Option Investor

Daily Newsletter, Tuesday, 04/03/2001

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The Option Investor Newsletter                  Tuesday 04-03-2001
Copyright 2001, All rights reserved.                        1 of 2
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MARKET WRAP  (view in courier font for table alignment)
        04-03-2001        High      Low     Volume Advance/Decline
DJIA     9485.70 -292.20  9774.80  9428.10 1.37 bln    737/2356	
NASDAQ   1673.00 -109.90  1759.01  1660.92 2.51 bln    800/3012
S&P 100   562.38 - 22.02   584.41   559.12   totals   1537/5368
S&P 500  1106.46 - 39.41  1145.87  1100.19           22.3%/77.7%
RUS 2000  426.96 - 12.80   439.76   424.82
DJ TRANS 2680.57 - 64.45  2745.02  2671.08
VIX        39.33 +  4.58    40.70    36.96
Put/Call Ratio      0.99

Heavy Volume, Heavy Losses, Is The End In Sight?

The Dow gapped down at the open on worries about Japan, China
and the U.S. economy. A small +50 point bounce at the close
brought it off its low of 9428. It was not a buying bounce but
simply short sellers taking profits in case of a dead cat
bounce at Wednesday's open or an unexpected rate cut by the
Fed. The Nasdaq tried to rally at mid-day but continued
negative news prevented bargain hunters from making any gains.

Window undressing continued in earnest on Tuesday. Fund managers
that bought stocks to dress up their quarter end statements were
dumping those same stocks this week. How much worse can it get?
Don't answer that! The Dow appears destined to retest the 9106
low set on March 22nd and the Nasdaq broke under support as well.
The next Nasdaq support level is 1500 with major support at the
low for 1998 of 1357. That low from October 4th, 1998 was the
low for the year and you have to go back to May 1997 for support
after that.

Obviously nobody wants to even consider a Nasdaq below 1500,
most of us are in denial that it is trading under 2000! The
analysts are now echoing my statements from last week that
there is no reason to buy stocks with the historical April
drop in front of us. Thanks for reading guys! With the first
quarter over the earnings warnings are coming fast. So far
this week there have been over 35 with more in the pipeline.

The B2B and Software warnings on Monday set the stage for
a weaker Nasdaq as each sector shakeup rattles investors
in the corresponding sectors. The Networking sector was hit
very hard today with Nasdaq:CIEN losing -6.75 or -20% and
Nasdaq:JNPR losing over -$5 or -15%. CSCO set a new 52-week
low of 13.56. The software sector was killed with VRTS losing
-7.50, CHKP -5.50, ADBE -3 and even MSFT -2.44.

The semiconductor sector I wrote about on Sunday has lost over
-10% in the last two days to a new 52-week low of 489. As the
"head of the snake" it has helped lead the Nasdaq to new lows.
If you took my editors play suggestion of SMH puts on Sunday
then you should be very profitable. If you did not read that
section on Sunday you should to understand the current market.

The current round of tech warnings has started a new trend.
Not only are tech warnings accelerating but each now has a
new component, layoffs. RATL warned and cut -10% of their
workforce, KEYN warned -13%, OYNX warned -20%, FIRE warned
-650, KANA warned after previously announcing layoffs. AGIL
warned today after the close as well as SYBS.

We are entering a very perilous time in the markets. Earnings
are weighing on stock prices producing a very negative sentiment.
Add to this sentiment the crisis over the spy plane in China and
the worry about Japan accounting methods changing and this
negative sentiment is completely over powering the buyers.
Add to these factors the advent of tax selling season for
individual investors and you have the perfect storm in the
markets. With tax day less than two weeks away investors are
watching the prices of stocks they were going to sell to raise
cash fall on a daily basis. The impulse to sell now and prevent
a further cash loss is great. Also weighing on the street are
persistent rumors of a big mutual fund that is in trouble.
If investors are withdrawing money from funds to pay taxes or
simply bail out of the markets, there is the possibility that
a fund that is over leveraged and got caught in the down market
could be failing. If that was announced publicly there would
be a run on remaining funds like the bank panics in the
depression. The Long Term Capital failure shook the markets
but not as bad as a retail fund collapse would. LTC was a
fat cat fund for very large institutions who knew the risks.
A retail fund failure would be catastrophic.

Another factor weighing on the tech sector is the true
seriousness of the inventory problem which is slowly coming
to light. Cisco is rumored to have as much as $1 billion in
excess component inventory which is becoming more obsolete
as each day passes. Rumors exist that this could be as much
as 18 months of inventory at present sales levels. Even
more rumors exist that CSCO is putting pressure on its
suppliers to take components back and on wholesalers to take
delivery of routers and switches they do not need to get the
inventory off Cisco's books and hide the problem. Want to
buy from us when the recession is over then take this
inventory now, or else! Big guys become bullies when times
get tough.

The severity of the recession struck home today with PSIX
saying they were on the verge of bankruptcy. If we see a
rush by others to join them then we could see an entirely
new leg down in the markets. The announcement rippled through
the networking sector with major suppliers to PSIX trading
lower on the possibility of payment problems. The biggest
suppliers to PSIX are CIEN, JNPR, CSCO and NT. See a pattern

Margin calls are again becoming a major problem. With each
down leg investors averaged down thinking surely stocks like
CIEN and JNPR would hold $50 or VRTS, CHKP and ARBA would
rebound. When those events fail to occur the investor becomes
trapped and each new drop creates a new wave of broker forced
margin selling. The big downdrafts like today trigger margin
calls which many investors will get tonight. This puts more
pressure on the next days session.

29 of the Dow 30 stocks were down today with Home Depot the
only survivor with a +.50 gain. Decliners on the NYSE beat
advancers more than 3:1 and almost 4:1 on the Nasdaq. The
real measure of the market internals was the volume. With
2.5 billion shares traded on the Nasdaq over 2.3 billion
was down volume. Up volume accounted for only about 200
million shares. The VIX came very close to its 52-week high
of 41.99 with a high today of 40.70. Fear is rampant in the
markets as evidenced by the VIX and the put/call ratio which
closed the day at .99 which indicates stronger put buying.
The missing component with the -292 Dow drop today was the
lack of a major bounce like we had on March 22nd. There
were just no buyers and that was a concern for professional
traders at the close. There were reports of institutional
short selling in late afternoon which would mean the big
boys are looking for even lower lows.

In our pick meeting today there was a serious gloom. Do we
buy puts on stocks down -$20 to -$30 in the last week? The
risk/reward ratio for that type of play is slim. Do we try
and pick a bottom on some stocks and play calls? Not when
every indicator is pointing down. Good stocks are getting
beaten almost as badly as the weak ones in this current
sell off. The Nasdaq is now down -67% from its high last
year and the Dow is down -19%. All the indicators are still
pointing down but like in any major market move there should
be a bounce soon. The market is very oversold again and there
is a lot of money burning a hole in pockets on the sidelines.
Dick Arms, (ArmsInsider.com) said on CNBC today that the
TRIN index was at levels he had never seen before in the
32 years it has existed. The severely oversold conditions
are pointing to a major rally soon in his opinion.

