Option Investor

Daily Newsletter, Wednesday, 03/13/2002

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The Option Investor Newsletter                Wednesday 03-13-2002
Copyright 2001, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      03-13-2002          High     Low     Volume Advance/Decline
DJIA    10501.85 -130.50 10620.17 10474.17 1.35 bln   1398/1767
NASDAQ   1862.03 - 35.09  1886.27  1858.45 1.65 bln   1503/2013
S&P 100   589.84 -  1.25   591.09   582.75   Totals   2901/3780
S&P 500  1164.31 -  1.27  1165.58  1151.01             
RUS 2000  495.45 -  3.45   498.90   494.40
DJ TRANS 2949.84 - 44.97  2995.93  2948.67
VIX        21.97 +  0.66    22.58    21.55 
VXN        43.26 +  0.25    44.17    42.55
TRIN        1.55 
Put/Call    0.67
Backing Off

First & foremost let me extend a warm welcome to Leigh Stevens, 
our newest market technician at OI. Hope you find this role as 
much fun as I have these past two years this month! Plenty of 
good people on both sides of this screen make it all worthwhile.

This week I find myself surrounded with average people who exist 
at arm's length of the markets. It's always a refreshing change 
to renew my vision thru their eyes instead of market addicts like 
myself who are intertwined with each daily gasp & exhalation of 
the tape.

Joe & Jane upper-middle class and upper class do not seem nearly 
as enamored with stocks this year as one might expect. Matter of 
fact, right when the experts on TV tell us a market bottom is in 
with nothing but green pastures ahead it is met with indifference 
to outright disbelief. I've seen stacks of unopened envelops with 
mutual fund statements inside and more than a few redemption 
checks as well. This is as unscientific a casual study as one 
could ever conduct, but interesting to me nonetheless.

Turning back to my fellow tape addicts in the trenches, we 
endured another gap-down open this session on the latest knee 
jerk reaction to realistic economic news. Never ceases to amaze 
me how today's "investor" or trader is more emotional and short-
sighted than ever, but I suppose the speed of fiber has much to 
do with this. Our task is to anticipate the illogical and try to 
understand emotional reaction before it occurs. I've learned a 
few new tricks the past couple months that are almost free money 
before the cash market opening bell ever rings, but that's 
another story. Suffice it to say we remain entrenched in a 
volatile market right now where creeping rallies and trends are 
merely distant memories.

(Weekly/Daily Charts: Dow)


Pea porridge hot, pea porridge cold... Dow looks coldest of the 
indexes right now as it met stiff rejection at resistance and 
both oscillators are poised for bearish reversals. Where doth 
thou support lie below? Just keep an eye on these various Fib 
retracement levels; especially 10,130 level below. The 20 DMA is 
rising to meet it and should offer magnetism next.

(Weekly/Daily Charts: OEX)


S&P 100 also sits on significant support right now and a break 
lower could easily revisit 560 areas noted above.

(Weekly/Daily Charts: QQQ)


Nazz 100 has recently climbed (clumb?) from 33 to 39 areas. I'd 
not be at all surprised if it doesn't at least retrace half that 
measure to 36, and quite probably in the next two sessions!

(Weekly/Daily Charts: SOX)


SOX rocks lately, but hot money flies in & out of there on every 
has-been upgrade and downgrade that crosses news wires several 
times each week. Great place for wild speculation, but "Semi-
Conductor Investing" is a HUGE oxymoron since early spring 2000.

Tough To Squeeze
Last week witnessed a significant shift in the COT report for the 
first time in months. Much like other sentiment indicators this 
is not a short-term trade filter: it is designed to give us a 
feel for what big and small money are doing. I'm interested to 
see just what if any changes are made this week in the flailing 
action as well.

Small speculators are easiest to squeeze and for that reason 
usually wrong. These are traders who merely go long or short 
index futures contracts and bite the bullet from there. This 
would be people like you & I who hold futures contracts just like 
options over time and take their chances from there.

Commercial traders are very difficult to shake out of their 
positions on a squeeze. That's because they use index futures to 
hedge portfolios of stocks, naked options or both. They also use 
cash index options to hedge their futures with in somewhat 
complex delta-neutral deals only big money paying zilch for 
commissions can do. They do not simply sell a few thousand naked 
calls or puts and walk away without having intricate hedging 
systems in place to reduce or totally eliminate adverse risk. 
Nope... the big boys (and girls) play stocks, index futures and 
especially short options in an entirely different manner than 

This is why monitoring the COT reports each week is important. 
Commercial traders are seldom wrong and when they are, it's just 
a matter of quietly unwinding their positions that doesn't really 
move the markets much. On the other hand, small speculators are 
easily squeezed and when they reach a recent extreme high and 
start to sell at any "ask" the long-squeeze shoots broad market 
price action down in a hurry.

As of last week we had commercials getting net short in a 
significant way with small specs getting net long with equal 
aplomb. Guess which group is hedged while the other twists in the 
breeze of market whims? Guess what might happen if the weak group 
is pressured a bit in the near future? Toss in a VIX stubbornly 
clinging to 22 range or lower and we've got the fixin's for a 
good ol' fashioned long-squeeze sell off ahead!

Expiration week, particularly a Triple-Witch even can be 
tumultuous and rife with noisy moves pushed by index futures 
contract rollouts and jostling. We'll have a much clearer picture 
of reality next Monday and the next two sessions are likely to be 
rocky, choppy and suitable for veteran scalpers only. My own 
money is still playing the downside more than not based upon the 
chart signals depicted above. There may not be signs nor catalyst 
of any major market plunge but I sure can't see budding evidence 
for any sustained rally to new recent highs right from here, 

The downside rules slightly for now, but believe anything you see 
for the next two days resembling weather patterns: each 15 
minutes could bring rain or shine!

Best Trading Wishes,
Austin P

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A Greek Encore
By Mark Phillips

It took us 6 weeks to go through our discussion of the Greeks,
explaining each of them in turn and then tying it all together
last week, showing how to use all of them together in formulating
a well thought out trade.  While I thought we had just about
exhausted the subject, I had several readers request a treatment
of "the other side of the coin".  Recall that our hypothetical
trade setup last week focused on IBM, where we came to the
conclusion that buying calls was the right decision based on Vega,
and then we used the other Greeks to determine the appropriate
strike price and expiration month.  My faithful readers asked
what we would look for in terms of the Greeks if we were looking
to sell some premium (i.e. sell options, rather than buy them).

My mother taught me at a young age that if a job is worth doing,
it is worth doing right.  So at the risk of boring some of you
that are tired of my endless prattling on about Delta, Vega, and
Gamma, I'm going to show "the other side of the coin" and describe
how the Greeks should influence your decision process if you
prefer to sell options.  And for any of you that missed any part
of the discussion that preceded our discussion here today, all
the articles are stored for posterity in the Options 101 Archives,
and I've provided the links here as well.

