Option Investor
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Daily Newsletter, Wednesday, 01/16/2002

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The Option Investor Newsletter                Wednesday 01-16-2002
Copyright 2001, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
      01-16-2002          High     Low     Volume Advance/Decline
DJIA     9712.27 -211.88  9916.54  9711.10 1.47 bln   1141/2002	
NASDAQ   1944.44 - 56.47  1981.81  1944.32 1.88 bln   1187/2392
S&P 100   574.99 -  9.86   584.85   574.89   Totals   2328/4394
S&P 500  1127.57 - 18.62  1146.19  1127.49             
RUS 2000  476.42 -  8.58   485.00   476.22
DJ TRANS 2638.34 - 49.74  2693.33  2635.36
VIX        25.26 +  0.84    25.42    24.03 
VXN        49.43 +  1.41    50.75    48.58
TRIN        2.41 
Put/Call    0.69
*******************************************************************

You Won't Hear Such Nonsense From Me
Austin Passamonte

Very little makes me cringe more than hearing market reporters say 
things like, "It was an ugly day in the market". I've seen that 
incomplete statement all over the place today and it irks me no 
end. I say incomplete statement because such biased remarks depend 
squarely on emotional opinion, not logical fact.

Today's action wasn't good or bad: it merely was. If traders were 
long puts or short shares on the right stuff it was good. If they 
were on the wrong side of market action it was bad. If they were 
flat it was nothing at all except just another day. Simple as 
that.

Any other attitude places a person with such bias in grave danger 
of busting out of our profession frustrated, dejected and broke. 
Money flows both ways every day and in the case of this current 
and (probably continued) bear market it flows better downhill than 
up. January put plays on MMM up over +800% intraday for anyone 
fortunate enough to take them pretty much says it all!

On to the future.

Forget about anything INTC or EBAY could have possibly said to all 
who cared last night, and focus on supply/demand for a moment. 
Both of these stocks had huge 10/1 call-to-put ratios in January 
and February contracts heading into their reports. That kind of 
staggering bullish disparity tells us everyone who wanted to buy 
good news already did. If either company then reports stellar 
news, so what? Who's left to respond and push prices higher?

But if either/both say anything less than incredible things, there 
might be a sudden rush for the exits now that unrealistic levels 
of hope are dashed. The days of go-go news momentum via 1999 are 
dead & gone forever: we can go back to ignoring irrational market 
reaction and once again measure sentiment levels. Then trade this 
underlying evidence with high-odds effectiveness.

(Weekly Chart: Dow)


 

The Dow has been forming a bear-flag channel these past nine weeks 
straight and it confirmed with authority this week. Next target 
ahead is 9,500 area. Stochastic values just starting a reversal 
from overbought down towards oversold extreme might finish their 
endless cycle this time with price action well below that.

(Daily Chart: Dow)


 

Switching to a daily-chart view, the Dow failed to hold its first 
mild Fib retracement level in the current bear-market rally and 
next on the map is 38% near 9,440 area. We are quite apt to see an 
ultimate retracement of -50% to -62% this entire move, placing the 
Dow back down near its 9,000 level in the coming weeks ahead.

All at once? Not likely: oversold stochastic values suggest the 
slide will slow or halt and possibly chop its way lower, but that 
is just an assumption.

(Weekly Chart: NDX)


 

We've drawn this year-long channel in the NDX numerous times 
recently and expect it will last for awhile further. I'd watch 
that middle line (black) for price action to test when stochastic 
values reverse near/within oversold extreme for the next sustained 
rally to begin. Looks like about 1250 level or 31.25 in the QQQ. 
Seems a bit low to me, but the charts have proven all my "gut 
feelings" dead-wrong several hundred times before.

(Daily Chart: NDX)


 

We could say the NDX has formed a semblance of bearish descending 
triangle pattern and if so, price action now rests on support. A 
break from there leaves next stop near 1500 level or roughly 37.50 
in the QQQ.

(Weekly/Daily charts: XAU)


 

Gold Fever strikes! Not talking about one of my favorite shows on 
the Outdoor channel, I mean the Gold & Silver Index that Jeff & 
Eric alerted everyone of back near the 54.00 level. Remember what 
those "pointy-finger" (point & figure) charts were saying last 
week? On his birthday, Eric told us in Market Monitor that a print 
above 55.00 level was a buy signal. Hope he spent some birthday 
cash on Placer Dome or like kind!

Need to watch current levels near 61.00 area as oscillators go 
toppy in overbought extreme and some old overhead supply areas are 
reached as well.

Conclusion
When the September rally stalled in early December and flailed 
sideways from there, most of us have waited since for the 
inevitable correction to begin. Looks like we've seen it start. I 
don't think there will be a straight-down plunge from here for 
many reasons, not the least of which is momentum players quick to 
hammer the short side these days that creates tinder for short 
squeeze explosions.

I do know that seasonal patterns tend to strongly repeat. Remember 
how the last two year's March/April patterns have gone? New yearly 
lows. May has launched powerful rallies after both plunges as 
well. Can we expect a hat trick? I would certainly not count that 
out.

Let's just be grateful we're all traders here, able to play either 
direction with equal aplomb. Don't you feel sorry for biased-bull 
stock players or call-buyers only trapped in the 1999 time warp? 
They've had brief moments to profit squeezed between long 
stretches of giving back those gains to us since then. But, that's 
just how trading works and no one can change it. Here in OI we all 
work very hard to educate the above-average individual on how to 
profit regardless what broad markets decide to do.

I have no idea whether we will see the Dow at 5,000 or 15,000 
next, and frankly I don't care. I cannot afford to care, because 
it clouds my judgment terribly and keeps me from making money. 
Hard enough trying to earn vulgar amounts of profit with emotional 
baggage weighing me down, and I'm sure you'd agree. So, we'll take 
what the markets give us because that's what we're all gonna get 
in the end!

Summation
Earnings season will create volatility from one session to the 
next. Big picture via weekly charts is downward strength for now. 
We have plenty of important price levels to monitor and need to 
favor the downside on a broad index basis with upside bias for 
individual stocks along the way. The Dow and S&Ps have lost plenty 
of ground since failing at recent tops and are due to bounce 
around soon. I would not fall in love with either market direction 
right now as that may result in broken hearts or worse. 

Earning results are merely short-term noise. How the market 
responds several days later is much more important than what gets 
said. Along with earnings gyration we have the next FOMC event two 
weeks from today. The Fed is quite dead to the upside, but a move 
away from continual cuts must happen eventually or we'll get paid 
to borrow money soon! Wouldn't that be grand? Don't count on it. 

We've had fun in Swing Trade model these past couple weeks, and 
shorting every iShare symbol with bearish long-term charts looks 
favorable from here as well. For more views of intraday charts if 
you can't get enough looking at such doodling, please join me 
within the Gameplan sections each night. There will plenty of 
opportunities with calls and puts alike this year, so let's do our 
best to hit those winning entries with gusto both ways! 

Best Trading Wishes,
austinp@OptionInvestor.com


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***********
OPTIONS 101
***********

Paying Attention To Option Pricing
By Mark Phillips
Contact Support

When trading options, there are a lot more factors to pay
attention to, when compared to just trading stocks.  Several
months ago, I was planning a series of articles on all the
factors that we need to pay attention to as option traders.
As frequently happens, I got sidetracked and spent a couple
months talking about various spread and delta-neutral trade
strategies.  Now that I've finished with that series, I want to
return to the topic of option pricing.  To refresh everyone's
memory and bring new subscribers up to date, let's start at the
beginning.

