Option Investor
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Daily Newsletter, Wednesday, 02/27/2002

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The Option Investor Newsletter                   Wednesday 02-27-2002
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)
*******************************************************************
      02-27-2002          High     Low     Volume Advance/Decline
DJIA    10127.58 + 12.32 10255.24 10058.66 1.39 bln   1913/1207
NASDAQ   1751.88 - 14.98  1793.73  1741.48 1.80 bln   1813/1721
S&P 100   563.09 +  0.42   570.45   558.95   Totals   3726/2928
S&P 500  1109.89 +  0.51  1123.06  1102.26             
RUS 2000  472.61 +  1.32   474.86   471.13
DJ TRANS 2861.06 + 52.76  2861.35  2809.01
VIX        23.09 -  0.48    24.12    22.30 
VXN        45.76 +  0.99    46.72    44.05
TRIN        1.04 
Put/Call    0.64
*******************************************************************

The Bulls Are Not Convincing Us
Austin Passamonte

We'd be a lot more convinced that any bear-market rallies these 
days might actually last awhile if they just didn't collapse so 
quickly. Trying to trade the upside for any distance or duration 
seems to be an effort in futility.

Fundamentalists point to a hundred different reasons why markets 
plunged this afternoon and a few of them may be right. It's 
important for some people to try and rationalize why the markets 
do whatever it is they do. I suppose this gives some level of 
emotional comfort inside, as if understanding what did happen can 
help make money with what's going to happen next. I've never been 
smart enough to figure all that stuff out nor do I possess an 
attention span broad enough to do so.

Suffice it to say that indexes pushed toward resistance early in 
the session, met repeated rejection there and futures traders over 
at the CME began selling the market and cash indices followed 
suit. Those who think the retail trader puttering around in Nasdaq 
Comp has anything to do with broad market action are sadly 
mistaken. That ceased to exist about three trillion lost dollars 
ago. Equity markets are once again controlled by program buying or 
selling in the index futures pits and this afternoon's vertical 
slide was living proof of that.

So all we need to know is where the points of reference are 
everyone else is watching, and trade reversals at those pivots or 
to a much lesser extent, breakouts when they appear to succeed.

(Weekly/Daily Charts: SPX)


 

This weekly chart of the pro's index shows firm support near 1087 
and similar resistance near 1132. But don't let those numbers fool 
you: plenty of shorts in the pits will whack the 1125 area every 
time it's tested until bulls prove they mean business. That wasn't 
today.

Speaking of which, this is the second day in a row we've seen 
markets post a rather large range doji session the Japanese refer 
to as spiders and various other fancy names. Regardless, it tells 
us that indecision still reigns. 

Stochastic values are trying to do something in the weekly chart 
while rapidly reaching overbought in the daily chart. Not a sign 
of sustained underlying price strength by any means.

(Weekly/Daily Charts: NDX)


 

The NDX is weaker looking by relative comparison. Still trapped in 
a defined channel and yet to break higher. Sitting near 25% off 
the low range of year 2001's price span, it just fell and hasn't 
gotten up. Personally I'd look for tech to under-perform the 
general market for years and would only consider buying CSCO in my 
Roth when it hits $5.00 a share, but that's just a personal 
opinion. 

(Weekly/Daily Charts: Dow)


 

The Dow is currently fighting against a collision of two moving 
averages and major Fib retracement value in the weekly chart. It 
may very well break higher and test its 10,300 and 10,500 areas 
soon but that's not looking like a high-odds probability to stick 
& stay. Trust me when I tell you that shorts will step on the old 
index in a monstrous way if/when it fights up to those measures. 
Whether bulls or bears prevail from there will remain to be seen.

(Weekly/Daily Charts: DTX)


 

Plenty of excitement about Dow Transports breaking out. I see this 
all over the web at numerous sites, and the DTX was even charted 
on CNBC these past few days in between Enron scum and Greenspan 
testimony! Can you believe that? Nary once did we see this index 
on CNBC in 1999 or 2000 that I can recall.

And it is on a nice, strong run. Successful breakout of its wedge 
pattern and stochastic values are pointing straight up. I sure as 
heck would not even dream of shorting this puppy right now, but it 
could be getting a bit toppy these days. Strongest sector I've 
seen in my nightly scan of numerous charts, but the prime entry 
points for longs is now below us at support.

Conclusion
I expected a rally these past two days and saw brief parts of one. 
Monday was impressive, but lonely without company of follow 
through. Thursday and Friday should see mutual funds playing the 
fan dance game of marking up big holdings to puff the performance 
and hope to attract fresh money to their lairs. Even with that 
said, I'm a very tentative trader right now in either direction. 
Too many whipsaw sessions smashing out stops on calls and puts for 
those who hold too long is not a fun world to play in.

(One Minute Chart: S&P 500)


 

Much as I can live without the adrenaline rush, scalping works 
best for me these days. This hyper-quick action is not for 
everyone and I'd safely say it's not for most traders. But those 
who find a directional move like we saw the last two hours of 
today can make a week's (or month's) wages in quick fashion. If 
they don't lose the same first!

Today at 1:44pm in the Market Monitor we warned that indexes were 
breaking down. All intraday chart signals were in classic bearish 
reversal fashion and the SPX broke 1119, a near-term channel line 
of support depicted in last night's (and tonight's) Swing Trade 
Gameplan. Soon as traders saw that break, hit the "short" button 
on trade window parked open and waiting. Keep shorting every pop 
all the way down to session lows near 3:00pm for possible 18 index 
points of profit.

At 3:00pm we saw sell programs driving price action down but 
immediately stop on 1102, a measure of support from Monday still 
drawn on our chart. What next? All intraday chart signals are 
buried in oversold extreme. Let's see if the next test of that low 
breaks or holds. If it breaks, we watch it fall to further lows. 
If it holds, let's test the upside for a real quickie. 

Higher low holds, we get in around 1104 and exit near 1108 or hold 
into the bell for double that distance by 4:15pm. This is fast 
action scalping at it's best... quick, small gains and few/no 
losing trades done right. Done wrong one can expect to take a 
string of losses and get carved to pieces. Looks real easy 
profiled here tonight, but when those flags are still forming and 
price action whirs by it's a whole 'nother story. I much, much 
prefer buy & hold trading and long for those days to return but 
they are not with us here right now.

Summation
Much of the trading world is waiting for the bottom to fall out of 
this market in utter collapse. We wouldn't know that by looking at 
the VIX low reading, would we? I for one have no strong opinions 
right now. I see indexes that desperately want to go higher but 
simply cannot manage to do so. I see markets poised to go up that 
continually go down faster on a different whim every day. I see a 
market that scares me either way, so I'll play fast & small for 
now. I don't really like what I see, but that does not change the 
picture in my view.