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
The Greeks - Putting It All Together

Reviewing what we did in last week's example, first we looked at
the price chart to determine whether a bullish or bearish stance
is warranted in the underlying stock.  Once we determined that
the upside was the likely direction for the stock over the near
term, we moved over to the volatility chart at www.ivolatility.com
and determined that with relatively low volatility, we would want
to be a buyer of options (buy when volatility is low and sell when
it is high).

Then we pulled out our other Greek tools, using Delta and Gamma
to pick the right strike price, and our understanding of Theta to
choose an appropriate expiration month.

The process really isn't that much different if we are looking to
sell options, rather than buy them.  But there are some important
distinctions that we need to be aware of.  Since we already have
a predisposition to sell options, we need to focus on Vega
(volatility) first.  The reason is that we want to pick options
that have relatively higher implied volatility if we're going to
sell them.  It wouldn't do us any good to sell a low-volatility
option and then have volatility increase, now would it?  In fact,
selling a low volatility option is playing with the deck stacked
against us.  We could be right about the direction and timeframe
for the trade to materialize, but expanding volatility could
actually inflate the value of the sold option such that we lose
money on the trade.  Remember, we want to get all the Greeks
working in our favor -- that is the basis of an intelligent
trading decision.  So our first mission is to find a stock (and
option) with high volatility first.

Back to www.ivolatility.com for that information.  Those
industrious folks over there have put together a wealth of
information for those of us that are serious about our
volatility.  Looking for stocks that are near the upper bound of
their historical volatility range?  Just click on the link for
their Volatility Ranker and specify the information as you wish.
I selected the S&P500 as the pool of stocks to consider and
selected the radio button "Implied Volatility as a scaled % of
IV Hi/Low range", then "Mean", "20" for the number of stocks to
view and "Top Ranked only" to provide those stocks with the
highest relative volatility ranking.  Click "Show" and you're off
to the races!

Observant students that followed that process will notice the
same thing that the VIX is currently telling us.  Namely,
Volatility is LOW!  There are not a lot of stocks that are
trading near the upper end of their historical volatility
ranges.  By far, the highest relative volatility I found was on
Conseco (NYSE:CNC), but with a current price less than $5, I
quickly lose interest.  There just aren't a lot of 'options'
available when a stock's price is that low.  Another one that
looks rather interesting is Maytag (NYSE:MYG), which has just had
a nice bullish run from the low $30s to $45.  The HV range is
from 21.46-52.97, and IV is currently sitting at 44.  Not at a
peak to be sure, but definitely near the upper end of the range.
So investors that like to sell naked options would definitely
want to take a more careful look.

Unfortunately, due to the large increase in price recently (MYG
hasn't traded this high for over 2 years) the highest strike
available on MYG is $45, which severely limits our choices if
our preference is to utilize a spread.  But let's go ahead and
use MYG for our example today, with the intent of selling naked
options on the stock.  Now let me be perfectly clear.  THIS IS
ONLY AN EDUCATIONAL EXAMPLE.  I do not consider this to be a good
or even passable trade.  It just happens to show the process that
we need to go through if we are going to apply our newfound
knowledge on the Greeks to implementing a trade where we sell
time (and volatility).

Ok, now that we've decided to sell a naked option on MYG, we need
to then turn to the price chart and our news sources to determine
whether to play puts or calls.  Yesterday, the stock surged higher
when the company announced that they would handily beat analyst
estimates for the first quarter due to fatter profit margins.
That was followed today by Prudential raising estimates for both
2002 and 2003.  That news capped off a nice solid rally over the
past month that has pushed the stock to fresh 2-year highs.  I'm
not a fan of shorting that kind of strength, so I'm not wild about
selling naked calls.  On the other hand, MYG has had one heck of
a run lately and could be due for a bit of a pullback over the
near term.  If forced to pick a direction for an option sale, I
think I'd have to go with selling the naked put, but I would want
to see a bit of a pullback before initiating the trade.

And that brings us to the issue of time.  How long do we want to
have the trade open?  That comes down to the issue of time decay.
Remember that time value in an option decays faster and faster
as we approach expiration, so ideally we want to sell our option
at such a time that the time value will erode rapidly.  That
means as close to expiration as possible.  I would have to rule
out the March contracts as there are only 2 days remaining until
expiration (with very little premium to sell), which makes April
contracts the best choice.  When selling options, our desire is
for the options to expire worthless, or at least decline in value
so that we can buy them back to close at a significantly reduced
price.  Time value always decays and with volatility relatively
high right now, both Vega and Theta will be working in our favor.

Which brings us back to where our exercise started with the IBM
example, Delta and Gamma.  If we are correct in our assessment
that MYG should continue higher following the vastly improved
fundamental news, then we want to sell an option that already has
high Delta and Gamma, which should also erode as the trade works
in our favor.  Since we know that Delta and Gamma will be fairly
high for an ITM option, we would want to select the $45 strike.
So our actual trade would consist of selling the $45 April put,
ideally on a dip and bounce in the vicinity of $42.50 (the top
of yesterday's gap).  Then as the stock continues its ascent
heading into earnings, we will have all the Greeks working in our

Time decay always works in the favor of the option seller and
volatility decay should also work in our favor as the excitement
of this week's news fades from investor's minds.  Then as our
sold option moves from ITM to ATM to (hopefully) OTM, the premium
of the option will decrease due to the decrease in Delta, as
dictated by the current value of Gamma (our acceleration).  As a
side note, this is a big reason why Jim is a big fan of selling
Deep ITM puts.  As the trade works in his favor, he is capturing
nearly 100% Delta, so that his trade profits almost
dollar-for-dollar with the move in the underlying stock.

So let's assume that we sell our April $45 Put next week on a
rebound from the $42.50 level.  What do we do for our exit
strategy?  Well, if everything goes our way, MYG will continue to
work higher into its earnings announcement on April 25th and as
long as MYG is trading over $45 on April 19th, our sold option
will expire worthless, allowing us to keep the entire premium in
our account.  But what if things don't go as planned?  Stop
losses, my amigos!  Depending on your risk tolerance, you would
want to place a (Buy to Close) stop just below your defined
support at $42, or for those able to tolerate a bit more risk,
$40 (where the stock built up a base before the latest surge
higher).  The point is that we always have to lay out our exit
plan before entering the trade or we have no business entering
the trade in the first place.

This obviously isn't an ideal trade, but hopefully the process I
have gone through here allows you to see the process one would
go through in trying to select a trade (based on the Greeks)
where the preference is to sell options rather than buy them.
Of course, there are numerous other option selling strategies
that could be employed here, such as initiating a spread, buying
the underlying stock and selling a covered call, or putting on
a straddle or strangle.  But I didn't want to confuse the issue
by trying to handle the Greeks and a complex option strategy at
the same time.  If there is sufficient interest, we can delve
into some of those complex strategies in the future.  

Next week, I want to focus on using the strike-specific Greek
information found on www.ivolatility.com to determine how best
to implement some of these more complex trades.  And that will
lead us into the topic of Volatility Skew, which can be
particularly useful when looking to initiate spread trades.

