Option Investor

Daily Newsletter, Thursday, 02/08/2001

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The Option Investor Newsletter                  Thursday 02-08-2001
Copyright 2001, All rights reserved.                        1 of 2
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MARKET WRAP  (view in courier font for table alignment)
        02-08-2001        High      Low     Volume Advance/Decline
DJIA    10880.50 - 66.20 10965.20 10871.50 1.09 bln   1431/1642
NASDAQ   2562.06 - 45.76  2651.84  2562.02 1.85 bln   1681/2074
S&P 100   694.32 -  6.45   704.74   694.32   totals   3112/3716
S&P 500  1332.53 -  8.36  1350.32  1332.42           45.6%/54.4%
RUS 2000  502.89 -  4.19   508.09   501.93
DJ TRANS 3025.24 -  9.43  3045.37  3012.35
VIX        24.09 -  0.43    24.48    23.57
Put/Call Ratio      0.71

Craving A Catalyst

Following the big short covering rally Wednesday afternoon, the
expectation going into Thursday's session was for higher prices
in the broader market averages.  However, in typical fashion, the
averages popped just enough this morning to lead market
participants astray before drifting lower due to a lack of a
catalyst.  The choppy, drifty action is making this tape a
difficult one to game.  Having said that, I reinforce that
traders - both longs and shorts - need to practice nothing but
discipline in the current market landscape.  When translated,
discipline means having sound risk management in place (read:

With no real catalysts to neither buy stocks nor sell stocks,
the best game in town continues to be the fast and furious
sector rotations that I, along with Matt Russ, have been
mentioning recently.  But even the sector rotation game was
tough to discern during Thursday's trading.  Of the 20, or so,
sectors I follow each day, only three finished with gains.
And of those three, two sectors finished only marginally higher.
As you'll see on the sector watch list below, the three
advancing groups were the Oil Index, Pharmaceutical Index and
the Health Care Index.  Worth noting, all three sectors are
defensive in nature.

Here's a quick list of some of the leading stocks within each

CBOE Oil Index (OIX.X):  Exxon Mobil (NYSE:XOM), Chevron
(NYSE:CHV), Texaco (NYSE:TX) and BP Amoco (NYSE:BP).  There
are obviously more components to the Oil Index, but these
stocks are some of the bellwethers that are worth monitoring.

AMEX Pharmaceutical Index (DRG.X):  Merck (NYSE:MRK), Pfizer
(NYSE:PFE), Eli Lilly (NYSE:LLY), American Home Products
(NYSE:AHP), Alza (NSYE:AZA), Watson Pharmaceuticals (NYSE:WPI),
Abbott Laboratories (NYSE:ABT) and  Schering Plough (NYSE:SGP).
Again, there are many stocks to watch within this group, but
this list should serve as a good reference.

S&P Health Care Index (HCX.X):  Cardinal Health (NYSE:CAH),
PacifiCare Healthy Systems (NASDAQ:PHSY), Healthsouth
(NYSE:HRC), Humana (NYSE:HUM), Oxford Health Plans
(NASDAQ:OXHP).  The S&P Health Care Index has many sub-sectors
within it, but the aforementioned names should serve as a
good representation of the broader group.

To reiterate, the three aforementioned sectors are defensive in
nature and should capital flow back into the growth sectors
of the market such as tech and finance, the defensive groups
of stocks are likely to pullback.  Nevertheless, the three
sectors and some of the stocks within those groups should
serve as a good reference in attempting to game the direction
of the broader market going forward.  What's more, the three
defensive sectors I reviewed can offset some of the systematic
risk associated with tech and finance; energy, drug, and
health care stocks can act as hedges.  But to make it
perfectly clear, if tech and finance find some bids Friday,
these three sectors are likely to decline.

Now let us segue from defensive to offensive sectors.  The
Semiconductor Sector (SOX.X) has problems, big problems.  As
I mentioned earlier this week, I feel that the SOX is crucial in
the progress of the Nasdaq Composite (COMPX).  And unfortunately,
as I had speculated on Monday, the weakness in the SOX is
spilling over into the COMPX.  I mentioned last Monday that, in
my opinion, it was crucial for the SOX to hold above its 50-dma,
which it did Tuesday and again Wednesday.  However, the SOX, for
the first time in a month, settled below its 50-dma.  Keep an
eye on shares of Intel (NASDAQ:INTC) and Applied Materials
(NASDAQ:AMAT) to game the blue chip portion of the SOX.  For the
more aggressive portions of the chip sector, I like to watch
shares of Xilinx (NASDAQ:XLNX), only because I trade the stock
often and know its behavior in relation to the SOX.

Along with the SOX and its impact on the Nasdaq Composite, I
feel that shares of Cisco Systems (NASDAQ:CSCO) are equally
important.  The $30 level in shares of Cisco has acted as a
floor for the stock following the company's earnings miss on
Tuesday.  If the $30 level breaks, and shares of Cisco begin
to drift lower into the $20s, I think the COMPX will
probably see the 2500 level in short order.  Conversely, if
the shorts begin to bring in their positions in Cisco, and
the stock subsequently lifts from the $30 level, the COMPX may
find a bit of relief and drift higher.  But without a catalyst
to cover shorts and buy Cisco, it's tough to say definitively
which direction the stock will trade in.  I'm not attempting
to game Cisco here.  Rather, the stock should be another
variable to monitor when planning trades in the tech sector.

One positive that I took away from the action in the COMPX
Thursday was at least it didn't take out its day low from
Wednesday, which was put in at 2554.  If the rotation back
into tech stocks begins early Friday morning, traders might
attempt to pick a bottom near 2554, because the risk in doing
so is pretty easy to quantify - a mental stop could be set just
beneath the 2550 level in the COMPX.  If the COMPX drifts
below the 2550 level, it could very well make its way to 2500
as I don't personally see much support below 2550.  The way
to discern rotation back into tech stocks is to monitor price
action in the SOX, shares of Cisco, and the defensive groups I
alluded to above.  These, of course, are just the variables
that I follow, but should serve the purpose of monitoring
rotations.  The individual risk tolerances and time frames of
traders should dictate the individual metrics they follow.

By scaling into some tech exposure near the oversold levels in
the COMPX, traders can position for a potentially
high-rewarding bounce while containing risk to relatively small
increments.  However, this is a strategy that only active
traders should pursue, who have the ability to monitor positions
throughout the day.  For those traders unable to actively
monitor positions and manage risk, I wish I had a strategy for
you to employ in the current marketplace.  The fact of the matter
is that I don't feel comfortable suggesting any sectors or stocks
for intermediate-term trades - that is, trades that last longer
than a day or two.  However, as soon as I discern a trade that
has the possibility of a prolonged move, I'll be sure to convey
that message in my market commentary.

Two trades that had been working for a prolonged period of time
recently were in the finance and retail sectors.  However, those
money-making trades have come to an abrupt halt this week.
Thursday morning, several retailers warned of lower profits and
weak same-store sales in the month of January.  Among the
notable warnings, Gap (NYSE:GPS) said same-store sales were in
the red across all of its divisions, which includes Gap Stores,
Old Navy and Banana Republic - by the way, Banana Republic is a
much-visited store by this consumer.  I do my part in boosting
Gap's sales in that division.

