Option Investor

Daily Newsletter, Wednesday, 11/21/2001

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The Option Investor Newsletter                Wednesday 11-21-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
      11-21-2001          High     Low     Volume Advance/Decline
DJIA     9834.68 - 66.70  9894.19  9796.41 1.02 bln   1260/1813
NASDAQ   1875.05 -  5.46  1884.49  1853.67 1.54 bln   1717/1772
S&P 100   586.36 -  3.67   590.03   581.93   Totals   2977/3585
S&P 500  1137.03 -  5.63  1142.66  1129.78
RUS 2000  452.31 -  1.59   453.90   449.95
DJ TRANS 2485.60 -  3.80  2491.34  2468.90
VIX        25.32 -  0.81    26.75    24.77
VXN        52.68 +  1.27    54.33    52.51
TRIN        1.38
Put/Call    0.60


Stocks finished with a negative bias Wednesday.  Volume was light
ahead of the holiday.  Bonds were whacked.

The Labor Department reported Wednesday morning that unemployment
claims dropped for the fourth consecutive week.  It's worth noting
that the recent four-week stretch of declining unemployment claims
is the longest since early 1999.  Jobless claims totaled 427,000
during the most recent reporting period, which was about 15,000
lower than expected.  Continuous claims, however, remained
historically high at around 3.75 million.  The recent retreat in
unemployment claims has some economists suggesting that the worst
has passed in the job market.

Meanwhile, the University of Michigan reported that its consumer
sentiment index rose to a higher-than-expected reading of 83.9 in
November.  The index hit 82.7 in October.

The two positive economic reports sent prices of treasuries
spiraling lower.  Bond market participants exited the government's
debt, betting that the Fed would bring an end to its benign
monetary policy in the wake of the positive economic reports.  The
sell-off in bonds further pointed to a recovery in the U.S.
economy next year.  The benchmark 10-year Note (TNX.X) traded
above 50.00 (5.00%) at one point Wednesday.  The print above 50.00
was the TNX.X's first since mid-August.

The growing consensus is that the U.S. economy will recover next
year, but not at the 5 percent annual rate of growth investors
grew to enjoy in the late 90s.  The economic indicators are
revealing that while the economy is still weak, it's on the mend
and any recession should be shallow and short.  The recent rally
in stocks from the September 21 lows discounted part of the
forthcoming economic recovery.

On the surface, the sell-off in stocks following the positive
economic reports Wednesday morning didn't make sense.  After
all, good economic news is good for stocks.  Right?  The markets
are forward-looking and as such had already discounted this
morning's positive reports.  If the forecasts are accurate, the
U.S. economy isn't going to grow at an exceptional rate next
year.  Many investors may still be in the frame of mind that
equates economic growth with 100 percent annual returns in
stocks.  That's just not the case.  The period between 1995 and
early 2000 was "of biblical proportions," in the words of Jeff
Bailey.  The economy grew at an exceptional rate as a result of
a confluence of several events and catalysts.

This week's weakness in stocks may be a product of investors
coming to the realization that while the economy is going to
grow next year, it may not be the type of growth that supports
doubles, triples, or 10-baggers in a lot of stocks.  Earlier in
the week, several chip analysts shed cautious comments on the
group, suggesting that "sentiment had gotten ahead of
fundamentals."  Wednesday morning, Salomon Smith Barney software
analyst, Richard Gardner, cut his rating on shares of
Microsoft (NASDAQ:MSFT).  Gardner reduced his rating to a
Neutral from Outperform, citing current valuation relative to
sales and earnings.  The market responded to Gardner's cautious
outlook as MSFT slid more than 2 percent.

The pullback across sectors levered to the economy Wednesday,
such as Retailers (RLX.X), Banks (BKX.X), Chemicals (CEX.X),
and Telecom (XTC.X), left those sectors relatively independent
of the business cycle to the bulls.  The broader healthcare
sector traded well.  The HealthCare Sector (HCX.X) was carried
higher by makers of defibrillators Wednesday.  Shares of
Guidant (NYSE:GDT), Medtronic (NYSE:MDT), and St. Jude (NYSE:STJ)
boosted the HCX.X to a 1.25 percent gain.  Guidant received
favorable news that suggested its implantable defibrillator
could benefit a larger number of heart patients than previously
thought.  The good news for Guidant spread to its aforementioned

Amgen (NASDAQ:AMGN) boosted the Biotech Sector (BTK.X) after
its bullish prognosis Tuesday night during its analyst meeting.
The company raised guidance for fiscal 2002 thanks in part to
sales of its anemia drug.  The company had been expected to
grow earnings by about 19 percent next year, but raised
expectations to the "low 20s."  Shares of Amgen finished 7
percent higher and pushed the BTK.X into positive territory.

