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Daily Newsletter, Tuesday, 05/15/2001

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The Option Investor Newsletter                   Tuesday 05-15-2001
Copyright 2001, All rights reserved.                         1 of 2
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        05-15-2001        High      Low     Volume Advance/Decline
DJIA    10873.00 - 4.300 10922.20 10816.20 1.05 bln   1909/1170	
NASDAQ   2085.76 +  3.84  2125.32  2077.50 1.70 bln   2098/1751
S&P 100   646.26 -  1.21   650.40   643.80   totals   4007/2921
S&P 500  1249.44 +  0.52  1257.45  1245.36           57.8%/42.2%
RUS 2000  489.63 +  2.99   490.30   486.49
DJ TRANS 2880.24 +  5.65  2880.24  2865.49
VIX        27.34 +  0.17    28.62    26.00
Put/Call Ratio      0.86
******************************************************************

Greenspan Delivers

The Federal Reserve lowered its target for the federal funds
rate to 4 percent Tuesday afternoon.  And hinted towards
continued easings.  In conjunction with its decision on rates,
the Federal Open Market Committee (FOMC) released the
following: "The Committee continues to believe that against
the background of its long-run goals of price stability and
sustainable economic growth and of the information currently
available, the risks are weighted mainly toward conditions that
may generate economic weakness in the foreseeable future."
From the preceding comment, we can derive that the Fed is
still on our team.

The Fed's decision Tuesday solidifies, in my mind, that they
are doing everything they can to stimulate the economy and
the stock market.  I think Greenspan and his cohorts will cut
by another 25 or 50 basis points in this cycle of benign
monetary policy, taking the federal funds rate below 4.00
percent - 4.00 percent is the lowest the fed funds rate has been
in seven years.  I think it's also worth noting that with the
exception of the Great Depression, the U.S. economy AND stock
market have rallied EVERY time the Fed has cut rates five
consecutive times - Tuesday's cut marks its fifth in this cycle.

But, despite the Fed's delivery of a 50 basis point cut and
expressing its willingness to continue to cut rates Tuesday, the
major market averages didn't respond in bullish fashion.  So,
what gives?

I think the market's reaction to the Fed's official announcement
Tuesday is a microcosm for the intermediate-term.  While I'm
bullish over that time period, especially on cyclical and
financial stocks, I think the trading is going to be slow,
instead of the volatile moves we've grown accustomed to over the
last several years - as traders, we'll need to grow patient!  Of
course, summer is nearing and this time of year has historically
been slow.  But, to emphasize my point, we simply need to examine
the trading range of the Dow Jones Industrial Average (INDU)
Tuesday.  The Dow traded in a 100 point range, which is quite
tight in light of the Fed's announcement.  The Dow did briefly
spike over the 10,900 near-term resistance level at the peak of
the post-Fed buying spree, but pulled back during the final hour
of trading.  Going forward, I'll continue to monitor 10,900 as
near-term resistance and just below, I'll be watching 10,800 as
near-term support.




On a quick side note, I received a lot of questions concerning
my chart in the Market Wrap column Monday about the Dow pulling
back to roughly 10,500 and completing its inverse head-and-
shoulders.  Although I don't foresee the Dow pulling back to
10,500 in the near-term, I've illustrated on the Daily chart
below the implications of such a move.  In short, I think a Dow
around 10,500 is a gift at this point in the cycle and would
provide traders and investors an excellent, low-risk entry
into the blue chip stocks within the Dow.




Of course, with the Dow, we're all still looking for the old
economy index to breakout above 11,000.  Two sectors that will
need to participate if the Dow is to settle above 11,000 are
the banks and cyclicals.  Here's where it gets interesting.  I've
observed that the KBW Bank Sector Index (BKX.X) and the Morgan
Stanley Cyclical Index (CYC.X) are on the verge of breaking out
BIG TIME.

The Bank Sector Index has been biding its time below the 900
level for quite some time, en route to building a bullish wedge
and continues to find buyers at its 200-dma, now at 870.




Meanwhile, the Cyclical Index has been contained by a descending
trend line, which began way back in early 1999.  The Cyclical
Index is currently testing its descending trend line, now at 550,
and an advance above 560 might confirm any breakout attempt.




If the Bank Sector and Cyclical Indexes breakout above the
aforementioned resistance levels, then I think the Dow will see
the upside of the 11,000 level.  It may take several days, weeks
or even another two months, but I foresee a breakout in all three
before too long and feel that the it can be traded.

While I am bullish on the cyclical and financial sectors of
the market, I'm still a little wary of the broader technology
sector, although certain spaces are beginning to improve.  For
example, Brocade Communications (NASDAQ:BRCD) reported after the
bell Tuesday that it was beginning to see an improvement in its
business.  Brocade is a maker of storage area networking
solutions, and is a major player in the data storage market,
along with EMC (NYSE:EMC), Veritas (NASDAQ:VRTS) and Network
Appliance (NASDAQ:NTAP).  Network Appliance also reported earnings
Tuesday after the bell and made comments consistent with those
from Brocade.  Officials from both companies proclaimed that the
bottom was in place in their respective business lines.

In addition to the reports from Brocade and Network Appliance,
Applied Materials (NASDAQ:AMAT) delivered numbers that missed
consensus estimates by one penny.  Although Applied Materials
missed its number, during the conference call its CEO, James
Morgan, said, "I believe that we are now in the bottom of this
cycle and we are waiting for the tipping point."  While the
magic word 'Bottom' was whispered, Amat has not yet seen an
upturn in business, which epitomizes why I'm still somewhat
cautious on technology shares.

For its part, the Nasdaq Composite (COMPX) rolled over
following the Fed's announcement and closed below the 2100
support level.  With the Nasdaq, the best game in town recently
has been fading the market.  That is, buying near support levels
and selling near resistance levels, instead of chasing
momentum-based moves that lead to head-fakes and whipsaws.
With an increasing number of companies mentioning the bottom
word, but not yet raising guidance, it makes sense that the
Nasdaq could continue to trade sideways during the summer
months or until the tech business improves.




(For those traders who monitor the semiconductor sector closely,
and particularly its impact on the broader tech sector, it's
worth noting that the Philly Semi Index (SOX.X) closed just
above key support  at the 600 level.)

I'd like to reiterate that instead of aggressively pursuing
stocks either on breakouts or break downs (momentum trading), I
think it may become conducive to fade the prevailing trend.  Again,
that means buying near support and selling near resistance,
especially in the tech sector.

With the Fed's meeting out of the way, and not another scheduled
until late June, the market will be left with earnings news and
guidance in addition to economic news for catalysts.  We have
several more big earnings reports this week from the likes of
Hewlett-Packard (NYSE:HWP), Dell Computer (NASDAQ:DELL) and CIENA
(NASDAQ:CIEN), which have the potential to move the markets.

For the most part, I'm growing more bullish over the
intermediate-term and strongly believe that the markets have the
potential to advance substantially in the latter part of the
summer and into the fall.  In the meantime, I think it makes
sense to stick with the blue chip names of the market, which
continue to work higher, such as the cyclicals like Boeing
(NYSE:BA), Caterpillar (NYSE:CAT) and DuPont (NYSE:DD) - a Jeff
Bailey favorite!

Eric Utley
Assistant Editor


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****************
MARKET SENTIMENT
****************

Fed Speak In Line
By Matt Russ

The Fed speaks and gives us what we wanted.  Delivered in full.
So how about the failure into the close?  The market was quite
whippy around the announcement, but somehow the VIX.X barely moved
until it imploded into the close as markets sold off.  Going into
Expiration Friday, I would expect an increase in volatility,
however, it's beginning to feel like the light volume battle
between the bulls and bears will keep us rangebound.  The
short-term seems uncertain and the long-term continues to improve
as the Fed redeems itself.