Trade Carefully Either Way,
austinp@OptionInvestor.com


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

Volatility - Part Deux
By Mark Phillips
mphillips@OptionInvestor.com

It has been quite a ride we've embarked on over the past month
or so, handling each of the Greeks in turn, endeavoring to
detail how each of them impact option pricing and how we can
utilize this information to our advantage.  Last week, we
tackled the issue of Volatility, otherwise know as Vega in an
attempt to determine whether a given option is relatively cheap
or expensive, relative to its historical norm.  After pointing
you at the www.ivolatility.com website, I left you with a mission
to explore some volatility charts and get a feel for what they
look like.  I assume (I know that's dangerous!) that by now all
of you that have an interest have already done so and we can
plunge into analyzing some volatility data and learning how to
interpret it.

For all you newcomers to this discussion, I would strongly
recommend you go back to the beginning of our discussion and work
your way forward before continuing with the remainder of this
article.  It will be here waiting when you return and the rest
of this article will make a lot more sense after you're done.
Here are the links (in order of publication to each of the
articles I've done on the Greeks, beginning with Delta and Gamma
and ending with last week's introduction to Vega.

The Greeks, Part I - Delta and Gamma
Application of Gamma and Delta to Strike Selection
Back to the Olympians of Old
Oh, That Vexing Volatility

When we left off last week, we had introduced the concepts of
both Historical Volatility (HV), which is the historical
volatility measure of the underlying stock, and Implied
Volatility (IV), which is the estimated volatility of the option
that is used to determine its price.

So let's start with a volatility chart of IBM, since we've talked
about that one a fair amount over the course of this series of
articles:



 

We can see that over the course of the past year, the HV for IBM
tends to bottom near 20%, while the IV tends to reach a base in
the 26-28% level.  This tells us nothing about whether to go long
or short, as we have to rely on the price chart and our standard
technical indicators for that sort of information.  What it does
tell us is that when IBM's volatility nears its historical lows,
odds favor option buyers rather than sellers because the options
will be relatively cheap on a volatility basis.  

So turning our attention to the price chart, we can make our
determination of what action we might want to take.



 

Looking at IBM on the combined weekly/daily chart above tells us
that in late December/early January odds clearly favored downside
plays, as both the daily and weekly Stochastics oscillators were
rolling over from overbought territory, with price action rolling
over from significant resistance near the $125 level.  So now
the question is whether to buy puts or sell calls.

Well, based on the volatility chart we have up above, IBM at the
time in question has both of its volatility measures clearly
buried near historical lows.  That tells us that if anything,
volatility should either remain flat for a bit longer or should
trend upwards.  Since increasing volatility tends to inflate
option premiums and decreasing volatility tends to deflate the
premiums, we would want to be a buyer of options at this point.
As volatility rises from current levels (early January, that is),
the volatility component of the option's price (whichever one we
happen to choose) should also rise.

So my vote at this point would be to buy Put options on IBM.
Since we are looking at these charts with the benefit of
hindsight, we could arrogantly say that the high odds approach
would have been to buy a fistful of March $100 Puts and be done
with it.  Closing that position for a tidy profit anytime in the
past week would have made for a solid trade.  That seems obvious
now, but we're in the process of building a model that helps us
determine IN ADVANCE what the best trade is based on the Greeks
at the time we wish to initiate the trade.  Volatility has done
its job, telling us near the beginning of the year that IBM
options would be relatively cheap on a volatility basis.  The
price chart tells us that puts are the best course of action.
But we've still got some important questions that need to be
answered.  How long should the downward move take to run its
course, or more directly, what expiration month should I select
for the puts?

And then there is the question of what strike price to buy.
Should I buy the $120, the $115, the $110?  Or should I really
go for the gusto and take a long-shot with $100 puts?  Those of
you that have been following along with this discussion for the
past several weeks recognize that these are all issues that we
are attempting to address with our compartmentalized approach
to handling each of the Greeks in turn.

Remember that our end goal is to tie it all together, so that
we can do our analysis and make a statement like this.  "Based
on the price chart, I believe that IBM should trade substantially
lower over the near to medium term and I intend to profit from
that situation by buying puts.  I have decided to buy puts
because volatility is near the lower end of its historical range,
so the options should be relatively cheap on a volatility basis.
I have looked at the Point and Figure chart and see that it is
giving me a bearish chart pattern with a price target of $105.
From statistical studies, I know that the current PnF chart
pattern takes approximately 3 months to achieve its price
objective, so I want to give myself plenty of time to be right.
So I will use April contracts.  Since I want to take maximum
advantage of the movement of Delta and Gamma, I will choose the
$110 strike, as that will give me a strong appreciation in the
option as Delta and Gamma move into the area that cause my option
price to appreciate rapidly, especially as IBM approaches my $105
price target."

While most of that description is still lacking the factual basis
to back it up (we're going to tie everything together next week),
you can see that we have used all of the Greeks together to make
a decision that gives us a very specific action plan.  We specify
direction and duration of the move that we expect and then fine
tune our trade to select both the appropriate expiration month
and strike price.  Very clear and concise.

But let's get back to volatility, as I've gotten a bit off track
here for today's discussion.  Looking back at the IBM volatility
chart, we can see that volatility spiked higher (with that of the
rest of the market) following the September attacks.  Traders
might have been looking to profit from a rebound in the stock as
volatility reverted to the mean.  But how to do that?

Our first task is to go back to the price chart and see if there
are any encouraging bullish signs that would have us looking to
play the upside.



 

Indeed there were!  We've got both the weekly Stochastics
attempting to put in a bottom, while price is successfully
bouncing at support near $87, a successful retest of the March
lows.  And over on the daily chart, we had some encouraging
signs as well, with bullish divergence between the price chart
and the daily Stochastics.  If we are looking for a trade here,
the high odds favorite would be to trade the upside.  But once
again, the question of how specifically to do it.

Volatility is high, which means that options are going to be on
the expensive side.  As volatility reverts back to the mean,
we're going to see option premium decline due to collapsing
volatility, so just purchasing calls may not be the best way to
go.  Remember that we want to buy low volatility and sell high
volatility.  One way to go would be to sell naked puts.  But as
many of you know, I'm not a big fan of going naked -- I'm just
not comfortable with that sort of risk, especially not after
the drubbing that the markets just suffered.  So I would be
looking at a way to profit from the upside, without exposing
myself to all that potential volatility decay.  Spreads, anyone?
That's right, we can put on a bullish spread using either calls
or puts depending on what gives us the best price for the spread.

Then as volatility decays, it reduces the value of the long and
short options by essentially the same amount.  So our spread
position is left to work for us as the anticipated bullish
action unfolds.  If we are right about the bullish potential for
IBM, then price action should far outpace any volatility affects,
but even if it doesn't, we have a reduced risk position due to
the characteristics of the spread.  But volatility is not a part
of our risk equation in this sort of position.  By utilizing a
spread, we essentially remove the volatility risk in our bullish
play.  I don't want to get into the details of Spreads here right
now, as it takes us away from the focus on the Greeks.  Besides
that, I've written a number of articles on various spread
strategies and they are stored for all to peruse at their leisure
in the Trader's Corner archives.

As usual, I'm running long today and running out of time in order
to get this published in tonight's newsletter.  But hopefully,
our little discussion has helped you to see that paying attention
to volatility can help you to determine which strategies will
work best at a given point in time.