We need a catalyst to make these people want to buy. With
earnings, China, Japan, fund problems and taxes as the
overriding worries about the only thing that could break
this drop is another inter-meeting rate cut. The first
three cuts have failed to work but at these levels another
aggressive cut could be the right trigger. The Jobs Report
on Friday is still my guess for a surprise announcement
if one is coming. We know the Fed probably gets the data
early so it is also possible on Wed/Thr. I am sure Bush
has "suggested" to Greenspan that another rate cut to prop
up the markets would be nice. Financials have started
moving down again as recession fears create earnings
worries for banks. If consumers are starting to feel the
heat from the market and can't make car payments, house
payments and credit card bills then more trouble is ahead
for the banks.

I know this sound very bearish. I want to be bullish but I
cannot find anything bullish to write about. The fact that
the Dow could be creating a double bottom by re-testing the
March 22nd low of 9106 could be bullish. Of course at 9475
that means it could drop another -375 points during that
retest. It could also rebound tomorrow but without an answer
to the China crisis and good news from Japan it is not likely
to happen. We could also take heart from the lack of warnings
from any big cap stocks today. Of course big cap has taken
on an entirely new meaning lately. CSCO hit $100 billion in
market cap today, down from $500 billion in March of last
year. So I repeat, nothing goes down in a straight line and
I would expect a bounce soon. When and how far is a mystery
to everyone. This is one of those days that it feels really
good to be 100% in cash. You can watch the markets fall
unemotionally and be ready to jump in when the trend changes.

Enter VERY passively, exit VERY aggressively!

Jim Brown

If you have not reserved your seat at the Spring Trading
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Learn the basics of Point and Figure Charting while analyzing
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Mark Skousen, Ph.D., Editor, FORECASTS & STRATEGIES
The Global Economy and its Impact on Us.
Learn from a professional economist who turns his understanding
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Harry Browne, Author of Fail-Safe Investing
Sixteen Golden Rules of Failsafe Investing.
A powerful session that translates the essence of the book
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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
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Tom DeMark, Author of three books on DayTrading Options
Day Trading Options.  An extremely popular subject taught by one
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Candlestick Charting.  Is that a doji or an evening star formation?
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Austin Passamonte, Editor, IndexSkybox.com
Buzz Lynn, Contributing Editor, IndexSkybox.com
Beating the Market with Indexes.  This is another tag team event
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Rance Masheck, President, SpreadTrader.com
Calendar Spreads & Bull Call Spreads.  Some of the first strategies
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Mark Skousen, Ph.D., Editor, FORECASTS & STRATEGIES
Scrooge Investing - The Best Bargains in Beaten Down Stocks for
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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
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Jon Najarian, Founder, Mercury Trading, Floor-Trader CBOE
Successful Option Trading. "Doctor J" is the name and options is
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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
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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

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Broken Records
By Austin Passamonte

That could aptly describe historical lows for many stocks,
groups, sectors and even broad indexes. Each rally buoyed by
bullish hope continues to fail in true fashion of savage bear
markets. How many tentative attempts to rally have we seen wiped
out by one more deft swipe of negative news' clawed paw? Not the
final one, that's for sure.

It could also describe our current report in this section. Market
neutral has meant downside expectations far longer now than
actually recall.

We continue to hear talking heads in the media attempt to call
bottoms on tech indexes and broad indexes as well. Investors who
listened to Abbey-Cohen & gang just a week or two ago bought that
latest round of stocks at quite the premium to what they were
fetching bids on today.

Analysts who rose to fame during the great bull-run continue
crumbling to ash on this side of the parabolic slope. Even
veteran market timers trying to rely on historical oversold
signals remain confounded at their continual failure time after

What does all this mean? We haven't reached bottom yet although
it could be soon.

Investors and traders are anxious to just wash it all out, end
the nagging pain and get on with resumption of their bull market
once again. If only it were that simple or easy. The most likely
scenario is we are trapped within a sideways to lower trading
range for months to follow.

Not what most traders want to hear? Join the club, but pretending
never made traders a single dime. It has cost them trillions but
never earned anyone a dollar. Realistic traders have high-odds
chance to profit and reality is, the trend and path of least
resistance still points down over the medium future.

Key for the tech indexes will be SOX holding it's 500 level. A
break of 525 and 512, two key measures themselves was damaging. A
close below the 500 level and further decline from there could
find the next bounce near its 400 index level.

NASDAQ indexes are on life support and approaching an ultimate
bottom in our opinion. Will they bounce back +100% above closing
levels today by/before year's end? That would be a major feat

Long-term investors will and probably should be picking through
the scrap heap in there for big caps & especially second-tier
companies that have customers, earnings, a business plan and
future. Which ones are those? That is up to each of us to decide
for ourselves.

Broad indexes may be another matter entirely. Downside targets
for the SPX are the 900 area and Dow at 8,000. Those who find
this absolutely incredulous need only reflect back on the thought
of 9,100 when INDU traded at the vaunted 11,000 level. We found
that just as mind-boggling ourselves, for sure. Yet we must
remain cognizant of all possibilities.

The VIX spiked to 40.00+ today as the trading world loads up on
puts. Seldom do we breach this zone without a powerful short-
squeeze to follow.

S&P 500 commercial traders continue to scale out of their huge
net-short position as we witness rising volume and falling open
interest in the SP01M contracts over at the CME. This indicates
further short covering since data was compiled last Tuesday.

We interpret this as an indication of uncertainty on their part.
They likely believe we have less downside risk than potential
upside gain at this point in time. However, we expect them to
cover shorts during subsequent declines and possibly open shorts
on future rallies. This cost-average scaling process could
continue until the economic future clears and a switch to neutral
or especially net long would be our strong inclination to buy.

Significant selling and downside profits unrealized could be
locked in soon, firing up yet another short-squeeze rally. We can
expect plenty of gap-open sessions ahead in either direction and
impossible to forecast the night before.

The power of rumor exists for Fed rate cut intervention before
the May FOMC meeting. As shorts painfully learned on January 3rd,
Greenspan can drop this bomb at almost any point in time and that
will weigh heavily on those holding massive short profits as each
session or week's end nears.

What Next?
Best guess? Retest of lows on the Dow and S&Ps with limited
downside left in techs. The SOX will lead NASDAQ markets up or
down considering there remains little if any other sectors
capable of doing so at this time.

We would trade the upside cautiously and downside a bit more
aggressively while following the daily trend with care. Still a
dangerous world out there, protect capital and take modest
profits in either direction when offered!


Tuesday 04/03 close: 39.33

Tuesday 04/03 close: 75.12

30-yr Bonds
Tuesday 04/03 close: 5.47%

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.

