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Daily Newsletter, Thursday, 03/29/2001

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The Option Investor Newsletter                 Thursday 03-29-2001
Copyright 2001, All rights reserved.                        1 of 2
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        03-29-2001        High      Low     Volume Advance/Decline
DJIA     9799.10 + 13.80 9882.800  9687.60 1.24 bln   1486/1563 
NASDAQ   1820.57 - 33.56  1876.74  1802.76 2.07 bln   1471/2137
S&P 100   584.90 -  3.41   592.66   577.75   totals   2957/3700
S&P 500  1147.95 -  5.34  1161.69  1136.26           44.4%/55.6%
RUS 2000  441.53 -  0.67   446.01   439.91
DJ TRANS 2753.43 - 11.65  2777.59  2749.50
VIX        33.83 +  0.61    34.51    32.16
Put/Call Ratio      0.91
******************************************************************
Window Dressing That Looks More Like Striptease!

If this is window dressing then I don't want to be in the
markets when the clothes come off. The Dow rambled 100
points on either side of the flat line to end only barely
positive. The Nasdaq fought off continued tech warnings
to close only 28 points from a new low. This is about as
exciting as a root canal! Fund managers are faced with
no targets to buy which will make them look good and a
flood of companies they need to sell to keep them from
looking bad.







This may be a good news bad news joke. Fund managers may
be dumping tech stocks to avoid having investors wondering
why they were still holding a company that is down -75%
for the year. Next week they may be buying those same
companies back because they are still the best prospects
for profits when the markets recover. While most funds
are already done with this end of quarter slight of hand,
there is still the fear that Friday could be a flush day.

With the Nasdaq closing near a new low investors that
usually dump tech stocks in April and buy them back in
October may decide to quit early and avoid the rush.
This may not be a factor considering the $3 trillion in
cash on the sidelines but still something we need to
watch.

The tech warnings from earlier in the week are giving
way to a rash of non-tech warnings. Ryder, Delphi, Coca
Cola Enterprises, International Paper, Federal Mogul,
Ingersoll Rand, to name a few. Everyone knew techs were
suffering from the economic slowdown but the non-techs
have been fairly quiet. Today's wake up call by IP, IR
and CCE shows that everyone is being impacted.

The tech giants are still painting a grim picture. INTC
says no improvement for 18 months. CSCO says no improvement
for at least three quarters. Others simply say they see
no end in sight. Where is the reason to buy? Would you
want to buy a company today because it appeared cheap
only to have them warn next week that earnings would really
be double digit losses? Several have said that this week.
Your cheap company suddenly became much cheaper.

First call said tech warnings are already up over +81%
for this quarter and the worst period for warning is
still ahead of us. Over 210 S&P-500 companies have
pre-announced and 150 of them warned of earnings problems.
According to First Call this is already the worst quarter
on record for warnings.

The economic picture is suddenly looking worse. The
fourth quarter GDP came in at a revised +1.0% and the
worst number since 1995. Estimates going forward range
from a minus -.3% to +.8% and continuing to decline.
The good news is simply the bad news cannot get much
worse. There are still over valued stocks although not
many.

Downside risk is minimal for many stocks. CSCO, ORCL
and SUNW at $15 and LU at $9 for example. Even the
networkers have finally broken down with CIEN and JNPR
the last to fall now trading near $40. When the generals
finally fall the end is near. The trouble becomes "who
is left to buy them?" The retail investor has become so
frustrated that there is little or no interest in the
markets. The day trading boom has bust. Ameritrade and
E*Trade for instance are heading for penny stock status.
This is a glaring example of the mood change for investors.

The good news, those of us still in the market have some
really good values to buy right now. When we were buying
BRCM, ITWO, CMRC, JNPR, CIEN at $200, a normal day could
produce $15-$20 swings. Today CSCO, SUNW and ORCL cost
less than the intraday swings we were accustomed to trading.
I can't tell you how many options I bought and sold that
cost more than the stock for these companies sells for
today. If the Nasdaq goes to 1700 or even lower it would
be impossible to lose a lot of money on these stocks.

Leaps on the QQQ are very cheap. The Jan-2002 $45 calls
are only $5.40 and the upside potential is incredible.
The Jan-2003 $50 leaps are only $7.10. Will tech stocks
recover? Absolutely! The only question is when. The
markets and talking heads are building a wall of worry
that the markets must hurdle. Good! That makes longer
and stronger rallies. The current administration will
get a tax cut passed. They will press for economic relief.
The Fed will continue cutting rates. The roadmap is in
place and real investors will profit possibly more than
in the 1999 rally.

The choices to buy are smaller with many companies heading
into oblivion. The quality companies, which can be numbered
on both hands, will receive huge amounts of money once the
buying begins again. Dot.coms with no game plan and no
earnings will be acquired or simply fold. That limits the
number of stocks available and forces money into tighter
and tighter groups. The broad market rally from 1999 will
be a memory and we will see a very narrow rally in 2001
but in my opinion one with very high velocity.

The major problem we still face is timing. Nobody knows
when we will turn the corner and start building on the
future. It could be next week, next month or even after
the summer. The trigger will be the same as it has been
for as far back as markets have memory. Evidence of a
rising economy and increased earnings. Once investors
see even a glimmer of hope in those areas the gold rush
for 2001 will be on. Until then we still need to watch
and wait. The put/call ratios are rising (.91) and the
VIX is climbing again. This would indicate that there
may be another dip in our future. Trade the bounces with
the emphasis on TRADE. As option investors the only long
position I would take with the intention of holding would
be 2003 leaps. Everything else is a very short term trade.

Enter passively, exit aggressively!

Jim Brown
Editor

If you have not reserved your seat at the Spring Trading
Expo here in Denver on April 5th-9th then you are missing
the best seminar we have ever held. This power packed
four-day event is structured to fully educate you not
only on advanced option strategies but stock analysis
as well. This will make you a better and more profitable
trader.


************************************
TOPICS and SPEAKERS
3rd Annual Trading Expo
April 5th-9th, Denver Colorado
************************************

Jeff Bailey, Editor, PremierBriefing.com
Learn the basics of Point and Figure Charting while analyzing
how supply and demand on an institutional level affects the
markets and the stocks you want to trade.