Due to the plethora of additional factors that influence
option pricing, most notably "the Greeks", it is possible
to enter an option trade that produces a loss, even when a
corresponding trade in the underlying equity or index would
have produced a profit.  Understanding these factors and their
influence on option pricing is essential to profitable option
trading, especially in the volatile market we currently have
at our disposal.

So what are the Greeks?  In order to answer that question, we
need to say a few words about how option prices are calculated.
Option prices are determined by applying the standard
Black-Scholes pricing model, which uses 5 inputs to create the
theoretical price of the option.  They are as follows:
1. Time to expiration
2. Strike price
3. Value of the underlying equity or index
4. Implied volatility of the underlying equity or index
5. The risk-free interest rate

Discussion of the inner workings of the Black-Scholes model is
far beyond the scope of this article, and there have been
numerous books written on the subject for the inquisitive
student.  Rather than delving into theory, I thought it would
be far more productive to deal with the practical measures of
option pricing and strike selection that can aid us in our
pursuit of profits.  These measures are commonly referred to
as the Greeks and the four most important Greeks, in my opinion,
are Delta, Gamma, Theta and Vega.

Delta measures the amount that a given option will move with
respect to the underlying security and is stated in terms of
percentage from 0 to 100.  If a stock moves $1 and the option
in question increases in value by $0.40, we know that the option
had a Delta of 40.  At-the-money (ATM) options typically have a
delta of 50, while out-of-the-money (OTM) options have a Delta
less than 50 and in-the-money (ITM) have a Delta greater than
50.  As we move further out-of-the-money, Delta approaches zero,
while it approaches 100 as we move deeper in-the-money.  Neither
of these extremes are met in practical application, but the
basic relationship should give us a useful working understanding.

Gamma is used to describe the rate-of-change of an option's
Delta, and those that understand the relationship can use their
knowledge to give their trading profits an extra boost.  Putting
the relationship in physics terms, Delta is the equivalent of
velocity, while Gamma can be equated to acceleration.  If you
recall your high school physics, you'll remember that
acceleration can really boost velocity over time.  The same is
true of the Delta-Gamma relationship.  I'll leave you to ponder
that concept and we'll revisit it in exacting detail on our next
visit.

The one constant in the universe (aside from taxes) is the
passage of time, and Theta is the Greek that measures the impact
of Father Time on option prices.  Options are, by definition, a
wasting asset, meaning that the portion of the option premium
that is attributable to time, declines day after day.  Adding
insult to injury, the rate of decay of the time-related portion
of an option's value increases as expiration Friday draws near.
The majority of an option's time value disappears in the final
30 days of its life and most of that evaporates in the final 2
weeks.  During expiration week, an equity must move in your
favor substantially, just to offset the loss in value due to
Theta-decay in an OTM or ATM option.

Volatility is perhaps the most apparent determinant of option
pricing; at least it has seemed that way during recent months as
we have watched the VIX race from 35 to 57 and then back down to
the low 20's.  While normal trending markets don't have nearly
that kind of volatility movement, when it does occur, it can
yield outsized returns for appropriately positioned traders, and
exact staggering losses from those unaware of its potential
effects.  Last week, I highlighted the perils of trading in a
high-volatility environment.  Traders that sell options in such
an environment can reap substantial rewards, but need to be
cognizant of the inherent risks that come with the territory.

One interesting point about time-value in options is that on a
percentage basis, ATM options are the most expensive in terms of
time value.  So when we buy ATM options, we need to understand
that we are buying the most time-value possible for that
expiration month, and every last shred of that time-value will
melt away by expiration Friday.  By expiration, either all the
time value will have melted away leaving a worthless option
(great for option sellers, but unpleasant for option buyers), or
the stock will have appreciated so that the option is ITM, now
possessing intrinsic value equivalent to how far in the money
the option is.

As a simple example, let's take a $50 OCT Call on stock XYZ
which is trading for $3.00 one month before expiration.  If on
expiration Friday, the price of the stock is $48 (even if that
is above the price of the stock one month earlier), the option
will expire worthless, with no time value and no intrinsic
value.  On the other hand, if XYZ appreciates to $54 by
expiration Friday, the option will be worth $4.00 ($4 intrinsic
value, and no time value).  In both cases, the time value of the
option fades away to nothing by expiration, but if the stock
moves sufficiently so that our option is in the money, we have
real, as opposed to anticipated value.

Delta and Vega are fairly easy to quantify, and there are a
number of websites that provide this data for those interested
in learning the inter-relationships and how they influence the
potential success of option trading.  One of my favorite sites
is www.ivolatility.com, which provides detailed analysis of
option Greeks, as well as historical volatility charts.  While
this site also provides an option calculator to determine Theta
and Gamma for specific options, I think these two Greeks are
more important to understand from a qualitative sense, so I tend
to focus less on the actual numbers and more on their general
influence on option prices.

One interesting trend I have noticed in recent months is that
online brokers are doing a better job of catering to option
traders.  All 3 of the brokers that I currently use, have
recently added options analysis tools to their trading sites.
This provides me with the ability to research the various Greeks
on a prospective option trade without ever leaving the trading
screen.  In addition to basic option calculators that provide
the ability to check Delta, Gamma, Vega and Theta for any option,
these sites now provide charts of both historical and implied
volatility.  Using this latter tool, I can see where a stock's
volatility is in relation to its historical range, helping me to
make sure I am buying low volatility and selling high volatility.
We'll devote a future article to just talking about volatility
and how to use it to our advantage.

When properly understood, the inter-relationship of the Greeks
on option pricing can be very useful to option traders (both
buyers and sellers) who understand how to capitalize the
opportunities provided.  This week's article was necessarily
general so that I could set the stage for our future
discussions, which will delve into greater detail on each of
the Greeks.

See you next time!

Mark


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***********************
INDEX TRADER GAME PLANS
***********************

IS Swing Trade Model: Wednesday 1/16/2002
Ring The Register Again

News & Notes:
------------
Put plays tracked since Thursday afternoon performed quite well 
today. Markets gapped down at the open and bounced methodically 
lower from there. A close right on session lows could bode further 
drop at Thursday's open, but we will call our exit here today and 
split differences between those who closed today (me included) and 
others who held over (many). Using 100% risk-loss capital allows 
one to hold right into expiration itself if directional conviction 
is strong, but rapid time (theta) decay offsets underlying index 
movement.

To each their own!


Featured Markets:
----------------
[60/30-Min Chart: OEX]


 

OEX remains in a short-term channel and may go lower before 
breaking out. 570 area should see a strong reactionary bounce. 30-
min chart stochastic values (right) suggest that may happen soon.


[60/30-Min Chart: SPX]


 

And so goes the big S&P as well. Look for a bounce near 1118 – 
1120 area at bottom of that channel. I'd consider both measures an 
excellent place to wager call plays if selling action reaches that 
far down!


