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Daily Newsletter, Wednesday, 12/05/2001

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The Option Investor Newsletter                Wednesday 12-05-2001
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MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
      12-05-2001          High     Low     Volume Advance/Decline
DJIA    10114.29 +220.45 10142.32  9891.35 1.75 bln   2063/1098
NASDAQ   2046.84 + 83.74  2056.81  1980.30 2.72 bln   2420/1272
S&P 100   597.70 + 12.07   599.38   585.63   Totals   4483/2370
S&P 500  1170.35 + 25.55  1173.62  1143.77
RUS 2000  479.42 + 11.58   480.43   467.84
DJ TRANS 2612.49 + 77.64  2618.47  2531.40
VIX        24.79 -  0.54    24.79    23.62
VXN        47.44 -  0.60    48.90    46.57
TRIN        0.34
Put/Call    0.44
*******************************************************************

Special K, Special Day

The Dow Jones Industrial Average (INDU) closed above the 10K mark
for the first time since September 5.  Meanwhile, the tech-laden
Nasdaq Composite (COMPX) closed above the 2K mark for the first
time since August 7.  WHOA, what a day!

The Catalysts:

There was a confluence of catalysts that emerged Wednesday
morning, which would carry stocks higher throughout the day.
Salomon Smith Barney raised its earnings per share estimates for
the S&P 500.  Salmon upped its earnings estimates for this year
and next.

The National Association of Purchasing Managers (NAPM)
reported its non-manufacturing index of business activity rose
to 51.3 percent during the month of November, which was a big
jump over October's reading of 40.6 percent.  Economists had
predicted the November NAPM number to rise to 42.2.  In other
words, the actual number was a big upside surprise.  A reading
above 50 percent in the NAPM index suggests growth.

Late Tuesday, Larry Ellison of Oracle (NASDAQ:ORCL) said his
company's businesses were stabilizing.  Ellison upped margin
estimates and reaffirmed revenue opportunities in the company's
new application server product.  Shares of Oracle finished over
eleven percent higher Wednesday.  The stock's gain added fuel
to the momentum in the Software Sector Index (GSO), which
finished 6 percent higher.  Other notable advancers in the GSO
included Rational (NASDAQ:RATL), PeopleSoft (NASDAQ:PSFT),
Siebel (NASDAQ:SEBL) -- an OI put play no more -- Check Point
(NASDAQ:CHKP), and Veritas (NASDAQ:VRTS).  I of course have to
mention Microsoft (NASDAQ:MSFT) when writing about the GSO; the
stock finished $2.10 higher.

Micron (NYSE:MU) boosted the chip sector.  Talk spread of
consolidation within the DRAM market.  The aim of consolidation
is to clear the excess inventory among DRAM manufacturers in
an attempt to firm up prices.  Shares of Micron added $2.57 on
the news.  The Semiconductor Sector Index (SOX) finished over
seven percent higher Tuesday.

The Short Covering Impact:

The two positive developments in the technology sector caught
the bears off guard in a big way.  Traders shorted into last
week's rally and again during Tuesday's rally.  I highlighted
that fact in Tuesday's Market Sentiment piece, noting the
excessive number of puts traded in the QQQs -- the tracking
stock of the Nasdaq-100 (NDX) -- which is a barometer for big
cap technology stocks.  I wrote that "I [didn't] expect another
4.25 percent day in the NDX [Wednesday]," which was obviously
wrong.  But the revelation of continued short selling into the
rally Tuesday proved to be a costly mistake for the bears.
Without the necessary supply to cover their shorts, the bears
were forced to chase stocks higher Wednesday, especially
technology stocks.

Big Breakouts:

Big Blue (NYSE:IBM) and Intel (NASDAQ:INTC) broke out to the
upside Wednesday.  In addition to only a few others, the two
stocks are the most important in technology.  Fortunately,
both IBM and Intel are current call plays on Option Investor.

In IBM, we've been writing about entering near support at $112.
The stock dipped down to that level last Thursday and provided
yet another entry opportunity near support, where risk could've
easily been managed.  Five days and nine points later, you're
a genius if you entered on the weakness.  The breakout in Big
Blue bodes well for the health of the technology sector.

