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Daily Newsletter, Tuesday, 02/19/2002

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The Option Investor Newsletter                 Tuesday 02-19-2002
Copyright 2001, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.



Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************      
      02-19-2002           High     Low     Volume Advance/Decline
DJIA     9745.14 -157.90  9899.38  9734.90 1.19 bln   1017/2116
NASDAQ   1750.61 - 54.59  1791.01  1745.05 1.73 bln   1051/2498
S&P 100   549.22 - 10.43   559.65   548.85   Totals   2068/4614
S&P 500  1083.34 - 20.84  1104.18  1082.24             
RUS 2000  459.98 -  9.27   469.25   459.47
DJ TRANS 2672.40 - 11.83  2694.01  2671.82
VIX        26.21 +  2.12    26.37    25.32
VXN        47.23 +  2.24    47.58    46.01
TRIN        2.35 
PUT/CALL    0.84
************************************************************ 

Market Under Attack On All Sides

The day started out bad and then got worse! Accounting concerns
caused further drops in name brand issues like IBM but rumors
were flying about numerous other stocks as well. The strong 
economic numbers failed to bouy investor confidence and worries
over Japan continued to weigh on financial stocks. All these
concerns caused the major averages to break critical support
levels and accelerate into the close.



 



 



 

IBM started the day off by announcing plans to release details
of financial income that it had previously recorded as offsets
to its expenses. Defending its prior accounting the CFO said the
company's practices had been correct under accounting guidelines
but shareholders and analysts had been asking for more. They
said they would provide more about intellectual-property income,
the impact of gains and losses from investments, the effect of
amortization of goodwill from acquisition, gains from sales of
real estate and income from IBM's overfunded pension plan. The
CFO said the disclosures would be in the annual report to the
SEC due to be filed next month. Concerns on accounting have
knocked -$10 off the price of IBM stock since last Thursday's
high. Investors are afraid they will see much of the profits
came from non-operating sources which would call into question
their current valuation.

PNC Financial Services spooked the market again by saying they
would have to restate their financials again, for the second
time in four weeks, due to accounting errors. Great! How would
you have liked to be that CFO who had to come to the board again
after being responsible for a $10 stock drop in January only to
tell them there was still more errors? Break out the Maalox!

Same with the management at JPM. The stock appears destined to
break under $29 as worries about bad debt mount along with class
action suits on Enron dealings. Add in Japan, Argentina, GX,
TYC and scores of others and JPM suffering is far from over. 

Circuit City has dropped almost -33% in the last four days as
analysts continue their verbal debate. Scot Ciccarelli, an 
analyst at Gerad Klauer Mattison said in a research note that
the costs to remodel the stores could exceed $700,000 each and
significantly impact earnings over the next two years. An analyst
at Bernstein said he has spoken with the company and they have not
even made a decision on remodeling. This is all speculation on the
part of Ciccarelli. Merrill Lynch said there was "no credence to
this speculation" because Circuit City was very conservative and
would never undertake a change of that magnitude if it would impact
earnings. The battle continued with G.K.M. saying that CC was also
at risk for its credit card loans. Other analysts quickly pointed
out that they sold those loans and had almost no risk. Scot, what
have you been shorting recently?

A management change at Honeywell also helped to accelerate the
drop at the close. HON announced that it had named David Cote,
formerly chairman and CEO of TRW as CEO of Honeywell effective
immediately. Current HON CEO, Larry Bossidy, had returned to
HON for a one year term after the failed GE/HON merger. The stock
of Dow component HON fell nearly -$2 on the news but rebounded
some to close down only $1. TRW however fell over -3.29 on the
news. 

King Pharma, KG, broke the cardinal rule of meeting estimates
but not raising its guidance. Sound strange? KG has previously
raised guidance almost every time it announced earnings but this
quarter the trend changed. KG dropped -2.20 on the news and may
have started a new down trend as traders used to bigger/faster
face flatter/slower in the future.

Cienna went shopping for a fiber bargain and came up with ONIS
which they picked up for a paltry $900 million in stock. Last
year it would have cost them $11 billion for the same company.
A bargain? What is Global Crossing worth? OOPS, unfair comparison.
They said it would make them more competitive against NT and LU
in the telecom sector. Isn't that the sector that is evaporating
daily? With only 5% of the available fiber capacity being used
and all the telecoms cutting jobs and services, why would you
want to be more competitive in that sector? The market was
under whelmed by the transaction which only carried a 12% premium
for ONIS shareholders.

Wal-Mart continued its domination of the retail sector with a 
+6.9% increase in same store sales and a cool $2.19 billion profit
in the last quarter. The nearly 4300 stores are slowly squeezing 
the life out of competitors near any of their locations. Their
move into groceries has been a big plus and they are able to 
obtain better margins due to their size and buying power. They
were aggressive in lowering their prices during the recession to
attack buyers and gain market share and it appears to have worked.  
I shop at Wal-Mart at least once a week and the checker last
Saturday was telling me that they were grossing $22 million an
hour and the goal by year end was $25 million an hour. With Kmart
filing bankruptcy and other retailers in trouble they could make
it.

SUNW took another hit from SoundView which cut them to a hold
citing a data center survey showing continued tight budgets and
SUNW in the fifth position among enterprise vendors and also 
fifth in customer satisfaction. SUNW fell to $8.33 and close to 
a 52-week low. 

The economic news was headlined by the Residential Construction
Activity which soared +6.3% in January to an annualized rate of
1.678 million. The continued low mortgage rates have sparked demand
to the point where some analysts fear a bubble is in progress.
The flaw in this argument is the limited four-month supply in
the pipeline. Should that supply start expanding rapidly it would
be a sign that demand had weakened. Until then it is still a sellers
market.

A sellers market was what we were seeing in the broader markets
on Tuesday. The Dow has now dropped -300 points from the highs
of 10050 last Thursday. The Nasdaq closed at a low not seen since
early November. Neither are showing signs of a bottom. As I said
last Thursday there was no confidence in the rally. It was just
another bear trap which has now been sprung. The daily accounting
problems along with downgrades and worry over the possibility of
the recovery being delayed even farther have soured investors on
the market. Normally after a big drop like we had today there is
some glimmer of a bounce at the close. If it occurred today 
nobody saw it. 

