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Daily Newsletter, Wednesday, 01/30/2002

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The Option Investor Newsletter                Wednesday 01-30-2002
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)
*******************************************************************
      01-30-2002          High     Low     Volume Advance/Decline
DJIA     9762.86 +144.62  9775.59  9529.46 1.99 bln   1890/1207	
NASDAQ   1913.44 + 20.45  1913.66  1851.49 2.04 bln   1947/1621
S&P 100   564.38 +  7.10   564.66   546.13   Totals   3837/2828
S&P 500  1113.57 + 12.93  1113.79  1081.66             
RUS 2000  479.72 +  5.74   479.78   468.38
DJ TRANS 2762.11 + 23.46  2769.01  2712.46
VIX        24.94 -  1.32    29.92    24.77 
VXN        44.67 -  1.23    48.28    44.55
TRIN        1.16 
Put/Call    0.72
*******************************************************************

Bulls & Bears Delight
Austin Passamonte

Today's session certainly had something for everyone. The day 
began upwards in tentative fashion before TYC, SPW and others 
absolutely collapsed, with major indexes followed suit.

Taking intraday put plays on a break below opening levels proved 
to be a winner as price action plunged from there. Very nice move 
to the downside. The VIX spiked up to graze its 30 level, put/call 
ratios and mirror-image option pricing soared in bullish 
contrarian fashion as well. With near term charts buried in 
oversold extreme, seemed as if a late day pop was brewing. Light 
call plays entered just off session lows were next in order.

Then our Fed announced no more bear bullets in the rate-cut gun. 
Indexes promptly soared and implied volatility in options spiked. 
Good time to exit those recent calls, or so it seemed as indexes 
pulled back sharply from the post-FOMC spike. Normally the initial 
market move is wrong and fading that wins past 3:00pm EST. This 
time the markets pulled back to near flat and then surged back up 
the charts in powerful fashion from 3:00pm into the close.

Whew! A lot went on in a short period of time. We could have done 
without the intraday turbulence that would have made call plays 
bigger winners, but bearish intraday charts and memories of FOMC 
afternoon power dives shook us out of our longs too soon. Major 
indexes finished well off their lows and actually reclaimed better 
than half of Tuesday's decline.

(Monthly Chart: TYC)


 

Joe Kernan of CNBC fame was all giggles & grins this afternoon, 
calling this a key reversal session (his words). Could very well 
be, and plenty of charts looked like this one. TYCO has taken a 
total pounding these last few weeks, down from near $60 to an 
intraday low of $27+ today.

This long-term monthly chart shows eight years of retracement 
history. Note how today touched and bounced from an important Fib 
level to close right on another. What next? 

(Weekly/Daily Charts: TYC)


 

Weekly and daily chart signals are both oversold. The easy short 
play is over and a reflexive bounce may be next. Once both of 
these chart signals move back up and align together in overbought 
extreme, that will be in harmony with monthly chart stochastic 
values Previous chart) as well. Watch the overhead Fib retracement 
moving averages and stochastic values while this one sits on the 
back burner for now. We don't marry stocks and my thought from 
here would be "next" for a trade.

Tempted to add this baby to your long-term investment holdings now 
that it's "cheap"? Some pundits may tout that, but I'll wait for 
monthly charts to go bullish first. Right now they've just begun 
to hint of a bearish roll, and that could take deep into this year 
for completion.

(Weekly/Daily Charts: SPW)


 

Here's a key reversal session that may not be. SPW took a big dive 
and almost as big a bounce today for what would have been 
monstrous option plays in both directions. And there I am trying 
to chip away at the S&Ps! Silly me. 

Anyway, look at the stochastic values here. Very bearish. Look at 
the 50 DMA touching 75% retrace right where the breakdown began 
today. I may not short this one right now but sure as heck 
wouldn't go long with any confidence, either. I don't know what 
their story is and quite frankly do not care. Price action in the 
stock is weak, which means it is under distribution and I'm not 
willing to stand beneath a dump truck on charts like this. Short 
or pass.

(Weekly/Daily Charts: Dow)


 

The Dow went down and flirted with 9,500 area today too. Big 
bounce from there on another large range session. Bottom in place? 
We've got the moving averages overhead along with former support 
at 10,000 level. Stochastic values remain mixed to weak. Just a 
dead cat bounce in prevailing downtrend until proven otherwise. 
When both weekly and daily stochastic values post bullish 
reversals and turn higher from here, I become an aggressive call 
buyer again!

(Daily Chart: NDX)


 

Nazz 100 remains pinned between Fib levels with mixed signals as 
well. I'd watch that 1578 to 1600+ level (roughly 40 in the QQQ) 
fro triple trouble with two major moving averages and 75% retrace 
waiting with palms facing down for the next rally attempt.

Conclusion
Just when markets lulled us all to sleep, things get interesting 
in a hurry. I went from ignoring my broker to taking several 
entries a day without fair warning from the market. Semper 
Paratus, right?

(10-Min Chart: SPX)


 

Today was another fun-filled flurry of action. Being a special 
occasion via FOMC and trying to oblige a few readers' requests I 
did my best to chronicle a day in the life of S&P mastery. Perhaps 
we fell a bit short of mastery, but there were some pennies to be 
gleaned regardless.

An early pop above 1100 level quickly failed and fell back thru 
with 10/5-minute chart stochastic values both posting bearish 
reversals from overbought extreme. Get short at break below 1100 
and hold on. Price action promptly fell of a cliff again, all the 
way down to 1081 for a -19 index point decline. I should have 
exited there, but the quick rebound back to 1085 coupled with now 
bullish stochastic values reversing from oversold extreme got me 
into calls at 1085 in the other direction.

Puts gone, calls in and markets flutter sideways just above entry 
for some time. Then price action moves safely away as the FOMC 
event nears. A volatile pop higher after the news usually means a 
fake out move, so bid 21.50 / ask 23.50 is split at 22.00. Someone 
wants to buy my calls from me, bless their merry souls! I try a 
third play in puts on a break below 1098 but get popped out of 
that one below my stop as things gained steam to the upside near 
3:00pm. Should have played the upside again for another +15 index 
point move, but the charts just didn't show it.

Five hours of market action (10:00am to 3:00pm) and I'm exhausted. 
Trading, typing, emails, potty breaks for the dog and occasionally 
me is one busy schedule. We won't do this very often, but 
hopefully it offers a glimpse into the busy side of trading.

Given a preference I'd make one entry on Monday, close it out 
Thursday afternoon and take three days off. Wouldn't that be 
awesome? But reality is I must trade the noise in between if Wendy 
is to avoid PayLess shoe stores. It's hectic, grueling, stressful 
and exhausting but a far cry better than the factory work I 
endured years ago.

Traders somewhat new to the game or at least one of this speed 
often lament they cannot learn quick enough to suit them. Join the 
club! We all want to begin life from crawling right to the starter 
blocks of Olympic sprinting, but the natural progression doesn't 
work that way. Others tell me their confidence is lacking (or 
worse) and they see the trades but just can't pull that trigger.

