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Daily Newsletter, Wednesday, 02/13/2002

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The Option Investor Newsletter                Wednesday 02-13-2002
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)
*******************************************************************
02-13-2002               High     Low     Volume Advance/Decline
DJIA     9989.67 +125.93  9998.25  9856.99 1.09 bln   1520/1560
NASDAQ   1859.16 + 24.95  1862.42  1844.12 1.59 bln   1708/1804
S&P 100   567.79 +  5.28   569.64   562.51   Totals   3228/3364
S&P 500  1118.51 + 11.01  1120.56  1107.50
RUS 2000  476.33 +  4.32   476.33   472.01
DJ TRANS 2711.59 - 19.17  2744.14  2702.93
VIX        22.44 -  1.07    23.60    22.14
VXN        44.17 -  1.28    45.59    44.08
TRIN        0.93
PUT/CALL    0.76

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

Split Decision
Austin Passamonte

As noted in my last three Index Wrap sections, we have expected 
rising index prices this week. Indeed our charts were correct and 
higher levels prevail, but it's not been a straight-up ascent.

Along the way we endured tough to read intraday charts that are 
the lifeblood of short-term traders but merely market noise to 
those with longer-term plays in mind. I do get mail from readers 
who confuse the two, wondering why we see bullish charts in the 
Wrap sections and bearish looking intraday charts within. Two 
completely different topics of discussion for separate market 
players entirely.

This nightly section is designed to offer guidance towards the 
next few sessions ahead and we usually focus on weekly/daily time 
frame charts within our little corner. No change in that approach 
tonight, so let's see what the mid-term future may hold.

(Weekly/Daily Charts: SPX)


 

First up, big index. Weekly chart at left shows why the 1119 area 
acts as such a price magnet; it's roughly 50% retrace from 2001 
high to low span. A break & close above there could bring the 1160 
area into play, and all stochastic values are still bullish right 
now. No reason to try shorting this one from here by any means.

(Weekly/Daily Charts: NDX)


 

The Nasdaq is rather subdued these days and not likely to be the 
mover & shaker market it was for a brief moment in time. Still, 
plenty of tech addicts exist and their comfort zone for this 
sector will linger far into the future. For now we see bullish 
stochastic values, a pending break from it's 2002 descending 
channel and clear sailing up to the 1600 area where both 50 and 
200 DMAs lie in wait to halt upward progress there.

(Weekly/Daily Charts: Dow)


 

Likewise the Dow seems to be movin' on up, but weekly chart shows 
both moving averages and 62% retrace of year 2001 span clustered 
at 10,125 zone. Stochastic values are bullish, and all seems well 
for continuation higher for now. Nothing bearish about these 
charts we've reviewed at all.

(Weekly/Daily Charts: SOX)


 

The SOX continues to power higher as well. This is one of tech 
addict's favorite romper rooms and makes for a lovely sector to 
trade because of that. These momentum players knee-jerk to every 
analyst call that comes down the pike, injecting plenty of 
volatility and directional movement for us to game. Looking full-
bull ahead for now and the upper line of its weekly channel (blue) 
may be the next upside target ahead.

I Know, I Know... The VIX Is Low
Plenty of reader's email flowed in today asking if we've seen the 
VIX and other volatility levels behavior today. Yes, we all know 
the VIX, VXN and QQV are falling back down to recent lows but that 
in itself is not a reason to get short today. Trust me, they can 
all fall much lower than here and don't be surprised if the VIX 
touches 20.00 or lower before the next market top is in place.

That won't be far off and should arrive below recent highs in 
early January. The last two selloffs when VIX broke below 22.00 
were not long-term bottom events by any means. This is a very weak 
market on fundamental and technical basis due for a relief rally 
in bear market fashion for now. If it sticks & stays for months on 
end, great! We'll trade the upside with glee and buy every dip. 
But the volatility levels have not blown off to enough extent 
after continually returning to low readings in the historical 
range. 

As we've repeated in this section since last summer and fall, the 
past two March/April periods have produced significant market 
declines right after February rallies where market pundits assured 
us it was straight up higher from there. That period is a mere 
three to four weeks away right now and no one can tell if history 
will repeat or not. But we can bet there are plenty of others 
looking at the same charts noting that pattern as well.

Emperor's Naked For Years Now
Since the late 1980s we've seen "relaxed" accounting methods to 
measure company performance. Salary incentives to corporate 
officers based on stock prices meant well, as that should have 
equated to strong company growth. But with all things that concern 
money, the human mind pushed by greed finds a shortcut to reach 
the payoff regardless its cost to others.

What does that mean in English? It means we have been told the sky 
is red for well over a decade and everyone put on rose-colored 
glasses to agree. Stock valuations are based on some synthetic set 
of values apart from traditional basis. The sky is red. Eventually 
the masses must admit the sky is not red, it's blue. Once that 
realization comes about, it changes the entire spectrum of color, 
now doesn't it?

Once the companies who've survived and even grown since inception 
using "red sky" fuzzy math are forced to report their valuation in 
blue it could cause quite an asset reallocation for the real 
basis. Would you agree? Stock players all lie to themselves about 
PE valuations because that's what keeps the IRAs and 401Ks afloat. 
By any means necessary keep those plates in the air. Say, do or 
think whatever it takes to keep stock prices going up or at the 
very worst not going down. Right or right? 

Know anyone who lies awake at night with a decimated retirement 
portfolio praying to their Maker that stock prices will "come 
back"? Think they can bear to face the possibility that a 
reshuffling of accounting practices could reshuffle the major 
indexes and big cap stocks that push the pile in a serious way? 
Nope... most market players right now cling to every word of 
economic recovery equals higher stock markets like a drowning man 
grasps for the shore. And that is where this dirty little reality 
shall remain, hidden away via fear & pain for now but not forever.

Summation
Do I think the market will return to new recent highs or crash 
thru September lows straight ahead? I honestly don't know, and 
anyone else who assures you either way doesn't know either. I do 
hope & pray you prepare yourself for any scenario possible, as 
that is the only way to survive and prosper in the treacherous 
profession we love.

Weekly/daily charts tell me price action wants to go higher from 
here. Up to where and for how long remains to be seen, but I see 
no reason to short anything more than intraday scalps and short 
term plays such as this via the indexes. Individual stocks are 
another matter, as some are always rising & falling in unison. I 
will keep buying any dips so long as these chart signals and 
patterns remain bullish above all us. History and personal 
experience long ago pounded that discipline in me at a costly 
price. Time to buy the dips when offered as chart signals continue 
higher and play the path of least resistance until our next fork 
in that road is reached.

Bullish For Now,
austinp@OptionInvestor.com


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

Back to the Olympians of Old
By Mark Phillips
mphillips@OptionInvestor.com

You know, the Greeks.  Ok, I know it's a bit of a stretch, but
I'm in a jaunty mood today.  In late January, we had been talking
about the various Greeks like Delta and Gamma, with an eye
towards understanding how each of these factors influence the
price of options we are interested in trading.  While I think we
have pretty much exhausted the subject of Delta and Gamma with my
last two articles on the subject, I know many of you (because of
the volume of email I have gotten on the subject) are anxious for
me to tie the topic of Strike Selection in with selection of the
proper expiration month.

For any latecomers that happened to miss the Delta/Gamma articles
the first time around, here are the links for everyone's
convenience.

The Greeks, Part I - Delta and Gamma
Application of Gamma and Delta to Strike Selection

Now that we've laid out a process whereby traders can pick the
strike that provides the best risk-reward ratio, we need to turn
to the concept of time.  The next Greek, Theta, encompasses the
issue of time decay as it pertains to option pricing.  We've all
heard that options are a wasting asset, losing value with each day
that passes.  While that isn't exactly true for all conditions, we
can restate the axiom in a more accurate manner.  Options are
wasting assets, that lose TIME VALUE with each passing day.
That's all well and good, but in order to make an informed trading
decision based on that knowledge, we need a way to quantify the
effect of time on the option we wish to trade.