Completing the healthcare trifecta, Eli Lilly (NYSE:LLY) received
regulatory approval for its sepsis drug late Wednesday.
Interestingly and separately, Chiron's (NASDAQ:CHIR) sepsis drug
had been rejected earlier in the day.  Lilly's drug, Xigris, was
approved based upon the results of its Phase III clinical trial,
which revealed that the risk of death from sepsis had been
reduced by 20 percent.  Shares of Lilly finished more than $2
higher.  Point & Figure aficionados might find it worth while
to take a closer look at Lilly.  The stock recently completed
a bullish triangle.

Lilly's positive development pushed the Drug Sector (DRG.X)
through the 400 level Wednesday.  The DRG.X has had a nice run
over the past four sessions and could have more upside in the
short-term.  It has some congestion between current levels and

The rally in healthcare may have been the cure for the bulls'
indigestion caused by the stocks levered to the economy.  There
may be a theme developing in healthcare that is worth monitoring
in this trader's opinion.  Don't confuse that with bearish
sentiment on the broader market, that's the farthest from the
truth.  I believe that we're in a new bull market.  I believe
that the bottom is in place.  But, each bull market is
different.  When most investors think about a bull market,
visions of the late 90s come to mind.  This bull market could
be different.  Maybe it'll be shorter.  Of course that's only
speculation, but it's a distinct possibility.  In the meantime,
as Jim has been suggesting, buying the dips has been working.

In the short-term, the major averages could be headed slightly
lower.  According to daily oscillators, the NDX is closer to
oversold than overbought.  But the INDU and SPX are still
relatively overbought.  The bond market, however, is a variable
that I don't yet fully understand.  The massive amount of money
coming out of bonds has to go somewhere.  Will it move into
corporate and high yield bonds?  Is the money coming from bonds
being to used to pay for recent stock purchases?  Or, is the
money coming from bonds earmarked for stocks over the short-term?
I don't have the answer yet, but hope to find it soon.  Independent
of the bond market, stocks appear due for more backing and filling.

Most importantly, have a safe and peaceful Thanksgiving.

Eric Utley
Option Investor



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SPW  - call
Adjust from $112 up to $113

KKD - put
Adjust from $42.25 down to $42


MSFT $64.03 -1.37 (-1.72) MSFT was downgraded this morning
by Salomon Smith Barney.  The stock was pressured lower by
the weakness in the broader tech sector as well as the
downgrade.  MSFT closed below our stop at $64.50.  We're
dropping the play in light of its stop violation and would
look to exit positions on a bounce Friday.


No Dropped Puts for Wednesday.


Measuring the Mood of the Markets
By Mark Phillips
Contact Support

One of the most important facts to understand about market
action is that it is driven by investor psychology.  In fact,
it has been said that the stock market is a barometer for fear
or complacency about the economy, where measurements are taken
in terms of dollars gained and lost.

Knowing that investor psychology is a dominant factor in the
financial markets is a necessary, but not a sufficient
condition for successful investing.  The other tool that
traders need is a method for measuring the emotions of other
investors as a group.  Fortunately, the Chicago Board of
Options Exchange (CBOE) has provided us just such a tool in the
form of the Volatility Index, or VIX.

The VIX is a sentiment indicator that is calculated using the
implied volatility of the eight most heavily traded front month
put and call options on the S&P 100 index (OEX).  Recall that
the VIX typically moves in a contrary manner to stock prices.
As prices rise, the VIX falls, and vice versa.

