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Daily Newsletter, Wednesday, 01/23/2002

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The Option Investor Newsletter                Wednesday 01-23-2002
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)
*******************************************************************
      01-23-2002          High     Low     Volume Advance/Decline
DJIA     9730.96 + 17.16  9773.37  9680.51 1.44 bln   1963/1154
NASDAQ   1922.38 + 39.85  1925.15  1879.24 1.83 bln   2189/1407
S&P 100   573.63 +  3.00   576.18   568.67   Totals   4152/2561
S&P 500  1128.18 +  8.87  1131.94  1117.43             
RUS 2000  477.45 +  8.02   477.45   468.04
DJ TRANS 2755.63 + 95.93  2755.63  2658.21
VIX        23.66 -  1.44    25.86    23.54 
VXN        48.15 -  2.22    51.42    48.03
TRIN        0.73 
Put/Call    0.42
*******************************************************************

Interpretation, Please?
Austin Passamonte

That's what we'll ask each other when Greenspan speaks tomorrow. 
Of course the minutes of his speech will be released and knee-
jerked to long before Al grabs the microphone but it may be what 
gets said in Q&A forum that makes a lasting difference.

Regardless, it's earnings season and market-moving news will come 
along most every session for the next couple weeks. After that we 
enter the quiet period (several days?) between last stragglers to 
report and the early birds who may pre-warn. No surprise that the 
last two March/April periods have driven markets to new yearly 
lows on perpetual disappointing news. Will we break that cycle two 
months from now?

Impossible for me to say, or anyone else for that matter. Gotta 
love the market prognosticators who peer into their crystal balls 
and try to call the markets for an entire year from right now. 
Yes, they'll hit a few points right on the head and miss others by 
a wide country mile. Guess which mark gets trumpeted while the 
other is buried in obscurity? Yes, you win the prize!

Speaking of calling the markets, dozens of financial websites, 
newspapers and TV media have been trumpeting Dow 9700, SPX 1120 
and NASDAQ Comp 1880 areas to watch for days now. And indeed 
everyone has. I know that many S&P 500 futures traders in the CME 
were covering shorts and/or going long near 1120 S&P once it broke 
lower, held and bounced above. Nice day trade opportunity in there 
for sure, but was that the bottom? Full bull ahead? Why don't we 
look at some charts and see if any signs on the roadmap exist for 
us to measure & weigh?

(Weekly Chart: Dow)


 

The first scan I do on any symbol of interest is a weekly/daily 
snapshot. The first thing I look for is stochastic value direction 
and alignment. Is price action weak or strong? That's priority one 
for me. In this example of Dow weekly chart it is 100% full-bear 
roll. Can a rally pop right from here and never look back? Sure 
can. And any of us can win Powerball's drawing tonight, too. Is 
that how you want to play financial odds?

From there we ask where lies resistance and support. The Dow now 
sits firmly on 50% retrace of 2001 yearly lows back towards highs. 
From there resistance meets in triple-threat fashion at 10,100 via 
50 & 200 WMA and 62% retrace as well. A break lower leaves the 
9,300 area as next floor below.

(Weekly Chart: NDX)


 

The NDX "powered higher" (CNBC's words) with all tech sectors 
firing away on full cylinders. Bottom in place? Maybe, but do you 
see any evidence of that? I see price action below three measures 
of quantified resistance coupled with stochastic values in the 
midst of a full-bear roll. SOX index weekly chart is a mirror 
image of this.

(Daily Chart: SOX)


 

Speaking of which, here's the daily-chart view of SOX (and NDX) 
tonight. The ascending channel from late September until last week 
will now offer resistance if approached again. So will both moving 
averages as well. Today's rally erased Tuesday's decline in 
bullish reversal "tweezer bottom" fashion but not formation. These 
patterns are most viable at relative lows and the SOX has merely 
bounced off a round number of support. If stochastic values 
reverse up from oversold extreme and rise above 20% level it might 
be time to tentatively test the upside.

(Daily Chart: OEX)


 

The OEX is a wonderful broad-market proxy because it encompasses 
so many key components in one orderly index. What's it tells us 
tonight? This semblance of a channel since early October 2001 has 
had support line tested three times before and price action 
bounced. Will there be a fourth? We're about to find out in the 
next couple days or so.

(Weekly Chart: BKX)


 

Is the rate-cut grafting nearing its end? Banking Index looks to 
break this year-long wedge in a week or two, and stochastic values 
are poised for downside action. Is money quietly exiting banks and 
flowing somewhere else? Wonder how that may impact the SPX, OEX 
and Dow with these components within?

Conclusion
Markets are chopping around widely touted levels of support that 
millions of eyes are watching. We can expect these levels to 
magnetize price action for awhile before releasing in directional 
fashion. These are merely four of a few dozen charts I scanned 
today looking for potential plays to fill Index Gameplans with. 
Each one began with an objective, unbiased view and evidence 
observed is weighed to form an opinion. That's the only way I know 
to assess market action in high-odds fashion... is there any other 
approach that works? None I've managed to find, and certainly not 
harboring any silly directional bias or favorites.

The trend is decidedly down in all broad index weekly charts I 
see. Daily charts show price action clinging near key pivot points 
while below several measures of resistance. Stochastic values are 
totally bearish on a weekly basis and oversold but benign in the 
shorter term. That's the overwhelming market evidence observed.

You may notice a lack of fundamental market news, earnings, etc 
factored in here. That's of varying importance to some traders but 
very little use to me. The only time I factor that stuff is when 
taking short-term plays (two days or less) during expiration week 
on news-driven symbols. Otherwise it's merely market noise that 
melts right into the charts.

With this in mind, following the trend as Jim reminds us to do 
means shorting this broad market with both barrels until the 
picture turns bullish again. When might that be? I wouldn't 
venture a guess but weekly charts turning bullish weeks or so from 
now will tell when it's time to bring in puts and switch to calls 
once more.

Selling All Rallies
If the trend is our friend, today's failed afternoon pop is our 
best buddy. The trend is down and we enter swing trades counter to 
that trend whenever the chance emerges. That counter-move pop 
setup the following condition tonight:

(60/30 Min Charts: SPX)


 

We saw a high-odds put play setup emerge in all indexes and many 
stocks today. This is precisely the scenario trend traders waited 
for. Using the SPX for our example, price action rapidly spiked 
from 1120 to 1131 in furious fashion and intraday oscillators 
chased it right up to overbought extreme. I trapped this picture 
near 3:00pm in case price action would change by the close.

We had 30-min stochastic values (right) in early bearish reversal 
and hourly signals following with a bearish touch or kiss. At the 
same time we had price action fall right back into the days' long 
descending channel from last week until now. Classic swing trade 
entry setup if I've ever seen one. Only thing better would have 
been overbought daily charts as well, but we can't always have 
everything.