Mark Skousen, Ph.D., Editor, FORECASTS & STRATEGIES
The Global Economy and its Impact on Us.
Learn from a professional economist who turns his understanding
of economics into highly valuable investing advice.

Harry Browne, Author of Fail-Safe Investing
Sixteen Golden Rules of Failsafe Investing.
A powerful session that translates the essence of the book
into guiding principles.

Jim Brown, Founder, OptionInvestor.com
Austin Passamonte, Editor, IndexSkybox.com
Jeff Bailey, Editor, PremierBriefing.com
Preparing for Battle.  This is a very popular session where
multiple speakers team together offering insights on: planning
your trades and the combination of research, market factors, and
choosing your hot list.

Tom DeMark, Author of three books on DayTrading Options
Day Trading Options.  An extremely popular subject taught by one
of the world's foremost authorities on chart analysis.  Tom wrote
the book on day trading options, literally.

Steve Nison, Author, Japanese Candlestick Charting Techniques
Candlestick Charting.  Is that a doji or an evening star formation?
How can this benefit your trading success?  Candlestick chart
analysis is another hot topic that traders are always eager to
learn.  Nison is internationally recognized as the "Father of
Candlesticks" and has written two books on the subject.

Austin Passamonte, Editor, IndexSkybox.com
Buzz Lynn, Contributing Editor, IndexSkybox.com
Beating the Market with Indexes.  This is another tag team event
where you'll hear from two of our staff from IndexSkybox.com as
they discuss topics like:  Don't Pick Stocks, Pick Markets; and
Market Timing Equals Sector Profits.

Rance Masheck, President, SpreadTrader.com
Calendar Spreads & Bull Call Spreads.  Some of the first strategies
a beginner will encounter in spread trading are these two spreads.
Both simple and effective they continue to draw experienced traders
over and over again.

Mark Skousen, Ph.D., Editor, FORECASTS & STRATEGIES
Scrooge Investing - The Best Bargains in Beaten Down Stocks for
2001.  This is a great topic and Mark's background as an economist
really offers some new insight into the challenge of choosing your
investments.

Jeff Bailey, Editor, PremierBriefing.com
Calculating the Bullish Percent.  Applying your new knowledge
in Point and Figure charting to decipher how many stocks in
a sector are showing buy signals.

Jim Brown, Founder, OptionInvestor.com
Austin Passamonte, Editor, IndexSkybox.com
Pre-Market Analysis.  A very popular session where multiple
speakers team together offering insights on: Pulling the Trigger,
Amateur Hour, and Market Hype.

Dick Arms, Inventor of the Arms Index, Founder, ArmsInsider.com
Increase your profit potential with Equivolume Charting, volume
adjusted moving averages and the TRIN

Derek Baltimore, Co-Editor, IntradayTrader.com
Risk Management in a declining Market

Buzz Lynn, Contributing Editor, IndexSkybox.com
Sector Trading with IShares.  You may know of DIAMONDS for the
Dow Jones, SPDRs for the S&P 500, and the QQQs for the NASDAQ but
there is a growing list of IShares and HOLDRS that offer great
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Jon Najarian, Founder, Mercury Trading, Floor-Trader CBOE
Successful Option Trading. "Doctor J" is the name and options is
the game.  Jon has twenty years of experience as a professional
option trader.  His firm makes markets in over 90 high-tech and
biotech stocks and trades up to 40,000 options per day.

Matt Russ, Editor, OptionInvestor.com
How to Profit from Option Pricing, Market Making and Volatility

Rance Masheck, President, SpreadTrader.com
Straddles. An excellent strategy for today's markets.  Traders
should be very familiar with the proper execution of a straddle to
benefit from expected volatility.

Jeff Wright, Preferred Trade
Understanding Option Basics and the roll of an options floor trader.

Buzz Lynn, Contributing Editor, IndexSkybox.com
Slump Busting.  Are you on a losing streak?  Learn what you need
to do to BUST out and break the pattern.

Jim Brown, Founder, OptionInvestor.com
Big Cap Strategies, Naked Puts, Zero Risk Trading, Making Dollars
not Dimes.

Jim Crimmins, President, TraderAccounting.com
Tax Strategies for the Active Trader.  It's that time of year
again and Uncle Sam wants a cut of your trading profits.  Let Jim
offer some advice on how traders should handle such taxing issues.

Molly Evans, Writer/Trader, IndexSkybox & OptionInvestor.com
The Organized Trader.

Rance Masheck, President, SpreadTrader.com
Five Point Star Trader System.  Learn what you need to know
about a stock before making a decision to trade.

Austin Passamonte, Editor, IndexSkybox.com
Swing Trading & Day Trading Index Options.  Many consider Index
option trading to be the pinnacle of equity options.  Learn more
about the do's and don'ts for Index Option trading.

Eric Utley, OptionInvestor.com & IntradayTrader.com
Psychology of trading and the Importance of the top down
approach to trading.

Buzz Lynn, Contributing Editor, IndexSkybox.com
Trading with Qcharts.  Learn how to properly set up,
use, and deploy the best features and techniques.

Derek Baltimore, Co-Editor, IntradayTrader.com
Exit Strategies, knowing when to quit

Tim Taylor - Preferred Trade
Using Direct Access Trading Platforms

Each topic will be covered in 1-2 hr general sessions
taught by over 20 professional traders and presented on
three giant screens. In the evening we will offer five
of our popular chalk talk sessions for that personal
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Unlike other seminars with only two or three instructors, you
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This is not a prepackaged presentation that gets repeated over
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****************
MARKET SENTIMENT
****************

Windows Are All Broken
By Austin Passamonte

Forget window dressing for the end of this quarter: fund managers
should be concerned about repairing the glass. What panes weren't
broken by Tuesday's close have mostly shattered since then.

As stated on Tuesday, we were left scratching our heads on the
short-squeeze rally prompted by a strong consumer confidence
report. Our opinion was then that investors were simply tired of
selling and wanted any excuse to buy. Twisting the logic of
confident consumers, strong economy worked very well for exactly
six hour's time before reality sank in like a pick-axe.