The retail sector has run-up over the last several months in
anticipation of lower interest rates.  And up until this
morning's warnings, the retail sector was still running as
measured by the S&P Retail Index (RLX.X).  The same-stores
sales reports this morning gave traders a reason to take
profits in the group, and I suspect that the sector will now
settle into a consolidating trading range.  However, with more
interest cuts looming in the not-too-distant future, I think
the retail sector has room to trade higher.  The name of the
game right now with the retail sector is to wait for the
leading stocks in that group to base for a decent amount of
time, and look for entry points during their next legs higher.
Some stocks that have been acting well within the group
include:  Steve Madden (NASDAQ:SHOO), Christopher & Banks
(NASDAQ:CHBS), American Eagle Outfitters (AEOS), Abercrombie
& Fitch (NYSE:ANF), Costco (NASDAQ:COST) and Liz Claiborne
(NYSE:LIZ).  Here again, the list could go on, but these names
are a good starting place.  And to reiterate with the
retailers, I would expect some consolidation so be patient
with the group - but that's just my opinion.  As always,
refer to price action and not my opinions.

The finance sector, like the retailers, is also pulling back
on profit taking.  There isn't a real good reason to sell
the financials right now, other than to take profits.  The
financial stocks will trade higher this year as the preceding
interest rate cuts work their way through the economy and
the upcoming interest rates cuts get discounted into share
prices.  I think there will be a lot of upside surprises in
earnings in the financial space in the coming six months, and
for that reason the group still looks attractive to me for
investment purposes.  Keep in mind that there's a big difference
between trading and investing!  For trading purposes, I think
it's difficult to game the short side in the financials.
Although OptionInvestor is gaming the profit taking in a
Goldman Sachs (NYSE:GS) put right now, I think any short in
the financials should be approached with tight stops.  The Fed
is on the offensive, it's just that simple.  In trading the
long side in the financials, at this point, it's a question
of when the profit taking subsides and the base-building
begins.  Once these stocks in the financial space build a base,
look for breakouts, or even consider gaming bottoms.  For a
good case study on how to game profit taking, consolidation,
and subsequent breakouts in the financial space, take a look
at shares of Astoria Financial (NASDAQ:ASFC).  This isn't a
recommendation to buy the stock.  Rather, a study on how to
trade finance stocks.

And with the finance stocks pulling back on profit taking,
the Dow Jones Industrial Average (INDU) will have a hard time
breaking the 11,000.  I know the INDU has poked above that
level this week, but has not closed above that level yet,
which is key in my mind.  Matt Russ called it pretty closely
in his market commentary Wednesday when he suggested the INDU
would pullback to 10,850 if it didn't plow above 11,000.  The
10,850 level looks like solid support, but if it fails, a
decline back down to 10,800 is likely.  That might be the
spot to leg into some financial exposure as the risk is
pretty easy to quantify.  And although I've suggested ways
to pick the bottom on both the INDU and COMPX tonight, you
must keep in mind that picking the bottom in any market
operation is a difficult proposition.  Realize that no
trader can pick the exact bottom in any market consistently.
However, a trader can attempt to pick the bottom by slowly
scaling into exposure at clearly defined levels, after
clearly defining risk parameters.

I'd like to make it clear that the market is very difficult
to game right now.  I would suggest trying to game the
sector rotations which have been so dominant this year.  But,
in doing so, it's crucial to know the levels of support and
resistance in the sectors you're trading along with the
individual mediums with which you plan on trading with.  With
the oversold condition of the tech sector, I would expect
a relief rally beginning as soon as tomorrow morning.  But I
was of the belief that the Nasdaq would advance today, so
it goes to show that my opinions, in the end, mean nothing
to the market.  Until a clear catalyst emerges to buy stocks,
trading will be tough and choppy.  We'll make sure to cover
some potential catalysts in this weekend's market commentary.

Also, I'd like to thank the hundreds of people who took the
time and effort to send in their opinions and suggestions
concerning my market commentary.  I'm in the process of
replying to each and every reader who was motivated enough to
respond.  If you haven't received a response from me, it's
on the way.

Eric Utley
Assistant Editor

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

OptionInvestor is proud to announce our third annual Spring
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was the best function you had ever attended.. You haven't seen
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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
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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
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We are starting the seminar with an optional one day boot camp
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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
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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
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presentations and a professional video package of the entire
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This is not a prepackaged presentation that gets repeated over
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Barren Pastures Already?
By Austin Passamonte

A late-winter chill is settling over bullish pastures this week.
Not long ago we were bombasted with rhetoric from CNBC and all
directions around us of "Rally Ho". Have to admit, all that talk
does have an effect on even the most objective technicians. If we
were locked in a room with the message, "You're a green Martian..
you are a green Martian..." piped in for successive days on end
and everyone in contact with us repeated that, we'd be checking
the color of our own skin before long.

Such is the effect repeated mantra has on the masses every time.
Power of suggestion will break down even the toughest neutral
opinions when repeated long & loud. Too bad it cannot do the same
thing to market reality or we'd all be rich way before this.

Now that media celebrities, clueless about market action have
been squelched from emotionally-biased chatter, let's assess the
situation once again from a technical and fundamental point of
view to weigh the evidence in front of us.

Fundamentals first. Interest rates are falling faster than Wal-
Mart prices (referring to those TV commercials, not stock prices
although both are applicable today) and a tax cut is promised for
what that's worth. Bullish trader's only hope to avoid new market
lows is the dangling golden carrot of another surprise rate-cut
by the Fed at any given moment. Fool's gold? That in our opinion
is the sole remaining leg this weakened market has to stand on
and its knee is looking a bit wobbly from here.

The economy is slow and will not V-bottom a recovery. Joe Average
citizen's mind-frame does not change nearly that fast no matter
what fiscal first-aid is applied. Traders used to changing
emotions at the speed of sector rotation often fail to maintain
touch with how the vast majority thinks, feels & reacts with
economic change.

Promise of rate cuts get all those exuberant momentum-bulls
jazzed up but won't have the masses storming retailers to spend
"excess" dollars any time soon. Energy providers will suck that
money away long before then. False catalyst to pin bullish hope
on right now.

Inflation, stagflation and recession are not beyond the realm of
possibility or even probability before economy improves. Traders
forget to recall that markets continue to rise after the first
few rate hikes in a tightening mode and continue to fall after
the first few cuts in an easing mode. Takes time to work through
our system in each event. Those who are certain January 3rd was
an ultimate multi-year bottom may very soon discover otherwise.

Technically speaking, mid-term charts are a mess. The Dow has
failed to crack that venerable 11,000 ceiling and may have tested
it for the last time this week and quite some time ahead as well.
A triple-top failure pattern since October would be the result.
Daily Stochastic, RSI and every other common oscillators are
turning down from oversold as we speak.

The NDX and Comp have reached the point of oversold on daily
charts but it could be some time before a base and reversal
occurs. Retesting previous lows at the least is highly possible.

