for next-generation optical networks under the
Smart Optics for Networks brand.  The company's fiber amplifier
products are widely deployed in optical networks to enable the
transmission of an increased amount of information at very high
speeds over extended distances.  Fiber amplifiers enhance the
strength of optical signals.  The company's wavelength management
products, which process and control the many wavelengths on an
optical fiber, enable network equipment providers to increase the
number of channels transmitted and to accurately, efficiently and
reliably manage a vast number of optical signals.  The company
sells its products to major companies including Agilent, Alcatel,
Avanex, Corning, Corvis, JDS Uniphase, Lucent Technologies, and
Nortel Networks.

NUFO shares rallied today after the company reported higher than
expected fourth quarter earnings and predicted a 60% increase in
revenues for the coming year.  Company officials also elevated
NUFO's earnings guidance, citing strong demand for its unique
products, and analysts agreed with the optimistic outlook.  Dain
Rauscher Wessels analyst Sanjiv Wadhwani upgraded New Focus stock
to a "strong buy" with a $100 price target and U.S. Bancorp Piper
Jaffray analyst Conrad Leifur reiterated his "strong buy" rating
on the issue.  Today's rally was on increasing volume; a bullish
indication, and this OTM Put-credit spread offers a conservative,
low risk position with a reasonable expectation of profit.

NUFO - New Focus  $60.19

PLAY (aggressive - bullish/credit spread):

BUY  PUT  FEB-40  DBE-NH  OI=302  A=0.50
SELL PUT  FEB-45  DBE-NI  OI=343  B=0.93
INITIAL NET CREDIT TARGET=$0.56-$0.62  ROI(max)=12%


Neutral Plays - Credit Strangles

AFFX - Affymetrix  $66.63  *** Technicals Only! ***

Affymetrix (NASDAQ:AFFX) is engaged in the field of DNA chip
technology.  The company has developed and intends to establish
its GeneChip system as the platform of choice for acquiring,
analyzing and managing complex genetic information in order to
improve the diagnosis, monitoring and treatment of disease.  The
GeneChip system consists of disposable DNA probe arrays containing
gene sequences on a chip, certain reagents for use with the probe
arrays, a scanner and other instruments to process probe arrays,
and software to analyze and manage genetic information from the
probe arrays.  The company's earnings are due on

This play is based on the current price of the underlying stock
and its recent technical history.  The pattern of consolidation
started early last year and the issue has spent very little time
outside the target profit range.  The probability of profit in
this position is higher than other plays in the same strategy
based on inflated option premiums.  In addition, the prospect
of the share value reaching our sold strikes is rather low, but
there is always the possibility of a break-out from the recent
trading range, so monitor the position for changes in technical

AFFX - Affymetrix  $66.63

PLAY (aggressive - neutral/credit strangle):

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

Sell Put  FEB 52.5 FIQ NX  276       0.69    51.81     9.4% ***
Sell Call FEB 85   FUE BQ  1111      0.69    85.69     9.4% ***

- or -

Sell Put  FEB 55   FIQ NK  396       1.06    53.94    12.5%
Sell Call FEB 82.5 FUE BX  50        1.06    83.56    14.0%



VECO - Veeco Instruments  $56.72  *** Second Chance! ***

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 since early January on optimism from
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
moves higher.  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.

VECO - Veeco Instruments  $56.72

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

Sell Put  FEB 35   QVC NG  3730      0.50    34.50     8.0% ***
Sell Call FEB 80   QVC BP  7         0.63    80.63    10.0% ***

- or -

Sell Put  FEB 40   QVC NH  388       0.75    39.25    11.8%
Sell Call FEB 75   QVC BO  166       1.06    76.06    16.2%


BEARISH PLAYS - Combinations

CEPH - Cephalon  $58.50  *** Trading Range? ***

Cephalon (NASDAQ:CEPH) markets PROVIGIL (modafinil) Tablets for
treating excessive daytime sleepiness associated with narcolepsy.
The company has completed studies using PROVIGIL in patients
suffering from fatigue associated with multiple sclerosis, and
excessive daytime sleepiness due to obstructive sleep apnea, as
well as a study to demonstrate improvement in performance and
alertness in a simulated shift-work environment.  The company has
initiated a study to investigate PROVIGIL's use in treating
attention deficit hyperactivity disorder in adults and a second
study in obstructive sleep apnea.  In addition to its clinical
program focused on PROVIGIL, the company has other significant
research programs that seek to discover and develop treatments
for neurological and oncological disorders.

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

CEPH - Cephalon  $58.50

PLAY (conservative - bearish/credit spread):

BUY  CALL  FEB-75  CQE-BO  OI=1376  A=0.56
SELL CALL  FEB-70  CQE-BN  OI=382   B=0.88
INITIAL NET CREDIT TARGET=$0.50-$0.56  ROI(max)=11%


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