Option Investor

Daily Newsletter, Wednesday, 11/28/2001

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The Option Investor Newsletter                Wednesday 11-28-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
      11-28-2001          High     Low     Volume Advance/Decline
DJIA     9711.86 -160.74  9867.20  9706.61 1.41 bln   1069/1289
NASDAQ   1887.97 - 48.00  1941.79  1887.97 1.87 bln   2078/2365
S&P 100   578.92 - 11.91   590.83   578.69   Totals   3147/3654
S&P 500  1128.52 - 20.98  1149.50  1128.29
RUS 2000  453.70 -  7.01   460.71   453.70
DJ TRANS 2457.95 - 51.35  2508.52  2457.95
VIX        27.84 +  2.63    27.91    26.09
VXN        52.21 +  2.94    52.37    49.53
TRIN        2.57
Put/Call    0.66

Lights Out

Troubled energy trader Enron (NYSE:ENE) took a turn for the worse
Wednesday.  Standard & Poor's lowered its credit rating on Enron
earlier in the day.  The downgrade gave Dynergy (NYSE:DYN),
Enron's proposed merger partner, reason to step away from the
deal.  A Dynergy press release cited "Enron's breaches of
representation, warranties, covenants, and agreements" as the
reasons for pulling out of the deal.  Shares of Enron lost more
than 80 percent of their value on more than 340 million shares
traded -- record one-day volume for a single stock.

The Enron debacle has far reaching implications.  The adverse
impact was felt in the energy sector.  Fears of exposure to
Enron pressured the Natural Gas (XNG) sector.  Shares of El
Paso (NYSE:EPG) and Williams (NYSE:WMB) were especially hard
hit.  The Bank Sector (BKX) was pressured lowered, with
Citigroup (NYSE:C) and J.P. Morgan Chase (NYSE:JPM) taking the
brunt of the selling.  The two banks reportedly backed the
proposed merger with loans and equity investments.

A bankruptcy filing appears imminent.  Enron's bonds reflected
that end Wednesday.  Most of the company's debt lost around 85
percent of its value in the bond market.  The fears induced a
flight to quality that lent a bid to Treasuries.  Although
Treasuries finished well off their highs, they did finish
higher as evidenced by the drop in yields across the curve.

Unfortunately, Enron was a much-loved stock among institutions.
According to the most recent filings, the biggest institutional
holders of the stock include: Janus, Putnam, AXA Financial,
Barclays Bank, Citigroup, Fidelity, State Street, Aim, Taunus,
and Vanguard.

The worst ramification of the Enron debacle is the impact on
its employees' 401(K) accounts.  I read a story in the New York
Times about an Enron employee who had put his entire retirement
into the stock several years back.  He had worked for the
company for several decades and was approaching retirement.  He
lost nearly all of what was left of his retirement today.
Indeed, I'd guess that more than a few of our readers own
directly or indirectly shares of Enron.

I don't want to make an example of anyone.  I sincerely
sympathize with the Enron employee I read about and anybody
in a similar situation.  But I think there are a few lessons
to be either learned or reinforced in the wake of Enron's

1) The identification and management of risk is a lost art.
Far too many investors don't fully understand the risk that
is involved with the stock market.

2) Diversification is a step towards the management of risk.
It's simple: remove the non-systematic risk through

3) Wall Street is the world's greatest salesmen.  Analysts
are salesmen and saleswomen.  That's why they are referred
to as the "sell side" of Wall Street.  There are currently
15 analysts covering Enron, 6 recommend the stock a Strong

4) Gurus are not.  In October's Money Magazine, Abbey
Joseph Cohen said Enron represented a "good value" in the
energy sector.  The stock traded above $30 at the time.

5) Price doesn't lie.  Somebody knew in late October and
early November.  They were selling.  Technical analysis
is a step towards the management of risk.  I'm not a very
good technician, but even I knew something bad was happening
with Enron over the past two months.

