Option Investor

Daily Newsletter, Wednesday, 08/01/2001

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The Option Investor Newsletter                Wednesday 08-01-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
        08-01-2001        High      Low     Volume Advance/Decline
DJIA    10510.01 - 12.80 10599.96 10484.20 1.30 bln   1817/1271 
NASDAQ   2068.38 + 41.25  2078.36  2045.13 1.76 bln   2185/1528
S&P 100   623.61 +  1.45   627.45   621.82   totals   4002/2799
S&P 500  1215.93 +  4.70  1223.04  1211.23
RUS 2000  489.24 +  4.46   489.98   484.78
DJ TRANS 2933.78 + 27.60  2933.78  2894.16
VIX        22.99 -  0.88    23.91    22.84
Put/Call Ratio      0.50

Mother Merrill, Please Pass the Chips

Jumpy bears and anxious bulls combined to carry the Nasdaq
Composite (COMPX) above meaningful resistance Wednesday.  Can the
COMPX make it three in a row?  We'll see Thursday, but there are
a few signs pointing to profit taking over the short-term.  As
always, the time element of any forthcoming move is the risk to
contend with.  After all, the future is uncertain.  And that fact
alone makes trading wonderfully challenging.

For its part, the COMPX advanced and subsequently SETTLED above
the 2060 resistance level, which has been a focal point of this
market participant.  My initial stance would be one of the bullish
nature following the COMPX's close above 2060.  If the upside
momentum persists, the COMPX could trade up to 2100 in the
short-term.  Thereafter, MAJOR resistance exists at 2150.

At the risk of coming off incredulous, however, dare I suggest
we're at a 50/50 juncture.  Care for a straddle?

The Ursus arctos in me noticed as of Wednesday that the COMPX
stochastic is not only in overbought territory, but also
beginning to rollover.  Combine that fact with the resistance
levels in key sectors, and it seems plausible to expect profit

Concerning the COMPX stochastic, it's worth mentioning that the
indicator recently broke its pattern of lower highs, which had
been in place since mid-June.  I find that to be constructive
over the intermediate-term.  Furthermore, keep in mind that
stochastics is an oscillator.  Oscillators work in bracketed
(range bound) markets.  The market is range bound.  Use

The largest part of my 50% bearish stance stems from the price
action of the Software Index (GSO.X).  The software sector is
the largest within the Nasdaq, accounting for roughly 25% of the
index.  The GSO ran smack dab into resistance at 200 Wednesday.
That much was not by coincidence as evidenced by the retracement
bracket on the chart below.  What's more, the single largest
component of the Nasdaq and the GSO continues to trade heavily.
I'm of course referring to Mr. Softee (NASDAQ:MSFT).  The stock
accounts for roughly 11% of the Nasdaq, and just can't seem to
get out of its own way.  The COMPX needs MSFT and the GSO to
participate IF it's going to advance from current levels over
the short-term.

While the GSO is the largest sector within the Nasdaq, the
Semiconductor Sector (SOX.X) continues to assume the leading
role.  For the day Wednesday, the SOX tacked on over 5%, while
the GSO added a comparatively poor 2.3%.  The exuberance in chip
issues stemmed from the Merrill Lynch (NYSE:MER) upgrade.
Analysts at the firm upgraded 11 chip and chip equipment makers
Wednesday based upon the "Bottom Is In Place" premise.  Whether
Merrill is correct or not remains to be seen.  And their upgrade
following several others among Wall Street's sell side does not
garner as much credence.  Further, there's the question of whether
Wednesday's sharp advance in the SOX was a product of short
covering or "real" buying by institutions.  If it's a case of
the former, then the SOX is set up for a pullback over the
short-term as shorts reinitiate positions.

Also, the SOX rolled over at meaningful technical resistance at
650.  The probable scenario over the short-term is for the SOX
to fall back down to the 600 range, plus or minus 15 points, to
consolidate its recent run-up.  After all, the index is up by
over 15% in just the last five days of trading.  That's an
awful big move and needs to be consolidated.  However, should the
SOX breakout above 650, we'd most likely see a capitulation on the
part of the bears, which could carry the SOX up to 700 and the
COMPX along with it.  Like I just wrote, the SOX will probably
pullback from current levels, but by no means is a breakout
from current levels improbable.

What was interesting is that Merrill's upgrade did NOT include
any communications chip makers, and the firm made that much
clear.  However, shares of PMC - Sierra (NASDAQ:PMCS), Applied
Micro Circuits (NASDAQ:AMCC), and the like sharply advanced.
That, in turn, boosted shares of the customers of the
aforementioned; namely, the networkers.  Juniper (NASDAQ:JNPR),
CIENA (NASDAQ:CIEN) and Cisco (NASDAQ:CSCO) all had solid days.
In the case of Cisco, the stock broke out above its bearish
resistance line on the point & figure chart, which has been in
place since last November!  (CSCO's a current OI call play!)

