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Daily Newsletter, Wednesday, 12/12/2001

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The Option Investor Newsletter                Wednesday 12-12-2001
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MARKET WRAP  (view in courier font for table alignment)
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      12-12-2001          High     Low     Volume Advance/Decline
DJIA     9894.81 +  6.44  9919.72  9806.10 1.42 bln   1520/1625	
NASDAQ   2011.38 +  9.45  2022.76  1975.65 1.86 bln   1855/1744
S&P 100   580.37 +  1.05   582.56   574.33   Totals   3375/3369
S&P 500  1137.07 +  0.31  1141.58  1126.01
RUS 2000  475.31 +  0.54   476.32   470.99
DJ TRANS 2580.28 -  6.31  2591.70  2561.87
VIX        25.45 -  0.24    27.38    25.14
VXN        48.09 -  2.64    51.36    48.09
TRIN        1.07
Put/Call    0.64
*******************************************************************

SPX At Support, Time To Buy Or Sell?

The S&P 500, referred to by the trader types as the SPX, rebounded
from a key support level Wednesday.  The index represents the 500
largest publicly traded stocks on the U.S. exchanges.  In other
words, it's a good representation of the broader market.  Let's
take a closer look at the SPX.

Levels: Where's my risk?

The SPX's rebound from 1126 Wednesday was meaningful for that
level has served as support on seven separate occasions in the
last four weeks.  Not exactly 1126, but in that general area.
Let's call it 1127.50, plus or minus 2.50.  You get the point.

The seven observations: 11/16 at 1129, 11/21 at 1129, 11/28 at
1128, 11/29 at 1125, 12/03 at 1125, 12/04 at 1128, and Wednesday
at 1126.  What's so special about the level?  Maybe a simple
retracement bracket can lend a hand.

Using the SPX's high in late-May around 1315 as my top anchor
point, I've anchored the bottom of the retracement bracket at
the SPX's September 21 low around 944.  It looks like this:



Before elaborating on the 1127.50 area, let me give this bracket
credence.  Through the month of October, the SPX gyrated around
the 38.2 percent retracement level around the 1085 area.  It
spent the month consolidating around 1085.  At that point, the
SPX had retraced 38.2 percent of its decline from late-May until
September 21.  The SPX then went on to break out of its range
in early November, advanced past the 1127.50 area, and reached as
high as 1173 on December 5.  Does anybody else find it curious
that the 1173 level is also the site of the SPX's 61.8 percent
retracement level?  Coincidence?  I think it not.  This bracket
works.

Here we are back at the 1127.50 area -- the 50 percent
retracement level of the bracket.  As I previously pointed out,
the 1127.50 level has provided support seven times during the
most recent consolidation.  Will the SPX rebound again and
retest relative highs around 1173?  If you're betting that way,
at least you can measure and manage your risk relatively easy
with the retracement bracket.

It works like this:  You've identified support in the SPX at
1127.50, you've observed that the level has provided support
on six occasions in the past.  You buy your favorite STRONG
stock on a bet that the SPX will again rebound from 1127.50
and trade higher over the short-term.  If you're wrong, and
the SPX cracks at 1127.50, then you can stop out of your bet
quickly and minimize losses.  Since the SPX has traded plus
or minus 2.50 points around 1127.50, you would need to set a
lower mental stop in order to weed out the whipsaws.  Currently,
I'd consider a decline below 1120 a break of the 1127.50
support area.

If you're right in buying at the 1127.50 level and the SPX
trades higher in the short-term, you can use the retracement
bracket to define your exit point.  The obvious level to turn
to is the 68.2 percent retracement level at 1173.

But, what if the SPX breaks down?  A breakdown below 1127.50,
again confirmed with a decline below 1120, could have the SPX
trading lower over the short-term.  Risk is more difficult to
measure and manage when trading breakdowns (or breakouts for
that matter).  The reason is because the majority can see and
will be in on the move.  Where there's more participants there's
more emotion, not to mention the fact that there isn't a
meaningful resistance level immediately above the 1127.50 area
to be used for a mental stop.  In these type of cases, it's best
to use a dollar amount- or percentage-based stop on bearish
bets.

While the retracement bracket isn't a lot of help in measuring
and managing risk in bearish bets, it clearly defines a downside
target at 1085.  Remember the 38.2 percent retracement level that
the SPX gyrated around in October?  That's your downside target
on shorts/puts entered on a break below 1127.50.

What's In It?

The SPX is divided into ten industry groups: Energy, Materials,
Industrials, Consumer Discretionary (Retail), Consumer Staples,
Health Care, Financials, Information Technology, Telecom
Services, and Utilities.  Information Technology currently
accounts for 18.83 percent, Financial accounts for 17.79 percent,
and Health Care accounts for 14.36 percent of the SPX.  The three
are the biggest by far.

If the SPX is going to trade higher after its bounce from
1127.50 Wednesday, it will need participation from at least two
of its big three industry groups.

Technology:

Technology was the only group that participated in Wednesday's
rebound.  Within technology, Hardware, Software, Box Makers,
Internets, Semiconductors, and Disk Drives were higher.  Only
Networkers finished lower within the group.

