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Daily Newsletter, Wednesday, 02/06/2002

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The Option Investor Newsletter                Wednesday 02-06-2002
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)
*******************************************************************
      02-06-2002          High     Low     Volume Advance/Decline
DJIA     9653.39 - 32.04  9733.10  9608.21 1.67 bln   1134/1930	
NASDAQ   1812.71 - 25.81  1853.13  1805.01 2.06 bln   1206/2364
S&P 100   550.20 -  2.18   555.04   546.89   Totals   2340/4294
S&P 500  1083.51 -  6.51  1093.58  1077.78             
RUS 2000  462.41 -  6.41   469.48   461.67
DJ TRANS 2621.98 - 80.45  2707.45  2615.84
VIX        28.05 +  1.28    28.66    27.14 
VXN        49.06 +  2.32    49.20    47.33
TRIN        1.21 
Put/Call    0.70
*******************************************************************

"Slip Slidin' Away"
Austin Passamonte

Can't recall the singer, album or era but I do remember that being 
title to a song. Might as well moniker the markets with it too, 
while we're at it. Tonight's market report is easy: we can forego 
all the news items fluff from last night until now and sum it up 
with four picture windows instead. How's that sound?

(Weekly/Daily Charts: SPX)


 

In no particular order we'll review trends based on accumulation 
and distribution. First up, the SPX. A homogenous blend of all the 
other indexes to follow below, it's a nice place to begin. Weekly 
chart (left) shows price action at or slightly below some key 
retracement levels measuring year 2001 highs in May to lows in 
September. Stochastic values are still pointing straight down, 
telling us the market is under distribution right now. 

That visual fact is reinforced by its daily chart (right) with 
stochastic values also rolling straight down in bearish fashion. 
Moving averages are miles above and ultimate support may come in 
around the 1036 area if 1050 doesn't hold first. We are talking 
about downside targets only because the trend and price strength 
are both in pure harmony across all time frames: down. If and when 
the signals shown turn bullish reversals ahead, we'll be targeting 
upside points of reference from there.

(Weekly/Daily Charts: OEX)


 

The OEX, mirror index of the SPX is of course exactly the same. We 
could and probably will see 528 area in the next few weeks or so. 
Zero signs of sustained bullish potential right now.

(Weekly/Daily Charts: Dow)


 

The Dow is slightly different, but not much. Weekly chart signals 
are trying to cease the halt but daily charts speak otherwise. The 
halfway mark of last year's price range just gave way and now 
serves as resistance. Looks like 9,300 area could be the next 
price magnet ahead.

(Weekly/Daily Charts: QQQ)


 

I'd guess the NDX/QQQ and primary sectors will be first to find a 
bottom and stabilize. Just as they were the first to break down, 
so shall tech sectors be first to flatten out. Bounce from there? 
Bulls should just be grateful for sideways action right now and 
that could come relatively soon.

Odds & Ends
You could stop right there and click out of this page with all 
that needs be known about the markets to make money. TYCO secures 
more credit to dig a deeper hole? CSCO conveniently slips out 
earnings before the markets open and way before any conference 
call? Bullish economic reports before the opening bell? Who really 
cares? Did price action seem to care? Not much longer than the 
first few minutes before prevailing trend resumed its course.

Thoughts to ponder: WCOM on its way to bankruptcy? Sure seems that 
way, and I expect the majority of current telecom and wireless 
components to follow suit. No one will buy anyone else out in that 
hapless sector because the few companies left with money don't 
need or want the other loser's overpriced, out-dated mess. I'm 
just hoping these dead stocks still walking can pop back up to 
resistance so I can ride them down the hill without missing the 
fun this time!

Wonder how CSCO's conference call is going? Maybe they didn't slip 
the markets a mickey today after all. Perhaps that inadvertent 
earnings release was not a ploy to prop up the stock before bad 
news leaks after all. I've had CNBC on mute since 2:00pm, my 
preferred mode of listening. Can't say as I tapped into the CSCO 
conference call, either. If I had that kind of idle time to 
fritter away it would've been spent napping on the couch instead. 

Let's see how well CSCO pleased the analysts.... hmmm... gotta be 
a price in the post-market ticker soon... ah yes, 17.30 and 
falling. Is that where CSCO closed today or did it pop up a couple 
bucks higher after the bell? All those sell side fundies keep 
telling us how much cash CSCO has on hand. Maybe they'll buy back 
a huge chunk of their float if things are looking so rosy over 
there. Can you think of a better investment CSCO could make 
instead of a record-breaking buy back?

Alex Henderson of Salomon Smith Barney can't think of any. He's 
the analyst on CNBC last night at this very hour pounding the 
table on CSCO as a strong buy. His firm's price target is $27 to 
$35 by year's end and implored us to buy it today, before the 
monster earnings tonight so all we ignorant folk don't miss the 
huge spike up to follow.

Thanks anyway Allie, but I'll stick with shorting the S&P for now. 
Up just over +70 index points since last Monday and would like to 
bank +100 by this week's end. I'll invest in your CSCO call some 
other time.

None Of It Matters At All
Market news and analyst mantra amuses me much as the next person. 
I cruise various fundamental news sites to see how the other half 
lives but for gosh sakes never base any of my trades on that inane 
stuff. I want to, check that... I NEED TO see price action in the 
charts before ever making a single trading decision that involves 
my money and other people's too. Long ago I learned nothing else 
matters when chart action is clear, and clarity reigns right now.

The trend is down, chart signals are all heading down in unison. 
Short every single rally attempt from now until chart signals turn 
bullish. That's all any of us need to know. The rest is pure noise 
& distraction.

I'm going out on an editorial limb saying such strong words and I 
know for an absolute fact some readers are bristling. That's the 
price I'm willing to pay for saving others who are intent on 
trying to catch a bounce with index calls. Every day with no 
exception I get email asking if readers should buy index calls 
here or there, is this the bottom, etc. I also get more than a few 
notes from those who bought calls, are trapped with painful loss 
and ask me for a solution to save them that does not exist. My job 
in here is to try and help shelter aspiring traders from fiscal 
harm first & foremost, and strong words are sometimes required.

(60/30 Min Chart: OEX)


 

Skilled, knowledgeable, daring intraday traders can attempt call 
plays for brief scalps but rest assured that is bucking the 
dominant trend. On the 60-min chart (left) you'll see stochastic 
values crossing over in or near overbought zones three times. 
Swing Trade model played the downside on those first two and hit 
some fairly big moves with absolute ease. Two other times there 
were upside pops from oversold extreme of tradable distance that 
lasted a few hours or less each time. Be quick or be dead when 
fading weekly/daily charts trending powerfully as they are right 
now.