The chip upgrade spilled over into the Networking Index (NWX.X),
which like the GSO and SOX, is very close to breaking out above
meaningful resistance.  The NWX is riding its ascending trend
line higher, in the process of forming a classic ascending wedge.
A breakout in the NWX would most certainly benefit CSCO and the
continuation of the latter's momentum.  The PIVOTAL level to
watch in the NWX is 348.  Otherwise, another pullback down to
its support line may offer solid risk/reward entries into the
leaders of the sector (Read:CSCO).

With the looming overhead supply in three of the Nasdaq's
largest sectors, we arrive to the question of what catalyst can
break the GSO, SOX and NWX out and above their respective
resistance?  It could come in the form of another upgrade,
positive comments from a tech firm, or anticipation that Cisco
is going to have a good quarter when it reports next week.

Also, there's a growing belief that the Fed is going to cut
interest rates a lot further than previously anticipated.  The
Fed Funds rate currently sits at 3.75%, and some have predicted
that the FOMC is going to take rates below 3%!  If Wednesday's
National Association of Purchasing Manager's (NAPM) Index is
any indication, the Fed may be far from finished cutting rates.
July's NAPM index fell to 43.6, below both estimates and June's
reading.  While still below the waterline at 50, July's number
indicated a further worsening of the manufacturing segment of
the economy during the month.  Greenspan monitors the NAPM
closely, so could another inter-meeting rate cut be in the
future?  The Fed meets on August 21.

Even if the Fed doesn't surprise the market, guidance, or the
market's expectation, for further rate cuts could advance the
GSO, SOX, and NWX above their respective resistance levels.  The
consensus had expected the Fed to ease off the accelerator
following its August meeting in conjunction with another 25
basis point cut.  But with the drop in the NAPM index during
July, that consensus may begin to shift towards further easings.
And if that happens, the market will rally.

The media has been pretty mum about the Fed's August 21 meeting
up until this point, but it should begin to garner increasing
amounts of attention over the coming week.  In fact, one possible
scenario that could unfold over the next week is for the SOX,
GSO, and NWX to pullback from current levels in a profit taking
fashion before breaking out ahead of the Fed meeting.  If that
happens, buying the dip might not be too bad of an idea.

Eric Utley
Option Investor


The Worst is Behind Us
By Jeffrey Canavan

Construction spending fell for the fourth straight month and
manufacturing contracted yet again, but according to Merrill
Lynch, the worst is over for the semiconductors.  Merrill
anticipates that stabilizing earnings estimates, improving year
over year revenue comparisons, and reduced capital spending
should help semiconductor stocks outperform over the next six
to twelve months.

Whatever the catalyst, at least it got the SOX moving.  This
index has already cleared a good amount of resistance, and could
be set to take off if resistance at 644 is cleared. If the Nasdaq
were to rally, semiconductors would be a nice leader.

Priceline posting a profit offset worms wiggling into websites,
and the Internet Index finished as today's second best sector, up
3.01%.  Networking, software, disk drives, and computers followed
close behind.

Biotechnology stocks lagged amid concerns about a federal ban on
cloning.  Biotechnology stocks lagged amid concerns about a
federal ban on cloning.  Retailers, healthcare, and drugs also
finished in lower territory.

Relatively strong sectors continue to perform well, but beaten
down technology is starting to come alive as investors yearn for
a reason, any reason, to buy.  These rallies are quickly sold
into, so bulls will have to keep plugging along until all the
sellers are shaken out.  Tomorrow we get unemployment claims and
export sales to stir the pot.

*************************Sector Watch****************************

            Weekly   Daily     Overbought    Support  Resistance
            Trend    Trend      Oversold

DJIA        Bearish  Neutral    Neutral      10,200   10,600
NASD        Bearish  Neutral    Overbought    1,940    2,125
S&P 500     Bearish  Neutral    Overbought    1,170    1,240
Rus 2000    Neutral  Neutral    Overbought      465      495

Semis       Neutral  Bullish    Overbought      600      645
Biotech     Bearish  Neutral    Overbought      490      550
Internet    Bearish  Neutral    Oversold        140      170
Networking  Bearish  Neutral    Overbought      300      365
Software    Bearish  Neutral    Overbought      180      200
Banking     Bullish  Neutral    Overbought      640      675
Retail      Bullish  Neutral    Overbought      875      920
Drugs       Neutral  Neutral    Neutral         380      410