Will these put plays work? Remains to be seen tomorrow, but if we 
can manage to take ten plays just like this I like our chances to 
win or exit near par on the vast majority of them!

Summation
"Follow The Trend" is age-old advice. Right now that is decidedly 
down across the broad market arena. If we want the best chance at 
making money and limiting risk, every attempt to rally that even 
hints at failure can be whacked to the downside for now. Weekly 
chart signals will tell us when that ceases to be the best 
approach down the road and we'll switch targeted directions in a 
heartbeat when that happens.

I'll be away from the website these next two days as I join 
Preferred Trade Live and some OI readers in Chicago at the CBOE 
floor. We'll be in the OEX pits playing at the mock trading 
session and chatting with floor traders there. You can bet I'll 
pick all of the local trader's brains with every question possible 
to see where my money goes and why. For those who'll be down there 
getting a market education with me, see you then. Hope the rest 
with live trades in the market out-perform expectations once more! 

Best Trading Wishes,
austinp@indexskybox.com


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

The Greeks, Part 1 - Delta and Gamma
By Mark Phillips
mphillips@OptionInvestor.com

After setting the stage for a protracted discussion of the Greeks
like Delta, Theta and Vega last week, Austin did me a huge favor
over the weekend by penning a very insightful Trader's Corner
article, Limiting Risk Trading OTM Options .  If you missed it, I
highly recommend you click on over and spend the 10 minutes
necessary to absorb its import.

In our visit last week, I laid out what I feel are the important
factors (or Greeks) that have a strong influence on option
pricing, along with some resources for individual traders to get
their hands on that information.  Tonight, I want to focus on
Delta and Gamma, which I believe are pivotal to the contract
selection process we all go through in our day-to-day trading.
While I'm not going to give you a cut-and-dried formula to apply,
I think the process we go through here tonight will give you the
ability to understand the quantitative reasons behind your strike
selection decision.

Let's face it, any two traders can look at the same stock, and
see vastly different trade possibilities depending on
expectations, experience and trading style.  Here's a case in
point.  The NASDAQ-100 has been declining steadily for the past
2 weeks, bringing the daily Stochastics deep into oversold
territory.  An intermediate-term trader could look at that chart
and see a bullish trade setup, looking to ride an oversold bounce
from the current level up to the $40-41 area as daily Stochastics
make their orderly transition back into overbought territory.  A
long-term trader like myself would look at the weekly chart, see
Stochastics still in steep decline and decide to wait for the
optimum entry after the oscillator enters oversold and starts to
flatten out.  Then we have the short-term trader like Austin, who
sees the 60/30-min charts just starting to roll over from oversold
territory and is eyeing a put trade.  The point here is that it
is all about expectations and timeframe.

In his weekend article, Austin did a great job of showing the
fallacy of believing that buying more time via back-month
contracts or even LEAPS is a lower risk proposition than buying
front-month options.  We need to be clear on our expectations
and the timeframe in which we think those expectations will be
met.  If you're looking to play a move measured in months rather
than hours, then certainly LEAPS should be considered, due to
the insulation they provide against time-decay.  But that's a
discussion for another time.  What I want to focus on here is the
issue of what option to select, whether In The Money (ITM), At
The Money (ATM) or Out of The Money (OTM).

The first issue that we need to understand is Delta, which is a
measure of how much the price of our option changes for a given
move in the underlying security.  An ATM option will have a Delta
of 50, meaning that a $1 move in the price of the underlying
equity will yield a corresponding move in the option of $0.50.
ITM options have higher deltas, while OTM options have lower
delta.

Next up is Gamma, which is a measure of how fast Delta changes
with moves in the underlying security.  The value of Gamma is
harder to predict, based on the option's strike relative to the
underlying stock price, so what we want to understand is HOW it
relates to changes in the price of an option as the underlying
security moves.

I'm still an engineer at heart, so I like to think of Delta and
Gamma in physics terms.  If we refer to Delta as the speed at
which the price of the option changes relative to the stock, then
Gamma would properly be referred to as acceleration.  Boiling it
down to a very simple example, let's talk about driving your car
down the road at 50 mph.  That speed is the functional equivalent
of Delta.  Based on that constant speed, we can quickly calculate
how long it will take us to reach our destination.  If we have
100 miles to go, our trip will take 2 hours.  If we want to speed
things up, all we need to do is step on the gas and accelerate
the car to a greater rate of speed.  Accelerating the car by 1
mph per second means that we could be ripping down the road at 80
mph (shortening our travel time to an hour and 15 minutes) in
only 30 seconds of acceleration.  

Bringing it back to the world of options, that is the power of
Gamma, in that a seemingly small value of Gamma of only 0.04 can
very quickly increase the Delta of our option, increasing the
rate at which it appreciates with favorable stock movement.

I was going to use a hypothetical example of a fictional $100
stock, but let's make this a little more meaningful by using IBM
for our example.  Let's assume that after the sharp decline in
the past 2 weeks, we're looking for the stock to retrace a
portion of those losses, rallying back to the $120 level. 
Unreasonable?  Maybe.  But it should make for an instructive
example.

With IBM currently trading near $108, and options available at
$5 strikes, we don't have the luxury of picking a strike that is
exactly ATM, but let's label the $110 strike as ATM, the $105
strike as ITM and the $115 strike as OTM.  From the options
analytics available from my broker's trading screen, the Delta
of the $110 Feb Call is 0.58 and the Gamma is 0.046.  So if we
enter a position at current prices, the call will cost $4.30.
So here's the theoretical calculation:

With IBM at $109, the option price should rise to $4.30 + 0.58
or $4.88.  That move raises the Delta from 0.58 to 0.63 due to
the affect of Gamma.  As IBM moves to $110, the option price
will rise to $4.88 + 0.63 or $5.51, with Gamma increasing the
value of Delta to 0.67.  Then as IBM moves up to $111, our
option increases to $6.18, and so on.  With each move up in
price, Delta increases by the increment provided by the value
of Gamma, and you can see how that geometric effect builds on
itself.  Of course, we need to keep in mind that this can't
continue forever, as the maximum value achievable for Delta is
theoretically 100, where the option moves dollar-for-dollar with
the underlying security.  Keeping this relationship intact is
the behavior of Gamma, which moves down as the stock price moves
up, slowing the rate of acceleration, but not the speed.