[60/30-Min Chart: QQQ]


 

The QQQ follows suit in that next high-odds support seems to lie 
near the 38.00 area, and we'll watch all of these short-term 
channels of support quite carefully. If they are tested on 
Thursday and D/60/30 chart stochastic values all align for 
possible bullish reversal, we will target call plays using 100% 
risk-loss capital in the QQQ and OEX alone. Jan SPX and DJX 
contracts cease trading Thursday night, so they are fit for 
intraday traders only from here.


Summation:
---------
Recent put plays could have captured up to +240 Dow points, +12 
SPX points, +8 OEX points and +1.20 QQQ points. Anything within 
that sphere is acceptable to us, and we await the next high-odds 
entry to let us attempt the same thing again! Let's watch those 
lower channel lines for possible action points on Thursday.


*Note* Both SPX and DJX Jan option contracts cease trading 
Thursday night at 4:15pm EST and settle in value on Friday's 
calculated open.


Trade Management:
----------------
Option traders may choose listed In-The-Money (ITM) or Out-The-
Money (OTM) contracts by personal preference. They are selected 
based on volume, open interest and "Delta" values in that order. 
Our preference is usually OTM contracts except for the last few 
days of expiration when ATM or ITM contracts are preferred.

Entry triggers are points where plays are tracked when price 
action breaks above for calls or below for puts. Stops are the 
exact opposite of that. Sell targets are points to exit based on 
index levels or %gain on option contract price as noted.

*No entry targets listed mean the models are idle at that time.


New Play Targets:
----------------
         QQQ                          DJX
Jan Calls: 41 (QQQ-AO)            Jan Calls: 102 (DJV-AX)  
Long: BREAK ABOVE - NONE          Long: BREAK ABOVE - NONE
Stop: Break Below                 Stop: Break Below 
                                

Jan Puts:  39 (QQQ-MM)            Jan Puts: 99 (DJV-MU) 
Long: BREAK BELOW - NONE          Long: BREAK BELOW - NONE
Stop: Break Above                 Stop: Break Above


=====

         OEX                         SPX
Jan Calls: 600 (OEY-AT)           Jan Calls: 1125 (SPT-AE)
Long: BREAK ABOVE - NONE          Long: BREAK ABOVE - NONE
Stop: Break Below                 Stop: Break Below 


Jan Puts: 575 (OEB-MO)            Jan Puts: 1140 (SPT-MH)
Long: BREAK BELOW - NONE          Long: BREAK BELOW - NONE
Stop: Break Above                 Stop: Break Above  



Open Plays:
----------                                                                              
Jan Puts:  39 (QQQ-MM)            Jan Puts: 99 (DJV-MU) 
Long: BREAK BELOW: 40.00          Long: BREAK BELOW 9,960.00
Stop: Break Above [Out 38.80]     Stop: Break Above [Out 9,720.00]

Jan Puts: 575 (OEB-MO)            Jan Puts: 1140 (SPT-MH)
Long: BREAK BELOW 583.00          Long: BREAK BELOW 1143.00
Stop: Break Above [Out 575.00]    Stop: Break Above [Out 1128.00]


Sector Share Trade Model: Wednesday 1/16/2002
Short To The Gills!

News & Notes:
------------
We decided to press the accelerator on short shares this week and 
are sitting fairly handsome tonight. Several targets are opened 
and already at the first measures of support below that we 
identified. That allows us to trail stops down on short plays to 
entry point or inside, reducing adverse risk to nil.


Featured Plays:
--------------
[Weekly/Daily Charts: HHH]


 

The Internet HOLDRs dropped nicely today on a gap-lower move at 
the open. We could easily see that gap tested on a refill attempt 
soon, but weekly chart signals suggest further downside action to 
come.

[Weekly/Daily Charts: SMH]


 

Semi-Conductor HOLDRs did fine on a break below our entry at 45.00 
and now rest right on both 50 and 200 DMA support. We targeted a 
bounce near there and saw these values suck price action in like a 
magnet. With stop-loss set at entry, how much risk is there in 
this play? Not much.


Summation:
---------
Tracking a slew of shorts but targeting nothing more for now. 
We've added Jeff Bailey's SPY short per request of several 
readers. We'll try to balance trailed stop management in a balance 
of capturing any further gains with choking out performing plays 
in the process. Let's have fun from here!


Trade Management:
----------------
Entry triggers are points where plays are tracked when price 
action breaks above for calls or below for puts. Stops are the 
exact opposite of that. Sell targets are points to exit based on 
index levels or %gain on share price as noted.

No entry targets listed mean the model is idle at that time.

* Asterisk means stop-loss level changed since prior posting


New Play Targets:
----------------
NONE


Open Short Plays:
----------
01/02
XLI
Short: BREAK BELOW 27.70
Stop:  Break Above 26.00 

01/14
SPY S&P 500 SPDR [*Bailey Play]
Short: BREAK BELOW  114.80 
Stop:  Break Above  113.80 

DIA Dow Industrial Diamond
Short: BREAK BELOW  99.00 
Stop:  Break Above  98.50 

SMH Semi-Conductor HOLDr
Short: BREAK BELOW 45.00 
Stop:  Break Above 45.00 

SWH Software HOLDr
Short: BREAK BELOW 48.00 
Stop:  Break Above 47.00 

HHH Internet HOLDR
Short: BREAK BELOW 34.00 
Stop:  Break Above 34.00 

01/15
QQQ Nasdaq-100 HOLDr
Short: BREAK BELOW 39.50 
Stop:  Break Above 39.50 

IAH Internet Architecture HOLDr
Short: BREAK BELOW 39.00 
Stop:  Break Above 40.00

XLY Cyclical Transport SPDR
Short: BREAK BELOW 28.00 
Stop:  Break Above 30.00

XLV U.S. Consumer SPDR
Short: BREAK BELOW 27.00 
Stop:  Break Above 29.00


IS Position Trade Model: Wednesday 1/16/2002
Looking Good

News & Notes:
------------
Still tracking Feb put option contracts and watching them swell in 
value each day. Had we caught the top of this recent move it'd be 
more than a double in gains right now, but with 4+ weeks left 
until expiration, plenty of time remains with bearish long term 
charts to go!


Featured Plays:
--------------
Charts pictured in tonight's Market Wrap


Summation:
---------
No new plays on tap for now, and we'll look to track new put plays 
on any failed rally attempts ahead.


Trade Management:
----------------
Option traders may choose listed In-The-Money (ITM) or Out-The-
Money (OTM) contracts by personal preference. They are selected 
based on volume, open interest and "Delta" values in that order. 
Position Trade model usually tracks OTM contracts with several 
weeks of time premium left until expiration for buy & hold plays.

Entry triggers are points where plays are tracked when price 
action breaks above for calls or below for puts. Stops are the 
exact opposite of that. Sell targets are points to exit based on 
index levels or %gain on option contract price as noted.

*No entry targets listed mean the models are idle at that time.


New Play Targets:
----------------
None


Open Plays:
----------
DJX
Feb Puts: OTM 98 (DJV-NT)
Long: 2.00
Stop: 1.00

SPX
Feb Puts:  OTM 1125 (SPT-NE)
Long: 24.60
Stop: 13.00

RTH                         
Feb Puts: ITM 41 (RTH-NR)         
Long: 1.60
Stop: 0.90

XLI                         
Feb Puts: ITM 28 (XLI-NB)         
Long: 1.00
Stop: 1.00         


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Anything else is too slow!

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


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The Option Investor Newsletter                Wednesday 01-16-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


************************Advertisement*************************
Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

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Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!

