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Daily Newsletter, Wednesday, 03/06/2002

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The Option Investor Newsletter                Wednesday 03-06-2002
Copyright 2001, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
      03-06-2002          High     Low     Volume Advance/Decline
DJIA    10574.29 +140.88 10601.51 10425.80 1.53 bln   2297/ 867
NASDAQ   1890.39 + 24.10  1891.83  1841.31 1.88 bln   2270/1279
S&P 100   590.21 +  8.26   591.73   581.90   Totals   4567/2146
S&P 500  1162.77 + 16.63  1165.29  1145.11             
RUS 2000  494.80 +  7.21   494.80   485.21
DJ TRANS 3014.53 + 33.93  3019.63  2980.21
VIX        22.06 +  0.25    22.21    21.43 
VXN        42.90 +  0.62    44.32    42.54
TRIN        0.61 
Put/Call    0.50
*******************************************************************
Is It?
Austin Passamonte

"Back to rally mode for Wall Street". A teaser I stole from CBNC 
this evening as they wrap up the hour steering bullish questions 
to yet another economist trying to guess where the economy is 
headed later this year. Heck, I'd settle for knowing where the 
market's going next week myself and let the future unfold from 
there!

Tuesday's pullback in the Dow was recovered today while Nasdaq 
eked out further gains. A morning dip was rallied, then the 2:00pm 
Beige/Tan (some color) book minutes were released and a bit of 
index futures volatility straightened out for a run to new session 
and recent index highs.

All is right with the equity world. Numerous fundamental signs 
suggest the recession is over, recovery underway so let's get on 
with 1999 revisited. Momentum buyers keep killing shorts trying to 
sell every pause only to capitulate quickly when markets fail to 
plunge. This could easily go on for awhile as momentum traders 
chase every dip and pop. Most traders don't mind missing out on a 
market plunge but they sure do despise missing any rallies. After 
all, this could be the BIG ONE... the new baby bull that never 
dips back down!

Or is it?

(Daily Charts: Dow)


 

Before we crown any indexes on their way to new market highs, 
let's see a few more things first. Right now the Dow is once more 
at a previous point of failure in this bearish expanding wedge. 
That's a somewhat long-term reverse consolidation where the index 
actually expended energy as opposed to coiling and storage of 
kinetic force. If it cannot crack and close above 10,600 several 
days in a row, the next stops are black line & moving averages 
below. Simple as that.

(Daily Charts: NDX)


 

The NDX has more room to run, but is wrestling with 50-DMA right 
now with 200-DMA poised to step on the bull's horns after that. 
Should it manage to peel past both the trifecta of trouble lies 
above there near 1650 or so. Divide all of these numbers by 40 for 
a close guess to equivalent QQQ measures as well.

(Daily Charts: OEX)


 

The OEX (and SPX) is actually more impressive as it has just 
broken an old wedge dating back to all-time highs in early 2000 
and recent lows last fall. The 200-DMA capped this caper, but who 
knows what from there? 573 area is next measure of solid support 
and important pivot point to watch.

(Daily Charts: SOX)


 

We've traced the SOX within an ancient wedge dating back to 1999 
Bubbleonia lows and historical highs in early 2000. Some traders 
would give anything to relive that period, but for me it is a 
distant second to one more shot at year 2000 instead! Regardless, 
the SOX epitomizes channeling symbols here from last fall until 
now. Long 500 and short 600 were money in the bank and may still 
be. 

One thing we didn't point out is the degree of overbought extreme 
each daily chart stochastic value measures. We know that indexes 
(or any market for that matter) can remained pinned in extreme 
zones for periods of time while a trend rages on. What we need 
from there are additional tools to measure market posture with 
beyond oscillators. Hence, our search for trend lines and points 
of reference with meaning.

Sure Thing Setups
There aren't too many things involved with trading that are sure 
things, but one of them setting up right now is close as we can 
ever get from the speculative side!

(Weekly Charts: VIX and SPX)


 

Nothing like a 500+ index point rally in the Dow to break the 
backs of hopeful bears who silently walk away from the VIX. I 
recall back in the summer of 2000 for nearly two months harping on 
how the VIX at 20, 19, 18 and 17 called for a massive correction 
eventually. Matter of fact, I wrote the same thing so many times 
in Market Sentiment (archived for posterity) that more than a few 
readers emailed me with less than flattering opinions. 

Most of those traders are gone now, retired from our profession 
forever. By the time VIX readings cycled back up from 20 to 30, 
those hapless bulls snorting flames were clawed to pieces. Those 
of us who scaled into distant-month OTM puts probably sold too 
soon but I'll tell you what, it made for one heckuva year-end 
bonus anyway!

Seeing is believing, so please tell me what you see? How many 
times in the past two years (or before) has a meaningful rally 
raced miles higher with the VIX at or below 22.00? Don't bother 
taking your shoes & socks off, or even looking down at your 
fingers. Neither will be necessary to keep count this time around.

So what does history tell us? Will this time break the streak and 
see indexes run far higher without looking back? Could be, but is 
that how YOU want to bet 'em? My plan is the same today as it was 
last week: scalp the upside for intraday longs each time short-
term charts go oversold and the session's trend remains up. But 
each milestone of resistance higher and I'm scaling into March, 
April and eventually May index puts that are OTM with plenty of 
time value left. 

If the Dow rallies another 500 points I'll short it all the way up 
with time value remaining. Doesn't mean I'm ignoring the upside... 
I'll happily scalp that every time. Bring on more upside moves 
just like today! But not for buy & hold call options right, that's 
for darn sure. I prefer to do that when the VIX hits 30 or higher 
instead, which will happen in the future and find me building the 
next distant-month OTM call scale of holdings then.

Batting $1,000s
I could ramble on & regurgitate today's market news but why 
bother? We've all heard that on TV or read it in the free news 
sites by now. The main thing I wish to impress upon you is 
caution. Yes we've seen monster moves in the indexes this week. 
Yes the entire media world is spouting full-bull ahead and 
wouldn't that be nice to believe? Yes we've seen overbought 
markets trudge higher and low VIX readings plunge well below this. 
I'm not calling a market top right here by any stretch but I am 
saying this: indexes will soon go much lower than current price 
levels tonight.