And then there's Intel.  Our play on Intel was written in a
simple fashion: enter on a breakout above $33.  Amazingly, the
stock opened Wednesday morning at $33.04, which was a rare
gift from the market makers.  More than $1.50 later, you're a
genius if you entered on the breakout.  Intel's advance above
$33 is a positive development for the SOX.



Know Your Debt:

Away from stocks, Treasuries were whacked Wednesday.  But that
made sense, right?  If bonds were sold heavily, wouldn't it
make sense for the proceeds of those sales to move into stocks?
Especially if bond market participants think the economy is
going to recover next year, right?  Wouldn't you rather own a
stock during an expansion than a bond?

The positive reading in the non-manufacturing NAPM number
added credence to the argument that the Fed is nearing the end
of its easing cycle.  The Fed Funds predicted about an 85 percent
chance of an easing next week, but no more cuts thereafter.  If
the economy rebounds and the Fed is near its easing cycle, which
way do interest rates move next?  Chances are higher, which is
what was reflected in the sell-off in Treasuries Wednesday.
(Remember that bond prices move inverse to yields.  Lower prices
equate to selling equates to higher yields.)

The recent action in the 5-year Note (FVX) was the one thorn in
the side of stocks.  The 5-year Note saw buying recently as
indicated by its falling yield.  But that all changed Wednesday
in the wake of the NAPM report.  The yield of the 5-year
sharply reversed as bond market participants discounted a
stronger economy.  The yield finished 6.87 percent higher, which
was a massive, massive move.



From a technical standpoint, the 5-year yield recently turned
lower at the 44.65 (4.46%) level.  The advance Wednesday carried
the yield to as high as 43.06 (4.30%), just above a key retracement
level at 42.80 (4.28%).  Readers can monitor the progress of the
yield through the levels of the retracement bracket.  (I've
anchored the bracket at May's high and September's low.)

The Business Cycle:

The recent economic reports and action in stocks and bonds
discounted a recovery next year.  How do you play the recovery?
There are many, many ways to play an economic recovery, but one
you might not have thought of is through cyclicals -- the
companies closely tied to the business cycle.  There are several
sub-sectors within the cyclical group, one of which is chemicals.

The S&P Chemical Index (CEX) hit a peak in late 1999 up around
the 550 level and traded all the way down to 315 in September
of this year.  The rising price of energy during that time
pressured the group and so did the economic slowdown.

But those two trends have recently reversed.  Despite Russia's
agreement to cut production Wednesday, the price of crude oil
remains relatively low around the $20 per barrel mark.  Energy
is a chief cost of the chemical companies.  In addition, a
recovery in the economy will spur economic activity and a
greater demand for chemical products.  As long as the price of
energy remains relatively low, the CEX could be a good place to
look for ideas for playing an economic recovery.



Among the more attractive CEX components include: FMC (NYSE:FMC),
Praxair (NYSE:PX), International Flavors & Fragrances (NYSE:IFF),
Dow Chemical (NYSE:DOW), and Engelhard (NYSE:EC).  Although not
a component of the CEX, Neogen (NASDAQ:NEOG) might be another
stock worth a look.  No, the chemicals aren't sexy.  But they're
something different and worth a try at this point in the cycle.
Don't you get tired of reading only about tech?

What To Do Next:

The last two days have been most bullish.  But I've received a
lot of e-mails from readers who've experienced a great deal of
frustration because they missed the move.  I've been told by
my mentors: opportunities are easier to make up than losses.
Write that down!  If you missed this move, don't worry about.
There will be more.  The only thing a trader can do is stick to
his/her strategy, discipline, and methodology.  If the recent
rally didn't offer a suitable entry point for YOU, then wait
until it does.

For those who captured this move, now may be a good time to
consider taking defensive steps in order to preserve gains.
That could include setting trailing stops, selling covered
calls, or scaling out of partial positions on further strength.
Just have a plan in place and stick with it.

