Option Investor

Daily Newsletter, Sunday, 05/13/2001

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The Option Investor Newsletter                   Sunday 05-13-2001
Copyright 2001, All rights reserved.                        1 of 5
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         WE 5-11          WE 5-4          WE 4-27          WE 4-20
DOW    10821.31 -129.93 10951.24 +141.19 10810.05 +230.20  +452.91
Nasdaq  2107.43 - 84.10  2191.53 +115.85  2075.68 - 87.73  +201.98
S&P-100  645.43 - 13.31   658.74 +  9.63   649.11 +  5.45  + 35.89
S&P-500 1245.67 - 20.94  1266.61 + 13.56  1253.05 - 10.07  + 60.41
W5000  11491.34 -195.93 11687.27 +178.43 11508.84 + 99.07  +557.12
RUT      487.36 -  5.53   492.89 +  8.92   483.97 + 17.26  + 11.69
TRAN    2879.56 + 10.37  2869.19 +  6.82  2862.37 +  1.07  + 94.71
VIX       27.48 -   .24    27.72 -   .05    27.77 -  1.24  -  1.27
Put/Call    .63              .67              .48              .91

Is The Fed Still Our Friend?

This week was not nearly as pleasant as the prior week with the Dow
losing -129 and the Nasdaq -84. We came so close to a potential
breakout but the cards were stacked against us. With each economic
report our hand of stud poker just got worse. You know how that
works. It is like starting out with a pair of jacks and thinking
alright, full house here we come. Instead every remaining card
drawn is not even remotely related. The economic cards we drew this
week have left traders wondering if the Fed will even cut at all,
much less by 50 basis points. With 50 points already priced into
the markets there was nothing left for traders to do but take
profits and hope for a wild card on Tuesday.

The trio of economic reports on Friday painted a picture that was
economically positive but two were Fed negative. Starting with the
Retail Sales report which followed the same path as the Chain Store
Sales on Thursday. Sales increased +.8% which was substantially
better than the 0.1% estimates. Auto sales were up a full percent.
The consumer is still buying and showing no signs of recessionary
caution or worry about their jobs.

The PPI was benign at 0.3% vs estimates of 0.4%. Prices rose only
moderately and showed that inflationary pressures were still absent
from the economy. The entire last year has had very little indication
of any inflation. About the only increases were in the energy prices
and in products impacted by high energy. This was good for the Fed
because they do not have to worry about inflation.

The preliminary reading of the Michigan consumer sentiment index
for May came in at 92.6 compared to April's 88.4 level. Optimism
about the economy appears to have rebounded and that is in marked
conflict with expectations. With signs that maybe the economy has
turned the corner and is recovering nicely the reasons for the Fed
to cut rates aggressively have evaporated. The rebound in the stock
market may have spurred the recovery in consumer confidence just
at the wrong time. The Fed had said they were very concerned in
the falling consumer confidence and it was obvious that Greenspan
timed the last inter-meeting rate cut to juice the market as much
as possible. Maybe his technique was too successful and now he is
going to find himself back behind the curve of having cut too much
too fast and he may need to take some back quickly. He just can't
seem to get the right interest rate at the right time.

Traders were almost in shock at the abrupt change in events in
just one week. Earlier in the week Fed funds futures indicated
an over 90% chance of a 50 point cut next Tuesday. Out of nowhere
a combination of events evolved to show that the Fed was ahead
of the recession curve and had maybe acted too aggressively.
As the chances for a big cut fell with each passing tick traders
who had profited from the rate cut rally headed for the exits.

The saving grace was it all occurred on VERY light volume. The
Nasdaq posted only 1.4 billion shares and was the lightest volume
day of the year. The NYSE only managed 896 million shares and it
was also the lightest day of the year. It was simply a buyers strike
more than a sellers rout. This produces a serious question of what
will happen when the summer doldrums actually appear. Still with
no volume we can draw no real conclusions from the trading day
other than everyone is holding their breath until the FOMC decision.
The worst thing we could see next week would be an increase in
volume with the markets still trending down.

The stock news did nothing to increase the desire to buy stocks.
Deutsche Banc said the Gartner Group is going to release a highly
negative report on the E-procurement software industry. It was
widely reported and began with questions about Oracle's pricing
power. There are several rumors that ORCL is under pressure to
severely discount their software or lose sales. This goes along
with rumors that ORCL will release an earnings warning soon. The
report said the stand alone E-procurement business in this sector
will not exist in three years. The entire sector sold off with
ARBA leading the list including ITWO, CMRC, EPNY, FMKT and PPRO.
Ironically ORCL may benefit from the demise of the smaller
companies as CEO Ellison says customers want an entire suite
of software from one company instead of buying pieces from
multiple providers. PSFT and SAP were cited with ORCL as the
possible winners of the sector shakeup. This news caused a drop
in the Internet sector in general even though the report was

Merger news was about the only other stock specific news of note.
American International Group agreed to acquire American General
for $23 billion in stock. This creates a huge company since AIG
is already the largest underwriter of commercial and industrial
insurance in the U.S. and one of the worlds largest.

Merck said it was acquiring RSTA, a leading genomics research
company for $620 million in stock. That was not the biggest
news for MRK. They are also rumored to be considering another
offer for Schering Plough (SGP). SGP was up almost +10% on the
news but sold off later in the day as analysts talked down the

Canadian Imperial Bank is reported to be in talks to acquire
Ameritrade for up to $10. Considering the gains in AMTD lately
it appears to be true. AMTD has risen from $5.27 to $8.56 in
the last three weeks in almost a vertical climb. CIBC is the
third largest bank in Canada and their rival, Toronto Dominion
bought TD Waterhouse. Last month AMTD chairman Joe Rickets, who
with his family owns 60% of the company said he was not against
selling the company, for $20 a share. Looks like CIBC was
listening but somebody folded on the price.

Bond yields have spiked in the last two days to levels not seen
since last November. When the Fed comes to an end of a cutting
cycle, yields tend to rise in advance and telegraph the event.
You don't need much telegraphing after the Fed fund futures
dropped to only a 42% chance of a 50 point rate cut next Tuesday.
The real market illness today was simply a realization that the
free rate cut ride may have drawn to a close. With analysts now
predicting only a 25 point cut on Tuesday and, are you ready,
possibly the next move after that a rate increase, the climate
for stocks has changed completely.

We all know the rules that say a rate change is not really felt
in the economy until six months after it is enacted. We have
several rate cuts that have not yet filtered through the economy
and those cuts should help the economy over the next several
months. The second guessers are saying now that Greenspan should
stop now and wait for evidence of direction before changing rates
again. However, not everyone has fallen off the 50 point wagon.
23 of 24 bond dealers surveyed on Friday said they still expected
one more 50 point cut. Were they just uninformed of the day's events
or just trying to put pressure on Greenspan to follow through on
the expected cut to avoid a market massacre? Who knows but you
can bet the discussions at the FOMC meeting on Tuesday will not
be casual.

The Fed normally telegraphs their intentions the three weeks
prior to the meeting and the fedspeak over the last three weeks
has been minimal at best. They have given no direction and with
the market expecting 50 points they are definitely aware of how
consumer confidence could be broken by a plunging market if they
do not cut. But, they may be convinced that a 25 point cut will
keep the major carnage from occurring and a minor dip worth the

Either way the markets are not going to be testing new upward
resistance on Monday and Tuesday. Even if we do get another 50
point cut the market knows it is probably the last. The guidance
the Fed gives with their decision will be critical to market
direction over the summer. If traders feel the cuts are over
and priced in then they have to depend on improved earnings
to increase stock prices. That news is simply not here yet.
Even the IBM pep talk on Wednesday was ignored by the markets
and analysts even talked down their comments significantly
causing IBM to gap down at the open. Has the ignore bad news
and celebrate good sentiment from last week disappeared? If
it has then next week could be rocky.

The semiconductor sector will brace for another blow when AMAT
announces results on Tuesday. With the dueling chip analysts
split over the fate of chip stocks this release could fuel the
rally or douse the fires completely. Also on Tuesday Dell, BRCD
and NTAP announce results. Dell has already said it would meet
the lowered target but further guidance will be critical. They
announced they were cutting more jobs this week and analysts
will want to see what they say about future visibility.

Both the Dow and Nasdaq rallied into the close on short covering
but no real buying interest. Traders enjoying the warmer weather
called in "well" and took an early vacation day. The Dow fell at
10:AM when the consumer confidence was released but then traded
in a very narrow 50 point range the rest of the day. 10800 was
weak support but without volume you have no directional
confirmation. The Nasdaq continued the slide from Thursday but
the rate of descent slowed as it approached 2100. The broader
markets as evidenced by the S&P stopped on support at 1240 dating
back to mid-April. Again, there are no conclusions to be drawn
here without volume and a Fed decision.

Waiting to exhale.

Traders should be wary of Monday/Tuesday. The Fed decision at
2:PM on Tuesday will be guessed and second guessed hundreds of
times before and after it is announced. All this information
will be sifted by traders and it will boil down to whether
investors feel there is substantial risk at this level. If they
decide the risk is minimal then they will continue to scale
into the market and provide a base to build from. The key is
the prior Fed rate cuts. As the economy improves due to those
cuts, earnings will improve. The market will normally anticipate
that event by about six months. Ding! That was the starting bell
because we are at that point now. Don't jump in just yet however!

Could there be another retest of the April lows? Sure, anything
is possible but I don't think it is probable. We are more likely
going to be range bound once the post Fed volatility passes. If
there is going to be a dip it should be soon and I would look at
it as a buying opportunity for fall. The concept of buying the
dip for fall is as alien to me as ET and I think most of our
readers feel the same. We want action now, not later. Our task
will be to find the leaders early. Find the stocks that funds
are trying to sneak into for the fall and ride their coat tails
for the short term. The best possible scenario would be a
significant drop immediately. We could track the stocks that
drop the least and they will likely be the leaders when money
starts flowing again. So if the market crumbles after the Fed
announcement we should all be cheering from the sidelines.
Investing in the market is still the new national pastime and
unlike the XFL it will still be here next year!

Technically the markets look terrible and ripe for that drop.
The Nasdaq, S&P and Dow have all bounced off significant
overhead resistance for two weeks with no breakthrough. The
S&P-500 has clearly rolled over. The Nasdaq barely clung to
weak support at 2100 at the close and should that fail, 2000
is almost a given. The Dow is now almost -200 points below its
highs from early in the week and not showing any signs of life.
If the markets get any bad Fed news this week it is a good
possibility the shorts will come out in force again and we
could easily get the retest the technicians have been missing
since April 4th. Like I said earlier, I doubt we will retest
the lows again but we could easily see 1800-1900 on the Nasdaq
and 10300-10500 on the Dow. It all depends on the Fed and
the guidance they give with their decision.

The "Capturing Stock Appreciation With Leap Puts" seminar
for this Sunday was rescheduled to Sunday May-20th due to
the Mothers Day conflict. We had numerous complaints that
we would schedule this without thinking about the family
strife it would cause. SORRY GUYS!!! We apologize!
Click here for current info:


Trade smart, enter passively, exit aggressively!

Jim Brown

Capturing Stock Appreciation With Leap Puts

If you are interested in attending an online seminar on my
strategy of capturing stock appreciation by selling Leap Puts
it will be next Sunday, May 20th at 8:PM ET and I will repeat
it at 8:PM PT as well. It will last 90 minutes and will be
interactive. You will be able to ask questions and I will
answer your questions in real time with charts and diagrams.
You do not need any special software to view the seminar
but you must have a 56K Internet connection or faster for
best results.

If you are interested in this seminar, please click here
for more information:



Expiration Week Straddles/Strangles

With expiration week upone us and the market confused about direction
the safest plays, IF you have to play, are straddles/strangles.
This time of month the time premiums are very low and many plays
can be entered for just a couple bucks.

Straddle = buying a put and a call for the same strike price

Strangle = buying a put and a call for different strike prices.

QQQ - Strangle $46 Call/$44 Put - Net Debit = $2.25

The QQQ, which represents the Nasdaq 100 has come to a dead stop
at $45 and with the Fed meeting on Tuesday and several big Nasdaq
companies announcing earnings, DELL, AMAT, and NTAP, it is entirely
possible the QQQ could move several dollars in either or both


Dow - strangle $109 Call/108 Put - Net Debit $2.15

The odds of the Dow making a 300-400 point move this week are
huge. Any negative Fed news could send us to 10500 or below and
positive Fed news could have us retesting 11000 again. The
strangle listed above only needs a small move in either
direction to be profitable.


GE - May $50 straddle - net debit $2.20

GE is a proxy for the Dow and has been making positive statements
lately. If we get bad news we could see $45 again but any positive
news could break them out over $50 and that would create a buy
signal for many funds.


These are just several of the many possibilities available in
expiration week. Do your own research and I am sure you will
find many other "safe" plays for a volatile week.



Falling Down
By Matt Russ

Friday's light volume dragged the major indices lower.  We all know
what we're waiting for now.  The Fed Funds Futures contract
has priced in a 100% chance of a 25 bp rate cut.  It would seem
that the markets will be greedy and want a 50 bp cut.  With the
markets having reacted to bad news rather well recently, there's
no telling what they could do in the face of only a 25 bp cut.
But, we have a good risk-to-reward scenario this coming week with
cheap May premiums and a volatility storm on the horizon.  Man,
I love it when major market-moving events are scheduled for
Expiration Week.

The Nasdaq selling continued on Friday without even mustering an
attempt at 2150, now overhead resistance.  2100 was briefly
breached with a low of 2097 late in the session.  Our critical
support level at 2089 has not yet been tested, but the Nasdaq
is not far off.  I highlighted this level last week and today's
chart below confirms support with the new retracement.  In
addition to the previous retracement spanning from April 4th
to the recent highs, I added one from April 25th as well.  This
was the day that the Nasdaq tested 2000.  The new retracement
reveals support at 2089 as the 68.2% level.  Support here is
very important.  A break would lead to 2050 and then, 2000.
Resistance at 2117 was established on Friday afternoon, also the
50% level from the new bracket.  If the Nasdaq bounces higher,
watch this level for sellers as well as 2144 - 2150 further up.
On the QQQs, support at $45.30 held up until late on Friday when
supply broke it.  Key support now is $45, $44, and 43.43.
Resistance at $46.42 and $47.11.

We saw the first sign of a breaking down in the S&P 500 on Friday
as the broad market index gave up key support at 1253 and 1247.
The wedge that was coiling and narrowing near 1270 has broken
down its recent trendline.  Support at 1240 was the saving grace
late in the session as the markets just drifted lower on light
volume.  A breakdown below 1240 would be bearish confirmation
that the bullish wedge has failed.  Now we must look for the
next level of support.  Using a retracement from April 25th's
lows to recent resistance at 1270, we can see how retracement
levels provide support, if only temporarily.  1240 is 50% and
held back on May 3rd.  This leads us down to 1232, established on
the 4th.  And we wonder if prices just stop at arbitrary levels.
Institutions are watching and the more I learn about retracement
levels, the more informed trader I am.  It has been a tremendous
trading tool.  So we will likely see support at 1240 and 1232,
with overhead in the 1248 - 1250 area.  On the OEX, support was
lost at 650, given the close at 645.  Next OEX support 638 - 640,
with overhead resistance at 648 - 650.

DOW 30
The Cyclical Index (CYC.X) did not break out over the downtrend
line on the weekly chart from Thursday.  That index sold off
slightly and the Dow slid even further, weakened by techs like
Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT), and IBM (NYSE:IBM).
10900 gave way early, plummeting 110 points in 20 minutes after
the Michigan Sentiment-Prem. for May came in stronger-than-expected,
92.6 vs. est 88.5.  After that, new resistance at 10835 provided
supply into the close.  During the session, the Dow spent some
time below 10800.  The same April 25th retracement to recent highs
as in the previous indices shows the key levels for the INDU.
Ahead of the Fed meeting on Tuesday, we will be watching roughly
the 10780 area for support, followed by 10720.  The latter support
has been tested numerous times and represents strong demand.