Let's look at the some IBM February options for comparison:

$100 Call (IBM-AT currently $14.20)
     Delta=0.88
     Gamma=0.021
$105 Call (IBM-AA currently $9.20)
     Delta=0.77
     Gamma=0.035
$110 Call (IBM-AB currently $4.30)
     Delta=0.58
     Gamma=0.046
$115 Call (IBM-AC currently $0.85)
     Delta=0.34
     Gamma=0.044
$120 Call (IBM-AD currently $0.25)
     Delta=0.14
     Gamma=0.27

We all know that OTM options are cheaper in terms of $$ cost, but
going too far out of the money can confront us with an
excessively high opportunity cost.  The lure of far OTM options
due to their low price has ruined more than one option traders'
account, and our goal here is to show how to intelligently use
the leverage provided by OTM options without putting us in a
position with low odds of success.  Note how the further out of
the money we go, the rate at which Delta drops off, especially
for the $120 strike.  There is an interesting lesson here; perhaps
cheaper, isn't necessarily cheap?  Interestingly, Gamma is the
highest for the ATM option in the example we've shown.

I know we've covered a lot of information here, mostly in
numerical form.  And unfortunately I've run out of time and space
before I could tie it all together.  Next week I want to spend
our time going through the remainder of the IBM example, with the
goal of defining what makes the most sense for a short-term trade
where we are looking for a move back to the $118-120 level in the
stock.  

There's a reason I've listed all the option prices, as well as
values for Gamma and Delta.  Industrious students should be able
to apply the simple math listed above to determine on a
theoretical basis exactly which option should provide the best
return for a moderate price move in the stock.  For those that
don't want to spend the time, just sit tight.  We'll go through
it in exacting detail next Wednesday, using all the values listed
above.  Stick with me on this, because there is really some
useful meat at the center of this topic.  Now that we've covered
the dynamic inter-relationship between option pricing and Delta
and Gamma, next week we can go through the process of using that
understanding to determine the strike price that gives us the
best odds for trading success.  Isn't that worth the wait?

See you next week!

Mark


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

IS Swing Trade Model: Thursday 1/23/2002
Silver Platter Setup?


News & Notes:
------------
Good things are supposed to come to those who wait. We'll see if 
that's true on Thursday or not. Market action setup a high-odds 
put play entry and we'll hit them tomorrow if possible.


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


 

The OEX has tracked a sort of expanding channel these past several 
sessions. Right now it meets upward resistance and chart signals 
are in full-bear alignment right now. Downside target could easily 
be 565 or lower within days if price action rolls.


[60/30-Min Chart: SPX]


 

A slightly different look at the channel, SPX falters near its 
resistance and appears poised to roll as well. Downside target 
could be 1110 area at bottom of expanding wedge as shown.


[60/30-Min Chart: QQQ]


 

QQQ is in identical formation and sees 37 area as next firm 
support if price action gives way.


Summation:
---------
We'll track put play entries on a break below Wednesday's close in 
all indexes should that happen on Thursday. Odds look excellent 
for a downside play setup in harmony with the overall trend.


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
Feb Calls: 40 (QQQ-BN)            Feb Calls: 98 (DJV-BT)  
Long: BREAK ABOVE - NONE          Long: BREAK ABOVE - NONE
Stop: Break Below                 Stop: Break Below 
                                

Feb Puts:  38 (QQQ-NL)            Feb Puts: 96 (DJV-NR) 
Long: BREAK BELOW 38.40           Long: BREAK BELOW 9,725 Dow
Stop: Break Above 39.75           Stop: Break Above 9,900 Dow 


=====

         OEX                         SPX
Feb Calls: 580 (OEY-BP)           Feb Calls: 1150 (SPT-BJ)
Long: BREAK ABOVE - NONE          Long: BREAK ABOVE - NONE
Stop: Break Below                 Stop: Break Below 


Feb Puts: 570 (OEB-NN)            Feb Puts: 1100 (SPT-NT)
Long: BREAK BELOW 573.50          Long: BREAK BELOW 1128.00
Stop: Break Above 577.00          Stop: Break Above 1135.00 


Open Plays:
----------
None


IS Position Trade Model: Thursday 1/23/2002
Midday Interruption


News & Notes:
------------
A second consecutive session where rally attempts fell short into 
the close. Indexes are not making any real headway right now and 
might not do so for a bit. Recent levels of support are serving as 
price magnets on either side of the action right now. 


Featured Plays:
--------------
None


Summation:
---------
A release from oversold extreme in daily-chart signals is 
imperative before attempting any further buy & hold put play 
entries. Until that happens, resulting market action could very 
well chop sideways while time premium values eke away against long 
holders of them. Given the choice we'd obviously buy puts for now, 
but a sudden rally pop could stick for a bit at any moment as 
could persistent sideways consolidation.


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: 1.50

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


Sector Share Trade Model: Wednesday 1/23/2002
Bulls Try It Again

News & Notes:
------------
Another failed rally attempt this afternoon as the rapid pop 
dropped once again. Shorted shares were taken out for modest gains 
this session, and we have a bunch of new short entries to track in 
here as well. Cannot find any high-odds long plays, although the 
BBH is shaping up for possible entry soon.

Featured Plays:
--------------
(Weekly/Daily Charts: RKH)


 

All banking and financial sector charts look bearish to varying 
degrees. Overbought stochastic values in weekly/daily time frames 
and price action sitting near support offers a decent risk/reward 
ratio. Shorting RKH shares at 112 gives a 2-point cushion to 
support at 110 area, and shorting near resistance at 115 would be 
even better if possible. With all financial sectors looking weak, 
we'll track these short if bearish entries are hit and let time 
take over from there.


Summation:
---------
We have little problem hitting plays for a point or three gains on 
frequent basis but have yet to catch a runaway break either way. 
We'll keep plugging away when weekly/daily charts line up and a 
market break will eventually carry us away!


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:
----------------
1/24
XLF Financial SPDR
Short: BREAK BELOW 26.00
Stop:  Break Above 28.00

IYF Dow Jones U.S. Financial
Short: BREAK BELOW 80.00
Stop:  Break Above 83.00

IYR Dow Jones Real Estate
Short: BREAK BELOW 79.75
Stop:  Break Above 82.00

IYG Dow Jones Financial
Short: BREAK BELOW 90.00
Stop:  Break Above 93.00

FFF Fortune 500
Short: BREAK BELOW 80.00
Stop:  Break Above 82.00

RKH Regional Bank HOLDR
Short: BREAK BELOW 112.00
Stop:  Break Above 116.00

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

01/14
SPY S&P 500 SPDR 
Short: BREAK BELOW  114.80 
Stop:  Break Above  113.00 [hit]
Result: +1.80

DIA Dow Industrial Diamond
Short: BREAK BELOW  99.00 
Stop:  Break Above  97.50 *

SMH Semi-Conductor HOLDR
Short: BREAK BELOW 45.00 
Stop:  Break Above 42.00 [hit]
Result: +3.00

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

01/15
IAH Internet Architecture HOLDr
Short: BREAK BELOW 39.00 
Stop:  Break Above 38.00 *

XLY Cyclical Transport SPDR
Short: BREAK BELOW 28.00 
Stop:  Break Above 28.00 [hit]
Result: Par

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


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The Option Investor Newsletter                Wednesday 01-23-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.