Just knowing that we are losing time value in our option as
expiration approaches is not enough; we need to know how FAST it
will disappear in the future.  Just as we looked at Delta and
Gamma values for IBM in the previous 2 articles in our attempt
to quantify which strike gives the best balance of risk and
reward, so too we can look at different options and determine
how much of the price is made up of time value.  This is actually
a much simpler exercise than what we went through with Delta and
Gamma, as all we need to do the rudimentary math is a simple
option chain.  By comparing the value of the same strike price
over various expiration months, we can determine the rate at
which an option will lose time value in the future.  It is a
rough estimate, but more than adequate for our purposes.

Let's stick with our IBM example, since I've grown rather fond
of it.  By the way, have you noticed how little the stock has
moved since we started this discussion back on January 23rd.  It
closed at $107.90 on that day, and here we are 3 weeks later
with IBM trading at $108.07.  A whopping 17 cents.  Aren't you
glad you didn't actually implement a trade on the stock when we
started talking about it?

Ok, let's get some raw data to work with.  I'm going to work
with the $110 strike for March, April, July and January 2003
for our discussion.

Mar 2002 $110 Call - $2.95
Apr 2002 $110 Call - $4.80
Jul 2002 $110 Call - $8.00
Jan 2003 $110 Call - $12.80

Since we are 2 days away from February expiration, we can treat
March like the front-month contract.  Since the $110 strike is
technically out of the money (we're treating it as the ATM, since
it is the closest to being truly At The Money), all of the
premium for this contract is time value.  So we can make some
quick deductions, based on the assumption that the price of IBM
does not move at all.  That price will move, but by making this
assumption, we can isolate the effect the passage of time has
on the price of our option.  

1. The final month of an IBM ATM option's life will see it lose
   $2.95 of time value.
2. The second to last month of an IBM ATM option's life will see
   it lose $1.85 (4.90-2.95).
3. On average, an IBM ATM option will lose $1.07 per month
   (8.00-4.90 divided by 3) in time value during the period of
   time that it is between 2-5 months from expiration.  It is a
   3 month span of time, so we divide the difference between the
   option prices by 3.
4. On average, an IBM ATM option will lose $0.80 per month
   (12.80-8.00 divided by 6) in time value during the period of
   time that it is between 5-11 months from expiration.   It is
   a 6 month span of time, so we divide the difference between
   the option prices by 6.

Notice how the monthly value for time decay increases as we get
closer to expiration.  One word of caution - I have treated the
concept of time value as though it were linear.  This is just a
matter of convenience, that works sufficiently well when we are
far away from expiration.  But time value actually is a function
of the SQUARE of the time remaining until expiration.  It is an
exponential relationship.  While I didn't want to confuse this
issue with a bunch of math, I feel it is important to point out
that I have taken some literary license here.  The important
thing to remember is that time decay accelerates the closer you
get to expiration.

So now we have a way to quantify how fast our option will lose
value IF THE UNDERLYING STOCK DOES NOT MOVE.  Obviously, that is
not the situation we want as option buyers.  We want the stock
to move in our direction.  And fast!  But it doesn't always
work out that way.  Sometimes a stock just sits there for 3-4
weeks (like IBM) before it gets moving.  Obviously, if we bought
FEB $110 calls on IBM back on January 23rd, we are likely to
lose money on the deal with expiration a mere 2 days away.  We
wouldn't have bought enough time.  But how much time would be
enough?

Aaahhh, now there's the real heart of the matter, now isn't it?
If we know exactly how long a move will take to occur, then we
know exactly which strike and expiration month to buy, now
don't we?  Unfortunately we don't have such a crystal ball...or
do we?  Jeff Bailey frequently talks about the PnF charts and
the statistical studies that have been done, showing the odds
of successful trades following specific patterns on the PnF
charts.  And to top it all off, the statistical results include
the amount of time (on average) that the projected move took to
run to completion.  WOW!  Did you get that?  There is a whole
list of PnF chart patterns that will project a likely %Rise (or
drop) in a stock following a particular chart formation, and
give an estimate of how long it should take for the move to
happen.  Those of you that took advantage of the great annual
renewal offer will be getting all of that data in Jeff's PnF
charting book.  What a bargain!

Ok, so now we have a way to quantify how long a move in the
underlying stock should take, and we can determine from the
stock's option chain, how fast a given option is likely to lose
time value.  How do we pick the right month to buy?  While it
is rather subjective, I like to plan my long-term trades so
that I can give my trade enough time to work and still exit
with 30-45 days of time before expiration.  So if I expect IBM
to move up $10 in the next 3 months, then I would likely
purchase July contracts.  Three months from now, they will
still have 60 days of time remaining until expiration.  It's
a subjective measure I know, but what I'm after is avoiding
holding onto an option through the expensive portion of the
time decay curve.  When using LEAPS, I always close out the
position when the LEAP has less than 6 months until expiration.

Of course, for shorter-term trades, my criterion is a bit
different.  If I'm trading front month contracts, I want the
amount of time I hold the position (the time period in which I
am losing money due to time decay) to be short, relative to the
amount of time remaining until expiration.  For instance, if I
were trading FEB contracts this week, my hold time would be
measured in hours, not days.  And there is no way I would be
holding over the close unless I was expecting a large move (in
my direction) at the open the following day.  Of course, that
would be done with 100% risk capital, as Austin frequently
reminds us.  Next week though, we'll be back into the first
week of the expiration cycle and I could see myself buying
March contracts and holding them for up to a week.  That's only
25% of the amount of time remaining until expiration, so I
still am only subject to a relatively small amount of time decay.

I don't need to go through an analysis of time decay on each
and every trade.  I've gone through the process enough times and
traded enough that I have boiled my rules for handling Theta down
to one simple premise -- KEEP THE HOLD TIME OF ANY POSITION
SHORT, RELATIVE TO THE AMOUNT OF TIME REMAINING UNTIL EXPIRATION.
Using that rule keeps me from being on the losing end of the
Theta equation almost every time.  Hey, there are exceptions to
every rule, right?

Buying extra time with options is kind of like buying fire
insurance on your house.  It costs you extra money, but provides
a bit of a safety net in return for that expense.  But it DOES
NOT give you immunity from loss.  If the stock that you have
bought options on trades sideways for a couple months, your
position will lose money at the rate of time decay.  This is the
benefit of a LEAP, in that it allows you the flexibility of time
to wait for expected move to materialize without incurring a huge
penalty due to time decay.  If you bought a 2-year LEAP and the
expected move takes place in 3 months, then take your profits
and move on.  The LEAP provided the "insurance" you were looking
for when you bought that initial time.

I can't emphasize this enough.  The most important factor
influencing the price of your option is the price movement of
the underlying security.  If the stock is falling, then so is
the price of your option, in accordance with the relationship
between the Greeks as defined by the Black-Scholes pricing
model.  (Please don't ask me for details of that model -- the
details are available from numerous books already in print, and
now that I've left the engineering world, I try to avoid
unnecessary exposure to equations.  My wife says it makes me
more pleasant to spend time with.)

Let's come back to the insurance analogy for a minute.  You hold
the insurance policy IN CASE your house ever catches fire, but
you hope that it won't.  If you sell the house and there are
still 6 months until the renewal of your insurance policy, are
you going to continue to keep the policy in place, just in case
there is a fire after you sold the house?  Of course not!  As
soon as you sell the house, you are going to terminate the policy
and get a refund for the unused portion of the term of the
policy.  This is precisely the same for the buyer of a LEAP who
is expecting a $20 move in a stock.  He/she may expect the move
to develop in 3-4 months, but want the extra "insurance" provided
by a LEAP, just in case the move takes longer than expected.  If
their stock moves up $20 in just 6 weeks, will they continue to
hold the LEAP, just because there is plenty of time until
expiration?  I hope not.  I know I would be exiting in a hurry
and taking my profits.  When we sell an option prior to
expiration, the time-value component of the option price is
equivalent to the refund on the unused portion of our insurance
policy.  We didn't use the time, so we get the premium back.