The Dow seems destined to test 9600 again but the real weakness
is in tech stocks. The Nasdaq closed at 1750 and could easily 
test 1665 this week. The only positive factor we could find was
the huge drop in tech stocks over the last two days. Look at
almost any of the high flyers, QLGC, BRCD, NEWP, EBAY, NVDA
as examples. Huge drops which could bring a short covering 
rally any day. This is why we did not add any PUTS in today's
play section. They all appeared overdone for the time being.
We expect a short covering rally in the next day of two and
then another leg down. We opted instead for two stocks that
turned in respectable performances despite the market. 



 

The semiconductor book to bill number for January was .81 which
represented a slight increase over December's revised .77 number.
While this is encouraging it is not earth shaking. The majority
of the gains came mathematically. Bookings only increased +$8.4
million from December but billings decreased $35.3 million. If
your billings decrease four times the amount of the booking 
increase then your ratio will improve but your business will
is still slowing. This number will be debated on Wednesday and
investors will vote with their dollars.

As traders we need to be very leery of this current market dip.
With the Nasdaq at three-month lows and falling the Dow could
continue to be dragged down with it. Stay short or flat until
this trend changes. Don't trust any bounce! That bounce could
come when the S&P hits 1080, only 3 points away.

Enter very passively, exit aggressively!

Jim Brown
Editor


********************
INDEX TRADER SUMMARY
********************

Continuation Instead Of Counter
Austin Passamonte

What... is every usual market pattern via expiration week bound to 
fail? We can usually rely on a counter-move on expiration Friday 
from the open to the close. Didn't happen last week. Well then, we 
usually see the Monday following expiration Friday move counter to 
the previous session as off-setting positions from last week 
unwind or get replaced. Didn't happen today, either.

Weekly/Daily charts began posting bullish reversal signals in what 
appeared to be the next bear market rally. I for one thought it 
would last until March, when history is likely to repeat with 
another significant selloff. Perhaps that move began a bit early?

(Weekly/Daily Charts: SPX)


 

Long-term charts for all indexes are in full-bear mode. There is 
absolutely no sign of bullish strength to be found anywhere, as 
one might expect after these past three sessions straight. Look 
for the SPX to shed 20+ points right away and possibly 50 or so 
before the next measure of firm support is found.

(Weekly/Daily Charts: BTK)


 

A big surprise to me has been weakness in the Biotech sector. 
Heaven knows I'm not a buy & hold trader right now, especially 
long stocks or call options of any kind. However, it did appear 
that this sector had better technical strength than most others. 
But we wouldn't know that now, as weekly and daily charts (not 
shown) are in full-bear roll.

This graphic is cluttered, so give your eyes time to pick the 
various lines apart. Note where resistance and next-level of 
support lies with price action in between. The 458 area is an 
important Fib retracement level and wedge line of support. If it 
breaks, I'll be shorting the BBH with confidence from there. No 
longs unless/until daily chart signals reverse their totally 
bearish outlook right now.

(Weekly/Daily Charts: BIX)


 

Nor is our money safe in the banks, so to speak. BIX painted a big 
red candle today as money withdraws in a hurry. Look for the 580 
area to be touched next, and at this rate could do so by Friday if 
not sooner!

Summation
What appeared to be the next bear market rally a week ago tonight 
has totally failed long before I figured it would. I myself made a 
drastic mistake in not trying to short that little rally a bit 
early and missed solid gains because of it. When the bottom fell 
out of the highs on Thursday this market has never really bounced 
a bit to look back, and that surprised me for sure.

After three big negative sessions I would be quite reluctant to go short "in the hole" right now for any expected lengthy holding 
period, although selling pressure could easily continue. More 
likely there will be some sort of reflexive or short-covering 
bounce that should offer up our next downside entry on a silver 
platter.

Don't fall in love with either direction, but keep your eyes down 
for now.

Best Trading Wishes,
austinp@OptionInvestor.com


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****************
MARKET SENTIMENT
****************

Fundamental Concerns Return
By Eric Utley

The three day weekend did nothing to ease investors' fears over
fundamental factors afflicting the market.  Worries over
accounting practices and levels of debt weighed heavily on stocks
Tuesday.  Tech shares fared worst with a 3.44 percent decline in
the Nasdaq-100 (NDX.X).  Weakness in Biotechs (BTK.X),
Hardware (GHA.X), Software (GSO.X), and Internet (INX.X) issues
pressured the NDX.X.

There were several conflicting signs in Tuesday's market that
strayed from the recent norm.  First, bonds finished lower.
Yields were higher across the curve, led by the long-end of
the curve with the 30-year Yield (TYX.X) finishing at 5.394%.
Typically we've seen the bond market catch a bid during the
weakness in stocks, but that didn't take place Tuesday.  Nor
did a rally in gold shares.  Quite the opposite, actually, as
the Gold and Silver Index (XAU.X) earned the day's poorest
performing sector spot.  There was no flight to quality in
today's session with the absence of bids in gold and bonds.

The internals of the Nasdaq worsened in Tuesday's session.
New lows far outpaced the number of new highs and the NDX
bullish percent dropped another two stocks.  Over the weekend,
we talked a little bit about looking for signs of internal
strength in the event of continued weakness.  We didn't see
that in Tuesday's session, which may portend the need for
further downside work before a rally of any substance takes
place in tech shares.

Separately, the 5-day Arms Index (INDEX:TRIN) rose to
extreme levels again.  While the indicator does tend to be
early, it is once again revealing a short-term oversold
condition for stocks in general.  

-----------------------------------------------------------------

Market Averages


DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     :  9745

Moving Averages:
(Simple)

 10-dma:  9808
 50-dma:  9918
200-dma: 10070



S&P 500 ($SPX)

52-week High: 1383
52-week Low :  945
Current     : 1083

Moving Averages:
(Simple)

 10-dma: 1099
 50-dma: 1132
200-dma: 1159



Nasdaq-100 ($NDX)

52-week High: 2771
52-week Low : 1089
Current     : 1387

Moving Averages:
(Simple)

 10-dma: 1450
 50-dma: 1572
200-dma: 1595



Airline ($XAL)

The XAL.X earned the day's top performing sector spot after
finishing 1.70 percent higher on the session.  United (NYSE:UAL)
reported Monday that it had reached a tentative contract
agreement with its mechanics, avoiding a strike.  Shares of
United finished 13.99 percent higher to $12.95.  Separately,
Southwest Airlines (NYSE:LUV) reported that it will hire more
than 4,000 people this year.  Shares of Southwest finished 1.14
percent higher to $20.28.