Well, we're playing the waiting game again here.  25 bp is pretty
much expected.  Looking at the New COT report below, positions
have changed very little, indicating that most of the Fed bets
have been placed.  Most notable is Small Specs increasing their
Net-Long position by 6.19% in the S&P 500 Futures.  They also
decreased their Net-Long positions on the Nasdaq by 8.47%.
Commercials remained relatively unchanged.  It certainly will be
an interesting week with Tuesday's reaction and Expiration on
Friday.  Keep an eye on the VIX.X, which spiked toward 29 on
Friday, but settled back down at 27.48.

Trade Smart,

Matt Russ

CBOT Commitment Of Traders Report: Friday 05/11
Weekly COT report discloses positions held by small specs and
commercial traders of index futures contracts on the Chicago
Board Of Trade(CBOT).

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
                (Current)  (Previous)    (Current)  (Previous)
S&P 500
Open Interest
Net Value        +47090      +36513       -49689      -41144
Total Open
Interest %      (+21.09%)   (+14.90%)    (-7.33%)    (-6.05%)
                net-long    net-long     net-short   net-short

DJIA Futures
Open Interest
Net Value         -7572       -6592        +7468      +7488
Total Open
Interest %      (-62.11%)   (-57.98%)    (+21.83%)   (+25.09%)
                net-short   net-short    net-long    net-long

Open Interest
Net Value         +2657       +4288        -9986      -10972
Total Open
Interest %      (+13.59%)   (+22.06%)    (-17.20%)   (-17.02%)
                net-long    net-long     net-short   net-short

What COT Data Tells Us
Indices: Divergence increased on the S&P 500 with the Commercials
adding to their net-short positions by 1.28 percent while the Small
Specs enhanced their net-longs by 6.19 percent.

From here were are in limbo until %values actually switch to flat
or net-long sometime in the future. We could see fluctuation of
positions oscillate up and down for weeks or even months to
follow. A major market hurdle will be the S&P 500 commercial
traders moving to net-long in accumulation stage and that is
still undetermined from here.

Data compiled as of Tuesday 05/08 by the CFTC.


Please visit this link for Market Posture:



Mother Should I Trust Greenspan?
By Eric Utley

After a couple of weeks of painfully slow trading, I welcome the
return of volatility next week with three key events.  Of course,
the big one we'll be watching is the FOMC's official announcement
on interest rates Tuesday.  I'm in the camp that the Fed cuts
by another 50 basis points.  If they don't, I'll be looking to
short tech stocks with weak fundamentals (Read: PMC-Sierra).

Following the Fed announcement Tuesday, capital equipment
giant Applied Materials (NASDAQ:AMAT) will announce its quarterly
number.  I think the AMAT release this time around will be
interesting in the wake of the Morgan Stanley upgrade last week.
Did they know something that we don't?  AMAT is expected to earn
33 cents.

A favorite of this column, CIENA (NASDAQ:CIEN), will report
Thursday.  Here again, I think the CIENA number will be very
interesting because the company raised guidance the last time
it reported, but had its estimates reduced recently.
The company is expected to earn 16 cents per share, and I'll
be listening for guidance on capital spending by the telecom
carriers and will elaborate upon that very topic below.

Finally, I'd like to wish all of those great people who make
this world a wonderful place a very, very Happy Mothers Day.

Love ya' mom!

Send your stock requests to Contact Support.
Please put the symbol of your requests in the subject line of
the e-mail.


JDS Uniphase - JDSU

As many others can attest this past 12 mo's have been painful
for holders of [JDSU].  Although I have trimmed my losses with
written calls and averaging down with incremental purchases I
remain 30% from even.  Can you give me your opinion for the
Fiber sector and JDSU specifically?  Thank you and keep up the
good work. - Bill

Thanks for the question and compliment, Bill.

To be succinct, I think it's too late to sell shares of JDS
Uniphase (NASDAQ:JDSU), but too early to buy.

To review quickly, JDS Uniphase is a supplier of fiber optic
components to original equipment manufacturers of telecom
systems and subsystems.  These manufacturers, in turn, sell their
subsystems to telecommunications carriers, such as WorldCom
(NASDAQ:WCOM), Verizon (NYSE:VZ), Qwest (NYSE:Q), AT&T (NYSE:T),
SBC Communications (NYSE:SBC), XO Communications (NASDAQ:XOXO),
Bellsouth (NYSE:SBC), Sprint (NYSE:FON), Global Crossing
(NYSE:GX), Level 3 (NASDAQ:LVLT) and Nextel (NASDAQ:NXTL), among

The reason I gave such a lengthy list of carriers is to reinforce
the fact that the JDS Uniphases of the world are totally dependent
upon the spending of the aforementioned companies.  Also known as
capital expenditures, or Cap-ex, these telecom companies have cut
back on the build out of their networks due to an initial
over expansion, decrease in revenues from long-distance service, the
economic slowdown, tight capital markets and competition from
emerging service providers, among other reasons.  But, to make it
perfectly clear, JDS Uniphase is levered to the spending habits of
the above list of carriers.

There's a fairly intense debate concerning cap-ex going forward.
As we heard on the Cisco Systems (NASDAQ:CSCO) conference call
last week, Chambers & Co. have yet to see an improvement in
spending from the telecom carriers.  Those remarks fueled the
bears' argument that spending will continue to decline in 2002,
amid continued defaults among the emerging carriers.  However, the
telecom bulls might argue that the big carriers, such as WorldCom
and Sprint will soon ramp spending as capital markets ease up
(Read: WorldCom's HUGE debt offering) and the emerging carriers,
while they may continue to experience defaults, are a much smaller
segment of the bigger telecom picture now.

Getting back to JDS Uniphase, I think it would be worth while to
monitor the news and guidance coming from the big carriers such
as WorldCom, Spring, AT&T, Qwest and SBC.  Look for signs that
these companies are increasing their spending.  When that begins,
I think it would be time to buy.

In the meantime, I think the most prudent strategy would be to
continue to try to lower your cost basis, Bill.  I don't know
when spending will begin to significantly increase and impact
JDS Uniphase's growth, and I would expect the stock to trade
sideways until we see an improvement.  I don't think that there's
much downside left in the stock.  After all, there were around
25 downward revisions in EPS estimates in the just the last
month.  And I would call that capitulation on the part of

In terms of a trading range, maybe look for shares to trade
between $18.50 to $23.50.


Laboratory Corp. - LH

Could you please check LH.  I have been watching this stock for
while and it look like that this is a good short stock.  I know
the bear season is over but hey it is May and as the saying goes
sell in May and go away.  That is why I wonder should short this.
- Ahmad

I can feel your thinking, Ahmad.  Sell in May and go away...to
the river for a summer filled with fly fishing!

After first glancing at the chart of Laboratory Corp. (NYSE:LH),
I can understand why you might want to short the stock.

However, the company is EXTREMELY strong in terms of financials
and despite its triple digit share price, sells at a modest
valuation relative to earnings.  Having said that, I think it's
most prudent to ONLY short shares of a company whose business
is deteriorating.  And from what I can tell, Lab's business is
just fine.  The only real catalyst that I can think of to back
up a bearish stance on Lab is that the market will begin to
rotate out of defensive issues into those companies that are
more likely to benefit from lower rates.  And that may be enough.

As previously mentioned, the chart of Lab is conducive to gaming
the stock from the short side.  Shares have been rolling lower
since the beginning of the year, tracing a pattern of lower highs
and lower lows.  At this point, I think the best way to trade the
stock from the short side is to wait for a rollover from the
clearly visible trend line of Lab's chart.  And by "best," I'm
obviously referring to the risk/reward dynamic.


This column is an information service only.  The information
provided herein is not to be construed as an offer to buy or
sell securities of any kind.  The Ask the Analyst picks are not
to be considered a recommendation of any stock or option but an
information resource to aid the investor in making an informed
decision regarding trading in options.  It is possible at this
or some subsequent date, the editor and staff of The Option
Investor Newsletter may own, buy or sell securities presented.
All investors should consult a qualified professional before
trading in any security.  The information provided has been
obtained from sources deemed reliable, but is not guaranteed
as to its accuracy.


For the week of May 14th, 2001

Business Inventories      Mar  Forecast: -0.20%  Previous: -0.20%
Industrial Production     Apr  Forecast: -0.20%  Previous:  0.40%
Capacity Utilization      Apr  Forecast: 79.10%  Previous: 79.40%
Kansas City Fed Mfg.       Q2  Forecast:    NA   Previous:  -6.0

FOMC Meeting                   Forecast:    NA   Previous:   NA
NAHB Housing Idx          May  Forecast:    NA   Previous:   56

CPI                       Apr  Forecast:  0.40%  Previous:  0.10%
Core CPI                  Apr  Forecast:  0.20%  Previous:  0.20%
Housing Starts            Apr  Forecast: 1.605M  Previous: 1.613M
Building Permits          Apr  Forecast:    NA   Previous: 1.615M
Internet Sales             Q1  Forecast:    NA   Previous:  $8.7B
MBA Mortage App        11-May  Forecast:    NA   Previous:  558.9
Oil and Gas inventory  11-May  Forecast:    NA   Previous:318.8MB

Initial Claims         12-May  Forecast:    NA   Previous:   384K
Philadelphia Fed          May  Forecast:   -10   Previous:  -7.2
Leading Indicators        Apr  Forecast:  0.10%  Previous: -0.30%
FOMC Minutes                   Forecast:    NA   Previous:   NA

Trade Balance             Mar  Forecast:-$29.0B  Previous:-$27.0B
Treasury Budget           Apr  Forecast:$180.0B  Previous:$159.5B
ECRI Wkly Leading Idx  11-May  Forecast:    NA   Previous: 123.2

Week of May 21st
May 24  Initial Claims
May 24  New Home Sales
May 25  Durable Orders
May 25  GDP-Prel.
May 25  Chain Deflator-Prel.
May 25  Existing Home Sales
May 25  Mich Sentiment-Rev.


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The Option Investor Newsletter                   Sunday 05-13-2001
Sunday                                                      2 of 5

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Post-Party Lull: A Favorite Play Strategy Returns
By Renee White

The overall strength in the markets is clearly different from
recent months, noted by traders holding on to their profits
longer. Mixed economic signs are now swinging the opposite
direction from last year, when we hung onto each one waiting to
hear if the booming economy was continuing or soon to stall. The
mixed economic signs stopped the Fed from raising rates further
back then, and soon we may find a Fed reluctant to aggressively
drop rates further.

This week's meeting should not be of concern. One more cut is
surely warranted. Nevertheless, the June meeting should keep us
alert to economic news from here forward. The more strength that
starts peaking through the covers of darkness, the less likely we
will see another 50-basis point cut. Personally, I would prefer
to see only a 25 basis point cut this week with another down the
road. But I would not be surprised to get one more 50 bp cut.
After that though, our rate cutting days may soon be over for a
while, with economic strength smoldering here and there. With the
European Central Bank joining the fight against the bears,
confidence is building, at least internally.

The market told us this week it is indeed feeling better. All
traders should be able to feel this change. Markets tell you the
most when they are quiet, not during massive over-reactive rallies
or sell-offs. Even though fundamentally the bull may be awakening,
it is still weak and subject to quick reversals. Don't be lulled
into thinking all is safe sailing from here. Only a fool would
take their eyes off of the market in this environment. Feeling
better or not, reversal can occur in the blink of an eye.

The markets were clearly on hold last week, waiting on the
upcoming Fed meeting. Did you notice that we returned to the "wait
on the Fed" mentality? We have not seen that for some time. During
the last 9 months of the last bull market, I made good money by
playing that lull period. Time and time again, the markets would
contract before the meeting, volume would dry up, option premiums
would contract and life would be boring. Then BAM! The
announcement, followed by explosive volatility. If you were on the
right side of the trade, it was very rewarding. If you didn't know
which side to be on, a straddle would work beautifully, allowing
a quick exit of the wrong leg on the announcement. I don't know if
we are creeping back into this pattern again, but I sure will be
looking for it. Had I caught it early enough this week, I would
have entered some bi-directional positions myself.

The markets are feeling some aspects of economic recovery brewing,
and the stagnation in volume is telling us that a continuation of
an aggressive Fed is started to feel uncertain. I suspect we will
see this reaction again in June. I'd love to see the good old' days
of market uncertainty before the Fed meeting, followed by a relief

The play is simple. Usually a week or so before the next Fed
meeting, volume will start to drop off. When countdown to the
meeting begins and volume decreases, one should take any option
profits off the table. The flat volume and dull market environment
will hurt any profits by deflating implied volatility. Then, I
found it best to wait a few days for implied volatility to
shrink. Let the markets reach boredom, usually with a slight dull
drift down, even a minor sell-off going into the meeting if there
had been a recent rally. When the Ballinger Bands contract
visibly, preferably for a few days, this became my signal to
enter cheap option trades on fast moving techs. Sometimes I
entered 2-3 days before the fed announcement and other times,
only a few hours before. I held until the relief rally that
followed showed signs of slowing and while the volatility was
high, so option premiums would not deflate. Again, that may have
been a few hours after the announcement, or a few days.

In 1999 and early 2000, I capitalized on this strategy. I had
forgotten about this pattern until this week, when flashbacks of
the past surfaced. Actually, my first reaction to the flat market
this week was to enter bearish trades, expecting profit taking
from the recent run-up. As I mentioned last week, all signals
appeared to be pointing to a correction, a natural expectation
after such a great rally. But with few wanting to take their
profits off the table, and few buyers wanting to jump in until
after it corrects, nothing much happened until the end of the
week. By Friday, I realized the return of this set-up, as
markets quietly drifted down. Business meetings will keep me
away from the markets on Tuesday, but my radar is officially
"on" for the return of this favorite play of mine in the future.

Of course, anything you love so much can always come back to hurt
you. A word to the wise: My faith in this play had grown overly
optimistic due to its success rate in 1999 and early 2000. Greed
was lurking and I did not notice its smiling face. In March 1999,
I was forced to be away from the markets for 10 days, the week
before and of the Fed announcement. Because I felt like I knew
this play so well, the week before the announcement I entered a
huge basket of options with limit orders that were at incredibly
cheap prices. In other words, I was expecting a sell-off, and I
let orders sit on the books, hoping to catch some high-flying
techs that sold off on the pre-announcement dip.

That proved to be a VERY painful and stupid mistake of mine. Not
only was I completely away from all news and my accounts, I did
not know until the weekend that the first leg of the bear market
had come knocking at the door. By the weekend, I saw that every
single order had filled and within 2 days, they were all 60-70%
underwater. The Fed announcement was the following Tuesday and
again I would be out of touch. If I remember correctly, our
fatal 50 basis point rate increase occurred, the markets
imploded immediately and violently, for the next several weeks.
I gambled on a dip and got a crash. Ashes to ashes...options to
dust. My loss was large, and my greedy game plan was stupid. If
you can't watch the markets, then at least hedge your positions.
Remember, during times when the overall market is changing
directions, the unexpected can happen.

I will use the next major correction as an entry point for my
long-term IRA accounts with some lazy LEAPS and possibly
non-techs that happen to pullback with the correction. With
buyers lurking in the background, bearish plays may become a bit
more challenging after this next period of profit taking. If you
continue to play the downside of the market, make sure you have
a clear understanding of support levels, for those levels may
find buyers ready to gobble you up.