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


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

ELBO - put
Adjust from $35.50 down to $35

THQI - put
Adjust from $48.50 down to $45.50

MMM  - put
Adjust from $114 down to $108


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

None


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

None


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Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!

http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN
**************************************************************


*********************
PLAY OF THE DAY – PUT
*********************

ADRX - Andrx $62.96 -0.22 (-0.86 this week)

Andrx formulates and commercializes controlled-release oral
pharmaceuticals using its proprietary drug delivery technologies.
Andrx markets and sells Catria XT and Dilitia XT, its generic or
bioequivalent versions of Cardizem CD and Dilacor XR.

Most Recent Update

The Biotech Sector Index (BTK.X) was so very close to breaking
down below short-term support today.  But the bulls came back
into the biotechs and carried them higher into the close.  A
breakdown in the BTK.X would come on a decline below the 530.00
level.  Such a decline should trigger selling in the group,
including ADRX.  For its part, ADRX finished fractionally higher
in today's session, but failed to touch its 200-dma as it has
done in the last 5 sessions.  The failure to trade up to the
200-dma may portend building selling pressure in the stock, but
it remains closely tied to the trading in the BTK.X, which is
why it's so very important to monitor the trading in the sector.
ADRX did make some progress to the downside before the broader
sector rebounded later in the day.  The traded down to and
bounced from the $62 level.  We'd like to see an intraday move
below the $61 level to trigger more selling in this stock.
Conversely, a rollover from the $65 level -- converged 10- and
200-dmas -- is appealing for its ease of risk management.  Just
make sure that ADRX is trading higher out of sector sympathy
when gaming a rollover near resistance, and not on its own.

Comments

This bearish play on the biotech sector is straightforward.
Watch for the Biotechnology Sector Index ($BTK) to trade below
530.00 early tomorrow morning.  Such a decline could bring about
another wave of selling in biotech issues such as ADRX.  Confirm
weakness in ADRX below $62, then $61.  Target $60 or $59 to the
downside, depending upon your specific entry point and attributes.

BUY PUT FEB-65*QAX-NM OI=2186 at $5.40 SL=3.50
BUY PUT FEB-60 QAX-NL OI=1162 at $2.95 SL=1.50

Average Daily Volume = 1.54 mln



**************
Traders Corner
**************

Negative Events and "one-time" Charges
Buzz Lynn
buzz@indexskybox.com

The other night I alluded to the idea that nasty surprises are NOT 
one-time occurrences in a primary bear market.  Surprises are in 
fact a marked characteristic.  Their presence is proof of the 
bearish trend.  If you doubt this, put yourself back in time three 
years to January 1999.  Life was grand, people were great, and 
business was terrific.  Everything fired on all cylinders and 
stocks were priced to grow forever - priced to perfection, as was 
often the reference then.  A little miss in the earnings from 
operations?  No worries.  The CFO could hit the numbers by 
spinning off a division to the markets and raking in the cash from 
an investing public eager to snap it up.  If there was only a 
little shortfall, some corporate stock or equity investments in 
another publicly traded firm could be sold to make up the 
difference.  In other words, the business side could lose money 
and the investment side could make up the difference so as to 
"beat analysts estimates" (itself a farce since the estimates were 
provided to analysts by the company) and keep investors numbly 
happy.  

Any idea how CSCO MSFT and INTC were able to consistently "beat by 
a penny" for so long?  Great news!  Excluding our ("one-time") 
losses, we look like we made money!  And as long as Wall Street 
keeps ignoring our outlandish expenses attributable to a business 
that will never make money, our stock will keep rising!  "It's a 
compelling value with a great story to tell" crowed the analysts.  

This white wash of financial reporting came to be called pro-forma 
earnings, which from the Merriam Webster dictionary means, "Made 
or carried out in a perfunctory manner or as a formality" or 
"provided in advance to prescribe form or describe items".  In 
other words, it's a fabrication with even worse implications 
because it didn't PRE-scribe any form.  The information was 
already known but was conveniently swept under the rug so as not 
to be too obvious.  

Ahh, for the olden days when it was called "a loss".

Investors were and still are lulled to sleep when they ought to be 
wide-eyed concerned that the pro-forma ether has dulled their 
senses.  CFO's, accountants, analysts, FASB, SEC, and brokers have 
been performing the equivalent of financial anesthesia on the 
investing public.  As I've noted before, you can't hide an 
elephant in a cherry tree, and all the white wash can't hide the 
fact that a company is losing money - at least not for long.  

For those of you that saw Disney's Jungle Book animated movie, the 
image going through my mind here is of Kaa, the snake hypnotizing 
Mogley (the "man-cub" and intended meal) by singing softly to him, 

"Trust in me.  Just in me.
Close your eyes.  Trust in me.
You will sleep, safe and sound
Knowing I, am around.
Slip into silent slumber.  
Sail on a silver mist
Slowly, your senses will cease - to exist."

That about the moment that Kaa put the final squeeze on Mogley.  
Fortunately, Mogley's guardian panther, Baghera wakes up in time 
to smack Kaa just in time to save him from being eaten.  The point 
is that we don't have guardian panthers, and when it comes to 
financial survival we must not be lulled to sleep by those that 
pass themselves off on TV as fear-placating experts while picking 
our pockets, or should I say asking us to empty our pockets such 
that we look forward to it.

Back to the subject - negative bear market events - remember we 
have witnessed Ford's intention to eliminate 35,000 employees 
worldwide (and its second dividend cut in a year), Merrill's lay-
off of 9,000 workers, Enron's failure, Arthur Anderson's shredding 
evidence in Enron's failure (thus making it an accomplice in the 
giant fleecing), K-Mart's junk debt status with the looming 
possibility of bankruptcy, Polaroid's bankruptcy, and today, 
adding more negative events, JP Morgan's earnings and the 
pummeling of 3-M over potential asbestos claim liability.  

I ask rhetorically, please, somebody try to convince me these are 
accidents.  The fact is that they are not.  They are symptomatic 
of a weak worldwide economy, which results in a bear market, not 
the other way around.  The bear market did not cause a weak 
economy.  Because the predominant economic issue is that companies 
are, have been, and probably will continue losing money, their 
stock prices can no longer be sustained, thus the bear market.  
Greenspan, in attacking the symptoms, has missed the cause.  In my 
opinion, he is partially the cause.  A doctor should not attempt 
to make a patient slightly sick by reason that the patient is TOO 
healthy.  But that's for another column.

What I really want to get to tonight is the JPM earnings this 
morning and how particularly dangerous its glossed-over earnings 
can be to the market.  Straight up, they missed consensus 
estimates by a country mile when they reported earnings this 
quarter of $0.12* per share compared to estimates of $0.35.  
Remember they provided those estimates in the first place and 
failed to warn or revise those numbers prior to the quiet period 
that began two weeks ago.  

Sure they missed by a long shot.  But, you know, criminy, they had 
Argentina exposure, got whacked a bit by Enron, had some private 
equity investments that went bad.  It was just a bad quarter.  
That will never happen again - merely a one-time occurrence, which 
has nothing to do with their ability to make money.  