Next week we're going tie up our rambling discussion of the
Greeks, by revisiting the IBM example at the top of this article,
fleshing out the hypothetical description of the trade using all
of the tools at our disposal.  By the time we are done, you
should have a clear picture of how to apply all the Greeks to
define your own individual trading plan on a trade by trade
basis.

Have a great week!

Mark


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

IS Swing Trade Model: Wednesday 2/27/2002
Active Session That Went Nowhere


News & Notes:
------------
Indexes popped, dropped and rallied higher before the closing bell 
again this session. Day trader's only conditions exist right now.


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


 

Indexes gapped open higher, broke above resistance and promptly 
trapped the bulls yet again on another afternoon plunge. Now we 
have mixed chart signals and price action sitting in the middle of 
no man's land.


[60/30-Min Chart: SPX]


 

These indexes could go anywhere from the open tomorrow and reverse 
themselves after that. Big surprise, right? Trouble is right now 
we have zero points of reference to gauge direction with. Sitting 
in space, chart signals mixed, inconclusive evidence tonight.

[60/30-Min Chart: QQQ]


 

Same for the QQQ, which is relatively weaker than the old economy 
indexes. 

Summation:
---------
I'd feel more bullish on Thursday if indexes fell at the open, 
bounced at or above Wednesday lows and chart signals turned up 
from oversold extreme in unison. That fantasy could easily be 
thwarted by markets that pop & drop instead. Or sideways, choppy 
action until another afternoon move. In any event we have nothing 
to measure entries with right here in front of us tonight, so 
we'll see what transpires tomorrow.


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: 102 (DJV-CX)  
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop: Break Below                 Stop: Break Below 
                                

Mar Puts: 34 (QQQ-OH)             Mar Puts: 100 (DJV-OV) 
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break above 


=====


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


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



Open Plays:
----------
Call plays entered at the open, exited at par.


IS Position Trade Model: Wednesday 2/27/2002
Nowhere Fast

News & Notes:
------------
Intraday volatility remains alive & well. Buy & hold index option 
attempts are not well. Entry points come and go on pinpoint turns 
and missing those has found traders with stops taken out in both 
directions in sideways, whipsaw noise.


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


Summation:
---------
The trend is decidedly down while indexes appear poised to rally. 
We cannot in good faith suggest call option plays that will hold 
for several days or weeks for high-odds success against this 
trend. However, shorter-term call plays look like potential 
winners to us. 

Our suggestion is to follow Swing Trade entries as they emerge 
later this week or Sector Share listings of optionable symbols and 
use those parameters for buy & hold calls. Using 100% risk capital 
instead of stops and March or (at the furthest away) April call 
option contracts for any option play attempts.


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


Sector Share Trade Model: Wednesday 2/27/2002
Up & Down Again

News & Notes:
------------
Indexes and sectors can be expected to chop sideways to higher 
right now, but it is purely evident the bulls will have to fight 
for every inch of higher ground claimed. Buy & hold conditions are 
difficult right now.


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


Summation:
---------
Current open plays have stops trailed closer, and no new entries 
to track are listed 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:
---------------
IIH             BHH
Long: 4.75      Long: 3.50
Stop: 4.25      Stop: 3.25

HHH             XLE             IYV
Long: 28.00     Long: 26.75     Long: 11.40
Stop: 27.00     Stop: 26.50     Stop: 11.00


QQQ             BDH             SWH
Long: 35.30     Long: 12.75     Long: 40.00
Stop: 34.00     Stop: 12.00     Stop: 38.50

WMH             IAH             MKH
Long: 45.60     Long: 32.75     Long: 57.60
Stop: 45.00     Stop: 31.50     Stop: 57.00

OEF             SPY             FFF
Long: 56.65     Long: 111.60    Long: 80.15
Stop: 56.00     Stop: 110.00    Stop: 78.00

IYZ             IYW             IYC
Long: 26.60     Long: 48.10     Long: 55.60
Stop: 26.00     Stop: 46.00     Stop: 55.00

IYG             IVE             IVW
Long: 87.00     Long: 53.10     Long: 58.10
Stop: 87.50     Stop: 52.50     Stop: 57.00

MDY             XLF             XLK
Long: 92.70     Long: 25.25     Long: 21.40
Stop: 93.00     Stop: 25.00     Stop: 20.50


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The Option Investor Newsletter                Wednesday 02-27-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


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

SII  - call
Adjust from $57 up to $59.75

TDW  - call
Adjust from $35.40 up to $36.40

UTX  - call
Adjust from $67.75 up to $69.50

HON  - call
Adjust from $33 up to $35

BA   - call
Adjust from $42.50 up to $43.30

MXIM - put
Adjust from $52.50 down to $51


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

ESRX $52.86 -1.65 (-0.92) ESRX was pressured lower today by the
weakness in the broader health care sector (HMO.X).  The HMO
finished 1.35% lower on weakness in Humana, WellPoint, and
Trigon.  The sector weakness gave investors reason to take
profits in ESRX after its recent solid run.  After its break
from consolidation and the weakness in its group, ESRX may be
due for a period of consolidation.  We're dropping coverage
ahead of that potential development and in light of its close
below our stop.  We will, however, revisit this stock as a
potential call play once it forms a short-term base as its
fundamentals and technicals remain among the stronger in the
market.


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

CCMP $57.68 +0.98 (+4.43) Cabot Micro bucked the weakness in
the broader semiconductor sector (SOX.X) Wednesday, finishing
nearly 2% higher.  The stock traded strongly for most of the
session and was only pressured lower during the late-day
retreat in the Nasdaq.  Its close above the 10-dma and our
stop prompt us to drop coverage on CCMP this evening.  If
you're holding open positions and weren't stopped out in today's
session, look to cut losses in tomorrow's session on any
follow-through to the downside in the SOX.X.

ADVS $49.40 +1.43 (+4.50) ADVS advanced sharply early Wednesday,
far out pacing the gains in the broader market averages.  The
stock's early strength allowed it to buck the weakness into the
close of the session.  The stock did, however, finish well off
of its session highs.  Its rollover early Wednesday from the 50-dma
is encouraging for potential downside into the coming sessions
on further sector and market weakness.  If you're still holding
open positions, look for a breakdown below the 10-dma at $48.75
for potential confirmation of downside.  For our part, we're
dropping coverage in light of the close above our coverage stop.


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

GS - Goldman Sachs Group $80.89 -0.51 (+1.89 this week)

The Goldman Sachs Group is a global investment banking and
securities firm that provides a wide range of services worldwide
to a substantial and diversified client base that includes
corporations, financial institutions, governments and high
net-worth individuals. The company provides investment banking,
which includes financial advisory and underwriting, and trading
and principal investments, which includes fixed income, currency
and commodities, equities and principal investments.  GS
recently completed the acquisition of Spear, Leeds & Kellog,
which is engaged in securities clearing, execution and market
making, both floor-based and off-floor.