Call Play of the Day:

GPS - The Gap, Inc. $33.20 (+5.10 last week)

See details in sector list

Put Play of the Day:

JNPR - Juniper Networks $54.26 (-6.87 last week)

See details in sector list


Remember that historically, when we drop a pick it will go up
10 to 15% the very next week. It is part of Murphy's Law.
Just because we drop a stock as a pick does not mean we are
advocating a "sell" on any position you have. We are simply
dropping our recommendation as a new play. Existing plays
can and do continue on and are usually profitable.


STOR $19.27 (+3.87) What a nice play!  We caught the trend just
at the right time!  Following the crucial break above the $13.50
neckline, it was off to the races.  The lucrative action lined
many traders pockets with gains; especially if you were
holding positions going into Friday's session.  STOR bolted from
the gate and lit the track on fire, well surpassing our $20
target.  STOR peaked at $21.13 before settling in for a bullish
day of trading primarily between $19.50 and $20.  While it can
be argued whether the upside close or the selling in late
afternoon dictates next week's potential trading scenario, we're
simply choosing not to be greedy - or put our handsome gains
at risk!  Coverage is hereby terminated.

MER $64.99 (-2.56) Simply put, the play on MER just didn't pan
out.  We added the stock to our call list speculating its strong
stance above the 200-dma coupled with its blue-chip reputation
would support bullish moves as the DOW advanced.  Unfortunately,
the precarious financials are blowing in the wind.  Not only did
the sideways trading cost us time, but the divergence from the
narrow trading channel signals trouble.  MER's break to the
downside in Friday's session violated our $65 protective stop;
and therefore, we're dropping coverage immediately.

LLY $83.90 (-2.14) Slowly losing steam with the rest of the
market throughout the week, LLY found itself unable to break
through the $87 ceiling and by mid-week was losing altitude.
As it became clear that the major indices were not going to
clear their formidable resistance levels, the Pharmaceutical
index (DRG.X) rolled over as well.  Just as it fell through
it's ascending trendline on Friday, LLY fell back into its
channel, and dropped solidly through our $85 stop.  While the
bulls may be back next week in anticipation of the Fed, we are
more than happy to book our gains on LLY and go hunting for
another winner.


GMST $37.10 (-2.70) As always, it's a pleasure to take profits on
a successful play.  Despite good news this week of customer wins
and upgrades from analysts, shares of the digital media provider
have continued to drift lower, taking our put play deeper into
profitable territory.  While we would have liked to hold this
play a little longer, the company is set to report on Monday
after the closing bell.  True to our sell rules, we are cutting
this play loose.


SL  = Suggested stop loss. Sell if bid breaks this price.
OI  = Open Interest - the number of open contracts outstanding.
ITM = In the money
ATM = At the money
OTM = Out of the money
ADV = Average Daily Volume

The options with a "*" by the strike price are our choices from the
group. If the stock moves as expected we feel they have the best
chance to substantially increase or double in price with the best
risk/reward ratio compared to the other options for the same stock.
You must determine if they fit your risk profile for time and price.

Analysts ratings: 1-2-3-4-5
Analysts who follow each stock rate it and these rating are
accumulated and displayed as follows;

Position 1 = number of analysts recommending "strong buy"
Position 2 = number of analysts recommending "moderate buy"
Position 3 = number of analysts recommending "hold" or "neutral"
Position 4 = number of analysts recommending "moderate sell"
Position 5 = number of analysts recommending "strong sell"

Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys",
1 "hold" recommendation.

The risk of selling naked puts is always the possibility
of a catastrophic event that drops the stock below the
strike price and could result in the stock being PUT to you.
Always protect yourself with a "buy to cover" limit order
to take you out before this can happen.


TGT - Target Corporation $39.93 (+1.33 last week)

Target Corporation operates large-store general merchandise
formats, including discount stores, moderate-priced promotional
and traditional department stores, as well as a direct mail and
on-line business called target.direct. At month-end, the company
operated 1,321 stores in 46 states. This included 991 Target
stores, 266 Mervyn's stores and 64 Marshall Field's stores.

TGT has been on a strong upward trend for the last six months,
and a renewed interest in the retail sector, combined with
good news and an upcoming earnings run might act as catalysts
to set a fire under this retail stalwart.  On Friday, two
economic reports were released which indicated that the
American consumer has not lost interest in one of our favorite
pastimes: shopping.  Retail spending rose a stronger than
expected 0.8 percent in April, and consumer confidence rose to
92.6, from the previous month's 88.4 reading.  This follows a
strong retail sales report on Thursday, which lifted the retail
sector; RLX.X was up over 3.4% for the day.  While the rest of
the market worried about the implications of these reports on
Federal Reserve policy, certain select retailers continued to
ride up on the waves of strong momentum which started earlier
in the month.  On Thursday, TGT reported an admirable increase
of 6.9% in its net retail sales from the year ago quarter, and
the stock surged up past its converged 5-dma and 10-dma of
$38.98 on impressive volume.  On Thursday, the momentum carried
TGT to a new 52-week high of $40.38, before the stock retreated
to strong support at $39.50, which could be an entry point going
forward.  TGT is scheduled to report earnings on May 22nd before
the opening, which leaves all of next week for this play.
Stronger than anticipated earnings and good news from others in
the retail sector like AEOS and GPS are likely to bid up shares
of TGT in anticipation of its earnings report, market conditions
permitting.  Next week will be tricky with the Fed meeting coming
up on Tuesday, and conservative traders might want to wait for
the market to settle down after this meeting before taking
positions.  A conservative trader could wait for TGT to close
above $40.40 with heavy volume before moving in.  Be sure to
monitor the RLX.X, as well as others like AEOS, and WMT.  We
are setting closing stops at $38, so end the position if TGT
closes below this level.

***May contracts expire next week***

BUY CALL MAY-35 TGT-EG OI= 440 at $5.10 SL=3.00
BUY CALL MAY-40 TGT-EH OI=1919 at $1.30 SL=0.75
BUY CALL JUN-35 TGT-FG OI= 194 at $5.70 SL=3.50
BUY CALL JUN-40*TGT-FH OI= 911 at $2.25 SL=1.25



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The Option Investor Newsletter                   Sunday 05-13-2001
Sunday                                                      3 of 5

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BA - The Boeing Company $66.01 (+1.51 last week)

The Boeing Company, an aerospace company, operates, together with
its subsidiaries, in three principal segments: Commercial
Airlines Operations, Military Aircraft and Missiles, and Space and
Communications. Commercial Airplanes Operations is involved in the
development, production and marketing of commercial jet aircraft.
The segment also provides related support services, principally to
the commercial airline industry worldwide. The Military Aircraft
and Missiles segment is involved in the research, development,
production, modification and support of military aircraft,
including fighter, transport and attack aircraft; helicopters;
and missiles.  The Space and Communications segment is involved in
the research, development, production, modification and support
of space systems, missile defense systems, satellites and
satellite-launching vehicles, rocket engines and information
and battle management systems.

An entry point occurred Friday morning, as BA rebounded from
a dip to its 5-dma at $65.29, probably riding on the momentum
brought on by good news and reassuring guidance from the company
management.  On Friday morning, Virgin Atlantic announced that
they are talking to Boeing regarding ordering their new Sonic
Cruiser airplane, which can fly up to 20 percent faster than
current passenger airplanes.  In addition, BA announced that they
had demonstrated their ability to meet a key demand in a project
that both BA and LMT are bidding on for the U.S. military, which
could be worth up to $500 million.  Boeing has stated that their
computer program can predict the performance of a plane, although
they do not have an identical prototype.  This reassurance
follows an announcement by the company management that they do
not foresee cancellations of aircraft orders, despite the
slowing economy.  With all of this good news, and a little
strength in the Dow, BA might be able to rally up to its next
major level of resistance at $70.  Positions could be taken
upon a bounce from the $65.50 level, if others in the sector
are strong.  Alternatively, traders could take positions at the
current level, or at a break above resistance at $66.50 with
strong volume.  We are keeping closing stops at $64, as a
drop below this level could signify an end to the current upward

***May contracts expire next week***

BUY CALL MAY-65 BA-EM OI=8475 at $1.75 SL=1.00
BUY CALL JUN-60 BA-FL OI= 256 at $7.10 SL=5.50
BUY CALL JUN-65*BA-FM OI=1538 at $3.40 SL=1.75
BUY CALL JUN-70 BA-FN OI=3440 at $1.05 SL=0.25


GDW - Golden West Financial Corporation $61.25 (+2.50 last week)

Headquartered in Oakland, California, Golden West Financial
Corporation is a savings and loan holding company with assets
of $57 billion as of March 31, 2001.  Currently operating 423
savings and lending offices under the World name, the company
has one of the largest thrift branch systems in the country.
Golden West's stock is listed on the Pacific and New York
Stock exchanges under the symbol GDW.

In a continuation of the momentum GDW has demonstrated after
popping up out the neutral wedge GDW had developed during
April, GDW made a high of $62.96 on Friday morning before
pulling back to consolidate at the first support level of $62.50.
Despite the fact that GDW pulled back to $61.25 later in the day,
the stock held onto most of its weekly gains in an impressive
demonstration of strength, despite persistent rumors that we
could see a smaller than previously anticipated rate cut next
week.  Upward moves have been accompanied by substantial volume,
as GDW's new current level of $61.22 may turn out to be a good
entry point for aggressive traders.  A glut of consolidation
continues in the financial service industry, and has been
stimulating interest in smaller, niche financial service
companies, as investors and analysts speculate on the next
possible takeover targets.  Next week, trading is likely to
be very volatile, especially for financial stocks, as analysts
continue to debate over the chances of a 25 or a 50 basis
point rate cut on Tuesday.  Very aggressive traders might
want to take a position if GDW pulls back to its 5-dma of
$60.43, if the overall indexes and banking sector are strong.
Alternatively, wait for another surge up past $62.50 with
heavy volume.  Traders must use their own judgement and risk
tolerance when deciding whether to hold over the Fed meeting,
which could be highly risky.  Remember to monitor other S & Ls
like RSLN and WM, and set a closing stop at $60.

***May contracts expire next week***

BUY CALL MAY-60 GDW-EL OI=126 at $2.00 SL=1.00
BUY CALL JUN-60*GDW-FL OI=164 at $3.80 SL=1.75
BUY CALL JUN-65 GDW-FM OI= 15 at $1.40 SL=0.75


YHOO - Yahoo! Inc. $17.72 (-2.30 last week)

Yahoo! Inc. is a global internet Internet communications,
commerce and media company that offers a comprehensive branded
network of services.  The company's principal offering is an
online navigational guide to the web.  The company also provides
online business and enterprise services designed to enhance the
productivity and Web presence of Yahoo!'s clients.  Yahoo! has
offices in Europe, Asia Pacific, Latin America, Canada, and the
United States.  Under the Yahoo! brand the company provides
broadcast media, communications, business, enterprise and
commerce services.

Bold traders who took YHOO positions at $17.50 were rewarded on
Friday, as the stock rallied from this strong support level to
intra day resistance at $18.03.  A key sign here which has been
a common theme with many technology stocks is volume.  Very low
volume was exhibited as YHOO drifted down on Friday, as selling
interest has been dwindling, and buying has had a dramatic
impact on this oversold Internet bellwether.  The Nasdaq rebound
from 2000 which occurred during April started YHOO moving on a new
upward channel to a high of $23.70 on May 1st.  This pattern could
possibly begin anew next week if we have some cooperation from the
Internet sector (INX.X) as well as the broad indexes.  While INX.X
dipped below its 5-dma of 209, and its 10-dma of 205 last week,
the sector remains well above its 50-dma of 170.86, so look for
a possible rebound of INX.X above 210 as a potential catalyst
to move YHOO over its own 5-dma of $18.90, which could be a good
entry point for conservative traders.  More daring types can
continue to take positions from pullbacks to $17.50, if others
like AOL and AMZN are strong.  We are setting stops right at the
50-dma of $17.50, so close positions if YHOO closes below this
critical support level.

***May contracts expire next week***

BUY CALL MAY-17.5 YHZ-EW OI= 9489 at $3.10 SL=1.50
BUY CALL MAY-20   YHZ-ED OI=11182 at $1.50 SL=0.75
BUY CALL JUN-17.5*YHZ-FW OI=  187 at $4.00 SL=2.50
BUY CALL JUN-20   YHZ-FD OI=  548 at $2.65 SL=1.25


MO - Philip Morris Companies Inc. $51.75 (-1.00 last week)

With 2000 underlying operating revenues of $80.3 billion,
($88.3 billion assuming Philip Morris owned Nabisco for all
of 2000) the Philip Morris family of companies is the world's
largest producer and marketer of consumer packaged goods.
Philip Morris Companies Inc. has five principal operating
companies :  Kraft Foods Inc., Miller Brewing Company,
Philip Morris International Inc., Philip Morris Incorporated,
and Philip Morris Capital Corporation.

After reaching a new 52-week high of $53.88 on Monday, MO
spent most of the week consolidating between the converged
5-dma and 10-dma of $51.60, and resistance at $52.50, as the
markets await the Federal Reserve’s verdict next Tuesday.
Considering the substantial gains MO has made in the last
several weeks, consolidation can be a healthy sign, and the
stock remains firmly positioned above its 50-dma of $48.28.
This week, Moody’s and Standard and Poor’s reaffirmed that MO’s
credit rating will not be impacted by a Florida statute which
required the company to post a bond in an ongoing litigation.
In addition, MO’s famous Oreo cookie (which fans claim is their
most addictive product) will have a new chocolate filled
variation launched in June, which is expected to be received
with much fanfare.  While MO consolidates, traders should be able
to carefully pick entry points for the rally which is likely
to occur in anticipation of the upcoming Kraft IPO.  On Friday,
MO announced that they had narrowed the price range of the
offering to $27 to $30 per share, and that an offering at the
high end of the price range could result in an $8.4 billion
IPO.  At this point, the offering is tentatively scheduled
for mid June, depending on market conditions.  A possible
strategy could be to take positions at the current price, if
the broad indexes exhibit a benign reaction to the Fed meeting.
Conservative traders might want to wait for a break and close
above $54 with heavy volume before jumping in.  Continue to
monitor others in the sector like LTR and RJR, and set closing
stops at $50.

***May contracts expire next week***

BUY CALL MAY-50 MO-EJ OI=16528 at $2.15 SL=1.00
BUY CALL JUN-50*MO-FJ OI=26314 at $3.50 SL=1.75
BUY CALL JUN-55 MO-FK OI=16571 at $1.15 SL=0.25


CAT - Caterpillar Inc $53.20 (+2.65 last week)

Caterpillar is a Fortune 50 industrial company and the world's
leading manufacturer of construction and mining equipment, diesel
and natural gas engines, and industrial gas turbines.
Caterpillar also offers innovative financing options through its
Financial Products Division.  Caterpillar is dedicated to both
sustaining and improving the quality of life.  The company is
guided by its Code of Worldwide Business Conduct in meeting or
exceeding local environmental regulations, developing solutions
to customers' environmental challenges, in advocating free trade
and in taking the lead in the business community on important

This Caterpillar has acted more like a butterfly for shareholders
who have been long shares of leading earth-moving equipment maker
this past week, as the stock continues to fly higher on increased
trading volume.  In doing so, CAT continues to make new 52-week
highs.  All of this has happened in spite of a flat to down week
for most Old Economy issues.  There were two news items of note
this week for the company.  First of all, CAT took advantage of
the recently lowered interest rates, by raising $1.1 billion in
the corporate bond market.  An easing Fed has traditionally
worked in the favor of deep cyclicals such as CAT and so far,
this appears to be the case once again.  What's more, a
well-received earnings report from Finning International, who is
a major distributor of Caterpillar products, noted strong new
equipment sales numbers, a good sign indeed for CAT.
Technically, the stock has displayed remarkable relative
strength.  Breaking above resistance at $51 on Monday, the stock
spent the next couple of days in consolidation mode before
basting off again on Thursday, this time taking out the $53
level.  Pullbacks to support at $53, the 5-dma at $52.39, the
10-dma at $51.38 and $51 may allow aggressive players to take a
position.  Just make sure that the stock continues to close above
our stop price of $51.75.  Continued buying pressure leading to a
break above $54 with conviction may allow conservative traders to
enter.  In both cases, keep an eye on sector peers DE and DOV.

