Option Investor

Daily Newsletter, Wednesday, 03/28/2001

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The Option Investor Newsletter                Wednesday 03-28-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
        03-28-2001        High      Low     Volume Advance/Decline
DJIA     9785.35 -162.19  9941.20  9695.81 1.30 bln   1083/1980 
NASDAQ   1854.13 -118.13  1925.30  1852.96 2.07 bln   1098/2606
S&P 100   588.31 - 17.27   605.58   584.87   totals   2181/4586
S&P 500  1153.29 - 28.88  1182.17  1147.83           32.2%/67.8%
RUS 2000  442.20 - 10.68   452.88   442.20
DJ TRANS 2765.08 - 37.41  2805.59  2746.99
VIX        33.22 +  2.53    33.95    32.30
Put/Call Ratio      0.86

Everybody Down

The catalyst for this latest round of bloodletting was two former
year 2000 high-flyers (which could be nearly anyone these days).
Electronic organizer king Palm (Nasdaq:PALM) got the rivulets
forming when it announced after the close on Tuesday that it
expects fourth-quarter earnings to fall short of estimates.
According to the company, it now expects to post a fourth-quarter
loss of $0.08 a share vs. the First Call estimate of a $0.03 per
share profit.

Palm's confession may have been good for the soul; unfortunately,
it wasn't very good for the stock price.  For the day, Palm shed
$7.44, or 48 percent, to close at $8.06.

Nor was Palm's confession very good for the competition.  Fellow
handheld contraption peddler Handspring (Nasdaq:HAND) got whacked
for $5.31 to $10.88 while Research in Motion (Nasdaq:RIMM) got
nicked $4.43 to $20.25.

Still, the handheld market's woes were small potatoes compared to
the outright despair displayed in the networking sector. This
morning Canadian telecom equipment supplier Nortel (NYSE:NT)
reported that it expects a per-share loss wider than it forecast
in February.  The company also reported that its 2001 projections
are unreliable (hey, who should know better?) and that it will
dismiss 5,000 employees by mid-year.  For the day, Nortel tumbled
$2.76 to $14.00, which, of course, was a new 52-week low.

Nortel's mea culpa quickly reverberated throughout the entire
networking sector. Cisco Systems (Nasdaq:CSCO), which was the
most active stock on the Nasdaq, skidded $2.38 to $15.75.
Meanwhile, Juniper Networks (Nasdaq:JNPR) crumbled $8.85 to
$43.89 and Corning (NYSE:GLW) slumped $3.49 to $21.50.

Another notable telecom loser was Lucent Technologies (NYSE:LU),
which had the misfortune of tapping the equities markets for its
Agere Systems (NYSE:AGRa) today.  Agere is a seller of
microelectronics and optical components used on communications
equipment and networks.  Agere was priced at $6.00 a share, a
considerable discount to the $15 to $20 share price Lucent had
anticipated as recently as last month.

Despite the lousy climate for tech stocks in general, and optical
component makers in particular, Lucent had no choice but to
proceed with the offering.  The company trashed its balance sheet
last year, causing its debt to balloon to unhealthy levels (over
$8 billion), and the spin-off will help clean up some of this
mess.  For the day, Lucent finished off $1.43 to $10.27 while
Agere finished up $0.02 to $6.02.

The seemingly never-ending tech sell-off was fully manifest in
most major market indices today, but nowhere more than the Nasdaq
Composite Index (COMPX).  The tech-heavy index was routed for
118.13 points, or 5.99 percent, to close at 1,854.13, putting it
smack-dab on its intermediate downtrend line.

I see a possible silver lining here.  While everyone is carrying
on about COMPX 1,750 or COMPX 1,500, there is an ever-so-slight
argument that it could hold 1,800.

Of course, for the COMPX to have any chance of standing firm, it
must get some help from the Triplets, meaning Microsoft
(Nasdaq:MSFT), Intel (Nasdaq:INTC) and Cisco Systems
(Nasdaq:CSCO).  All three finished off more than $2.00 today.

Meanwhile, in the Old Economy, traders and investors were once
again thinking bear market.  The Dow Jones Industrial Average
(INDU) lost 162.19 points, or 1.63 percent, to close at 9,785.35.
Of the INDU 30 components, only three finished the session up.
Johnson & Johnson (NYSE:JNJ) was the notable winner, closing up
$3.03 to $86.28 thanks to an upgrade from Morgan Stanley.

As for the INDU losers, the most notable was Disney (NYSE:DIS),
which lost $0.84 to $28.36.  In a surprising announcement, the
company said it will eliminate about 4,000 jobs, or 3 percent of
its worldwide workforce, to reduce annual operating expenses by
$350 million to $400 million.  If anything, the notion of folks
who used to earn a living masquerading as rats, dogs, birds and
dwarves having to seek employment elsewhere proves beyond a doubt
that no one is immune from a slowing economy.