NASDAQ & QQQ
The Nasdaq sold off yesterday, quickly breaking support at 2089
and finally finding buyers at 2061.  A combination of some short
covering and traders going long late Monday and into the Fed
meeting today propped up the tech index.  Intraday support showed
up at 2088 prior to the announcement, and after the cut, the
Nasdaq made a run to 2125 before sellers really let 'em have it.
This just happened to a 38.2% retracement between May 2nd's high
and yesterday's low.  What a great entry into a short position
for a savvy and patient trader!  That wasn't me though.  I jumped
in early after the announcement and managed to stay even.  I had
QQQ puts: the right directional bias, less-than-optimal entry.
Always wanting to pull the trigger.  The close was ugly and feels
like tomorrow we'll see more selling.  Look for support at 2060,
2032 and 2013.  Resistance at 2125 and 2145.  On the QQQs, support
at $45, $44.10, and $43.43; resistance overhead at $46.10 and
between $46.42 - $46.75.





SPX & OEX
Trading in a narrow range on Monday, the SPX.X held the 1240
support line before rallying almost 10 points into the close.
Before the Fed meeting, the index hugged the 1248 - 1250 line,
only to return by the close after a euphoric spike to 1257.
This will be the next level of resistance, 1257 - 1258, and
coincides with the previous uptrend line in red.  As the SPX.X
dove into the close, buyers support it at 1245.  Below, 1241
is strong.  On the OEX.X, support has been holding at 642 with
resistance at 648 and 650.




DOW 30
Still waiting on that Cyclical Index (CYC.X) to breakout.  But
with or without it, the Dow seems to be hanging on.  Since Friday's
dip to 10774, the $INDU has been making a series of higher lows
and higher highs, peaking today at 10922.  We saw support at 10800
yesterday, which has been a level we continue to watch.  The Dow
30 wants to move higher, yet if you look at a daily chart, it's
beginning to look top-heavy and the MACD is heading lower.  With
the 10-dma now overhead at 10879, supply might be winning over.
If a further pullback occurs below the 38.2% retracement at 10784,
buyers have been solid at 10700 - 10720.  This level would allow
long positions to be initiated with low risk.




Well, we got exactly what we wanted from the Fed.  Kind of a
boring day really.  Volatility was virtually non-existent except
for about 25 minutes, and then the VIX.X settled right back at
27.34.  I can't imagine an Expiration Week without a slight
explosion in volatility, can you?  Earnings from Hewlett (NYSE:HWP)
tomorrow and Thursday's Ciena (NASDAQ:CIEN) and Dell (NASDAQ:DELL)
reports should give us tradable guidance going forward.  Heck,
it might even give us a catalyst to trade out of this range, but
it's beginning to feel like the summertime lulls.

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

NASDAQ 100
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.


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

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***********
OPTIONS 101
***********

Backspreads And Ratio Spreads, Part II
By Lee Lowell

Let's finish off this session with a discussion of the "ratio
spread."  As we saw last time with the backspread, the ratio
spread also consists of an unequal amount of options.  Only this
time we'll have more short options than long in our position.  The
ratio usually occurs in the form of a 1x2 or a 1x3 spread and is
executed within the same month.  Same as the backspread, the ratio
spread could be of a put-type or a call-type.  And as I noted last
time, I'll show you how to get around the issue of having uncovered
short options in the account.

The ratio spread is also classified as a type of volatility spread
due to the fact that its success relies on a certain type of
option skew.  If you're initiating a put ratio spread, you'll buy
a put which is usually ATM or OTM, (depending on your preference),
and sell 2 or more farther OTM puts.  With a call ratio spread, you
buy an ATM or OTM call and sell 2 or more further OTM calls.  Since
we are short more options than long, we want to initiate the spread
using near-term options that have little time left.  We want very
little movement or slow movement towards our short strikes.
Contrast this to the backspread, where you are hoping for explosive
movement to occur very quickly.

When initiating a put ratio spread, we are looking for a "reverse"
volatility skew.  This means that the lower-strike options we sell
should be trading at a higher implied volatility than our long
higher-strike options.  In the case of a call ratio spread, we
want a "forward" skew which would give the short higher-strike
options a higher IV than the long lower-strike options.  This
ensures us of putting on the spreads in its most favorable
conditions.  How do you tell if the skews are correct?  You need
to have some sort of data vendor that supplies this information or
you can run the numbers through an option calculator and solve for
IV.  The easiest way though is through the data feed.




Here's a screen shot of the data feed vendor I'm currently using.
This is an option chain for Applied Materials showing the June put
contracts.  If you look at the last 2 columns on the right which
show "Imp Vol(B)" and "Imp Vol(A)", they signify the implied
volatility of the options (in percent) based off the actual bid
and asked prices respectively.  You always want to make sure you
see implied volatility numbers based off the bid/ask prices
because these are always current.  If you look at IV numbers based
off the last trade, you may be looking at stale numbers of a trade
that could've occurred days ago.

AMAT is showing a reverse skew for these June puts.  Just look at
the IV numbers and you can see how they get larger the lower you
go in strikes.  AMAT is currently trading at $50/share, so the $50
strike is ATM.  If you wanted to initiate a put ratio spread, you
could buy the $50 put at $4.50 ask with an ask IV of 78% and sell
two of the $45 puts at a bid price of $2.45 with a bid IV of 82%.
(Remember, you can always try to execute your trades somewhere in
the middle of the bid/ask.  I always do.)  This would be a correctly
formed put ratio spread.

ILLUSTRATIVE PURPOSES ONLY!

Ideally, you'd want to initiate the position for a credit (just
like the backspread) to compensate for the possible large loss due
to extra short options.  In this example, we'll take in a credit of
$.40 per spread.  (2 x $2.45 = $4.90 - $4.50 = $.40 Commissions not
included).  Remember, ratio spreads are for when you think the
market is going to sit still or move slowly towards your short
strike or totally in the opposite direction. Let's see what this
spread looks like graphically.




Since the position is a short-term trade, this is what the P/L
scenario looks like at expiration.  It's exactly the upside down
inverse of what the backspread graph looks like.  We see that
maximum profits occur right at the short strike price of $45 and
then losses start to accrue as we pass down through the short put.
If AMAT shoots higher, we keep our initial credit.  Again, we want
AMAT to sit still, move VERY slowly lower, or go higher.  If AMAT
finishes at $45, we'll make our max profit of $540.

So what about the unlimited loss with the naked options?  I know
most retail traders are not qualified by their brokers to sell
uncovered options.  In this case, all you need to do is buy a much
further OTM put option for very little money which will cover you
in a disaster scenario.  In this AMAT trade, we could buy the June
30 put for say, $.25, which would still leave us with a small
overall credit of $.15 in the position. (Commissions not included).
Here's the new graph:



The position still loses if AMAT tanks below $40, but that loss
will at least be limited as long as we have our $30 put in place.
Really, you could pick any strike you to cover the extra short
option.

What's the point of having the correct skew?  Well, IV lets us
know how an option is priced.  The higher the IV, the higher the
option's premium and vice versa.  If you're initiating a spread,
you want to buy an option with a lower IV than the option you're
selling.  If in our AMAT example, the $45 put had an IV of say 78%,
it would probably be priced somewhere around $2.25 compared to
its original $2.45 price, giving us a $0 net for the spread.  So
the key is to find options which have a favorable skew to the type
of spread you're initiating.