This insurance analogy works for another important point I'd like
to make.  If we bought extra time for insurance against flat
trading over the near term, what does that extra time do for us
if the stock falls sharply?  NOTHING!  If the stock falls
sharply, so does our option, driven by the movement of Delta and
Gamma.  Theta has no effect.  Expecting extra time to provide
insurance against a drop in the price of the stock is like buying
a fire insurance policy on your house, expecting it to protect
you against theft.  It makes no sense.  Imagine the holder of a
fire insurance policy calling his insurance agent to report a
robbery.  Ridiculous?  No more so than investors that bought
$100 2003 LEAPS on JDSU and never sold them because "there's
plenty of time left".  Sheer lunacy, but I'll bet there are
people reading this right now that have done something similar.
Heck, I even made mistakes like that in the early days.  It comes
from a lack of understanding of what the purpose is behind
buying more time.  It simply allows you more time to be right
(for the stock to move in your direction), but it does not give
you license to be lazy (fail to honor your stops because you hope
there will be plenty of time for the stock to come back later).

I know I hit the last couple points pretty hard, but I hope it
was worth it.  The reason I'm covering the various Greeks is so
that you will have a better idea how each of them affect the
price of the option you are considering trading.  Better
informed is better armed.  

I am way over both my time and space limits for today, so I'll
end it there.  Questions are always welcome!


Mark


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

IS Swing Trade Model: Wednesday 2/13/2002
A Struggle Toward Session Highs


News & Notes:
------------
Call plays from the opening bell stalled out early and bounced 
their way to higher lows all session. We entered & exited call 
plays tracked for tiny gains or breakeven on entry cost at worst, 
while indexes continue their consolidation efforts.


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


 

New & larger wedges continue to form. With stochastic values 
poised near overbought extreme and looking weak to bearish from 
here, a high-odds call play setup would occur if price action 
rolls down to the lower pink line of support and hold there while 
stochastic values turn bullish near or within oversold extreme. 
That would be near the OEX 564 area on Thursday.

[60/30-Min Chart: SPX]


 

Likewise for the SPX near 1111 area if price action reaches there 
while stochastic values turn bullish in unison. Long plays on 
support would be high odds, but not using Feb SPX option contracts 
that cease trading Thursday night and settle in value upon 
Friday's open. Switch to the OEX for Feb option contracts instead.


[60/30-Min Chart: QQQ]


 

The QQQ is a conundrum itself. This is a bullish triangle that 
should break to the upside but stochastic values are weak to 
bearish at best. A break higher above 37.25 is tradable, but not 
on a gap-thru open. If the index gaps open above this level, wait 
for price action to pull back and touch or "kiss" the 37.25 line 
of resistance then turned support and test longs from there.


Summation:
---------
No explosive session today... just a gap higher open and modest 
advance from there. Perhaps Thursday offers something more than 
what we saw, and call plays on a pullback look best to us from 
here.

Again, zero dollar stops will be applied... this is 100% risk loss 
capital only from here until the closing bell on Friday. Do not 
buy more option contracts than you are willing to lose 100% of the 
total cost on!


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: 36 (QQQ-BJ)            Feb Calls: 99 (DJV-BA)  
Long: BREAK ABOVE                 Long: BREAK ABOVE 
Stop: None – 100% risk loss       Stop: None – 100% risk loss
                                

Feb Puts:  36 (QQQ-NJ)            Feb Puts: 98 (DJV-NT) 
Long: BREAK BELOW                 Long: BREAK BELOW 
Stop: None – 100% risk loss       Stop: None – 100% risk loss


=====


         OEX                         SPX
Feb Calls: 570 (OEB-BN)           Feb Calls: 1125 (SPT-BE)
Long: BREAK ABOVE                 Long: BREAK ABOVE none
Stop: None – 100% risk loss       Stop: None – 100% risk loss


Feb Puts: 555 (OEB-NK)            Feb Puts: 1100 (SPT-NT)
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: None – 100% risk loss       Stop: None – 100% risk loss



Open Plays:
----------
         QQQ                          DJX
Feb Calls: 36 (QQQ-BJ)            Feb Calls: 99 (DJV-BA)  
Long: BREAK ABOVE 36.72           Long: BREAK ABOVE 98.50 
Exit: 36.80                       Exit: 99.25
Closed                            Closed 

         OEX                         SPX
Feb Calls: 570 (OEB-BN)           Feb Calls: 1125 (SPT-BE)
Long: BREAK ABOVE 564.00          Long: BREAK ABOVE 1110.00
Exit: 567.00                      Exit: 1118.00
Closed                            Closed 


IS Position Trade Model: Wednesday 2/13/2002
Edging Upwards Again


News & Notes:
------------
Markets moved higher, dooming our open Feb put plays to expected 
loss while March contract calls edge upwards in value.


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


Summation:
---------
We will track Feb put option contracts following the 100% risk-
loss capital method in lieu of stops right into expiration. If the 
market dives this week they have a chance. If not, we took the 
maximum loss possible right at the point of entry so no harm done.

March contracts also use 100% risk capital and no stops. We will 
initiate stops if/when gains accrue above entry in order to manage 
capital from there.


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:
----------------
None


Open Plays:
----------
Feb Puts: 36 (QQQ-NJ)          Feb Puts: 96 (DJV-NR) 
Long: BREAK BELOW 36.00        Long: BREAK BELOW 96.50
Entry: 1.10                    Entry: 1.30
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
Entry: 5.40                    Entry: 14.00
Stop: 100% risk-loss capital   Stop: 100% risk-loss capital


QQQ                            SMH
March Calls: 36 (QQQ-CJ)       March Calls: 44 (SMH-CI) 
Long: BREAK ABOVE 36.25        Long: BREAK ABOVE 44.00
Entry: 2.10                    Entry: 2.15
Stop: 100% risk-loss capital   Stop: 100% risk-loss capital

BBH                            HHH
March Calls: 125 (GBZ-CE)      March Calls: 30 (HHH-CF)
Long: BREAK ABOVE 117.75       Long: BREAK ABOVE 31.00
Entry: 2.10                    Entry: 2.50
Stop: 100% risk-loss capital   Stop: 100% risk-loss capital

PPH                            OIH
March Calls: 95 (PPH-CS)       March Calls: 60 (OIH-CL)
Long: BREAK ABOVE 95.00        Long: BREAK ABOVE 56.75
Entry: 2.20                    Entry: 1.50
Stop: 100% risk-loss capital   Stop: 100% risk-loss capital


Sector Share Trade Model: Wednesday 2/13/2002
Trudging Higher

News & Notes:
------------
Broad markets moved higher today and edged up values of many long 
share plays. However, few seem to close on their session highs as 
we'd like to see as a signal of upwards strength. For now we'll 
leave stops tight and no new plays to track.


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


Summation:
---------
Management mode from here and likely into next Monday as 
expiration volatility will probably chop current plays around as 
markets gyrate these next two sessions. 