Despite today's attrition, the INDU looks as if it will stay out
of bear-market territory (officially recognized by a close below
9,377) for the remainder of the week.  Technically, the INDU
appears to have support 9,650, if not more immediate support near
a weak uptrend line at 9,750.  In all honesty, though, predicting
support levels in this market has been as easy as picking
Powerball numbers.

In other stock news on Wednesday, ADC Telecommunications
(Nasdaq:ADCT) lost $2.25 to $8.31 after reporting that it expects
a second-quarter loss.  Like Disney, ADC expects to slash up to
4,000 jobs.

Yahoo! (Nasdaq:YHOO) also made news again today.  The king of the
Internet portals fell $0.63 to $14.94 despite being upgraded by
UBS Warburg.  However, the upgrade could be considered left-
handed at best.  Warburg upgraded Yahoo to a "hold" from a

Not that the rest of the Internet sector fared much better than
Yahoo, because it didn't.  Selling was widespread in the Internet
issues, as the AMEX Internet Index (IIX) tumbled 11 percent

Still, there is one sector of the capital markets thriving in
this contracting economic environment, and that's the treasury
sector.  The 10-year Treasury note was up 7/32 to yield 4.98
percent while the 30-year government bond shed 11/32 to yield
5.465 percent.

As for economic news, we were once again reminded that we are in
the midst of an economic downturn.  The Commerce Department
reported that new orders for durable goods fell 0.2 percent in
February, while new orders for capital goods - which tell us how
much companies are spending on new equipment and software -
dropped 4 percent.

Needless to say, every time the market gets slapped with a
negative economic data set, its eyes instinctively turn to the
Federal Reserve for comfort, which at this point may be a waste
of time and energy.  At this point, I think the Fed has done just
about all it can do.  After all, liquidity isn't the end all to
our economic downturn.  Clearly, the technology sector has
serious inventory overhang and pricing issues, which won't be
washed away by more market liquidity.

With that said, I wouldn't be surprised if the economy turns by
mid-summer, which means that the market will turn before then.
The fact is, the market is a discounting mechanism and I think
that most of the bad economic and earnings news is already
reflected in current stock prices.

Finally, I think that market pessimism has grown to levels that
probably necessities some sort of rally.  According to Bloomberg
and Investors Intelligence, pessimism about U.S. stocks surged to
its highest level in more than 16 months last week.  Keep in
mind, long before the economy and investor sentiment turns
positive, the market will probably be half way to reaching new

S.P. Brown
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FDC - First Data Corporation $60.53 +0.83 (+1.93 this week)

Atlanta-based First Data Corp. helps move the world's money.
As the leader in electronic commerce and payment services,
First Data serves more than two million merchant locations,
1400 card issuers, and millions of customers, making it easier,
faster, and more secure for people and businesses to buy goods
and services using virtually any form of payment.  Its money
agent transfer network includes approximately 101,000 locations
in more than 185 countries and territories.

After making an almost uninterrupted move from $19 to $50
during 1998 to 1999, FDC has been trading in a range from
$36.94 last September to resistance at the $57 level which
was penetrated once on February 16th.  This week's trading
pattern indicates that FDC may have broken out of its 18-month
trading range after clearing resistance at the 50-dma of
$59.19.  While FDC is considered a defensive stock with steady,
consistent earnings, it has not lost strength during previous
technology sector rallies, which often occurs with other
defensive sectors, like health care.  Over the last few weeks,
several excellent news items have been released confirming
the solid growth in demand for FDC's services.  For example,
on March 19th, Western Union (a subsidiary of FDC) signed an
agreement with China's national postal service, dramatically
expanding the company's presence in Asia, with 1000 locations
expected to be added the first year.  JP Morgan upgraded FDC
last week, stating that their new deal with China Post should
continue to expand their money transfer system, which
constitutes 50% of FDC's growth.  UBS Paine Webber and US
Bancorp Piper Jaffray also upgraded FDC, and US Bancorp Piper
Jaffray gave the company a year end price target of $72.
During last week's severe sell off in the Dow, FDC found strong
support at $55, and has since rebounded to higher support at
$58.36.  On Monday and Tuesday, FDC had difficulty clearing
strong resistance at $60, but on Wednesday the stock powered
through $60, and closed with a surge of buying on strong
volume.  Traders could consider taking positions on another
pullback to $60.  The next light resistance level is $62, and
a break above this level could be an entry point for
conservative traders.  Watch others in the sector like ADP
and PAYX.  We are setting stops at $58.50, so close positions
if FDC closes below this level.