52-week High: 160
52-week Low :  59
Current     :  92

Moving Averages:
(Simple)

 10-dma:  89
 50-dma:  90
200-dma: 109


Gold and Silver ($XAU)

In a reversal of recent trend, the $XAU earned the day's worst
performing sector spot by shedding 5.11 percent.  The decline
in the $XAU came on the heels of a sharp pullback in the
commodity.  The April contract dropped by $5.30 in Tuesday's
session.  Leading the way down were shares of Harmony Gold
(NASDAQ:HGMCY) -10.76 percent, Placer Dome (NYSE:PDG) -8.94
percent, and Gold Fields (NASDAQ:GOLD) -6.68 percent.

52-week High: 70
52-week Low : 46
Current     : 64 

Moving Averages:
(Simple)

 10-dma: 67
 50-dma: 59
200-dma: 56

-----------------------------------------------------------------

Market Volatility

The VIX spiked higher in Tuesday's session, but remained below
its 200-dma.  That level currently sits overhead at 27.11.  A
break above would reveal increased levels of fear.

The VXN traded up to its 50-dma in Tuesday's session, but
finished well off of its highs.  There may still be some
options positioning impacting the VXN following last week's
expiration of February contracts.

CBOE Market Volatility Index (VIX) - 26.16 +2.07
Nasdaq-100 Volatility Index  (VXN) - 46.62 +3.62

-----------------------------------------------------------------

          Put/Call Ratio  Call Volume   Put Volume
Total          0.84        606,361       507,293
Equity Only    0.71        552,690       392,921
OEX            1.39         11,416        15,869
QQQ            3.86         27,704       107,140
 
-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          52      + 0     Bull Alert
NASDAQ-100    36      - 2     Bull Alert
DOW           53      + 0     Bull Correction
S&P 500       58      + 0     Bull Correction
S&P 100       58      + 0     Bull Correction

Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

-----------------------------------------------------------------

 5-Day Arms Index  1.57
10-Day Arms Index  1.27
21-Day Arms Index  1.31
55-Day Arms Index  1.24

Extreme readings above 1.5 are bullish, and readings below .85 
are bearish.  These signals don't occur often and tend be early, 
but when the do, they can signal significant market turning 
points.

-----------------------------------------------------------------

Market Internals

        Advancers     Decliners
NYSE      1017           2116
NASDAQ    1051           2498

        New Highs      New Lows
NYSE       74             59
NASDAQ     57            113

        Volume (in millions)
NYSE     1,191
NASDAQ   1,730

-----------------------------------------------------------------

Commitments Of Traders Report: 02/12/02

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

Commercial traders grew more bearish last week with a net increase
in the group's bearish position by about 3,600 contracts.  Small
traders grew more bullish by shedding more shorts than longs.  The
group's net bullish position increased by about 3,000 contracts.

Commercials   Long      Short      Net     % Of OI 
01/29/02      345,583   401,923   (56,340)   (7.5%)
02/05/02      347,583   401,569   (53,986)   (7.2%)
02/12/02      355,276   412,868   (57,592)   (7.5%)

Most bearish reading of the year: (111,956) -   3/6/01
Most bullish reading of the year: ( 36,481) - 10/16/01

Small Traders Long      Short      Net     % of OI
01/29/02      128,826     63,127   65,699     34.2%
02/05/02      128,235     64,404   63,831     33.1%
02/12/02      126,730     59,902   66,828     35.8%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year:  91,122 - 3/06/01
 
NASDAQ-100

Commercial traders shed a small number of shorts and added a
few longs for a decline in the group's net bearish stance.  Small
traders' actions resulted in a small decline in their net
bullish position.

Commercials   Long      Short      Net     % of OI 
01/29/02       31,577     33,651    (2,074)  (3.2%)
02/05/02       32,357     35,405    (3,048)  (4.5%)
02/12/02       32,712     34,841    (2,129)  (3.2%)

Most bearish reading of the year: (15,521) -  3/13/01
Most bullish reading of the year:   7,774  - 12/21/01

Small Traders  Long     Short      Net     % of OI
01/29/02        9,709     8,293     1,416      7.9%
02/05/02       10,416     8,173     2,243     12.1%
02/12/02        9,009     7,415     1,594      9.7% 

Most bearish reading of the year:  (9,877) - 12/21/01
Most bullish reading of the year:   8,460  -  3/13/01

DOW JONES INDUSTRIAL

Commercial interests increased both long and short positions for
a net increase in the group's bullish position.  However, % of OI
dropped.  Small traders grew more bearish with an increase in
the group's net short position as well as % of OI.

Commercials   Long      Short      Net     % of OI
01/29/02       19,956    12,171    7,785     24.2%
02/05/02       21,868    12,068    9,800     28.9%
02/12/02       26,811    16,488   10,323     23.8% 

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
01/29/02        5,872     9,709    (3,837)   (24.6%)
02/05/02        5,764    10,528    (4,764)   (29.2%)
02/12/02        4,562    10,038    (5,476)   (37.5%) 

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   1,909  -  1/16/01

-----------------------------------------------------------------


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


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

IS Swing Trade Model: Saturday 2/16/2002
Selling Rallies Again?


News & Notes:
------------
As noted previously, today's gap-down open never looked up from 
there. Short-term charts are pinned in oversold extreme and need 
to release from there for swing trade entries of any good odds to 
appear. Individual traders are welcome to attempt shorting the 
markets straight down, but a relief rally short-squeeze could 
emerge at any moment in swift & powerful fashion to wipe them out.

Such a rally is expected to be short-lived and the next great 
entry opportunity should it emerge.


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


 

Still trading within its channel, the OEX may roll lower from 
here. An attempt to fill the gap-open move is quite likely this 
week.

[60/30-Min Chart: SPX]


 

Same for the SPX... watch for an attempt to fill this morning's 
gap from 1105 to 1098 window.

[60/30-Min Chart: QQQ]


 

Trending straight down in a channel, the QQQ is also grossly 
oversold and will most likely release from this pressure very 
soon.

Summation:
---------
No swing trade entry parameters exist right now. Be very careful 
of shorting a down open market tomorrow... pressure is built to 
the downside and will easily pop with any catalyst given. Shorting 
from here is for nimble individuals only until a swing up & away 
from current down trend presents the next failed pop.