What's the conclusion of the ratio spread?  If you find stocks
that have large skews within the same expiration month and you
feel we'll be rangebound, then the ratio spread is a great trade.
You can make money if the stock sits still, moves slowly towards
your short strike, or in the opposite direction of your strikes.
Just make sure you initiate the spread for a credit and purchase a
deep OTM option in case you are unauthorized for naked short
options.

Good luck.


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

Those Terrific Takeovers
By Scott Martindale

Any creative, high-growth company in a high-potential sector can
be considered a takeover target.  The gorillas often swallow up
these upstarts to add to their own expertise or product line
rather than trying to develop a competing product.  They want
fast, cheap entry into hot, innovative product lines.  Also,
mergers of equals occur to give both companies a stronger market
position.  And when an offer is made, it usually is at a
substantial premium to the current market value of the takeover
target.

Case in point: Rosetta Inpharmatics (NASDAQ: RSTA).  I bring up
this little biotech gem because I recently started accumulating
RSTA shares in my long-term account, and it gave me a surprise 75%
jump on Friday (biggest Nasdaq mover of the day!) when Merck
announced a takeover bid.  My cost basis was $10.10, and I had an
open limit order to sell Jun 10 calls for 2.00.  With the +$7 gap
at the open, the calls were executed for $7.10.  Nice.  I only
wish it were the May calls, which sold for the same price.

In the situation I am in now, I have three main choices.  (1)
Since the stock probably won't move much between now and June
expiration, I could close out the position now to free up the cash
by buying back the call and selling the stock, which locks up my
70% gain and puts me back in cash for another trade.  (2) I could
let the play ride and get called out in June for $10, which gives
me the same 70% gain -- but in five weeks rather than today.  (3)
I could wait to see if the stock sells off a bit, buy back the
call, and then look to sell it again.  Because the purchase
involves a stock swap of 0.2352 shares of MRK for each share of
RSTA, which values RSTA at almost $18 today, the value of RSTA
will rise and fall with MRK's fluctuations.

I bought shares of RSTA primarily because of its prowess in
genomics research, but this also made it a takeover target for a
drug maker (like MRK) that is looking to speed development of new
medicines.  By the way, MRK also was been rumored to be
considering another offer for Schering Plough (NYSE: SGP), briefly
pushing up SGP by 10% intraday.

Of the 20 biggest deals of the 1990's, the acquired companies rose
an average of 23% from just prior to the announcement to the day
of the merger, and the same or better can be expected in small and
mip-cap takeovers.  The best targets are companies with good
products and financials along with a depressed share price.  This
month, American International Group (NYSE: AIG) acquired American
General (NYSE: AGC) for a slight premium.  Canadian Imperial Bank
(NYSE: BCM) is reported to be in talks to acquire Ameritrade
(NASDAQ: AMTD) for up to $10 (a 20% premium.  Today, TriQuint
Semiconductor (NASDAQ: TQNT) announced it will acquire Sawtek
(NASDAQ: SAWS), paying (in TQNT stock) a 16% premium to today's
closing price.

Other potential targets that experts cite today include diverse
names like Knight Trading (NASDAQ: NITE), York International
(NYSE: YRK), Priceline.com (NASDAQ: PCLN), Material Sciences
(NYSE: MSC), Tupperware (NYSE: TUP), Siebel Systems (NASDAQ:
SEBL), Research in Motion (NASDAQ: RIMM), Scientific Atlantic
(NYSE: SFA), Ciena (NASDAQ: CIEN), American Water Works (NYSE:
AWK), Williams Communications (NYSE: WCG), and Florida Power &
Light (OTCBB: FLPLP).

Last March, Technology Investor magazine's premier issue listed 11
companies in their "Takeover Candidates Portfolio."  Two of them
were acquired during 2000: Pairgain by ADC Telecom (NASDAQ: ADCT)
and Verio by NTT Communications (NYSE: NTT).

As for today's market action, I always get to write immediately
following Fed moves since they generally happen on Tuesdays.
Today, of course, the Fed did what we all hoped and expected.
Trying to prevent a recession without overheating a recovery into
severe inflation, they seem to be more willing to err on the side
of preventing recession.  I never doubted this outcome, despite
figures showing rising consumer confidence and falling
productivity.  The frightening global consequences of a U.S.
recession are just too great.

In fact, my only short play going into the announcement was the
last-minute purchase of Nasdaq 100 Trust (AMEX: QQQ) May 44 Puts
as a slight hedge on my bullish positions.  I sold them minutes
later on the announcement for a small $0.15 loss.  Prior to the
Fed announcement, I also closed out a couple of bullish plays just
to lighten my exposure a bit.  I'll discuss them next week in a
review of my May trades.  As I mentioned last week, I've moved a
lot of cash back into my aggressive trading account, and I've
slowly started putting it to work.  I think today's muted market
response was caused by investors waiting for any "sell the news"
action to play out before they bring in more funds.

I'm looking forward to the time in which the Fed is no longer the
driver of the market.  An earnings recovery will allow stocks to
climb on their own merits.  To get to that point, these rate cuts
should push large institutional investors to buy lower-rated bonds
to achieve their targeted yields. Over the past week or so, we've
seen some big telecoms come out with big debt offerings: $3
billion for Verizon (NYSE: VZ), $8 billion for British Telecom
(NYSE: BTY), and $12 billion for WorldCom (NASDAQ: WCOM).  Can we
assume this money will become capital expenditures, finding its
way into the income statements of those upstart networking,
communications equipment, and semiconductor companies?





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


CALLS:
*****

AOL $50.75 -0.81 (-0.83) It looked like it'd be another day of
flat-lining for AOL and the other media stocks, but the late
afternoon brought about some erratic trading on the NASDAQ.
Initially AOL was towing the mark above our $51 closing stop and
all looked bright following the Greenspan overture.  However the
NASDAQ influence and news of consumer advocates seeking a
federal review to see if AOL's choice of carrying High Speed
Access Corp over its cable lines meets the federal merger
conditions as an unaffiliated ISP sent the share price into a
flurry of activity.  The solid bounces off $50.50 on the
downside was promising and demonstrated AOL's soundness, but
unfortunately, the bulls couldn't take the share price back over
the top of $51 or the trailing 5 & 10-dmas.  While another
upside breakout could be on the horizon, we're sticking by our
guns and exiting on the premise of AOL's stop violation.


PUTS:
*****

RIMM $29.87 +1.86 (+1.50) It appears that support at $28 managed
to hold after all.  While the stock retreated below that level
intra-day on Monday, the pullback was on low volume.  Some last
minute buying at the end of day on very brisk trading was enough
to send shares of the portable computer maker back above the $28
level.  Today, the stock managed to rebound, gaining 6.64
percent.  While volume on the move was light, less than 70
percent of the average daily, this was enough to close RIMM above
our stop price of $29.  As a result, we no longer recommend
taking on any new positions.





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The Option Investor Newsletter                   Tuesday 05-15-2001
Copyright 2001, All rights reserved.                         2 of 2
Redistribution in any form strictly prohibited.