Cisco Systems (NASDAQ:CSCO) is reporting to analysts this
evening and Intel will do the same after the bell Thursday.
Remember that the market is a forward-looking mechanism, so
bullish guidance by either of the aforementioned tech
bellwethers may actually be met with selling, in a typical
"buy the rumor, sell on the news" event.  Now, I'm not
suggesting that either stock will go lower.  Rather, the good
news may have been discounted in the last two days.

The jobless claims Thursday morning and non-farm payrolls
number Friday morning are two big forthcoming economic
reports.  Each could influence the Fed's decision on interest
rates next week and consequently impact trading in the bond
market.

The Dow and S&P 500 (SPX) kissed their 200-dmas Wednesday,
while the Nasdaq measures closed well above their 200-dmas.
That was a significant development in tech, which may prompt
institutional buyers to step in again Thursday.  The Nasdaq-100,
for example, hasn't traded above its 200-dma in more than a
year.  Yep, it sure feels like a new bull market.

Eric Utley
Option Investor


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*****************
STOP-LOSS UPDATES
*****************

SPW  - call
Adjust from $118.50 up to $122

PMCS - call
Adjust from $21 up to $25

PDLI - call
Adjust from $35 up to $36

CNXT - call
Adjust from $13 up to $14

MCDT - call
Adjust from $22 up to $25

INTC - call
Adjust from $30 up to $32

MLNM - call
Adjust from $31 up to $32

IBM  - call
Adjust from $112 up to $115

IMCL - call
Adjust from $67 up to $69


*************
DROPPED CALLS
*************

No Dropped Calls for Wednesday.


************
DROPPED PUTS
************

SEBL $24.80 +1.82 (+2.45) SEBL charged higher out of the gates
this morning in the wake of the positive ORCL comments.  The
stock bolted above its 10-dma and closed above our stop which
was at the $24.50 level.  Traders with open positions might
look for a pullback early tomorrow to cut losses.


*****
LEAPS
*****

Due To Overwhelming Demand - Let's Look At EBAY Again
By Mark Phillips
Contact Support

The past 2 days' action in the broad markets have left me with
no choice but to embrace the idea that the bull is back in town.
Do I think it is here to stay?  Not a chance!  The Fed has done
a remarkable job of flooding the market with liquidity, and
market participants are taking the gift as an excuse to
re-inflate the tech bubble.  Investors don't seem to need any
proof that profits are going to surge next year; just the
slightest hint that things are not getting worse is sufficient
to drive the momentum stocks of yore to 5-10% daily gains.  It
feels just like late 1999 again.

Except for one thing...we aren't in an expanding economy.  Even
the most die-hard bull would only describe the current economic
condition as "possibly bottoming".  In my never-to-be-humble
opinion, valuations (particularly in the technology arena) are
rapidly approaching ridiculous levels once again.  Judging by
some of the email I've received this week, I'm not alone.  I've
had a long list of emails requesting a revisit of the eBay
(NASDAQ:EBAY) LEAP Put play that we dropped from the Portfolio
last weekend, asking if it might be ripe for an even more
attractive entry.

I had intended to talk about my bearish slant over the long term
on stocks such as Intel (NASDAQ:INTC) and Home Depot (NYSE:HD)
after receiving several requests since the weekend for
elaboration on my expectations.  But the number of requests for
further discussion of EBAY far outnumbered them.  So let's start
with just one of the emails I received this week, which I think
is representative of the group.

"Wondered if you've been watching (actually I know you have
given your comments from last Sunday) EBAY and it's ascension
to what looks like a very significant price of $70 (june/july
high). I was wondering if you felt this price point could be an
even more attractive entry than those you have previously
discussed. It would seem if 70 could hold up as resistance,
there is plenty of room to move to the downside on any sort
downturn. In addition, it seems pretty low risk if one sets
their stop just above $70. To borrow the theme from your Sunday
article - this $70 level may have been worth the wait.  Thoughts
on this subject?

Curious and I thought I'd comment.
Alan"

Thanks, Alan!  Many others echoed the same point, but I believe
it gives us a starting point for today's discussion.  Let's
start by looking at the weekly/daily chart we used at the end
of October.