If there's one thing that I hope to impress upon my readers
it's the necessity for risk management.  It's given scant
emphasis by the sales machine that is Wall Street and not
nearly enough credence by the financial media.  Instead of
asking yourself how much money you can make from an
investment, try: How much can I lose?  Ask that question and
you're one step closer.  And remember, it can always get

I'm not sure how much more of an impact the Enron debacle
is going to have on the broader markets.  Going into
Wednesday's session, the major averages remained overbought
in the short-term.  The Enron debacle may have been the
catalyst to start the necessary consolidation process
before the next leg higher.  The selling was heavy and
broad which helped to work off part of the overbought
nature of the averages.

The Dow Jones Industrial Average ($INDU) shed about 300
points from its recent peak up around 10,000 to its close
around 9700.  The S&P 500 (SPX) pulled back sharply and so
did the Nasdaq-100 (NDX).  The daily oscillators across
each of the averages made some progress to the downside
and although the numbers weren't available at the time of
writing, I'd be willing to bet that the bullish percent
figures across the major averages moved lower.

Like I wrote earlier, there may be more negative consequences
from the Enron disaster.  Sectors that may fall under
additional pressure might include Banks and Energy.  But there
may be a few buying opportunities in insulated sectors such
as the Biotechs (BTK).  The biotech group has been among the
strongest since the September 21 bottom.  Additional
market-related weakness might pressure the BTK back down to
support, where bulls might look for strong biotech stocks to
bounce.  The BTK has been trending higher since 09/21, using
an aggressive ascending support line.  It has bounced from
the line several times and is again approaching the support
level.  The ascending line sits around 580, which may be a
good spot to target the biotechs in the event of further

The tech sector will remain subject to earnings news and
guidance in Thursday's session.  Brocade (NASDAQ:BRCD)
reported numbers after the bell that edged past estimates
but the company provided a less-than-bullish outlook for
its next quarter.  Brocade officials provided flat guidance
in the quarter-over-quarter period.  The downbeat guidance
pressured shares lower in the after hours session.  Brocade
is a component of the Hardware (GHA) sector and the Nasdaq-100.

In the Networking (NWX) space, ADC Telecom (NASDAQ:ADCT)
reported a loss for its most recent quarter that was in-line
with expectations.  The company's guidance was downbeat too.
ADC Telecom forecasted modest growth for next year, but
nothing spectacular.  The stock edged lower in the evening

Altera (NASDAQ:ALTR), a make of programmable logic devices,
reaffirmed its current quarter guidance, which calls for a
decline in revenues between 5 and 10 percent from the
third- to the fourth-quarter.  The company was expected to
reaffirm guidance, so the news may have already been
discounted in the stock.  Nevertheless, shares edged higher
in the after hours sessions.

While not much good can come for the Enron calamity, it may
have served as the catalyst to remove some of the bulls from
the market and work off the overbought condition of the
averages.  The drop from Tuesday's peak and Wednesday's
subsequent decline took a lot of froth out of the bulls'
charge.  That's a good thing as Jim suggested Tuesday in
his Market Wrap piece.  If everybody's a bull, who's left to
buy and carry prices higher?  Stocks are again approaching
support levels and may start bouncing in the next day or two.
The dip-buying pattern has been prevalent since September 21.
We'll find out in the next couple of days whether the pattern
holds or if a protracted sell-off is in the mix.  The
beauty of buying stocks near support is that a tight stop
can accompany those entries.  And with a tight stop, risk is

Eric Utley
Option Investor



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KKD  - put
Adjust from $41 down to $40

LH   - put
Adjust from $82.50 down to $80


NOK $22.10 -1.62 (-2.08) The bounce we were expecting never
materialized in NOK.  The stock gapped lower Wednesday
morning below its 200-dma.  The selling picked up through
the day as NOK headed down to the $22 level.  Traders who
weren't stopped out Wednesday should look for any strength
back up to the 200-dma at $23.20 for an exit point.


No Dropped Puts for Wednesday.


VIX Details for the Masochist
By Mark Phillips
Contact Support

I never could have imagined the level of interest last week's
VIX article generated from readers.  Of course there was the
long list of messages from those that expressed their gratitude
for showing the characteristics of what has frequently been
referred to as the "Fear Index", and those comments are always
appreciated.  But it was the other emails that I found most
interesting.  Summarizing last week's article, what I did was
demonstrate how to use the VIX to read the pulse of the market,
or if you'll pardon the analogy, how to tell time.