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
Mar Calls: 37 (QQQ-CK)            Mar Calls: 99 (DJV-CA)  
Long: BREAK ABOVE                 Long: BREAK ABOVE 
Stop:                             Stop: 
                                

Feb Puts: 35 (QQQ-OI)             Feb Puts: 97 (DJV-OR) 
Long: BREAK BELOW                 Long: BREAK BELOW 
Stop:                             Stop: 


=====


         OEX                         SPX
Mar Calls: 570 (OEB-CN)           Mar Calls: 1125 (SPT-CE)
Long: BREAK ABOVE                 Long: BREAK ABOVE none
Stop:                             Stop: 


Mar Puts: 550 (OEB-OJ)            Mar Puts: 1075 (SPQ-OO)
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop:                             Stop: 



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


IS Position Trade Model: Tuesday 2/19/2002
Bottom's Out

News & Notes:
------------
Markets opened with a gap-down drop and never really paused from 
there. Deliberate slide into the close offered modest gains for 
intraday traders and solid gains for any holding open puts from 
last week. Neither scenario describes the action in here, and not 
likely to change for the next session or two.

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


Summation:
---------
We are looking for a failed bounce for puts or massive selling 
event to enter calls. No buy & hold index/sector option plays 
setup for tonight.


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:
----------
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:  2.20 [hit]              Stop:  1.50 [hit]


Sector Share Trade Model: Tuesday 2/19/2002
Done It Again

News & Notes:
------------
Markets continued their slide from Friday straight thru Tuesday's 
session. So much for the Trader's Almanac calling for a historical 
bullish session after President's Day!


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


Summation:
---------
Markets are too oversold for short & hold share plays and too weak 
for buy & hold attempts. No entries tracked from tonight.


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


Open Long Plays:
---------------
OIH Oil Services
Long: BREAK ABOVE 56.75
Stop: Break below 58.00 [hit]
Result: +1.25

MKH Market 2000+ Big Caps
Long: BREAK ABOVE 57.25
Stop: Break below 57.00 
Result: -0.25

IYH Healthcare
Long: BREAK ABOVE 59.75
Stop: Break below 60.00 
Result: +0.25

XLB Basic Technology
Long: BREAK ABOVE 22.00
Stop: Break below 21.50 


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* ZERO minimum deposit required to open an account
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Note: Options involve risk. Risk disclosure: 
http://www.optionsxpress.com/welcome_risk_index.htm
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The Option Investor Newsletter                  Tuesday 02-19-2002
Copyright 2001, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


****************
PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

CTX $55.25 -0.96 (-0.96) In light of the positive housing
numbers this morning, the action in shares of CTX was rather
disappointing.  After the opening pop, sellers were in control
and the stock just couldn't mount a decent bounce all day.
"Sell the news" seems to have been the theme of the day in
housing stocks and after CTX rolled over again at the $56 level
late in the day (another lower high), we decided to pull the
plug.  While our stop was never violated, neither has the stock
performed for us.  And when a play isn't going with you, its
going against you.  Use any strength on Wednesday to close
open positions and find a better play.

TRW $41.75 -3.29 (-3.29) Unexpected news is precisely why we
always use stop loss orders, no matter how well a play is
performing.  TRW had been performing well right up until the
last 30 minutes of Tuesday's trading session, when news broke
that the CEO was resigning to take the helm at Honeywell.  That
unleashed a flood of selling that dropped TRW from the $44.50
level to below $42 by the closing bell.  While all positions
should have been stopped out on the sharp decline, use any
rebound on Wednesday to close out any remaining positions.


PUTS:
*****

None


***********************************************************
DAILY RESULTS
***********************************************************

Please view this in COURIER 10 font for alignment
*************************************************

CALLS              Tue

UPS      56.72   -0.28  Trading well thanks to strength in $TRAN
ASYT     16.27   -1.03  Pressured by the SOX.X, watch $16 support
UNH      73.81   -0.50  Pullback in HMO.X, buyers at $73.50 level?
ESRX     52.25    0.54  Still trading strong, bounced from 10-dma
TRW      41.75   -3.29  Dropped, CEO left and so did the bulls
CTX      55.25   -0.96  Dropped, bubble in housing market fears
SII      57.98    0.10  Held back by market, finished strongly
APA      50.40   -0.63  Pullback in oil patch, better than market
SPW     121.25   -0.87  New, fears subsiding, strong fundamentals
IMCL     19.31    0.87  New, short covering around the corner???


PUTS

TLAB     11.15   -0.88  Downside target hit at the $11 level
KSS      67.70   -0.80  Tracking the RLX.X, decline below $67
CHKP     28.90   -0.90  Steadily working lower, support at $28
GNSS     40.25   -4.51  Big drop, possible bounce at the 200-dma
SFA      21.58   -0.52  The beginning of the next leg lower?
GS       78.45   -4.31  Brokers act poorly, breakdown in the XBD.X


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********************
PLAY UPDATES - CALLS
********************

UPS $56.72 -0.28 (-0.28) UPS gapped slightly lower this morning
and spent the rest of the trading day in a tight range.  The
stock's day low was traced at $56.51 and its high was set at
$56.77.  The 26 cent range was very tight, even for a stock
like UPS.  The consolidation-type trading came on relatively
lighter volume.  The fact that UPS held up during the day's
broad market sell-off was encouraging for the bulls.  What's
more, UPS found buyers near its 10-dma, from which it
rebounded from later in the day.  The very short-term line in
the sand may be the 10-dma, which currently resides at $56.59.
Short-term traders should monitor UPS' price action around the
10-dma closely in the coming days.  From more of a macro
standpoint, the Dow Jones Transports ($TRAN) traded relatively
well today.  Look for the $TRAN to rebound this week and carry
UPS higher.  Watch for an advance past $57.10.

ASYT $16.27 -1.03 (-1.03) The 3.55% drop in the SOX.X pressured
ASYT lower in today's session.  For the day the stock lost
almost 6%.  The relative weakness in ASYT is disconcerting for
the bulls.  The stock has been one of the strong in the
broader semiconductor sector, which puts today's relative
weakness into focus.  We'll be watching for the buyers to
defend bullish positions at the $16 level tomorrow if the SOX.X
continues lower.  If the $16 level holds traders might look for
entries on a rebound.  Those in search of more confirmation
might wait for ASYT to spend some time trading sideways in the
next few sessions and look for the stock to rebound back above
its 10-dma, which now rests overhead at the $16.74 level.