What does this tell us? Play the trend. This afternoon there was a 
third viable put play entry as the OEX failed near 555 and broke 
below S/R price magnet of 552.50 area. Puts long at 552.00 and 
held over the close might work real well tomorrow. Stops set at 
555.25 just above the last high would limit risk fairly well. I 
did not take this play myself, but sure wish I had. With CSCO 
bleeding red all over the post-market ticker, it could be another 
very methodical day tomorrow once more.

Summation
You are fully armed & ready for the market. Watch your favorite 
stock, index or sector for weekly/daily charts just like these. 
Wait for 60/30 min charts to line up in overbought and turn 
bearish just like the ones above. Get short, set stops and hold 
on. Trading the downside right now is slightly easier than 
printing crispy, new $100 bills of your laser printer, and you 
will sleep easier at night knowing the Secret Service isn't about 
to pay a visit.

If that sounds brazen or cocky I apologize. But we are right in 
the middle of a beautiful trend to trade and most people I talk 
with have been looking upwards for the past two weeks. Turn 
around, look down, short every rally and fire up the printing 
presses in your home. The trend is your friend and we've all got a 
party going on with our friend right now!

Sell Every Rally With Gusto,
austinp@OptionInvestor.com


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

Greekus Interruptus
By Mark Phillips
mphillips@OptionInvestor.com

I know I was planning to cover the next of our infamous Greeks,
Theta (time decay) this week, but I've got to put it on hold for
a week due to what I think are a couple of really interesting
reader questions.  Usually I just answer these individually, but
I think both of these questions will be beneficial to all.  The
best part is the fact that both questions came from the same
reader!

So let's dive right in, shall we?  Just so everyone knows what
to expect, the first question has two parts, just like those
standardized tests we took in school.  Taking literary license,
I've broken up the question into its parts so that we can cover
each issue in turn.

BACKGROUND
"Mark, When one company buys another would you please explain
what happens to the options and what strategies may be more
applicable after an announced purchase. 

For example: In the biotechnology area MLNM bought CORR, MEDI
bought AVIR, and AMGN bought IMNX. The AMGN-IMNX offer has not
closed yet and the offer to IMNX owners is 0.44*(closing share
price AMGN) plus $4.50 per share.  Today AMGN closed at 56.37
and IMNX closed at 28.04.  When I do the multiplication I get
0.44 times 56.37 = 24.03.  Adding that number to 4.50 = 29.30.
The difference between the offered price to IMNX owners and the
closing price of IMNX is (29.30 - 28.04)= 1.26.  So 
IMNX is trading 1.26 less than the offering price."

Q&A
Q1: "I guess the market assigned the risk that the deal does
not go through as this price?  Do you have an explanation?"

A1: Absolutely correct.  The difference between the theoretical
price of the company that is being acquired and the actual price
on any given day is the "risk premium" that the market has
assigned to the possibility that the merger will fail to go
through.

Since the stock price of the company doing the acquiring normally
drops following the announcement and the price of the acquired
company normally rises, if the deal were to fall through, this
effect would likely be reversed.  With a breakdown in the merger
(for whatever reasons) the price of the acquirer will likely rise
and the acquired will drop.  This is the net result of the
acquiring company paying a premium for their acquisition, which
will likely be dilutive to earnings in the near term.  So
naturally, if the deal fell apart, that dilutive effect would be
reversed.

Q2: "Since we do not know the exact date of the approval of the
purchase (clearing regulatory agencies, etc.) one can sell
options for January 2003 or 2004 that will expire worthless long
before these dates with a company purchase.  Is this an example
where the option seller has an additional edge as this is not
typically one of the factors in the option calculations (unless
there is less volatility because of the company purchase?).
Would you please comment on my thinking and let me know whether
I am misunderstanding something or whether one can really sell
a Jan 2004 that will expire within 6 months."

A2: Ah, now I see where you're going...I'm sorry to say that
there are two erroneous conclusions there.  If I understand the
question correctly (and I think I do), my reader is under the
mistaken impression that once the acquisition is completed, any
options on the acquired company will be wiped out.  Not so.
While the acquired company's stock and underlying options will
no longer trade, they are simply converted to new symbols at the
closing prices as of the date that the acquisition is completed.
So if the acquisition was completed with AMGN trading at $60,
all the IMNX shares would be converted to AMGN shares at the 0.44
ratio plus $4.50, or $30.90.  That means that 100 shares of IMNX
would convert to 44 shares of AMGN at $60 and the shareholder
would be paid the $4.50 per share in the form of a dividend.

The issue of the options is a little stickier, as the actual
conversion involves a change in the option symbol (and strike)
and is usually determined by the listing exchange, usually the
CBOE.  Normally, the options on the acquired company are
converted to options on the acquiring company with a different
strike price; in this case, any outstanding options on IMNX
would be converted to AMGN options at a different strike price
(at a ratio close to the 0.44, taking into account the $4.50
cash dividend).  This is a highly individualized conversion
process, and if you are holding options on a company that is
going to be acquired, you'll want to check with the listing
exchange to see how they will convert and what the new option
symbols will be.  But the important point is that the options
DO NOT cease to exist.  They just change, based on the
acquisition.

I mentioned above that there were two misconceptions.  The other
one is that the stocks will continue to trade near their current
value all the way through the completion of the acquisition.
While this may in fact be true, external events could act to
dramatically change the price of BOTH stocks.  Negative news
relating to any drugs under development could crater both stocks.
Remember Imclone Systems (NASDAQ:IMCL)?  The company was set to
be acquired by Bristol Myers (NYSE:BMY) before news of IMCL's FDA
rejection of its ERBITUX license application.  IMCL shares are
more than 75% off of their early December highs due to that very
negative development, while BMY has dropped more than 20%.  The
point here is that just because an acquisition value is set and
the 2 stocks are trading at a given ratio to one another, it
doesn't mean that there can't be substantial changes to that
relationship.  In late October, when the planned acquisition
was announced, IMCL was trading at roughly 1.1 times the price
of BMY.  Now three months later, IMCL is trading at just 0.36
times the price of BMY.

This effect could work the other way too, especially with the
volatile Biotechs.  If the company being acquired were to
announce the discovery of a cure for cancer, it is a safe bet
that both stocks would then trade substantially higher.
Initiating an option trade on the expectation that the stocks of
2 companies engaged in the acquisition process will remain near
current values right up through the completion of the deal is
an exercise in flawed logic.  Both stocks could fluctuate wildly
in the intervening time, based on factors totally unrelated to
the proposed acquisition.

All right, hopefully that clears up that issue.  Now let's move
on to my reader's final question.

Q3: "One other totally different question.  When one sees an
option transaction of 31,400 contracts on a contract that rarely
has this type of volume what's going on?  Look at OPWV.  The
March 5 Put contract traded 31,400 contracts today (UGE-OA).
It typically does not trade like Intel contracts.  There appears
to be no spread involved."