               Percent Change
            Last    Last    Last    Rel Strength   Point and
           5 Days  10 Days 30 Days   vs S&P 500   Figure Signal
DJIA       (1.0%)   (0.1%)  (1.2%)    Neutral         Buy
NASD        4.2%     2.6%    3.8%     Neutral         Sell
S&P 500     2.1%     0.7%    0.3%       N/A           Sell
Rus 2000    2.6%     1.2%    0.1%     Neutral         Sell

Semis      15.1%    13.2%    8.3%     Positive        Buy
Biotech     3.9%     1.5%   (8.9%)    Negative        Buy
Internet    2.9%    (7.3%)  (8.4%)    Negative        Sell
Networking  9.9%     8.5%    4.2%     Neutral         Buy
Software    4.6%     2.8%   (6.4%)    Neutral         Sell
Banking     2.4%     0.5%    3.9%     Positive        Buy
Retail      0.1%     0.5%    2.3%     Neutral         Buy
Drugs       3.2%     0.9%   (1.8%)    Neutral         Buy



More on Entry Points
By Mark Phillips

Have you noticed what I have?  Oscillators are oscillating
between overbought and oversold extremes again and that is great
for our trading purposes.  Rangebound markets tend to make
oscillators like the Stochastics and RSI (Relative Strength
Index) really shine as tools for picking ideal entry points.  By
their very nature, markets (or stocks) that are stuck in a range
tend to reverse when they reach the overbought or oversold

The runaway bull market of 1999 and early 2000 had Stochastics
frequently remaining glued to the ceiling in overbought
territory for weeks and months at a time, making momentum
strategies ideal and long-term oscillators difficult to use.
Similarly, the most recent leg of the corrective bear market
(September 2000-March 2001) had the oscillators of numerous
stocks nailed to the floor in oversold territory, seemingly
unable to recover.

Since hitting its lows in early April, the market seems to be
telling us that rangebound trading strategies are starting to
work again as the bulls and the bears fight for dominance.
While this up and down action can be frustrating to long-term
buy and hold investors, it gives us exactly what we are looking
for in the LEAPS portfolio, especially as we target covered
calls on our LEAPS in an attempt to reduce our cost basis,
preferably to zero.

Helping to underscore the case for rangebound trading is the
fact that many pundits are still trying to call the bottom of
the market in the worst seasonal time of the year.  August and
September are historically the worst months of the year for the
bulls, but that didn't stop Abby Joseph Cohen from grabbing a
microphone this morning to reiterate her year-end targets of
12,500 for the DJIA and 1550 for the S&P500.  With earnings
season winding down, there are fewer opportunities for really
bad news to crater the market and of course, investors are once
again focused on the Fed and the expectation of more interest
rate cuts to prop up our still-sagging economy.

In the past couple weeks I've had a number of emails requesting
further clarification on when to enter new positions -- both
when to buy the LEAPS and when to sell the Covered Call.  With
my observations of the change in behavior of technical
indicators, I thought I would use our time together to
highlight a couple of plays from our Portfolio, showing the
details of our LEAPS entry and what I am looking for in terms
of Covered Calls entries.

So let's go to the charts, shall we?  After the artificial
Fed-induced spring rally in the markets, I noticed that some of
our old Technology favorites like Cisco Systems (NASDAQ:CSCO)
and Sun Microsystems (NASDAQ:SUNW) had begun to bounce from
major support (but above the spring lows) as the weekly
Stochastics oscillator reversed from the oversold region.
Contrary to the pattern seen in the September-March period, the
weekly Stochastics oscillator is running from oversold to
overbought and back again.  This gives us a much better tool
for gauging our long-term entries.

While the stochastics oscillator continued to provide false or
non-existent entries during the October-March timeframe, we can
see that things have improved significantly over the past four
months.  Support held up nicely near $14 as the daily
Stochastics posted a series of higher lows in July, helping to
push the weekly Stochastics into ascent mode.  We took our entry
on the bounce from $14 on July 24th, and so far the stock is
moving nicely, breaking out above the $16 resistance level

Although the chart is a little different, CSCO presents us with
much the same picture.  The frustrating days of watching weekly
Stochastics meander in the lower half of its range for months at
a time are behind us, and the recent recovery from the $16 level
set us up for an attractive entry in early July.

With the weekly Stochastics reversing into ascent mode, all we
had to do was look for a reversal of the daily Stochastics from
oversold territory.  And looking at the daily chart, there it
is, accompanying a renewed bounce from the $16 level.  The dip
and bounce from $17 a week later was confirmed by a higher low
in the daily Stochastics, allowing us to breathe easier with
the additional evidence that our indicators are giving us good
signals again.