While most of us know that the VIX has a 'normal' range in which
it trades, giving buy signals above 30 and sell signals near 20,
that knowledge doesn't really address the underlying importance
of the indicator.  When the market is falling, traders buy more
puts than calls either to protect open long positions, or as
speculation that the market will continue to fall.  As the
market declines further, increasing levels of put buying drives
the VIX towards the high end of its range by increasing the
ratio of puts to calls, confirming the increased fear in the
market.  Conversely, when the market is rising, investor
enthusiasm drives them to speculate with calls, decreasing the
put/call ratio.  The cycle feeds on itself, driving the VIX
towards the lower end of its range.

Since we talk about the action of the VIX so frequently,
especially in the LEAPS column, I thought it would make sense
to look at the action of this indicator in detail.  Analyzing
historical behavior in the market helps us to both profit from
patterns that tend to repeat, as well as avoid repeating
mistakes we may have made in the past.

We have all seen long periods of time where the VIX can hover
near one of the extremes of its range for weeks and months at
a time without a corresponding move back in the other direction.
Then all of the sudden, it (and the market) reverse directions
and give us a very tradable rally (or decline).  Then during
extreme movements in the markets, the VIX may stay outside the
normal 20-30 range for weeks or even months at a time.

What this demonstrates is that peaks and troughs in volatility
are not discrete events, but should instead be viewed as a
process.  I went back to a couple of historical peaks in
volatility that I think demonstrate this process; first in
late 1998 and then the first half of 2001.  Note the similar
behavior demonstrated as the VIX pushed through the upper end
of its normal range near 30.

Starting with the 1998 case, we can see that the VIX began
probing above the 30 level in early August, but fear didn't
really take hold until nearly a month later when the VIX finally
broke decisively above 30.  After that point, it took 6 full
weeks for the 'fear index' to reach its peak near 60 on October
8th.  With that kind of blowoff, the markets reached an
unsustainable level of fear driven both by the 'Asian flu'
currency crisis and the collapse of the Long Term Capital
Management (LTCM) hedge fund.  Not only was October 8th the
peak for the VIX, but it also represented the low for the broad
market as measured by the S&P 500 (SPX.X) or the S&P 100
(OEX.X).  As investors determined that neither of the
macro-economic events listed above would cause a national
economic disaster, they started behaving in a more bullish
manner, buying stocks (and calls) and this led the VIX back down
to the 30 level by the end of the month.  Once the VIX moved
back into the 20-30 range in late October, the broad market had
gotten a nice start on the next leg of its great bull run that
lasted into the following summer.

The picture for the VIX was very similar earlier this year,
although the cause was very different.  As the economy continued
to weaken, investor fear started increasing throughout the month
of February and the VIX shot began pushing above the upper end
of its typical range.  The real breakout didn't take place until
mid-March, and that set the stage for more than 6 weeks of
exceedingly volatile trade in the markets, culminating with the
completion of a double-top in early April.  Once again, the
final VIX peak near 40 on April 3rd coincided with a near-term
market bottom, from which the bulls were able to stage a solid
7-week rally.

We can't use the VIX alone to make our trading decisions, but
it can certainly provide a powerful confirmation of the extremes
in the market.  So let's take a look at more recent action and
see what the VIX is telling us.

After the inflection point seen in late August, the market was
already in decline before the September 11th terrorist attack,
and that event was simply the catalyst to hasten the spike in
fear measured by the VIX running as high as 58 in late
September.  The sharp decline in the VIX that followed over the
next few weeks came at the same time that the SPX rallied well
off its lows.  Then most of the month of October, showed a
coiling action, with the SPX refusing to sell off under support,
while the VIX failed to break resistance in the high 30's.
Simply put, the bears were unable to stampede the bulls into
another selling panic, and that situation naturally resolved
itself with the market rallying through resistance and the VIX
falling back into its historical range.

Over the past few days, we've seen some profit taking in the
broad market, but important support levels are holding,
indicating there is certainly not a rush for the exits -- all
we have here is some healthy profit taking ahead of the holiday
weekend.  This is confirmed by the declining fear in the
markets, as the VIX continues to work towards the lower end
of its traditional range, even on negative market days.
Barring another terrorist attack, or equally fear-inducing
event, it appears that the VIX will continue falling towards
the 20-22 area before we see a meaningful reversal in sentiment.