************************Advertisement*************************
BARRON'S SAYS OPTIONSXPRESS HAS "a lot of bang for the buck"

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* 8 different FREE options pricing, strategy, and charting tools
* Real-Time Buying Power, Account Balances or Cancels
* EASY screens for spreads, collars, covered calls or 
butterflies!
Go to http://www.optionsxpress.com/marketing.asp?source=oinvestor013

Note: Options involve risk. Risk disclosure: 
http://www.optionsxpress.com/welcome_risk_index.htm
**************************************************************


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

MRVL - call
Adjust from $39 up to $39.50

TGH  - call
Adjust from $69 up to $69.25

LPNT - call
Adjust from $33 up to $34

THQI - put
Adjust from $46 down to $45


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

None


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

QCOM $43.54 +2.14 (-1.41) Bear Sterns' bullish call on the
wireless services sector buoyed shares of QCOM today.  Of
course the broad tech rally helped too.  The company reports
after the bell tomorrow, with consensus estimates calling for
a profit of 0.23 per share.  Use today's high at $44.14 as a
possible stopping out point on further strength earlier
tomorrow.  Hopefully the stock will weaken tomorrow, allowing
traders with open positions to exit at a more favorable level
ahead of the company's earnings report.


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

PNC - PNC Financial Services $61.45 +0.32 (+0.19 this week)

PNC Financial Services Group, Inc. is a bank holding company and
a financial holding company. The Company is a diversified
financial services company operating community banking,
corporate banking, real estate finance, asset-based lending,
wealth management, asset management and global fund services
businesses. The Company provides certain products and services
nationally and others in PNC's primary geographic markets in
Pennsylvania, New Jersey, Delaware, Ohio and Kentucky. The
Company also provides certain products and services
internationally. 

Most Recent Update

The Bank Sector Index (BKX.X) finished the day in positive
territory despite the overwhelming weakness in the broader
market.  The BKX.X finished 0.15% higher in today's session.
We mention the BKX.X because PNC is a component of the sector
index and accordingly tracks it very closely.  The broader
bank sector was bolstered by a report from Bank of America
(NYSE:BAC) and what is positive for the rest of the sector is
positive for our PNC play.  The stock worked higher early this
morning, but was dragged back lower by the broad market weakness.
Today's pullback reinforced that while the BKX.X was higher, we
still need the broader market to advance if this play is going to
be successful.  We're in the right sector and right stock, but
still need the market to be bullish if we're going to win in this
play.  That said, if the broad market weakness continues, start
looking for PNC to pullback to support.  The first level to look
for a bounce is from the $60.75 to $61 area, which would keep the
short-term ascending wedge intact.  If the market falls under
further pressure, look for PNC to firm up at the $60 level.  On
market and sector strength, watch for PNC to test its 200-dma at
the $62.23 level.  A breakout on heavy intraday volume could
set-up PNC to move substantially higher in the short-term.

Comments

PNC bounced from its 10-dma during today's trading, following
its pullback during yesterday's trading.  The stock is coiling
between its converging 10- and 200-dmas.  The 10-dma currently
sits below at $60.51 and the 200-dma currently rests overhead
at $62.20.  Further strength in the Bank Sector (BKX.X) could
boost PNC out of its recent trading range and into breakout
mode, above the 200-dma.  Look for entries near support at the
10-dma to position ahead of a potential breakout.  Or use an
advance past the 200-dma on heavy volume to entry new plays.
Confirm strength in the BKX.X before entering on a rally
attempt.

BUY CALL FEB-60*PNC-BL OI=1025 at $2.55 SL=1.50
BUY CALL FEB-65 PNC-BM OI=1726 at $0.40 SL=0.00  Aggressive!
BUY CALL MAY-60 PNC-EL OI= 417 at $4.50 SL=3.25
BUY CALL MAY-65 PNC-EM OI= 640 at $1.90 SL=1.00

Average Daily Volume = 998 K



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

Fundamentals Guy Sins!
Buzz Lynn
buzz@indexskybox.com

Not quite, but it makes for a good headline since I'm talking 
about politically incorrect companies tonight that just happen to 
make consistently juicy profits.  Nonetheless, call them "sin" 
stocks.  Everyone else does.

Why do I have interest in these companies right now?  A couple of 
reasons.  First, like Warren Buffet's gratitude that half the 
population will wake up in need of a shave tomorrow morning 
(Berkshire Hathaway [BRK.A] owns a big chunk of Gillette [G]), I 
would be grateful that people eat, drink beer, and yes, smoke 
cigarettes.  I know that in the last 20 years, the latter have 
become a plague, a scourge, and an evil vice foisted up the 
innocent public by greedy companies whose best customers die early 
(or so the pitch goes).  

I don't smoke, never have and never will.  I intensely dislike 
cigarette smoke and appreciate fully the law that makes it a crime 
to smoke in any restaurant in California.  I don't choose it for 
myself but would certainly defend to the death someone else's 
right to do so because there are people that choose it of their 
own free will and who engage in it outside the company of those 
who object.  And frankly, it probably calms their nerves.  That 
does not mean I encourage smoking (but the government does - more 
on that if I have time).  However, please hold the hate mail.  I'm 
not debating the link between addiction and profit here.

Second, these companies turn out nice profits through good times 
and bad, and might make good defensive plays in the portfolio.  
Yes, I am a big fan of compound interest.  Many of you already 
know my bent toward companies that provide a return to their 
shareholders, usually in the form of a dividend.  The more 
reliable the dividend, the greater comfort I have with a stock.  

5% yield is the minimum that I like, but I wouldn't be interested 
in the likes of Eastman Kodak (EK), which pays nearly 7%.  That's 
the trick with high dividends.  They often shield problems down 
the road, and In EK's case, they are losing market share to Fuji 
(FUJIY) and Germany's Agfa.  Though many thought EK's new digital 
imaging strategy might be its salvation, it has yet to prove its 
superiority in the market and is handily getting whooped.  

Personally, I think EK's days in its current form are numbered.  I 
expect that before they become great again, they will have to cut 
or eliminate their dividends, sell potential growth divisions, and 
rely on their dieing cash cow, film sales and processing, to keep 
them afloat.  Shades of AT&T come to mind, as it has had to rely 
on its dieing long distance cash cow while it seeks to sell its 
salvation, the cable/broadband business.

Ford (F) also fits this profile although I think it will survive 
since F knows it's taking on water and recently taken steps to 
right the ship by cutting its dividend twice in the last year 
while laying off 35,000 people worldwide.  Ouch!  

Lesson: don't rely on traditional dividend payers if people don’t 
buy their products in good and bad times.

So why not go for Colgate, Clorox, Proctor and Gamble, or other 
consumer product companies.  Simply stated their returns are not 
as good and their P/E ratios, generally 30 and up (aka 3.3% 
expected returns) are too high for my liking.