For the technology group, readers can use the Philadelphia
Semiconductor Index (SOX).  Curiously, the SOX rebounded from
a key support level Wednesday in similar fashion to SPX.  The
SOX rebounded from 560, which is now a double-bottom in the
index.

The SOX, however, has traced a pattern of sequentially lower
highs since peaking on December 5 -- the same day the SPX hit
its relative high.  The SOX has fallen into a very short-term
descending trend, which remained intact even after Wednesday's
rebound.  (Some technicians might refer to the SOX's recent
price pattern as a flag or pennant.)

If the pattern of lower highs persists, the SOX may breakdown
below its double-bottom at 560.  Such a breakdown would be
signaled with a decline below the 555 level.  Any breakdown of
the sort would add conviction to betting on a breakdown in the
SPX below its support level.



After the bell, Applied Materials (NASDAQ:AMAT) reported that
it was eliminating 1,700 jobs.  The company is the world's
biggest maker of semiconductor equipment and is one definitely
worth monitoring as it relates to the SOX.  Shares of AMAT
shed about 40 cents in the after hours session on the news of
the job cuts.

Financial:

Within the financial industry group, only the insurers traded
higher during Wednesday's rebound.  Banks and brokers finished
fractionally lower.

The bank sector is perhaps one of the better gauges of the
health of the economy and can be tracked through the KBW Bank
Sector Index (BKX).  The BKX ran higher about two weeks ago,
but has since slid lower.

There are several issues at play in the sector that may be
pressuring the BKX.  Fears continue to linger over Argentina
and the country's troubled financial situation.  And the Enron
fiasco isn't helping.  Citigroup (NYSE:C) and J.P. Morgan
Chase (NYSE:JPM) -- the two biggest components of the BKX --
have a significant amount of exposure to Enron.  But a panel
of Enron's creditors, including Citi and Morgan, convened
Wednesday to sort out the company's debts.  If all goes well,
Citi and Morgan will get back part or all of the $1.5 billion
the two banks recently injected into the troubled energy
trader.  Such a development could ease fears and lend strength
to the BKX, thus propping up the SPX.

Away from the micro concerns, the macro environment is shaping
up well for the bank sector.  The yield curve is incredibly
steep, which allows the banks to borrow at the short-end and
lend at the long-end, thus capturing the spread and printing
money in the process.  The steep yield curve, which reflects
a rebound in the economy, is a huge element of bullishness for
the banks.  Indeed, the trough of a business cycle is the right
time for money-center banks such as Citigroup.  The prospects of
a recovering economy next year could translate into an
elimination of bad debts and a boost to the balance sheets of
many banks.

But the aforementioned fears are holding back the BKX in the
short-term.  The index has been struggling to advance past its
200-dma since peaking in late November at the 865 level.  The
BKX again rolled over at its 200-dma following the Fed's
decision to lower rates Tuesday.  An advance in the BKX could
portend a run on relative highs and a subsequent breakout.  Of
course a breakout in the banks would boost the SPX.  In the
meantime, I think the banks make sense on weakness; or, a good
sector to consider buying on weakness.



Healthcare:

Healthcare, for all of its defensive attributes, has been one
of the more volatile sectors of the SPX recently.  I define
the broader healthcare industry through the AMEX Pharmaceutical
Index (DRG), the AMEX Biotechnology Index (BTK), and the S&P
Healthcare Index (HCX).  The HCX is the best representation of
the broader sector.  It includes medical device makers such as
Guidant (NYSE:GDT) and HMOs such as Humana (NYSE:HUM).  If you
had to monitor only one index in the healthcare sector, it
should be the HCX for its breadth; it includes pharmas and
biotechs.

The three (DRG, BTK, and HCX) all finished lower Wednesday.  The
biggest drag on the DRG was shares of Merck (NYSE:MRK).  The
stock continued lower in Wednesday's session a day after the
company warned on '02 financial performance.  A slew of downgrades
and earnings estimate reductions pressured MRK and others in the
DRG Wednesday.  Bristol-Meyers (NYSE:BMY) and Schering-Plough
(NYSE:SGP) were knocked down patent expiration fears.

The BTK has had its share of weakness recently.  The group went
from one of the strongest in the market to a relatively weak
sector recently.  There's been several reasons why.  First, a
disappointment from Protein Design Labs (NASDAQ:PDLI) -- a
component of the BTK -- sent the stock sliding lower.  The
company reported disappointing results for two of its
developmental drugs.  Second, several mergers have been
frowned upon by the street, most notably the Millennium
(NASDAQ:MLNM) and Corr Therapeutics (NASDAQ:CORR) marriage.  The
acquirer, Millennium, has seen its stock drop by more than 30
percent since announcing its merger plans, including another five
percent drop Wednesday.

HOWEVER, like the SOX, the BTK is near a very meaningful support
level.  Using its relative low in late-September as the bottom
and its recent high up around 625 as the top, I've laid a
retracement bracket over the BTK's recent rally.  The 38.2 percent
retracement level sits at 540 -- a super serious support level.
I think the stronger biotechs can be played on a bet that the
BTK bounces from 540.  If it doesn't, a tight mental stop can
be placed at 530.  For if 530 is broken, the BTK is likely to
head much lower over the short-term and in doing so, pressure the
SPX.  But it's a relatively low risk (assuming you manage risk with
the 530 level), potentially high rewarding situation.