The really important point here is that the extremes in the VIX
consistently telegraph high-odds buying opportunities.  We have
to endure some volatile market action in the weeks that follow
the extreme, but history demonstrates that these times can
provide outsized returns for those with above-average
intestinal fortitude.

There are other sentiment indicators such as the Put-Call ratio
and the TRIN, and each has their own advantages and
disadvantages.  No single technical indicator can tell you
everything you need to know to trade a given financial
instrument, but if you trade the SPX or OEX (or any of their
major components), then using the VIX along should allow you
to act rationally when the crowd is paralyzed by fear.

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NOC - Northrup Gruman $94.30 -2.45 (+2.80 this week)

Northrop Gruman is a global aerospace and defense company.  The
company provides technologically advanced products, services and
solutions in defense and commercial electronics, systems
integration, information technology and non-nuclear shipbuilding
and systems.

Most Recent Update

The Defense (DFI.X) sector worked off its oversold condition in
the last three session.  NOC did the same.  Its daily
oscillators, which were buried in oversold territory just last
week, have measurably moved out of oversold territory.  In
addition, the stock rolled over near recent historical
congestion between $97 and $98.  We would've liked to have seen
the stock pause and rollover at a slightly lower level, but
Tuesday's action was encouraging nonetheless.  The DFI.X
finished fractionally higher, which put NOC fractional gain
into perspective.  If the sector and stock are going to
rollover, the weakness should begin to emerge in tomorrow's
session.  Traders who took entries on the intraday rollover
today should have a tight stop set to manage risk.  Those
looking to enter new positions should watch for weakness in
the DFI.X and consider entries at current levels.  Those
looking for more confirmation to the downside might wait for
the DFI.X to weaken and look for NOC to decline below the $95
to $95.50 range.


The rollover in the DFI.X came on schedule Wednesday.  NOC
followed its sector lower.  Look for follow-through to the
downside in Friday's session, confirming weakness in the
sector.  Consider entries at current levels on confirmation.

BUY PUT DEC-95*NOC-XS OI= 739 at $3.90 SL=2.50
BUY PUT DEC-90 NOC-XR OI=1342 at $1.90 SL=1.25

Average Daily Volume = 1.19 mln


Time For A Holiday!
By Ray Cummins

The major equity averages finished "in the red" today amid light
volume ahead of the Thanksgiving Holiday.  Investors continued
to be optimistic however, as favorable employment data and news
of improving consumer confidence helped the Market rebound from
session lows.

Readers have asked for more information on exit and adjustment
strategies when trading spreads and since today's publishing
deadline limits the time available for new candidates, this is
an excellent opportunity to reprint a portion of one of my
recent E-mail replies regarding this subject.

Credit Spreads:

A credit spread is a combination strategy that allows traders to
have time decay work in their favor while maintaining a manageable
level of risk.  To initiate a credit spread, a trader writes a put
(call) option and buys a put (call) option that expire at the same
time but have different strike prices.  The short option is closer
to the price of the underlying issue than the long option, thus it
has a higher premium.  Traders receive a credit in their account,
hence the name "credit spread."  The objective is for both options
to expire worthless so the trader can retain all of the credit in
their account.  Normally, a credit spread trader uses front-month
options, as the time decay evaporates most rapidly in the final few
weeks before expiration.  The rapid time erosion benefits a credit
spread trader, assuming there are no changes in the other variables
that might affect the position; the underlying security's price,
volatility, dividends, or interest rates.

With credit spreads, a trader has many different alternatives when
the underlying issue moves beyond the sold (short) strike price in
the position.  In most instances, the appropriate action should be
taken prior to that event, when the stock experiences a technical
change in character such as breaking-out of a recent trading range
or closing above/below a moving average.  The methods for taking
profits and preventing losses (as well as making adjustments or
rolling to new positions) fit into one of two basic categories: a
prearranged target profit or loss limit; or a technical exit based
on the chart indications of the issue.  The first technique; using
a mechanical or mental closing STOP to exit a play, or initiate a
roll-out, is simple as long as you adhere to the limits that were
initially established for the position.  The alternative method; a
technicals-based exit, is more difficult.  However, there are many
different indicators available to establish an acceptable exit
point; moving averages, trend-lines, previous highs/lows, etc. and
with this type of loss-limiting system, you exit the play after a
violation of a pre-determined level.