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:
----------------
IYR Dow Jones U.S. Real Estate
Short: BREAK BELOW 80.00 
Stop:  Break Above 80.50 


Open Long Plays:
---------------
LONG
QQQ
Long: BREAK ABOVE 36.25
Stop: Break below 36.00 

SMH
Long: BREAK ABOVE 44.00
Stop: Break below 44.00 *

BHH
Long: BREAK ABOVE 3.80
Stop: Break below 3.20 *

BDH
Long: BREAK ABOVE 14.00
Stop: Break below 13.90 

HHH
Long: BREAK ABOVE 31.00
Stop: Break below 30.25

IAH
Long: BREAK ABOVE 35.00
Stop: Break below 34.50

TTH Telecom
Long: BREAK ABOVE 39.00
Stop: Break below 38.00

OIH Oil Services
Long: BREAK ABOVE 56.75
Stop: Break below 56.00 

MKH Market 2000+ Big Caps
Long: BREAK ABOVE 57.25
Stop: Break below 57.00 

IYH Healthcare
Long: BREAK ABOVE 59.75
Stop: Break below 60.00 *

PPH Drugs
Long: BREAK ABOVE 94.75
Stop: Break below 96.00 *

BBH Biotech
Long: BREAK ABOVE 117.75
Stop: Break below 120.00 *

XLB Basic Technology
Long: BREAK ABOVE 22.00
Stop: Break below 20.50


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Fresh Horses and Dividends For My Men
Buzz Lynn
buzz@OptionInvestor.com

Yep, even the best gun-slingers needed a break from the shoot-em-
up riggers of the Old West.  That's undoubtedly why John Wayne 
asked for "fresh horses and whiskey for my men" in a John Ford 
Western, the title of which escapes me.

But for those of you wanting a bit of hard-earned relaxation 
following days (heck years) on the dusty trail of trading that 
equals any financial dangers of the Old West, how about a nice a 
nice slug of dividends?  Maybe even a fifth?  Sorry, those are 
available only to ENE executives!  

All kidding aside, dividends can really take the edge off an 
otherwise risky portfolio.  Oh sure, I can hear it now.  "Those 
stocks are boring.  They never move.  How will I ever make money 
with those boring things?"  Easy to say, but how would your 
portfolio look if you owned them in February 2000?  Would you have 
incurred any loss of principal owning these?  Probably some, but 
how much more did we get whacked with the outdated thinking that 
tech stocks would be back when we get our V-shaped bottom in the 
last half of 2001 - no, first half 2002 - OK, second half 2002 - 
whatever.  

Newsflash: the recovery isn't here yet.  While signs are 
encouraging that the economy may have already bottomed, an actual 
recovery is an entirely different matter.  

But back to why I think dividend paying stocks are great thing.  
By and large, they are safer against risk of principal loss than a 
fallen technology angel.  Why is that?  A few reasons

First and foremost, it generally means that said company MAKES 
MONEY.  A company cannot pay dividends if it doesn't first make 
money.  That means that ALL its expenses, including interest, 
taxes, depreciation, and amortization are less than its gross 
receipts.  It's called a profit, which is the reason that I 
invest.  Generally speaking, once a dividend is in place, it is a 
vote of management's confidence in the company's future ability to 
earn profits for its owners.  It shows visibility, stability, 
predictability - whatever we choose to call it - and makes the 
equity share more like the revenue stream accorded bonds.  This is 
especially true for preferred shares, but that's for another 
column.  

Did you catch the significance?  A predicable stream of earnings 
that can be distributed to owners can also be capitalized into a 
net present value representing that stream of predictable -
hopefully long term - income.  That said, it's pretty darn hard to 
crater the stock price of a dividend-paying stock as long as the 
earnings stream, and hence the income available for distribution, 
or dividend in not threatened.  

Are there ever cases where dividends are threatened?  You bet.  
Just because a stock pays a dividend does not mean it can't be 
killed with possibly permanent and fatal bad news.  Think AT&T 
(T)or Ford (F), both of which have cut and/or eliminated dividends 
within the last year.  

We want to be careful of companies that pay too much dividend too.  
One example that comes to mind is Eastman Kodak.  More able 
competitors like Japan's Fuji Film and Germany's AGFA are cleaning 
their camera.  To boot, their digital imaging strategy has not met 
much success and I believe that juicy 6.5% dividend paid by EK is 
in danger of being cut or eliminated if the company is to survive.  
Otherwise it appears destined to meet an untimely death as did 
Polaroid.  That size dividend is not as enticing if it is not 
safe.

Any company, no matter how seemingly safe the business, can still 
get into trouble for a number of reasons.  As noted in earlier 
paragraphs, dividends aren't a guaranty of safety.  But they do 
provide a margin of comfort from price volatility.

The other reason I like dividend-paying stocks is more directly 
related to the strongest force in the universe - compound 
interest.  See, with dividends, that 5% annual return gets 
compounded, which using the rule of 72, and assuming revenues 
never go up and the stock price remains flat, still doubles my 
money every 14 years.  Sure, it's slow.  But I can be a comatose 
or nearly dead investor and my money still grows.  Sure beats 
owning CMGI, MFNX, GX,CMRC or LVLT!  

For more on the value of compound interest, see the Traders Corner 
article from January 8, 2002 titled simply, "Compound Interest".

http://www.OptionInvestor.com/traderscorner/010802_1.asp

OK, for peace of mind and a no-brainer (to be fair, "little-
brainer") growth of the ole nest egg, dividends can provide the 
ballast that keeps your portfolio upright and always growing.  The 
real beauty is that if share price never grows and sales never 
increase, dividends still build portfolio value.

OK, Buzz, that all sounds nice, but what do you like?  Glad you 
asked!  Let me make a distinction though.  What I own, what I like 
now, and what I might be interested in later are three separate 
line items.  That said, - full disclosure - I don't any of these 
yet, and may never own them at all.  They are merely intriguing as 
would be the beautiful young woman at the dance to the young man 
on a mission.  She may not be the right one, but the perfume is 
nice!

For starters, I still like the sin stocks.  U.S. Tobacco, makers 
of smokeless tobacco and also the owners of Chateau St. Michelle 
Wines pays a handsome 5.45% and currently sells for $34.06.  There 
is little exposure to tobacco settlements as well.

Philip Morris also has my interest as I've noted in previous 
articles.  It still owns over 95% or Kraft Foods (KFT), which 
makes a nice slush fund from which to draw cash should tobacco 
litigation rear its head again.  Meanwhile, MO pays a 4.63% 
dividend and sells for $50.65.  Personally, I would be a buyer of 
MO at a later date when the price is more attractive as determined 
by chart oscillators.  It is currently overbought across all 
timeframes and is looking ripe for a fall to lower levels.  
Support looks good around $45-$46; $43 if you want to press the 
entry.  But it may never get there.

Also interesting to me are some of the power companies - yes those 
stodgy old utilities.  American Electric Power (AEP) is a holding 
company whose subsidiaries produce power for some eastern, mid-
western, and southwestern states.  At $41.98, it yields 5.78%.  
Take a look at DTE Energy (DTE), the holding company for Detroit 
Edison - $41.36 with a 4.98% yield.  Autos may be struggling, but 
Detroit is not going away and it will always need power, if even 
just to light those beautiful Grosse Pointe and Bloomfield homes!  

Really want stodgy?  How about metal bender Worthington Industries 
(WOR) that trades at $14.69 and yields 4.4%.  PE at 30 is a bit 
high for my liking, but it's worth a look.  

Ever heard of WD-40?  Probably not a man alive that doesn't have a 
can or two of the stuff in his possession.  And why not?  It can 
be used by fisherman to spray the human scent off the bait - just 
one of the 1001 uses!  But did you know they also own Lava Soap, 3 
In One Oil, X-14 products, Carpet Fresh, and 2000 Flushes?  It's 
good for a yield of 3.94% and sells for $28.16.

Finally, there's Sovran Self Storage (SSS).  Never heard of them?  
Neither had I until I saw that they owned over 12.4 mln square 
feet of storage space in 21 states that operates under the kitschy 
"Uncle Bob's Self-Storage" brand name.  Nice 7.46% yield on a 
$31.53 stock.  Yes, this is a REIT.

Well, there you have it.  Take a load of that trading saddle and 
settle in for some financial relaxation with dividend-paying 
stocks.  It may not be as tasty as a good belt of whiskey (or as 
invigorating as fresh horses for the ride, but done right, 
dividends will help you get all the horses and whiskey you could 
want.