Most Recent Update

Bearish resolve is being tested again, and this can be seen in
the recent trading action of the Broker/Dealer index (XBD.X),
which is trying mightily to put in a bottom at the $450 support
level. While Monday's action was encouraging for the bulls, it
was clear from Tuesday's trading that there isn't a lot of
bullish conviction out there right now. The XBD failed to push
through resistance and the resulting downward pressure could be
clearly seen in our GS play as the stock pulled back from its
opening highs (right at the descending 20-dma). Following a
tepid rally attempt through most of the remainder of the day,
GS pulled back right at the $82 level near the closing bell,
setting us up another possible entry point. That being said, we
may be on the cusp of a failed play, and the action in the XBD
tomorrow will likely hold the deciding vote. Use a rollover in
the XBD from current levels and more weakness in GS in the
vicinity of $82 as a fresh entry point. More conservative
traders will want to wait for GS to break below the $80 level on
increasing volume again before attempting new positions. Keep in
mind that the $78 level has provided support twice in the past
week, and we'll want to tighten up stops on open plays as GS
approaches that level again.

Comments

The brokers (XBD.X) finished lower Wednesday in spite of
the positive finish in the banks (BKX.X).  Additionally, the
XBD failed at resistance again.  The XBD's current resistance
level is 472, where the index rolled Wednesday.  That has us
thinking that GS could be in for more downside in tomorrow's
session if the XBD continues lower.  Watch for the XBD to
breakdown below 459 and cross-reference that action point with
GS at $80.

BUY PUT MAR-80*GS-OP OI=4681 at $2.60 SL=1.00
BUY PUT MAR-75 GS-OO OI=1535 at $1.15 SL=0.50

Average Daily Volume = 3.08 mln



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

Longing For A Bit Of "Irrational Exuberance"
By Ray Cummins

Stocks ended mixed today in spite of Fed Chair Alan Greenspan's
cautiously upbeat outlook for the U.S. economy.

The Dow industrial average climbed to its highest level since
early January Wednesday in the wake of Greenspan's optimistic
comments before the House Financial Services Committee.  The Fed
Chief said a "subdued recovery" is likely underway, though the
risk that growth could falter remains.  He also cautioned that
the soft labor market could put a damper on consumer spending
but he presented a positive stance on inflation.  Greenspan's
remarks pacified both bond and equity investors, however fresh
economic data offered a mixed outlook for the future.  A rise in
durable goods suggested the economy was growing while declining
new homes sales figures put a damper on the recovery viewpoint.
Despite the apparently improving economic conditions, the recent
volatility in stocks continued with the Dow up 140 points at its
apex before slumping to a 12 point gain at the close.  The most
popular issues early in the session were Honeywell (NYSE:HON),
Citigroup (NYSE:C), International Business Machines (NYSE:IBM),
United Technologies (NYSE:UTX), American Express (NYSE:AXP), and
Boeing (NYSE:BA).  The technology segment was also active with
the NASDAQ Composite rising 27 points before retreating 14 ticks
into the red at day's end.  Semiconductor and software companies
were bullish in early trading but a sell-off in networking issues
weighed heavily on the hi-tech index.  Among the broader market
groups, financial, airline, biotechnology, major drug and defense
issues were moderately upbeat during the first half of the session
while retail and gold stocks slid lower after recent gains.  On a
positive note, one brokerage firm turned bullish on stocks amid a
belief a recovery is taking hold.  Salomon Smith Barney boosted
their target equity asset allocation to 75% based on "increasing
evidence, both from our own work and that of our economists, that
the predicted U.S. economic recovery is under way."  (Apparently,
no one was listening...)

***************
Summary of Current Positions (as of 02-26-2002):
***************

Covered Calls: (Margin not used in calculations)

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

RTEC    MAR     40    37.64   38.52   0.88    2.4% ***

Short-term traders should have closed the bullish
position in Rudolph Technologies (NASDAQ:RTEC) when
the issue moved below the cost basis of the play.


Naked Puts:

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

INVN    MAR     25   24.20   39.03   0.80    7.2%
MU      MAR     30   29.20   33.70   0.80    7.5%
NVDA    MAR     47.5 46.45   55.00   1.05    6.4%
KLAC    MAR     50   48.55   59.97   1.45    7.4%
AMAT    MAR     40   39.40   44.57   0.60    5.1%
KLAC    MAR     50   48.95   59.97   1.05    7.5%
RTEC    MAR     35   34.25   38.52   0.75    6.9% ***
TER     MAR     27.5 27.00   34.22   0.50    6.3%
IDPH    MAR     55   54.00   64.12   1.00    7.1%
ACS     MAR     42.5 41.95   46.42   1.10    5.0% ***
AMAT    MAR     40   39.40   44.57   0.60    6.3%
KLAC    MAR     50   49.20   59.97   0.80    7.1%
TER     MAR     27.5 27.10   34.22   0.40    6.8%

Conservative traders should consider an early exit in
the Rudolph Technologies (NASDAQ:RTEC) position if the
issue moves below the sold (short) strike in the play.
Affiliated Computer (NYSE:ACS) has been adjusted for
the recent 2:1 stock split.

 
Naked Calls:

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

VRTS    MAR    45    45.80   37.76   0.80    8.2%
EMLX    MAR    47.5  47.95   37.00   0.45    7.4%


Credit Spreads:

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

CYMI   41.37    37.87  MAR30P/35P   0.75   34.25   0.75   Open
AZN    47.60    50.80  MAR40P/45P   0.40   44.60   0.40   Open
NOC   109.32   107.72  MA95P/100P   0.80   99.20   0.80   Open
PG     82.50    86.50  MAR75P/80P   1.00   79.00   1.00   Open
TGH    77.00    74.96  MAR65P/70P   0.45   69.55   0.45   Open
BVF    42.05    48.15  MAR55C/50C   0.60   50.60   0.60   Open ***
ROOM   54.72    50.59  MAR40P/45P   0.70   44.30   0.70   Open
HIG    67.00    68.87  MAR60P/65P   0.90   64.10   0.90   Open
PGR   152.90   155.52  M140P/145P   0.90  144.10   0.90   Open
XL     97.11    94.55  MAR85P/90P   0.60   89.40   0.60   Open
AHC    64.48    68.87  MAR55P/60P   0.50   59.50   0.50   Open
BGEN   54.45    55.86  MAR65C/60C   0.50   60.50   0.50   Open
TEVA   59.99    56.84  MAR70C/65C   0.60   65.60   0.60   Open
ACE    42.50    43.36  MAR35P/40P   0.50   39.50   0.50   Open
ETN    78.45    81.80  MAR70P/75P   0.55   74.45   0.55   Open
MRK    61.26    60.65  MAR55P/60P   0.80   59.20   0.80   Open
LXK    50.48    52.54  MAR60C/55C   0.55   55.55   0.55   Open
WHR    65.50    73.40  APR80C/75C   1.10   71.10   1.10   Open ***

Shares of Whirlpool (NYSE:WHR) soared today after the company
predicted better-than-expected earnings in the first quarter,
citing an improving outlook for the U.S. appliance market.
Based on appliance industry conditions in January and February,
Whirlpool said it now expects per-share profit in the quarter,
excluding charges or any other items, to increase 15% to 20%
from the $1.10 a share the company earned a year earlier.  A
company spokesman said that first-quarter results would exceed
the consensus estimate of $1.23 a share and investors flocked
to the issue on the news.  We had previously decided to roll up
and out to a higher strike (APR80C/75C) on any move through $70,
but we did not expect the issue to enjoy such exuberant buying
near its all-time high.  Now we will have to monitor the issue
closely for any break-out above the current resistance (at $75),
which could lead to a significant rally.  Biovail (NYSE:BVF) is
another issue which has reversed direction and the new bullish
trend suggests we should consider adjusting (or exiting) the
current short position at $50.  A transition to the MAR60C/55C
spread would preserve the initial position credit and offer a
high probability of a successful outcome, due to the technical
resistance at $55.