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Anything else is too slow!

http://www.sungrp.com/tracking.asp?campaignid=2175
**************************************************************


********************
PLAY UPDATES - CALLS
********************

CAT $53.14 +0.32 (-0.06) Ahead of the Fed meeting, traders in CAT
were cautious yesterday, as the stock retreated fractionally on
less than 80 percent of the average daily volume.  Today's FOMC
announcement of a 50 basis point cut was good news for deep
cyclical issues, helping shares of the leading earth-moving
equipment maker to successfully test its 10-dma, bouncing
strongly to end the day higher on heavy volume.  Today's move
keeps the stock's six week long up-trend intact, setting it up to
challenge formidable resistance at $54.  A break through this
level with conviction could be the signal for conservative
traders to jump in, but keep in mind that historical resistance
at $55 could also prove to be difficult.  However, a break
through $55 could mean a clear path to $60.  CAT rallied today in
spite of news from rival DE, who posed poor earnings.  But
brokerage houses such as Bear Stearns and UBS Warburg came out to
defend CAT, saying that DE's woes were company specific.
Aggressive players may target pullbacks to the 5 and 10-dma, at
$52.91 and $51.88 for potential entry points, keeping in mind out
closing stop price of $51.75.

GPS $33.28 +0.37 (+0.08) So far, the strong gap up move last week
continues to hold, as the stock has edged gradually higher.
Shares of the apparel maker did pull back fractionally yesterday
to start off the trading week, but today's gains more than made
up for Monday's deficit.  Earnings are set for this Thursday, May
17th, after the market close and as always, we will close out
this play before ahead of that event.  In the meantime, the 50
basis point rate cut from the Fed, along with continued upward
momentum in the retail apparel sector, may give GPS one last
burst of strength.  As the company announced last week that it
will surpass Street estimates, the question at this point is by
how much.  If traders are optimistic, and bid the stock above
today's intra-day high of $33.28 on volume, this could allow for
an entry on strength.  For entries on pullbacks, the 5-dma at
$32.12 along with support at $33, $32 and our closing stop price
of $31.50 may allow higher risk players to jump in, but only if
rivals AEOS and ANF are also moving higher.

BA $66.59 -0.15 (+0.59)  The defense sector continues to
exhibit strength, and BA shines as a star within this sector.
A pullback to support at $65.50, just a quarter point above
the 10-dma, was a good entry point, as the stock rebounded
a full point on the day.  A large spike of volume was
seen at the close, which should bode well for tomorrow's open.
BA management continues to reassure investors, and today the
company stated that it does not plan to delay any shipments
to China at the present time.  It may be possible to enter
BA on another pullback, possibly to the 5-dma at $66.  A close
above $67 could signal more conservative traders that a
possible entry point is available.  Continue to monitor others
in the defense sector, like GD and LMT, and move closing stops
to $65.

TGT $38.30 -1.40 (-1.40)  An upgrade from Lehman Brothers
propelled TGT to $40.43 at the market's open, but profit
taking ensued in the retail sector, and TGT pulled back to
strong support at $37.74.  From there, TGT was able to
rebound, but only to the current levels.  While the action
of TGT may seem weak, the stock may have been due for a
pullback, and remains in its upward channel which was
established in mid April.  We would like to see RLX.X
demonstrate additional strength by moving above the 900
level, which could signal traders to potential bullish
movement in retail stocks.  Traders could take positions
upon a move up past the converged 5-dma and 10-dma of
39, if RLX.X is also strong.  Alternatively, a close
above $40.50 could give a green light to more conservative
traders.  We are keeping stops at $38, so close positions
if TGT closes below this level.

JNY $46.23 +0.64 (+1.28)  JNY has formed a consistent pattern
of making new 52-week highs for the last three days, and, if
we see a little more strength in RLX.X, we may be able to see
JNY move to even higher levels yet.  RLX.X sold off slightly
today in the overall lackadaisical market action, yet remains
close to the psychologically important 900 level.  If RLX.X
can make a strong move above 900, this could indicate that
JNY might be ready to move higher.  With all of the bullish
action, a little consolidation might be healthy, and traders
could consider entering on a pullback to the 5-dma at $44.76.
Alternatively, positions could be taken at current levels, if
the overall indexes and other apparel retailers like GPS are
rallying.  We are moving closing stops to $44.

GDW $61.56 +0.83 (-0.31)  Monday's pullback in the markets
gave aggressive traders an excellent entry point for GDW at
the 5-dma of $60.50.  The rate cut and positive statements
from the Fed seem to have provided the catalyst necessary
for GDW to proceed on its upward trend.  In addition, the
bidding war for Wachovia Bank is helping to stimulate
interest in the savings and loans, as investors speculate
on potential future takeover candidates.  Going forward, it
would be helpful to see more strength in the banking
sector, BKX.X, to add additional momentum to this play.
Traders could take positions at current levels, if others
like WM and GPT are strong.  GDW has encountered heavy
resistance at $63, and a strong break above this level
could be an entry point for more conservative trades.  We
are moving closing stops to $60.50 in light of market action.

MO $50.92 +0.01 (-0.38)  With the spotlight on the Federal
Reserve, MO took a back seat over the last two days, as
investors struggled to find a clear trend, and interpret the
future policy directives.  Some disconcerting news was
released concerning a possible increase in the cigarette
tax, and FDA regulation of cigarettes, as well as new
tobacco rules adopted by the European parliament.  Despite
this news, and a somewhat disappointed market, MO maintained
firm support at the $50.50 level.  The closer we get to the
Kraft IPO, the more attention MO will attract, and it is
likely that we could see a strong rally in the shares in the
days ahead.  Aggressive traders could take positions at the
current level, if the overall indexes are exhibiting strength,
as well as others in the sector, like LTR and RJR.  As an
alternative strategy, wait for MO to move above its
converged 5-dma and 10-dma of $51.50 on strong volume before
entering.  We are keeping stops at $50, so close the position
if MO closes below this level.


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

BRCM $37.11 -0.09 (-1.24) Monday's fall of $1.29 or 3.35 percent
was certainly a welcome start to our put play on Broadcom.  While
volume was less than half of its average daily, most of the
shares that traded hands were to the downside.  Coverage was
initiated by Friedman Billings, who started shares of the
communications chipmaker at a Market Perform rating.  Today, BRCM
continued to drift lower, closing down fractionally on low
volume.  At this point, the stock remains sandwiched between its
moving averages.  The 5 and 10-dma (currently at $38.28 and
$41.33 respectively) both continue to exert downward pressure on
the stock, while the 50-dma (just below at $35.16) acts as
support.  A break below the 50-dma would allow conservative
traders to take a position, but confirm with volume.  Failed
rallies at moving average resistance along with our closing stop
price of $38 may allow higher risk players to make a play.  Just
make sure that Merrill Lynch's Semiconductor HOLDR (SMH) confirms
the rollover.

EMLX $37.59 +1.18 (-1.21) After being handed the interest rate
cut they were hoping for, investors bid technology stocks higher
this afternoon, driving EMLX as high as the $41 level before the
euphoria began to wear off.  Sure enough the stock rolled over
sharply in the final half hour, and volume was on the rise too.
While EMLX managed to post a gain today, the daily chart shows
that the majority of its intraday gains disappeared by the
close, indicating a lack of conviction by the bulls.  Aggressive
traders got a shot at an attractive entry point as the rally
fizzled towards the end of the day.  Despite the fact that the
bulls made a solid push through our $39 stop intraday, the sharp
decline that followed prompts us to keep the play alive heading
into the end of the week.  Support is still holding near $37,
and conservative investors will want to see the stock trade
below that level before initiating new positions.  Factors that
could have an effect tomorrow include the earnings reports from
QLGC and BRCD, which came in tonight after the close.  BRCD met
estimates, while QLGC beat the consensus by 4 cents.  If
investors are pleased with these results tomorrow, the positive
effect will likely bleed into trading in EMLX.  We are sticking
with the play in anticipation that the bulls will be unable to
push the stock higher in the wake of the FOMC meeting, but any
close above our $39 stop will bring it to an end.