Keep in mind that the Dow and NDX have yet to trade at extreme
lows together. Money has always chased from one to the other. The
same scenario may repeat itself this time but should both indexes
test lows together, we would see deeper SPX and OEX levels since

The VIX/VNX have been posting lower readings since early October
2000. Too many call buyers spurred by false hope(and hype)
tilting the ship.

Commercial S&P 500 traders continue to short every rally and have
been scoffed at lately for doing so. Right now that seems like a
pretty wise idea, especially today! How many SPX puts or bear-
call credit spreads would you like to be holding now since just
last week when the cash index traded near 1380? The right answer
to that question is, "Ten times the number I could afford at the

What next? Market Sentiment has moved to staunchly bearish and
will follow the only ones we see making money on the long side in
current market conditions; sell every rally with both hands and
the kitchen sink.

Long puts have been profitable and bear-call credit spreads
almost easier than finding a bag full of cash tumbled from the
rear door of a security truck (current news event). We hope the
person who snatched that half-million dollars off the street does
the right thing and turns it in (?) but if not, please consider
using it to buy long puts and/or sell call credit spreads for the
next few weeks or so.

Then return the original funds while keeping your much, much-
bigger resulting share!


Thursday 02/08 close: 24.09

Thursday 02/08 close: 62.91

30-yr Bonds
Thursday 02/08 close: 5.46%

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

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

  (Open Interest)       Calls        Puts          Ratio
S&P 100 Index (OEX)
740 - 725               11,957        1,046        11.43
720 - 705                9,617        8,317         1.16

OEX close: 700.77

695 - 680                2,915        8,888         3.05
675 - 660                  312        7,280        23.33

Maximum calls: 720/3,860
Maximum puts : 700/4,702

Moving Averages
 10 DMA  710
 20 DMA  704
 50 DMA  701
200 DMA  756

NASDAQ 100 Index (NDX/QQQ)
 70 - 68                87,629         9,843         8.90
 67 - 65                65,117        37,298         1.75
 64 - 62                74,151        41,867         1.77

QQQ(NDX)close: 60.60

 59 - 57                11,759        23,518         2.00
 56 - 54                 7,267        24,268         3.34
 53 - 51                 2,142        22,795        10.64

Maximum calls: 70/60,740
Maximum puts : 60/41,413

Moving Averages
 10 DMA 63
 20 DMA 64
 50 DMA 63
200 DMA 82

S&P 500 (SPX)
1400                   16,383         1,981          8.27
1375                    9,306         6,302          1.47
1350                   16,038        16,571           .97

SPX close: 1340.90

1325                   10,897        11,633          1.07
1300                    2,812        13,948          4.96
1275                      586        10,962         18.71

Maximum calls: 1400/16,383
Maximum puts : 1350/16,571

Moving Averages
 10 DMA 1358
 20 DMA 1347
 50 DMA 1335
200 DMA 1415


CBOT Commitment Of Traders Report: Friday 02/02
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts on the
Chicago Board Of Trade.

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

                     Small Specs             Commercials
DJIA futures     (Current) (Previous)    (Current) (Previous)
Open Interest
Net Value          -467      +426          -5599     -7528
Total Open
interest %       (-6.18%)   (+5.66%)      (-22.99%)  (-30.35%)
                 net-short  net-long      net-short  net-short

Open Interest
Net Value         +1810     +1262          -6642      -4061
Total Open
Interest %      (+11.61%)  (+8.36%)      (-10.94%)   (-5.90%)
                net-long   net-long      net-short   net-short

S&P 500
Open Interest
Net Value        +73434     +69952        -93215       -91053
Total Open
Interest %      (+39.86%)  (+37.54%)     (-12.53%)  (-12.11%)
                net-long   net-long      net-short  net-short

What COT Data Tells Us
Indices: The disparity between Commercials and Small Specs
remains intact on the S&P 500. Small Specs have moved from net-
long to net-short on the DJIA while the Commercials have
increased their net-short positions on the NASDAQ 100.

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

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

Energies: Commercials are net-long crude & oil products at one
year extremes. These producers are hedgers and almost always take
the opposite side of expected market action to lock-in production
prices. They expect lower prices from here (Bearish)

Metals: Commercials are moving to net-long in Gold, Silver and
Copper from short positions. This has happened quickly and they
expect higher precious metals soon.(Bullish)

COT/CRB: This commodity index measures the entire spectrum of
commodities in overall bullish or bearish outlook. It is now at a
one-year high for commercial bullishness, meaning the outlook for
commodities is long-term positive while equities as a mirror are
considered long-term negative.

Data compiled as of Tuesday 01/30 by the CFTC.


Please visit this link for Market Posture:



How's the Trading Going?
By Molly Evans

Tonight we need to clear up a couple of questions written in to
me by readers.

The first concerns my last Trader's Corner article of January
25th, "Making Rational Decisions..."

One reader astutely yet very kindly confronted me for obviously
violating my own business plan discussed in my "The 2001
Trading Plan."

In the Making Rational Decisions article, I had lamented that I
held a bullish trade even though I had turned bearish for the
day and for that stock in particular.  I had wanted to give my
trade time and room to let the market noise do as it will and not
be stopped out.  As our reader pointed out, this is in direct
conflict to my business plan which states that I will trade
strictly by the charts, thereby taking the emotion out of it.
This would imply that no profit is too small to take if the chart
has turned against the trade.

As he so aptly states, it was "interesting to see how greed took
over discipline that you set out in your business plan."  Indeed
interesting!  And DUMB!  I'm embarrassed but will confess to
how this trade has turned out.  Those were SUNW(Nasdaq:SUNW) calls.
My entry point was just under $30 and I STILL have the March

TERRIBLE!  You say?  Not really - I altered the plan and am
trying a little experiment with these.  Yes, I broke my rules
in the business plan but have been extremely loyal to it
before and since this mistake.  The plans work very well if one
will stick to it.

I've been selling February calls against these March calls every
day based on the thirty and sixty minute charts.  It's absolutely
amazing how lucrative it is to be the seller.  I'm following the
plan to a T - i.e. - trading the chart and profiting anywhere from
a half a point to a point and a half on these calls.  Still, I'm
not quite even but I anticipate that I'll own the March calls
free and clear before next week's Options Expiration day as I'm
not far off.

IF this works out nicely, I'll add it to the business plan as a
strategy to generate consistent returns.  The negatives of doing
this are the commissions, obviously, and I could have something
get away from me very quickly.  For example, I have the March 30
calls and have been selling the February 25s.  That's not exactly
the way one should do it.  I know this and am willing to assume
the risk that should SUNW suddenly zoom up the chart, I'd have to
buy to close the position at a loss so as to not be assigned a
whole lot of SUNW stock at $25.00.  For now, it's working and
it's been a learning experience for me.  That can't be all bad.

So, a trading plan doesn't have to be written in stone and I did
leave room for that in my original format.

The reader further asks:

Q) How have I fared using the disciplines set forth in the
business plan?