BUY CALL APR-55 FDC-DK OI=  10 at $6.40 SL=4.50
BUY CALL APR-60*FDC-DL OI= 473 at $2.80 SL=1.50
BUY CALL MAY-55 FDC-EK OI=2385 at $7.40 SL=5.25
BUY CALL MAY-60 FDC-EL OI=2890 at $4.20 SL=2.50



ADBE - Adobe Systems $33.97 -2.63 (-1.72 this week)

A long-time leader in desktop publishing software, ADBE
provides graphic design, publishing, and imaging software
for Web and print production.  Offering a line of application
software products for creating, distributing, and managing
information of all types, the company generates nearly 75% of
sales through publishing software products such as Photoshop,
Illustrator, and PageMaker.  In addition, ADBE licenses its
Industry standard technologies to major hardware manufacturers,
software developers, and service providers, as well as
offering integrated software solutions to businesses of all

Those of you that joined us earlier in the month as we rode
ADBE down to its recent lows near $25, are likely licking their
chops in anticipation of a repeat performance.  Moving up ahead
of the recent bounce in the broader Technology market, the
software company ran out of gas late last week near the $36-37
resistance level.  Pulling back from the upper Bollinger band
(currently at $37.44) the stock is showing definite signs of
weakness.  The descending trendline (now at $37) turned the
bulls back with barely a whimper of protest, and if the $33.50
level fails to provide support, we could see the bears drive the
stock back down for a retest of its lows.  Adding to the bearish
picture is the daily Stochastics oscillator, rolling down out of
the overbought zone, and completing a solid pattern of bearish
divergence with respect to the price action between the
mid-January highs and the highs last week.  Earnings warning
season is upon us, and we saw the first installment last night
from the likes of NT, PALM and BGEN.  The result was a hobbling
of the Biotechs, and absolute carnage in the Semiconductor and
Networking sectors today, leading the NASDAQ back to test its
lows from last week.  Imagine what will happen if we get a
warning from a company in the Software sector.  It would likely
wreak havoc on the Computer Software index (GSO.X), which gave
up almost 10% today anyways.  Conservative entries will
materialize as selling volume pushes our play below the $33
level, while more aggressive traders may want to target a
rollover following an oversold bounce to the $36-37 resistance
area.  Monitor the GSO.X to confirm continued bearish sentiment
in the sector before playing and place stops at $37, just in
case the bulls decide to attempt another rally.

BUY PUT APR-40 AEQ-PH OI=3317 at $7.10 SL=5.00
BUY PUT APR-35*AEQ-PG OI=1767 at $3.60 SL=1.75
BUY PUT APR-30 AEQ-PF OI=1509 at $1.50 SL=0.75
BUY PUT APR-25 AEQ-PE OI=3749 at $0.65 SL=0.00


NSM - National Semiconductor $26.00 -2.90 (-3.65 this week)

National Semiconductor is a leading technology provider of
analog solutions and related semiconductor products.  The
company promotes its system-on-a-chip (SOC) components, which
combine microprocessors with logic, memory, and other functions
on a single chip.  Its Geode SOC products serve a variety of
markets; particularly wireless communications and power
management.  Customers include Compaq, Nortel Networks and

Ironically enough, chip stocks were strong in the down markets
of late.  Some investors felt the sector, which has been in a
perpetual downtrend for some time now, was the best candidate to
yield positive results.  But it now looks like they could fall
back to the wayside; especially given the tough business market
ahead.  The downturn in tech spending, which translates to high
inventories and low demand, is a critical issue that isn't going
to disappear any time soon, despite the oversold conditions.
The influential brokerage firm, Lehman Brothers, recently
started coverage on NSM and rivals Analog Devices (ADI), Linear
Technology (LLTC), Maxim Integrated Products (MXIM) with a
measly Market Perform due to the heavy downside risk.  Today
Goldman Sachs and Banc of America came forward with similar
Market Perform ratings on NSM.  This coverage combined with the
major sell-off across the broad markets brought NSM down a
notch, to say the least.  On the day, NSM was cut down $2.90, or
10% on 2.4 times the ADV.  That's some serious selling!
Currently, NSM is perched just a smidgen below the 10-dma
($26.49).  More downside action from this level or a distinct
rollover off the 5-dma ($28.35) offer traders a variety of entry
points in a declining environment.  Better confirmation of a
true breakdown would be for NSM to slide under the immediate
support at the converged 30 & 50 DMAs, tracing $24 and $25, on
heavy volume.  If there's a major slide, expect buyers to start
nibbling as NSM approaches the $20 level. Lock in gains early!
If our expectations don't come to fruition, we'll exit the play
on a close above the $29 mark.