Which are the stronger biotechs?  Millennium is not.  Neither is
Protein Design Labs.  Of the components of the BTK, Immunex
(NASDAQ:IMNX) and IDEC Pharmaceuticals (NASDAQ:IDPH) are among
the stronger.  While not a component of the BTK, Myriad Genetics
(NASDAQ:MYGN) is another that trades well.

Into The Unknown

The future is unknown.  As traders, we operate in an environment
of uncertainty, of risk.  It's only after that risk is identified
and managed should a trade be entered.  Not all risks are foreseen.
Not all risks can be managed.  But the risks that are easily
observed and managed should be observed and managed.  If you take
the step of identifying the easy risks, then you're better than 90
percent of the players in this game.

The risk in being bearish on this market is that the banks could
blow-up to the upside.  After all, they are primed for such a move
at this point in the business cycle.  The risk is being bullish
on tech stocks is that the SOX could breakdown below its
double-bottom, sparking a sell-off across the broader tech space.
Will either of the aforementioned events occur?  I don't know, but
you're better-informed by knowing where the risks are.  In the
process of finding the risks, you begin to identify opportunities
and piece together the puzzle that is the market.  Why was the SPX
higher Wednesday?  That's an easy one: techs were higher.  Will the
SPX continue higher Thursday?  You can find the answer through the
process of risk management.

Eric Utley
Option Investor


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

CNXT - call
Adjust from $15 up to $15.50

XMSR - call
Adjust from $11 up to $12.50

NVDA - call
Adjust from $58 up to $59

QLGC - call
Adjust from $51 up to $52

CAH  - put
Adjust from $67.75 down to $66.75

HGSI - put
Adjust from $39 down to $35.50

DYN  - put
Adjust from $29.50 down to $28.50


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

No Dropped Calls for Wednesday.


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

No Dropped Puts for Wednesday.


*****
LEAPS
*****

No More Procrastinating - It's Time To Talk About Intel
By Mark Phillips
Contact Support

IMPORTANT NOTICE: Before we get started tonight, a quick note
for all of you that have emailed me with questions.  I always
respond to emails, sometimes directly, and sometimes simply
with a followup article that addresses the questions you have
raised.  If you've sent a question, but haven't received a
response, make sure that I haven't answered it in a subsequent
article.  Then confirm that you have a valid return email
address.  This is very important, as it is the only way that
I can respond to you.  There are few things more frustrating
than composing a reply to an interesting question, and having
the mail administrator kick the message back to me as
undeliverable.  I bring this up because it is occurring with
greater frequency.  And Jan in Montreal.  You're the next
contestant on the "Email Address Isn't Right".  Just remember
to get those return addresses set correctly and I'll do my
best to provide useful answers.

Thanks!
-MP

And now, on with the show!

I've made no secret of the fact that I think the current rally
in the markets is an exercise in sheer lunacy.  With Uncle
Alan reinflating the bubble that he took great pains to pop in
2000, investors are throwing money at their favorite momentum
stocks in the hopes that it is 1999 all over again.  Nothing
would make me happier than to report that it is true, but I'm
not Santa Claus.

Since the market lows (and fear highs) in late September,
investors have been responding positively to aggressive
stimulative action from the Federal Reserve (interest rate
cuts) and promises of generous assistance (economic stimulus
package) from the Federal Government.  That combined with hints
from leading companies (technology and otherwise) that they are
seeing conditions improving, has many investors going to bed
with visions of sugarplums dancing in their heads.

This optimism seems to founded on the expectation that we are
going to not only have a recovery in the first half of 2002, but
that it is going to be a barn-burner.  While most analysts are
calling for a more muted recovery, price action, particularly in
the Technology sector is pointing towards a stellar and dramatic
recovery in earnings over the next 6 months.  Either that, or we
are heading for what my good friend Buzz Lynn has termed "MOPO"
(Mother Of all Put Opportunities).  And it could very well be
the latter.  By most fundamental measures, many stocks are more
ridiculously overvalued than they were in early 2000, and few
stocks were immune from that deflationary effect.

In terms of percentage movement, few areas of the market have
moved further to the upside than Semiconductors (SOX.X), and it
is all coming on anticipation of better profits ahead.  That is
the definition of faith - the substance of things hoped for,
the evidence of things not seen.  While faith can be a good
thing, I wouldn't consider it to be a rational near-term
investing methodology.  But the charts are hard to argue with,
and from the weekly chart of the SOX below, you can see the
index has been a favorite of the bulls for the past 3 months,
rising through numerous resistance levels that should have
provided more resistance than they did.



I must admit that I was impressed with the SOX's ability to
clear the $550 level, but it looks to me as though the index is
getting a bit top heavy. Stochastics are getting kind of flat
in overbought territory, and we have significant resistance near
$600, both historical and descending trendline.  While a
rollover near $600 may make for a good entry, don't rule out the
power of a crowd of irrational bulls.  Overbought can become
more so, and I could see the SOIX running as high as $675 before
the bulls exhaust themselves.  And judging by some of those
recent weekly candles, you can see that a move of 75-100 points
would not be out of the question in a short one-week span of time.