HGSI $57.04 -0.02 (-0.84) Along with the rest of the market,
Biotech stocks traded flat ahead of the FOMC's interest rate
decision, but the resulting upward move gave us a choice entry
point on our HGSI play.  Enthusiastic bulls pushed the stock
right up to our $60 stop before the bears took over control for
the final hour, dropping HGSI back to the unchanged level at the
close.  Volume today seemed to favor the bears as well.
Although it was anemic up until the interest rate decision, we
saw buying volume pick up immediately after the announcement.
Within 30 minutes the upside momentum had slowed as volume
tailed off.  Then the bears got busy, pushing the price lower
as volume increased right into the close, leaving the deck
currently stacked in favor of a further decline.  The $540
resistance level is still holding the Biotechnology index
(BTK.X) back, despite positive earnings results last night from
PDLI.  Unless the bulls can find some hidden catalyst, the BTK
and our HGSI play look like they will be subject to further
losses as the week continues.    Conservative traders will still
want to target new entries on a drop through the $57 support
level, while more aggressive entries will materialize on any
failed intraday rallies that are turned back below the level of
our stop, also the site of the declining 10-dma ($59.80).

JNPR $53.15 -0.62 (-1.11) It didn't take long for the interest
rate excitement to wear off this afternoon.  After the Fed gave
investors their expected 50 basis point cut, JNPR managed to
rally through $56 level, but their victory was short lived.  The
bears were lying in wait and pushed the stock below the level of
Monday's close in the final hour of trading.  The 2-week
descending channel is still intact and is increasing the
downward pressure on the $52 support level, also the site of the
converged 30-dma ($52.12) and 50-dma ($52.34).  The broader
Networking index (NWX.X) isn't helping matters either, as it
continues in its own descending trend, pressuring its $440
support level.  Despite the intraday move through our $55 stop,
we are sticking with our JNPR play due to the strength of the
afternoon retreat.  Aggressive traders got a great entry on the
rollover this afternoon and can still consider failed intraday
rallies near the $55 level as attractive for initiating new
positions.  More conservative entries will appear as JNPR falls
through the $52 support level through the rest of the week.  The
next likely catalyst for the NWX will be earnings from CIEN on
Thursday, before the market open.  Keep that in mind when
considering new positions.  We are keeping our stop at $55, and
any daily close above that level will bring our play to an end.

MERQ $59.25 -1.80 (-2.07) The interest rate cut got our play
on MERQ off to a good start this afternoon, giving aggressive
traders an attractive entry point following the announcement.
After failing for the fourth time today to hold above the $63
resistance level, the bears piled on in the final hour, slashing
more than $3 from the stock's recent gains to produce a loss on
the day.  Although the daily volume was still only 60% of the
ADV due to very light trading up until the FOMC meeting, selling
volume ramped up and remained heavy right up to the closing
bell, setting the stage for the bears to have another good day
tomorrow.  With the late-day decline, MERQ is primed to fall
through the nest level of support between $58-59.  Conservative
traders will want to key on this level and initiate new
positions as MERQ falls below $58 on its way to testing the next
level of support near $55.  The 2-week descending trendline (now
at $64.50) is still in a dominant position and should continue
to pressure the share price lower, as positive catalysts for
Technology stocks are rapidly disappearing.  Our stop still
rests at $65, and aggressive traders can target shoot new
entries on a failed intraday rally at this level or today's
intraday $63 resistance level.

NVLS $48.20 +0.02 (-0.88) Semiconductor stocks have been trying
to decide which way to move this week in advance of earnings
from bellwether AMAT.  Similar to other Semiconductor Equipment
stocks, NVLS has been weak, subject to its descending trendline
(currently resting at $50), but has refused to breakdown.
Tonight after the close, AMAT reporting its earnings, a penny
light of consensus estimates, and forecast a poor revenue
outlook for the remainder of the year.  This is not what the
bulls wanted to hear and it is likely to continue to weigh on
shares of NVLS as the week progresses.  The stock is currently
sitting right in the middle of the $48-49 support level, and
closed just fractionally below the 30-dma ($48.23).  Volume
continues to remain light, but we saw a significant increase
following the Fed's interest rate announcement.  With volume
increasing right up to the closing bell, the stock looks primed
for further losses throughout the rest of week.  Even though our
stop was temporarily crested following the FOMC meeting, the
fact that the bulls couldn't hold their ground prompts us to
keep the play alive and our stop in place at the $50 level.
Look for the fallout from the AMAT earnings report to be the
primary catalyst for weakness across the Semiconductor sector.
Aggressive entries will still materialize on a failed rally near
the $50 level, while more conservative players will want to wait
for NVLS to fall through the $48 level, preferably on increasing
volume.





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

AGGRESSIVE:


XOM - Exxon Mobil Corporation $89.45 +0.39 (+1.81 this week)

Exxon Mobil is the world's largest integrated oil company.
Incorporated in 1882, the company is engaged in oil and gas
exploration, global production and marketing; electric power
generation; and the mining and sale of coal, copper and other
minerals.  Exxon Mobil operates more than 40,000 service
stations in 118 countries under the Exxon, Esso, and Mobil
brands, 16,000 of which are in the U.S.  Their fiercest global
rival is Royal Dutch Petroleum.

Can ever-increasing gas prices, increased production, and a shot
of adrenaline from the Feds today ignite a fire under XOM over
the next few sessions?  We're speculating that may very well be
the case as XOM's share price hovers at a climacteric point and
the broad markets absorb the economic details.  Take a look at
an XOM chart for the month of May to confirm a double pattern of
an inverted head-and-shoulders formation.  A high-volume break
through $90 would therefore, be of great significance from a
technical perspective.  If XOM could close that gap, momentum
traders would likely to jump on the bandwagon.  The 5 & 10
DMAs have also been bolstering the share price in recent weeks;
you might find these measurement devices useful as you plan your
entry/exit strategies.  Solid bounces from $88 and $89 provide
feasible entries in an advancing marketplace, assuming the
energy stocks continue to demonstrate strength.  We're allowing
some room for XOM to operate over the near-term and have set our
protective stop at $87.  OI will exit if XOM fails to close
above this mark.  Pay attention to the broader energy sector,
too.  Some stocks to watch include Royal Dutch (RD), Halliburton
(HAL), Chevron (CHV), and Phillips Petroleum (P).  These rivals
are also nearing relative highs as investors pad their
portfolios with energy-related issues.  If you err more on the
side of caution, wait for a visible move through $90.  This line
of opposition has served as an unyielding force since November
of 2000 - a convincing break would be monumental!

BUY CALL JUN-85*XOM-FQ OI=  580 at $5.60 SL=3.50
BUY CALL JUN-90 XOM-FR OI= 3051 at $2.30 SL=1.25
BUY CALL JUN-95 XOM-FS OI= 6322 at $0.65 SL=0.00
BUY CALL JUL-90 XOM-GR OI=17241 at $3.60 SL=1.75
BUY CALL JUN-95 XOM-GS OI=10449 at $1.55 SL=0.75

Average Daily Volume = 5.80 mln
http://www.premierinvestor.com/oi/profile.asp?ticker=XOM


Q - Qwest Communications $37.65 -0.28 (+0.23 this week)

As a broadband Internet communications company, Qwest provides
advanced communications services, data, multimedia and
Internet-based services on a global basis.  Additionally, the
company provides wireless services, local telecommunications
and related services in a 14-state local service area.  Q
primarily serves large and mid-size business and government
customers on a national and global basis, while residential and
small business customers account for most of the company's
revenues in the local service area.  The company also provides
network transport services nationally, on a wholesale basis to
telecommunications companies and Internet service providers.