WRONG!  They lost money, and a lot more that they thought just two 
weeks ago!  That's the point - they lost money according to 
analysts because of never-to-happen-again charges.  "Things will 
be fine next quarter."  That is the flaw in the logic.  The 
symptoms don't go away without treating the root cause - worldwide 
economic slowdown.  It may be a one-time charge for Argentina.  
But what do they call a writedown in '97 on Russia, or Mexico, or 
Brazil, or Japanese real estate loans or any other charges that 
occurred just "one time"?

Wake up JPM and analysts who tout them, including Merrill Lynch 
who reiterated their Strong Buy rating after the news and just 
before S&P revised their outlook to Negative from Stable!  A 
series of one-time charges amount to RECURRING SERIES OF CHARGES!  
And every one-time event is another thread to a rope from which 
one-time charge reporters will swing, especially in a bear market.  
As Rosanne Rosanna Danna, a character played years ago by the late 
Gilda Radner on Saturday Night Live used to say, "If it's not one 
thing, it's another.  It just goes to show you it's always 
something."  The point is to get used to the idea that in this 
economic environment, one-time charges are not just one time.

But what I really want to drive home is that asterisk on the $0.12 
earnings.  If you can believe this, that asterisk signifies a 
footnote (that they hope you won't notice) that increased their 
loan loss reserves by $510 man, which they chose not to include in 
their $0.12 earnings.  Had they done so, with nearly 2 bin share 
outstanding and roughly a half bin in reserves for bad debt, that 
amounts to another $0.25 in loss or a REAL loss of $0.13 per share 
this quarter.  That folk is how you lose $1 bin and still report a 
$0.12 profit.  

Don't get me wrong - setting aside reserves for bad loans is a 
responsible act of fiscal conservatism.  Not labeling it as a loss 
is, in my opinion, a crime.

Investors should be outraged.

Unfortunately, they are not, and many more companies continue to 
report their earning with nary a complaint from the average 
shareholder because the practice is so widespread that it has 
acceptable by default and complacency.  Also unfortunately, we 
have not heard or seen the last of it with Arthur Anderson and JPM 
as just the tip of the iceberg.  Ever hear of a little company 
called Cisco that trades at about $19?  They have no earnings and 
every quarter report pro-forma losses, which would be even greater 
if they logged their "one-time" recurring losses accurately.  

Lots of fallout from this pro-forma thing is yet to come and I 
would expect a substantial investor backlash as these deceptive 
reporting incidents come to life in greater numbers.  

The point here is recognize that negative events are recurring in 
a bear market and to expect more of them, many of which will stem 
from deceptive accounting intended to provide a rose colored tint 
for those with a bent toward reality.  It is no accident that many 
negative events spring to life in a bear market.


************************************************
BIG CAP COVERED CALLS, NAKED PUTS & COMBINATIONS
************************************************

Spread Trading 101: Entry, Exit and Adjustment Strategies
By Ray Cummins

One of our readers submitted some great questions concerning the
techniques used to initiate and manage combination positions.


Hello OIN,

I have a couple of questions regarding the credit spreads covered
in the newsletter and was hoping you could help me out.

First, I am never sure how long to leave an order open when trying
to enter a spread.  I am usually not filled initially when I place
the trade within the recommended credit range, but could be filled
a day or more later.  This is often because the stock is moving
toward the sold strike.  Can you suggest any guidelines or other
resources I might use to help decide when the trade is no longer a
good trade to open.  Also, I believe leaving these opening orders
in place could actually mean getting the order filled directly into
a losing position.  Any ideas would be welcomed.

Thanks!


Dave,

I am glad to hear you are using the OIN to supplement your search
for profitable trading positions.  All of us on the newsletter
staff pride ourselves in working for a company that offers some of
the best stock/option research at a reasonable price.

Spread trading is indeed a unique undertaking for less experienced
option traders and unfortunately, the ability to profit consistently
with this approach is not something I can explain in an E-mail.
However, you have asked many of the "right" questions (and it's
obvious you are willing to acquire the knowledge necessary to
succeed in this unique game we play) so I will try to help you get
started on the road to discovery and understanding.

Regarding the "target" prices:  Obviously, you can't always achieve
my target credit in these positions.  That's why I call it a target.
It 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
usually 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 usually, 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.  You will 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.

As you mentioned, the first problem comes when you don't get filled
initially (do you chase the play?) or when the issue moves in
opposition of the expected trend after just a few sessions
(regardless of whether you have actually opened the position).  In
reality, every decision you make about trading should be based on
your analysis of the underlying issue and your forecast for its
future movement.  That assessment is then factored into the risk-
reward outlook for the strategy (or the position) you are using.
Of course, that's a very subjective task, thus the best advice I
can offer is that, if the current conditions dictate that the
position is no longer viable (based on your personal criteria),
then it should be closed (or avoided).

With regard to opening/initiating new spread and combination orders:
I do think it's important to have the correct tools for achieving
this task and that means accurate real-time quotes (and theoretical
option pricing) and access to a floor specialist who will work on
your behalf to get the best entries in combination orders.  Most
"spread" orders will not get filled at my target (if they do, I have
not accurately identified the option values or their trading range)
with discount brokerages unless the options actually trade at those
prices and the potential for success with a personal online trading
platform such as Preferred Trade (which has direct access to the
exchange but does not allow simultaneous orders for multiple
positions) is based strictly on your skills and the market's
volatility.  In addition, it is important to have a thorough 
understanding of the relationship between stock movement and the
option's price and for that information, you can consult the many
online articles on the subject or the ever-reliable bibles of
option trading: "Option Volatility & Pricing: Advanced Trading
Strategies and Techniques" by Sheldon Natenberg, and "Options As A
Strategic Investment" by Lawrence G. McMillan.


Also, the concept of hedging the position with a short of the stock
(for the purpose of covering the short put in a "bullish" credit
spread) which you suggested is interesting to me.  Would it be
possible (or wise) to do this during after hours trading using
some sort of a stop or stop-limit order.  Or is there some sort of
service which could alert you via phone or email when a certain
threshold has been broken?

Covering a short put with the sale of stock when the underlying
issue moves through the sold options' strike is a common method
for offsetting potential losses in spread positions, but it is
not appropriate for everyone.  In a bearish issue however, the
technique offers a favorable "rescue" strategy if the stock has
little chance of finishing the expiration period above the strike
price of the sold put.

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

As far as when to use the strategy and the various order types
to initiate the trade: short transactions can occur after the
market (an advantage over options) and there are lots of unique
methods for transmitting stock prices using the latest technology.
You can research the various combinations of brokerages and their
quote/order communications systems on the Internet.  If you find
one you really like, send me a note so I can share it with others.

I hope I have helped answer some of your questions.  For additional
information on spread trading, consult these books (in your local
library or the OIN bookstore):

The Option Advantage and New Option Secret, by David Caplan and
The Complete Option Player, by Ken Trester.

Good Luck!