Simply put, the bull is still running, but the bears are closing
in.  Which brings me to the heart of our conversation.  Intel
(NASDAQ:INTC) has been running with the SOX, and marginally
positive comments from the company last week was the necessary
catalyst to push the stock through the $32 level, which had been
holding back the bulls



Note that the chart above ended in late November, as that was
the last snapshot available before the stock moved through the
$32 resistance level.  Despite my fundamental bearish leaning
on the stock, there was nothing on the chart to tell me to
start warming up that order for long-term puts...at least not
yet.

Speaking of the fundamental picture, here's what is getting my
attention on INTC.  The company still makes (and will continue
so for the foreseeable future) most of their revenue from sales
of its Pentium line of microprocessors.  And the primary use
for those processors is new computers.  Aside from industry
leader Dell Computer (NASDAQ:DELL), I haven't heard anything
bullish from the PC industry lately.  Oh there is lots of
speculation that people and companies and individuals WILL
BE buying more PCs in the near future.  But that hope is not
borne out yet by increasing retail sales.  Either sales must
pick up soon, or Q1 2002 could be ugly.

Here's where the potential ugliness comes from.  In their
mid-quarter update, INTC  was seeing orders start to pick up
for their P4 chips.  So that means someone is buying the chips
to put into new PCS, right?  Well, what happens if those new
PCs don't leap off the shelves into the arms of eager holiday
buyers?  That's right!  The following quarter (Q1, which is
historically weak for PC sales) would see the next wave of
demand-weakness hit the chip giant right in the bottom line.
And I think the long-term charts could be giving us a hint of
that eventual outcome, as I sit here tapping these keys.


Now that chart almost looks tempting doesn't it?  With the
beginning of a rollover in the weekly Stochastics, eager players
might be thinking about Put LEAPS near current levels.  But not
me.  What gives me pause is the picture on the monthly chart.



When we switch to the monthly time frame, we can see that INTC
has handily cleared the $32 level, but may be facing an uphill
battle near the $36 level.  But with the Stochastics pointing
skywards, I wouldn't be surprised to see the stock testing
major resistance in the $39-40 area before real weakness
arrives.

Putting It All Together:

I could be accused of just trying to find a convenient chart
pattern in order to rail against INTC for whatever deep-seated
reasons I might have.  But that isn't the case.  At least not
this time.  What I see is a sector that has run too far, too
fast, and on dubious grounds.  Essentially the SOX is up based
on expectations of an economic rebound in the first half of
next year.  While we may be seeing conditions stabilize and
improve modestly, the recent action in certain sectors of the
market (particularly Semiconductors) is forecasting a return to
the rapid growth seen in the late 1990's.  In my
(never-to-be-humble) opinion, that is a fantasy.  Even with all
the monetary stimulus currently being thrown at the economy,
that is likely to just diminish the severity of the downturn,
not power us out of it.

So if you accept my theory that the SOX is getting ahead of
yourself, why not get ready to profit from one of the
sub-sectors most likely to feel the pinch when the recovery
fails to materialize.  Namely PC sales.  INTC is a great company
and will be an industry leader for the foreseeable future.  But
the business environment is not conducive to a sustained upward
move from current levels.  In fact, the convergence of the $675
level on the SOX, with the $39 level in shares of INTC could
line up nicely with the monthly Stochastics starting to weaken
(led lower by the weekly) in perhaps February or March.  I know
it's a little ways off, but many good trades consist of
forecasting the set up and then waiting for everything to come
into alignment.  I think INTC is going to be a good example of
that and you can bet I'll be watching carefully.

I may end up with egg on my face, but one way or the other I
think we'll all learn something from the process.  Keep an eye
on this column and the LEAPS column over the next couple months.
Who knows, INTC could make it onto our LEAP Puts play list.
Until then remember, that chance favors the prepared mind.  I'm
in the process of preparing MY mind to profit from MOPO when it
arrives.  I'm not saying that the scenario I've painted above
has to come to pass, but if you're currently long on INTC, don't
you think it would make sense to pay attention to the behavior
of the SOX and INTC over the next few months, paying particular
attention to the points I've laid out and what comes to pass
with respect to the demand side of the equation.  Better safe
than sorry!

Have a great week!


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**********************
PLAY OF THE DAY - CALL
**********************

IBM - Int'l Business Machines $123.20 +1.70 (+2.80 this week)

International Business Machines uses advanced information
technology to provide customer solutions.  The company provides
value to its customers through a variety of solutions including
technologies, systems, products, services, software and
financing.  IBM's three hardware product segments are comprised
of Technology, Personal Systems and Enterprise Systems.  Other
major operations consist of a Global Services segment, a
Software segment, a Global Financing segment and an Enterprise
Investments segment.