Questions are always welcome!


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Index Trader Swing-Trade Game Plan: Wednesday 3/13/2002 
Sold Off

News & Notes: 
From today's MM window at 9:24am EST (actual time): "My plans for 
short-term option trades today are very simple: follow the 
triangle patterns depicted in last night's Swing Trade Gameplan 
section, puts below and calls above the respective consolidation 
patterns. That equates to roughly DJX 105.90 for puts and 106.50 
for calls, which were not charted in there. Together with price 
channels tracked for many days in those same charts, we have easy 
points of reference to follow!"

Indexes did not confirm their bullish triangles from last night, 
and failed chart patterns are powerful to trade the opposite way 
of prediction. Shorts off the bell or into the feeble bounce 
attempt near 10:30am failure in 10/5 min charts was an easy play 

Featured Markets: 

[60/30-Min Chart: OEX]  


OEX broke to the downside, short entry was in the 587 - 588 range 
and session low was several index points lower than that.

[60/30-Min Chart: SPX]  


SPX initial entry was near 1159 or so, fell another 8 index points 
lower and still resides well below after the bell.

[60-Min Chart: QQQ]  


QQQ was a short near 37.40 at the open to 37.50 on a failed pop 
and rolled down to close near 37.00 from there.

Day trader's market still with volatile action and gap-open moves 
the norm instead of exception. Far easier to lose money than make 
it trading options right now, so extreme caution with entries and 
capital allotment is key!

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: 38 (QQQ-CL)            Mar Calls: 106 (DJV-CB)  
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop: Break Below                 Stop: Break Below 

Mar Puts: 37 (QQQ-OK)             Mar Puts: 105 (DJV-OA) 
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break above 


OEX                               SPX
Mar Calls: 600 (OEY-CT)           Mar Calls: 1175 (SPT-CO)
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop: Break Below                 Stop: Break Below 

Mar Puts: 590 (OEB-OR)            Mar Puts: 1150 (SPT-OJ)
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break Above 

Open Plays:

Index Trader Sector-Trade Game Plan: Wednesday 03/13/2002 
Taking Turns.

News & Notes: 
The bears had their way today taking advantage of soft retail 
numbers and a barrage of bearish analysts’ comments. We’ll remain 
on hold until after the “triple witching” has come and gone. We 
continue to track our open plays.

Featured Plays: 

No new entries listed for 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 symbol has listed options as well 

New Play Targets (Short):

Open Long Plays:
Long: 26.75     
Stop: 28.50 [hit]
Long: 12.75     
Stop: 14.50 [hit]    

Open Short Plays
XLB **          XLP **          
Short: 23.75    Short: 26.00    
Stop:  25.00    Stop:  28.00    

XLV **          XLY **          
Short: 29.00    Short: 29.90    
Stop:  31.00    Stop:  32.00    

IYD             IYK             
Short: 45.25    Short: 45.90    
Stop:  48.00    Stop:  48.00    

IYR             UTH **          
Short: 84.75    Short: 93.25    
Stop:  88.00    Stop:  98.00    

RTH **          PPH **          
Short: 98.00    Short: 98.75    
Stop: 102.00    Stop: 102.25    

DIA **[DJX]     IYM
Short: 105.90   Short: 42.00 
Stop:  110.00   Stop:  44.50

Short:  49.70
Stop:   52.00

Short:  97.00
Stop:  101.00

”If you haven’t traded options online – you haven’t really traded 
options,” claims author Larry Spears in his new compact guide 

“7 Steps to Success – Trading Options Online”.

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The Option Investor Newsletter                Wednesday 03-13-2002
Copyright 2001, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!



IDPH - call
Adjust from $62 up to $65

TDW  - call
Adjust from $39.25 up to $40

HON - call
Adjust from $27 up to $38

SYMC - call
Adjust from $38 up to $40

DCN - call
Adjust from $19 up to $19.50




ABT $55.50 +0.31 (+1.41) Fulcrum initiated coverage on ABT
this morning with a buy rating.  That move added to the
momentum that was already in place in the broader drug
group, based on positive developments.  Plus the weakness in
the broader markets is causing capital to flow into the
defensive sectors of the market.  Health care stocks finished
higher across the board in today's session.  With the recent
downward trend coming to an end, ABT looks like it could
have some more upside over the next several days.  We're
looking to cut losses ahead of additional upside.  Look to
close positions on any weakness early tomorrow morning.

”If you haven’t traded options online – you haven’t really 
traded options,” claims author Larry Spears in his new compact 
guide book:  

“7 Steps to Success – Trading Options Online”.  

Order today and save 25% (only $15) by clicking on PreferredTrade 
and clicking on the link to the book on its home page.



SYMC - Symantec $42.24 +0.51 (+0.29 this week)

Symantec Corp. provides a broad range of content and network
security solutions to individuals and enterprises. The Company
is a provider of virus protection, firewall, virtual private
network (VPN), vulnerability management, intrusion detection,
remote management technologies and security services to
consumers and enterprises around the world. The Company
currently views its business in five operating segments: Consumer
Products, Enterprise Security, Enterprise Administration,
Services and Other.

Most Recent Update

SYMC is holding up very well relative to its sector and the
broader market, as measured by the Nasdaq Composite (COMPX).
The COMPX lost 1.67% in today's session, while SYMC finished
only fractionally lower.  Moreover, the Software Sector Index
(GSO.X) finished 2.12% lower in today's session.  SYMC
definitely gained some relative strength in today's session.
The company is slated to present at the Lehman Brothers Global
Software Conference tomorrow at 2:15 p.m. EST.  The presentation
could produce market moving guidance so traders need to be on
alert tomorrow afternoon going into the conference.  If the
company's presentation produces positive news, then traders can
look for a breakout on heavy volume above the $43 level.
Ideally we'd like to see the GSO.X confirm any breakout
attempt.  But good news may trump sector weakness if it
persists.  In the event of a pullback, look for SYMC to retreat
to the $40 level, reinforced by the 10-dma below at $39.76.


SYMC held up very well in today's session relative to the
broader tech market and the Software Sector (GSO.X).  The
Nasdaq finished 1.84% lower and the GSO.X finished 2.59%
lower.  SYMC finished 1.22% lower.  The stock is extended and
a component of a weaker sector, but nevertheless could trade
higher if the tech sector rebounds tomorrow.  We'd be looking
for a quick trade in SYMC if it advances above $43.  Such a
move should cause another round of quick short covering, good
for maybe a move up to $45.  Look for a quick entry and sell
too soon.

BUY CALL APR-40 SYQ-DH OI=10832 at $4.60 SL=2.75 
BUY CALL APR-42*SYQ-DV OI= 1448 at $3.20 SL=1.50 
BUY CALL APR-45 SYQ-DI OI= 1072 at $2.05 SL=1.00 
BUY CALL JUL-45 SYQ-GI OI=  590 at $4.30 SL=2.25 

Average Daily Volume = 1.90 mln


Is This A Correction or Consolidation?
By Ray Cummins

Stocks retreated again today amid disappointing retail sales
data and concerns the economic recovery might take longer than expected.