The corporate economy stinks, no one made any money, most will
miss their earnings and we're about to see the extent of that
between Tuesday last and the end of April. Remains to be seen
where this takes us but a lasting trip up the charts may be
asking a bit much until May.

There isn't much we can use to measure downside support right
now, but let's begin with daily-chart Bollinger bands. Using the
lower two-standard deviation extreme from the 20-day moving
average for downside and 20-day MA for upside, the following
points could be considered potential targets the next several
sessions:

Possible Resistance

SPX: 1184
OEX:  605
NDX: 1750
SOX:  598
DJIA: 10,073
Compx: 1984

Potential Deep Support

SPX: 1089
OEX:  551
NDX: 1490
SOX:  531
DJIA: 9182
Compx: 1500

Of great interest to us will be Friday's public release of the
COT report at/after 4:00pm EST. We really want to see what S&P
500 commercial traders did by Tuesday's close. Further short
covering on Tuesday's rally could tell us that much of the final
washout is behind us. If they continued to short Tuesday's action
we might interpret that as indecision on their part as the
scaling process unfolds.

We'll wade through the data as usual and post it here in Market
Sentiment in plenty of time for all to act on it. We compile this
from several fee-based sources for those who wonder and include
it here as part of our service to you.

Not much left to say except Friday may be a volatile day but
what's new? Next week is anyone's guess. Keep in mind that we've
had few positive closes on Friday since mid-December and odds
aren't good for another. Food for thought if we witness any mid-
day rallies that look vulnerable into the close!

********

VIX
Thursday 03/29 close: 33.83


VXN
Thursday 03/29 close: 73.22


30-yr Bonds
Thursday 03/29 close: 5.50%


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. A reading above 10.00 is considered viable
resistance or support respectively within that general strike
price range.

                                   Thursday
                                 (03/29/2001)
  (Open Interest)       Calls        Puts          Ratio
S&P 100 Index (OEX)
Resistance:
625 - 610                7,891        2,311         3.41
605 - 590               10,831        8,578         1.26

OEX close: 584.90

Support:
580 - 565                2,541       10,473         4.12
560 - 545                  983        7,713         7.85

Maximum calls: 600/ 5,189
Maximum puts : 520/ 8,585

Moving Averages
 10 DMA  585
 20 DMA  605
 50 DMA  655
200 DMA  732


NASDAQ 100 Index (NDX/QQQ)
Resistance:
 48 - 46               190,006        47,246         4.02
 45 - 43               214,343       141,303         1.52
 42 - 40               140,045       108,771         1.29

QQQ(NDX)close: 38.95

Support:
 38 - 36                 5,676        68,443         12.06
 35 - 33                 6,786        50,043          7.43
 32 - 30                   948        14,905         15.72

Maximum calls: 45/131,912
Maximum puts : 43/76,928

Moving Averages
 10 DMA 41
 20 DMA 43
 50 DMA 52
200 DMA 75


S&P 500 (SPX)
Resistance:
1225                    6,066         7,072           .86
1200                   11,854        14,559           .81
1175                    8,211         6,799          1.21

SPX close: 1147.95

Support:
1125                    1,662         8,497          5.11
1100                    1,361        21,411         15.73
1075                      259        13,776         53.19

Maximum calls: 1275/25,117
Maximum puts : 1100/21,411

Moving Averages
 10 DMA 1147
 20 DMA 1184
 50 DMA 1266
200 DMA 1379

***********

CBOT Commitment Of Traders Report: Friday 03/23
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 Spec              Commercials 
S&P 500         (Current)  (Previous)    (Current)  (Previous)
Open Interest
Net Value        +70479     +78245         -69490     -94842
Total Open
Interest %      (+38.13%)  (+29.35%)      (-9.63%)   (-11.74%)
                net-long   net-long       net-short  net-short


DJIA futures
Open Interest
Net Value         -2516      -1981          -2696     -1491
Total Open
interest %      (-19.73%)  (-15.88%)      (-11.17%)  (-4.35%)
                net-short  net-short      net-short  net-short


NASDAQ 100
Open Interest
Net Value         +3555                     -8928
Total Open
Interest %       (+21.46%)                (-12.57%)
                 net-long                 net-short


What COT Data Tells Us
**********************
Indices: For the second week in a row the Commercials have
reduced their net-short positions on the S&P 500. In addition,
Commercials have added substantially to their net-short positions
on the DJIA.

Currencies: Commercial traders continue to build net-long
positions in the Japanese Yen

Metals: Commercials in the silver market are near a five-year net
long extreme.

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 03/20 by the CFTC.


**************
MARKET POSTURE
**************

Please visit this link for Market Posture:

http://www.OptionInvestor.com/marketposture/032901_1.asp


**************
TRADERS CORNER
**************

Beating The Bid/Ask Spread
By Austin Passamonte

Beating the spread. A frequent question that leads our topic here
for the next few sessions. Talk of day-trading options and buying
below prevailing "ask" while selling at "ask" has generated more
than a little interest. Shall we dive right in? Here's the email
question, edited for brevity:

"Dear Austin,
My question has to do with bid-ask spreads. Until I read your
article on SPX day trading I thought you bought at "ask" and sold
at "bid." I am just paper trading now but need to know a few
things to keep it as accurate as possible.

In the SPX, if you have a spread of 1.5 points like 11 bid and
12.5 ask, if I were to put in a buy limit of 11.8 which is about
55 percent between bid and ask would I get filled 9 out of 10
times like you said? I understand that market conditions can
change things.

I have been trying your system of 10/5 charts with the bull and
bear crosses of stochastics along with the Bollinger bands and it
is working like you described. Out of 14 trades risking 2 points
to get 1.5 I am 10 and 4. If I risk 1.5 to get 1 I am 12 and 2
because 2 trades went to 1.4 above entry before falling back. I
can see why splitting the bid-ask price is 75 percent of your
approach and is pretty smart.

Another question I have is the bid-ask spread on the SOX and BTK.
I like to work off the 60/30 charts on these indexes because they
have good playable moves of 20 to 30 points and you can pick off
5 or so points. Now here is the question. If the spread is 3
points like 12 bid and 15 ask what are my chances of getting
filled at 13.6 or 13.7? Now I am talking about strike prices that
are OTM but have open interest albeit in the tens or hundreds of
instead of the thousands like the SPX.