  (Open Interest)       Calls        Puts          Ratio
S&P 100 Index (OEX)
600 - 585               12,206        8,727         1.40
580 - 565                2,843       11,281          .25

OEX close: 562.38

560 - 545                  989        8,059         8.15
540 - 525                  207        9,398        45.40

Maximum calls: 600/ 6,093
Maximum puts : 520/ 9,744

Moving Averages
 10 DMA  582
 20 DMA  596
 50 DMA  647
200 DMA  729

NASDAQ 100 Index (NDX/QQQ)
 44 - 42               155,686       103,196         1.51
 41 - 39               161,936       125,669         1.29
 38 - 36                13,409        73,535          .18

QQQ(NDX)close: 34.66

 33 - 30                   870        25,992         29.88

Maximum calls: 45/138,619
Maximum puts : 43/73,609

Moving Averages
 10 DMA 40
 20 DMA 42
 50 DMA 51
200 DMA 74

S&P 500 (SPX)
1175                    8,097         7,189          1.13
1150                   16,717        19,853           .84
1125                    2,024         9,486           .21

SPX close: 1106.46

1075                      299        13,324         44.56
1050                      404        16,460         40.74
1025                       14        18,278       1305.57

Maximum calls: 1275/24,155
Maximum puts : 1100/20,804

Moving Averages
 10 DMA 1142
 20 DMA 1168
 50 DMA 1253
200 DMA 1374


CBOT Commitment Of Traders Report: Friday 03/30
Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts on the
Chicago Board Of Trade.

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

                     Small Specs              Commercials
S&P 500         (Current) (Previous)      (Current) (Previous)
Open Interest
Net Value        +64946     +70479         -65571     -69490

Total Open
Interest %      (+30.79%)  (+38.13%)       (-9.15%)  (-9.63%)
                net-long   net-long        net-short net-short

DJIA futures
Open Interest
Net Value         -3269      -2516          +3299      -2696

Total Open
interest %      (-24.49%)  (-19.73%)      (+14.22%)  (-11.17%)
                net-short  net-short      net-long   net-short

Open Interest
Net Value          +431      +3555          -4461      -8928

Total Open
Interest %       (+2.03%)   (+21.46%)     (-5.89%)   (-12.57%)
                 net-long   net-long      net-short  net-short

What COT Data Tells Us
Indices: Commercials took a breath this week with net-short
positions on the S&P 500 remaining virtually unchanged. Commercials
did reverse their positions on the DJIA as they are now net-long.

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 03/27 by the CFTC.


Please visit this link for Market Posture:



A Little Tight Around The Collar?
By Lee Lowell

Does it feel like your collar is squeezing your throat a little
bit harder these days?  Are you seeing open long positions
bleeding away?  Are you getting that sinking feeling that my net
worth has evaporated?  If so, then you're not alone.  The carnage
is everywhere.  I keep reading about new layoffs everyday,
companies filing for bankruptcy, retirees thinking about coming
out of retirement, all because of the stock market.

If you want to play the options market, it's apparent now more
than ever that you must take control of the "limited risk" nature
of options.  It's true that when you buy options, your risk is
limited, but that limited risk can take a big chunk out of your
capital.  Yeah, I can buy a LEAP call for 2003 and wait it out.  I
have two years to be correct.  Well, look at all those LEAP calls
on CSCO, EMC, SUNW, ORCL, JNPR, CIEN, etc, etc.  They have all been
sliced by about 75% or more of their original value and the outlook
doesn't look so good for at least a few more quarters.  It's
limited alright, but by now those positions are probably only worth
$2 each.  I know some of mine are.

So we have to take control of the situation and sell out the
losers, (as painful as it may be) if you haven't already and work
on the next strategy.  It's hard to let go of a stock that you've
felt will serve you well in the long run.  It may have been good to
you in the past, so you don't want to let go.  Well, that's your
decision, but do you think SUNW, CSCO, INTC care about how much
money has been drained from your portfolio?  Don't feel bad about
selling stock.  You'll not only make you wallet feel better, but
also your psyche.  Once you have the losers out of the way, you
can think much more clearly.  If you want to get back into these
stocks in the future, then no problem.  Buy them back when things
look brighter.

I'd like to discuss an option strategy that corresponds to the
title of this article.  It's called a "collar."  This is a great
very low-risk, or no-risk strategy to use with LEAP options.  It's
good for those long-term positions that you originally wanted to
let sit in your account and not have to worry about.  This is
truly one of those strategies.

A collar is constructed by buying the underlying stock, buying an
ATM LEAP put and selling an OTM LEAP call.  The put and call should
be of the same expiration LEAP month.  Because of the nature of
long-term options, the calls will usually be priced higher than
their equivalent puts.  For this reason, the OTM calls can be used
to totally offset the purchase price of the put and allow for some
upside appreciation.

Let's look at some examples.  IBM is currently trading at $92.50.
The Jan 2003 $90 put and the Jan 2003 $110 call are both trading
for about $16.40.  This means we can buy 100 shares of IBM at
$92.50, and buy the put and sell the call for even money.  Our
risk/reward is easy to calculate.  Since the options were done at
zero cost, our upside is limited to the strike price of the call
which is at $110.  So if IBM were at $110 or higher at Jan 2003
expiration, we would make $1750 per spread.  At $110 or higher,
the puts would expire worthless and the calls will get called away.
But either way, we make the difference on our long stock:

$110 - $92.50 = $17.50 x $100 = $1750

Our downside is very limited.  If IBM tanked to $50, our calls
would expire worthless but we would exercise our $90 puts which
would almost entirely offset the loss on our long stock.  Since
we bought IBM at $92.50 and exercised our put at $90, the most we
would lose is $250.  This is truly a limited risk, long-term
strategy that is bullish in nature.  We'll make money if IBM heads
higher like we hoped and our loss is very minimal if IBM falls.

This isn't the only way to construct a collar.  You can vary the
strike prices around and you can vary the position size of either
the calls or puts.  In terms of shifting the strike prices, you
can substitute the IBM $110 call with the $100 call.  This will
give you a net credit when initiating the spread.  The $100 call
will trade at $20 and the $90 put still at $16.40, giving us an
initial credit of $3.60.  Since we have lowered the strike of the
call, our upside is capped at the $100 strike which could
theoretically give us a maximum profit of:

$7.50 ($100 - $92.50) + $3.60 (initial credit) = $11.10 upside profit

Our downside would even show a profit too now!  If IBM went belly
up and became a worthless company, we still could exercise our $90
put against our long IBM from $92.50.  This would result in the
same -$2.50 loss as before, but now we have our credit of $3.60 to
cushion that loss too.  So our downside is actually a positive
$1.10 per spread.  This is truly a "can't lose" position.  We make
money on the upside and the downside.  How's that for a strategy?
Our only drawbacks are the commission costs and the limited upside
potential.  But there's nothing that says you can't buy back the
short call at anytime if you feel IBM is truly headed higher.  Who
wished they had executed some collars last spring right before
everything tanked?  I'll be the first to raise my hand.