  
Index Credit Spreads:

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

OIH    56.65    62.63  MAR45P/50P   0.60   54.40   0.60   Open
OEX   557.59   562.66  M595C/590C   0.50  590.50   0.50   Open


Synthetic Positions:

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

WMT    59.86    59.29  MAR65C/55P   0.25   54.75   0.40   Open

Discount retailer Wal-Mart (NYSE:WMT) broke to a new 52-week
high today and our bullish position is comfortably profitable.
Traders should consider using the current rally in the retail
group to "lock-in" gains in the speculative play.


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 - Speculative Synthetic Positions

One of our long-time readers asked for some low-risk speculative
positions on bullish issues.  All of these stocks have excellent
technical indications and favorable option premiums, and based on
the quarterly earnings reports, each underlying company has solid
fundamentals.  Investors with a bullish outlook on these stocks
may find the risk-reward outlook in these positions attractive,
however they should also be evaluated for portfolio suitability
and reviewed with regard to your personal investing criteria.
Current news and market sentiment will have an effect on these
positions, so review them thoroughly and make your own decision
about their outcome.  These plays will not be included in the
monthly summary.

***************
BA - Boeing  $45.90  *** New Contracts! ***

The Boeing Company (NYSE:BA), an aerospace company, operates,
together with its subsidiaries, in three principal segments:
Commercial Airlines Operations, Military Aircraft and Missiles,
and Space and Communications. Commercial Airplanes Operations is
also involved in the development, production and marketing of
commercial jet aircraft.  The segment provides related support
services, primarily to the commercial airline industry worldwide.
The Military Aircraft and Missiles segment is involved in the
research, development, production, modification and support of
military aircraft, including fighter, transport and attack
aircraft; helicopters; and missiles.  The Space & Communications
segment is involved in the research, development, production,
modification and support of space-based systems, missile defense
systems, satellites and satellite-launching vehicles, rocket
engines and information and battle management systems.

BA - Boeing  $45.90

PLAY (speculative - bullish/synthetic position):

BUY  CALL  APR-50.00  BA-DJ  OI=1859  A=$0.70
SELL PUT   APR-42.50  BA-PV  OI=105   B=$0.75
INITIAL NET CREDIT TARGET=$0.15-$0.25  TARGET PROFIT=$0.60-$0.90

Note:  Using options, the position is similar to being long the
stock.  The collateral requirement for the sold (short) put is
approximately $1,500 per contract.


***************
CB - Chubb  $75.32  *** Recovering Industry! ***

Chubb Corporation (NYSE:CB) is a holding company with subsidiaries
primarily engaged in the property and casualty insurance business.
The property and casualty insurance subsidiaries provide insurance
coverages mainly in the United States, Canada, Europe, Australia,
and parts of Latin America and the Far East.  The company also has
many investments in high quality bonds, U.S. Treasury, government
agency, mortgage-backed securities and corporate issues as well as
equity securities.  The company has a Real Estate Group that is
composed of Bellemead Development Corporation and its subsidiaries.
The group's activities involve commercial development primarily in
New Jersey and residential development activities in Florida.

CB - Chubb  $75.32

PLAY (speculative - bullish/synthetic position):

BUY  CALL  APR-80  CB-DP  OI=318  A=$1.45
SELL PUT   APR-70  CB-PN  OI=122  B=$1.35
INITIAL NET CREDIT TARGET=$0.10-$0.25  TARGET PROFIT=$1.00-$1.25

Note:  Using options, the position is similar to being long the
stock.  The collateral requirement for the sold (short) put is
approximately $2,500 per contract.


***************
VAR - Varian  $42.25  *** Hot Sector! ***

Varian Medical Systems (NYSE:VAR) is engaged in the design and
production of equipment for treating cancer with radiation, as
well as high-quality, cost-effective X-ray tubes for original
equipment manufacturers, replacement X-ray tubes and imaging
subsystems.  In serving the market for advanced medical systems
(primarily for cancer care), the company continues to broaden its
offerings to address the continuing demand to contain costs and
enhance efficacy of healthcare.  In addition to developing unique
medical equipment, the company also develops software products
and devices designed to enhance the productivity and quality of
its equipment, devices manufactured by other companies and the
general delivery of healthcare services.

VAR - Varian  $42.25

PLAY (speculative - bullish/synthetic position):

BUY  CALL  APR-45  VAR-DI  OI=8  A=$1.00
SELL PUT   APR-40  VAR-PH  OI=20 B=$0.90
INITIAL NET CREDIT TARGET=$0.10-$0.20  TARGET PROFIT=$0.75-$1.00

Note:  Using options, the position is similar to being long the
stock.  The collateral requirement for the sold (short) put is
approximately $1,500 per contract.


***************
WGO - Winnebago Industries  $47.40  *** Outstanding Growth! ***

Winnebago Industries (NYSE:WGO) is a United States manufacturer of
motor homes, self-contained recreation vehicles used primarily in
leisure travel and outdoor recreation activities.  The company's
motor home sales represent more than 86% of its revenues and its
motor homes are sold through dealer organizations, primarily under
the Winnebago, Itasca, Rialta and Ultimate brand names.  Among the
other products manufactured by the company are extruded aluminum,
commercial vehicles, and a variety of component products for other
manufacturers.  Finance revenues consist of revenues from floor
plan unit financing for a limited number of the company's dealers.

WGO - Winnebago Industries  $47.40

PLAY (very speculative - bullish/synthetic position):

BUY  CALL  APR-55  WGO-DK  OI=0  A=$0.65
SELL PUT   APR-40  WGO-PH  OI=3  B=$0.50
INITIAL NET CREDIT TARGET=$0.05-$0.15  TARGET PROFIT=$0.50-$0.75

Note:  Using options, the position is similar to being long the
stock.  The collateral requirement for the sold (short) put is
approximately $1,200 per contract.


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

BULLISH PLAYS - Naked Puts & Combinations

***************
GILD - Gilead Sciences  $69.41  *** Stock-Split Coming! ***

Gilead Sciences (NASDAQ:GILD) is a biopharmaceutical company that
seeks to provide accelerated solutions for patients and their
caregivers.  The company discovers, develops, manufactures and
commercializes therapeutics for challenging infectious diseases
(viral, fungal and bacterial infections) and cancer.  Gilead also
has expertise in liposomal drug delivery technology.  The company
markets AmBisome ((amphotericin B) liposome for injection), an
antifungal agent, DaunoXome (daunorubicin citrate liposome), a
drug approved for the treatment of Kaposi's Sarcoma, and VISTIDE
(cidofovir) for the treatment of cytomegalovirus retinitis.
Hoffmann-La Roche markets Tamiflu (oseltamivir phosphate) for the
treatment of influenza under a collaborative agreement with GILD.
Gilead is also developing products to treat diseases caused by
human immunodeficiency virus and hepatitis B virus, bacterial
infections and cancer.