I do not know when, how much lower or what the catalyst to drive 
them there will be. No one does. I do know a tinderbox ready to 
explode when I see one and this has all the makings of such. I've 
seen this a few times before, we've played puts every time and won 
big. Only four other times in the past twenty-four months, just 
twice a year have we seen this bearish play setup. How many have 
lost money? Zero. How many have profited wildly given a bit of 
time? All of them.

"MOAPO" #5 is building steam and won't stay repressed forever... 
what are you going to do about it?

Summation
The trend is up, buying dips has worked and may very well continue 
to. I intend to go long each day when the session's trend permits 
but am flat all bullish plays when the closing bell rings. Expect 
INTC and SUNW to liven things up a bit for us on Friday, as if 
these large-range sessions aren't volatile enough. From there we 
tip-toe towards pre-warn season and for sure ORCL and McData (or 
whoever Tuesday night) are not the last to speak the words no one 
long their stock wants to hear.

Three other things I know for sure as well:
1. My nightly sector can turned up no fewer than 15 ripe short 
plays listed in Sector Share model (most have listed options) and 
at least ten more sectors will soon follow to short. Only tech 
issues still look to have upside room and everything else is toppy 
at best.

2. We rock & roll with winners in that Model with hardly any 
losses and some pleasing gains, including 8+% on Financial 
Services iShare long play right now. Next best thing to free money 
and far, far better than bilking retirement accounts like Enron 
scumbags did.

3. When a preponderance of similar listings are found to one 
extreme, it usually signals the next directional turn. Last week 
we posted 18 long plays and sifted out 12 others that would have 
worked as well or better. Now the down side is tipping this boat, 
so longs beware. We haven't been massively wrong yet when hitting 
the setups as they emerge and this may be the first big miss, but 
that's not how I'll bet 'em in there, either!

Guard any gains in your account with care, and consider looking 
into the distance with one eye on that VIX, one eye on chart 
resistance and the other eye on distant-month, OTM puts. Too many 
eyes? Sorry about that; keep watch as best you can and I'll try & 
do the same!

Best Trading Wishes,
Austin P


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

The Greeks - Putting It All Together
By Mark Phillips
mphillips@OptionInvestor.com

Its been quite an educational process we've gone through here
in the past several weeks, handling each of the Greeks along with
the manner in which they affect option pricing.  But now I think
now we are in a position where we can put it all together to show
how we utilize all of the Greeks together to make an intelligent
decision about how to implement a given trade.

But first some housekeeping for any latecomers that happened to
miss the first three articles on their initial release dates.
I've listed the links here for quick reference, in order of
publication.

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
Volatility - Part Deux

So let's review what we have learned before plunging into today's
example.  Delta describes the rate at which an option will
appreciate for a given movement in the underlying stock, and
Gamma tells us how rapidly Delta will increase.  Remember that
we equated Gamma to the acceleration of option value, based on
the movement of the stock.  Without having to go through all the
calculations to optimize strike price selection, we know that an
option that is slightly OTM will likely have a Delta in the 30-45
range, but with Gamma just entering the fat portion of its
"torque curve", Delta should increase rapidly with 
favorable price action in the underlying stock.

Not only that, but by picking an option that is slightly OTM,
we've actually reduced our risk (due to lower cost) and increased
our potential reward (on a % basis).  The degree of OTM that we
are willing to go will depend on primarily how far we think the
stock can go in our favor.  Our desire is to pick a strike that
will be slightly ITM at the point where we wish to exit the trade
for a profit.  That gets into the topic of picking a price target
for the underlying stock, and requires us to determine not just
a price target, but also a time for achieving that target.

There are many tools that can be used for this endeavor, from
Point and Figure (PnF) price targets to retracement brackets, to
simple oscillators and support/resistance lines.  My personal
preference is the PnF price targets, but I usually supplement
that with some chart analysis using everything at my disposal to
come up with a reasonable estimate of where I think the stock is
likely to move.  Of course I also have to make a reasonable
estimate of the timeframe over which I expect that move to
occur.

That brings us to the next of our Greeks, Theta.  We want to
select an expiration month that we expect will not suffer heavy
time decay during the time we hold an open trade.  If we are
expecting a 1-month hold, then we want to select an option that
will still have 30-45 days until expiration at the conclusion of
the trade.  If however, we are looking for a trade that may last
5-6 months, then we are going to want to buy a significantly
longer timeframe contract, possibly looking at the 2003 or even
2004 LEAPS.  Selection of the expiration month is still a
subjective exercise, but the underlying rule is that we do not
want time decay to be a significant factor over the life of the
trade.

And finally Vega.  Here we are getting a measurement of the
relative "value" of the option contract we are looking to
purchase.  If volatility is rather high (relative to the
historical range), then we need to understand that.  It doesn't
mean that we can't take our trade, but it may direct us to
initiate a spread trade, rather than just a simple option
purchase.  Of course, if Implied Volatility (IV) is near the
lower end of its historical range, that just gives us one more
factor working in our favor.  Low IV tells us that we are
buying our option when it is relatively cheap, on a volatility
basis.

So let's go back to our IBM example.  I know familiarity may
breed contempt, but it also gives us familiar territory to wind
up our discussion.  I think it is rather interesting that IBM
is currently trading within $2 of where it was when we began this
study of the Greeks 6 weeks ago.  Much of the data that we looked
at along the way is still very close to being accurate, such as
Delta, Gamma and Vega.

But the price chart is showing us a much different picture.  The
stock appears to have put in a decent bottom near $96, and
looking at the PnF chart, we can see that the breakout over the
$100 level last week generated a fresh double-top buy signal.
The current vertical count tells us that IBM is good to run to
the $118 level and it could grow even higher depending on how far
the current column of X's extends before reversing into a column
of O's.  But let's just work with the $118 target.  Looking at
the price chart of IBM, we can see that the $118-120 level has
been a historical range of congestion for the past year, and that
looks like a reasonable target from where I sit.

Based on the past 2 cycles higher, where IBM pushed up out of its
base near the $95-100 level, it looks to me like that target is
achievable in a period of about 8 weeks.  Since we are currently
approaching the end of the March expiration cycle, a 2 month hold
will put us at the end of the May expiration cycle and if we
select July contracts, that will still leave us with
approximately 2 months until expiration.  Plenty of time left to
keep us insulated from the ravages of time decay that accelerate
towards the end of the options life span.  