The most difficult decision that traders face is when to exit or
adjust a position.  Of course, the action taken should be based on
the existing market, sector and industry conditions as well as the
current outlook for the underlying issue and the ratio of potential
gain to additional risk.  One outstanding principle that investors
fail to adhere to is the need to outline a basic exit strategy,
before initiating any position, to eliminate emotional decisions.
This plan must be simple enough to implement while monitoring a
portfolio of plays in a volatile market.  In addition, these exit
(and adjustment) rules should apply across a range of situations
and be designed to compensate for a trader's personal weaknesses
and inadequacies.  To be effective in the long term, they must be
formulated to help maintain discipline on a general basis and at
the same time, offer a timely memory aid for difficult situations.
Utilizing this type of system addresses a number of problems, but
the most significant obstacle it eliminates is the need for any
"judgment under fire."  In short, a sound exit strategy will help
you avoid exposing your portfolio to excessive outflows and that's
important because the science of successful trading is far less
dependent on making profits, but rather on avoiding undue losses.

Specific Exit/Adjustment Strategies:

Credit spreads are a very popular strategy among option traders
and there are ways to limit potential losses or even capitalize
on a reversal (or transition) to a new trend.  With bullish credit
spreads, there are three common methods to exit or cover a losing
position and the alternatives range from "legging-out" or rolling
into a long-term spread to "shorting" the underlying issue.  First,
you can simply close the position at a debit and register the loss.
There is also another popular technique; covering (by shorting the
stock) the sold option as the stock moves through the short strike.
This is a great method for exiting the position when the issue has
reversed course but you must be prepared to repurchase the stock
in the event of a recovery.  Another option is to "roll-out" of the
spread for profit (or at least a break-even exit).  To roll-out of
a credit spread, place an order to close the short option anytime
the stocks trades (and preferably closes) below technical support
or a well-established trend line or moving average on heavy volume.
There are certainly more precise signals that can be used but this
simple technique is based on the probability that (once a reversal
has occurred) the stock should continue to move in that direction.
After the short option is repurchased, wait for the new trend to
lose momentum and sell the long position to close the entire play.
It is a very difficult technique to perform when emotion enters
the formula but it works well once you become experienced at it,
and learn to work with the technical indications rather than your
impulses.  The key to success is using the method at known support
levels or after obvious reversal signals, otherwise you are simply
speculating about the stock's next move.

The great thing about spreads; once you understand them, you can
turn many losing plays into winning ones with the effective use of
STOPS and by rolling out-of/in-to new positions when the stock
moves against you.  When you do lose, at least you have reduced
your losses by leveraging against another position.  In all cases
where an attempt to recover a losing position is made, you must be
prepared for further draw-downs and have thorough knowledge of the
strategy.  As with any technique, it must also be evaluated for
portfolio suitability and reviewed with regard to your personal
approach and trading style.

Good Luck!


P.S.  I can't tell you when to trade, that simply wouldn't be
appropriate.  However, I do try to provide comments concerning
the technical condition of issues in the current portfolio and
suggestions as to potential exit/adjustment opportunities.  Keep
in mind the Option Investor Newsletter is really just a selection
of candidates to supplement your search for profitable trading
positions.  As with any investment, you must decide if the issues
meet your criteria for potential plays.  Only you can know what
strategies are suitable for your skill level, portfolio outlook,
and risk-reward tolerance.  In addition, we suggest 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.

Summary of Current Positions (as of 11/20/01):

Covered Calls: (Margin not used in calculations)

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

INTU    DEC     45   40.85   39.79  (1.06)    0.0%
ELBO    DEC     35   33.50   35.89   1.50     3.7%
TMPW    DEC     35   33.20   39.70   1.80     4.5%