Caught in a sustained downtrend over the past 10 months, Q has
not been particularly rewarding to its investors lately.
Relative to the broader Telecom sector however, Q has performed
rather well, losing less than 50% of its value between the
highs of last July and the recent lows in early July near $30.
Helping to keep the stock from suffering the carnage inflicted
on other Telecom stocks is the fact that Q continues to meet
its earnings estimates, posting revenue and profit growth on a
year-over-year basis.  How many other companies do you know that
can make that claim over the past year?  Although the descending
trendline (currently $40.50) is still intact and will likely
present solid resistance in the near future, the stock has found
solid support near $37 over the past month.  The daily
Stochastics oscillator has recently declined into oversold
territory, but the price has not followed suit, holding firm at
support.  This is a good sign of underlying support, and we are
looking for the price to recover nicely as the oscillator
emerges from oversold territory.  Adding to the strength of this
support level are the 30-dma and 50-dma, currently resting at
$36.80 and $36.24 respectively.  Finally, the North American
Telecommunications index (XTC.X) is finding support near the
$960 level.  A meaningful recovery for the XTC from current
levels will help to push Q higher in the days and weeks ahead.
Firm support gives us the ability to place a tight stop at $36,
as a violation of this level would indicate the bears have
regained the upper hand again.  Aggressive entries will
materialize on an intraday dip and bounce that occurs above the
$36 level, especially if it is accompanied by a resurgence in
buying volume.  More conservative entries will appear as the
stock rallies through the $38.50 resistance level on its way
back up to test resistance at the descending trendline.

BUY CALL JUN-35   Q-FG OI=  25 at $4.20 SL=2.50
BUY CALL JUN-37.5*Q-FU OI=1037 at $2.65 SL=1.25
BUY CALL JUN-40   Q-FH OI= 874 at $1.35 SL=0.50
BUY CALL JUL-40   Q-GH OI=5007 at $2.70 SL=1.25
BUY CALL JUL-42.5 Q-GV OI=3674 at $1.75 SL=1.00

SELL PUT JUN-35   Q-RG OI= 765 at $1.15 SL=2.25
(See risks of selling puts in play legend)

Average Daily Volume = 5.59 mln
http://www.premierinvestor.com/oi/profile.asp?ticker=Q


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

AGGRESSIVE:

DOX - Amdocs Limited $60.86 -0.39 (-0.44 this week)

Amdocs provides information solutions to the leaders of the
communications industry worldwide, offering customer care,
billing and order management systems for communications and
Internet services providers, and business support systems for
directory publishing companies.  Their software products make
innovative use of technology, helping their customers distinguish
themselves in an increasingly crowded and competitive
marketplace.  Amdocs systems provide the convergence, business
flexibility and infrastructure communications companies need to
retain existing customers and win new ones.

We are initiating an aggressive put play on DOX.  Since reporting
earnings in late April, in which the company beat Street
estimates by a penny, the stock has managed to break above its
50-dma (now at $54.79).  However, DOX has since settled into a
tight trading range, with support below at $58.50, and resistance
overhead at $62.50.  Having traded in this narrowing range for
almost two and a half weeks now, it appears that the stock is
ready to break either way.  We have many reasons to believe that
the likely direction is down.  Stochastics have crossed over
bearishly over the past week and appear to be rolling over,
signaling the possibility of downward movement in the near
future.  As well, support from the 10-dma (now at $60.86 and
$60.96 respectively) has now been broken, as the stock teeters
precariously right on its 5-dma of $60.86.  Despite good news
such as upgrades and positive analyst coverage, DOX has been
unable to make further progress.  What's more, formidable major
moving average resistance is just overhead, with the 100 and
200-dma (currently at $62 and $63.05 respectively) exerting
significant pressure on the stock price.  A break below the $60
level on volume could allow conservative traders to enter on
weakness.  From there, DOX may find support at $58.50, but
continued selling pressure could mean a test of its 50-dma line,
just below the $55 level.  Aggressive traders looking for a lower
entry price may target failed rallies as the stock approaches
major moving average resistance, along with $61 and our closing
stop price of $62.50.  In both cases, make sure that movement in
rivals CVG and EDS confirm bearish sentiment before making a
play.

BUY PUT JUN-60*DOX-RL OI=221 at $3.00 SL=1.50
BUY PUT JUN-55 DOX-RK OI=136 at $1.35 SL=0.75

Average Daily Volume = 1.77 mln
http://www.premierinvesor.com/oi/profile.asp?ticker=DOX


DIGL - Digital Lightwave $42.59 +1.72 (+0.29 this week)

Digital Lightwave serves the growing fiber-optic networking
industry with products and technology that are used to develop,
monitor, maintain, and facilitate the management of high-speed
communication networks. The company's product families include
Network Information Computers(NIC(TM)), the industry's
leading high-speed portable analyzers for fiber-optic network
installation and maintenance testing for both domestic and
international and Network Access Agents(TM)(NAA(TM)), which
provide network-integrated, centralized performance monitoring
and analysis for optical networks, including remote multi-channel
DWDM. Digital Lightwave also provides customized optical
monitoring subsystems for OEM applications.

DIGL soared to lofty highs along with its brethren in the
networking sector last year, and since then has taken a steep
fall.  When viewed on a daily chart, it is apparent that DIGL
has been forming a pattern of rolling over from lower highs
at $70 and $56.50.  DIGL looks as if it is positioned to roll
over from current levels, thus completing a rounded top pattern.
A possible post rate cut pullback in the overall indexes,
combined with a post earnings slump might provide the environment
to make our put play profitable.  On April 17, DIGL reported
record revenues of $34.4 million, up 85% from the year ago
quarter, as well as record earnings of .27 cents per share, up
237% from the year ago quarter.  The stock gapped up from $23
to $30 after reporting, and continued to rally, but could not
clear resistance at $45.  In addition, the networking sector,
NWX.X, rolled over after failing to rally past 500, and fell
below its 50-dma of 451 this week.  Additional weakness in the
networking sector could serve as a catalyst for DIGL to begin
a rollover its current level, which could be a possible entry
point.  A drop below the 10-dma of $42 with heavy volume could
be a more conservative entry point.  Monitor others in the
networking sector, like CSCO and CIEN, and set closing stops
at $45.  We will end the play if DIGL closes above $45.

BUY PUT JUN-45*DGU-RI OI=27 at $6.60 SL=4.50
BUY PUT JUN-40 DGW-RH OI=94 at $3.90 SL=2.50

Average Daily Volume = 1.03 mln
http://www.premierinvestor.com/oi/profile.asp?ticker=DIGL


*********************
PLAY OF THE DAY - PUT
*********************

BRCM - Broadcom Corporation $37.11 -0.09 (-1.24 this 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.