A) Very well!  Much better year.  I've stuck to my own loss
limit on any one position and if I see that I'm wrong before
that - then all the better, I've gotten out.  The worst loss
came on a gap against me resulting in a 32% loss.  I already
squawked about that in a previous article.  And would you believe
that just yesterday I bought Microsoft (NASDAQ:MSFT) puts just
TEN minutes before that story about a potential settlement with
the DOJ hit the wire?  That thing was on the verge of breaking
down and going to close its gap at $55 in my estimation.  Then,
POW.  Quickest 25% hit I've ever taken.  And then of course, the
thing spent the entire session red today.

Anyway, in addition to my lost discipline, I've stuck to
the allocation of a set amount in any one position and trade
only a set portion of the portfolio - profits go to the bottom
line but are not then used as trading risk.

Q) It would be helpful to see the decision making process of
your trades.

A) Ahh.  Well, I've become much more patient.  My rules state
that the entry may be to the long or short side of the market
but must be based upon compelling technical and/or fundamental
setups.  I'm all technical though.  As Austin says, it's
certainly better than a toss of the coin!  It's working for me
whereas fundamental analysis is fraught with subjective
interpretations and reactions, and unfortunately, downright
dishonesty.  Therefore, my trades are based on the technical
indicators and my market bias.  Yes, as many of you could guess,
I keep a lot of puts in my account and I'm all too quick to
flip out those calls - err - well, except for SUNW.

Q) You mention that if it's overbought and the trend is down,
that you buy puts.  What technical indicators will you use to
determine the underlying equity is overbought?  What other
technical indicators do you heavily rely on in making your

A) No magic formula here.  I look for support and resistance
lines - anything I can draw a line across, I do.  I use Fibonacci
retracements a lot too.  On Qcharts you just hit the retracement
tool and draw from a low point to a high point of an equity's
move and the retracement levels paint themselves in.  It's
amazing how price bounces off or will consolidate on the 38.2%
and other levels so often.

But by far, my favorite is the stochastics indicator - with the
%K length set at 10, the %K smoothing set at 3 and the %D
smoothing set at 5.  I look hard for divergences in the thirty,
sixty and daily charts.  You might recall a blurb I wrote one
time about taking some knocks in Lehman(NYSE:LEH)?  Well - I never
forget who owes me.  LEH owed me.  Take a look at the chart.
I found this one on a daily over last weekend.  I hope my
explanations are satisfactory to show how I see a setup.

If I'm bearish on the market for the day - I try my darndest
not to see bullish plays unless it's SO obvious that everything
is turning and we've got the makings of a good run in progress.
I don't want to enter into a bullish (or bearish if I'm bullish
on the day for that matter) trade going against the general
market current.  I do my homework the night before and form my
opinion as to what the potential scenarios might be and how they
might unfold.  When things seem to be going against what I
thought - I try to step back and be objective, determine if my
own thinking was flawed or if the actual "lines in the sand"
have convincingly been crossed.

Let me give one example of that.  Today, LEH spent most of the
day in the green.  However, I'm bearish on the market through
today and into tomorrow, maybe Monday for a variety of reasons.
So, last night, I thought LEH was looking a little oversold on
the thirty and sixty minute charts.

I ask myself - is this a chart I would buy if were bullish the
market?  Oh yes indeed it is.  So I should sell my puts right?
No.  Why not?  Because I think LEH's intermediate trend is down.
So what can I do while I have to suffer it's upward gyrations
against my position?

Then, I drew a trendline down the slope - it's all very easy -
and simply waited to see if it would bump its head again - and
indeed it did.  I got one point per contract in just that short
time frame and then watched smugly as LEH got on with its business
of going on down the line.

Q) What is scalping?

A) Scalping is just what I did with LEH and what I'm doing in
selling those SUNW calls - just going in for a short time to shave
off a point or a fraction of a point while the iron is hot.
Usually that term is applied to daytrader's methods of buying big
blocks of shares - say 1,000 shares and selling it for an 1/8th of
a point higher for a gain of $125.  They make money (or lose it)
by doing this many, many times over the course of a day.  I wrote
that into my business plan with the intention of doing it with
stock on breakouts or breakdowns - but I seem to have no talent
for that so I've written that right back out of the plan.

Whew!  This article has gone on much longer than I thought it
would and I didn't even get to the other reader's question about
reading divergences in indicators.  Darn.  I'm sorry but that one
is going to have to wait for next week.  I've taken up enough of
your good time as it is.  Go watch ER.

See you next week.  MKE

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


AEOS $53.63 -4.63 (-2.24)  Shares of AEOS sold off today amid
broad sector weakness in the retail specialty apparel sector.
We can blame it on the Gap, which reported disappointing
January sales, and predicted lower-than-expected fiscal fourth
quarter earnings.  While AEOS is still expected to beat
expectations, it sold off in sympathy, as did LTD, and ANN.
Since AEOS closed below our stop level, we are dropping it

LU $16.89 -0.12 (-0.84)  In the wake of the CSCO fallout, many
related players are still suffering, including LU.  While the
damage has been relatively contained, LU, as well as the
broader market, is desperately seeking the next catalyst to
drive it higher.  Today's drifting took LU below our stop loss
level of $17, if only by a fraction.  LU may continue to
consolidate its recent gains as it waits for the next catalyst.
In the meantime, we will take our 16% profit in the stock tonight,
wishing it would have been more.

NKE $55.18 -1.50 (+0.23) NKE's bullish disposition was evident
in Wednesday's session with the share price edging upward to
$57.50 on respectable volume; although, there wasn't a
significant breakout to entice traders to take positions.
The broad marketplace simply wasn't advantageous for our call
play on NKE.  The negative bias and profit taking that ensued as
the price level approached the 52-week high of $60.06 took its
toll.  Today, NKE opened to the negative and saw clear
violations of the 5-dma ($55.72) and 10-dma ($54.74) before it
rebounded in the last hour of trading.  The stock's weak upside
recovery from $54.12 barely positioned it topside of our $55
protective stop and leaves us no choice but to close the play on
NKE this evening.


SCMR $24.94 +1.25 (-2.06)  Sycamore offered fast profits for
put players on Wednesday, with a drop from $26 down to $23 in
the morning.  Thus, we revised our stop level to $25 on Wednesday.
On Thursday, Sycamore dropped from $25 to $23.88 by mid-day,
but rallied at the close.  This afternoon rally may just be short
covering, as the stock had trouble at the $26 level where sellers
stepped back in.  The shorts may be reasserting themselves for
another down turn, yet we are taking our profits and dropping
SCMR tonight.

IDPH $59.50 +1.38 (+2.28) It looks like the roller coaster ride
in shares of IDPH has reached bottom and is attempting to
establish a new upward trend.  After reaching bottom near $55
early Monday morning, the stock has been gradually ticking
higher, and has been flirting with our $60 stop for the past 3
days.  In fact it actually breached that level on an intraday
basis today, and that, combined with a series of higher lows
this week, severely weakens the bearish case for IDPH.  Throw
in the refusal of the Biotech index (BTK.X) to proceed lower,
and it seems like it is high time we throw in the towel on IDPH
before it really moves against us.