Summary of Current Positions (as of 01-15-2002):


Covered Calls: (Margin not used in calculations)

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

VRTS    JAN     40    37.42   45.10   2.58    5.7%
NBIX    JAN     45    43.35   47.00   1.65    3.9%
MRVL    JAN     32.5  31.66   39.69   0.84    5.0%
MU      JAN     32.5  31.14   35.30   1.36    8.3%
SEBL    JAN     27.5  26.30   33.52   1.20    8.7%

Closed Positions: AmeriCredit (NYSE:ACF)


Naked Puts:

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

VRTS    JAN     35   43.80   45.10   1.20    9.8%
NVDA    JAN     50   48.95   65.34   1.05    6.2%
EMLX    JAN     27.5 26.80   42.70   0.70    6.5%
IGEN    JAN     25   24.50   39.75   0.50    6.1%
NBIX    JAN     40   39.45   47.00   0.55    5.1%
ACF     JAN     25   24.35   23.25  (1.10)   0.0%
EBAY    JAN     55   54.10   64.03   0.90    7.4%
EMLX    JAN     30   29.40   42.70   0.60    9.1%
NVDA    JAN     55   54.25   65.34   0.75    6.6%
VRTS    JAN     35   34.45   45.10   0.55    7.5%
MRVL    JAN     30   29.50   39.69   0.50   11.3%
MU      JAN     30   29.35   35.30   0.65   11.5%
SEBL    JAN     25   24.40   33.52   0.60   14.2%
NVDA    JAN     55   54.60   65.34   0.40    5.1%
EMLX    JAN     30   29.75   42.70   0.25    5.5%
ACDO    JAN     45   44.30   49.49   0.70   15.5%
MRVL    JAN     35   34.75   39.69   0.25    7.6%
SYMC    JAN     65   64.60   70.40   0.40    6.3%
SEBL    JAN     30   29.75   33.52   0.25    8.9%
BRKS    JAN     45   44.50   46.92   0.50   10.6%

ACDO    FEB     40   39.10   49.49   0.90    6.5%
EMLX    FEB     35   33.85   42.70   1.15    8.8%
MRVL    FEB     30   29.35   39.69   0.65    6.0%
CHKP    FEB     40   38.75   38.68  (0.07)   0.0%
SYMC    FEB     60   58.90   70.40   1.10    5.1%
SEBL    FEB     27.5 26.65   33.52   0.85    8.8%
BRKS    FEB     40   39.15   46.92   0.85    6.0%

As we noted last week, the recent upside activity in
AmeriCredit (NYSE:ACF) has come to an end and bullish
positions in the issue should be closed (or adjusted)
to avoid additional losses.  Checkpoint Software
(NASDAQ:CHKP) plunged $6 Tuesday after announcing that
profits fell in the fourth quarter, as expected, but
they also warned that revenues would not improve in
the first quarter of 2002.  Based on the abrupt change
in technical character, it may be best to close the
position before further downside movement occurs.

Positions Closed: Genzyme (NASDAQ:GENZ)


Naked Calls:

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

ICOS    JAN    65    65.95   51.83   0.95     5.1%
IMCL    JAN    75    75.95   32.08   0.95     7.3%
ADI     JAN    55    43.85   46.59   0.55     5.8%


Synthetic Positions:

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

WMT    58.23    56.87  JAN60C/55P   0.10   54.90   0.10   Open
DGX    71.40    72.01  FEB85C/60P   0.10   59.90   0.20   Open
MER    57.99    55.91  FEB65C/50P   0.15   49.85   0.15   Open

The maximum credit observed in the Wal-Mart (NYSE:WMT) synthetic
position was $0.20, well short of our speculative goal.  However,
Quest Diagnostics (NYSE:DGX) has recovered from the recent selling
pressure in biotechnology stocks and the bullish play may provide
a favorable profit in the next few weeks.


Debit Straddles:
    
Stock  Pick     Last    Position   Cost  Cur.Val.  G/L   Status

GPT    44.14    43.08  JAN45C/45P  2.00   1.85    (0.15)  Open


Credit Spreads:

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

ADSK   39.39    39.95  JAN30P/35P   0.50   34.50   0.50   Open
KBH    40.10    38.90  JAN30P/35P   0.55   34.45   0.55   Open
MCHP   40.33    38.66  JAN30P/35P   0.75   34.25   0.75   Open
LXK    58.70    58.45  JAN45P/50P   0.50   49.50   0.50   Open
CMA    56.93    56.79  JAN50P/55P   0.65   54.35   0.65   Open
IMPH   44.00    40.61  JAN35P/40P   0.80   39.20   0.80  Close?
HMC    20.44    19.25  JAN17P/18P   0.11   18.64   0.11   Open ***
SPW   138.86   132.50  J125P/130P   0.50  129.50   0.50  Close?
CEPH   72.70    71.78  JAN85C/80C   0.60   80.60   0.60   Open
SII    55.12    48.60  FEB40P/45P   0.65   44.35   0.65   Open
THC    62.10    65.22  FEB55P/60P   0.80   59.20   0.80   Open
XAU    58.07    59.56  FEB50P/55P   0.85   54.15   0.80   Open
    
Positions Closed: Dianon Systems (NASDAQ:DIAN); now profitable!

*** Last week, J.P. Morgan announced a ratio change for Honda
Motor's (NYSE:HMC) American Depositary Receipts.  The new ratio
is 2 ADRs for 1 share of common stock and to effect the change,
shareholders received three (3) additional ADRs for every one (1)
ADR held.  The position prices have been adjusted accordingly.
Smith International (NYSE:SII) slumped with the sell-off in oil
service shares and rather than test the sold strike at $50, we
decided to move out and down to a FEB40P/45P spread for a small
debit.  Based on the previous position and the cost to roll out
to February options, the current credit in the play is $0.65.


Credit-Spread Strangles:

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

OEX   589.62 584.85  FEB640C/630C    0.80   630.80  0.80   Open
OEX   589.62 584.85  FEB530P/540P    0.70   539.30  0.70   Open


New Candidates:

This following group of plays is simply a list of candidates to
supplement your search for profitable trading positions.  As
with any investment, you must decide if the selections meet your
criteria for potential plays.  Only you can know what strategies
are suitable for your skill level, risk-reward tolerance and
portfolio outlook.  In addition, we recommend that you avoid any
strategy or technique in which you are not completely comfortable
with the potential loss, the necessary adjustments and the common
entry-exit strategies.  (We monitor the positions marked with ***).

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

BULLISH PLAYS - Credit Spreads

One of our reader's commented that the recent selections in
the Healthcare Services group have performed very well and he
suggested we list some additional limited-risk positions in
that industry segment.  Since we have offered relatively few
credit spreads over the past month, we will focus on that
strategy in today's edition of the newsletter.  All of these
positions offer favorable risk-reward potential, based on the
option premiums and the recent technical indications in the
underlying stocks.  However, current news and market sentiment
will have an effect on these issues, so review each position
individually and make your own decision about its future outcome.

***************
TRI - Triad Hospitals  $31.50  *** On The Rebound! ***

Triad Hospitals (NYSE:TRI) provides healthcare services through
hospitals and ambulatory surgery centers, located in small cities
and selected urban markets, primarily in the Southwestern, Western
and South-central United States.  In addition to providing capital
resources, Triad makes available a variety of management services
to its healthcare facilities.  These services include ethics and
compliance programs, national supply and equipment purchasing and
leasing contracts, accounting, financial and clinical systems,
governmental reimbursement assistance, information systems, legal
support, personnel management and internal audit, access to
regional managed care networks and resource management.