Me too. If I had free time I think it'd be fun to enter the 
Robbins Cup live trading contest and line up with the big boys. By 
day I believe I can smoke any of them in the S&Ps. But at 5:00am 
this morning I woke up in a cold sweat. Was dreaming I stood on 
stage at a live trading seminar and got my a, uh head handed to me 
losing every single trade while the crowd laughed and jeered.

Which is it? Cocky or cowardly? Guess I need to ask Dr. Phil of 
Oprah Winfrey fame. Trade long enough and you become various 
measures of both. We're all a neurotic bunch, so don't let that 
bother you. My advice is to trade small, learn to win and grow 
from there. For gosh sakes do so taking some of Jeff's, Eric's and 
Mark's equity plays! Have you seen the hot picks those boys have 
been ferreting out? Land sakes alive... who can't win following 
that dynamic trio?

Summation
Yes, I'm about done for those who wonder after suffering this 
long. What are the markets fixin' to do next? Beats the heck out 
of me, which is why I reverted to telling stories. But if I had to 
guess I'd say we start off higher tomorrow and struggle with 
points of resistance all long the way. Technical damage was done 
on Tuesday & Wednesday then partially erased in one fell swoop. 
The VIX has gone on a volatile ride. Bulls still want to rally 
this thing and I don't expect a serious test of last year's lows 
until March & April myself, so who knows what from here?

We can't know what will happen but we do know what to look for & 
where. Watch the Fib retracements, moving averages and VIX level 
if it quickly drops back below 22. Soon we'll have price action 
consolidating in wedges and it's time to enter & roll the dice 
again!

Best Trading Wishes,
austinp@OptionInvestor.com


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

Application of Gamma and Delta to Strike Selection
By Mark Phillips
mphillips@OptionInvestor.com

When we parted company last week, I had laid out the basic
dynamics behind the influence that both Delta and Gamma have on
the movement in an option's price, using IBM as an example for
the February expiration cycle.  To better illustrate the point
I was trying to make, I put together the following spreadsheets,
using the IBM example and the values listed in last week's
article.

I'll warn you all in advance.  This is a LONG article, but I
think you'll agree that shortening it would have done both the
concept and you a disservice.  Feel free to print it out and
work through it when time permits.  You certainly won't hurt
my feelings! {BIG GRIN}

Recall my analogy of Delta and Gamma to the speed and
acceleration of a car.  Delta is a measurement of how fast the
price of an option changes with respect to the motion of the
underlying security, while Gamma can be viewed as the rate at
which the option price accelerates.  It may have been a bit
difficult to understand from my description last week, but I
think the spreadsheets I've included tonight will really drive
the point home.  For those of you that are discouraged by all
the numbers and math, stick with me.  It will be worth it in
the end, even if all the math makes your head swim.  So let's
go!

First up, lets deal with the $110 strike, which was arguably the
closest to an ATM strike at the time I wrote last week's article,
with IBM trading at $107.90.  At that point in time, I captured
the option prices along with Delta and Gamma values for all of
the February strikes between $100 and $120, inclusive.  In each
of the spreadsheets I've included here, I've just added (or
subtracted) the appropriate amount to arrive at new values for
the option price, Delta and Gamma for each $1 move in the price
of IBM.  


 

Starting with IBM at $108 (hence that line is in BOLD), an
increase in IBM to $109 gives us an option price of $4.88.
Price + Delta (4.30+0.58) yields a new value of the option at
$4.88.  At the same time, Delta increases to 0.63 (adding
Delta + Gamma), and through some simple interpolation, Gamma
drops slightly to 0.44.  Repeating this process for IBM at each
$1 increment up to $120, produces the bottom half of the table
shown above.  Starting once again at the $108 level, we perform
the same series of steps in reverse -- Subtract the value of
Delta from the option price at the $108 level to arrive at the
value of the option ($3.72) if IBM trades at $107.  Delta
decreases by the amount of Gamma (0.046) at the $108 level,
changing to 0.53.  As before, interpolation between the known
values at the $5 strike prices gives us an unchanged Gamma...so
far.

There are some simple observations that can be made just from
this basic table.  Gamma remains fairly constant for prices of
IBM between $102-110, making Delta change fairly rapidly in this
range.  Coming back to the car analogy, this is like operating
in the fat part of the torque curve for your car's engine.
Fairly small changes to input (depression of the accelerator)
produces substantial changes to the rate of travel, measured by
speed (Delta) option price (distance traveled).  Moving closer
to the $100 level, Delta decreases steadily, meaning that our
speed is decreasing.  Conversely, as we move towards the $120
level, Delta approaches the idealized 1.00 level, with Gamma
rapidly decreasing.

The further OTM we move, the less responsive the option price
becomes to changes in the price of the underlying.  The further
ITM our option becomes, the closer it comes to moving 1-for-1
with the underlying security.  But we're moving close to maximum
velocity and there is very little additional acceleration that
we can provide.  Mashing the accelerator to the floor near
maximum speed produces almost no additional speed.  This behavior
is best understood by looking at the %Change column.  In moving
$1 either up or down in the price of IBM from the $108 level,
the price of our option changes by nearly 13.5%.  But dropping
from $101 to $100 gives us only a 6% change in the price of the
option.  And you can see that increasing the price of IBM gives
us ever fatter incremental returns that effectively plateau at
the $114 level.  At this point, each $1 move in IBM is increasing
our option's gain by approximately 20%.  Adding on another $5 to
the price of IBM and the incremental change to our option's price
from $119 to $120 only tacks on about 22%.  We've effectively
reached maximum speed and there is no way to further accelerate
our returns as IBM moves higher.  We're essentially moving at a
linear rate.

Let's contrast this table with what would happen for the same
price movement in IBM, if we instead chose to purchase the $105
strike.



 

While we start out with a higher value of Delta at the $108
level, notice that Gamma is significantly lower (0.035 vs.
0.046), and as our option moves deeper ITM, Gamma drops off
rapidly.  Translation: at the point where we initiated the
position using the $105 strike, we paid additional money for
the higher initial speed, but there is far less acceleration
available.  That can be seen from the %Change column, where a
$12 move up to the $120 level only produces a 118% return as
opposed to the 220% return from the ATM contract ($110 strike).
The final rate of speed is the same, but we paid extra premium
for the initial high rate of speed.  Purchasing a strike even
further in the money exacerbates this effect, as you can see
from the same table applied to the $100 strike below.



 

Here, we get very little acceleration from the $108 level up to
the $120 level due to the fact that Delta is already 0.88 (88%
of maximum) when we initiate the trade.  We get great movement
in the option relative to the underlying IBM shares, but the
price we pay is in the %Change that now maximizes at only 80%
for a $12 move in IBM up to $120.  Now don't get me wrong,
there's certainly nothing wrong with an 80% return, but you are
unnecessarily limiting your use of leverage if all you do is
buy Deep ITM options.  So let's look at the other side of the
coin, the OTM contracts.


 

While purchasing the $115 strike, (1 strike OTM) starts us out
with a Delta of only 0.34, this disadvantage is quickly made up
for by the affect of the high Gamma.  Notice that Gamma is
fairly constant between $106-114.  This is because we have
initiated the trade in the fat part of the torque curve, meaning
that a little bit of additional input (price movement in IBM)
yields a significant change in both Delta and subsequently the
price of our option.  By the time IBM reaches the $119 level,
each additional dollar of price movement hands us a nearly 100%
increase in the profit of our option.  Now that's what I call
leverage!