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The Option Investor Newsletter                 Thursday 02-08-2001
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

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CIEN $82.94 +1.06 (-0.81) Although the NASDAQ continued to
stumble today, the bears couldn't dominate the action on CIEN.
After dipping to $79.44 shortly after lunch, buying volume came
back in a rush, pushing the stock up by more than $6 in the
space of an hour.  Aggressive day traders could have made a
quick buck during the sharp rise, but needed to be nimble to
lock in those profits as the bears came out of hibernation in
the final hour, pushing our play down to test intraday support
near $82 at the close.  So where do we go from here?  Nimble
traders will continue to rule the day with CIEN in the near
term, as they target shoot dips near the $80 support level.
Just keep in mind that CIEN is trying to buck the broader NASDAQ
trend, and so the stock is likely to be volatile.  One
encouraging note in today's session was the fact that the stock
managed a positive close on volume in excess of the ADV, on a
day when the NASDAQ closed negative.  Although this is an
aggressive play, more conservative entry points may be possible
as the bulls become dominant again and push CIEN through
resistance near $85.  Keep in mind that this is a short-term
play, as the company will be reporting its quarterly earnings
next Thursday before the open, and we will want to be out of
the play the night before.

DELL $26.06 -0.44 (+0.88) Technology selling continued to
plague the bulls today, and all things considered, our DELL
play held up rather well.  Although the stock ended the day
with a fractional loss, it came on volume that was only about
half of the ADV, indicating that there is not a rush for the
exits.  Rather, investors are holding their breath and waiting
for the next catalyst to drive the stock one way or the other.
We're hoping that anticipation of the company's earnings next
Thursday (February 15th) after the close will provide a nice
upside bias over the next few sessions.  We would like to see
the bulls hold the line near today's $26 intraday support level
and make another run higher, as we are getting rather close to
our $25 stop at this point.  Intraday dips to $25 are still
buyable for traders that can tolerate a bit more risk, but the
more cautious approach will be to wait for buying volume to
come back and push DELL back up through the $27.50 resistance
level.  Make sure the NASDAQ is moving up before playing, as
DELL will have a hard time bucking the market trend.

RE $63.11 -0.92 (+3.61) That's about what we expected RE to do
today, as it seemed unlikely that it would be able to plow
through its upper Bollinger band on a day when all of the major
indices lost ground.  Given the fact that the stock was a bit
overextended as of yesterday, it was encouraging so see the
bulls hold the loss to less than $1 and keep our $62 stop at a
comfortable distance.  While we don't have an entry point yet
(we need to see buyers step in to support the stock first), $62
looks like a good level for initiating new positions, provided
support holds and RE heads up from there.  Adding strength to
our notion that today was simply profit taking, the stock only
managed a paltry 211,000 shares of trading volume today, 40% of
the ADV.  As long as there is no rush for the exits, it seems
the bullish trend has good odds of continuing.  There ought to
be a couple more weeks in which to play the stock, as it heads
towards its earnings announcement, scheduled for February 21st,
after the close.  Watch the Insurance index (IUX.X) for an
indication of the direction of the broader sector before
playing - any serious weakness in the broader sector will
eventually be felt by even the strongest stocks, and we don't
want to get caught unaware.


AETH $30.63 -6.23 (-12.99) Heavy selling continued in shares of
Aether today, as two Wall Street firms issued downgrades.
Lehman Brothers revised their year end price target downward, and
Robertson Stephens downgraded Aether from a long-term Attractive
to a Buy.  According to the Robertson Stephens report, it will
be difficult for Aether to deliver substantial upside surprises
this year.  Aether gapped down nearly four points at the open,
and rallied up to $34.31, at which point the sellers took control
and pushed the stock below support at $32 and $31.  If support
at $30 is broken, the next support levels are $29 and the 52-week
low of $28.50.  Traders can take positions at current levels, or
at a roll over from $32.00.  Watch the wireless sector for
weakness, and set stops at $35.

HGSI $51.81 -0.44 (-3.63) Mirroring the broader Biotech index
(BTK.X), HGSI is gradually coming back to earth.  The sharp
rise Tuesday morning, which was due to a nearly 10% move in
PDLI, gave us a great entry point into puts on HGSI.  Our play
shot as high as $56, before beginning the long steady decline
that has characterized the remainder of the week.  Each bounce
has less life in it than the one that came before it, and
support between $51-52 is just about to give way under the
bears' assault.  Volume is a bit of a concern at this point
though, as it dropped to just about 50% of the ADV in today's
session.  Aggressive traders can still attempt to grab a better
entry point on failed intraday rallies, so long as our $55 stop
remains intact, but a more conservative approach will be to wait
for support to fail on heavier volume.  Just below the current
support level, the bears will have another downside obstacle in
the form of the support at $46-48.  If they are successful in
breaking this support level, it could be a quick trip to the $40
level, especially if the BTK.X continues to weaken.  Keep in
mind that we have earnings looming just around the corner;
unofficially they are set for February 13th, but the company
will neither confirm nor deny the date.  Take this into account
when considering new plays and stops on existing ones.

IDTI $38.19 -0.31 (-4.38) Well, it hasn't exactly been a thrill
ride, but IDTI is continuing to deliver daily drops to keep the
bear happy.  Intraday rallies keep running out of momentum at
resistance, keeping our stop (now at $41) intact so that we can
ride the play again tomorrow.  The intraday chart is
instructive, showing the formation of a bearish wedge forming,
with horizontal support resting at $38, very near today's lows.
Entry points should be fairly easy to gauge, with aggressive
traders targeting a rollover near the descending trendline
($40.50).  More conservative players will want to wait for $38
support to fail, and enter new positions as this level is
penetrated on increasing selling volume.  The collateral damage
in the Networking group is still being priced in, as we can see
by the continuing weakness in stocks like CSCO, NT, JDSU, and
GLW.  Until the selling in these stocks winds down, IDTI is
going to have a hard time holding its ground.  One note of
caution on the play is of a purely technical nature.  With the
convergence of historical support at $36, the lower Bollinger
band at $37, and daily Stochastics flattening out in oversold
territory, IDTI could be due for some short covering in the
near future.  Keep this in mind when planning and managing your

STT $108.71 +0.40 (-2.03) The first day of our new Financial
play was a big yawn, as STT traded in a narrow $1.50 range all
day, before actually closing positive with a fractional gain.
This is interesting, as the Brokerage index (XBD.X) managed to
move in a 3% range, ending the day with a slight loss.  So STT
was actually stronger than the underlying sector - not exactly
what we are looking for in a put play, now is it?  But with the
bearish trends still intact on both STT and the XBD, it looks
like today may have just been a low volume day, with little
interest.  Our entry strategy looks intact as well, with
aggressive entries materializing on a failed rally between
$110-111.  Waiting for support near $108 to fail may be the
more prudent strategy at this juncture, with the broader markets
unsure of which way they want to move.  The technicals are still
in our favor, as Stochastics are continuing their rollover, and
MACD is just about to turn negative.  Wait for selling volume to
pick up, and then jump aboard for the next leg down.  Keep stops
set at $111.