Tomorrow we tackle another episode of Q-Charts.  Until then, keep 
your wings level and trust your instruments!


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The Option Investor Newsletter                Wednesday 02-13-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


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

ASYT - call
Adjust from $15.50 up to $16

TRW  - call
Adjust from $41.75 up to $42.90


*************
NEW CALL PLAY
*************

IBM - Int'l Business Machines $108.07 +1.50 (+3.08 this week)

International Business Machines Corporation (IBM) uses advanced
information technology to provide customer solutions. The Company
operates using several segments that create value by offering a
variety of solutions, including, either singularly or in some
combination, technologies, systems, products, services, software
and financing. Organizationally, the Company's three hardware
product segments are comprised of Technology, Personal Systems
and Enterprise Systems. 

Tech bulls are growing confidence after the recent strength
displayed by the group.  Positive earnings reports have helped
to revive sentiment.  Applied Materials (NASDAQ:AMAT) beat
estimates when it reported yesterday night.  Network Appliance
(NASDAQ:NTAP) also beat estimates and said good things about
its business going forward.  Hewlett-Packard (NYSE:HWP)
reported quarterly profits late today that also handily beat
expectations.  The combination of positive earnings news
could build some momentum in technology shares and has us
turning to IBM.  The company is a bellwether for technology
and if the group rallies so too should IBM.  The company is
linked to both Network Appliance and Hewlett-Packard, so the
positive earnings news from both could have a positive impact
on IBM in the days to come.  The stock is in the process of
retracing its sell-off associated with its earnings report
that disappointed earlier in January.  Further bullish
sentiment in the technology sector could see IBM continue to
work higher.  Bullish traders can look for strength in the
broad market and the Nasdaq early tomorrow and consider entry
points at current levels.  Momentum traders might wait for
a strong breakout above the $110 level before initiating
positions.  If the stock does pullback on market-related
weakness, watch for a rebound from the $106 area of a
potential entry point.  Our stop is initially in place at
$105.

BUY CALL MAR-105 IBM-CA OI= 6003 at $5.90 SL=4.00 
BUY CALL MAR-110*IBM-CB OI= 5890 at $2.95 SL=1.50 
BUY CALL APR-105 IBM-DA OI=11859 at $7.90 SL=5.75 
BUY CALL APR-110 IBM-DB OI=13333 at $4.80 SL=3.25 

Average Daily Volume = 7.03 mln
 


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

TYC $28.90 -1.60 (-0.98) Tyco issued a profit warning during
Wednesday's session that shocked investors.  The company said
that its earnings could fall below consensus estimates because
some of its customers have cancelled orders due to the
controversy surrounding the company.  Investors responded by
selling TYC as low as the $28.10 before the stock rebounded.
Given the new revelations and weakness Wednesday, we're dropping
coverage this evening.  Traders with open positions can use any
bounce early tomorrow to exit plays.


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

ADI $40.62 +0.37 (+1.79) Analog Devices is slated to report
earnings after the bell tomorrow.  The company is expected to
have earned 11 cents per share during the quarter, with
revenue estimates ranging from $390 million to $410 million.
The stock traded poorly relative to its sector Wednesday, but
the overwhelming strength still helped the stock to finish
fractionally higher.  Look for weakness ahead of the report
tomorrow to exit plays.

MMS $33.25 +0.65 (+2.89) MMS continued higher in Wednesday's
session on relatively light volume.  The strength in the
broader markets contributed to the short covering taking place
in this stock.  Although MMS did stage a big reversal from its
intraday high at $34.60, the stock did manage to settle above
its 10-dma, right on our coverage stop at $33.25.  Given the
close above the 10-dma, we're dropping coverage this evening.
Look for a decline below the 10-dma intraday tomorrow to cut
losses.

KLIC $16.62 +0.77 (+1.93) The market's reception of AMAT's
earnings report and guidance was most bullish early today.
The news helped carry the Semiconductor Sector (SOX.X) to a
3.89% gain on the day.  The sector strength carried KLIC
higher and above its short-term congestion.  While a rollover
is possible from current levels, we're dropping coverage in
light of the violation of our upside stop.


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*********************
PLAY OF THE DAY - PUT
*********************

KSS - Kohls $69.10 +0.79 (+2.40 this week)

Kohl's Corporation currently operates 354 family oriented,
specialty department stores that feature quality, national
brand merchandise priced to provide value to customers. The
Company's stores sell moderately priced apparel, shoes,
accessories and home products targeted to middle-income
customers shopping for their families and homes. Kohl's
stores have fewer departments than traditional, full-line
department stores, but offer customers dominant assortments
of merchandise displayed in complete selections of styles,
colors and sizes.

Most Recent Update 

There's a growing debate in the retail sector.  It centers
around the group's cost cutting efforts which have boosted
sales.  The question concerns at what expense the sales
numbers were achieved.  Take Kohls, for example, who reported
same store sales growth of 11.5 percent for the month of
January.  The sales numbers were indeed impressive given the
economic environment.  However, it remains to be seen what
impact, if any, the deep discounting used to achieve those
sales numbers has on the bottom-line.  Bears are arguing that
the retailers are going to have margin pressure this year in
the wake of massive mark-downs.  Robertson Stephens recently
used that argument to downgrade its investment rating on
shares of Kohls.  The brokerage house cut its rating to a
buy from strong buy, citing the company's heavy discounting
in addition to costs from expansion as impediments on earnings
growth this year.  From a technical perspective, shares appear
to be under distribution noting the recent series of relatively
lower highs and lows.  The market related rebound in the last
week could have provided traders with an opportunity to enter
bearish bets on KSS as the stock is near significant resistance.
The $70 level should contain any strength from current levels,
offering traders a close stop level.  Our coverage stop is in
place at $70.25.  To the downside, if the pattern of lower
lows continues, the stock could have downside to the low $60s.
The 200-dma at $61 is a possibility.  The risk to reward is
favorable in this play over the short-term.

Comments

January's retail sales numbers were positive.  Ex-autos, sales
grew by 1.2% in the month.  The retail sector (RLX.X) finished
1.06% higher on the news.  KSS moved higher towards its $70
resistance level, which positioned the play for a better entry
point.  We like the risk/reward that put entries offer at current
levels in KSS.  While the RLX.X could continue higher, dragging
KSS along with it, the risk is easy to manage with a tight stop
just above $70.  Use any weakness in the RLX.X early tomorrow to
take entries in KSS at current levels.  Use a very tight stop
just above $70.

BUY PUT MAR-70*KSS-ON OI= 372 at $3.10 SL=2.25
BUY PUT MAR-65 KSS-OM OI=1251 at $1.25 SL=0.75

Average Daily Volume = 1.78 mln



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

Recovery Rally Underway!
By Ray Cummins

Industrial stocks soared today after a solid retail sales report
boosted investor optimism of a future economic recovery.

Analysts said the new data suggests consumer spending is showing
initial signs of broadening while continued improvement in labor
market conditions and the public's attitudes should help further
the economic rebound.  The Dow Jones Industrial Average advanced
125 points to 9,989 after rising as much as 135 points and coming
within a whisker of the 10,000 level.  Among the blue-chip index's
winners were General Motors (NYSE:GM), Alcoa (NYSE:AA), American
Express (NYSE:AXP), Home Depot (NYSE:HD), and Johnson & Johnson
(NYSE:JNJ).  In the technology group, chip, hardware and Internet
stocks led the NASDAQ 24 points higher to a solid finish at 1,859.
The broader market S&P 500 index closed up 11 points at 1,118 on
strength in retail, financial and cyclical stocks.  The brokerage
group also rallied despite a sector downgrade and insurers were
among the day's biggest upside movers.  Limited selling pressure
was focused primarily on oil service and airline issues.  Trading
volume totaled only 1.20 billion on the NYSE and 1.58 billion on
the NASDAQ.  Market breadth was bullish overall, with advancers
defeating decliners 2 to 1 on the NYSE and 4 to 3 on the NASDAQ.
The 10-year Treasury note was off 6/32 to yield 5% percent while
the 30-year government bond erased 7/32 to yield 5.47%.