The last question for this email is this. My studies show that a
20 point move in these underlying indexes produce a 4 or 5 point
move in OTM strikes between 12 and 17. If I bought a contract for
13.6 on the SOX and set a sell limit of 17, what happens if the
"ask" moved to 16.7 and the index seemed to stall? If I wanted to
sell too soon and I set my sell limit to just under "ask", would
it get filled? Thank you. (BW)"

Alrighty then. BW raises a few solid questions we'll address and
no telling what rabbit trails that will lead us down.

First, part is a quick review of the bid/ask process. Options are
priced by market makers and originate from them. Sold by them to
us at the "ask" price or bought back from us by them at the "bid"
price. Get it? We the retail public buys "ask" price and sells
"bid" price. And that's what most traders do.

Retail traders have almost no fiscal advantages over floor
traders I can think of except maybe one: the guarantee of first
rights for certain orders to be filled. If we're trying to buy or
sell 20 or fewer current-month index option contracts (5 distant-
month option contracts) our orders get precedence above all.
Isn't that nice? If we have a resting order in the market and
buy/sell activity takes place, we get first dibs. I have no idea
if the same number of contracts apply to equity options or not,
best to check with your specific broker for those who are
interested.

One very important factor in this equation is liquidity. High
volume and open-interest means there are plenty of buyers and
sellers at any point in time. This keeps bid/ask spreads narrow
due to all the action. Low volume and open interest means a
market is illiquid and bid/ask spreads wide. It's just you & the
market maker in there with his deck to stack.

Now for the process. Let's say we want 10 contracts of XYZ option
contracts and the current bid/ask spread is 9.00 bid - 10.00 ask.
Must we pay 10.00 to get filled? Maybe, maybe not.

If market action is slow and/or we don't want in terribly bad, a
buy-limit order for 9.50 - 9.75 will fill on liquid markets far
more times than not. Keep in mind that hundreds or thousands of
other traders are out there and believe it or not, some of them
see things the exact opposite we do. I like to call traders on
the other side of my plays "constant winners." Just kidding. I
think.

The market maker set prevailing bid at 9.00, ask at 10.00 until
we came along and made the new bid for ten contracts at 9.50 buy-
limit. He's willing to buy from others for 9.00 and we're willing
to pay them 9.50, a premium offer. Who do you think sellers want
to do business with?

Now the market maker has choices. He can leave our new best bid
in place and let us fill if & when someone sells. He can fill
just to get us out of the way, which we'll talk about later. Or
he can raise his bid above ours, in this case 9.60 to squeeze us
out for the time being.

Let's dissect each scenario.

If the market moves slightly against us and that happens all the
time, the market maker will probably move his ask down from 10.00
to 9.50 as well. If an order to sell 100 contracts comes in at
9.50 sell-limit or market order, our ten-lot gets filled and he
books the other ninety contracts. If another ten-lot comes in, we
get the whole thing ahead of him. If a five-lot comes in for
sale, we get a partial fill. Had we simply entered a market order
to buy he would have hit us for 10.00 and immediately moved "ask"
down to 9.50, sometimes before our fill even confirms!

On ten contract lots that's $500. Not a big sum by any means but
turn a few trades like this and it all adds up. But there is a
downside, too. While we play around trying to shave spreads wild
markets can run away on us and turn savings to great loss. That
9.00 bid - 10.00 ask can pop to 10.00 - 11.50 on the OEX, SPX and
many active stocks in one move. Instead of simply buying at 10.00
before, our buy-limit order for 9.50 is toast while the market
rapidly moves away. Penny-wise, rally foolish.

How do we know when to do what? Simple. Play around during slow
markets but just get in during fast ones. This holds especially
true for getting out, but we'll hammer the sell side much harder
than buying later. Buying is easy: selling for profit is all the
work.

A market maker may choose to fill our tiny little ten-lot just to
move us aside. Let's say our order hits just before a block trade
of 1,000 contracts comes in to sell. He will buy us out ASAP in
order to drop his bid lower for handling such bulk. What's our
little $500 stipend to him when a 0.50 drop on the bid without us
means $50,000 difference for the next trade? We got lucky this
time.

The market maker's other choice is to simply nudge up his bid
above ours, offering best price to sellers. We edge ours up, he
edges his up until we reach what used to be "ask". Then he fills
us at that price and immediately drops the bid back where he
wanted it in the first place. Essentially, we bought the "ask"
even though he moved it to make us feel better. Tricky little
devils. Wonder how they afford those mansions in the Hamptons?
Who pays for all that?

Does it seem to you like we just get cookin' in here and our
allotted space runs out? Nevertheless, we must adjourn this topic
until next week. See you here Thursday next for Part II on
beating the spread!

Best Trading Wishes,

austinp@OptionInvestor.com


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PICKS WE DROPPED
****************

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.


CALLS:
*****

No dropped calls tonight


PUTS:
*****

GENZ $92.50 +2.71 (+8.25) Despite widespread Technology selling
yesterday, the Biotechs came through relatively unscathed, and
we saw GENZ creep a bit higher by the close.  The buyers came
out in earnest this morning, shooting through the $91 level in
the first few minutes of trading, never to return (at least not
today).  After running as high as $95, the bulls took a break,
allowing the price to fall back a bit towards the close.  But
that doesn't matter now.  After piercing our stop today, and on
volume that more than doubled the ADV, we are clearly bucking
the trend here, a clear cause to drop GENZ tonight.

LLL $77.50 +1.04 (+2.50) Added to the playlist to jump into the
rapid downhill slide, LLL has been a disappointment.  It seemed
the ink was barely dry on that first play writeup and the stock
managed to find support.  Over the past four sessions,
resistance has begun to solidify near $78, but support is also
firming up in the vicinity of $75.  Our stop has not been
violated, but LLL is not performing as we initially expected.
Rather than sit and wonder why, we'll drop the play and get out
of the way.