Carrying this analysis to the extreme, we'll finish up with a
look at what happens with the $120 strike.



 

Initial cost is a measly $0.25, but if we were to get a move to
the $120 level, the return is truly staggering, now isn't it?  We
pay a pittance for the option originally for a reason -- the odds
of the option moving ITM by expiration Friday is very low.  The
underlying cause of this fact lies in the realm of a couple other
Greeks, Vega (volatility) and Theta (time decay), which are
topics for a couple additional articles.  But the underlying
behavior we have been talking about holds true here as well.
Note that both Delta and Gamma are fairly low when we initiate
the trade at the $108 level, but both of them increase rapidly as
the price of IBM moves up the chart.  By the time IBM reaches the
$111 level, Gamma has already moved up to the 0.044 level (the
fat part of the torque curve) and you can see the effect in the
%Change column.  By the time IBM reaches the $119 level, each
additional dollar of movement in the underlying hands us more
than an additional 200% to the profit line.

All right, let's come back to reality.  We all know intuitively
that the odds of buying a front-month option that is more than
$10 OTM and having it deliver a 1700% return is not the highest
odds bet.  My intent here is not to convince you to always
speculate with far OTM options due to the greater return
possibility.  Too often when we choose to play this way, we end
up with a worthless expiring option.  Granted, it isn't nearly
as painful when we only paid $25 for the option in the first
place, but we want to make money, not just minimize our losses.
See how quickly the $120 strike becomes worthless if IBM moves
against us?  A $3 move down in IBM and our $25 option is now
worthless.  If you're playing in this arena, stop losses are
almost pointless.

For practical purposes, I would shy away from both the $100 and
$120 strikes if I were seriously considering this IBM trade.  The
$100 strike is just too expensive, costing more than $1400 to
initiate the trade with 1 contract and with such a high Delta,
an adverse move in the stock doesn't take long to wipe out a fair
amount of capital.  A $5 drop in IBM hands us a loss of nearly
$4, which isn't far shy of the TOTAL COST of the $110 strike.
Likewise, if we choose to play with the $110 strike, an adverse
move of only $2 in the price of IBM results in a loss of more
than $1, which is greater than the TOTAL COST of the $115 strike.
So we could play the $115 strike with reasonable odds for a much
greater return, and not deal with the issue of a stop loss (with
options that are less than $1, stop loss orders make very little
sense).  

By utilizing an OTM option, we effectively increase our potential
reward and decrease our capital at risk -- Now that's a win-win
scenario.

Alright, I know I promised to tie it all together for those that
struggled through all the numbers, math and car analogies up
above, and here is the really valuable nugget.  You don't EVER
have to go through a detailed Delta/Gamma exercise like this to
pick the right strikes to trade.  But you do need to understand
the dynamics and how they affect the movement of option prices.
Hopefully, I have explained this in a manner that illuminates
rather than confuses.

So Which Strike Do I Pick?
Actually it is easier than you might expect.  As a rule of thumb,
buy the strike that is where you expect the underlying stock to
trade by the time that you want to exit the trade.  Not where you
hope and dream it could go, but where you reasonably think it
will go.  Coming back to the IBM example, I would probably trade
the $115 strike (if I really thought it was a good trade), as IBM
can very easily move $7-8 in a week, and $115 is near the first
major level of resistance (actually $114) for the stock, based
on retracement work and the bottom of the gap from January 18th.
Of course, if there were only 3 days left until expiration, this
would obviously NOT be the optimum strike to select, due to the
issue of time decay (Theta), but we'll cover that topic next
week.  The reason we want to pick a strike that is where we think
the stock can go is because if we are right, we will reap the
lion's share of the benefits of Gamma (acceleration) and will be
exiting the position when the option is ATM, with a fairly beefy
Delta.  Note that at the $115 level, Gamma is just starting to
drop off, as the option leaves the fat portion of the torque
curve, where less acceleration is available for creating
additional speed (faster appreciation of our option).  Buy cheap,
and sell dear.  One other factor that works in our favor by
selling for a profit when our option becomes ATM, is that ATM
options are always the most expensive in terms of the amount of
time value you are buying.  This is yet another reason why I
eschew buying ATM options (except during expiration week), but
we'll delve deep into that subject next week.

I hope you all found this useful.  As always, questions are
welcome.  Barring a barrage of questions that require a third
article on this topic to clarify any issues, next week I'll be
launching into the next of our Greeks, Theta (time decay).  One
of the critical issues to deal with there is how to pick the
right time frame (which expiration month to select) based on how
long it should take for our expected price move to develop.

See you next week!

Mark


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

IS Swing Trade Model: Wednesday 1/30/2002
V-ish Day

News & Notes:
------------
A day trader's session, with volatile moves in both directions 
today. The action was swift, dramatic and fleeting when it 
happened. Intraday traders following market monitor pre-market 
suggestions may have entered on the early break near 10:00am and 
fared quite well for themselves. Predicting market action from 
here is far tougher than simply going with the flow, I'm sorry to 
say.


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


 

We have both S&Ps in a channel since January 7th highs. The OEX 
has room to run from here to 575 area where channel line 
resistance comes in. Also need to watch steep trendline in 30-min 
chart as well.

[60/30-Min Chart: SPX]


 

The SPX could fail and resume prevailing downtrend near 1130 area. 
That still leaves a solid chunk of chart to traverse up from here 
to resistance.

[60/30-Min Chart: QQQ]


 

The QQQ will bump its head near 39.40 area next as well. Note 
intraday chart stochastic values are all toppy near overbought 
extreme across the spectrum as well.

Summation:
---------
Individual traders who want to play can buy calls at the open 
tomorrow IF the markets don't gap-up open. Also, if the open is 
below today's close (which I doubt will happen) traders can also 
go long IF price action breaks back above Wednesday highs.

These are not high-odds swing trades. That setup will come if/when 
price action makes it up to resistance lines shown and fails from 
there. I have listed put play triggers to start the day only 
because all 60/30 min chart signals are nearing overbought extreme 
but expect a pop at the open tomorrow. If that happens, we will 
advance put play triggers or pull them according to market action 
noted within Market Monitor window.

Therefore, the plan is to leave call play attempts to the 
discretion of individual day traders. Prevailing trend remains 
down for now, so we will look for price action to resume the 
downward trend soon or wait for next entry setup if that fails to 
happen


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: 38 (QQQ-BL)            Feb Calls: 98 (DJV-BT)  
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop: Break Below                 Stop: Break Below 
                                

Feb Puts:  37 (QQQ-NK)            Feb Puts: 96 (DJV-NR) 
Long: BREAK BELOW 37.80           Long: BREAK BELOW 9725 Dow
Stop: Break Above 38.60           Stop: Break Above 9800 Dow


=====


         OEX                         SPX
Feb Calls: 570 (OEY-BN)           Feb Calls: 1125 (SPT-BE)
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop: Break Below                 Stop: Break Below 


Feb Puts: 550 (OEB-NJ)            Feb Puts: 1075 (SPQ-NO)
Long: BREAK BELOW 562.00          Long: BREAK BELOW 1109.50
Stop: Break Above 565.00          Stop: Break Above 1115.00



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


IS Position Trade Model: Wednesday 1/30/2002
V-Bottom Reversal?