I had a number of emails asking for further details of how the
VIX is created, or to continue the analogy, how the clock
actually works.  Here are a couple of the questions that came
out of the list, which I think are fairly representative of the

"What I still don't understand is the connection between the
put/call ratio and the VIX defined as the "implied volatility
of the eight most heavily traded front month put and call
options on the S&P 100" (from your par. 3). It is clear why
p/c grows with declining markets and fear, but why does
volatility (=variance) get higher with increasing p/c? What
is the causal relation between the two?"

And then from another reader,

"I note that the VIX is calculated using the IV of the noted 8
call and put OEX options.  Is the VIX calculated by averaging
the IV of the 8 calls and puts?  Does the put/call ratio
directly affect the calculation of the VIX?  For example,

1. When the market declines, put buying increases, the put/call
ratio.  Does this ratio directly affect the VIX?  Or is it that
the IV of the chosen puts goes up enough to affect the total IV
of the combined 8 puts and calls?

2. In the opposite direction, when the market goes up and there
is more call buying, does this not increase the IV of calls and
why does that not also increase the VIX?"

WOW!  Great questions, guys!  My initial response was "Duuuhhh,
I dunno!"  To be honest, I had never really given the internals
of the VIX much consideration, content with the information it
provided me about current market conditions.  I considered the
VIX to be just another key indicator to be used in my day-to-day

But my curious cohorts roused my normally-dormant alter ego,
RocketMan.  Long time readers will recall that I was a NASA
engineer in a prior life, and "How does it work" musings
launched me down the road to discovery once again.  Care to
join me and find the answers?

Since the VIX is created and maintained by the ever-vigilant
folks over at the CBOE, I decided that contacting them would be
the logical place to start.  After several dead-ends, I got John
Hiatt from the Research Department on the phone and am eternally
grateful for the assistance he provided.  After about 5 minutes
of him describing how the VIX is calculated, I realized I was
never going to wrap my throbbing brain around the concept
without seeing the equations in print.  Mr. Hiatt was kind
enough to forward me a copy of a document (Derivatives on
Market Volatility: Hedging Tools Long Overdue by Robert E.
Whaley) that included the formulation for the VIX.

After reading the text 3 times, all I had to show for it was a
pounding headache, so I'll throw in this disclaimer now -- "You
are now entering the Theoretical Zone - proceed at your own

Just to get everyone on the same page, I'll quote from the

"The CBOE Market Volatility Index (VIX) is constructed from the
implied volatilities of the eight near-the-money, nearby, and
second nearby OEX option series.  The implied volatilities are
weighted in such a manner that VIX represents the implied
volatility of a hypothetical thirty-calendar day
(twenty-two-trading day), at-the-money OEX option."

Without going into a great deal of detail (mainly because it
isn't a necessary waypoint on our journey of discovery), suffice
to say that a proprietary approximation method is used for
calculating the implied volatilities of the OEX options.  This
is necessary because the OEX is an American-style cash-settled
index and the Black-Scholes model is insufficient for the task.

Coming back to the VIX calculation, we need a couple definitions
before we proceed.  As stated above, the VIX is constructed from
the implied volatilities of the eight near-the-money, nearby,
and second nearby OEX option series.  The nearby series are
defined as the front-month series, provided that there are at
least 8 calendar days until expiration.  Otherwise, the nearby
series is defined as the next expiration month.  The second
nearby series uses the contract month following the nearby

That definition alone can be confusing, so let's simplify it
with an example.  Since we are currently more than 8 calendar
days away from December expiration, the nearby month would be
defined as December and the second nearby would be defined as
January.  If we were in the final week of the December
expiration cycle, January would be the nearby month and
February would be the second nearby month.  Are you with me
so far?