A3: Sure enough, that option saw some huge volume on Monday.
Looking at my chart of the option, I can see that the heavy put
option activity began last Wednesday, and clearly somebody has
been buying this contract with wild abandon for the past 6
sessions -- total volume in that time is in excess of 72,000
contracts, as open interest has surged to a whopping 65,000
contracts.  Adjacent strikes have open interest measured in the
0-300 contract range.  There does not appear to be any
corresponding interest on the call side of the equation or in
other expiration months, so this is interesting.  Unfortunately
that is all we can infer from this option activity.

Somebody is buying A LOT of the $5 puts for the March expiration
cycle, and it is apparently not a part of a spread or straddle
combination position.  The problem is that we don't know WHY
such a large volume of options is being purchased (or sold).  It
could be pure, unbridled speculation or it could be somebody
hedging a large equity position on fears that the stock may be
going to $0.  We just don't know.  We could even be looking at a
trader (or multiple traders) that think the stock doesn't go any
lower and they are selling naked puts to take in the premium.
But given the bearish stock chart and the fact that the option
has been increasing in price, and the fact that there is such a
small premium being collected ($0.20-0.40), I don't think that
is the case.  My bet is that it is a hedge of an existing stock
position, but again, we just don't know.

Watching block trades of options on individual equities does not
provide the same high-odds trade filter that Austin employs in
the SPX option market, where he can use large ITM block trades to
tell him where the smart money is going in the SPX market, but
that filter doesn't necessarily work so well in equity land.
Watching for unusual option volume tells us that SOMETHING is up,
but most of the time we have no way to determine what trades are
being implemented or for what reason.

I hope that helps to clear things up, rather than add to the
confusion.  I love getting questions like this, as it tells me
that readers are thinking outside the box and looking for
unusual developments and trying to learn from them.  That's the
process that helps each of us along the path towards trading
success.  Keep it up guys!  Next week, I promise we'll get back
to our discussion of the Greeks, picking up with Theta, or time
decay.

In the meantime, keep those great questions coming!


Mark


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

IS Swing Trade Model: Wednesday 2/06/2002
Solid Gains Today

News & Notes:
------------
From last night's Summation: "Indexes got pretty noisy today on 
several rally attempts. Regardless, it still looks as if general 
price action will continue to chop its way lower from here. We 
track open put plays into Wednesday's action with trailed stops at 
or below entry levels and expect favorable action from there."

And favorable action it was. After just missing our stop-loss 
prices by fractions of a point, index levels promptly reversed and 
dove deep in our favor from there. Trailed stops were taken out 
towards low levels of the day for DJX, OEX and SPX while the QQQ 
play remains alive & well.


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


 

The OEX has wedged itself up once again and appears poised to 
break lower once more. The ideal entry was near 552.00 as depicted 
in tonight's Market Wrap, but a break below 549 should work as 
well.


[60/30-Min Chart: SPX]


 

Same for the SPX, as usual. Short the break below 1083 if the 
index doesn't take a large gap-down at the open


[60/30-Min Chart: QQQ]


 

If the QQQ breaks below 36.00 on Thursday it looks good for 
another point from there as well.


Summation:
---------
Indexes are getting choppy right now and entry points need to be 
crisp & defined. We have new triggers listed for those who are 
flat, but only if the markets don't open Thursday on a large gap-
down move. It's tough to place a specific value on that, as a 
slight gap-down could be tradable. There is no black & white rule 
to give in here, but I'd say greater than –2.00 SPX index points 
or –1.00 OEX index point below listed triggers would be excessive 
slippage. Better to short a failed pop instead of gapped drop 
right now during volatile times the past two sessions and possibly 
more.


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:  36 (QQQ-NJ)            Feb Puts: 96 (DJV-NR) 
Long: BREAK BELOW 36.00           Long: BREAK BELOW 96.50
Stop: Break Above 37.00           Stop: Break Above 97.25


=====


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


Feb Puts: 540 (OEB-NH)            Feb Puts: 1075 (SPQ-NO)
Long: BREAK BELOW 549.00          Long: BREAK BELOW 1083.00
Stop: Break Above 552.50          Stop: Break Above 1090.00



Open Plays:
----------
Feb Puts: 37 (QQQ-NK)             Feb Puts: 97 (DJV-NS) 
Long: BREAK BELOW 37.00           Long: BREAK BELOW 97.50
Stop: Break Above 36.00           Stop: Break Above 96.50 [hit]

Feb Puts: 550 (OEB-NJ)            Feb Puts: 1100 (SPQ-NO)
Long: BREAK BELOW 557.00          Long: BREAK BELOW 1098.00
Stop: Break Above 550.00 [hit]    Stop: Break Above 1083.00 [hit]


IS Position Trade Model: Wednesday 2/06/2002
Poised For Another Drop?

News & Notes:
------------
We have listed the major indexes for Feb put plays tracked from 
Thursday until next week at expiration or solid gains ahead, 
whichever comes first.

Featured Plays:
--------------
As depicted in Swing Trade Gameplan

Summation:
---------
No stops will be used: we are tracking the exact dollar amount of 
option contracts one would risk the entire purchase amount on. 
If/when gains accrue we will switch to a stop-loss approach from 
there. If they lose right from the open, no harm done as loss is 
totally quantified at the start.


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 means the model is idle at this time.


New Play Targets:
----------------
Feb Puts: 36 (QQQ-NJ)          Feb Puts: 96 (DJV-NR) 
Long: BREAK BELOW 36.00        Long: BREAK BELOW 96.50
Stop: 100% risk-loss capital   Stop: 100% risk-loss capital

Feb Puts: 540 (OEB-NH)         Feb Puts: 1075 (SPQ-NO)
Long: BREAK BELOW 549.00       Long: BREAK BELOW 1083.00
Stop: 100% risk-loss capital   Stop: 100% risk-loss capital



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


Sector Share Trade Model: Wednesday 2/06/2002
Weakening Still

News & Notes:
------------
We continue to track short share plays on every bounce the market 
offers before another leg down resumes. Hard to say how much 
longer this incredibly predictable trend will last, but savor it 
while we can!


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


Summation:
---------
Tracking a slew of short share plays across various sectors and 
long-term charts still appear favorable from here.