GS $105.95 +0.75 (-8.01) A rough day of trading for financial
stocks yesterday translated into a good day for our put play in
GS, as the stock fell sharply in sympathy with its sector.  News
that two of the largest investors of GS, Sumitomo and Kamehameha,
filed to sell about 3 million shares of its stock only added fuel
to the fire sale.  Today, GS attempted to bounce back from
oversold conditions in the early going but encountering resistance
from the 5-dma at $109.23, the sellers returned with avengeance.
While the stock did close up fractionally, there was little for
the bulls to cheer about.  A break below $105 on good volume could
allow for an entry on weakness as it appears that GS may be headed
lower to test its 50-dma near $102.  For higher risk players, look
for another failed rally above resistance at the 5-dma as well as
our stop price at $107 as a potential entry point.  In both cases,
confirm with peers BSC, LEH, MWD.

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FDC - First Data Corporation $59.91 +0.41 (-0.39 this week)

First Data is the remarkably efficient, often invisible engine
powering today's global shift to a cashless economy.  They
process and safeguard every type of electronic payment method:
credit, debit and stored-value cards, electronic checks and
cash.  They also provide Electronic Funds Transfers to 75
percent of the world and provide card issuer services for
1,400 financial institutions and 396 million consumers
worldwide. And, through their visionary Internet Commerce
Group, they are developing advanced services and solutions
that help financial institutions, merchants, business and
consumers access the power and possibilities of the Internet.

There's nothing like relative strength to keep a stock going.
Since bottoming out last October, shares of FDC have been
rallying relentlessly, with occasional visits to the 50-dma
providing rare but ideal entry points.  It appears that the
buying interest from late last year has carried forward to 2001.
Positive comments from analysts have also helped the stock to
move ever higher.  Merrill Lynch upgraded the stock early in the
year while First Union Securities re-iterated their Strong Buy
rating and $70 price target on the stock based on accelerating
revenue growth and attractive valuation.  US Bancorp Piper
Jaffray has been especially diligent in their coverage,
maintaining their Strong Buy rating but upping their target price
from $60 to $65, then from $65 to $68 post-earnings and most
recently, from $68 to $72, also citing attractive valuation along
with predictable profitability.  Reporting record earnings
recently, the company provided a bullish outlook during the
conference call, raising its guidance for 2001 EPS.  The stock
recently pulled back on low volume but finding horizontal support
at the $58 level, appears to be on the verge of making new
all-time highs.  We are placing a protective stop at $58 support.
Confirmed bounces off this level as well as $59 could allow
aggressive traders to take a position, while a break back above
its 5 and 10-dmas, converged near $60, could allow for a more
conservative entry.  Keep an eye on rivals FISV and PAYX to gauge
sector sentiment.

***February contracts expire next week***

BUY CALL FEB-50 FDC-BJ OI= 261 at $10.30 SL=7.25
BUY CALL FEB-55 FDC-BK OI=2025 at $ 5.20 SL=3.25
BUY CALL FEB-60 FDC-BL OI=6257 at $ 1.25 SL=0.00
BUY CALL MAR-55 FDC-CK OI=  10 at $ 6.50 SL=4.50
BUY CALL MAR-60*FDC-CL OI= 272 at $ 3.00 SL=1.50




GLW - Corning Inc $43.05 -3.45 (-8.03 this week)

Corning is a global communications technology company that
operates in three primary business segments: Telecommunications,
Advanced Materials, and Information Display.  They are the
world's top producer and pioneer of fiber-optic cable, which it
invented over 20 years ago.  Corning also owns the well known
crystal maker, Steuben Glass.  The company operates 40
manufacturing plants in 10 countries.

The fiber optic stocks continued to buckle under the pressure
this week as lingering uncertainty in the market effectively
drove share prices near their respective lows.  At the end of
January, Corning reported better-than-expected 4Q results with
revenue up 52% and earnings of $0.34 beating the consensus
estimate by $0.06.  However, the world's largest producer of
optical fiber and cable concurrently announced it had seen some
softening in orders from several existing customers, Lucent (LU)
and Nortel (NT) in particular.  Corning's tempered guidance for
2001 combined with JDS Uniphase (JDSU) also singing the blues
incited a strong sell-off across the board in recent weeks.  The
broad negative marketplace certainly isn't boosting investors'
confidence either.  Yesterday, GLW caved in late afternoon and
violated the $50 support on accelerating volume levels.  The
bearish activity extended into today's session with further
technical breakdowns effectively driving the downward momentum.
GLW is currently well below the near-term 5 & 10 DMAs of $48.43
and $52.42, respectively.  These measurement devices can
realistically be used as entry/exit gauges, depending of course
on your personal risk portfolio and trading style.  Going
forward, we're keeping a tight lease on our GLW play considering
the attractive buying opportunity.  Although we have our
protective stop firmly set at the $46 mark, the more aggressive
types might enter at a higher level if there's evidence of a
strong rollover in a declining market.  A safer approach is to
buy into further weakness below $43 and $42.83, the stock's 52-
week low.  The fiber optic stocks tend to exhibit volatile
direction changes and wide variances in price, so it'll be
important to not only pay attention to GLW, but also to keep
track of others in the sector such as JDSU and its merger
partner SDLI, ALA, CYTC and NEWP.

***February contracts expire next week***

BUY PUT FEB-55 GLW-NK OI=7920 at $12.40 SL=9.25
BUY PUT FEB-50 GLW-NJ OI=9630 at $ 7.30 SL=5.00
BUY PUT FEB-45*GLW-NI OI=4474 at $ 3.20 SL=1.50
BUY PUT FEB-40 GLW-NH OI= 383 at $ 0.85 SL=0.00


GSPN - GlobeSpan, Inc. $29.25 -3.15 (-5.01 this week)

GlobeSpan is a company focused on DSL technology.  They are a
leading worldwide provider of integrated circuits (chip sets),
software, and system designs for Digital Subscriber Line (DSL)
solutions that enable the high-speed transmission of data, voice
and video over the World Wide Web at rates over 100 times faster
than today's 56 Kilobit modems.  Using existing copper telephone
lines that run to nearly every home and business, GlobeSpan's
products create the functionality and speed that makes DSL a
reality.  A growing call for high-speed, low cost Internet
access has produced an enormous demand for GlobeSpan's products.

Like many Semiconductor issues, GSPN had a great January, as the
Chip stocks across the board broke through and closed above their
50-dma lines for the first time since Autumn of last year.
Looking more closely at the charts however, reveals that relative
to its sector, shares of GSPN have lagged during the recent Chip
run.  With the Semis looking likely to move lower in the near
term, it appears that relative weakness could weigh heavily on
the stock, allowing our put play to potentially flourish.  Having
just fallen below its 50-dma support, this moving average, now at
$33.87, has acted as resistance.  This has happened in spite of a
blowout earnings report and positive comments from Prudential
Securities, who re-iterated their Strong Buy rating.  What's
more, the stock has been unable to close above its 5-dma
(currently at $32.86) so far this month.  Look for a failed test
of these two moving averages as aggressive opportunities to
initiate a play, but make sure that selling volume returns before
doing so.  Horizontal resistance can also be found at $30, $31.50
and our stop price of $32.  For an entry on weakness, look for
GSPN to break below its recent lows, below $28.50, on strong
selling volume before making a play.  In doing so, use the
Philadelphia Semiconductor Index as well as fellow DSL player
RBAK as potential guides for direction.