***May contracts expire next week***

BUY CALL MAY-50 CAT-EJ OI=4156 at $3.60 SL=1.75
BUY CALL MAY-55 CAT-EK OI= 910 at $0.45 SL=0.00
BUY CALL JUN-50*CAT-FJ OI= 586 at $4.50 SL=2.75
BUY CALL JUN-55 CAT-FK OI=2094 at $1.85 SL=1.00
BUY CALL AUG-50 CAT-HJ OI=2823 at $6.00 SL=4.00
BUY CALL AUG-55 CAT-HK OI=1884 at $3.40 SL=1.75
BUY CALL NOV-55 CAT-KK OI= 787 at $5.00 SL=3.00


GPS - The Gap, Inc. $33.20 (+5.10 last week)

Gap Inc. is a global company with three distinct brands - Gap,
Banana Republic and Old Navy - and revenues topping $11.6
billion. The company has its headquarters in the San Francisco
Bay area, product design offices in New York City and
Distribution Centers and offices coordinating sourcing, store
operations and supply activities around the world.  At the heart
of the company are more than 140,000 people world-wide supporting
their catalog and Web site operations, in addition to more than
3,000 stores in the United States, Canada, France, Germany, Japan
and the United Kingdom.

The Gap has certainly lived up to its name this past week.  When
we initiated coverage on this call play on Wednesday, we cited a
number of factors both fundamental and technical.  Low interest
rates, analyst upgrades, and a strong stock chart were compelling
reasons for GPS to rise.  The next day, the stock gapped up at
the open on news of another upgrade, along with positive comments
for the retail apparel industry and the company itself.  Stronger
than expected retail numbers for the apparel industry due to
warmer than anticipated weather helped to lift the entire sector.
 The company also came out to say that that first quarter numbers
(due this coming Thursday) would be higher than Street estimates.
 By the end of the session, GPS closed up over 12.5 percent on
3.7 times the average daily volume.  This bullish sentiment
carried over into Friday, on the heels of strong retail figures
from the Commerce Department.  The stock closed at the highs of
the day, up 2.44 percent on 1.65 times the ADV.  At this point,
resistance at $34 may be formidable, but if GPS can surpass this
level on volume, this may allow conservative traders to make a
play.  For entries on pullbacks, support may be found at $33, $32
and our closing stop price of $31.50.  Correlate entries with
movement in rivals AEOS and ANF.  Please note that we will be
dropping coverage this week ahead of earnings on May 17th.

***May contracts expire next week***

BUY CALL MAY-30 GPS-EF OI=3689 at $3.30 SL=1.75
BUY CALL JUN-30*GPS-FF OI=8749 at $4.20 SL=2.50
BUY CALL JUN-35 GPS-FG OI=2301 at $1.35 SL=0.75
BUY CALL SEP-35 GPS-IG OI= 673 at $3.20 SL=1.75
BUY CALL SEP-40 GPS-IH OI= 681 at $1.75 SL=1.00


AOL - AOL Time Warner Inc $51.64 (-0.56 last week)

AOL Time Warner is the result of a 2001 gargantuan merger that
married the world's largest online company with a media giant.
America Online brings its flagship online service, CompuServe,
Netscape, and several interactive online services whilst Time
Warner's contributions span films and TV, music, cable networks
and systems, publishing, and professional sports.  AOL Time
Warner's brands include Time Warner Cable, Warner Brothers,
Warner Music, HBO, Turner, America Online, CNN, New Line Cinema,
and Time Inc.

The lackluster activity of the media stocks failed to generate
an action-packed week of trading.  AOL's narrow channel,
although at the higher levels, is also frustrating.  The break
through the $52 resistance on Thursday does however, offer some
comfort that AOL is capable of a major run.  We continue to
maintain a CLOSING stop at the $51 near-term support level.  OI
will exit if AOL cannot hang tough above this mark.  A solid
bounce off the 10-dma ($51.70) followed by a clean break of
$52.98, Thursday's relative high, should incite momentum traders
to take notice of AOL.  Be patient for a successful synergy of
an advancing marketplace to ignite the technology stocks before
considering additional positions in AOL. If AOL does make the
big breakout, it's likely to challenge the $60 level as it did
in previous months.  Take a look at a six to nine-month chart
for visual confirmation.

***May contracts expire next week***

BUY CALL MAY-50 AOO-EJ OI=24678 at $2.40 SL=1.25
BUY CALL JUN-45 AOE-FI OI=  766 at $7.80 SL=5.50
BUY CALL JUN-50*AOO-FJ OI= 3693 at $4.00 SL=2.50
BUY CALL JUN-55 AOO-FK OI=21826 at $1.45 SL=0.75
BUY CALL JUL-50 AOO-GJ OI=33533 at $5.20 SL=3.25
BUY CALL JUL-55 AOO-GK OI=42760 at $2.65 SL=1.25



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The Option Investor Newsletter                   Sunday 05-13-2001
Sunday                                                      4 of 5

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RIMM - Research In Motion Ltd. $28.37 (-6.81 last week)

Based in Waterloo, Ontario, Canada, Research In Motion Limited is
a leading designer, manufacturer and marketer of innovative
wireless solutions for the mobile communications market.  Through
development and integration of hardware, software and services,
RIMM provides solutions for seamless access to time-sensitive
information including email, messaging, Internet and
intranet-based applications.  RIMM technology also enables a
broad array of third party developers and manufacturers in North
America and around the world to enhance their products and
services with wireless connectivity.

Despite the strong growth prospects in the wireless computing
market, the sector has not been immune to the economic woes,
which have affected Tech stocks across the board.  IBM came out
this week and noted that they see the future trending towards
wireless networking via handheld computing devices, choosing to
focus heavily on that aspect of the Technology market.  However,
at the present, excess inventory problems are weighing heavily on
RIMM.  News that one of the company's major distributors, Aether
Systems, has an overstock of Blackberry devices to last the next
several quarters, was not looked well upon by shareholders of
RIMM.  This announcement struck a note of uncertainty in the tune
sung by analysts.  Now no longer as sure of their revenue
estimates for the upcoming quarters, the market has been in the
process of pricing in this news.  At this point, the stock
appears technically weak.  The past three of trading sessions
have been marked by declines on large selling volume.  Friday's
drop of 5.72 percent resulted in yet another close below
resistance at the 50-dma (now at $31.65).  Aggressive traders may
look for that moving average along with the 5 and 10-dma (at
$31.65 and $33.02) as potential targets for entry.  As well,
$29.50, $30 and our closing stop price of $32 may provide
horizontal resistance.  For an entry on weakness, wait for the
stock to fall below $28 on volume before making a play, but only
if other handheld computer makers such as HAND and PALM are also
moving lower.

***May contracts expire next week***

BUY PUT MAY-30 RUL-QF OI=4559 at $2.95 SL=1.50
BUY PUT MAY-25 RUL-QE OI=2186 at $0.70 SL=0.00
BUY PUT JUN-30*RUL-RF OI=4134 at $5.00 SL=3.00
BUY PUT JUN-25 RUL-RE OI=4518 at $2.60 SL=1.25


EMLX - Emulex Corporation $38.80 (-4.50 last week)

A leading networking company, EMLX designs, builds and
distributes three types of connectivity products: network
access servers, printer servers, and high-speed fibre channel
products.  It's fibre channel products, which are based on
internally developed ASIC technology, are deployable across
a variety of network configurations and operating systems to
support increasing volumes of stored data.  EMLX sells its
products directly throughout the world to OEMs and end users,
as well as through system integrators and industrial

After running up more than 250% in less than a month, EMLX ran
into a brick wall near $46 and over the past 2 days it is clear
that the bulls are starting to lose their resolve.  Following a
series of economic reports that have lessened investor's
conviction that the Fed would cut interest rates by the expected
50 basis points on Tuesday, all of the major indices have pulled
back from testing recent resistance levels.  The last 2 days
have seen volume on the rise again, while price has been falling.
To the tune of 15%.  That was enough to get the daily
Stochastics oscillator heading south out of overbought
territory.  Next week is going to be a busy one for EMLX
executives.  Starting on Tuesday, President and CEO Paul Folino
will present at the CSFB Communications Technology 2001
Conference.  Wednesday and Thursday will find Ron Quagliara,
president of the company's IP Storage Networking Group, and VP
Mike Rockenbach presenting at the Salomon Smith Barney Data
Storage Infrastructure Conference.  Combined with the Fed's
interest rate announcement on Tuesday, there should be plenty
of potential catalysts to move the stock next week.  Closing out
last week below the $39 support level, EMLX bears are now
setting their sights on support at $35.  Intraday resistance at
$41 and $43 will likely provide for aggressive entry points on
failed rallies.  More conservative players will find entry
points materializing as the bears push the price below the $37
level, preferably on solid volume and weakness in other
fibre-channel stocks like BRCD and QLGC.  Speaking of QLGC, the
company will release its earnings report after the close on
Tuesday and cautious investors may want to close any open
positions in EMLX ahead of this report to avoid an adverse gap
move.  We are initially placing our stop at $43, and a close
above this level will spell a premature end to our play.

***May contracts expire next week***

BUY PUT MAY-40 UMQ-QH OI=1367 at $3.60 SL=1.75
BUY PUT MAY-35 UMQ-QG OI=1518 at $1.40 SL=0.75
BUY PUT JUN-40*UMQ-RH OI= 363 at $6.70 SL=4.75
BUY PUT JUN-35 UMQ-RG OI= 604 at $4.10 SL=2.50
BUY PUT JUN-30 UMQ-RF OI= 378 at $2.30 SL=1.25



BRCM - Broadcom Corporation $38.49 (-4.50 last week)

Broadcom Inc. is the leading provider of highly integrated
silicon solutions that enable broadband communication and
networking of voice, video and data services.  Using proprietary
technologies and advanced design methodologies, Broadcom designs
develops and supplies complete system on a chip solutions and
related applications for digital cable set top boxes and cable
modems, high speed local and metropolitan optical networks,
carrier access, satellite, DSL, and network processing.

Earnings from Cisco on Tuesday took center stage this past week,
as the widely followed report was to serve as a barometer of
health for the entire Tech sector.  CSCO's numbers were
especially meaningful to Broadcom, since the communications
chipmaker is a major supplier to the networking giant.  With that
in mind, Cisco beat lowered Street estimates by a penny.  But
what traders were more interested in was the outlook going
forward.  During the conference call, CEO John Chambers stated
that visibility was still uncertain.  Analysts did not see this
as good news, as Merrill Lynch's Michael Ching re-iterated his
Neutral rating on communication chipmakers who provide components
to CSCO, such as AMCC, CNXT, PMCS and VTSS.  With that, BRCM has
headed lower, since failing to break above psychological
resistance at $50 earlier in the month.  Connecting the highs and
lows since that time, we can see the downtrend channel that the
stock has been caught in.  A break below $37 on volume may allow
conservative traders to jump in, but only if the Philadelphia
Semiconductor Index (SOX) confirms downward momentum.  From
there, BRCM will most likely test 50-dma support at $35.55.
Resistance overhead is formidable, with the 5 and 10-dma at
$40.78 and $42.25 respectively.  Horizontal resistance may also
be found at our new closing stop price of $40.

***May contracts expire next week***

BUY PUT MAY-40 RCQ-QH OI=8932 at $3.80 SL=2.50
BUY PUT MAY-35 RCQ-QG OI=6134 at $1.65 SL=0.75
BUY PUT JUN-40*RCQ-RH OI= 513 at $6.70 SL=5.00
BUY PUT JUN-35 RCQ-RG OI= 472 at $4.00 SL=2.50


AMAT - Applied Materials $51.71 (+0.18 last week)

Applied Materials develops, manufactures, markets and services
semiconductor wafer fabrication equipment and related spare
parts for the worldwide semiconductor industry.  Many of
AMAT's products are single-wafer systems designed with two or
more process chambers attached to a base platform.  The
platform feeds a wafer to each chamber, allowing the
simultaneous processing of several wafers to enable high
manufacturing productivity and precise control of the process.
These platforms support chemical vapor deposition, physical
vapor deposition, etch and rapid thermal processing

While the weekly change numbers above paint a less-than-exciting
picture for our AMAT play, judicious entry and exit points have
made AMAT a successful, if slow-moving venture.  As
Semiconductor stocks have continued to pull back from their
recent highs, our play has consistently pulled back each time it
has ventured up to the long-term descending trendline.  The
200-dma has regained the upper hand this week, winning out
against the bulls every day.  The range has been small though,
as sellers have been unable to break the $50 support level
either.  While easier to see on a chart, you should recognize
this pattern as a descending or bearish wedge, and it looks like
it will break one way or the other within the next week.  Alas,
we don't have that much time as AMAT is set to release earnings
Tuesday after the close, so we'll want to have all positions
closed before then.  But gun-slinging, aggressive traders may be
able to make one more swipe at profits early this week.  The
little spat between Morgan Stanley and virtually every other
analyst (Merrill Lynch, Goldman Sachs, CSFB, etc.) about the
near-term future for Semiconductor Equipment stocks Thursday
morning provided fertile ground for new short positions in AMAT
as the gap open quickly fell apart, driving the stock down to
close more than $3 below the open, but a mere 3 cents below
Wednesday's closing price.  So you can see the importance of
good entry and exit points.  Use any strength early next week
to initiate new positions on a rollover near the descending
trendline and our stop (currently $53).  Keep a tight reign on
the position as it approaches support at $50, and don't be
afraid to take a profit when it is offered.  More conservative
players can enter new positions on a drop through support, but
need to make sure that all positions are closed by the end of
trading on Tuesday.

***May contracts expire next week***

BUY PUT MAY-55 ANQ-QK OI=7670 at $4.50 SL=2.75
BUY PUT MAY-50 ANQ-QJ OI=7080 at $1.75 SL=0.75
BUY PUT JUN-50*ANQ-RJ OI=2398 at $3.90 SL=2.50
BUY PUT JUN-45 ANQ-RI OI=2259 at $2.30 SL=1.25


HGSI - Human Genome Sciences $57.88 (-3.89 last week)

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

Going the way of several other sectors, the Biotechnology index
(BTK.X) ran into impenetrable resistance at $580 2 weeks ago
and no amount of pushing and straining could give the bulls a
victory.  After several attempts, the bulls seem to have given
up and the BTK is now rolling over.  Sure enough, HGSI is
following the broader index lower and with the daily Stochastic
oscillator now in a steep descent, the stock is at a critical
point.  UBS Warburg initiated coverage of the stock with a Buy
rating on Friday, but amidst all the market weakness, HGSI
continued to decline, ending just above the $57 support level.
A drop below this level will provide new entry points for
conservative traders although they will want to be on the
lookout for a bounce near the $54-55 support level, which
coincides with the 30-dma (currently $54.40).  Due to the
recent weakness, we are ratcheting our stop down to $61, just
above Friday's high.  More aggressive players can use failed
rallies near this level as an opportunity to open new positions
in anticipation of further weakness.  Confirm the health of the
play by watching for more weakness in the BTK index (preferably
a drop through the $535 level) and increasing selling volume on

***May contracts expire next week***

BUY PUT MAY-60 HHA-QL OI=914 at $4.50 SL=2.75
BUY PUT MAY-55 HHA-QK OI=752 at $2.05 SL=1.00
BUY PUT JUN-60*HHA-RL OI= 47 at $8.20 SL=5.75
BUY PUT JUN-55 HHA-RK OI=105 at $5.60 SL=3.50
BUY PUT JUN-50 HHA-RJ OI=189 at $3.50 SL=1.75


JNPR - Juniper Networks $54.26 (-6.87 last week)

As a provider of Internet infrastructure solutions, JNPR serves
Internet service providers and other telecommunications service
providers, helping them to meet the demands resulting from the
rapid growth of the Internet.  The company delivers next
generation Internet backbone routers that are specifically
designed for service provider networks.  The routers provided
by the company combine the features of the JUNOS Internet
Software, high performance ASIC-based packet forwarding
technology and Internet-optimized architecture into a
purpose-built solution for service providers.