The blue-chip Dow average backpedaled 130 points to 10,501 on
weakness in Intel (NASDAQ:INTC), Eastman Kodak (NYSE:EK), AT&T
(NYSE:T), Citigroup (NYSE:C), General Electric (NYSE:GE), and
International Paper (NYSE:IP).  The slump in technology shares
also weighed on the NASDAQ Composite, which fell 35 points to
1,862 after bearish analysts' comments on the chip sector sent
buyers to the sidelines.  Morgan Stanley lowered its rating on
a slew of chip-equipment companies, citing too-high valuations,
while Lehman Brothers said it remains cautious on the overall
semiconductor equipment industry due to the group's relatively
high valuations and expectations for only a modest recovery in
the second half of the year.  Networking issues were also among
the losers and stocks in the telecom group continued to struggle
after Tuesday's bruising losses.  In the broader market sectors,
airline, financial and cyclical groups moved lower while defense,
drug, and biotechnology issues saw limited buying pressure.  The
oil service segment received a boost from Merrill Lynch, which
reiterated its positive stance on the industry.  Supporting data
came the American Petroleum Institute, which said late Tuesday
that U.S. petroleum product supplies declined in the previous
week and Merrill also noted that overall oil fundamentals appear
to be improving in conjunction with the downtrend in inventories.
The brokerage said it now sees oil service earnings bottoming at
much higher levels than in preceding down-cycles and continues to
believe that oilfield equipment and service stocks have the best
risk/reward potential in the near-term.


MAILBAG - Reader's Comments & Questions

Hi Ray,

Hello and hope you're well.  A quick question: What is the
difference between your credit spread plays and your naked put
plays?  If you purchase the next lower put for protection on
the naked put play, it becomes a bull put spread.  Do you use
a different screen or different criteria for coming up with
those selections?



Regarding your question about NPs and Credit Spreads:

To generate the majority of plays, I search through lists of
candidates from various option-premium and chart-based sources
and then evaluate the positions and their potential returns
based on the technical outlook of the underlying issue (as well
as its sector and the overall market).  If I feel the chart fits
the strategy and there is an acceptable risk/reward ratio, the
position is placed on a list of final candidates.  After I have
assembled the group of potential plays for a specific day, I
simply choose those which, in my opinion, appear most favorable.

As far as the source of these positions, the majority of naked
puts candidates emerge in a scan for "overpriced options on
bullish issues" while the credit spread issues generally come
from a sort for "premium disparities."  Also, I try to offer a
range of plays in the most popular strategies so there may be
some positions that would fit in both categories but I have
listed them in only one form to provide some balance to the
published plays.
For traders, the primary difference between a credit-spread
candidate and a potential naked-put play is the risk/reward
outlook and the overall return on investment in the position.
Of course, naked puts have unlimited risk so if the next lower
strike option can be purchased for a favorable price, it may be
wise to initiate a bullish credit spread instead of a selling a
cash-secured put.  However, many of the (target) naked-puts are
too "deep-in-the-money" to allow this approach, so the only
alternative is to accept the unlimited risk and manage the play
diligently.  Regardless of the strategy you choose, always be
sure to evaluate the position based on probability of profit
and decide whether the risk/return ratio meets your personal

Hope that helps...

Good Luck!

Summary of Current Positions (as of 03-12-2002):

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   44.85   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   48.29   0.80    7.2%
MU      MAR     30   29.20   35.69   0.80    7.5%
NVDA    MAR     47.5 46.45   54.59   1.05    6.4%
KLAC    MAR     50   48.55   66.11   1.45    7.4%
AMAT    MAR     40   39.40   50.66   0.60    5.1%
KLAC    MAR     50   48.95   66.11   1.05    7.5%
RTEC    MAR     35   34.25   44.85   0.75    6.9%
TER     MAR     27.5 27.00   37.48   0.50    6.3%
IDPH    MAR     55   54.00   66.38   1.00    7.1%
ACS     MAR     42.5 41.95   52.18   1.10    5.0%
AMAT    MAR     40   39.40   50.66   0.60    6.3%
KLAC    MAR     50   49.20   66.11   0.80    7.1%
TER     MAR     27.5 27.10   37.48   0.40    6.8%
GILD    MAR     30   29.72   35.74   0.27    5.5%
COF     MAR     50   49.65   61.04   0.35    7.4%
CEPH    MAR     55   54.30   64.61   0.70   13.4%
KLAC    MAR     60   59.45   66.11   0.55    8.9%
PHTN    MAR     47.5 46.85   51.85   0.65   12.1%
COF     APR     50   48.60   61.04   1.40    5.6%
CEPH    APR     50   48.35   64.61   1.65    7.9%
KLAC    APR     55   53.30   66.11   1.70    6.9%
PHTN    APR     45   43.30   51.85   1.70    7.0%
GILD    APR     27.5 26.75   35.74   0.75    6.4%

There was no play in biotechnology company Sepracor
(NASDAQ:SEPR) as its stock price plunged after the
Food and Drug Administration announced it intends to
issue a "not approvable" letter over safety data in
tests of its allergy drug Soltara.  Fortunately, the
news came before Thursday's opening bell, preventing
any losses in the position, but the activity clearly
demonstrates why you should never sell puts on stocks
you don't want to own!

Naked Calls:

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

VRTS    MAR    45    45.80   43.33   0.80    8.2%
EMLX    MAR    47.5  47.95   31.65   0.45    7.4%
MRVL    MAR    42.5  42.90   40.32   0.40   10.5%
PSFT    APR    42.5  43.30   37.48   0.80    7.2%
NVDA    APR    70    71.00   54.59   1.00    5.6%
QLGC    APR    60    60.85   50.01   0.85    5.8%

Credit Spreads:

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

CYMI   41.37    44.64  MAR30P/35P   0.75   34.25   0.75   Open
AZN    47.60    49.57  MAR40P/45P   0.40   44.60   0.40   Open
NOC   109.32   109.47  MA95P/100P   0.80   99.20   0.80   Open
PG     82.50    85.28  MAR75P/80P   1.00   79.00   1.00   Open
BVF    42.05    47.99  MAR55C/50C   0.60   50.60   0.60   Open
ROOM   54.72    63.50  MAR40P/45P   0.70   44.30   0.70   Open
HIG    67.00    65.42  MAR60P/65P   0.90   64.10   0.90   Open
PGR   152.90   155.58  M140P/145P   0.90  144.10   0.90   Open
XL     97.11    93.88  MAR85P/90P   0.60   89.40   0.60   Open
AHC    64.48    75.76  MAR55P/60P   0.50   59.50   0.50   Open
BGEN   54.45    50.49  MAR65C/60C   0.50   60.50   0.50   Open
TEVA   59.99    54.36  MAR70C/65C   0.60   65.60   0.60   Open
ACE    42.50    42.10  MAR35P/40P   0.50   39.50   0.50   Open
ETN    78.45    83.33  MAR70P/75P   0.55   74.45   0.55   Open
MRK    61.26    63.49  MAR55P/60P   0.80   59.20   0.80   Open
FD     41.68    43.49  MAR37P/40P   0.40   39.60   0.40   Open
UTX    72.95    75.00  MAR65P/70P   0.55   69.45   0.55   Open
XL     95.70    93.88  MAR85P/90P   0.45   89.55   0.45   Open
CCU    47.00    49.22  MAR55C/50C   0.50   50.50   0.50   Open
LXK    50.48    57.37  APR65C/60C   0.60   60.60   0.60   Open  *
WHR    65.50    79.66  APR80C/75C   1.10   76.10  (1.40) Closed *
BGEN   57.07    50.49  APR45P/50P   0.60   49.40   0.60  Closed?