TRI - Triad Hospitals  $31.50

PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-25  TRI-NE  OI=233   A=$0.25
SELL PUT  FEB-30  TRI-NF  OI=2500  B=$0.75
INITIAL NET CREDIT TARGET=$0.60-$0.65  PROFIT(max)=14%


***************
UNH - UnitedHealth Group  $73.00  *** New Trading Range? ***

UnitedHealth Group (NYSE:UNH) forms and operates markets for the
exchange of health services.  The company's Health Care Services
segment consists of the UnitedHealthcare and Ovations businesses.
UnitedHealthcare coordinates network-based health and well being
services on behalf of local employers and consumers nationwide.
Ovations is a business dedicated to advancing the health and well
being goals of Americans age 50 and older.  The company also has
other businesses including Uniprise, Specialized Care Services
and Ingenix.  The Uniprise business is devoted to serving the
needs of large organizations. The Specialized Services business
is an expanding portfolio of health and well being companies,
each serving a specialized market need with a blend of benefits,
provider networks, services and resources.  The Ingenix business
is engaged in the field of health care data and information,
research, analysis and application.

UNH - UnitedHealth Group  $73.00

PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-65  UHB-NM  OI=72   A=$0.30
SELL PUT  FEB-70  UHB-NN  OI=664  B=$0.85
INITIAL NET CREDIT TARGET=$0.65-$0.70  PROFIT(max)=15%


***************
WLP - Wellpoint Health  $125.16  *** New All-Time High! ***

WellPoint Health Networks (NYSE:WLP) is a United States managed
healthcare company.  Wellpoint offers a range of network-based
managed care plans.  The company offers these plans to the large
and small employer, individual, Medicaid and senior markets.
The company's managed care plans include preferred provider
organizations, health maintenance organizations and standard
point-of-service and hybrid plans and traditional indemnity
plans.  In addition, the company offers managed care services,
including underwriting, actuarial services, network access,
medical cost management and claims processing.  The company
also provides a broad array of specialty and other products,
including pharmacy, dental, utilization management, life and
specialized healthcare insurance, preventive care, disability
insurance, behavioral health services, COBRA and flexible
benefits account administration.

WLP - Wellpoint Health  $125.16
  
PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-110  WLP-NB  OI=63  A=$0.55
SELL PUT  FEB-115  WLP-NC  OI=52  B=$1.00
INITIAL NET CREDIT TARGET=$0.55-$0.60  PROFIT(max)=12%


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

BULLISH PLAYS - Covered Calls & Naked Puts

***************
WGO - Winnebago  $40.27  *** Reader's Request! ***

Winnebago Industries (NYSE:WGO) is a United States manufacturer of
motor homes, self-contained recreation vehicles used primarily in
leisure travel and outdoor recreation activities.  Motor home sales
by the company represent more than 86% of its revenues.  Winnebago
motor homes are sold through dealer organizations, primarily under
the Winnebago, Itasca, Rialta, and Ultimate brand names.  Other
products manufactured by the company consist primarily of extruded
aluminum, commercial vehicles, and a variety of component products
for other manufacturers.  Finance revenues consist of profits from
floor plan unit financing for a limited number of the company's
dealers.

One of our subscribers was kind enough to point out the bullish
activity in this issue and asked if it would be a good candidate
for a covered-call, given the company's excellent fundamental
outlook.  Indeed the recent technical indications are favorable
and today's upside movement was based on news that Winnebago plans
to increase production due to a substantial rise in wholesale
orders and retail sales.  The company said its sales order backlog
for Class A and C motor homes was 2,365 units on 1/12/02, a 70%
increase over a backlog of 1,390 units at the same time last year.
Winnebago also continues to see growth in its motor-home market
share and orders are up 50% since the end of the company's first
quarter on 12/1/01.

Investors were very encouraged by the strong sales data as they
pushed the issue up almost 10% in today's session and the heavy
volume suggests there is further upside potential for the stock.
We recommend that traders target a lower cost basis in position
through the use of a "net-debit" order, to allow for a brief
consolidation from the rally.

WGO - Winnebago  $40.27  *** Reader's Request! ***

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 FEB 40   WGO BH   25       2.70    37.57      6.3% ***

-or- 

SELL PUT  FEB 35   WGO NG   0        0.50    34.50      4.3% "TS"
SELL PUT  FEB 40   WGO NH   7        2.10    37.90     11.5%


***************
ACDO - Accredo Health  $49.60  *** Same Play - Different Week! ***

Accredo Health (NASDAQ:ACDO) provides specialized contract
pharmacy services on behalf of biopharmaceutical manufacturers
to patients with chronic diseases.  The company's services help
simplify the difficult and often challenging medication process
for patients with a chronic disease and help ensure that patients
receive and take their medication as prescribed.  The company's
services benefit biopharmaceutical manufacturers by accelerating
patient acceptance of new drugs, facilitating patient compliance
with the prescribed treatment and capturing valuable clinical
information about a new drug's effectiveness.  Their services
include contract pharmacy services, reimbursement services,
clinical services, and delivery services.

The Health Services sector has been one of the best performing
market segments in recent sessions and the reason is, these
companies offer an excellent portfolio hedge when the broader
market begins to slump.  Accredo Health is one of the leading
firms in the group and the issue climbed to new highs last
week after the company announced a deal to buy the specialty
pharmaceutical services business from Gentiva Health Services.
The acquisition makes ACDO the largest specialty distributor
of pharmaceuticals, with a market share of over 17%, leaving
retail pharmacies as the only companies that have a larger
presence.  Analysts were optimistic about the announcement and
Steven Halper, an analyst at Thomas Weisel Partners LLC, said
the deal is a, "landmark transaction for Accredo."

We simply favor the recent technical trends and these positions
offer a great way to speculate on the future movement of the
issue in a conservative manner.  Target-shoot a higher premium
in the sold put initially, to increase the return on investment
in the position.

ACDO - Accredo Health  $49.60

PLAY (sell naked put):

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

SELL PUT  FEB 40   DZU NH  53        0.50    39.50      4.6% "TS"
SELL PUT  FEB 45   DZU NI  124       1.50    43.50      8.8%

http//www.OptionInvestor.com/charts/jan01/charts.asp?symbol=ACDO
***************

BEARISH PLAYS - Naked Calls & Combinations

The issues are excellent candidates in the "premium-selling"
category of options trading.  Based on analysis of historical
option pricing and the underlying stock's technical background,
these positions meet our fundamental criteria for profitable
"naked" calls.  Each issue has robust option premiums, a well
defined resistance area and a high probability of remaining
below the target strike prices.  As with any recommendations,
these positions should be carefully evaluated for portfolio
suitability and reviewed with regard to your strategic approach
and personal trading style.  

***************
AMAT - Applied Materials  $41.55  *** Chip Sector Sell-off! ***

Applied Materials (NASDAQ:AMAT) develops, manufactures, markets
and services semiconductor wafer fabrication equipment and related
spare parts for the worldwide semiconductor industry.  Many of
Applied's products are single-wafer systems designed with two or
more process chambers attached to a base platform.  The platform
feeds wafers to each chamber, allowing the simultaneous processing
of several wafers to enable high manufacturing productivity and
precise control of the process.  Applied has five single-wafer,
multi-chamber platforms: the Precision 5000, the Centura, the
Endura, the Endura SL and the Producer.  These platforms currently
support chemical vapor deposition, physical vapor deposition, etch
and rapid thermal processing technologies.  Customers for their
products include semiconductor wafer manufacturers and integrated
circuit (or chip) manufacturers.  The company's quarterly earnings
are due on 2/12/02.

