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Daily Newsletter, Monday, 12/10/2001

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The Option Investor Newsletter                   Monday 12-10-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
      12-10-2001          High     Low     Volume Advance/Decline
DJIA     9921.45 -128.01 10075.61  9921.45 1.19 bln    965/2152	
NASDAQ   1992.12 - 29.14  2036.54  1989.68 1.65 bln   1336/2311
S&P 100   581.24 - 10.54   591.94   581.22   Totals   2301/4463
S&P 500  1139.93 - 18.38  1158.31  1139.66
RUS 2000  474.18 -  7.03   481.21   473.50
DJ TRANS 2599.10 - 29.16  2645.54  2590.92
VIX        26.00 +  1.11    26.65    25.22
VXN        52.12 +  1.94    52.15    50.54
TRIN        1.56
Put/Call    0.57
*******************************************************************

Sleepy Session Ahead of the Fed

The major averages attempted to rally early Monday morning, but
failed to follow-through above overhead congestion.  The triple
digit loss in the Dow Jones Industrial Average (INDU) and nearly
1.5 percent dip in the Nasdaq (COMPX) might have you think that
Monday was a wild session.  But it wasn't.  Following the early
morning rally attempt, stocks drifted lower throughout the
session, ultimately closing near their day lows.  The drifty
action of the tape was indicative of traders stepping to the
sidelines ahead of the FOMC's announcement on interest rates
Tuesday afternoon.  Volume totals reflected the non-commitment
on the part of traders.  Only 1.2 billion shares traded on the
NYSE, while 1.65 billion exchanged on the Nasdaq market.  The
totals are well below the recent daily volumes.

The Federal Reserve will announce its decision on rates at 2:15
p.m. EST.  The market is expecting another 25 basis point
reduction in short-term interest rates Tuesday afternoon.  In
addition, the market will be listening for guidance from the Fed.
While nothing short of vague, traders will nevertheless turn to
the release accompanying the decision on rates for insight into
being Alan Greenspan.  Tomorrow's announcement, more than any
other this year, will be read into by Wall Street very carefully.
There's a growing consensus that the economy may be over stimulated
from monetary and fiscal stimuli.  While Main Street continues
suffering through loss of jobs and a lousy economy, Wall Street
is growing worried about the prospects of inflation.  That's why
traders will scour the Fed's release tomorrow afternoon, searching
for indications of what the Fed's opinion is of the U.S. economy
and when they may begin to raise rates in an attempt to fend
off inflation.  The Fed Fund Futures contract is currently
anticipating a hawkish monetary policy by next summer.

Despite the prospects of another rate cut, bonds were modestly
higher Monday, evidenced by lower yields in the longer-dated
securities.  The short-end of the yield curve, however, was
slightly lower.  The 13-week Bill Yield (IRX) finished at 1.68%.
The shorter-dated securities had been aggressively bought last
week.  Today's action in the IRX was most likely a product of
profit taking and rotation into longer-dated securities.

Without any economic news Monday morning, stocks were left to
their own devices and earnings guidance.  The biggest of
companies, General Electric (NYSE:GE), reaffirmed its financial
goals for fiscal 2001.  The company said it would hit its revenue
target and EPS goals for the year and would achieve double-digit
growth for fiscal 2002.  The company hosts its analyst meeting
next week, when more details about the current quarter and
forecasts for next year may become available.  Despite the
reaffirming of its financial targets, shares of GE finished
lower by almost 1 percent.

JDS Uniphase (NASDAQ:JDSU), the beleaguered optical networking
equipment maker, said Monday morning that its sales would
continue to slump until its fiscal third-quarter, which ends in
March.  The company reported that it expects another 10 to 15
percent drop in revenues in the meantime.  But that March
quarter will represent the bottom in sales for the current
slowdown in spending.  The attempt to call the bottom didn't
appease traders.  JDSU finished 5.5 percent lower on relatively
active volume.  The stock added pressure to an already weak
Networking Index (NWX), which lost more than 3 percent on the
day.

The most recent victim in the energy sector was Calpine
(NYSE:CPN).  An article in the New York Times over the weekend
suggested that similarities existed between Calpine and Enron,
which should give investors reason to worry.  Investors in the
energy sector, already nervous after the Enron debacle and
Haliburton (NYSE:HAL) issues, took the Times' warning to heart
and knocked shares of Calpine down to the tune of nearly 17
percent.  The stock finished Monday at a two year low.  Calpine
hosted a conference call after the bell in an attempt to soothe
and reassure investors that it is not like Enron.  Poor Enron.
The words of Calpine's CEO seemed to help as the stock gained
about 35 cents in the evening session.