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

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

* Asterisk means stop-loss level changed since prior posting


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


Open Short Plays:
----------------
HHH Internet HOLDR
Short: BREAK BELOW 34.00 
Stop:  Break Above 29.00 *

SWH Software HOLDR
Short: BREAK BELOW 45.50 
Stop:  Break Above 42.50 *

IYV U.S. Internet
Short: BREAK BELOW 13.75 
Stop:  Break Above 12.00 *

02/06
XLV U.S. Cyclical/Transport
Short: BREAK BELOW 28.50 
Stop:  Break Above 29.50

SMH Semi-Conductor HOLDR
Short: BREAK BELOW 43.50 
Stop:  Break Above 45.75

UTH Utilities HOLDR
Short: BREAK BELOW 84.50 
Stop:  Break Above 87.00

RTH Retail HOLDR
Short: BREAK BELOW 96.40 
Stop:  Break Above 99.50

RKH Regional Banks HOLDR
Short: BREAK BELOW 106.90 
Stop:  Break Above 110.00

IDU Dow Jones U.S. Utilities
Short: BREAK BELOW 60.00 
Stop:  Break Above 62.50

IYF Dow Jones U.S. Financials
Short: BREAK BELOW 74.50 
Stop:  Break Above 77.50

IYR Dow Jones U.S. Real Estate
Short: BREAK BELOW 80.00 
Stop:  Break Above 82.50

IJJ Mid-Cap 400 BARRA SPDRs
Short: BREAK BELOW 88.20 
Stop:  Break Above 91.00

IJK Mid-Cap 400 BARRA Growth Index
Short: BREAK BELOW 88.20 
Stop:  Break Above 91.00

MDY Mid-Cap SPDRs
Short: BREAK BELOW 90.00 
Stop:  Break Above 93.00


Open Long Plays:
---------------
BBH Biotech HOLDR
Long: BREAK ABOVE 120.00 
Stop: Break below 116.00

PPH Pharmaceutical HOLDR
Long: BREAK ABOVE 97.00 
Stop: Break below 94.00 

IYH Dow Jones U.S. Healthcare
Long: BREAK ABOVE 60.90 
Stop: Break below 59.00

XLP Consumer Staples
Long: BREAK ABOVE 25.30 
Stop: Break below 24.75 *


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The Option Investor Newsletter                Wednesday 02-06-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


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

AT   - put
Adjust from $56 down to $54.85

VRSN - put
Adjust from $31 down to $26.50


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

RATL $21.53 -0.71 (-2.19) RATL was trading weak due to the
broader technology sector early today, but fell under
dramatic volatility when rumors arose that the company's
financials were in question.  The talk caused a steep
drop in shares on extremely heavy trade.  The stock traded
down to its 200-dma before staging an incredible intraday
rebound.  Not by surprise, we're dropping the play in light
of the swing today.  Not to mention that the stock closed
below our stop.


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

None


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

AGN - Allergan $65.78 -1.05 (-3.14 this week)

Allergan, Inc. is a provider of eye care and specialty
pharmaceutical products throughout the world with products in
the eye care pharmaceutical, ophthalmic surgical device,
over-the-counter contact lens care, movement disorder and
dermatological markets. The Company's worldwide consolidated
revenues are principally generated by prescription and
non-prescription pharmaceutical products in the areas of
ophthalmology and skin care, neurotoxins, intraocular lenses
and other ophthalmic surgical products and contact lens care
products.

Most Recent Update

AGN was knocked down in yesterday's session based on the broader
weakness in the biotech and pharmaceutical sectors.  The Elan
(NYSE:ELN) news added to AGN's weakness.  The stock traded as
low as $62.75 in yesterday's session on significant volume.
Trading activity was also heavy in today's session, when Banc
of America upgraded AGN.  The firm said that it liked the
prospects for its spin-off the medical device business that
we've been writing about.  AGN retraced the majority of its
sell-off from Monday, but slipped lower in the last hour of
trading today.  We're looking for the stock to head lower and
retest its low from Monday sometime later this week.  Traders
can look for entries at current levels with weakness in the
Drug Sector (DRG.X).

Comments

AGN retraced Tuesday's rebound during today's session.  Volume
remained active during the stock's 1.57% drop.  Continued
pressure from the Drug Sector (DRG.X) should pressure AGN
lower in tomorrow's session.  Watch for the DRG.X to break
below 368 and confirm weakness in AGN with a trade below $64.

***February contracts expire next week***

BUY PUT FEB-70*AGN-NN OI=1148 at $4.70 SL=3.25
BUY PUT FEB-65 AGN-NM OI=1399 at $1.40 SL=0.75

Average Daily Volume = 759 K



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

Stocks Struggle Yet Another Day
by Ray Cummins

The major equity averages fought diligently to limit losses today
in the wake of continued selling pressure in almost every market
segment.

The Dow Jones Industrial Average was among the better performers,
down only 32 points on strength in defensive issues such as Alcoa
(NYSE:AA), Boeing (NYSE:BA), Honeywell (NYSE:HON), and United
Technologies (NYSE:UTX).  Leading the downside activity were
AT&T (NYSE:T), American Express (NYSE:AXP), Intel (NASDAQ:INTC),
Hewlett-Packard (NYSE:HWP) and SBC Communications (NYSE:SBC).  In
technology trading, shares of computer software stocks slid lower
after some unexpected news from Moody's Investors Service on the
outlook for Computer Associates (NYSE:CA).  The popular software
maker fell more than 10% despite a reaffirmation of its quarterly
financial targets when Moody's announced it planned to review the
company's debt rating.  The news affected a number of bellwether
stocks in the software industry and weighed heavily on the NASDAQ.
On the bright side, networking behemoth Cisco Systems (NASDAQ:CSCO)
announced that its fiscal second-quarter results would exceed the
current consensus estimate in both earnings-per-share and revenue.
The company also told analysts that booked orders for the quarter
ending January amounted to $3.9 billion, slightly above its target
of $3.75 billion.  In the broader market, investors continued to
unload airline, biotechnology, financial, drug and retail stocks
while oil, oil service and natural gas issues saw limited buying
pressure.  Gold stocks also remained volatile throughout the day
as traders moved in and out of the defensive group in reaction to
the broader market's gyrations.  Analysts say the best investors
can hope for is a short-term bounce off of "oversold" levels but
there is no reason to expect any substantial upside to develop in
the coming weeks.  That's sobering news for those who thought the
bottom was established last October.

***************
Summary of Current Positions (as of 02-05-2002):
***************

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   33.70   2.25     6.0%
MU      FEB    32.5   30.04   34.45   2.46     5.5%
MRVL    FEB    32.5   30.36   37.68   2.14     4.8%
WGO     FEB    40     37.57   39.35   1.78     4.6% ***

Micron Technology's (NYSE:MU) recent bearish activity
ended with a technical rebound near the current support
area (at $30), so long-term investors are once again in
a relatively safe position.  However, a move below $32
(the 30-dma) should be considered an initial indication
of a new downward trend.  Winnebago's (NYSE:WGO) close
below a recent support area suggests a new downtrend may
be underway.  Conservative investors should consider
exiting the position to lock-in profits or limit future
losses.