CSCO and SUNW are just a couple of recent examples of how my
favorite indicator is once again providing reliable entry
signals.  The convergence of buy signals on the daily and weekly
charts gives us strong long-term LEAPS entries and then all we
have to do is focus on the daily charts to gauge our entry
points for selling the covered calls.

While the high-odds entries on these plays have passed into
history for this cycle, there are other plays on the Watchlist
that look like they are quickly approaching our desired entry
points.  Barrick Gold (NYSE:ABX) has almost fallen back to the
$14 level and the daily Stochastics have dropped back into
oversold territory.  I'm betting we get a tradable bounce in
the next week, and if it comes above our entry target, we'll
step into another attractive long-term play.  With weakness
still keeping the Oil Service stocks under pressure, we're
similarly setting up for an attractive entry in our Global
Marine (NYSE:GLM) play as daily Stochastics head back for
another reversal in the oversold region.

I'll finish up this discussion on entry points next week with
an equally detailed analysis of how to target the Covered Call
side of the position.  Who knows, in the intervening time, we
may see some weakness emerge on the CSCO and SUNW plays,
providing us with some attractive setups that that we can
dissect to our heart's content.

The key to successful trading is to recognize what is working
and what is not working in the current market environment.  Now
that we can see oscillators providing reliable signals again,
that gives us some valuable information for planning our trades.

Happy Hunting!

Contact Support


BRCD - Brocade Communications $37.70 +4.70 (+6.16 this week)

Brocade Communications Systems is a supplier of open Fibre Channel
Fabric solutions that provide the intelligent backbone for Storage
Area Networks. For the 6 months ended 4/28/01, revenues totaled
$280.2M, up from $104.8M. Net income totaled $44.5M, up from
$20.6M. Revenues reflect higher demand for the SAN switching
products and an increased customer base. Net income also reflects
lower component and manufacturing costs.

BRCD broke through short-term resistance today with a strong move
through both its 20 and 100 DMAs.  The storage sector has been
pretty hot over the last few days and if this recent uptrend in
NASDAQ continues, BRCD is almost certain to be one of the
beneficiaries.  Three consecutive days of increasing upside volume
have prepared the stock for a test of the 50 DMA at $38.36.  A
breakout above this level could portend better things to come with
short-term resistance not arriving on the scene until the early to
mid $40s.  MACD has crossed over as of yesterday and a positive
close tomorrow will likely push the indicator past breakeven.
Stochastics show that the stock is still within its trading range
and On Balance Volume indicates that a breakout of the recent
consolidation phase should have gas to continue the upside moves.
Short-term traders should keep an eye on two trading levels in
BRCD.  First, the 50 DMA is very close on the horizon at $38.36.
While we don't think that level will pose any real threat, the
stock hasn't traded at this average in nearly one month.  Second,
the $40.00 price could function as a psychologically important
level, given that shares haven't seen this level in about as long.
Those with a long-term focus will notice that the area between
$45.00 and $49.00 is cluttered with recent highs.  These could be
tuff to get past and one might consider taking gains at this
level.  Don't forget to protect your downside with a stop at

BUY CALL AUG-35 UBF-HG OI=6718 at $5.20 SL=3.00
BUY CALL AUG-40*UBF-HH OI=4439 at $2.50 SL=1.25
BUY CALL SEP-35 UBF-IG OI=4003 at $7.00 SL=5.00
BUY CALL SEP-40 UBF-IH OI= 479 at $5.00 SL=3.00

Average Daily Volume = 14.0 mln


No new puts tonight


AHAA - call
Adjust from $36 up to $38

CSCO - call
Adjust from $18.25 up to $19

JBL  - call
Adjust from $30.50 up to $31

PHCC - call
Adjust from $22 up to $23

MEDI - put
Adjust from $41 down to $40

PDII - put
Adjust from $66 down to $65


WLP $103.25 -3.75 (+0.24) Cigna dropped a bomb Wednesday morning
that adversely impacted our WLP call play.  In fact, WLP gapped
lower and never really regained its footing.  Obviously the gap
lower prevented entry into this new play.  As such, we're
dropping coverage tonight and may reconsider initiating bullish
coverage if WLP rebounds in the next week or two.