Most Recent Update

After last week's stellar breakout through the $120 level, shares
of IBM were due for some consolidation.  That's just what we got,
as Big Blue dipped back near the $119 level before resuming rally
mode on Tuesday.  Buying volume surged again, as the stock
rebounded to post another yearly closing high of $121.50.  Traders
that bought the most recent dip are waiting with bated breath to
see if IBM can blow through the $123 level and start the next
ascent towards the $127.50 level, last visited in September 2000.
Continue to target new entries on dips near $119-120.  A
breakout over $123 is buyable, but be quick to harvest profits
with the looming $127.50 resistance level.  Due to the strong
performance over the past week, we are raising our stop to
$117.

Comments

IBM displayed its awesome strength again Wednesday with another
new yearly high.  The stock closed at its day high.  Look for
follow-through early tomorrow morning and consider targeting
new entries at current levels if the market is advancing.  Those
readers who bought the dip down to $120 recently might use any
further strength early tomorrow to book quick gains on partial
positions.

***December contracts expire in less than two weeks***

BUY CALL DEC-120*IBM-LD OI=37762 at $4.10 SL=3.25
BUY CALL DEC-125 IBM-LE OI=17261 at $1.25 SL=0.75
BUY CALL JAN-120 IBM-AD OI=39233 at $6.70 SL=5.25
BUY CALL JAN-125 IBM-AE OI=29388 at $3.80 SL=2.50
BUY CALL JAN-130 IBM-AF OI=23032 at $1.90 SL=1.00

Average Daily Volume = 8.56 mln



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

Stocks Finish On A Positive Note Despite Profit Warnings
By Ray Cummins

The blue-chip average moved higher today, just one session after
interest rates were lowered for the 11th time this year, even as
earnings warnings from Dow bellwethers American Express (NYSE:AXP)
and Merck (NYSE:MRK) weighed heavily on investors.

The Dow Industrials fell in early trading after financial services
giant American Express told analysts it would cut its workforce
by an additional 5,500 jobs and warned that earnings-per-share
in the fourth quarter would fall short of consensus expectations.
The company said business volumes in financial markets, travel,
corporate spending and the general economy were impacted by the
effects of the 9/11 terrorist attacks.  Not to be outdone, drug
kingpin Merck said it expected zero earnings growth in 2002 due
to stiff competition from generic products.  The company's share
value tumbled in the wake of the unexpected news and downgrades
from CS First Boston and ABN Amro quickly followed.  Among the
day's lesser performers were Alcoa (NYSE:AA), DuPont (NYSE:DD),
J.P. Morgan (NYSE:JPM), Honeywell (NYSE:HON), and McDonald's
(NYSE:MCD).  The lone bright spot was Procter & Gamble (NYSE:PG),
which jumped 5% after the company said it expects to beat Wall
Street's profit expectations in its second quarter due to strong
sales growth in baby, beauty and health products.  Analysts at
Lehman Brothers and Morgan Stanley upped their EPS views on the
consumer products conglomerate to reflect a better-than-expected
mix of products and pricing.  The technology index followed the
blue-chips lower for most of the day with losses in networking
and chip companies.  Stocks in both groups fared poorly despite
numerous upgrades from popular analysts, including a bullish
report on the semiconductor equipment segment from Prudential
Securities.  InVision Technologies (NASDAQ:INVN) was among the
most attractive NASDAQ issues, up over 10% after the company said
it had received an order from the Federal Aviation Administration
for multiple explosive detection systems valued at $16.3 million.
Chartered Semiconductor (NASDAQ:CHRT) was also a popular issue,
with the stock gaining 8% after the chip company announced it is
maintaining its fourth-quarter financial targets.  Companies in
the software segment were bolstered by the bullish activity in
Veritas Software (NASDAQ:VRTS), which was upgraded to a "buy" at
Salomon Smith Barney.  The firm said it believes the company is
set for a solid 2002, based on their strong pipeline of products
for data protection, data management and data availability.  In
the broader market, selling in natural gas, utility, oil service,
drug, biotechnology and chemical shares led the major averages
lower in early trading while airlines, gold and insurance stocks
boosted the late-session recovery.


Summary of Current Positions (as of 12/11/01):


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   43.56   2.88     4.8%
TMPW    DEC     35   33.20   45.18   1.80     4.5%
ELBO    DEC     35   33.50   42.10   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   42.47   0.50    7.9%
EBAY    DEC    50    48.85   70.10   1.15    6.8%
PCSA    DEC    45    44.05   53.59   0.95    6.0%
TMPW    DEC    30    29.40   45.18   0.60    6.0%
INTU    DEC    35    34.20   43.56   0.80    5.6%
CVTX    DEC    42.5  41.90   54.53   0.60    5.1%
BBY     DEC    55    54.00   69.20   1.00    5.1%
ELBO    DEC    30    29.50   42.10   0.50    5.0%
IGEN    DEC    30    24.65   33.92   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   78.55   0.65     5.4%
CHIR    DEC    50    50.45   43.37   0.45     5.3%
IDPH    DEC    75    75.70   67.75   0.70     5.2%
EASI    DEC    55    55.50   37.90   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   44.28   1.30     4.9%
AZN     DEC    45-P  43.60   44.28   0.68     2.6%

ERTS    DEC    50-P  48.45   63.18   1.55     7.9%

Closed: Electronic Arts (NASDAQ:ERTS) DEC-$60 call.