And the final step is the analysis of volatility.  Hopping on
over to www.ivolatility.com, I can see that the IV of IBM options
is just above 30, near the lower end of the historical range..
It's not at a historical low, but very close to the lower end of
the range.  That tells me that the best approach for a bullish
trade in IBM right now is an outright option purchase, at least
on a volatility basis.

So if I was looking to initiate a bullish trade in IBM, here's
what it would look like.  I would be buying the July $110 call
option, with an anticipated target for closing the trade near
the $118 level or in two months, whichever comes first.  Even
though we are purchasing extra time, remember that there is
nothing that says we have to use it.  If our price objective is
met, then it is time to lock in profits and move on.  

Since the $110 strike is just slightly OTM, that means that Delta
and Gamma are both going to work in my favor, probably up to the
$115 level before Gamma will start to flatten out.  By that time,
Delta will likely have risen to above 0.90, meaning that my
option will be appreciating almost dollar-for-dollar with the
underlying stock.

See what I've done here?  I have picked a trade where all the
Greeks are working in my favor.  Delta and Gamma will increase as
the trade progresses in my favor, I've insulated myself from time
decay by buying enough time to let the trade work for me, and I
have confirmed that I am buying my option during a period of
relatively low Implied Volatility.  That's all there is to this
relatively complex and sometimes arcane area of option trading.
Our job is to be fully informed about the factors that can
influence the potential success of a trade, stacking as many of
them as we can in our favor.  That's precisely what we have done
with this hypothetical trade.

Alright, full disclosure time.  While we are currently tracking a
LEAP Call play on IBM in the LEAPS Portfolio, I do not currently
have a position in the stock nor do I have intentions of doing so
right now.  Simply put, there is one big technical factor that
would keep me on the sidelines, and that is the daily Stochastics,
which are currently buried in overbought territory.  That tells
me that over the very near term, the risks are somewhat weighted
to the downside, and I would want to see that condition relax
somewhat before firing up my broker's window.  The ideal
situation, in my opinion, would be to see the Stochastics drop
back down to the oversold region, while price relaxed a bit (near
$102-103 would be just about right).  When the daily Stochastics
reversed from oversold, then that would be my signal to actually
take an entry, and I would do so with the July $110 contracts as
I have described above.  Remember, that creating and entering the
trade is only part of the overall picture, and controlling risk
needs to be at the forefront of our minds at all times, in every
trade.

Hopefully, I've done more than just give you a potential trade
candidate.  My intention here is to remove the veil of mystery
that often shrouds the concept of the Greeks and how they
influence option pricing.  If you can now listen to a discussion
about Delta and Gamma and Vega and understand what is being
communicated, then I'm happy.  If you can use each of these
Greeks to formulate your future trades in a profitable manner,
then my job is done.

Questions are always welcome!

Mark


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

IS Swing Trade Model: Wednesday 3/06/2002
They Keep Buying 'Em!

News & Notes:
------------
After a slight pullback in the morning, indexes burst higher and 
never looked back. Traders long certain puts from Tuesday had a 
chance to exit near par or even tiny gains at best before price 
action popped out of coiled wedges, off channel line support and 
higher into the afternoon.


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


 

The current trend continues as price action walks the new channel 
in methodical fashion. Currently off support and below resistance, 
we have no unit of measure tonight as was present on Tuesday. A 
drop back to support is highly possible, and should be the next 
short-term call play entry if black line is touched while 
stochastic values reach oversold extreme once again.

[60/30-Min Chart: SPX]


 

Same for the SPX... 1150 area was a good intraday entry and a 
pullback to 1158 area (black line) might setup the next stair-step 
higher if the trend remains intact.

[60/30-Min Chart: QQQ]


 

QQQ merely tracked higher below resistance without ever giving up 
much ground. Looking ready for a return to support for rest, which 
may offer the next call play entry near 36.50 if touched.

Summation:
---------
A risky market for call plays held over the close right now, but 
they'll work intraday if the same pattern repeats itself from 
Tuesday night once again tomorrow. Watch these points of action 
and chart signals for the green light, or a breakdown below 
support for possible change in direction as well.


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: 36 (QQQ-OJ)             Mar Puts: 104 (DJV-OZ) 
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: 580 (OEB-OP)            Mar Puts: 1125 (SPT-OE)
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break Above 



Open Plays:
----------
QQQ                               DJX 
Mar Puts: 36 (QQQ-OJ)             Mar Puts: 104 (DJV-OZ) 
Long: BREAK BELOW 36.93(gapped)   Long: BREAK BELOW 105.75
Stop: Break Above 38.00 [hit]     Stop: Break above 105.50 [hit]

OEX                               
Mar Puts: 580 (OEB-OP)            
Long: BREAK BELOW 586.00          
Stop: Break Above 584.00 [hit]


Sector Share Trade Model: Wednesday 3/06/2002
Still Snorting!

News & Notes:
------------
After an early dip for techs, indexes were off to the races. Some 
of our remaining sector share plays exited at trailed stops while 
other remain open and tracked. Of particular interest is the IYG 
Dow Jones Financial Services iShare entered at 87.00 and now 
resting above 94.00; a +08% move in the stock itself. A few of 
these every now & then would be nice... perhaps the HHH is next?


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


Summation:
---------
Remaining open plays have stops trailed tightly with no less than 
15 new short-play entries listed tonight. At least 10 more 
weekly/daily charts are setting up for short plays as well, but we 
are still a session or two away from maturation in those.


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 symbol has listed options as well


New Play Targets (Short):
------------------------
XLB **          XLP **          XLE **
Short: 23.75    Short: 26.00    Short: 28.00
Stop:  25.00    Stop:  28.00    Stop:  30.00

XLV **          XLY **          IYM
Short: 29.00    Short: 29.90    Short: 42.00
Stop:  31.00    Stop:  32.00    Stop:  44.50

IYD             IYK             IXC
Short: 45.25    Short: 45.90    Short: 52.75
Stop:  48.00    Stop:  48.00    Stop:  55.00

IYR             UTH **          IJJ
Short: 84.75    Short: 93.25    Short:  97.00
Stop:  88.00    Stop:  98.00    Stop:  101.00

RTH **          PPH **          DIA **[DJX]
Short: 98.00   Short: 98.75    Short: 105.90
Stop: 102.00    Stop: 102.25    Stop: 110.00



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


Open Long Plays:
---------------
IIH             BHH
Long: 4.75      Long: 3.50
Stop: 5.20      Stop: 4.25
[hit]           [hit]

HHH             XLE             
Long: 28.00     Long: 26.75     
Stop: 31.50     Stop: 28.00     

BDH             IYV
Long: 12.75     Long: 11.40
Stop: 13.50     Stop: 12.93 
                [hit]
            
IYZ             XLF         
Long: 26.60     Long: 25.25    
Stop: 27.60     Stop: 27.00    

IYG             IYE
Long: 87.00     Long: 48.10
Stop: 94.00     Stop: 49.00
                [hit]


IS Position Trade Model
Please Join Us In Sector Share!