No dropped puts for Wednesday


ADBE - Adobe Systems $37.49 -3.05 (-5.57 this week)

A long-time leader in desktop publishing software, ADBE
provides graphic design, publishing, and imaging software
for Web and print production.  Offering a line of application
software products for creating, distributing, and managing
information of all types, the company generates nearly 75% of
sales through publishing software products such as Photoshop,
Illustrator, and PageMaker.  Its Acrobat Reader, which uses
portable document format (PDF) is popping up all over the
Internet, as businesses shift from print to digital
communications.  In addition, ADBE licenses its industry
standard technologies to major hardware manufacturers,
software developers, and service providers, as well as
offering integrated software solutions to businesses of all

Most Recent Write-Up

Doing its part to put a damper on the Software sector, ADBE
issued a revenue warning yesterday, citing weakness in all of
its business segments due to the continuing global economic
weakness.  Even though the company said they would meet their
earnings forecast, the damage to investor psychology was done,
as evidenced by the price action on Tuesday.  The $40 support
level failed at the open and continued right up to the closing
bell, with the stock posting its first close below $38 since
April 9th.  With selling volume heavy at nearly 6 million
shares, it looks like a significant breakdown in the share price
is in process.  The Point and Figure chart agrees with a
double-bottom breakdown today painting a bearish picture.  The
recent breakdown forecasts a bearish price target of $29.
Significant support exists at $37, and a drop through that level
will likely galvanize the sellers to take aim on that $29 level
in the days ahead.  Weakness is developing on the Software index
GSO.X) as well, as it has been unable to break through the $200
resistance level and we now have bearish stochastics divergence
developing on the daily chart.  Target failed intraday rallies
in the $39-40 level for new positions and place stops at $41.
Alternatively, wait for confirmation of the stock's weakness as
it falls through the $37 level on continued strong volume.


ADBE rolled over in concert with the Nasdaq Wednesday afternoon,
but never really recovered into the close.  Its weakness may
offer a solid put trade if the COMPX weakens Thursday.  In terms
of entry points, look for either a rollover near the $39.50
range or a breakdown below the $38 level, depending on market

BUY PUT AUG-40*AEQ-TH OI=2196 at $2.95 SL=1.50
BUY PUT AUG-35 AEQ-TG OI=1387 at $1.00 SL=0.50

Average Daily Volume = 3.85 mln


As The Market Churns...
By Ray Cummins

Chips stocks led the NASDAQ higher today after a bullish forecast
from Merrill Lynch spurred new buying interest in the group.  The
brokerage raised its recommendation on a number of semiconductor
issues, suggesting that although the chip industry continues to
struggle with over-capacity and weak demand, the worst of the
downturn is over.  The brokerage also upped its long-term view on
some Asian and European chip outfits as well as several equipment
stocks.  In a research note entitled "The train is pulling into
the station, climb aboard," Merrill detailed that chip-equipment
issues generally begin to see improvement several months before
the orders make a "bottom" and thus these stocks are unlikely to
test previous lows.  Shares of broadband companies also rallied
even as Lucent Technologies (NYSE:LU) slumped after announcing it
will sell $1 billion through the sale of convertible stock.  The
troubled company also saw its debt rating downgraded by Standard
& Poor's and UBS Warburg said the new offering, issued to satisfy
existing debt holders, was done on "very unfavorable" terms for
Lucent.  Internet stocks moved higher on news of Priceline.com's
(NASDAQ:PCLN) better-than-expected earnings report.  The online
travel company reported a second-quarter profit of $0.05 a share,
well ahead of consensus analyst's estimates on strength in hotel
bookings and a climb in the volume of airline tickets sold.  The
company also raised its EPS target for the third quarter.  Among
blue-chip technology issues, hardware shares were popular with
Intel (NASDAQ:INTC), Hewlett-Packard (NYSE:HWP) and International
Business Machines (NYSE:IBM) leading the way.  Citigroup (NYSE:C)
and American Express (NYSE:AXP) also saw increased buying interest
and the positive activity in the financial giants helped limit
losses on the Dow.  In the broader market, biotechnology issues
were bolstered by positive news from Biogen (NASDAQ:BGEN), which
reaffirmed that 2001 earnings will be in the range of $1.90 per
share.  In other S&P 500 sectors, gold, natural gas, brokerage,
bank and utility issues experienced buying pressure while retail,
drug, paper, oil, oil service and select consumer product issues
generally retreated.