Our aggressive stance was clearly rewarded last week as JNPR
took a tumble, first on a less than glowing earnings report
from Networking giant CSCO Tuesday night and then a poorly
received conference call Thursday afternoon.  It seems the fact
that company management provided no additional guidance for the
current quarter didn't set well with investors as they continued
to punish the stock right up to the closing bell with only a
mild (less than $1) recovery on Friday.  In the midst of this,
the Networking index (NWX.X) has fallen back to support near the
$450 level and looks to be in danger of further downside.  What
should really be disconcerting to the bulls at this point is the
fact that the NWX has now broken below its 6-week ascending
trendline (currently at $470), and this level should provide
significant resistance in the near future.  What about JNPR?
Same pattern, only it broke the ascending trendline (then at
$61) Monday morning.  Selling the rallies seems to be back in
vogue as the broader markets weaken ahead of Tuesday's FOMC
meeting in which the outcome has become uncertain due to recent
stronger than expected economic reports.  If the bears are
successful at breaching the $450 support level on the NWX, then
new positions in JNPR look attractive as the stock falls through
its corresponding $51-52 support level, right at the merging
30-dma ($51.01) and 50-dma ($52.45).  More aggressive traders
can use intraday rallies as an opportunity to get onboard at a
better price, target shooting a rollover from resistance at $56,
$58 or $60, depending on your risk tolerance.  Keep stops set
at $60.

***May contracts expire next week***

BUY PUT MAY-55 JUX-QK OI=11708 at $3.90 SL=2.50
BUY PUT MAY-50 JUX-QJ OI=10636 at $1.95 SL=1.00
BUY PUT JUN-55*JUX-RK OI= 5518 at $7.40 SL=5.25
BUY PUT JUN-50 JUX-RJ OI= 7567 at $5.30 SL=3.25
BUY PUT JUN-45 JUX-RI OI=  896 at $3.50 SL=1.75


NVLS - Novellus Systems $49.09 (-1.86 last week)

Providing equipment for advanced Semiconductor manufacturing,
NVLS focuses on advanced, high-productivity thin film
deposition systems and surface preparation systems used in
the fabrication of integrated circuits.  Utilizing Chemical
Vapor Deposition (CVD), Physical Vapor Deposition,
electroplating, photoresist strip and residue removal systems,
the company's products provide high film quality while
attaining the high levels of productivity required to meet
the semiconductor industry's need for high-volume, low-cost
wafer production.

Semiconductor bulls had another frustrating week, thrice failing
to push the Semiconductor index (SOX.X) back above the critical
$650 resistance level.  Although it certainly couldn't make any
upward progress, NVLS managed to keep from losing too much
ground on a weekly basis.  While there were scattered negative
reports from various chip companies, the real excitement of the
week transpired in the first hour of trading on Thursday.
Morgan Stanley upgraded the whole stable of chip equipment
stocks (including NVLS) before the open, giving both the SOX
and all the affected stocks a nice pop at the open.  It took
less than 30 minutes after the open before dissenting opinions
from the likes of Merrill Lynch, Goldman Sachs and CSFB hit the
newswires, bringing the early rally to an abrupt end.  Traders
that jumped into new positions as the rally fizzled got a nice
ride down on Thursday and the stock's losses widened
fractionally Friday.  NVLS has now filled the gap left on April
18th and could be finding support near $49.  Daily Stochastics
have now reached oversold, volume has dropped off to just over
half the ADV and the Fed's decision on interest rates is less
than 2 trading days away.  Adding one more hazard to the mix for
bearish positions, CE Unterberg Towbin initiated coverage of the
stock at a Strong Buy on Friday.  So here's the approach.
Conservative entries still make sense, but only if NVLS falls
through the $48 level on increasing volume.  Intraday bounces
will provide opportunities for more aggressive types, letting
them into the play near the $51 resistance level (also the
location of our stop).  The real key to more weakness is for the
SOX to fail to hold above the $600 level, opening the door to a
possible retest of $540.  Another item to keep on your radar
screen is earnings from AMAT.  They will be released Tuesday
after the close, so cautious investors may want to go flat
before the announcement, just in case the company releases good
news with the numbers.

***May contracts expire next week***

BUY PUT MAY-50 NLQ-QJ OI=2034 at $2.90 SL=1.50
BUY PUT MAY-45 NLQ-QI OI=1821 at $0.90 SL=0.00
BUY PUT JUN-50*NLQ-RJ OI=1178 at $5.80 SL=3.75
BUY PUT JUN-45 NLQ-RI OI=3433 at $3.30 SL=1.75
BUY PUT JUN-40 NLQ-RH OI=1127 at $1.75 SL=1.00


QLGC - QLogic Corp $44.11 (-5.18 last week)

QLogic Corporation is the leading manufacturer of fibre channel
bus adaptors.  The company is also a designer and supplier of
semiconductor and board level input/output (I/O) components
They've been designing and marketing SCSI-based (small computer
system interface) products for over 12 years and sells its
products to server, workstation, and date peripheral makers.
Blue-chip clients include Compaq, Dell, Hitachi, IBM, and
Quantum Corporation.

QLGC's initial instability and critical break of the $46 support
on Thursday forecasted downside trading as the company
approached it earnings' release this coming Tuesday, after the
market.  On the basis of a technical meltdown and investor
caution, we added QLGC that evening.  As it turned out, we were
rewarded with a viable rollover entry from the 5-dma line early
in Friday's session.  The slide to $43.13 then offered a
profitable exit, if you were quick to the keyboard.  At this
point, we essentially have only two trading days to play QLGC.
Remember, OI never holds over an announcement despite the
earnings' projection.  For example, while it's  expected that
they'll come in at $0.28 p/s in comparison to last year's same
quarter of $0.24, there's simply no telling what other
interesting tidbits the company may render.  The Semiconductor
Index (SOX.X) can play a vital role in QLGC's trading, so keep
an eye on the index levels.  Currently the SOX.X is dawdling in
the lower trading zone of 610 and 620, with 605 marking very
dangerous bear territory.  A breakdown through 600 signals a
superb trading opportunity, assuming QLGC is tracing the broader
sector.  If your strategy is to buy into subsequent weakness,
consider locking in gains as QLGC converges upon the $40 level;
especially in light of the tight time frame.

***May contracts expire next week***

BUY PUT MAY-45 QLC-QI OI=549 at $3.70 SL=2.00
BUY PUT JUN-50 QLC-RJ OI= 52 at $9.60 SL=6.75
BUY PUT JUN-45*QLC-RI OI=163 at $6.60 SL=4.50
BUY PUT JUN-40 QLC-RH OI=228 at $4.10 SL=2.50



Waiting On The Fed
By Mark Phillips
Contact Support

With less than 2 full trading days to go before we receive Alan
Greenspan's august delivery of the latest interest rate move by
the Federal Reserve, investors' hopes of another fat 50 basis
point cut are fading fast.  Just a couple short days ago, half a
point was almost a certainty according to the Fed Futures
contract.  And along with that expectation, all the major
averages were knocking on the door of major resistance.  Not so,
any more.  So what happened?

In the upside-down topsy-turvy world of the stock market, good
news is sometimes bad and bad news is sometimes good.  In this
case, the worse the economic news got, the more investors
expected to receive their monthly dose of 50 basis point cuts
from their friendly neighborhood Fed Chairman.  That's all fine
until the economic news is no longer abysmal.  With stronger
than expected Initial Jobless Claims on Thursday and robust
Retail Sales on Friday, there were hints of economic healing on
the horizon.  Then University of Michigan Consumer Sentiment
came out Friday morning, throwing more cold water on the bulls'
excitement.  The index ticked up to 92.6 in early May, up
significantly from 88.4 and fooling economists who had expected
another slight drop.  That's right, Uncle Alan's unsung hero,
the mighty consumer, looks like he/she will continue to spend
with abandon until the economy has shed all vestiges of
recession.  Don't bet on it!

The reaction in the market was just what one might expect, with
bond yields exploding to the upside (if you read Jeff & Jeff's
intraday updates, then you already knew that), and the Fed Fund
Futures are now only giving the 50 basis point cut a 50-50 shot.
The equity markets didn't like the news either, as early losses
continued to widen and every major index I looked at continued
to bleed red.

I know what you're thinking.  "Thanks Mark, but what does any of
this have to do with LEAPS?"  I'm glad you asked!  Entry Points!
Despite hints of economic improvement, I think these are largely
anomalous, and expect the Fed to continue its interest
rate-cutting spree.  Unless Easy Al cuts rates by 100 points
on Tuesday, I expect a selloff on the news.  Earnings are all
but over and catalysts for an upward move in the markets are
waning faster than California power supplies as summer
approaches.  Sure we have Dell Computer (NASDAQ:DELL) and Oracle
Corp. (NASDAQ:ORCL) later in the week, but I don't expect any
earth-shaking positive comments from either of these previous

While I think we are likely to see some weakness in the days
and possibly weeks following the Fed's action on Tuesday, I
don't expect to get anywhere near a retest of the March lows in
the markets.  If I am right, the post-Fed dip (when it
stabilizes) should provide the attractive entry points we've
been waiting for.  This isn't an excuse for trying to catch
falling knives, but I would look for support to hold at higher
levels on this trip down.  Major index support that is likely
to hold firm, in my opinion, would be DJIA=10,300; S&P500=1200;
NASDAQ Composite=1900.  Will we get there?  I really don't know,
but I think our current list of Watch List (and Portfolio) plays
would look very attractive for new long-term positions on a
return to those levels.

The Fed has been good to us so far this year (despite their
unadmitted culpability in none-too-gently bringing an end to the
historic economic expansion), and when the economy does show
definitive signs of recovery, those plays should appreciate
nicely.  That is, so long as the Fed doesn't wake the sleeping
inflation monster with their easy money policies.

Look at the entry targets for our current Watch List plays.
Note that I have raised those for Texas Instruments (NYSE:TXN),
EMC Corp. (NYSE:EMC), and Verisign (NASDAQ:VRSN) due to their
good relative strength over the past couple weeks.  All of our
entry targets have been placed at what I expect to be
significant support levels and I'm looking to get filled on
several of these in the next few weeks.  At those levels, I
perceive our plays to be providing attractive values, and
limited downside risk.

There is one caveat to this approach.  I would be hesitant to
initiate new long-term positions with 2002 LEAPS.  These will
soon cease to be treated as LEAPS as the 2004 LEAPS are
released.  The consequence is that time decay will soon start
to be a significant factor in the 2002 expiration cycle LEAPS
and the expected recovery could take a few months to really get
moving.  You don't want to have time decay shrinking the gains
from your plays just as the recovery gets going.  Refer to the
link at the bottom of the Strategy section for a full
explanation of how and when the 2004 LEAPS are released to the
trading public.  As soon as the 2004 LEAPS are available, our
recommended strikes will be added to the Watch List.

Just like the rest of our indicators, the VIX has been rather
directionless lately.  Maybe it is waiting for the Fed as well?
In fact, it looks like there is support forming between 26-27
that should support one more launch over the venerable 30 level
before all is said and done.  That move upwards should coincide
with drops on the major indices near the support levels
mentioned above, providing us with another confirming tool that
says "Attractive risk/reward ratio".  It has been difficult
sitting on the sidelines during this recent rally without
chasing some of our Watch List plays higher, but I think our
patience is going to be rewarded soon.  For the record, the VIX
closed out the week at 27.48.

As you can tell by my commentary, I expect some near-term
weakness, which should provide entries for us on several of our
Watch List plays.  But at the same time, we have moved up nicely
on many of our Portfolio plays.  Most of our stops are remaining
in place this week with the exception of Clorox (NYSE:CLX) and
Wal-Mart (NYSE:WMT).  Over the past 2 months CLX refused to
close below $30 and I think that level bodes well for support
going forward.  WMT benefited from the recent run in Retail
stocks, and we have booked some decent gains since we added the
play in late March.  I'm not convinced it will continue much
higher without some consolidation however.  Rather than let
those profits melt away, I have moved the stop up to $51, and
any serious profit taking will close that play out with a modest

Those of you with itchy trigger fingers have already paged down
to see the new Watch List plays, Brocade Communications
(NASDAQ:BRCD) and Nextel Communications (NASDAQ:NXTL).  You'll
quickly notice that we are looking for significant pullbacks
before we are willing to take a position.  As I have stressed
recently, I think patience and following a predetermined game
plan (logical entry points and ruthless money management) are
the keys to success over the long run.

I know it sounds like a broken record, but chasing stocks higher
at this point could give you the dubious distinction of buying
near the highs.  Remember to stick to your plan and let those
entry points come to you.

Mark Phillips
Contact Support

Current Playlist (Old Format)


CPN    01/21/01  JAN-2002 $ 40  YLN-AH   $10.50   $17.50    66.67%
                 JAN-2003 $ 40  OLB-AH   $15.38   $22.80    48.29%

LEAPS Portfolio

Current Open Plays


CLX    03/13/01  '02 $ 35  WUT-AG  $ 3.50  $ 3.70    5.71%  $ 30
                 '03 $ 35  VUT-AG  $ 6.10  $ 6.30    3.28%  $ 30
GENZ   03/23/01  '02 $ 85  YGZ-AQ  $24.50  $32.50   32.65%  $ 99
                 '03 $ 90  OZG-AR  $27.75  $40.30   45.23%  $ 99
SWS    03/22/01  '02 $ 18  YWF-AT  $ 4.10  $ 7.10   73.17%  $ 20
                 '03 $ 20  VWZ-AD  $ 5.00  $ 7.80   56.00%  $ 20
WM     03/22/01  '02 $ 50  WWI-AJ  $ 6.00  $ 8.40   40.00%  $ 48
                 '03 $ 50  VWI-AJ  $ 9.20  $12.00   30.43%  $ 48
WMT    03/23/01  '02 $ 50  WWT-AJ  $ 7.00  $10.00   42.86%  $ 51
                 '03 $ 50  VWT-AJ  $11.00  $14.00   27.27%  $ 51
JWN    03/30/01  '02 $ 20  WNZ-AD  $ 1.65  $ 2.05   24.24%  $17.50
                 '03 $ 20  VNZ-AD  $ 3.30  $ 3.60    9.09%  $17.50
GS     04/05/01  '02 $ 90  WSD-AR  $14.00  $18.70   33.57%  $ 89
                 '03 $ 90  VSD-AR  $20.50  $26.80   30.73%  $ 89
MU     04/05/01  '02 $ 40  WGY-AH  $10.60  $10.60    0.00%  $ 38
                 '03 $ 40  VGY-AH  $14.80  $15.80    6.76%  $ 38
NSM    04/05/01  '02 $ 25  WUN-AE  $ 5.50  $ 6.10   10.91%  $ 24
                 '03 $ 30  VSN-AF  $ 7.20  $ 8.20   13.89%  $ 24
NOK    04/06/01  '02 $ 25  WIK-AE  $ 4.70  $ 9.70  106.38%  $ 29
                 '03 $ 25  VOK-AE  $ 7.00  $12.30   75.71%  $ 29
FON    04/09/01  '02 $ 25  WO -AE  $ 2.80  $ 3.00    7.14%  $ 19
                 '03 $ 25  VN -AE  $ 4.40  $ 4.90   11.36%  $ 19
QQQ    04/25/01  '02 $ 40  WD -AN  $11.10  $10.70  - 3.60%  $ 41
                 '03 $ 45  VZQ-AS  $12.30  $12.10  - 1.63%  $ 41
DELL   04/27/01  '02 $ 25  WDQ-AE  $ 6.20  $ 4.90  -20.97%  $ 23
                 '03 $ 25  VDL-AE  $ 9.00  $ 7.70  -14.44%  $ 23