News & Notes:
------------
Markets dropped & popped. If the downtrend is to continue from 
here, we will look for put play entries to track if indexes fail 
near resistance ahead.


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


Summation:
---------
No buy & hold option plays at this time.


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. 

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


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


Open Plays:
----------
XLI
Feb Puts: 28 (XLI-NB)
Long: 1.00
Stop: 2.50


Sector Share Trade Model: Wednesday 1/30/2002
Now What?

News & Notes:
------------
There were some very nice intraday gains to be had at session lows 
today, but the snapback in market action erased them from capture. 
Our Regional Bank HOLDR (RKH) hit its stop at +5.00 from entry but 
the rest held so far.


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


Summation:
---------
Could see a bunch of current short plays tracked get blown out 
near the open tomorrow, but level of risk is nil on all of them. 
We can chip away at small gains day & night here with nary a loss, 
but catching a solid trend move over time is our goal.


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:
----------
HHH Internet HOLDR
Short: BREAK BELOW 34.00 
Stop:  Break Above 32.00 

01/25
IYF Dow Jones U.S. Financial
Short: BREAK BELOW 80.00
Stop:  Break Above 78.00 

IYR Dow Jones Real Estate
Short: BREAK BELOW 79.75
Stop:  Break Above 80.00 

01/28
IYG Dow Jones Financial
Short: BREAK BELOW 91.50
Stop:  Break Above 88.00 *

RKH Regional Bank HOLDR
Short: BREAK BELOW 115.00
Stop:  Break Above 110.00 [hit]
Result: +5.00 gain

1/29
XLF Financial SPDR
Short: BREAK BELOW 26.00
Stop:  Break Above 26.00

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

1/30
RTH Retail HOLDR
Short: BREAK BELOW 94.50 
Stop:  Break Above 97.00 


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The Option Investor Newsletter                Wednesday 01-30-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.



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

ADRX - put
Adjust from $63 down to $61.75

AT   - put
Adjust from $56.75 down to $56.30

IVGN - put
Adjust from $59 down to $57

CIMA - put
Adjust from $30 down to $29


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

MRVL $40.65 -1.86 (-4.31) J.P. Morgan issued cautious comments
on MRVL this morning, which caused the stock to tank a day
after accounting rumors had already pressured the stock.  Morgan
suggested selling MRVL ahead of its earnings report in February
based upon the stock's high valuation.  The cautious comments
knocked us out of the MRVL play as the stock closed below our
coverage stop.  The one positive note in today's session was
that MRVL rebounded from its 50-dma.  Traders that weren't
stopped out can use strength in tomorrow's session to exit plays.


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

None


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

DPMI – DuPont Photomasks $49.66 +1.68 (+0.95 this week)

DuPont Photomasks manufactures photoblanks and photomasks for
the Semiconductor industry.  Photomasks are high-purity quartz
or glass plates containing precise, microscopic images of
integrated circuits that are used as masters (similar to
negatives in a photographic process) to optically transfer the
image of circuit patterns onto semiconductor wafers during the
fabrication process.  Photomasks are made from photoblanks,
which are highly polished quartz or glass plates coated with
ultra-thin layers of chrome and photoresists.  The film is
typically precision-coated with an anti-reflective layer to
improve optical performance characteristics. 

Most Recent Update

As Semiconductor stocks continued to rebound, as measured by the
Semiconductor index (SOX.X) on Monday, DPMI pushed as high as the
$50 level in early morning trade before consolidating near the
$49 level going into the close. The big event last night was the
earnings report from TXN, which managed to beat estimates. That
seemed like good news until the company revealed that they would
be slashing their Cap-Ex budget from $1.8 billion to $800 million
for the year. That's more than a 50% reduction and the effect
wasn't lost on investors in the sector this morning, as the SOX
reversed and headed lower shortly after the open. By the end of
the day, the SOX had given up nearly 2.5%, which isn't bad when
you consider the broad-based selling that was the theme of the
day. While DPMI gave up some ground, it was encouraging to see
that the selling was fairly orderly and came on rather light
volume. The stock came to rest just above the 20-dma ($47.68),
after that level provided support earlier in the day. We only
want to initiate new plays on a successful bounce from above the
$47 support level, as a close below there would likely spell the
end of the current rally. We're raising our stop to $47 tonight.
Watch the SOX for confirmation of bullish sector sentiment
as well. 

Comments

Among tech sectors, the SOX.X traded the strongest Wednesday.
The index finished 4% higher, far outpacing the broader tech
measures.  DPMI traded exceptionally well, rebounding after
Tuesday's pullback to the 10-dma.  Watch for the stock to first
clear the $50 level early tomorrow.  From there, an advance
past $51 should send the stock to new relative highs.  Look for
an exit near $55.

BUY CALL FEB-45 DUD-BI OI=402 at $5.70 SL=3.75
BUY CALL FEB-50*DUD-BJ OI= 86 at $2.10 SL=1.00
BUY CALL MAR-50 DUD-CJ OI=140 at $3.30 SL=1.75
BUY CALL MAR-55 DUD-CK OI=  6 at $1.60 SL=0.75

Average Daily Volume = 273 K
 


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


The Disclaimer/ VIX Trade Revisited
Buzz Lynn
buzz@OptionInvestor.com

The Disclaimer

Arthur Anderson should have been as forthcoming about its 
intentions to deceive the investing public.  I am of course, 
talking about the fine print so often glossed over by the 
investing public who buy "speculative pieces of paper" based on 
someone's say-so, not fractional interests in companies based on 
sound business principles.

What got me thinking about this was the following disclaimer I got 
at the bottom of a spam e-mail, which touted its stock of the day 
- ICON in this case.  My comments in brackets [ ].

Disclaimer:

MarketWizardAlerts (MWA) publishes reports providing information 
on selected companies that MWA believes has investment potential 
[As long as it doesn't go to $0]. MWA is not a registered 
investment advisor or broker-dealer. [Limits the fiduciary 
liability we owe you, the buyer] This report is provided as an 
information service only, and the statements and opinions in this 
report should not be construed as an offer or solicitation to buy 
or sell any security. MWA accepts no liability for any loss 
arising from an investor's reliance on or use of this report. 
[What we write may be incorrect; we don't know, so you can't sue 
us] An investment in ICON is considered to be highly speculative 
and should not be considered unless a person can afford a complete 
loss of investment. An affiliate of MWA has been hired by a third 
party consultant, and is contracted to receive 70,000 free trading 
shares of common stock for the publication and circulation of this 
report. MWA intends to sell all or a portion of the of the ICON 
stock at or about the time of publication of this report. [We 
intend to profit from the hype and will be one of the sellers when 
you buy] Subsequently MWA may buy or sell shares of ICON stock in 
the open market. This report contains forward-looking statements, 
which involve risks, and uncertainties that may cause actual 
results to differ materially from those set forth in the forward-
looking statements. For further details concerning these risks and 
uncertainties, see the SEC filings of ICON including the company's 
most recent annual and quarterly reports. [More fine print here, 
but you have to dig for it]

Isn't that great?  These guys are pump and dump artists and they 
willingly tell us so without using that slang term in the 
disclaimer.  "An affiliate of MWA has been hired by a third party 
consultant, and is contracted to receive 70,000 free trading 
shares of common stock for the publication and circulation of this 
report. MWA intends to sell all or a portion of the of the ICON 
stock at or about the time of publication of this report."  While 
I despise the blatant and deceitful (to an unsuspecting public) 
"pump and dump" method of making money in the market, at least 
these guys are telling us they intend to take our money as we step 
up to buy, and that the shares may then go to zero.  Nominations 
for the "Back-handed Truth In Advertising" award anyone?