SII $57.98 +0.10 (+0.10) SII was upgraded this morning from a
hold rating to a buy rating.  The positive analyst action
probably contributed to the stock's strong trading during
Tuesday's broad market weakness.  The day low for the stock
was traced near the 10-dma.  The 10-dma may continue to be a
level to use as an entry point on sector-related weakness in
SII.  Speaking of the broader energy sector, it finished
lower in today's session.  But the weakness in the energy
patch was not as much as was seen in the broader market.  So
the relative out performance by oil stocks was most
encouraging for our SII play.  Looking into the next several
sessions, we'll be watching for the Oil Service (OSX.X) and
Oil Index (OIX.X) to firm and carry SII above its short term
resistance at $59.  A high volume breakout above that level
may be playable.  Otherwise look for entries on weakness
near the 10-dma.

APA $50.40 -0.63 (-0.63) APA finished lower in Tuesday's
trading on sector and market related weakness.  The Oil
Index (OIX.X) finished 1.38% lower in today's trading.  The
loss in the sector was less than the drops in the broader
market gauges, such as the 1.88% drop in the S&P.  The
relative strength of the oil index was encouraging and
hopefully portends higher prices in stocks such as APA.
For its part, APA spent the session gyrating around its
200-dma, which currently sits at $50.29.  That level may
continue to act as a magnet if the broader market continues
to weaken.  A solid advance above the 200-dma could allow
for SII to breakout above its short term relative highs.
Traders looking for a breakout can wait for an advance
past the $52 level, supported by strength in the OIX.X.
Those in search of an entry on weakness can look for a
rebound from the 10-dma below at the $49.56 level.

ESRX $52.25 +0.54 (+0.54) Selling pressure in the broad markets
at the open on Tuesday dropped our ESRX play right at the open
before calmer thinking prevailed and the stock managed a sharp
recovery in the early going.  After moving back into positive
territory, the stock meandered sideways for most of what was a
big negative day for the market before some final hour excitement
gave traders another dip and rally into the close.  Buying those
dips would have made for a couple favorable entry points for
those able to see through the noise, but for those of us looking
in hindsight, it is another lesson in relative strength.  Despite
the sharp selloff in most sectors of the market, Health Care held
up fairly well and ESRX was one of the lucky few to end the day
with a gain.  Buying the dips continues to be a profitable venture
in ESRX, as Tuesday's action demonstrated.  It was encouraging to
see buying volume on the rise going into the closing bell,
reinforcing our dip-buying approach.  Continue to target intraday
dips near $51-50-52.00 for initiating new positions, as the bulls
get set to take another run at the $53-54 resistance level.

UNH $73.81 -0.50 (-0.50) Selling has been the name of the game
over the past couple days in the broad market and it is a
testament to relative strength that shares of UNH are still
holding above support at $73.50.  Even with the Health Care
sector (HMO.X) giving up 1.7% on Tuesday, the index came to rest
right on the $479 support level and UNH kept its loss to only 50
cents.  This is a critical juncture for our play.  UNH needs to
hold support and the HMO index does too, if our play is going to
survive.  Consider new positions in UNH only if it bounces from
above the $73.50 level and the HMO index is seeing buying
interest.  If those support levels give way, we'll want to stand
aside from the play, as a breakdown could quickly take the stock
back to the $71-72 area.  Remember that relative strength only
takes us so far, and if the sector is falling under support, even
strong stocks will have a hard time holding their ground.


**************
NEW CALL PLAYS
**************

SPW - SPX Corp. $121.25 -0.87 (-0.87 this week)

SPX Corporation is a global provider of technical products and
systems, industrial products and services, service solutions
and vehicle components. Its products include storage area
network, fire detection and building life-safety products,
television and radio broadcast antennas and towers, transformers,
substations and industrial mixers and valves.

Many stocks were recently knocked down due to fears over
exposure to asbestos litigation.  Those fears seem to have
subsided.  SPW was a stock that was beaten down for its
potential exposure to asbestos.  But the stock has recently
rebounded thanks in part to a solid earnings report.  The
diversified manufacturer reported early last week that
earnings had risen by 2 cents per share from the year earlier
period.  The company reported $2.04 per share in profits,
which beat consensus estimates by a penny.  Analysts were
bullish on the earnings report, noting strong cash flow
and growth in some of SPW's divisions.  With the post
earnings slump now past, SPW could continue retracing the
asbestos-related sell-off which began up around the $140
level.  The stock has been holding up relatively well in a
tough market environment.  If we get a bounce in the market,
SPW could lead the charge higher.  Watch for the major
averages to rebound and for SPW to trade higher from
current levels.  Momentum traders might consider waiting
for a breakout above the $125 level on healthy volume.
Those who favor entries on weakness may wait for a pullback
on market weakness to the $119 to $120 range on relatively
lighter volume.  Our stop is initially in place at $117.

BUY CALL MAR-120*SPW-CD OI=235 at $ 7.80 SL=5.50 
BUY CALL MAR-125 SPW-CE OI=262 at $ 5.40 SL=3.25 
BUY CALL JUN-125 SPW-FE OI= 12 at $11.80 SL=9.25 
BUY CALL JUN-130 SPW-FF OI=934 at $ 9.60 SL=7.00 

Average Daily Volume = 726 K


IMCL – Imclone Systems $19.31 +0.87 (+0.87 this week)

Engaged in the research and development of novel cancer
treatments, IMCL focuses on growth factor inhibitors,
therapeutic cancer vaccines and angiogenesis inhibitors.  The
company's lead product candidate, IMC-C225, is a therapeutic
monoclonal antibody that inhibits stimulation of a receptor for
growth factors upon which certain tumors depend.  Phase I/II
clinical trials have been promising.  The lead candidate for
angiogenesis inhibition, IMC-1C11 is an antibody that binds
selectively and with high affinity to KDR, a principal
Vascular Endothelial Growth Factor (VEGF) receptor, thus
inhibiting angiogenesis.