Summary of Previous Candidates:

Covered Calls: (Margin not used in calculations)

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

MSCC    AUG    50    46.00  66.93    $4.00   7.1%

Naked Puts:

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

TARO    AUG    37.5  36.88  42.53    $0.63   8.2% Adj 2-1 Split
MU      AUG    32.5  31.95  43.70    $0.55   7.3%
GMST    AUG    35    34.40  42.27    $0.60   6.2%
PLMD    AUG    30    29.40  33.50    $0.60   5.9% Monitor Closely
BRL     AUG    65    64.10  85.04    $0.90   5.0%

Sell Strangles:

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

IMCL    AUG    35p   33.85  43.68    $1.15  11.5%
IMCL    AUG    60c   60.80  43.68    $0.80   8.3%

Naked Calls:

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

ENZN    AUG    75    75.90  65.00    $0.90  10.0%
BBOX    AUG    70    70.60  54.10    $0.60   5.3%
NVDA    AUG   100   100.80  85.84    $0.80   5.1%

Credit Spreads:

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

STJ   $69.94  $68.50   AUG60p/65p  $0.60   $64.40 $0.60  ALERT!
SZA   $57.49  $55.30   AUG50p/55p  $0.70   $54.30 $0.70  ALERT!
TEVA  $68.79  $69.90   AUG60p/65p  $0.80   $64.20 $0.80  ALERT!

Watch the above positions closely as they consolidate!

Debit Straddles:

Stock  Position    Debit  Target   Value    Gain    Status

DST   AUG55c/55p   $5.75  $7.19   $7.19+   $1.44+   Closed *
CVS   AUG40c/40p   $3.25  $4.06   $4.06+   $0.81+   Closed *
EMR   AUG55c/55p   $4.35  $5.44   $3.80   ($0.55)   Open

*  The DST debit straddle traded over $9 this week.
*  The CVS debit straddle traded at $5 today.

New Candidates:

This following group of plays is simply a list of 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
are suitable for your skill level, risk-reward tolerance and
portfolio outlook.  In addition, we recommend that you avoid any
strategy or technique in which you are not completely comfortable
with the potential loss, the necessary adjustments and the common
entry-exit strategies.  (We monitor the positions marked with ***).


BULLISH PLAYS - Covered Calls, Naked Puts, & Combinations

ADI - Analog Devices  $50.00  *** Merrill Upgrade! ***

Analog Devices (NYSE:ADI) is engaged in the design, manufacture
and marketing of high-performance analog, mixed-signal and digital
signal processing (DSP) integrated circuits (ICs) used in signal
processing applications.  The company offers a generic list of
approximately 2,000 products, with the highest revenue product
accounting for approximately 4% of its revenue in fiscal 2000.
Analog also designs, manufactures and markets a range of assembled
products.  Applications for its products include communications,
cellular telephones, computers and computer peripherals, consumer
electronics, automotive electronics, factory automation, process
control and military and space systems.

Semiconductor stocks rallied today after Merrill Lynch said it
raised its opinion on the global semiconductor sector and upgraded
its recommendations on 12 chip stocks worldwide.  In a research
note, the brokerage said a combination of more realistic earnings
projections, a drop in spending on chip-making equipment, and an
expected recovery in chip sales make many semiconductor stocks a
good buy.  The Merrill analysts heaped their greatest praise on
companies that manufacture chips for mobile telephones, analog
chipmakers, and the foundries that are contracted to build chips.
Analog Devices was included in this select list of stocks and
conservative traders can profit from future bullish movement in
the issue with this combination position.

ADI - Analog Devices  $50.00

PLAY (conservative - bullish/credit spread):

BUY  PUT  AUG-40  ADI-TH  OI=1230  A=$0.40
SELL PUT  AUG-45  ADI-TI  OI=4978  B=$0.90
INITIAL NET CREDIT TARGET=$0.60-0.75  PROFIT(max)=14% B/E=$44.40



BRCM - Broadcom  $46.23  *** Chip Sector Rally! ***

Broadcom (NASDAQ:BRCM) is a provider of highly integrated silicon
solutions that enable broadband communications and networking of
voice, video and data services.  Using proprietary technologies
and advanced design methodologies, Broadcom designs, develops and
supplies system-on-a-chip solutions for applications in digital
set-top boxes and cable modems, high-speed local, metropolitan
and wide area and optical networks, home networking, Voice over
Internet Protocol (VoIP), carrier access, residential broadband
gateways, direct broadcast satellite and also terrestrial digital
broadcast, digital subscriber line (xDSL), wireless communications,
server solutions, and network processing.  The company's quarterly
earnings are due on July 18.

As I noted last month, traders are always asking for our favorite
companies in specific sectors and when it comes to issues in the
Integrated Semiconductor group, Broadcom is a leading contender.
The company has solid fundamentals and from a technical viewpoint,
this position offers a reasonable risk-reward ratio, based on the
technical support at the sold strike ($40).  In addition, today's
rally was accompanied by good volume and the move above resistance
near $44 suggests there is additional upside potential.  Traders
who want to speculate conservatively on the future movement of
BRCM should consider this position.