With weekly Stochastics starting to weaken, all we had to do was
wait for the daily oscillator to get back to overbought, more
than likely in the $58-60 area, and we'd have a high-odds LEAP
Put entry.  Well, sure enough, the Portfolio took that entry a
couple weeks later, and last week got stopped out, as the bulls
rallied right through the long-term descending trendline.

So with the stock now trading nearly $13 higher than in the
chart shown above, the big question is whether this is an even
better entry point into the play.  With the fundamental picture
materially unchanged in the past 6 weeks, we have nothing else
to rely on than the almighty charts.  So let's see how the
weekly/daily montage has changed since we last discussed EBAY.



With the breakout over both the $62-63 resistance level and the
long-term descending trendline, a lot of damage has been done to
the bearish picture that we painted back in October.  Looking at
the daily chart above, you can see that the past month has seen
a series of higher highs and higher lows.  And what about that
bearish reversal on the Weekly Stochastics?  It too has been
negated with the strong bullish reversal and is now deep in
overbought territory.

So we could definitely make the case that a fresh put entry is
rapidly approaching on EBAY.  Both the daily and weekly
Stochastics are overbought, and we got a big 'doji' reversal
today on huge volume (nearly double the ADV).  Let's take a
closer look at the daily chart and see where our targets of
opportunity may lie.



The bulls were rebuffed at the $71 level on Wednesday, although
they made an impressive push higher in the early going.  They'll
need a bit more conviction to clear the June/July highs, but
judging from the current momentum in the market, I will be
surprised if they don't manage to break through this level over
the near term.  In fact, the stock will more than likely
challenge the $76 level of resistance, which was last seen way
back in September of 2000.  Sure it's silly, but bullish
enthusiasm is breaking out all over.  Given the relatively
strong performance of EBAY over the past year, I would be
surprised to see much downward pressure on the stock until the
broad market runs out of steam.  Even with some sustained
selling pressure, I now see the downside as limited to the
$60-62 level, as this resistance will more than likely act as
support going forward.

All the leading Technology sectors (including the Internets) are
seeing strong buying pressure and taking out important
resistance levels (seemingly on a daily basis lately).  Trying
to game the downside in that environment is going to be rough.
As much as it goes against my own rationality, it looks to me
like the bull may be here for awhile -- possibly until
March/April of next year.  One final bullish factor to add to
the mix is the evidence offered by the monthly chart.
Unfortunately, I can't seem to get my charting program to
respond this late in the day, so I'll have to go from memory,
and you'll have to use your imagination.

What I noticed is that since the September lows, the monthly
Stochastics has been charging towards overbought territory and
could be entering that zone in the next couple months.  Not only
that, but the stock broke above the very long-term descending
trendline near $67 on the monthly chart with its breakout move
last week.

With both the monthly and weekly charts exhibiting strong
bullish trends and the descending trendlines broken in both
timeframes, it is hard to make a case for a bearish play.  While
I still believe EBAY could prove to be a profitable play to the
downside, the time for that sort of play is definitely not now.
I'll be first in line to buy long-term puts when
monthly/weekly/daily charts align in overbought territory and
the daily begins to roll over.  I expect that convergence to
occur at price levels considerably higher than right now due to
the irrational enthusiasm currently fueling the market's rally.

I don't want to stand in the way of that rally, as I would be
likely to get trampled.  From my peek at the various charts
tonight, I'm inclined to think there may be some money to be
made to the upside before the music stops.  I may just have to
see if I can harvest part of that rise for myself.  Of course,
for those of you that have learned to treat my advice as the
ultimate contrarian indicator, maybe my venturing into the long
side on EBAY will be just the key to pulling the rug out from
under the bulls. (big grin)

Remember, that this is only one man's opinion.  Is EBAY
overpriced?  Yes.  Can it continue higher?  Yes.  Could the
stock sell of from here, making it a great put play?  Yes.  I
just can't make a technical argument to play puts at this point
in time.  My strongest ally is the picture painted by the
charts, and right now they are telling me there is no bearish
play to be had.  I wish I had been right with my put play last
month, but given the choice between being right and making
money, I'll pick making money every time.  And right now, the
money is being made by the bulls.

I hope this helps.