The Packard Foundation voted against the proposed
Hewlett-Packard (NYSE:HWP) - Compaq (NYSE:CPQ) merger.  Both
stocks were lower on the news.  HWP seemed to track the weak
tech sector Monday, but CPQ's 14 percent drop was more than
market-related.  The drop in CPQ seemed to reflect a growing
consensus that the merger will never be.

In the Biotechnology (BTK) space, Protein Design Labs
(NASDAQ:PDLI) dropped by nearly 19 percent.  The company
reported the full results of its Phase II cancer drug, Remitogen.
Of the 25 test patients, only one showed a positive response to
the treatment.  The poor showing of PDLI's Remitogen followed the
release of poor data for its leukemia drug last Friday.  The
stock was the target of several analyst downgrades and weighed on
the BTK as PDLI is one of the components of the index.  The BTK
finished lower by 4.26 percent.

Away from individual company news weighing on the market, Banc
of America's "market guru" reduced his weighting of stocks in
his recommended portfolio to 55 percent from 60 percent.  Tom
McManus suggested to take the five percent from stocks and to
put it into bonds, which is interesting noting the recent
weakness in Treasuries.  Noting the recent retreat in bonds,
McManus said that higher long-term rates could pose a challenge
to the consumer, the group that has been busy refinancing homes
and spending.  McManus added that the sell-off in bonds puts
into question stock valuations.

With the exception of GE's two bits, the news flow was fairly
negative Monday.  It's no wonder stocks finished lower.  It's
a wonder that they didn't fare worse.  The selling Monday was
very contained and routine, the boring type.  Stocks drifted
lower throughout the day on relatively light volume.  There
weren't any major earnings warnings (JDSU isn't major), just
a bit of bearishness here and there.  Moreover, the trends in
the major averages are intact, which means we could be nearing
another entry point, possibly ahead or shortly after the Fed's
announcement tomorrow.

The Dow finished about 20 points away from its ascending trend
line that has been in place since September 21.  Another bounce
from the line at 9900 be the entry point that buyers have been
waiting for.  A breakdown below 9900, however, could send up a
red flag and have the bears ready to pounce.  Weakness below the
9800 level could negate the Dow's trend and cause the bulls to
re-think their strategy.



The COMPX is in a similar position.  The tech-heavy index is
about 40 points away from the ascending trend line of its
regression channel.  A bounce from the 1950 area could be the
entry point into tech stocks.  But a breakdown below that level,
confirmed by a decline below 1900, could give the bears incentive
to short tech stocks.



With the Dow and COMPX approaching key support levels, the bulls
better be ready to step in.  That could happen before or after the
Fed's official announcement on rates tomorrow afternoon, which may
have been partially to blame for the weakness Monday.  Whatever the
reason was, stocks pulled back in a normal, routine, profit taking
fashion today.  The light volume on negative news didn't reveal
conviction on the part of sellers.  Rather, the bulls took the day
off, opting to wait for the Fed's decision on rates.

The contained selling pressured the major averages closer to key
support levels, where the bulls may return tomorrow.  The beauty
of entering BULLISH plays near key support levels is that risk is
relatively easy to manage with tight stops just below the support
levels.  That way, risk isn't a four-letter word.

Eric Utley
Option Investor


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

Fade The Crowd
I get numerous emails each day during live market action asking
about general or specific trade advice. While I have neither the
resources nor legal ability to answer many, one received today is
a common question that I think we can all learn from together.

[From 12/06 ahead of INTC and SUNW conference calls]
Readers Write: "Hi Austin, Wouldn't you be buying calls today
ahead of the Sun and Intel analyst meetings? While I don't expect
them to guide to record earnings, even the word "stabilization"
could spark a rally tomorrow, don't you think? Anand"

Well Anand, I don't know... let's see!

When I traded equity options heavily it was always in front of an
event such as this. Indexes move deliberately but much more
frequently than stocks, and it takes a catalyst to move them. An
event such as tonight's would be noted sometime before and the
first thing I'd want to know is what everyone else is doing.

(SUNW Calls & Puts)





Here's a template straight from www.cboe.com public website of
free quotes that demonstrates investor sentiment right now. I
haven't taken the time to add all of the open interest columns on
each side, but a quick glance is enough to show me there are lots
more open calls than puts. Care to do the math? Have fun! I just
want to know which way the crowd is leaning, and more on that in a
bit.