LEAPS Watchlist

Current Possibles


CPN    03/18/01  $46-47        JAN-2002 $ 45  YLN-AI
                               JAN-2003 $ 50  OLB-AJ
GE     03/25/01  $45-46        JAN-2002 $ 50  WGE-AJ
                               JAN-2003 $ 50  VGE-AJ
TXN    03/25/01  $34-35        JAN-2002 $ 35  WTN-AG
                               JAN-2003 $ 40  VXT-AH
EMC    04/22/01  $36           JAN-2002 $ 40  WUE-AH
                               JAN-2003 $ 40  VUE-AH
SEBL   04/22/01  $38           JAN-2002 $ 40  YDS-AH
                               JAN-2003 $ 40  OIE-AH
VRSN   04/29/01  $45-47        JAN-2002 $ 50  YXO-AJ
                               JAN-2003 $ 50  OVX-AJ
LRCX   04/29/01  $25           JAN-2002 $ 30  WMJ-AF
                               JAN-2003 $ 30  VPC-AF
ADBE   05/06/01  $36-37        JAN-2002 $ 40  WAE-AH
                               JAN-2003 $ 40  VAE-AH
AOL    05/06/01  $49-50        JAN-2002 $ 55  WAN-AK
                               JAN-2003 $ 55  VAN-AK
BRCD   05/13/01  $30-32        JAN-2002 $ 35  YNU-AG
                               JAN-2003 $ 35  OMW-AG
NXTL   05/13/01  $14-15        JAN-2002 $ 15  WFU-AC
                               JAN-2003 $ 20  VFU-AD

New Portfolio Plays


New Watchlist Plays

BRCD - Brocade Communications $40.18

Stocks in the Storage arena were among the last to undergo
valuation compression, but as the ferocity of the bear
increased, even BRCD fell sharply over the past few months.
The company is a leader in the storage area networking
infrastructure arena, and recent comments from other leaders
in the Storage sector are indicating a slight increase in
demand.  CSFB initiated coverage with a Buy rating on Friday,
adding just one more reason to put BRCD on our radar screen.
The bottom line is that the demand for storage isn't going to
diminish for the foreseeable future, and companies like BRCD
are poised to profit handsomely as the bear heads back into
hibernation.  Trading as low as $16.75 just over a month ago,
the stock has really had quite a run and it is good to see it
coming back to earth a little.  The combined effect of the FOMC
meeting and BRCD's earnings announcement on Tuesday could be the
catalyst to provide an attractive entry point.  We don't want to
chase this stock as the valuation is already rich (with a PE
ratio north of 100), but we want to be ready when it comes back
to solid support.  Look for a pullback to the $30-32 level, also
the site of the converged 30-dma and 50-dma, to provide entry,
as we attempt to position ourselves for what we expect to be a
stellar performing Portfolio play.

BUY LEAP JAN-2002 $35.00 YNU-AG
BUY LEAP JAN-2003 $35.00 OMW-AG

NXTL - Nextel Communications $17.89

Nextel provides a wide array of digital wireless communications
services throughout the United States, primarily to business
users.  Wireless stocks haven't exactly been popular of late
(with the notable exception of Nokia, which is already in our
Portfolio), due to concerns about growth in the industry and
profitability.  Despite increasing revenues, many of these
companies (including NXTL) are still unprofitable, and that is
not an attractive characteristic in the current marketplace.
But Goldman Sachs was out priming the pump a week ago,
recommending the likes of NXTL, AWE and PCS.  Their
recommendation for NXTL came complete with a price target of
$27.  By no means do we expect the stock to go stratospheric
any time soon.  Rather this is our opportunity to go fishing
for an attractive entry point, and the expected market
consolidation over the next couple weeks may be just the
ticket.  We are looking for the stock to come back to the
$14-15 level before finding support from which to launch its
recovery into the end of the year.  Providing Goldman is
accurate in their estimates of the stock's potential over the
next year, then we should be able to book a tidy gain in the
months ahead.

BUY LEAP JAN-2002 $15.00 WFU-AC
BUY LEAP JAN-2003 $20.00 VFU-AD




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The Option Investor Newsletter                   Sunday 05-13-2001  
Sunday                                                      5 of 5

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Covered-Call Basics: The "Total Return" Concept
By Mark Wnetrzak

This week, the Covered-calls editor is on a brief hiatus so
we decided to publish one of his most popular narratives on
conservative option trading techniques.

There are many types of investors and no single strategy can
work for all of them however, a position with moderate profit
potential and relatively low risk can be very appealing.  The
technique we use to achieve this outlook is the "in-the-money"

All covered-calls involve selling a call against stock that is
owned.  If the stock declines, the covered writer will offset
part of his loss by the amount of the option premium.  The two
most common approaches are the "out-of-the-money" covered-call
and the "in-the-money" covered-call.  Some investors prefer to
strive for higher potential returns with an aggressive outlook,
writing out-of-the-money calls on stocks in their portfolios.
These (OTM) positions offer greater rewards but also have less
downside protection.  The maximum potential profit of an OTM
position, while generally greater than that of an in-the-money
(ITM) position, will always require an increase in price by the
underlying stock.  Thus, by using an OTM option, the success of
the overall position depends more on the movement of the stock 
price and less on the benefits of writing the call.  Since the 
premium generated from the sale of the call is much smaller,
the overall position will be more susceptible to loss if the
stock's price declines.  ITM plays are more defensive, offering
less risk but also smaller reward potential.  These conservative
positions appeal to those investors who are attempting to earn a
relatively consistent return while striving for preservation of
capital.  In spite of having a smaller profit potential, the
"in-the-money" approach can be attractive on a percentage return
basis, especially when the stock is held in a margin account.
The cost basis in the underlying issue is substantially reduced
and even if the stock declines, the position can still return a
profit.  Traders who utilize this conservative approach consider
both downside protection and potential profit.  The combined
position (both stock and options) is viewed as a single entity
and the trader is not overly concerned with long-term ownership
of the underlying issue.  This "total return" concept represents
the true focus of most successful covered call writers.

The ideal investment offers limited risk and a good probability
of making a profit.  Our primary goal is to provide plays that
make acceptable returns while still receiving an above-average
amount of downside protection.  Investors who plan to sell OTM
calls should concentrate on the "return not called."  This is the
return on investment that one would achieve even if the stock 
price were unchanged when the sold option expires.  One can also
compare potential positions more fairly using this approach
since no assumption is made about the price movement in the 
underlying issue.  In our conservative option-writing strategy,
we search for plays that return a minimum of 3-5% per month with
downside protection of at least 10% (of the current stock price).
The overall position that is constructed using these guidelines 
will be a relatively low risk play, regardless of the volatility
of the underlying stock, since the levels of protection will be
large and there is still the expectation of a reasonable return.

Since the primary objective of covered-call writing for most
investors is increased income though stock ownership, the amount
of downside protection and the return on investment are both
very important considerations in determining which position to
choose.  Of course, the technical and fundamental outlook of the
underlying stock must also be favorable.  While a minimally
acceptable return is a matter of personal preference, it would
appear that with the current market volatility, the advantages
of the in-the-money position; consistent profits and lower risk,
are more attractive to the majority of investors.

Good Luck!

Note:  Margin not used in calculations.

Stock  Price  Last   Call  Strike Price   Gain   Potential
Symbol Picked Price  Month Sold   Picked  /Loss  Mon. Yield

LMNE    5.22   4.65   MAY   5.00  1.30   $  0.73  20.2%
MFNX    5.25   5.36   MAY   5.00  0.95  *$  0.70  17.7%
MRVC    8.80   8.23   MAY   7.50  2.15  *$  0.85  13.9%
STOR   15.40  19.27   MAY  12.50  3.40  *$  0.50   9.1%
BORL    7.99  10.50   MAY   7.50  1.05  *$  0.56   8.8%
ENMD   20.26  19.25   MAY  17.50  3.70  *$  0.94   8.2%
ASTE   16.05  18.60   MAY  15.00  2.10  *$  1.05   8.2%
SRNA   18.81  20.85   MAY  15.00  4.50  *$  0.69   7.0%
NFLD   11.55  13.50   MAY  10.00  1.85  *$  0.30   6.7%
JBL    26.00  30.79   MAY  22.50  5.00  *$  1.50   6.2%
EXAR   30.15  27.15   MAY  25.00  6.50  *$  1.35   6.2%
EXFO   31.95  34.14   MAY  25.00  8.60  *$  1.65   6.1%
SBYN   13.75  13.10   MAY  10.00  4.40  *$  0.65   6.0%
TWAV   17.70  17.90   MAY  15.00  3.10  *$  0.40   6.0%
AHAA   21.21  27.37   MAY  17.50  4.80  *$  1.09   5.8%
MU     44.07  40.32   MAY  37.50  8.00  *$  1.43   5.7%
EMIS   18.20  15.63   MAY  15.00  4.10  *$  0.90   5.5%
FDRY   13.35  17.24   MAY  10.00  3.70  *$  0.35   5.3%
ILUM   29.13  29.38   MAY  25.00  5.00  *$  0.87   5.2%
ISIL   31.74  30.98   MAY  25.00  7.60  *$  0.86   5.2%
SMTC   31.67  29.80   MAY  27.50  4.80  *$  0.63   5.1%
ZIGO   24.74  34.32   MAY  17.50  8.20  *$  0.96   5.0%
PVTL   24.13  22.55   MAY  20.00  4.80  *$  0.67   5.0%
ULCM   28.00  26.05   MAY  22.50  6.00  *$  0.50   4.9%
ITWO   23.85  19.63   MAY  20.00  4.40   $  0.18   2.0%
NXCD   11.35   9.66   MAY  10.00  1.85   $  0.16   1.8%
PIOS   13.37  12.05   MAY  12.50  1.25   $ -0.07   0.0%

*$ = Stock price is above the sold striking price.


I may be gone but I am still here!  I am enjoying the HOT
Vancouver weather while my son attends a hockey camp!  Well,
at least it's hot compared to Anchorage.  Next week should
be very interesting as it appears everyone is waiting on the
FED (not to mention it is also expiration week).  Emisphere
Tech (NASDAQ:EMIS) held at support and is enjoying a bit of 
a rally.  The April high is near-term resistance and a move
higher would improve the bullish outlook.  Keep a close eye
on Illuminet (NASDAQ:ILUM) as Friday's action is a worrisome.
Pivotal (NASDAQ:PVTL) has again failed to move above its 150
dma.  Monitor closely as it now appears ready to test support
at $20.  i2 Technologies (NASDAQ:ITWO) has reversed direction
and is also testing support at $20.  Evaluate your long term
outlook on Nextcard (NASDAQ:NXCD) and also Pioneer Standard
(NASDAQ:PIOS) as they continue to act technically weak.


Sequenced by Company
Stock  Last  Call Strike  Option  Last Open  Cost   Days  Target 
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

AFCI   17.70  JUN 15.00   AQF FC  3.40 161   14.30   35    4.3%
AREM   18.81  JUN 15.00   UKM FC  4.60 106   14.21   35    4.8%
FNSR   20.98  JUN 15.00   FQY-FC  7.00 323   13.98   35    6.3%
NEM    20.98  JUN 20.00   NEM FD  2.00 8226  18.98   35    4.7%
NPIX   10.00  JUN 10.00   XMQ FB  1.15 122    8.85   35   11.3%
STOR   19.27  JUN 15.00   OSU FC  5.40 347   13.87   35    7.1%
VOXX   10.09  JUN 10.00   UXX FB  0.95 111    9.14   35    8.2%

Sequenced by Target Yield (monthly basis)
Stock  Last  Call Strike  Option  Last Open  Cost   Days  Target 
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

NPIX   10.00  JUN 10.00   XMQ FB  1.15 122    8.85   35   11.3%
VOXX   10.09  JUN 10.00   UXX FB  0.95 111    9.14   35    8.2%
STOR   19.27  JUN 15.00   OSU FC  5.40 347   13.87   35    7.1%
FNSR   20.98  JUN 15.00   FQY-FC  7.00 323   13.98   35    6.3%
AREM   18.81  JUN 15.00   UKM FC  4.60 106   14.21   35    4.8%
NEM    20.98  JUN 20.00   NEM FD  2.00 8226  18.98   35    4.7%
AFCI   17.70  JUN 15.00   AQF FC  3.40 161   14.30   35    4.3%

Company Descriptions

LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even 
point, DE-Days to Expiry, TY-Target Yield (monthly basis).

AFCI - Advanced Fibre  $17.70  *** Technicals Only! ***

Advanced Fibre Communications (NASDAQ:AFCI) develops, makes and
supports telecommunications access products and services that
enable telecommunications companies and other service providers
to connect their central office switches to end users for voice
and high-speed data communications.  The company's products are
integrated multi-service access platforms and devices, network
management systems, indoor and outdoor cabinets for the portion
of the telecom network between the service provider and their
customers, often referred to as the local loop.  Not much news
on this once-dominant player in the telecom hardware sector but
the technical indications suggest that investors are willing to
support the issue at the current price.  Use a net-debit order
to target a better cost basis (and monthly yield) in the issue.

JUN 15.00 AQF FC LB=3.40 OI=161 CB=14.30 DE=35 TY=4.3%

AREM - Aremissoft  $18.81  *** Solid Earnings! ***

Aremissoft (NASDAQ:AREM) develops, markets, installs and supports
enterprise-wide software applications, primarily for mid-sized
organizations in the manufacturing, hospitality, healthcare and
construction industries.  The company's suite of Internet-enabled
products is designed to allow customers to manage and execute
mission-critical functions within their organization, including
accounting, purchasing, manufacturing, customer service, and sales
and marketing.  The modular design of its products enables AREM to
provide customers with a cost-effective scalable solution that can
be easily implemented.  AremisSoft reported record results in late
April with revenue of $39.2 million, an 82% increase for the first
quarter of 2000.  On a pro forma basis, net income for the first
quarter increased 140% year-over-year and EPS increased 108% from
the year-ago quarter.  The company's business remains solid and
has not been negatively affected by the current market conditions.

JUN 15.00 UKM FC LB=4.60 OI=106 CB=14.21 DE=35 TY=4.8%

FNSR - Finisar  $20.98  *** Options Activity! ***

Finisar (NASDAQ:FNSR) provides fiber optic subsystems and network
performance test systems that offer high-speed data communications
over local area networks and storage area networks.  Additionally,
the company has developed products for digitizing the return path
of a cable television network and for aggregating data traffic in
extended networks.  Finisar also offers optical subsystems, which
convert electrical signals into optical signals, for networking
and storage equipment manufacturers that develop systems based on
Gigabit Ethernet and Fibre Channel.  The company's line of optical
subsystems supports a wide range of applications and Finisar also
provides network performance test systems.  Options in FNSR have
been active in recent sessions on speculation of a recovery in the
networking sector and news of an upgrade by FAC/Eqts First Albany.
Now the issue is trying to consolidate recent gains and investors
who think the company is a good long-term holding can establish a
reasonable cost basis in the stock with this position.