***February contracts expire next week***

BUY PUT FEB-30*GLQ-NF OI=488 at $2.88 SL=1.50
BUY PUT FEB-25 GLQ-NE OI=438 at $0.88 SL=0.00


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HGSI - Human Genome Sciences $51.81 -0.44 (-3.63 this week)

Possessing one of the largest human and microbial genetic
databases, HGSI licenses its database of knowledge to
pharmaceutical heavyweights like GlaxoSmithKline and Merck.
Management has chosen to forgo the race to decode the entire
human genome, and has instead focused on finding and patenting
genes involved in developing gene-based therapeutics.  Its
four compounds currently in clinical trials are intended to
limit the toxic effects of chemotherapy, promote the repair of
damaged cells, stimulate antibody production, and spur regrowth
of blood vessels.

Most Recent Write-Up

Mirroring the broader Biotech index (BTK.X), HGSI is gradually
coming back to earth.  The sharp rise Tuesday morning, which was
due to a nearly 10% move in PDLI, gave us a great entry point into
puts on HGSI.  Our play shot as high as $56, before beginning the
long steady decline that has characterized the remainder of the
week.  Each bounce has less life in it than the one that came
before it, and support between $51-52 is just about to give way
under the bears' assault.  Volume is a bit of a concern at this
point though, as it dropped to just about 50% of the ADV in
today's session.  Aggressive traders can still attempt to grab a
better entry point on failed intraday rallies, so long as our $55
stop remains intact, but a more conservative approach will be to
wait for support to fail on heavier volume.  Just below the current
support level, the bears will have another downside obstacle in
the form of the support at $46-48.  If they are successful in
breaking this support level, it could be a quick trip to the $40
level, especially if the BTK.X continues to weaken.  Keep in
mind that we have earnings looming just around the corner;
unofficially they are set for February 13th, but the company
will neither confirm nor deny the date.  Take this into account
when considering new plays and stops on existing ones.


HGSI rolled over from resistance at $54 and offered a great entry
into this put play.  If the selling continues in the broader market
and HGSI, look to enter on a break on Wednesday's low of $51.63.
Keep in mind that buyers stepped in around $50.50 on Monday.  If
the stock moves higher in the morning, entries can be attained on a
rollover from intraday resistance at $53 or $54.  Watch the BTK.X
for sector sentiment.

***February contracts expire next week***

BUY PUT FEB-55*HHA-NK OI=412 at $4.88 SL=3.00
BUY PUT FEB-50 HHA-NJ OI=761 at $2.75 SL=1.50
BUY PUT MAR-55 HHA-NJ OI=256 at $8.88 SL=6.75


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

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Another Disappointing Day...

Technology stocks retreated again today as investors found little
reason to open new positions in light of the dismal forecasts
for future earnings.

Wednesday, February 7

Technology investors ran for the exits today after the meager
quarterly profits from Cisco Systems (CSCO) incited new fears of
an economic slowdown.  The NASDAQ closed down 56 points at 2,607.
The selling pressure spread to the Dow industrials, causing a 10
point decline in the blue-chip average.  The S&P 500 index ended
11 points lower at 1,340.  Trading volume in broad market issues
was light at 1.14 billion shares, with winners beating losers by
1,634 to 1,452.  Activity on the NASDAQ was average with only 2
billion shares exchanged.  Technology declines outpaced advances
2,228 to 1,489.  In the U.S. bond market, the 30-year Treasury
fell 15/32, pushing its yield up to 5.53%.

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

Luminent     (NASDAQ:LMNE)  APR12C/7P   $0.25   credit   synthetic
Weatherford  (NYSE:WFT)     FEB45P/50P  $0.55   credit   bull-put
Cabot Micro  (NASDAQ:CCMP)  FEB65P/70P  $0.56   credit   bull-put

All of our new combination positions offered favorable entry
opportunities today.  The synthetic position in Luminent was
very active with 90 contracts traded, and it appears that the
most common credit achieved was $0.25.  Weatherford and Cabot
Micro were also popular positions and the target prices were
observed in both plays.

Portfolio Plays:

Technology stocks slumped today after Cisco Systems (NASDAQ:CSCO)
announced a shortfall in second quarter earnings.  The networking
giant also indicated that the demand for telecom equipment has
declined and that minimal growth is expected in the coming months.
Analysts used the opportunity to downgrade a number of issues in
the group and the selling pressure in other sectors soon followed.
Internet and semiconductor shares fell precipitously and telecom
stocks also experienced substantial losses.  Industrial sectors
were less affected by the news as investors rotated into cyclical
and defensive issues.  Blue-chip technology stocks International
Business Machines (NYSE:IBM) and Microsoft (NASDAQ:MSFT) were the
surprise winners of the session, with both issues climbing higher
in opposition to the overall trend.  In the broader market, new
buying interest surfaced in biotechnology, utility, natural gas
and retail stocks while oil service, major drug, paper and gold
issues generally retreated.

Our portfolio saw a mix of activity with most technology shares
moving lower while select industrial stocks rallied.  Among the
popular cyclical issues, Clorox (NYSE:CLX) added another $1.15 to
close above $36 and our bullish calendar spread profited from the
stock's upward movement.  At the same time, another stock in that
section; Cabletron (NYSE:CS) was doomed by the "Cisco Affect" and
we were forced to close the time-selling position in the interest
of capital preservation.  However, many of the technology sectors
were not included in today's sell-off as the gains in Microsoft
demonstrated.  The software maker advanced $2.12 to $64 after the
appeals court overseeing the company's antitrust lawsuit invited
lawyers on both sides to debate whether the judge who ordered the
company's breakup made inappropriate and biased comments to the
public.  Rumors of a settlement and speculation that the court
might throw out the government's case helped the stock attract
new buyers and also benefited our Covered-calls with LEAPS play.
Qualcomm (NASDAQ:QCOM) was another big mover, up almost $4 to a
recent high near $86 and the issue was one of the leaders in the
Wireless Telecom sector.  In contrast, Motorola (NYSE:MOT) moved
in the opposite direction and traders in the long-term calendar
spread should roll to March options in the short position before
the premium erodes further.  Among the bullish synthetic plays,
Household International (NYSE:HI) and Landry's Seafood (NYSE:NY)
continued to rally and both issues are trading at yearly highs.
The Straddles section has experienced very little activity as of
late but the recent movement in Triad Hospitals (NASDAQ:TRIH) is
worth noting.  The issue continued its recent rally today and the
move provided sufficient premium in the call option to make the
play profitable for those who traded the cycle.

Thursday, February 8

Technology stocks retreated again today as investors found little
reason to open new positions in light of the current forecasts
for future earnings.  The NASDAQ Composite index finished at its
session lows near 2,562 and the selling pressure helped push the
Dow down 66 points to 10,880.  The S&P 500 index closed 8 points
lower at 1,332.  Trading volume on the NYSE reached 1.08 billion
shares, with losers beating winners 1,643 to 1,435.  Activity on
the NASDAQ was light at 1.8 billion shares exchanged.  Technology
declines beat advances 2,074 to 1,688.  In the bond market, the
30-year Treasury fell 16/32, pushing its yield up to 5.56%.