BUY PUT APR-35 NSM-PG OI= 34 at $9.20 SL=6.25
BUY PUT APR-30*NSM-PF OI=596 at $4.70 SL=2.75
BUY PUT APR-25 NSM-PE OI=699 at $1.50 SL=0.75



ERTS - call play
Adjust from $51 up to $52

OPWV - put play
Adjust from $25 down to $22

AETH - put play
Adjust from $17 down to $15

VRTS - put play
Adjust from $55 down to $53

ENE - put play
Adjust from $62 down to $60

DPMI - put play
Adjust from $51 down to $48


ELNT $26.94 -3.00 (-4.75) There was no doubt that traders were
taking profits today.  The sell-off was hard and fast across the
broad markets.  After a failed attempt to break $32 during
amateur hour, ELNT went into sell mode.  The $29 support managed
to keep the share price afloat during the doldrums of lunch,
but the bears returned in force.  Our $29 closing stop and
notably, the 10-dma ($27.65) were violated; hence, we're exiting
the play this evening.

QCOM $54.81 -5.06 (-4.06) QCOM had built a very nice ascending
wedge into the $60 level and was poised to make a move.
Unfortunately, PALM and NT played the spoilers with warnings in
after hours.  Right out of the gates, QCOM slipped below our
closing stop level of $57 and began settling along the $56 line.
With the NASDAQ accelerating to the downside throughout the
session, entry into this call play should have been avoided
entirely.  As went the brief relief rally of last week goes our
QCOM play after it closed under our stop level.

VRSN $33.06 -4.56 (-0.31)  VRSN had been hammering out a support
level at $32 throughout last week.  Monday's move from that
consolidation level and through $35 caught our eye.  The action
on Tuesday was picture perfect as VRSN opened slightly lower, then
exploded toward $39.  It appeared that VRSN, along with the NASDAQ,
was making a short-term rally attempt.  But, PALM and NT's warnings
were all it took to crush this fragile market's uncertain hope.
This is a good example of how sentiment can change on a dime and
the importance of stops.  VRSN closed below our stop of $34 and
we are disappointed to drop it this evening.


MDT $46.55 +1.11 (+1.55)  While the market initially gave MDT
a lukewarm response to the company's reiteration of their
earnings expectations, the trend was defined today.  On Tuesday,
First Union Securities, US Bancorp Piper Jaffray, and Prudential
Securities all upgraded MDT, which helped to give the stock a
temporary lift in the morning.  However, the news released by
Nortel and Palm last night devastated the tech sector today,
which helped the defensive sectors like health care attract money.
MDT closed above our stop level with a bullish candlestick
pattern, and as such, we are dropping it this evening.


Broad Market Indicators To Watch
By Mary Redmond

No one knows if last week marked the beginning of the end of the
downfall in the indexes, although many analysts have been trying
to pinpoint a particular level which is "the bottom."  Instead of
trying to decide which analyst is right, traders might want to
watch for several key indicators which contributed to the
decline, and are starting to turn around.  In addition, it is a
very good idea to take fast profits and use as many technical
indicators in tandem as possible.

One of the most important indicators of future market action is
the action of bond yields.  We want to see money coming out of
bonds and into the stock market.  Since last fall, the ten year
bond yield(TNX.X) has been on a strong downward trend.  The TNX.X
made a big move up on Tuesday of this week, and has so far held on
to most of its gains.  If the TNX.X drops precipitously again, this
could indicate additional downward momentum for the major indexes.

In addition to simply watching bond yields, the spread between
high grade corporate bonds and medium grade corporate bonds is
key to recovery.  We have not yet seen enough of a tightening in
credit spreads to stimulate the corporate debt market.  Bank
lending is still very tight, in fact, worse than it was during
the 1990 recession.  One way to monitor the spread between AAA
and medium grade corporates is through the Barron's confidence
index.  This measures the high grade corporate yield divided by
the intermediate grade corporate yield.  A rise in the confidence
index can imply that the financing window may be opening again for
corporations.  The confidence index is currently 88.2 compared
to the year ago level of 93.2.  This comes from a best grade
yield of 6.8% divided by an intermediate yield of 7.4%.  In
comparison, last year's yields were 7.71% vs. 7.94%.

Another important factor is liquidity entering the market.
It took a long time for the massive flood of cash which entered
the market last year to dwindle to a trickle, and it may take
even longer for this trickle to become a tidal wave again.  While
money market funds have already taken in over $200 billion this
year, the weekly moving average of cash to equity funds has been
varying between negative levels and $1 or $2 billion per week.

It is also important that companies start giving optimistic
projections for the second half of 2001.  Some companies may
be reluctant to state overly optimistic projections for a number
of reasons.  In addition to Reg FD, many companies have been
bombarded with class action law suits over the last few months.
It has been a field day for lawyers.  If you look at the news
released by companies which gave optimistic guidance for the
coming quarters and then warned, you will often see five or six
law firms lined up waiting to suck the blood out of the wounded
beast.  Most shareholder class action suits amount to a settlement
in which the lawyers benefit and the shareholders get zero,
nonetheless, it is an added expense companies don't want.  So, at
this point, many companies feel it is safer to give no guidance
going forward than to face additional lawsuits.