It's like you are playing poker with a stranger in a black hat and 
he tells you he's going to reach across the table and grab your 
chips.  Then he does.  

I don't condone thieves, but if I leave my chips exposed after 
I've been warned, I'd have to judge my own stupidity greater than 
the poker player's audacity.  I lock my door when I leave the 
house, look both ways at a crosswalk, and don't stalk packs of 
wild hyenas at night with a slingshot - just common sense.

There is a lot to be learned in the fine print as many investors 
have learned from TYC, JPM, CD, and ENE (though the fine print may 
never have properly existed or was shredded in the case of ENE).  
Cozy up to the idea of reading the fine print if you want to 
preserve capital.  That's common sense too.  

The old saying is true, "What the Lord giveth, the fine print 
taketh away".  

VIX Trade

Last night, I outlined a bearish put-buying trade based on the 
VIX, which I thought would take some time to pan out, perhaps 
until tax selling abated into April 15th.  I got in the trade for 
what I thought were all the right reasons - namely a historically 
low VIX that I felt sure would spike in the coming months.  There 
were other bearish reasons too, but mostly it was the VIX.  It was 
supposed to be a speculative long-term trade.

No need to read about the specifics.  But if you are interested, 
here is the link.

http://www.OptionInvestor.com/traderscorner/012902_1.asp

Frankly, I could have made a better choice by playing the OEX, SPX 
or DJX rather than the QQQ, which I assumed would take the greater 
hit in a downturn since I believed tech stocks were more over-
valued than the aggregate Dow or S&P.  WRONG!  I should have paid 
more attention to the Q's relative strength and avoided it.  

But for this explanation today, the chosen index is not as 
important as the concept.  See, when I chose to make the play, it 
was based on a reason, or set of reasons, from which I drew a 
likely conclusion, and then waited to be proven true.  Or should I 
say, I would have liked the market to it true.  If it does not 
prove true, my reasons for entry were flawed.

Keeping in mind that the reason for entering the June QQQ put 
trade was to have ample time to be right by having the VIX cycle 
back up from 21.64 to 30 or greater over a period of time.  This 
presumes that I have a planned exit too once the cycle up is 
complete.  When the objective is reached, no sense in getting 
greedy for more unless the trade still has momentum in my favor.

Nobody was more surprised than I was to see that my objective, 
which should have taken weeks to reach, happened in two trading 
days.  Yep, the VIX reached 29.92 just before news that TYC's CEO 
and CFO would each purchase 500K share of TYC in order to help 
restore investor confidence in the company.  In fact, any 
conglomerate (GE, CD) or any other non-financial company with 
accounting issues got a ride in Kozlowsky and Swarz' Tyco jet in a 
stellar 12:00 pm reversal that lasted throughout the rest of the 
day.  The Fed comments provided afterburner that helped financials 
get off the ground too.  Yep, bullish reversal.

That said, it was then decision time.  Do I keep the trade and 
wait for more action in my favor and for the VIX to exceed 30?  Or 
do I remind myself, "mission accomplished" and focus on other 
trades?  Tough question.  The answer?

I was not comfortable that the VIX was going to keep marching 
upward after such a large 2-day move - seemed like gravity ought 
to take over, especially at market support.  Uh oh, starting to 
think of my long-term play in terms of day trading.  After all, I 
had a little profit and I did not want it to slip into a loss 
should the VIX retreat, which it surely might.  Been there, done 
that, no need to revisit.  With an intentional whack on the side 
of the head, I needed to refocus on why I took the play and where 
I would exit.  Day-trader or long-term directional bet?  

Well, the QQQ held up pretty well on the VIX spike (bad choice of 
indexes as noted above) even as the SPX touched near 1080 and the 
Dow fell near 9550 - both strong support levels.  As Austin 
rightly pointed out in the Market Monitor, the market looked 
poised for a bounce with all timeframes turning bullish (except 
the weekly).

I had a profit; objective reached; and it just happened to 
coincide with rational trading parameters too - take the profit 
when it's earned and don't get greedy for more.  I took the profit 
and ran. . .

. . .to the nearest Subway Sandwich where it was just enough to 
buy a nice sandwich, chips, and a drink, plus get some change back 
from my $20 bill!  There should be enough left over for dinner 
tonight too!

Folks, this was a slow trade that happened fast with an index that 
was not in lockstep with the rest of the market's behavior.  I had 
a profit for the right reasons, but the market was proving me 
wrong on many other fronts.  I was fortunate to have my meals paid 
for today (after commissions!) by this trade.  

Trading Axiom: If the market isn't going with me, it's going 
against me (soon, if not now).

Take this update as a reminder to harvest profits when they 
present themselves or when an objective has been reached.  Hanging 
out for more on a sub-par trade is a recipe for loss.

Until tomorrow, keep your wings level and trust your instruments!  
We'll cover more Q-Charts then!


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

Stocks Close Higher After Fed Leaves Rates Unchanged
by Ray Cummins

The major equity averages finished with an upside bias after a
volatile session in which investors were deluged by quarterly
earnings reports, new economic data and the Federal Reserve's
decision on interest rates.

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

MAILBAG - Reader's Comments & Questions

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

Today's unpredictable market activity has provided an excellent
opportunity to publish one of our recent E-mail questions.

 
Hi:

   I'm a new subscriber to Option Investor.  I have been following
the Naked-Puts section.  I realize it's updated on Wednesdays and
Sundays but there seems to be different stocks covered on Wednesday
versus Sunday.  Would you explain the basis for this?   As well I
like to track the recommendations thru the week and beyond because
often I can't sell the option at the listed price.  How long are
these recommendations good for?   Would I be advised that if I
haven't got a fill in the current week to drop that recommendation?
 
Any other information would be greatly appreciated.

Thanks

GG


Hello GG,

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

The explanation to your first question is simple; the two sections
you referred to are completely different, although they have one
similar strategy among their candidates.  The Wednesday section is
known as the BIG CAPS portfolio (from the era in which it started,
when there were hundreds of large-cap technology stocks) and the
weekend section is simply the NAKED PUTS portfolio.  The weekend
section is geared more toward to the new investor with a smaller
trading portfolio and that's why you don't see high priced stocks
in that section very often.