Here's a variation of the collar that I learned from a friend
recently.  Instead of doing the OTM/ATM version for the calls and
puts, you can do them both ATM and use a different amount of
options.  We could buy 300 shares of IBM at $92.50, buy 3 $90 puts
at $16.40 (total $49.20), and sell only 2 $90 calls for $24.60
(total $49.20).  What we have done here is cut back on the amount
of calls which would give us unlimited potential on the upside
because we only covered 200 of our 300 IBM shares with the short
calls.  The prices of the options offset each other like before,
so there's no cost for doing the options.  Once again, our downside
is limited to the -$250 loss, but we've gained the chance of
unlimited upside potential.

It truly is amazing what kind of strategies you can put together
with options.  There's one for every kind of scenario, you just
have to create it.  Take a look at the collar as it is a very
powerful strategy.  As we have all learned the hard way over the
last year, it's good to protect your upside and your downside.

Good luck.


Wall Street Limbo Contest: How Low Can It Go?
By Scott Martindale

How low can it go?  Who is winning this limbo contest, anyway?  If
you have been staying short despite the VIX and VXN bullishly
eclipsing the 40 and 75 levels, respectively, you are without a
doubt cashing in big time.  I have been somewhat distracted by
other tasks lately, so I have been missing conservative entry
points for shorting the indices (I don't want to chase them down
at these levels).  But with so many technical indicators screaming
for relief, the only thing keeping the markets down right now is
the buyer's strike.  Every possible reason for this has been
offered including assorted things like margin calls, taxes due,
corporate earnings visibility, China confrontation...perhaps
even my beloved Arizona Wildcats losing the NCAA basketball
championship last night.  No sector was spared today as even the
current darlings in power production and utilities were hit.
Gold stocks, anyone?

I saw Tom Gallagher on CNBC last week say that he had never seen
anything so bad since he began working on the Street back in 1964.
As a comparative newcomer to the trading scene, my eyes have
witnessed the kind of carnage that will shape my thinking forever.
No more riding out downswings for fear of missing the "inevitable"

JDS Uniphase (NASDAQ: JDSU) below $15?  This is a company with a
dominant industry position and a bright future, but with no
earnings it's had no takers lately. Juniper Networks (NASDAQ:
JNPR) below $30?  Are you kidding me?  This is a buyers strike of
epic proportions.  Perhaps President Bush is on the verge of
putting the kibosh to this strike, too.  We can hope.

I have stopped out of many equity positions and written calls
against others in my long-term portfolio to protect some gains,
stem some losses, and reduce cost basis.  But I just can't get
myself to short this market at these levels.  After today, I plan
to stand pat with my remaining holdings to just ride it out from
here into the next rally -- if and when it decides to come -- and
then consider some shorts.  My holdings include some lottery plays
in new technology and biotech as well as a few big-cap techs and
several names in energy, power generation, marine transportation,
gold, high-yield stocks (such as natural gas royalty trusts), and

What's a relatively safe way to play this market?  Well, energy
stocks, utilities, and power generation companies, despite recent
weakness, are all strong performers with bright futures.  When we
see weakness like they have shown this week, it is a good time to
consider writing at-the-money naked puts and put credit spreads.
And then when they gain strength, write at-the-money or slightly
in-the-money covered calls.  Or you can simply buy and sell the
shares.  Indeed, these are true "rolling" stocks.  With reasonable
P/E's, strong current income statements, and steady projected
growth, you really aren't risking much.  Of course, you won't make
a big killing either, but you can do surprisingly well over the
course of a year by playing the cycle every one to three months.

Let's look at Texaco (NYSE: TX) as an example.

Over the past year, TX cycled between $50 and $60 for several
months before moving up to a new range between $60 and $70.
Whether you had been playing the stock or the options, you would
have been selling at $60, including mid-October or mid-November.
However, once it strongly broke up through the $60 level in late
December, that was an indication that it might be ready to move up
to a higher range after a normal pullback.  The break back up
through $60 in late January after the brief pullback was the buy
signal.  Today, I would be looking for technical indicators to
flash a buy signal as the stock again cycles back down toward that
$60 support level.

Diamond Offshore (NYSE: DO) is another stable energy play that has
cycled reliably three times over the past year between $35 and
$45.  Today it is again coming down toward the $35 level and I
would be watching the technicals for a buy signal.

Another way to go is the power generation and distribution sector,
including Calpine (NYSE: CPN), AES Corp. (NYSE: AES), NRG Energy
(NYSE: NRG), Reliant Energy (NYSE: REI), and El Paso Energy (NYSE:
EPG).  These companies have been cycling within an upward trend.

Before I sign off for today, let's again look briefly at that
basket of techs I've been watching that seem to have the greatest
gains when the Nasdaq rallies and likely will lead the next
sustained advance.  BEA Systems (NASDAQ: BEAS), Human Genome
Sciences (NASDAQ: HGSI), Juniper Networks (NASDAQ: JNPR), Mercury
Interactive (NASDAQ: MERQ), and Ballard Power (NASDAQ: BLDP).
Despite relatively high valuations, these high-volatility stocks
had been managing to hold steady during selloffs and lead the
rallies.  However, with the sweeping market carnage over the past
week, they are now being killed like everything else.
Nevertheless, I will continue to watch these stocks closely once
the markets appear to be turning.

Unfortunately, I won't be at this week's OIN Seminar.  I'm sure it
will be fantastic, and I regret not being able to be there.  But I
plan to attend the next one -- hopefully this fall.

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index instead?

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


PMI $63.70 -1.91 (-1.10) PMI has provided call players with
Good opportunities since we picked it at $59.75.  However,
all good things must come to an end, and PMI is no exception.
The IUX.X collapsed below support at 725 this morning, and
PMI fell below support at $65, and then $64.  While PMI
is still in an upward trend, the stock closed below our stop
at $64, and thus, we are taking our gains and dropping the
position tonight.

FDC $58.41 -1.38 (-1.05) FDC made another attempt to rally
past $61 on Monday before the market collapsed in the afternoon.
On Tuesday, FDC fell to support at $59, which held up
pretty well during the carnage in the broad sectors.  However,
the selling took control toward the end of the day, and
overwhelmed FDC.  While the stock may likely recover in the near
term, FDC closed below our stop level at $58.50, and we are
dropping it tonight.

MO $44.51 -1.68 (-3.24) The general premise behind our MO play
was to play defense from the long side, as Phillip Morris is
viewed as a defensive company in times of economic uncertainty
and/or contraction.  Although our premise was, and still is,
correct, MO has slid lower as institutional investors have
been raising cash through selling virtually all equities,
including MO.  As such, the selling continued during Tuesday's
session and MO fell below our downside stop at the $45 level.
Its violation of $45 has forced us to drop coverage on MO this
evening.  Use any pop back above $45 to exit any open positions
if the break below our stop Tuesday didn't already.