While we are waiting for a strong upward trend, there have been
a few profitable trades for traders who are able to pinpoint key
entry and exit points, as well as those who have a solid reading
of the technical indicators.  One of the best ways to trade is to
look at the market first, then the sector, then the stock's
pattern, then the TNX, TYX, VIX, QQV and VXN, as well as the
stochastics and other indicators.

As an example, take a look at one of the one of our successful
call plays from this week.  PMI is a mortgage insurance
company which was bucking the downward trend by trading in a
range from approximately $55 to $59 since the end of January.
The stock fell sharply after the initial Fed rate cut, and
pivoted at the $48 level.  Since that point, it traded in a
strong upward channel.

You can see the upward channel which started around March 13th,
at which point the Dow was over 10,400.  While the Dow proceeded
to tumble, PMI demonstrated excellent technical strength,
especially considering the fact that the IUX.X was performing
poorly.  This can be partly attributed to the fact that the stock
is a small cap($2.6 billion) value stock with a low beta of .69,
which indicates that it has a low sensitivity of response to
overall market moves.

When viewed on a 30 minute chart, you can see how the stochastics
are indicating a very strong upward move.  In addition, look at
the series of higher lows the stock formed over the last week.
An article which appeared in the Wall Street Journal last week
discussed how PMI and other mortgage insurers might likely
benefit from reductions in interest rates, as the increase in
mortgage applications would over shadow the decrease in
mortgage insurance.

You see how there is heavy resistance at $60? The longer the
stock has been trying to penetrate resistance without success,
the stronger the resistance is.  If there is very strong
resistance, then a breakout above this level is likely to
have real momentum.

So, we are going to consider where our entry points would be.
There are different ways to play it.  For example, last week
was a tumultuous week with a very dramatic turnaround in the

On the 22nd, the VIX reached a very high level of over 40.  There
have only been four times in the last several years when the VIX
reached this level, and each was a turning point.  At this point
PMI was at support at $58.  When the Dow started to turn around,
traders could have taken positions in PMI, which would have been
an aggressive entry point.  At this point, the IUX also started
to turn around.

Traders could also have waited for the 23rd, and a confirmation
of the rally.  At this point, the 10 year treasury bond yield(TNX.X)
had made a significant move upward of 10 basis points.

Alternatively, take a look at what happened on Monday.  The stock
broke above $61 with strong volume and a very bullish candlestick
pattern.  A trader who bought at $62 could have sold at $64 for
a quick profit.

In conclusion, this is probably one of the most difficult trading
environments in many years.  Traders who can hone their skills at
this point might find themselves more able to prosper in easier


OPWV - Openwave Systems Inc. $18.71 -4.30 (-4.84 this week)

Openwave Systems Inc., the combination of Phone.com and
Software.com, is the worldwide leader of open Internet-based
communication infrastructure software and applications.
Openwave's customers are communication service providers
worldwide, including wireless network operators, wireline
carriers, internet service providers, portals, and broadband
network providers.  Openwave was formed in November of 2000
following the merger of Phone.com Inc. and Software.com Inc.

Most Recent Write-Up

OPWV bucked the trend on one of the strongest market rallies we
have had in weeks.  While OPWV moved in a vary narrow range
between $24.56 and $25.49 on Monday, OPWV experienced a sharp
drop to $21.15 on Tuesday morning, and a subsequent rally to a
lower high consistent with the two week pattern.  Tuesday's
selling occurred on heavy volume of over 7 million shares, nearly
15% higher than the average daily volume, which sets OPWV in a
precarious position going forward.  If the markets experience a
pullback or any profit taking in the next couple of days, OPWV is
likely to roll over from the $23 level to the next support level
at $21.  The near term outlook for OPWV seems particularly bleak,
considering the fact that Robertson Stephens downgraded the stock
from a strong buy to a buy on Monday.  While analyst Marianne Wolk
states that OPWV has a $300 mln backlog of business, the company
is experiencing some near term weakness in messaging due to the
difficult macro environment.  Aggressive traders could take
positions at current levels, particularly if others in the sector
such as CMVT are weak.  Conservative traders could wait for a
break below $22.62 on strong volume, particularly if accompanied
by weakness in the broad indexes.  We are keeping stops at $26,
so close the position if OPWV closes below this level.