The logical question then becomes, "Well, why then, Buzz, are you 
interested in sin stocks, especially tobacco, which has such a 
high legal exposure from smoking cases and induced health care 
costs that the government wants to recover?"  Well, now that we've 
swerved into it, here's the answer.  I apologize if this sounds 
cynical, but it relates to my comment above that the government 
wants you to smoke.  

WHAT???  Yep, the government wants smokers to keep smoking.  Oh 
boy, here comes the can of worms.  So here goes.  I make market 
judgments and business decisions based on action, not on words.  
While the federal government and attorneys general of most states 
flock to the noble cause of saving children from the ravages of 
smoking, not to mention the reimbursement of healthcare claims 
related to smoking, they did not outlaw the stuff.  The action not 
the words was to preserve the tobacco business and the sale of 
cigarettes.  

If smoking is so dangerous, why?  Simple.  The government wants 
the money.  No matter who's side you take in this, anti-smokers or 
tobacco companies, or even if you are agnostic about the whole 
thing, the government has demonstrated by its actions that it 
wants the money to the tune of hundreds of millions of dollars per 
year.  It really amounts to nothing more than a way to raise taxes 
from businesses that can afford to pay them.  The government 
doesn't want tobacco companies out of business because they are a 
huge source of revenue, not just in taxes, but in judgment 
payments over the next 18 years too.  As a state or federal 
government official, do I want tobacco companies eradicated or a 
nice stream of income that tobacco will throw my way if I let 
those companies survive by paying a "settlement"?  Call it what 
you want, but the action says tobacco settlements are the 
equivalent of protection money.

Everybody catch the nuance?  Lesson 2:  Government has a big 
vested interest in tobacco companies' survival.  Litigation is a 
non-issue in the long run.  Lesson 3:  Like bank robber, Willie 
Sutton (maybe a baseball player - I get them confused sometimes) 
use to say about banks, "That's where the money is".  Now, the 
money is in tobacco companies.  How does that affect me as an 
investor?  Tobacco companies have money and a secure stream of 
income courtesy of Uncle Sam and many state A.G's.  

Now folks, please understand, I'm not here to defend tobacco 
companies' or the governments' ethics or transgressions.  They are 
plentiful on both sides of the issue.  I am merely drawing 
attention to the economic reality and attempting to invest based 
on the facts lain down before me.  As an investor, that's a strong 
level of comfort if I want to get defensive.  And that's all this 
is about, so please hold the hate mail.

Now, wading back out of the political muck, let's look at some 
fundamental financial information that has me interested in these.  
Take Philip Morris first.  What's the first thing we hear from 
analysts on CNBC just before they tout a stock?  Right - 
compelling value, low P/E by comparison, steady and diversified 
source of income, growing revenues, great earnings growth, 
experienced management, etc.

MO currently trades at $49.70 with a P/E ratio of about 13 and a 
$2.32 annual dividend (4.75% yield).  Market cap is $105 bln.  MO 
still owns 96% of Kraft (KFT) giving MO a value of just $21.84 net 
of KFT shares.  That also means all other divisions (net of KFT 
earnings) earn $3.10 per share available to distribution.  Were 
MO to actually pay that out in dividends, it would amount to a 
yield of 14% on the underlying business net of KFT.  Talk about 
value!  Anyone know a tech stock that does that and pays a 
dividend?  Me either.

To boot, MO's dividends have consistently grown at roughly 10% per 
year for the last 20 years - it's earnings even more.  So you can 
be sure that they are not robbing retained earnings to pay 
dividends as Ford had done.  They are saving some for a rainy day 
too.  

Better yet, look at the operating margin of 17.4%.  MO makes money 
and has a 50% (!!) return on equity with debt about equal to 
equity.  Asset return is 11.24%.  These are really strong numbers.  
Not just buying the Marlboro's, but if we as consumers are buying 
Miller Beer, Maxwell House, International Foods, Kool-Aid, Post 
cereals, DiGiorno, Cracker Barrel, Velveeta, Philly Cream Cheese, 
Jell-O, Altoids mints, Claussen pickles, or Oscar Mayer, we are 
adding to revenues.  These are things we use everyday, even more 
so than men in need of a shave.

This is a typical Buffett-type of company.  While it can be 
purchased at a reasonable price and provides a growing stream of 
returns for its shareholders, a "margin of safety" at $49.70 does 
not currently exist.  Plus the long-term charts don't look so 
great.  Thus, I'll be looking to buy it at a cheaper price in the 
future, not now.  It remains on my list of IRA candidates when the 
price becomes attractive.

Another sin stock I like is U.S. Tobacco (UST).  This company 
makes smokeless tobacco, aka, "chew" under the brand names of 
Copenhagen, Skoal, Rooster, and Red Seal.  They also own wine 
brands Columbia Crest and Chateau St. Michelle.  While nowhere 
near the size of MO, UST revenues are roughly $1.5 bln.  But it 
sports HUGE margins as follows.  49% profit margin; 29% operating 
margin, a MONSTER 144% return on equity with 29% return on assets.  
Yes, UST has a lot of debt, but it has immense cashflow to service 
the debt.  At 29% return on assets, UST is an extremely efficient 
operator with strong brands in their niche.  They have little 
liability for tobacco and to my knowledge were not involved in the 
big tobacco litigation of 1998-2000.  (look out - might be a 
target later).

Dividends?  How about $1.84 on a $34.50 stock for a 5.35% yield?  
Sales are growing only in the low to mid-single digit range, but 
the dividend appears really safe based on a conservative and 
efficient use of debt and assets.  It's another IRA candidate.  

UST has a decent looking chart, but I'm still awaiting a pullback.

Sadly, the constraints of time and space (way too many words 
tonight) keep me from rattling on about sin stocks, but you get 
the point.  Many don't understand the value here, however, I think 
that as defensive stocks paying dividends that take advantage of 
the power of compounding, these are hard to beat.  Rest assured 
that Fundamentals Guy will keep "sinning" as long as it's good for 
my financial health.  These are businesses, not debate issues.

See you tomorrow in Options 101 where we pick up on more Q-Charts!


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

Stocks Rebound On Positive Earnings News!
By Ray Cummins

The major equity averages rallied today after a string of bearish
sessions as optimistic quarterly announcements gave investors new
hope for an economic recovery.