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

LH - Laboratory Corp. of America $78.25 +0.75 (+1.35 this week)

Laboratory Corporation of America Holdings (LabCorp) is the #2
clinical laboratory service in the world, behind Quest
Diagnostics.  LH performs 2000 types of tests for more than
100,000 clients, including health care providers, pharmaceutical
firms, physicians, government agencies and employers.  With 25
major laboratories and some 1200 service sites nationwide, the
company emphasizes specialty and niche testing such as allergy
tests, HIV tests, blood analyses, and substance abuse
screenings.

Most Recent Update

The positive market environment this week has helped to buoy
shares of even poorly performing stocks and LH has certainly
been a beneficiary of this effect over the past couple days.
Finding support near the 200-dma ($75.92) and recovering back
towards the descending trendline (currently $78.50).  With
historical resistance at this level and the declining 10-dma
($78.85) looming overhead, a rollover in price near $78.50
looks attractive for initiating new positions.  The
longer-term ascending trendline is currently resting at $72,
and we would look to harvest profits on a dip near that level.

Comments

LH rolled over at the $80 level today, which is currently the
site of our stop.  The failure to trade above $80 in such a
strong market may portend a reversal over the short-term.  Look
for weakness in the Healthcare Sector (HCX.X) early tomorrow.
A breakdown below $77.40 may offer favorable entries into
weakness.

BUY PUT DEC-80 LH-XP OI=551 at $4.00 SL=3.25
BUY PUT DEC-75*LH-XO OI=271 at $1.80 SL=1.25

Average Daily Volume = 762 K



*****************************************
BIG CAP COVERED CALLS & NAKED PUT SECTION
*****************************************

Global Finance 101: Zurich - The Money Center!
By Ray Cummins

Most traders will agree, "Money makes the world go round" and
in Zurich, Switzerland, the popular adage has never been more
accurate.

Switzerland was once described as a combination of the "colossal
and the well ordered" and similar to the country's reputation
for precision timepieces, Zurich runs like an atomic clock.
Indeed, much of Switzerland's architectural beauty and complex
works of civil engineering, as well as the core of its ultra-
reliable public transportation system are showcased in this
grand city.  Of course, that doesn't mean it is predictable,
despite rumors to the contrary, and the Swiss financial capital
definitely offers something for everyone.

In contrast to its banking background, Zurich presents a unique
blend of many of the world's oldest cultures with an uncommonly
diverse range of urban lifestyles.  Switzerland's largest city
boasts a population of over 350,000 and it houses the country's
most famous landmarks and cultural offerings including one of
the world's best operas.  Visitors are drawn to the city's well
known historical repositories such as the National Museum and the
Zurich Museum of Fine Arts.  In addition, tourists enjoy lovely
walks through the narrow streets of old town, which is inundated
with cozy restaurants and chic art galleries, and they also come
to Lake Zurich for fun and frolic on the historic paddleboats.

Geographically, Zurich is located in the northern region of
Switzerland and its name comes from the large body of water
at the city's center.  The ancient community started life as a
Roman outpost called Turicum.  It grew slowly with time, as
textiles merchants gradually increased the wealth of the area
and in 1812, Zurich became a free city in the Holy Roman Empire.
During the following century, merchants and artisans formed a
group of powerful guilds that eventually took control of the
local government and in 1351, they elected to join the Swiss
Confederation.  The decision was an important one as it marked
the starting point for the cultural and intellectual growth of
the region and Zurich's unique reputation, as well as its rich
tradition, has blossomed ever since.  From a financial viewpoint,
Zurich's status as a global industrial and business center is
thanks in no small part to the efforts of the railway magnate
Alfred Escher; a strong force in government and politics during
the mid-1800s.  In 1877, Zurich's stock exchange was founded,
and it is still the most important facility of its kind in the
country.

Today Zurich offers one of the world's best blends of new age
affluence and traditional culture and it is the only place where
chocolate bars battle with gold bars for your attention.  Those
of you who are long-time readers know I consider both of those
items to be valuable commodities and only with great resolve was
I able to focus on the more relevant subject during my brief
visit.  Indeed, a tour of the Zurich Exchange and banking center
was the main purpose of my journey to Europe and in the next
segment of Global Finance 101, we will explore the innermost
workings of the highly developed financial mechanism that is the
"World's Money Center."