Setting the at-the-money level of the OEX options at the current
cash-settled value of the OEX, we would then pick a Put and a
Call just above that level and just below that level for each
of the expiration months for a total of 8 options -- 2 December
calls, 2 December puts, 2 December puts and 2 January puts
(since there are more than 8 calendar days to expiration).  That
is the basis for the calculation.  So taking the current value
of the OEX at 578, here are the options we would use for the

December - 575 Call, 575 Put, 580 Call and 580 Put
January - 575 Call, 575 Put, 580 Call, and 580 Put

The first step in the calculation involves averaging the implied
volatilities in each of the 4 groups of options as follows:

IV1 = (IV of the DEC 575 Call + IV of the DEC 575 Put)/2
IV2 = (IV of the JAN 575 Call + IV of the JAN 575 Put)/2
IV3 = (IV of the DEC 580 Call + IV of the DEC 580 Put)/2
IV4 = (IV of the JAN 580 Call + IV of the JAN 580 Put)/2

Ok, I know it's getting deep here, but bear with me.  We're
getting close to the end.  The remainder of the calculation
involves interpolation between the nearby implied volatilities
(IV1 and IV3) and the second nearby implied volatilities (IV2
and IV4) to create hypothetical "at-the-money" implied
volatilities for each expiration month.  I won't bore you with
the details of the calculation, as it would likely raise more
questions than it would answer.

Simply put, IV1 and IV3 through interpolation yield a value for
implied volatility for December (IV-DEC).  IV2 and IV4 yield a
value for implied volatility for January (IV-JAN) through a
similar interpolation process.

The final step is to interpolate between the IV-DEC and IV-JAN
implied volatilites to create a thirty calendar-day (or 22
trading day) implied volatility.

Exiting the Theoretical Zone

So now that I have put everyone to sleep except for those that
actually raised the questions listed above, does all of this
theory help to answer their questions?  Well yes, at least

Let's take them one at a time, shall we?

Q: I note that the VIX is calculated using the IV of the noted 8
call and put OEX options.  Is the VIX calculated by averaging
the IV of the 8 calls and puts?
A: Yes, absolutely.  First the implied volatilities are averaged
together, and then interpolation is used to average between the
front month implied volatility numbers to arrive at a
theoretical at-the-money implied volatility for December.
Repeat the process for January, and then use the results to
interpolate one more time, arriving at a theoretical 30-day
at-the-money implied volatility for the OEX, which is the VIX.

Q: Does the put/call ratio directly affect the calculation of
the VIX?
A: Interestingly enough, the answer here is No.  The ratio of
puts to calls does not figure into the calculation of the VIX;
only the implied volatilities of each of the individual options
are pertinent to the calculation.

Q: It is clear why p/c grows with declining markets and fear,
but why does volatility (=variance) get higher with increasing
p/c? What is the causal relation between the two?
A: This question really cuts to the heart of the matter, and to
be honest, I really don't know.  I think it is a bit of a
chicken and egg scenario -- which comes first?  The change in
the put/call ratio or the change in implied volatilities that
are used to create the VIX?  It would seem that the increase in
put buying that comes with increasing fear in the markets would
increase the implied volatility of the puts, while the decreased
buying of calls would decrease the implied volatility of the
calls, keeping the VIX relatively constant.

I think the real answer is that in a falling market, traders
become more uncertain and implied volatility of both calls and
puts rises, which in turn causes the VIX to rise.  Conversely, a
rising market deflates the implied volatilities of both puts
and calls, resulting in a falling VIX.

It seems to me that the VIX and the put/call ratio are different
indicators that do the same thing - measure fear in the markets.
Each have their own rules of application and corresponding
extremes, which can guide vigilant traders through a minefield
of information, hopefully to the end goal of trading profits.

Needless to say, I don't have all the answers, but I hope this
excessively complex discussion helps to illuminate the issue for
those with inquiring minds.  While I did indeed learn from the
process, I now need to give my brain a rest.  An icepack and a
cold margarita ought to do the job nicely!

See you next week!

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ERTS - Electronic Arts $53.61 (-0.09 this week)

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

Most Recent Update

ERTS hasn't done much in the last two days.  We'd like to see
the stock make a move in one direction or another.  The tedium
of a trading range is the worst pain.  If ERTS rallies up to
its resistance range around the $57 level, then bearish traders
would be presented with a favorable risk/reward dynamic in
entering put plays.  In other words, a rally up to $57 would
allow traders to enter puts accompanied with tight stops.
Conversely, a breakdown below $51 would signal a break below
ERTS' short term trend line and potentially offer momentum
traders an entry into weakness.  In the meantime, we're better
off waiting for a move.