As you mentioned, a problem emerges when you don't get filled on an
order initially (do you chase the play?) or when the issue moves in
opposition of the expected trend after a few sessions (regardless
of whether you actually opened the position).  In almost every case,
the decision you make about a specific trade 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 a position is no longer
viable, due to the size of the premium (or lack of it), and based on
your personal profit/loss criteria, it should be closed (or avoided).


The Fundamentals of Put Writing with the OIN

Put writing is designed to complement a stock-trading portfolio
because it offers two methods for generating profits: collecting
premium by selling out-of-the money options and/or acquiring a
stock at a reduced price.  In our current approach, we focus on
out-of-the-money (OTM) options with average position returns of
5% to 8% per month.  We expect you to initiate our plays at or
near the premium that is quoted in the play narrative.  That's the
only way you can expect to achieve the overall return we list for
each candidate.

The easiest way to utilize our candidates is to take the range of
selections and narrow them down through your own due diligence
until you find plays that meet your risk-versus-reward tolerance.
Always research the company and its calendar of upcoming events,
earnings dates and other scheduled announcements.  When you have
up-to-date information about a stock and its industry, you will
be way ahead of traders who buy and sell on rumors or comments
from the online message boards.  The axiom, "Knowledge is Power!"
was never more appropriate than with investing and with the tools
on the Internet, there is no excuse for being uninformed about a
company or its industry group.

After you have selected a candidate, you must decide how much
stock you are willing to (potentially) purchase through the sale
of puts.  Usually, it's a minimum of 5 - 10 contracts (to prevent
commissions from significantly affecting the ROI) and we suggest
that you place the opening order with your broker as a "limit"
rather than a "market" because some of the positions are thinly
traded.  After your order is filled, monitor the play until it
expires or needs to be closed for other reasons.  We track both
portfolios on a weekly basis but we may not make comments about
every position after the initial recommendation.  The ongoing
summary narrative is a service we provide to help novice traders
understand when and why various plays might be opened and closed.
However, it is not intended as a substitute for your personal
trading techniques nor does it replace your duty to manage the
positions in your portfolio.


Early Exits and Potential Adjustments:

A "short" put position generally requires the underlying issue to
remain above a specific price in order to generate profits.  You
must be confident of this outcome before initiating any play on
our candidate list.  In addition, anytime you participate in an
option trade, you should know at what (stock) price the position
will be at "break-even."  You should also determine the price the
underlying issue would have to reach to generate unacceptable
losses.  Ideally, you will enter a position and then simply wait
for expiration.  Unfortunately, it doesn't always work that way.
To be successful on a consistent basis, option positions must be
closed or adjusted if predetermined exit points are reached.  You
must be prepared to make these adjustments when they are needed,
not after the position has moved beyond a reasonable loss level.
This type of money management requires advanced planning and the
discipline to execute preplanned strategies in adverse conditions,
regardless of your emotions or instincts.

With this form of trading, there is a large downside potential and
and in many cases, failure to adjust a position in a timely manner
can lead to catastrophic portfolio losses.  We publish the classic
"warning" paragraph in the weekend play narrative for that reason
alone.  The last two sentences are paramount to success: "It is
also important that you consider using trading STOPS on any naked
option positions to help limit losses when the stock price drops.
Many professional traders suggest closing the position when the
stock price falls below the sold strike or using a 'buy-to-close'
STOP at a price that is no more than twice the original premium
from the sold option."  It is not uncommon for traders who have
enjoyed a long string of winning positions to get "wiped out" by
one bad play because they failed to limit their losses when the
market moved against them.  The problem is, the decision usually 
has to be made under duress, at the worst possible moment.  The
only way to avoid this fate is to develop a plan with a target
exit (or adjustment) point, and stick to it.  This requirement is
difficult for new traders to adhere to but the simple fact is,
professionals use proven money management techniques to maximize
profits and limit losses and that's why they come out ahead in
the long run.

Good Luck!

***************
Summary of Current Positions (as of 01-29-2002):
***************

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   34.93   2.25     6.0%
MU      FEB    32.5   30.04   30.49   0.45     1.1%
MRVL    FEB    32.5   30.36   42.51   2.14     4.8%
WGO     FEB    40     37.57   41.32   2.28     6.0%

Micron Technology's (NYSE:MU) recent bearish activity
(the move below its 30-dma today) was a good early-exit
signal for investors who do NOT want to own the stock.
Those who have a more long-term outlook should watch
for a close 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   48.45   0.90    6.5%
EMLX    FEB     35   33.85   44.36   1.15    8.8%
MRVL    FEB     30   29.35   42.51   0.65    6.0%
SYMC    FEB     60   58.90   75.75   1.10    5.1%
SEBL    FEB     27.5 26.65   34.93   0.85    8.8%
BRKS    FEB     40   39.15   46.51   0.85    6.0%
ACDO    FEB     40   39.50   48.45   0.50    4.6%
WGO     FEB     35   34.50   41.32   0.50    4.3%
SEBL    FEB     27.5 26.95   34.93   0.55    9.3%
MRVL    FEB     32.5 32.10   42.51   0.40    5.7%


Naked Calls:

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

AMAT    FEB    50    50.50   41.31   0.50    5.6%
KLAC    FEB    60    60.60   52.80   0.60    5.5%
QLGC    FEB    65    65.65   47.31   0.65    6.0%
ADI     FEB    50    50.45   41.66   0.45    6.2%

The semiconductor sector is performing relatively well,
despite the recent selling pressure in the broader markets.
Traders should watch for any movement that challenges the
near-term technical resistance areas in these issues and
if necessary, take action to lock-in current profits.


Index Credit Spreads:

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

SII    55.12    51.01  FEB40P/45P   0.65   44.35   0.65   Open
THC    62.10    61.91  FEB55P/60P   0.80   59.20   0.80   Open
TRI    31.50    32.34  FEB25P/30P   0.60   29.40   0.60   Open
UNH    73.00    72.95  FEB65P/70P   0.65   69.35   0.65   Open
WLP   125.16   122.04  F110P/115P   0.55  114.45   0.55   Open
AT     56.70    54.62  FEB65C/60C   0.60   60.60   0.60   Open
MMM   103.47   108.65  F120C/115C   0.65  115.65   0.65   Open
BAC    62.86    59.20  FEB55P/60P   0.60   59.40  (0.20) Closed?
HSIC   43.26    43.65  FEB35P/40P   0.40   34.60   0.40   Open
KSWS   37.38    36.22  FEB30P/35P   0.75   34.25   0.70   Open
GNSS   58.68    58.01  FEB75C/70C   0.50   70.50   0.50   Open

Banc Of America (NYSE:BAC) was devastated by the sell-off in
financial issues and the one-day plunge to the bottom of its
recent trading range left little opportunity to exit the play
without a loss.  Since the move was likely overdone, traders
may consider using a future technical bounce to close or adjust
the position with a favorable (low cost or low risk) outcome.


Index Credit Spreads:

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

XAU    58.07    60.35  FEB50P/55P   0.85   54.15   0.80   Open
PPH    98.60    95.40  FEB90P/95P   0.45   94.55   0.45   Open

Today the Pharmaceutical Holdrs Trust (AMEX:PPH) moved below the
support level of a recent trading range and any further downside
activity should be seen as an early-exit (or adjustment) signal.