Portfolio Plays:

Stocks edged lower today as technology selling continued in the
wake of Cisco's earnings shortfall and a slump in retail shares
weighed heavily on the industrial group.  Losses in the telecom
sector were heavy while chip and chip equipment companies ended
the session with mixed results.  Some positive moves were seen
in the Internet group but the upside activity was limited by
losses in Yahoo! (NASDAQ:YHOO) and Amazon.com (NASDAQ:AMZN).
Networking shares also continued to slide and computer software
issues fell amid some profit-taking in Microsoft (NASDAQ:MSFT).
Among industrial stocks AT&T (NYSE:T), Wal-Mart (NYSE:WMT), Home
Depot (NYSE:HD) and International Paper (NYSE:IP) were the big
losers.  Inside the broad market, retail, chemical, paper and
airline issues declined while utility, biotechnology and select
oil service shares edged higher.  Traders said the rotation in
major market sectors is expected to continue and the activity
will keep the market in a small range until an economic catalyst
changes the current outlook.  Valuation experts suggest that
investors use the current weakness to accumulate positions in
capital goods, consumer staples, cyclicals, financial, utility
and energy stocks, since all of these groups remain attractive
in the long run.

There were only a few significant moves in the Spreads Portfolio
today as stocks continued to trade in a relatively small range.
One of our new speculation positions, Luminent (NASDAQ:LMNE)
provided a nice surprise, climbing to a midday high near $11.
The move provided a $0.69 premium in the synthetic position and
combined with the initial $0.25 credit, the play yielded a $0.93
profit in just two days.  Obviously we didn't plan to close the
the play so soon, but it's nice to have the opportunity with a
favorable early-exit return.  Clorox (NYSE:CLX) was the leader
in the industrial group, moving above $37 for the first time in
two months as traders continued to rotate into defensive shares.
Utility Company AES Corporation (NYSE:AES) also climbed back to
the top of a recent trading range near $58 and the consolidation
may eventually be resolved to the upside.  Our bullish position
in Atlantic Coast Airlines (NASDAQ:ACAI) appears safe for now as
the volatile issue is again testing its all-time high near $47.
On the downside, Advanced Energy (NASDAQ:AEIS) is returning to a
recent trading range near $20, and traders who are still in the
bullish credit spread at $22.50 should consider closing the play
for a small gain (unless they don't mind owning the issue).  The
cost basis, if assigned, would be just below $22.  Fortunately,
the renewed selling pressure in the broad market benefited some
of our bearish plays including; Aflac (NYSE:AFL), Union Carbide
(NYSE:UK) and Digene (NASDAQ:DIGE).

Questions & comments on spreads/combos to Contact Support
                           - NEW PLAYS -

One of our readers asked for some new speculation plays in the
small-cap group and based on recent technical indications, these
issues are excellent candidates for future upside activity.

DAVX - Davox Corporation  $11.50  *** Bracing for A Rally? ***

Davox (NASDAQ:DAVX) provides customer interaction management
solutions to more than 1,000 customers through superior and
proven software, services, and support.  Financial institutions,
utilities, airlines, telecommunications providers, insurance
companies, retail organizations, and other companies worldwide
benefit from the enhanced agent productivity, optimized customer
service, more effective management control, and rapid deployment
advantages provided by Davox's customer interaction management
solutions.  These solutions help organizations build profitable
customer relationships and lower the costs of interacting with
other businesses.

Davox shares have been gradually recovering over the past few
months and the company has an optimistic outlook for the future.
The CEO believes the increased demand for its Ensemble customer
contact suite and professional services offerings, as well as
continued demand for its Unison call management system will help
bring the company back to past valuations.  The balance sheet
continues to improve and Davox generated positive cash flows of
over $3 million in the most recent quarter.  The company also
secured 22 new-account customers, and existing customers placed
114 orders, demonstrating Davox's continued ability to deliver
reliable, easily integrated, and rapidly deployed solutions that
help its clients build and maintain strong business relationships.
In the coming year, total revenue is expected to increase above
the $100 million mark with earnings per share of $0.32 to $0.36.

Traders who agree with the optimistic outlook for the company's
share value can speculate in its performance in the short-term
with this bullish position.

PLAY (speculative - bullish/synthetic position):

BUY  CALL  MAR-12.50  VQ-CV  OI=59  A=$0.75
SELL PUT   MAR-10.00  VQ-OB  OI=0   B=$0.38

Note:  Using options, the position is similar to being long the
stock.  The collateral requirement for the sold (short) put is
approximately $350 per contract.

SOI - Solutia  $13.70  *** On The Move! ***

Solutia NYSE:SOI) and its subsidiaries produce and market a wide
variety of high performance chemical-based materials.  Solutia
creates solutions and products for customers in the consumer,
household, automotive and industrial products industries.  Their
products include SAFLEX plastic interlayer, adhesives and window
and industrial films; liquid, powder and waterborne resins; and
VYDYNE and ASCEND nylon polymers, chemical intermediates, and
nylon fibers.

This position surfaced in one of our primary charting programs
in the category of "Bullish Breakouts."  Indeed the move above
a recent trading range near $13 appears to suggest that further
upside activity will occur.  In addition, the excellent support
near our cost basis limits the risk in this position, providing
a great speculation opportunity for traders who are bullish on
the issue.  We will target a lower debit initially, to allow for
a brief consolidation in the issue.

PLAY (speculative - bullish/synthetic position):

BUY  CALL  APR-15.00  SOI-DC  OI=324  A=$0.80
SELL PUT   APR-12.50  SOI-PV  OI=735  B=$0.40

Note:  Using options, the position is similar to being long the
stock.  The collateral requirement for the sold (short) put is
approximately $475 per contract.

                      - TECHNICALS ONLY -

These plays are based on the current price or trading range of
the underlying issue and the recent technical history or trend.
The probability of profit from these positions is also higher
than other plays in the same strategy based on disparities in
option pricing.  Current news and market sentiment will have an
effect on these issues.  Review each play individually and make
your own decision about the future outcome of the position.

APOL - Apollo Group  $38.94  *** Disparity Play! ***

Apollo Group (NASDAQ:APOL) through its many subsidiaries; the
the University of Phoenix, the Institute for Professional
Development, the College for Financial Planning Institutes
Corporation, Western International University, and Apollo
Learning Group, is a provider of higher education programs for
working adults.  The company currently offers its programs and
services at 51 campuses and 80 learning centers in 35 states,
Puerto Rico and Vancouver, British Columbia.

A scan of option pricing disparities identified this position
and based on the technical outlook for the underlying issue,
it warrants further consideration.  While the premium received
for the (post-split) credit spread is rather small, the overall
risk is as well.  Those of you who favor this strategy and agree
with a bullish outlook for APOL may find the position to be a
suitable candidate.

PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-33.38  POU-NY  OI=87  A=$0.12
SELL PUT  FEB-35.00  OAQ-NG  OI=25  B=$0.38
INITIAL NET CREDIT TARGET=$0.31-$0.38  ROI(max)=23% B/E=$34.69


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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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