USAI $22.00 -1.44 (-1.94) USAI fell victim to widespread
selling in equities Tuesday.  On a side note, the sell-off in
USAI came on relatively light volume, which lends to our
market-related weakness hypothesis.  Nevertheless, USAI did
close below our recently-raised stop at the $23 level and
we're dropping coverage tonight in an attempt to cut losses
quickly and manage risk effectively.  Use any rebound off the
$22 level early Wednesday to exit any open positions.


No dropped puts tonight

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The Option Investor Newsletter                  Tuesday 04-03-2001
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

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COF $53.85 -2.30 (-1.65) Despite a steep drop in peer AXP
yesterday due to an earnings warning, shares of consumer credit
giant COF were able to end the day in the positive, closing up
1.17 percent on 1.65 times the ADV.  There were two factors
contributing to this.  First of all, AXP's woes were due to junk
bond losses, an area where COF has little if any exposure.  As
well, Lehman Brothers re-iterated their Strong Buy rating, citing
that the company would generate higher than expected growth in
loans during what is a traditionally weak quarter.  With the
broader markets in steep decline today, COF succumbed to the
selling pressure, pulling back 4.1 percent.  However, volume was
only average and at present, its up-trend is still intact.
Aggressive traders may look for bounces off support at our
closing stop price of $53 as a potential entry point, but confirm
with volume.  A strong break above the 5-dma at $54.69 would
allow more cautious traders to enter.  Just keep an eye on other
companies in the Financial sector such as C and PVN.

WFC $48.95 -0.74 (-0.54) Amidst one of the worst sell-offs we
have had so far this year, WFC held up comparatively well.
News was released this week regarding Berkshire Hathaway's
purchase of $3.4 billion worth of WFC helped, as well as an
upgrade of WFC by Salomon Smith Barney.  Salomon analysts stated
in a research report that money center names should begin to
strengthen in the next couple of months.  WFC actually dipped to
strong support at $48.24 in the late afternoon, but rebounded
to close at $48.95, which is testimony to its strength.  WFC is
one of the few stocks which is still above its 200-dma of $46.83.
A move above resistance above the 50-dma of $49.34 could be
an entry point for conservative investors.  Alternatively,
traders could take positions at current levels if BIX.X is
exhibiting strength.  We are keeping stops at $48, so close
positions if WFC closes below this level.


OPWV $14.10 -4.15 (-4.87) A double top and subsequent failed rally
at $20 on Friday and Monday correlated to a failed rally in the
QQQs near the $40 level.  When OPWV failed to hold at $18 on
Tuesday, the stock collapsed as the major indexes sold off.
Another failed rally past $15.25 towards mid-afternoon led
to OPWV establishing a new 52-week low.  At this point, the
Nasdaq is heavily oversold and we may have a relief rally in the
near future.  Nonetheless, it will take more than a simple
relief rally to salvage OPWV.  Put players can continue to take
positions from further failed rallies from the $15.25 level.
A drop below $14 on heavy volume would be an entry point for more
conservative put players.  In light of market action, we are
moving stops to $18 to protect gains.  Traders should close
positions if OPWV settles above this level.

AETH $9.34 -1.66 (-3.66) It appears that no news is bad news in
the case of AETH.  Aside from Monday's release of its SEC Form
10-K and recent insider trading report, the company has been
quiet so far this week.  As mentioned in Sunday's write-up, a
share lockup expiry in late February has resulted in an increase
in float of 35 percent.  In looking at the insider trading data,
it is apparent that the sellers are wasting little time.  This
being the case, we could expect continued significant selling
pressure ahead.  The stock fell $2 or over 15 percent yesterday
and while volume was about average, the bears picked up the pace
today, dropping AETH over 15 percent again on almost 1.2 times
the ADV.  Now in the single digits, a break below $9 would allow
for an entry on weakness while aggressive traders may target
resistance at $10, $11 and the 5-dma at $11.86.  Track sector
sentiment by following peers CMVT and OPWV and make sure AETH
continues to close below our lowered stop price of $11.

ISSX $20.09 -6.63 (-7.27) Up until today, ISSX had been fairly
quiet for the past few sessions, trading in a range between
support at $25 and resistance overhead at $30 on relatively low
volume.  This sideways movement allowed enough time for the
stock's short-term moving average resistance levels to catch up.
ISSX closed down 2.34 percent on light volume yesterday, in
continuation of the agreement formed between the bulls and bears
as to a fair price for shares of the Internet security provider.
However, with weakness in NASDAQ and Internet stocks today, ISSX
plunged almost 25 percent on over three times the ADV, putting
our put play deep into the heart of profitable territory.
Further selling leading to a bearish plunge below the
psychological $20 level would allow the risk averse to enter on
weakness while bounces leading to rollovers at $22.50, $25 and
our closing stop price of $26 may provide higher risk players
with targets to shoot for.  Correlate entries with movement in
sector sisters CHKP and VRSN.

DPMI $40.50 -1.42 (-3.04) DPMI had been making a pattern of
lower highs for the last several weeks.  A failed rally from
$45 on Friday turned out to be an excellent entry point, as it
coincided with a drop in the SOX.X below 550.  When the SOX.X
dropped below 500, DPMI dropped below $42, and has so far held
at strong support at the $40 level.  However, if we experience
additional weakness in the SOX.X, $40 could very well collapse.
Unless we have some positive news or visibility from some of
the chip stocks, this scenario is possible.  Conservative
traders might want to wait for a break below $40 on heavy
volume before taking positions.  Aggressive traders could take
positions upon a roll over from $42, if the Nasdaq and SOX.X
are experiencing weakness.  We are moving stops to $43, so
exit positions if DPMI closes above this level.

AMGN $54.69 -2.31 (-4.69) Our put play for Amgen worked out just
as we planned it.  On Monday morning, the BTK.X attempted to rally
past 450 and collapsed with the broad market indexes.  A downgrade
of several biotech stocks by Lehman Brothers helped to initiate a
sell off.  Following this, AMGN attempted to rally past $58.63,
and subsequently fell below $58 to support at the $56 level.  On
Tuesday morning, AMGN made a classic failed rally past a lower
high at $58, and heavy selling followed.  BTK.X fell all the
way to 411 today, and made an attempt to rally toward the close.
We will have to wait until tomorrow to see if the index can
through.  However, AMGN only reached $55 at the close, which does
not bode well for the stock going forward.  Aggressive traders
could take positions upon a failed rally past $56.  A fall below
the $50 level would be very bearish, and could possibly take
AMGN all the way down to $45.  At this time, we are moving the
stops to $58, so close positions if AMGN closes above this level.