We may be early on this one.  ERTS continued to trade in its
range Wednesday.  But with further pressure from the broader
markets, it could breakdown in Thursday's session.  Pay close
attention to the Software Sector Index (GSO.X) and the broader
Nasdaq market.  Look for selling in the two markets to push
ERTS below the $52 level.

BUY PUT DEC-55*EZQ-XK OI= 853 at $3.80 SL=2.75
BUY PUT DEC-50 EZQ-XJ OI=2030 at $1.55 SL=1.00

Average Daily Volume = 814 K


An Overbought Market Suffers From Profit Taking
By Mark Wnetrzak

The FED's beige book survey of regional economic conditions dis-
appointed investors today as the report indicated the economy
remained soft in October and November.  Yesterday, the Conference
Board issued a disappointing report on consumer confidence.  Add
Nokia's (NYSE:NOK) weak forecast for sales growth in 2002 and the
termination of the Dynegy (NYSE:DYN) and the Enron (NYSE:ENE)
merger agreement, which reduced Enron to penny status.  The major
averages were ripe for a correction after testing their resistance
areas for the last several days.  Will it be a "normal" pullback
to support offering new buying opportunities, or is the beginning
of a move towards the September low?

The regular editor of this section is on his annual pilgrimage to
the CBOE to view the latest in electronic trading technology and
the current exchange floor techniques.  He will also be visiting
another major financial institution in the world's money center,
Zurich, Switzerland.  While he is away from the market, we have
asked the Covered-calls editor, Mark Wnetrzak, to provide some
new candidates for this section.  In addition, we have included
a recent E-mail response regarding position adjustment strategies
with put-credit spreads.

Dear OIN,

  I was reading in one of your recent articles concerning the
manners in which one could handle a credit spread which has
crossed the sold strike.  One mentioned was to short the stock
to cover the sold option.  Could you explain how this works;
if it has to be repurchased before expiration, or is it covered
somehow at expiration?  How does shorting the stock affect the
margin requirement in my account?  Lastly, could this method be
used with both stock and index credit spreads?  I thank you very
much for your time and assistance.



First, thanks for your interest in the Spreads/Combos section of
the OIN.  The narrative you referred to (regarding exit/adjustment
strategies for put-credit spreads) noted that:

"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 another popular technique; covering (by shorting the stock) the
sold put option as the stock moves through its strike price.  This
is a great method for exiting the position when the underlying
issue has reversed course, but you must be prepared to repurchase
the stock in the event of a recovery."

The first subject that must be clearly understood is short selling
or "shorting" a stock.  In general terms, selling short is a less
common technique whereby a trader seeks to sell high and buy low;
the reverse of what most investors try to do.  To participate in
this strategy, an investor sells borrowed stock in anticipation of
a drop in price.  A broker supplies the stock in a loan to your
margin account.  If the stock falls below the price at which it
was sold, it is repurchased and eventually returned to the broker
as a replacement for the stock that was originally borrowed.  The
profit is the difference between the sale price and the purchase
price.  While this technique may seem easy, short selling is one
of the most misunderstood of all types of securities transactions
and is often considered unscrupulous.  But, when properly executed,
selling short can preserve capital and be very profitable, and it
also a necessary element of position management for option traders
as well as an essential hedging component for market-makers and
exchange-floor specialists.

The most common use of the strategy with retail traders involves
selling the underlying stock to hedge or cover losing positions
that include short put options.  The put writer is "covered" if
there is a corresponding short position in the underlying stock,
or its equivalent, in his account.  If the sold put is exercised,
and the stock is delivered, it can be further assigned to replace
the previously borrowed equity.  Remember, a "short sale" is the
sale of a security that is not owned.  The investor borrows the
stock, through a broker, and then sells it in the open market.
When the sold put is assigned, the investor is forced to purchase
the stock, which he eventually returns to the broker, replacing
the borrowed position.  The problem with this technique is the
potential loss can be substantial when the share value of the
underlying issue rebounds above the initial short price and you
do not repurchase the stock in a timely manner.  If the issue
remains above the strike price of the sold put, it will not be
assigned and the trader will be forced to buy the stock in the
open market, at the current price, to fulfill his obligation.
The absolute necessity of protective trading stops is obvious in
this strategy.  With a "buy stop" on the stock, the chance of a
potential loss in the (recovery) position is much lower if the
price of the stock moves significantly higher than the strike
price of the sold put.  It is generally recommended that the
trader place a "buy-stop" order for the (sold) stock slightly
above the strike price of the short option, to protect against
unexpected rallies or trend reversals.