Naked Puts:

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

ACDO    FEB     40   39.10   54.97   0.90    6.5%
EMLX    FEB     35   33.85   42.36   1.15    8.8%
MRVL    FEB     30   29.35   37.68   0.65    6.0%
SYMC    FEB     30   29.45   36.09   0.55    5.1%
SEBL    FEB     27.5 26.65   33.70   0.85    8.8%
BRKS    FEB     40   39.15   46.30   0.85    6.0%
ACDO    FEB     40   39.50   54.97   0.50    4.6%
WGO     FEB     35   34.50   39.35   0.50    4.3%
SEBL    FEB     27.5 26.95   33.70   0.55    9.3%
MRVL    FEB     32.5 32.10   37.68   0.40    5.7%
INVN    FEB     30   29.20   43.52   0.80   16.6%
INVN    MAR     25   24.20   43.52   0.80    7.2%


Naked Calls:

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

AMAT    FEB    50    50.50   44.44   0.50    5.6%
KLAC    FEB    60    60.60   57.81   0.60    5.5% ***
QLGC    FEB    65    65.65   46.18   0.65    6.0%
ADI     FEB    50    50.45   42.02   0.45    6.2%

The semiconductor sector continues to perform very well,
despite the selling pressure in the broad-market issues.
Traders should watch for any activity (KLAC would be a
good example, as it has reversed its recent downtrend)
that challenges the near-term technical resistance in
these issues and, if necessary, take action to limit
losses or lock-in current profits.


Debit Straddles: 

Stock  Position   Debit  Target   Value    Gain     Status

QCOM  FEB45C/45P  3.80    4.55    5.65     1.85      Open

The Qualcomm (NASDAQ:QCOM) straddle was our big winner this
week, providing up to a 50% gain on $3.80 invested in only
6 days.


Index Credit Spreads:

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

SII    55.12    53.30  FEB40P/45P   0.65   44.35   0.65   Open
THC    62.10    64.85  FEB55P/60P   0.80   59.20   0.80   Open
TRI    31.50    31.90  FEB25P/30P   0.60   29.40   0.60   Open
UNH    73.00    75.00  FEB65P/70P   0.65   69.35   0.65   Open
WLP   125.16   127.84  F110P/115P   0.55  114.45   0.55   Open
AT     56.70    54.41  FEB65C/60C   0.60   60.60   0.60   Open
MMM   103.47   108.68  F120C/115C   0.65  115.65   0.65   Open
HSIC   43.26    44.42  FEB35P/40P   0.40   34.60   0.40   Open
KSWS   37.38    37.09  FEB30P/35P   0.75   34.25   0.70   Open
GNSS   58.68    53.73  FEB75C/70C   0.50   70.50   0.50   Open
FIC    55.75    59.60  FEB45P/50P   0.40   49.60   0.40   Open
NOC   106.81   108.08  FE95P/100P   0.50   99.50   0.50   Open
ROOM   54.72    51.04  FEB45P/50P   0.60   49.40   0.60   Open
      
Hotel Reservations Network (NASDAQ:ROOM) is now in a period
of (expected) consolidation after the recent rally.  However,
a move below the sold strike at $50 would be an indication of
further downside activity, thus suggesting an early exit or
adjustment in the position.  A transition to the MAR-$45 strike
is a viable adjustment, due to the recent support at that price
range.

Positions Closed:  Banc Of America (NYSE:BAC) rallied for two
days after our exit recommendation, allowing traders close or
adjust the position with a favorable (low cost/risk) outcome.


Index Credit Spreads:

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

XAU    58.07    67.83  FEB50P/55P   0.85   54.15   0.80   Open
PPH    98.60    95.70  FEB90P/95P   0.45   94.55   0.45   Open

The Pharmaceutical Holdrs Trust (AMEX:PPH) is still above the
sold strike in our bullish position and with the relatively
oversold market conditions, there is potential for a technical
bounce in the coming sessions.  However, traders should consider
any further downside activity as an early-exit/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
WMT    59.86    58.80  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   589.62 552.38  FEB640C/630C    0.80   630.80  0.80   Open
OEX   589.62 552.38  FEB530P/540P    0.70   539.30  0.70   Open
BBH   127.58 117.24  FEB145C/140C    0.50   140.50  0.50   Open
BBH   127.58 117.24  FEB100P/115P    0.55   114.45  0.55  Closed

The bullish position in the Biotechnology Holdrs Trust (AMEX:BBH)
was closed to protect profits and/or limit 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, Naked Puts, & Combinations

Semiconductor and chip-equipment stocks have been among the few
resilient technology groups during the recent market slump and
one of our readers suggested that we offer some candidates in
those sectors for traders who want to speculate on a rebound in
the NASDAQ.  All of these issues are excellent candidates in the
"premium-selling" category of options trading and each position
meets our fundamental criteria for profitable naked-puts.  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.

***************
KLAC - KLA Tencor  $58.90  *** On The Rebound! ***

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

KLAC has been "on the rebound" in recent sessions and the buying
pressure in the issue, amid the broad-market sell-off, suggests
further upside potential.  In addition, KLAC is once again near
a 52-week high and the long-term technical trend is favorable.
The premiums in these options provide excellent reward potential
at the risk of owning the issue at an acceptable cost basis.

KLAC - KLA Tencor  $58.90

PLAY (sell naked put):

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

SELL PUT  MAR 45   KCQ OI  1,622     0.70    44.30      4.6% "TS"
SELL PUT  MAR 50   KCQ OJ  2,051     1.45    48.55      7.4% ***
SELL PUT  MAR 55   KCQ OK  1,681     2.75    52.25     10.1%


***************
MU - Micron Technology  $36.69  *** Chip Sector Favorite! ***

Micron Technology (NYSE:MU) and its subsidiaries are principally
engaged in the design, development, manufacturing and marketing
of semiconductor memory products.  The company offers products
that include dynamic random access memory, synchronous dynamic
random access memory, double data rate dynamic access memory,
legacy dynamic random access memory products, static random
access memory products and Flash products.  Dynamic random
access memory (DRAM) is the Company's primary semiconductor
memory product.  DRAMs are high-density, low-cost-per-bit,
random access memory components that store digital information
and provide high-speed storage and retrieval of data and DRAMs
are a widely used semiconductor memory component in computer
systems.  DRAM sales represented approximately 87%, 94% and 95%
of the company's net sales in 2001, 2000 and 1999, respectively.

Micron has been a popular position in our portfolio over the
past few weeks and the recent recovery in the company's share
value has brought it back in favor with technology investors.
The current technical outlook for Micron is bullish and our
target position offers an excellent way to participate in the
future movement of the issue with relatively low risk.