Massive volume poured into OPWV, taking the stock firmly below the
$20 level.  There's blood and the shorts are circling!  This type
of violation of $20 has been providing large profits to the shorts,
AETH being one of them on our put list.  To play OPWV puts, look
for a rollover from overhead resistance at $20 or on a high volume
breakdown below $18, the low today.  Use the NASDAQ direction to
aid in entering this position.  If it's weak, these types of tech
stocks will fall prey to the shorts.

BUY PUT APR-25 UGE-PE OI=998 at $7.30 SL=5.75
BUY PUT APR-20*UGE-PD OI=834 at $3.50 SL=1.75



They're Back!  Tech Warnings Draw out the Bears...

The Markets fell today, sending technology and blue chip
stocks down sharply in reaction to another round of earnings
warnings and job cuts.  Nortel (NYSE:NT) warned after the close
Tuesday, saying that revenue would miss previously lowered
estimates in the first quarter.  The company now anticipates a
first-quarter loss of 10 to 12 cents a share vs. previous
estimates of a loss of 4 cents.  Nortel also said it would cut
another 5,000 jobs in 2001 on top of the 10,000 job cuts
previously announced.  Nortel fell $2.76 to $14.00 and pulled
down all of the fiber-optic and networking stocks. Cisco Systems
(NASDAQ:CSCO) fell to a new 52-week low of $15.75 and Corning
(NYSE:GLW) lost $3.52, finally stopping at $21.47.  Palm (NASDAQ:
PALM) warned after the close Tuesday of a shortfall in its fourth
quarter and announced that it would cut 250 jobs.  The DOW wasn't
exempt, as Walt Disney (NYSE:DIS) announced that it's slashing
4,000 jobs worldwide, or 3.7% of its work force, due to the
softening economic environment.  Profit taking was in vogue as
investors worried on the potential for further Tech warnings
and the lack of forward visibility.  The Drug sector was one of
the few areas of safety as Merck (NYSE:MRK), Johnson & Johnson
(NYSE:JNJ), and Eli Lilly & Co. (NYSE:LLY) all advanced.

Summary of Previous Candidates:

Covered Calls: (Margin not used in calculations)

Stock  Strike Strike Cost   Current  Gain  Potential
Symbol Month  Price  Basis  Price   (Loss) Mon. Yield

NVLS    APR    40    37.56  44.38    $2.44   5.3%
NVDA    APR    45    42.81  68.11    $2.19   4.2%
ERTS    APR    45    43.00  55.88    $2.00   3.2%
Positions closed: SNPS

Naked Puts:

Stock  Strike Strike Cost   Current  Gain  Potential
Symbol Month  Price  Basis  Price   (Loss) Mon. Yield

ERTS    APR    45    42.81  55.88    $2.19  10.5%
NVLS    APR    35    33.81  44.38    $1.19   9.3%
NVDA    APR    40    38.75  68.11    $1.25   8.1%
NVDA    APR    40    38.94  68.11    $1.06   8.1%
MU      APR    30    29.38  44.25    $0.62   5.5%
Positions closed: SNPS

Sell Strangles:

Stock  Strike Strike Cost   Current  Gain  Potential
Symbol Month  Price  Basis  Price   (Loss) Mon. Yield

GMST    APR    30    29.19  29.69    $0.50   4.4% Close or Cover?
GMST    APR    60    60.69  29.69    $0.69   6.2%

JNPR    APR    30    29.06  43.89    $0.94   8.3%
JNPR    APR    80    80.88  43.89    $0.88   7.8%

VECO    APR    30    28.75  43.75    $1.25  13.3%
VECO    APR    55    56.00  43.75    $1.00  11.0%

Naked Calls:

Stock  Strike Strike Cost   Current  Gain  Potential
Symbol Month  Price  Basis  Price   (Loss) Mon. Yield

WWCA    APR    50    50.62  42.13    $0.62   6.0%
GENZ    APR    95    95.94  89.79    $0.94   5.9% At Resistance
CHKP    APR   110   111.25  50.50    $1.25   5.7%
PDII    APR    85    85.62  60.88    $0.62   5.6%

Credit Spreads:

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

EMR   $66.31   $61.06  APR80c/75c  $0.75  $80.75  $0.75  Open
SII   $74.80   $71.29  APR90c/85c  $0.80  $90.80  $0.80  Open
LEN   $39.04   $43.30  APR30p/35p  $0.80  $34.20  $0.80  Open
MMM  $103.63  $104.83 APR120c/115c $0.80 $115.80  $0.80  Open
Positions closed: HAL, NBL

New Candidates:

There will be no new candidates this week as Ray is travelling
abroad on a visit to one of the most popular European trading
venues; The London International Financial Futures and Options
Exchange (LIFFE).  In the interim, readers who participate in
writing covered calls may benefit from a review of this common
option-trading strategy.


Selling Covered-Calls: A Conservative Approach

With the recent indications of a potential market bottom in the
technology group, it's a great time to review the fundamentals
of one of the most common stock-option strategies.