The upbeat activity in the Dow industrials was bolstered by DuPont
(NYSE:DD) and Exxon Mobil (NYSE:XOM), which both posted favorable
quarterly results.  The chemical giant was the more optimistic of
the two, saying it expects 2002 earnings to exceed those of 2001
and projecting first quarter earnings to be "substantially above"
those of the fourth quarter.  Alcoa (NYSE:AA), Wal-Mart (NYSE:WMT),
and SBC Communications (NYSE:SBC) were among the blue-chip issues
that performed well during the session.  The technology group was
comfortably "in the black" as the semiconductor segment roared
back from recent losses on the heels of numerous upgrades as well
as industry data showing a monthly increase in orders.  Novellus
Systems (NASDAQ:NVLS), Applied Materials (NASDAQ:AMAT), KLA-Tencor
(NASDAQ:KLAC), Teradyne (NYSE:TER), and Varian Semi (NASDAQ:VSEA)
were all upped to "long-term buys" on a belief that the worst news
is already factored into prices and that semiconductor bookings
reflect broad stabilization.  News that orders and shipments for
semiconductor equipment in North America increased sequentially in
December also boosted the chip-equipment group.  It was the first
such increase in over a year, according to Semiconductor Equipment
and Materials International.  Stocks in the software sector moved
higher as Computer Associates (NYSE:CA) registered a fiscal third
quarter profit from operations that was well beyond the consensus
estimates and shares of data storage issues rebounded in the wake
of positive announcement from Emulex (NASDAQ:EMLX), which posted a
second-quarter profit that bested expectations.  The company also
indicated that it expects a sequential increase in revenue for the
third quarter and that comment produced upgrades from J.P. Morgan,
H&Q, A.G. Edwards, Salomon Smith Barney, and First Albany.  In the
broader market, oil, oil service, natural gas, biotechnology and
drug issues were popular and the retail sector bounced back after
a series of dismal sessions.  Pfizer (NYSE:PFE) was a catalyst in
the drug sector after the company posted a fourth-quarter profit
that matched Wall Street's estimates and biotech stocks rallied in
conjunction with Amgen (NASDAQ:AMGN) after the issue was upgraded
by Merrill Lynch to an intermediate-term "strong buy."



Summary of Current Positions (as of 01-22-2002):


Covered Calls: (Margin not used in calculations)

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

SEBL    FEB    27.5   25.25   32.62   2.25     6.0%
MU      FEB    32.5   30.04   30.88   0.84     1.9%
MRVL    FEB    32.5   30.36   43.53   2.14     4.8%
WGO     FEB    40     37.57   39.85   2.28     6.0%

Micron Technology (NYSE:MU) closed at the session low
and below its 30-dma today, signaling an early exit for
investors who do NOT want to own the stock.  Those who
have a more long-term outlook should watch for a move
below the current support area near $30 before exiting
the position.


Naked Puts:

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

ACDO    FEB     40   39.10   50.48   0.90    6.5%
EMLX    FEB     35   33.85   38.60   1.15    8.8%
MRVL    FEB     30   29.35   43.53   0.65    6.0%
SYMC    FEB     60   58.90   76.04   1.10    5.1%
SEBL    FEB     27.5 26.65   32.62   0.85    8.8%
BRKS    FEB     40   39.15   41.72   0.85    6.0%
ACDO    FEB     40   39.50   50.48   0.50    4.6%
WGO     FEB     35   34.50   39.85   0.50    4.3%


Naked Calls:

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

AMAT    FEB    50    50.50   39.49   0.50    5.6%
KLAC    FEB    60    60.60   47.86   0.60    5.5%
QLGC    FEB    65    65.65   48.16   0.65    6.0%


Credit Spreads:

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

SII    55.12    47.04  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
TRI    31.50    31.75  FEB25P/30P   0.60   29.40   0.60   Open
UNH    73.00    72.55  FEB65P/70P   0.65   69.35   0.65   Open
WLP   125.16   123.34  F110P/115P   0.55  114.45   0.55   Open
AT     56.70    56.25  FEB65C/60C   0.60   60.60   0.60   Open
MMM   103.47   106.42  F120C/115C   0.65  115.65   0.65   Open


Synthetic Positions:

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

DGX    71.40    72.00  FEB85C/60P   0.10   59.90   0.20   Open
MER    57.99    55.01  FEB65C/50P   0.15   49.85   0.15   Open


Credit-Spread Strangles:

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

OEX   589.62 570.63  FEB640C/630C    0.80   630.80  0.80   Open
OEX   589.62 570.63  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 - Naked Puts

Today's "naked" put candidates are two of the most popular long
term portfolio issues in the technology segment.  These companies
are leaders in their respective industries and based on technical
and fundamental analysis, they both offer above-average upside
potential in the coming year.  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.

***************
MRVL - Marvell Technology  $42.85  *** Industry Leader! ***

Marvell Technology Group (NASDAQ:MRVL) designs, develops and
markets integrated circuits utilizing proprietary communications
mixed-signal and digital signal processing technology for
communications-related markets.  The company's products provide
the critical interface between analog signals and the digital
information used in computing and communications systems and
enables its customers to store and transmit digital information
reliably and at high speeds.  The company designs, develops and
markets integrated circuits using proprietary communications
mixed-signal processing and digital signal processing technologies
for communications-related markets.  Marvell Technology also makes
high-performance communications internetworking and switching
products for the broadband communications market.

The major semiconductor companies have been under-performing the
broader market in recent sessions due to "profit-taking" in the
group but Marvell has been little affected by the activity.  The
company is one of the leaders in the industry and their recent
debut of the world's first all-CMOS, low power, high integration,
processor and radio frequency chipset reflects their dominance.
The company's revolutionary wireless products are expected to
dictate the core standards for wireless LAN networking, including
notebook PCs, PDAs, and consumer PCs and appliances.  Investors
who wouldn't mind owning this unique issue can use the target
position to establish a low-risk cost basis in the stock.

MRVL - Marvell Technology  $42.85

PLAY (sell naked put):

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

SELL PUT  FEB 32.5 UVM NZ  129      0.40     32.10      5.7% ***
SELL PUT  FEB 35   UVM NG  605      0.85     34.15     10.6%
SELL PUT  FEB 37.5 UVM NT  148      1.40     36.10     13.5%


***************
SEBL - Siebel Systems  $34.80  *** Solid Earnings! ***

Siebel Systems (NASDAQ:SEBL) is a provider of unique eBusiness
applications software.  Siebel Business Applications comprise a
family of Web-based applications software designed to meet the
sales, marketing and customer service information requirements
of even the largest multinational organizations.  The company's
eBusiness Applications enable organizations to sell to, market
to, and service customers across multiple channels, including
the Web, call centers, field, resellers, retail and other dealer
networks.  By employing comprehensive eBusiness applications to
better manage their customer relationships, Siebel's customers
achieve high levels of customer satisfaction and continue to be
competitive in their markets.

Today Siebel Systems announced quarterly earnings that were lower
than a year ago, but beat Wall Street's consensus estimates.  The
company also made positive comments about the December quarter,
noting that license revenue rose 29% on strength in financial
services and their international segment.  The share value was up
slightly in "after-hours" trading and there is little chance the
issue will retreat significantly in the coming weeks without a
broad sell-off in technology issues.