Gilead Sciences' shares traded near recent highs today after the
biotechnology company reported that two studies showed its Viread
drug reduced the hepatitis B virus levels in patients who already
were infected with HIV.  The company said the studies, which ran
for 12 and 24 weeks, respectively, showed Viread "significantly"
reduced the serum hepatitis B virus DNA levels compared to the
placebo drug.  Viread, a one-tablet, once-daily antiretroviral
agent, has already received marketing approval for HIV treatment
in the U.S. and it also received European approval earlier this
month.

In addition to the news about Viread, investors are anticipating
the upcoming 2-for-1 stock split on March 8.  Stockholders of
record as of the close of business on February 14 will receive a
stock dividend of one additional share of common stock for every
share of common stock they own.  The CEO of the company says the
stock split will increase market interest in Gilead and traders
who agree with that outlook can speculate on the future value of
GILD with these positions.

GILD - Gilead Sciences  $69.41

PLAY (sell naked put):

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

SELL PUT  MAR 60   GDQ OL  1,042     0.55    59.45       5.5% ***
SELL PUT  MAR 65   GDQ OM  2,353     1.40    63.60      10.8%


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

BULLISH PLAYS - Credit Spreads

***************
FD - Federated Department Stores  $41.68  *** Bullish Outlook! ***

Federated Department Stores (NYSE:FD), through its subsidiaries,
is an operator of full-line department stores in the U.S., with
over 400 department stores in 33 states and Puerto Rico.  The
company's subsidiaries operate department stores under the names
Bloomingdale's, The Bon Marché, Burdines, Goldsmith's, Lazarus,
Macy's, Rich's and Stern's, and related direct-to-customer mail
catalog and electronic commerce businesses under the names of
Bloomingdale's By Mail, bloomingdales.com and macys.com.  These
department stores and related businesses sell a wide range of
merchandise, including men's, women's and children's apparel and
accessories, cosmetics, home furnishings and other consumer goods.

Retail stocks have performed well over the past few sessions and
shares of Federated Department Stores rebounded Tuesday after the
company issued optimistic comments about fall sales and raised
its profit outlook for 2002.  Federated said it now expects 2002
earnings from continuing operations of $3.30 to $3.55 a share, up
from an earlier forecast of $3.25 to $3.50 as share.  The CEO said
sales are expected to rise overall in the near-term and sales of
items like apparel and furniture should strengthen as the year
progresses.  Analysts at ABN AMRO agree with the outlook and they
raised the issue to a "buy" rating today, based on the improving
company fundamentals.

Apparently, investors were also pleased with Tuesday's news as the
issue has shown signs of a recovery and this position offers a way
to speculate conservatively on the company's future share value.

FD - Federated Department Stores  $41.68

PLAY (moderately aggressive - bullish/credit spread):

BUY  PUT  MAR-37.50  FD-OU  OI=107  A=$0.25
SELL PUT  MAR-40.00  FD-OH  OI=106  B=$0.60
INITIAL NET CREDIT TARGET=$0.40-$0.45  PROFIT(max)=19%


***************
UTX - United Technologies  $72.95  *** Solid Technicals! ***

United Technologies (NYSE:UTX), through its operating segments,
manufactures, installs and services elevators and escalators;
manufactures commercial and residential heating, ventilating
and air conditioning systems; produces commercial, aviation and
military aircraft engines, and military & commercial helicopters;
and supplies transport helicopters.  Otis manufactures, markets
and installs elevators, escalators, automated people movers and
service.  Carrier manufactures heating, ventilating and air
conditioning systems and equipment, and commercial and transport
refrigeration equipment.  Pratt & Whitney makes aircraft engines,
parts, industrial gas turbines and space propulsion.  The Flight
Systems division manufactures helicopters, and sells aircraft
power generation and management systems, engines, flight controls,
auxiliary power units, environmental control systems and propeller
systems, compressors, metering devices, fluid handling equipment
and enclosed gear drives.

Shares of United Technologies moved higher today after one of its
major subsidiaries, engine maker Pratt & Whitney, said it had been
awarded a contract to supply engines for nine Boeing 767-300ER jet
airliners.  The announcement was just one in a series of recent
"major" events that has boosted the share value of UTX and other
companies in the aerospace/defense sector and the stock appears
poised to move higher in the coming sessions.  Traders who think
the issue is destined for a future rally can profit from continued
upside movement in its share price with this combination position.

UTX - United Technologies  $72.95

PLAY (conservative - bullish/credit spread):

BUY  PUT  MAR-65  UTX-OM  OI=958  A=$0.25
SELL PUT  MAR-70  UTX-ON  OI=986  B=$0.75
INITIAL NET CREDIT TARGET=$0.55-$0.65  PROFIT(max)=12%


***************
XL - XL Capital  $95.70  *** Second Chance For Profit! ***

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 continue
to perform well amid optimistic forecasts for the industry.
Analysts at Deutsche Banc recently 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.  XL Capital appears to be one of the more bullish
issues in the group and the favorable option prices will allow
traders to speculate, in a very conservative manner, on the
future movement of the company's share value.

XL - XL Capital  $95.70

PLAY (very conservative - bullish/credit spread):

BUY  PUT  MAR-85  XL-OQ  OI=601  A=$0.30
SELL PUT  MAR-90  XL-OR  OI=55   B=$0.65
INITIAL NET CREDIT TARGET=$0.40-$0.50  PROFIT(max)=9%


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

BEARISH PLAYS - Naked Calls & Combinations

***************
MRVL - Marvell Technology  $34.10  *** Earnings Speculation! ***

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

Marvel is due to report earnings tomorrow and based on the recent
share price activity, there is little optimism among investors
concerning the quarterly report.  In addition, MRVL is a great
candidate in the "premium-selling" category of options trading
due to the higher than average premiums in its options and the
well defined resistance area near the target strike price ($42.50).
The issue is below a significant moving average (30-dma) and the
recent sell-off has occurred on increasing volume, suggesting
further downside activity is likely in the near-term.  Traders
can speculate on the outcome of the report with these positions.

MRVL - Marvell Technology  $34.10

PLAY (aggressive - sell naked call):

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

SELL CALL MAR 42.5 UVM CR  291       0.40    42.90      10.5%
SELL CALL MAR 40   UVM CH  566       0.95    40.95      20.8%
SELL CALL MAR 37.5 UVM CT  485       1.50    39.00      24.3%


***************
CCU - Clear Channel Comm.  $47.00  *** Just A Bad Day! ***

Clear Channel Communications (NYSE:CCU) is a diversified media
company with three business segments, radio broadcasting, outdoor
advertising and live entertainment.  The company owns, programs or
sells airtime for over 1,000 domestic radio stations and two
international radio stations and owns a national radio network.
In addition, the company has equity interests in various domestic
and international radio broadcasting companies.  The company is
also an outdoor advertising company, with a total advertising
display inventory of 149,171 domestic display faces and 549,094
international display faces.  Clear Channel is also a diversified
promoter, producer and venue operator for live entertainment
events and owns or operates over 100 live entertainment venues.