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The Option Investor Newsletter                 Thursday 03-29-2001
Copyright 2001, All rights reserved.                        2 of 2
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********************
PLAY UPDATES - CALLS
********************

PMI $63.70 +0.80 (+3.82) After moving to $64 on Monday this
week, PMI experienced consolidation on Tuesday, which brought
the stock to strong support at $60.50, a level which had been
resistance for weeks.  On Wednesday, PMI rested at a higher
support level at the $62 level, like a coiled spring waiting
to snap again.  However, it took broad strength in the insurance
sector to propel PMI all the way up as high as $65 on Thursday,
during the brief market rally which occurred in the morning.
IUX.X cleared resistance at 700, and reached 710 before pulling
back later in the day.  If this week's pattern of higher lows
and higher highs continues, the stock should be able to break
above $65 and stay there at some point in the near future.
Traders could take positions at a pullback to support at $63,
or upon a move above the $64 level with strong volume.  Continue
to monitor IUX.X, as well as MTG, and move stops to $62.  We
will exit positions if PMI closes below this level.

ERTS $56.13 +0.25 (+4.13) Shares of leading computer game maker
Electronic Arts continues to display unusual relative strength,
as a triple digit down day for the Tech index was not enough to
dissuade buyers from picking up ERTS on Wednesday.  Closing up
$1.13 or just over 2 percent, volume was heavy, clocking in at
2.75 times the average daily volume.  Today, the stock continued
to push higher, adding fractionally to its gains on about 1.6
times the ADV.  Having how broken $55 resistance, look for this
level to act as support, along with the 5 and 10-dma (at $54.10
and $51.78 respectively).  Look for pullbacks intra-day to these
levels for aggressive entries.  For the more risk averse, wait
for ERTS to take out $57 resistance with conviction before taking
a position.  Keep an eye on competitors ATVI and THQI to confirm
movement and direction.  Please note that to protect our profits,
we are moving our closing stop up from $51 to $54.

FDC $60.19 -0.32 (+1.61) FDC fell to a low of $58.80 today
on profit taking, and promptly rebounded toward the close.  Volume
has been higher during rallies over the last week, and FDC's
strong showing in today's weak market indicates that the stock
might be able to muster up enough momentum to reach the 52-week
high of $64.10 in the near future.  Today, PMI released news
that their subsidiary Western Union signed a multi-year agreement
with Publix Markets to offer the Western Union Money Transfer
Services at 650 Publix locations throughout Alabama, South
Carolina, Florida and Georgia.  This agreement was reached after
a successful pilot program was launched at Publix stores in
Atlanta and Miami.  Traders could take positions at current
levels, or possibly at another pullback to $59.  If FDC can
clear $62.50 with strong volume, it should be able to move up
to $64, and conservative traders might want to wait for this
type of breakout.  Continue to monitor others in the sector,
like ADP, and keep stops at $58.50.  We will close positions if
FDC closes below this point.

MO $46.83 +0.42 (+3.43) This consumer product stock consolidated
its trading at the higher levels of $46 to $48, holding its own
against the broad selling that effected nearly all the sectors.
Today's move through the unyielding 30-dma line, currently at
$47.55, also offers a hint of better things to come.
Conservative types should look for a convincing break through
the immediate resistance, in an advancing marketplace, before
jumping into this play.  The more enterprising traders might
find profitable opportunities on intraday bounces from the 5 &
10 DMAs, near our $45 closing stop mark.  Expect some opposition
as MO moves through the $50 level and approaches $52.04, the
52-week high set on March 9th.  And mark your calendars too; the
company has a confirmed earnings date of April 17th.  This event
could generate some of its own momentum over the near-term.


*******************
PLAY UPDATES - PUTS
*******************

AETH $13.44 +0.88 (+3.00) A down day for the NASDAQ was enough
reason for the bears to hit the sell button on AETH yesterday, as
the stock lost $2.44 or over 16 percent of its value on strong
selling pressure, over 1.6 times the ADV.  While AETH managed a
bounce today in the face of another red-letter day for the
NASDAQ, moving up just under 7 percent, volume to the upside was
weak, less than 88% of ADV, which suggests a lack of conviction
on the buyers' part.   For aggressive traders, failed rallies
above resistance at $14, the 5-dma at $14.60 and our closing stop
price of $15 may provide potential targets of entry, but wait for
sellers to return before jumping in.  A bearish plunge below the
$13 price level may allow for an entry on weakness, but be aware
that AETH may find support at $12.  Confirm entries with strong
downside volume and sector sentiment by tracking peers CMVT and
OPWV.

DPMI $43.23 -1.52 (-6.75) Weakness in the semiconductor sector
which has occurred over the last three days has led to selling
in DPMI, which took the stock below support at the $45 level
this afternoon.  With a grim projection for earnings weakness,
and a product demand cycle which lags the semiconductor industry
by several quarters, there is simply no near term catalyst to
rally shares of DPMI.  Since this is a thinly traded stock which
averages only about 400,000 share a day, traders should be
careful with the wide intra day spikes.  For example, on Thursday
DPMI moved from a low of $42 to a high of $46.80 before
collapsing.  Aggressive traders could take positions upon a
failed rally past the $44 level.  Alternatively, a drop below
$41 on strong volume would likely lead DPMI to the 52-week low
at $39, and possibly even lower.  Continue to monitor SOX.X
for weakness, and set stops at $46.  We will close positions if
the stock closes below this level.

OPWV $16.25 -2.60 (-8.31) Since dropping below $20 on Wednesday,
OPWV has been acting like the orphan nobody wants.  OPWV sold
off again today on volume which was 25% higher than the average
daily volume of approximately 6 million shares.  JP Morgan
lowered their revenues and earnings estimates for the first
quarter to $597.3 million from $640.6 million and 40 cents
per share from 45 cents per share.  The report stated that
the weakness is a result of weak subscriber growth from carriers
like Nortel and Verizon, and investors dumped the stock to a
new 52-week low of $15.96.  Heavy spikes of volume toward the
close indicate that OPWV may very well hit yet another 52-week
low tomorrow, depending on market conditions.  Another failed
attempt to rally past $17 would be a good entry point for
aggressive put players.  Alternatively, a break below $16 on
heavy volume could lead OPWV to the $15 level, and would be an
entry point for conservative put players.  We are moving stops
to $20, so close positions if OPWV closes above this level.