News & Notes:
------------
For the month of March we will combine both Sector Share and 
Position Trade models for index and sector play listings. Most of 
the sector share listings are also optionable, and we consider 
these triggers viable for options and shares alike. Call options 
are suitable for long play triggers while put options are suitable 
for short play triggers. 

From here we combine the best of both worlds in one fell swoop 
until otherwise noted!


Featured Plays:
--------------
See Sector Share Trade Model



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. 

Entry triggers are points in the underlying symbol where plays 
are demonstrated as price action breaks above long triggers for 
calls or below short triggers for puts. Stops are the other 
points listed as well. 

*No entry targets listed means the model is idle at this time.


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The Option Investor Newsletter                Wednesday 03-06-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


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TDW  - call
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DROPPED CALLS
*************

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

None


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

LPNT – LifePoint Hospitals $33.40 +0.61 (+0.44 this week)

LifePoint Hospitals operates 21 acute care hospitals in growing
non-urban communities in Alabama, Florida, Kansas, Kentucky,
Tennessee, Utah and Wyoming.  The hospitals usually provide
commonly available medical and surgical services, as well as
diagnostic, emergency and outpatient services.  The company also
makes available a variety of management services to its
facilities including information systems, leasing contracts,
accounting, financial and clinical systems, as well as internal
auditing and resource management.

Most Recent Update

It has been a rather unimpressive beginning to our bearish play on
LPNT this week, as the stock has failed to make any progress
either way.  That doesn't mean there hasn't been some interesting
intraday action, with the stock posting 3 doji candlesticks in a
row (normally a sign of indecision).  Intraday support has been
forming near $32, so a break of that level on solid volume would
be one signal to enter new positions.  Alternatively, entering
the play on another failed rally at the $34 intraday resistance
level will give us a better entry point.  It's hard to read much
into the action of the Health Care index (HMO.X) so far this week,
except that it is weak relative to the rest of the market,
gradually working its way lower in the developing downtrend.
That's another point in favor of the bears.

Comments

LPNT traced the famous inside day in Wednesday's session.  That
is, the stock traded within Tuesday's range.  The pattern is
indicative of consolidation ahead of either a reversal in
recent trend or continuation.  If the recent negative trend is
going to continue, LPNT needs to breakdown below the $31.97
level, which was Tuesday's low.  That's the action point to
look for going into Thursday's session.  Watch for volume to
return if the stock declines below $31.97. 

***March contracts expire next week***

BUY PUT MAR-35*PUN-OG OI=28 at $2.40 SL=1.50
BUY PUT APR-30 PUN-PF OI= 0 at $1.15 SL=0.50

Average Daily Volume = 486 K



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

Born To Be Wild
Buzz Lynn
buzz@indexskybox.com

Afraid to sell naked puts and naked calls out of fear of 
assignment of nearly worthless stock or getting called out of 
shares that have gone to the Moon that you don’t own?  I have a 
solution for you.  This may be a re-run for some of you, but it’s 
called a credit spread and is a cousin to the covered call.  

Veteran OIN readers who have attended OIN seminars may recall my 
propensity to “get naked”.  Jim Brown does this too and I assure 
you it has nothing to do with this trader's dress code.  It is a 
strategy of selling at-the-money (ATM) or slightly out-of-the-
money (OTM) calls (Deep ITM for Jim – he trades delta) when a 
stock has peaked and likely to fall, or selling puts when a 
stocked has bottomed and likely to rise.  Naked puts and calls are 
the closest thing to “free money from God” that I have found.  But 
they carry a boatload of risk with the potential to submarine your 
account (and other assets too) if you aren’t careful.

Here’s how a naked call works.  I want theta or time decay and a 
falling stock price to work in my favor against the other guy.  
Ideally I am never put the stock in the case of a naked put, or 
called out in the case of a naked call, and the option expires 
worthless to the buyer with the premium coming to me, the seller.  

The strategy is to sell calls at the high and puts at the low.  
For instance, say that JDS Uniphase (JDSU) is trading at $180 
(remember March 2000?) and appears to be on its way to $200 by 
expiration day.  Fat chance now, but hang with me on the concept.  
I might have sold a $180 put (ATM) for $20 in anticipation of the 
price continuing up (based on candlesticks, oscillators, and 
Bollinger bands), which hopefully would expire worthless as JDSU 
traded for $210 on expiration day.  

Similarly, I might have sold $180 calls for $18 on Priceline.com 
(PCLN) when it traded at $175 in anticipation that the price would 
fall, I wouldn’t have to buy the stock, and I keep the premium (as 
long as PCLN closed under $180 at expiration).  Now those stocks 
are has-beens that tanked long ago.  As Austin noted earlier today 
in the Market Monitor, "How I long for the olden days of April 
2000 when techs could nothing but fall", or something like that.

The mantra at the time was that stocks in the "new" economy would 
only go up from now to eternity because. . . and you know the rest 
of the story.  It reminds me of a mantra in the commercial real 
estate business from the 1980’s that was something like, “pre-
leasing is for wimps” – just before multimillionaire developers 
removed their kids from private school and gave the Mercedes and 
slough of empty buildings back to the bank.  Well, and so it goes 
that in March 2000, covered positions were for wimps too.  Not anymore. 

Of course, as I would soon discover, I was ill-prepared for a 
meltdown at that time on my naked put positions.  As prices of 
stocks began to tumble, I was in real danger of being forced to 
pay $180 for a $130 stock (or less – remember I sold a put in what 
turned out to be a popped-bubble market, which allowed the holder 
to “put it too me” at the $180 strike price).  It was either that 
or buy back (cover) the naked puts at a greater price for a huge 
loss on the position.  I opted for the latter and took my 
financially painful lumps.