Credit Spreads:

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

PCAR   62.59    64.05  DEC50P/55P   0.70   54.30   0.70   Open
AHP    58.75    58.75  DEC65C/60C   0.65   60.65   0.65   Open
CSC    45.09    49.16  DEC35P/40P   0.60   39.40   0.60   Open
PEP    50.28    46.60  DEC45P/47P   0.35   47.15  (0.55) Closed
NKE    51.56    55.00  DEC45P/47P   0.40   47.10   0.40   Open
AGN    76.10    75.78  DEC65P/70P   0.60   69.30   0.60   Open
LLY    83.33    80.40  DEC75P/80P   0.80   79.20   0.80  Closed
CHIR   45.59    43.37  DEC55C/50C   0.60   50.60   0.60   Open
IGEN   35.44    33.92  DEC25P/30P   0.85   29.15   0.85   Open
ENZN   57.00    553.50 DEC70C/65C   0.60   65.60   0.60   Open

With the move away from safety and cyclical stocks, the Food and
Beverage group has become less attractive and Pepsi (NYSE:PEP)
has been fading since the middle of last week when the issue fell
below near-term support at $48.  Fortunately, the recent technical
indications provided a great "early-exit" signal, allowing traders
to close the position near break-even or for a very small loss.
Eli Lilly (NYSE:LLY) closed below near-term support at $81 Tuesday
and a move below the sold strike at $80 (the top of a previous
trading range) would be an absolute confirmation of a new bearish
trend.


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

***************
ADSK - Autodesk  $39.39  *** Low Risk - Low Reward! ***

Autodesk (NASDAQ:ADKS) is a software design and digital content
company for the architectural design and land development,
manufacturing, utilities, telecommunications and media and
entertainment industries.  The company provides design software,
Internet portal services, wireless development platforms and
point-of-location applications that empower more than four
million customers in over 150 countries.  The company's software
products are sold worldwide, both directly to customers and
through a network of resellers and distributors.  The company
is organized in two reportable segments: the Design Solutions
Segment and the Discreet Segment.

New traders are always asking for low risk positions that will
allow them to participate in combination strategies with a high
probability of success.  Based on the recent bullish technical
indications and the solid buying support near our cost basis,
this play meets the basic criteria for a low risk - low reward
position.  Target a higher premium in the spread initially to
increase the overall profit potential of the play.

ADSK - Autodesk  $39.39

PLAY (very conservative - bullish/credit spread):

BUY  PUT  JAN-30  ADQ-MF  OI=81   A=$0.25
SELL PUT  JAN-35  ADQ-MG  OI=142  B=$0.65
INITIAL NET CREDIT TARGET=$0.50-$0.60  PROFIT(max)=11%


***************
EMLX - Emulex  $40.70  *** An Old Favorite! ***

Emulex (NASDAQ:EMLX) is a designer, developer and supplier of a
broad line of storage networking host bus adapters, application
specific computer chips and software products that provide the
connectivity solutions for storage area networks (SANs), network
attached storage and redundant array of independent disks storage.
The company's products are based on internally developed ASIC,
firmware and software technology, and offer support for a wide
variety of SAN protocols, configurations, system interfaces and
operating systems.  The company's architecture offers customers
a stable applications program interface that has been preserved
across multiple generations of adapters, and to which original
equipment manufacturers have customized software for mission
critical server and storage system applications.

When it comes to leading-edge technology for data storage, Emulex
is widely recognized as one of the foremost companies in the
industry.  Their products have been selected by the world's top
server and storage providers, including EMC, Fujitsu-Siemens,
Dell, Compaq, Hewlett-Packard, Hitachi Data Systems, IBM, NEC,
Network Appliance and Unisys.  In addition, Emulex includes a
number of technology industry leaders such as Brocade, INRANGE,
Intel, Legato, McDATA, Microsoft, and Veritas among its current
strategic partners.  From our perspective, Emulex is simply an
"old favorite" that has finally begun to recover from the recent
market-wide slump and it is definitely an issue we would like to
have in our long-term stock portfolio.  These positions allow
investors to establish a discounted cost basis in the issue.

EMLX - Emulex  $40.70

PLAY (sell naked put):

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

SELL PUT  JAN 27.5 UMQ MY   87       0.70    26.80      6.5% ***
SELL PUT  JAN 30   UMQ MF   794      1.10    28.90      9.8%
SELL PUT  JAN 35   UMQ MG   607      2.25    32.75     14.4%


***************
KBH - KB Home  $37.82  *** Hot Sector! ***

KB Home (NYSE:KBH) is a homebuilder with domestic operating
divisions in California, Arizona, Nevada, New Mexico, Colorado
and Texas.  Kaufman & Broad S.A., the company's majority-owned
subsidiary, is a homebuilder in France.  In fiscal 2000, the
company delivered homes to 22,847 families in the United States
and France.  It also operates a full-service mortgage company,
Kaufman and Broad Mortgage company, for the convenience of its
buyers.  The company builds homes that cater primarily to first
time and first move-up homebuyers, generally in medium-sized
developments close to major metropolitan areas.