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

MAILBAG - Reader's Comments & Questions

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

Ray,

Thank you as always for the wonderful service you and OIN provide.

A quick investment philosophy question concerning credit spreads.
I see two approaches one could take on a regular basis:

1. Small credits from several trades deep out of the money.  Less
risk of the trades going against you.  But smaller credits provide
less protection when one trade goes against you.  You could wipe
out months of successful gains with one bad trade.

2. Larger credits from trades closer to the money.  There's more
risk of a trade going against you, but a few months of these
credits can provide some relief in the case of a bad trade.

I'm at odds, since I see the benefits and drawbacks of both.
Perhaps diversity is the answer through establishing several
positions?  Any insight is appreciated!

ER


Regarding Position Selection:

Your observations are correct!  And, in reading your comments
on both strategies, it sounds as if you already understand the
advantages and drawbacks to the different (more conservative
versus more aggressive) approaches.

The basic questions are: how much downside are you willing to
risk in return for the (relatively small) profit achieved, and
are you the type that manages his positions more aggressively,
with a focus on limiting losses before they become substantial.
In addition to defining the core attitude in your portfolio,
the first question relates directly to option pricing theory,
because we know that the prices are determined from historical
and statistical data, and that in all but the most unique cases,
the market trades inside the 2nd standard deviation of a normal
distribution.  Strangely, that area is generally equivalent to
the 3%-5% monthly (annualized) return in strategies such as
deep-OTM credit spreads.  So, if you want to have a very high
probability of making a low profit (one way, but not necessarily
the best method of option trading), target plays that are in
that range.  The second part of the question is probably more
important since it relates to the fact that success with a low
profit-high probability approach to the market is based on
limiting losses to a minimum.  There are never any big winners
to offset the big losers, so there simply can't be any big
losers.  Strategies such as OTM credit spreads (as well as many
common trading techniques), need to have some type of exit point
in case the market/stock/sector turns in the opposite direction
from that which is expected.  Obviously, a gapping issue will
occasionally wipe out a portion of previous gains and there is
nothing you can do about it.  But, at the same time, you must
manage the remaining positions effectively or there will be no
profits to offset the rare catastrophic losers.

So, my point is, there is no absolute correct position with
credit spreads.  The key to success is more dependent on the
position management that follows the initial trade.  Always
remember: traders become successful when they learn to take
small profits regularly and they don't let losing plays
significantly erode capital.

Good Luck!

***************
Summary of Current Positions (as of 02-12-2002):
***************

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   34.33   2.25     6.0%
MU      FEB    32.5   30.04   37.80   2.46     5.5%
MRVL    FEB    32.5   30.36   38.80   2.14     4.8%
WGO     FEB    40     37.57   39.32   1.75     4.6% ***

Winnebago (NYSE:WGO) has recovered from recent selling
pressure and appears to be in a new bullish trend.  The
first major test of the recovery will be the near-term
resistance at $40.


Naked Puts:

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

ACDO    FEB     40   39.10   54.58   0.90    6.5%
EMLX    FEB     35   33.85   43.09   1.15    8.8%
MRVL    FEB     30   29.35   38.80   0.65    6.0%
SYMC    FEB     30   29.45   35.10   0.55    5.1%
SEBL    FEB     27.5 26.65   34.33   0.85    8.8%
BRKS    FEB     40   39.15   47.00   0.85    6.0%
ACDO    FEB     40   39.50   54.58   0.50    4.6%
WGO     FEB     35   34.50   39.32   0.50    4.3%
SEBL    FEB     27.5 26.95   34.33   0.55    9.3%
MRVL    FEB     32.5 32.10   38.80   0.40    5.7%
INVN    FEB     30   29.20   39.07   0.80   16.6%
INVN    MAR     25   24.20   39.07   0.80    7.2%
MU      MAR     30   29.20   37.80   0.80    7.5%
NVDA    MAR     47.5 46.45   62.20   1.05    6.4%
KLAC    MAR     50   48.55   57.41   1.45    7.4%


Naked Calls:

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

AMAT    FEB    50    50.50   44.71   0.50    5.6%
KLAC    FEB    60    60.60   57.41   0.60    5.5%
QLGC    FEB    65    65.65   48.70   0.65    6.0%
ADI     FEB    50    50.45   40.25   0.45    6.2%
VRTS    MAR    45    45.80   38.00   0.80    8.2%

The semiconductor sector is performing very well and
any of these issues could rally in the coming sessions.
Traders should watch for bullish activity supported by
heavy volume 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    9.00     5.20     Closed

The Qualcomm (NASDAQ:QCOM) straddle continued to be our big
winner of the month, returning up to $9.00 credit on $3.80
invested in only two weeks.  The best exit opportunity came
when the issue slumped to $37.46 last week after a research
note questioned the company's current accounting practices,
including its method of recognizing revenue.


Credit Spreads:

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

SII    55.12    56.17  FEB40P/45P   0.65   44.35   0.65   Open
THC    62.10    64.44  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    75.56  FEB65P/70P   0.65   69.35   0.65   Open
WLP   125.16   130.02  F110P/115P   0.55  114.45   0.55   Open
AT     56.70    56.21  FEB65C/60C   0.60   60.60   0.60   Open
MMM   103.47   114.17  F120C/115C   0.65  115.65   0.65   Open
HSIC   43.26    43.88  FEB35P/40P   0.40   34.60   0.40   Open
KSWS   37.38    34.40  FEB30P/35P   0.75   34.25   0.15   Open
GNSS   58.68    46.85  FEB75C/70C   0.50   70.50   0.50   Open
FIC    55.75    61.60  FEB45P/50P   0.40   49.60   0.40   Open
NOC   106.81   109.58  FE95P/100P   0.50   99.50   0.50   Open
PGR   145.17   147.99  F155C/150C   0.75   50.75   0.75   Open
CYMI   41.37    38.30  MAR30P/35P   0.75   34.25   0.75   Open
AZN    47.60    49.26  MAR40P/45P   0.40   44.60   0.40   Open
NOC   109.32   109.58  MA95P/100P   0.80   99.20   0.80   Open
PG     82.50    83.55  MAR75P/80P   1.00   79.00   1.00   Open
TGH    77.00    75.14  MAR65P/70P   0.45   69.55   0.45   Open
BVF    42.05    44.00  MAR55C/50C   0.60   50.60   0.60   Open
WHR    65.50    66.31  MAR75C/70C   1.10   71.10   1.10   Open
ROOM   54.72    46.72  MAR40P/45P   0.70   44.30   0.70   Open

Hotel Reservations Network (NASDAQ:ROOM) continued to slump
after our transition to March options (for a small credit) and
now it seems as if closing the play might have been a better
decision.  The stock is at a key moment, near the 30-dma and
the next few sessions will likely determine its near-term fate.
Minnesota Mining (NYSE:MMM) and Progressive (NYSE:PGR) are in
similar situations with both issues testing recent resistance
areas.  A rally in blue-chip stocks could put either position
in jeopardy prior to Friday's expiration, thus traders should
monitor each issue closely and be prepared to adjust or exit
the plays.  The bullish position in Banc Of America (NYSE:BAC),
which is positive, was closed earlier in the month.


Index Credit Spreads:

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

XAU    58.07    66.25  FEB50P/55P   0.85   54.15   0.80   Open
PPH    98.60    96.35  FEB90P/95P   0.45   94.55   0.45  Closed?
OIH    56.65    57.28  MAR45P/50P   0.60   54.40   0.60   Open

The Pharmaceutical Holdrs Trust (AMEX:PPH) is still above the
sold strike in our bullish position however the play likely
would have been closed when PPH fell below $94.