AMAT - Applied Materials  $41.55

PLAY (aggressive - sell naked call):

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

SELL CALL FEB 50   ANQ BJ  7,958     0.50    50.50      5.6% ***
SELL CALL FEB 47.5 ANQ BW  6,641     0.90    48.40      7.6%
SELL CALL FEB 45   ANQ BI  3,842     1.55    46.55     10.3%


***************
KLAC - KLA Tencor  $50.01  *** Chip Sector Slump! ***

KLA-Tencor (NASDAQ:KLAC) is a supplier of process control and
yield management solutions for the semiconductor and related
microelectronics industries.  The company's large portfolio
of products, software, analysis, services and expertise is
designed to help integrated circuit manufacturers manage yield
throughout the entire wafer fabrication process, from research
and development to final mass production yield analysis.  The
company offers a broad spectrum of products and services that
are used by every major semiconductor manufacturer in the world.
These customers turn to the company for in-line wafer defect
monitoring; reticle and photomask defect inspection; CD SEM
metrology; wafer overlay; film and surface measurement; and
overall yield and fab-wide data analysis.  KLA Tencor's earnings
are due on 1/23/02.

KLAC - KLA Tencor  $50.01

PLAY (aggressive - sell naked call):

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

SELL CALL FEB 60   KCQ BL  1,661     0.60    60.60      5.5% ***
SELL CALL FEB 55   KCQ BK  1,865     1.75    56.75     10.2%
SELL CALL FEB 50   KCQ BJ  422       3.70    53.70     15.3%


***************
QLGC - Qlogic  $49.75  *** It's Time To Take Profits! ***

QLogic Corporation (NASDAQ:QLGC) is a designer and supplier of
Storage Area Networking infrastructure building blocks.  Its
SAN infrastructure building blocks, comprised of semiconductor
chips, host board adapters and switches, are integrated into
storage networking solutions of the world's leading system and
storage manufacturers.  Companies such as Sun Microsystems, IBM,
Dell Computer Corporation, Compaq Computer Corporation, Fujitsu
Microelectronics, and Hitachi all use some of its components in
the storage and systems solutions they also sell to the world's
largest information technology environments.  In addition to its
original equipment manufacturer relationships with these and
other companies, in January 2000 the company started delivering
selected Fibre Channel building blocks to leading distributors,
systems integrators and resellers, thereby expanding its reach
and visibility to the information technology community.  The
company's quarterly earnings are due on 1/23/02.

QLGC - Qlogic  $49.75
  
PLAY (aggressive - sell naked call):

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

SELL CALL FEB 65   QLC BM  858       0.65    65.65      6.0% ***
SELL CALL FEB 60   QLC BL  2,001     1.50    61.50     12.9%
SELL CALL FEB 55   QLC BK  1,915     2.80    57.80     15.7%


***************
AT - Alltel  $56.70  *** Earnings Speculation! ***

Alltel Corporation (NYSE:AT) is a customer-focused information
technology company that provides wireline/wireless communications
and information services.  The company operates in two principal
areas, communications and information services.  The company's
communications operations consist of its wireless, wireline (local
and long-distance) and emerging businesses segments.  Emerging
businesses are the company's key product offerings, and include
the company's long-distance, competitive local exchange carrier,
Internet access, and personal communication system and network
management operations.  Alltel subsidiaries provide wide-area
paging and information processing management services, and
advanced application software along with telecommunications
products.  Another subsidiary publishes telephone directories
for affiliates and other independent telephone companies.

Alltel's earnings are due next week (1/24/02) and based on the
recent downside activity, traders are not expecting a favorable
report.  In addition, Alltel has issued comments suggesting it
would be interested in acquiring more telephone access lines,
and it believes consolidation is "critical" for the wireless
industry.  Unfortunately, acquisitions are rarely seen as a
positive share-value event until after the "deal is done" and
the benefits are easily recognizable.  In any case, the current
trend is bearish and unless the company announces surprisingly
positive earnings, the issue has little chance of reaching our
sold strike in one month.
 
AT - Alltel  $56.70
  
PLAY (conservative - bearish/credit spread):

BUY  CALL  FEB-65  AT-BM  OI=84  A=$0.20
SELL CALL  FEB-60  AT-BL  OI=81  B=$0.70
INITIAL NET CREDIT TARGET=$0.60-$0.65  PROFIT(max)=12%


***************
MMM - Minnesota Mining  $103.47  *** Asbestos Woes! ***

Minnesota Mining & Manufacturing (NYSE:MMM), an integrated
enterprise, is engaged in the research, manufacturing and
marketing of products related to its technology in coating and
bonding for coated abrasives.  Characterized by substantial
inter-company cooperation, 3M's business has developed upon the
research and technology of its original product, coating and
bonding. This process consists of applying one material to
another, such as abrasive granules to paper or cloth (coated
abrasives), adhesives to a backing (pressure-sensitive tapes),
ceramic coating to granular mineral (roofing granules), glass
beads to plastic backing (reflective sheeting) and low-tack
adhesives to paper (repositionable notes).

A number of industrial companies have been hit by "asbestos
woes" in recent months and today shares of MMM plummeted amid
fears about the impact of new asbestos litigation against the
company.  Minnesota Mining was a defendant in roughly 20,000
lawsuits in various courts as of the end of last September,
and those cases purport to represent about 85,000 individual
claimants.  Nine U.S. companies have filed for Chapter 11
bankruptcy protection since January 2000 as a result of the
financial burden of asbestos claims and MMM investors became
concerned about the effects of current lawsuits after company
officials said, "There can be no certainty that the company
may not ultimately incur charges for litigation in excess of
presently recorded liabilities."

Regardless of the outcome, the issue is in a steep downward
trend and this conservative position offers a great way to
participate in the future (bearish) movement of the issue
with relatively low risk.

MMM - Minnesota Mining  $103.47

PLAY (conservative - bearish/credit spread):

BUY  CALL  FEB-120  MMM-BD  OI=546  A=$0.55
SELL CALL  FEB-115  MMM-BC  OI=508  B=$1.05
INITIAL NET CREDIT TARGET=$0.60-$0.65  PROFIT(max)=14%


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

SUPPLEMENTAL CREDIT-SPREAD CANDIDATES

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

BULLISH PLAYS:

Stock  Last    Long    Ask    Short    Bid   Target  Target
Symbol Price  Option   Price  Option   Price Credit  Profit

LNCR   28.70  FEB-25P  0.50   FEB-27P  0.95   0.50    25%
HCA    41.50  FEB-37P  0.30   FEB-40P  0.55   0.30    14%
AET    36.25  FEB-30P  0.25   FEB-40P  0.75   0.60    14%
FDC    80.03  FEB-70P  0.35   FEB-75P  0.90   0.60    14%


BEARISH PLAYS:

Stock  Last    Long    Ask    Short    Bid   Target  Target
Symbol Price  Option   Price  Option   Price Credit  Profit

ADI    42.50  FEB-55C  0.30   FEB-50C  0.80   0.60    14%
CDWC   52.49  FEB-65C  0.35   FEB-60C  0.85   0.60    14%
FIC    47.81  FEB-60C  0.40   FEB-55C  0.90   0.60    14%
MXIM   55.29  FEB-70C  0.40   FEB-65C  0.90   0.60    14%

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


SEE DISCLAIMER
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