Synthetic Positions:

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

DGX    71.40    69.60  FEB85C/60P   0.10   59.90   0.20   Open
MER    57.99    49.00  FEB65C/50P   0.15   49.85  (0.85) Closed
WMT    59.86    57.91  MAR65C/55P   0.25   54.75   0.20   Open

The bullish position in Merrill Lynch (NYSE:MER) was closed when
the issue moved through near-term support (and its 30-dma) at $53.


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
BBH   127.58 117.80  FEB145C/140C    0.50   140.50  0.50   Open
BBH   127.58 117.80  FEB100P/115P    0.55   114.45  0.55  Closed

The Biotechnology Holdrs Trust (AMEX:BBH) is suffering from the
widespread selling pressure in its large-cap components and the
decline below $120 suggests further downside activity.  Traders
may consider an exit or adjustment in the bullish portion of
the position to avoid future losses.
 

New Candidates:

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

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

BULLISH PLAYS - Covered Calls: A Reader's Request!

One of our new readers requested some Covered-Call candidates
in the industrial groups such as transports and basic materials.
While the current (low) premiums in options do not provide the
downside protection we prefer in our conservative approach to
this strategy, investors with a bullish outlook on the underlying
issues may find the risk-reward outlook in these plays attractive.
All of these companies have reported earnings this quarter and
have favorable fundamentals and relatively bullish technical
indications however, they should also be evaluated for portfolio
suitability and reviewed with regard to your personal investing
criteria.  These candidates will not be included in the monthly
summary.
  
***************
ACTN - Action Performance  $39.80  *** Go Racing! ***

Action Performance Companies (NASDAQ:ACTN) designs and markets
licensed motorsports products, including die-cast scaled replicas
of motorsports vehicles, apparel and souvenirs.  The company also
develops promotional programs for sponsors of motorsports that
feature the company's die-cast replicas or other products which
are intended to increase brand awareness of the products or
services of the corporate sponsors.  The company markets its
products to approximately 10,000 specialty retailers throughout
the world, directly or through its many wholesale and dealer
distributors, to motorsports enthusiasts through its Racing
Collectables Club of America, and through mobile trackside
souvenir stores and promotional programs for corporate sponsors.

ACTN - Action Performance  $39.80

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 MAR 40   QNC CH   57       3.20    36.60      6.4%
SELL PUT  FEB 35   QNC NG   267      0.30    34.70      4.7%


***************
BDK - Black & Decker  $40.69  *** Tools For Everything! ***

Black & Decker (NYSE:BDK) is a global manufacturer and marketer
of power tools and accessories, hardware and home improvement
products and technology-based fastening systems.  The company
operates in three business segments: Power Tools and Accessories,
including consumer and professional power tools and accessories,
electric lawn and garden tools, electric cleaning and lighting
products and product service; Hardware and Home Improvement,
including security hardware and plumbing products; and Fastening
and Assembly Systems.  Black & Decker markets its products and
services marketed in over 100 countries.

BDK - Black & Decker  $40.69

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   BDK BH  4,873     1.65    39.04       4.4%
SELL PUT  FEB 40   BDK NH  1,623     0.85    39.15       9.3%

Investors should target a lower cost basis in these positions
to allow for some consolidation in the underlying issue and
increase the overall return on investment.


***************
NBR - Nabors Industries  $30.36  *** Bottom-Fishing For Oil! ***

Nabors Industries (NYSE:NBR) operates in two primary business
segments within the oilfield services industry, contract drilling
and manufacturing and logistics.  The company provides drilling,
workover, well-servicing and related services on land and offshore
in the lower 48 states of the United States (lower 48 states),
Canada and Alaska, as well as international markets.  The company
also manufactures and leases (or sells) top drives, drilling
instrumentation systems and rig-reporting software domestically
and internationally, and provides oil rig construction, logistics
services and marine transportation and support services in Alaska
and the lower 48 states.

NBR - Nabors Industries  $30.36

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 MAR 30   NBR CF  1372      2.40    27.96      5.0%
SELL PUT  FEB 27.5 NBR NY  821       0.40    27.10      7.4%


***************
ROAD - Roadway Corporation  $40.24  *** Hot Sector! ***

Roadway Corporation (NASDAQ:ROAD), formerly known as Roadway
Express, provides less-than-truckload freight services on major
city-to-city routes (lanes) in North America and on international
lanes to and from North America.  The company was spun-off from
Roadway Services, the former parent, which was a holding company
formed by Roadway.  Roadway provides transportation of general
commodity freight by motor vehicle.  General commodity freight
includes apparel, appliances, automotive parts, chemicals, food,
furniture, glass, machinery, metal and metal products, non-bulk
petroleum products, rubber, textiles, wood, and miscellaneous
manufactured products.  The company offers LTL service in Canada
and Mexico through its subsidiaries and also offers service to 66
additional countries worldwide through offshore agents.  Roadway
serves over 500,000 customers in North America.

ROAD - Roadway Corporation  $40.24
  
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   EJQ BH  19        1.40    38.84       5.3%
SELL PUT  FEB 40   EJQ NH  0         1.25    38.75      13.1%


***************
VLO - Valero Energy Corporation  $44.28  *** On The Move! ***

Valero Energy Corporation (NYSE:VLO) is an independent petroleum
refining and marketing company that's in the United States.  VLO
owns and operates six refineries in Texas, California, Louisiana
and New Jersey with a combined throughput capacity of one million
barrels per day (723,000 BPD of crude capacity).  Valero produces
premium, environmentally clean products such as reformulated
gasoline, low-sulfur diesel and oxygenates, and is able to produce
gasoline-meeting specifications of the California Air Resources
Board (CARB) gasoline.  Valero also produces a substantial slate
of middle distillates, jet fuel and petrochemicals.  Valero sells
its products in 34 states through an extensive wholesale bulk and
rack-marketing network, and in California through 350 locations.
In January 2002, the company acquired Ultramar Diamond Shamrock,
an independent petroleum refining and petroleum product and
convenience merchandise marketing company.

VLO - Valero Energy Corporation  $44.28

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 MAR 45   VLO CI  2,267     1.85    42.43      4.2%
SELL PUT  FEB 42.5 VLO NV  2,376     0.45    42.05      4.9%

Investors should target a lower cost basis in these positions
to allow for some consolidation in the underlying issue and
increase the overall return on investment.
 

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

BULLISH PLAYS - Naked Puts, Credit Spreads, Synthetic Positions

All of these plays are based on the current price or trading
range of the underlying issue and its recent technical history
or trend.  The probability of profit from these positions may
also be higher than other plays in the same strategy based on
disparities in option pricing.  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.