SEBL - Siebel Systems  $34.80

PLAY (sell naked put):

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

SELL PUT  FEB 27.5 SGQ NY  3,146     0.55    26.95       9.3% ***
SELL PUT  FEB 30   SGQ NF  5,689     0.90    29.10      11.4%
SELL PUT  FEB 32.5 SGQ NZ  6,246     1.65    30.85      15.8%
SEBL PUT  FEB 35   SGW NG  4,866     2.70    32.30      20.3%


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

BULLISH PLAYS - Credit Spreads & Synthetic Positions

These plays are based on the current price or trading range of
the underlying issue and the recent technical history or trend.
However, current news and market sentiment will have an effect
on these issues so review each play individually and make your
own decision about the future outcome of the position.

***************
BAC - Bank of America  $62.86  *** Solid Earnings! ***

Bank of America (NYSE:BAC) is a global bank and financial holding
company.  Through its banking subsidiaries and various non-banking
subsidiaries, the company provides a diversified range of banking
and financial services and products in the mid-Atlantic, including
Maryland, Virginia and the District of Columbia; the Midwest,
including Illinois, Iowa, Kansas and Missouri; the southeast,
including Florida, Georgia, North Carolina, South Carolina and
Tennessee; the southwest, including Arizona, Arkansas, New Mexico,
Oklahoma and Texas; the northwest, including, Oregon and Washington;
and the west, including California, Idaho and Nevada, and in other
selected international markets.  The company operates in four main
business segments: Consumer and Commercial Banking, Asset Management,
Global Corporate and Investment Banking and Equity Investments.

BAC - Bank of America  $62.86

PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-55  BAK-NK  OI=7088   A=$0.30
SELL PUT  FEB-60  BAK-NL  OI=10488  B=$0.80
INITIAL NET CREDIT TARGET=$0.55-$0.60  PROFIT(max)=12%


***************
HSIC - Henry Schein  $43.26  *** Bullish Outlook! ***

Henry Schein (NASDAQ:HSIC) is a distributor of healthcare products
and services to office-based healthcare practitioners in the North
American and European markets.  The company conducts its business
principally through two segments: healthcare distribution and
technology.  The healthcare distribution segment consists of the
company's dental, medical, veterinary and international groups.
The international group is comprised of the company's healthcare
distribution business units located primarily in Europe and the
Pacific Rim, and offer products and services to dental, medical and
veterinary customers located in their respective geographic regions.
The technology segment consists primarily of the company's practice
management software business and certain other value-added products
and services, which are distributed primarily to healthcare
professionals in the North American market.

Note: Target a higher premium initially, to allow for a brief
consolidation form the recent rally and increase the overall
return on investment in the position.

HSIC - Henry Schein  $43.26

PLAY (very conservative - bullish/credit spread):

BUY  PUT  FEB-35  HQE-NG  OI=27  A=$0.20
SELL PUT  FEB-40  HQE-NH  OI=11  B=$0.55
INITIAL NET CREDIT TARGET=$0.40-$0.50  PROFIT(max)=9%


***************
KSWS - K-Swiss  $37.38  *** Hot Sector! ***

K-Swiss (NASDAQ:KSWS) designs, develops and markets a wide array
of athletic footwear for high performance sports use, fitness
activities and casual wear.  The K-Swiss "Classic" has evolved
from a high-performance shoe into a casual, lifestyle shoe.  The
company sells its products in the United States through independent
sales representatives, primarily to specialty athletic footwear
stores, pro shops, sporting good stores and department stores.  It
also sells its products to a number of foreign distributors.  The
company now has sales offices or distributors throughout the world.

KSWS - K-Swiss  $37.38

PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-30  SWU-NF  OI=10  A=$0.20
SELL PUT  FEB-35  SWU-NG  OI=0   B=$0.85
INITIAL NET CREDIT TARGET=$0.70-$0.75  PROFIT(max)=16%


***************
WMT - Wal-Mart  $59.86  *** New 52-Week High! ***

Wal-Mart Stores (NYSE:WMT) is principally engaged in the operation
of mass merchandising stores.  Wal-Mart discount stores and the
general merchandise area of the Supercenters are organized with
40 departments and offer a wide variety of merchandise, including
apparel for women, girls, men, boys and infants.  Each store also
carries domestics, fabrics and notions, stationery and books,
shoes, housewares, hardware, electronics, home furnishings, small
appliances, automotive accessories, horticulture and accessories,
sporting goods, toys, pet food and accessories, cameras and other
supplies, health and beauty aids, pharmaceuticals and jewelry.
In addition, the stores offer an assortment of grocery merchandise,
with the grocery assortment in Supercenters being broader and
including meat, produce, deli, bakery, dairy, frozen foods and
dry grocery.  At the beginning of 2001, Wal-Mart operated 1,736
Wal-mart discount stores, 888 Supercenters, 475 SAM'S Clubs and
19 Neighborhood Markets.   Internationally, the company operates
units in Argentina (11), Brazil (20), Canada (174), Germany (94),
Korea (6) Mexico (499), Puerto Rico (15) and the United Kingdom
(241), and under joint venture agreements, in China (11).  The
company operates through three segments, the Wal-Mart Stores
segment, the SAM'S Club segment and the International segment.

WMT - Wal-Mart  $59.86

PLAY (speculative - bullish/synthetic position):

BUY  CALL  MAR-65  WMT-CM  OI=2644   A=$0.55
SELL PUT   MAR-55  WMT-OK  OI=12583  B=$0.75
INITIAL NET CREDIT TARGET=$0.25-$0.35  TARGET PROFIT=$0.75-$0.90

Note:  Using options, the position is similar to being long the
stock.  The collateral requirement for the sold (short) put is
approximately $1,950 per contract.


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

BEARISH PLAYS - Naked Calls & Combinations

***************
ADI - Analog Devices  $42.00  *** Premium Selling! ***

Analog Devices (NYSE:ADI) is engaged in the design, manufacture
and marketing of high-performance analog, mixed-signal and digital
signal processing (DSP) integrated circuits (ICs) used in signal
processing applications.  The company has a generic list of 2,000
products, with the highest revenue product accounting for less than
5% of its revenue in fiscal 2000.  Analog also designs, manufactures
and markets a range of assembled products.  Applications for its
products include communications, cellular telephones, computers and
computer peripherals, consumer electronics, automotive electronics,
factory automation, process control and military and space systems.

Analog Devices is an 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.  The issue has robust option premiums, a relatively
well defined resistance area and a high probability of remaining
below the target strike price.  Many traders may favor a more
aggressive approach, selling options that are closer to the
current price of the issue, to produce a higher initial return.
While that technique may be more attractive, it also increases
the theoretical risk of loss.  Only you can know what plays are
suitable for your personal risk-reward tolerance and portfolio
outlook.