After that, I learned to use stop losses, though those don’t 
always work either in a fast-moving market.  There had to be a 
better way to accomplish the same thing – time decay on the other 
guy without the unlimited downside risk.  That’s when I began to 
think the credit spread might be a great strategy.

I don’t know about you, but getting the benefit of time decay in 
my favor with only LIMITED DOWNSIDE RISK (!!) sounds like a no-
brainer to me!  A nice looking technical chart offering a high-
odds entry is the key.

Unlike a naked position, a credit spread isn’t as dangerous or 
intimidating as you might think.  While it too carries some 
downside risk, it is quantifiable and you always know your maximum 
loss before you enter the trade.  And you can use a much less 
volatile equity – like an index equity – instead of a volatile 
tech stock to make steady returns.  You don’t need to be a high 
wire expert or gunslinger to make this work.  It isn’t quite a 
“set and forget” trade, but many readers will appreciate that 
using this strategy does not require intraday monitoring to yield 
success.  It can be monitored and managed once a day after hours 
if you like.

Here’s how it works.  Take for instance a boring old index like 
the Dow Industrial 30.  In place of the Dow, the DJX trades for 
exactly 1/100th of the value.  So at Dow 10,500, a DJX equity 
share trades for $105.00.  At Dow 11,000, a DJX share is just 
$110.  Not much volatility there!  But the real money is in the 
credit spread.

Say the Dow trades at 10,600, as it does now.  The DJX would then 
trade at $106.  From the chart setup (and as Austin has been 
pointing out for the last week) the Dow has been moving up into 
overbought on the daily/60/30-min charts and is now begging for 
the opportunity to roll over.  I figure the cycles of human 
emotion would produce a selloff like it always does in a down-
trending market.  In short, the charts are potentially telling me 
to bet on a rollover and so is psychological trading history.  I 
act accordingly expecting the Dow to fall.

Just like a naked put, I SELL an ATM DJX MAR-106 Call for what 
seems like the meager sum of $1.00.  But here’s the twist.  Just 
in case I am wrong, I simultaneously BUY a higher strike price 
– DJX MAR-108 Call for $0.40.  You can do this spread for as many 
contracts as you like, as long there is an equal amount of both 
positions.  That way your short position always stays hedged with 
your long position.  It’s like a buy/write in covered calls except 
that in the case of a credit spread, a long call takes the place 
of the underlying security and exposes you to some (though 
limited) risk.

Anyway, doing the math produces a net credit of $0.60, or $60 per 
contract ($1.00 - $0.40).  That is yours to keep.  If the DJX 
closes at $105 or less on March 16th, you keep the whole thing.  
If the DJX closes at $108 or more in a worst-case scenario, your 
maximum loss is $2 ($106 - $108) plus your initial credit of 
$0.60, or $1.40 maximum risk of loss.  That also happens to be the 
margin equity requirement.  

That’s right.  You only need to keep $1.40 of margin equity on 
hand to cover you in a worst-case scenario!  Let’s see. . . $0.60 
profit divided by $1.40 margin equity equals. . .42.9% return on 
equity capital in three weeks (best case if DJX is under $105).  
Black-Shoals model says that this has a 67% chance of happening.  
I like the return and those odds of winning for a two week hold.

My intention here again is to have time decay work in my favor to 
narrow the spread to zero by expiration and the whole $0.60 will 
be mine!  Ten contracts of this trade would ideally yield $600 
per month if held to expiration for maximum profit and I would 
only need to maintain $1400 of margin to do it.  (Check with your 
broker as most require a minimum account size to employ this 
strategy - Preferred requires $10,000 in cash balance)

Now can you see the profit potential?  Again, the key is time 
decay working in your favor.  But with a credit spread, your 
downside risk is limited and quantifiable.  You’ll sleep much 
better at night employing this strategy rather than “getting 
naked” and worrying about “accounting irregularities” on the 
company in which you shorted puts.

Out of time for now.  But next time I’ll go into how to close the 
position for a profit before expiration or how to exit for less 
loss than the worst case if the trade goes against us. 

Another episode of Q-Charts is up tomorrow.  Stay tuned!


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

Stocks Soar Amid Bullish Economic Data
By Ray Cummins

Industrial stocks rebounded Wednesday on strength in cyclical and
defensive issues while the technology index extended its recent
gains.

The Dow Jones Industrial Average rose 140 points to 10,574 with
J.P. Morgan Chase (NYSE:JPM), Alcoa (NYSE:AA), Johnson & Johnson
(NYSE:JNJ), General Motors (NYSE:GM) and Merck (NYSE:MRK) among
the best performers.  Activity in the hi-tech segment was also
positive with the NASDAQ Composite up 24 points to 1,890 despite
some weakness in chip and storage stocks.  Telecom and wireless
shares were the surprise winners with both groups edging higher
after bullish comments from Sprint (NYSE:FON), which said it was
on track to meet 2002 financial targets.  In the broader markets,
buying interest was seen in airline, retail, drug, biotechnology
and utilities stocks while oil service issues generally slumped.
Steel company shares were popular following news that President
Bush imposed tariffs of up to 30% on most imported steel for a
period of three years and banking stocks also moved higher after
Deutsche Banc Alex. Brown upgraded J.P. Morgan Chase based on an
attractive valuation, a bottoming risk profile and a belief that
the company has much to gain from a strengthening economy.  The
latest piece of economic data revealed that new factory orders
rose 1.6% while inventories declined 0.6%, both of which were
in line with analysts' expectations.  The Federal Reserve said
that the U.S. economy showed indications it was recovering from
recession in the first two months of the year, based on signs of
improvement in economic conditions from its infamous "beige book."
Much of the data in recent sessions has led to a more optimistic
outlook and many of the economists on Wall Street argue that the
world's largest economy is slowly pulling out of the recession.
Fed policymakers will offer their opinions on the subject at the
March 19 meeting of the Federal Open Market Committee, when the
interest rate-setting panel will make a decision on the Federal
funds rate.  Most analysts believe they will leave the cost of
borrowing unchanged in anticipation of a more accurate economic
picture in the near future.