***************
INVN - InVision Technologies  $37.00  *** New Orders! ***

InVision Technologies (NASDAQ:INVN) markets advanced detection
and inspection products by adapting medical and laboratory
technologies for government and commercial uses, such as security,
defense and process control.  InVision is the worldwide leader in
explosive detection technology and the company makes, manufactures,
markets and supports explosive detection systems for civil aviation
security based on advanced computed tomography technology.  The
company's products were the first automated explosive detection
systems to be certified by the Federal Aviation Administration as
meeting its stringent requirements.  The company has sold an
aggregate of 231 systems to the FAA, foreign aviation security
agencies, and domestic and foreign airports and airlines.

INVN - InVision Technologies  $37.00

PLAY (sell naked put):

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

SELL PUT  FEB 30   FQQ NF  1,113      0.80   29.20      16.6% ***

SELL PUT  MAR 22.5 FQQ OX  5          0.55   21.95       5.1%
SELL PUT  MAR 25   FQQ OE  30         0.80   24.20       7.2% ***
SELL PUT  MAR 30   FQQ OF  123        2.00   28.00      15.1%


***************
FIC - Fair, Isaac and Company  $55.75  *** Earnings = Upgrade! ***

Fair, Isaac and Company (NYSE:FIC) is a global provider of decision
making solutions.  The company serves clients primarily in the
Financial Services industry, and, to a lesser extent, the Insurance,
Retail and Telecommunications industries.  The company also employs
various tools, such as database enhancement software, predictive
modeling, adaptive control and systems automation to help businesses
use data to make faster, more profitable decisions on their marketing,
customer acquisition campaigns, operations and portfolio management.
Among Fair, Isaac and Company's signature products are the North
American credit bureau scores, FICO credit bureau risk scores, used
throughout the credit card, mortgage, auto lending and other unique
industries; a credit account management system, TRIAD; and a scoring
system for granting small business credit.

FIC - Fair, Isaac and Company  $55.75

PLAY (very conservative - bullish/credit spread):

BUY  PUT  FEB-45  FIC-NI  OI=72  A=$0.25
SELL PUT  FEB-50  FIC-NJ  OI=10  B=$0.60
INITIAL NET CREDIT TARGET=$0.40-$0.45  MONTHLY PROFIT(max)=15%


***************
NOC - Northrop Grumman  $106.81  *** More Defense Spending! ***

Northrop Grumman Systems (NYSE:NOC) is a global aerospace and
defense company.  The company provides technologically advanced
products, services and solutions in defense and commercial
electronics, systems integration, information technology and
non-nuclear shipbuilding and systems to United States and
international military, government and commercial customers.
The company acquired Litton Industries, making Litton a 97%-owned
subsidiary of Northrop Grumman.  Litton designs, builds and also
overhauls non-nuclear surface ships and provides defense and
commercial electronics technology, components and materials.  In
November 2001, the company acquired 81% of Newport News Shipbuilding.
Newport News Shipbuilding is engaged in the design, construction,
repair, overhaul and refueling of nuclear-powered aircraft carriers
and submarines for the United States Navy.  In January 2002, the
company acquired the remainder of Newport News Shipbuilding

NOC - Northrop Grumman  $106.81
  
PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-95   NOC-NS  OI=2539  A=$0.40
SELL PUT  FEB-100  NOC-NT  OI=2266  B=$0.80
INITIAL NET CREDIT TARGET=$0.50-$0.60  PROFIT(max)=11%


***************
ROOM - Hotel Reservations  $54.72  *** Earnings Surprise! ***

Hotel Reservations Network (NASDAQ:ROOM) is a consolidator of
hotel and other lodging accommodations.  The company contracts
with lodging properties in advance for volume purchases and
guaranteed availability of rooms at wholesale prices, and sells
these rooms to consumers often at significant discounts to
published rates.  The company's supply relationships also often
allow it to offer customers accommodation options for otherwise
unavailable dates.  In addition, through its major subsidiary,
TravelNow.com Inc., the company offers customers the ability to
book hotel rooms, airline travel and car rentals.  At the end of
last year, Hotel Reservations Network had room supply agreements
with approximately 2,600 hotels in 97 major markets in North
America, the Caribbean, Western Europe and Asia, as well as 113
vacation rental properties in 17 markets in North America and
the Caribbean.

ROOM - Hotel Reservations  $54.72

PLAY (conservative - bullish/credit spread):

BUY  PUT  FEB-45  URD-NI  OI=239  A=$0.40
SELL PUT  FEB-50  URD-NJ  OI=345  B=$0.95
INITIAL NET CREDIT TARGET=$0.60-$0.70  PROFIT(max)=14%


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

Neutral Plays - Straddles & Strangles

***************
QCOM - Qualcomm  $44.69  *** Volatility Play! ***

Qualcomm (NASDAQ:QCOM) is a developer and supplier of code division
multiple access (CDMA)-based integrated circuits and system software
for wireless voice and data communications and global positioning
system (GPS) products.  The company offers complete system solutions,
including software and integrated circuits for wireless handsets and
infrastructure equipment.  This complete system solution approach
provides customers with advanced wireless technology, enhanced
component integration and interoperability, as well as reduced time
to market.  QCOM provides integrated circuits and system software to
many wireless handset and infrastructure manufacturers.

Based on the recent share value activity and historical option
prices, this position offers a favorable "speculative" straddle.
QCOM's options are undervalued and the stock has the potential
to move (high or low) enough to make the straddle profitable.  In
addition, the issue has a history of multiple movements through
a sufficient range in the required amount of time to justify the
overall risk-reward of the position.

QCOM - Qualcomm  $44.69

PLAY (very speculative - neutral/debit straddle):

BUY  CALL  FEB-45  AAO-BI  OI=12024  A=$1.80
BUY  PUT   FEB-45  AAO-NI  OI=11449  A=$2.10
INITIAL NET DEBIT TARGET=$3.75-$3.80 TARGET PROFIT=20%


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

BEARISH PLAYS - Naked Calls & Combinations

***************
PGR - The Progressive Corporation  $145.17  *** Trading Range? ***

The Progressive Corporation (NYSE:PGR) is an insurance holding
company.  The company has 76 subsidiaries and two mutual insurance
company affiliates.  The Progressive Corporation's many insurance
subsidiaries and affiliates provide personal automobile insurance
and specialty property-casualty insurance and related services
throughout the United States.  The company's property-casualty
insurance products protect its customers against collision and
physical damage to their motor vehicles and liability to others for
personal injury or property damage arising out of the use of those
vehicles.

This play is based solely on the current price and trading range
of the underlying stock and its recent technical history.  PGR
has been comfortably mired in a rectangular pattern near $145
since late last year and there is little reason to believe the
issue will experience a significant change in character in the
near future.  The company has already reported earnings for the
quarter and there are no major events expected in the next few
weeks.  Traders who agree that the probability of PGR's share
value reaching our sold strike is rather low can speculate on
that outcome with this conservative position.  Since there is
always the possibility of a break-out from the recent trading
range, monitor the issue daily for any changes in its current
technical outlook.
 
PGR - The Progressive Corporation  $145.17
  
PLAY (moderately aggressive - bearish/credit spread):

BUY  CALL  FEB-155  PGR-BK  OI=214  A=$0.35
SELL CALL  FEB-150  PGR-BJ  OI=442  B=$1.00
INITIAL NET CREDIT TARGET=$0.75-$0.80  PROFIT(max)=17%


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




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