As noted in Sunday's Spreads/Combos section, Intuit did
not cooperate with our bullish outlook as the company
posted earnings last week that were less than outstanding.
The issue was promptly sold-off, down to a level not seen
since October and it may be some time before the stock
can recover from the bearish activity.  Investors in the
long-term position must decide if their capital would be
better utilized elsewhere.  Electronics Boutique was also
a victim of earnings-related selling pressure.  The stock
slipped through a near-term support area at $36 ahead of
its quarterly announcement and the rise in trading volume
supported a bearish change of character.  A decision to
exit the play, in the interest of capital preservation,
would have been a viable alternative but after the bell
Tuesday, the company posted quarterly profits that were
double those during the same period last year and said it
now expects same-store sales to increase over 30% in the
current quarter.  It remains to be seen how investors will
respond to the news and we can only hope this was simply
some profit-taking after the recent upside activity.  A
close below $35 will be the first indication of a failed

Naked Puts:

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

INTU    DEC    35    34.20   39.79   0.80    5.6%
ELBO    DEC    30    29.50   35.89   0.50    5.0%
TMPW    DEC    30    29.40   39.70   0.60    6.0%
EBAY    DEC    50    48.85   59.11   1.15    6.8%
BBY     DEC    55    54.00   66.26   1.00    5.1%
PCSA    DEC    45    44.05   55.65   0.95    6.0%

Naked Calls:

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

IDPH    DEC    75    75.70   67.60   0.70     5.2%
EASI    DEC    55    55.50   40.92   0.50     4.5%

Idec Pharmaceuticals (NASDAQ:IDPH) was previously in
the credit-strangle section but when the issue moved
through the break-even point in the bearish portion
of our neutral position, we decided to remain in the
play for a credit with a transition to a DEC-$75 call.

Sell Strangles:

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

AZN     DEC    50-C  51.30   45.40   1.30     4.9%
AZN     DEC    45-P  43.60   45.40   1.40     5.3%

Credit Spreads:

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

PCAR   62.59   62.90   DEC50P/55P   0.70   54.30   0.70   Open
AHP    56.47   57.09   DEC65C/60C   0.65   54.35   0.65   Open
CSC    45.09   46.11   DEC35P/50P   0.60   39.40   0.60   Open
PEP    50.28   49.68   DEC45P/47P   0.35   47.15   0.35   Open
NKE    51.56   53.64   DEC45P/47P   0.40   47.10   0.40   Open

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 - Conservative Covered-Calls & Naked-Puts

CVTX - CV Therapeutics  $54.53  *** Angina Treatment! ***

CV Therapeutics (NASDAQ:CVTX) is a biopharmaceutical company that
is engaged in the discovery and development of new small-molecule
drugs to treat cardiovascular disease.  The company is conducting
clinical trials for three of its drug candidates.  Ranolazine, the
first in a new class of compounds known as partial fatty acid
oxidation (pFOX) inhibitors, is in Phase III clinical trials for
the potential treatment of chronic angina.  Another drug, CVT-510,
an A1 adenosine receptor agonist, is in Phase II clinical trials
for the potential treatment of atrial arrhythmias.  CVT-3146, an
A2A adenosine receptor agonist, is in Phase I clinical trials for
the potential use as an adjunctive pharmacologic agent in cardiac
perfusion imaging studies.

Trading has been very active in CVTX shares during the past few
weeks and the reason for the new interest in the issue is the
recent positive announcement about the company's experimental
treatment for the heart condition angina.  CVTX said the drug,
called Ranolazine, achieved its main goals in patient testing;
a significant increase in the length of time patients were able
to exercise.  CV Therapeutics, which presented the data at a
recent meeting of the American Heart Association, said it plans
to apply for government approval to market the drug in 2002.
Today, Morgan Stanley started coverage of CV Therapeutics with
a "strong buy" rating and a price target of $71, based on the
the upside potential for the experimental heart drug.  Traders
who agree with a positive outlook for the company can establish
a discounted cost basis in the issue with these positions.

CVTX - CV Therapeutics  $54.53

PLAY (sell naked put):

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

SELL PUT  DEC 42.5 UXC XV  63        0.60    41.90      5.1% ***
SELL PUT  DEC 45   UXC XI  192       1.00    44.00      7.4%
SELL PUT  DEC 47.5 UXC XW  7         1.45    46.05      8.8%

IGEN - IGEN International  $36.59  *** Legal Success? ***

IGEN International (NASDAQ:IGEN) develops and markets products
that incorporate the company's proprietary ORIGEN technology,
which permits the detection and measurement of unique biological
substances.  ORIGEN is incorporated into instrument systems and
related consumable reagents.  IGEN also offers assay development
and other services used to perform analytical testing.  Products
based on the company's ORIGEN technology currently address the
following markets: Life Science; Clinical Testing-In Vitro; and
Industrial Testing.