Stocks in the residential construction group rallied today after
luxury homebuilder Toll Brothers (NYSE:TOL) reported robust
fourth-quarter earnings and said the high-end home market has
recovered faster than expected after the post-9/11 slowdown.
The company, whose single-family homes sell for an average price
of about $500,000, said earnings jumped 17% in the quarter as
lower interest rates made mortgages more affordable and fueled
home buying.  Homebuilders have weathered the recession as low
mortgage rates have bolstered demand and the housing outlook
improved again on Tuesday after the Federal Reserve cut the cost
of borrowing to the lowest level in 40 years.  Analysts say the
next few months should be bullish for homebuilders and traders
can speculate on that outcome with this conservative position.

KBH - KB Home  $37.82

PLAY (conservative - bullish/credit spread):

BUY  PUT  JAN-30  KBH-MF  OI=456  A=$0.35
SELL PUT  JAN-35  KBH-MG  OI=75   B=$0.85
INITIAL NET CREDIT TARGET=$0.60-$0.65  PROFIT(max)=13%


***************
MCHP - Microchip Technology  $40.33  *** Chip Sector! ***

Microchip Technology (NASDAQ:MCHP) develops and manufactures
specialized semiconductor products used by its customers for
a wide variety of embedded control applications.  The company's
product portfolio comprises field-programmable RISC-based
microcontrollers that serve eight- and 16-bit embedded control
applications and a broad spectrum of high-performance linear
and mixed-signal, power management as well as thermal management
devices.  The company also offers complementary microperipheral
products, including interface devices, serial EEPROMS and its
patented KEELOQ security devices.  The company markets its many
products to the automotive, communications, computing, consumer
and industrial control markets.

Microchip Technology was in the news today as company officials
announced in a quarterly business update that, based on October
and November data, MCHP is tracking towards its earlier guidance
of revenue and earnings for the quarter.  After reviewing current
operating data, Microchip reaffirmed its guidance on earnings
per share at the upper end of the range, near $0.17 per share.
In addition, the company's cash balance at the end of the year
is expected to be approximately $240 million, an increase of $70
million from the end of the September quarter.  The surplus is
a result of continuing strong cash flow from operations and low
capital spending, two conditions that are expected to boost the
company's EPS in the coming months.  Analysts were bullish on
the report and traders can profit from future upside activity
in the issue with this conservative combination position.

MCHP - Microchip Technology  $40.33

PLAY (conservative - bullish/credit spread):

BUY  PUT  JAN-30  QMT-MF  OI=1632  A=$0.40
SELL PUT  JAN-35  QMT-MG  OI=2204  B=$1.05
INITIAL NET CREDIT TARGET=$0.75-$0.80  PROFIT(max)=17%


***************
NVDA - Nvidia  $64.67   *** Reader's Request! ***

Nvidia (NASDAQ:NVDA) designs, develops and markets unique graphics
processors and related software for personal computers and digital
entertainment platforms.  Nvidia provides a "top-to-bottom" family
of performance graphics processors and graphics processing units
that has set the standard for performance, quality and features
for a broad range of desktop PCs, from professional workstations
to low-cost PCs, and mobile PCs, to performance laptops.

Nvidia is one of the top companies in the Specialty Semiconductor
group and among our readers, it is also a popular portfolio issue.
The fundamental outlook for the company is excellent and the chip
sector is expected to outperform the broader market in the coming
months; both factors that lead us to a bullish position in the
issue.  In addition, NVDA closed at a new all-time high today and
the long-term technical trend is very favorable.  The premiums in
these options provide excellent reward potential at the risk of
owning the issue at a favorable cost basis.

NVDA - Nvidia  $64.67

PLAY (sell naked put):

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

SELL PUT  DEC 57.5 RVU XA  1,969     0.40    57.10      7.1% ***
SELL PUT  DEC 60   RVU XL  1,878     0.85    59.15     13.0%

SELL PUT  JAN 50   RVU MJ  6,417     1.05    48.95      6.2% ***
SELL PUT  JAN 52.5 RVU MT  784       1.30    51.20      7.1%
SELL PUT  JAN 55   RVU MK  1,367     1.80    53.20      8.2%


***************
VRTS - Veritas  $44.42  *** Hot Stock! ***

Veritas Software (NASDAQ:VRTS) is a supplier of data availability
software products.  Its unique products are designed to enable
continuous productivity for computing environments ranging from
desktop computers to the large enterprise data center, including
storage area networks.  The company offers a wide range of data
availability software products to manage the growth of available
data and increasing complexity and size of networked environments
that its customers face.  Its products allow businesses to improve
the management of their data, to protect their data and increase
the availability of their data.  Veritas develops products for
operating systems, including versions of UNIX, Windows NT and
Linux.  Its software solutions are used by customers across a wide
range of industries, including many global corporations and other
e-commerce businesses.  The company also provides a full range of
services to assist its customers in planning and implementing
their data availability solutions.