NSM $24.20 -0.06 (-2.55) The chip stocks were somewhat buoyed
in Tuesday's session from what appeared to be short covering.
For its part, NSM consolidated around above the $24 level in a
tightening range into the close of trading.  The stock's
tightening range is a classic sign of consolidation and could
very well portend another leg lower.  The apex of NSM's
consolidation is at roughly $24.25, which could prove to be
an excellent entry into the play.  For more conservative
bears, wait for NSM to break below the $24 level on increased
volume before initiating new positions.  Moreover, confirm
weakness in the SOX.  We have lowered our stop on NSM to $25 in
an attempt to lock in the gains we've earned since initiating
coverage on the play at $26.

SONS $13.88 -4.44 (-6.06) SONS was hammered in Tuesday's
session in the wake of myriad earnings warnings and analyst
downgrades in the networking sector.  The stock plunged on
heavy volume to a new 52-week low and appears to have more
downside.  While SONS has dropped to the low teens, and little
juice remains in the stock for the shorts, it may work its
way to the $10 level, which will provide existing put holders
with additional profits.  New positions may be added at current
levels, but traders should be aware that the risk in doing so
has increased after SONS' big drop Tuesday.  Finally, we're
lowering our stop on SONS to $17 in order to lock in gains,
while giving the stock room to work lower.

XLNX $31.44 -1.69 (-3.69) Although the broader chip sector
traded relatively well Tuesday - all things considered - XLNX
did continue to work lower on heavy volume.  In fact, we're
happy with the steady descending trend in XLNX and the heavy
trading on which it's taking place.  As just mentioned, XLNX
is in an eight-day descending trend, with the upper range of
that trading located around the $33 level and the lower end
now established at $31.  As such, traders can look for entry
points either near $33 on a rollover or on a break below the
$31 level depending upon individual risk tolerances.

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AEP - American Electric Power $48.02 +0.41 (+1.02 this week)

American Electric Power is a multinational energy company
based in Columbus Ohio.  AEP owns and operates more than 38,000
megawatts of energy, making it one of America's largest
generators of electricity.  The company is also a leading
wholesale energy marketer and trader, ranking second in the U.S
in electricity volume.  AEP provides retail electricity to more
than 9 million customers worldwide, and has more than $55
billion in assets, primarily in the U.S, with holdings in select
international markets.  Wholly owned subsidiaries are involved
in power engineering, construction services, energy management,
and telecommunications.

While many of the traditional safe havens, like pharmaceuticals
and consumer staples got slaughtered today, the electric utilities
were one of the few positive sectors amidst the selling in the
major indexes.  Last Friday, the utility sector, UTY.X surged
through its 50 dma of 359.86, while AEP powered through its own
50 dma of $45.37, and hasn't looked back since.  Investors are
currently realizing that the demand for energy in its various
forms has never been higher.  The California energy crisis has
heightened the public awareness of the vast shortage in the supply
of energy in certain states.  In addition, several significant
news items have been released in the last few weeks, which acted
as additional catalysts to spur the sector to new heights.
The governor of California has ordered an accelerated approval
process for the development of new power plants in the state.
Calpine corporation, an independent power producer, stated that
their earnings would be above analysts expectations.  On Tuesday,
Berkshire Hathaway disclosed that they had purchased shares of
GPU, a New Jersey electric utility.  In addition, AEP shares
rallied on the news released on Monday that Entergy and FPL,
two rival electrical utilities, had called off their proposed
merger, which could have been a potential competitor to AEP.
AEP has formed a strong upward channel since March 22, and is
now encountering heavy resistance at the $48 level, which it
was unable to penetrate in December and February.  A strong
move above $48 with heavy volume would be a good entry point
for conservative call players.  Traders could also take a
position on a pull back to $47.50, if UTY.X is rallying.  Watch
others like EXC and NGG for sector strength, and close
positions if AEP closes below our stop level of $46.

BUY CALL APR-45*AEP-DI OI=199 at $3.50 SL=1.75
BUY CALL MAY-45 AEP-EI OI=845 at $4.00 SL=2.50
BUY CALL MAY-50 AEP-EJ OI=437 at $1.05 SL=0.50  High Risk!!


EQT - Equitable Resources, Inc. $70.59 +1.33 (+1.59 this week)

Equitable Resources is an integrated energy company with emphasis
on Appalachian area natural-gas supply, natural-gas transmission
and distribution, and leading-edge energy-management services.
Equitable Resources, its divisions and its subsidiaries, offer
natural gas products and energy services to wholesale and retail
customers through three business segments: Equitable Utilities,
Equitable Production and NORESCO.  NORESCO provides
energy-management services for projects across the United States
and in selected international markets.  The division focuses on
energy infrastructure, performance contracting, and power quality
related projects.

In a market that seems bent on making new 52-week lows, EQT
stands out as an exception, bullishly charging up to new all-time
highs.  One of the main reasons for this is the company's
consistent stream of stellar earnings reports.  EQT last reported
in early February, with a 71 percent rise in EPS due to increases
in production, energy prices and efficiencies in operation.
During the conference call, the CEO offered optimistic comments
going forward.  At a time where lack of visibility seems to be
the mantra on Wall Street, this news was warmly welcomed.
Despite a downgrade last Thursday from JP Morgan from a Buy to a
Long Term Buy rating, shares of the energy provider continue to
move up on increasing volume.  After struggling twice with
formidable resistance at $67, it appears that the third time was
a charm.  With this level now breached, the stock will now likely
find support at this point.  It is here that we are drawing our
lines in the sand, placing a protective stop.  Make sure that EQT
continues to close above this level.  When considering an entry,
track movement and direction in industry peers DYN and SRE to
ascertain sector sentiment.  Aggressive traders may target
pullbacks intra-day to support at $70, the 5-dma near $69, $68
and the 10-dma just above $67.  The more cautious may want to
wait for buying volume to continue, taking EQT above $71 with
conviction before taking a position.

BUY CALL APR-65 EQT-DM OI=460 at $6.40 SL=4.50
BUY CALL APR-70*EQT-DN OI=111 at $2.75 SL=1.25
BUY CALL MAY-70 EQT-EN OI= 15 at $4.40 SL=2.75
BUY CALL MAY-75 EQT-EO OI=100 at $2.15 SL=1.00



WR - Western Resources $24.15 +0.85 (+0.30 this week)

As a consumer services company, WR primarily provides electric
generation, transmission and distribution services to
approximately 628,000 customers in Kansas and monitored
services to approximately 1.6 million customers in North
America and Europe.  Rate-regulated electric service is
provided by KPL, a division of the company, and Kansas Gas
and Electric, a wholly-owned subsidiary.  Monitored services
are provided by Protection One, Inc., of which WR has an 85%
ownership stake.  Additionally, through its partial ownership
of ONEOK, Inc., WR is involved in natural gas transmission
and distribution services to approximately 1.4 million
customers in Oklahoma and Kansas.