Shares of IGEN have rallied in recent sessions amid speculation
the company will soon win a lucrative settlement in its ongoing
legal fight with German medical company Roche Diagnostics.  In a
lawsuit filed in 1997, IGEN charged that Roche, a subsidiary of
Swiss health-care giant F. Hoffman-La Roche, breached an earlier
contract in which Roche licensed IGEN's biological-detection
technology, called Origen, for use in clinical testing products.
Among other claims, IGEN accuses Roche of violating the contract
by underreporting royalties and selling Origen-based systems in
markets not covered by the contract.  Earlier this year, a U.S.
judge granted a summary judgment in IGEN's favor on three of 14
claims and analysts believe the courtroom activity is favoring a
positive settlement of the 11 claims currently being decided at
the trial.  The jury's verdict is expected before Christmas and
some experts say the final settlement could exceed $1 billion.

The robust option premiums will allow traders to speculate, in
a conservative manner, on the future movement of the company's
share value.

IGEN - IGEN International  $36.59

PLAY (buy stock and sell covered call; or sell naked put):

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

SELL CALL DEC 30   GQ LF   3,105     7.60    28.99      3.4% ***
SELL CALL DEC 35   GQ LG   5,244     4.40    32.19      8.6%

SELL PUT  DEC 25   GQ XE   355       0.35    24.65      4.5%
SELL PUT  DEC 30   GQ XF   841       1.10    28.90     11.8% ***
SELL PUT  DEC 35   GQ XG   88        2.70    32.30     16.8%


BULLISH PLAYS - Conservative Credit-Spreads

AGN - Allergan  $76.10  *** Reader's Request! ***

Allergan (NYSE:AGN) is a provider of eye care and other specialty
pharmaceutical products throughout the world with products in the
eye care, ophthalmic surgical device, over-the-counter contact
lens care, movement disorder and dermatological markets.  Their
worldwide consolidated revenues are principally generated by
prescription and non-prescription pharmaceutical products in the
areas of ophthalmology and skin care, neurotoxins, intraocular
lenses and other ophthalmic surgical products and contact lens
care products.

One of our readers submitted this issue for a bullish position,
based on the company's favorable earnings outlook and the recent
positive news about its new glaucoma medication.  In October,
Allergan posted a 22% rise in third-quarter earnings, fueled by
the company's eye-care pharmaceutical sales.  The CEO said that
numerous worldwide product approvals throughout the course of
2001 are beginning to lift sales growth and the company now
expects an average profit margin for the year of about 75%, or
2.5 points higher than full-year 2000 results.  On Monday, the
company announced that a European committee had recommended its
glaucoma medication Lumigan be approved by the EUC and the full
EU sanction should occur within about three months.  The company
said the drug has already been approved by the FDA and sales for
Lumigan this year have already exceeded $20 million.  Analysts
at Thomas Weisel recently started coverage on the stock with a
favorable rating and based on the bullish technical indications,
this position offers reasonable reward potential with relatively
low risk.

AGN - Allergan  $76.10

PLAY (conservative - bullish/credit spread):

BUY  PUT  DEC-65  AGN-XM  OI=55   A=$0.40
SELL PUT  DEC-70  AGN-XN  OI=260  B=$1.00

LLY - Eli Lilly  $83.33  *** FDA Approval For Xigris! ***

Eli Lilly and Company (NYSE:LLY) discovers, develops, makes and
sells its products in one significant business segment, called
Pharmaceutical Products.  The company also manufactures and sells
animal health products, and manufactures and distributes other
products through owned or leased facilities in the United States,
Puerto Rico and 30 other countries.  The company's products are
sold in approximately 160 countries.  Lilly directs its research
efforts primarily toward the search for products to diagnose,
prevent and treat human diseases.  Lilly also conducts research
to find products to treat diseases in animals, and to increase
the efficiency of animal food production.