ADI - Analog Devices  $42.00
    
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  ADI BJ  2,997     0.45    50.45       6.2% ***
SELL CALL  FEB 45  ADI BI  990       1.60    46.60      13.2%


***************
GNSS - Genesis Microchip  $58.68  *** Profit-Taking Underway! ***

Genesis Microchip NASDAQ:GNSS) designs, develops and markets
integrated circuits that receive and process digital video and
graphic images.  Its integrated circuits are typically located
inside a display device and process images for viewing on that
display.  The company also supplies reference boards and designs
that incorporate its proprietary integrated circuits.  Genesis is
focused on developing and marketing image-processing solutions
and targets the flat-panel computer monitor and other potential
mass markets.

Genesis Microchip shares have dipped in recent sessions, despite
having reported quarterly sales that almost tripled from a year
ago and profits that topped analyst expectations.  In addition,
the issue did not perform very well today despite the recovery
rally in the semiconductor group.  From a technical viewpoint,
the near-term trend is decidedly bearish and traders who believe
the downward bias will continue can speculate on that outcome
with this conservative position.     
  
GNSS - Genesis Microchip  $58.68
  
PLAY (conservative - bearish/credit spread):

BUY  CALL  FEB-75  QFE-BO  OI=949  A=$0.40
SELL CALL  FEB-70  QFE-BN  OI=880  B=$0.85
INITIAL NET CREDIT TARGET=$0.50-$0.60  PROFIT(max)=11%


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

INDEX-OPTION SPREADS

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

As a trader, you may be familiar with options on individual stocks
where you have the right to buy (call option) or the right to sell
(put option) a particular stock at some predetermined price within
some predetermined time.  The buyer has the rights and the seller
the obligations.  With index options the basic ideas are the same.
Index options allow you to make investment decisions on a specific
industry group or on the market as a whole.  Spread strategies can
be made with index options similar to those made with individual
stock options and professional traders also employ index spreads
in hedge strategies.  We favor spreads on the S&P 500 index (SPX)
and the S&P 100 index for "premium-selling" plays and hedging.  We
also prefer "out-of-the-money" credit spreads on the major sector
indexes and other exchange-traded stock instruments such as HOLDRS
(Holding Company Depositary Receipts), when the risk-reward outlook
is acceptable.

***************
BBH - Biotechnology Holders Trust  $127.58  *** Range-Bound? ***

The Biotechnology Holders Trust (AMEX:BBH) is a unique instrument
that represents an investor’s ownership in the stock of specified
companies in the biotechnology sector.  HOLDRS allow investors to
own a diversified group of stocks in a single investment that is
highly transparent, liquid and efficient.  Each HOLDR is a fixed
basket of 20 stocks (except the Telebras HOLDR, which holds 12
companies).  They work operate much like ADRs; American Depositary
Receipts, which allow U.S. investors to purchase foreign-owned
companies on the U.S. exchanges in dollar denominated amounts.  In
just the same way, the investor actually owns the shares of each
underlying company, receives dividends, proxies, and annual reports
from each.  The HOLDRs are not managed, and once the companies and
amounts have been determined they are fixed, no companies will be
substituted.  In this way, the HOLDRs differ somewhat from Spiders
(SPDRs), or Standard & Poor Depositary Receipts and other exchange
traded funds, which will add and delete stocks on a regular basis,
usually in conjunction with an index that they are tracking.

A complete explanation of this issue, including the companies that
make up each HOLDRS' particular industry, sector or group can be
found here:

http://www.holdrs.com/holdrs/main/index.asp?Action=Definition

Traders who participate in credit-spreads often utilize sector
indexes as they provide an underlying instrument less prone to
"gapping" moves and because the strategy profits if the index
remains in a relatively small range.  From a technical viewpoint,
the recent rally in the biotechnology segment seems likely to put
BBH back in the middle of relatively constrained price pattern and
since the long-term outlook is somewhat uncertain, the range-bound
pattern could continue for the next few months.  By combining two
credit-spread positions, you can participate in a popular neutral
strategy known as the "Long Iron Condor."  It is often used with
range-bound issues and it is a unique limited risk, limited profit
position that gives you a wide range for success.  The benefit to
this technique is that some brokers require less collateral for
the combined position, as only one spread can lose at expiration.
You should consult your brokerage to determine the maximum margin
requirements before initiating the position.

BBH - Biotechnology Holders Trust  $127.58

PLAY (conservative - bearish/credit spread):

BUY  CALL  FEB-145 GBZ-BI  OI=329  A=$0.30
SELL CALL  FEB-140 GBZ-BH  OI=683  B=$0.75
NET CREDIT TARGET=$0.50-$0.55 PROFIT(max)=11%

- and -

PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-110  GBZ-NB  OI=676   A=$0.65
SELL PUT  FEB-115  GBZ-NC  OI=2228  B=$1.15
NET CREDIT TARGET=$0.55-$0.60 PROFIT(max)=12%


***************
PPH - Pharmaceutical Holders Trust $98.60  *** Bottom Fishing! ***

The Pharmaceutical Holders Trust (AMEX:PPH) is a unique instrument
that represents an investor’s ownership in the stock of specified
companies in the Pharmaceutical sector.  HOLDRS allow investors to
own a diversified group of stocks in a single investment that is
highly transparent, liquid and efficient.  Each HOLDR is a fixed
basket of 20 stocks (except the Telebras HOLDR, which holds 12
companies).  They work operate much like ADRs; American Depositary
Receipts, which allow U.S. investors to purchase foreign-owned
companies on the U.S. exchanges in dollar denominated amounts.  In
just the same way, the investor actually owns the shares of each
underlying company, receives dividends, proxies, and annual reports
from each.  The HOLDRs are not managed, and once the companies and
amounts have been determined they are fixed, no companies will be
substituted.  In this way, the HOLDRs differ somewhat from Spiders
(SPDRs), or Standard & Poor Depositary Receipts and other exchange
traded funds, which will add and delete stocks on a regular basis,
usually in conjunction with an index that they are tracking.

The pharmaceutical group is starting to show signs of a rebound
from the recent selling pressure and the technical indications of
PPH appear favorable for a conservative "bottom-fishing" position.
Traders who agree with a bullish outlook for major drug stocks can
profit from that activity with this low-risk play.  Target a higher
premium initially, to increase the "return on investment" in the
spread.

PPH - Pharmaceutical Holders Trust $98.60
  
PLAY (very conservative - bullish/credit spread):

BUY  PUT  FEB-90  PPH-NR  OI=310   A=$0.25
SELL PUT  FEB-95  PPH-NS  OI=1364  B=$0.60
INITIAL NET CREDIT TARGET=$0.40-$0.45  MONTHLY PROFIT(max)=14%


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


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