As one of the first Biotech stocks to come under selling pressure
last December, IMCL led the decline in the Biotechnology index
(BTK.X) lower throughout December and January.  Over the past few
weeks though, the stock has been finding support near $15 and is
starting to look a little more healthy.  Add to that the fact
that the BTK appears to have put in an important bottom near
$450, and it just might be time to nibble on calls on one of the
more beaten down Biotech stocks.  Risk is certainly easier to
manage in IMCL, now that several attempts have failed to break
below the $14 level.  Despite a negative market and sharp losses
in the BTK over the past 2 sessions, IMCL has been trading
positively, perhaps in part due to news that financier and
corporate raider Carl Icahn is seeking permission to acquire as
much as $500 million (more than 30%) of IMCL stock.  While the
company is taking action to prevent such a move, Icahn's interest
sends a signal that the billionaire investor believes the stock
still has upside potential.  Technically things are looking more
positive too, with IMCL posting a series of higher lows over the
past week.  Intraday dips near the short-term ascending trendline
($17.50) will make for the best entry points, although we might
get a breakout over near-term resistance before another buyable
dip.  For those interested in buying the breakout, look for the
stock to push through $19.50 on solid buying volume to trigger
new entries.  Trading through $20 will create a fresh buy signal
on the PnF chart, with an upside target of $30.  There is firmer
overhead resistance at $21, and we'll want to be on the lookout
for profit-taking near that level.  Trading through the $21 level
will increase our level of conviction in IMCL's bullish potential
and more cautious bulls may want to wait for this resistance
level to give way before playing.  We are initiating our play
with our stop set at $16.

BUY CALL MAR-17 QCI-CW OI=2200 at $3.80 SL=2.00
BUY CALL MAR-20*QCI-CD OI=3692 at $2.70 SL=1.25
BUY CALL MAR-22 QCI-CX OI=2898 at $1.45 SL=0.75
BUY CALL APR-20 QCI-DD OI=   0 at $4.00 SL=2.50
BUY CALL APR-22 QCI-DX OI=   0 at $2.55 SL=1.25

Average Daily Volume = 5.32 mln



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Note: Options involve risk. Risk disclosure: 
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*******************
PLAY UPDATES - PUTS
*******************

TLAB $11.15 -0.88 (-0.88) TLAB is trading according to plan,
which is a rarity in this market.  After breaking down below
the $13 level, the stock reached our short-term downside
target at $11 in today's session.  Short-term traders who
took the entry on the break below $13 can consider looking to
pocket profits on further weakness down around the $11 level
depending upon risk tolerance and time frame.  With the $11
level reached, we would expect some consolidation, but much
of that is dependent upon the price action in the NWX.X and
YLS.X.  If the two continue lower, TLAB could very well trade
below support at $11.  Ideally we'd like to get another two
or three days of short covering to offer a better entry point
up around the $12 or $13 level.  As for our next downside
target, we'll look for TLAB to retest its September low around
the $9 level, which is another $2 from current levels.  Our
stop is lowered to the $13 level.

KSS $67.70 -0.80 (-0.80) The earnings report from Wal Mart
(NYSE:WMT) didn't help to boost retail shares in today's
trading.  The S&P Retail Sector Index ($RLX) finished 1.33%
lower for the day, mirroring the performance of the Dow
Jones Industrial Average ($INDU).  For its part, KSS tracked
the performance of the $RLX.  We'd like to see the stock
lose some relative strength versus the market and its sector.
Until that happens, KSS will most likely track that $RLX and
broader market closely.  The stock closed near its 10-dma
in today's session.  The 10-dma currently sits at $67.83.  A
continuation of the recent sell-off through that level into
tomorrow's session could have KSS lower in the short-term.
Confirmation of weakness would be provided on a decline below
the $67 level.  From there, we'll look for the stock to
trade down to the $65 level if the $RLX continues to weaken.
Watch for volume to increase on further weakness.

CHKP $28.85 –0.95 (-0.95) A little bit at a time, CHKP continues
to drift lower.  Add all those little bits together and pretty
soon, you're talking about real money.  Following Friday's drop
under the 62% retracement, shares of CHKP dropped again under
broad-based selling pressure as support in the $28-29 area
continues to weaken.  With the daily Stochastics buried deep in
oversold territory, we may be nearing another oversold bounce,
which would provide us another attractive entry point.  The
Software index (GSO.X) isn't helping the bulls' case either, as
it broke below the $165 support level this morning on its way to
a 4.5% daily loss.  As long as the trend for both the stock and
the sector remains down, selling the rallies is the way to go.
Target new entries on a railed rally near the $30 level or up as
high as $31.50.  Lower stops to $32.

GNSS $40.25 -4.51 (-4.51) One of the leaders of the loss parade
on Tuesday, shares of GNSS headed south right from the opening
bell and gave up more than 10% by the time the closing bell
rang.  The Semiconductor sector (SOX.X) is continuing southward
after failing to hold above the long-term descending trendline
($570) last week, and it looks like this bearish cycle for the
SOX has room to run.  Pressured by sector weakness, GNSS broke
below some important levels today, among them $42 support (from
October and November), the 62% retracement ($40.79) and the
200-dma ($40.64).  And on the PnF chart, we got another
double-bottom breakdown when the stock traded below $43.  All
told, GNSS appears to be a bearish delight.  And that is where
the caution comes in.  The stock has been down for the past 5
days and has given up nearly 20% in that timeframe, so an
oversold bounce should be just around the corner.  Use that
bounce to initiate new positions on a rollover near $44 or even
the $46 level.  In expectation of a solid bounce, we're keeping
a wide stop on the play, moving it down to $46.50 tonight.  If
you've got solid profits in the play right here, consider
harvesting profits and waiting for the next bounce to initiate
new positions.

GS $78.45 -4.31 (-4.31) There was no joy in Broker-ville today,
as the fallout of JP Morgan's Enron woes continued to play out
in the broad market.  The Broker/Dealer index (XBD.X) got hit
for more than a 4% loss and that follows Friday's 4% drubbing.
Shares of GS went along for the slide on Monday, getting the
play off to a nice start with a more than 5% loss on nearly
double the average daily volume.  The bulls tried mightily to
defend the $80 support level throughout the first half of the
day, but after lunch, the selling resumed, pushing the stock to
close the day at the low of the day, just above the $78 support
level.  With the sharp 2-day loss, we could see a bounce off
the $78 level and for that reason are tightening our stop to the
$82.50 level.  But with daily Stochastics still pointed sharply
lower, it looks like shares of GS have some more downside to
deliver.  Use any weak rally near the $80-81 level to initiate
new positions as the stock rolls over.  Stronger support rests
near the $75 level and we'll want to watch out for a bounce from
that level if the stock heads lower from the open on Wednesday.
A drop near that level would make an ideal opportunity to harvest
short-term profits and then wait for the next bounce to re-enter.