Shares of the drug giant soared today after the FDA approved the
company's sepsis drug Xigris, calling it a significant advance
against an often deadly syndrome that has eluded treatment.
Sepsis occurs when the body's immune system overreacts to an
infection, causing blood clots that can lead to organ failure
and death.  Xigris is a potential blockbuster for Lilly because
it is one of a handful of medicines the company is counting on
to fill the revenue gap caused by dramatically slowing sales of
its antidepressant Prozac.  Lilly said it plans to start selling
the drug in the United States "within days" and the company has
also applied for regulatory approval of Xigris in Canada, the EU
and Australia.  Analysts say this development is very positive
for the company and investors have flocked to the issue since
the announcement.  We simply favor the bullish character change
and our conservative position offers a way to participate in the
future movement of the issue with relatively low risk.

LLY - Eli Lilly  $83.33

PLAY (moderately aggressive - bullish/credit spread):

BUY  PUT  DEC-75  LLY-XO  OI=6078  A=$0.25
SELL PUT  DEC-80  LLY-XP  OI=4828  B=$0.95


Neutral Plays - Straddles & Strangles

ERTS - Electronic Arts  $54.00  *** Premium Selling! ***

Electronic Arts (NASDAQ:ERTS) operates in two principal business
segments globally: EA Core, the primary business, comprises the
creation, marketing and distribution of entertainment software,
while the EA.com business segment is composed of the creation,
marketing and distribution of entertainment software which can
be played or sold online, ongoing management of subscriptions of
online games and Website advertising.

Readers have been asking for more "premium selling" plays and
based on the underlying issue's technical background and option
premiums, ERTS is a favorable candidate for this strategy.  The
stock has established a relatively stable trading pattern near
its current price and our profit envelope is comfortably beyond
the range of its movement for the past month.  In addition, the
company is a leader in its industry and a cost basis near $47
would be an acceptable entry point in the stock for long-term
investors.  News and market sentiment will have an effect on
the position, so review the play thoroughly and make your own
decision about its outcome.

ERTS - Electronic Arts  $54.00

PLAY (aggressive - neutral/credit strangle):

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

SELL PUT  DEC 50   EZQ XJ  1,981     1.55    48.45       7.9%
SELL CALL DEC 60   EZQ LL  3,793     0.90    60.90       5.4%

CREDIT TARGET=$2.50-$2.60 UPSIDE B/E=$62.50 DOWNSIDE B/E=$47.50


BEARISH PLAYS - Naked Calls & Combinations

CHIR - Chiron  $45.59  *** Lilly's Success = Chiron's Demise! ***

Chiron (NASDAQ:CHIR) is a biotechnology company that applies
leading scientific approaches to discover and develop innovative
healthcare products to prevent and treat cancer and infection.
The company brings products to the worldwide healthcare market
through collaborations with major healthcare companies and also
through three growing businesses: biopharmaceuticals, vaccines,
and blood testing.  Chiron has recently acquired PathoGenesis,
a biotechnology company developing drugs to treat infectious
diseases, particularly serious lung infections, where there is
significant need for improved therapy.  In addition, Chiron has
also established an alliance with Novartis AG, a life sciences
company headquartered in Basel, Switzerland.

Investors unloaded shares of Chiron today after the company said
its drug designed to treat the blood infection syndrome sepsis
proved ineffective in a clinical trial.  The experimental drug,
Tifacogin, had been expected to compete with Xigris, a sepsis
treatment from Eli Lilly that received approval from the FDA.
Analysts noted that Tifacogin, co-developed with Pharmacia, had
been Chiron's best bet to produce a "blockbuster" and they were
banking on the drug to propel it into the top tier of bio-tech
companies.  The company said it would make a decision about the
future development of the drug after it fully analyzes data from
the clinical trial but Ken Nover, an analyst at A.G. Edwards &
Sons, said "It would appear Chiron's drug is dead."  That's not
good news for the company in the near-term and traders who think
it is unlikely the issue will recover from the sell-off over the
next few weeks can speculate on that outcome with this position.

CHIR - Chiron  $45.59

PLAY (conservative - bearish/credit spread):

BUY  CALL  DEC-55  CIQ-LK  OI=16775  A=$0.30
SELL CALL  DEC-50  CIQ-LJ  OI=2342   B=$0.85



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