NSM $28.05 +2.05 (-1.60) The semiconductor sector was mixed in
today's session, with some stocks claiming modest gains ahead of
Micron's (MU) earnings release today.  The small wave of
anticipation brought NSM off its lows, but the uptrend didn't
create the dynamism to crest our $29 protective stop, neither
intraday or on the close!  This is definitely a bearish sign;
however, make note of the firm support NSM found at the $28
level in late afternoon trading.  Tomorrow's trading could be
impacted by Micron's earnings results.  The company was expected
to lose three cents a share for the 2Q, but came in this
afternoon with only a $0.01 loss.  Ultimately, the analysts'
interpretation of the whole package of numbers will dictate
near-term sentiment.  Therefore, keep a close watch on the
Philadelphia Semiconductor Index (SOX.X) to provide overall
guidance going forward.  A breakdown below 550 would provide
ideal confirmation of the sector's weakness.  Before adding
aggressive positions, look for NSM to rollover from its current
perch at the 5-dma line on robust volume.  If you're especially
conservative, wait for an unmistakable slide through the $26
level before jumping into the decline.

ADBE $32.57 -1.40 (-3.12) How about those Software stocks?
After a few days in the sun, it is back in the deep freeze for
them, along with just about every other Technology-related
stock.  The NASDAQ is running to new lows, and ADBE looks
poised to go there with it.  Helping the stock along today was
weakness in the Computer Software index (GSO.X) and VRTS,
another Put Play.  For its own part, ADBE has the odds stacked
against it after rolling over right at the 5-month descending
trendline, then at the $36-37 resistance level.  Then we have
the daily Stochastics rolling over from the overbought region,
giving the ADBE bulls a tough row to hoe.  The penetration of
the $33.50 support today, opens the door for a similar test of
the $32.50 level tomorrow.  If this level fails, it will be a
good signal for conservative traders to initiate new positions.
We are using the descending trendline (currently $35) as a
backstop for our play, setting our stop at that level.  We would
also target aggressive entries on a bounce that fails to
penetrate $35 on a closing basis.  Watch for continued weakness
in the Software sector before playing.

ENE $55.31 -2.79 (-4.09) Conveniently obeying its descending
trendline this week, ENE looks like it will head down to test
last week's lows in the near future.  Weakness abounds in
virtually every sector right now, and until some leadership
emerges, expect stocks, good and bad, to continue their descent.
After failing to hold above the $60 support level, our play
quickly declined over the past 2 days, ending today's session
just fractionally above last Thursday's closing low at $55.02.
Without even reaching the overbought zone, the daily Stochastics
oscillator is rolling over, and its next trip into oversold
should drag the stock down to new yearly lows.  We are
ratcheting our stop down to $57, near intraday resistance, and
aggressive traders may want to consider new positions on a
failed rally near this level.  The more conservative approach
will be to wait for intraday support at $54-55 to fall to the
bears assault.

VRTS $43.04 -4.46 (-10.84) Conservative bears got their wish
during yesterday's Technology selloff, as VRTS finally fell
through both the $52.50 intraday support level, and then last
week's lows near $49.  Picking up right where they left off
yesterday, the bears went to work on the stock again today,
whittling the price ever lower throughout the day, finishing
just off the lows of the day near $42.  This marks another
52-week low for the stock, so support levels are a bit difficult
to gauge.  Look for $40 and then possibly $34 (support levels
from late 1999) to provide some respite for the weary bulls.
Today's close is actually below the lower Bollinger band and
daily Stochastics are once again in oversold, indicating we
could see an oversold bounce in the near future.  On the bearish
side, the stock dropped nearly 10% today on volume 50% above the
ADV.  There sure doesn't appear to be an overabundance of buying
volume.  We've moved our stop down to $48, and aggressive
traders will want to consider new positions on a failed bounce
that can't get through this level.  More cautious players will
want to watch today's lows for an entry.  As selling volume
picks up again, step into new positions when VRTS falls through
the $42 intraday support level.  Watch the Computer Software
index (GSO.X) for confirmation of weakness in the sector before
playing.


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**************
NEW CALL PLAYS
**************

AGGRESSIVE:

UVN - Univision Communications $39.45 +0.66 (+3.33 this week)

Based in Los Angeles, California, Univision Communications Inc.
is a Spanish-language television broadcaster in the United
States.  The company's network provides the Univision affiliates
with 24 hours per day of Spanish-language programming with
substantially all new programs.  Univision's Network, which is
the most watched television network (English- or
Spanish-language) among Hispanic households, provides the
Company's broadcast and cable affiliates with 24 hours per day of
Spanish-language programming with a prime time schedule of
substantially all first run programming (I.E., no reruns)
throughout the year.

For reasons both fundamental and technical, we are initiating
coverage on UVN.  It has been said that television is the drug of
a nation.  While this reference was meant to illustrate the
almost addictive qualities of TV, the comparison works on a
number of levels.  Like drug stocks, earnings for cable companies
are fairly stable and predictable, which makes this sector a
potentially attractive play for defensive traders.  The concept
of affordable luxury also comes to mind, as even with a slowing
economy and necessary cutbacks in spending, consumers are
unlikely to give up their cable television.  What makes UVN
especially attractive amongst its peer group is its demographics.
Recently, census data revealed that the Latin community has now
become the largest minority group by population in the United
States.  As UVN holds the major market share of this lucrative
customer base, this puts gives the company a unique competitive
advantage when negotiating ad revenues.  The technical picture
confirms the fundamental strength, as the stock has been trading
in a upward trending channel all month long in the face of a weak
market.  Having just taken out its 50-dma near $39, a bounce off
this moving average as well as the 5 and 10-dma (at $38.37 and
$38.22) may provide ideal targets for aggressive traders.  Just
make sure the stock continues to close above our stop price of
$38.  Conservative traders may want to wait for UVN to break
cleanly through resistance at $40 before jumping in, confirming
strength by monitoring rivals COX and CVC.