Previously closed: Trigon Health (NYSE:TGH) - which is positive.

Comments: Lexmark (NYSE:LXK) continued to rally this week and as
noted in the previous summary, we rolled up and out to a higher
strike spread (APR65C/60C) to protect gains in the position.
Shares of Whirlpool (NYSE:WHR) traded lower Friday, retreating
as investors took profits from the recent rally.  However, the
buying pressure renewed as the stock price fell to short-term
technical support and the bullish trend was quickly rejuvenated.
It was tough to admit defeat but as we mentioned last week, the
key would be how the stock reacted as it neared $75 and indeed,
$74.65 was the low on Monday.  Those of you following the play
know the rest of the story as the issue "never looked back" and
today was the absolute last straw when Maytag (NYSE:MYG), the
third-biggest U.S. home appliance maker, said it expects first
quarter earnings to rise 50% more than previously anticipated
due to strong sales in the first two months of the year.  Our
exit on Monday afternoon wasn't pretty as the loss was almost
double the initial premium in the position, but we felt much
better after watching the rally continue Tuesday morning.  As
if that wasn't enough excitement, our new position in Biogen
(NASDAQ:BGEN) was affected by some unfortunate news.  The FDA
overturned the orphan drug status of Biogen's Avonex, thus
allowing one of the company's competitors, Serono (NYSE:SRA),
to sell a competing multiple sclerosis drug.  Biogen released
a statement saying it's confident Avonex will continue to be
the leading drug in the U.S. market, but the news was clearly
devastating to investors.  Our spread is currently profitable
however it may be best to simply close the play on any strength
and move on to a more favorable position.

Index Credit Spreads:

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

OIH    56.65    67.78  MAR45P/50P   0.60   54.40   0.60   Open
OEX   557.59   591.03  M595C/590C   0.50  590.50  (0.53) Closed?

The recent broad-market rally has pushed the OEX to a test of
near-term resistance (in the 590-595 range) and conservative
traders should have closed the bearish spread to protect profits
and/or limit losses.

Debit Straddles: 

Stock  Position    Debit  Target   M/V      Gain     Status

QCOM   MAR40C/40P  2.90    3.65    4.60     1.70     Closed

Qualcomm was the big winner this week as the speculative play
offered up to a $4.60 credit on $2.90 invested in only 4 days!

Synthetic Positions:

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

WMT    59.86    62.23  MAR65C/55P   0.25   54.75   0.40   Open

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

ACS - Affiliated Computer  $52.57  *** Target Shooting! ***

Affiliated Computer Services (NYSE:ACS) is a global Fortune 1000
company that delivers comprehensive business process outsourcing
and information technology outsourcing solutions, as well as
various system integration services, to both commercial and U.S.
government clients.  In the commercial sector the company offers
its clients with business process outsourcing, unique systems
integration services and technology outsourcing.  Within the
federal government sector, Affiliated provides business process
outsourcing and systems integration services.

One of our subscribers asked about the abbreviation for "TS" (in
the play listing area) last week and this position provides a
perfect opportunity to explain the acronym.  In this section, we
occasionally use the abbreviation TS for "target shoot" on some
of the lower ROI plays where the underlying issue is due for a
pullback.  It is generally on positions that are just below our
monthly profit threshold (5%).  We usually don't recommend plays
that are below a 5% monthly return but often the initial premium
or credit can be increased during the next day's trading activity
(by target-shooting) to make it a favorable position.

Indeed, that is the situation in this play and initially, we are
going to target-shoot an entry in the APR-47.50 put at a premium
of $0.90-$1.10.

PLAY (sell naked put):

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

SELL PUT  APR 47.5 ACS PW  1,084     0.85    46.65      4.2% "TS"
SELL PUT  APR 50   ACS PJ  1,509     1.45    48.55      6.0%
SELL PUT  APR 53   ACS PT  28        2.40    50.10      8.4%

COF - Capital One  $59.60  *** Same Play - Different Week! ***

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 weeks, 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 (after a necessary consolidation) can speculate on
that outcome with these positions.

COF - Capital One Financial  $59.60
PLAY (sell naked put):

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

SELL PUT  APR 47.5 COF PT  365       0.60    46.90      3.9% "TS"
SELL PUT  APR 50   COF PJ  997       0.90    49.10      4.9% ***
SELL PUT  APR 55   COF PK  1,123     1.90    53.10      7.4%

SYMC - Symantec  $42.24  *** New "All Time" High ***

Symantec (NASDAQ:SYMC) provides a broad range of content and
network security solutions to individuals and enterprises.  The
company is a provider of virus protection, firewall, virtual
private network, vulnerability management, intrusion detection,
remote management technologies and security services to consumers
and enterprises around the world.  Symantec currently views its
business in five primary operating segments: Consumer Products,
Enterprise Security, Enterprise Administration, Services & Other.

Shares of SYMC traded at a new "all-time" high today and despite
the bearish near-term outlook for technology stocks, analysts
agree with a positive future for the company.  Investors are also
bullish on the issue, based on the recent technical indications,
and traders who want to speculate on the near-term performance of
Symantec's share value should consider these positions.

SYMC - Symantec  $42.24
PLAY (sell naked put):

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

SELL PUT  APR 35   SYQ PG  1,502     0.65    34.35      5.2% ***
SELL PUT  APR 38   SYQ PU  1,246     1.10    36.40      6.8%
SELL PUT  APR 40   SYQ PH  487       1.90    38.10      9.4%


Credit Spreads - Reader's Request

One of our readers asked if we would search for some conservative
credit-spread candidates, since the March expiration period is
coming to an end and many traders will be looking for new plays
in which to invest their capital.  With that idea in mind, we
have listed a selection of "bullish" positions, based on recent
technical indications and favorable option premiums.  Investors
with a positive 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.

BBY - Best Buy Company  $75.27  *** Earnings Speculation! ***

Best Buy Company (NYSE:BBY) is a specialty retailer of consumer
electronics, home office equipment, entertainment software and
appliances.  The company operates retail stores and commercial
Websites under the brand names Best Buy (BestBuy.com), Media Play
(MediaPlay.com), On Cue (OnCue.com), Sam Goody (SamGoody.com),
Suncoast (Suncoast.com) and Magnolia Hi-Fi (MagnoliaHiFi.com).
Best Buy stores account for 68% of the company's total retail
square footage.  Best Buy stores offer customers a selection of
name-brand models consisting of approximately 6,000 products.
The company's quarterly earnings are due 4/2/02.