Investors usually write covered-calls to generate monthly income,
collecting the premium for the sale of an option against a stock
position in his or her portfolio.  This conservative strategy can
be used effectively on all type of stocks as long as the outlook
(fundamental or technical) for the issue is favorable.  One of the
advantages to this approach is that it allows new investors to
learn successful trend-trading techniques with a small margin of
safety while managing the combined position for upside profit and
downside risk.  The underlying basis for this strategy is a high
probability of limited profit.  The primary advantage to a novice
trader is the technique is easy to use and the resultant position
is more conservative than outright stock ownership.  In writing an
option on the stock, the investor has insured the issue against a
future drop in value.  Of course, the downside risk in ownership
is not eliminated, only reduced.  In addition, the actual cost of
opportunity loss or potential upside movement can be substantial.
There are other, more subtle benefits and disadvantages but these
are the most common reasons that investors choose (or avoid) this

Each week we receive a number of questions regarding the various
approaches to the investment strategy of selling covered-calls.
In our personal portfolios, we utilize the "in-the-money" covered
write as a primary technique for consistent profits.  This method
is easy to master and works in harmony with a low maintenance, low
risk investing style.  The theory behind this approach is to be
"aggressively conservative."  This tactic is in contrast to the a
popular "conservatively aggressive" outlook used by many traders,
where the underlying position is bullish, (based on OTM calls) and
requires an upward movement from the stock for profit.  In general
we are traditional, long-term investors with contempt for excessive
risk and the potential for large losses.  Studies suggest (and our
results confirm) that the average investor will make substantially
greater returns through the consistent profits from "in-the-money"
covered writing than he/she would using the high risk, high reward
approach of more aggressive positions.

You may think that this technique is far too conservative to yield
favorable returns however, the "magic" ingredient of the strategy
is the power of compound interest.  Covered call writing allows
investors to potentially compound their returns on stock ownership
each month of the year.  Unfortunately, while most investors begin
writing covered calls with the goal of compounding their money on
a monthly basis, many lose focus of the fundamental outlook of the
technique (consistent, low risk profits) and begin to concentrate
on higher, single transaction returns.  This is a common mistake
and it can substantially increase risk and the probability of loss.
The market historically offers a 2-4% monthly (annualized) return
for this strategy but with diligent research and analysis, and
proper money management, the margin of profit can be increased.
In our personal portfolios, we attempt to establish positions
that offer on average, a 4-6% (8-12% on margin) monthly return on
investment.  Even with this meager profit, the long-term portfolio
growth is excellent, due to the unique mathematics of compounding.
Earning 3% per month in a personal portfolio, without compounding
or margin trading, equates to a 36% yearly return.  We have yet to
find a bank or CD that matches that rate.  Obviously, most retail
option traders regard a 3% monthly return as far too low.  In fact,
why would anyone want such a paltry reward when the market offers
such great potential for wealth.  There is answer is quite simple:
RISK.  Any strategy that yields 10% will be riskier (on a purely
theoretical basis) than one offering a 3% return.  The old adage,
"The greater the risk, the greater the reward" is quite accurate.
Regardless, some of you will learn the hard way, just as we did.
After getting hammered on the majority of aggressive positions, we
made the transition to ITM covered-writes with lower yields.  Now
our portfolio value grows (most of the time) on a consistent basis.

The goal of the covered-call writer is to have a good selection of
favorable positions with adequate downside protection.  With this
approach, an investor reduces risk by entering several stock and
option plays with a predetermined conservative profit target for
each one.  We strive for a 5-8% monthly yield in the newsletter
but again with a lower profit target, the higher the probability
of a favorable outcome and the lower the risk.  To further reduce
the potential for catastrophic loss, a trader should diversify his
market exposure through a wide variety of covered-call positions.
The stocks you purchase should generally represent companies of
different types in a variety of favorable industries.  Most novice
investors ignore this principle and consequently, their portfolio
losses are substantial when a heavily weighted sector falls "out
of favor."  Many experts suggest you should limit each investment
to no more than 10% of your overall portfolio value.  This is very
important to the success of the covered call strategy as you don't
want one issue to have a significant impact on your overall gains
or losses.  The fact is, no one really knows what a specific stock
is going to do in the future.  History suggests that even the most
prolific traders are correct in only slightly more than one-half
of their directional forecasts and that statistic reinforces our
basis for choosing to hedge poor selections with "in-the-money"
covered writes.