Shares of Clear Channel Communications slumped today after the
company reported a greater than expected loss in its quarterly
earnings and said it also expects to take a pre-tax, non-cash
impairment charge of $15 to $25 billion to comply with a new
accounting rule that prohibits the amortization of goodwill and
indefinite-lived intangibles.  Investors reacted appropriately
to the news, driving the stock to recent lows and the outlook
for the issue is not very favorable.  Traders can profit from
continued bearish activity in the stock with this position.

CCU - Clear Channel Comm.  $47.00
 
PLAY (conservative - bearish/credit spread):

BUY  CALL  MAR-55  CCU-CK  OI=874   A=$0.15
SELL CALL  MAR-50  CCU-CJ  OI=1484  B=$0.60
INITIAL NET CREDIT TARGET=$0.50-$0.60  PROFIT(max)=11%


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

BULLISH PLAYS:

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

PCAR   72.19  MAR 70P  0.85   MAR 65P  0.25   0.65    15%
PGR   157.02  MAR 150P 1.05   MAR 145P 0.50   0.60    14%
SWK    50.78  MAR 50P  0.90   MAR 45P  0.35   0.60    14%
ATK    94.18  MAR 100P 1.00   MAR 95P  0.50   0.55    12%
MMC   108.35  MAR 105P 0.75   MAR 100P 0.30   0.50    11%


BEARISH PLAYS:

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

ENZN   46.06  MAR 50C  0.90   MAR 55C  0.25   0.70    16%
CVTX   40.99  MAR 45C  0.85   MAR 47C  0.55   0.35    16%
NVDA   53.20  MAR 60C  0.90   MAR 65C  0.35   0.60    14%
FNM    77.97  MAR 80C  0.70   MAR 85C  0.15   0.60    14%
KMI    46.08  MAR 50C  0.80   MAR 55C  0.25   0.60    14%

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


SEE DISCLAIMER
*****************************


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TRADERS CORNER
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"The List" of Arthur Anderson Clients, Plus a Lesson in Trader Psychology

Buzz Lynn
buzz@OptionInvestor.com

Reader e-mail is the basis of today's Fundamentals Guy chat.  
Since my open letter to all CEO's and CFO's two weeks ago titled 
"Use Pro Forma, Go to Jail" 
(http://www.OptionInvestor.com/traderscorner/021202_1.asp), I have 
received quite a bit or e-mail.  Two in particular struck me as 
important.  The first for its informational content; the second 
for its lessons in trader psychology.  Let's get to it.

In the Open Letter I opined that publicly traded companies should 
dump Arthur Anderson (the brand) as their auditors since the name 
had become a liability to shareholder value.  I never expected 
more than a handful of company symbols to trickle in from readers 
who might have the scoop on one or two that use AA.  One reader 
took the research to a new level.

Keith M. writes "Read your open letter, did some 5000 keystrokes 
on a friends Bloomberg and thought it may interest someone when 
not yourself.

Carry on the great work."

Thanks for your great work too Keith!  Anybody interested in 
knowing which companies he found on Bloomberg that use AA?  Me 
too!  But in fairness, I have not verified the findings.  Some of 
these companies may have already made the switch, or use AA in 
addition to other auditing functions.  Just because the AA name 
pops up shouldn't automatically besmirch the listed company.  Do 
you own research by calling the companies for definitive answers.  
Still, my guess is there is a high degree of accuracy to the list, 
as it is but two weeks old and utilizes Bloomberg information.

Now, "The List":

Following is a list of S&P500 companies who have Arthur Andersen 
as Auditor (source:- Bloomberg 14/02/2002)

ABT		Abbott Labs
ADCT		ADC Telecom.
APD		Air Products
AW		Allied Waste
AT		Alltel Corp.
AHP		Amer.Home Prod
APA		Apache Corp.
ONE		Bank One
BCR		Bard Inc.
BBT		BB&T Corp.
BMC		BMC Software
BCC		Boise Cascade
BC		Brunswick Corp.
CPN		Calpine Corp.
CTX		Centex Corp.
CIN		Cinergy Corp.
CMS		CMS Energy Corp.
CL		Colgate-Palmolive.
COST		Costco Wholesale
CUM		Cummins Inc
DHR		Danaher Corp.
DAL		Delta Airlines
DNY		RR Donnelley
DYN		Dynegy Inc.
EIX		Edison Intl.
EC		Engelhard Corp.
EOG		EOG Resources
EFX		Equifax Inc.
FDX		FedEx Corp.
FE		First Energy Corp.
FRE		Freddie Mac
FCX		Freeport-McMoran
GD		General Dynamics
GP		Georgia-Pacific
HAL		Halliburton
HET		Harrahs Entertainment
HIG		Hartford Financial
HSY		Hershey Foods
HLT		Hilton Hotels
HI		Household Int.
ITW		Illinois Tool
IP		International Paper
ITT		ITT Inds.
KMG		Kerr-McGee
KSE		KeySpan Corp.
LIZ		Liz Claiborne
MAR		Mattiot Int.
MI		Marshall & Ilsle
MAY		May Dept. Stores
MRK		Merck
MIR		Mirant Corp.
NWL		Newell Rubbermaid
NEM		Newmount Mining
GAS		Nicor Inc.
NI		NiSource Inc.
NTRS		Northern Trust
OXY		Occidental Petro.
OMC		Omnicom Group.
ORCL		Oracle Corp
PTV		Pactiv Corp.
PGL		Peoples Energy
PFST		Peoplesfot
PKI		PerkinElmer
PCL		Plum Creek Timber
QTRN		Quintiles Trans.
Q		Qwest Comm.
RHI		Robert Half
SANM		Sanmina-SCI
SLE		Sara Lee
SFA		Scientific-Atlanta
SIAL		Sigma-Aldrich
SNA		Snap-On Inc.
SO		Southern Co
SOTR		SouthTrust Corp
HOT		Starwood Hotels
STI		Suntrust Banks
SYY		Sysco Corp
TMO		Thermo Electr.
UNH		UnitedHealth Group
UVN		Univision Comm.
SLM		USA Education
WAG		Walgreen
WMI		Waste Management
WY		Weyhaeuser
WCOM		WorldCom
XEL		XCEL Energy

Delta (DAL) and SunTrust Banks (STI) have already fired AA.  There 
may be more.  Thanks again for the research Keith!

The next e-mail I got was a bit of a sadder tale, and an all too 
common demonstration of negative trader psychology that almost 
every trader is unable to avoid at least once in their hopefully 
long careers.  I'm not intending to pick on our fellow trader, for 
the condition is as common as the day is long.  Neither Austin nor 
I have mentioned it lately, but this goes straight to the heart 
of, "The market can remain irrational much longer than I can stay 
solvent".