Most Recent Write-Up

Monday's fall of $1.29 or 3.35 percent was certainly a welcome
start to our put play on Broadcom.  While volume was less than
half of its average daily, most of the shares that traded hands
were to the downside.  Coverage was initiated by Friedman
Billings, who started shares of the communications chipmaker at
a Market Perform rating.  Tuesday, BRCM continued to drift lower,
closing down fractionally on low volume.  At this point, the
stock remains sandwiched between its moving averages.  The 5 and
10-dmas (currently at $38.28 and $41.33, respectively) both
continue to exert downward pressure on the stock, while the
50-dma (just below at $35.16) acts as support.  A break below
the 50-dma would allow conservative traders to take a position,
but confirm with volume.  Failed rallies at moving average
resistance along with our closing stop price of $38 may allow
higher risk players to make a play.  Just make sure that Merrill
Lynch's Semiconductor HOLDR (SMH) confirms the rollover.

Comments

The chip sector's massive rollover late Tuesday may extend into
Wednesday's trading following Applied Materials' lukewarm earnings
report.  In addition, the Semiconductor Sector's (SOX.X) bearish
close Tuesday may add credence to the idea of chip-related issues
sliding in the near-term.  Look for the SOX to breakdown below
support at the 600 level and for BRCM to fall below its near-term
support level at $36.50.  If the trade goes in our favor, look to
take profits near the $35 level or the $31 level, depending upon
risk tolerance.


BUY PUT JUN-40*RCQ-RH OI=644 at $6.70 SL=5.00
BUY PUT JUN-35 RCQ-RG OI=537 at $4.10 SL=2.50

http://www.premierinvesor.com/oi/profile.asp?ticker=BRCM





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

Rate Cut Fails To Stimulate New Optimism...

The stock market finished almost exactly where it started today
as investors showed little enthusiasm for the Fed's half-point
reduction in interest rates.

Monday, May 14

Industrial stocks edged higher today in anticipation of the Fed's
interest rate decision, due on Tuesday afternoon.  The Dow was up
56 points at 10,877.  Technology stocks retreated on weakness in
bellwether issues ahead of some key earnings reports.  The NASDAQ
closed down 25 points at 2,081.  The broader market posted small
gains with the S&P 500 index closing 3 points higher at 1,248.
Trading volume on both the NYSE and the NASDAQ was the lowest in
2002, as investors remained cautious ahead of the Federal Reserve
monetary policy meeting Tuesday.  Only 851 million shares traded
on the NYSE, with advances beating declines 8 to 7.  Activity on
the NASDAQ was very light at 1.32 billion shares exchanged, with
losers beating winners 22 to 15.  In the bond market, the 30-year
Treasury rose 2/32, pushing its yield down to 5.85%.


Portfolio Plays:

The stock market traded with little enthusiasm today as investors
awaited the decision on interest rates from the Federal Reserve.
Most analysts expect the Fed to reduce rates by 50 basis points
but there are also concerns that future rate cuts will be smaller
and less frequent.  In addition, last week's bullish retail sales
and consumer sentiment data raised concerns of a less aggressive
outlook by the FOMC.  On the Dow, Philip Morris (NYSE:MO) and Home
Depot (NYSE:HD) led the downward move in industrial stocks while
chip giant Intel (INTC:NASDAQ), computer maker Hewlett-Packard
(NASDAQ:HWP) and software designer Microsoft (NASDAQ:MSFT) were
among the worst performing technology components.  On the NASDAQ,
Internet, networking and chip shares all declined and computer
hardware stocks retreated on concerns that continuing weakness
in demand will erode future revenues.  In the broader market,
select bank stocks were strong after Wachovia (NYSE:WB) made an
unsolicited $14 billion offer for SunTrust Banks (NYSE:STI).  The
stock swap offer comes on the heels of Wachovia's agreement to be
bought by First Union (NYSE:FTU), generating speculation that
further consolidation will occur in the industry.  Retail shares
also edged higher amid optimistic analysts comments on the group
and oil service issues continued to rally in the wake of rising
crude prices.

There was little significant activity in the Spreads portfolio
due to the limited trading volume in today's session.  Brokerage
stocks were a popular group and our selections in Merrill Lynch
(NYSE:MER) and Lehman Brothers (NYSE:LEH) both profited from the
upward movement.  Progressive (NYSE:PGR) moved back to the top
of a recent range near $118 and our bullish spread in the issue
is at maximum profit.  Lowe's (NYSE:LOW) drifted higher on new
strength in the retail segment and in the telecom sector, Nextel
(NASDAQ:NXTL) and Worldcom (NASDAQ:WCOM) rebounded as traders
looked for bargains in technology issues.  Our position in AT&T
(NYSE:T) was also active on news that British Telecom (NYSE:BTY)
and AT&T are considering a joint telecommunications venture in
the global market.  One position we have been watching closely
is Shire Pharmaceuticals (NASDAQ:SHPGY), as the company recently
completed its acquisition of Biochem Pharma (NASDAQ:BCHE).  The
transaction included the issuance of 0.7585 Shire ADRs to BCHE
shareholders who elected to receive the shares in consideration
for the merger.  It's interesting to note that today's closing
price of SHPGY ($47.22) pushes the exchange value of BCHE below
$36 and within a few pennies of our break-even cost basis in the
bearish credit spread.  Traders who transitioned to the bullish
Covered-call at $35 are relatively safe while those who chose to
remain in the original position have also seen some viable exit
opportunities.  Since BCHE shareholders will not receive SHPGY
shares for a few days, it will be interesting to see how the
issue performs in the sessions prior to expiration Friday.


Tuesday, May 15

The stock market finished almost exactly where it started today
as investors showed little enthusiasm for the Fed's half-point
reduction in interest rates.  Traders said the effects of the
rate cut were already factored into the current share values and
there was no confidence that recent economic weakness will end in
the near-term future.  The NASDAQ closed 3 points higher at 2,085
while the Dow was down 4 points at 10,872.  The S&P 500 index was
unchanged at 1,249.  Trading volume on the NYSE was moderate with
1.04 billion shares exchanged and winners beating losers 19 to 11.
Activity on the NASDAQ was light with only 1.69 billion shares
changing hands and advances beating declines 20 to 17.  In the
U.S. treasury market, the 30-year bond was down 26/32 to a yield
of 5.91%.


Portfolio Plays:

The major equity indices ended mixed today as investors were
comforted by the Federal Reserve's decision to lower rates by
50 basis points but hesitated to commit new funds to a market
with little upside potential in the near-term .  The central
bank was expected to lower rates, however recent economic data
revealed that the U.S. economy may be regaining some strength,
leading to concerns the Fed would not be as aggressive in the
future.  In the statement accompanying its decision, the FOMC
said the reduction in excess inventories appears well advanced
and that consumption has held up reasonably well.  At the same
time, they noted that "The erosion in current and prospective
profitability, in combination with considerable uncertainty
about the business outlook, seems likely to hold down capital
spending going forward."  The Fed also stated that "risks are
weighted mainly toward conditions that may generate economic
weakness in the foreseeable future."  The news generated some
bullish activity initially but the optimism soon faded and by
the end of the session, both the Dow and the NASDAQ were in
the red.  Among industrial issues, Wal-Mart (NYSE:WMT), Merck
(NYSE:MRK), Coca-Cola (NYSE:KO) and Boeing (NYSE:BA) were the
worst performers.  The decline in blue-chip technology issues
continued with Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT)
and Hewlett-Packard (NYSE:HWP) moving lower.  On the NASDAQ,
Internet and semiconductor shares were strong and computer
software issues also enjoyed limited upside activity.  In the
broader market, oil and oil service, banking, biotechnology
and paper stocks enjoyed small while utility, gold, retail,
airline and drug shares generally retreated.