Before you open any position, it is important to understand the
strategy that you are using and identify the specific goals for
that particular trade.  You can't make good decisions without
knowing the mechanics of a specific technique.  In addition, don't
use complex or advanced methods simply because they are intriguing.
The best strategy is usually the simplest one that accomplishes
your goals.  Prior to executing a transaction, you should know
exactly what the break-even (cost basis) point is, and be prepared
to take action if the underlying issue reaches that price range.
Once you have a candidate in mind, do your homework!  Study the
company and the calendar; upcoming events, earnings dates and any
other scheduled reports.  When you have a superior knowledge of a
stock and its industry, you are way ahead of the investor that
trades simply on intuition or outside advice.

Portfolio management is critical to the success of any portfolio.
After you take a position in a particular issue, stay informed by
monitoring all the news and announcements affecting that issue.
Observe the daily progress of the your stocks and realize that you
have the ability and control to adjust or close the position at any
time.  Obviously you do not need to check the prices on an hourly
basis, but we do recommend that you review each session's closing
quotes.  News and public opinion can have a significant impact on
a stock's price and unfortunately, it is impossible to research
"future" events before you buy an issue.  The key is to be fully
prepared for any outcome because the most difficult lesson comes
when you close a losing trade.  Indeed, it is very hard to learn
to exit unsuccessful plays in a timely manner but the simple fact
is, there is no reason to hang on to a losing position when there
are so many other profitable plays that deserve your time and
money.  Accept your losses, learn from your mistakes (evaluate
each one critically) and move on!  With any strategy losses are
inevitable and instead of being surprised, you must anticipate
them.  History has proven that a percentage of the covered write
positions selected will be unprofitable thus, when the situation
arises, it is not regarded as a failure but rather an integral
part of the trading system.  Your personal portfolio should be
evaluated based on the sum of its positions, rather than each
transaction.  In this manner, success is gauged by growth in
portfolio value and the losses become less significant.  That is
one of the principal reasons for entering several positions; it
becomes much easier to identify and act on a potentially negative
play when it doesn't have a substantial effect on your overall

The concepts of most exit and adjustment strategies are relatively
simple but there is no way to develop a specific guide for proper
position management.  With stock and option combinations, the key
is to evaluate the risk-reward outlook of each possible scenario
and construct a position that fits your trading plan and technical
outlook for the underlying issue.  Success with this strategy lies
in one objective; a consistent flow of monthly income with limited
portfolio risk.  The focus of play selection and management should
be to continually generate an acceptable level of option premium
while protecting against the potential for downside losses.  Any
positions that become unfavorable due to changes in the fundamental
or technical characteristics of the underlying issue should be
removed from the portfolio before they can generate significant
deficits.  Catastrophic failures are not unavoidable but they can
be sufficiently managed to reduce the effects of the shortfall.
Obviously, each situation will require a different solution but in
general, a trader should try to limit individual position losses
to 20%.  Unfortunately, there are some occasions when issues fail
without warning, leaving no opportunity for exit or adjustment.
Unexpected events simply occur; earnings warnings, shareholder
lawsuits, negative news in the industry or sector and changes in
public sentiment.  All of these activities can affect the success
of an individual position but with a diversified portfolio, the
long-term effects are minimal.

Our approach to "in-the-money" covered calls is designed to lock
in profits whenever possible and reduce the inevitable losses to
a minimum.  A rise in share value is the ultimate goal of stock
ownership and with this strategy, a significant short-term move
can provide additional opportunities for profit.  When the share
value rises substantially after the initial position has been
established, you have several choices.  You can do nothing, get
"called-out" and accept the original return that was established
when the play was opened.  If the option is priced near parity,
you can close the play early or, you may also choose to adjust
the position to match the new outlook for the underlying issue,
"rolling" the call up and forward to a higher strike price.  When
you roll up (repurchase the current sold call and sell a higher
strike call), the profit potential of the position is increased.
Unfortunately, the downside break-even point is also increased by
the amount of debit required to complete the transaction.  That
is the main reason most traders transition to a future expiration
date; it reduces the debit required for the new position.

While it is not always compatible with our weekly candidates,
there are a number of benefits and advantages to long-term stock
ownership.  If that is your intention, additional measures are
necessary when utilizing "in the money" covered-writes.  As
expiration nears and the time-value premium disappears from the
written option, you should consider rolling forward to reduce the
likelihood of early assignment.  The overall profit potential of
the position will be increased and the risk versus reward outlook
for the combination can be adjusted, consistent with your forecast
for the movement of the underlying issue.  With deep-in-the-money
calls, most of the time premium vanishes long before expiration.
However, as long as time value remains in the call option, there
is little risk of early assignment.  When the option price (bid)
falls to parity or a discount, there is a considerable probability
of exercise by arbitrageurs; specialists and floor traders who do
not pay commissions for trading.  When this situation occurs, you
should endeavor to roll-forward or adjust the position in some
manner that prevents a monetary loss through unexpected assignment
of the short option.

Good Luck!


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