MU - Micron Technology  $36.69
  
PLAY (sell naked put):

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

SELL PUT  MAR 27.5  MU OR  884       0.40    27.10      4.2% "TS"
SELL PUT  MAR 30    MU OF  6,572     0.80    29.20      7.5% ***
SELL PUT  MAR 32.5  MU OS  956       1.30    31.20      9.1%


***************
NVDA - Nvidia  $62.02  *** The Best Graphics Chips! ***

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

Nvidia is one of the top companies in the Specialty Semiconductor
group and among our readers, it is also a popular portfolio issue.
The fundamental outlook for the company is excellent and the chip
sector will likely be a top performer in the technology segment
in the coming year; both factors that lead us to a bullish outlook
for the issue.

NVDA - Nvidia  $62.02

PLAY (sell naked put):

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

SELL PUT  MAR 45   RVU OI  1,610     0.70    44.30      4.4% "TS"
SELL PUT  MAR 47.5 RVU OW  286       1.05    46.45      6.4%  ***
SELL PUT  MAR 50   RVU OJ  4,148     1.45    48.55      8.4%


***************
CYMI - Cymer  $41.37  *** Earnings Rally! ***

Cymer (NASDAQ:CYMI is a supplier of excimer laser illumination
sources, the essential light source for deep ultraviolet (DUV)
photolithography systems used in the building of semiconductors.
DUV lithography is a key enabling technology, which has allowed
the semiconductor industry to meet the exacting specifications
and manufacturing requirements for volume production of today's
most advanced semiconductor chips.  Cymer's lasers are used in
step-and-repeat and step-and-scan photolithography systems for
the manufacture of semiconductors with critical feature sizes
below 0.35 microns.  Cymer believes its excimer lasers constitute
a substantial majority of all excimer lasers incorporated in DUV
photolithography tools.  Cymer's various products consist of
photolithography light sources, replacement parts and service.

There was not quite enough "premium" in the CYMI options to
offer multiple naked-put positions, however the issue rallied
today after the company announced favorable earnings and we
believe it deserves consideration for a bullish position.

CYMI - Cymer  $41.37

PLAY (conservative - bullish/credit spread):

BUY  PUT  MAR-30  CQG-OF  OI=41   A=$0.40
SELL PUT  MAR-35  CQG-OG  OI=152  B=$1.10
INITIAL NET CREDIT TARGET=$0.75-$0.80  PROFIT(max)=17%


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

Credit Spreads

Traders who are interested in more conservative plays should
consider these limited-risk positions on issues in the major
drug, healthcare and defense industries.  All of these positions
are based on the current price or trading range of the underlying
issue and its recent technical trend.  The probability of profit
in 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 carefully and make your own decision
about the future outcome of the position.

***************
AZN - AstraZeneca  $47.60  *** Solid Earnings! ***

AstraZeneca PLC (NYSE:AZN) is a pharmaceutical company that
provides products to fight disease in important areas of medical
need.  The company focuses on seven major therapeutic areas:
cancer (oncology); cardiovascular; central nervous system;
gastrointestinal; infection; pain control and anesthesia, and
respiratory.  The company's non-pharmaceutical businesses are
Astra Tech, Salick Health Care, and Cellmark Diagnostics.  Astra
Tech develops and markets advanced medical devices and implants,
focusing primarily on urology, surgery, dental implants and
diagnostic imaging.  SHC provides a broad range of services to
health insurers, oncologists, other specialists and their
patients in the U.S., principally in the diagnosis and treatment
of cancer and the treatment of kidney failure.  Cellmark
Diagnostics is engaged in DNA fingerprinting outside the U.S.

AZN - AstraZeneca  $47.60

PLAY (very conservative - bullish/credit spread):

BUY  PUT  MAR-40  AZN-OH  OI=0    A=$0.25
SELL PUT  MAR-45  AZN-OI  OI=104  B=$0.60
INITIAL NET CREDIT TARGET=$0.45-$0.50  PROFIT(max)=9%

Investors should target a higher premium in this position to
allow for some consolidation in the underlying issue and
increase the overall return on investment.


***************
PG - Procter & Gamble  $82.50  *** The Ultimate Safety Stock! ***

The Procter & Gamble Company (NYSE:PG) manufactures and markets
a broad range of consumer products in many countries throughout
the world.  The company categorizes its business operations as
follows: Baby Care, Beauty Care, Fabric and Home Care, Feminine
Care, Food and Beverage, Health Care, and Tissues and Towel.  In
November 2001, the company acquired Clairol, a manufacturer of
hair color and hair care products, from Bristol-Myers Squibb.

PG - Procter & Gamble  $82.50

PLAY (moderately aggressive - bullish/credit spread):

BUY  PUT  MAR-75  PG-OO  OI=684   A=$0.45
SELL PUT  MAR-80  PG-OP  OI=2466  B=$1.35
INITIAL NET CREDIT TARGET=$1.00-$1.10  PROFIT(max)=25%


***************
NOC - Northrop Grumman  $109.32  *** Hot Sector! ***

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
January 2002, the company acquired Newport News Shipbuilding.
Newport News Shipbuilding is engaged in the design, construction,
repair, overhaul and refueling of nuclear-powered submarines and
aircraft carriers for the United States Navy.

NOC - Northrop Grumman  $109.32
  
PLAY (moderately aggressive - bullish/credit spread):

BUY  PUT  MAR-95   NOC-OS  OI=184  A=$0.85
SELL PUT  MAR-100  NOC-OT  OI=198  B=$1.55
INITIAL NET CREDIT TARGET=$0.80-$0.90  PROFIT(max)=19%


***************
TGH - Trigon Healthcare  $77.00  *** Pre-Earnings Rally! ***

Trigon Healthcare (NYSE:TGH) through its subsidiaries, is a
managed healthcare company in Virginia, serving over two million
customers through statewide and regional provider networks.  The
company divides its business into four segments, which include
health insurance, government programs, investments and all other.
The company's health insurance segment provides a comprehensive
spectrum of managed care products primarily through three network
systems with a range of utilization and cost-containment controls.
The government programs segment includes the Federal Employee
Program, which is the company's largest customer.  All of the
investment portfolios of the consolidated subsidiaries are
managed and evaluated collectively within the investment segment.
The company's other health-related business, including disease
management programs, third-party administration for medical and
workers compensation, health promotions and similar products, is
reflected in an "all other" category.  The company's quarterly
earnings are due on February 8, 2002.

TGH - Trigon Healthcare  $77.00

PLAY (very conservative - bullish/credit spread):

BUY  PUT  MAR-65  TGH-OM  OI=5  A=$0.35
SELL PUT  MAR-70  TGH-ON  OI=0  B=$0.70
INITIAL NET CREDIT TARGET=$0.45-$0.50  PROFIT(max)=9%

Investors should target a higher premium in this position to
allow for some consolidation in the underlying issue and
increase the overall return on investment.