***************
Summary of Current Positions (as of 03-05-2002):
***************

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   44.20   2.36    6.4% ***

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   42.75   0.80    7.2%
MU      MAR     30   29.20   39.50   0.80    7.5%
NVDA    MAR     47.5 46.45   58.91   1.05    6.4%
KLAC    MAR     50   48.55   66.92   1.45    7.4%
AMAT    MAR     40   39.40   50.97   0.60    5.1%
KLAC    MAR     50   48.95   66.92   1.05    7.5%
RTEC    MAR     35   34.25   37.70   0.75    6.9%
TER     MAR     27.5 27.00   39.09   0.50    6.3%
IDPH    MAR     55   54.00   65.73   1.00    7.1%
ACS     MAR     42.5 41.95   51.35   1.10    5.0% ***
AMAT    MAR     40   39.40   50.97   0.60    6.3%
KLAC    MAR     50   49.20   66.92   0.80    7.1%
TER     MAR     27.5 27.10   39.09   0.40    6.8%
GILD    MAR     60   59.45   72.99   0.55    5.5%

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   41.86   0.80    8.2%
EMLX    MAR    47.5  47.95   37.27   0.45    7.4%
MRVL    MAR    42.5  42.90   38.33   0.40   10.5%


Credit Spreads:

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

CYMI   41.37    45.01  MAR30P/35P   0.75   34.25   0.75   Open
AZN    47.60    50.64  MAR40P/45P   0.40   44.60   0.40   Open
NOC   109.32   103.95  MA95P/100P   0.80   99.20   0.80   Open
PG     82.50    85.06  MAR75P/80P   1.00   79.00   1.00   Open
TGH    77.00    68.81  MAR65P/70P   0.45   69.55  (0.74) Closed
BVF    42.05    47.00  MAR55C/50C   0.60   50.60   0.60   Open
ROOM   54.72    59.37  MAR40P/45P   0.70   44.30   0.70   Open
HIG    67.00    68.27  MAR60P/65P   0.90   64.10   0.90   Open
PGR   152.90   159.22  M140P/145P   0.90  144.10   0.90   Open
XL     97.11    96.49  MAR85P/90P   0.60   89.40   0.60   Open
AHC    64.48    71.77  MAR55P/60P   0.50   59.50   0.50   Open
BGEN   54.45    54.77  MAR65C/60C   0.50   60.50   0.50   Open
TEVA   59.99    57.13  MAR70C/65C   0.60   65.60   0.60   Open
ACE    42.50    43.90  MAR35P/40P   0.50   39.50   0.50   Open
ETN    78.45    83.75  MAR70P/75P   0.55   74.45   0.55   Open
MRK    61.26    61.81  MAR55P/60P   0.80   59.20   0.80   Open
LXK    50.48    54.96  MAR60C/55C   0.55   55.55   0.55   Open ***
WHR    65.50    76.50  APR80C/75C   1.10   76.10  (0.40)  Open ***
FD     41.68    41.70  MAR37P/40P   0.40   39.60   0.40   Open ***
UTX    72.95    73.90  MAR65P/70P   0.55   69.45   0.55   Open
XL     95.70    96.49  MAR85P/90P   0.45   89.55   0.45   Open
CCU    47.00    49.02  MAR55C/50C   0.50   50.50   0.50   Open

Lexmark (NYSE:LXK) rebounded this week along with the computer
hardware group and although the issue ended below our maximum
profit point today, traders should consider rolling to a higher
strike spread (APR65C/60C) to protect gains in the position.
Shares of Federated Stores (NYSE:FD) slumped with the retail
sector despite news that sales at U.S. chain stores climbed
modestly in February.  The bullish data was supported by food
and spring clothing sales, but analysts say the overall tone
of consumer spending suggests a slow recovery ahead for the
struggling economy.  Investors took that outlook to heart as
they sold-off stocks in the retail group and the key test for
FD in the near-tem will be recent support at $40.  Shares of
Whirlpool (NYSE:WHR) continued to rally this week, however the
issue is certainly due for a technical correction in the coming
week.  We will monitor the stock for indications of new buying
pressure as it tests current support near $75.

  
Index Credit Spreads:

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

OIH    56.65    65.09  MAR45P/50P   0.60   54.40   0.60   Open
OEX   557.59   581.95  M595C/590C   0.50  590.50   0.50  Closed?

The recent broad-market rally has pushed the OEX to a test of
near-term resistance (in the 590-595) range and the bearish
portion of our position is now in jeopardy.  Traders should
consider closing the spread to lock-in profits and/or limit
losses.


Synthetic Positions:

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

WMT    59.86    60.76  MAR65C/55P   0.25   54.75   0.40   Open

As we noted last week, retail giant Wal-Mart (NYSE:WMT) recently
moved to a new "all-time" high, allowing traders lock-in a small
gain 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 - Covered Calls, Naked Puts, & Combinations

***************
COF - Capital One Financial  $57.10  *** Hot Sector! ***

Capital One Financial (NYSE:COF) is a holding company whose
subsidiaries provide a variety of products and services to
consumers using its proprietary information-based strategy.
The company's main subsidiary, Capital One Bank, a limited
purpose credit card bank, offers various credit card products.
Capital One, F.S.B., a federally chartered savings bank, has
consumer lending and deposit products.  Capital One Services
Inc., another subsidiary of the company, provides operating,
administrative and other services to the company and its many
subsidiaries.  Capital One's business consists of both lending
and non-lending activities.  Its lending activities consist
primarily of credit card products, but also include other
consumer lending activities, such as unsecured installment
lending and automobile financing.  Its non-lending business
activities consist primarily of its retail deposit-taking
business and various non-lending new business initiatives.

Bank, brokerage and credit card stocks have rallied in recent
sessions on an improving U.S. economic outlook and hopes that
loan losses might abate and companies involved in businesses
like investing and trading would recover in the coming months.
In addition, investors have begun to express a new interest in
the market over the past few days, due to upbeat economic data
in manufacturing, construction and consumer spending.  The new
buying pressure has extended to the Credit Services group and
Capital One Financial has benefited from the bullish momentum.
Traders who believe the upside activity in the sector will
continue can speculate on that outcome with these positions.