BBY - Best Buy Company  $75.27

PLAY (very conservative - bullish/credit spread):

BUY  PUT  APR-60  BBY-PL  OI=1865  A=$0.55
SELL PUT  APR-65  BBY-PM  OI=965   B=$1.00

CI - Cigna  $96.38  *** Trading Range? ***

CIGNA Corporation (NYSE:CI) is one of the largest investor-owned
employee benefits organization in the United States.  CIGNA is a
holding company and its subsidiaries are primary providers of
employee benefits offered through the workplace; healthcare
products and services, group life, accident and disability
insurance, retirement products and services and also investment
management.  CIGNA's major insurance subsidiary is Connecticut
General Life Insurance Company.  The company's principal business
segments are Employee Health Care, Life and Disability Benefits,
Employee Retirement Benefits and Investment Services and also
International Life, Health and Employee Benefits.

CI - Cigna  $96.38

PLAY (conservative - bullish/credit spread):

BUY  PUT  APR-80  CI-PP  OI=307  A=$0.70
SELL PUT  APR-85  CI-PQ  OI=165  B=$1.25

FRX - Forest Laboratories  $83.65  *** Rally Underway! ***

Forest Laboratories (NYSE:FRX) develops, manufactures and sells
both branded and generic forms of ethical drug products that
require a physician's prescription, as well as non-prescription
pharmaceutical products sold over-the-counter.  The company's
most important U.S. products consist of branded ethical drug
specialties marketed directly, or "detailed," to physicians by
its Forest Pharmaceuticals, Forest Therapeutics and Forest
Specialty sales forces.  The company's products include those
developed by Forest and those acquired from other pharmaceutical
companies and integrated into Forest's marketing and distribution
systems.  Principal products include Celexa, Forest's SSRI for
the treatment of depression; the respiratory products Aerobid and
Aerochamber; Tiazac, a once-daily diltiazem for the treatment of
hypertension and angina; and Infasurf, a lung surfactant for the
treatment and prevention of respiratory distress syndrome in
premature infants.

FRX - Forest Laboratories  $83.65

PLAY (very conservative - bullish/credit spread):

BUY  PUT  APR-70  FRX-PN  OI=70   A=$0.70
SELL PUT  APR-75  FRX-PO  OI=105  B=$1.05

TOL - Toll Brothers  $53.00  *** Stock Spit Coming! ***

Toll Brothers (NYSE:TOL) designs, builds, markets and arranges
financing for single-family detached and attached homes in middle
income and high-income residential communities catering to move-up,
empty-nester and age-qualified homebuyers in 21 states in six main
regions around the United States.  The communities generally are
located on land the company has either developed or acquired fully
developed and, in some cases, improved.  The company operates its
own land development, architectural, engineering, mortgage, title,
security monitoring, landscape, cable TV, Internet access, lumber
distribution, house assembly and manufacturing operations.  The
company also owns and operates golf courses in conjunction with
several of its master-planned communities.

TOL - Toll Brothers  $53.00

PLAY (conservative - bullish/credit spread):

BUY  PUT  APR-40  TOL-PH  OI=90   A=$0.20
SELL PUT  APR-45  TOL-PI  OI=482  B=$0.70

VLO - Valero Energy  $47.85  *** Oil Sector Speculation! ***

Valero Energy Corporation (NYSE:VLO) is an independent petroleum
refining and marketing company in the United States.  Valero owns
and operates six refineries in Texas, California, Louisiana and
New Jersey with a combined throughput capacity of one million
barrels per day.  Valero produces premium, environmentally clean
products such as reformulated gasoline, low-sulfur diesel and
oxygenates, and is able to achieve the specifications of the
California Air Resources Board (CARB) for gasoline.  Valero also
produces a substantial slate of middle distillates, jet fuel and
petrochemicals.  Valero markets its products in 34 states through
an extensive wholesale bulk and rack-marketing network, and in
California through approximately 350 retail locations.  Earlier
this year, the company acquired Ultramar Diamond Shamrock, an
independent petroleum product and convenience store merchandise
marketing company.

VLO - Valero Energy  $47.85

PLAY (moderately aggressive - bullish/credit spread):

BUY  PUT  APR-42.50  VLO-PV  OI=2375  A=$0.60
SELL PUT  APR-45.00  VLO-PI  OI=103   B=$0.95


Neutral Plays - Straddles & Strangles

NTRS - Northern Trust  $59.19  *** Probability Play! ***

Northern Trust Corporation (NASDAQ:NTRS) is a multi-bank holding
company that owns all of the outstanding capital stock of The
Northern Trust Company.  The company also owns national or state
bank subsidiaries in Arizona, California, Colorado, Florida and
Texas, a federal savings bank with offices in Michigan, Missouri,
Nevada, Ohio, Washington and Wisconsin, a trust company in New
York and other non-bank subsidiaries, including an investment
management company, a securities brokerage firm, an international
investment consulting firm and a retirement services company.
The company organizes client services around two primary business
units, Corporate and Institutional Services and Personal Financial
Services.  Two other business units provide services to the two
main business units.  They are Northern Trust Global Investments
and Worldwide Operations and Technology.

Based on the recent share value activity and historical option
prices, this position offers traders a favorable "speculative"
straddle opportunity.  The issue's options are undervalued and
the stock has the potential to move (high or low) enough to make
the straddle profitable.  In addition, 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

NTRS - Northern Trust  $59.19

PLAY (speculative - neutral/debit straddle):

BUY  CALL  APR-60  NRQ-DL  OI=728  A=$1.80
BUY  PUT   APR-60  NRQ-PL  OI=233  A=$2.50


BEARISH PLAYS - Naked Calls & Combinations

BRCM - Broadcom  $40.24  *** "Bearish" Technicals! ***

Broadcom Corporation (NASDAQ:BRCM) is a provider of integrated
silicon solutions that enable broadband communications and
networking of voice, video and data services.  Using proprietary
technologies and advanced design methodologies, Broadcom designs,
develops and supplies system-on-a-chip solutions for applications
in digital cable set-top boxes and cable modems, high-speed local,
metropolitan and wide area and optical networks, home networking,
Voice over Internet Protocol (VoIP), carrier access, residential
broadband gateways, direct broadcast satellite and terrestrial
digital broadcast, digital subscriber line (xDSL), wireless
communications, server solutions, and network processing.

This play is simply based on the current price or trading range
of the underlying stock and its recent technical history.  The
near-term BRCM price trend is bearish and reflects a negative
divergence from an intermediate-period moving average.  Also,
the failure at $45 on Monday reestablishes a previous resistance
area at that price (May - Aug 2001) and increases the potential
for a "head-n-shoulders" top formation in the coming weeks.  With
the additional overhead supply near $50, the share value has
little chance of moving beyond our sold strike in the next month.