BUY CALL APR-35 UVN-DG OI= 31 at $5.50 SL=3.50
BUY CALL APR-40*UVN-DH OI=172 at $2.40 SL=1.25
BUY CALL APR-45 UVN-DI OI= 22 at $0.75 SL=0.00
BUY CALL MAY-40 UVN-EH OI=  0 at $3.60 SL=2.50  Wait for OI!!
BUY CALL MAY-45 UVN-EI OI= 29 at $1.75 SL=1.00

http://www.premierinvestor.net/oi/profile.asp?ticker=UVN


*************
NEW PUT PLAYS
*************

AGGRESSIVE:

SONS - Sonus Networks $19.78 -3.22 (-8.22 this week)

Sonus Networks furnishes the voice infrastructure solutions that
let public network providers -- long distance carriers,
wholesale carriers, ISPs, and cable operators -- offer voice and
data networks.  Essentially, the company's hardware and software
facilitates the voice transmissions and provides efficient
routing.

The rolling waves of selling hitting the technology markets have
put SONS of the brink of ultimate destruction.  If the brazen
whispers effecting the sector don't let up, the historical
support at $20 will crumble.  SONS current price level provides
aggressive traders with lucrative opportunities, assuming the
play goes our way.  We're looking for more technology weakness
to knock SONS off its precarious pedestal as industry leaders
like Ciena (CIEN) and Juniper (JNPR) drive the major index
lower.  Buying into high-volume declines and locking in gains
quickly offers the least risk, but don't be fooled.  This play
is not for the conservative.  Traders might also find
enterprising entries if SONS makes a charge for the intersected
5 & 10 DMAs, just above $25, and then reverses course on
increasing volume.  This strategy portends high volatility and
fleeting in-and-out scenarios; although the profits would likely
be abundant.  We're keeping a tight lease on SONS and will exit
the play if the share price CLOSES above the $23 mark.

BUY PUT APR-25 UJS-PE OI=1044 at $6.25 SL=4.25
BUY PUT APR-20*UJS-PD OI= 486 at $2.81 SL=1.50

http://www.premierinvestor.net/oi/profile.asp?ticker=SONS


ISSX - Internet Security Systems $26.81 -2.25 (-5.69 this week)

Internet Security Systems is the leading provider of total
information security management for networks, servers,
applications and desktops.  Not only does ISS offer
market-leading, best of breed security management systems for
security assessment, policy enforcement and intrusion detection -
all built on the company's SAFEsuite security management platform
- it also provides superior customer service, consulting and
education offerings that significantly reduce the complexity and
expense inherent in protecting online assets.  ISS approaches
Internet security through a complete lifecycle approach, offering
a managed solution that covers the full continuum of Internet
security needs.

While the NASDAQ declined sharply in the month of February, it
was surprising to see the Internet Security sector hold up,
despite weakness especially in Software stocks.  The general
agreement on the Street on the part of analysts was that security
is a cornerstone of a successful e-business strategy.  As a
result, this would make the sector less susceptible to decreases
in capital expenditures, especially since the goods and services
produced were considered necessities.  The Bears' argument is
that these were the same things that were said about the Storage
sector, just before the sellers lowered the boom on the heels of
profit warnings and lower than expected revenues from the likes
of BRCD, EMC and VRTS.  The subject of valuation is also a
possibly valid point, as premiums built on the shaky foundation
of high expectations are now being questioned.  Since falling
below the critical support level of $45 earlier this month, it's
been all downhill for the stock.  Connecting the highs and lows
since the middle of February reveals that ISSX is trapped in the
midst of a steep downward regression channel.  The 5 and 10-dma,
now converged near $31, have acted as formidable resistance
throughout the stock's slide.  Increased selling pressure leading
to a rollover as ISSX approaches this level as well as horizontal
resistance at $28 may allow higher risk players to make a play.
Just keep in mind that we have placed a closing stop at the $30
mark.  For the more risk averse, a break below $27 on continued
selling may allow for an entry on weakness.  Correlate entries
with direction in sector peers CHKP and VRSN.

BUY PUT APR-30*ISU-PF OI=275 at $5.38 SL=3.50
BUY PUT APR-25 ISU-PE OI= 92 at $2.38 SL=1.25

http://www.premierinvestor.net/oi/profile.asp?ticker=ISSX


**********************
PLAY OF THE DAY - CALL
**********************

ERTS - Electronic Arts Inc. $56.13 +0.25 (+4.13 this week)

Electronic Arts is the leading independent interactive
entertainment software company that develops, publishes and
distributes products for personal computers and advanced
entertainment systems such as the PlayStation and Nintendo 64.
Since its inception, EA has garnered more than 700 awards for
outstanding software in the U.S. and Europe.  Combining such
diverse media as video, photographic images, computer graphics,
and stereo sound with the work of professional story writers and
Hollywood film directors, EA is breaking traditional boundaries
and evolving into a 21st century high-technology entertainment
company.

Most Recent Write-Up

Shares of leading computer game maker Electronic Arts continues
to display unusual relative strength, as a triple digit down day
for the Tech index was not enough to dissuade buyers from picking
up ERTS on Wednesday.  Closing up $1.13 or just over 2 percent,
volume was heavy, clocking in at 2.75 times the average daily
volume.  Today, the stock continued to push higher, adding
fractionally to its gains on about 1.6 times the ADV.  Having how
broken $55 resistance, look for this level to act as support,
along with the 5 and 10-dma (at $54.10 and $51.78 respectively).
Look for pullbacks intra-day to these levels for aggressive
entries.  For the more risk averse, wait for ERTS to take out
$57 resistance with conviction before taking a position.  Keep an
eye on competitors ATVI and THQI to confirm movement and direction.
Please note that to protect our profits, we are moving our closing
stop up from $51 to $54.

Comments

ERTS has been trading as if the NASDAQ were non-existent.  After
Wednesday's break above $55 on high volume, buyers came back for
more today.  With a brief dip in the morning, ERTS consolidated
along the $54.75 line throughout the session, supported by decent
volume.  Look for entry into this call play on a continued surge
through $56.50 with convincing volume.  Otherwise, wait for a
pullback to support at $54.75 along with a a bounce, which would
be the better risk-to-reward entry.  A break below $53.88, today's
low, would indicate profit taking.