Synthetic Positions:

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

DGX    71.40    71.90  FEB85C/60P   0.10   59.90   0.20   Open
WMT    59.86    60.10  MAR65C/55P   0.25   54.75   0.20   Open

The bullish position in Wal-Mart (NYSE:WMT) is starting to
perform as expected and Monday's close at a new high suggests
the issue has further upside potential.  The Merrill Lynch
(NYSE:MER) play was closed in late January, 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   589.62 562.51  FEB640C/630C    0.80   630.80  0.80   Open
OEX   589.62 562.51  FEB530P/540P    0.70   539.30  0.70   Open
BBH   127.58 121.84  FEB145C/140C    0.50   140.50  0.50   Open

Although it is now comfortably profitable, the bullish position
(FEB110P/115P) in the Biotechnology Holdrs Trust (AMEX:BBH) was
previously 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

***************
AMAT - Applied Materials  $47.93  *** Optimistic Outlook! ***

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

Shares of Applied Materials rallied today even after the company
posted a fiscal first quarter net loss of $45 million, or 6 cents
a share, on revenue of $1 billion.  During the same quarter last
year, net income was $156 million, or 19 cents a share, on revenue
of $2.36 billion.  The consensus expectation was for "break-even"
results, excluding charges, on revenue of $1.01 billion.  However,
the company surprised investors by announcing that new orders rose
for the first time in four quarters.  AMAT's CEO also noted that
semiconductor revenues have apparently reached a bottom because
memory chip prices have risen and activity in chip factories has
increased.  Traders who agree with that outlook can speculate on
the future performance of the chip-equipment group with these
positions.

AMAT - Applied Materials  $47.93

PLAY (sell naked put):

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

SELL PUT  MAR 40   ANQ OH  4,958     0.60    39.40      5.1% ***
SELL PUT  MAR 42.5 ANQ OV  7,704     1.00    41.50      6.9%
SELL PUT  MAR 45   ANQ OI  3,391     1.60    43.40      9.1%


***************
KLAC - KLA Tencor  $61.29  *** On The Move Again! ***

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 move" in recent sessions and today's $4
rally came in conjunction with renewed optimism for stocks in
the chip-equipment sector.  When all was said and done, KLAC
closed at a new 52-week high and the long-term technical trend
is favorable.  The premiums in these options provide excellent
reward potential for traders who are bullish on the issue.

KLAC - KLA Tencor  $61.29

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   2,331    0.50    44.50      4.0% "TS"
SELL PUT  MAR 50   KCQ OJ   3,490    1.05    48.95      7.5% ***
SELL PUT  MAR 55   KCQ OK   2,251    1.95    53.05      9.8%
SELL PUT  MAR 60   KCQ OL   6,679    3.60    56.40     13.6%


***************
RTEC - Rudolph Technologies  $41.34  *** Hot Sector! ***

Rudolph Technologies (NASDAQ:RTEC) is engaged in the design,
development, manufacture and support of unique process control
metrology systems used in semiconductor device manufacturing.
Its proprietary systems non-destructively measure the thickness
and other properties of thin films applied during various steps
in the manufacture of integrated circuits, enabling semiconductor
manufacturers to increase yields and lower production costs.  The
company provides its customers with a flexible full-fab metrology
solution by offering families of systems that meet their various
transparent and opaque thin film measurement needs in applications
across the fabrication process.  Rudolph sells its many products
worldwide to over 100 semiconductor device manufacturers including
both independent semiconductor device manufacturers and foundries
throughout the world.

Rudolph Technologies was among the winners in the chip-equipment
group today and the issue also appeared on a scan/sort for stocks
with bullish trends and favorable option premiums.  The current
technical outlook for RTEC is favorable and our target positions
offer an excellent way to participate in the future movement of
the issue with relatively low risk.

RTEC - Rudolph Technologies  $41.34

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   UXH CH  153       3.70    37.64      6.4% ***

- or -

SELL PUT  MAR 35   UXH OG  0         0.75    34.25      6.9% ***
SELL PUT  MAR 40   UXH OH  10        2.40    37.60     13.8%


***************
TER - Teradyne  $33.28  *** More Chips...Bring The Dip! ***

Teradyne (NYSE:TER) is a manufacturer of automatic test equipment
and related software for the electronics and communications
industries.  Products include systems to test and inspect
semiconductors; circuit boards; high-speed voice and data
communication, and software.  Teradyne is also a manufacturer
of backplanes and associated connectors used in performance
electronic systems.

Semiconductor and chip-equipment stocks have been among the best
performing technology groups during the recent market slump and
today's rally in the sector confirmed a renewed bullish trend
in many issues.  Teradyne appears to be one the stronger stocks
in the group, based on the current technical indications, and
traders who wouldn't mind owning the issue at discounted cost
basis should consider these positions.
  
TER - Teradyne  $33.28

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 TER OY  162       0.50    27.00       6.3% ***
SELL PUT  MAR 30   TER OF  578       1.05    28.95       9.6%
SELL PUT  MAR 32.5 TER OZ  78        1.95    30.55      13.7%


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

Credit Spreads - Insurance Sector Rally!

Stocks in the insurance group led the broad market higher today
after analysts at Deutsche Banc said that property casualty
insurers are in the early stages of a rising pricing cycle and
the pricing environment is likely to be favorable for the next
few years.  Based on the current technical indications, many of
the issues in the sector are poised for upside activity in the
near-term and investors who agree with that outlook can profit
from future bullish movement with these positions.

***************
HIG - Hartford Financial Services  $67.00  *** On The Rebound! ***

Hartford Financial Services Group (NYSE:HIG) is a diversified
insurance and financial services company.  The Hartford is among
the largest providers of investment products, individual life,
group life and group disability insurance products, and property
and casualty insurance products in the United States.  Hartford
Fire Insurance Company, founded in 1810, is the oldest of The
Hartford's subsidiaries.  The Hartford underwrites insurance and
reinsurance in the United States and internationally, and their
assets are valued at over $170 billion.  The Hartford is organized
into two major operations: Worldwide Life and Worldwide Property &
Casualty.  Within these operations, The Hartford conducts business
principally in eight operating segments.

Analysts say that profits for property and casualty insurers will
grow in the coming months, due to the rate increases initiated
after the tragedy of 9/11/01.  A survey conducted by Merrill Lynch
found that average price hikes have been in the 20% to 40% range
across major lines and that could translate into higher revenues, 
allowing the leading companies in the sector to record explosive
growth over the next few quarters.  Hartford Financial Services is
widely recognized as an industry leader and the balance sheet for
the company has historically been very good.  In addition, the
current technical outlook for HIG is favorable and our bullish
combination position offers an excellent way to participate in
the future movement of the issue with relatively low risk.

HIG - Hartford Financial Services  $67.00

PLAY (moderately aggressive - bullish/credit spread):

BUY  PUT  MAR-60  HIG-OL  OI=192  A=$0.55
SELL PUT  MAR-65  HIG-OM  OI=18   B=$1.40
INITIAL NET CREDIT TARGET=$0.90-$1.00  PROFIT(max)=22%


***************
PGR - Progressive Insurance  $152.90  *** Revenge Play! ***

The Progressive Corporation (NYSE:PGR) is an insurance holding
company.  They have 76 subsidiaries and two mutual-insurance
company affiliates.  The Progressive Corporation's insurance
subsidiaries and affiliates offer 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.

Progressive was a "trading range" play in the BIG-CAP section
just two weeks ago but today's bullish activity pushed the issue
well clear of the recent resistance area and now its share value
is at a new, all-time high.  Based on the strong, heavy volume
move through $150, it appears the issue has little chance of
returning to its previous (JAN-FEB) range in the near-term and
traders who agree with that outlook should consider this bullish
position.