This has been edited for brevity and to protect the innocent.

T. writes, "In '99 and 2000 I made $512,000 playing blackjack. I 
even made $530K in the market through Nov/00.  I predicted then 
that the market would go down.  I could not believe how overvalued 
it was, yet I went long over a year ago because I assumed baby 
boomers would continue their insanity thanks to all the baby 
boomer books at the time, which said insanity would continue 'til 
2008-10.  From Jan/01 to March/01, I got creamed holding various 
stocks long.  I then sold out and had only $130,000 left.  Again, 
I predicted a downturn, but refused to chase it down for an entry 
point.  Bizarre.  Then I finally shorted at (SPX) 1138.  At (SPX) 
945 I had $285,000.  But I stayed short as it retraced all the way 
back to 1160.  I covered my short at the worse possible time, 
almost the entire move up except for about 12 additional points.  
I can't understand how this happens to me.  

I now have $60,000 left, which is in June (SPX) 1050 big S&P500 
puts. I have 84 trading days left to June 21st.  All I know to say 
is this has been a nightmare experience for me.  I can't believe I 
would be willing to short at 1060 but cover at 1160. Over-leverage 
was the culprit, but I was trying to get my $530,000 back.  This 
market sure knows how to steal money from me or rather I sure know 
how to give it away.  I have been reading a good 5 hours/day on 
any information I can get my hands on about the market.  So 
basically now I am the end of my ropes - I need the S&P500 to be 
at least 1000 before June 21. If the S&P500 went to 900 I would 
have $300,000 CDN. If it went to 800 I would have $500,000.  

I wish I could have never invested and continued traveling the 
world playing blackjack.

I am now really starting to get depressed.  I am in shock."  
Signed, T.

I might add that T.'s e-mail came with a ton of research and math 
that support the notion that the market MUST, HAS TO, CANNOT HELP 
BUT, go down in order to make T.'s position profitable.  In my 
opinion, T.'s analysis was dead on and I too believe the market 
must fall for the same fundamental reasons T. states.

But there's key distinction that needs to be made.  Let's see if 
we can help T. out.  There is rationality and there is market 
reality.  The two are not related.  Again, the market can remain 
irrational much longer than we can remain solvent.  T.'s issue is 
not with reading the market correctly or incorrectly.  In the long 
run, perhaps T. has read it correctly.  The logic is certainly 
impeccable given the premises on which the trading decision was 
based, but June may not be long enough to be right.  

The issue is psychology, the first step of which is money 
management.  That begins with never risking more than we can 
afford to lose.  Trying to "win it back" is equally as deadly 
because we dupe ourselves into seeking rewards (greed) that far 
exceed our capacity to handle the downside risk (ruin).  Never 
look at reward without first evaluating risk using equal aplomb.  
Double or nothing will eventually get us nothing.

How else might T. benefit in the future?  Once in the trade, a 
simple axiom applies - ride winners, cut losses early.  We should 
never come to believe that we MUST be right and that that market 
is wrong.  We should avoid demanding that the market cater to what 
we believe.  The market does not care what we think or demand.  It 
will do as it pleases, irrational or otherwise.  The market just 
is, and it our job to play what is given.  Right about the time we 
reach our threshold of pain ("puke point", as it's termed), the 
market reverses.  Yes, it happens to everyone at some point or at 
many points in their careers if they don't lose their trading 
account first.  

Protecting capital if we are wrong is the name of the game.  Fear 
of loss prevents us from doing that.  Think of how irrational this 
is.  If we are not willing to take a small loss out of never 
wanting to lose money, and our fear compounds with potentially 
greater loss, we have no business selling when the pain of loss is 
the greatest.  I'm not saying to grit your teeth and take the 
pain.  Far from it.  I'm saying cut the loss before it becomes an 
increasingly painful issue.  Personally, I'd rather need a Band-
aid than stitches, major surgery, or worse, amputation of my limb 
or trading account.

One other thing I want to address here.  We can see that T. is a 
bunch of turmoil.  The first step in overcoming it is to change 
our thinking.  Notice the pre-supposed condition?  "I can't 
understand how this happens to me".  The supposition is that "I 
don't understand".  That can only happen if we let it happen.  We 
have the ability to control the "happening".  A better outcome 
results from asking better questions of ourselves.  Instead of 
"why does this happen to me", a better question would be "what has 
this taught me about the market and how can I apply it in the 
future".  

Your brain will answer any questions you pose to it, positive or 
negative.  Since it can't distinguish positive from negative, your 
answer will only be as good as the question.

Asking the better question (as in the one above) might then yield 
the answer, "I cannot control the markets no matter how much I 
rationally believe they must go up or down".  And, "based on my 
risk profile, I am willing to lose only $X on this trade in order 
that I sleep well at night and to know that I controlled my risk 
to the best and smartest of my ability."  We might conclude with, 
"I will never let my losses grow so large as to risk my entire 
account (let alone my nest egg) again."

Unfortunately, as in T.'s case, there is only luck to rely on once 
a position has gotten away from us.  We are in fear, we are scared 
and hoping to find anything or any reason to hang on.  In short, 
we have a big case of analysis paralysis, or "deer in the 
headlight" syndrome.  But we still have some choices that can 
render us from the depths of hopelessness and giving up.  From 
this moment forward, we can decide to cut our losses and exit now 
with a few dollars intact and work on our psychology.  Or we can 
accept the inherent risk of losing everything and be willing to 
bet it all with no regrets if we lose it all.  If the latter is 
too horrible to contemplate, we are betting too big.  Another 
solution might then be to take money off the table by closing part 
of the position and riding the rest.  Again, our decision depends 
on our risk profile.  

No amount of study of economics or analysis of the market, which 
seeks to bolster or weaken our position once we are in a pickle, 
is going to make us money.  It won't change the outcome of the 
markets and it won't change the outcome of our trade if we are 
already in state of heightened fear.  Moneymaking is done between 
our ears before we enter the trade from a state of confidence 
derived from a plan.  If the market proves us right, ride it until 
the market proves us wrong.  If it proves us wrong, exit and wait 
for another opportunity for the market to prove us right.  

Again, this is about trading psychology, not about further study 
of the market.  If any of the above resembles you, and my maker 
knows, it's resembled me at times, the best salvation can be found 
in APPLYING the contents of Alan Goldberg's book, "Sports Slump-
Busting".  It is not for wimps.  It is hardcore a readjustment of 
your mental state.  For softer, but equally practical mental state 
changes, I think any tape set or book by Anthony Robbins is good 
too.  Even better, one of my personal all-time favorites is "Think 
and Grow Rich" by Napoleon Hill.

Let me leave you with one more thought.  "Failure" is only failure 
if and when we accept it as such.  Adopt the mentality that has 
you viewing losses (or anything else for that matter) as only a 
temporary setback, and our world becomes a better place just by 
virtue of improved attitude.

Questions always welcome.  A great Q-Charts article lies in 
waiting for tomorrow!


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

We're sticking with what's been working. Another deep cyclical and 
transport make their way onto the watch list.


To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/022702.asp


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