BUY CALL APR-50 EZQ-DJ OI=2802 at $8.38 SL=6.25
BUY CALL APR-55*EZQ-DK OI=2287 at $5.13 SL=3.25
BUY CALL APR-60 EZQ-DL OI=1304 at $3.00 SL=1.50
BUY CALL MAY-55 EZQ-EK OI=  71 at $7.38 SL=5.50
BUY CALL MAY-60 EZQ-EL OI= 162 at $5.13 SL=3.25

http://www.premierinvestor.net/oi/profile.asp?ticker=ERTS


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**************************************************************


************************
COMBOS/SPREADS/STRADDLES
************************

Conservative Option Trading Strategies: The Review Continues
By Ray Cummins

One of the most popular delta-neutral strategies for new traders
is the debit straddle.  This neutral, low risk approach works
very well when the underlying issue is expected to make a large
movement in either direction.  Before we can begin a discussion
on the proper techniques for purchasing straddles, there are a
few fundamentals that must be understood.

Option Pricing: The primary influence on an option's price is the
movement of the underlying security.  The next important factor is
time value.  An option's price decays each day it is in existence.
The closer the option gets to expiration, the faster it decays.
There are other, less important factors that affect the price of
an option including interest and dividend rates.

Volatility:  The volatility component of option pricing is a
measure of the range the underlying security is expected to
change over a given period of time.  The actual measurement is
the standard deviation of the daily price changes in the issue.

Historical (statistical) Volatility:  A measure of how quickly the
underlying security has moved in the past.  It is a mathematical
definition based on historical prices.  In most cases, the higher
the statistical volatility, the more an option is worth.

Implied Volatility:  The market's estimate of future volatility of
the underlying security.  Implied volatility calculators start with
the current option price and extrapolate the theoretical value of
volatility.  Even though it is a computed value, it is still just
an estimate and is subject to errors (or irregularities) when the
market performs unexpectedly.  In general terms, implied volatility
is the volatility value that makes an option's fair value equal to
its actual market price.

Debit Straddle:  A neutral option trading strategy, which consists
of purchasing both a put and a call, generally with the same strike
and the same expiration month.  The position will benefit from a
large move in one direction or the other and based on the size and
timeliness of the move, it can generate large profits.  The risk,
(if little or no movement occurs) is limited to the initial amount
paid for the straddle.  By carefully identifying undervalued
options and making reasonable assumptions about future movements
in the underlying security, this can be a profitable strategy with
very limited risk.

There are three rules to identifying favorable conditions for a
straddle purchase.  First, the trader should select options that
are undervalued (cheap).  Next, the underlying security must have
the potential to move (high or low) enough to make the straddle
profitable.  Finally, the underlying stock should have a history
of multiple movements through a sufficient range in the required
amount of time to justify the overall risk/reward of the position.

The first step is to determine how fairly the options are priced.
This may be done with sophisticated pricing software or by simply
comparing the current levels of implied volatility to past levels
of implied volatility.  In simple terms, when the relative implied
volatility is low, options are effectively under priced.

After identifying a series of inexpensive options, the trader must
determine if the underlying stock has the ability to move to a
profitable position in the required amount of time.  A few months
is usually the shortest recommended period for conservative debit
straddles; shorter-term plays suffer from time decay too quickly.
With a probability calculator, it is easy to estimate the chance
of the underlying stock finishing outside the break-even points at
expiration.  But, one thing you must realize when using these tools
is that historical volatility measures are generally based on 10,
20, 50 and 100 day statistics, thus it is important to use a
conservative estimate so as to not to artificially inflate the
probability of profit.

The next step is to look at a price chart of the stock to see if
it has a history of moving the required distance in the allotted
time frame.  The important thing to examine is how often the issue
moves through the necessary profit range in each of the past four
or five "target" periods.  Again, simple option analysis software
will do this automatically and more importantly, it will forecast
the probability of actually profiting from the position.

One thing to be aware of when buying any option is that time decay
becomes greatest during the last month before expiration.  A three
month debit straddle will have lost approximately 50% of its value
before the beginning of the worst erosion period even if the stock
remains exactly at the original price when the position was opened.
This makes it very important to use a mental loss limit (near 50%
of the initial cost of the straddle purchase) to preserve capital
in the event the underlying issue does not perform as expected.

After the position is open and the underlying stock begins to make
a move, it is necessary to decide whether to ride the trend to the
break-even point or trade against the straddle.  One technique is
to hold the position until the value of either option pays for the
whole straddle, then the remaining (long) option is risk-free with
unlimited profit potential.  A similar method bases the target exit
on the sum total of both positions.  When one position is worth
the total initial debit, both positions are closed and the premium
from the lower priced option is profit.  The latter strategy works
well when there is still ample time until the options expire.

"Riding the trend" is considered the more profitable technique for
directional traders but it involves additional risk and requires
knowledge of basic technical analysis.  The most common approach to
this strategy is to monitor the underlying issue for a breakout or
key reversal through a technical support or resistance level.  When
the new trend has been positively identified, the lower priced
options (losing side) are sold along with one-half of the higher
priced options (profitable side).  The remaining position is held
until a reasonable profit target is met and downside protection
is maintained with a trailing stop.  Advanced traders favor this
follow-up technique because it is based on known technical trends
and the action generally occurs near the position's break-even
points.  When one of these points is reached, two simple trades
lower the overall cost basis while retaining a high probability
of eventual profit.

Determining how and when to exit a play is a matter of personal
preference but in most cases, if the underlying issue performs
poorly, the play should be liquidated before time value decay
erodes the entire position significantly.  As the last month of
option life approaches, you should begin to plan an exit. Study
the daily movement of the underlying issue and use it to your
advantage to exit the position; selling each option for whatever
you can get when the market (not emotion!) tells you it's right.
It's very difficult to learn to close out losing plays early 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 the losses; learn from
your mistakes; evaluate each one critically; then move on!

Favorable debit straddles are relatively simple to uncover. The
basic requirements are inexpensive options on issues that have
proven historical volatility.  The strategy is very simple and
perfect for the novice trader providing he or she understands
option pricing basics and follows a few simple guidelines. This
type of strategy can generate excellent returns because losses
are limited to the initial investment and profits are limited
only by time and volatility in the underlying issue.

Good Luck!


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