The well-publicized energy crunch is having a deleterious
effect on most sectors of the economy, with one exception;
those companies involved in the supply of that energy to
consumers.  Utilities are one of the few sectors in the market
that hasn't been decimated lately, and WR has been holding up
nicely along with it.  After a dip near $22 a couple weeks ago,
the stock has been marching upwards, along with the strength in
the broader sector.  The plain and simple fact is that it
provides two commodities that people are hesitant to cut back
on, even in tough economic times; energy and security services.
After confirming support near $22, WR has quickly come back up
near the $24-25 congestion zone, and as investors look for a
safe place to put their money in these perilous times, the
stock seems to be attracting their interest.  WR is a thinly
traded stock, (with thinly traded options, to boot), but should
provide some attractive profits in the current market
environment.  There was a bit of uncertainty after the company
announced earnings last Friday, but the action this week seems
to indicate that investors like what they heard.  And why not?
Earnings for the year ended December 31st, 2000, were $1.96,
versus a paltry $0.20 in the year-ago period.  Technically the
stock is looking solid as well, with a nice cup-and-handle
formation on the weekly chart pointing to a coming rally that
should push through the $25 level in short order.  Support at
$23 (also the location of our stop) will provide attractive
entries for aggressive traders should we get a mild pullback
and bounce.  More conservative traders may want to wait for a
move through $25 before taking a position.  Monitor the Dow
Jones Utility index (UTY.X) for continued strength, confirming
the strength in WR before playing.

BUY CALL APR-22.5 WR-DX OI=  0 at $1.85 SL=1.00  Wait for OI!!
BUY CALL APR-25   WR-DE OI= 10 at $0.35 SL=0.00  High Risk!!
BUY CALL MAY-22.5*DD-EX OI= 29 at $2.10 SL=1.00
BUY CALL MAY-25   DD-EE OI=162 at $0.50 SL=0.00



CMVT - Comverse Technology, Inc. $48.69 -6.49 (-10.20 this week)

Comverse Technology Inc. is the world leader in multimedia
telecommunications applications. Founded in 1984 and
publicly-traded since 1986, Comverse Technology Inc. is based in
Woodbury, Long Island, New York and is a NASDAQ-100 Index
company.  Through its Comverse Network Systems division, the
market leader, the Company markets its Access NP and TRILOGUE
Infinity Enhanced Services Platforms, which enable wireless,
wireline, and internet companies to offer, to their residential
and business customers, a growing range of revenue-generating
enhanced services.

Readers who have been following our highly successful put play in
Aether Systems will no doubt have noticed that negative sentiment
and selling pressure in the Wireless Software space has been
formidable indeed.  Slower than expected deployment of next
generation wireless networks, continued concerns in the business
models of firms in this sector and the extreme optimism that has
now turned to pessimism have all played a role in the decline of
CMVT.  It appears now that the negative momentum is feeding upon
itself, as even positive comments from analysts are not helping
the stock to find a bottom.  US Bancorp Piper Jaffray recently
re-iterated their Strong Buy rating on CMVT, along with a $95
price target, citing new contract wins and continued traction for
CMVT's products as reasons to like the stock.  WR Hambrecht
followed suit with Buy rating and a $75 price target. This led to
a bounce last Thursday, upon which the bears sold deeply into
what little strength the bulls could muster.  Today, the stock
plunged sharply, losing almost 12 percent on over 1.45 times the
average daily volume.  Further selling leading to a break below
today's intra-day low of $47.61 could allow conservative traders
to make a play, but confirm with volume. For higher risk players,
oversold bounces leading to a rollover upon encountering
resistance at $50, $51, $52.50, $55 and our closing stop price of
$57 may provide potential entry points. Keep an eye on
competitors AETH and OPWV to gauge possible movement and
direction before jumping in.

BUY PUT APR-50*CQV-PJ OI=3942 at $5.10 SL=3.00
BUY PUT APR-45 CQV-PI OI=1067 at $3.10 SL=1.50



AETH - Aether Systems Inc. $9.34 -1.66 (-3.66 this week)

Aether Systems Inc. is a leading provider of wireless and mobile
data products and services allowing real time communications and
transactions across a full range of devices and networks.  Using
its engineering expertise, the ScoutWare family of products
including the Aether Intelligent Messaging (AIM) software
platform, and its network operations and customer care center,
Aether seeks to provide comprehensive, technology independent
wireless and mobile computing solutions.  Aether develops and
delivers wireless and data mobile services across a variety of
industries and market segments both in the United States and

Most Recent Write-Up

It appears that no news is bad news in the case of AETH.
Aside from Monday's release of its SEC Form 10-K and recent
insider trading report, the company has been quiet so far this
week.  As mentioned in Sunday's write-up, a share lockup expiry in
late February has resulted in an increase in float of 35 percent.
In looking at the insider trading data, it is apparent that the
sellers are wasting little time.  This being the case, we could
expect continued significant selling pressure ahead.  The stock
fell $2 or over 15 percent yesterday and while volume was about
average, the bears picked up the pace today, dropping AETH over
15 percent again on almost 1.2 times the ADV.  Now in the single
digits, a break below $9 would allow for an entry on weakness
while aggressive traders may target resistance at $10, $11 and the
5-dma at $11.86.  Track sector sentiment by following peers CMVT
and OPWV and make sure AETH continues to close below our lowered
stop price of $11.


Unproven tech companies have been seeing the worst of the market
selling.  AETH happens to be one of them.  Today marked an
all-time low for AETH as the stock was introduced to single digits.
While cheap, we still see the stock going to new lows and the next
logical level would be $5.  Entries can be attained on a rollover
from $9.75, which was intraday resistance today.  A breakdown
through $9 on strong volume would also afford entry.

BUY PUT APR-12.5 HIZ-PV OI=270 at $3.88 SL=2.25
BUY PUT APR-10  *HIZ-PB OI= 48 at $2.13 SL=1.00


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Conservative Option Trading:
A Review of Strategies and Position Management
By Ray Cummins

The Options Market is unique because it offers a variety of ways
to profit.  At the same time, the risk in some positions can be
substantial and as a trader, your primary goal must always be to
maximize returns and preserve capital.  The easiest way to achieve
this objective is to become familiar with reliable strategies and
acquire the knowledge to implement and manage them correctly.

Defining Your Approach

The principal requirement for profitable trading is the ability
to achieve acceptable returns and control risk effectively.  A
thorough and deliberate approach to strategy selection is the
first step in the process.  After the principal techniques have
been identified, it is crucial to execute them with discipline
and consistency.  Discipline in option trading is the ability to
maintain self-control and implement a pre-determined plan.  The
most difficult skill that traders must learn is the ability to
overcome human (emotional) impulses.  When real money is at stake,
the influences of greed and fear (of loss) will attempt to sway
your judgment, hindering a rational thought process.  If you can
not overcome these effects, the chances of success are slim.  In
fact, that is the primary reason it is so important to utilize
strategies that promote a mechanical approach to trading.  These
types of techniques offer little opportunity for indecision and
generally provide more consistent returns as they are exposed to
less risk than those with a high level of maintenance.