BRCM - Broadcom  $46.23

PLAY (conservative - bullish/credit spread):

BUY  PUT  AUG-35  RCQ-TG  OI=11022  A=$0.40
SELL PUT  AUG-40  RCQ-TH  OI=31118  B=$1.00
INITIAL NET CREDIT TARGET=$0.65-$0.75  PROFIT(max)=15% B/E=$39.35



HIT - Hitachi  $88.30  *** Technicals Only! ***

Hitachi (NYSE:HIT) is Japan's largest diversified manufacturer of
electronic and electrical products.  Hitachi divides its primary
operations into five segments: Information Systems & Electronics,
Power & Industrial Systems, Consumer Products, Materials, and
Services.  The Information Systems & Electronics segment makes
and sells computers, semiconductors, communications equipment,
display tubes, and liquid crystal displays.  Hitachi's Power &
Industrial Systems segment manufactures and sells power plants,
industrial machinery, transpiration equipment, construction parts
and machinery and other products for power utilities and industry.
The Consumer Products segment manufactures and sells products in
two main categories: home appliances and consumer electronics.
The Materials segment includes fabricated chemical and metal
products supplied as materials to downstream manufacturers of
mainly electric and electronic products.

Is Hitachi forming a technical "double-bottom" pattern?  From a
long-term perspective, it appears the recently beleaguered stock
is in the early stages of completing the right side of the "W".
In the short-term, the chart indications suggest a possible
rally towards resistance near $95.  A move through the 30-dma
(near $89) will be the first test of the current recovery.  The
rebound above the recent highs near $85 and increasing trading
volume on the rally raise the probability of a favorable outcome
and we are going to speculate on that result with a limited-risk
combination position.

HIT - Hitachi  $88.30

PLAY (aggressive - bullish/credit spread):

BUY  PUT  AUG-80  HIT-TP  OI=12  A=$0.75
SELL PUT  AUG-85  HIT-TQ  OI=37  B=$1.75
INITIAL NET CREDIT TARGET=$1.10-$1.25  PROFIT(max)=28% B/E=$83.90



MXIM - Maxim Integrated Products  $48.90  ** On The Rebound! ***

Maxim Integrated Products (NASDAQ:MXIM) designs, manufactures and
markets a range of linear and mixed-signal integrated circuits,
commonly referred to as analog circuits.  The company provides a
range of high-frequency design processes and capabilities that can
be used in custom design.  The analog market is highly fragmented
and characterized by many diverse applications, a great number of
product variations, and as to many circuit types, relatively long
product life cycles.  Maxim's objective is to develop and market
both proprietary and industry-standard analog integrated circuits
that meet the increasingly stringent quality standards demanded by

Maxim is another of analog companies that was included in the list
of favorable semiconductor issues published today by Merrill Lynch.
Analysts said that industry fundamentals suggested global demand
has hit a trough and supply was stabilizing after strong growth.
A combination of stabilizing earnings estimates, reduced capital
spending and bottoming year-on-year revenue change should cause
semiconductor stocks to begin outperforming, albeit slowly, over
the next few months and that is a good reason to speculate on the
best issues in the group.  From a technical viewpoint, MXIM is one
of those stocks and today's rally above the resistance area near
$44-$46 suggests there is excellent potential for future upside

MXIM - Maxim Integrated Products  $48.90

PLAY (sell naked put):

Action    Month &  Option  Open     Closing  Cost     Target
Req'd     Strike   Symbol  Int.     Price    Basis    Mon. Yield

Sell Put  AUG 40   XIQ TH  7834      0.55    39.45     9.3% ***
Sell Put  AUG 45   XIQ TI  4805      1.35    43.65    15.1%



NVDA - Nvidia  $85.84  *** New Entry Point? ***

Nvidia (NASDAQ:NVDA) designs, develops and markets 3D graphics
processors, graphics processing units and related software that
set the standard for performance, quality and features for every
type of personal computer user, from professional workstations to
low-cost PCs.  The company's 3D graphics processors are used in a
wide variety of applications including games, the Internet and
industrial design.  Its graphics processors were the first to
incorporate a 128-bit multi-texturing graphics architecture
designed to deliver to users of its products a highly immersive,
interactive 3D experience with compelling visual quality, with
realistic imagery and motion, stunning effects, and complex object
and scene interaction at real-time frame rates.  The company sells
its products to major OEMs such as Compaq, Dell, Gateway, Hewlett
Packard, IBM, micronpc.com, NEC, Packard Bell and Sony and add-in
board manufacturers such as ASUStek, Creative Labs, Elsa, Guillemot
and Leadtek.