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

BEARISH PLAYS - Naked Calls & Combinations

***************
VRTS - Veritas  $36.20  *** Sector Sell-Off! ***

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

Veritas is recognized as one of the leading independent storage
software companies in the industry but recent comments by the CEO
at a Goldman Sachs conference and today's negative news concerning
Computer Associates (NYSE:CA) have conspired against its share
value.  The broad-market sell-off pushed the issue into a sharp
downward trend and traders who agree that the near-term outlook is
less than favorable can use these positions to speculate on the
stock's future activity.

VRTS - Veritas  $36.20

PLAY (aggressive - sell naked call):

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

SELL CALL MAR 45   VIV CI  2,039     0.80    45.80       8.2% ***
SELL CALL MAR 40   VIV CH  530       1.95    41.95      12.7%


***************
BVF - Biovail  $42.05  *** Technicals Only! ***

Biovail Corporation (NYSE:BVF) is an international, integrated
pharmaceutical company with capabilities in the development,
manufacture, sale and marketing of branded pharmaceutical
products.  Building on its strengths in the development of drugs
using advanced controlled-release and FlashDose technologies, its
primary business strategy is to expand its sales and marketing
presence in the U.S. and Canada to support the commercialization
of its product development pipeline, which the company intends
to complement by the acquisition of established pharmaceutical
products and the in-licensing, from third parties, of products in
earlier stages of development.  The company seeks to capitalize
on opportunities in the pharmaceutical industry arising from
consolidation initiatives being undertaken by larger companies in
the industry.  The company also intends to pursue acquisitions
that will add to its product offerings, product pipeline or sales
and marketing capability.

This play is simply based on the current price or trading range
of the underlying stock and its recent technical history.  The
near-term BVF price trend is bearish and reflects a pronounced
negative divergence from an intermediate-period moving average.
In addition, the decline has come on increasing volume and a
recent support level near $45-$46 has been violated.  With the
previous trading range near $47, and the overhead supply at $52,
the share value has little chance of moving above our sold strike
price in the coming month.

BVF - Biovail  $42.05

PLAY (conservative - bearish/credit spread):

BUY  CALL  MAR-55  BVF-CK  OI=229  A=$0.25
SELL CALL  MAR-50  BVF-CJ  OI=896  B=$0.75
INITIAL NET CREDIT TARGET=$0.60-$0.65  PROFIT(max)=14%


***************
WHR - Whirlpool  $65.50  *** Bad News On A Bad Day! ***

Whirlpool Corporation (NYSE:WHR) is a worldwide manufacturer and
marketer of major home appliances.  The company manufactures in
13 countries under 11 major brand names, and markets products to
distributors and retailers in more than 170 countries.  Whirlpool
manufactures and markets a full line of major appliances and
related products, primarily for home use.  Whirlpool's principal
products are home laundry appliances, home refrigerators and
freezers, home cooking appliances, home dishwashers, and room
air-conditioning equipment, mixers and other small household
appliances.  The company also produces hermetic compressors and
plastic components, mainly for the home appliance and electronics
industries.

Whirlpool was in the news today as rumors "whirled" around the
company's recent quarterly report.  The appliance maker posted
earnings that claim to show dynamic "core" earnings growth but
there are concerns about excluded "one-time" costs and charges
that appear to affect the company's bottom-line performance.
Regardless of the actual fundamental results, investors are
not showing favor with the issue and the sell-off may be the
beginning of a new bearish trend.  Traders who agree with a
negative outlook for WHR in the near-term can speculate on
that activity with this limited-risk position.

WHR - Whirlpool  $65.50

PLAY (very speculative - bearish/credit spread):

BUY  CALL  MAR-75  WHR-CO  OI=209  A=$0.65
SELL CALL  MAR-70  WHR-CN  OI=343  B=$1.70
INITIAL NET CREDIT TARGET=$1.10-$1.20  PROFIT(max)=28%


***************
SUPPLEMENTAL CREDIT-SPREAD CANDIDATES (Back By Popular Demand!)
***************

BULLISH PLAYS:

Stock  Last   Short    Bid    Long     Ask   Target  Monthly
Symbol Price  Option   Price  Option   Price Credit   Gain

BLL    79.74  MAR-75P  1.35   MAR-70P  0.50   0.90     21%
FAST   69.81  MAR-65P  1.35   MAR-60P  0.55   0.80     19%
HRB    46.95  MAR-45P  1.05   MAR-40P  0.30   0.80     19%
LLL    103.93 MAR-95P  1.55   MAR-90P  0.90   0.70     16%
SII    54.58  MAR-50P  1.25   MAR-45P  0.65   0.65     15%


BEARISH PLAYS:

Stock  Last   Short    Bid    Long     Ask   Target  Monthly
Symbol Price  Option   Price  Option   Price Credit   Gain

GS     81.90  MAR-90C  1.20   MAR-95C  0.60   0.65     15%
ACS    90.26  MAR-100C 1.45   MAR-105C 0.90   0.60     14%
THQI   40.06  MAR-50C  0.80   MAR-55C  0.30   0.55     12%
GILD   62.48  MAR-75C  0.90   MAR-80C  0.40   0.55     12%
THQI   40.06  MAR-50C  0.80   MAR-55C  0.30   0.55     12%
ENZN   47.10  MAR-55C  0.70   MAR-60C  0.25   0.50     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 (OEX) for premium-selling plays and hedging.
We also favor "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.

***************
OIH - Oil Service Holders Trust  $56.65  *** Range-Bound? ***

The Oil Service 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 description 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 above a specific price range.  From a technical viewpoint,
the oil service segment of the oil industry is starting to show
signs of a stable support near area $50-$52 and those who agree
with a neutral to bullish outlook for this industry group can
profit from that activity with this low-risk position.

OIH - Oil Service Holders Trust $56.65
  
PLAY (conservative - bullish/credit spread):

BUY  PUT  MAR-45  OIH-OI  OI=0   A=$0.30
SELL PUT  MAR-50  OIH-OJ  OI=80  B=$0.85
INITIAL NET CREDIT TARGET=$0.60-$0.65  PROFIT(max)=14%


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


SEE DISCLAIMER
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PE ratios and Hope
Buzz Lynn
buzz@OptionInvestor.com

PE ratios and hope.  The two seem to go hand in hand.  I was 
cruising through some old watch lists that I used over two years 
ago wondering if I might find some tradable nuggets.  You know, 
some symbols I should have been watching but hadn't because I 
rarely used that particular list anymore.  As Fundamentals Guy is 
prone to do, I got quite an education on a basic ratio, as I 
veered off course from my search.  The ratio?  Price to Earnings, 
often expressed as the PE ratio.

While not exactly in search of funky numbers, I found a bunch of 
groupings with similarities - certain sectors with no earnings, 
some sectors with high PE', and some with low PE's that actually 
paid decent dividends.  It was not just the numerical values that 
I found interesting, but also the consistency of some sectors, 
which lead me to the conclusion that the market is still 
overvalued by historical standards.