SFA $21.58 -0.52 (-0.52) As we mentioned when we initiated
coverage of SFA over the weekend, the stock doesn't move fast.
But the consistent downtrend is hard to argue with.  It comes as
no surprise that the stock continued lower on Tuesday with the
broad markets (Technology and otherwise) in sell mode.  The
fractional loss for the day brought SFA right to its lows from
last week at the closing bell, so we didn't really get a
breakdown to speak of.  But SFA has now clearly dropped below
its ascending trendline that began back in September and the next
stop will be the $20 support level.  The successful approach in
this market is to sell the rallies, not the breakdowns.  So we
favor waiting for a rebound near the $22.50-23.00 level before
initiating new positions.  Based on the PnF chart, our downside
target is $16.  Lower stops to $24.50 tonight.


*************
NEW PUT PLAYS
*************

None


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* IRA Accounts Available
* 8 different FREE options pricing, strategy, and charting tools
* Real-Time Buying Power, Account Balances or Cancels
* EASY screens for spreads, collars, covered calls or 
butterflies!
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Note: Options involve risk. Risk disclosure: 
http://www.optionsxpress.com/welcome_risk_index.htm
**************************************************************


**********
DISCLAIMER
**********

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


**************************************************************
ADVERTISING INFORMATION

For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support
The Option Investor Newsletter                  Tuesday 02-19-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.



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

UPS - United Parcel Service $56.72 -0.28 (-0.28 this week)

United Parcel Service Inc. (UPS) is an express carrier, package
delivery company and a global provider of specialized
transportation and logistics services. Over the course of more
than 90 years, the Company has expanded from a small regional
parcel delivery service into a global company. UPS delivers
packages each business day for 1.8 million shipping customers
to six million consignees. The Company's primary business is
the time-definite delivery of packages and documents throughout
the United States and in over 200 other countries and territories.

Most Recent Update

UPS gapped slightly lower this morning and spent the rest of the
trading day in a tight range.  The stock's day low was traced at
$56.51 and its high was set at $56.77.  The 26 cent range was
very tight, even for a stock like UPS.  The consolidation-type
trading came on relatively lighter volume.  The fact that UPS
held up during the day's broad market sell-off was encouraging
for the bulls.  What's more, UPS found buyers near its 10-dma,
from which it rebounded from later in the day.  The very short
term line in the sand may be the 10-dma, which currently resides
at $56.59. Short-term traders should monitor UPS' price action
around the 10-dma closely in the coming days.  From more of a
macro standpoint, the Dow Jones Transports ($TRAN) traded
relatively well today.  Look for the $TRAN to rebound this week
and carry UPS higher. 

Comments

The $TRAN held up during Tuesday's broad based sell-off.  It
stabilized at the 2670 level.  Bullish traders can look for
the $TRAN to rebound back above the 2700 level in Wednesday's
session.  Such a move should allow UPS to break from its
near-term congestion.   Watch for the stock to advance past
$57.10.

BUY CALL MAR-55*UPS-CK OI= 3089 at $2.10 SL=1.50 
BUY CALL MAR-60 UPS-CL OI= 4707 at $0.15 SL=0.00 
BUY CALL APR-55 UPS-DK OI=22332 at $2.75 SL=1.75 
BUY CALL APR-60 UPS-DL OI=17542 at $0.40 SL=0.00 

Average Daily Volume = 1.26 mln
 


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* EASY screens for spreads, collars, covered calls or 
butterflies!
* FREE REAL-TIME quotes and custom option chains
* $1.50 Per Contract (10+ contracts) or $14.95 Minimum. No Hidden 
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* ZERO minimum deposit required to open an account
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Note: Options involve risk. Risk disclosure: 
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**************************************************************


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

How To Trade A Merger or Acquisition
Buzz Lynn
buzz@OptionInvestor.com

Maybe a better title would be "Anatomy of a Merger/Acquisition and 
How to Potentially Profit".  Within the time and space 
confinements of an article, I'm going to attempt covering a lot of 
real estate on what could otherwise be a very lengthy topic.  So 
let's get to it!

In short, when attempting to play a merger/acquisition, our 
mission is to profit from closure or convergence ($2 word) of the 
price disparity between the acquiring company and the acquired 
company.  Every merger runs the risk of the deal falling apart for 
any number of reasons including denial by the shareholders 
(possibly with HWP and CPQ), anti-trust concerns (GE and HON), or 
disclosure issues (called flat-out lying in the case of DYN and 
the former ENE).  That risk is represented by the difference in 
share prices between the two companies.  For those just getting 
initiated to the process, let me explain that.

The absolute prices are not the concern, but rather, the RATIO of 
prices is the disparity that successful mergers seek to close.  
More on that in a minute.

So why merger or acquire in the first place?  There are a 
gazillions of specific reasons for that too.  But in the end, it's 
all about making money from combining efficiencies or in the worst 
case, saving shareholders from ruin.  Some of these are driven by 
a company on the hunt for a acquisition target.  Others are driven 
by a company realizing that it needs to be acquired or die.  There 
are always plenty of each, especially with the current ill winds 
of the telecom equipment companies struggling for survival.  If 
they are to survive (and not all of them will), they will need to 
build on synergies.  The latter case of needing a buyer to survive 
might apply to yesterday's announcement of Ciena's (CIEN) purchase 
of an optical networking company called ONI Systems (ONIS).  

With this acquisition/merger in mind, let's focus on the big 
fundamental picture.  The first thing for which I like to look is 
the gain of some competitive advantage by the companies doing the 
deal.  Merging for the sake of getting bigger isn't enough.  There 
must be a motivation -usually a gain of efficiencies, bolstering 
of financial strength, or advantageous expansion of products that 
lead to greater profits.  

Let's see - CIEN is an all-optical networking equipment company 
who sells and services mainly incumbent local exchange carriers 
(ILEC's) and long distance companies - traditional operating Bell 
companies and long distance carriers.  ONIS is also an all-optical 
equipment company.  But they sell and service equipment for 
metropolitan and regional networks sometimes known as short-haul 
markets.  By combining strength, they can offer seamless equipment 
coverage for the transfer of voice and data from end user to end 
user, not just a portion of the network in between.  They would 
make it easier for customers to complete a whole system with one 
phone call.  Seems like managements of both companies are thinking 
of their strengths being of benefit to the other.  Nice going guys 
and gals!  If so, that's a good reason for a merger.