Nvidia appears to have made a positive test of its support near
the March high, which coincides with its 200-dma.  The recovery
rally above its 30- and 50-dmas bodes well for the short-term,
though it is unlikely the stock will move through resistance
near $95 without significant news or a change in the outlook for
the overall market.  In the near-term, the stock appears to be
creating a support area near $80, which would make a move towards
our target strike price (and cost basis) unlikely.  The company's
earnings are due August 14.

NVDA - Nvidia  $85.84

PLAY (sell naked put):

Action    Month &  Option  Open     Closing  Cost     Target
Req'd     Strike   Symbol  Int.     Price    Basis    Mon. Yield

Sell Put  AUG 65   RVU TM  999       0.40    64.60     4.3%
Sell Put  AUG 70   RVU TN  1813      0.80    69.20     7.9% ***
Sell Put  AUG 75   RVU TO  1032      1.50    73.50    11.4%
Sell Put  AUG 80   RVU TP  1620      2.70    77.30    16.5%


Neutral Plays - Straddles & Strangles

SNE - Sony  $50.00  *** Probability Play! ***

Sony (NYSE:SNE) is the ultimate parent company of the Sony group.
In the Electronics business, Sony is engaged in the development,
design, manufacture and sale of electronic equipment, instruments
and devices.  In the Game business, Sony develops, manufactures,
markets and distributes home-use entertainment hardware and other
related software.  In the Music business, Sony is engaged in the
development, production, manufacture, marketing and distribution
of recorded music.  In the Pictures business, Sony is engaged in
the development, production, distribution and broadcasting of
image-based software, including film, video, television and new
entertainment technologies.  In the Insurance business, Sony now
conducts insurance operations primarily through Sony Life and Sony
Assurance.  In addition, Sony is engaged in other businesses, such
as banking, leasing and credit financing, satellite broadcasting
and location-based entertainment.

Profitable debit straddles are relatively simple to uncover and
there are three rules to identifying favorable conditions for a
straddle purchase.  First, the trader should select options that
are undervalued (cheap).  Next, the underlying security must have
the potential to move (high or low) enough to make the straddle
profitable.  Finally, the underlying stock should have a history
of multiple movements through a sufficient range in the required
amount of time to justify the overall risk/reward of the position.
SNE has acceptable values in all three categories and traders
who think the issue is a good candidate for future volatility can
profit from that outcome with this conservative position.  Our
initial target debit in the play will be slightly lower than the
current quoted price, due to the large BID/ASK spreads.

SNE - Sony  $50.00

PLAY (conservative - neutral/debit straddle):

BUY  CALL  SEP-50  SNE-IJ  OI=45  A=$3.10
BUY  PUT   SEP-50  SNE-UJ  OI=36  A=$2.80


BEARISH PLAYS - Naked Calls & Combinations

AHC - Amerada Hess  $76.73  *** Oil Sector Slump! ***

Amerada Hess (NYSE:AHC) explores for, produces, buys, transports
and sells crude oil and natural gas.  These exploration and
production activities take place in the United States, United
Kingdom, Norway, Denmark, Gabon, Algeria, Azerbaijan, Indonesia,
Thailand, Malaysia, Brazil and other countries.  The company also
manufactures, purchases, transports, trades and markets refined
petroleum and other energy products.  The company owns 50% of a
refinery joint venture in the United States Virgin Islands, and
another refining facility, terminals and retail outlets located
on the East Coast of the United States.

Stocks in the Oil and Gas Refining segment have performed poorly
over the past few weeks and although Amerada Hess recently posted
second quarter earnings that surpassed the consensus estimates,
the company also said softening energy prices may make this the
last quarter of windfall profits in the oil industry.  Amerada
Hess, which produces oil and gas and also holds a 50% interest in
the largest oil refinery in the Western Hemisphere, said earnings
rose over 75% on strong natural gas prices and higher profits
from gasoline production.  Unfortunately, AHC's solid performance
has not translated into higher share values and the issue is well
below the yearly highs (near $90) achieved in May.  The stock has
managed to recover from recent lows but the decline in early July
came on increasing trading volume and a major support level at
$80 was violated.  Now that area becomes "resistance" and AHC's
share value should have some difficulty reaching (and remaining
above) our sold strike price prior to the August expiration.

AHC - Amerada Hess  $76.73

PLAY (moderately aggressive - bearish/credit spread):

BUY  CALL  AUG-85  AHC-HQ  OI=901   A=$0.25
SELL CALL  AUG-80  AHC-HP  OI=4591  B=$0.90
INITIAL NET CREDIT TARGET=$0.75-$0.80  PROFIT(max)=17% B/E=$80.75



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