The risks of short selling are many but the most obvious problem
is that when you are short, the potential loses are infinite.
Short-sellers lose when the stock price rises and a stock is not
limited on how high it can rise.  Because short-selling involves
margin (borrowed money), it's very easy for losses to get out of
control and traders must maintain adequate collateral in their
portfolio at all times or they will be subject to a margin call.
Traders who short stocks are also subject to strict operational
rules.  All short sales must be made in a margin account, usually
with stock borrowed from another customer of the brokerage firm,
and the collateral requirements are similar to stock ownership.
If the stock is in demand among short sellers, a trader may have
to pay a premium for borrowing it.  In addition, all dividends on
the stock must be paid to the current owner and as a borrower,
you are not entitled to any rights or benefits of ownership.

Covering a short put with the sale of stock when the underlying
issue moves through the sold options' strike is a common method
for offsetting potential losses in spread positions, but it is
not appropriate for everyone.  However, in a bearish market, the
technique offers a favorable "rescue" strategy if the issue has
little chance of finishing the expiration period above the strike
price of the sold put.  The technique can also be used with index
puts, provided you have enough capital to finance the purchase of
the underlying instrument.

For more information on basic option trading strategies, read
Options as a Strategic Investment, by Lawrence McMillan and
Option Volatility and Pricing Techniques, by Sheldon Natenburg,
both available in the OIN bookstore.

Good Luck!

Summary of Current Positions (as of 11/27/01):

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   39.90  (0.95)    0.0%
ELBO    DEC     35   33.50   36.78   1.50     3.7%
TMPW    DEC     35   33.20   42.01   1.80     4.5%

As noted in last week's BIG-CAP section, Intuit has
not cooperated with our bullish outlook, moving lower
since the company posted earnings that were less than
outstanding.  It may be some time before the stock can
recover from the bearish activity so investors in the
long-term position must decide if their capital would
be better utilized elsewhere.

Naked Puts:

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

INTU    DEC    35    34.20   39.90   0.80    5.6%
ELBO    DEC    30    29.50   36.78   0.50    5.0%
TMPW    DEC    30    29.40   42.10   0.60    6.0%
EBAY    DEC    50    48.85   64.77   1.15    6.8%
BBY     DEC    55    54.00   71.08   1.00    5.1%
PCSA    DEC    45    44.05   55.08   0.95    6.0%
CVTX    DEC    42.5  41.90   55.34   0.60    5.1%
IGEN    DEC    30    24.65   36.70   0.35    4.5%

Naked Calls:

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

IDPH    DEC    75    75.70   69.67   0.70     5.2%
EASI    DEC    55    55.50   41.86   0.50     4.5%

Sell Strangles:

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

AZN     DEC    50-C  51.30   45.99   1.30     4.9%
AZN     DEC    45-P  43.60   45.99   1.40     5.3%
ERTS    DEC    60-C  60.90   54.64   0.90     5.4%
ERTS    DEC    50-P  48.45   54.64   1.55     7.9%

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
AGN    76.10   78.07   DEC65P/70P   0.60   69.30   0.60   Open
LLY    83.33   82.23   DEC75P/80P   0.80   79.20   0.80   Open
CHIR   45.59   43.68   DEC55C/50C   0.60   50.60   0.60   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 - Covered-Calls, Naked-Puts & Combinations

SMTC - Semtech  $36.90  *** Favorable Outlook! ***

Semtech (NASDAQ:SMTC) is a supplier of analog and mixed-signal
semiconductors.  Semtech designs, manufactures and markets a wide
range of products for commercial applications, the majority of
which are sold to the communications, industrial and computer
markets. Semtech's semiconductors enable power management, test,
protection and a wide range of other functions in products that
require analog or mixed-signal processing.  Semtech's customers
are primarily original equipment manufacturers that produce and
sell electronics.