Summary of Current Positions (as of 12/4/01):


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   43.73   2.88     4.8%
TMPW    DEC     35   33.20   41.90   1.80     4.5%
ELBO    DEC     35   33.50   41.15   1.50     3.7%


Naked Puts:

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

SMTC    DEC    30    29.50   39.93   0.50    7.9%
EBAY    DEC    50    48.85   69.99   1.15    6.8%
PCSA    DEC    45    44.05   53.05   0.95    6.0%
TMPW    DEC    30    29.40   41.90   0.60    6.0%
INTU    DEC    35    34.20   43.73   0.80    5.6%
CVTX    DEC    42.5  41.90   55.85   0.60    5.1%
BBY     DEC    55    54.00   72.37   1.00    5.1%
ELBO    DEC    30    29.50   41.15   0.50    5.0%
IGEN    DEC    30    24.65   35.50   0.35    4.5%


Naked Calls:

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

CCMP    DEC    80    80.65   72.98   0.65     5.4%
CHIR    DEC    50    50.45   43.33   0.45     5.3%
IDPH    DEC    75    75.70   69.43   0.70     5.2%
EASI    DEC    55    55.50   42.12   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   45.37   1.30     4.9%
AZN     DEC    45-P  43.60   45.37   1.40     5.3%

ERTS    DEC    50-P  48.45   64.44   1.55     7.9%

The (short) call position in Electronic Arts (NASDAQ:ERTS)
should have been closed last week when the stock moved up
to the sold strike price.  The issue remained near $60 for
two sessions before moving higher, providing ample exit (or
adjustment) opportunities.


Credit Spreads:

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

PCAR   62.59    63.27  DEC50P/55P   0.70   54.30   0.70   Open
AHP    56.47    60.10  DEC65C/60C   0.65   60.65   0.55   Open
CSC    45.09    48.95  DEC35P/40P   0.60   39.40   0.60   Open
PEP    50.28    48.47  DEC45P/47P   0.35   47.15   0.35   Open
NKE    51.56    52.97  DEC45P/47P   0.40   47.10   0.40   Open
AGN    76.10    74.74  DEC65P/70P   0.60   69.30   0.60   Open
LLY    83.33    82.79  DEC75P/80P   0.80   79.20   0.80   Open
CHIR   45.59    43.33  DEC55C/50C   0.60   50.60   0.60   Open
IGEN   35.44    35.50  DEC25P/30P   0.85   29.15   0.85   Open
ENZN   57.00    57.80  DEC70C/65C   0.60   65.60   0.60   Open


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

Strategy and Play Selection: Part II

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

Sunday's discussion of spread and combination strategies generated
some interesting E-mails, all of which I will answer when I return
from Europe.  However, since many of the questions referred to the
methods I use in play selection and portfolio management, it seems
appropriate to review the fundamental goals of the Spreads/Combos
section, as well as the techniques used to produce the candidates
and establish the entry and exit prices for each position.


Spreads and Combination Plays: A Conservative Approach

The Spreads/Combos section is produced for a target audience:
novice traders that need simple strategies.  To generate the
majority of plays, I search through lists of candidates and
evaluate the positions and their potential returns based on the
technical outlook of the underlying issue, its sector and the
overall market.  If I feel the chart fits the strategy and there
is an acceptable risk/reward ratio, the position is placed on a
list of final candidates.  After I have all of the possible plays
for a specific day, I simply choose those which, in my opinion,
appear most favorable.  On some days, I also list positions on
candidates (stocks or indexes) that readers have requested or
submitted, so they can see what type of play a more experienced
trader might utilize, based on their outlook for the underlying
issue, industry or market segment.  These plays are always listed
with the heading "Reader's Request" to differentiate between my
picks and those coming from subscribers.