JUN 15.00 FQY-FC LB=7.00 OI=323 CB=13.98 DE=35 TY=6.3%

NEM - Newmont Gold  $20.98  *** Gold Sector Hedge ***

Newmont Mining (NYSE:NEM) is engaged in the production of gold,
the exploration for gold and the acquisition and development of
gold properties worldwide.  The company currently produces gold
from mines in Nevada and California, and outside of the U.S. from
operations in Peru, Indonesia, Mexico and Uzbekistan.  The company
also produces copper concentrates from a copper/gold deposit at a
second location in Indonesia.  The company's subsidiary, Battle
Mountain Gold has operations in Ontario, Canada and Bolivia, as
well as interests in mines in Australia and Papua New Guinea,
became a wholly-owned subsidiary of Newmont.  Gold stocks are HOT
and investors who want to diversify their growth portfolio with a
broad-market hedge should consider owning this issue.  Target a
slightly lower cost basis in the stock initially, to allow for a
brief consolidation after the recent rally.

JUN 20.00 NEM FD LB=2.00 OI=8226 CB=18.98 DE=35 TY=4.7%

NPIX - Network Peripherals  $10.00  *** Reverse Merger ***

Network Peripherals (NASDAQ:NOIX) designs and markets scalable,
cost-effective Gigabit Ethernet switching solutions designed for
local area networks. All of its switches are based on its highly
flexible NuWaveArchitecture, which combines its advanced design
and its proprietary Application-Specific Integrated Circuits.
This architecture is designed to enable the Company to deliver
standards-based switches that can work seamlessly with a variety
of existing LAN infrastructures and technologies.  It is the only
wire-speed, non-blocking performance capability on all ports in a
stackable configuration and facilitates the creation of multiple
configurations of Fast Ethernet and Gigabit Ethernet switches.
Network Peripherals is involved in a unique reverse merger with
privately held storage software maker FalconStor.  The all-stock
deal is valued at about $300 million and NPIX will issue shares
of its common stock for FalconStor shares, which will be listed
on the NASDAQ under the stock symbol FNST.  Investors appear to
favor the new deal and after some extensive due diligence, you
may as well.

JUN 10.00 XMQ FB LB=1.15 OI=122 CB=8.85 DE=35 TY=11.3%

STOR - Storagenetworks  $19.27  *** On The Move! ***

Storagenetworks (NASDAQ:STOR) is the world's leading provider of
data storage management services, and an innovator of storage
management software.  Their technology, software and services
enable enterprises to easily and cost-effectively store rapidly
growing volumes of business-critical information.  The rally in
Storagenetworks began in early May after the company said Ford
Motors (NYSE:F) had signed up for two of its storage packages.
Storagenetworks also surprised investors by announcing it can
reduce storage costs for its clients by 25% to 30% and analysts
say the company's services also improve utilization.  The recent
bullish trend in this niche sector is favorable and the heavy
volume breakout in STOR suggests the issue is poised for future
upside activity.

JUN 15.00 OSU FC LB=5.40 OI=347 CB=13.87 DE=35 TY=7.1%

VOXX - Audiovox  $10.09  *** Solid Fundamentals ***

Audiovox (NASDAQ:VOXX) designs and markets a diverse line of
communications products, and provides related services around
the globe.  These products and services include handsets and
accessories for wireless communications, fulfillment services
for wireless carriers, automotive entertainment and security
products and automotive electronic accessories.  Audiovox
operates in the Wireless Group and the Electronics Group and
among these segments, it is one of the most fundamentally sound
companies with an excellent price-to-earnings ratio and a book
value well above the current share price.  Investors who are
looking for a long-term holding in this industry should consider
this conservative entry position.

JUN 10.00 UXX FB LB=0.95 OI=111 CB=9.14 DE=35 TY=8.2%



The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary. 

Sequenced by Target Yield (monthly basis)
Stock  Last  Call Strike  Option  Last Open  Cost   Days  Target 
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

VITR    5.00  JUN  5.00   TKU FA  0.85 145    4.15   35   17.8%
IMNR    4.90  JUN  5.00   IMQ FA  0.80 426    4.10   35   17.0%
PCG     9.97  JUN 10.00   PCG FB  1.25 679    8.72   35   12.5%
NFLD   13.50  JUN 12.50   DHQ FV  2.20 16    11.30   35    9.2%
BTGC   10.64  JUN 10.00   QTG FB  1.30 256    9.34   35    6.1%
ACPW   26.85  JUN 25.00   ACQ FE  3.10 491   23.75   35    4.6%



Option Trading Basics: Q&A with the Editor
By Ray Cummins

This week's questions concern institutional option trading and
liquidity, hedge funds and the difference between the Trade Date
and Settlement Date.

One of our readers asked how institutional traders affect the
retail options market.  What strategies do they use and how does
their influence affect retail players?  Also, what is a "Hedge
Fund" and which trading strategies do they use to profit in the
financial markets.

Institutional investors use futures, options and other financial
instruments to help control risk and maximize the value of their
portfolios.  In the equity-options market, portfolio managers are
often option sellers as well as buyers, writing both put and
call options to improve the income of their stock holdings and
provide a margin for downside movement in volatile markets.  The
strategy of Covered-call writing has become a popular technique
for pension funds and other specialized investment vehicles, who
use this method to outperform the major indices.  Since pension
funds have few alternatives to holding a major portion of their
assets in common stocks, covered-writing also provides a form of
risk management with no additional cash outlays or expenditures.
Another common strategy among institutional option traders is the
protective put.  Fund managers who want to eliminate the risk of
a downward price movement can simply purchase a block of puts to
"protect" the value of a specific holding.  This method is more
common because it allows the buyer to "lock-in" a realized profit
at specific cost basis and also participate in any future upside
activity in the underlying.  Institutions are almost always in
the market for put options and they are willing to pay a premium
for the insurance against a drop in the price of the held asset.
This is the main reason that put options have enjoyed relatively
high premiums over the past few months and the trend is likely to
continue for some time.  Indeed, institutional traders do have a
significant impact on the stock-options market and even more so
in index options, which are used to insure portions of, or entire
equity portfolios.  This activity adds liquidity to the market
and allows retail traders to enter and exit their positions much
more efficiently and with better prices.

Hedge funds are simply private pools of capital usually limited to
a small number of "qualified" investors and administered by a fund
manager (who may also have his/her own money in the fund).  Hedge
funds profit through the use of many unique strategies including
everything from sophisticated arbitrage techniques to speculation
in high growth issues and structured products.  Some funds invest
only in ordinary stocks and bonds while others focus on intricate
risk management systems and complex derivatives.  Almost all of
them use high leverage instruments and "short" positions in their
portfolios but most of these funds don't actually "hedge" as the
title suggests.  The concept of "hedging" refers to the practice
among traders of buying or selling opposing futures contracts or
other derivatives to limit or reduce exposure to unwanted price
movements.  Most hedge funds simply use a variety of strategies to
reduce their overall exposure to the market in which they trade.
The most important fact about hedge funds is they are unregulated
and qualified (very wealthy) investors are simply limited partners
in the fund with no input on its management or objectives and very
little recourse if it should go bankrupt.

Another reader requested an explanation of the differences between
the Trade Date and the Settlement Date, with regard to stock and
option trading.

In simple terms, the Trade Date is the day you actually enter an
order and have it executed.  When you buy or sell a stock (or an
option), that day is reported as the trade date.  The Settlement
Date is when cash or securities must be in place in your account
to settle a trade.  The current settlement period is 3 business
days after the trade date for stocks and 1 business date after
the trade date for options transactions.  In Wall Street lingo,
the settlement date for stocks is T + 3 (the trade date plus three
business days).  These dates are important because when you sell a
stock, you need to know how long you've held it for tax purposes.
For example, if you want to sell a stock within a certain period
such as the end of the calendar year (to take a loss in an issue),
you need to know which date is important to the Internal Revenue
Service.  In most cases, records for tax purposes are based on the
trade date of a transaction, not the settlement date.  By using
the trade date, you can sell a stock on the last day of the year,
as long as the market is open.  Even though the transaction won't
settle until three business days later, you are able to recognize
the loss for the current year, as long as you record the day you
bought the stock as the trade date.

Good Luck! 

                      *** WARNING!!! ***
Occasionally a company will experience catastrophic news causing
a severe drop in the stock price. This may cause a devastatingly
large loss which may wipe out all of your smaller gains. There is
one very important rule; Don't sell naked puts on stocks that you
don't want to own! It is also important that you consider using
trading STOPS on naked option positions to help limit losses when
the stock price drops. Many professional traders suggest closing
the position when the stock price falls below the sold strike or
using a buy-to-close STOP at a price that is no more than twice
the original premium from the sold option.


Stock  Price  Last   Call  Strike Price   Gain   Potential
Symbol Picked Price  Month Sold   Picked  /Loss  Mon. Yield

AVCI   14.98  13.59   MAY  10.00  0.30  *$  0.30  19.8%
AHAA   27.20  27.37   MAY  22.50  0.50  *$  0.50  16.3%
SRA    23.60  23.36   MAY  20.00  0.45  *$  0.45  15.5%
PPD    20.86  21.35   MAY  15.00  0.45  *$  0.45  14.1%
PPD    17.25  21.35   MAY  10.00  0.50  *$  0.50  13.8%
UCOMA  15.39  15.69   MAY  10.00  0.30  *$  0.30  12.9%
CTLM   32.73  26.55   MAY  25.00  0.40  *$  0.40  12.5%
ISIL   33.10  30.98   MAY  25.00  0.40  *$  0.40  12.4%
FNSR   16.00  20.98   MAY  10.00  0.40  *$  0.40  12.1%
SNWL   16.60  17.63   MAY  12.50  0.40  *$  0.40  11.7%
MCDT   25.99  32.31   MAY  17.50  0.45  *$  0.45  11.5%
MANU   34.40  31.31   MAY  22.50  0.75  *$  0.75  10.7%
NTAP   23.55  24.25   MAY  15.00  0.50  *$  0.50  10.4%
PSFT   35.87  36.09   MAY  27.50  0.55  *$  0.55  10.3%
EBAY   41.63  53.25   MAY  30.00  1.10  *$  1.10  10.1%
RFMD   17.85  28.71   MAY  12.50  0.45  *$  0.45   9.7%
EMLX   34.96  38.80   MAY  22.50  0.50  *$  0.50   9.7%
SEBL   45.70  41.44   MAY  32.50  0.65  *$  0.65   9.6%
AMD    30.00  27.68   MAY  22.50  0.35  *$  0.35   8.0%
SCI    22.99  25.20   MAY  17.50  0.45  *$  0.45   7.7%
VSEA   39.35  38.72   MAY  30.00  0.70  *$  0.70   7.1%
BRCD   36.78  40.18   MAY  22.50  0.50  *$  0.50   6.9%
MUSE   48.83  39.41   MAY  25.00  0.65  *$  0.65   6.8%
EXFO   31.95  34.14   MAY  17.50  0.45  *$  0.45   5.7%
GOTO   21.92  17.10   MAY  17.50  0.35   $ -0.05   0.0%

*$ = Stock price is above the sold striking price.


Funny, this week we have some "good" news about the economy 
which of course was "bad" news for the Markets.  Of course,
everyone is really wondering how Alan and the FED interpret
the news; just some added ingredients to the expiration week
stew.  A little Nortel (NYSE:NT) scare for Centillium Comm.
(NASDAQ:CTLM) was put to rest after the company confirmed its
previous revenue and earnings guidance.  We shall see if the
rally continues into next week.  Carreker (NASDAQ:CANI) was
the victim of an unexpected downgrade by Robertson Stephens
before the opening bell on Monday.  The comments were quite
negative and changed the outlook for the issue significantly.
The stock opened lowed and never looked back, dropping 30% in
two sessions.  That's a good example of why it's so important
to check the news after the weekend and monitor each issue on
a daily basis.  Based on the bearish recommendation, we did
not initiate the position.  Goto.com (NASDAQ:GOTO) retreated
sharply this week on heavy volume and we decided to close the
play for a small loss.


Sequenced by Company
Stock  Last  Call Strike  Option  Last Open  Cost   Days  Target 
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

APCC   16.83  JUN 15.00   PWQ RC  0.45 749   14.55   35    7.3%
AVCI   13.59  JUN  7.50   QYV RU  0.30 10     7.20   35    8.6%
EXEL   15.97  JUN 12.50   XQT RV  0.70 0     11.80   35   15.6%
GLGC   21.05  JUN 17.50   CYV RW  0.70 34    16.80   35   10.9%
GNSS   20.45  JUN 15.00   QFE RC  0.35 132   14.65   35    6.9%
NFLD   13.50  JUN 10.00   DHQ RB  0.30 3      9.70   35    8.7%
PDG    11.05  JUN 10.00   PDG RB  0.30 4695   9.70   35    7.1%
TSAI   12.03  JUN 10.00   TQR RB  0.30 20     9.70   35    8.5%

Sequenced by Target Yield (monthly basis)
Stock  Last  Call Strike  Option  Last Open  Cost   Days  Target 
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

EXEL   15.97  JUN 12.50   XQT RV  0.70 0     11.80   35   15.6%
GLGC   21.05  JUN 17.50   CYV RW  0.70 34    16.80   35   10.9%
NFLD   13.50  JUN 10.00   DHQ RB  0.30 3      9.70   35    8.7%
AVCI   13.59  JUN  7.50   QYV RU  0.30 10     7.20   35    8.6%
TSAI   12.03  JUN 10.00   TQR RB  0.30 20     9.70   35    8.5%
APCC   16.83  JUN 15.00   PWQ RC  0.45 749   14.55   35    7.3%
PDG    11.05  JUN 10.00   PDG RB  0.30 4695   9.70   35    7.1%
GNSS   20.45  JUN 15.00   QFE RC  0.35 132   14.65   35    6.9%

Company Descriptions

LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even 
point, DE-Days to Expiry, TY-Target Yield (monthly basis).

APCC - American Power Conversion  $16.83  *** Power Monger! ***

American Power Conversion designs, develops, manufactures, and
markets power protection and management solutions for computer
and electronic applications worldwide.  The company's solutions
include uninterruptible power supply products, electrical surge
protection devices, power conditioning products, and associated
software, services, and accessories.  These solutions are used
with sensitive electronic devices, which rely on electric utility
power including, home electronics, personal computers, servers,
networking and telecommunications equipment, data-centers and
other electronic facilities.  Despite an ongoing slowdown in the
technology industry, the battery backup giant improved on last
year's sales and announced better-than-expected results in its
most recent quarterly report.  The bullish trend has resumed and
traders who favor the outlook for the company can own the issue
at a discounted price with this position.

JUN 15.00 PWQ RC LB=0.45 OI=749 CB=14.55 DE=35 TY=7.3%

AVCI - Avici Systems  $13.59  *** Cheap Speculation! ***

Avici (NASDAQ:AVCI) develops and sells high-speed data networking
equipment that allows communications service providers to transmit
high volumes of information across fiber optic networks.  Their
high-performance solution is being marketed to telecommunications
companies and Internet service providers that are creating new
optical networks to address the increasing data traffic on the
Internet.  The Avici Terabit Switch Router product is designed to
address the critical needs of carriers by: managing high volumes
of network traffic at high speeds; providing the ability to add
capacity to the network without disrupting network performance;
with high levels of availability and redundancy; prioritizing
traffic types for new revenue-generating services, such as video
streaming and the transmission of telephone calls over the web;
and operating with existing carrier equipment.  We like the recent
basing pattern and the low-risk cost basis that can be established
with this position.

JUN 7.50 QYV RU LB=0.30 OI=10 CB=7.20 DE=35 TY=8.6%

EXEL - Exelixis  $15.97  *** Earnings Speculation! ***

Exelixis (NASDAQ:EXEL) is a biotechnology company focused on the
discovery and validation of novel targets for several major human
diseases, and on the discovery of potential new drug therapies,
specifically for cancer and other proliferating diseases.  The
company is focused on the life sciences industries and development
of proprietary drugs, through its unique experience in comparative
genomics and model system genetics.  The company also develops
proprietary genetic, biochemical and cell-based assays for use in
screening for potential targets, proteins and products.  Exelixis
shares have rallied in recent sessions amid optimism in the gene
sequencing segment and with quarterly earnings due Monday, this
position qualifies as "conservative speculation."