(INTC Calls & Puts)




Again we have some high open interest on the call side here which
tells me most players are gaming the upside ahead. What does this
all mean?

Option Unwinding Pressure
Someone is short more calls net than puts. Doesn't matter who and
they are spread across a mass of entities. Market makers, retail
investors and institutions are either short naked or covered calls
to a greater degree than puts. Market makers sell calls short to
buyers and buy the underlying stock to hedge their position as one
form of hedging the trade. What happens if the stock goes up and
traders want to cash in profitable calls before time decay kills
them? Excellent question!

They sell the calls back into the market, where most are absorbed
by the market makers. How do they unwind their previous short call
position in turn? They buy calls to close and sell long shares to
go flat. What does selling pressure on the stock do? Lowers price
action.

Take the opposite side of this equation. What if we saw calls and
puts open interest balanced or better yet, more puts than calls as
witnessed in October? Market makers sold those puts short to
people who bought them, and how did they immediately hedge to
offset? That's right: they shorted the stock.

Then what happens if a company says anything other than bearish
news? Stock price rises and those who are long the puts have two
choices: buy stock in the aftermarket action to offset their
losing puts on a market rise, or sell the puts for a loss next
day.

Buying stock in the post-market is merely short-squeeze action
where the holders of those long puts strive to save capital while
chasing "ask" prices higher. Traders who wait until the next day
before dumping withered puts at any price cause the market maker
to buy-close their short puts to offset and buy long the shorted
shares they hedged with. What does all this buying action in the
stocks to cover put options do? You guessed it: short squeeze
ramp!

Matter of fact, momentum players who load the call side may sell
on the news even if it's bullish and this unwinding causes a stock
to drop on good news. Ever see that happen during earnings or
other event? Momentum players who load the put side may sell on
the news even if it's bearish and this unwinding causes a stock to
pop on bad news. Ever see a stock rally on bad news before?

Now you know why, and more importantly which clues to look for
ahead of time. When trying to decide what (if any) action to take
on equity plays or the sector/index they may affect, always look
for option disparity first. It does not always exist but when
present is one very, very high-odds directional filter to trade.

Hope This Helps,
austinp@sungrp.com


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

CNXT - call
Adjust from $14.50 up to $15

MCDT - call
Adjust from $25 up to $25.50

LH   - put
Adjust from $80 down to $78.50

CAH  - put
Adjust from $69 down to $67.75

HGSI - put
Adjust from $41.50 down to $39


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

No Dropped Calls for Monday.


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

WWCA $25.56 +1.88 (+1.88) We had been waiting for a rally in
WWCA to gain a better entry point, but didn't expect the
stock to surge the way it did today.  A report released this
morning revealed recent insider buying of WWCA which was
enough to power the stock above $27 at one point early in the
session.  Fortunately the stock pulled back, but still finished
above our stop at the $25.50 level.  Those who took entries on
the rally can look for further weakness in tomorrow's session.


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

LH - Laboratory Corp. of America $74.25 -2.00 (-2.00 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

Like the cat on the poster, LH is hanging in there.  The wedge
continues to narrow, as bullish moves are still being capped by
the descending trendline (now at $77.75), while support at the
200-dma ($76) is keeping the bears in check.  Despite the weak
price action, daily Stochastics have been rising over the past
week, but that came to an end on Friday, as they once again
turned south.  This wedge will likely break in the next couple
days and the direction of the break will either prove us correct
or bring the play to an end.  More favorable entries can be
taken on failed intraday rallies near the descending trendline,
although more cautious investors may want to wait for price to
fall below the 200-dma before taking a position.  Volume has
been downright anemic for the past week, and Friday's session
was no exception, barely reaching half the ADV.  Look for an
increase in volume to further illuminate the picture and confirm
a continuation of the bearish trend.

Comments

After waiting patiently, LH finally broke below its 200-dma in
today's session.  The stock shed -$2 today and could be headed
lower if the close below the 200-dma is any indication of short
term direction.  LH did find intraday support again around the
$73 level.  That's the same support level that the stock bounced
from on November 28th.  Look for a breakdown below the $73 for
confirmation of further downside and monitor the HCX for
weakness.

***December contracts expire in 2 weeks***

BUY PUT DEC-75 LH-XO OI= 366 at $3.20 SL=2.25
BUY PUT JAN-75 LH-MO OI= 124 at $4.90 SL=2.75
BUY PUT JAN-70 LH-MN OI= 172 at $2.75 SL=1.50

Average Daily Volume = 738 K



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