On November 19, Semtech posted third-quarter earnings that beat
the consensus estimate by a penny.  SMTC earned $7.7 million, or
$0.10 per share, and says it expects sales to rise between 4%
and 6% in the fourth quarter.  That's good news for the semi-
conductor sector and investors who want a low risk entry point
in the issue should consider this position.  Semtech has been
forming a Stage I base over the last year with strong support
near $30.  Target a higher premium initially, to improve the
monthly return.

PLAY (sell naked put):

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

SELL PUT  DEC 30   QTU XF  1080     0.50     29.50     7.9% ***
SELL PUT  DEC 32.5 QTU XT  61       1.15     31.35    13.2%
SELL PUT  DEC 35   QTU XG  310      1.85     33.15    16.6%

IGEN - IGEN International $35.44 *** Legal Successes? ***

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.
Separately, Roche has dismissed all claims against IGEN in a
patent infringement action and is reimbursing IGEN for the legal
fees that IGEN incurred in defending that suit, which total
approximately $5.7 million.

We simply favor the recent bullish break-out and this position
offers a great way to speculate on the future movement of the
issue in a conservative manner.

PLAY (conservative - bullish/credit spread):

BUY  PUT DEC-25 GQ XE OI=375  A=$0.50
SELL PUT DEC-30 GQ XF OI=904  B=$1.25


BEARISH PLAYS - Naked Calls & Combinations

CCMP - Cabot Microelectronics  $68.00  *** Failed Rally ***

Cabot Microelectronics (NASDAQ:CCMP) is a supplier of high
performance polishing slurries used in the manufacture of the
most advanced integrated circuit (IC) devices, within a process
called chemical mechanical planarization.  The company supplies
slurries to IC device manufacturers worldwide.  Cabot Micro is
developing and selling new slurries used to polish copper, a
new metal used in wiring layers of IC device fabrication.  Also,
the company has developed and has begun sales of new CMP slurries
designed for polishing several components in hard disk drives,
specifically rigid disks and magnetic heads.  In addition, the
company has recently begun producing and selling polishing pads
used in the CMP process.

This play is simply based on the current price or trading range
of the underlying stock and its recent technical history.  Cabot
Micro has been unable to break through near-term resistance at
$75 and the short-term technicals suggest a move towards support
at $60 is likely.  With the current rally failing (forming a
triple top), the share value has little chance of reaching our
target position in the next three weeks.

PLAY (aggressive - sell naked call):

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

SELL CALL DEC 70   UKR LN  1620     3.50     73.50    16.1%
SELL CALL DEC 75   UKR LO  357      1.75     76.75    10.5%
SELL CALL DEC 80   UKR LP  390      0.65     80.65     5.4% ***

CHIR - Chiron  $43.36 *** 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 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.
Target a higher premium initially, to improve the monthly return.

PLAY (aggressive - sell naked call):

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

SELL CALL DEC 45   CIQ LI  594      1.65     46.65    12.6%
SELL CALL DEC 47.5 CIQ LT  1698     0.90     48.40     8.4%
SELL CALL DEC 50   CIQ LJ  2651     0.45     50.45     5.3% ***

ENZN - Enzon  $57.00  ***  Technical Breakdown ***

Enzon (NASDAQ:ENZN) is a biopharmaceutical company that develops
and commercializes enhanced therapeutics for life-threatening
diseases through the application of its two proprietary platform
technologies:  polyethylene glycol and single-chain antibodies.
The company applies its polyethylene glycol technology to improve
the delivery, safety and efficacy of proteins and small molecules
with known therapeutic efficacy.  The company applies its single-
chain antibody technology to discover and produce antibody-like
molecules that offer many of the therapeutic benefits of monoclonal
antibodies while addressing some of their limitations.

Enzon recently announced the results of several clinical studies
that Schering-Plough (NYSE:SGP) presented at the 52nd AASLD on
the PEG-INTRON(TM) treatment of chronic hepatitis C.  Enzon is
entitled to royalties on worldwide sales of PEG-INTRON.  Investors
apparently were not pleased as the stock has sold off and has now
moved below its 150-dma.  The short-term technicals are bearish
and the move lower on increasing volume reduces the probability
of a significant upward move.

PLAY (conservative - bearish/credit spread):

BUY  CALL DEC-70 QYZ LN  OI=1159  A=$0.25
SELL CALL DEC-65 QYZ LM  OI=1408  B=$0.75



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