BRCM - Broadcom  $40.24

PLAY (conservative - bearish/credit spread):

BUY  CALL  APR-55  RDZ-DK  OI=3288  A=$0.40
SELL CALL  APR-50  RCQ-DJ  OI=6653  B=$0.85

LEH - Lehman Brothers  $63.49  *** Earnings Speculation! ***

Lehman Brothers Holdings (NYSE:LEH) is the holding company of
subsidiaries that constitute one of the leading global investment
banks, serving institutional, corporate, government and individual
clients and customers.  The company is engaged mainly in providing
financial services.  The company's many business services include
capital raising for clients through securities underwriting and
direct placements, corporate finance as well as strategic advisory
services, private equity investments, securities sales and trading,
research, and the trading of foreign exchange, derivative products
and certain commodities.  Lehman Brothers provides a full array of
capital market products and advisory services worldwide.  Through
its many banking, research, trading, structuring and distribution
capabilities of equity and fixed income products, Lehman continues
its focus of building its client/customer business model.

Shares of brokerage and finance companies have rallied in recent
sessions in expectation of a resurgence in trading activity and
investing in the equity markets.  Lehman's stock has benefited
from the bullish momentum and the optimistic outlook has also
boosted the trading volume in its call options.  In addition, the
company's earnings are due next week (3/20) and the event provides
a great opportunity for speculation on the issue's future movement.
Traders who believe the stock has little chance of reaching $70 in
the near-term can profit from that outcome with this position.

LEH - Lehman Brothers  $63.49
PLAY (conservative - bearish/credit spread):

BUY  CALL  APR-75  LEH-DO  OI=1717  A=$0.20
SELL CALL  APR-70  LEH-DN  OI=2484  B=$0.75

QLGC - Qlogic  $48.96  *** Trading Range Continues? ***

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.

We offered this issue as a bearish candidate last Wednesday and
despite the brief rally in technology shares, it appears the
stock is again headed for lower prices.  From a purely technical
viewpoint, the issue has a significant resistance area between
$55 and $60, and with today's "less than favorable" outlook for
the semiconductor segment in the coming months, the probability
of a significant upward move seems rather small.

QLGC - Qlogic  $48.96

PLAY (conservative - bearish/credit spread):

BUY  CALL  APR-65  QLC-DM  OI=720   A=$0.50
SELL CALL  APR-60  QLC-DL  OI=2649  B=$1.05





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

AHC    75.51  APR 70P  0.85   APR 65P  0.30   0.60     14%
FLIR   53.65  APR 45P  1.10   APR 40P  0.55   0.60     14%
NOC   109.83  APR 100  1.25   APR 95P  0.70   0.60     14%
CHIR   47.09  APR 42P  0.70   APR 40P  0.45   0.30     14%
ABC    69.09  APR 65P  1.00   APR 60P  0.50   0.55     12%
GENZ   47.70  APR 40P  1.00   APR 35P  0.50   0.55     12%


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

ADI    43.50  APR 50C  0.85   APR 55C  0.30   0.60     14%
ELBO   35.59  APR 40C  0.85   APR 45C  0.30   0.60     14%
NVDA   53.61  APR 65C  1.00   APR 70C  0.45   0.60     14%
WLP   124.00  APR 135C 1.45   APR 140C 0.90   0.60     14%
ADRX   40.57  APR 50C  1.25   APR 55C  0.75   0.55     12%
EBAY   56.85  APR 65C  0.80   APR 70C  0.30   0.55     12%



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When "Rich Dudes" Talk, I Listen

Buzz Lynn

I can't sit in Bill Gates or Warren Buffet's office every day to 
get investment ideas or hear their take on the future.  So when I 
get an opportunity to hear one of them talk, I jump at it.  In 
fact, anyone can jump at it at any time.  I don't yet have a 
hotline to Bill.  But would it be useful to know how to tune into 
the Oracle of Omaha's thoughts at any time?  Fortunately you can 
and it won't cost you a dime.  Here's how.  Simply go to the 
Berkshire Hathaway website.  It's a treasure trove of information.

See, Warren Buffet pens a letter to his shareholders every year.  
It is the most honest production and summary that I've ever seen 
generated by ANY CEO.  If you doubt that, check out the following 
from nearly the first paragraph penned on February 28th and 
delivered on March 9th.  

"Though our corporate performance last year was satisfactory, MY 
performance was anything but. I manage most of Berkshire’s equity 
portfolio, and my results were poor, just as they have been for 
several years.  Of even more importance, I allowed General Re to 
take on business without a safeguard I knew was important, and on 
September 11th, this error caught up with us.  I’ll tell you more 
about my mistake later and what we are doing to correct it."

Furthermore, "Over the last few years, however, our cost [of float 
in our insurance businesses] has been too high, and in 2001 it was 

Finally when talking about losses at Dexter Shoes, one of the last 
remaining shoe manufacturers in the U.S., Buffet summarizes, "I've 
made three decisions relating to Dexter that have hurt you in a 
major way: (1) buying it in the first place; (2) paying for it 
with stock and (3) procrastinating when the need for changes in 
its operations was obvious.  I would like to lay these mistakes on 
Charlie (or anyone else, for that matter) but they were mine.  
Dexter, prior to our purchase - and indeed for a few years after - 
prospered despite low-cost foreign competition that was brutal.  I 
concluded that Dexter could continue to cope with that problem, 
and I was wrong."

Can you imagine one of the world's most successful investors 
admitting he ate the green burrito - and more than once in the 
same year?  That's about as honest as it gets and a far cry from 
what we might hear out of Ken Lay (ENE), Gary Winnick (GX), Joe 
Naccio (Q) or anybody else that has been called to testify before 
a Senate committee, including Alan Greenspan.  These guys are 
living proof that prevarication is legal as long as FASB 
(Financial Accounting Standards Board) allows it.  It's 
interesting to me that the House and Senate also fail to follow 
GAAP, and severely abuse it - a hypocritical case of the pot 
calling the kettle black, as I've noted before.  Again, that's for 
another discussion.  

But he nails the truth with humor in talking about corporate 
insiders' abuse of shareholders: "One story I’ve heard illustrates 
the all-too-common attitude of managers toward owners: A gorgeous 
woman slinks up to a CEO at a party and through moist lips purrs, 
'I’ll do anything - ANYTHING - you want. Just tell me what you 
would like.'  With no hesitation, he replies, 'Re-price my 
options.'". . .kind of like the old joke, "paint my house".

In similar vein while referring to his 2001 acquisition of MiTek, 
a roofing structural system manufacturer, he notes what a great 
business Berkshire bought.  But I was more interested in the 
actions of management as he relayed it:  "[MiTek's] managerial 
crew is exceptionally enthusiastic about the company and wanted to 
participate in the purchase. Therefore, we arranged for 55 members 
of the MiTek team to buy 10% of the company, with each putting up 
a minimum of $100,000 in cash.  Many borrowed money so they could 

[This is the good part]  As they would NOT be if they had options, 
all of these managers are true OWNERS.  They face the downside of 
decisions as well as the upside.  They incur a cost of capital.  
And they can’t "re-price" their stakes: What they paid is what 
they live with."