Shares of Veritas led the software group higher today after the
company announced a deal with the consulting arm of computer
hardware giant International Business Machines (NYSE:IBM).  The
report said IBM's consulting arm will resell Veritas' storage
management software products as part of its data infrastructure
services and Salomon Smith Barney quickly upgraded VRTS on the
news.  The brokerage upped VRTS shares to a "buy" with a price
target of $56, based on several factors.  Analyst H. Clinton
Vaughan said he believes that Veritas' pipeline is strong; that
since the attacks of 9/11, IT managers are focusing spending on
data protection, data management and data availability -- the
areas where Veritas has strength; and his expectation that the
company will beat his estimate for per-share earnings of $0.60
in 2002.  That is certainly a bullish outlook and investors
appear to agree with the assessment.  These positions allow a
more conservative entry point in the issue with a reasonable
expectation of profit.

VRTS - Veritas  $44.42

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

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

SELL CALL JAN 40   VIV AH  15,346    7.00    37.42      5.7% ***

-or-

SELL PUT  DEC 40   VIV XH  9,477     0.60    39.40     14.5% ***

SELL PUT  JAN 30   VIV MF  31,097    0.50    29.50      4.4%
SELL PUT  JAN 35   VIV MG  5,213     1.20    33.80      9.8% ***
SELL PUT  JAN 40   VIV MH  14,105    2.50    37.50     13.0%


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

BEARISH PLAYS - Naked Calls & Combinations

***************
ICOS - Icos Corporation  $56.70  *** Technicals Only! ***

ICOS (NASDAQ:ICOS) is a product-driven company with expertise in
both protein-based and small molecule therapeutics.  The company
combines its capabilities in molecular, cellular and structural
biology, high-throughput drug screening, medicinal chemistry and
genomics to develop products with commercial potential.  Icos is
evaluating Cialis, a small molecule compound that inhibits the
phosphodiesterase type five enzyme for the treatment of male
erectile dysfunction and female sexual dysfunction.  The company
is also evaluating Pafase, a recombinant human serum protein, for
the treatment of sepsis and diseases characterized by increased
activity of platelet-activating factor.

Icos is one of our regular issues on the "premium selling" list
and after observing the recent technical indications, we have
decided to add it to our small selection of bearish candidates.
Based on analysis of option pricing and the underlying stock's
technical background, this issue meets our fundamental criteria
for a favorable "naked" call position.  The issue has robust
option premiums, a well-defined trading range and a relatively
high probability of remaining below the target strike price.  As
with any recommendation, these positions should be carefully
evaluated for portfolio suitability and reviewed with regard to
your strategic approach and personal trading style.

ICOS - Icos Corporation  $56.70

PLAY (conservative - sell naked call):

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

SELL CALL JAN 65   IIQ AM  7,894     0.95    65.95      5.1% ***
SELL CALL JAN 60   IIQ AL  1,828     2.20    62.20      8.4%


***************
BMY - Bristol-Myers Squibb  $50.45  *** Nationwide Lawsuit! ***

Bristol-Myers Squibb (NYSE:BMY) is a producer and distributor of
medicines.  The company's products include PRAVACHOL, GLUCOPHAGE,
TAXOL, PLAVIX, BUSPAR, PARAPLATIN, ZERIT, MONOPRIL, CEFZIL, VIDEX,
AVAPRO, SERZONE, CAPOTEN/CAPOZIDE, EXCEDRIN, infant formulas,
ostomy products, and wound care products.  Last year, the company
announced the divestiture of its Clairol and Zimmer businesses.
The company separated the Zimmer business in a tax-free spin-off
to shareholders in August, 2001 and in November 2001, the company
sold Clairol to Procter & Gamble.  Bristol Meyers Squibb recently
acquired DuPont Pharmaceuticals Company, a subsidiary of DuPont.
DuPonts' key products include SUSTIVA, a non-nucleoside reverse
transcriptase inhibitor; COUMADIN, an oral blood anticoagulant;
and CARDIOLITE, a cardiovascular radiopharmaceutical that is the
gold standard.

Bristol-Myers Squibb was a big mover today, down almost 10% after
the company received news of a legal broadside in which attorney
generals from 29 U.S. states filed lawsuits against the drug giant.
The complaints allege that BMY illegally kept generic versions of
its BuSpar anxiety medication off the market, cheating consumers
out of millions of dollars.  The complaint also alleged that the
world's #5 drug-maker knowingly made false statements to the U.S.
Food and Drug Administration and that's not something you want to
do when you have other developmental drug applications pending.
One analyst said, "The company has tried to bring every bit of
legal leverage they could find to protect their patents and there
has been a question if this aggressive approach was going to
backfire."  The answer appears rather obvious at this point and
traders can speculate on the near-term movement of the issue, in
a conservative manner, with this combination position.

BMY - Bristol-Myers Squibb  $50.45

PLAY (speculative - bearish/credit spread):

BUY  CALL  DEC-60  BMH-LL  OI=3880  A=$0.20
SELL CALL  DEC-55  BMH-LK  OI=1736  B=$0.50
INITIAL NET CREDIT TARGET=$0.35-$0.40  MONTHLY PROFIT(max)=22%


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


SEE DISCLAIMER
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