COF - Capital One Financial  $57.10

PLAY (sell naked put):

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

SELL PUT  MAR 50   COF OJ  6,202     0.35    49.65      7.4% ***
SELL PUT  MAR 55   COF OK  2,806     1.00    54.00     15.5%
SELL PUT  APR 47.5 COF PT  228       0.95    46.55      4.6% ***
SELL PUT  APR 50   COF PJ  895       1.40    48.60      5.6%


***************
CEPH - Cephalon  $63.50  *** Profit-Taking Complete? ***

Cephalon (NASDAQ:CEPH) is a global biopharmaceutical firm focused
on the discovery, development and marketing of products to treat
sleep disorders, neurological disorders, cancer and pain.  In the
United States, Cephalon markets three products, Provigil Tablets
for treating excessive daytime sleepiness and narcolepsy, Actiq
for the management of cancer pain in opioid tolerant patients,
and Gabitril for the treatment of partial seizures associated
with epilepsy.  In the United Kingdom, Cephalon markets Provigil
and five other products, including Tegretol, a treatment for
epilepsy, and Ritalin, a treatment for ADHD, or attention deficit
hyperactivity disorder.  The company also markets other products
in France, Germany, Austria and Switzerland.

Cephalon has been under pressure in recent weeks but the selling
appears to have abated and the stock may be bracing for a recovery
in the wake of bullish comments from a popular industry analyst.
Standard & Poor's biotech analyst Frank DiLorenzo says investors
should focus on companies that already have approved drugs; that
are rapidly increasing their sales; or that have a major drug in
Phase 3 trials.  He mentioned that among the small- and mid-cap
biotech stocks, Cephalon is a favorite because of the company's
two primary drivers: Provigil, which is a drug used for patients
who are suffering from excessive daytime fatigue, and Actiq, which
helps ease the pain of cancer patients.  Indeed, the demand for
both of Cephalon's major drugs is growing and traders who believe
the worst is over for CEPH shares should consider these positions.

PLAY (sell naked put):

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

SELL PUT  MAR 55   CQE OK  5,232     0.70    54.30      13.4%
SELL PUT  MAR 60   CQE OL  3,602     1.45    58.55      21.0%
SELL PUT  APR 50   CQE PJ  1,402     1.65    48.35       7.9% ***


***************
GILD - Gilead Sciences  $73.20  *** 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 have traded at all-time highs in recent
sessions after the company said that 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 last 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  $73.20

PLAY (sell naked put):

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

SELL PUT  MAR 65   GDQ OM  2,460     0.45    64.55       7.1%
SELL PUT  APR 55   GDQ PL  171       1.50    53.50       6.4% ***
SELL PUT  APR 60   GDQ PM  94        2.55    57.45       9.5%


***************
KLAC - KLA Tencor  $66.19  *** Chip Sector Favorite! ***

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

KLAC consolidated today after the recent rally but the issue
is still a "favorite" in the semiconductor-equipment sector
and this week's bullish activity suggests there is optimism
for a few companies in that group.  The long-term technical
outlook remains favorable and the premiums in these options
offer excellent reward potential for traders who are bullish
on the issue.

KLAC - KLA Tencor  $66.19

PLAY (sell naked put):

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

SELL PUT  MAR 60   KCQ OL  12,640    0.55    59.45      8.9%
SELL PUT  APR 50   KCQ PJ  502       0.90    49.10      4.4% "TS"
SELL PUT  APR 55   KCQ PK  719       1.70    53.30      6.9% ***


***************
PHTN - Photon Dynamics  $50.05  *** On The Move! ***

Photon Dynamics (NASDAQ:PHTN) is a provider of yield management
solutions to the flat panel display (FPD) industry.  The company
also offers yield management solutions for the printed circuit
board assembly and advanced semiconductor packaging industries
and the cathode ray tube display and CRT glass and auto glass
industries.  The company's test, repair and inspection systems
are used by a range of manufacturers to collect data, analyze
product quality and identify and repair product defects at all
critical steps in the manufacturing process.

Semiconductor and chip-equipment stocks have been among the best
performing technology groups during the recent technology rally
and the extreme bullish activity in PHTN's shares suggests that
investors believe it is a leader in the industry.  Based on the
technical indications, PHTN is indeed one of the stronger stocks
in the semiconductor group and traders who wouldn't mind owning
the issue at discounted basis should consider these positions.

PHTN - Photon Dynamics  $50.05
  
PLAY (sell naked put):

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

SELL PUT  MAR 48   PDU OW  55        0.65    46.85      12.1%
SELL PUT  APR 40   PDU PH  1,064     0.70    39.30       4.5% "TS"
SELL PUT  APR 42.5 PDU PV  12        1.05    41.45       5.4% ***
SELL PUT  APR 45   PDU PI  90        1.70    43.30       7.0%


***************
SEPR - Sepracor  $47.27  *** On The Rebound! ***

Sepracor (NYSE:SEPR) is a research-based pharmaceutical company
dedicated to treating and preventing human disease through the
discovery, development and commercialization of pharmaceutical
products that are directed toward serving unmet medical needs.
Sepracor's drug development program has yielded an extensive
portfolio of pharmaceutical candidates that are focused on the
treatment of respiratory, urology and central nervous system
disorders.

Today SEPR surfaced on our list of bottom-fishing candidates
and based on the short-term technical indications, the issue
appears poised for future upside activity.  The recent rally
began in late February when J.P. Morgan started coverage of
the biotech firm with a "buy" rating and a $56 price target,
due to the company's unique product pipeline.  Analyst Corey
Davis said the company's product pipeline of four major drug
launches over the next three years will drive accelerating
growth.  Davis also said Sepracor should get an "approvable"
letter from the FDA on Soltara, an allergy drug, and its very
successful asthma drug Xopenex.  Overall, the analyst favors
"Sepracor's transition to a fully integrated drug company as
the success with Xopenex highlights the company's development
expertise and marketing savvy that can now be applied to its
rich near term pipeline."  We simply like the chart pattern
and traders who agree with a bullish outlook in the near-term
can profit from that outcome with these positions.

SEPR - Sepracor  $47.27

PLAY (sell naked put):

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

SELL PUT  MAR 40   ERQ OH  2,315     0.35    39.65       9.9% ***
SELL PUT  MAR 45   ERQ OI  396       1.65    43.35      30.5%
SELL PUT  APR 35   ERQ PG  711       0.80    34.20       5.4% ***
SELL PUT  APR 40   ERQ PH  924       1.80    38.20       9.3%


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

Credit Spreads

***************
BGEN - Biogen  $57.07  *** New Trading Range? ***

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

BGEN emerged today in a scan/sort for issues that have moved
above recent trading patterns.  In addition to a favorable
short-term price pattern, BGEN has excellent option premiums
and based on analysis of historical pricing and its technical
background, this position meets the fundamental criteria for
a bullish credit-spread.  The stock has been forming a Stage I
base for almost two years, trading in a range from $50 to $70.
More recently, Biogen has also formed a strong support area at
$52 with resistance near $56, and the increased volume during
today's rally suggests the upside activity will continue in the
near-term.