That says a lot about general corporate managements' participation 
as "House" in the "Casino" versus MiTek's management's vested 
interest in business ownership.  I'd rather see a hard dollar 
investment myself, as vesting and exercise of qualified and non-
qualified incentive options are a drain and real expense to any 
business that frequently is conveniently left off a P&L statement.

One thing I found interesting is that 99% of Buffet's net worth is 
in Berkshire stock of which he has never sold a share.  It also 
means he has $380 mln in other "stuff" - a princely sum to say the 
least, but just 1% of his estimated $38 bln net worth.  Clearly 
the guy is not hyping his own stock and selling into duped-
investor strength.  He opines, "To their [publicly traded 
management heads] shame, these business leaders view shareholders 
as patsies, not partners."  

When the world's greatest steward of capital is telling me that 
many issuers of shares consider me a patsy, I have to stop to 
examine my own reasoning as to why I would want to buy shares.  
For those who care, I am again in all cash with no desire to be 
long shares in any portfolio, even my IRA - and I can't short that 

While I am not so interested in what Buffet reports about the 
various businesses Berkshire owns and manages, I am interested in 
the investment principles and wisdom falling off the pages like 
marbles from a school kid's desk. 

If you want clear demonstrations of homespun wisdom, just look at 
the cutting truths cloaked in humor with regard to EBITDA and pro-
forma income.  Buffet states: "Bad terminology is the enemy of 
good thinking.  When companies or investment professionals use 
terms such as "EBITDA" and "pro forma," they want you to 
unthinkingly accept concepts that are dangerously flawed. (In 
golf, my score is frequently below par on a PRO-FORMA basis: I 
have firm plans to "restructure" my putting stroke and therefore 
only count the swings I take before reaching the green.)"

I was laughing myself silly at that one - one, because it was 
funny; but two, because it simply exposes the absurdity of pro-
forma accounting in terms that anyone can understand.

Here's another pearl.  Did you ever wonder what the principles are 
that make a good insurance businesses?  This is a great metaphor 
for our trading businesses that we each operate too.  Again, 
Warren teaches us in three easy principles how to trade - and this 
is free!

"What counts in this business is underwriting discipline [like 
trading].  The winners are those that unfailingly stick to three 
key principles: 

1.  They accept only those risks that they are able to properly 
evaluate (staying within their circle of competence) and that, 
after they have evaluated all relevant factors including remote 
loss scenarios, carry the expectancy of profit [see Jeff, Eric, 
Austin, and Mark on risk and reward].  These insurers ignore 
market-share considerations and are sanguine about losing business 
to competitors that are offering foolish prices or policy 

2.  They limit the business they accept in a manner that 
guarantees they will suffer no aggregation of losses from a single 
event or from related events that will threaten their solvency.  
They ceaselessly search for possible correlation among seemingly-
unrelated risks.  [Don't put all your money in one trade or basket 
of technology - think Q, WCG, GX, ENE all in the same sentence]

3.  They avoid business involving moral risk:  No matter what the 
rate, trying to write good contracts with bad people doesn't work. 
While most policyholders and clients are honorable and ethical, 
doing business with the few exceptions is usually expensive, 
sometimes extraordinarily so. [Unless you count cards, it's tough 
to beat the house.]

Interesting observations that if we think hard enough about them, 
we can apply them anywhere from the mundane to the exciting parts 
of our lives.  But on other subject near and dear to our hearts - 
the market - he has some cautionary and sometimes ominous 
comments.  From the average Joe on the street, I would have a hard 
believing it.  But from a guy who builds arks instead of just 
predicting rain (he puts his money where his mouth is), Buffet 
gets a lot more credibility from me.

For starters, he accompanies his comments with a cautionary 
statement for perennial BubbleVision watchers: "One more point 
about our investments: The media often report that 'Buffet is 
buying' this or that security, having picked up the "fact" from 
reports that Berkshire files.  These accounts are sometimes 
correct, but at other times the transactions Berkshire reports are 
actually being made by Lou Simpson, who runs a $2 billion 
portfolio for GEICO that is quite independent of me.  Normally, 
Lou does not tell me what he is buying or selling, and I learn of 
his activities only when I look at a GEICO portfolio summary that 
I receive a few days after the end of each month.  Lou's thinking, 
of course, is quite similar to mine, but we usually end up in 
different securities.  That's largely because he's working with 
less money and can therefore invest in smaller companies than I. 
Oh, yes, there's also another minor difference between us: In 
recent years, Lou's performance has been far better than mine. 
[Another admission of honesty.  You have been forewarned.]

But here is the meat - the part that, sadly, most every analyst 
dog on Wall Street is missing from his/her current diet of 
exchanged foot and partially-nibbled crow:

"We made few changes in our portfolio during 2001. As a group, our 
larger holdings have performed poorly in the last few years, some 
because of disappointing operating results.  Charlie and I still 
like the basic businesses of all the companies we own.  But we do 
not believe Berkshire's equity holdings as a group are 
undervalued.  [Major current holding include KO, G, AXP, WFC, 
Moody's, Washington Post, and H&R Block.  Wink, Wink!  These 
things aint cheap!] 

Our restrained enthusiasm for these securities is matched by 
expressed my views about equity returns in a speech I gave at an 
Allen and Company meeting in July (which was a follow-up to a 
similar presentation I had made two years earlier) and an edited 
version of my comments appeared in a December 10th Fortune 

Charlie and I believe that American business will do fine over 
RETURNS FOR INVESTORS. [ALL CAPS - mine]  The market outperformed 
business for a very long period, and that phenomenon had to end.  
A market that no more than parallels business progress, however, 

Perhaps that would explain why he goes on to enumerate the 
Berkshire businesses that will be selling "stuff" at the 
shareholder's meeting in Omaha on May 4th, one of which is, ". . . 
underwear, of course.  Assuming our Fruit of the Loom purchase has 
closed by May 4, we will be selling Fruit's latest styles, which 
will make you your neighborhood's fashion leader.  Buy a lifetime 

 Does he mean wide-eyed bulls are going to need 
them for market conditions that are to come in the years ahead?  A 
better idea - save the run on FTL undies and learn to trade both 
directions instead of fearing the downside!

If you thought these comments were good, check out the whole thing 
at http://www.berkshirehathaway.com/2001ar/2001letter.html.  There 
is 35 years of collective financial wisdom contained on the site, 
which far surpass any Ivy League MBA ever earned.  

Chalk one up for the "Rich Dude"!

Tomorrow, a Q&A on Q-charts.  See you then!


Stocks fall under pressure.  Two breakdown candidates make their 
way onto the watch list.

To Read The Rest of The OptionInvestor.com Market Watch Click Here


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