Using a proven trading system is one of the best ways to become
successful in the market.  A plan of attack helps novice traders
learn proper money management and the correct use of technical
analysis in identifying precise entry and exit points.  Trading
in a systematic manner is far more likely to produce consistent
profits than a scheme based on intuition, emotion or the trend
of the day.  The benefits to this approach are many but most
importantly, you can eliminate the guesswork that comes from
trying to manage an active position without realistic goals or
loss limits.  The targets and exit strategies are predefined,
leaving no doubt as to when and how to get out of a position if
the market moves against you.  Potential risk is identified prior
to beginning the trade, with a fixed limit on maximum losses and
a formula for taking profits.  There are no positions initiated
without a complete assessment of the capitalization necessary to
carry out the entire strategy, even in the worst case scenario.
A thorough study of the underlying issue’s historical data is used
to provide objective goals for future movement, based on expected
volatility and technical indications.  With all of these elements
properly evaluated and arranged, you can develop an effective plan
that contains a suitable risk-reward outlook based on appropriate
strategies that are compatible with your personal trading style.

A major stage in developing a practical method for participating
in the market is to determine your comfort threshold and stress
level.  Think about the unique emotional effects of your trading
activities and managing a complex portfolio.  Are you ordinarily
a cautious person or do you feel comfortable traveling at warp
speed?  How will a specific type of trading affect you mentally?
Can you handle the volatility of day-trading options or are you
happier with conservative, longer-term plays.  After you identify
the appropriate trading attitude, it is important to decide what
type of market activity is most favorable to your personal style.
Some traders prefer strategies that profit from trending markets
such as those characterized by a sustained advance or decline.
Techniques that benefit from this type of movement include Put or
Call buying and high-potential spreads or combinations.  Another
tactic might be to focus on changes in volatility.  Traders using
this approach buy or sell premium in an attempt to profit from
transitions in market character.  Some utilize neutral positions
such as calendar or ratio spreads when the technical outlook for
the underlying issue is range-bound or static.  Regardless of the
method you prefer, each category of price action demands a unique
type of trading system.  The key to success is to specialize in a
specific kind of market activity and utilize trading strategies
that perform well in that particular environment.

One of the most important steps in developing a profitable system
is identifying the appropriate level of complexity when selecting
trading techniques.  The simplest approach is most often the best
but every strategy has risk and it is impossible to classify any
particular technique as the absolute perfect method.  In most
cases, there is more than one favorable technique and even though
each strategy has different attributes, they can all be useful in
a trader's arsenal at the proper time.  The easiest way to become
successful is to become completely knowledgeable of the mechanics
of any technique that you are using and then construct a group of
diverse candidates based on the correct market outlook.  Of course,
you must remember that the individual investment objectives are
far more important than the merits of the technique itself.  If a
specific strategy is not suitable for you or your trading style
then it should not be used, no matter how attractive it appears.
In addition to selecting the proper trading techniques, you must
also identify the appropriate time frame in which to participate
in the market.  Most investors are suited to longer-term plays as
they require less attention and are easy to manage for those who
have full-time commitments to work or family.  Traders who have
the temperament and resources to follow the markets at all hours
should consider short term techniques based on intra-day data and
momentum-based trends.  Using the appropriate strategy when the
markets dictates action is the fundamental step in developing the
ability to trade in a disciplined manner.

After you have identified the characteristics of the market and
selected the correct technique to profit from future trends, the
next task is to determine specific entry and exit points for the
underlying instrument.  In most cases, technical analysis should
be used to ascertain the correct parameters for risk and reward.
With this approach, a simple mechanism for money management is
built into the initial position.  Entry timing can be based on a
number of different indicators and the criteria used to identify
a trading opportunity is a personal choice.  The great thing is,
you don't have to open any position until you are satisfied with
the probability of a profitable outcome.  You can search through
charts for the perfect pattern, perform extensive due-diligence,
and wait for the best combination of technical indicators and
favorable market conditions.  In short, you can forego any trade
until the number of reasons to participate becomes overwhelming.
Remember, the market does not care whether you play along or sit
on the sidelines.  In addition, when you trade without a system,
it's amazing how confusing the situation can become.  Once you
are committed, you are playing by the market’s rules, not your

Strategy Selection

Profitable trading strategies have a number of common traits;
precisely defined principles, ease of execution and flexibility.
However, the most important characteristic for the majority of
investors is asset preservation.  In the options market, the most
successful systems are those which employ effective defensive
measures.  The ability to protect and conserve portfolio capital,
while achieving consistent returns is a fundamental quality of
any profitable technique.  Fortunately, numerous option-trading
strategies satisfy this criteria and our goal at the OIN is to
help novice investors discover the most appropriate combination
of trading techniques and provide them with the tools necessary
to profit on a regular basis.

The majority of option traders use derivatives to speculate on the
directional movement of stocks.  The appealing feature of option
ownership is leverage with limited risk.  If a trader correctly
predicts the market direction and takes the appropriate position,
he can expect to make a profit.  Unfortunately, that technique has
a relatively low probability of success.  As all option traders
quickly discover, owning the correct position (CALL or PUT) when
the market moves in the predicted direction will not necessarily be
profitable.  The reason is, over short periods of time (while the
trader is waiting for the option to rise in value), the position is
at risk from a variety of changes in the market.  One method that
experienced traders use to overcome this problem involves simple
combination positions or "spreads."  Spread trading is one way
to take advantage of mis-priced options and premium disparities,
while at the same time reducing the effects of short-term changes
in market conditions so that a position can be held to maturity.

Most successful option traders engage in some form of combination,
position or spread trading.  The basic technique involves buying
and selling simultaneous (but generally opposing) positions in
different option series.  The most common strategies are used to
reduce the cost, and the risk, of a position while providing a
higher probability of a limited return.  Other, more advanced
methods of spreading are based strictly on pricing disparities.
Experienced traders know there is an identifiable relationship
between various option series and when the relationship appears to
be mis-priced, they will buy the under-priced position and sell the
over-priced position.  The spread will profit as the prices of the
instruments return to a linear relationship.

The wonderful thing about option trading is its diversity.  There
are an incredible number of strategies available, one for every
type of market trend, character and outlook.  Positions involving
combinations of calls and puts, with different strike prices and
expiration months, along with index and futures options offer the
astute trader a variety of ways to participate in the market.  This
assortment provides even the most conservative investor the ability
to construct positions with an acceptable level of risk and reward
in almost any situation.  In addition, students of option pricing
theory can identify combinations with potentially superior returns
when the relationships between the options are theoretically skewed.
While there is no "perfect" position, successful traders learn to
maximize profits and hedge their risk in as many different ways as
possible, limiting the effects of short-term volatility and market
gyrations.  Obviously, there is no way to completely eliminate risk
but you can reduce it much more than that of a inexperienced trader
who does not utilize all of the available strategies.

Good Luck!

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

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