BGEN - Biogen  $57.07

PLAY (conservative - bullish/credit spread):

BUY  PUT  APR-45  BGQ-PI  OI=1566  A=$0.40
SELL PUT  APR-50  BGQ-PJ  OI=1981  B=$0.95
INITIAL NET CREDIT TARGET=$0.60-$0.65  PROFIT(max)=14%


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

Neutral Plays - Straddles & Strangles

***************
QCOM - Qualcomm  $39.95  *** Speculative Volatility Play! ***

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

Based on the recent share value activity and historical option
prices, QCOM is again (it was a big winner last month!) offering
traders a favorable "speculative" straddle opportunity.  QCOM's
options are undervalued and the stock has the potential to move
(high or low) enough to make the straddle profitable.  Also, the
issue has a history of multiple movements through a sufficient
range in the required amount of time to justify the overall
risk-reward outlook of the position.

QCOM - Qualcomm  $39.95
 
PLAY (very speculative - neutral/debit straddle):

BUY  CALL  MAR-40  AAW-CH  OI=19140  A=$1.50
BUY  PUT   MAR-40  AAW-OH  OI=8750   A=$1.60
INITIAL NET DEBIT TARGET=$2.80-$2.90  TARGET PROFIT=15%-25%


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

BEARISH PLAYS - Naked Calls & Combinations

The recent upside market activity has generated some speculative
call-option buying, providing bearish traders with a number of
excellent opportunities for "premium-selling" strategies.  Here
are three favorable candidates, based on analysis of historical
option pricing and the underlying stock's technical background.
All of these positions meet our basic criteria for profitable
"naked" calls: each issue has robust option premiums, a defined
resistance area and a high probability of remaining below the
target strike prices.  As with any recommendations, these plays
should be carefully evaluated for portfolio suitability and
reviewed with regard to your strategic approach and personal
trading style.
 
***************
NVDA - Nvidia  $57.06  *** Premium Selling! ***

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

NVDA - Nvidia  $57.06

PLAY (aggressive - sell naked call):

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

SELL CALL MAR 60   RVU CL  11,827    1.10    61.10     17.7%
SELL CALL APR 60   RVU DL  5,127     4.00    64.00     11.6%
SELL CALL APR 65   RVU DM  4,100     2.30    67.30      9.3%
SELL CALL APR 70   RVU DN  895       1.00    71.00      5.6% ***


***************
PSFT - Peoplesoft  $34.53  *** Software Slump! ***

PeopleSoft (NASDAQ:PSFT) designs, develops, markets and supports
a family of enterprise application software products for use
throughout large and medium-sized organizations.  These unique
organizations include corporations, higher-education institutions
and federal, state, provincial and local government agencies
worldwide.  PeopleSoft provides enterprise application software
for customer relationship management, e-commerce, human resources
management, financial management, supply chain management and
enterprise performance management, along with a wide range of
industry-specific products.  PeopleSoft's applications offer a
high degree of flexibility, rapid implementation and scalability
across multiple databases and operating systems.  In addition to
enterprise application software, PeopleSoft offers a variety of
services to its customers including implementation assistance,
project planning, online analytic processing deployment, minor
software product enhancements and training.

PSFT - Peoplesoft  $34.53
 
PLAY (aggressive - sell naked call):

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

SELL CALL APR 40   PQO DH  3,991     1.25    41.25      9.0%
SELL CALL APR 42.5 PQO DT  875       0.80    43.30      7.2% ***
SELL CALL APR 45   PQO DI  905       0.45    45.45      4.2% "TS"


***************
QLGC - Qlogic  $46.25  *** Storage Sector Sell-off! ***

QLogic Corporation (NASDAQ:QLGC) is a designer and supplier of
Storage Area Networking infrastructure building blocks.  Its
SAN infrastructure building blocks, comprised of semiconductor
chips, host board adapters and switches, are integrated into
storage networking solutions of the world's leading system and
storage manufacturers.  Companies such as Sun Microsystems, IBM,
Dell Computer Corporation, Compaq Computer Corporation, Fujitsu
Microelectronics, and Hitachi all use some of its components in
the storage and systems solutions they also sell to the world's
largest information technology environments.  In addition to its
original equipment manufacturer relationships with these and
other companies, in January 2000 the company started delivering
selected Fibre Channel building blocks to leading distributors,
systems integrators and resellers, thereby expanding its reach
and visibility to the information technology community.  

QLGC - Qlogic  $46.25

PLAY (aggressive - sell naked call):

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

SELL CALL APR 50   QLC DJ  3,028     3.20    53.20      12.3%
SELL CALL APR 55   QLC DK  3,272     1.70    56.70      10.3%
SELL CALL APR 60   QLC DL  2,426     0.85    60.85       5.8% ***


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

BULLISH PLAYS:

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

DVN    46.72  MAR 45P  0.50   MAR 40P  0.10   0.50     11%
ACS    51.97  MAR 50P  0.50   MAR 47P  0.30   0.25     11%
TOL    52.62  MAR 50P  0.60   MAR 45P  0.20   0.45      9%
RTH    98.18  MAR 95P  0.65   MAR 90P  0.25   0.45      9%
NOC   109.33  MAR 105P 0.70   MAR 100P 0.30   0.45      9%
HI     57.86  MAR 55P  0.70   MAR 50P  0.30   0.45      9%


BEARISH PLAYS:

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

MERQ   37.73  MAR 40C  0.80   MAR 45C  0.20   0.65     15%
ADRX   41.47  MAR 45C  0.95   MAR 50C  0.35   0.65     15%
QLGC   46.20  MAR 50C  0.75   MAR 55C  0.20   0.60     14%
LOW    42.88  MAR 45C  0.40   MAR 47C  0.15   0.30     14%
IBM   106.25  MAR 110C 0.60   MAR 115C 0.15   0.50     11%
EMLX   34.15  MAR 37C  0.55   MAR 40C  0.35   0.25     11%

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




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





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

Bulls return to the market.  So do a few bullish possibles on the 
watchlist.


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