How so?  Well for starters, when I'm not trading, I tend to think 
of stocks as ownership interests in a going concern designed to 
produce a return for its owner.  So instead of actually owning the 
neighborhood pizza parlor with $1 mln in sales that produces 
$100,000 net after ALL expenses at the end of the year, I have the 
opportunity to own one one-thousandth of one percent of Philip 
Morris (the parent of Tombstone Pizza) that represents about $1 
mln of MO's nearly $90 bln in annual sales.  My fractional net is 
about $90,000 annually, from which I will earn a dividend of 
$47,500.  The balance is retained by the business as retained 
earnings and adds to the share price.  

While on the surface, that would appear to be less money than the 
actual pizza parlor, I don't have to work 12 hours per day, 6 days 
per week at MO to insure that income like I would at Godfather's.  
I also need not worry how I'll grow sales at roughly 10% annually 
with MO.  Management handles that for me.  In short, they can 
produce a "safer" return with much less effort than I can at my 
own pizza parlor, and the value of my fractional interest in MO is 
growing as a result. (Yes, tax benefits of owning your own 
business are great as are the other intangible benefits like 
sponsoring the little league team and enjoying community prestige 
in having made a difference in your neighborhood through your 
efforts.  But this is about PE ratios.)

But for comparison purposes, my pizza parlor would have a true PE 
of 10 if the market values the business at $1 mln based on 
$100,000 in net income available for distribution.  The market 
values MO at a 12.9 PE for having $3.88 of net income for every 
$50 share.  Nearly as good in my book as a pizza parlor and for 
much less effort.

While PE is ratio expressed as the price of a stock divided by 
earnings, think of it also as an inverted rate of return.  If we 
own a $100 stock that earns $1 per share, that's a PE of 100!  It 
is also a meager 1% return on our money ($1 divided by $100).  But 
in the case of MO with a PE of 12.9 (not trying to plug the stock 
here), $3.88 in earnings divided by $50 per share is a 7.76% 
return, and that's if the share price never grows.  Those in the 
income property business will understand this because of the 
similar relationship of a rent multiple to a rate of 
capitalization.  It too is an inverse relationship on a net basis.

Of course, there are other companies out there that have sales, 
but also have expense far in excess that produce a consistent net 
loss.  They have no E in which to compute a ratio!  Therefore they 
have no PE ratio.  Zero earnings.  I can stomach that if doesn't 
become a bad habit.  For instance if a major tire company gets 
nailed in a lawsuit.  They'll still make tires with similar 
margins.  Likewise with disclosing the write-off of a bad 
investment every once in a blue moon.  I'll save the "abuse of 
one-time charges" speech tonight.

There are also plenty of companies out there that have exorbitant 
PE ratios in the 100's or higher.  I can't fathom buying a pizza 
parlor for $1 mln and earning a paltry $10,000 per year, or less, 
on that invested money.  Why would anyone want to buy a fractional 
interest in any other business with the same return?

Well, all that digested, here's what I found.

Drug companies:

Company         PE ratio

Merck             18.92
Pfizer            34.42
Shering Plough    24.48
Lilly             28.66
Glaxosmithkline   24.98

Ahem. . .Anybody overly excited about earning roughly 3.5% based 
on the PE ratios here?  While these are fine companies that will 
cater to demographic sweet spot in years to come, that's already 
reflected in the price.  Where is the upside?  Nowhere that I can 
see.  

How about a few old favorites?

Internet Companies:

Company         PE ratio

Ariba             N/A
Commerce One      N/A
Tibco Software    N/A
Freemarket's Inc. N/A
AOL/TimeWarner    N/A
Amazon            N/A
Yahoo!            225.29
E-Bay             170.31

Notice a pattern here?  These companies were barely profitable in 
their heyday (if they even reached profitability).  The only thing 
that can possibly be driving EBAY and YHOO is speculation since it 
will be a cold day in Hades when these two actually have real 
earnings to match their current stock price.  No catalyst for 
upward movement that I can see.

Maybe some retailers would look better?  Let's take a look.

Retail Companies:

Company         PE ratio

Home Depot        31.46
Costco            35.05
Gap Stores        22.11
Target            30.68
Wal-Mart          40.72
Circuit City      41.94
Best Buy          34.59
Autozone          35.29

Wow!  These are pretty pricey too reflecting investor's acceptance 
of a 2.5%-3.0% return at these PE's.  Owners of these companies 
are betting on recovery that will justify these prices.  But if 
the recovery is shallow or doesn't happen soon enough?  No thanks.

Here are more of my favorites (not!) in the 
communications/connectivity industry.

Routers/switches Companies:

Company         PE ratio

Cisco             N/A (until today, now roughly 51 annualized)
Juniper           27.02
Foundry          307.00
F5 Networks       N/A
Extreme Networks  N/A
Sycamore          N/A
Ciena             N/A
JDS Uniphase      N/A
Nortel            N/A
Corning           N/A
Lucent            N/A

CSCO is the soundest of them all and as of this evening trades at 
roughly 51 times annualized earnings - rich for a company that can 
offer no visibility past Q3 and only notes then that revenue 
growth will be "flat to low-single digit" sequentially.  It 
doesn't appear that earnings are likely to rise enough to make the 
current price seem reasonable.  Hmmm. . .conclusion?  The price 
will fall or remain stagnant.  Neither is a pleasant choice for 
those desiring to go long.

Last, the stodgies.  I like these, but think even they will get 
less expensive with time.

Stodgy Companies:

Company         PE ratio

Philip Morris     12.90 (with a 4.75% dividend yield, I like it)
US Tobacco        11.53 (ditto with a 5.37% yield)
ConAgra Foods     19.66 (3.86% yield)
Cemex              6.83 (3.82% yield)
WD-40 Co.         22.07 (3.93% yield)

By no means am I offering a "Buy" rating on any of these, but they 
are interesting given their yields and ability to produce an 
income for their owners.  Consumer goods like Gillette, Proctor 
and Gamble, and Clorox are interesting too.  But with PE's pushing 
30, I think they too are overpriced, and major economic recovery 
isn't going to improve the sale of deodorant or bleach that much.

There you have it.  Bargains are still few an far between given a 
company's ability to produce a return for its owners.  Even with 
economic recovery and earnings growth in any of the above, prices 
will only then approach "reasonable" based on business values.  A 
better deal exists in your own well-located pizza parlor with few 
exceptions.

Thus, I refrain from going long for the "long-term" anytime soon.  
Even at current levels, the values still are not there.  But that 
leaves plenty of fodder for shorting!

See you tomorrow in another installment of Milking Q-charts.


************
MARKET WATCH
************

We're sticking with what's been working.  A strong health care and 
weak financial stock make their way onto the list

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/020602.asp


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