One of the first skills new market participants must learn is to
identify and execute a favorable opening trade.  A good technique
for initiating a combination position is to place the order as a
"spread."  That's why I always list a suggested "net-credit" or
"net-debit" target to help traders open the play.  This is simply
a recommended entry point; just my opinion of what a trader might
use as an initial "limit" for the spread order, and it should be
a reasonable price to initiate the play even with small changes in
the stock and option quotes.  The target is always less than the
straight BID/ASK numbers (we don't pay "market" for spread orders)
and generally, you can expect to shave a minimum of $0.10-$0.20
off the BID/ASK price when opening or closing even the smallest
spread order.  The margin can be more or less, depending on the
price of the options, whether they are ITM or OTM, the time value
remaining, the volatility of the stock, etc.  I simply try to give
the beginning trader an idea of the value of the position because
the option prices are always different the next day.  Of course,
you may need to adjust this target based on the activity of the
underlying issue, the trading volume of its options or the Implied
Volatility of the series being traded.  In closing the plays, I
generally suggest a target return of 10-20% per month on most of
the basic spread strategies and that is how the target profit or
"return on investment" numbers are derived.  I try to construct
positions to reflect that goal, but not every play is a winner so
the main objective is to limit losses and close losing positions
before they become very costly, preserving trading capital for the
next success.


Portfolio Tracking:

I follow the portfolio "real-time" with Interquote and paste all
the prices for each position into an archive at regular intervals
throughout the day.  I trade the "paper" portfolio just as I would
trade (or adjust) my personal account and I post the target entry
prices for each position (the suggested NET CREDIT or NET DEBIT
numbers) whenever they are achieved or fall within a small margin.
That margin is generally $0.10-$0.20 for spreads under $3-$4 and
slightly more for higher priced positions.  Occasionally, I will
allow additional latitude on unique plays if it is realistic that
the target price could have been attained and I have knowledge of
the market-maker that handles that issue or can document other
trades in that series at that price.  I usually don't "leg" into
combination plays as far as the newsletter portfolio is concerned
(unless specifically stated) but I try to utilize the volatility
at the open and close of the session to improve the entry prices.
Some of the positions may be priced better than the "target" while
others are worse.  I do not simply take the best price of day; I
try to trade just as I would in my own portfolio.  In addition, I
have the benefit of real-time (and historical) option quotes and
a link to one of the top market-makers in the industry, to help
price the positions without actually trading them.  In most cases,
the published prices are a fairly accurate record of the potential
entry opportunities and keep in mind, I rarely show positions as
"not-traded" even though I personally might have avoided them,
based on new information that became available after the play was
initially offered.

New readers occasionally complain when they are unable to achieve
the entry targets, even after trades are posted at those prices.
As with most experienced traders, I have the benefit of a floor
specialist working on my behalf to get the best entries.  Most
orders will not get filled at our target with discount brokerages
unless the options actually trade at those prices.  The potential
for success with an online broker such as Preferred Trade (which
has direct access to the exchange but does not allow simultaneous
orders for multiple positions) is based strictly on the trader's
skills and the market's volatility.  Most of our advanced readers
use the Spreads/Combos section as a candidate list and they trade
their own positions at different prices.  I correspond with many
of them daily (lots of candidates that way!) and they are quick to
report when an entry price has been posted in error or could not
have been achieved.  Some of them open and close new positions
using the method I previously referred to: "legging" in or out-of
a spread.  Basically, you just try to utilize the daily movement
of the underlying stock to your advantage, buying a long position
when it is cheaper and selling a short position when it is more
expensive.  This tactic becomes easier after you are familiar with
the daily stock, sector, and market trends and use the appropriate
trading tools.


The Weekly Summary (Portfolio Activity):

I try to monitor all the plays in the Spreads/Combos section on a
regular basis and as time permits, I will make suggestions as to
when they might be closed or adjusted.  However, my primary job is
to provide candidates for your careful scrutiny and to identify
positions that have a favorable risk/reward outlook.  In the end,
the determination to trade is solely yours.  I will also try to
identify those occasions when a play offers a favorable early-exit
profit, or when I notice an issue has reversed direction and may
require closure or adjustment of the associated position.  Keep in
mind that I generally have over 100 positions in three sections to
track on a daily basis and I may not always observe the crucial
turning point or change in character of a specific issue.  The
portfolio narrative is a service I provide to help novice traders
understand how various positions might be opened and closed.  In
most cases, actions taken based on the commentary would be far too
late to be effective, thus it is not intended as a substitute for
personal trade management nor does it replace your duty to monitor
the positions in your portfolio.  In years past, we published a
monthly summary of combination positions, and it was a reasonable
representation of the plays offered during the month.  However,
because there are so many ways in which each play can be opened ,
closed and adjusted, the summary eventually became a journal of my
personal management of the positions and it became obvious that it
might not be completely representative of the manner in which the
average trader would react.  Now I create an Excel-based summary
for daily play tracking and the ongoing summary, which is part of
the week-end Spreads/Combos section, and is in a narrative format.