JUN 12.50 XQT RV LB=0.70 OI=0 CB=11.80 DE=35 TY=15.6%

GLGC - Gene Logic  $21.05  *** A Big Day! ***

Gene Logic (NASDAQ:GLGC) provides a wide variety of products and
services in the areas of gene expression information, genomic data
management and bioinformatic software as well as pharmacogenomics.
These products and services all designed to improve the efficiency
and effectiveness of the drug discovery and development process.
They may also be useful in research and development in diagnostics,
animal health and agriculture.  The company's information products
enable scientists to produce biological knowledge by integrating
the company's proprietary expression information with a growing
array of biological information available on the Internet.  GLGC
has become a merger target, due to Merck's acquisition of genetic
research company Rosetta Inpharmatics (NASDAQ:RSTA) and analysts
say that Gene Logic is now the leading provider of disease-related
gene expression information.  If this is a company you want to own,
the sale of an OTM Put can help you establish a discounted cost
basis in the issue.

JUN 17.50 CYV RW LB=0.70 OI=34 CB=16.80 DE=35 TY=10.9%

GNSS - Genesis Microchip  $20.45  *** Chip Sector! ***

Genesis Microchip (NASDAQ:GNSS) designs, develops and markets
integrated circuits that manipulate and process digital video and
graphic images.  The company also supplies reference boards and
designs that incorporate its proprietary integrated circuits.  The
company is focused on developing and marketing image processing
solutions and is currently targeting the flat panel monitor market.
In addition to product sales, the company derives revenues from 
providing design services which help its customers to develop
products that include its chips in their designs or to accelerate
the development of its products to meet customer demand.  Genesis
recently posted fourth quarter earnings that topped expectations,
and forecast current quarter revenue would grow to $20 million,
above the analysts' consensus estimates for the upcoming period.
Investors applauded the news and it appears GNSS is once again a
favorable small-cap issue in the semiconductor sector.

JUN 15.00 QFE RC LB=0.35 OI=132 CB=14.65 DE=35 TY=6.9%

NFLD - Northfield Labs  $13.50  *** Blood Substitute ***

Northfield Laboratories (NASDAQ:NFLD) is primarily engaged in the
development of a safe and effective alternative to transfused
blood for use in the treatment of acute blood loss.  Its PolyHeme
blood substitute product is a solution of chemically modified
hemoglobin derived  from human blood.  The company is devoting
substantially all of their efforts and resources to the research,
development and clinical testing of PolyHeme and NFLD officials
recently announced at the Deutsche Banc Alex. Brown Healthcare
Conference that they were confident and optimistic about bringing
the company's blood substitute product through the regulatory
review process.  Traders who like drug stock speculation can use
this position to establish a favorable cost basis in the issue.

JUN 10.00 DHQ RB LB=0.30 OI=3 CB=9.70 DE=35 TY=8.7%

PDG - Placer Dome  $11.05  *** Precious Metals Hedge ***

Placer Dome (NYSE:PDG) and its subsidiaries, joint ventures and
associated companies (collectively, Placer Dome) are principally
engaged in the exploration for, and the acquisition, development
and operation of gold mineral properties, although significant
quantities of silver and copper are also produced.  The company's
share of gold production in 1999 was derived from mines in Canada,
the United States, Australia, Papua New Guinea, South Africa and
Chile.  The La Coipa Mine in Chile contributes the majority of the
company's share of silver production, with the balance from the
Misima Mine in Papua New Guinea.  The Zaldivar Mine in Chile and
Osborne Mine in Australia are responsible for the company's share
of copper production.  Here's a favorable position in the Precious
Metals sector for investors who want to diversify their portfolio.

JUN 10.00 PDG RB LB=0.30 OI=4695 CB=9.70 DE=35 TY=7.1%

TSAI - Transaction Systems  $12.03  *** On The Move! ***

Transaction Systems Architects (NASDAQ:TSAI) develops, markets,
installs and supports software products and services primarily
focused on facilitating electronic payments and other electronic
commerce.  In addition to its own products, TSA distributes or
acts as a sales agent for software developed by third parties.
The products and services are used mostly by banks and financial
institutions, retailers and e-payment processors in domestic and
international markets.  Transaction Systems recently posted a
quarterly profit of $0.06, matching consensus estimates and said
it expects third quarter earnings in the range of $0.12-$0.18 per
share with revenues of $79-$84 million.  Apparently investors are
pleased with the news as the company's share value has rallied
since the announcement.

JUN 10.00 TQR RB LB=0.30 OI=20 CB=9.70 DE=35 TY=8.5%



The following group of issues is a list of additional candidates
to supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
and positions are suitable for your experience level, risk-reward
tolerance and portfolio outlook.  They will not be included in
the weekly portfolio summary. 

Sequenced by Target Yield (monthly basis)
Stock  Last  Call Strike  Option  Last Open  Cost   Days  Target 
Symbol Price Mon. Price   Symbol  Bid  Int.  Basis  Exp.  Yield

CMLS   12.84  JUN 10.00   UUC RB  0.35 0      9.65   35   10.4%
ACPW   26.66  JUN 22.50   ACQ RX  0.75 0     21.75   35    9.0%
PGNX   13.61  JUN 10.00   GUB RB  0.30 20     9.70   35    8.6%
FNSR   20.98  JUN 12.50   FQY RV  0.30 179   12.20   35    5.8%
EMLX   38.80  JUN 20.00   UML RD  0.45 226   19.55   35    4.8%
VECO   49.85  MAY 45.00   QVC QI  0.70 283   44.30   35   27.0%



The Market Approaches A Key Moment...

Stocks slumped today as renewed strength in retail spending and
rising consumer confidence fueled concerns the Fed would be less
aggressive with interest rate reductions in the coming months.

Friday, May 11

Stocks slumped today as renewed strength in retail spending and
rising consumer confidence fueled concerns the Fed would be less
aggressive with interest rate reductions in the coming months.
The Dow was down 89 points at 10,821 and the NASDAQ finished 21
points lower at 2,107.  The broader S&P 500 index also retreated,
down 9 points to 1,245.  Trading volume on the NYSE was light at
896 million shares, with declines beating advances 16 to 13.  On
the technology exchange, volume reached just 1.41 billion shares
with losers outpacing winners 21 to 16.  In the bond market, the
30-year Treasury fell 1 9/32, pushing its yield up to 5.85%.

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

Pepsi     (NYSE:PEP)    JUL50C/42P   $0.10   credit  synthetic
Pepsi     (NYSE:PEP)    JUN42P/45P   $0.70   credit  bull-put
Novellus  (NASDAQ:NVLS) JUN65C/35P   $1.55   credit  strangle
Alliance  (NYSE:AC)     JUL50C/50P   $5.40   debit   straddle
Norfolk   (NYSE:NSC)    JUN22C/22P   $2.35   debit   straddle

Today's bearish activity provided some great entry opportunities
in the PEP positions.  We chose the bullish synthetic play with
a downside break-even near $42.40.  The conservative straddles in
AC and NSC were also available at acceptable prices and the NVLS
credit strangle offered a reasonable opening credit.

Portfolio Plays:

The major averages closed lower today with industrial stocks deep
in the red on weakness in financial and defensive issues.  Shares
of technology bellwethers also weighed heavily on the market with
the greatest selling pressure seen in computer hardware companies,
software vendors, chip-makers, and telecom equipment stocks.  The
bullish economic data regarding consumer confidence and spending
did little to assuage widespread concerns that corporate earnings
will continue to decline over the next few quarters.  In addition,
some analysts suggested that today's optimistic reports reduced
the potential for future rate cuts and investors began to question
how much longer the Fed would pursue its aggressive interest rate
management in view of the new data.  Experts say a half-point cut
is expected next week but the changing economic conditions may not
warrant another reduction in rates during 2001.  Some of the more
optimistic traders expect the Federal funds rate to fall to 3.75%
by mid-summer and yet there is little confidence that an economic
recovery will begin in earnest before the first quarter of 2002.
Investors echoed that outlook as they retreated to the sidelines
with little interest in opening new positions before the weekend.
The obvious anxiety over the current reporting period has started
to fade but already there are rumors of upcoming sales and profit
warnings, when companies confess they are likely to miss earnings
estimates amid the slowing economy.  Unless your are still waiting
for an entry point, it's not a pretty picture in the near-term.

Fortunately, there were a few positive moves in the Spreads/Combos
section today.  While most technology shares traded lower, select
wireless telecom stocks posted small gains and AT&T (NYSE:T) and
Nextel (NASDAQ:NXTL) were among those issues.  In the chip sector,
PMC Sierra (NASDAQ:PMCS) rebounded almost $3 to remain in a recent
trading range near $40 and the retail group also advanced with Liz
Claiborne (NYSE:LIZ) and Lowe's (NYSE:LOW) enjoying limited upside
activity after analysts at Merrill Lynch analysts said they expect
a strong performance from the sector.  In the industrial segment,
Active Power (NASDAQ:ACPW) continued its recent rally and both of
the bullish plays in that issue are expected to finish at maximum
profit.  Among the bearish positions, Minnesota Mining (NYSE:MMM),
Dynegy (NYSE:DYN) and Total Fina Elf (NYSE:TOT) all retreated and
in the premium selling category, Lincare (NYSE:LNCR), Shire Pharma
profitable.  One of the surprises of the session occurred in that
category as Western Wireless (NASDAQ:WWCA), a provider of cellular
service in mostly rural areas, posted a first-quarter loss amid a
sequential decline in sales.  The company said its losses totaled
$17.3 million, or $0.22 a share, well below the consensus earnings
estimate of $0.02 a share.  Sales rose 35% from one year earlier
but revenue actually declined slightly and the company gained only
37,000 new customers, far short of the 54,000 added in the fourth
quarter, when sales tend to be strongest.  Investors were shocked
by the news and they dumped the stock for a $3 loss to $40.  Since
there was no real explanation for the shortfall, it may be best to
take the current profit of $0.75 in the neutral credit strangle,
closing the position before any other surprises become public.

Questions & comments on spreads/combos to Contact Support
                     - TRADING STRATEGIES -
There are no "New Plays" today as I will be assisting with other
sections of the newsletter.  However, the market is once again
entering a favorable period for option buying and since (debit)
Straddles are a popular strategy, now is a great time to review
some of the fundamental concepts in this technique.

Debit Straddles - Volatility and Time Value

A Straddle is an appropriate strategy for situations in which one
suspects that a stock's price will move substantially but does not
know in which direction it will go.  A straddle can work very well
in situations where important news is about to be released and it
is expected that it will be either very favorable or extremely
unfavorable.  Corporate earnings announcements, new drug approvals,
merger or takeover speculation and annual board meetings (where
splits and spin-offs are announced) are examples of situations in
which unexpected information can significantly affect stock prices.
The most important thing to remember when evaluating a straddle of
this nature is that the greater uncertainty associated with the
current situation is known by everyone.  The options may already
be priced according to a higher future volatility, making the play
unfavorable.  The most attractive straddles will be those in which
the trader is confident that the stock will be more volatile than
everyone else and for that kind of evaluation, you need a solid
understanding of Implied Volatility and Time Value.  If you do not
have a basic knowledge of volatility, please review that concept
before you participate in these types of positions.  It is very
important that you understand what it is and how it behaves before
you devote portfolio capital to strategies that profit from its

Assuming you have an fundamental understanding of volatility, we
can discuss another important component of option pricing: Time
Value.  Option premium consists of two components: Intrinsic Value
and Time Value.  Assume that the current stock price is equal to
the strike price.  In this case, an option's premium for the call
and put does not have any intrinsic value, only time value.

The main factors that influence Time Value include:
1)  The number of days until expiration
2)  Implied Volatility 
3)  How far the option is in- or out-of-the-money.

At-the-money options have the highest time value.  As the option
starts moving in- or out-of-the-money, the time premium begins to
lose value.  The closer an option is to expiration, the more an
option's premium will shrink (per day), due to time decay.

This gives us a guideline in selecting straddles.  We have to pick
an expiration month so that the price of the straddle will not be
too high (not too far from expiration).  However, it should still
provide enough time for the stock to perform as expected, before
we have to exit the trade to preserve capital.  One important fact
to remember; the highest increase in time decay for at-the-money
options occurs in the last 30 days before expiration.  That means
one should rarely hold a straddle position to expiration.  When you
understand that time decay is working against the trade, you can
begin to choose positions in which the other beneficial components
such as intrinsic value and implied volatility, will boost the
potential for profit, even as time passes.  Now that you know time
decay is working against the straddle, what other factors can help
you achieve your goal of selling at a higher price in the future?
Two components: Implied Volatility and Intrinsic Value.

Implied volatility is a characteristic of an option's time value.
The higher the implied volatility, the higher the option's time
value.  When you find a situation where implied volatility is
statistically low (probability dictates that it should start to
move higher), you can make a profit by selling your straddle at
a higher price, even if the underlying stock price doesn't trade
in a large range.  Obviously, any increase in implied volatility
will boost the time value of your position and move your position
closer to a profitable outcome.

Another basic component that can help us profit in a straddle is
Intrinsic Value.  Once again, assume that the underlying price is
equal to the strike price; this means that our straddle does not
have any intrinsic value.  When the stock starts moving in either
direction, one of our options will become in-the-money.  This will
cause the intrinsic value to grow in that option.  In contrast,
the time value of both of our positions begins to decrease as the
underlying moves away from the at-the-money strike.  Remember, the
further the option is in- or out-of-the-money, the less time value
it contains.

The rate of change for both of these values is very important.
Intrinsic value has a rate of change equal to one; if the stock
price moves one point into the money, intrinsic value increases
by one point.  Time value is much more complex; the rate of change
depends on how far away the option is from the strike price.  The
further the option is in or out-of-the-money, the smaller the rate
of change on a one point move in the underlying issue.  With that
concept in mind, it is easy to see that when the stock price moves
away from the strike price, we gain more in intrinsic value than
we lose in time value and that's one way a straddle profits.  The
measurement of the underlying move is statistical volatility and
we look for straddles on issues where we expect that component to

To construct profitable straddle positions, it is important to be
aware of the effects of all these components.  A theoretical edge
in one or two of these factors can make a position favorable but
it is better to have the majority of them on your side.  The most
common mistake among new traders is the purchase of short-term
straddles.  You can profit from these positions but usually that
occurs only when the underlying starts moving immediately after
the play is opened.  Of course, it appears attractive because the
straddle does not have a large amount of time value and the small
movement required for profit seems very probable.  The problem is,
if the underlying doesn't move right away, time decay will start
to increase rapidly and the option premiums will fall regardless
of the potential for future stock price movement.  Many traders
believe that 2 to 3 months should be the minimum time frame for a
debit straddle.  If you have a choice between two or more series
of expirations and the implied volatility for the longer-term
options are lower, then you should probably go with the greater
time value because those options are theoretically cheaper.

In addition, you must always look for volatility that is low with
respect to its historic levels.  The reason is the tendency for
volatility to return to its historical trend or median.  This is
sometimes called the "Rubber Band" effect and it basically means
there is a high probability that when it's pulled too far in one
direction, it will eventually reverse and start moving the other
way.  This pattern of behavior is the main reason why experienced
traders use volatility based positions to make money.  They will
construct plays that take advantage of the future volatility of
an issue, when the current value is high or low compared to its
recent history.  Volatility is a predictable and powerful concept
for option traders and understanding this unique component is a
must for achieving consistent profits in the derivatives market.

Good Luck!



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