And about profits?  UGH!  Neither of these companies turn a profit 
(unless we count pro forma as real money and you all know how I 
feel about that - use pro forma, go to jail).  Perhaps the synergy 
will help the situation if more customers buy the whole product 
line.  Management can only hope on this one.  The good news is 
that ONIS has $680 mln cash on hand, which can help CIEN, who 
already has $1.3 bln cash on hand.  That's nearly $2 bln in cash, 
a nice war chest, or rainy day fund depending on your view of the 
markets.  $2 bln will certainly help weather a few storm that are 
likely to come.  Nonetheless, CIEN will assume some ONIS 
(onerous?) debt that according to an article yesterday will still 
leave the company with $1.3 bln cash,

So in summary, we have two money-losing companies with 
complimentary emerging technologies that need to merge in order to 
survive, and hopefully thrive, as one.  Financial fortification 
along with business synergy probably makes this (at least on the 
surface) a reasonable merger.  For each of them, it sure beats the 
alternative of staying single!

Now about the exchange ratio from where we seek our profits.  Keep 
in mind, this is a trade, not an investment.  I am not buying 
either of these with the idea that the price will rise to higher 
levels as Wall Street continues to deny actual expenses and 
losses.  With that in mind, CIEN will pay approximately $900 mln 
for ONIS.  That will entitle each share of ONIS to be converted 
top 0.7104 shares of CIEN.  No cash will be paid to ONIS owners.

Prior to the announcement early Monday morning, CIEN closed last 
week at $8.73 while ONIS closed at $5.54.  Using the exchange 
ratio of 0.7104 CIEN for each share of ONIS, that would value ONIS 
shares at $6.20 ($8.73 x 0.7104), or a scrawny 12% premium to 
where it was trading Friday.  That only leaves a maximum of $0.66 
cents to earn on each prior-owned ONIS share prior to Friday's 
close.  

Not looking so hot at least in terms of real numbers.  On this 
basis alone, I'd probably pass on the trade.  But the likelihood 
of success is pretty high and the breakup risk pretty low.  So 
let's pretend to go with it just to see how we might still make 
money as an investment.

My objective here (if all pans out nicely) is to profit from a 
closure of the spread.  That means that we want ONIS shares to 
rise in value to a full 0.7104 per CIEN share of value.  So if 
CIEN remains flat at $8.73 (which it won't, but play along for a 
minute) until the merger closes in the second or third quarter of 
2002, each ONIS share should rise to full valuation of $6.20 by 
the close date.  That would give us the 12% return over the next 
say six months (end of Q3) - not bad as an investor.

So should be just buy ONIS and hope it goes up in value to $6.20?  
No way!  What happens if CIEN shares go to $3 by then?  At the 
exchange ratio, that would leave ONIS shares valued at just $2.13, 
a severe loss from the $6.20 we were expecting.  How do we make 
money?  

Let's take another tack.  In a word, it goes by "arbitrage".  If 
the deal were to close at today's close of market with CIEN shares 
valued at $8.45, that would fully value ONIS shares at $6.00 even.  
Instead, ONIS shares closed today at $5.94 - just $0.06 shy of 
full valuation.  That says that the market believes the 
acquisition is all but a sure thing - hardly any speculative 
aspect that this deal will not happen.  Besides, commissions and 
spreads would gobble that up in a heartbeat.  But lets just 
pretend we run a monster hedge fund with billions at our disposal 
(getting a broker to buy us lunch or dinner at Le Cirque and cover 
our commissions on this Tiddly-Wink flyer would never be a 
problem) and still wanted to capture that spread keeping in mind 
that the shares we purchase today at $5.94 will be worth $0.06 
more on completion of the deal.  We know the ratio will always be 
0.7104 shares of CIEN for each ONIS share no matter what the CIEN 
price.

Here's what we do.  Yes, we would buy the acquiree shares (ONIS) 
at $5.94 per share.  But we would also simultaneously hedge that 
against loss by shorting an equal value of CIEN.  So that however 
much CIEN moves, ONIS will move in proportion.  Real numbers will 
make this easier to see.  Our hedge fund would short 1,000,000 
shares of CIEN at $8.45 per share (if we could actually do this) 
for $8,450,000 in proceeds (remember schmoozing broker eats our 
commission because he wants our business).  At the current price 
of $5.94, we would buy $8,450,000 worth of ONIS, roughly 1,422,559 
shares.  

So every downward price move of CIEN would gain us money while the 
ONIS shares would lose value in equal amounts.  Conversely, every 
gain that would lose us money on our short CIEN position will gain 
us money on our long ONIS position.

One big caveat:  we only make money in the end IF the deal still 
goes through.  The risk we run in any merger is that it blows 
apart before the close as did GE/HON.  Folks arbitraging that one 
got killed, but that's another story.

Anyway, let's say the market goes wildly bullish by the time the 
merger closes and our 1,000,000 shares of CIEN are worth $110 per 
share again - and we are still short!!!  Hang with me here.  That 
is $110,000,000 worth of short CIEN.  Are we getting killed?  NO!!  
Why?  Because our ONIS has gone up in value at a ratio of 0.7104 
CIEN shares for each of ours.  On closing day with the ratio now 
at parity, that values our 1,422,559 long ONIS shares at $78.144 
or $111,164,450!

Doing the math, we have a long ONIS position of $111,164,450 with 
a cost of $8,450,000 that yields us a net of $102,774,450.  
Meanwhile our CIEN short has a gross loss value of $110,000,000 
plus our original proceeds of $8,450,000 for a net loss of 
$101,550,000.  So we gain $102,774,450 on the long and lose 
$101,550,000 on the short for a net profit of. . .Ta Da!!  
$1,224,450 just by waiting for parity at the close!

You can do the math on any deal you want just by shorting the 
acquiring company and buying an equal value of the acquired 
company current prices.  But the values must be equal.  Your 
return will be the net gain when the deal closes at the parity 
exchange rate.

While there is money to made in these arbitrage situation, 
remember you can get burned if the deal falls apart and the gap 
between prices widens.

One other thing.  If a merger is announced and the whole market 
thinks the deal is likely to happen, but you think the deal is 
stupid and unlikely to happen, you can do employ the opposite 
strategy to go long the acquiring company and short the acquired 
company.  In that situation, you will win by having the exchange 
gap widen.  Very risky and you'd have been bucking conventional 
wisdom, but you'd have made money on the GE/HON deal unraveling.

No trade here on the CIEN/ONIS deal or even an investment 
worthwhile, but there will be others.  Keep analyzing!


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