PGR - Progressive Insurance  $152.90

PLAY (moderately aggressive - bullish/credit spread):

BUY  PUT  MAR-140  PGR-OH  OI=45  A=$0.90
SELL PUT  MAR-145  PGR-OI  OI=86  B=$1.70
INITIAL NET CREDIT TARGET=$0.90-$1.00  PROFIT(max)=22%


***************
XL - XL Capital  $97.11  *** All-Time High! ***

XL Capital Limited (NYSE:XL) provides insurance and reinsurance
coverages, and financial products and services to industrial,
commercial, and professional service firms, insurance companies
and other enterprises on a worldwide basis.  XL Capital Limited
is organized into three major underwriting segments: insurance,
reinsurance, and financial products and services.  The company
also has a corporate segment, which includes the investment
operations of the Company.  The company's Lloyd's syndicates,
which are operated by XL Brockbank and Denham, are included in
the insurance segment.

Stocks in the property and casualty insurance segment rallied
today on the heels of optimistic forecasts for the industry.
Investors appear to agree with a bullish assessment for XL as
the issue jumped almost $6 on extreme volume.  The stock has
excellent buying support near our cost basis and the lack of
overhead supply suggests a high probability of further upside
movement for the issue.

Traders should target a higher premium in the spread initially,
to allow for a brief consolidation from today's rally.

XL - XL Capital  $97.11

PLAY (conservative - bullish/credit spread):

BUY  PUT  MAR-85  XL-OQ  OI=584  A=$0.45
SELL PUT  MAR-90  XL-OR  OI=30   B=$0.85
INITIAL NET CREDIT TARGET=$0.55-$0.60  PROFIT(max)=12%


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

Credit Spreads - Reader's Request!

***************
AHC - Amerada Hess  $64.48  *** Oil Service Sector ***

Amerada Hess (NYSE:AHC) explores for and produces, purchases,
transports and sells crude oil and natural gas.  The company's
exploration and production activities take place in the United
States, United Kingdom, Norway, Denmark, Gabon, Algeria,
Azerbaijan, Indonesia, Thailand, Malaysia, Brazil and other
countries.  The company also manufactures, purchases, transports,
trades and markets refined petroleum and other energy products.
The company owns 50% of a refinery joint venture in the United
States Virgin Islands, and another refining facility, terminals
and retail outlets located on the East Coast of the U.S.

One of our readers asked for a low risk position in the oil
services industry, to benefit from the recent bullish activity
in many of the issues in that segment.  A number of stocks came
up on the scan/sort for potential positions including; Smith
International (NYSE:SII), Weatherford International (NYSE:WFT),
BJ Services (NYSE:BJS), and Schlumberger (NYSE:SLB), but the
issue we favor most (based on recent technical indications) is
Amerada Hess.  Traders who want to hedge their broad-market
portfolio with an oil sector play should consider this spread.

AHC - Amerada Hess  $64.48

PLAY (conservative - bullish/credit spread):

BUY  PUT  MAR-55  AHC-OK  OI=173  A=$0.20
SELL PUT  MAR-60  AHC-OL  OI=184  B=$0.65
INITIAL NET CREDIT TARGET=$0.50-$0.60  PROFIT(max)=11%


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

BEARISH PLAYS - Naked Calls & Combinations

***************
BGEN - Biogen  $54.45  *** Trading Range! ***

Biogen (NASDAQ:BGEN) is a biopharmaceutical company principally
engaged in the business of developing, manufacturing and selling
drugs for human healthcare.  Biogen currently derives revenues
from sales of its Avonex (Interferon beta-1a) product for the
treatment of relapsing forms of multiple sclerosis, and from
royalties on worldwide sales by the company's licensees of a
number of products covered under patents controlled by Biogen.
Such products include forms of alpha interferon, hepatitis B
vaccines and hepatitis B diagnostic test kits, among others.
Biogen continues to have an active development program related
to Avonex, and is conducting several important clinical trials
of the product.  Biogen also continues to devote significant
resources to its other ongoing development efforts.

Biogen surfaced again today in a search/sort for issues with
stable trading patterns and robust option premiums.  Based on
analysis of historical option pricing and the issue's technical
background, this position meets the fundamental criteria for a
bearish credit-spread.  The stock has been trading in a range
from $50 to $60 for almost nine months and more recently, BGEN
has struggled near the bottom of the rectangular pattern.  The
rally earlier in the week boosted the call option premiums and
we are going to take advantage of the situation with a bearish,
limited-risk position.

BGEN - Biogen  $54.45

PLAY (very conservative - bearish/credit spread):

BUY  CALL  MAR-65  BGQ-CM  OI=203  A=$0.15
SELL CALL  MAR-60  BGQ-CL  OI=734  B=$0.55
INITIAL NET CREDIT TARGET=$0.45-$0.55  PROFIT(max)=9%


***************
TEVA - Teva Pharmaceutical  $59.99  *** Earnings Speculation! ***

Teva Pharmaceutical Industries (NASDAQ:TEVA) is a fully integrated
global pharmaceutical company producing drugs in every therapeutic
categories.  In the area of proprietary drugs, Teva has focused on
products for central nervous system disorders, and the development
of Teva's first globally marketed branded drug, Copaxone, a new
treatment for relapsing-remitting multiple sclerosis.  The company
also possesses the primary manufacturing operations for active
pharmaceutical ingredients (API).  Teva Pharmaceuticals USA, the
company's principal United States subsidiary, is a generic drug
company in the United States.  Teva manufactures over 130 generic
products in 210 generic forms, which are distributed and sold in
the United States together with 15 additional generic products in
29 dosage forms manufactured by third parties.  Teva manufactures
over 270 generic products in 600 dosage forms, which are sold
primarily in the Netherlands, the United Kingdom and Hungary.

Teva is expected to report its quarterly earnings tomorrow and
based on the recent share price activity, no one is anticipating
a major upside surprise.  Traders say the reason may be due to
concerns over possible imported generic drug delays and the
potential for expenses related to probable acquisitions in the
coming months.  Regardless of the reason, TEVA has not been the
target of rampant buying pressure ahead of its announcement and
traders who think the report will be less than outstanding can
speculate on that outcome with this bearish position.  TEVA is
hosting the conference call at 10 a.m. (Eastern Standard Time),
so any trades in the position will likely need to be made soon
after the market opens.

TEVA - Teva Pharmaceutical  $59.99

PLAY (speculative - bearish/credit spread):

BUY  CALL  MAR-70  TVQ-CN  OI=517   A=$0.30
SELL CALL  MAR-65  TVQ-CM  OI=2783  B=$0.85
INITIAL NET CREDIT TARGET=$0.60-$0.70  PROFIT(max)=14%


***************
SUPPLEMENTAL CREDIT-SPREAD CANDIDATES
***************

BULLISH PLAYS:

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

ANN    42.81  MAR 40P  1.25   MAR 35P  0.55   0.75     18%
HD     51.24  MAR 50P  1.15   MAR 45P  0.45   0.75     18%
IP     44.50  MAR 42P  0.65   MAR 40   0.35   0.35     16%
DIAN   62.86  MAR 55P  1.20   MAR 50P  0.55   0.70     16%
AMGN   58.92  MAR 55P  1.00   MAR 50P  0.40   0.65     14%
DGX    74.20  MAR 70P  0.95   MAR 65P  0.45   0.55     12%


BEARISH PLAYS:

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

ACS    94.00  MA 105C  1.15   MA 110C  0.60   0.60     14%
BVF    43.79  MAR 50C  0.75   MAR 55C  0.25   0.55     12%
SEPR   42.11  MAR 50C  0.90   MAR 55C  0.40   0.55     12%
VRTS   37.50  MAR 45C  0.75   MAR 50C  0.25   0.55     12%
CACI   36.57  MAR 40C  0.85   MAR 42C  0.60   0.55     12%
SPW   118.38  MA 135C  2.15   MA 140C  1.75   0.50     11%

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


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