Position Management:

One of the questions I receive frequently concerns the correct
timing of early exits and adjustments for spread positions.  While
there is no perfect answer (or solution) to this dilemma, one of
the most practical closing strategies is based on the target ROI
(return on investment) for the position.  For example, if a play
originates with a 15% monthly return target and a slightly smaller
but reasonable profit becomes available at an earlier date (based
on a lower yield and shorter time period), the position is indeed
a candidate for early closure.  Of course, most positions that
meet that criteria will appear to be so successful they can't
possibly lose at expiration.  This aspect, along with commission
considerations and the effects of human nature - which urges you
to simply hold the play and hope for maximum profit - will prevent
most traders from closing the play early.  As you know, even when
the issue moves in the predicted direction, the position is always
at risk from a variety of changes in the market.  These effects
are reduced with hedged positions but the end result can still be
unfavorable.  There are a number of examples in past portfolio
plays including some which might have been our most profitable
positions, except that they were closed in the interest of sound
money management.  As far how to place STOPS and closing orders;
some traders suggest closing a position when it meets a specific
price while others use technical analysis to determine the correct
placement of potential exit orders.  The limited-risk techniques
discussed in the Spreads/Combos section are not with out their
disadvantages and obviously, the more advanced strategies are not
immune to the market's corrections.  Spreads and combinations, as
well as all option trading techniques, need to have some type of
exit point in case the market/stock/sector turns in the opposite
direction from that which is expected, and position management is
an important part of being a successful trader.  In addition, the
success of a limited risk strategy such as OTM credit spreads is
limiting loss to a minimum.  There are never any big winners to
offset the big losers, so there simply can't be any big losers.
Obviously, a gapping issue will occasionally wipe out a portion of
previous gains and there is nothing you can do about it.  But, at
the same time, you must manage the remaining positions effectively
or there will be no profits to offset the rare catastrophic losers.


Additional Information:

As far as trading strategies, I have written a number of narratives
for the techniques used in my sections and those are still listed
in the web-site archives (Options 101 etc).  Of course, there are
also a plethora of great articles by other OIN writers, covering
just about every imaginable option trading strategy commonly used
by retail investors.  Unfortunately, there is no way to produce a
list of specific guidelines or step-by-step techniques on entering
and exiting combination plays.  The methods I use are much the same
as those that Jim and the other writers discuss in daily strategy
narratives and each is based on simple, proven money-management
techniques; the most important of which is "keep the losses small!"
The older articles in Options 101 (by broker Robert Ogilvie) cover
the basic spread strategies and their possible outcomes (good and
bad) and many of Jim's recent trading lessons describe the use of
position trading adjustments (rolling into spreads for example) to
minimize losses in straight option positions (buy call/sell call).
The most important entry/exit information for spreads comes from
the knowledge of option pricing, time-value erosion, volatility
and probability.  Those subjects have been covered at length in
past educational series on the web-site.

Contrary to what you might believe, there are no simple and easy
answers.  Option trading is not free money in any way -- lots of
hard work and research -- and success comes only after failure and
experience.  The key is to find something you do well and stick
to it.  Don't use complex strategies just because they are unique
or intriguing.  Often the best course of action is the simplest.
The key to remember is most sections of the newsletter are really
just a list of candidates to significantly limit your search for
profitable trading positions.  You still have to decide what you
are looking for, and if the positions meet your personal criteria
for potential plays.  Only you can know what type of strategies
are suitable for your portfolio outlook, skill level, and risk
tolerance.

Good Luck!

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


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