Our portfolio experienced limited upside activity during the
period after the interest rate announcement.  Companies in the
retail group were generally lower but our bullish position in
Lowe's (NYSE:LOW) profited as the issue rallied to a new high
near $66.  Financial shares also traded higher and our recent
positions in Merrill Lynch (NYSE:MER) and Providian (NYSE:PVN)
benefited from today's upward momentum.  Progressive (NYSE:PGR)
moved closer to a new yearly high near $119 and Unitedhealth
(NYSE:UNH) also continued to recover from near-term selling
pressure amid strength in select healthcare stocks.  Positions
in the premium-selling group including Lincare (NASDAQ:LNCR),
Chiron (NASDAQ:CHIR) and Veeco (NASDAQ:VECO) also enjoyed new
buying support and all of those plays are profitable.  Stocks
in the semiconductor group performed very well with LSI Logic
(NYSE:LSI) and Cirrus (NASDAQ:CRUS) leading that section of
the Combos portfolio.  Cirrus was bolstered by reports of new
cost-reduction activities intended to align company resources
and expenses with its desire to become the largest "pure-play"
semiconductor company in the consumer-entertainment electronics
industry.  Among telecom shares, Worldcom (NASDAQ:WCOM) edged
higher and Earthlink (NASDAQ:ELNK) topped our Internet segment,
climbing $0.50 to $12.75.  Traders remaining in the long-term
calendar spread at $12.50 should consider rolling forward to
June options for a credit of $0.60-$0.75.

Questions & comments on spreads/combos to Contact Support

******************************************************************
                          - NEW PLAYS -

Today we received a request for some conservative combination
positions in the banking industry, based on the idea that many
finance issues will benefit from lowered borrowing costs and
increased consumer spending.  These candidates have favorable
technical trends and reasonable upside potential but as always,
the positions should be evaluated for portfolio suitability and
reviewed with regard to your personal approach and trading style.

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

NCC - National City  $28.14  *** Slow But Steady! ***

National City (NYSE:NCC) is a unique financial holding company
that provides a full range of banking and financial services to
individuals and businesses, including commercial and retail
banking, consumer finance, asset management, mortgage financing
and servicing and item processing.  The company's operations are
conducted through more than 1,200 banking facilities in Ohio,
Pennsylvania, Indiana, Kentucky, Illinois and Michigan, and over
350 mortgage offices located throughout the United States.

Stocks in the Financial Services group traded higher today after
the Federal Reserve reduced its lending rate to a seven-year low
and indicated that more rate cuts may be on the way.  The Federal
Open Market Committee (FOMC) slashed 50 basis points from the
Federal funds rate, marking the fifth half-point reduction this
year as the central bank attempts to rekindle the sluggish U.S.
economy.  The FOMC said it is concerned about declines in capital
spending, lower corporate profits, high energy prices and rising
unemployment.  The forward-looking comments eased concerns that
the Fed is at the end of its rate cut cycle and finance issues
rallied on the news.  In most cases, banks benefit from declining
interest rates because of increased borrowing by consumers and
corporations, which boosts lending profits.  Financial service
stocks generally outperform the broader market in periods after
multiple interest-rate cuts and traders who want to speculate on
that trend can do so with this conservative position.

PLAY (very conservative - bullish/calendar spread):

BUY  CALL  OCT-30  NCC-JF  OI=1560  A=$1.35
SELL CALL  JUN-30  NCC-FF  OI=186   B=$0.30
INITIAL NET DEBIT TARGET=$0.95-$1.00  TARGET PROFIT=50%

http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=NCC

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

MEL - Mellon  $44.28  *** On The Move! ***

Mellon Financial Corporation (NYSE:MEL) is a global financial
services company that offers a comprehensive range of products
and services in domestic and selected international markets.
Through its worldwide subsidiaries, the company provides wealth
and global investment management for both institutional and
individual investors, global investment services for businesses
and institutions and a wide variety of services for individuals
and small, mid-size and large businesses and institutions.  The
company has six core business sectors.  They consist of Wealth
Management, Global Investment Management, Global Investment
Services, Regional Consumer Banking, Specialized Commercial
Banking and Large Corporate Banking.

Mellon has been "on the move" in recent sessions due in part to
the performance of the Regional Banking sector and also on new
speculation that it might be a merger target in a consolidating
industry.  The recent sale of Mellon's U.S Leasing and Dealer-
Manufacturing Services to GE Capital helped the company return
to a focus on high-growth, high-return services and Mellon is
also poised to benefit from declining interest rates and the
additional liquidity coming into the financial industry.  Today
the board of directors of Mellon made a statement about their
confidence in the company by authorizing a repurchase program
covering 25 million shares of common stock.  This new program
follows an existing 25 million share repurchase program, which
is expected to be completed before the end of the second quarter
of this year.  With the company committed to buying almost 10%
of the outstanding shares, there is little doubt the board of
directors believes in the future potential of the issue.  Those
of you who agree with a bullish outlook for the company can
speculate on the future performance of its shares with these
combination positions.

PLAY (moderately aggressive - bullish/credit spread):

BUY  PUT  JUN-40.00  MEL-RH  OI=2738  A=$0.55
SELL PUT  JUN-42.50  MEL-RV  OI=1394  B=$1.05
INITIAL NET CREDIT TARGET=$0.60  PROFIT(max)=31%

- or -

PLAY (conservative - bullish/synthetic position):

BUY  CALL  SEP-50  MEL-IJ  OI=1386  A=$1.75
SELL PUT   SEP-40  MEL-UH  OI=813   B=$1.75
INITIAL NET CREDIT TARGET=$0.10-$0.20 TARGET PROFIT=$1.25-$1.50

Note:  Using options, the position is similar to being long the
stock.  The collateral requirement for the sold (short) put is
approximately $1,525 per contract.

http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=MEL

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

STT - State Street  $106.26  *** Financial Giant! ***

State Street (NYSE:STT), a financial holding company, provides
investment services and management through its subsidiary, State
Street Bank and Trust Company.  The Investment Services business
line includes accounting, administration, custody, daily pricing,
operations outsourcing, securities lending, foreign exchange,
record keeping, deposit and short-term investment facilities,
lease financing and information services.  Management Services
are comprised of a range of investment management strategies,
securities lending, specialized investment management advisory
services and investment management and other financial services.
The company's clients include mutual funds and other collective
investment funds, corporate and public pension funds, investment
managers and others.  STT's services are provided from 31 offices
in the United States and numerous other offices internationally.

Shares of STT have drifted higher in recent weeks as the company
announced a series of new contracts and service arrangements with
some of America's leading banks and brokerages.  The company has
recently contracted to provide additional services for Merrill
Lynch and last week, State Street announced it had been appointed
by Philips Pension fund to provide a range of global investment
services and securities lending services for its customers.  The
company also announced earlier this week that Eastern Bank, a $3
billion full-service bank based in Boston, has selected State to
provide global trade banking services to Eastern.  In addition to
the excitement over the company's new clients, investors are also
interested in the upcoming 2-for-1 stock split at the end of May
and today, J.P. Morgan initiated coverage on State Street shares
with a "buy" rating.  Traders who are interested in learning more
about this unique financial services company can view an upcoming
investor relations presentation live via the Internet on Tuesday,
May 22 at 10:00 a.m. EDT.  The presentation will be accessible on
State Street's investor relations home page: www.statestreet.com.

PLAY (very conservative - bullish/credit spread):

BUY  PUT  JUN-90  STT-RR  OI=5   A=$0.65
SELL PUT  JUN-95  STT-RS  OI=60  B=$1.05
INITIAL NET CREDIT TARGET=$0.50-$0.55  PROFIT(max)=11%

http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=STT

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


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